Recently by Doug Casey: A Short Course In Clearing Customs
L: So, Doug London has suffered more damage from recent rioting than from anything else since the Blitzkrieg; the stock market had its most volatile week in years; gold shot well north of $1,800; and the U.S. government almost crashed into its debt ceiling. Smells like blood in the streets. What does a street fighting man like you make of all this?
Doug: Well, it was about 40 years ago in 1971 [laughs] when I read Harry Brownes first book, How to Profit from the Coming Devaluation. In that book, Harry said that if gold went as high as $200, it would be a sign runaway inflation was coming, and readers might need their survivalist retreats, etc. He was actually right about everything he said in the book, and for the right reasons, but things didnt get as bad as quickly as Harry thought they would.
That just goes to show that if you predict any particular number or outcome, you should not say when it will happen, or if you predict a time for important events, you should not say specifically what will happen.
Anyway, Im very uncomfortable predicting serious gloom and doom for two reasons: One, most individuals intuitively look out for themselves by producing more than they consume and saving the difference so the amount of net wealth in the world grows. Two, technology continues to improve Moores Law and all that.
L: Ive heard you say that before, but youre the guru, so you dont get off so lightly. What do you feel comfortable telling us?
Doug: My sense is that we are definitely exiting the eye of the storm at this point, and were heading back into the raging winds of financial, political, and social turmoil. The riots you see now are just an indicator of whats ahead an appetizer hardly the main course.
L: Thats a pretty bold statement, Doug. Weve been talking about the so-called recovery really being nothing more than the eye of the financial storm that hit in 2008. But the U.S. and other governments around the world have been able to animate the corpse of the 20th-century economy and keep an appearance of life in its zombie motions longer than we thought possible. To say were exiting the eye of the storm implies that zombie is going to stop moving and the smell of decay will soon overpower everything else. Are you ready to make that call?
Doug: Youre asking me to do what I just said was unwise: to say both what and when. But yes, it does look grim to me. With the markets fluctuating so wildly, the Dow going up and down hundreds of points per day, thats very likely to spook the government, investors, business managers, and consumers even more than they already are. Normally I dont pay much attention to consumer confidence; its an emotional state, and emotions can change in a New-York second. But at this point the economy rests on nothing more substantial than confidence. Its a confidence game. And confidence can blow away like a pile of feathers in a hurricane.
L: So what were looking at is not just a bump in the road. Its going to change priorities and marching orders for market participants and for those who interfere in the markets in various ways.
Doug: Yes. Its the kind of thing that accelerates a negative spiral, in good part because everybody wants the government to do something, in the idiotic belief that it can improve things by doing more. Actually it can only help by doing less.
L: So the economy slows more. Why cant the government reanimate the corpse one more time, turning up the juice on the stimulus heart-shock paddles?
Doug: Theyve already created trillions more currency units. Most of these are currently sitting in banks rather than circulating. Thats partly because people are afraid to borrow and banks are afraid to lend, but also because the Fed is paying banks interest to keep what are considered to be excess reserves locked up. So these trillions of dollars that were created to bail the banks out are sitting there, but theyre not going to sit there forever. Once those dollars start circulating in the economy, prices will rise rapidly.
The other way for prices to really explode would be for the foreigners holding some six or seven trillion hot-potato dollars to start dumping them. With the U.S. government clearly unable to deal with its debt and the consequent credit rating downgrade which was both inadequate and long overdue those foreigners are getting pretty nervous holding dollars. Almost any sort of financial calamity could spook some central bank into exiting its dollar position wholesale. And once one of them starts, the race will be on, because no one is going to want to be left holding the bag.
These are two time bombs that are ticking away right now the trillions of dollars outside the U.S. that could come pouring back in, and the trillions of dollars inside the U.S. that were created to paper over the leading edge of the storm. Either of those things could bring on the end of the dollar as we knew it, and both may well happen at once.
L: Okay But the state has been very good at convincing people to pay no attention to the man behind the curtain. If the markets settle down, why cant people go back to imagining that everythings fine?
Doug: Im not sure that many people really ever believed there was a recovery under way. Wall Street acted like there was but only somewhat, since banks never started lending again. But unemployment has remained high; itd actually be about twice the official 9% level, if it was calculated the same way it was 30 years ago. And outside of the price collapse of certain asset classes like real estate the cost of living has increased greatly for most people; the calculation of the governments CPI is as corrupt as its unemployment numbers. I think its a mistake to talk about a double dip in the economy; we entered the Greater depression in 2007 and are still in it. A jobless recovery is not a recovery. The only thing thats recovered is the stock market, to some degree. Aside from government hocus-pocus, the mirage of corporate earnings, and foolish investors wanting to believe it was safe to get back in the water, things have not gotten better. And they are about to get much worse.
L: That may be so, but the government, the press, and corporate America have all been talking about a recovery. With the Fed promising easy money, if the markets calm down, couldnt the illusion of recovery be reestablished?
