U.S. Heading for Currency Destruction, Debt Default And Great Depression!
- This is an excellent interview of Doug Casey. What he says is sound. He is correct in his conclusions. My question is whether the Illuminists will go for a sudden collapse or a gradual ‘boiling the frog’ scenario. Not sure yet though, I think a sudden collapse is more probable.
U.S. Heading for Currency Destruction Debt Default Great Depression
As the world sinks deeper into what he calls the Greater Depression, Casey Research Chairman Doug Casey sees default on the U.S. national debt as inevitable—albeit probably in the guise of currency destruction. He anticipates further contraction in real estate, particularly on the commercial front. As long as stocks remain overpriced, he’ll shy away from equities—except perhaps in favored sectors such as gold. In fact, in this exclusive interview with The Gold Report, Doug posits that gold juniors might “go up by an order of magnitude or more, even while most other stocks are going down.”
The Gold Report: Doug, at a recent conference you said that the U.S. ought to default on its national debt now. Why that rather than letting it play out?
Doug Casey: Several other things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons.
To start with, once the U.S. government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it’s criminal to make indentured servants out of people who aren’t even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.
The debt will be defaulted on one way or another. The trouble is they’re almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That’s because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of dollars, they’re going to wipe them out financially.
It’s just horrible. Runaway inflation will reward the profligates who are in debt—people who’ve been living above their means. And punish the producers who’ve been saving and trying to build capital. That’s in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were.
TGR: But your belief is we’ll try to inflate our way out of it to pay for it.
DC: Don’t say “we.” Say the U.S. government. I don’t consider myself part of the problem. Americans have to learn that the government isn’t “us.” It’s an entity that has its own interests, its own life, its own agenda. It views citizens as milk cows—or perhaps even beef cows—strictly as a means to its ends.
TGR: Whether it’s overt or by default, doesn’t that end up in the same place down the line?
DC: There are two ways they can default—one by saying, “We don’t have the money and we’re not going to pay you,” and the other by continuing to print up money and giving people the number of dollars that they’re owed, except the dollars are worthless. The first alternative is by far better, for many reasons we can’t fully explore now. But it’s going to be traumatic either way.
TGR: But the assumption that we could actually just print more dollars and pay off the debt implies that somewhere the debt will stabilize.
DC: Oh no. It doesn’t have to stabilize. To pay interest on the national debt, and to pay for additional spending, all the Federal Reserve has to do is buy bonds from the U.S. government. It doesn’t have to stabilize at all. The government is most unlikely to cut back on its spending, most of which has become part of the social fabric—Medicare, Social Security, unemployment benefits, food stamps, corporate bailouts, continuing foreign wars, domestic “security”…These people are crazy enough that it could get like Germany in the ’20s or Zimbabwe a few years ago.
TGR: At what point do we tip over and turn into a situation such as Zimbabwe or the Weimar Republic?
DC: At the moment we’re in an economic twilight zone or, if you wish, the eye of a hurricane. There is apparent stability in the economy. The stock market’s high. The bond market’s high. Only the real estate market is in visible trouble. Retail prices are level; they’re not going up and maybe they’re even going down in some cases. This is a temporary situation. We will inevitably—and soon—hit the other side of the storm. At some point those trillions of dollars created by the U.S. government—and many other governments around the world have created trillions of currency units—are going to have an effect. When will that be? The timing is uncertain. But I think it’s going to be soon.
TGR: Will it be rapid?
DC: If these things were perfectly predictable, it would be easier to dodge the bullet. This is an almost unique time in world economic history, and I think we’re not only going to have economic consequences, but social and political consequences, and very likely military consequences. So hold on to your hat.
TGR: To protect what individual wealth we may have, you’ve recommended selling real estate and renting, holding assets outside the United States, owning gold, etc. When we’re out of the eye and in the thick of this economic hurricane, what types of equity investments should people be holding?
DC: Now is a very bad time to have most kinds of equities; stocks in general are very overpriced, by almost every parameter. I’m not looking to sell my gold until I can buy solid blue chip stocks for dividend yields in the 8% to 10% area. That’s after they cut their current dividends. Although it’s certainly not the bargain it was 10 years ago. Nonetheless gold will go higher. Stocks will go lower. I don’t know exactly when I’ll sell my gold and buy stocks, but it will be when there’s a panic into gold and when stocks are bargains. I’m sure I’ll be afraid to make the trade when the time comes—but good trades almost always run counter to your emotions. Perhaps the tip-off will be when Newsweek or Time—if either still exists then—run a front cover with a golden bear tearing apart the New York Stock Exchange.
