(Interviewed by Louis James, Editor, International Speculator)

L: Doug, the news of the week is the big meltdown in the gold market. Some people are saying the bear is here to stay, and it's time to sell everything gold-related and look for greener pastures elsewhere. Others are saying the is the buying opportunity of the decade, and it's time to go "all in." What do you think?

Doug: I'd say it was neither. It could be that just as in 2008, when gold went down a lot at just the time you might think everyone would be panicking into it. But a lot of people had to sell their gold to meet their other obligations that were denominated in various paper currencies. That may be happening at this very moment in Cyprus. There are conflicting reports, but they may end up being forced to sell something on the order of half a billion euros' worth of gold – and if that happens to them, it could happen to other much larger countries that are in trouble, like Greece, Italy, Spain... or France.

L: That is an interesting explanation. A lot of people have been pointing at the lower price target and guidance issued by Goldman Sachs – but why anybody would listen to those guys after all they've been wrong about, at taxpayers' expense, is beyond me.

Doug: Yes. It makes no sense that anyone would listen to Wall Street analysts about gold. Insofar as these people have an education in economics, it's invariably something they've gotten from a conventional university program, which is to say that their economics degrees are worth nothing, and their economic thinking is both totally askew and totally conventional. You can always rely on conventional thinking from the Establishment. The moment someone looks like he's thinking independently, he's seen as a danger and asked to go away. Which means getting off the gravy train. And who wants to both be ostracized and lose a fat income?

L: That's what Walter Block said last week. Did you see my interview with him?

Doug: I did, and I liked it. That was a very good interview. How rare to have a conversation with a university economics professor and have it not only make sense, but be entertaining.

L: It was fun. But that's exactly what he said: "My credentials are worthless."

Doug: [Laughs] That's one of the many reasons why I like Walter; he's not only extremely smart, but very intellectually honest. He looks at reality and calls it the way he sees it, no matter how politically incorrect. That's immediately obvious to anyone who reads his book Defending the Undefendable, which is a hoot; it's like hitting someone between the eyes with a mental 2 x 4... one of my all-time favorites.

He recognizes that a Ph.D in economics from Columbia is a sham. I'm not sure if it's worth more or less than a doctorate in political science, sociology, or education. Or a degree from a Bible college, for that matter. Actually, I'd assign a negative value to all of them. They only prove that the recipient was naïve enough to spend the time and money it takes to get them. There's a lot more I could say. Those who are interested can read more in our conversation on education.

L: Right. But back to the matter at hand. You're saying that at least the proximal cause of the big selloff in gold was Europeans getting hit by the demands of their obligations and being forced to hit the bid on gold – or fear of this happening in a big way?

Doug: It's hard to say. I think that's part of the puzzle. Once a selloff starts pushing investors into panic mode, that negative momentum can seem to take on a life of its own, making the downturn longer and deeper than a rational response to the situation merits, or indeed than most people can imagine. In other words, it's a normal – albeit radical – market fluctuation in abnormal times. The sellers are apparently treating gold as a speculation, which is a mistake. They should view it as a bedrock financial asset, something you buy and put away for the very long haul. It's not a trading sardine.

There are, of course, plenty of theories that flood the Internet every time gold sells off when it seems like it should be advancing – mostly conspiracy theories. The proponents don't like it when we call their theories conspiracy theories, but that's what they are. They allege it's all because of the bullion banks, or the Bilderbergers, or the Trilateral Commission, or the Council on Foreign Relations, or the Fed's crash team, or some other nefarious agency. I have good friends who are otherwise quite knowledgeable and rational who sincerely believe that such groups are constantly knocking the price of gold down. I know they mean well, but I have to put these theories in the tinfoil hat category.

L: Some people are saying the Fed hit the market with 500 tons of naked gold shorts. I'm not sure how they could prove that, but the argument that the government wants to see the price of gold go down does have a certain appeal.

Doug: Of course governments want the price of gold lower. They want the prices of everything lower: silver, copper, iron ore, soybeans, corn…everything but housing, which for some reason they want higher. But gold is the least important commodity to these people. Not only don't they understand its monetary role, they don't believe in it or even really care about it.

It's true that the US government tried to suppress the gold price back in the late '60s, back when it was $35. But that was because the Treasury had to redeem its paper money for gold at that price; since 1971 it no longer does that. Actually, if anything, the US should want a much higher gold price now; with a reported 265 million ounces in national reserves, the US is by far the world's largest gold owner.

But the price-suppression theories are quite ridiculous from a practical standpoint as well. The US couldn't even suppress gold's price 40 years ago – when there was only half as much gold in the world as there is now, and twice as much was owned by governments, and it was 1/40 of the price that it is now. And governments were far more solvent than they are today. Yet they are somehow supposed to be able to keep the price of gold down now. So, whatever else it might be, I do not attribute gold's retreat to an official price-suppression conspiracy. The idea gives conspiracy theories a bad name…

L: They have successfully suppressed the price of gold from $250 an ounce all the way down to $1,600 or $1,800 an ounce... until recently.

Doug: [Chuckles] Yes, exactly. Nobody, not even the US government, is stupid enough to fight the biggest bull market in history for the last 12 years. Especially when it's bankrupt; exactly how are the losses being accounted for? And especially when traders talk like high-school girls about who's winning or losing in the markets. They don't get paid bonuses for losing money. I wonder when the conspiracy guys suppose the government will stop trying to suppress the price… at $5,000? $10,000? I wonder why the US would be trying to help the Russians, the Chinese, and lots of other governments buy gold at lower prices? None of this makes any sense.

L: Okay, we may never sort out all the imponderables relating to why, but perhaps the more useful question now is what to do now as gold investors.

Doug: Well, this environment is full of buying opportunities. That said, I'd be careful about backing up the truck and going all in. It's not as though gold has dropped all the way back to where it started its current bull run, back under $300 an ounce.

L: So what should people do?

Doug: They should stick with their plans, buying consistently and lowering their dollar cost average. The lower it goes, the more gold at better prices they will own.

L: And that's still a good thing?

Doug: Yes. All these governments around the world are still printing up trillions of dollars' worth of new currency units. At this point, all that new paper money is basically just sitting in the financial system – not entirely, but most of it. At some point it's going to get into the economy. It's going to cause much higher prices for consumer goods. And it's definitely going to create more asset bubbles. One of the most certain of those bubbles is gold. That in turn will create an even bigger bubble in its old friends the gold stocks, which, relative to the price of gold, are about as cheap as they have ever been in history.

As you know, the reason why I like junior mining stocks – well, mining stocks in general, but especially the juniors – is that they are the most volatile class of securities on the planet. It seems to me that everything is lining up right now for a perfect bear-market bottom in these stocks. That's despite the fact that mining is a terrible industry that has gotten nothing but worse over the years.

L: More regulation, taxation, and confiscation.

Doug: That's right. There are thousands of NGOs running around the world trying to put miners out of business, and lots of native tribes who see the recent mining boom as an opportunity to hop on the gravy train and perform a righteous shakedown. That's in addition to the fact that young people see it as a 19^th-century choo-choo train business. You have to spend huge amounts up front on an Easter egg hunt to find deposits, then billions more to build a mine with no certainty you'll ever get even a return of investment – forget about return on investment – many years later. Plus the fact that the world has been picked over for both large and high-grade deposits. It's a horrible business. Despite these things – or in some ways because of them, actually – I think there's going to be a super bubble in mining stocks. Which means a fantastic opportunity for those with the courage to buy now, because true market capitulation is shaping up in the sector, as we speak.

L: Is there a price below which you would advise throwing caution to the wind and going all in?

Doug: No. Almost no matter how low it goes, it can always go lower. If it dropped below $800 or $900 per ounce, that would be below the average cost of production today, and would rationally signal that gold would have to rise eventually. But the new supply of gold is unimportant to moving its price. About 80 million ounces are mined annually these days, but there are about six billion ounces estimated to remain above ground. So supply only increases about 1.3% per year – it's fairly trivial, especially after industrial consumption. What determines the price is the desire of current owners to buy, hold, or sell it. It's not like wheat, or even copper, where new supply is critical.

So, no; if the negative momentum were strong enough, it could fall well below the cost of production. I'm not saying I think it will go that low, just that the only point at which it can go no lower is zero. Now, I don't expect it to drop much more, and I'd be very surprised at a drop below $1,000 an ounce, but there is no law of nature preventing it from doing so. All markets fluctuate. People who get panicked are overcommitted... or maybe they shouldn't be in the market because they're not psychologically suited for it. The problem is that government currency debasement practically forces everyone to be in the market, just to try to stay ahead of inflation.

You can't time market bottoms, but you've got to play the odds. If I were going to sell anything now, I wouldn't think of selling my gold or gold stocks – as we said already, I'm a buyer today – but I would absolutely sell any government bonds, if I hadn't been paying attention and still owned any. I'd also get out of most common stocks, which are very overpriced, based on very unsound economic fundamentals.

L: On the other hand, you say that all these trillions of new currency units are flooding the market and have to go somewhere – clearly a lot of them are going into stocks. We just saw that in Japan, with the government announced it would be printing a lot more yen, and the same thing sure seems to be happening on Wall Street. This can be a new super-bubble forming in stocks; might a speculator not want to buy before that happens?

Doug: Well, that might work, at least if you buy the kind of stocks Warren Buffett buys, as they represent ownership in real productive assets. But that's a bubble that could pop at any time, and I view it as extremely high risk. I want to re-emphasize that we're just in the eye of the biggest financial and economic hurricane in history. The key in the Greater Depression is first and foremost to keep what you have. That's not going to be easy.

L: All right, I understand – the precious metals remain my favorite investment as well. But last week Walter Block said that as much as he likes gold for similar reasons, he hesitates to recommend buying it because it's subject to confiscation by desperate governments. It happened in the United States in the 1930s, by Executive Order 6201, issued by FDR.

Doug: That's why I have always recommended internationalizing one's assets. No place is perfect, no country on earth is completely safe, but you can mitigate political risk by distributing your assets across a variety of jurisdictions. Political diversification makes more sense than ever today.

Bluntly: all investments are dangerous these days. There are very few bargains anywhere, in any market, in any country. Governments around the globe are completely out of control – there is nothing so low that they will not stoop to it. They are predators, they are desperate, and they are hungry.

Oblivious people, mostly untraveled and unsophisticated US tax slaves, argue that one should not diversify internationally, believing that foreigners are more likely to steal from them. The amount of fear and antagonism that some quarters of the populace have toward libertarian ideas is actually quite disturbing. The people who think this way generally have the same attitude that medieval serfs had who could not be persuaded to go further than ten miles from their home towns, because they had heard that they were dragons over the hills. I pity the fools. They don't realize that their main danger is from their own government, which believes it owns them.

This is true of all governments, but most governments are generally not aggressive towards tourists. Tourists are treated as honored guests who come and spend money – and can pick up and leave if offended. Citizens, on the other hand, are commonly regarded as milk cows, if not beef cows. And contrary to what most people in the US think, there are countries that are more stable than the US is today. These people are living in the past, thinking that the United States is no different from the America of 50 years ago.

L: I scratch my head about that too. Anybody who thinks that what happened in Cyprus, for example, could only happen in Cyprus, is just not paying attention. It was the European Central Bank's idea to confiscate people's savings, not that of the Cypriot politicians or central bankers. That's First World politicians' thinking these days: "the people's money is our money to do with as we please." People are being naïve beyond reason if they imagine that such a thing could never happen in America.

Doug: That's right. It's been said that officials in Canada and New Zealand have talked about seizing bank accounts, if necessary, just like in Cyprus – and those two have long been considered among the most stable countries in the world.

L: Okay, well, Cyprus was a banking destination until a few weeks ago, and obviously won't be again for a very long time. Have your thoughts on where the best places in the world to internationalize changed any in recent times?

Doug: It really depends on who you are, what stage of life you're in, what you want, how much money you have, and so forth. If I were just starting out, for example, I would definitely do Africa. It's not a lifestyle destination, but a raw and rough place where people with courage, brains, and determination can seek and create their fortunes.

If a gracious and pleasant lifestyle were my goal, on the other hand, Europe is still a place to go – it's just bloody expensive. And the culture has been totally corrupted by ingrained socialist ideas, high taxes, onerous regulation, and extravagant welfare programs. The politics there will likely become even worse in the future, until the place collapses economically or has another war. I've lived in several countries there, but it's not for me.

I'm a big fan of the Orient, as you know, because that's where the future lies. The problem with the Orient, however, is that unless you were born there you will always be an outsider, regardless of how welcome a guest you may be.

So I remain a fan of Latin America. I spend almost all of my time these days in Argentina and Uruguay. Both are quite similar to Europe culturally, but with much lower population density. Also, they won't be on the front lines of the ongoing war with Islam. Of course, they both have completely insane governments – but that's true of most everywhere today. I'm here for the lifestyle, not to do business. From that point of view, it's impossible to beat them.

L: So, suppose you bumped into one of our readers who had just read our past interviews, and wanted some advice on the first steps to take to internationalize his or her life. What would you say?

Doug: The first and most important thing is to uproot and destroy any remnants of medieval serf thinking you may have lurking around in the crevices of your mind. Second is to open a bank account or a brokerage account in some country – any country that you like spending time in and has reasonable banking laws – where you are not a citizen/resident/ milk cow. This is both hard and getting harder for people carrying US passports, but it's very important and well worth doing. Political diversification is even more important than investment diversification at this point.

Just start traveling. Explore the world. Look for countries you truly enjoy, that are friendly to foreigners, and are open to investors – especially as regards real estate.

L: Because buying a farm in the Congo isn't likely to turn out well, unless you actually plan to live in the Congo and keep an eye on it? Better to build a house on the beach in Thailand or Costa Rica, if that sort of thing is your cup of tea.

Doug: Precisely. But today, it's important to think as a speculator, not an investor. Personally, I probably wouldn't pick Costa Rica these days, because it's totally overrun with gringos and way too expensive. Thailand makes it quite hard for foreigners to buy real estate, but it's one of the best choices in the world for lifestyle. But to each his own.

L: Would you say that Costa Rica is more expensive than Uruguay?

Doug: Nothing is more expensive than Uruguay, it seems… I think Uruguay is now about three times as expensive as Argentina, all in. It's 50% more expensive than the US. Uruguay is no bargain, although it is pleasant.

L: Well, maybe Costa Rica is a good starter country for people new to internationalization; people might find it more comfortable and less frightening to be in a place where they hear English as much as Spanish. Sort of like San Diego, but just a bit farther south.

Doug: Maybe that's not a bad idea; sometimes you have to start with baby steps. It's not a bad place. Panama might be my suggestion, from that point of view.

L: Very well, then… anything else?

Doug: I guess I should tell our readers that we're going to be moving these conversations to monthly editions of The Casey Report. I'm pretty busy practicing what I preach down here in Cafayate, and I've pretty much said the most important things I wanted to say, at least in this format.

I am, however, working with my friend Dr. John Hunt on a series of six novels, reforming six very politically incorrect – but unjustly besmirched – occupations. I'm not crazy about preaching to the choir anymore, but there are lots of things you can show and say in fiction that you don't dare talk about in a format like this one. I expect they'll be quite fun.

I also think we'll have a second volume of our conversations, a sequel to Totally Incorrect, out in a while as well. I trust many of our readers liked our first volume.

