Doug Casey: Debt, Doom, and Opportunity

Interviewed by Louis James, Editor, International Speculator

Doug Casey, Chairman

L: Doug, we talked a couple weeks ago about the US and global economies exiting the eye of the storm, and it seems thus far that you’re right on target. The eurozone is under extreme debt stress, the dollar is no better, and gold is back over $1,800 per ounce again – and has surpassed platinum again as well. People thought we were crazy when we wrote about $2,000 gold, but here we are, within kissing distance of it. Still, it sounds crazy to think this is just the beginning – too apocalyptic to believe. Are you sure there’s no way out?

Doug: Well, never say never. And I’m an eternal optimist. But as I’ve said before, even if friendly space aliens landed on the White House and gave us a magic technology that fed and housed everyone, the economic dislocation would still wreck the world as we know it. I truly can see no way out. Let me be completely clear about why. The West in general, but the US in particular, has been living way above its means for a long time. The proof for that statement is all the debt we’re awash in – federal, state, municipal, and individual. Debt is worse than living out of capital. It amounts to living out of anticipated future revenues – which may not even be there. It amounts to eating the seed corn.

L: Well, even if you could see a way out, the politicians would never do the right thing.

Doug: It’s worse than that, much worse. They can be counted on to do not just the wrong thing, but the opposite of the right thing. Everything the government is doing is making things worse – for instance, Obama’s idiotic $447 billion stimulus plan. It will extract that much productive capital from society and simply flush it down the cosmic toilet. But I’ll go further: Not only do I not see any way out – politically feasible or not – everything I know about economics tells me that it’s impossible for the global economy to get out of this intact. Important body parts are caught in the wringer; we are, therefore, going through the wringer.

L: And yet, the dollar is holding its own against the euro…

Doug: That’s just an illusion created by the race to the bottom; the euro is in even worse shape than the dollar. Italy – surprise, surprise – may not be able to enact the necessary austerity measures required for its bailout. Greece, Italy, Portugal, Spain, Ireland – all these governments are bankrupt. So is France. The euro is in terminal decline. So what does it mean that the USD is running neck and neck with it? It just means both are being debased at similar rates. Just look at the dollar or euro against the Swiss franc, for example.

L: Here’s a chart. I suggest clicking on the five-year option – pretty impressive.

Doug: Exactly. However, now they’re stepping in to fix the price of the CHF. It’s yet another stupid idea. A strong currency is a huge advantage. It temporarily hurts local exporters, of course; but it reduces the cost of all imports, makes it possible for business to buy foreign assets at a discount, encourages domestic producers to become more efficient, and rewards those who have saved. It acts to increase the standard of living of everyone in the country. A devaluation does the opposite. This whole thing with the Swiss franc is quite telling. Even though the Swiss franc has historically been a “strong” currency, it’s really just another government-issued piece of paper, backed by nothing. And yet it has a patina of value, a perception of historical strength that is making it a refuge for frightened money all around the world.

L: The safe-haven premium.

Doug: Everything is relative. Any port in a storm, as they say.

L: Does it deserve the reputation? I mean, just because the Swiss don’t print pieces of paper as fast as others, that doesn’t actually give those pieces of paper any intrinsic value. If the international financial system collapses, would the abstract “value” of a Swiss franc being a Swiss franc make some guy selling gas in Albuquerque accept them in exchange for hard-to-come-by gasoline or food?

Doug: I don’t think it does, especially since Switzerland is a very small country, with fewer than seven million citizens. Gold is a vastly better safe haven; it’s been used as money for millennia. That said, people can believe in the value of almost anything that sounds good for a time, like stock in Enron, GM, or Fannie Mae. It’s like the perceived value of Bitcoins, as we discussed a few weeks ago; they are just as abstract and without intrinsic value as paper money, but they are not paper money and are supposed to be inflation proof. That was enough to get people to see value in them. They are, to reference the old joke, trading sardines, not eating sardines.

L: I just checked on eBay, and I see offers for Bitcoins ranging from $4 to $8 each… that’s about an eighth to a quarter of what they were before the hack that shook confidence in them. Still, that’s not bad these days for a currency not issued by any government and already hit with one big scare.

Doug: Yet another sign of the dollar’s doom; almost anything looks good relative to government paper. It’s another bullish indicator for what’s in store for gold.

L: Dollar’s doom… I used that for the headline in an issue of the International SpeculatorDollar’s Doom, Gold’s Boom – back in October of 2007.

Doug: And it’s happening now. The Chinese have more US dollars than anybody else and are offloading those dollars anywhere they can, for instance in Africa, in exchange for real wealth – natural resources to fuel their future growth. This is a global trend today; we see deals around the world cutting the dollar out wherever possible, such as the one between the Iranians and the Argentines. It’s almost like barter. Nobody wants to use the paper of an unreliable third party, so the dollar has become the Old Maid card nobody wants to get stuck with.

L: I know you don’t like making predictions, but you’re the guru, so when do you think the game will wind down to the Old Maid card?

Doug: In five years the dollar will have lost its reserve status completely. It could be less – two or three. I hate to put such a near-term time frame on something that’s so momentous, but that’s the way I see it.

L: Because the debt is beyond paying?

