Doug Casey Revisits the Greater Depression and Explains the Realities of Investing in the 21st Century

Interview with Scott Smith

The Daily Bell is pleased to present an exclusive interview with Doug Casey.

Introduction: Doug Casey has appeared on hundreds of radio and TV shows, and has been the subject of articles in People, Us, Time, Forbes, The Washington Post, and numerous other publications. For nearly three decades, Doug Casey and his team have been correctly predicting major budding trends in the overall economy and commodity markets.

Daily Bell: We asked you a number of questions nearly a year ago about fiscal and monetary issues – as well as the state of the world. You weren't especially optimistic then. We can't imagine your mood has improved much, has it?

Doug Casey: Well, my personal mood is fine. But the economy's mood is likely to go from merely grumpy to psychotic. The Greater Depression began, I believe, in 2007, and will get much worse because not just the US government, but every major government in the world, has been doing not just the wrong things but exactly the opposite of the right things.

The right thing would be for these governments to get totally out of the picture. What they are doing instead is inserting themselves further into the economy. But I suppose this is what the average person wants them to do because, idiotically, the average person thinks that the government is some kind of a magic cornucopia and is the solution to their problems – when actually government is the basic cause of all these problems. Its only products are taxes, regulations, and inflation – along with wars, pogroms, persecutions and the like. Government produces nothing. So I guess I'm not overly sympathetic to them; they are pretty much going to get what they deserve in the years to come.

The Greater Depression is on a temporary hiatus at the moment because the stimulus measures and extra debt these governments have created to deal with the crisis have given the appearance of a recovery; but in the months to come, things are going to devolve back to the financial chaos of a year or two ago and actually get much, much worse. I hate to make such a gloomy forecast, if only because people that draw wacky conclusions from sources like Nostradamus, the Bible, and the Mayan calendar are so prone to do so. But I'm not talking about the end of the world, just a bit of a social and economic upheaval – and we've had plenty of those over the centuries.

So, in brief, we're kind of in the eye of the storm at the moment, but I expect this thing is going to be much worse on the other side of the hurricane. And it's not going to be brief; this could linger on for years with a lot of consequences, not just the obvious economic and financial ones.

Daily Bell: You thought the euro and the dollar were both on their way out last time we spoke – though you gave no timeline. Can you give us your thoughts on where we are with these currencies – euro first and then the dollar? Is the bailout going to work for the euro?

Doug Casey: Absolutely every currency in the world is going to reach its intrinsic value in the next few years, and basically every currency is nothing but toilet paper. Basically all the governments are going to wind up destroying their national currencies. That won't be just an academic thing; it will have the consequence of destroying a lot of the middle classes around the world. That will likely create ugly political and sociological fallout.

In particular the Euro, which is a totally artificial construct, is a dead duck. As I said last year, if the dollar is an "IOU nothing," then the Euro is a "who owes you nothing." The bailouts are completely insane, counterproductive, and the opposite of what should be done. It's not just Greece. The EU is going to have to bail out Spain, Italy... in fact the whole structure is rotten. The EU will try to bail itself out, which is rather absurd.

Daily Bell: Let's follow up on Europe. We've spoken about the euro but now give us your thoughts about Europe itself. Can the EU stand – why or why not? Will there perhaps be a smaller EU?

Doug Casey: I think the EU is almost certainly going to break apart. It's Frankenstein's monster, cobbled together. You have countries with very different cultures. Europe is famous for having had thousands of wars with each other since before the days of the Roman Empire; a history of Europe is a history of warfare. I see no reason why that will change. Of course the EU is something that is supposed to keep them from going at each other's throats again but the EU will actually cause more conflict, resentment, and hatred – not less.

The way to improve matters would have simply been to taken down barriers to travel and trade, which would have been fine. In other words, get rid of regulations and taxes, and make the states less powerful. But what they have done, idiotically, is centralize power in Brussels, and add yet another layer of bureaucracy. This has created more resentment, not less, between different national groups.

Daily Bell: You can see it happening right now. The Germans hate the Greeks for causing them loss of capital and the Greeks hate the Germans for not subsidizing them anymore.

