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Doug Casey: How to Prepare for When Money Dies
Written by Doug Casey Subject: Casey Research ArticlesAn eye-opening interview with renowned speculator Doug Casey, conducted by Karen Roche and JT Long of The Gold Report. Doug explains why fiat currencies around the world are destined for collapse… and what investors can, and should, do to protect themselves.
If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007–2009. Catastrophe will come when everybody realizes that the dollar is an "IOU nothing." That's the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this exclusive interview with The Gold Report, Doug also identifies some reasons to be hopeful.
The Gold Report: You've
been talking about two ticking time bombs. One is the trillions of
dollars owned outside the U.S. that investors could dump if they lose
confidence. And the other is the trillions of dollars within the U.S.
that were created to paper over the crisis that started in 2007. Are
these really explosive circumstances that will bring catastrophic
results? Or will it just result in a huge, but manageable, hangover?
Doug Casey: Both, but in sequence. One thing that's for
sure is that although the epicenter of this crisis will be the U.S.,
it's going to have truly worldwide effects. The U.S. dollar is the de
jure national currency of at least three other countries, and the de
facto national currency of about 50 others. The main U.S. export for
many years has been paper dollars; in exchange, the nice foreigners send
us Mercedes cars, Sony electronics, cocaine, coffee—and about
everything you see on Walmart shelves. It has been a one-way street for
several decades, a free ride—but the party's over.
Nobody knows the numbers for sure, but foreign central banks, and
individuals outside the U.S., own U.S. dollars to the tune of something
like $6 or $7 trillion. Especially during the recent crisis, the Fed
created trillions more dollars to bail out the big financial
institutions. At some point, foreign dollar holders will start dumping
them; they are starting to realize this is like a game of Old Maid, with
the dollar being the Old Maid card. I don't know what will set it off,
but the markets are already very nervous about it. This nervousness is
demonstrated in gold having hit $1,900 an ounce, copper at all-time
highs, oil at $100 a barrel—the boom in commodity prices.
Some countries are already trying to get out of dollars, but it could
become a panic if the selling goes from a trickle to a flood. So, yes,
it's a time bomb waiting to go off, or maybe a landmine waiting to be
stepped on. If a theatre catches fire and one person runs out, soon
everybody rushes toward the door and they all get trampled. It's a very
serious situation.
TGR: If panic erupts on the U.S. dollar, would products manufactured in the U.S. become super-cheap or super-expensive?
DC: They would become super-cheap. Everybody says that
devaluing the dollar will stimulate U.S. industry because the products
will become cheaper and foreigners will buy them. This is a huge canard
everybody repeats and nobody thinks about. Yes, it is true for a while,
but if devaluation were the key to prosperity, Zimbabwe should be the
most prosperous country in the world as it has already collapsed its
currency.
A strong currency is essential for a strong economy. Sure, a strong
currency can hurt exporters for a while. But, a strong currency
encourages manufacturers to invest in technology, and become more
efficient. It rewards savings and results in the growth of capital
that's critical for prosperity. A strong currency allows businessmen to
buy foreign companies and technologies at bargain prices. It results in a
high standard of living for the country, and yields social stability as
a bonus. The idea that decreasing the value of currency to stimulate
exports is a short-lived, stupid and counterproductive solution to the
problem. People seem to forget that while the German currency was rising
about sixfold from its level of 1971, and the Japanese yen about
fourfold, those countries became the world's greatest export economies.
It didn't happen despite a strong currency, but in large measure because
of it.
TGR: Given that the U.S. is the world's biggest
consuming nation, wouldn't fleeing the dollar create a big consumer
vacuum in the international community? Doesn't the rest of the world
want to keep up the high level of exports to these U.S. consumers?
DC: That's exactly why the U.S. is in such trouble;
it's idiotically focused on consumption, while only production can
create prosperity. The world doesn't need to stimulate consumption. This
is another canard, because everybody has an infinite desire for goods
and services. I know for myself, I'd like not just a car, but 10
Ferraris, a couple of Gulfstreams and 10 houses around the world. So, by
myself, I have an infinite desire for goods and services. Multiply that
by 7 billion other people. The only way to gratify those desires is by
producing enough to trade with other people to give you what you want.
