Published on February 16 2011

Doug Casey: Make Corruption Your Friend, Part 2

Editor's Note: When we last saw our heroes, they were hanging on a cliff of corruption, thinking about a world in which Egyptians stage a now-successful revolution, apparently more in response to government corruption than anything else. Mubarak the thief was more intolerable than Mubarak the dictator – especially when people got hungry.

L: Okay, now that we've looked at what the beast [corruption] is, let's talk about making it our friend. Seems like the last thing anyone would want to do…

Doug: It's hard to find a good analogy, but almost everything has a bright side. Let's say corruption is like an African buffalo – stinking, unpredictable, bad-tempered, and powerful – but it can also be a great source of meat and leather. Before we talk about making leather, we should point out that, while these ideas we've been discussing about corruption may seem abstract to some, there's a vast amount of historical evidence in support of what we're saying. Like all serious problems, you must confront it. Trying to tiptoe around it, or pretend it doesn't exist, is only a formula for disaster.

In point of fact, corruption is going to be the biggest of growth industries in the years to come. Why? Because the governments of the world are in growth mode, and history shows that absolutely guarantees a massive growth in all kinds of corruption.

L: The clearest and most powerful example for Americans probably was Prohibition.

Doug: A sorry example of what blue-nosed puritans people can be. The Volstead Act and the 18th Amendment were not repealed in 1933 because Americans suddenly remembered that human rights are individual rights; the light of philosophy rarely penetrates very deeply into the dark recesses of collective psychology. It was not because Boobus americanus thought the busybodies' efforts to stop people from drinking alcohol were unethical and un-American. The measures were repealed out of practicality, because people saw that they were stupid and inconvenient.

Prohibition turned a large segment of the law-abiding population into criminals and created an illegal free market, which is to say a “black market.” The result of that huge new black market was wholesale corruption of the police and government officials tasked with shutting it down, and a gigantic growth of the mafia in the U.S. Widespread corruption of the so-called pillars of society – plus the undeniable failure of Prohibition to stop the flow of alcohol – was what turned the tide against the temperance movement and made alcohol legal again. The crime wave also prompted the creation and growth of the FBI, which amounts to a national plainclothes police force – not a good thing. The FBI has since expanded into yet another plodding and increasingly corrupt bureaucracy.

L: I wonder why people responded to that failure rationally back then, by discontinuing a counterproductive prohibition, while today we have an equally abject failure and source of corruption in the War on Drugs. But declaring a ceasefire is unthinkable…

Doug: That's a good question; the two prohibitions – alcohol in the '20s and drugs today – are exactly equivalent and are having exactly the same results. Well, same in kind, but the drug prohibition is actually worse in magnitude and consequences. The state has become much larger, much more powerful, and much more draconian this time around.

A few weeks ago Hillary Clinton said they can't legalize drugs because “there's too much money in it” – an extremely odd statement. Too much money being spent fighting drugs by a bankrupt government? Too much money dealing in them by the narcotraficantes, who use a lot of it to pay off the police, the DEA, and other government types? If the stories from the days when Bill was governor of Arkansas – the goings-on in Mena and such – are true, she knows a lot more about the drug business than I do, and from hands-on experience.

The only reason drugs are so profitable, of course, is because they're illegal. If they were legalized, there would be about as much profit in them as any other chemical or agricultural business – maybe less, since marijuana can be grown in useful quantities in a one-bedroom flat. And of course, the more draconian the drug laws, the higher the price drugs command – which draws in more entrepreneurs.

The drug business is problematical – like so many activities – in a number of ways. But it certainly offers giant-sized entrepreneurial profits precisely because it's currently illegal. A drug lord must necessarily make corruption his friend.

By the way, I'm working on a sextet of novels to reform the reputations of six unjustly besmirched occupations, one of which is that of drug lord.

L: I'm sure that will be a riot – perhaps literally. But still, it's depressing that the grandchildren of the very same people who rebelled against the stupidity, futility, lethality and corrupting influence of the War on Alcohol are completely acquiescent to this new and more virulent war. Why do you suppose that is?

Doug: It is strange, in that during the '60s and '70s everybody was toking and snorting. One might have thought the Boomers would have ended the War on Drugs. But, after generations of government-sponsored irresponsibility and government-run schools that spread an entitlement mentality instead of a work ethic, maybe the clock is just winding down. Perhaps Americans have become a nation of whipped dogs, who just do what they're told.

