Doug Casey on The Return of the Crisis Creature

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, on March 3, you and I spoke about how to profit from the coming collapse of the euro. Prior to that, we talked about a major market correction on the way this year. Just last week, we saw a major confidence crisis hit the eurozone and the Dow drop 1,000 points in one day's intra-day trading. It looks to me like the beginning of a sequel to the film we saw in 2008: Return of the Crisis Creature. How do you see the latest market developments?

Doug: All of the problems we're confronting today were completely predictable – and, actually, were predicted by people watching the trends 30, 40, and even 50 years ago.

L: Not to mention our predictions of a currency regime change and a credit crisis in the International Speculator in 2006 and 2007. But who was predicting these things decades ago?

Doug: The Austrian economist Ludwig von Mises, for one. He never put a time horizon on his projections, but he did say that the Keynesian "spend yourself into wealth" economic policies that were being lauded and implemented all over the world would result in disaster. He was so obviously right, and the politicians and social engineers who used Keynes as an excuse to encourage entire countries to live beyond their means were so obviously wrong, who would have thought it would take decades for the whole thing to implode?

Harry Browne got it right -- not only what would happen but when it would happen, in his book, How to Profit from the Coming Devaluation, back in 1970. The '70s were in many ways an economic disaster. It was bad for investors in the stock market, the bond market, and the property markets, and currencies lost value all over the world as well. Things could have fallen apart then, but didn't for two main reasons: the distortions in the economy were much less serious than today's, and interest rates were much higher. I think that what's going to happen now, in the teens, is going to be like the 1970s, but much, much worse.

L: Those writers were spot-on, on many things, but the world economy, badly shaken as it is, has still not collapsed.

Doug: It has taken much longer for the chickens to come home to roost than many of us thought. One reason is that there's an immense amount of capital that's been accumulated around the world over the course of decades, if not centuries, and even spendthrift governments take time to dissipate that much real wealth. Second, the private sector is always creating new capital when production exceeds consumption, especially through investments in new technologies that increase production.

L: Yes, I've long thought that you'd have been right about The Greater Depression much sooner if it wasn't for the incredible boost in productivity unleashed by the proliferation of computers.

Doug: The computer revolution is ultimately going to be more important than even the invention of the printing press. Technology is the greatest friend of mankind in general, and the average man in particular. It's why I'm quite optimistic about the long run. That said, timing is always a problem. You know what they say: when making predictions, you should never predict both the time and the event. One or the other, but not both. People love predictions, however, so let me go out on a limb here and make a prediction.

Since everything that all the governments of the world – it's not just the Americans and Europeans, but the Chinese and other governments as well – are doing are not just the wrong things, but the exact opposite of the right things, things will get worse.

Now, that's not a tough prediction to make, so let me be more specific: In real, inflation-adjusted terms, the bear market in stocks that started in 2000 is going to get much worse.

Interest rates will go to much higher levels, whether the governments like it or not. They are being kept artificially low in hopes that they will stimulate economies, but that means money is flowing to where the market doesn't see profit, and hence, by definition, the money is being misspent.

The property markets are going to keep heading lower, much lower. They have not bottomed at all in Europe and the U.S., and, in fact, are still on a boil in places like China and Australia.

And, of course, the specific prediction I've been making all along, most of the world's currencies are going to reach their intrinsic value.

L: For new readers, we see the intrinsic value of paper money being that of pieces of paper. But this paper you can't even write on, because it's already covered with meaningless doodles and spells cast by the witch-doctors at the Fed, ECB, etc. In other words: zero.

So, back to the present global economy: do you think Greece will default?

Doug: First, you shouldn't talk about "Greece" like that. We're talking about the Greek government's debt. And my view is that not only will they default, but that they should default. Generations of future Greek taxpayers should not be turned into serfs in order to pay for the excess of today's Greek politicians. And the people who lent the Greek government all that money to do stupid things with should be punished for both their lack of foresight and their collusion with corruption. And it would be doubly good if this happened, because it would greatly hamper the ability of the Greek government to borrow money in the future, which would limit how much it could spend on all the disastrously stupid things governments spend money on.

I'll go further and say that all of these struggling governments, including the U.S. government, should default on their debts and punish the people foolish enough to lend them money. The world would be a better place if governments around the globe were unable to borrow money.

L: Okay, that may be what should happen, but will it?

Doug: I think so, sooner or later, but only when those in government see no other options. Entirely apart from the fact the nation-state is on its way out. Remember, defaults won't destroy what capital there is in the world. Technologies, factories, farms, mines, and such will still exist. They will just change hands. Hopefully, that will transfer a lot of capital out of public hands and into private hands, where it belongs.

L: But the EU has just made it very clear that, like the U.S., they will do "whatever it takes" to hold their doomed house of cards together. It doesn't look like they will let Greece – sorry, the Greek government – or any other government default.

Doug: Well, these idiots can say whatever they want, but they really have only two choices; they either default and their currency units might maintain some integrity. Or they can print up more currency units, which will destroy their currency. I think that's what's most likely to happen. That's why I keep saying that the euro is a total dead duck – it doesn't have a prayer of surviving.

