David Galland here, back from a couple of weeks in the Argentine outback.

The primary purpose of the trip was to finalize the details on the construction of our house at La Estancia de Cafayate, my dear partner Doug Casey’s version of Galt’s Gulch. Given that July is deep in the Argentine winter – the equivalent of January in these parts – we were prepared for cold weather. What we got for the most part was beautiful sunny days with temperatures in the mid-70s, followed by cool evenings, many of which were so temperate we were able to dine out-of-doors.

While there, we met fellow travelers from Hong Kong, the Philippines via Monaco, Greece, Canada, and a wonderful family of LEC property owners from Arkansas, with whom we ended up hanging out with for several days (including sharing an amazing hike to a waterfall up a very steep mountain trail).

Though there was work to be done, there was time enough for games of golf, horseback rides, and leisurely conversations about this and that over long lunches (as often as not accompanied by a fine bottle of local wine) at one of the many cafés on the quaint plaza.

On the topic of leisurely dining, it strikes me that one’s life is greatly enhanced by living in what might be called a “café society.” By that I mean a place where, by tradition, the locals allocate a certain portion of each day to sipping favorite beverages and nibbling comestibles while parked at small tables out-of-doors.

I come to that conclusion based on observations of both a broader and of a more personal nature. The first is that I don’t believe I have ever seen a person rush his or her refreshments while sitting at a café table. This may be because there is some deep inner need fulfilled by dining outdoors – a corner of the reptilian brain that finds comfort by returning to more primitive times when most meals were taken in the open air.

Or perhaps it is that the very act of placing one’s bottom in a café chair is itself an act of specific purpose, much as is the act of sliding behind the wheel of a car, or plopping into a seat at movie theater… To wit, the mere act of sitting signifies that you are about to engage in an act of leisure. And, so seated, you relax.

In addition, I have always felt there is a sense of elegance – sophistication, even – inherent in café sitting. While this is a certainty when nestled among the afternoon crowd at Les Deux Magots, I don’t doubt that a hint of better air circulates among the tables even at the meanest workers’ café. As that time we spend in better society – and feel that we are deservedly there – rarely fails to improve our self-opinion, it is only natural that we feel elevated by the simple act of supping al fresco at one’s favorite café.

Also in the favor of café society is that, by custom and necessity, café tables tend to be small and usually round. This limits the nature of the food served to modest portions and excludes from culinary consideration large and sloppy dishes, the sort that when consumed leaves a body feeling sluggish and the mind heavy.

While I could go on extolling the virtues of the café society, I will leave off in favor of more serious topics. But before I do, a final comment. I am always reminded when in Cafayate that most of that which we concern ourselves with in the fast-forward cultures is little more than farce and fiction.

We Americans in particular need to spend a lot more time enjoying our time – as opposed to being glued to the ceaseless torrent of news, almost all of which is carefully conceived to scare, titillate, and obfuscate far more important issues. For instance, which café to lunch at, or which wine to order once the decision has been made.

Five Things You Need to Know About the Economy

Speaking of farce and fiction, the latest struggle in Congress over raising the debt ceiling could serve as a poster child.

Do you seriously think for even a second – yes, you, dear reader –that the U.S. is about to default on its many debts?

Of course, in time the U.S. government (along with many others) will default. However, they are highly unlikely to do so by decree or even through the sort of inaction now on display, but rather by continuing with the time-honored tradition of screwing debtors via the slow-roasting method of monetary inflation.

Yet everybody today seems to want to talk about the drama now being presented by the Congressional Players – a troupe of actors whose skills at pretense and artifice might very well qualify them for gilded trophies at awards banquets. But rather than glittering statuettes, these masters of the thespian arts settle for undeserved honorifics and the pole position at the public trough. Followed by lifelong pensions.

But to the heart of the current matter, do I think that the current impasse will lead to the dreaded government shutdown (oh, no, not THAT… anything but THAT)?

As a matter of fact, yes. It’s not like it hasn’t happened before – it has, as the direct result of a similar gridlock during the Clinton administration.

Do I think that such a shutdown will have any more lasting effect on the trajectory of the economy than what I had for breakfast this morning (raw oats with a dab of maple syrup, milk, a sprinkling of strawberries, and half of a banana, sliced)?

Absolutely not. Sorry to say, but the trajectory of the economy at this point is well established, and closely resembles that of a comet streaking through the night sky. What’s left of the solid matter of the nation’s accumulated private wealth is fast being burned off by an unstoppable inferno of government spending, inevitably leading to an earth-shaking crash.