When so-called "economists" think the problem is that we don't have
enough consumption, that shows that the profession itself is bankrupt.
It's actually quite embarrassing.
TGR: But other countries currently produce enough of
what the U.S. wants. With U.S. dollars, that trade won't look good on
their side eventually.
DC: The problem is the U.S. doesn't produce enough in
return. The U.S. has been lucky to have a currency that has, so far,
been accepted by everybody. But when everybody realizes that the dollar
is an "IOU nothing" on the part of a bankrupt government and a society
that doesn't really produce anything anymore, it's going to create a
worldwide catastrophe. Those $7 trillion held by foreigners are going to
become instant hot potatoes.
TGR: Considering what you said a moment ago, that the
world doesn't need to stimulate consumption, you must find some irony in
the Obama administration's plan to stimulate consumption again in the
U.S. as a way to spur some economic growth.
DC: I'm afraid that after being counseled by the fools
that surround him, Obama talking about economics is like the blind
leading the doubly dismembered. They want to spend $450 billion trying
to create new jobs—but these are government jobs, where you have people
digging holes during the day and filling them up at night to create the
appearance of employment. No government has any idea what the market
really wants and needs. There should be zero government involvement in
this. The government cannot and should not even try to create jobs. If
Obama wants to stimulate the economy, he can decrease the size of the
government. I would say a 90% reduction would be a good starting figure.
TGR: But that will create even more unemployment.
That's one of the big concerns. States laying off employees could
increase unemployment even more.
DC: It is wonderful that states are starting to lay off
employees. Once they lose their state jobs, which suck wealth from
taxpayers, maybe those people can find real, productive jobs providing
goods and services that people actually want and will pay for
voluntarily. So I'd argue that getting rid of state employees is
essential to a sound recovery plan.
TGR: You warned early on in the 2008–2009 economic
crisis that it would really be more of a hurricane. In the last year or
so, we've been in the eye of the hurricane and there's more turmoil to
come. Will the other side of the storm be worse than the first? And
given the recent economic news, do you think we have moved out of that
eye?
DC: Yes, I think we are moving out of the eye and going
into the other side of the storm. This storm will be much more severe
because we haven't solved any of the problems that caused the hurricane
in the first place. The fact that governments all over the world have
created trillions of currency units has only aggravated those problems.
Now, I expect exploding prices to compound the problems that we saw back
in 2007, 2008 and 2009. That will devastate the prudent people in
society who saved money. They saved it in the form of currency, and
wiping out their savings will be catastrophic.
TGR: Will this affect only North America and Europe?
DC: Mostly North America and Europe, but it's going to
be very serious in Japan, too. It could be even more disastrous in
China. The Chinese real estate market bubble is very inflated, driven by
the lending of Chinese banks that won't be able to recover their loans.
They will all go bankrupt, taking out the Chinese populace's savings
with them. At the same time, those who own real estate will find it
worth vastly less than what they paid for it. Those problems will create
social disruptions in China, leading to riots, perhaps even revolution,
and who-knows-what. The fallout is going to be terrible.
TGR: Many pundits and economists still project growth
in China, albeit at a lower rate, and anticipate further expansion of
the middle class.
DC: The 21st century will be the Chinese century, but
the distortions and misallocations of capital that have occurred over
the last 30 years—notwithstanding the truly phenomenal progress the
country has made—are serious and have to be washed out. I am a huge bull
on China for lots of reasons, but I am bullish for the long run. I
think it is going to go through the meat grinder over the next 10 years.
I don't know how it will come out; maybe China will break up into five
or six different countries. Actually, that would be a good thing. Most
of the world's nation-states are artificially constructed and too big to
be manageable as political entities.
TGR: Your outlook on China fits right in with something
you've been saying for years—about this being the "Greater Depression,"
which is also the topic of your upcoming presentation at the sold-out
Casey Research/Sprott Inc. "When Money Dies" summit next month in Phoenix. Your opening general session talk is
entitled, "The Greater Depression Is Now." We are now four years into
it, based on your 2007 start date.
DC: Actually, depending on how long a historical scale
you look at, you could say that, for the working class in the U.S.
anyway, the depression started in the early 1970s. After inflation,
after taxes, their take-home pay hasn't risen in real terms for 40
years. But the definition of a depression that I use is "a period of
time during which most people's standard of living drops significantly."