L: I can't imagine the clowns in Washington facing up to the fact that the U.S. can't pay its bills, and I don't see the dollar being in much better shape… but at least the War Between the States made it unlikely that the more productive states will dump dead-weight states like California, whereas the EU could much more easily come apart under stress.

Doug: Exactly. But maybe California will go its own way eventually, simply because young Hispanic males will decide they don't want to pay 25% of their incomes in Social Security and Medicare alone – that's going to happen – to support aged Anglo women in Massachusetts. At the very, very best, the current situation can be seen as the eye of a gargantuan, globe-spanning storm. The situation is very serious.

L: I thought you said it was hopeless but not serious.

Doug: I stand corrected. Quite right; entirely hopeless. But, on a cosmic level, not really very serious at all.

L: So, let's inch a little farther out on the limb and put a time frame on this. I realize that's tempting the fates, but what the heck – we've got your crystal ball out already, what does it tell you?

Doug: Okay, if only for its entertainment value, I'll say that within the next year, we will see things noticeably coming unglued. And they'll just keep getting worse and worse, until governments finally get out of the way of what must happen to set things right, painful as that will be.

And for that to happen, the lapdogs and cheerleaders in the media, and the people who listen to them, have got to stop looking to the government for solutions to the problem. People have got to stop looking for clever men who will do the "right things" to make everything better. The government can't solve the problem because the government is the problem. It needs to… go away.

L: I don't think I'll hold my breath waiting for the masses to realize that.

Doug: No. The average guy has been educated to think of the government as both a cornucopia and his friend. When actually, it's a black hole and his enemy. That's why I sound like such a pessimist – I'm not a gloomy person, but the necessary understanding of economic fundamentals simply isn't out there. What passes for economics in mainstream thinking is built on quicksand, totally fallacious premises that guarantee disaster. The masses of desperate people who think things are getting better are only fooling themselves; things are getting worse, not better, no matter what rosy lenses the governments put over the TV cameras around the world.

I'm not predicting the end of the world, but I'm convinced that the changes developing now will not only be the biggest changes since the Great Depression, but will result in the greatest changes to society since the Industrial Revolution.

L: Bud Conrad, whom I interviewed last week, has documented a truly shocking change in the economy already; lending by private institutions has dropped to almost nothing while government lending has shot through the roof. That could be evidence of perhaps irreversible changes already starting to percolate through the economy.

Doug: Well, you know that people are going to say that banks should be forced to lend all that money they were given. But creating massive quantities of new dollars and forcing the banks to lend them out to people won't make society any wealthier. Otherwise, Zimbabwe could have printed itself into prosperity.

The problem is not a lack of currency – dollars – but a lack of capital. And what's been happening all over the world, and what's happening at an even faster pace as a result of the crisis, is that economic policy is dissipating capital, not encouraging its creation. Propping up bankrupt companies like General Motors, Chrysler, Fannie and Freddie is throwing good money after bad. These things are like little Soviet Unions; the amount of capital that goes into them is less than what they create, instead of more. That's what profits are – they are the measure of the value you are to society. These dinosaurs are net drains on society, part of the continuing deterioration of the situation.

Other government stimuli, like all the money they are spending trying to keep people in houses they can't afford, keeping people employed at unproductive jobs… all of this is making things worse. It exacerbates and extends the consumption of saved capital, which puts people off from cutting expenses, working harder, and producing more capital than they consume – savings.

It's all totally backwards.

L: So what would be some signs that things are really starting to come unglued? When will it be time to seriously batten down the hatches, maybe head to Cafayate or some other place you've selected to weather the rest of the storm?

Doug: Well within the next few years, we're going to see accelerating destruction of the dollar. It may not look that way compared to the euro, but that'll just be because the euro is circling down the same toilet even faster, as is the yen. But the euro's purchasing power will start dropping by 20 or 30 percent per year, and then we'll start to see what's happening in Greece now happening in the U.S. By then, it will have happened in Spain and Ireland, and with most of its customers tightening their belts, it will hit China as well. Americans, who've become used to living above their means for decades are not going to like tightening their belts, and it's going to get very ugly.

I hate to sound apocalyptic, but the whole world shows every sign of being on an economic volcano that's rumbling.

L: You can see that rumbling in Greece, where they don't seem to like belt-tightening any more than in America. People have died in the rioting.

Doug: Indeed. And what's happening in Greece is just the opening round of a problem that's likely to spread to other countries. Including the U.S. and China.

L: Well, by stepping in with guarantees for all the PIGS countries, hasn't the EU just, in fact, spread the problem all across Europe? They've pledged a trillion dollars they don't have, trying to solve debt problems with more debt, just like the U.S., putting out the fire with gasoline.

Doug: I'm afraid so. The crisis hasn't caused the whole system to collapse yet, but I just don't see any way out. As I said above, they are not just doing the wrong things, but the exact opposite of the right things. Doing what's right is politically impossible; there are simply too many voters who'd squeal if anyone tried to change the old order. But change it will, although in a very disorderly manner as the system falls apart. Let me again emphasize the likelihood of tightening foreign exchange controls.

