Dear Reader,

I received quite a few reader emails in response to my column on Occupy Wall Street last Friday.

While most were positive (and thank you for that), there were a number expressing a less supportive view.

An illustrative excerpt:

You say that gov’ts should meddle less – I disagree as look what the governments’ lack of regulation of derivatives and of the banks has accomplished – a world economic meltdown – we definitely need more regulation, not less – to protect the taxpayers from the unbridled power, exploitation and greed of the rich financial class.

To which I responded (with only minor edits)…

Thanks for the note.

The problem with your argument, in my opinion, is that you conflate the current system in the US with a free market – a common error.

What we have today is a government operating without limits or principles. Thus it is completely vulnerable to being corrupted by the Wall Street parasites, the trade unions, the farmers, the military-industrial complex, etc., etc., etc. 

Is it any surprise that things are so screwed up when law is allowed to drift way outside of anything resembling reasonable limits, based on nothing more than who spends the most lobbying, or who promises they can deliver the most votes or the most campaign contributions?

The point I was making in my article was not that I was against the protests (if you re-read it, you will find my comment that if there was ever a good time for a protest, it is now), it is rather that the views (many of which are patently ridiculous) of the Occupy Wall Street folks are way too unfocused to make them effective.

And they are aiming at only one of the many problems you cite – not the actual source, 227 miles south (in my opinion).

Not to go on, because frankly the topic is wearing thin, but it’s worth a quick comment on what is purported to be an overarching positive aspect of the OWS protestors – their adherence to a purer form of democratic principles. In the modern context, that means that the group supposedly makes all decisions only after receiving inputs from the members of the cluster, mostly via social media. The leadership, thus advised, then handcrafts a list of goals reflecting the collective will. 

The result, we are told, is a movement “of the people, for the people.” Who can argue against that?

So, here’s a proposal: let’s give the OWS people everything they want – let them rewrite the Constitution!

That’s what one country – Iceland – is pretty much doing.

From the People, for the People

The story begins after Iceland’s government – aided and abetted by its banks and those in Europe who threw stupid money into Icelandic debt – spiked the debt-to-GDP ratio to over 200%. As you’ll recall from the news, the gross misallocations of capital effectively blew up the Icelandic economy, triggering a surge of popular discontent. The grumblings escalated into near-revolution after the government, bowing down to its international creditors, voted in a levy on every citizen of 100 euros a month for 15 years and carrying a 5.5% interest rate.

Rightly enraged, the Icelandic protestors forced a referendum in which the vast majority voted to stiff the creditors. And they went one step further, voting to have a group of everyday citizens rewrite the country’s constitution in order to ensure that no further destructive alliances between government and the global money-men could arise.

By everyday citizens, I mean just that: twenty-five out of a prospective pool of 522 citizens not belonging to any political party, each of whom was recommended by at least 30 others as being of sound character and all that.

Taking full advantage of the latest technologies, the document was developed as a collaboration on the Internet, in full view of the citizenry, with meetings of the new constitutional writing group streamed in real time.

Pretty cool, eh?

At least that was the initial assessment of a colleague who forwarded me an optimistic email on the topic of Iceland’s new constitution. And I quote…

This is so cool – and of course not reported in the US media at all.

The Icelanders actually kicked the fraudulent bankers out and wrote a new constitution to make sure something like that can’t happen again. “A government of, by and for the people” at its best.

To which I responded thus…

Look, I think they had it right in refusing to pay the debt.

But the reason that Iceland is recovering is because it defaulted on its debts, not because of any upsurge in participatory democracy via a new constitution. I would reserve your positive judgment until you read the draft constitution, which, I strongly suspect, will be just as full of government meddling, and probably more, than the one it replaces.

Encouraged to dig deeper, my colleague found a copy of the proposed new constitution. You may read the entire thing by following this link.  

For those of you who prefer the CliffsNotes version, here are a few snippets, which, I dare say, confirm my skeptical view.

Chapter II, Article 13. The right to property is inviolate. No person shall be compelled to surrender property unless required by the public interest. In such a case, an act of law and full compensation shall be required. 

The right to property is subject to duties as well as limitations in accordance with law.

Is it just me, or was the only sensible provision in that article, expressed in the first sentence, nullified by the second… then given the coup de grâce by the last? Maybe just an oversight. Or maybe not.