America is an empire in decline, getting old and tired. What makes this particularly dangerous is that it's not only becoming corrupt, like Eastern Europe, Latin America, Africa, the Orient, the Mideast – almost all of the world – but, worse, it's got this huge and fairly efficient enforcement mechanism few of the other countries have. The Nazis would have loved the situation in the U.S.  It's become the worst of both worlds: Nordic efficiency and American neo-puritanism. A deadly combination. Only an increasing measure of corruption can keep things going until the whole mess collapses on top of itself.

L: Made all the worse because a dumbed-down and quiescent population cheers it on and, without acknowledging it, accepts that corruption is normal and nothing can be done about it. Back in the Prohibition era, America had a moral culture that rejected corruption vehemently. Not so now.

Doug: Yes, well, political corruption is certainly a double-edged sword. And you can see that in the counterproductive solutions people propose. They say we should pay our legislators and judges and police more, so they are less tempted by bribes. But that's complete nonsense; today, the average government employee already earns between 50% and 100% more than the average citizen does. These people are already fleecing the taxpayers they supposedly serve. Adding to that will only make the brown envelopes fatter, because they'll feel they need even more. It just adds insult to injury. Would doubling Mubarak's salary have made him less corrupt? I think not.

The solution is not to pay government thugs and stooges more. Remember Tacitus. Nothing has changed in 2,000 years. The only answer now – and the only thing that has ever worked throughout history – is to abolish these laws that force people to work around them.

L: That would mean repealing 99% of all laws.

Doug: Ultimately, it would mean repealing them all. In the end, there are only two laws that are necessary, and, not coincidentally, only two laws that work, because they are the two fundamental laws of human ethics: Do all that you say you'll do, and don't aggress against other people or their property.

We don't need any other laws – and we don't need no stinking badges either.

L: That'll never happen – not voluntarily. The politicians would never derail their own gravy train, and even if they did suddenly develop some moral fiber, fearful people who believe they are entitled to a life of luxury will never allow it. Still, that fits what we've been saying: if you repeal the laws, particularly those that impede industry, you remove the incentive of businessmen to bribe regulators. If you take away the power of vice squads to try to control people's private choices of recreation, you bring those markets into the white and eliminate the incentive to corrupt the police. And so forth…

Doug: How true. I don't know where this is going to end, but it's going to end badly. All of these people who write about how the government should increase its efforts to combat corruption are looking in exactly the wrong place for answers. They think the answers are: more pay for government employees; pass more laws; impose stricter penalties – all the very things that result in more corruption. If stricter penalties worked, there'd be no corruption in China, where corruption is a capital crime – and yet, it's as corrupt as it gets. As always, it's not just the wrong thing, but the exact opposite of the right thing…

L: I can hear it coming – go ahead and say it, Doug…

Doug: [Laughs] Yes, it's… perverse.

L: [Laughs]

Doug: [Laughs harder] Totally perverse. This is why I'm increasingly convinced that I've been put on this planet as a punishment for something really bad I must have done in some past life. I must have been quite naughty. But not as naughty as most of those here on this prison planet, judging by the fact that half the people still live on less than $3 a day. At least I'm like a trustee this time – it's not like I'm in the hole, in solitary confinement.

L: [Chuckles] Okay, so, getting back to making corruption your friend. I presume you're not talking about practicing the art of passing along envelopes full of cash, but about observing the trends created by the distortion corruption makes in economies, and then investing accordingly.

Doug: Yes, just so. As you know, I always try to look on the bright side of things. The more corruption there is in a society, the more distortions that will create in the market, and therefore, the more opportunities for a speculator, especially when those distortions liquidate. It's as though governments are stretching rubber bands that must eventually break, and when they do, that's when you can make life-altering investments, buying all sorts of things for pennies on the dollar.

You know, I would prefer to live in a world where corruption didn't exist and wasn't necessary, but the only world where that could be the case would be one in which the only laws were the two I mentioned. Since we do live in a world awash in laws and corruption – soon to drown in both – we ought to take advantage of it.

It may seem like taking advantage of misfortune, and perhaps it is – but if someone is going to buy distressed assets, why not you? The people selling them need the cash, and if you've been smart, consuming less than you produce, you'll have the cash they need. If you make a bundle once the market bottoms, you deserve it for taking the risk you did when no one else would.

In my own life, I make the rules. But in the broader world, I don't make the rules, I just play the game.

L: It's worth emphasizing that this is not a quick trading strategy, but a long-term plan.

Doug: Absolutely. These huge market liquidations make and break fortunes – or more accurately, move them from weak hands to strong – but major fluctuations take years to play out.

It's quite interesting, actually, how the culture of corruption has overcome the whole world. All these governments all around the world are growing like cancers, passing more and more laws as the alleged cure for the very problems they are creating. That means there will be opportunities to take advantage of all over the world. That's going to be the theme of the first novel I'm writing, Speculator.