Doug Casey: You don't need a gigantic, and necessarily corrupt and inefficient bureaucracy – with an arcane rule-book the size of the London phone directory – to enable free trade and free travel. What you need is simply to abolish the existing restrictions. But the prevailing philosophy and psychology in Europe is deeply socialistic, so of course they took the wrong approach. It's why in a couple of generations Europe will be fit for nothing but to be a source of maids and houseboys for the Chinese.

Another reason the EU is going to break up is because the tendency all over the world is towards smaller political units, not bigger ones. Before this is over I wouldn't doubt that Canada breaks up into a number of different enclaves, and I don't mean just Quebec. I think over the next 50 years, the US itself will start to fall apart; no way is a young Hispanic in California going to submit to paying 25% of his income to subsidize an old Anglo woman in Massachusetts. That is true of most countries in the world; they are artificial constructs. Every country in Africa was created out of whole cloth by European invaders, and that is one of the main reasons why Africa is such a Hell-hole. It was divided up with no regard whatsoever to cultural and linguistic and tribal boundaries.

The good news is that you don't have to worry about a world government, which a lot of people think they need to worry about. One favorable consequence of the Greater Depression will be the bankruptcy of most of the world's governments. As a result, they'll become less powerful. The nation-state, which has been around since the middle of the 17th century, is actually going to start disappearing in the years to come. I see that as a good thing. The EU is going to be the first to go.

Daily Bell: What's your take on Britain and the pound? Is Britain also subject to sovereign risk?

Doug Casey: Britain used to be somewhat different from other countries in Europe, because of its Common Law tradition. But now it seems well on its way to devolving into a society very much like that portrayed in the movie V for Vendetta. Fantastic flick, incidentally; I recommend it. But, as far as sovereign risk goes, their debt is junk. Pity the poor fool who owns it, especially with interest rates as low as they are.

Daily Bell: How about America? How are America's finances?

Doug Casey: The era of one-trillion-dollar-plus annual deficits is definitely here. And those are just the official deficits, which are going to be running a trillion or a trillion and a half dollars per year for the indefinite future. And on top of that you've got $100 trillion of unfunded liabilities of Social Security, the Medicare, the Medicaid. In a few years, you are going to have Obama-care, which is going to make the problem considerably worse. Then add on the probable federal bailouts of numerous bankrupt states like New York and California. And then hundreds of billions more for the FDIC, which is also totally bankrupt. Just like Fannie and Freddie. Then the Pension Benefit Guarantee Corp., will be hundreds of billions more – that hasn't hit the front pages yet. General Electric is just like a gigantic, 30–1 leveraged hedge fund; that's going to be bailed out too! Amtrak, which despite its outrageously high fares, continues to loose a couple billion dollars a year; of course that's just chicken feed in today's context. And of course these wars – and supporting military bases in over 100 countries.

Furthermore the ethical fiber of the country has eroded. You've got 40 million Americans getting food stamps; that number is going much higher. People feel no shame in living on extended unemployment benefits. No shame in living in a house for a year or more after defaulting on the mortgage. No shame in gaming the system – which is encouraged by a plethora of laws. America was once a great idea – in fact America IS an idea, much more than a place. But now it's just another corrupt nation state.

So, I don't see any way out, I just think it's going to get worse for the United States.

Daily Bell: Where does China and its yuan stand in all this?

Doug Casey: I have always been a big bull on China. Instead of thinking of the "rise and fall," as with the Roman Empire, you have to think of the "fall and rise" of China, because for many centuries they were way ahead of the West. Western culture overtook them, but now they are regaining their historic prominence. That is the long-term view.

But in the short term, the business cycle exists, and it exists in China too, despite the fact it's supposed to be a centrally planned economy. Since the collapse of communism, China has, in fact, become more economically free than the US. Communism was nothing but a gigantic swindle perpetrated upon the Chinese people, but it only lasted thirty-some years. That is a blip on the screen of China's history, almost meaningless! Mao was just the founder of a different, short-lived dynasty of corrupt emperors, of which they've had many.