Doug: I dont think so. The economy isnt going to stay in the eye of the storm for much longer. The stab of panic we saw last week gave lie to the emperors new recovery clothes. Its not just the losses on the stock market, but gold hitting significant new all-time highs in nominal terms, and Bernanke saying that the Fed would hold interest rates close to zero for another two years. Thats huge and a huge mistake. It tells me that Bernanke has truly panicked. The impact this will have on the dollar cannot be overstated; its a guaranteed disaster. It assures that people will do all sorts of things they would not do without that artificially easy money.
L: Okay, but if they go into debt to buy houses and cars, theyll create jobs and there will be more appearance of recovery, wont there?
Doug: Thatd just be digging the hole deeper at this point. What needs to be done is to let the market raise interest rates, to encourage savings the accumulation of the capital needed to start moving forward on a solid basis. Instead of encouraging people to work, spend less than they make, and save the difference, these low interest rates encourage profligacy. They encourage people to liquidate savings and live above their means. As usual, the government isnt just doing the wrong thing, its doing the exact opposite of the right thing.
Doug: Because of the false belief that printing money stimulates the economy. The artificially depressed interest rates of today will result in very high inflation and very high interest rates in the near future. A healthy economy gets naturally low interest rates as a result of a lot of savings, a lot of capital creation. A healthy economy has stable interest rates that relate to the amount of new wealth being created, typically just above the natural rate of inflation that results from real money gold being mined out of the ground. Artificially low interest rates stimulate malinvestment.
The Fed is also keeping rates low because of the governments massive debt problem. The U.S. is already running trillion-dollar deficits if interest rates go up, say, to 12% like back in the 70s, that would add another trillion to the deficit right there. Financing a $16 trillion debt at 12%, rather than 2%, equals another $1.6 trillion of spending just for interest.
This really means they have no choice. The situation is completely out of control the U.S. financial house of cards is irredeemable at this point, even with interest rates at close to zero. The whole financial structure is close to collapse, and thats why I think were exiting the eye of the storm.
L: The Titanic has been struck, but Captain Obama just doesnt yet realize how badly?
Doug: Exactly. And adding insult to injury not only are they doing the opposite of the right thing, they are actively punishing people who did the right things, who worked hard and saved. Pensioners living on fixed incomes are being forced to reach for higher and higher yields, which means they are being forced to put their nest eggs into riskier and riskier investments. This guarantees that the pensioners and the savers will be wiped out.
L: Unless they put their savings into gold.
Doug: Sure, but nobody but crazy goldbugs even thinks about that. And it gets worse: The current course guarantees the total destruction of the U.S. dollar. Again, I cannot emphasize enough how serious this is. People all around the world save in dollars. If the dollar is destroyed, it wont just be Americans whore hurt, it will be all the hard-working people around the world whove struggled to scrimp and save and put money away for future needs. All these people who were wise and frugal, they are going to be wiped out. They are going to be left with absolutely nothing. This is criminal its the stuff revolutions are made of. And thats exactly what I expect well see plenty of, all around the globe.
L: Seems so clear what could they possibly be thinking?
Doug: Perhaps Bernankes making the same mistake people with maxed-out credit cards make, when they think hyperinflation will wipe out their debts. They forget how nasty, brutish, and short life can be in a society in a hyperinflationary collapse. And think about it: What happens if you wipe out these debts? Who are the debtors? They are the most profligate people in society. So these artificially low interest rates reward the most irresponsible and punish the most responsible people in society.
L: Absolutely perverse.
Doug: [Chuckles] Took the words right out of my mouth.
L: Easy enough to do in this case.
Doug: Well, theres your answer. Whats going on now really is creating the foundation for revolution, and not just in the U.S. The riots in London and Chile, and other outbreaks of chaos around the world arent anomalies theyre a warmup. An overture before the symphony starts. Things will be especially bad in British and European cities, where there are millions of people whove never worked. Ever. Theyve just lived off the state.
L: Maybe well hear the music on November fifth.
Doug: Remember, remember, the fifth of November That would be interesting indeed. Readers should rewatch V for Vendetta to put them in a proper frame of mind on how serious things are. I mean it is going to be a time when Street Fighting Man will be a most appropriate theme song. Turn up your speakers.
L: I agree with you, Doug, but I have to say it makes me a bit nervous to come out and say were exiting the eye of the storm. The powers that be have proven far more adept at keeping the balls they are juggling in the air than I ever thought they could be. Every time I think it cant get worse without things coming apart, it does get worse, and somehow things dont come apart, they keep going.
Doug: Of course. As I started out saying, Harry Brownes prediction 40 years ago was essentially the same that Im making today. Harry was a bit early and I was too, in 1980. But this time really is different, with so many unprecedented actions and reactions between the market and the state. I truly see no way out for the state this time, and its going to be much, much worse than it would have been had it collapsed back then. I cant say for sure exactly when things will fall apart, but Im more convinced than ever that they will, and that we are about to plunge deeper into the Greater Depression.
