Mania Phase Is Getting Closer
Casey Interviewed by Louis James, Editor, International
on Bernanke: Be Afraid, Be Very Afraid
When we left
our intrepid heroes last
week, Doug was saying, "Now we have new economics – a house
of cards built on quicksand. The whole corrupt system is doomed.
But good riddance, actually…" We now return for another action-packed
episode of Conversations With Casey…
if not lies. That Jon
Stewart link I provided last time shows that Bernanke himself
called quantitative easing "printing money" in his previous 60
Minutes interview, even though he denied the very same thing
in this new one. Throughout the whole interview, aside from the
quivering lip and the quavering voice, he seemed to be speaking
out of both sides of his mouth, in terms of content. On one hand,
he repeatedly sounded his warning that the economy is not out of
the woods, and that's why printing more money was necessary; but
on the other, he said the risk of a double-dip recession was very
I find it amazing that anyone pays any attention at all to what
the man says. Except for a brief time waiting tables in school,
he has zero experience in the real world. His whole life has been
reading abstruse books written by people like himself, and doing
complicated math formulas that are supposed to describe economic
phenomena, but have absolutely nothing to do with the study of human
action. He's a character who should appear in Alice
in Wonderland, or Through
the Looking Glass.
he claimed that another leg down for the economy was very unlikely
because "cyclical" elements, like housing, were already very weak.
actually said they couldn't get much weaker!
He's either a knave or a fool – possibly both. But the odds are
he's just an educated fool, an archetypical, clinical example of
one. Either way, it's bad news for the U.S. and global economies.
Of course, there's really nothing that anyone could do, at this
point, to avoid a huge amount of economic, political, and social
turmoil. There are only two choices for a central bank: one is to
keep printing money, and hope that magic happens; two is stop printing
money, and let the existing structure collapse. Neither is a pleasant
prospect, and there's no third alternative, in my view. It might
have been possible to negotiate a relatively soft landing some years
ago, but I believe that time has passed.
things will eventually bottom, and then get better. But in the meantime
things can get worse, much worse – and, in fact, they are worse
than the government is admitting. They don't admit it because they
think confidence is important. It's not. If an economy rests on
confidence, then you're in real trouble. A big reason things will
deteriorate is because the people in power are under the illusion
that all is well as long as people keep spending.
money they don't have.
Right. I keep coming back to basics; to accumulate wealth, you have
to produce more than you consume and save the difference. In time,
that savings can be invested in new ventures and new technologies
that create prosperity. You simply cannot spend and consume your
way into prosperity, either as an individual or as a society. Worse,
all the debt in the world is an indication that many people are,
in effect, living out of future production. This is why I keep saying
that what they are doing is not only the wrong thing, but the exact
opposite of the right thing. I'm not just being rhetorical – it's
the literal truth. Real, sustainable economic recovery and growth
depends on abandoning the old, uneconomic patterns of production
and consumption that punish saving.
to mind the strongly negative association most people have to the
words "I'm from the government, and I'm here to help." And yet people
seem willing to let the government do just about anything, from
printing massive amounts of money to trampling the Constitution
in the name of the War on Terror. How can people be so foolish as
to trust an institution they know is untrustworthy?
Just goes to show how degraded society has become. This is a primary
reason why I believe things must and will get worse before they
get better. The average person in the United States doesn't much
believe in the virtue of productive work, or saving. Instead, they
believe they have a natural right to spend and consume with virtually
no limit. Americans have come to believe they should maintain a
higher standard of living than the rest of the world. They don't
understand that the world is full of people willing to work harder
and longer, doing equivalent work or better, for less pay. Things
have changed. The old model is broken, and things are not going
back to the status quo ante, no matter how hard they try
to "stimulate" economic activity by printing up money.
Europe is no
better off, and neither is Japan. The old way of things is bankrupt,
and we're in the endgame now, during which we'll see more and more
violent fluctuations as the system disintegrates.
the king's horses and all the king's men couldn't put Humpty Dumpty
back together again.
No. But, frankly, Humpty had it coming. An egg had no business trying
to balance on top of a wall. Anyone living in what is now called
a first-world economy should be afraid – very afraid.
