Casey on the Fiscal Cliff
by Louis James, Editor, International
by Doug Casey:
Books Doug's Ideal Library
So Doug, the talk of the day is the horrific mass
murder of little children in Connecticut last week. I'm sure
you join me in extending sympathies to the families of the victims
I hope they can survive being survivors.
But we've already
about such attacks, and this event doesn't really change the
path we're on; it only accelerates the disarmament of more future
victims. It's another sign of the accelerating decay of US society,
which we've talked about at length.
Yes, I suppose our readers could probably predict most of what we'd
say about the murders in Connecticut. Not much to add, but I predict
that they'll find that the 20-year-old killer, Lanza, was on Ritalin,
Zoloft, Prozac, or some similar psychiatric drug. Most mass murders
are proven to have been on these drugs, and the medical records
are sealed for many other killers, so we can't find out. As usual,
the chattering classes and their political buddies will focus on
the tools used by the killer, rather than on what made him a killer
in the first place. It's that and the ethically degraded state of
society that I blame not the availability of some guns, knives,
rocks, or whatever.
The killer at the Colorado movie theater, the Columbine killers
there certainly seems to be a pattern of young men on prescribed
medications turning into mass murderers.
It was also true of many of the postal workers who gave rise to
the phrase "going
postal." It appears a substantial part of the US is on some
type of psych meds. This massacre is so extreme in its emotional
power, pandering politicians will absolutely have to "do something."
That means catering to some of people's basest emotions: fear and
anger. And giving them what they think they want: vengeance and
the appearance of safety. They'll call it "justice" and "reasonable"
gun control, but it will be neither. And it won't stop the violence;
it will get worse because of the deterioration of US society. New
laws will just give the average American more of a false sense of
security, and make him even more of a serf.
par for the course, these days. As you say, we've already covered
this ground. Anyway, you can't convince people of a viewpoint regarding
this subject. What people believe is a question of their psychology,
not the intellectual merits of the argument. Let's talk about something
else that's looming, and that people can do something
about: the so-called "fiscal cliff."
There's something people can do about that? You can't be thinking
that writing a letter to whatever slimy creature in Congress claims
to represent us will do any good...
Of course not. But the fiscal cliff will have economic consequences.
Those who see them coming can and should profit from them.
Okay; let's start with a definition, as usual. What is the fiscal
Well, of course, fiscal
cliff is really a misnomer. Part of it's good, and part is bad
for the economy. The term refers to the simultaneous expiration
of the Bush tax cuts and automatic spending cuts mandated by the
Budget Control Act of 2011 that go into effect next year. Many pundits
say this will cause the US to go into a recession. Well, we're already
Greater Depression. But here's what would happen. The higher
taxes would suck more capital out of the productive economy and
divert it to the government that's very bad. And lower government
spending would help unravel distortions and misallocations of capital
that spending was causing which is good. In the process, some
people would have to find new jobs, and some businesses dealing
with government handouts would go bust. Painful, but necessary,
and we need to see lots more of both.
not the US economy that's facing this alleged cliff; it's the US
government. It just goes to show how hopeless the situation is,
when people equate the government with the economy. They're two
entirely different things. The only way to revitalize the US economy
is a vast reduction in taxes and a vast reduction
in government spending. Instead, these idiots are arguing over how
much to raise taxes and how little they can cut spending. Of course
it will be a disaster.
Fair enough, but raising taxes and cutting spending is exactly the
kind of "austerity" the Germans are saying the rest of Europe should
embrace why is that seen as a good thing over there but a looming
disaster over here?
It is curious, isn't it? The Europeans are hooked on government
spending look at all the riots and protests. That's why their
grandchildren will all be houseboys and maids for the Chinese. The
difference is just that the Europeans know they have their backs
against a debt wall and have no choice, whereas in the US, people
still imagine they can borrow and spend their way into prosperity.
Americans stupidly think that because they could get away with acting
like the profligate grasshopper 50 years ago, they can still do
But Congress passed its budget law back in 2011 to force themselves
to do what was seen as necessary. They didn't do what was necessary
voluntarily in the time they gave themselves, so now are being forced
to do what they themselves saw as necessary back when they passed
the law. How is it that politicians of both parties could agree
such a measure was necessary less than two years ago, and now say
it's an impending disaster?
