There
is a great deal of uncertainty among investors about what the future of the
U.S. economy may look like - so I decided to take a stab at what's likely to happen
over the next 20 years. That's enough time for a child to grow up and mature,
and it's long enough for major trends to develop and make themselves
felt.
I'll
confine myself to areas that are, as the benighted Rumsfeld might have
observed, "known unknowns." I don't want to deal with possibilities
of the deus ex machina
sort. So we'll rule out natural events like a super-volcano eruption, an
asteroid strike, a new ice age, global warming, and the like. Although all
these things absolutely will occur sometime in the future, the timing is very
uncertain - at least from the perspective of one human lifespan. It's
pointless dealing with geological time and astronomical probability here.
And, more important, there's absolutely nothing we can do about such things.
So
let's limit ourselves to the possibilities presented by human action. They're
plenty weird and scary, and unpredictable enough.
THE MARKET FOR PROGNOSTICATION
People
are all ears for predictions, whether from psychics or from
"experts," despite the repeated experience that they're almost
always worthless, often misleading and more than rarely the exact opposite of
what happens.
Most
often, the predictors go afoul by underrating human ingenuity or
extrapolating current trends too far. Let me give you a rundown of the state
of things during the last century, at 20-year intervals. If you didn't know
it's what actually happened, you'd find it hard to believe.
1911-- The entire world is at peace. Stability, freedom and
prosperity prevail almost everywhere. Almost every country in Europe is ruled
by a king or queen. Western civilization has spread to nearly every corner of
the world and is received with appreciation. Stunning breakthroughs are being
made in science and technology. There's no sign of a gigantic world war about
to come out of nowhere to rip apart the political and cultural map of Europe
and bankrupt everybody. Who imagined that a dictatorial communist regime
would arise in Russia?
1931-- It's early in a disastrous worldwide depression.
Attention is on economic troubles, not on the virtually unthought-of
possibility that in less than 10 years a new world war would be under way
against Nazism and a resurgent Germany.
1951-- Except for Vietnam, all that remains of the colonies
the West had established in the 19th century are quiescent. Nobody guessed
almost all would either be independent, or on their way, in 10 years. China
has joined Russia - and many other countries - as totally collectivist. Who
imagined that Germany and Japan, although literally leveled, would be perhaps
the best investments of the century? Who guessed that the U.S. was already at
its peak relative to the rest of the world?
1971-- Communist and overtly socialist countries all over
the world seem to be in ascendance, soon to be buoyed further by a decade of
rising commodity prices. The U.S. and the West are entering a deep malaise.
Little significance is attached to rumblings from the Islamic world.
1991-- Communism has collapsed as an ideology, the USSR has
disappeared, and China has radically reformed. Islam is increasingly in the
news.
2011--The world financial/economic crisis is four years
old, but things are still holding together. Islamic terrorism and collapse of
old regimes in the Arab world dominate the news. China is viewed as the
world's new powerhouse.
BAD AND WORSE
Regrettably,
I'm not much of a linguist. But I do pick up interesting semantic trivia. In
Spanish they don't say "in the future," as we do in English, which
implies a definite outcome. Instead they say "en un futuro"
- in a future - which implies many possible outcomes. It's a better way of
assessing reality, I think.
Here
are three 20-year futures to consider. There are, obviously, many, many more
- but I think these encompass the three most realistic broad possibilities.
BEST CASE - FACTS GET FACED
Realizing
what a disaster the complete destruction of their currencies would be, most
governments decide to endure the pain of allowing interest rates to rise and
limiting increases in the money supply. Poorly run corporations and banks are
left to fail. Talk of abolishing the Federal Reserve, and using a commodity
for money, becomes serious and widespread.
Shaken,
the U.S. ends its profligate ways, in part because it lacks the means to
continue, and in part because everyone but collectivist ideologues has
actually learned something from the brutal '10s and '20s.