Back in the U.S., we'll know the collapse is imminent when people realize that saving in dollars makes no sense because the value of the dollars is being wiped out at a faster rate than they can earn interest on savings – especially after taxes. The destruction of value in the stocks, bonds, and property can be blamed on the evil markets, and things might lurch forward for a while longer, but when they finally destroy the currency, it will destroy the incentive to work and save. Worse, it will destroy the people who are savers – the most productive people – and that will put us into the endgame.

So, crystal ball jokes aside, I really don't know how it's going to end, nor when, nor what shape the endgame will take. But the way things are going, and with the political impossibility of changing direction, I'd say that if this crisis were a ball game, we've only seen the first inning and are now moving into the second.

L: We'll need a requiem for the ill-prepared. This will hopefully not include our readers. So let's talk about investment implications. You said once that you could see the currency crisis actually being good for stock prices, as people fleeing depreciating dollars look for someplace, anyplace to park their wealth…

Doug: Yes. Well, at least notionally, stock certificates represent ownership of real wealth. Companies create profit – capital – or they go out of existence. But the problem with betting on a general stock market rally in response to a dollar crisis is that a lot of company earnings could evaporate, along with the notion that owning their stock represents any sort of wealth. So, yes, there could be a panic into the stock market, but that could be very short-lived.

L. What might you see as a sign that stocks, in general, are a good buy?

Doug: Needless to say, I want to buy low and sell high. Historically, when the stock market bottoms, not just in the U.S., but everywhere in the world, dividend yields rise over six percent, up to as high as 15 percent. Book values drop to less than one. Price/Earnings ratios drop to less than six to one. By those parameters, the general equities markets are still grossly overpriced.

So, yes, we could see stock markets going higher. With governments all over the world creating trillions of currency units, they will undoubtedly ignite more bubbles. One of those bubbles could be in stocks in general – but I doubt it. Not while there's such obvious reason to be pessimistic about corporate earnings. My best guess will be no surprise to you; I think the most likely bubble, driven by fear and greed, will be in the precious metals.

L: Music to my ears.

Doug: Of course, and I think there's an excellent chance there could be a corollary bubble in the mining stocks Jeff covers in Casey's Gold and Resource Report, as well as the more speculative junior companies you cover in the International Speculator.

L: Anything else?

Doug: Oil. As currencies go down, oil will have to go up. But there's a lot to be said for Hubbert's Peak Oil theory. And the increasing possibility of a serious war could send it to the moon. In any event, demand from developing economies will continue growing. The need for it isn't going away anytime soon. At least not until we're well into the Nanotech Era.

L: We cover that in Casey's Energy Opportunities. What else?

Doug: Agriculture. Wheat, corn, and such commodities are notoriously fickle, highly susceptible to weather, bugs, and government subsidies – all sorts of nasty variables. But people won't stop eating, and agricultural land is real capital. Looking at the global markets, I still like my long-term call on cattle, and right now, I think milk is looking almost cheap. And that's saying something, because right now – metaphysical impossibility that it might seem – almost nothing looks cheap to me.

L: People can read more about that in The Casey Report. So, it's not that these commodities are particular bargains, but that given the predictable outcome of government action, speculators can expect them to shoot up in price.

Doug: Right. Nothing looks like a screaming bargain to me these days, but in relative terms, food commodities and the precious metals look like the places to be. Remember, most of the time, the intelligent speculator will do nothing. Maybe 90 percent of the time, you don't swing at the ball. But when you do, it should be because it looks to you like you've got a chance to knock it out of the ballpark.

L: In that context of waiting for the right time to pounce, and the question of what to do with your cash while you're waiting, it's worth reminding our readers that gold is cash.

Doug: Yes, as we've said many times, it's the only asset class that is not simultaneously someone else's liability. And that's more important than ever today; counterparty risk is going to extreme levels. Gold is the main asset to benefit both from fear of crisis and from inflation, when that beast finally rears its ugly head.

L: And it's highly liquid. You can actually pay for things in gold and silver, if need be.

Doug: Yes. I'm sorry I don't have a super pick today that will make our readers millionaires overnight. But as Richard Russell said, in a depression nobody really wins – the winners are those who lose the least. I'm starting to think more of capital survival than capital gains, so when things do hit bottom, we'll have the resources to buy great assets cheap and start accumulating a real fortune in a sound, sustainable recovery. Because there will be one. At some point.

L: At last, an upbeat prediction! Thanks for that.

Doug: You're welcome. Talk to you next week.

As Doug said, right now is not the time to take huge risks with your money, but to batten down the hatches -- which you can do best by buying physical gold and silver, as well as stable precious metals stocks. Even in the Great Depression, for example, gold producers like Homestake Mining did well for investors while most other assets plummeted in value. Learn all about buying and storing gold and which mid- to large-cap gold stocks, funds, and ETFs are the soundest -- details here.

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May 12, 2010