How is it they can say any of the insane things they do? The fact
of the matter is that Congresscritters back in 2011 just wanted
to kick the can down the road and keep the gravy train rolling.
They didn't think they would have a new solution today they only
wanted to escape certain doom then... and hoped magic would happen.
They have no solution, not then, not now. They'll just try to put
off judgment day once again. They'll do it by selling hundreds of
billions more in debt to the Federal Reserve they'll have to because
the Chinese and Japanese aren't buying anymore. They want to get
rid of what they have.
So, you think they will find a compromise and enact new legislation
before the end-of-the-year deadline? Are you having a "guru moment?"
Yes. 2013 is likely to be a nasty year. I hate to be a permabear,
but there's no alternative. The two parties that run the US claim
to be different, but it's more accurate to see them as the tax-and-spend
party and the tax-and-spend-more party. One thing they both agree
on and they're dead wrong, but they agree is that the economy
rests on confidence, and that if they can only restore confidence,
the economy will grow.
As if the coyote could keep running
on air, as long as he didn't look down?
Exactly. The economy would be just fine if the government disappeared.
The problem is the US dollar, which has no intrinsic value and is
backed by nothing but confidence. The dollar is a complete fiat
currency, and its accelerating debasement has the potential to destroy
the economy. The economy itself is the aggregate of all the people,
businesses, inventory, manufacturing plants, mines, farms, transportation
networks, research facilities, and accumulated capital of all the
grows when people produce more than they consume, and save the difference.
They then have capital to put into new ventures, create new jobs,
develop new technologies, and so forth. No government is needed
to make this happen rather the opposite.
But the average
American, who is completely ignorant of economics, thinks the government
is a magic cornucopia. As proof of that statement, I offer the fact
that Obama is president, Romney was offered as an alternative, and
dingbats like Boehner, Pelosi, and Ried control the Congress.
So, what does get the economy going?
People can't just sit at home because they lack confidence; they'd
starve. They have to work, create, build, invest deploy their
capital, whether that be financial, intellectual, or the simple
time they can sell to employers. The alternative is dissipation
and eventually death.
If the economy
isn't growing, it's not because the government isn't spending enough
to "stimulate" it. Government spending comes from: taxation, which
is a burden on the economy; borrowing, which is a future burden
on the economy; or printing money inflation which is an especially
dishonest, hidden form of taxation makes people think they're richer
while they're being impoverished.
No. If the
economy isn't growing, it's because the government has burdened
it with heavy taxation, smothered it with excessive regulation,
distorted it with false information (the Fed's manipulation of interest
rates), and replaced real money gold with paper.
What you've just explained in a few simple paragraphs was such a
great mystery to me back in school. I remember being taught that
unrestrained capitalism caused the Great Depression, and that without
government to smooth out the "business cycle," the economy would
grow too fast and investors would go too far, creating a crash,
destroying confidence, and leading to recession and depression.
What I didn't
get then was how a recession or depression could ever end. If it
was all about confidence, and confidence was destroyed, no one in
their right mind would risk spending anything, building anything,
employing anyone, etc., until they saw signs of recovery
but with everyone waiting for those signs, they would never come.
I guess many
people are still stuck in this economic error. That's why so many
think you need a government to stimulate growth to trick people,
essentially, into seeing clear signs of recovery, and therefore
unleashing a real recovery.
Perhaps so but stimulated, or let's say "simulated" signs of
recovery aren't needed if people have savings, accumulated capital,
that can be deployed.
they mostly have debt. Government stimulation won't work if capital
doesn't exist or is punished for being used. If you've destroyed
people's jobs, taxed them more for investing wisely, piled on so
many regulations that you can't sell lemonade without decades of
permitting and clinical trials, all the stimulus in the world won't
create a vibrant economy.
You won't get an argument from me and in this context it makes
sense for the EU to hit the wall before the US; it has a lot more
regulations, higher taxation, and more omnipresent government over
But back to
the US fiscal cliff: if it does indeed represent a sort of forced
austerity for the US government, might that not be at least partially
a good thing? If the government is forced to live more within its
means, maybe it won't be able to do as much harm?