People have learned absolutely nothing. Like in Egypt. It's wonderful they've gotten rid of Mubarak. But that stooge and his family are going to get away with many billions, stolen from the Egyptian economy. And the poor fools in Tahrir Square think they've won a victory! They've only opened a space at the top for some general – most of them are already multi-millionaires, but that's chicken feed when you're running a government – to become a multi-billionaire. Along with his cronies. And they'll protect Mubarak from prosecution to keep him from implicating them in past crimes. Meanwhile, the stupid, bankrupt Americans keep sending them at least $1.5 billion a year.

But back to making corruption your friend. On a personal level, one prudent thing I would advise readers to do is to move to a country where people already know how to deal with corruption. The U.S. is going to get increasingly unpleasant as it passes ever more draconian laws that will be strictly enforced. Latin America is much more pleasant, because nobody takes their stupid laws seriously, and corruption takes the sting out of those that actually are enforced – reducing them to the level of a nuisance.

From a speculator's point of view – or even an entrepreneur's point of view – I have to say that, as much as I've bashed Africa as being a hopeless basket case, I can see the day coming when there will be a lot of opportunities there. There's no question that Africa is, by far, the most corrupt place on the planet – and that's going to create huge opportunities.

L: Hm. I can see it being, therefore, closer to the bottom, but will the place ever really head back up again?

Doug: I would like to see Africa, with all its abundant resources and struggling people, become the shining city on the hill, an example of health and wealth for all the world to see. In one of the novels I'm working on, to be called Warlord, I will show how that could happen.

L: Hm. I'm not going to hold my breath. But the untapped potential is certainly there. Any investment implications specific to America?

Doug: Well, a lot of this money the governments are now creating is flowing into the stock market, and it's creating a new equities bubble. A lot is also creating a commodities bubble. I think it's probable, therefore, that the biggest bubble of all will occur in junior resource stocks. They're not even micro-caps; they're nano-caps – the kind of speculations you specialize in researching and recommending in the International Speculator. So returns of 100:1, which have been seen many, many times in the past in these types of stocks, are not out of the question in that space, going forward.

That bubble will be caused by paper money. But paper money represents a very profound type of corruption; while it may pump up the stock market in the short run, it will destroy the underlying corporations at some point. Unbacked paper money is already responsible for much of the corporate corruption so evident today. Directors and high corporate officers are quite susceptible to betraying trust for personal gain – especially if they're not the entrepreneurs who started the company, but are just hired help. Most executives at big companies are good mainly at back-slapping and back-stabbing. In today's highly politicized economy, they have to spend a lot of time dealing with their opposite numbers in government agencies. They're not really businessmen, they're political hacks. And they're like magnets for bad habits and attitudes.

We've seen some of that already in corporate executives who pay themselves huge salaries, bonuses and option grants, while treating the shareholders as suckers. They themselves rarely pay for a share.

Mainstream stocks are increasingly becoming a speculative vehicle, rather than an investment vehicle. Where we're headed, investing based on Graham-Dodd fundamentals will become less and less valid.

You know I'm a hardcore capitalist; I think you should charge whatever the market will bear. But  these huge multi-million-dollar bonuses are in truth not only unwarranted, they're criminal. They amount to theft from the shareholders. As many problems as I think Warren Buffett has, I must say that I do respect the fact that he only pays himself something like $150,000 per year, making his real money on the same capital gains he's supposed to be creating for investors. Though, for the reasons I just gave, I think his method of investing is going to become less and less effective in the years to come, and we'll be left with just his goofy political views.

L: It occurs to me that as corruption accelerates, it's not just equities that are in jeopardy, but all business is in trouble. Any good business can be ruined by a competitor who pays a bribe to an official to give him an advantage. You can't make any sound business decisions when the arbitrary power of the state can upset all your plans with the stroke of a pen.

Doug: That's true. And that will only accelerate the collapse of the old world order. That's the good news: a collapse will wipe many tables clear and allow people who learn from history to start again, on sounder foundations – like, hopefully, limiting laws to the two I mentioned. Until corruption sets in again. So, even though things often have to get worse before they can get better, I'm optimistic that things will get better.

L: Another grim foretelling, Sir Guru. I don't know whether to hope you're right or you're wrong.

Doug: You know I just call 'em like I see 'em. 'Til next week, Sir Wolf.

L: Okay Boss, thanks for your insight.

—–

[For most investors, the bubble Doug foresees in junior resource stocks is not even a blip on their radar. But if you get in early, you could make a fortune when the herd finally catches on. Case in point: The best of the best junior mining companies are already generating amazing gains for the subscribers of Casey's International Speculator. Learn more here.]