As for our conversations going forward, I'll keep on commenting on the passing parade in The Casey Report, so I encourage readers who really like them to sign up for TCR. But regardless of their choice on that, I urge them in all sincerity to think like contrarians, and implement our strategy: Liquidate, Consolidate, Speculate, and Create.

May we all live long, and prosper.

L: Thanks, Doug!

Doug: You're very welcome.

Starting next week: Fresh perspectives from our extensive network of financial and economic experts. You won't find any recycled Wall Street Journal articles here – only exclusive, closely circulated, or premium content from some of the brightest minds in the financial world. Stay tuned for Midweek Matters, beginning next Wednesday, from The Casey Report editor Dan Steinhart.

(Interviewed by Louis James, Editor, International Speculator)

Editor's note: Loyola University professor of economics Walter Block and Doug Casey have been friends for many years. Perhaps that's because Walter wrote a book called Defending the Undefendable, debunking most so-called victimless crimes, and Doug takes great delight in debunking nonsense wherever he sees it. But Walter says that Doug – dire predictions regarding the Greater Depression notwithstanding – is a "wuss," so we had to ask Walter to tell us what the score really is, if even Doug is being too optimistic. We spoke to Walter via video conference on Skype, so he was able to show us the photos and books referenced below.

L: Hello Walter, it's been years – thanks for agreeing to speak with us.

Walter: My pleasure. Where do we begin?

L: Well, you're an academic – let's start with that. What's your academic claim to fame?

Walter: My main claim to fame is that I shook hands with Ludwig von Mises – and have never washed that hand since. So if you shake my hand – it's purely voluntary – you can channel Mises.

L: [Laughs] Well, it's been said that libertarianism is best spread through person-to-person contact.

Walter: I was also a friend of Murray Rothbard's – oh wait, I have a picture here of me playing chess with Hayek. Can you see it?

L: Yes… These are excellent credentials for free-market economics junkies.

Walter: Yes, well, ordinarily when you ask an academic for credentials, he'll tell you where he got his PhD, or what research he's working on now. But my PhD in economics, from Columbia University, had nothing to do with the Austrian school of thought I'm now a member of. It was mainly mainstream neoclassical… crap.

L: That's a technical economics term?

Walter: [Chuckles] While I was studying at Columbia, I read Hayek's Road to Serfdom, and in the introduction Hayek says that he hates to take time away from his important academic work to write such a political book, but that it's necessary. I asked my professors if I should read Hayek's important work, and they all said, "No, no, no. It's nonsense." So I never read Hayek until years later when I met Murray Rothbard and really got into Austrian economics. That means that the honest answer to your question is that my official academic credentials are worthless, at least in terms of knowing anything about the dismal science. Of course, insofar as getting an academic job, a PhD from Columbia must count as a plus, a very large one.

L: But you've written about ocean-steading and other theoretical matters; surely you've pushed the boundaries of human knowledge somewhere?

Walter: Well, I think I've pushed the envelope on libertarianism more than on economics, but I have made a few small contributions on the theory of interest rates, the business cycle, and the gold standard. More recently, I've coauthored a whole series of articles with my colleague Bill Barnett, mainly on Austrian economics and methodology. We've come out with a book on this, called Essays in Austrian Economics. [Waves book in front of camera]

L: Wow, that looks quite weighty!

Walter: [Chuckles] Yes, it's 600 pages long, so you can bash people with it if they don't see reason.

L: That's what leftists do with their copies of Das Kapital, so fair is fair.

Walter: The cover depicts our criticism of the Austrian structural production triangle analysis, which was used for a long time, even before Hayek – but getting into that may be more technical than we want for this conversation. Let me just say that we are criticizing some of the ideas of our predecessors, Hayek and Mises and so forth, but from an Austrian perspective – what we hope is a truer Austrian perspective.

L: I once heard Peter Boettke say, "We stand on the shoulders of giants, but we have to kick their heads sometimes."

Walter: [Laughs long and hard] That's magnificent! That openness to inquiry is important and welcome. Austrian economics has sometimes been called a cult – I've been called a cultist to my face by my former thesis advisor at Columbia, Gary Becker, and also by James Buchanan. Both of them have won Nobel Prizes in economics, which indicates what I think about that award – apart from Hayek's.

L: Well then, let's take a step back from the academic world and talk about your work in an area of great interest to our readers: the gold standard. Can you defend the premise that gold is not just a "barbaric relic?"

Walter: That's a good topic. It was Keynes who called it a "barbaric relic." It has become a relic, in the sense that it has not been used as official money for many decades. Our man FDR took our gold away in the 1930s, then Nixon severed the last link between it and the dollar in 1971. But the real problem with gold, from the point of view of our friends on the left, is that it functions as a set of fiscal handcuffs on the government.

L: Because gold can't be printed at whim. To spend it you have to have it, physically.

Walter: Right. Now, there are three – and only three – ways the government can get money. The first is to tax the people. The problem with that from the point of view of our masters is that everyone knows who's doing it. The politicians can't blame greedy capitalists or any others for what the tax-man does, and that's a problem for them. The second source of revenue for the government is borrowing. But again, there's a limit on how much you can borrow, because everyone knows who's doing it – and has a good idea of how indebted the government is. The third way is much, much better from their point of view, and that is to create money out of thin air. That may be done via fractional reserve banking, or printing fiat currency, or whatever. This is good from their perspective because not one in 1,000 people, or maybe not one in 10,000, knows who's doing it and that it is causing inflation. It's theft on a grand scale, understood by so few, so they can get away with it.

I think it was Lenin who said that the best way to destroy an enemy is to debauch that country's currency. That's what these guys are: currency debauchers. Ben "the paper hanger" Bernanke is going berserk with his quantitative easing. There's no more quantitative easing one, two, or three, its quantitative easing forever. Every month, billions of new dollars are pumped into the economy.

So the last thing the government wants is this barbaric relic to limit their spending to what they can actually tax and borrow. And that, of course, is why people like you, me, Doug, and like-minded others, favor the gold standard; we want the government handcuffed, so it can't go around spending money it doesn't have on unnecessary wars and other destructive and counterproductive things governments like to do.

L: I agree, but they'll never admit it.

Walter: Of course. What they say is that gold is bad because it used to cause volatility and instability in the economy. But it's not true. If you look at the business cycle in the 100-year period before the Fed was established in 1913, and compare it to the 100-year period after that (to the present day), the volatility has been vastly greater in the more recent period of greater government involvement in the economy and the abandonment of the gold standard.

There was volatility before, and some of it was due to imperfections in the gold standard we had then, but the volatility of the business cycle was much lower in the earlier period than in the latter one than what we have now. So I'm a big fan of the gold standard. So is Ron Paul, who's done yeoman's work getting the word out. The Keynesian idea is just totally wrong.

L: Okay, but still, most people believe that our modern economy would just not work if we used gold and silver for money. Is there an economic argument to justify this view?

Walter: None that I am aware of. The burden of proof is on them, to show why gold-backed money wouldn't work.

L: I suppose, if anything, it's more practical now than ever. It's already rare for people to shuffle actual little pieces of paper back and forth. It would be no different to transfer ownership of gold back and forth, except that the gold would actually exist and have intrinsic value, whereas most of the so-called money in the world today does not physically exist, and has no intrinsic value even when it does exist.

Walter: I agree. Look, a banker is really just like a tailor. A tailor takes big pieces of cloth and cuts them into smaller pieces to make shirts and pants and things. A tailor also takes smaller pieces of cloth (thread, yarn) and sews them together to make larger items. Bankers do the same thing: they take billions of dollars from large depositors and break it into smaller pieces – a few million here, a few million there – to put to productive use. Bankers also take small deposits – $10 here, $100 there – and aggregate them into larger amounts, also to be put to productive use. This is the essence of the banking system, and what finance is for. For this to work, all you need is a form of money – any form of money – that people trust. You do not need fractional reserve banking or a fiat currency system; all that does is increase the stock of money, which makes each unit worth less.

L: That's a great metaphor.

Walter: By the way, I don't say that we have to use gold as money. We could use dollar bills as money – as long as those dollar bills were 100% backed by something of value such as gold or silver. It's neither necessary nor practical for people to go around with great bulging sacks of gold coins like Scrooge McDuck – you know who Scrooge McDuck is, don't you?

L: Of course; Scrooge McDuck is Doug Casey's great hero.

Walter: [Chuckles] So, I would say that it's not entirely accurate to say that I back the gold standard. I would say that I'm a proponent of free-market money. As it happens, whenever the market has been free to choose, gold has emerged as the most convenient and universally accepted form of money. That does not mean that money can only be backed with gold; it could be silver, platinum, copper, anything people accept as having value for other purposes. The important thing, as regards your question, is that anything you can do with unbacked fiat money, you can also do with money fully backed by something of actual value. The only thing you can't do with it is create more of it out of thin air.

L: Which is only of concern to spendaholic governments.

Walter: Yes. It's the same as with the minimum wage, which Obama is trying to raise right now. He wants to raise it to nine or ten dollars, on the grounds that $7.25 is not a livable wage. The idea here is that with the stroke of a pen we can make people richer. Cure poverty. Well, if that's so, why be so niggardly and stop at $10? Why not make it $100, or $1,000 per hour?

And if that's a problem, why can't they see that it's the same problem trying to make a whole society or economy richer at the stroke of a pen – or a few keystrokes at the Fed? Why isn't Zimbabwe the richest country in the world? Why weren't Germans who had to carry wheelbarrows full of deutsche marks to the store to buy a loaf of bread in 1923 rich?

L: How important in your analysis is the backing, or convertibility into something of value? I ask because today we have the phenomenon of bitcoin, which has been created in such a way as to resist inflation. It's not backed by anything, and yet seems to be gaining wide acceptance as money.

Walter: My answer to questions about bitcoin starts with an economics joke. An economist is asked: "How is your wife?" And he answers: "Compared to what?" [Pauses] That was a joke.

L: I get it… I get it.

Walter: So if you ask me if I like bitcoin, I ask: "Compared to what?" If the comparison is with a gold coin system, I'd rather have the gold coin. If the comparison is with the US dollar, which is going the Zimbabwe route, I'd rather have the bitcoin. Now, other monetary authorities around the world seem to be debauching their currencies faster than the US is destroying the value of the US dollar, so the dollar appears strong in foreign exchange. But that doesn't change the fact that each dollar in existence is made worth a little less with each new dollar created. So compared to that, I'd still prefer the bitcoin.

L: You touch on so many interesting things. This phenomenon of currencies all around the world being debased, and people focusing on the exchange rate between them – rather than what they can buy in the real world – is what we call "the race to the bottom." As an economist, can you see a way out of that death spiral, or is Doug's Greater Depression inevitable?

Walter: Well, if Americans had elected Ron Paul, and Ron had put Doug in charge of the Fed and told him to get rid of it within a week, Doug would've gotten rid of it within two days. That would've stopped it. Unfortunately, that's not what happened.

Did you know that when Alan Greenspan was a younger man, he was influenced by Ayn Rand, and wrote articles in defense of the gold standard? I remember reading about it in the newspaper when he was appointed Fed chairman, and I thought he'd get rid of it in a few weeks. That shows how naïve I was! But I would trust Doug.

I have to say that I think Doug is absolutely right. It's basic Austrian business-cycle theory. When you create money, you artificially lower rates of interest. There are certain goods that are very interest-rate sensitive, particularly long-term investments, like houses, cars, mines, and things like that. So lowering interest rates increases investment in these kinds of heavy, long-term things in a way that is incompatible with the saving-consumption decisions of the populace, which haven't changed. This results in a bubble that must burst – Doug is absolutely right about that. I can't predict when that will happen, but it will.

Trying to cure an economy that has seen massive amounts of malinvestment by stimulating more of the same is like trying to cure a drunk by giving him more alcohol. It's not going to work. The cases of Zimbabwe and Germany in the 1920s show that it doesn't work.

L: And the real cure – cutting spending and living within our means – is not politically viable. So Doug is right and there's no way to avoid going through the wringer?

Walter: The economy would crash even if we put Ron and Doug in charge now; there are too many investments that never should have been made in the first place. Those mistakes must be liquidated. The movement of capital out of areas where it should not have been invested in the first place and into areas where it should have gone will help some people, but it will also hurt huge numbers of others. But really, the correction doesn't create the pain; it uncovers pain caused by incorrect investment caused by previous government intervention.

Instead of this, the government is trying to paper the problem over. But even all the money the government has created is not working as they'd hoped. Unemployment remains high, at seven or eight percent officially, but more than twice as high if you look at the shadow stats. It would be even higher if you counted the so-called discouraged workers who are no longer looking for jobs. And it's even higher if you break it down and look at segments of the population like young, black males. Their unemployment rate is over 40%.

So the government is trying to paper the problem over, but it's not working. We don't see soup-kitchen lines like back in the 1930s because the government gives poor people food stamps that look like ordinary credit cards – they've tripled the amount of handouts in recent years.

People say this is a strange recovery. Well, the obvious answer is that this is no recovery at all. It's going to get worse, just as Doug says.

L: Okay then. You're a professor, not an investor like Doug, but from your point of view, is there any investment class that's safe, or even some investments that might do well during this sort of crisis?

Walter: Well, I'm tempted to say gold – but what did FDR do during the last Great Depression? He stole everyone's gold. So, I can't even tell people gold and silver are safe, because Obama could wake up one day channeling Roosevelt, and issue a similar executive order, seizing everyone's bullion.

L: This is why Doug advises people to store their gold in multiple jurisdictions, especially outside the US. But it's a threat everywhere.

Walter: We could also talk about land; no one is making any more of it, so it resists inflation pretty well. However, governments can double, triple, or raise taxes on it even higher, making it a pretty risky investment as well.

L: They could basically confiscate the value while leaving you the title; and you can't hide your land, nor pick it up and take it somewhere else. But Doug likes to point out that there are jurisdictions around the world that are famous for not doing such things – and real estate abroad can never be forcefully repatriated to your home jurisdiction. Anything else?

Walter: I'm very reluctant to tell anyone to invest in anything at all – even bitcoins. Even if the bitcoin system itself were to prove unhackable, governments could still arrest people who use them and put them in jail, call them terrorists or something. They are capable of anything.

L: They've already done that, jailing Bernard von Nothaus, calling him a terrorist for circulating warehouse receipts for gold and silver bullion.

Walter: That's right – the Liberty Dollar. That's a truly disturbing and disgusting bit of recent history.

So, I admire Doug – and all of you – because you step into this morass, where professors like me fear to tread, because we can't be sure of any investments. You guys are more entrepreneurial, and I'm more theoretical. So I'm never wrong! [Chuckles]

L: And never long. Okay, I won't push you on what's not your field. But putting investments aside, theoretically, what is a person to do in such an environment? Nothing is safe, but one can't see the crisis coming and do… nothing?

Walter: Well, what would Scrooge McDuck do? He didn't keep his money in other people's banks; he kept it in his own vaults, some right at hand – stuffed in the mattress, as it were – and more scattered around other places. It's not perfect, but then they can't pull a Cyprus on you: close the banks, take your savings, and only let you withdraw $100 a week or so of your own money.

We do need to use banks for some things, and the FDIC guarantees deposits up to $250,000 – even with fractional reserve banking, deposits up to that limit are likely to be honored, because the government can just print up more money – but I wouldn't want to leave any more than that in any bank. And I'd always know that after all the money-printing the government would do to avert a major bank run would mean that while I might get the same number of dollars back, they would not buy as much as when I put them in.

