Doug Casey on the Collapse of the Euro and the EU

Doug Casey, Chairman

(Interviewed by Louis James, Editor, International Speculator)

L: So Doug, a lot of readers are concerned about what's going on in Europe. Is this the beginning of the proverbial "it?" Or can the Eurozone be saved?

Doug: In brief, the answers are "yes," then "no" – and a "good riddance" to both the Eurozone and the euro. But most people think the old order should be maintained at almost any cost. That would include George Soros, who recently penned an article called Does the Euro Have a Future?

Now, I don't normally look to Soros for economic commentary, despite the fact that he's one of the shrewdest and most successful speculators in the world. He does, however, represent the way the Davos people, Eurocrats, and the ruling classes in general think. But just because he's made a lot of money doesn't make him an expert in economics, any more than financial success is proof that Ted Turner, Bill Gates or Warren Buffett know anything about economics. They're all idiot savants, a bit like Dustin Hoffman's character in Rain Man. But that's another subject.

Soros writes: "The political will to create a common European treasury was absent in the first place, and since the time the euro was created the political cohesion of the European Union has greatly deteriorated." He's absolutely right about that and goes on to say that to create a common European treasury, the EU would have to have the power to tax. So, he's saying that the euro should be preserved, and that to do that, it should be backed by wealth extracted by force from the average person in Europe.

But that's the problem with every currency in the world today; they're not backed by a commodity, but only by the ability of government to steal from the people. And the euro doesn't even have that going for it.

L: And the power to tax is an essential, defining characteristic of the nation-state. It's the thing that empowers it to exist and separates it from voluntary organizations. To create that power in Europe would really be to turn the place into one single country. It wouldn't be long before they had a European army.

Doug: Exactly. Right now the Eurocrats in Brussels really only have the power to regulate, which is bad enough. But if the European Union had the power to tax, it would become an actual empire. Especially if they then created a European army – there's no telling what kind of mischief they'd get into.

On the bright side, they can't really afford an army. That's the bright side of all these governments being bankrupt: They spend way too much on welfare and debt service to afford much warfare… I guess that makes welfare and debt good things, in a perverse way.

L: [Laughs]

Doug: Anyway, Soros went on to observe: "The euro crisis could endanger the political cohesion of the European Union." That's true too, of course. The EU is a completely artificial union. The Swedes are very different from the Sicilians, and the Portuguese very different from the Austrians. These people have little in common besides a history of fighting with each other. Force them together into a phony union, and they'll become mutually resentful, the way the Germans and the Greeks now are. The EU was put together partly to avoid future wars, but it may turn out to be a war incubator. It makes no sense for there to be a European Union at all.

Incidentally, people think of these countries – Italy, France, Germany, and so on – as though they are fixtures in the cosmos, but they aren't. In their current forms, they're all newcomers on the stage of history.

L: You mean the gods didn't affix them to the celestial spheres, up there with the stars? I could have sworn Jupiter told me he did…

Doug: [Laughs] No. The average person doesn't realize that the country we know as Italy today was only created in 1861, a consolidation of many completely independent and very different entities that had been separate states since the collapse of the Roman empire. Germany was only unified in 1871, out of scores of principalities, dukedoms, and whatnot. Both unifications were very bad ideas. Even today, there are separatist movements in big Western European countries, like the Basques in Spain, or those in the United Kingdom who wish it weren't quite so united.

L: So what's the alternative?

Doug: Of course, the ideal would be for there to be seven billion little countries on the planet – each one a sovereign individual. But I'll take what I can get in the meantime, and would rather see smaller states competing for citizens as customers – although I don't really like that analogy, because states are not voluntary organizations, nor do they provide much in the way of useful services. Anyway, a more cohesive European Union is a step in the direction of Orwell's Oceania, which was in constant warfare with Eurasia and Eastasia. It's odd how the world is becoming much more like 1984 in some ways at the same time that the nation-state itself is collapsing.