Well, does Bernanke get any brownie points for saying that the U.S.
is going to have to tackle its budget deficit? He said that in 15
to 20 years, almost all of the government's budget would be taken
up just by Medicare, Medicaid, Social Security, and interest on
the national debt, leaving none for even the military.
No, no credit at all, unless you get points for mouthing idiotic
platitudes. He said that while reining in spending is important,
it should not be done now. He said the U.S. should not take any
actions that would cut spending this year, and slow the so-called
recovery. This is exactly how you set your feet on the path to Zimbabwe.
Good theoretical intentions for some indefinite but faraway future...
don't think of themselves as deciding to destroy their currencies;
they think of themselves as taking emergency measures necessary
to keep things going today. Tomorrow, they'll get back to doing
things properly, after the emergency passes. And of course, every
time tomorrow dawns, there's some new urgent need to keep emergency
measures in place, or take even stronger emergency measures, leaving
the harsh medicine for yet another tomorrow.
about Bernanke's call to simplify the tax code and lower tax rates?
That sounds like a push in the right direction.
Sure. But it's way too little, too late. Cutting taxes is always
good for any economy, and so is minimizing red tape, with the U.S.
tax code being among the worst masses of red tape in existence.
But the kind of seismic shifts needed – like eliminating capital
gains taxes entirely, and income taxes as well – are not politically
viable. It does no good to make marginal improvements to a system
that is fundamentally flawed and broken. Bernanke is proposing a
band-aid where amputation is needed.
do you know Bernanke doesn't mean really deep tax cuts?
He's not a closet anarcho-capitalist secretly out to reform the
entire system. He's a mainstream academic economist, and a bureaucrat
who believes he can fiddle with the economy and control it. Remember
what he said about being able to stop inflation simply by raising
interest rates in 15 minutes. And remember his evasive answer to
the question about how the Fed missed the impending crisis: he said
that "large parts of the financial system were not adequately covered
by the regulatory oversight."
specifically cites AIG and Lehman Brothers as being examples of
financial institutions that were essentially unregulated. That's
total nonsense, of course; they may not have been regulated by the
Fed, but they sure as heck were regulated by other federal agencies.
And it's a misdirection. The Fed's theoretical responsibility is
the economy, not individual banks and insurance companies that might
be taking excessive risks. To say that he and his colleagues at
the Fed didn't see the crisis coming because of lack of regulation
shows a complete lack of understanding of what their task is. Besides,
any observer with any sense could see what was happening then. We
He may just have a complete lack of honesty. And absolutely a complete
lack of understanding of economics, finance, history, and monetary
theory – a shameful but perhaps predictable state for someone who's
lived his whole life in an ivory tower. The man has been wrong about
everything he's ever said about the U.S. economy.
sign of his world-view being a problem was his answer to the question
about the "income gap" between the rich and the poor in the United
States being a product of education. He cited as evidence in support
of this idea that unemployment for college grads is half that of
Of course, as a professor, he'd see it that way. And that was true
50 years ago, maybe even 25 years ago. But he's out of touch. Even
if were true today, it has nothing to do with the fact that college
grads have stupidly misallocated four years and $200,000 having
their heads filled with politically correct nostrums, getting worthless
degrees in stuff like English, psychology, sociology, art history,
education, and gender studies. But education is not the problem.
The great income disparity between Mugabe and his cronies and poor
Zimbabweans isn't due to the superior education of the Zimbabwe
rich. American history is full of examples of people with little
education making it big. What's needed is an entrepreneurial spirit
and the freedom to pursue it, not a college degree. (For more on
this, readers should see our conversation
said that increasing income disparity is a very dangerous development
that is creating two societies. Even when Bernanke is right, he
misses the actual point. The rich have always had their own society,
even in the most egalitarian cultures. But what's happening is there's
a growing perception of "us vs. them" between the diminishing middle
class and the rich, and it is indeed very serious – because of the
way in which many people are getting rich. People can see bankers
being paid gigantic bonuses with government money, and it justifiably
makes them angry. The pot of envy and jealousy is being stirred
up big time, and the implications for anyone with any amount of
wealth are potentially dire. It doesn't take much to turn widespread
resentment into a wave of violence.
As I said,
it's time to eat the rich, and these days, anyone who isn't poor
is considered rich.