L: It's quite striking to hear an academic agree with so much of Doug's more dire views and predictions. Much food for thought. Anything else you'd like to tell our readers?

Walter: Well, we spoke of being free to choose earlier; that's of course the title of a famous book by Milton Friedman, an economist highly regarded by most free-market type people. I must say a word or two about Milton Friedman.

L: Okay, shoot. Metaphorically; no sectarian violence allowed.

Walter: Murray Rothbard used to say that mainstream economists specialize in what they are bad in. If you look at Milton Friedman's work, you can see that he's very good on free trade, minimum wage, rent control, occupational licensure, and other topics…

L: But he was a monetary interventionist.

Walter: Yes, he was a monetary interventionist – and that was his main thing, apart from educational vouchers, which are also a horrible idea. If someone says "monetarist," who will most people come up with by association? Milton Friedman. He was just horrible on this; he favored fractional reserve banking, he favored the Fed, all sorts of government monetary and tax intervention, and he had the audacity to name his book Free to Choose. But when people were free to choose, what did they choose? Gold. He's a disgrace!

L: Don't hold back, Walter – tell us what you really think.

Walter: [Chuckles] Well, I don't mind disagreement. We have to have Krugmans and Keyneses – but the problem is that everyone thinks Friedman was a champion of free enterprise, and people will come to you, and me, and Doug, and tell us were wrong because "even Milton Friedman concedes…"

L: It's like the problem arising from Ronald Regan using libertarian rhetoric to get elected, and then overseeing the biggest acceleration of growth in government ever seen until that time. That had typical results of too much regulation and government spending, and people think that the Reagan years showed that free enterprise doesn't work. Just as people are taught that the Great Depression proves that "unbridled laissez-faire capitalism" doesn't work – when, in fact, the Depression was the result of government intervention into the economy.

Walter: Precisely.

L: Well, this has been fun, in a horror novel sort of way. I fear our conversation will have people thinking that the "dismal science" deserves its name. Your message seems to be: be afraid – be very afraid. Is that right?

Walter: Be afraid, be very afraid – of government. It's a criminal gang. They steal from us – just try not paying what the IRS calls a "voluntary" tax this April 15. They kill people all around the world – despite its highly public outrage regarding weapons of mass destruction, the US has the only government that has used nuclear weapons, and on civilian populations. They intervene in the economy with all sorts of chicanery that causes great harm – and then use that as an excuse for more intervention. Doug is right in all his criticisms of the government – he just doesn't go far enough. [Big smile]

L: Well… we could start five new conversations on each of those topics, so let's call it a wrap for this time. Thanks for your time and insights.

Walter: You're very welcome. It is an honor to do this interview with you.

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(Interviewed by Louis James, Editor, International Speculator)

L: Doug, there is considerable disagreement over the significance of the Cyprus crisis. A lot of people are saying that it's just a flash in the pan; Cyprus is a small country, far off, and doesn't really matter. Other people are saying it's very significant. The European Central Bank took unprecedented steps. What do you think?

Doug: I think this could be the spark that ignites the keg of dynamite under the current financial system. All banks, all around the world, are bankrupt, and have been for years. That's because all the world's banks run on a fractional reserve basis.

L: I know what you mean, but we should spell that out: by law and backed with government guarantees, banks only have to keep a tiny fraction of the money people deposit on hand. They lend out the vast bulk of it, and in even in good times, they could not return all depositors' money at once, since loans cannot be called in instantaneously, and most would be defaulted on if they were. In bad times, the charade is even more hollow, since many loans that banks are currently owed will never ever get paid.

Doug: Yes, and they are all in that position. It was more serious in Cyprus because that economy is very leveraged to finance. In other words Cyprus was a banking epicenter for Europe. It was easier to make deposits – there were fewer questions asked – making banking the major business of the country. But I think the trouble will spread from there. It could spread to Luxembourg or Malta next; both are at least as leveraged to the financial sector as Cyprus. And from there... who knows?

Anyone with any sense should withdraw whatever cash they have in European banks, whether in euros or any other currency, immediately. Cyprus demonstrated that governments are quite willing and able to confiscate money sitting in a bank account in order to preserve the banking system. We live in Bizarro World.

L: Why would it spread? Cyprus was said to be particularly vulnerable because of its strong Greek connections; Cypriot banks had bought of lot Greek debt. Would people in Luxembourg be as exposed?

Doug: All banks are in effect creatures of the state at this point. They all own a lot of government bonds, which are considered the most secure form of capital. Of course, that's the opposite of the truth; all these governments are bankrupt as well. The Greek government is just more overtly bankrupt than most.

Actually, we should take a minute here to discuss what a properly run banking system looks like. Historically, banks offered two types of accounts: demand deposits and time deposits. Demand deposits are what we call checking accounts today, but the original idea was that you'd pay your bank to store your money securely, and you had the right to "demand" your deposit back immediately, and to transfer funds via check.

The idea of time deposits, which became savings accounts, was that the bank would pay you interest when you deposited your money with them for a specific period of time. That's why it's called a "time" deposit; you lent the bank your money for a given time, as did other depositors, and the banks would always know how much money they could lend out – at higher interest rates. Furthermore, loans made against time deposits were always short term, and also self-liquidating, against receivables, or excess inventory, for instance.

There were no government guarantees for deposits back then; bankers needed to capitalize their businesses with their own funds, and if they miscalculated, they were personally liable – and often did go bankrupt themselves if they made too many bad loans. Depositors naturally avoided banks known to make risky or illiquid loans. Banks competed to be known as the most prudent and solvent.

Both lenders and depositors were cautious. Before the early 20^th century, people might well have laughed at today's depositors of Cypriot banks. If they were foolish enough to put their money in banks that made such stupid loans, they only get what they deserve.

L: Our friend Rick Rule likes to say that the idea that the state can guarantee everyone's deposits is just another unaffordable, unbacked social promise of the 20^th century. Just another example of living beyond our means.

Doug: Yes. I don't think people understand this. People don't have a clue, do they? People read editorials by Paul Krugman and neither laugh nor roll their eyes. It's like they're all on Prozac.

L: The nature of real banking is not something they teach in school anymore, that's for sure.

Doug: Then it's worth repeating. The distinction between time and demand deposits is critical. They are completely different, actually unrelated businesses. Today the distinction has been totally lost. But it's much worse, since central banks have allowed the problem to compound to the n^th degree.

Sound banks never made what we call consumer loans today, because there is no guarantee, no collateral. Banks in the past made only short-term commercial loans that were fully covered by the value of the assets being financed. You never had to rely on the good faith of the borrower. You simply facilitated short-term – short-term – liquidity. The idea of a 30-year, a 20-year, or even a 10- or 5-year mortgage was anathema to sound bankers. A building and loan society might grant a five-year mortgage to one of its members, with a very significant down payment; that's because even though it's an asset class with value, real estate is illiquid. Forget about credit cards. Forget about car loans; if you want a car, save up for one. It's funny, actually. Car loans started out with a one-year term and a big down stroke. Then they went to two years. Now they're five or more, when people don't just lease. So even the family car has gone from a minor asset to a long-term liability. Subprime loans would have been completely unthinkable in the past.

L: Many people might say that credit that tight would be impractical today.

Doug: Many people don't like the idea of having to live within their means. They feel they have a right to have whatever they want, now. That's why the average American has essentially zero net assets. If everyone had to pay cash for everything, our whole society – from individuals on the lower rungs to big corporations to the state itself – would be much, much wealthier. We would not be, individually and as a society, one paycheck from being forced to live in a cardboard box under an overpass.

L: Perhaps so, but again, many people think modern high finance is not just normal, but necessary for civilization today. Big Business requires Big Credit.

Doug: Nonsense. The way you become wealthy is by producing more than you consume, and saving the difference. We don't need a fractional reserve banking system, we don't need government guarantees, and we certainly don't need to use government IOUs backed by nothing masquerading as money.

I understand something like 20% of the US economy is financial in nature. It's ludicrous; millions of people spending billions of dollars bundling, swapping, and repackaging imaginary assets. I'd guess that in a free-market economy, banking and related industries would amount to about 2%, a tenth as much. Money is essentially just a medium of exchange and a store of value; it's problematic when it becomes a gigantic industry. All these people who spend their days gambling with ledger entries would have to go out and find something productive to do.

L: Get real jobs.

Doug: Exactly. The whole banking business is corrupt from top to bottom today. Part of the problem is that banks are no longer financed by the individuals who start them, putting their personal net worth on the line. Now, they are all publicly traded entities – just like all brokerages – playing with Other People's Money. Management has no incentive to do anything but pad their wallets, so they pay themselves gigantic salaries and bonuses, and give themselves options. These people aren't shepherding their money and that of clients they know personally. They've got zero skin in the game.

This is true all over the world, not just in the US and Europe. All these banks are going to blow up, and not just in far-off, little countries.

L: It's interesting that a part of the basis for your negative prognosis for the global financial network is rooted in human psychology – the perverse incentives of playing with Other People's Money, exacerbated by government guarantees and banks mistakenly viewing government bonds as safe investments.

Doug: Imagine you're a smart, young trader working for Goldman, Deutsche Bank, or one of these big financial institutions. It's actually in your interest to make incredibly crazy bets. You can win billions of dollars if red comes up on the financial roulette wheel. If that happens, you get a multimillion-dollar bonus. You win. But if your bet doesn't work out, what then? The bank loses a few billion dollars, and you just go work for another bank, with more experience on your résumé. And you do the same thing over again.

L: So what does one do with hundreds of trillions of dollars in derivatives?

Doug: I don't know, and neither does anyone else. Not even Warren Buffett. Nobody can possibly keep track of quadrillions of dollars of derivatives. It's a daisy chain in which nobody can really know who is creditworthy. It's impossible to assess the real counterparty risk. All these thousands of traders sitting at computer banks, second-guessing markets; it's actually quite insane. I can hear them on the phone: "Hello, New York? Buy! Hello, Tokyo? Buy! Hello, London? New York and Tokyo are buying. Sell." It's an immense waste of productive manpower, them and the divisions of highly paid lawyers, accountants, and administrators behind them. Little of this would exist in a free-market world without central banks spewing trillions of currency units out every year to support governments. Of course, a gigantic financial industry arose to deal with it.

In any event, the people who today imagine they run the show may have put a finger in a dike, but it's all going to come to very bad end.

One of the interesting things about this Cyprus thing is that, according to the numbers I hear bandied around, the Russians are supposed to have had somewhere in between $30 and $60 billion in Cyprus. Who knows what the real facts are, because you can't trust what's reported in the press… but I've been to Cyprus – both Northern Cyprus and the Republic of Cyprus. It's true that the place is overrun with Russians and Russian money.

Now, you've got to figure that if you're a Russian oligarch with a lot more than 100,000 euros in a bank and the bank tells you you're not getting it back – are you going to just sit on your hands and do nothing? I hate to say what I would do if I were a crony capitalist… but if I were, I might just send several very burly men with cold steel strapped under their arms to talk to the banker in question and make it very clear to him that I will get my money back.

L: I sure wouldn't want to sell life insurance to Cypriot bankers right now – nor ECB bureaucrats, for that matter.

Doug: I've read that just before this crisis hit the papers, billions and billions of Russian money found its way out of Cyprus. That's supposed to be why the Russians were raising hell at one point, and now they've gone quiet. My guess is that the Cypriots heard from their oligarch depositors or prudently gave them advance warning, and decided that the most important thing was getting that money back to them. But everyone else – people who don't have squads of hit men – gets screwed.

So much for Cyprus. I guess they'll go back to shepherding, growing olives, serving ouzo to the occasional hippie tourist, or whatever subsistence-level activities they did before becoming a banking haven, because no one anywhere in the world is going to deposit any money in Cyprus for a very long time. Cypriot businesses can't even get money out of the bank to pay their bills – they've just been hit with the financial equivalent of a nuclear bomb.

On the other hand, Cyprus has a little stock market that's probably at a washout bottom. Five years ago, at the top of the bubble, its Index peaked at around 3,300. Now it's about 100. That's one of the worst crashes in history, anywhere. I suspect that there are some very viable businesses available – companies selling for a tiny fraction of book. A smart speculator would be on a plane to start sorting through the wreckage. I think fortunes could be made there, especially since it now has capital controls. Which, incidentally, will become common everywhere.

The more important take-away from all this is that no bank in the world is safe at this point. They are all in exactly the position as Cypriot banks were before their crash.

L: In today's world, you almost have to have some money in the bank, if only to pay bills with.

Doug: Just keep enough cash for a few months' expenses. A bigger crash is coming, there's absolutely no question about that in my mind. The only question is whether it happens later this week, or next week, or next month, or a few months from now. I don't know, but it won't be long before it all starts unraveling.

I cannot stress strongly enough that I think anyone who chooses to keep a significant amount of money in any bank is patently stupid. I mean that in the technical sense of stupidity – being an unwitting tendency towards self-destruction. And I don't just mean European banks, though they are certainly closer to the edge – but it's true of Japanese banks, it's true of American banks, Chinese banks: it's true of all of them.

L: So where do you keep your money?

Doug: There is only one answer, as far as I'm concerned: buy gold. One of the most important financial truths I know is that gold is the only financial asset that is not simultaneously somebody else's liability. This is not an academic distinction. It never was, but the urgency of it is much more pressing today.

L: Do you really think the Cyprus crisis could spark the unwinding of the bankruptcy of the rest of the global financial system? Is this the first domino?

Doug: Well, it could be. But I have to tell you, I'm here in Punta del Este in Uruguay, and I just had lunch with some Spanish real estate developers. They have quite substantial assets, actually, and they didn't seem worried at all. I was surprised; these are rich, sophisticated people. But they seemed like most US tax slaves, who think Bernanke cares about them and can kiss everything and make it better. These guys see problems, but they think Christine Lagarde and her fellow bureaucrats are going to sort everything out. They see that real estate prices are off 50% in Spain, and are thinking that this is the time to buy. I think it's way too early, of course. Better to wait for massive riots. A lot of that property is going to catch fire from Molotov cocktails.

L: That's pretty striking. Of all Europeans, it's the Spanish and Italians you might expect to be most worried, and these Spanish guys didn't seem worried at all?

Doug: They were pretty sanguine. If I were in Europe, I'd run to my bank first thing. But I haven't heard of any bank runs in Europe. When it does happen, however, government printing presses will be running at even higher capacities than now, and people will have the problem of what to do with all that cash. A lot – like my Spanish friends I had lunch with today – are viewing real estate as a place to park wealth that can't just dry up and blow away. That's true, of course. But property has significant carrying costs, and prices can plummet if there are no buyers; there's a huge liquidity risk associated with getting overweight in real estate. That brings me back to gold again.

L: Some people are saying that increased distrust of banks in Europe might actually be bearish for gold prices. Europeans needing to move large amounts of cash will buy dollars, and many people are still programmed to sell gold when the dollar rises.

Doug: That's plausible, but I just don't see gold going down in a big way at this point. I really don't.

I just met a fellow in Cafayate last week – a very interesting guy who runs a gold exploration project in south Kivu province in the DRC. He says that there are Chinese all over Kivu, buying gold from the artisanal miners, on the order of 40-50,000 ounces per month – and they're paying London spot prices. Apparently this is under the auspices of the Chinese government itself, as it allows them to dump dollars off the market and cart home the gold. The Chinese are stuck with far more dollars than they can get rid of without provoking a panic, so this makes perfect sense. It's quite clever of them, actually.