Net savings shows that you're living within your means and putting aside
capital for the future. In the U.S., people have been living above
their means for many years—that is what debt is all about. Debt means
that you are borrowing against future production, which is exactly what
the U.S. has been doing.
TGR: So, how long will this Greater Depression last?
DC: It doesn't have to last long at all. It could be
quite brief if the U.S. government, which is basically the root cause,
retrenches vastly in size and defaults on the national debt, which is
essentially an enormous mortgage, an albatross around the neck of the
next several generations of Americans. The debt will be defaulted on one
way or another, almost certainly through inflation. I simply advocate
an honest, overt default; that would serve to punish those who, by
lending to the government, have financed its depredations. Distortions
and misallocations of capital that have been cranked into the economy
for many years need to be liquidated. It could be unpleasant but brief.
The government is likely to do just the opposite, however. It will try
to prop it up further and make it worse—compounding the problem by
expanding the wars. So, it could last a very long time. In that sense,
I'm not optimistic at all. I think there is little cause for optimism.
On the other hand, I'm generally optimistic for the future. There are
only two causes for optimism. First, smart individuals all over the
world continue, as individuals, to produce more than they consume and
try to save the difference. That will build capital, which is of
critical importance. They should just save by holding paper currency.
Second, expanding and compounding technology will increase the standard
of living. Remember that there are more scientists and engineers alive
today than have lived in all previous history combined. Those two
factors countervail the government stupidity around us. Whether they
will be overwhelmed and washed away by a tsunami of statism and
collectivism, I don't know.
TGR: You say that the U.S. government is the root cause
of this problem. Isn't that putting too much blame for a worldwide
problem on one nation?
DC: The institution of government itself is the
problem, and the problem is metastasizing like a cancer all over the
world. But, sad to say, the U.S. is the most serious offender because it
is currently both the most powerful and the most aggressive
nation-state. It has been greatly abetted by the fact that the U.S.
currency has been accepted globally. The U.S. dollar is, in effect, the
reserve that backs all the other currencies in the world. That is why
the U.S. government has been the most destructive from an economic point
of view. Furthermore, military spending—which in the U.S. equals that
of all the other militaries in the world combined—is purely destructive.
It serves no useful economic purpose at all. The military is no longer
"defending" anything—least of all liberty. It's actively creating
enemies and provoking conflict. So, yes, I think the U.S. government is
actually the most dangerous force roaming the world today.
TGR: Do you see that changing after the next election?
DC: No. I think the chances of Obama being reelected
are high, simply because more than half of Americans are big net
recipients of state largesse. The U.S. has turned into a larger version
of Argentina politically, where the electorate is effectively bribed to
vote for the biggest thief. It is likely to turn out much worse than
Argentina, however. Unlike the Argentines, the U.S. government is fairly
efficient. And, unlike Argentina, the U.S. is rapidly turning into a
police state.
Electing a Republican might be even worse, though. With the exception of
Ron Paul and Gary Johnson, the potential Republican candidates
absolutely make my skin crawl. So, no, there is no help on the horizon.
The U.S. government is spending about $1.5 trillion more this year than
it takes in, and it is not going to cut that. In fact, foolish spending
to bail things out will increase. And, worse than that, the Fed has
artificially suppressed interest rates for three years. Interest
accounts for roughly 2% of $15 trillion official national debt, or $300
billion per year. As interest rates inevitably rise, that interest
amount will grow. At 12%—and I'm afraid they'll have to go even higher
than that—it would add another $1.5 trillion just in interest payments.
I absolutely see no way out without a collapse of the U.S. currency and a total reordering of the U.S. economy.
TGR: When Money Dies, the title of your summit, implies some return to a gold standard. How do you see that playing out?
DC: Nothing is certain, but when the dollar
disappears—and it's going to reach its intrinsic value soon—what are
people going to use as money? Will we gin up another fiat currency like
the euro? The euro is likely to fail before the dollar. My suspicion is
that people will want to go back to gold. It's not because gold is
anything magical, but simply the one of the 92 naturally occurring
elements that—for the same reasons that make aluminum good for planes
and iron good for steel girders—is most useful as money. In fact, the
reason that gold has risen as high as it has is that the central banks
of third-world countries—places that don't have large gold reserves,
such as China, India, Korea, Russia, even Mexico—have been buying the
stuff in size.