L: What if youre wrong?
Doug: I honestly hope I am, because if Im right, the global economic devastation is going to have a very real and significant death toll. The price in human suffering these fools in government are setting us up for is truly monstrous. As a human being, of course Id rather see good times.
L: But as a speculator
Doug: Yes, as a speculator, I know the crisis will create phenomenal opportunities. If we lived in a stable society, with a stable monetary order and a non-predatory government, itd be impossible to be a reliably successful speculator, because thered be few or no politically induced distortions in the economy to take advantage of. So, always looking on the bright side, we can look forward to many new bubbles to result from the states massive interventions today and in the future.
L: Such as?
Doug: There will be a huge bubble in gold ignited, and maybe soon. That seems pretty much baked in the cake at this point.
L: Thats interesting. A lot of people say gold is already in a bubble that the recent surge up to $1,800 per ounce is a sure sign of that. But youre saying it hasnt even started yet?
Doug: Well, I hate encouraging people to buy gold at $1800 an ounce, because that level is already more than 700% above the bottom in 2001, and Im a bottom fisher. I like bargains, and I cant call gold a bargain today. But its plain as day that gold is going to go higher. Theres simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. What else could people buy as they get more and more afraid of paper currencies losing acceptance? What are corporations going to do with the billions of dollars in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too what will they do when they need to dump dollars in favor of something that will hold value?
This is why I see a bubble in gold still ahead. It has nothing to do with the supply and demand for gold in the jewelry trade, or whatever its going to be a result of there being no viable alternatives when the paper-money con game is over. Gold is the ultimate cash, and thats where people will go when theres a global, total, panic to cash.
L: Agreed. Other investment implications?
Doug: Gold mining stocks. Most good ones arent bargains, even though theyve been lagging gold in recent trading, maybe because of the fear in the marketplace. But theyre going higher.
L: Of the two major forces that drive markets, greed and fear, which do you think will predominate going forward? Because there are different buying patterns, depending on whether its greed or fear in the drivers seat
Doug: Youre quite right. I think it will be a market driven primarily by fear for some time, and that will favor profitable producers, emerging, high-margin production stories, and maybe the best of the best explorers advancing projects with obvious merit towards production. Nobody buys the risky junior exploration plays when fear is driving the market.
L: Except a bottom fisher.
Doug: Except a bottom fisher, yes. There will be some fantastic opportunities in earlier-stage exploration companies that will get smashed because of fear. But speculators looking for those have to be patient. Many junior explorers will dry up and blow away during the fear-induced drought. Eventually, the best will come roaring back when the bubble inflates and the real mania phase of this bull market kicks in. Then, everything with gold in its name will trade at ridiculous premiums, even the crappiest juniors whose only gold is in their name.
L: How long before greed kicks back in?
Doug: There you go asking for a time as well as a prediction again. I dont know, but it could be a while: A lot of greed has been washed out of the system with the big panic of 2008, the real estate collapse, and the stock market really going nowhere for the last ten years. Plus, when the bond market collapses, as I think it will, that will be the final blow. Thats really The Big One on the horizon these days the bond market is three times the size of the stock market, so a major reversal there will cause enormous damage.
L: So, stay away from the junior explorers?
Doug: Just the crappy ones and as you well know, 95% of explorers have nothing and never will have anything. But there are some which actually have gold or silver in the ground or clear drill indications that they are close to being able to report having such assets the kind you specialize in finding for the International Speculator. Those stocks are going to benefit from the flood of money hitting the precious metals sector. Remember, the whole gold market is trivial in size. Its only a tiny fraction of the oil patch, and not even a rounding error compared to the global market. When the average investor wakes up to the need to own gold for safety and the potential profit from owning gold stocks for leverage to gold, its going to be like trying to fit the contents of the Hoover Dam through a garden hose. Prices will go ballistic, and there will be plenty of money hitting even the smaller juniors that have good stories.
L: Good reminder about safety.
Doug: And thats another factor that will be driving the price of gold: It wont just be speculation, it will be prudence the flip side of fear. Prudence will drive people into buying more physical gold. Greed will drive people into gold stocks. I own a lot of physical gold already, but Im still buying, even at these levels. And I own a lot of gold stocks, but Im still accumulating those too, when we dig up good opportunities.
L: Very well. Anything else?
Doug: I should mention for those in our audience who like our video conversations that I recently had a conversation on the Money and Wealth Show when I was in Vancouver, similar to what weve discussed today.
L: Very good. I also want to mention that Ive just set up an LJ Facebook page for the entertainment of those who wish to follow my travels and adventures on a sporadic but hopefully more frequent basis than in the monthly issues of the International Speculator.
Doug: Great I look forward to seeing the pictures I know youll take on your next rock-kicking expedition. Til next time.
L: All right then til next time.