I think it will be a generation before American real estate is a solid buy again. And the world at large will likely have quite a different character then.
TGR: I take your point about equities in general, but are you also staying away from gold equities? Or do you maybe see an opportunity there?
DC: They’re a special situation; on the one hand they are a play on gold, but on the other hand they’re stocks. There’s an excellent chance that with the trillions of currency units being created, the government inevitably will wind up inflating other bubbles. There’s a very good chance for a bubble in gold and a very big bubble in gold stocks. So I would say that they are an exception to other equities. We could see these juniors go up by an order of magnitude or more, even while most other stocks are going down. Historically, junior resource stocks are the most volatile class of securities in existence.
As to what’s going to happen over the next few years, I feel confident that we’ve entered upon the Greater Depression in earnest. It will be an extended period of time when most people’s standard of living drops significantly. But as I said, I think there’s an excellent chance of a bubble igniting in resource stocks. That will build on the bubble that’s going to come in gold.
TGR: What’s your definition of resource stocks? For some, it’s very broad and includes metals, agricultural commodities and such. Are you referring specifically to gold?
DC: I’m most friendly toward gold; it’s the only financial asset that’s not simultaneously someone else’s liability. I’m friendly toward silver, too, because silver is kind of poor man’s gold. I’m very friendly toward oil because I do believe a good, solid argument can be made for what was first defined by M. King Hubbert as “peak oil.” Also, oil is likely to be a major player in the next major Mideast conflict. I like uranium; nuclear is certainly the safest, cheapest and cleanest form of mass power generation.
There’s an excellent case to be made for agricultural commodities in general, and live cattle in particular. I’m not very friendly toward base metals such as lead, zinc, copper, aluminum, iron and so forth. Usage of industrial metals could drop considerably in the ongoing depression.
TGR: We spoke earlier about inflation and the likelihood of the U.S. government printing its way out of debt. Do you see a point in time where the United States or even other governments will go back to the gold standard?
DC: It’s both essential, and inevitable. That’s because they have no reason to trust one another. They need a medium of exchange and a store of value that’s not faith-based.
All the other governments of the world know that the U.S. is bankrupt and the dollar is nothing but a floating abstraction. Why should they hold billions or in some cases trillions of these things on their balance sheets? They’re going to go back to gold because it’s the only financial asset that’s not simultaneously somebody else’s liability.
It’s not because gold is magic in any way. It’s just because it has characteristics that among the 92 naturally occurring elements make it uniquely well suited for use as money. It’s durable. It’s divisible. It’s convenient. It’s consistent. It has use value in and of itself. And it can’t be created out of thin air by some government. It’s a better combination of those things than any of the 92 elements. It’s infinitely better than paper. So yes, I think they’ll go back to gold within this generation.
TGR: The Chinese recently announced that they will start selling gold coins through their banking system. What do you make of that? Is it really big news?
DC: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the U.S. dollar. That it could blow up in their hands. They also see the problems they’re creating for themselves by creating trillions of new renminbi. So I think that they’re encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn’t left too destitute and too angry. At least he’ll have some gold coins. I think they’re being quite intelligent about encouraging their people to buy gold.
TGR: What do you make of the fact that a country with a communist orientation encourages its citizens to buy gold, while the world’s supposedly premier democracy does not?
DC: First of all, let’s recognize that communism was a very short-term aberration in the 5,000-year grand screen of Chinese history. Mao only ruled the country for about 30 years. Since the late ’70s, China’s been returning to its old ways. Everybody knows that the Communist Party in China is nothing but a scam for its members to cream something off the top of everything. It’s ludicrous to say China is a communist country. It’s easier to do business in China than it is in the U.S.—lower taxes, less regulation, less legal hassles.
In point of fact, the Chinese are reverting to the mean. For many centuries, up until the Industrial Revolution, China was much wealthier than the West. Now it’s rising again. As far as the United States is concerned, unfortunately it’s going the other way. The issue has nothing to do with democracy. Democracy is just mob rule dressed up in a sports coat. It’s much overrated. The U.S. government is becoming more powerful, and the U.S. is radically departing from the economic philosophy of free markets that made it great. It’s simultaneously becoming more politically repressive. The Chinese are just reverting to their traditional economic philosophy, which is not communism, it’s capitalist trade and production.
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