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L: Doug, last time we spoke, you said quite a bit about debt, in the context of
your expectation that the euro is on its way out. At the end of that
conversation, you mentioned, of course, that the problem is not limited to
Greece, nor the eurozone.
America as a country has become a world-class debtor, and many Americans seem
to think a maxed-out credit card is a reason to get a higher credit limit,
not to economize. It's like a global epidemic. Let's talk about debt.
Doug: Sure. This is a story
that's going to end very badly for a lot of people. I've said this before, in
many different ways, but I think it's worth saying again, because most people
just don't grok it…
L: Grok. From the Martian
word for "drink" and "understand." In Heinlein's novels,
water was a critical element of Martian culture – makes sense, for a
desert planet. When you grok knowledge, as when you
drink water, you don't just hold it in your mouth and spit it out. You take
it into yourself, it goes into your blood, and eventually into every cell in
your body; it becomes part of you. This is heavy-duty understanding…
Sorry for jumping in with the spontaneous lecture. I just suspect many
readers will not know the term.
Doug: Or put another way, in the
negative case, most people just don't get what money really is – and
what it isn't. They take it as a given, as part of the cosmic firmament. But
it's not. A prime example of this is the mistaking of debt for money, a phenomenon
David Galland pointed out in a Casey's
Daily Dispatch a few weeks ago.
This is why the entire world's monetary system today is headed for a
disastrous failure. And this is absolutely inevitable. There's no way around
it.
L: Why?
Doug: Because you can't use debt
as money. As I've pointed out before, Aristotle, in the fourth century BC, was the first
person to define what money is. And what is it? It's a store of value and a
medium of exchange.
The paper we use today is a medium of exchange – it got that way
because governments made it illegal not to accept it – but it's not a
good store of value. And it's rapidly and radically becoming less of a store
of value. What we use as money today is actually not money; it's currency.
Technically, that's simply a word that indicates a government substitute for
money.
What does make for good money? Again, Aristotle gives us the answer.
It's something that has five characteristics: it's durable and divisible,
consistent and convenient, and has value in itself.
L: Some of our readers who've studied Austrian economics challenged us on that last bit, last time we talked
about gold, because, as the Austrians pointed out, value is subjective. But
you don't mean some sort of value that's independent of people making value
judgments. You mean that people value something that makes for good money,
because of its innate qualities – not something "valued"
because of government threats of force.
Doug: Right. And for these
reasons, gold is almost certainly the best thing to use for money. Not
because I say so, nor because Aristotle said so, but because, over time,
people have found it to be the most durable, divisible, consistent,
convenient, and inherently valuable thing to use. Silver is also good, but
it's less durable because it corrodes. And less convenient, in that it takes
about 60 times more of it – at the moment – to offer the same
value as gold. Copper is the next traditional step down the ladder.
L: That, plus one reason that's pertinent today but
was not a problem in Aristotle's world: gold can't just be printed up on the
arbitrary whims of those in power.
Doug: That's the big one. Using
metals as money takes the whole matter out of the hands of the government and
its bureaucrats.
L: But we don't use gold today…
Doug: No, as per David's example,
it's as though a bunch of friends without any real money started exchanging
IOUs for money, and then after a while forgot that the IOUs were supposed to
represent, and be redeemed in, real money.
The problem with this is that, in the case of the IOUs between
friends, paper is based solely on hope and trust. One can move away, or die,
or turn dishonest, or become insolvent – many other things could
happen. A guy stuck with a dead man's IOU has nothing.
With government IOUs, or currencies, it's worse, because they can
increase the number of IOUs in circulation without telling anyone –
that's what inflation is. Since the government creates the IOUs, it gets the
benefit of spending them before the inflation they create raises prices,
which is basically stealing from the people. And, of course, sometimes
governments do "die," leaving the holders stuck with nothing, just
as with the IOUs between friends. In fact, it's arguably far more likely that
such problems will arise from trusting a government to print IOUs than from
trusting a friend.
L: Most people feel that they should do right by
their friends – government's don't have
friends, and most see their citizens as being property, like cattle, that
require the state's permission to do anything. Inflating the currency isn't a
crime in their view, just a tool for controlling the dumb masses. But it's
really taxation without representation.
Doug: Sadly so. And since the
institution of government is based on force, on compulsion, they feel they
have every right to do what they want. They sanitize all types of criminality
by saying it's in "the national interest" or some such poppycock.
L: Okay… but these currencies have
worked for a very long time. Why are you right about this and the rest of the
world wrong? Why is it inevitable that government currencies will fail?