So the good news is that Maoism and communism have collapsed totally, but the bad news is that one of their leading imports has been stupid ideas from the West – first Marxism, then Keynesianism in more recent years. They have ignited a gigantic real estate bubble in that country which is going to bust with the consequences of bankrupting most of their banks and bringing down real estate speculators, which are widespread in China. The size of their bailouts, in response to this crisis has been even bigger proportionate to the size of their economy than in western countries, so I think it's got the potential to be very ugly in China. But in the long run, after they get through this misadventure over the next ten or fifteen years, China is going to be resurgent again.

Look at it this way, you have the average Chinese making $1 per hour for what the average American is making maybe $10 or $20 per hour. The fact is that the Chinese guy has better work habits, he's just as smart or smarter, and the company he works for doesn't have any legacy costs in the form of medical benefits and pensions, and there are a lot less regulations and taxes. So eventually Chinese wages and western wages are going to meet in the middle. Chinese incomes are going much higher, and western incomes are going to be much lower. This is tough luck for the average person in the west, whose standard of living is going to drop. And of course, if they start blaming the Chinese foolishly, which they probably will, this is potentially another cause for conflict in the future.

Daily Bell: Let's turn to China's archrival. Is Barack Obama doing a good job?

Doug Casey: No, he's doing a horrible job. But I have to put that in the context of what's come before him. You have to look at this much the way you would have looked at the Roman Empire. When Tiberius died, the Romans were thrilled because Tiberius was such a degraded being; they foolishly thought it couldn't get any worse. He was replaced with Claudius, who was an embarrassment. After Claudius was assassinated they thought perhaps it would get better – but they got Caligula. Then after Caligula they thought how can it get any worse?? And they got Nero... I think the US is at a stage now where we can expect that our emperors will pretty much follow the pattern of the Romans. In other words, one is not better than the other; they're just different.

But one of the problems with Obama is that he is a sincere believer in all these destructive actions that he is taking. At least Bush, who was a numbskull – at once thoughtless, unintelligent, arrogant, and certain – at least kind of talked the free market talk. At least he probably didn't really believe in all the stupid domestic economic policies he implemented – like the Medicare Drug Benefit, No Child Left Behind, TARP, and so many more. But that was probably only because he had no core beliefs. But Obama apparently does – and all his appear bad. Look at the $400 million he wants to give the Palestinians. Actually, we shouldn't care, since the money is borrowed from the Chinese. It's really their problem I guess. Obama, unlike Bush, has a high IQ, but he has the instincts of a Chicago ward healer, or small-time community organizer. He's a statist, through and through.

We will see who comes after him; I believe he will be a one-term president. I am sure the next guy will even be scarier than he is, since we'll then be in the throes of a real crisis. God forbid Americans then opt for a strong leader, in the mold of leaders in the 1930s and 40s

US presidents like, Clinton and Bush and Obama... they are nothing-nobodies, that came out of nowhere. I wonder how can this be? Is it now impossible for person of substance be elected to the office of president? People with the character of Washington, Madison or Jefferson or Adams? Probably. What manner of person would be willing to do what is necessary to be elected? So now we get non-entities. No one has even heard of these people before, because they've accomplished nothing with their lives, except for politicking. I mean I don't believe in conspiracy theories, but these people are characters at once so trivial and misdirected it makes you want to believe it's a cosmic joke of some kind.

Daily Bell: Where is a good place to be investment wise – stocks, bonds, gold? What kind of stocks?

Doug Casey: We are in a very strange twilight zone in the investment world right now. In fact, it seems to me that everything is overpriced... and of course that's metaphysically impossible, everything can't be overpriced. What I'm saying is that there's very little "value" to be had anywhere. There are, however, some places that I definitely don't want to be at this point, because we are looking right now at what I expect is going to be the biggest economic upset, not just since the last depression but since the industrial revolution.

I don't like the stock market, because when the stock market's cheap, dividend yields are typically in the 6–8% range. Not so terribly long ago, in the mid-80's, markets like Spain, Belgium and Hong Kong were all yielding 15% in current dividends, selling to half to one times book value, and 2, 3 or 4 times earnings. I think things can get much worse than they were in the 80s, so I don't think stocks are the place to be.

