Doug Casey on the Fiscal Cliff

Doug Casey, Chairman

(Interviewed by Louis James, Editor, International Speculator)

L: So Doug, the talk of the day is the horrific mass murder of little children in Connecticut last week. I'm sure you join me in extending sympathies to the families of the victims – I hope they can survive being survivors.

But we've already talked about such attacks, and this event doesn't really change the path we're on; it only accelerates the disarmament of more future victims. It's another sign of the accelerating decay of US society, which we've talked about at length.

Doug: Yes, I suppose our readers could probably predict most of what we'd say about the murders in Connecticut. Not much to add, but I predict that they'll find that the 20-year-old killer, Lanza, was on Ritalin, Zoloft, Prozac, or some similar psychiatric drug. Most mass murders are proven to have been on these drugs, and the medical records are sealed for many other killers, so we can't find out. As usual, the chattering classes and their political buddies will focus on the tools used by the killer, rather than on what made him a killer in the first place. It's that and the ethically degraded state of society that I blame – not the availability of some guns, knives, rocks, or whatever.

L: The killer at the Colorado movie theater, the Columbine killers… there certainly seems to be a pattern of young men on prescribed medications turning into mass murderers.

Doug: It was also true of many of the postal workers who gave rise to the phrase "going postal." It appears a substantial part of the US is on some type of psych meds. This massacre is so extreme in its emotional power, pandering politicians will absolutely have to "do something." That means catering to some of people's basest emotions: fear and anger. And giving them what they think they want: vengeance and the appearance of safety. They'll call it "justice" and "reasonable" gun control, but it will be neither. And it won't stop the violence; it will get worse because of the deterioration of US society. New laws will just give the average American more of a false sense of security, and make him even more of a serf.

But that's par for the course, these days. As you say, we've already covered this ground. Anyway, you can't convince people of a viewpoint regarding this subject. What people believe is a question of their psychology, not the intellectual merits of the argument. Let's talk about something else that's looming, and that people can do something about: the so-called "fiscal cliff."

L: There's something people can do about that? You can't be thinking that writing a letter to whatever slimy creature in Congress claims to represent us will do any good...

Doug: Of course not. But the fiscal cliff will have economic consequences. Those who see them coming can and should profit from them.

L: Okay; let's start with a definition, as usual. What is the fiscal cliff anyway?

Doug: Well, of course, fiscal cliff is really a misnomer. Part of it's good, and part is bad for the economy. The term refers to the simultaneous expiration of the Bush tax cuts and automatic spending cuts mandated by the Budget Control Act of 2011 that go into effect next year. Many pundits say this will cause the US to go into a recession. Well, we're already in the Greater Depression. But here's what would happen. The higher taxes would suck more capital out of the productive economy and divert it to the government – that's very bad. And lower government spending would help unravel distortions and misallocations of capital that spending was causing – which is good. In the process, some people would have to find new jobs, and some businesses dealing with government handouts would go bust. Painful, but necessary, and we need to see lots more of both.

However, it's not the US economy that's facing this alleged cliff; it's the US government. It just goes to show how hopeless the situation is, when people equate the government with the economy. They're two entirely different things. The only way to revitalize the US economy is a vast reduction in taxes and a vast reduction in government spending. Instead, these idiots are arguing over how much to raise taxes and how little they can cut spending. Of course it will be a disaster.

L: Fair enough, but raising taxes and cutting spending is exactly the kind of "austerity" the Germans are saying the rest of Europe should embrace – why is that seen as a good thing over there but a looming disaster over here?

Doug: It is curious, isn't it? The Europeans are hooked on government spending – look at all the riots and protests. That's why their grandchildren will all be houseboys and maids for the Chinese. The difference is just that the Europeans know they have their backs against a debt wall and have no choice, whereas in the US, people still imagine they can borrow and spend their way into prosperity. Americans stupidly think that because they could get away with acting like the profligate grasshopper 50 years ago, they can still do so today.

L: But Congress passed its budget law back in 2011 to force themselves to do what was seen as necessary. They didn't do what was necessary voluntarily in the time they gave themselves, so now are being forced to do what they themselves saw as necessary back when they passed the law. How is it that politicians of both parties could agree such a measure was necessary less than two years ago, and now say it's an impending disaster?