Doug: [Chuckles] Because
governments are not living persons who care and can be motivated to do the
right thing. They are collections of individuals – politicians and
bureaucrats, not exactly the most desirable types – who pursue their
own interests. Regardless of the rhetoric, their interests coincide with the
public good only on occasion, like a broken clock being right twice a day.
Even in the most enlightened times – even in the best of times –
governments have huge incentives to spend more than they take in. These are
not the best of times; the population has been trained for generations to
expect subsidies and freebies as their due, without regard to who pays or how
they will be paid.
I'll give you an example. When I was on the Phil Donahue Show,
the day before the national elections in 1980, I was making the same
philosophical points I am now. I explained how they, the taxpayers, would pay
for all the goodies – like Social Security and unemployment
compensation – that they wanted. A middle-aged guy in the audience
asked: "Well, why can't the government pay for these things?" And
the rest of the audience roared approval.
It was then that I first realized that resistance was futile and the
situation was basically hopeless. And that someone who can seem perfectly
sensible when he's discussing sports, or the weather, or the state of the
roads, was likely to be a moron when it came to economics. And that when he
became part of a crowd, it was even worse: he might transform into an
imbecile or even an idiot.
Anyway, the dollar has existed for many years, even though it's
degraded over time – first with the creation of the Federal Reserve in
1913, then with the repudiation of domestic gold redeemability
in 1933, then with the repudiation of international redeemability
in 1971. Even though the government has created trillions of new ones, the
dollar is still thought of as some kind of a cosmic standard. In point of
fact, it's no better than the Argentine peso and will have the same fate.
These IOUs have a quite ephemeral reality and are far too easy to
create – there's literally no limit at this point. We don't even have
to actually print them anymore, they're created by computer strokes –
so it's unrealistic to expect fiscal restraint on the part of any government
over time. It's just too tempting to spend money to make people feel richer
than they really are, buying votes.
L: Looking at the deficits and national debt, it
certainly seems so.
Doug: The national debt –
when was the last time you heard any average person worry about the national
debt? Americans have become so used to carrying huge loads of debt around
– right out of college with student loans – that it doesn't even
occur to them that there could be any reason for concern over the national
debt. It's an abstraction, like the number of light years to the Andromeda
Galaxy.
People used to at least pay attention, though most would say,
"It's not a problem, we owe it to ourselves." But that was always a
delusion. Some people, organized in a club called the government, borrowed it
from some other people. But now it's even more dangerous, because the U.S.
government owes it mostly to foreigners: the Chinese, the Japanese, the
Taiwanese, and so forth. Americans, who at least theoretically have some
interest in keeping the U.S. government straight, are tapped out. So it's gone
to borrow from other societies. And they won't like it if they are left
holding a bunch of worthless IOUs at the end of this experiment.
As the world political situation continues to deteriorate towards
something I think will vaguely resemble World War III, the chances are
excellent that a U.S. government at the end of its financial rope will
default, likely by radically devaluing its dollar. They're way past thinking
in millions. They don't even think in billions anymore; they're up to
trillions. Soon Obama will have to ask the buffoon he appointed as a science
advisor what comes after trillions. Those nice foreigners who gave Americans
physical wealth in exchange for pieces of paper are going to find that,
indeed, all they got was a bunch of paper. Maybe not even that, but just
ledger entries representing pieces of paper.
It's not just the Chinese and Japanese governments that are going to
be unhappy. But hundreds of millions of individuals around the world –
in places from Russia to the Congo, to Mexico, to Thailand – that have
a trillion of the things under their mattresses, because they justifiably
don't trust their own government's paper, are going to be even more unhappy
with the U.S.
This is big trouble. It's not just another economic downturn when
scores of millions find their life savings go "poof." What we're
looking at is a cataclysm at some point soon. I hate to sound inflammatory,
but I think the situation is much, much more explosive than it appears on the
surface, much worse than you see on the TV news.
L: That's a frightening assessment. But World War III
is a topic for another day. As dire as the scenario you paint may be, is it
enough to cause currencies to stop functioning as means of exchange? So few
people can even conceive of an alternative…
Doug: They probably won't stop
functioning as means of exchange. At least not right away.
Even during Germany's infamous hyperinflation of the 1920s, or
Zimbabwe's more recent one, in which there were so many zeros after the ones
on the bills you couldn't even count them – people still used
the governments' paper currencies. They still used them! When I was last in Zim, three years ago, we already had to pay for gas with
backpacks full of notes; most inconvenient. In the case of Germany, there
were still ten- and twenty-mark gold coins available, if not exactly in
circulation. People forget that the mark, the franc, the lire, the dollar all
used to be names for a certain amount of gold.