Chapter II, Article 11. The inviolacy of private life, home and family shall be guaranteed. A person’s body may not be searched nor his residence or personal effects except with a court order or special authorisation by law. The same applies to a search of documents, postal transmissions, telephone calls or other communications as well as any other comparable curtailment of privacy.

The first paragraph notwithstanding, limits may be placed on the inviolacy of private life, home or family if urgently necessary due to the rights of others.

So “we the people” are big on individual rights… as long as the government doesn’t feel the need to roll over those rights. Speaking of rights…

Chapter II, Article 8. All shall be guaranteed a right to life with dignity. Human diversity shall be respected in every way.

You betcha! But what does such limp verbiage actually mean? How will it ultimately be enforced? Then there was this…

Chapter II, Article 12. All children shall be assured by law of the protection and care that their welfare demands.

The best interest of the child shall always have priority in decisions regarding their affairs.

Of course, this begs the question of who decides “the best interest of the child”? What if, for example, a parent decides to homeschool (anti-social behavior) or looks the other way as junior packs on some extra pounds? This is the sort of loosely written clause that, were I an Icelander, I might have to express a public opinion on. At least that right is undiluted, right?

Chapter II, Article 14. All are free to have their opinions and convictions and shall have the right to express their thoughts. [Gee, thanks! Wait… what’s this next bit?]

Censorship and other comparable impediments to the freedom of opinion must never be enacted into law. Limits on the expression of opinion may, however, be stipulated by law to protect children, security, health, the rights or reputation of others, as necessary in a democratic society.

The public authorities shall guarantee the conditions for an open and informed discourse. The access to the Internet and information technology shall not be limited unless by a court verdict and subject to the same conditions as apply to the limits of the expression of opinion.

Again, freedom of expression… except when the government decides otherwise.

The document continues on in this way, and on and on, in almost every case allowing the individual a right, but only conditionally.

Now, I am not presenting this here in order to poke fun or derision at members of the Icelandic nation (well, maybe a little). Instead, it is to reflect on human nature as it relates to governance and to the investments we make.

Specifically, if the proposed new Icelandic constitution demonstrates anything, it demonstrates a near global belief in Almighty Godvernment. Reading the document, I can’t help but be reminded of the sort of inane platitudes favored by organized religions, platitudes such as “We are not worthy” or “Thank you for this food on our table” or “Please deliver us from temptation.”

Simply, the Icelanders, and almost everyone in the world, now accept as doctrine that the rights of the individual are only provided at the convenience of the all-powerful state.

While the topic of how far individual rights should go before crossing the line where the state might take a legitimate interest is rich fodder for debate and discussion (ideally over a glass of Malbec at El Terruno’s on the plaza in Cafayate, Argentina, where I will be parked next week), the actual point is, in my opinion, a very important one.

For starters, the flow of human history has led us to the point where the state has taken on a patina of having almost supernatural powers. No matter the problem, it is now universally believed that the correct form of supplication (rounding up votes or making campaign donations being quite effective) can result in the high priests of government mouthing magical incantations that will make everything better again.

For example, the OWS, among many others, want the government to put its god-like fingers around the throats of the greedy bankers and choke the stuffing out of them. Sentencing Raj Rajaratnam, a man with advanced diabetes and failing kidneys, to death (the inevitable result of his 11-year sentence) for insider trading has nothing to do with justice but everything to do with mollifying the mob.

The greenies want the government to block the Keystone pipeline extension, ban all fracking for natural gas, close down the nuclear industry… and that’s just on Day One. While they haven’t had all their prayers granted, it’s clear that their supplications have caught the democratic deity’s attention as witnessed by the amount of bureaucratic gum now in the works of the energy sector.

And almost everyone, it seems, is now in favor of the wealthy not only paying their fair share but everyone else’s fair share too. It’s only a matter of time before the Godvernment comes down from the mountain with a new tablet of taxes and regulations to make that come to pass.

The Problem with Godvernment

While I haven’t made a scientific study of the topic, I suspect the leading genre for popular entertainment – and for popular delusions of crowds, for that matter – revolves around magical worlds. As illustration, the Harry Potter series will serve.

The problem is that there is no such thing as magic, at least not in the mystical sense (versus sleight-of-hand variety). Rather, the physical world, and even the metaphysical world constructed by humans in their ancient and long-running quest for protection from the physical world, operates within the boundaries of certain irrefutable truths.

In the first instance, the laws of physics are only rarely found wanting; in the second, basic principles of economies are inviolate, or should be if you actually want an economy to succeed for any length of time.

