by David Galland: Gold
Stocks in a Failing Fiat Currency
the current situation in these United States, and in many of the
worlds other superpowers, we here at Casey Research have often
used the word intractable
as in, impossible
may not be technically accurate because there is no problem
related to economics that cant be solved if one is willing
to swallow sufficiently strong medicine it is a correct assessment,
given the overwhelming role that politics now play in the economy.
In a recent
edition of The
Casey Report, I observed that the largest and most persistent
bubble of all over the last half-century has been the bubble in
government making the ones witnessed in dot-com stocks and
housing mere blips by comparison.
chart is particularly illustrative of that contention.
As you can
see, the level of government spending (state being the blue area,
and federal being the red) as a percentage of GDP has grown to levels
last seen during the unprecedented mobilization undertaken to fight
WWII a period marked by the government takeover of entire
industries, rationing of all key commodities, wage and price controls,
and much more.
Though it is
an overused analogy, the chart paints a perfect picture of a frog
in a pot of water slowly being brought to a boil.
trap the government has stumbled into opened decades ago, as a result
of the nations leaders misunderstanding both the basics of
economics and the complex relationship between the rulers and the
To frame the
discussion, I would start by pointing out that in order for a government
to be successful, above everything else it needs to avoid being
hated. Thats not to say that it has to be wildly popular,
though thats never a bad thing, just not actively despised.
speaking, the single most important way that a government avoids
becoming the object of public hate is to maintain things in such
a way that people are able to get by financially.
might not like a politicians ethics, and they might have strong
views about some stupid and destructive government act, but if people
can get up every morning secure in the knowledge that there will
be food on the table and a roof over their heads that their
businesses will carry on in a more or less predictable manner
their opinion about the government will never rise to the level
overarching goals of government should be to assure that, come what
may, the footing of the economy is firm and that the property of
the citizenry is protected. Given that the government doesnt
actually create wealth of its own accord, the best way to accomplish
these goals is relatively simple and can be summed up as, Do
us to the trap the U.S. government stepped into, as did virtually
all of its peers around the globe.
the government simply decided to expand its role beyond providing
the basic services that make some contribution to a smoothly operating
society. While it may have done so with the best of intentions,
the record makes it clear that its motivations have increasingly
been political in nature.
to the chart, you can see that in the early part of the 20th century
there was almost no growth in government. You can also see that
that period of quietude was sharply disrupted by WWI, then the Great
Depression, which was followed by WWII each of which jacked
the governments role in the economy markedly higher. And once
the trend got started, it has largely continued unabated until today.
Note the latest spike, at the far-right side of the chart, and you
dont need to wonder where things are headed next.
could have avoided stepping into this trap simply by resisting all
calls for it to expand the limits of its role in order to do
something about this societal ill or aspiration rigorously
leaving such matters to the people themselves to address.
generations might have groused about the government being uncaring
or unsympathetic to the needs of the needy, by being tight-fisted
and modest in its exertions, the governments finances would
have remained solid as a rock. That in turn would keep the weight
of the governments dead hand on the economy light and readily
manageable. As a consequence, come what might, the vast majority
of people could count on being able to earn a good dollar and keep
most of it for their own purposes.
In other words,
if back in 1905 or so, the government had just said no
to foreign adventures and domestic largess, we would today be living
in a different world altogether.
Let me get
to the point, because it has important implications for us all.
If the government
had kept its role limited and its finances in good shape, people
might not love it, but theyd respect it and, more to
the point, they wouldnt hate it. However, by expanding as
it has, the government has drained its treasury. Then, politically
unable and unwilling to stop its spending, it kept going
racking up the largest debt in history.
That has brought
us to a crossroads.
One path leads
to more spending, in which case the currency will collapse, wiping
out the remaining wealth of the citizenry
resulting in a hateful
population. The other leads to overt default and a wholesale unwinding
of the governments massive role in the economy, again wiping
out the wealth of the citizenry and resulting in a hateful population.
scenario, a government anxious to avoid the worst can be expected
to raise taxes and take other desperate measures to avoid failure.
Hungary, Poland, Bulgaria, and other nations have recently made
pension grabs; we can expect to see that in the U.S. as well before
this is over. Again, at the same time that these moves may help
the government stay afloat awhile longer, it plants the seeds of
public hatred and cements its eventual downfall.
In our strongly
held view, the government will continue to opt for the path of more
spending until it simply cant, at which point the first
path will lead back to the second. And so, no matter what it does
at this point, the government will soon find itself faced with serious
and widespread discontent.
Throw a heavily
militarized constabulary into the mix, and the potential arises
for the situation to get very ugly, very fast.
That the government
remains firmly committed to its spending becomes obvious in a recent
Reuters article about plans by the new Republican House to reduce
Obamas already diluted $100 million in planned federal budget
cuts, to just $50 million.
And this while
the government continues deficit spending to the tune of more than
$100 billion a month. What a joke. What a bad, bad joke.
In the current
edition of The
Casey Report, senior editors Doug Casey, Bud Conrad, and
Terry Coxon chart the frothy economic waters we are finding ourselves
in and provide practical advice how to navigate them to your
You have to
make your own decision as to how youll protect yourself about
whats coming, whether by just diversifying into inflation
hedges, or diversifying your life internationally but whatever
you do, dont be lulled into complacency by any temporary pick-up
in economic activity engendered by the governments monetization.
Its a trap.
you can get The
Casey Report for only $98 per year an unprecedented
72% off the regular price. But hurry, this special offer is only
available for 72 hours. Details
February 14, 2011
is the managing editor of Casey
© 2011 Casey