And this is just one story, from one place. So no, I don't see gold going down.

L: Okay. We already know that you say to buy gold for prudence; are there any other investment implications?

Doug: Well, I mentioned the Cyprus stock market. That's the sort of thing I might do if I were younger – hop on a plane tomorrow and go check out the opportunities for crisis investing at a time when there are almost no other buyers.

More generally, I just have to say again that the trailing half of the storm is coming, and it's going to be much worse than 2008. Investors who don't rig for stormy weather will go down with their ships.

You know, another thing my Spanish friends said was that more and more people they know are thinking of moving to South America. It's much cheaper, there's less crime, less regulation, less taxation, and more opportunity. I think other Europeans – all Europeans – should think of following suit.

L: And folks in the US?

Doug: Them too. Things look calmer in the US right now, but the government in the land that was once America is now much more powerful, aggressive, arrogant, grasping, and ruthless than the governments in Europe.

I'd say to all people, all around the world, that the failure of Cyprus is like the failure of the Credit-Anstalt Bank in Austria that failed in 1931 and set off the banking crisis that followed the stock market crash of 1929, and then the Great Depression. You need to plan for further crisis and the deepening of the Greater Depression that has already started – and start taking concrete steps now to implement that plan.

I can't say exactly when the next big step down is coming, but it is.

L: Okay Doug. Well… another cheerful conversation – but an important one, I think.

Doug: You're all very welcome.

While Doug Casey isn't rummaging through the wreckage of the Cypriot stock market in search of bargains, he is implementing a plan to create new wealth. It's a strategy that he, fellow contrarian investing legend Rick Rule, and others have used to make multiple fortunes over the years. On April 8 you can hear them reveal exactly how they do it… and how you can too.

(Interviewed by Louis James, Editor, International Speculator)

Ed. Note: In the economic turmoil of the last five years, a lot has transpired. World markets lost nearly half their value in the panic, but have since recovered – albeit only in nominal value, with a massive lost opportunity cost over that time, and inflation taxing the real worth of those gains. Yet, throughout that time, one market sector has done surprisingly well – rebounding quickly and decisively from market lows, and growing precipitously during the climb out of the hole.

That industry? Technology.

From market bottom to today's record-breaking Dow Jones Industrial Average levels, Alex Daley has been seeing us through the maze of high-technology investments – and doing so quite profitably, we might add. Today, we talk with Alex about what's happening in technology and whether that bull run has the steam to continue.

But before we begin, a brief announcement: For liquidity reasons, one of our analysts needs to sell some small positions in Isis Pharmaceuticals Inc. (ISIS) and Curis Inc. (CRIS), but will wait until subscribers first have an option to do the same if they wish. This announcement is to comply with Casey Research ethics and trading policies and does not constitute a change in our recommendation for these companies.

L: Alex, it's been more than two years since we last sat down for one of these conversations, and the world has changed considerably since then. Can you update us on how tech investments look in the current context?

Alex: Sure. I agree with the Casey consensus on the macroeconomic picture – that is, the direction the US dollar is headed, the US economy, and that of the Eurozone. Long term, government overspending is a limiting factor on economic growth. It will ultimately reduce savings, increase taxes, and generally continue to be a liability thrust upon society. We can already see the beginnings of that today. However, other than the momentary market panics that will ensue as a result of this, the trend for technology investments is very strong, and for the long term.

L: What makes you so sure?

Alex: Three reasons. The first is that at a time when companies are afraid to hire – as we've had for the last five years – technology tends to advance very quickly. Managers deploy the cash they have on hand in new technologies that reduce their need for human labor, streamline operations, and reduce costs. This has led to several of the explosive growth stories we've seen in technology over the last two years, such as Big Data.

L: As it happens, I was recently visiting a mine where I saw an elaborate and extensive use of robots and automation in the processing mill. It looked very expensive to me, but the mine manager told me the robots saved them tons of money; they never get tired, take no coffee breaks, and are immune to repetitive motion injuries – the one we were looking at moved 50-pound rock samples 24/7/365. I found it striking to see this use of technology in such a basic industry. I mean, lifting rocks is not something I associate with NASA – unless they're on another planet.

Alex: Absolutely. Robotics is an extremely high-growth field these days. This brings me to the second reason technology is such a robust, long-term trend, and that's the major investment that has gone on for decades in R&D. One set of companies in today's economy is hunkering down in the face of economic turmoil, cuts in government spending, and so on. That has investors in another set of companies – those that have been pouring money into R&D – stepping in with innovations that solve problems and cut costs. New approaches to old markets, from the mining robotics you mentioned to advances like software-defined networking and in-memory databases are finding not just acceptance, but rapid adoption, as larger and more established companies in all sectors seek ways to streamline operations.

If anything, this has actually accelerated since 2008; you can find dozens and dozens of new startups every day. Many of these are now in intelligent systems, data mining, robotics, and biological technologies like genomics research. All of these areas were previously hard problems to tackle, because of the sheer computational power needed. That has gotten so cheap today, even compared to just ten years ago, we can now do things on a practical – commercial – scale that weren't even imaginable a decade earlier. That's driving the best investments today, which lie in intelligent systems and deep analysis (and the discoveries they enable), increasing productivity while reducing labor.

L: What about fundamental research? Does basic science suffer at a time like this?

Alex: To some degree, of course. Whether it should be or not, the fact is government is one of the major funders of basic scientific research in the modern world, so there have been cuts. However, there are multiple factors still driving significant fundamental R&D spending at the corporate level. For instance, in pharmaceuticals – an industry with approximately $750 billion in annual revenue, the second- or third-largest industry in the world – there is a massive patent cliff now arriving and slated to continue for the next three to five years. Over these coming few years, the big players are set to lose hundreds of billions of dollars in revenues, as the patents on their old chemical drugs expire. That is driving many companies to invest in new technologies.

Both the established companies and hungry entrepreneurs have seen this coming, sometimes starting decades ago, and we've seen a massive investment in new biotech treatments that has accelerated in recent years. This has spread into genomics, lipidomics, proteomics, and really, a deep study into all the things people are made of in order to find new therapies. I can't overstate how huge this research effort has been.

L: That's interesting – not just because of the investment opportunities this implies, but because there's a silver lining: a lot of conventional medicines are about to become much cheaper… a flood of newly available generic drugs from India?

Alex: Yes, but it's not so simple. Not everyone has the knowledge or technical ability to produce these chemicals, especially to the high quality standards required for human use. Japan is a more likely source than China or India, at least in the near term – cheap labor is not the same advantage it would be in other areas. But yes, there will be a shift.

However, most of these drugs are not really cures for most diseases, but "maintenance" treatments that address some of their symptoms, such as pain. This is the so-called "small molecule" chemical approach of the 20^th century. The 21^st century approach is to understand how a disease works and work on its underlying causes.

The diseases that cost us the most money are long-term things like diabetes, heart disease, and cancer. Those three alone account for more than 50% of medical spending today, by some estimates. Thus, this is where the most biotechnology research is focused.

L: I understand they are making major advances – not just finding ways to treat cancer symptoms, but to cure the disease?

Alex: Well, yes, but bear in mind that cancer is not one disease. There are about 145 ailments that we collectively refer to as cancer or oncological diseases. There are tons of companies working on this. There's Seattle Genetics, which is working to make chemotherapy more targeted and effective; Curis, which is working on blocking biological pathways for cancer; and countless others. We've talked about both of these before, and both have proven not only to be advancing excellent technologies, but have been excellent investments as well.

The brute computational force and unique biological techniques needed to crack the genetic codes relevant to cancer has resulted in major advances in other fields of medical research as well. Cancer treatment is a multibillion-dollar–a-year industry. It's such a big target that the amount of research going on in the field is almost unfathomable. This has produced many breakthroughs, such as reducing the cost of sequencing the genome of a human being from about a billion dollars to about a thousand – while reducing the time needed for the process from ten years to about one day. This is a major improvement in the ability of scientists to study the mechanisms that drive life itself – and what can go wrong – at a core, chemical level.

L: Such as?

In our most recent issue of Casey Extraordinary Technology, we covered a company that's working on a disease called age-related macular degeneration (AMD). This is the number-one cause of blindness in seniors in the US, and millions of people around the world have it. Its pervasiveness is increasing as our population ages, and really, we have no effective treatment for it. We can slow it, but we can't stop it, and we certainly can't reverse it. We've picked one company out of dozens in the field that we think has a very good chance of really making a dent, particularly against wet AMD, which is the most common kind, by focusing on the lipids – the fat molecules – that are involved in the onset of AMD. Without the R&D investment into cancer and biologics in general, its work would not have even been possible. But with rapidly improving tools giving birth to new insights by the day, the pipeline of biological treatments like this one is growing dramatically.

L: So, despite the economic turmoil of the last few years, the money is still there for research, and progress is still being made – and investments in commercial application of these new technologies are working out?

Alex: Yes. What's interesting about this market, though, is that it's your big, established players that struggle the most. This is not an environment in which to be jumping into the big companies that have always been there in the past – this is to say you should not be index investing right now. Instead, you have to focus on companies that have demonstrable revenue growth locked in. For example, while Microsoft and Intel have been struggling, Apple, over the past five years, has been a stark contrast. However, as a rule of thumb, the biggest companies suffer the most during hard economic times, as they have the most to lose. And when the markets are at all-time highs, like right now, that poor performance will be reflected more in share prices than when all boats are rising, like in the period following a secular low. So, when investing in the large caps, now is the time to be choosy.

Those same hard times, however, are nothing less than great opportunities for the startups that have new, better, faster, cheaper ideas.

L: For example?

Alex: Oracle is really struggling right now. A slew of new Big Data companies have been very successful selling more economic solutions to the data problems Oracle was handling for decades. These little companies are doing it cheaper, faster, and with a better interface that's accessible to business people. These products take analytics out of the province of nerds, if you will, and put it into the hands of executives, marketers, and everyone else.

Microsoft is struggling with the smartphone revolution, and Dell and Hewlett-Packard are suffering from the shift to tablets and more mobile computing. The personal-computer industry has, for the first time ever, shrunk, as governments, businesses, and individuals have held off on repurchases. Again, we see the big players affected the most; the majority are worse off than they were five years ago.

However, at the lower end of the technology food chain, at the startup or junior technology level, there's much more market opportunity. The amount of venture capital such companies have been able to raise and the amount of research they've been able to conduct has been virtually unaffected by the economic downturn. If anything, it has allowed them to grow faster – and given them more reason to.

L: I am again struck by the parallels between what you're describing and the junior resource sector I focus on. Rising costs hurt the big producing companies, but don't change the enormous addition of value shareholders see when an exploration company goes from having nothing to making a huge, rich mineral discovery. A tech startup also goes from having nothing to having a solution or improvement people need and will pay for – all the more so in hard times.

Alex: Yes, precisely. And unlike, say, a company searching for oil or copper, there is no commodity price fluctuation that's going to drive the stock one way or another. And if a company does "discover" a new technology, it doesn't run out when they mine or pump it all out; it can continue paying dividends for years and years. At the end of the day, they are turning intellectual capital into a product or service, which, if successful in the market place, returns financial capital on their investment. They are literally inventing value, and that's largely independent of the vicissitudes of broader markets. That's how some of the more successful technology companies – Apple, Microsoft, and so on – have returned tens of thousands of percent gains for their early shareholders.

L: I hate to admit it, but most tech also has the advantage of being perceived as cool – if not actually necessary and beneficial for society – whereas mining is a dirty business increasingly unwelcome just about everywhere. With the possible exception of military research, tech companies are in greater harmony with the modern ethos pervading society.

Alex: Even military research into new technologies can have that same kind of social approval and acceptance. Outside of the big defense contractors like Raytheon and Lockheed Martin, the companies that are doing the best in military tech are the ones focused on getting human beings off the battlefields and out of harm's way. Things like using robots to disarm explosives, survey the sea for submarines, or fly over hostile territory are seeing massive investment from the military these days.

But it doesn't stop there. The military pays for research and may or may not use the results, but there are often commercial applications of the same technology that make our lives better and safer – like the mine robots you saw. The software for self-driving cars is another good example – those self-piloted Google cars use software developed by the military.

There is certainly something to be said for the overall positive impact of technological development on society, though, of course, there are always prices to be paid. For example, as we move to more and more automated and robotic systems, there will be less and less need for manual labor. For example, Amazon recently purchased a company that makes robot-operated distribution warehouses – Amazon currently operates dozens of huge warehouses employing many people. For Amazon, it's the same as with your mining company; robots don't twist the wrong way and hurt their backs – and if they do, it's a two-hour service call, not a six-week workman's comp lost time incident. A social shift is coming, ready or not, when there is no longer a need for blue-collar work.

L: The world is changing, that's for sure. What was the third reason you mentioned when we started, the third factor that's going to keep the technology sector growing?

Alex: The third reason is precisely that change. New mechanisms for productivity help drive existing businesses to be more efficient, and that is always in demand – especially during tough economic times. And, yes, the last 20 or 30 years of R&D is really just starting to peek its head into the markets. Everything from robotics to genetics to artificial intelligence are just now making their way to true commercial viability.

The last five years of economic fear have created an innovation vacuum at the top of the tech stratosphere. This has opened opportunities for startup companies to seize upon the reticence of their much larger competitors – a gap early-stage venture investors pounced on aggressively. That is just now starting to show in public markets.

These three forces together have conspired to make an excellent environment for the more aggressive technology investor. Large corporations are either scrambling to find their footing or scrambling to buy companies that already have. Gone are the days, for the moment, of mega-mergers and goliaths stomping out the little guys. For the time being, nimble little mice are running circles around the scared majority of elephants. You can see it with the emergence of software-defined networking, which is threatening the Internet's big plumbing providers. You can see it with tablets wreaking havoc on the PC makers. And with Big Data.

L: You keep mentioning this "Big Data" phrase – which I hear a lot in the news lately too. Can you elaborate?

Alex: It's about mining the enormous quantities of information companies and organizations collect all the time. Traditional "row-based" databases have been the standard since E.F. Codd invented the relational database in the 1970s. That technology hasn't changed in a major way since that time – until recently. The explosion in processing speeds and implosion of data storage and retrieval costs have completely changed the way we can do data calculations now. It's not actually one technology, but several that have come together, driven by companies like Google with mind-bogglingly huge datasets.

Formerly proprietary stuff that Google used to keep behind closed doors has turned into open-source code that enables many businesses to harness the richness of the data they have accumulated, for the first time, really. We're talking truly in-depth analytics that enables companies to more fully understand just about any trend or problem facing their business. This is, again, bad for the likes of Oracle, SAP, and Microsoft, but it's been a boon for startups. Technologies like Hadoom, column-oriented databases, and in-memory databases, among many others, are all shrinking the time and skill required to garner insights from massively large databases.

L: Example?

Alex: The most important applications are on the fundamental level of analyzing and understanding a business. For example, if you're an accountant trying to go through millions and millions of reimbursement receipts looking for fraud – or suppose you're a research scientist trying to go through the gigabytes and gigabytes of data generated by taking even a handful of human genomes, looking for similarities among people in order to pinpoint the causes of certain diseases. Either of these tasks is incredibly data-intensive – the sort of thing that used to require a supercomputer to be able to tackle. Today, those searches are much, much faster, and can be done with relatively cheap, off-the shelf hardware bolted to a rack.