What would have made sense is for Europe to have become a free-trade and -travel zone. No customs duties and no need for work permits or passports. A free-enterprise union – created simply by dropping barriers – would have facilitated all sorts of business and job creation. Instead, idiotically, the Europeans just created yet another layer of government in Brussels. Which is rather ironic in that Belgium is itself a non-country, created out of two very different societies – Flanders and Wallonia. Now there's a wannabe megagovernment bent on finding new ways to regulate enterprise out of existence. And if people like Soros are heeded, it will have the right to tax in addition, in order to give value to its essentially worthless currency.

All this would be a non-problem if they simply used gold – which is what, as I've long predicted, is happening, starting with the gold-for-oil trade between India and Iran.

People talk about the EU as being a way to avoid new wars in Europe. But they forget that in the 19th century, Europe had fewer wars than ever before or since. At that time, "mark, " "lira, " "franc, " and "pound" were all just names for specific amounts of gold. It worked very well; and to paraphrase Ludwig Von Mises: When goods cross borders freely, soldiers don't – or at least are less likely to.

All the gyrations and machinations these Eurocrats are desperately rushing into place to try to save the unnecessary and counterproductive euro are…

L: …not just the wrong thing, but the exact opposite of the right thing.

Doug: [Laughs] Just so. Back to Soros. He has a prescription for preventing a meltdown, of course. He advises: "First, bank deposits have to be protected." In other words, to discourage people from bailing out of unsound banks and destabilizing a corrupt banking system, all bank deposits should be guaranteed. That's a catastrophic idea. It would further encourage all sorts of bad lending by incompetent bankers while sucking hundreds of billions of capital from productive parts of the economy. He also asserts that some banks in defaulting countries have to be kept functioning, in order to keep the economy from crashing entirely. That's another ridiculous idea, plundering the prudent and productive to pay for the profligate.

If banks were run according to sound banking principles, with a clear division between demand deposits and time deposits and no fractional reserve banking, we wouldn't have to worry about any of these issues.

But instead, Soros goes on to write that the European banking system should be recapitalized and put under EU supervision. I want to know how this recapitalization would be done – all those governments are bankrupt. All that Soros is suggesting is to make a bunch of national problems into one big continental problem. For all anyone knows, the Fed is creating trillions of dollars to give to the EU. The only thing that's really clear is that we're moving out of the eye of the hurricane and back into the storm. But it will be much, much fiercer than what we saw in 2008.

Soros also states that government bonds have to be protected from "contagion." Whatever that means, the implication is more central control and throwing more taxpayer money at the insoluble government problems. The bankrupt banks will have to lend the bankrupt governments money, so they can pay their bonds off, while at the same time the same bankrupt governments lend the bankrupt banks money, so they don't go under. It's all just a ridiculous shell game.

L: It all sounds like a call for creating more unbacked currency units. If their only answer is just to run the printing presses, it'll be Weimar hyperinflation all over again.

Doug: Yes. Soros' bottom line is: "There's no alternative but to give birth to the missing ingredient: A European treasury with the power to tax and borrow." This, he claims, is "the only way to forestall a possible financial meltdown and another great depression." Forestalling the depression is impossible. All that can be done is to make it less severe – by doing exactly the opposite of what Soros recommends.

L: And that would be…?

Doug: My view, as you well know, is that they shouldn't forestall the meltdown, but should let the market correct past mistakes and get on with building real economic growth for the future. Nietzsche was right when he said, "That which is about to fall deserves to be pushed." But it really doesn't matter what these fools do; we're in the early stages of the Greater Depression. It's going to have a life of its own.

Soros' solutions are counterproductive band-aids. But since he got to offer solutions, I'm going to offer some too. For starters, the national debts of all these countries should be defaulted on, including the United States. Those debts constitute an unethical mortgage without consent on the next two or three generations of people as yet unborn as a result of the excess consumption of their parents and grandparents. The government debt should also be defaulted on to punish the people stupid enough, or unethical enough, to lend these states the money they've used to do all the destructive things they do.

Second, central banks should be abolished and thereby fractional reserve banking as well. That would force banks to run on sound, classical terms, and depositors would be induced to seek out the most sound and secure banks.

Third, there shouldn't be national currencies. Commodities – with gold most likely the popular choice – would again be used as money.

Fourth, most financial regulations and taxes – especially income taxes – should be radically reduced or eliminated. At the same time, government spending should be cut even more radically. These governments, if their existence is to be tolerated at all, should be strictly limited to doing nothing more than protecting people from overt force and fraud.