Look, the tax increases they're proposing are significant and immediate;
they're hoping to increase tax revenue by almost 20% in 2013. Well,
they'll greatly increase tax rates anyway for instance, capital
gains are set to go from 15% to 20%, and the top income tax rate
to 39.6%, including dividend income. But the spending cuts are modest,
and mostly for the future only a 0.25% decrease in actual outlays
by the government in 2013. That's a rounding error. In short, it'll
be harder to earn an honest living and there will be less incentive
to invest wisely, but bloated government will continue running the
printing presses as fast as they'll go. I think we'll see at least
a trillion dollar deficit next year. Maybe more like $1.5 trillion.
The US Government
is on tilt.
We're stuck with QE4-ever?
They have no alternative unless they default on the national debt,
abolish Social Security, Medicare, Medicaid, and cut back the military
about 90%. Now they've announced $40 billion more a month, on top
of the $45 billion a month they announced just before the election
and it's not just the US. The new Japanese
government says it has a mandate to print and spend unlimited amounts,
whatever it takes to stimulate its economy. The Europeans are at
So, why do you suppose gold actually sold off when they announced
the new QE last week? One would expect the announcement of such
massive new money-printing to send gold upward.
Actually, the initial reaction on the day the Fed made its announcement
was a spike in the gold price, but that lasted only minutes. It's
hard to say exactly why it didn't stay up; and guru jokes aside,
I truly have no crystal ball. Nor does anybody else. I'd guess that
some investors have been suckered by the recent appearance of improvement
in the US employment and housing markets. Most people still don't
even know gold exists they're idiotically buying long bonds for
a couple percent of yield.
Be that as
it may, the one thing we know for sure is that the world is being
flooded with new funny money. Economic contraction is masking the
effect, and that money is just sitting in banks now, but you can't
print trillions and trillions of new currency units indefinitely
without inflation showing up. Timing is always the hard part confusing
what's inevitable with what's imminent but this is as sure a thing
as I can see in today's market.
So, how do investors best speculate on that?
Well, first, there are the things to avoid. Government bonds are
my leading example of this a triple threat to your wealth, as
we've said before. They're the world's biggest bubble. You also
have to understand that as governments get more desperate, they
will become more dangerous, so you have to diversify your assets
and your lifestyle internationally. That's not new either, but I
know from past experience that few people will take action; and
it's a shame, because while you may survive your government treating
you like a milk cow, things change considerably when it decides
to treat you like a beef cow.
Is there an anti-government bond play you would recommend? Maybe
an ETF that goes up when bonds go down?
I don't recommend one at present, because there's no telling exactly
when the tide with shift; and until it does, investors in such vehicles
run the risk of losing their patience and giving up too early. I
think there will be time to invest in that when the tide shifts,
but has not yet gained momentum then shorting government bonds
will be the trade of the decade.
What else gold,
Absolutely. All of this currency creation is going to ignite a real
bubble in gold and silver. Gold is certainly not cheap compared
to its lows a decade ago, but it is the only safe haven we have
against the destruction of the US dollar and other paper money.
Remember, I don't buy gold to speculate on its price rising, I do
it for prudence.
For speculation, you buy the gold stocks.
Exactly. And we happen to be in a buyer's market. Even though gold
has traded roughly sideways for the past year, market sentiment
and the gold sector has turned so bearish, most of the gold stocks
are selling for much less than they were a year ago. They're a fantastic,
I'm reminded of the old saying about being careful what you wish
for. It wasn't so long ago that you were complaining about the metaphysical
impossibility of everything being expensive at the same time
Yes, well, those late to the gold table can be thankful for the
spectacular opportunities there are to buy good, profitable companies
today at much more attractive prices than last year such as the
ones we recommend in our BIG
GOLD newsletter, and earlier-stage companies with the potential
to return extraordinary near-term gains such as you recommend in
Thanks for the plug.
[Chuckles] My pleasure.
2013 is going to be ugly. But just a warmup for 2014.
Ouch. Okay then, until next week.
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