The Mania Phase Is Getting Closer

Recently: Doug Casey on Bernanke: Be Afraid, BeVeryAfraid

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…

L: Quicksand, 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 low.

Doug: 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.

For instance, he claimed that another leg down for the economy was very unlikely because “cyclical” elements, like housing, were already very weak.

L: He actually said they couldn’t get much weaker!

Doug: 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.

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Of course, 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.

L: Spending money they don’t have.

Doug: 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.

L: Brings 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?

Doug: 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.

L: All the king’s horses and all the king’s men couldn’t put Humpty Dumpty back together again.

Doug: 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.

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L: Hm. 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.

Doug: 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…

Central bankers 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.

L: What about Bernanke’s call to simplify the tax code and lower tax rates? That sounds like a push in the right direction.

Doug: 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.

L: How do you know Bernanke doesn’t mean really deep tax cuts?

Doug: 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.”

L: He 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 certainly did…

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Doug: 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.

L: Another 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 high-school grads.

Doug: 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 on education.)

Bernanke also 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.

It’s going to get really, really ugly, and if you don’t prepare now, you’re going to get hurt.

L: We’ve 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?

Doug: 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.

L: And 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 the duration.

Doug: 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 stays.

L: What 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?

Doug: 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 idea.

L: Pretty grim, Doug.

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Doug: 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.

L: What about an investment update — what’s your guru sense telling you today?

Doug: 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.

That’s for 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 Speculator.

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.

L: Well, I’m not going to argue with that, but I’d add silver to the mix. Anything else?

Doug: 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.

L: And 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: Just so.

L: Thanks, Doug. Till next time.

Doug: My pleasure. We’ll talk soon — the passing parade is getting more interesting, day by day.

December 17, 2010