I make this dire prediction not out of an aberrant psychology (I hope), or in an outburst of self-promotion for Casey Research because the big-picture scenario we have so long warned of is unfolding according to script, but rather due to certain fundamental truths about our current situation.

And that brings me to the five things you need to know about the U.S. economy (much of which also applies to the other large developed nations)…

  1. The U.S. remains in the grip of a debt-induced depression. While personal levels of debt have eased somewhat since the crash, most of the improvements have come at the expense of debt repudiation, and are offset by the steep decline in housing prices that have left something like 50% of mortgages underwater. Meanwhile the debt on the balance sheets of the U.S. government and the country’s largest financial institutions remain at record highs: and much of that debt is toxic.

    So, what’s the one thing that the heavily indebted – individual or institution – most fears? Answer: Rising interest rates.

  1. Interest rates can’t stay low. Despite the debt, interest rates remain near historic lows – which is to say, well below the norm. At some point they have to at least revert to the mean, which would push the 10-year treasury rate north of 5% from today’s rate below 3%. But in reality, the levels of monetary inflation, the nature of the debt, and mind-numbing scale of the government’s other financial obligations – in total upwards of $70 trillion – all but guarantee that interest rates must go much higher than 5%. That in turn torpedoes the half-sunk real estate market and risks kicking off a debt death spiral as higher interest payments suck the financial juice out of the economy and causes debtors to demand even higher rates. Say hello to Doug Casey’s Great Depression.

    The last time the U.S. economy found itself in such dire straits was back in the 1970s, when the problem was raging price inflation. Back then, though, the debt levels were considerably lower than they are now. And Fed Chairman Paul Volcker had the latitude to raise rates, and by so doing helped to choke out inflation. By contrast, today the Fed is virtually helpless. Rates certainly can’t be pushed lower by any appreciable amount, and the Fed sure as hell doesn’t want them to go up. While the Fed has been a primary factor in controlling interest rates up to this point in the crisis, in the near future the direction of interest rates – particularly long-term rates – will increasingly be determined by skittish market participants. Specifically, the sovereign and institutional buyers whom the U.S. Treasury so desperately needs to keep showing up at their auctions.

    To use a metaphor, the situation today is akin to a bunch of gunfighters facing off in a dusty street, hands poised over their six-shooters, eyes nervously shifting this way and that – to the eurozone, to the housing markets, to the situation in Japan, to the U.S. government spending, to the crumbling balance sheets of the banks, to the Fed. Everyone is anxiously watching, waiting for someone else to start making the first move. The standoff can’t last – and when the lead starts flying, there will be few places to hide.

  1. There is no non-disruptive way to resolve the debt. I can’t stress this point enough. Simply, there is no magic wand that can be waved in order to make the debt go away. In order for this crisis to end, someone’s ox has to be gored, and gored badly.

    Yet, because we live in a democracy, where any politician wanting to be re-elected has to cater to their constituency – and politicians make their careers by being re-elected – it is considered business as usual for the denizens of Washington to hand out bread and put on circuses. It is this situation that has brought us to this place in the first place.

    But it is the flip side of that equation that provides a clear signal as to where things are headed. Namely that politicians will jump through every possible hoop in order to avoid making politically unpopular decisions – even if they know that failing to act will have serious and lasting negative consequences for the nation. The key is to make sure that those consequences only become acute during the next guy’s watch.

    The key point is that there is no easy fix, and there is no politically convenient time to take the draconian measures needed to rebalance the budget and get the nation’s finances in order. To actually take the measures needed to curb the deficits, let alone reduce the debt, would be political suicide.

    So there will be a lot of talk blowing out of Washington, but if you have to make a bet, bet on the crisis continuing and getting worse. Greece provides a reasonable look at how things are likely to unwind. And the problems in Greece – problems which will increasingly include social unrest – are far from over.

  1. The monetary system is irretrievably broken and will be replaced. For a recent edition of The Casey Report I interviewed monetary scholar Edwin Vieira, who pointed out that every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time around for the U.S. was in 1971, when Nixon cancelled the convertibility of dollars into gold. Remarkably, the world bought into the unbacked dollar as its reserve currency, but only because that was the path of least resistance. But here we are 40 years later, and it is clear to anyone paying attention that the monetary system is irretrievably broken and will fail.