Doug: How is it they can say any of the insane things they do? The fact of the matter is that Congresscritters back in 2011 just wanted to kick the can down the road and keep the gravy train rolling. They didn't think they would have a new solution today – they only wanted to escape certain doom then... and hoped magic would happen. They have no solution, not then, not now. They'll just try to put off judgment day once again. They'll do it by selling hundreds of billions more in debt to the Federal Reserve – they'll have to because the Chinese and Japanese aren't buying anymore. They want to get rid of what they have.

L: So, you think they will find a compromise and enact new legislation before the end-of-the-year deadline? Are you having a "guru moment?"

Doug: Yes. 2013 is likely to be a nasty year. I hate to be a permabear, but there's no alternative. The two parties that run the US claim to be different, but it's more accurate to see them as the tax-and-spend party and the tax-and-spend-more party. One thing they both agree on – and they're dead wrong, but they agree – is that the economy rests on confidence, and that if they can only restore confidence, the economy will grow.

L: As if the coyote could keep running on air, as long as he didn't look down?

Doug: Exactly. The economy would be just fine if the government disappeared. The problem is the US dollar, which has no intrinsic value and is backed by nothing but confidence. The dollar is a complete fiat currency, and its accelerating debasement has the potential to destroy the economy. The economy itself is the aggregate of all the people, businesses, inventory, manufacturing plants, mines, farms, transportation networks, research facilities, and accumulated capital of all the participants.

The economy grows when people produce more than they consume, and save the difference. They then have capital to put into new ventures, create new jobs, develop new technologies, and so forth. No government is needed to make this happen – rather the opposite.

But the average American, who is completely ignorant of economics, thinks the government is a magic cornucopia. As proof of that statement, I offer the fact that Obama is president, Romney was offered as an alternative, and dingbats like Boehner, Pelosi, and Ried control the Congress.

L: So, what does get the economy going?

Doug: People can't just sit at home because they lack confidence; they'd starve. They have to work, create, build, invest – deploy their capital, whether that be financial, intellectual, or the simple time they can sell to employers. The alternative is dissipation and eventually death.

If the economy isn't growing, it's not because the government isn't spending enough to "stimulate" it. Government spending comes from: taxation, which is a burden on the economy; borrowing, which is a future burden on the economy; or printing money – inflation – which is an especially dishonest, hidden form of taxation makes people think they're richer while they're being impoverished.

No. If the economy isn't growing, it's because the government has burdened it with heavy taxation, smothered it with excessive regulation, distorted it with false information (the Fed's manipulation of interest rates), and replaced real money – gold – with paper.

L: What you've just explained in a few simple paragraphs was such a great mystery to me back in school. I remember being taught that unrestrained capitalism caused the Great Depression, and that without government to smooth out the "business cycle," the economy would grow too fast and investors would go too far, creating a crash, destroying confidence, and leading to recession and depression.

What I didn't get then was how a recession or depression could ever end. If it was all about confidence, and confidence was destroyed, no one in their right mind would risk spending anything, building anything, employing anyone, etc., until they saw signs of recovery – but with everyone waiting for those signs, they would never come.

I guess many people are still stuck in this economic error. That's why so many think you need a government to stimulate growth – to trick people, essentially, into seeing clear signs of recovery, and therefore unleashing a real recovery.

Doug: Perhaps so – but stimulated, or let's say "simulated" – signs of recovery aren't needed if people have savings, accumulated capital, that can be deployed.

Instead, today they mostly have debt. Government stimulation won't work if capital doesn't exist or is punished for being used. If you've destroyed people's jobs, taxed them more for investing wisely, piled on so many regulations that you can't sell lemonade without decades of permitting and clinical trials, all the stimulus in the world won't create a vibrant economy.

L: You won't get an argument from me – and in this context it makes sense for the EU to hit the wall before the US; it has a lot more regulations, higher taxation, and more omnipresent government over there.

But back to the US fiscal cliff: if it does indeed represent a sort of forced austerity for the US government, might that not be at least partially a good thing? If the government is forced to live more within its means, maybe it won't be able to do as much harm?