TGR: The concept of going to a gold standard seems
impossible in the sense that there is only so much gold above ground—6
billion ounces? Maybe $11 trillion worth? But it's only a fraction of
the U.S. GDP. Even with gold at $2,000 an ounce, that leaves an immense
gap. In that scenario, how do you convert to a gold standard?
DC: In terms of today's dollars, gold should probably
be a lot higher than it is. I don't know what the number will be,
because a lot of those dollars will disappear in bankruptcies; they will
dry up and blow away. It's like a real estate development that was
worth $1 billion on somebody's books; when it fails, that's $1 billion
destroyed. It's a question of the battle of inflation (with the
government creating dollars to prop things up) against deflation (where
businesses fail and wipe out dollars). But put it this way: the U.S.
Government reports it owns about 265 million ounces. Its liabilities to
foreigners alone are at least $6 trillion. If they were to be redeemed
for a fixed amount, that would require roughly $22,000/oz. gold. And
that doesn't count dollars in the U.S. itself.
I'm a bargain hunter and a bottom fisher, and bought most of my gold at
vastly lower prices. But I think gold is going much higher because most
people still barely even know that the stuff exists. As inflation picks
up, they are going to want to get rid of these dollars—but what other
monetary commodity can they turn to? So, gold is going higher. I'm still
accumulating gold.
TGR: You said that the storm as we emerge from the eye
of the hurricane will be worse than it was on the other side. If they
don't own gold, how do investors protect themselves?
DC: It's very hard to be an investor in today's world
because an investor is someone who allocates capital in a way to create
new wealth. That is not easy in today's highly taxed and regulated
economy. It's late in the day, but not too late, to buy gold, silver and
other commodities. Productive assets are good to own. Of course, the
easiest way to buy most productive assets is through the shares of
publicly traded companies, but the stock market is quite overvalued in
my opinion, so that's not the best option right now.
In addition to trying to build personal holdings of gold and, to a
lesser degree, silver, I think people should learn to be speculators.
This is not to be confused with gamblers, who rely on random chances.
Speculators position themselves to take advantage of politically caused
distortions in the marketplace. In a true free market society, you would
see very few speculators because there would be few such distortions.
But regulations, taxes and currency inflations are likely to keep
markets very volatile. Good speculators will position themselves to take
advantage of bubbles, and identify bubbles that have been blown to
their maximum and are about to deflate.
Government actions are going to force people to become speculators,
whether they like it or not. Most won't like it, and very few will be
good at it.
TGR: What bubbles might speculators look to exploit?
DC: I'd say the world's biggest bubble is real estate
in China, but real estate bubbles are just starting to deflate
elsewhere, too—in Australia and Canada, for example. It's relatively
hard to short real estate, of course. Shorting bank stocks is an
indirect way to play it. I'd say bonds are the short sale of the
century. They're going to be destroyed. Bonds pose a triple threat to
capital because:
1. Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.2. Bonds are denominated in currencies, and most currencies, let's say dollars, are going to lose a lot of value.3. The credit risk of most bonds, certainly those issued by governments, is high.
On
the long side, mining stocks are very cheap relative to the price of
gold right now. I'd say there's an excellent chance of a bubble being
ignited in gold mining stocks, especially the small ones; in fact, I'd
put my finger on that as likely being the easiest way to make a killing.
TGR: Technology was one of the two areas of optimism you mentioned earlier. Do you see a bubble forming there?
DC: You have a point, but I'm not sure you can talk
about technology stocks as a whole; technology is too variegated, too
vast a field. Although, I've long been a huge believer in nanotech,
which is likely to change the world as we know it. With gold stocks,
however, you can jump into a discrete universe, that's likely to become a
mania.
TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.
At the sold-out Casey/Sprott Summit When Money Dies, more than 20 seasoned investment pros, economists and freethinkers provided their insights and advice on the coming currency collapse… and what investors can do to protect their assets. Listen to the timely investment advice and specific stock recommendations of North America's top financial experts from the comfort of your home—in 20+ hours of power-packed audio recordings on CD (or MP3). More details.
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