We can now take on almost any kind of question. Retailers are looking for patterns in what kind of products to put next to each other on the shelves of their stores to increase sales. Zara, for example, has been a smashing international success in the clothing retail business, based partly on its sense of fashion, but also on the use of a fantastic inventory-management system. This has made Zara's founder one of the richest men in the world, rivaling even Carlos Slim.

This is what Big Data can do for you, and as data analytics get faster and cheaper, we're going to see more and more mining of this data to drive productivity, marketing, etc.

L: This may be an aside, but isn't there a Big Brotherish side to this? You couple Big Data with the proliferation of cameras throughout the world, and it's a bit frightening.

Alex: You know, people said the same thing about the advent of the automobile, which was very bad for the horse industry… and airplanes – people were never meant to fly!

L: [Laughs] I've been called many things, but never a Luddite!

Alex: [Chuckles] We all become Luddites in our own time. That may be the one lesson the steady march of technological progress has for us, despite all objections. But yes, you're right; as the ability to process massive quantities of data in real time increases, the ability of people to apply that to spy on others increases dramatically.

In the last election, both the Obama and Romney camps were talking up their use of Big Data approaches to analyzing and managing their campaigns. We're just going to have to get used to the fact that modern life produces reams of data about us each, individually, and that is going to be analyzed and made use of.

On the plus side, it also means we'll have smarter systems – better traffic management, for instance – and more individualized products and services. Imagine if TV became as relevant to us as Google search results. There is nothing technological stopping cable companies from delivering targeted ads via all those millions of set-top boxes. If they can use your data to show ads you're more likely to respond to, then they can show fewer ads and charge more for them. In that scenario, the cable company can make four times as much money with half the ads, which improves its bottom line, produces better results for advertisers, and results in a better viewing experience for the viewer. Win–win-win.

Retailers, restaurants, car companies, doctors, and so on will know our individual needs and be able to serve us better. Good with the bad.

L: I just hope I won't have to have my eyes surgically replaced to avoid unwanted advertisements or invasive government interference, like in the movie Minority Report. But okay, I get it. So, with all of this going on, what are your favorite tech investments today?

Alex: With the S&P 500 having reached the level it has today, the most important thing to remember is to cherry-pick the best companies.

Contrarian investments work very well these days, such as companies with strong fundamentals that are out of favor with the market. For instance, we recently opened and closed a position in Hewlett-Packard in six months, a very successful investment in our new BIG TECH newsletter.

With so many stock prices at multiyear highs and breaking through to higher levels, you have to be very careful. You can't just buy the index and hope to come out well. By being a contrarian in a market this frothy – which tends to overreact to both positive and negative news – you can make a lot of money.

L: With so many stocks riding high and so many business models becoming obsolete, do you ever recommend taking short positions?

Alex: We don't have any short positions in our letters today, but I think we're on the cusp of doing so again. We've had success with such plays in the past when we've seen bubbles form.

But back to my point: you have to be a contrarian regarding the big companies, thanks to the bubble forming in large-cap investments, but not so much for the smaller ones. There are so many, no Wall Street analyst can follow them all, so there are many that have escaped the hype. By being intrepid detectives, we can find great companies before the big guys have caught on. You want to be there before their revenues start to rise. That's where we make our biggest wins, the 100%, 200%, or 300% gains.

L: Sounds like what I do, applied in a different world.

Alex: It really is quite similar, in many ways. Any investor who finds himself or herself at home with the junior resource sector should do well in the tech sector. In any speculative market like that, it's all about separating signal from noise. That's what we do here at Casey Research, in all our different divisions.

L: Very well, then. Makes sense to me – thanks for the update. As I mentioned in Monday's Daily Dispatch, investing in more of your picks is definitely on my to-do list this year.

Alex: You're welcome. I'll do my best for you.

L: I'm sure you will.

(Interviewed by Louis James, Editor, International Speculator)

L: Doug Casey is busy this week, hosting a big bash at La Estancia de Cafayate in Argentina, so I'm speaking today with Vedran Vuk, a senior analyst here at Casey Research. Vedran, I know many of us here rely on your help, but I suspect that few of our readers will know your name. What exactly is it you do?

Vedran: I contribute to The Casey Report and also work closely with Dennis Miller on his new Casey publication, Miller's Money Forever. I occasionally write the Friday Daily Dispatch and pitch in with general research whenever anyone on the team needs help.

L: Very good. You pretty much have your finger on the pulse of everything going on here at Casey Research and support all our different publications, so I'd like to get your take on the world today. But let's back up and talk a little more about who you are. How did you end up on the Casey crew?

Vedran: I was going to school at Loyola University in New Orleans. Actually, several current and former Casey researchers are from Loyola, including Chris Wood, Jake Webber, and Robert Ross. One of my professors was Walter Block, who is a well-known Austrian economist. He happens to be a good friend of Doug Casey. Since Doug was speaking at a New Orleans Investment Conference a few years ago, he stopped by to talk at Loyola. Afterward, Walter took a few of his students out to meet Doug and have dinner with him. I didn't start working for Casey Research immediately, but went into an economics Ph.D. program. I left that after almost two years because academia isn't my thing. Academia is a careful game of university and department politics –you're encouraged to publish papers that won't ruffle anyone's feathers. When you're working in the financial markets in the private sector, you're free to have any idea, and you can put your money behind them. If you're right, you'll be handsomely rewarded; and if you're wrong, the market will have your head. That's the sort of environment that drew me from a Ph.D. in economics to applying the ideas in real time. So I contacted Olivier, with whom I'd kept in touch since the dinner with Doug. I have the same outlook on economics as Doug, I have writing ability and analytical skills, and the Austrian economics background – it fit like a glove.

L: Note to the young readers I know we have: Casey Research is not hiring at present, but it can't hurt to send a résumé in and as Vedran says, keep in touch.

Vedran, when you mentioned Louisiana, I of course thought of Walter Block. Are you a defender of the undefendable as Doug and Walter are? Or are these ideas too extreme for you?

Vedran: I'm definitely on board. Dr. Block made me very radical – well, my free-market ideas are radical according to some people. I'd say Block and I are on the same page. In a world where regulating every aspect of our lives and invading multiple countries is the norm, I'm more than happy to be as "radical" as possible.

L: It's pretty funny. In everyday life, we consider ourselves radicals, then we join Casey Research and we're just run of the mill. Hope that doesn't mess with your head too much…

Vedran: [Chuckles] Yes, strange to be normal. But it's good to be surrounded by people who understand my views. I've heard stories of people with an Austrian economic perspective who got jobs in big financial institutions like Goldman Sachs, and it drives them crazy because the people they work with don't see the market as they do.

L: I can imagine. So you've been on the team for several years now – our general specialist, or special generalist. How does the world and the global economy look to you today?

Vedran: The way I see it, with the Fed pumping plenty of money into the system, the stock market is probably going to keep going up – until something completely derails it. In a way, the market has a date with destiny; there will eventually be a crash. They may pump too much money into the economy, to the point where it's a bubble – and all bubbles have to burst.

Or we may see the alternative, in which things generally go pretty smoothly – let's say for the next year or two – and then the Fed starts letting interest rates rise, as it has promised to do. I don't know how it can raise interest rates and expect the market to keep booming.

If you have an Austrian, free-market view, the bubble scenario is clearly bad news, but even if you're a more mainstream or Keynesian thinker, you have to realize that raising interest rates is like putting the brakes on the economy. That may make sense in an overheated economy, but not in one struggling to recover. That leaves us between the proverbial rock and hard place. It doesn't matter what your school of economic thought, every day we're moving closer and closer to some market correction. The end result is the same, although the reasons may differ.

L: When does the crunch hit?

Vedran: Hard to say, but at best, I think we may enjoy a year or two before things really go off the rails.

L: Can you clarify why higher interest rates are the kiss of death? After all, the economy has functioned when rates were higher before; why can't it do so again?

Vedran: It definitely could do so again, but it's the change, the increasing of rates that causes growing pains – getting from Point A to Point B. Once it gets to Point B, businesses will have adapted. I mean, we lived through the 1980s, with interest rates at very high levels. But right now, companies are basically able to borrow money for nothing, so changing to having to pay for borrowing is going to have a negative impact.

You also get asset pricing issues. Rising interest rates will hurt everything from bond portfolios to real estate. We've got a little bit of a recovery in real estate now; once rates start rising, the cost of buying real estate increases. All those banks that lend for real estate and still have mortgage-backed securities on the books are just getting back on their feet. When rates start to rise, they are going to get kicked into the dirt.

So again, once people adapt, it's not a huge problem, but the transition will be killer. With the 10-year Treasuries at about 2% – which is essentially zero, given that the official inflation figure is at about the same rate – going to a more normal historical range, say, around 5%, will be a painful transition. There's really nothing the Keynesians have to offer that can avoid this. Bernanke knows this, and that's one reason he's been keeping rates so low.

L: Doug says the government can't allow rates to rise, or the interest on the national debt will balloon to where it consumes almost all of the government's revenue, leaving nothing for the military and other things the government is supposed to do.

Vedran: The government's debt situation will definitely go from bad to worse. I don't know that it would lead to an immediate default, but it would be one more serious problem on top of many others. You have to keep in mind that this would hit at the same time as many obligatory increases in entitlement payments hit, and as more and more of the Baby Boomers retire and start needing more medical services. It's a nasty situation, creating a powerful incentive to try to inflate away the debt.

L: Understood. Hm. So much for the US. What about abroad?

Vedran: One thing beneficial about what's going on in Europe is that there's been so much time to think about it. The EU has been openly in crisis for about five years now, so I'm wondering how many financial institutions have been able to unwind their exposure to the problems. I'm reminded of our own problems with mortgage-backed securities and the subprime mess. It's not like everything was fine in 2004 and stayed that way until suddenly crashing in 2008. In 2007, everyone knew there was a problem, and that it was serious.

L: Everyone except Ben Bernanke.

Vedran: Yes. There was some discussion at the Fed, but people like Bernanke thought they could just raise rates a little to dampen speculation, and everything would be fine.

But back to Europe. I have to wonder how many of these problems have been unwound. I mean, if a country like Spain were to default tomorrow, of course it would be bad – but perhaps not as bad as it would have been a couple years ago, now that everyone has seen the writing on the wall for so long.

That's the good news: there has been a lot of time to prepare. The bad news is that if a major country like Spain or Italy defaults, it will really hurt everyone – there's just no sunshine in that scenario.

L: So if you had to guess, would you say that Europe has muddled through the worst of it, or would you guess there's worse to come?

Vedran: Tough call. It's hard to sit here and say that Europe is going to crash tomorrow or in the near future. What's easier to say is that Europe is not going to boom tomorrow – nor in the near future. I can't see, for instance, putting my money into European equities and betting that the clouds will part tomorrow, lifting the European markets and my shares.

As an investor, I have to recognize that I don't know what will happen, but I also have to recognize that there's very little imminent upside, while there is serious potential that things could go very wrong in the near term. If the upside were potentially huge and imminent, it might justify the risk – but that's not the case.

L: So why go there?

Vedran: Exactly.

L: Okay then – what about China? Isn't China going to save the global economy?

Vedran: It's interesting – people take such divergent views on China, even among free-market thinkers. Some people, like Jim Rogers, see China as the next great market – the best place for investors to be in the world for decades to come. I respect Jim Rogers very much, but there's another view, that despite some pro-market policies, China is still a very managed economy lacking transparency and the free market's corrective mechanisms. The famous Chinese ghost cities are emblematic of this problem.

This is very confusing to many investors. It's in the nature of the Chinese economy, some aspects of which are indeed very free and some aspects of which are under total government command and control.

Two things are clear to me. First, China's blistering pace of growth has slackened, and that graph has to continue leveling off. It can't maintain 10% growth forever. The other thing is that the command aspects of the economy are a hindrance to China's ability to become the market paradise of the 21^st century – there are huge, government-induced distortions in the Chinese economy that have yet to be unwound.

We've learned something very important from China, and that's how much an economy can grow after freedom is increased even just a little. But that doesn't guarantee sunny days for the century ahead.

L: Maybe it's another example of Pareto's Law – the 80/20 rule. The country got huge benefits from making a few changes, but to really go all the way would take much deeper and more thorough reform. It would have to adopt the kind of market institutions and mechanisms that are completely at odds with the desire of the central committee to continue controlling the economy. The infrastructure takes time to build and a cultural shift to make work – the country just doesn't have that yet.

Vedran: I agree, and see the same thing in other emerging economies. India and Brazil are great examples of the same issue. Both countries have been growing pretty well, but I think it would be wrong to say that Brazil or India is a real free market. They have, however, opened up enough compared to what they had before, and are seeing a lot of growth as a consequence.

L: The wonders of a low starting point. Percentage increases can be spectacular.

Vedran: Yes. At some point, much more change is needed in order to keep growth going.

L: That's a good point. It's not just about how free the market is, but about how stable growth is and hence the ability to lift more people out of poverty.

Vedran: Exactly.

L: Hm. Well then, is there a ray of hope for today's economic order out there anywhere? Or do you agree with Doug that the Greater Depression has started, and it's got to get worse before it can get better?

Vedran: We're on an inevitable path to meet up with doom, considering our growing debt and ever-expanding government. My only ray of hope has to do with timing – that maybe this isn't the recession that pushes us over the cliff, but rather some other one, perhaps a decade or more down the road. But the downside here is that this point of view only buys time. It doesn't make the problems go away. My other ray of hope is that once a truly enormous crash happens, we'll finally get our game together quickly rather than spending twenty years in a Greater Depression. One can hope, but your chances on the lowest-probability horse at the racetrack are probably better.

L: So where does one invest today?

Vedran: I think you have to be extremely selective about what you invest in. In Miller's Money Forever, for example, a lot of the investments we're looking at are bigger, defensive investments – things that don't fluctuate much with the market. Things like consumer staples and pharmaceuticals – people are going to eat, and they'll need their meds regardless of what the economy is doing.

L: People can cut back on going to the movies, but not their diabetes pills.

Vedran: Right. That limits the downside, but these same companies will surge with the rest of the market if continued quantitative easing forces a lot of newly printed dollars into stocks. In contrast, consider something like Bank of America. If the market keeps rising for the next couple years, that stock will probably be a winner – but I really wouldn't want to own the shares if there's another crash.

We want to take advantage of what's going on in the market, but also stay very defensive as well. Hedging with gold, as you recommend, is another thing we're doing as well in Money Forever. And we also have trailing 20% stop losses with our picks, to limit the downside. While the market is going up, we're taking advantage of it, but we're not taking our eyes off the risks for even a second, by choosing more defensive picks and using the stop losses.

L: Sounds good. And this has been a good look at some of the thinking that goes on here at Casey Research – a conversation around our virtual office water cooler. Thanks for your time and insight.

Vedran: Thanks for inviting me – it's been fun.

L: All right then, until another time.

(Interviewed by Louis James, Editor, International Speculator)

L: Hola Doug; what's on your mind this week?

Doug: Well, it occurs to me that for all the times we've criticized the counterproductive, foolish, or just plain wrong ideas of others and have sometimes offered sounder alternatives, I've never fleshed out a picture of what I would do if I could call the shots.