Doug: Look, the tax increases they're proposing are significant and immediate; they're hoping to increase tax revenue by almost 20% in 2013. Well, they'll greatly increase tax rates anyway – for instance, capital gains are set to go from 15% to 20%, and the top income tax rate to 39.6%, including dividend income. But the spending cuts are modest, and mostly for the future – only a 0.25% decrease in actual outlays by the government in 2013. That's a rounding error. In short, it'll be harder to earn an honest living and there will be less incentive to invest wisely, but bloated government will continue running the printing presses as fast as they'll go. I think we'll see at least a trillion dollar deficit next year. Maybe more like $1.5 trillion.

The US Government is on tilt.

L: We're stuck with QE4-ever?

Doug: They have no alternative – unless they default on the national debt, abolish Social Security, Medicare, Medicaid, and cut back the military about 90%. Now they've announced $40 billion more a month, on top of the $45 billion a month they announced just before the election – and it's not just the US. The new Japanese government says it has a mandate to print and spend unlimited amounts, whatever it takes to stimulate its economy. The Europeans are at it too.

L: So, why do you suppose gold actually sold off when they announced the new QE last week? One would expect the announcement of such massive new money-printing to send gold upward.

Doug: Actually, the initial reaction on the day the Fed made its announcement was a spike in the gold price, but that lasted only minutes. It's hard to say exactly why it didn't stay up; and guru jokes aside, I truly have no crystal ball. Nor does anybody else. I'd guess that some investors have been suckered by the recent appearance of improvement in the US employment and housing markets. Most people still don't even know gold exists – they're idiotically buying long bonds for a couple percent of yield.

Be that as it may, the one thing we know for sure is that the world is being flooded with new funny money. Economic contraction is masking the effect, and that money is just sitting in banks now, but you can't print trillions and trillions of new currency units indefinitely without inflation showing up. Timing is always the hard part – confusing what's inevitable with what's imminent – but this is as sure a thing as I can see in today's market.

L: So, how do investors best speculate on that?

Doug: Well, first, there are the things to avoid. Government bonds are my leading example of this – a triple threat to your wealth, as we've said before. They're the world's biggest bubble. You also have to understand that as governments get more desperate, they will become more dangerous, so you have to diversify your assets and your lifestyle internationally. That's not new either, but I know from past experience that few people will take action; and it's a shame, because while you may survive your government treating you like a milk cow, things change considerably when it decides to treat you like a beef cow.

L: Is there an anti-government bond play you would recommend? Maybe an ETF that goes up when bonds go down?

Doug: I don't recommend one at present, because there's no telling exactly when the tide with shift; and until it does, investors in such vehicles run the risk of losing their patience and giving up too early. I think there will be time to invest in that when the tide shifts, but has not yet gained momentum – then shorting government bonds will be the trade of the decade.

L: What else – gold, I assume?

Doug: Absolutely. All of this currency creation is going to ignite a real bubble in gold – and silver. Gold is certainly not cheap compared to its lows a decade ago, but it is the only safe haven we have against the destruction of the US dollar and other paper money. Remember, I don't buy gold to speculate on its price rising, I do it for prudence.

L: For speculation, you buy the gold stocks.

Doug: Exactly. And we happen to be in a buyer's market. Even though gold has traded roughly sideways for the past year, market sentiment and the gold sector has turned so bearish, most of the gold stocks are selling for much less than they were a year ago. They're a fantastic, high-potential speculation.

L: I'm reminded of the old saying about being careful what you wish for. It wasn't so long ago that you were complaining about the metaphysical impossibility of everything being expensive at the same time…

Doug: Yes, well, those late to the gold table can be thankful for the spectacular opportunities there are to buy good, profitable companies today at much more attractive prices than last year – such as the ones we recommend in our BIG GOLD newsletter, and earlier-stage companies with the potential to return extraordinary near-term gains such as you recommend in the International Speculator.

L: Thanks for the plug.

Doug: [Chuckles] My pleasure.

L: Anything else?

Doug: 2013 is going to be ugly. But just a warmup for 2014.

L: Ouch. Okay then, until next week.

Doug: Next week.

Dec 19, 2012