    What will replace it is still unclear, but I suspect that when the stuff really hits the fan and inflation rages the government will try the approach taken by the Germans to end their hyperinflation back in the 1920s, coming up with the equivalent of the Rentenmark – a dollar that is loosely linked to some basket of commodities and financial instruments. It won’t be convertible, because it would be impossible for bank tellers to exchange your dollar for a cup of oil, and a coupon off of a bond, and a chip of gold, or whatever makes up the basket – but it might restore some semblance of confidence in the currency. That’s one option. Another is that some government decides to make its currency convertible into precious metals; but that will only happen when all other less fiscally restraining systems have been floated and failed. Simply, at this point we can’t know what will replace the current monetary system, or when. All we can know is that the status quo cannot and so will not survive this crisis.

    Regardless, between now and the point in time where the Fed throws in the towel on today’s fiat monetary system, you would have to be naïve in the extreme not to expect volatility, uncertainty, and wholesale financial dislocations.

  1. The government is not your friend. Another simple truth is that the politicians, being just average humans, will always look after themselves first. They are well aware how difficult it is becoming to kick the can down the road and are only growing more desperate. And as the economy worsens and cries from the masses grow for the government to do “something,” the politicians will grow more desperate still.

    As should now be clear to anyone, today’s political apparatuses are not operating based on any core principles – other than getting members of the government re-elected, that is. Thus the government of the U.S. and all the highly indebted Western nations are free to do almost anything in the name of the “public good.” Exchange controls? Higher taxes on the productive elements of society? Deliberate debasing of the currency? Outright confiscations for regulatory infractions? All of that – and literally anything else that helps mollify the masses and continue the charade – is likely.

    Ironically, the worse the situation gets – and today’s GDP data again confirm the weakness in the economy – the greater the demands will be from the public for the government to do more, even though the government was mostly responsible for bringing us to this place. And so the government’s reach into your private affairs, and especially your finances, will only grow.

    As this coincides with the rapid deployment of new monitoring technologies and procedures that allow the U.S. government in particular to cast its Sauron-like eye into every nook of the globe, the free flow of capital and legal avoidance of whatever new taxation schemes are passed will become increasingly challenging.

Summing up…

  • Unless and until the deficits and the debt are tangibly dealt with, expect things only to worsen and prepare accordingly. As there will never be a good time to deal with the debt, the situation will continue to deteriorate until there is a systematic breakdown.
  • Inflation remains the only politically viable way to continue the charade. Pretty much anything tangible will help offset the coming inflation, though the monetary metals of gold and silver will likely do better than most.
  • There is a lot of cash floating around. As equities are representative of a tangible (i.e., a share in an operating company), selective equities – especially those that provide essential services – will probably do okay, even if only keeping up with the inflation. Those of precious metals companies should do much better than that, but again, being selective is key because a lot of these companies actively pursue policies that are not advantageous to shareholders, most importantly steadily diluting existing shareholders by regularly issuing large swaths of new shares.
  • Diversification across two or more political jurisdictions makes a lot of sense to me. There is no place you can invest which doesn’t entail taking some risk at this point, but that fact only adds weight to the argument for spreading your assets around.

Finally, it’s important to remember that, as far as we know, you only live once. In some ways the transition we are going to live through is going to be pretty exciting. Perilous, certainly, but exciting as well. If you take the right steps, you should come out much better than most.

But if you overly obsess about this stuff – or the latest disingenuous move by the politicians – it will drive you crazy. Thus, it’s better to take the steps necessary to get in sync with the way things are and then get on with your life.

Watch the Lips

Over my breakfast this morning, I started to read a client newsletter put out by old friends of mine who manage money.

Because I want to stay friends, and because I don’t want to cause them any embarrassment, I won’t name names – but there was something that I read in their newsletter that I felt worth sharing with you. It was an excerpt from an interview my friends did with the manager of one of the very largest bond mutual funds in these United States.

During that interview, the topic turned to interest rates. Here’s the question and the answer:

Do you think rates are likely to start rising immediately?

Well, I think we could have low rates for a long time. I mean rates could gradually move their way up, but I don’t think a lot. I do think we are going to have higher inflation going forward.

I think with all of the debt that we have, it’s in the government’s interest to inflate our way out of the debt problem; especially if we also cut the deficit, cut spending and increase taxes and do those kinds of things.

I think gradually, we would work our way out and higher inflation would help reduce the burden of the debt. Three percent or four percent inflation, I think, in my mind would kind of be a Goldilocks outcome.

The road back to full employment is really a long road. Even if we get 200k or 250k jobs per month, we’re still three years away. And that’s just recovering the jobs we lost, and not the additional 125-150k that the population growth should be normally getting as well to get employment back to where we were five years ago. So, it’s a long, long road.