This is why,
since the crisis, my mantra has been to not just diversify one's
assets and financial risks, but to diversify political risk. Political
risk is actually greater than financial risk today. It may not be
time to get out of Dodge quite yet. But if you don't want to be
left with grabbing a backpack and heading for the hills as your
only option, it is absolutely time to be setting up second residences
in places you'd enjoy going for an extended vacation while the global
economy works through the coming liquidation of decades of stupid
government economic policies.
to get really, really ugly, and if you don't prepare now,
you're going to get hurt.
talked before about diversifying to protect
your assets, diversifying to minimize
political risk, where
you think it's best to do so, and how to invest
during the crisis. I'd guess that as far as protecting your
assets goes, especially with currency controls already ramping up,
you'd say that that's gone beyond urgent – if any readers have not
taken action yet, they need to do so immediately. What about physical
security? I can imagine angry mobs on Main Street at some point,
but probably not tomorrow. How much time do you think we have to
set up alternative residency in safer jurisdictions?
A society can fall from grace with amazing speed. Yugoslavia was
a relatively rich European country that went from peace to chaos
and violence in a matter of weeks. I suppose that in terms of actual
social disorder, there will be increasingly obvious signs, and even
in the event of a breakdown in social order, some days of transition.
But at that point, it's too late to set anything up – if the borders
are even still open.
the way various U.S. authorities have taken the term "lockdown"
from prison use and applied it to airports and even schools, it's
not hard to imagine the entire country being put on lockdown for
Indeed. It's high time to set up residences in places where you'd
like to weather the storm, and see to the legalities of extended
about those who can't leave, because of family members who refuse
to move, or because they have jobs they can't work from afar?
Better start educating those family members and looking for work
not tied to a specific office or place. If you're really stuck,
at least getting out of the big cities and setting up base in a
rural community, even if it means long commutes, is probably a good
That's the way I see it. I don't make the rules, I just play the
game. But just because it's going to be tough for most people doesn't
mean it has to be tough for you. Most of the real wealth in the
world is still going to be here – it's just going to change ownership.
And since there are more scientists and engineers alive now than
have ever lived before in all history, new wealth will continue
being created. There's plenty of cause for optimism, long term.
about an investment update – what's your guru sense telling you
Nothing new to regular readers, but I am feeling that the Mania
phase of the current bull market for precious metals is coming closer.
Gold is not cheap, compared to ten years ago, but it's definitely
the one asset most certain to retain value throughout the unfolding
crisis. Putting a significant amount of your savings or net worth
into gold is no speculation at this stage, but positively the safest
thing you can do with your money. It's what I'm doing.
surviving the coming Greater Depression. Your best bet at thriving
is to speculate on gold stocks, especially the kind of junior exploration
companies working on discovering new deposits, such as you focus
on in the International
All these trillions
of currency units that governments around the world are creating
will result in other asset bubbles. That's bad news for society,
but good news for speculators like us. This will probably help equities
in general, as they represent ownership companies that presumably
are worth something, but gold is going to be the hottest asset throughout
this crisis, and gold stocks will offer leverage to that heat. I
think we're going to see a spectacular mania in these things. It's
such a small market sector that even a small shift of interest from
mainstream stocks will be like trying to siphon the contents of
the Hoover Dam through a garden hose – the better ones are going
to go absolutely ballistic.
I'm not going to argue with that, but I'd add silver to the mix.
Agriculture, in certain areas, is good. Energy, in certain areas,
is good. Betting on rising interest rates is as close to a sure
thing as I can see in mainstream investments today. But the main
thing is to take seriously our calls to diversify political risk.
The crisis is not over; we're just in the eye of the storm.
It is going to get worse, and those caught unprepared are
really going to regret it.
if people do buy gold, speculate in great stocks, set up second
residences in Argentina, Panama, or wherever… that won't hurt them
if the old world order does not come to an end, as you're predicting.
Those investments and allocations can always be unwound. Better
to prepare for the worst and hope for the best.
Doug. Till next time.
My pleasure. We'll talk soon – the passing parade is getting more
interesting, day by day.
Casey (send him mail)
a best-selling author and chairman of Casey
Research, LLC., publishers of Casey’s
© 2010 Casey
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