L: "If I were president"… But you're an anarchist!

Doug: Yes, but that doesn't mean that I don't have any ideas on what should be done, if there were anyone with the strength and courage to do it.

L: And a very good bulletproof vest.

Doug: Just so. I'm certainly not interested in taking up residence in the White House – wouldn't want the job if offered. But say some other occupant of that government housing project got hit on the head and woke up honest, industrious, and willing to do what was right come hell or high water.

L: Okay, I'm game. What would she do?

Doug: Are you referencing that Heinlein story in which the crooked president dies and his honest VP takes over – and she's a lady?

L: Good catch. Heinlein wrote that since men had held the office for 200 years, a law was passed limiting it to women for the next 200 years. He thought they would be less likely send young men off to die in wars for stupid reasons, and would generally be more sensible than men on many subjects. But anyway, as you were saying…

Doug: First, I would declare to the public that the problems we face today as a society have been generated by our own governments, particularly in the US, where it's pretty much 100% government induced.

L: "Government is a disease masquerading as its own cure." Bob LeFevre.

Doug: Exactly. And it should be admitted, stopped, and apologized for – just as should have been, but was not done when the writing on the wall regarding the Vietnam War was clear to all.

L: Okay, I'll buy that; calling a spade a spade is very important in this day of spin and misdirection. But how would you go about the "stopping it" part?

Doug: The first thing to do is to cut the budget. Almost all of the harm the government does would be reduced or eliminated if it weren't able to steal so much money to pay for its harmful activities.

L: Taxation is theft – just try not paying the "voluntary" income tax to the IRS – okay, but they also borrow and print money.

Doug: That's just indirect theft. Borrowing money forces future tax slaves to hand over money against their wishes, and printing it steals wealth from everyone by making the money in their pockets worth less and less with every new dollar, euro, yen, or whatever printed.

But it's not just the act of stealing that is so harmful, but the things the government spends it on. They are almost always directly against the best interests of those from whom the money was taken.

We need to starve the beast; so all these marginal, so-called budget cuts the politicians are wailing about are just smoke and mirrors – not a real, meaningful scaling back of the government. It's too late for half measures. I'd cut the budgets of the federal, state, and local governments by 98%. For starters.

L: You're joking – 98% – that'll never happen!

Doug: Yes, it will. It's just a question of whether it happens in a somewhat controlled, voluntary way, or whether it comes about as a result of a totally out-of-control collapse. What's going on today is completely unsustainable, so I'm convinced this sort of change is coming – it'll just be that much more destructive if we let it come as an involuntary crash. It's like when you have an old, unstable building that will collapse sooner or later; it's wiser and safer to bring it down at a time and in a way you control than to let it collapse on its own, with no warning to those around.

L: A controlled demolition of the US and global economies. US voters would probably love that just as much as Greek voters love austerity programs.

Doug: Probably so, but it's still the right thing to do. The whole current structure is rotten through and through, corrupt and counterproductive. It needs to be replaced, not fixed.

L: Replaced with what?

Doug: Economic freedom, of course. Let the future build itself, based on the voluntary actions of all market participants, acting in free exchange.

L: You know I'm on the same page, but many of our readers may be skeptical.

Doug: It's good to question everything. But this is not just a theory – look at Iceland, which didn't bail all the idiotic bankers out, but let them crash. It has recovered much faster than most people expected. And that's without embracing real, thorough economic freedom; it’s simply as a result of letting stupidity reap its natural reward.

It remains to be seen how well things work out for Iceland – it still has way too much government in my view – but there's an earlier, well-documented example in the history of Chile. When Pinochet overthrew Allende, he enacted deep and far-reaching reforms of the Chilean economy. He didn't go as far as I would have, but he did enough, and in such a way that it stuck and has had greatly beneficial economic consequences long after his departure. Chile is now the most prosperous country in Latin America, and may well be the most prosperous country in the western hemisphere.

L: I've been there many times and have noted the modern buildings and clean streets of downtown Santiago. The middle class in that city exercises on mountain bikes on weekends and enjoys excellent restaurants evenings. They dress fashionably and stroll along sipping Starbucks lattes… downtown could be a city in California. But there are hovels in the poor districts and dirt streets in the countryside. Are you saying Chile is more prosperous than the US or Canada?

Doug: Yes. Parts of the place may still look third world, but Chileans are not loaded with debt the way North Americans are. My understanding is that the average Chilean has greater net worth than the average US tax slave.

One important contributing factor to this is that Pinochet privatized the social security program, and Chileans pay into individual retirement accounts that they own and control. There are restrictions, but they can fire their managers and move them to those who deliver results – this is good use of a vital market mechanism. These are real assets that can be liquidated and reinvested – not like US Social Security, which is nothing but a vague promise backed by nothing but an impossibly debt-ridden government with financial problems that are about to get much worse.

Taking this single step in the US would enable a huge reduction in budget and unfunded future spending. There is absolutely no need for government involvement; people's retirement should be their own individual responsibility, and their employers' contributions to their retirement accounts should be negotiated between the people and their employers.

L: Just to be clear, you're not condoning Pinochet's death squads and such – just commenting on the results of his economic reforms.

Doug: The facts are the facts. Pinochet was a rare bird. And yes, it seems certain that he had several thousand people killed – but how many people did Baby Bush kill in Iraq over so-called weapons of mass destruction that weren't even there? Many of the world's big governments are guilty of far greater atrocities and numbers of deaths that are orders of magnitude larger.

The US has supported – and continues supporting – far more barbaric and destructive dictators around the world. It seems to me that Pinochet is demonized because he instituted many free-market reforms – that was his truly unforgivable sin, particularly among leftist intellectuals.

L: The sort of people he had killed…

Doug: Yes. Two wrongs don't make a right, but the fact is that Chile has many advantages today because of Pinochet. It's not as cheap as Argentina, but it's cheaper than Uruguay. It's the least corrupt of Latin American countries, and one of the least corrupt in the world. You picked a good analogy; it has a fantastic California climate. It has a low population density. It has one of the freer economies in the world – And it’s growing rapidly. Plus, they grow some world-class wines in Chile. It has many advantages.

What I don't like about Chile is that it's the most conservative country in Latin America – probably in the western hemisphere. It's the most religious, and that's saying a lot in Latin America. They love their police. They love their army. And it's isolated. It's like an island, with the Andes to the east, the South Pacific and Antarctic oceans to the west and south, and a desert to the north. That makes the culture more provincial than I prefer – but that is a personal preference. I find Argentina more welcoming to bon vivants, even with all the problems it has – those problems really don't affect foreigners living there who have income from abroad.

L: So noted. I can't say I wish we had a Pinochet takeover in America – the US version would almost certainly be hawkish and have the world's biggest military budget to play with. Scary. But suppose a Ron Paul type made it and was following your plan, cutting the budget 98%, privatizing Social Security. What would be next?

Doug: Default on the national debt. That would punish the people foolish enough or unethical enough to lend the US government money. It would reduce the budget and greatly reduce the ability of the government to spend beyond its means. But most important of all, it wouldn't make indentured servants out of future generations of US taxpayers.

Look, I know this seems unthinkable to most people, but it's going to be defaulted on anyway. There is simply no way it can be repaid, and an uncontrolled default would be catastrophic – probably in the form of total destruction of the US dollar as we know it today.

It has to be emphasized that default on the national debt is default on the government's debt, not the people's. Most of the real wealth in the world will still be there after the dust settles – it'll just be in different hands. The feds might even be forced to sell off their assets – a sort of gigantic "going out of business" sale that would put those assets into more capable and productive private hands. NASA, for example, as we've discussed already.

L: I understand, but that would still hurt a lot of people who have their savings in Treasury Bills.

Doug: Those savings will be lost anyway, if they leave them in Treasuries. The people it would hurt the worst are the fat cats in bed with the government – the kind who got their pals in Washington DC to bail them out. It'd be poetic justice.

L: Okay. What's next?

Doug: Eliminate the Federal Reserve. Get the government out of the money business entirely, so it can't inflate it to pay for things people would not willingly, knowingly pay for.

L: Why stop there – why not go for complete separation of economy and state? The same logic applies as with the separation of church and state, which once seemed unthinkable and now is the norm in much of the world – in the West, at least.

Doug: All in good time, Lobo. Next, I would take whatever gold is left in Fort Knox and use it to back the US dollar. After defaulting on the debt and the ensuing collapse, trillions and trillions of dollars would cease to exist. Assuming the gold is still there – the government doesn't allow any independent audits of Fort Knox – I would use it to put what dollars were left on a solid, inflation-proof footing, at whatever price of gold that could be accomplished at the time.

L: Right. What next?

Doug: Eliminate unnecessary, counterproductive, and unconstitutional government programs. Cutting spending is only a beginning; you have to abolish the programs if you don’t want the spending to come back. We've already talked about getting the government out of Social Security. This and other social spending is the biggest chunk of government spending and liabilities – something on the order of $220 trillion, last I heard. So, Social Security, Medicare, and Medicaid have to go.

Unfortunately, people over 50 have come to rely on it too heavily to take it away from them, so their payments and benefits would have to continue. But people under 50 don't get anything, and the payroll taxes that support the programs would be ended immediately.

L: Who pays for the older ones who keep getting the benefits? They were deceived into thinking they were making savings deposits of a sort, but it's not true; the government has already spent every dime they put away for the future.

Doug: I know. A large portion of whatever income the government could honestly generate from core services like running the courts and military would have to be directed to this expense until it went away naturally.

L: That won't win any popularity contests, but I suppose it would be an extension of the default you’ve already recommended. Bankruptcy is never pretty. It's also unavoidable, when the money just isn't there. What next?

Doug: De-fund, eliminate, and abolish every single alphabet agency the government currently lavishes money on. If any provide services people value, the market will step in to provide those services – at a fraction of the cost and without the ability to ride roughshod over citizens who dissent. For starters, every agency and government action not expressly listed in the Constitution should be uprooted entirely and the ground where it stood sown with salt. Enforce the 10^th Amendment. Then we can see if there's anything left that we really don't need anymore.

It's important to understand that the budgetary savings are really the lesser issue here. What's really important is getting the government off the peoples' collective back. The state is sand and glue in the gears of the economy, and it needs to be completely cleaned away to allow it to function freely to create greater prosperity for all.

L: That wouldn't leave much… the military.

Doug: Yes. Unfortunately, most people in the US are under the delusion that the military is the one part of the government that is honest and works – that it protects them from dangers foreign and domestic. The truth is that even if many soldiers are honorable, the politicians who control them are not, and their missions around the world are creating more enemies and stirring up more hatred almost everywhere they go. This is making the world a more dangerous place, not a safer one.

Further, the "military-industrial complex" Eisenhower warned us of is still in place, more entrenched, and greedier than ever. Remember the $600 toilet seats?

But more important than this financial debacle is that the military now exists to protect the government, not the people. Veterans are being increasingly indoctrinated to view civilians as potentially hostile enemies, rather than the very thing that justifies the military's existence. And when they muster out and go to work for law enforcement agencies (not people protection agencies), their training and attitudes become extremely dangerous to average citizens.

L: That'll be a hard pill for most people to swallow. They still want to think of most cops as being like Andy Griffith, even though the evidence is strong that many, if not most cops see civilians as potential threats and object to control. Your whole list is going to be hard for most people to believe, let alone accept.

Doug: No doubt. But once the avalanche has started, it's too late for the pebbles to vote. This is all going to happen. The only questions are how, and whether the damage and chaos can be limited along the way.

Unfortunately, I have to say that I see absolutely no way that these steps will be taken voluntarily. As we discussed when we talked about Ron Paul, the kind of person who could do these things would never get elected – and if by some cosmic accident such a person were elected, he or she would almost certainly be assassinated in short order. Remember Kennedy – and don't say it can't happen in the place that was once America. It's going to be like France after 1789.

Chaos is coming.

L: Our regular readers should know what you recommend doing about it…

Doug: Yes. I am doing exactly what I've been saying for some time now: I'm building cash to deploy buying great assets during the crash, I'm putting my savings in gold and silver, and the businesses I'm building are in productive agriculture. As a speculator, I remain convinced that these junior mining stocks that you follow have explosive upside – as much now as at any point I've ever seen.

L: Okay then. Enough said. Not a happy vision of the future, but our aim is to offer the best guidance we can, not to sweet-talk people into smiling. And – speaking of offering guidance – our own chief economist, Bud Conrad, will be speaking at the upcoming Global Currency Expo, held April 5-7 in San Diego. He'll share his big-picture views of the American economy over the near future, as well as making some specific investment recommendations.

Doug: Yes, I enjoyed your conversation with Bud last week, and encourage those able to attend to do so – it should be a great event.

L: Very well. Thanks for your thoughts, Doug.

Doug: You're very welcome.

Doug Casey writes every month for The Casey Report, which focuses on leveraging emerging trends to outstanding gains. These are the same tactics that have made Doug and other legendary investors like Rick Rule and Peter Schiff fortunes. Learn more about The Casey Report.

(Interviewed by Louis James, Editor, International Speculator)

L: We are speaking today with Casey Research Chief Economist Bud Conrad. Bud, in my mind, the thing that makes your insights so valuable is that you're not actually a career economist with a Ph.D. in the subject. You are an engineer, and you bring an engineer's systems analysis perspective to bear on economic questions. So, how does the system of the world's economy look to you today? Is it really on the mend, as so many economists are saying?

Bud: That's a very broad question. Thanks for mentioning my background. We so often see economists arguing with economists about their points of view. I think it helps to step back and have a fresh look at things, focusing on what the data tell us, rather than focusing on their ideas based on theories… which I don't think are correct.

L: That reminds me of the old joke about a physicist, engineer, and an economist stranded on a deserted island. The only food they have is a can of beans, but they have no can opener. The physicist has an idea to use fire to open the can, but that would ruin the beans. The engineer has an idea to use rocks to open the can, but that would ruin the beans as well. The economist says: "Let's assume a can opener."

Bud: [Chuckles] I have to say, I really do think that the intellectual bedrock of modern economics is very weak. The reality today is that governments around the world – not just the United States, but also in Europe with the ECB and Japan with Abe's mandate to the Bank of Japan requiring it to maintain an inflation rate of 2%, and other governments as well – they are all moving in the direction of printing more money. The United States is not the worst offender, but only because we have a rich country that can afford substantial deficits.

We have a system in which the government finds it easy to print money in an effort to meet everyone's needs. Those needs include the baby-boomer generation going into retirement, with $75 trillion in future obligations, and a large and ever-growing military – much larger in proportion to GDP than what any other country in the world is maintaining. Coupled with this, we have a lack of interest in raising taxes among politicians, who see that as unpopular with voters. The politicians have no will to fix our deficits.

The deficit has been papered over by the Fed printing money. However, the problem is not a matter of just this last year. Nor is it just this last recessionary period that started in 2008. The bubbles really started forming back in the 1990s when Greenspan turned on the spigots after the 1987 stock market crash. That brought on the first modern big bubble, the one in tech stocks. The dot-com bubble was very large, and its bursting should have been a lesson and a warning about what was to come.

In response to the crash that followed the popping of the dot-com bubble, Greenspan lowered interest rates to around 1%. At the time, that was a new record in easy-money policy on the part of the Fed. This led to the housing bubble. The bursting of this bubble was not well predicted, not by most people, but it was by me.