Bonds are even worse. Bonds are a triple threat to your capital. You have the currency risk, and I talked about currencies earlier. You've got the interest rate risk; interest rates are going to go much, much higher and bonds fluctuate inversely with interest rates. And then you've got the credit risk, whether or not the person you lent the money to will ever pay it back. Bonds are now the worst possible place for your capital.

Real estate is a disaster that's not nearly over yet. You've still got real estate bubbles in China, Australia, and Canada – although I think they're popping even as we speak. Real estate is going to get hurt much worse. Property has been driven to absurd levels by government policies making borrowed money easily available. It will be an object of taxes from bankrupt governments, it will be crushed by higher interest rates.

I guess gold is the least bad thing to be in. I say that because gold is no longer where it was even 10 years ago, $250–$300 an ounce, it's up 4 or 5 times in price. Not withstanding that, it's still probably the best place to be because it's the only financial asset that's not simultaneously somebody else's liability. But you know what they say about a depression? Everybody loses, the winner is just the person who loses the least.

From the speculator's point of view, the nice thing about these governments printing up trillions of new units of their currencies is it will ignite bubbles in other places in the investment world, and it is possible that they are going to ignite a bubble in the world of precious metals, and perhaps a bubble in the precious metals stocks. And it's possible to get 20, 50, or 100 to 1 return on your money in these volatile small – actually micro cap or nano cap – stocks.

One of the consequences of high rates of inflation is that it almost forces everyone to try to speculate, just to survive. There's an excellent chance they'll ignite a bubble in mining exploration stocks, as well as gold and commodities.

Daily Bell: Geopolitical tensions often ratchet up during a bad economic time. Is the West headed into a war with Iran?

Doug Casey: That's entirely possible. But, unfortunately it's not just Iran. The thing is that bad economic times usually lead to war for all kinds of reasons. One reason is because people tend to blame other people for their problems and that leads to war. Another reason is that, idiotically, a lot of people believe that war can cure economic problems. They actually think that WWII brought the west out of the depression, which is not true at all; it actually extended the depression, by destroying immense amounts of wealth. Remember, the best general definition of a depression is: a period of time where most people's standard of living drops significantly.

Anyway, something resembling WWIII has already started; you might describe it as a continuation of the Crusades. The war with Islam has been going on since the Muslims invaded Spain. They were turned back at the Battle of Tours in 732, then Europeans invaded the Middle East in 1095, then the Muslims reinvaded Europe, and were stopped at Vienna in 1683, then the Europeans colonized the Muslim world throughout the 19th century – so this has been going on between Islam and the west for 1300 years now. And I expect it is heating up again. Although it's camouflaged as the War on Terror – which is ridiculous, because terror is a tactic, not an enemy. The US has stuck its nose into the tar baby of Iraq and Afghanistan, maybe Iran, or even Pakistan, is next on the dance card. These are all Muslim countries.

You have a billion and a half Muslims in the world, maybe 15% of them are radical fundamentalists. That's a lot of people, and they resent western soldiers running around in their countries, as much or more as we would resent Islamic armies here in the United States, breaking down doors at 3 o'clock in the morning.

Daily Bell: What about Afghanistan – is the West winning? Why is America in Afghanistan anyway?

Doug Casey: The only reason that America is in Afghanistan has got to be the most perverse type of stupidity that I can imagine. It serves no useful purpose at all to be in Afghanistan, it does nothing but creates a whole new class of enemies among these people for the reasons I just said. It solves absolutely nothing. And to expect that America is going to be anymore successful having invaded Afghanistan than the Russians were, boggles my mind. I mean, there's a good chance that the United States is going to leave Afghanistan is pretty much the way they left Saigon at the end of the equally pointless Vietnam war – with the helicopters evacuating the last people from the top of the Embassy. But it is doing absolutely no good at all and it's going to end badly. It's going to go a long way towards bankrupting the US financially, as well as morally.

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June 14, 2010

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