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An eye-opening interview with renowned speculator Doug
Casey, conducted by Karen Roche and JT Long of The Gold Report. Doug explains
why fiat currencies around the world are destined for collapse… and
what investors can, and should, do to protect themselves.
If dollar-dumping turns from a trickle into a flood,
look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation
of the dollar will compound the problems we saw in 2007–2009.
Catastrophe will come when everybody realizes that the dollar is an "IOU
nothing." That's the downside in the decade(s) ahead, according to Casey
Research Chairman Doug Casey. But an optimist at heart, in this exclusive
interview with The Gold Report, Doug also identifies some reasons to
be hopeful.
The Gold Report: You've been talking about two ticking time bombs. One
is the trillions of dollars owned outside the U.S. that investors could dump
if they lose confidence. And the other is the trillions of dollars within the
U.S. that were created to paper over the crisis that started in 2007. Are these
really explosive circumstances that will bring catastrophic results? Or will
it just result in a huge, but manageable, hangover?
Doug Casey: Both, but in sequence. One thing that's for sure is that
although the epicenter of this crisis will be the U.S., it's going to have
truly worldwide effects. The U.S. dollar is the de jure national currency of
at least three other countries, and the de facto national currency of about
50 others. The main U.S. export for many years has been paper dollars; in
exchange, the nice foreigners send us Mercedes cars, Sony electronics,
cocaine, coffee—and about everything you see on Walmart
shelves. It has been a one-way street for several decades, a free
ride—but the party's over.
Nobody knows the numbers for sure, but foreign central banks, and individuals
outside the U.S., own U.S. dollars to the tune of something like $6 or $7
trillion. Especially during the recent crisis, the Fed created trillions more
dollars to bail out the big financial institutions. At some point, foreign
dollar holders will start dumping them; they are starting to realize this is
like a game of Old Maid, with the dollar being the Old Maid card. I don't
know what will set it off, but the markets are already very nervous about it.
This nervousness is demonstrated in gold having hit $1,900 an ounce, copper
at all-time highs, oil at $100 a barrel—the boom in commodity prices.
Some countries are already trying to get out of dollars, but it could become
a panic if the selling goes from a trickle to a flood. So, yes, it's a time
bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a
theatre catches fire and one person runs out, soon everybody rushes toward
the door and they all get trampled. It's a very serious situation.
TGR: If panic erupts on the U.S. dollar, would products manufactured
in the U.S. become super-cheap or super-expensive?
DC: They would become super-cheap. Everybody says that devaluing the
dollar will stimulate U.S. industry because the products will become cheaper
and foreigners will buy them. This is a huge canard everybody repeats and
nobody thinks about. Yes, it is true for a while, but if devaluation were the
key to prosperity, Zimbabwe should be the most prosperous country in the
world as it has already collapsed its currency.
A strong currency is essential for a strong economy. Sure, a strong currency
can hurt exporters for a while. But, a strong currency encourages
manufacturers to invest in technology, and become more efficient. It rewards
savings and results in the growth of capital that's critical for prosperity.
A strong currency allows businessmen to buy foreign companies and
technologies at bargain prices. It results in a high standard of living for
the country, and yields social stability as a bonus. The idea that decreasing
the value of currency to stimulate exports is a short-lived, stupid and
counterproductive solution to the problem. People seem to forget that while
the German currency was rising about sixfold from
its level of 1971, and the Japanese yen about fourfold, those countries
became the world's greatest export economies. It didn't happen despite a
strong currency, but in large measure because of it.
TGR: Given that the U.S. is the world's biggest consuming nation,
wouldn't fleeing the dollar create a big consumer vacuum in the international
community? Doesn't the rest of the world want to keep up the high level of
exports to these U.S. consumers?
DC: That's exactly why the U.S. is in such trouble; it's idiotically
focused on consumption, while only production can create prosperity. The
world doesn't need to stimulate consumption. This is another canard, because
everybody has an infinite desire for goods and services. I know for myself,
I'd like not just a car, but 10 Ferraris, a couple of Gulfstreams
and 10 houses around the world. So, by myself, I have an infinite desire for
goods and services. Multiply that by 7 billion other people. The only way to
gratify those desires is by producing enough to trade with other people to
give you what you want. When so-called "economists" think the
problem is that we don't have enough consumption, that
shows that the profession itself is bankrupt. It's actually quite
embarrassing.