L: When and where, Bud?

Bud: I predicted the end of the housing bubble back in 2006, when you and I were both working on the International Speculator, before we pulled out the big-picture economics and started publishing that material in The Casey Report. There was an issue in 2006 called The Coming Currency Crisis in which we said the housing bubble was bursting. But in 2007, Bernanke was still saying that the problems in the housing sector were contained. Of course, it is the nature of his job to avoid frightening people with dire comments, but in looking at the minutes of the Fed meetings it's clear that they really didn't have a clue as to what was going on.

L: Ah, I remember that one. We got a lot of things right – made me laugh to see Bernanke on TV after the crisis hit in 2008, saying that no one could have seen it coming.

Bud: Indeed. I knew we were in a bubble, just looking at the subprime lending phenomenon. Many in the mortgage industry knew we were in a bubble. The Fed's response to the bursting of the housing bubble and everything else that's gone wrong since 2008 has inflated a third bubble – the bond bubble, which I think is now peaking. It's harder to predict when a bubble will burst than to identify the fact that we're in one, which is what I'm saying now.

We have the lowest interest rates in 250 years – lower than at any time since the founding of the country – created by the Federal Reserve forcing interest rates to zero in the short term. In addition, we have the Fed encouraging banks to help lower rates through buying Treasuries. On top of this, we also have some $350 trillion of swaps derivatives of interest rates – more than half of all the derivatives out there are interest-rate derivatives. Banks use these swaps to transmit lower rates to other debt instruments based on what can they can get from the Fed. This drives all rates down.

L: Sounds pretty questionable… Good thing the government saved us from evil bankers in 2008, cleaned house, and set us all on the path to righteousness.

Bud: I don't think our financial situation is any more solid than before the crisis. We've still got many undisclosed, not yet written down, toxic financial items out there. It may be better than the middle of the worst part of the crisis, but that's not saying much.

L: So what happens next?

Bud: We've seen 30 years of declining interest rates. I think we'll begin to see them move in the other direction this year. I think rates on everything from high-yield corporate bonds to government bonds – which are considered the safest – are way lower than they should be. Consider the high probability of inflation ahead, the currency exchange rate risk, and the eventual default risk. All three risks are totally undiscounted by the market, because of the distortion created by the Fed. That will hit its limit at some point.

Some people say the Fed can keep up its juggling act forever. I don't agree.

L: Doug has been describing the bond market as "a triple threat to your capital" for some time now. I understand that it is difficult to predict exactly when a market bubble will pop, but can you give us some indicators to watch for? What would be conclusive evidence that the popping is actually under way?

Bud: That's a tough question. I've done extensive work on when countries explode. The premier take away from Carmen Reinhart and Ken Rogoff's best-selling book, This Time Is Different, is that when debt gets to 90% of GDP, that's when things get risky. Well, we have $15 trillion in GDP and $16.4 trillion of debt. That's well-publicized now, because of the political wrangling over the debt ceiling, which we've actually already exceeded.

L: So we're already in the red zone?

Bud: We do have some advantages over other countries. We have a big military, which does cost us, but also tends to make other powers more cooperative. Most of our debt is denominated in our own currency, which gives us a big advantage over a smaller country that has debt denominated in US dollars – if their currencies fall against the dollar, their troubles are compounded. So we can probably push things further than the 90% threshold. That's not a hard number by the way, just an average within a fairly wide footprint.

However, with our level of debt to GDP, most countries would already be looking at something on the order of 10% interest rates, whereas we've got something in the neighborhood of 2% for the 10-year Treasury. This is an extreme distortion from what the market would dictate under such circumstances.

So, will interest rates start rising now that we're over 100% debt to GDP? I know rates can't go much lower, so I expect they will be heading up from here. Look at the trillion dollars a year in new debt we're accumulating, and consider that in four years we will have more than $20 trillion in government debt. At 5% interest, that would require a trillion dollars a year in interest payments. We only collect $2.5 trillion in federal taxes. I don't see how we could reach such a number without something breaking. That's four years away, but since we know it's coming, we should already be preparing for the problems that can be anticipated.

All that's needed for things to break down is some event that causes a panic. Such an event might be some foreign government with a huge trade surplus with the US that it has invested in US Treasuries deciding that the 2% they're getting paid to hold them is not worth it in the face of 5% inflation in the things they need to buy, like raw materials. If something like that were to happen, it could spark a race to head for the exits on US bonds. This highlights a real Achilles heel we have, compared to other countries that don't have as huge a trade deficit as we do.

L: So a good sign that the balloon is going up would be that the interest rates start rising despite the government's efforts to keep them down?

Bud: Yes. There will come a time when the Fed announces a new easing program and the market ignores the announcement so that rates rise rather than fall, and stocks fall rather than rise. At that point the game is surely over.

Watching interest rates is certainly important in terms of keeping track of the turning tide. If they move from 2% toward 4% – which is not a very large change in historical terms – they could then accelerate and push the whole mess off a cliff very quickly.

L: The Keynesians will just answer that all this deficit spending will stimulate the economy, which will then grow at a more rapid rate and enable us to afford the debt. But is that even possible? Wouldn't we need a double-digit GDP growth rate, such as China used to enjoy, to pull that off?

Bud: Well, in the simplest terms, if your debt is growing faster than your GDP, you won't ever be able to pay it off. It's simple math.

Now if you look at the kind of debt problems governments get into, there comes a critical point at which people recognize that the problem is too big to be solved. The most recent high-profile example of this is what happened to Greece. In such a case, there are only a few things you can do. The first is to find someone bigger to bail you out. Greece found that the ECB was able to bail it out – at least for a time, but they're still in trouble. The United States is too big for that.

The second thing you can do is to hope you can grow out of it, as you just suggested some might argue. The US's debt growth has been bigger than GDP growth for decades. It's just not credible to argue that we can grow our way out of our debt.

The next alternative is to simply declare default, as Argentina and Russia have done, among others. This is what many countries along the southern fringe of Europe are likely to do, in my opinion. The public in these countries is rebelling against the austerity plans the ECB is requiring. Default of some kind is their only alternative. Default is very destructive in the short term, greatly reducing the ability of governments to borrow and spend in the future. It's also politically very unpalatable, especially in places like the US, where most people can't even conceive of their government defaulting on its obligations.

This leaves only one alternative: printing money to try to kick the can down the road. This is the path we are on. It too is highly destructive, but that destruction is hidden and delayed. It is not, however, sustainable, and I think we will see a breakdown in the not-too-distant future.

L: How "not-too-distant?"

Bud: My current intuition is that we will begin to see this happening in the near term, meaning this year. As that gets going, it will build momentum and accelerate. That's my current prediction: the third bubble created by the many years of easy money policy by the Fed, the bond bubble, will pop soon.

L: In discussing this last week, Doug and I likened this to a house of cards. Everyone knows it's shaky, and nobody wants to get caught when it comes down. That means that when it starts, the collapse should come very quickly. Do you think we could see a 2008 level of crisis arising from the bursting of this bubble as early as this year?

Bud: I don't want to predict exactly what will happen when, but I am willing to say that we have seen the lows in interest rates and they will start rising this year.

L: That's still a bold statement. Do you have a theory as to why European countries – most of which are far more overtly socialist than the United States – are struggling to embrace austerity measures, while in the US, aside from some small budget cuts generating big headlines, there's no real consideration being given to actually trying to live within our means?

Bud: I would simply say that the Europeans have better PR. I really don't think they are that much different. The ECB has said it will do whatever it takes to defend the euro – that means printing more euros. The public statements about austerity have been effective enough that they haven't had to do much printing in the last six months, but Europe looks no better off to me now than it did six months ago. France is weakening greatly, and that's one of the pillars of strength being relied upon to help carry the others. The ECB is kind of a paper tiger. It's supposed to be able to print up money and rely on the strong countries to back them up. But can anyone take the idea of France bailing out Italy and Spain seriously? It's just another house of cards.

Most people don't realize that not only is there the ECB, but each country has its own central bank. While in theory the central bank of each country is not allowed to print euros, a loophole that is not understood is that the TARGET2 money transfer system causes them to enlarge their balance sheets. This is the same thing as printing money. This is particularly true of the German Bundesbank, which is owed money by the ECB, which is owed money by Spain and other importing countries. The system is unsustainable, and I think the process of collapse is starting, though it may take a while to gather momentum. I admit that I'm surprised by the current relative strength of the euro. I think that it will weaken from here.

I see enough problems in the world's financial system and our own to say that while the dollar may not look particularly weak in foreign exchange, all of these paper currencies are tragically flawed. At some point people will wake up to their lack of intrinsic value and not care whether it's pesos or dollars you're offering them – they won't take anything backed by nothing.

L: Gee, Bud, you're as gloomy as Doug!

Bud: [Laughs] It's not a contest! It's just what the data are telling me: Europe is in recession. Next up is Japan, which is trying to bail itself out for the 43^rd time in the last 20 years by printing money. I think the US will be the third domino to fall – I think we're heading for stagflation by the end of this year.

L: We should also probably warn people against speculating in real estate, because even though those assets are real, real estate is going to get slaughtered if interest rates rise.

Bud: Good point. But the fact remains that the size of this bubble is bigger than the other two that have popped already. The debt market is on the order of $53 trillion across all sorts of debt. The stock market is only $15 trillion. The home real-estate market is $20 trillion. So when the debt market crashes, it'll be two or three times worse than the previous bubbles bursting. The resulting wealth transfer will be much larger than most economists can even understand – most don't really focus on debt. It's critical that the measuring stick they're using, the dollar, is made of rubber. They are going to be caught off guard, and many people are going to be wiped out.

L: Okay, so how do we position ourselves to invest?

Bud: I don't know if I would pick an inverse interest rate ETF or futures market short position yet. The fundamental thing is not to keep your cash in a bank account that is essentially paying you a zero interest rate. I look to invest in safe-haven assets like the precious metals, essential needs like energy, and real estate – particular things like productive agricultural real estate. I might even add stocks in general to the list…

L: Doug disagrees on that last one.

Bud: Mainstream economists are saying that the worst is over and that the blue chips will head higher. I'm saying the worst is not over, and with inflation on the way, higher nominal stock prices will not translate to big returns in real terms. They might do better than your .01% CD, but the gains will not be attractive in terms of increased purchasing power. I didn't recommend stocks because I think they're going to be big winners, but simply as a way to avoid losing money on bank deposits. I'd rather own gold, personally. But the important thing to understand is that as paper money is being made worthless, we need to protect ourselves.

L: Okay, I get it. I think I need a beer... or better yet, a hug from my children – that always makes me feel better. But I do appreciate your candid assessment. It helps to explain some of the things Doug's guru-vision has been telling us. Thanks. I think.

Bud: You're welcome. Thanks for giving me a chance to give my warning. I just hope people will listen.

Bud Conrad is the author of Profiting from the World's Economic Crisis. He also shares his economic and investment insights in The Casey Report, a monthly advisory that focuses on profit opportunities in emerging trends. For more information on the topics discussed, listen to Bud's recent interview with Jim Puplava of Financial Sense.

(Interviewed by Louis James, Editor, International Speculator)

L: So Doug, the G20 declared that there will be no currency war. Other than a belly laugh, any reactions?

Doug: First, we should define what a currency war is. I'd say it's a competition between governments to devalue their respective currencies, accomplished by creating lots more new dollars, euros, yen, or what have you. The idea is to increase exports and decrease imports, with the supposed bonus of stimulating the economy. It's an idiotic idea, proof that the people struggling for control of the world's economy are both knaves and fools. The worst part is that people apparently think somebody actually can and should try to control the economy. The world is imitating Argentina.

I believe that Argentina is still a member of the G20, although hanging on by its fingernails. It would be interesting to see the transcript of the meeting and see what the Argentine representative said, because they're inflating the currency down here at a rate of about 30% per year, even while they're trying to maintain an artificial exchange rate. My suspicion is that the general level of economic knowledge, competence, and ethics among the participants of that conference is not much above that of Argentina.

L: That may be, but it strikes me as being... just so ridiculous. I mean, the US is printing money by the helicopter load and sending much of it abroad, which prompts other countries to try to do the same. Bernanke says it isn't so, but everyone can see it is. How can they say there's no currency war? Is this an attempt at a Big Lie?

Doug: The new Japanese prime minister has come out and said that the Bank of Japan needs to redouble its efforts to create new yen. The Chinese are creating yuan in hyperdrive. The Europeans are doing the same with the euro. In the US, they're printing new dollars at a rate of about 100 billion per month. And that's just among the four big players. It's as though they believe their own lies and think that the driving force of an economy really is public opinion. Believing that, they have no problem admonishing people to pay no attention to the man behind the curtain; everything will be fine as long as people believe it will be.

This reminds me of the story of the guy who jumps off a 100-story building and yells as he passes the 50^th floor, "So far, so good!"

L: Does anyone even know if it's possible for the G20 economies to grow at a rate that would make their deficit/debt levels manageable?

Doug: I understand that it would take growth on the order of what made China famous in the previous decade, but if anything their growth rates are going down. I think they are heading toward collapse. That's in part because of the ongoing currency debasement, but also in part because the inevitable response of these governments to the harmful effects of that debasement is to impose more rules, regulations, and controls.

Consider again the example of Argentina. The government here recently made it illegal for newspapers to publish advertisements that include prices for things like food. Since Argentina now has price controls for food, they say it's unnecessary and will only excite the public. This is the kind of thinking that permeates the economic establishment today. Everywhere.

I should pause and emphasize, however, that as difficult as Argentina is for doing business, it's a fantastic place to live. I doubt that will be true of the US in a few years.

L: Sounds pretty crazy, and this is a place that already prosecutes journalists for publishing inflation statistics that contradict those of the government. It does seem par for the course worldwide, however, for governments to intervene in the marketplace, cause disruptions, and then use those disruptions as mandates for establishing new regulations and laws.

But Doug, let me push back a little here. You've been saying for some time now that we are on the verge of exiting the eye of the storm. I look at the data, I look at the logic, and I can't disagree with you, but this has lasted several years now… Why should anyone think it's going to happen now?

Doug: Fair question. I could point out that the recent negative GDP numbers from Germany – and all of Europe – are extremely bearish: the endgame for the EU can't be too far off. A number of large US retailers are closing scores, even hundreds, of stores. The earnings of fast-food outlets are falling as people find they can't afford to eat out. But still, even if the natives are restless, they're still not out in the streets with their torches and pitchforks. Perhaps this summer…

But really, this is an almost philosophic question. The economy consists of the values and actions of seven billion people, all doing different things for a million different reasons. It's hard enough to make any prediction about such a complex system; it's extremely difficult to get both the prediction and the timing of the events right. That said, I admit to sometimes conflating the imminent with the inevitable.

L: It's like a sort of Heisenberg's uncertainty principle for economics.

Doug: That's a good analogy. People may be growing tired of hearing me predict the same gloomy near-term economic outcome, but that doesn't make me wrong. Here at Casey Research, we have an economic model of the way the world works. It's not our model exclusively (people who would like to know more should do a search for "Austrian economics"). This model has been shown to be correct and to have excellent predictive power time and time again over the last century. It's been shown to be totally correct in the recent past as well. But knowing you're right doesn't necessarily give you the power to know when you will be proven right. It's just not possible to be absolutely certain when something inevitable like this has in fact become imminent. We're talking about predictions that are far more complicated than predicting at 11 o'clock that the hands on the clock will point at the number 12 in an hour.