Amidst
massive protests, the government closes much of its counterproductive
apparatus, eliminates many taxes, and lets 30% of its employees go. It also,
albeit reluctantly, liberalizes its regulation of the economy because it has
become impossible to deny that the U.S. has been falling behind in all areas.
Although
there is a resurgence of libertarian thought - reminiscent of the Reagan-Thatcher
era - simple practicality is mainly responsible for forcing the government's
hand. For one thing, it can't afford the bureaucracy needed to enforce
detailed interference. For another, entrepreneurs are increasingly just doing
what they please, partly from necessity and partly from a growing sense of
righteousness. Interest rates go to 25%, to compensate for high levels of
inflation. That's high enough to make it worthwhile for people to save, and
the capital base starts growing. The stock market has collapsed to its lowest
level in living experience (in real terms), but the values available
encourage people to become investors. Business is restructured on a sound,
debt-free basis, with little speculation.
The
U.S. radically cuts its military spending and pulls almost all troops out of
their foreign bases and wars. The War on Drugs comes to an end, and the crime
rate in both the U.S. and Mexico plummets.
The
government solves most of its overhanging financial problems with a seriously
devalued - but not hyperinflated - dollar. The
Social Security deficit is eliminated by abstaining from benefit increases
and by inflating away much of what had been promised before. Most Americans
suffer a severe drop in their standard of living, as they're forced into new
patterns of production and consumption. A generation of college students find that their degrees in sociology, political science,
economics, English lit, Black studies, gender studies and underwater basket
weaving are of no real value.
When
it's all over, the tough times that started in '07 prove to have been no more
than a cyclical bump in the road, like all the other recessions since WW2,
just much bigger.
A
rough and memorable ride, but it ends with a return to prosperity.
MIDDLE CASE - FACTS ARE IGNORED
The
world's governments continue under the delusion that printing massive
quantities of paper money will solve problems when, in fact, printing lies at
the base of the problems. Most currencies lose most of their value. Some lose
it all. This destroys the most productive people in society, the middle
class, who produce more than they consume and save the difference... in
currency.
And
it injures successful corporations that have billions, or even tens of
billions, in cash. Few of their managers know what to do with such sums other
than to hold currency; at best they'll buy their own and other companies'
stock. The result is a stock market boom in the midst of a grim depression.
But only one person in a hundred will be in a position to benefit from it,
because most will be living too close to the edge, and the stock market will
be the last thing on their minds. The destruction of capital sets technology
back quite a bit in the U.S., Japan and Europe. Chindia
increases its relative strength.
The
U.S. government, believing it has both the obligation and the ability to
"do something," redoubles its control of the economy. Price
controls and capital controls are the order of the day. Petroleum products
are rationed. Enforcement of new regulations is assigned to a new agency, the
"Economic Recovery Administration," which resembles the TSA in most
regards - except it has many plain-clothes employees, to better ferret out
violators.
People
think increasingly of politics as the way to get what they want. More and
more Americans move abroad - although things are deteriorating in most places
in the world. Poor, backwater countries offer the best opportunities because
their governments are either weak, or corrupt, enough to allow new economic
activity.
WORST CASE - WAR
War
is the worst thing that can happen to an economy, but it's also the most
likely thing at this point. When the going gets tough, the people in charge
like to blame somebody else for the problem. That's compounded by the foolish
- but widely accepted - notion that war is good for the economy and that, for
instance, it pulled the U.S. out of the last depression.
Like
all wars, this one results in a complete stifling of civil and economic
freedoms. If my second scenario is unpleasant, this alternative is grim.
The
big conflict has already been teed up - the continuation of the Forever War
between Islam and the West. I'll hazard the major situs
will be Europe - which has pretty much always been the case for wars in
general for the last 2,000 years. Europe will be the worst place to be over
the next two decades. And North America will be locked down like a police
compound.
China
will have serious social turmoil as it is forced to reorient an export-driven
economy catering to Europe and the U.S. As in the past, South America will be
out of the conflict and in a position to benefit from it. India will also be
a net beneficiary, largely uninvolved, and happy to watch their ex-colonial masters rope-a-dope themselves into poverty.