TGR: But other countries currently produce enough of what the U.S.
wants. With U.S. dollars, that trade won't look good on their side
eventually.
DC: The problem is the U.S. doesn't produce enough in return. The U.S.
has been lucky to have a currency that has, so far, been accepted by
everybody. But when everybody realizes that the dollar is an "IOU
nothing" on the part of a bankrupt government and a society that doesn't
really produce anything anymore, it's going to create a worldwide
catastrophe. Those $7 trillion held by foreigners are going to become instant
hot potatoes.
TGR: Considering what you said a moment ago, that the world doesn't
need to stimulate consumption, you must find some irony in the Obama
administration's plan to stimulate consumption again in the U.S. as a way to
spur some economic growth.
DC: I'm afraid that after being counseled by the fools that surround
him, Obama talking about economics is like the blind leading the doubly
dismembered. They want to spend $450 billion trying to create new
jobs—but these are government jobs, where you have people digging holes
during the day and filling them up at night to create the appearance of
employment. No government has any idea what the market really wants and
needs. There should be zero government involvement in this. The government
cannot and should not even try to create jobs. If Obama wants to stimulate
the economy, he can decrease the size of the government. I would say a 90%
reduction would be a good starting figure.
TGR: But that will create even more unemployment. That's one of the
big concerns. States laying off employees could
increase unemployment even more.
DC: It is wonderful that states are starting to lay off employees.
Once they lose their state jobs, which suck wealth from taxpayers, maybe
those people can find real, productive jobs providing goods and services that
people actually want and will pay for voluntarily. So I'd argue that getting
rid of state employees is essential to a sound recovery plan.
TGR: You warned early on in the 2008–2009 economic crisis that it would really be more of a hurricane. In the
last year or so, we've been in the eye of the hurricane and there's more
turmoil to come. Will the other side of the storm be worse than the first?
And given the recent economic news, do you think we have moved out of that
eye?
DC: Yes, I think we are moving out of the eye and going into the other
side of the storm. This storm will be much more severe because we haven't
solved any of the problems that caused the hurricane in the first place. The
fact that governments all over the world have created trillions of currency
units has only aggravated those problems. Now, I expect exploding prices to
compound the problems that we saw back in 2007, 2008 and 2009. That will
devastate the prudent people in society who saved money. They saved it in the
form of currency, and wiping out their savings will be catastrophic.
TGR: Will this affect only North America and Europe?
DC: Mostly North America and Europe, but it's going to be very serious
in Japan, too. It could be even more disastrous in China. The Chinese real
estate market bubble is very inflated, driven by the lending of Chinese banks
that won't be able to recover their loans. They will all go bankrupt, taking
out the Chinese populace's savings with them. At the same time, those who own
real estate will find it worth vastly less than what they paid for it. Those
problems will create social disruptions in China, leading to riots, perhaps
even revolution, and who-knows-what. The fallout is going to be terrible.
TGR: Many pundits and economists still project growth in China, albeit
at a lower rate, and anticipate further expansion of the middle class.
DC: The 21st century will be the Chinese century, but the distortions
and misallocations of capital that have occurred over the last 30 years—notwithstanding
the truly phenomenal progress the country has made—are serious and have
to be washed out. I am a huge bull on China for lots of reasons, but I am
bullish for the long run. I think it is going to go through the meat grinder
over the next 10 years. I don't know how it will come out; maybe China will
break up into five or six different countries. Actually, that would be a good
thing. Most of the world's nation-states are artificially constructed and too
big to be manageable as political entities.
TGR: Your outlook on China fits right in with something you've been
saying for years—about this being the "Greater Depression,"
which is also the topic of your upcoming presentation at the sold-out Casey
Research/Sprott Inc. "When Money Dies" summit next month in Phoenix.
Your opening general session talk is entitled, "The Greater Depression
Is Now." We are now four years into it, based on your 2007 start date.
DC: Actually, depending on how long a historical scale you look at,
you could say that, for the working class in the U.S. anyway, the depression
started in the early 1970s. After inflation, after taxes, their take-home pay
hasn't risen in real terms for 40 years. But the definition of a depression
that I use is "a period of time during which most people's standard of
living drops significantly."