This unblinking faith in an all-caring, omnipotent Godvernment is terrifyingly misplaced: it not only runs contrary to many of those truths but runs contrary to nearly every important lesson history has to teach. Look no further than the debts and deficits of Godvernments around the world to see the consequences of trying to keep this myth alive.

That this faith is on the increase, versus the opposite, should be very concerning… both to those who believe in the rights of individuals and to those trying to build and maintain a reasonable standard of living in this age of deep uncertainty.

Especially in that most, if not all, of that uncertainty, as well as active threats to the general well-being, emanates from the very Godvernments people look to for salvation and sustenance.  

I had planned on running the graphic shown here in today’s Friday Funnies, but because it seems so apropos to this discussion, I’m running it here.

Now, I am sure that some of you view these remarks as just another libertarian tirade, and I guess to some degree, they are.

Yet, I think there is an important underlying point that requires serious reflection. Namely, with people the world over trapped in a delusional and self-destructive cycle of believing that the Godvernments can solve all that ails – even though almost all that ails is caused or made worse by those very same institutions – then things can only get worse from here.

It’s like all but the tiniest minority of the world’s population have been brainwashed into joining a dangerous cult. A cult whose leaders are unscrupulous about stripping their followers of their wealth, their dignity (see cartoon above) and their sense of individuality, while rewarding their most ardent supporters with pensions, tax breaks, a leg up over competitors and, if push comes to shove, hard cash in the form of bailouts.

Viewed through this lens, the thinking individual – you, for instance – should see the need to take certain self-protective measures. And since few things are as useful as a high net worth when it comes to protecting your independence, there are opportunities to chase down as well.

Some suggestions, a number of which you have heard before.

  1. Expect the latest Eurozone patch-up job to come unglued. When you have the heads of the Eurozone’s largest countries talking about levering up bailout funds or ringing up the Chinese to ask for money, you know the latest “solution” to the Eurozone’s intractable problems is little more than a hastily concocted plan to kick the wine bottle just a bit further down the road. The problem is that nothing suggested begins to resolve the structural problems of the Eurozone – because nothing can be done to resolve those problems. Thus, a heads-up speculator will look for ways of betting on failure and place those bets during brief flare-ups of euro-optimism.
  2. Likewise, expect the US government’s new Super Committee to fail. Sure, they may come up with some optics in an attempt to mask the dire nature of the situation (for instance, by pushing the impact of any proposed measures out for five or more years – time enough to ignore them), but the fundamental truth in this case is that the Godvernment is hopelessly broke, at the same time the population expects it to do ever more.  

    On the prospects for the Super Committee, and how the bond markets are likely to react if it fails, Casey Research Chief Economist Bud Conrad sent me an email yesterday.


What do you think will happen when the Super Committee fails with deficit reduction and S&P follows through with its promise for another debt downgrade? Probably not that much, as the last time it didn’t wreck the markets, but if rates rise, it would not be a good call to be long stocks. 

We have had good auctions from the Treasury until a very bad acceptance today that drove the 10-year Treasury to 2.4%. When I wrote my recommendation at the end of September confirming that rates were too low (for the October edition of The Casey Report), the rate was only 1.8%. This kind of move up would normally take months, not days. Here is the pretty dramatic chart:

I have made the point before but will stress it again here and now… rising US interest rates will be a stake through the heart of the US economy. Even just a return to more normal historical averages will skyrocket the costs of servicing the US Godvernment’s mountain of debt, wreak havoc in the bond markets and simultaneously smash any prospect of recovery in the hugely important housing sector. More on interest rates from Bud Conrad momentarily, but the key point is that this is big, important stuff you have to be preparing for.

  1. Reassess the risks to you or your business. Given the sense of extreme empowerment felt by the high priests of the Godvernment, you need to keep a very close eye on your personal vulnerabilities.

    A cautionary example are the Alabama farmers who failed to anticipate the tough new anti-immigrant legislation their meddling state government passed, and who now face sure ruin due to the lack of trained workers willing to do the back-breaking work of bringing in the crops or planting new crops for next spring.

    Is there personal or business risk that you can take steps to mitigate now, while you still can? Especially if you are on the wrong side of the populist mantras now being heard in the temples of Washington, you can’t afford to be complacent.

    For example, if you or your business are involved in, or reliant upon, the financial services, you might want to consider developing some new lines of business. On that front, we haven’t even begun to understand the implications and effects of the Dodd-Frank legislation, other than that it was written by career politicians with zero business experience in a period of hysteria following the 2008 crash, and that it is very ambitious.