Doug: The US government spends $1.5 trillion more than it takes in per year – that is, it’s adding that much more debt to the already unpayable national debt. Given this situation, the status quo is just about the best it could possibly be. But it’s unstable – and unsustainable. It will get much worse going forward. The US government admits to 9.1% unemployment, though if that number were calculated the way it was in the ‘80s it would be over 20%. When business failures increase, as we move back into the storm, the government will spend even more on welfare and bailouts. The politicians made a lot of noise about cutting a few trillion out of the federal budget, but that’s over a ten-year period and it’s loaded towards the end of the ten years. The supposed cuts are trivial and unlikely to actually be implemented two elections from now.

L: And – for new readers – the right thing to do is?

Doug: The cure for this won’t prevent the train wreck – it’s way too late for that. I’d just like to save the next generation from having to work as maids and houseboys for the Chinese. It’s necessary to let the market correct the politicians’ mistakes and liquidate decades of malinvestment and other distortions in the economy. Interest rates should go back up to 12-14%, or whatever level the market finds will reward prudent savers and punish borrowers. As we’ve discussed, I would privatize the military, but I know that’ll never happen. So I’d cut military spending 90%, close all foreign bases, stop covert operations, and end all foreign aid.

Regulatory agencies like the SEC, FDA, HUD, USDA, DOE, OHSA, FAA, EPA, etc. should be abolished and salt sowed in the ground where their ashes stain the land. The Fed should be abolished and gold freed to function as money again – that one will happen, one way or another.

The national debt should be overtly defaulted on for numerous reasons, including punishing those who lent money to an unethical government, but more importantly because it’s unethical to mortgage future generations and turn them into indentured servants.

Of course the government is opposed to high interest rates, partly because it runs counter to Keynesian theory and partly because it would greatly accelerate its own fall. As we discussed last time, if interest rates go from today’s 2% level, which is effectively zero, to the 12% level of the late 1970s, interest payments on the national debt – which has been financed short term and has to be rolled over annually – will go up sixfold from about $300 billion to $1.8 trillion. The deficit, therefore, would double – increase by another $1.5 trillion dollars a year. That’s going to happen whether we like it or not. The economic train wreck, as I said, is inevitable.

L: But the measures you mention will never happen, because embracing such a painful remedy is beyond the ability of anyone who must curry favor with voters…

Doug: Yes, it’s an academic matter. And it’s important to understand that it’s not just the government that has a debt problem. Many of those voters the politicians must pander to have no savings and are one paycheck away from hunger – if they even have jobs. Americans are not alone in being burdened with an entitlement mentality – that’s why Europe is perhaps even more incapable of fixing its problems. It’s why Latin American governments make ever more economically suicidal policy decisions in the wake of protests and pressure from organized labor – but at least there’s no debt in Latin America, simply because no one will even lend them money.

People in many countries have been consuming more than they have been producing, and they feel they have a right to do so. They’ll be disabused of that feeling soon, and it’s going to be very ugly. But until then, no way will debt-ridden voters vote for politicians who promise to smash their cracked rice bowls. That’s why the Ron Paul campaign is of educational value only.

We have finally gone beyond the point of no return. There’s no way to avoid a gargantuan catastrophe – much worse than what happened in the 1930s and ‘40s. There are several ways this could play out, but the government always chooses the worst alternative, which in this case is the destruction of the US dollar. Its first priority is saving the US government, not the dollar, nor the interests of the people. The politicians will wind up destroying the productive parts of the economy to save the government; the parasite will kill the host. It’s a total disaster, with wide-ranging consequences, and it’s already happening.

L: Okay, good summary… Now, how do we make lemonade out of these lemons?

Doug: Gold and silver are no longer the cheap values they were ten years ago – but over the next year or so they are going much higher. Nobody is going to want to hold dollars – or any unbacked paper currency by the time this is all done. Gold is going to be driven much higher by fear, greed, and prudence, all at once – a very powerful confluence of the strongest market forces. I expect a historic gold mania is still ahead.

So, the starting place is the precious metals – buy physical metal. If you have some, buy more. Unless you’ve got a good third of your assets in gold or gold-related investments, you’re underexposed to the most certain trend I see in the economy going forward.

For leverage, you want gold stocks, and silver, of course. Currently, the market seems dominated by fear, and that means most of the money looking for leverage on the metals is going into producers. I like emerging producers more than the big companies, because they offer the fear-soothing plus of regular cash flow, along with the possibility of rapid growth. However, the big companies will probably be the first to surge ahead as the mania kicks in. New money entering the sector likes familiar names.

But my favorite way to play this is by speculating on the junior explorers. They require nerves of steel, as the market is very nervous about such risky stocks, but they are relatively cheap for just that reason. They’re quite cheap relative to the gold and silver they’re looking for. That ratchets up the leverage. And, of course, when a company that has nothing makes a multimillion-ounce gold discovery, the increase in value is enormous – much more than when a billion-dollar producer makes the same discovery.

You and Jeff cover all of this in our paid-subscription metals newsletters – the International Speculator and BIG GOLD – but if our readers will bear with a little plug, there’s something completely free they can do to find out about more ways to survive and potentially even thrive through what’s coming. That is to watch our recent free webinar on the American Debt Crisis.

L: Very good. Since it’s educational and free, I think our readers may forgive the plug. Thanks for your time.

Doug: A pleasure, as always – I just hope readers take this seriously. Doing so and preparing for the storm will have major consequences in their lives, in the near term. Readers who listened to our calls to invest in gold back when we started these conversations in early 2009 would have doubled their money by now, just by buying gold – and could have done so much more.

L: We’ll do our best to help – but no one can be helped who will not help him- or herself first.

Doug: Right you are… Okay then, until next time.

L: Next time.


Sep 21, 2011