Net savings shows that you're living within your means and putting aside
capital for the future. In the U.S., people have been living above their
means for many years—that is what debt is all about. Debt means that
you are borrowing against future production, which is exactly what the U.S.
has been doing.
TGR: So, how long will this Greater Depression last?
DC: It doesn't have to last long at all. It could be quite brief if
the U.S. government, which is basically the root cause, retrenches vastly in
size and defaults on the national debt, which is essentially an enormous
mortgage, an albatross around the neck of the next several generations of
Americans. The debt will be defaulted on one way or another, almost certainly
through inflation. I simply advocate an honest, overt default; that would
serve to punish those who, by lending to the government, have financed its
depredations. Distortions and misallocations of capital that have been
cranked into the economy for many years need to be liquidated. It could be
unpleasant but brief. The government is likely to do just the opposite,
however. It will try to prop it up further and make it
worse—compounding the problem by expanding the wars. So, it could last
a very long time. In that sense, I'm not optimistic at all. I think there is
little cause for optimism.
On the other hand, I'm generally optimistic for the future. There are only
two causes for optimism. First, smart individuals all over the world
continue, as individuals, to produce more than they consume and try to save
the difference. That will build capital, which is of critical importance.
They should just save by holding paper currency. Second, expanding and
compounding technology will increase the standard of living. Remember that
there are more scientists and engineers alive today than have lived in all
previous history combined. Those two factors countervail the government
stupidity around us. Whether they will be overwhelmed and washed away by a
tsunami of statism and collectivism, I don't know.
TGR: You say that the U.S. government is the root cause of this
problem. Isn't that putting too much blame for a worldwide problem on one
nation?
DC: The institution of government itself is the problem, and the
problem is metastasizing like a cancer all over the world. But, sad to say,
the U.S. is the most serious offender because it is currently both the most
powerful and the most aggressive nation-state. It has been greatly abetted by
the fact that the U.S. currency has been accepted globally. The U.S. dollar
is, in effect, the reserve that backs all the other currencies in the world.
That is why the U.S. government has been the most destructive from an
economic point of view. Furthermore, military spending—which in the
U.S. equals that of all the other militaries in the world combined—is
purely destructive. It serves no useful economic purpose at all. The military
is no longer "defending" anything—least of all liberty. It's
actively creating enemies and provoking conflict. So, yes, I think the U.S.
government is actually the most dangerous force roaming the world today.
TGR: Do you see that changing after the next election?
DC: No. I think the chances of Obama being reelected are high, simply
because more than half of Americans are big net recipients of state largesse.
The U.S. has turned into a larger version of Argentina politically, where the
electorate is effectively bribed to vote for the biggest thief. It is likely
to turn out much worse than Argentina, however. Unlike the Argentines, the
U.S. government is fairly efficient. And, unlike Argentina, the U.S. is
rapidly turning into a police state.
Electing a Republican might be even worse, though. With the exception of Ron
Paul and Gary Johnson, the potential Republican candidates absolutely make my
skin crawl. So, no, there is no help on the horizon. The U.S. government is
spending about $1.5 trillion more this year than it takes in, and it is not
going to cut that. In fact, foolish spending to bail things out will
increase. And, worse than that, the Fed has artificially suppressed interest
rates for three years. Interest accounts for roughly 2% of $15 trillion
official national debt, or $300 billion per year. As interest rates
inevitably rise, that interest amount will grow. At 12%—and I'm afraid
they'll have to go even higher than that—it would add another $1.5
trillion just in interest payments.
I absolutely see no way out without a collapse of the U.S. currency and a
total reordering of the U.S. economy.
TGR: When Money Dies, the title of your summit,
implies some return to a gold standard. How do you see that playing out?
DC: Nothing is certain, but when the dollar disappears—and it's
going to reach its intrinsic value soon—what are people going to use as
money? Will we gin up another fiat currency like the euro? The euro is likely
to fail before the dollar. My suspicion is that people will want to go back
to gold. It's not because gold is anything magical, but simply the one of the
92 naturally occurring elements that—for the same reasons that make
aluminum good for planes and iron good for steel girders—is most useful
as money. In fact, the reason that gold has risen as high as it has is that
the central banks of third-world countries—places that don't have large
gold reserves, such as China, India, Korea, Russia, even Mexico—have
been buying the stuff in size.