    Think Patriot Act for financial services – there will be consequences, and I doubt many of them will be good. Investors should consider doing some short-selling or using options strategies in betting on another big leg down for the banks and the financial-services sector.  (In The Casey Report, we’re using a simple option strategy to bet on the failure of a massively overindebted regional bank.)

  2. Don’t expect anyone to help you. Actually, with the growing meme to soak the “rich,” namely anyone who pays more than a modest amount of taxes, you need to wake up to the reality that you are on your own. 

    Put another way, if you have assets, you have a target on your back. Laugh at the OWS folks if you want (and it’s hard not to), but it is their world we’ll be living in going forward, not the ones our parents or we made (and, truth be told, screwed up pretty badly). If you think you’re going to be able to afford to retire on your Social Security, think again. If you’re lucky, it will buy you a hot cup of coffee to enjoy while you and your buddies stand around the burning oil drum on a cold winter’s night. 

    If you don’t have a respectable net worth at this point, then learn useful skills – such as how to speculate in investment markets. Or how to program computers. Apparently, the youth of today like to use the stuff but aren’t so hot on actually learning how to program – they prefer liberal arts educations. Given that many of the iconic successes in the computing industries (Gates, Jobs, Ellison) never graduated college, it would be a mistake to consider that a prerequisite. There are many more directions you might go in, including internationally, the important point being that it’s time to get going.

  3. Internationalize. With the biggest threat to your wealth and maybe even well-being coming from your own government, it’s essential that you spread your wealth into other political jurisdictions. Don’t do it hastily, but do it nonetheless., a new site that picks up where Doug Casey’s best-selling book International Man left off, may be of some help. Remember, once exchange controls are implemented (almost a certainty), your wealth is trapped and the government will be able to have its way with your assets.
  4. Front-run the mob. For example, with the mob against all currently viable forms of baseload energy production – and they are – careful bets on rising energy prices are, over a period of time, a sure thing. 

    Let me say that again because it seems self-destructive madness to me, but a large chunk of the mob as well as the priesthood of Godvernment are actually dead-set against all currently viable forms of baseload energy. You know, the stuff that keeps the lights on at night. Coal, oil, nuclear and now, thanks to the trumped-up fracking controversy, even natural gas! While the mob hasn’t yet overrun the barriers of sanity and pulled the energy plug – though many would do so in a heartbeat – they have been very effective at slowing exploration and development of energy resources to a crawl. Actions have consequences, in this case, higher energy prices. That’s what I call an opportunity… don’t miss it.

    Likewise, the mob is not going to stop demanding that the Godvernment provide succor and sustenance, and so deficit spending and debt has to continue to rise, leading to currency debasement. Buy tangibles, but especially gold and silver, on any setbacks.

    Those are just a couple of ideas for front-running the mob, but if you put on your thinking cap, I’m sure you’ll come up with many more.

Well, I’ve done it again. Starting with the full intent of making a few passing remarks and ending up writing a thick slab.

Wrapping up, I’ll repeat my basic position on all of this… in the form of an excerpt from another lightly edited response to one of the other dear readers who took offense at last Friday’s article.

The left and the right both have it wrong, as far as I am concerned. Both share equal responsibility for the big dislocations that have proven so damaging to the economy and society.

Thus, I can only conclude that who is in charge is far less important than what those who are charge are actually allowed to do. The size and scope of government, in my view, has to be very specifically spelled out and very limited so that the next gang to take control can’t just willy-nilly play to the prevailing mob sentiments.

That’s how we got here in the first place. Put another way, are many of Obama’s policies counterproductive and damaging to the economy? Of course. But so were those of Baby Bush. And, before him, Clinton (who allowed the government to grab Social Security funds so that he could claim a balanced budget). And before him, Bush senior… and before him… and so forth and so on.

Unless and until we stop the madness – stop the meddling – the path the world takes will remain perilous and, fortunately for us speculators, somewhat predictable.

Musical Interlude

Transitioning, I will pause to share a song that has been stuck in my brain for the last couple of days. While of the dramatic genre I favor, it is something of a change of pace from the head-banging variety I often rely on to power me through my working day. Instead, it has a more romantic yet still punchy, almost gospel-like theme. Check it out – You Got the Love by Florence and the Machine.