Despite the difficulty, it's very important to have a model that has predictive power; seeing where things are going is extremely valuable, even if you can't be sure exactly when things will happen.

L: It's certainly got to be better than a model predicated on assumptions that are defined by the whims of politicians.

Doug: Quite right. I'm sorry if some people are perturbed by our inability to make things happen on a certain time schedule, but I think they should look at our track record and give us some credit for being right about how things are happening. We predicted the debt crisis, the currency crisis, the housing crisis, and the direction of precious metals – accurately and years before others. I think we will soon be shown to be absolutely correct about the direction of the bond market, which is now peaking. It may sound brash, but I feel quite certain that will be shown to be right on all the major trends we are now predicting.

L: Back to the G20: as ridiculous as their denial of the currency war currently under way is, the conclusion they drew is no laughing matter. Just as you said, despite their denials, they claim the situation requires new currency controls. The noose tightens.

Doug: Yes. Despite what they say, these people clearly feel an urgent need to gain control of the situation. They've caused immense chaos, and at some level they probably know it. Of course, they would never dream of accepting responsibility and rolling back any of their economically suicidal policies. Their only response – always and ever – has to be new rules and regulations. They are clamping the lid on the pressure cooker even tighter. These people are truly stupid, in the clinical sense of that word. No matter how badly their meddling backfires, their answer is always more meddling. I'm sorry I can't tell you the day and the hour this thing will blow, but I'm absolutely certain it will.

L: How can they be so blind?

Doug: Bastiat explained it 200 years ago. They see only the immediate and direct consequences of their actions and pay no attention to – or deny – the delayed and indirect consequences of their actions. If the United States, say, devalues its currency by 20%, an immediate effect inside the United States is that everything is 20% cheaper for foreigners. Labor and products are cheaper for foreigners, so exports may increase and make it seem like the economy is getting a great boost.

But this is typical fallacious economic thinking. There are extremely important delayed and indirect effects that are ignored in such a case. Among them is that people don't want to save a weak currency. If people don't save, you can't build capital, and without capital it's impossible to have investment, and progress is diminished. Another ignored consequence is that domestic businesses face increased import costs. Politicians may shrug that off, saying people can buy American cars instead of German or Japanese cars, but many businesses rely on equipment, technologies, and raw materials from abroad. Moreover, all businesses, families, and individuals consume energy, much of which is imported from abroad. Further, if the currency is devalued 20%, it means Americans can buy that much less of foreign businesses, and foreigners can buy that much more of US businesses. Frankly, I couldn't care less what the nationality of buyers and sellers might be. But Americans will be hurt by a weak US dollar as surely as Zimbabweans were hurt by a weak Zim dollar.

People forget that in 1971, when Nixon devalued the dollar, the Swiss franc was $0.23, and the German mark was $0.25; today they're $1.08 and $1.31, respectively. The Japanese yen was 300 to the dollar; today it's about 90. The success of these countries was partly because of strong currencies. A strong currency helped them become rich and prosperous. Of course, most governments are now deeply in debt, and that's a powerful incentive to destroy their currencies.

L: The very currency war the G20 is denying.

Doug: Yes, and the result is that you don't just get one currency devaluing, but all currencies devaluing against real assets, commodities, goods, and services. I do believe that within the foreseeable future all these paper currencies are going to be devalued to zero – in other words, they will reach their actual intrinsic values.

This is extremely serious, because the productive people of the world – the ones who actually consume less than they produce and save the difference, which is what all economic growth and progress depends upon – will be wiped out. When their savings vanish, it's going to create a social and political earthquake right off the Richter scale.

L: Okay, but I'm not going to let you off the hook here. Tune in to your guru sense please, and tell us: Do you still see 2013 as the year when the global economic house of cards starts visibly falling apart?

Doug: Well, never say never. Almost anything is possible. I don't think it will happen, but I can't say it's impossible that government efforts around the world to paper over the crisis won't succeed for a while longer. But even if that were to happen, it would only make the ultimate crisis that much worse.

Here's what it boils down to: if you see a tidal wave coming at you and you're not exactly sure when it will hit, it doesn't actually matter. You've got to get out of its way. You've got to get to high ground. Period. This is the bottom line for me. Stating this as loudly and clearly as possible is my role in today's economic discourse.

L: When it comes to a house of cards like this, it's better to be a year early than a day late.

Doug: It's like Rick says in Casablanca: "If that plane leaves the ground and you're not with him, you'll regret it. Maybe not today, maybe not tomorrow, but soon and for the rest of your life."

I hate to sound like a broken record, but the investment implications remain very clear: sell bonds; general equities are overpriced; real estate is dangerous. Gold and silver aren't cheap, but they're the only safe havens available right now. Well, I could add productive farmland to that short list, but it takes a lot of management – owning precious metals is much simpler.

L: Okay Doug, I appreciate your candid responses. We'll talk again soon.

Doug: My pleasure, as always.

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For more information, please visit this special investor's bulletin.

Dear Subscribers,

We know that many of you are interested in different areas of investing, so we thought we'd share the insights of Doug Casey and his chief investment strategists delivered at the recent Vancouver Resource Investment Conference. This includes remarks by Doug himself, Jeff Clark of BIG GOLD, Marin Katusa of Casey Energy Dividends, and yours truly, editor of International Speculator. Doug works through a large number of questions of the sort we get from readers every day, and our panel takes them on, one by one. The focus is on metals and energy, but the topics cover much more ground.

We must caution that our current recommendations on some of the specific companies mentioned may be different now, so we encourage you to consider the advice and other comments on a conceptual level. That said, we hope you enjoy the discussion and benefit from the information.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

(Interviewed by Louis James, Editor, International Speculator)

L: Marin, it's been a long time since we asked you for an update on energy markets, which are your specialty. Given all that Doug says is coming down the pike, what do you see ahead, and how does one invest?

Marin: I think that for the most part, we'll see a continuation of what we've seen for the last 18 months…

L: That's not an encouraging thought.

Marin: Maybe so, but that's the reality of what I see in the markets, especially when it comes to the juniors. There are a lot of subsectors of the energy markets for which I've been telling people to stay away from the juniors for at least 18 to 24 months. Thermal coal is an example. I'm glad we've stayed away, as the thermal-coal companies have become massive destroyers of wealth.

L: Can you elaborate on that? We still need coal, so why aren't the current low prices a "buy low, sell high" setup?

Marin: Well, there are two factors to consider. First, as I mentioned on national TV about two years ago, permitting coal projects – not just for production, but even for exploration – was going to become very, very difficult... especially in North America.

L: All these people up in arms about "mountaintop mining" and such?

Marin: Exactly. The reality is that nobody wants a coal mine in their back yard. This affects both thermal and metallurgical coal projects, but the two face different market dynamics. Met coal got slaughtered because of decreased steel manufacturing, while thermal coal got slaughtered because of the competition from natural gas. Still, both saw lower prices, and in an environment of much more difficult and expensive permitting, the companies are getting trashed.

L: And the second factor?

Marin: That's the new carbon tax the Obama administration is pushing. Believe it or not, the oil companies are actually supporting it.

L: Why on earth would they do that?

Marin: Because many of them are not just oil companies. A company like Exxon is as much a gas company as it is an oil company, and they're having a hard time competing with the national oil companies on the global market. So, they've come home and are buying up large reserves of natural gas, making a heavy commitment to North American natural gas. So it's in their interest jump on the Obama bandwagon and increase taxes on coal to benefit their gas investments in North America.

L: Politics as usual. Got it. So, we keep staying away from coal, especially thermal coal. What about uranium? That's been in the news a lot lately as well, with Japan doing an about-face on its nuclear program.

Marin: Yes, the new president of Japan basically stated that Japan has no choice but to bring its reactors back online. But it's not going to happen as quickly as the market wants it to happen, so while we've made good money on uranium plays in the last few months – and I'm very bullish on uranium – we've taken profits on our winners in our energy letters. We still have core holdings.

Actually, we've written that we believe that Fukushima is the beginning of the fourth great bull market for uranium. With the Chinese, Russians, Koreans, and other countries committing to nuclear energy as part of their energy matrix, even after Fukushima the trend is very solid. By 2020, there's going to be another 88 reactors online. And already today, the US imports over 90% of the uranium it consumes.

To put that into perspective, consider that in 1960, the US was the world's largest uranium producer. At the time, there were over 1,000 uranium mines in the US, producing over 36 million pounds of uranium every year. Today, there are eleven uranium mines, producing 3.4 million pounds a year. So America is producing less than 10% of what it produced in 1960, and yet is more dependent than ever on nuclear energy.

One in every ten homes in America is powered by Russian uranium.

L: Wow… I can see why you're still bullish. What else do you like these days?

Marin: One of the most interesting and powerful market dynamics I see today is the European addiction to Russian natural resources. That can't change quickly, and there is a great potential for profit. The way we approach it in our letters is to ask ourselves how we can profit from the Putinization of Europe. It's not just oil and gas, but uranium as well, and non-energy resources. We've found several profitable niches.

L: Okay. But getting back to the original question, if Doug Casey is right about the Greater Depression gathering force this year, that would seem bearish for energy. How do you strategize for that?

Marin: I think there's a good chance Doug is right. So, in our newsletters, the first things we look at are management, cash, and expenditure programs in the specific jurisdictions the companies operate. We want companies that have a lot of cash, and will not need to go back to the market any time soon. From an equities standpoint in the resource sector, that's the ultimate Achilles heel of most resource companies. The reality is that most are, as Doug likes to day, burning matches.

L: Sure, but you don't want companies that are just sitting on cash.

Marin: Of course. We want companies that have the cash and the ability to advance a project that will deliver value. They need to have a project with technical merit, in a place where they can get it permitted – we use the same 8 Ps you do. Most important is that even if they do have the cash, get permitted, and drill a successful well, do they have the infrastructure to deliver that oil to the market and make money doing so?

Energy is very different from mining. Certain wells are extremely expensive to drill, and you don't really know what you'll get until you do drill them. Once you do, you know right away if it worked out, what you have, and you can go into production if it all works out. Mining exploration is much cheaper, and the big capital expenditures don't come until after you know what you have, and have done a feasibility study on it.

L: I get it; a big mine can cost several billion dollars to build, but you can drill a grid of holes that outline an ore body for just a couple million bucks.

Marin: Yes. A single oil well in Kenya can cost north of $65 million.

L: $65 million! I can build a modest but significant gold mine for that much.

Marin: Yes, you could build a 25,000 to 45,000-ounces-per-year gold mine for that. But on the positive side, when you make your discovery in the oil patch, the path to cash flow is very short and fast, so the impact on share prices can be explosive. That's why I love energy stocks.

L: Sure; the Casey team likes volatility. And I also see your point about infrastructure. With metals, if you have a concentrate that's valuable enough – not to mention gold or silver doré bars – you can transport your product anywhere in the world. But if you've got a well that's more gas than oil, and there's no pipeline network in the area that can handle it, you've got a product you can't sell.

Marin: Exactly.

L: Okay, let's talk about political risk – "resource nationalism" being the bogeyman of the day. Where are your favorite places in the world to invest? Are you willing to pay a premium for the safer jurisdictions?

Marin: That varies by sector and the type of commodity. Some places are not workable for uranium exploration, for example, even though they are good for other kinds of mineral exploration.

So I'm very bullish on WISR uranium production in the US. That is a term we created, so readers will see it here first: Warm In-Situ Recovery. WISR has much lower cost of production than other in-situ recovery projects in the US, comparable to those in Kazakhstan, but with much better environmental standards. I think that's going to be a strong trend to bet on over the next five years. I'd stay away from uranium plays in Europe, Africa, and South America – the risk is just too high. We've had a great run on the Athabasca Basin uranium plays, and having made our money, we've taken it back off the table.

For oil-patch plays, I really like the East African Rift in Kenya. We were the first to recommend that area play. We've also taken profits there, but it's very interesting what's going on there. Those are large, world-class deposits being drilled off right now.

I'm also very bullish on certain parts of Europe, where there are great, past-producing oil fields that have light, liquid-rich oil, but have not seen any modern exploration. And yet the people living in those places are paying a premium over global energy prices, because they are so dependent on imports from Russia and the Middle East.

I'd warn people to be very careful about these junior Canadian oil companies that are chasing yield in the western sedimentary basin. I think there are a lot of risks associated with that, so there's little room for error. Because of the differentials – investors have to remember that just because you get $90 a barrel for WTI, that doesn't mean you'll get the same for Canadian oil far from any distribution infrastructure – any bad news can be fatal.

L: So what do you look for in that kind of situation? Very near-term Push? Focus on quick wins, rather than big wins?

Marin: Yes. For example, we recommended Atico and PRD Energy at the Casey conference last September, and both have more than doubled since then. Anything we recommend has to have cash in the bank, management have to be the largest shareholders, and they have to go for assets that matter – can really move the needle, by delivering sustainable cash flow. Like you, we start with the People. That's absolutely critical.

L: Very good. Can you give us a sneak preview of what you're working for upcoming publications?

Marin: We have a lot going on. Right now we're doing a complete analysis of the master limited partnerships and the American oil and gas sector, and a complete analysis on whether the US can actually become energy independent by 2035. I'll also be publishing an interview with a former senior OPEC official I recently spoke with. Also, a trip to Saudi Arabia is in the works – there's a lot in the pipeline.

We're looking at juniors in the right places, because that's where the most volatility is – and the most potential for big profits. But if there is a big global economic pullback, most of these juniors don't have a chance. It's so capital intensive… A single ultra-deep oil well offshore can cost more than $100 million. The little guys won't stand a chance if the market turns negative and stays there for a few years.

Maybe one thing we should highlight is that the game has really changed. It's become so much more expensive, and the big oil companies reserves are decreasing, because of the changing value of their BOEs.

L: Not all oil equivalents are really equivalent to oil.

Marin: Barrels of oil equivalent – BOEs – are the biggest scam in the energy sector today. They say they have a gas component of their production that's equivalent to so many barrels of oil, but they don't define what's in that gas. Is it methane? Butane? Propane? Pentane? All of these have different and changing values. The SEC allows the companies to roll all of this up as "BOE," but they are not all equal. And yet, many companies present their reserves as though their reserves were the same thing as oil. This is very important.

L: How does the average investor know what the real value of a company's BOEs are, then?

Marin: They have to really dig down deep into the PV10s and other technical disclosures. You have to have the ability to understand these reports and to be willing to put in the time into doing so. This is, I'm proud to say, one of our Casey advantages; we do this for all our energy publications. Few others will put out net-back reports as we do. What matters is not how many BOEs companies produce, but what they get back for them after delivery to the market.

I don't mean to be negative, but a lot of people don't get this; and, frankly, they're screwed.

L: That's a technical term.

Marin: [Chuckles] Yes.

L: Very well, then; words to the wise. Thanks for the interview, brother, and stay safe out there.

Marin: You're welcome, and you too.

L: Will do.

Marin Katusa is chief energy investment strategist for Casey Research and the editor of two company newsletters on energy: Casey Energy Dividends, which focuses on low-risk dividend-paying energy stocks, and Casey Energy Report, which features junior energy exploration companies with huge profit potential. He also edits an elite alert service that covers fast-moving energy plays in the junior resource sector, Casey Energy Confidential.