TGR: The concept of going to a gold standard seems impossible in the
sense that there is only so much gold above ground—6 billion ounces?
Maybe $11 trillion worth? But it's only a fraction of the U.S. GDP. Even with
gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do
you convert to a gold standard?
DC: In terms of today's dollars, gold should probably be a lot higher
than it is. I don't know what the number will be, because a lot of those
dollars will disappear in bankruptcies; they will dry up and blow away. It's
like a real estate development that was worth $1 billion on somebody's books;
when it fails, that's $1 billion destroyed. It's a question of the battle of
inflation (with the government creating dollars to prop things up) against
deflation (where businesses fail and wipe out dollars). But put it this way:
the U.S. Government reports it owns about 265 million ounces. Its liabilities
to foreigners alone are at least $6 trillion. If they were to be redeemed for
a fixed amount, that would require roughly $22,000/oz. gold. And that doesn't
count dollars in the U.S. itself.
I'm a bargain hunter and a bottom fisher, and bought most of my gold at
vastly lower prices. But I think gold is going much higher because most
people still barely even know that the stuff exists. As inflation picks up,
they are going to want to get rid of these dollars—but what other
monetary commodity can they turn to? So, gold is going higher. I'm still
accumulating gold.
TGR: You said that the storm as we emerge from the eye of the hurricane
will be worse than it was on the other side. If they don't own gold, how do
investors protect themselves?
DC: It's very hard to be an investor in today's world because an
investor is someone who allocates capital in a way to create new wealth. That
is not easy in today's highly taxed and regulated economy. It's late in the
day, but not too late, to buy gold, silver and other commodities. Productive
assets are good to own. Of course, the easiest way to buy most productive
assets is through the shares of publicly traded companies, but the stock
market is quite overvalued in my opinion, so that's not the best option right
now.
In addition to trying to build personal holdings of gold and, to a lesser
degree, silver, I think people should learn to be speculators. This is not to
be confused with gamblers, who rely on random chances. Speculators position
themselves to take advantage of politically caused distortions in the
marketplace. In a true free market society, you would see very few
speculators because there would be few such distortions. But regulations,
taxes and currency inflations are likely to keep markets very volatile. Good
speculators will position themselves to take advantage of bubbles, and
identify bubbles that have been blown to their maximum and are about to
deflate.
Government actions are going to force people to become speculators, whether
they like it or not. Most won't like it, and very few will be good at it.
TGR: What bubbles might speculators look to exploit?
DC: I'd say the world's biggest bubble is real estate in China, but
real estate bubbles are just starting to deflate elsewhere, too—in
Australia and Canada, for example. It's relatively hard to short real estate,
of course. Shorting bank stocks is an indirect way to play it. I'd say bonds
are the short sale of the century. They're going to be destroyed. Bonds pose
a triple threat to capital because:
- Interest rates are artificially low, and as
interest rates rise—which they must—bonds will fall.
- Bonds are denominated in currencies,
and most currencies, let's say dollars, are going to lose a lot of
value.
- The credit risk of most bonds, certainly those
issued by governments, is high.
On the long side, mining stocks are very cheap relative
to the price of gold right now. I'd say there's an excellent chance of a
bubble being ignited in gold mining stocks, especially the small ones; in
fact, I'd put my finger on that as likely being the easiest way to make a
killing.
TGR: Technology was one of the two areas of optimism you mentioned earlier.
Do you see a bubble forming there?
DC: You have a point, but I'm not sure you can talk about technology
stocks as a whole; technology is too variegated, too vast a field. Although,
I've long been a huge believer in nanotech, which is likely to change the
world as we know it. With gold stocks, however, you can jump into a discrete
universe, that's likely to become a mania.
TGR: Thank you for the tips, Doug, and as always, for your thoughtful
insights.
At the sold-out Casey/Sprott
Summit When
Money Dies, more than 20 seasoned investment pros, economists
and freethinkers provided their insights and advice on the coming currency
collapse… and what investors can do to protect their assets. Listen to
the timely investment advice and specific stock recommendations of North
America's top financial experts from the comfort of your home—in 20+
hours of power-packed audio recordings on CD (or MP3). More
details.
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