People
will always argue who really started it. Was it the Muslims when they poured
out of Arabia in the 630s? Or was it the West when it invaded the Near East
with the Crusades starting in 1099? Or was it the Muslims when the Turks took
Constantinople in 1453 (although only 40 year later the Muslims would lose
Grenada, in Spain, as the reconquista was
completed) and then moved on to almost conquer Europe before being turned
back at Vienna in 1683? Or is it more relevant just to look at recent
history, starting at the beginning of the 19th century, when the West
conquered and colonized every single Muslim country? Or the very recent past,
when Muslims were counter-attacking, using a new military approach popularly
called "terrorism"?
My
bottom line is that the next twenty years may be dominated by the Forever War
that started in the 600s, being resumed in earnest. At least in Europe, it
has the prospect of becoming a war of survival, much nastier than either WW1
or WW2.
That
resumption is being accelerated by what is going on in the Middle East now.
The chances that the upheaval in the Arab world will just peter out and
everyone will return to the status quo ante are about zero. It's a
culture-wide affair, much as the revolutions in Eastern Europe were. Or, for
that matter, the revolutions against Spain in South America at the beginning
of the 19th century.
The
Arab revolutions are a good thing, in that they're getting rid of criminal
regimes. Some will be replaced with equally repressive cliques, although
manned with different criminals. I suspect a few might be more like the
French Revolution of 1789; good riddance to the old regime, but then came Robespierre. And after him Napoleon.
Regardless
of how the tumult plays out in any particular country, the erstwhile docile
collaborators with Europe and the U.S. are being elbowed aside, and the
regimes that replace them are going to accommodate the vast public
constituency for hostility toward the West, if only for the sake of internal
political advantage.
The
war is not going to be fought with conventional armies. First of all because
the Islamic world doesn't have any that would last more than a day or two
against a Western army. But also because a Western army is useless against an
amorphous mass of millions of people.
So
what will the conflict be like? Amorphous and disjointed, chaotic and without
fixed fronts. Millions of Muslims are in Europe - Pakistanis in the UK, Turks
in Germany, North Africans in France, Indonesians in Holland. Europe's
destructive conquest of the world has come back to bite. These people will
approach majority status over the next 20 years, both because they reproduce
at several times the rate of the Europeans and because they're not being
absorbed. And because, now, millions and millions more are going to arrive as
boat people.
The
natives aren't going to like it, for lots of reasons. And the outcome will
likely resemble what always happens when large numbers of unwelcome
foreigners invade a territory: violence.
One
consequence of the war, and especially of the collapse of the regime in
Arabia (in 2031 it's no longer called Saudi Arabia, because the ruling Saud
family - at least the ones who couldn't get to their jets in time - has been
massacred) is a cut-off of oil until the U.S. invades.
I
hate to overemphasize oil, but the world still runs on it. When something
does happen in Arabia, you can count on a disruption in the shipment of oil.
And absolutely count on active U.S. intervention.
A
prolonged guerrilla war, similar to those in Iraq, Afghanistan, Libya and
other Arab countries will follow. But there won't be any cover story about
ousting a bad guy or bringing democracy to the oppressed. It will be pretty
obvious to everybody that, from the West's point of view, it will start out
simply to answer the question: What's our oil doing under their sand? But
from the Muslim's point of view, it will be a different question: How can we
rid ourselves of these aggressive infidels once and for all? Then the West will
rephrase their question to: These people want to kill us! How can we stop
them once and for all?
You
may be thinking that the U.S. can't lose a war because it has a large and
extremely high-tech military. All those expensive toys can be useful from
time to time; they can win lots of small battles. But they're basically
useless for winning the next generation of warfare, as useless as cavalry in
WW1, battleships in WW2, tanks in Vietnam or nuclear missiles today.
What?