L: Sounds good to me, but you know that's not gonna happen. So, tune in your guru-vision for a moment and tell us what you think is most likely to happen. Does Soros get his wish and we see a new European superstate emerge? Or does the EU disintegrate?

Doug: There's not a snowball's chance in hell that the EU will turn into a superstate. The chances are much, much better that it will fragment. If these countries have breakaway movements within them, how could they possibly succeed in peacefully joining together?

If you think about it, the Soviet Union was a sort of Eastern European Union, and it disintegrated. Yugoslavia also showed what happens to artificial European unions, as did Czechoslovakia. These are all straws that show which way the wind is blowing in Europe.

That's quite apart from the fact that trying to compact all of these different ethnicities, languages, religions, cultures, and so forth together into one giant nation-state is illogical, counterproductive, dangerous, and pointless.

L: So, how long do you give the EU before it breaks up? And the euro?

Doug: Well, as you know, one should never predict both an event and the time it will take place. But I've long said that, "While the US dollar is an 'IOU nothing, ' the euro is a 'who owes you nothing.'" So I think the euro will reach its intrinsic value long before the dollar does. The euro – in anything like its present form – will cease to exist within two to three years at the outside. If I had a lot of my wealth in euros, I would get it out ASAP. My favorite alternative for protecting wealth, of course, is the precious metals: gold and silver. If you want to speculate for gains on this trend, I think there will be a bubble in the mining stocks, many of which are cheap right now.

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L: For new readers, Doug's notion of the intrinsic value of the euro, the dollar, or any unbacked "fiat" currency is zero. They are literally worthless and only useful as long as people imagine otherwise. So much for the euro, but what about the EU itself?

Doug: Centripetal force will eventually tear it apart, with the EU as a whole disintegrating long before its individual parts – France, Italy, Germany, the UK, etc. – fall apart.

L: How long is "eventually?" Can the EU itself last long after such a crushing setback as the collapse of the euro?

Doug: Probably not – they'll likely go in close succession. Europe is just in a world of trouble; the continent reminds me of that cruise ship that sank off the coast of Italy recently. They are dying financially, with all the debt bankrupting governments, businesses, and individuals. They are economically in a lot of trouble, with stifling regulations and taxes. They are demographically in a lot of trouble, with birth rates far below replacement in general, except among African and Muslim immigrants who are not integrating. Europe has long been a hotbed of religious, ethnic, and race wars – quite frankly I see the next one building up right now.

L: What about Eastern Europe? They have different problems – like endemic corruption and other Soviet legacies – but they tend to be very pragmatic and willing to work hard.

Doug: Yes, there's a dichotomy. The bad news is the Soviet legacy hanging over them, but the good news is that they've experienced naked socialism, and they know what it's really like. A lot of thinking people there are experiencing shock therapy and leaning much more towards free markets than people in the West. I'm definitely more optimistic about Eastern Europe than Western Europe. However, the general decline of Europe – which started with World War I – is going to continue. I only hope Europe just declines in relative terms, not absolute terms.

The fact of the matter is that I'm most optimistic about the Orient. That's where the action has been and is going to be. I'm also favorably inclined toward Latin America, which has huge problems but is, at least, mostly out of harm's way from the evolving Forever War.

L: Doug, you're on record as saying that China is in a bubble and that it's going to pop. How does that square with your being optimistic about the Orient? You can't be thinking Japan will take the lead again…

Doug: No, certainly not. I do think China is ripe for a fall, but it's a matter of the short vs. the long run. I'm very bearish on China in the short term, but after the current system washes out, I think it's going to be the place to be – or at least, that area. I think China is another country that has excellent chances of breaking up into five or more separate countries.

L: Wow… okay… More investment implications, besides getting out of the euro?

Doug: Buy gold and silver. Don't be fooled into thinking the dollar is strong just because the euro is weaker.

L: Very well; thank you for your thoughts.

Doug: My pleasure. I've got some other things on my mind, so we'll talk soon.

L: Looking forward to it. Have a great evening, Tatich.

Doug: You too, Lobo.

[Editor's Note: For new readers, "tatich" is Mayan for "big chief."]

Jan 25, 2012