And with that, let’s return, albeit briefly (I promise!), to the topic of government excesses. Specifically, the sort of spending the almighty entity has committed to on behalf of its clamoring citizenry. And for this view, I again turn the page over to Bud Conrad, co-editor of The Casey Report.

New Projections of the Government Budget from the GAO

By Bud Conrad

Earlier this week, the Government Accountability Office (GAO) published its updated view of where federal deficits might go in future years if we stay on our current path. Using the GAO data, I created the following chart. As you can say, if a picture tells a thousand words, then this picture tells the story of impossible growth in government. Understand that these are the government’s own numbers, not my estimates. It shows the spending by major categories. Taken together, government spending reaches $50 trillion in 2085.

(Click on image to enlarge)

The red line is the projected revenues (taxes). The white double-ended arrow shows the difference between the two, which is the deficit. The impossible $35 trillion deficit won’t happen, as something will break – probably the value of the dollar – well before then.

The overwhelming problem that should jump out at you is that interest paid on the debt dominates this disaster. With a little calculation, I backed out the implied interest rate behind these projections and was surprised at how conservative the GAO was in its interest rate expectations: It forecasts they will rise over the early years from today’s 2.3% to only 4.9%. With deficits as big as they are today, let alone what the GAO is projecting, there is no way that the rate will not rise above 4.9%. The point is that even the dire scenario laid out by the GAO is more optimistic than what is likely to happen.

The “All other spending” category stays flat, which is also an unlikely optimistic projection.

The fix for the problem is supposed to come from a Super Committee in November in the form of a proposal to cut $1.2 trillion over 10 years ($120 billion per year) that is supposed to be voted on by Congress. With that likely to fail, there is supposed to be sequestering of spending. I don’t expect that to succeed. Even if it does, it is not even close to enough to make a difference.

We have government spending out of control – according to the government’s own data.

Friday Funnies

It’s a Matter of Perspective

The Montana Department of Employment, Division of Labor Standards, claimed a small rancher was not paying proper wages to his help and sent an agent out to investigate.

GOV’T AGENT: “I need a list of your employees and how much you pay them.” 

RANCHER: “Well, there’s my hired hand who’s been with me for three years. I pay him $200 a week plus free room and board. Then there’s the mentally challenged guy. He works about 18 hours every day and does about 90% of all the work around here. He makes about $10 per week, pays his own room and board, and I buy him a bottle of bourbon every Saturday night so he can cope with life.

“Oh, and he also sleeps with my wife occasionally.” 

GOV’T AGENT: “That’s the guy I want to talk to – the mentally challenged one.” 

RANCHER: “That would be me.”

Logophiles United

Okay, you logophiles, you lovers of words, aside from the old “stand-bys” such as, “You can tune a piano, but you can’t tuna fish” or “I wondered why the baseball was getting bigger, then it hit me,” here are more for you to enjoy….. 

To write with a broken pencil is pointless.

When fish are in schools, they sometimes take debate.

A thief who stole a calendar got twelve months.

When the smog lifts in Los Angeles, U.C.L.A.

The professor discovered that her theory of earthquakes was on shaky ground.

The batteries were given out free of charge.

After a dentist and a manicurist married, they fought tooth and nail.

A will is a dead giveaway.

If you don’t pay your exorcist, you can get repossessed.

With her marriage, she got a new name and a dress.

You are stuck with your debt if you can’t budge it.

A boiled egg is hard to beat.

Police were called to a day care where a three-year-old was resisting a rest.

A bicycle can’t stand alone; it is two-tired.

Those who get too big for their britches will be exposed in the end.

When she saw her first strands of gray hair, she thought she’d dye.

An Organizational Chart of the European Union

That’s It for This Week

Before I duck out for the week, I want to share just one more small insight into the workings of the government. If you follow this link pertaining to changes in the Freedom of Information Act (FOIA), and wade through the jungle of bureaucracy, you will note that the current administration’s Justice Department is seeking to change the rules so that the government doesn’t actually have to acknowledge that certain information exists, and then doesn’t have to hand over the information even if it is later discovered. Classically, the changes are associated with implementing the OPEN Government Act of 2007.

So, why not just get rid of the FOIA altogether?

But enough grousing about the powers-that-be. Once you understand the situation, in the absent of any tangible change, you can get on with taking appropriate action. That’s really where the rubber meets the road.

And with that, I’ll be hitting the road.

Until next time, thanks for putting up with my editorial excesses and for subscribing to a Casey Research publication!

David Galland
Managing Director
Casey Research