Nuclear missiles obsolete? Of course. They're expensive, clunky, and the
enemy can tell exactly where they came from. A plane, or a boat, or a truck -
or a FedEx package - is a much neater delivery system. And there will be
plenty of nuclear devices to deliver. If they're within the grasp of tiny
countries like Israel and North Korea, they're within the grasp of anyone.
In
fact, the centerpieces of today's military are well on their way to the
scrapheap or to museum displays. There may well be a few aircraft carriers,
nuclear missiles, B-2 bombers, F-22 fighters, and the like around in 20
years. But they'll be oddities reserved for special purposes, like
typewriters. Laser, electronic and robotic weapons will have replaced those
using gunpowder, and they'll be readily available to anyone (an accelerant in
the collapse of the nation-state). The military's reliance on centralization
and on computer power will prove an Achilles heel; a gang of teenage hackers
(not only the best kind, but the most common kind) can devastate a military
for pure sport.
Conquest
of wealth or territory will be pointless; that's one thing even the Soviets
suspected in the '80s, when they still had the power to invade Western
Europe. It's now nothing like in the old days, when a successful war yielded
lots of gold, cattle and slaves. This lack of an economic return will obviate
one reason for a military. The hollowing-out of nation-states will obviate
another; governments will find they just don't have either the financial
means or the popular support for serious military establishments.
The
military, as the cutting edge of the nation-state, is in serious decline.
Conflict between groups will still exist, of course, but it will be more
informal, more the kind of thing that a Mafia or an Al-Qaeda might conduct.
The growth of private military contractors, like Blackwater
(now Xe), which only need be paid when in use, is
indicative.
A BASIC PLAN
Sorry
I can't do any better than a best-case scenario that just isn't very rosy -
at least over the near term. And there's a high likelihood of the worst-case
scenario. There will probably be some overlapping elements from all three, if
I'm on the right track.
From
an economic point of view, I see only two things as being predictable: One,
that many people will always produce more than they consume and save the
difference; this will create capital, which is critical for not only a higher
standard of living, but for the advancement of technology.
Two,
that since there are currently more scientists and engineers alive than have
lived in all previous history combined, technology will keep advancing;
technology is the major force to advance the general standard of living. So
that's essentially why I'm an optimist. Let's just hope the savers aren't
wiped out, and the scientists don't do too much government work.
The
most sensible plan for the next 20 years is to plan to survive. The days of
"He who dies with the most toys wins," and of two whole generations
living way above their means, are over.
20
years isn't forever. Think of it like a bear market, when the best thing to
do is take your chips off the table, grab some books and retire to the beach
for a year - except that this is going to be a lot longer and more serious.
Nonetheless, I expect my fundamental optimism to get through it undamaged, as
should yours.
For
one thing, the long-term trend is favorable. Mankind has risen from
subsistence and living in caves as little as 12,000 years ago, to reaching
for the stars today - and the rate of progress has been accelerating. Why
should that stop now?
But,
as I mentioned earlier, thinking too far in the future is perhaps pointless.
So what should you do now? The essential advice remains the same:
- Own gold and
silver. At Casey Research, we've made a lot of money on them - and
they're no longer cheap - but they're going higher, simply for lack of
alternatives. Look at them as you would cash.
- Produce more
than you consume, and save the difference. This is no longer the time
for promiscuous, conspicuous consumption.
- Be alert for
speculations. Some markets will collapse (for instance, I wouldn't want
to own a McMansion in the suburbs or a
"collectible" car). Other markets will likely turn into
manias, benefiting from trillions of new currency units (I suspect
mining stocks will be one of them).
- Diversify
your assets (and yourself) politically and geographically. As big a risk
as the markets will be, your government is an even bigger one.
And,
incidentally, we're going to be looking carefully at the stock markets in the
Arab world. It's too early to buy. But there's a time and a price for
everything.
Hear more
investment advice from Doug and the Casey team, as well as 35 renowned
experts who gathered at the recent Casey Summit in Boca Raton. It’s
all in your discount Double-Dip
Crisis Bundle – including the complete Summit CD
set and a subscription to The
Casey Report. Full
details here.
Doug Casey
|