The jobs situation is going to be pretty bad for a while, but we do think we are in an expansion phase, not just a recovery anymore. We’re now expanding and we think we will be growing at 2.5-3.5 percent for many years even with fiscal austerity, if we hopefully get that in place.

We still think we’re still in the expansion stage of the cycle that is very powerful and granted, there are a lot of headwinds to it, but I think that is pretty good for corporate bonds and is pretty good for keeping rates lower for longer.

And people wonder why many on Wall Street are viewed with the sort of disdain reserved for politicians and used car salesmen…

The above quote has one of the true elites of the bond mutual fund industry speaking out of one side of his mouth, that interest rates should stay “low for a long time,” but then quickly shifting his lips in order to say out of the other side, “We are going to have higher inflation going forward.”

And he speaks of higher inflation as if it’s a good thing, ignoring the very real pain such an inflation causes to pensioners and savers – a profile that includes a large swath of the nation’s elderly.

As much as anything, it is clear from some of his comments that he actually understands the scale of the problems the nation faces; but he’s not being paid to tell the truth, but rather to talk his book – and so he does. Meanwhile, the number of fund investors shifting assets from stocks into bonds – in a very real sense running from the frying pan straight into the fire – is soaring.

What a toad.

Friday Funnies

Okay, these two entries are admittedly politically one-sided, and if I had time to find a couple that made fun of the Republicrats, I would – but I don’t, so I won’t. This first one was sent along by long-time correspondent and penpal Dennis Miller:

This next one is from the always excellent LewRockwell.com.

(Click on image to enlarge)

The End of Sexism

Are you a sexist? Reason.com, one of my favorite websites, tells of a new study that says acknowledging there are different sexes brands you as a sexist.

The Great Debt Debate in Pictures

If you thought you knew what was going on behind the scenes in Washington, think again. Here’s the complete story… in pictures.

Bring Me the Special

A resident in a hotel breakfast room called over the headwaiter one morning and read from the menu. “I’d like one undercooked egg so that it’s runny, and one overcooked egg so that it’s tough and hard to eat. I’d also like grilled bacon which is a bit on the cold side, burnt toast, butter straight from the freezer so that it’s impossible to spread, and a pot of very weak, lukewarm coffee.”

“That’s a complicated order sir,” said the bewildered waiter. “It might be quite difficult.”

The guest replied sarcastically, “It can’t be that difficult because that’s exactly what you brought me yesterday!”

End Notes

A bit of this and that to leave you with this weekend.

Good Tune

My new friends from Arkansas told me they like when I share music, something I have been fairly lax about in recent missives (but only because not much new has come my way.) To continue the tradition, here’s a song that I’ve been playing a bit too much: Pumped Up Kicks by Foster the People. Give it a try and see if it grows on you.

Good YouTube

I have often commented that if you study something you love one hour a day, within six months, a year maybe, you’ll be a master at it. Doug Casey forwarded me this remarkable video about a guy who clearly put in his hours learning to do something he loves – in this case, riding a bike. Insanity or inspirational? You decide.

Good Read

On the plane to Argentina I started Game of Thrones by George R.R. Martin. While I am just now finishing up the first of the series (I think there are four more books, with more on the way), I am swept away by the setting, the characters, the drama, the action, and so forth. It could end up being the modern era’s Lord of the Rings. If you are looking for a serious diversion over the summer, this is about as good as it gets. (I also understand that HBO’s series based on the book is also quite good. Josh, one of my new friends from Arkansas, told me that it was on par with the Deadwood series, which is saying something.)

Good DVD

Speaking of Lord of the Rings, in a number of sittings over the last month the family unit has watched the director’s cut of the Lord of the Rings. I was a fan of the theatrical release, but having watched the director’s cut I am amazed at how much better it is. As it includes a lot of additional footage – footage that in retrospect seems essential to a proper telling of Tolkien’s story – the director’s cut is much longer, but the caliber of the additional material makes the added length go unnoticed.

Good Times in Good Company

We have a couple of events coming up that you’ll want to mark the dates for:

When Money Dies, our next Casey Research Summit: Phoenix, October 1-3. The faculty is still being assembled for this look at the timing and the consequences of the end of the current monetary system, but you will be impressed. More details in the mail soon.

Discover Cafayate: La Estancia de Cafayate, Argentina, November 1-6. As usual, the next event to be held in Cafayate will feature a Casey Research conference along with lots of fun and interaction with fellow subscribers and like-minded people from around the world. You can ask to be added to the list to receive more information and an invite at LaEst.com.

And with that, I will sign off for the week by thanking you for reading, and for being a Casey Research subscriber.

Warm regards,

David Galland
Managing Director
Casey Research