When World War I started, Germany went off the gold standard –
it used to be about five marks equaled a dollar. By 1923 there were trillions
to the dollar. Only the Germans who either kept those gold coins under a
mattress or had foreign bank accounts still had liquid capital by 1923;
everybody else was wiped out. So people didn't spend their gold if they could
avoid it.
That's what Gresham's Law is all about. If there is
a "legal tender" money – a paper money –
floating around, you try to pay your obligations in it. You try to get rid of
the hot potato. But you try to get paid in the good stuff and hold on to it.
The Weimar inflation of Germany was an utter disaster for that country; it
led to all kinds of nastiness.
L: So many people think of Weimar Germany and
Zimbabwe as aberrations from far lands, if they think about them at all.
Interesting that Germany is at the heart of the euro now, facing Gresham's
Law again.
Doug: It's been true since at
least the days of Rome. But I wonder if it won't be much more serious this
time. All the world's major currencies are issued by governments of countries
that are much more urbanized, with economies that rely mostly on services. In
the U.S., the UK, the eurozone, and Japan –
all of their currencies are in big trouble for various reasons, and there's
relatively little production of what you might call the basics.
Back in the 1920s, or even a few years ago in Zimbabwe, half of the
people still lived on farms, and a lot of people didn't even have bank
accounts, let alone credit cards and pension funds. The demise of the dollar
and other paper currencies has got to be much, much more serious than these
episodes in the past.
L: Currency regime change hits the global reserve
currency – it won't be easy. Let me come at this a different way. As an
advocate of hard money, you understand that inflation of the money supply
leads to inflation in prices. If you have 1,000 gold coins in a small
village, in the unlikely event that someone digs up enough gold top make 1,000
more gold coins, you now have twice as many coins chasing roughly the same
goods, and so prices will go up. But we don't live in a hard-money economy.
We're off the gold standard. We have fractional reserve banking, we have easy
debt financing for individuals, businesses, and governments. So one new
dollar gets multiplied and impacts the economy like multiple new dollars. But
on the downside, if you have loss of confidence in what amounts to a bunch of
currency derivatives, those get wiped out in large swaths, greatly reducing
the multiplier effect.
So, is it not possible that we could see the government's
unprecedented creation of trillions of new dollars in debt and currency
compensated for by the obliteration of trillions in derivatives, and hence no
price inflation?
Doug: That's a good point. It's
one of the many problems with a paper money system based on credit. All those
dollars are created out of nothing – inflation. But when banks fail and
bonds are defaulted on, you can get deflation. With a metal
money, the money supply grows only about as fast as miners can mine more
– which is usually about as fast as the real economy grows. So the
value of the money tends to stay constant. Or even go up, in a gentle
deflation. That's a good thing, because it discourages debt and encourages
saving. And saving is how either an individual or a society gets wealthy.
But these government officials are now totally out of their depth. I
remember in 2007, for once in his life since he became one of the nomenklatura, when Alan Greenspan actually said something
clear and understandable. He was no longer chairman of the Fed and was,
believe it or not, on the Daily Show, a comedy show. I thought John
Stewart did an excellent job when he interviewed him. He asked Greenspan if
he knew what the money supply really was – if he knew how big it was.
Greenspan, quite candidly, said, "Well, we don't really know."
L: I think I found a video of this while you were talking.
Doug: There's a titanic battle
right now between the forces of inflation and deflation. When a big
corporation like General Motors, or Fannie or Freddie, defaults on its debt,
hundreds of billions of dollars disappear. Assets people thought they had and
could have been converted into cash disappear. That's deflationary. In a
sound banking system, in which money is a commodity like gold, money can't
disappear. It can change ownership, but it can't disappear. But in our
current system, it can dry up and blow away as easily as it can be created.
One major problem that stems from this is that some people benefit
from government money creation and some don't. Who gets to spend it first,
when it's most valued, and who gets stuck holding the Old Maid card when it
vanishes? It's usually the little guy – the middle-class guy –
who gets hurt when this happens. And in the U.S., the middle class is contracting.
The financial gyrations we're going through are destroying the middle class,
which naïvely believes that traditional American values still hold sway
and that their government is honest. The lower class has long since lost any
values, and the upper class is way too cynical and self-interested to really
care. Most middle-class people will end up joining one or the other of these
two classes, and that'll be a moral disaster for the country.
America used to be a place where class wasn't really important, and
you could move between classes easily – not at all like Europe or the
Orient. But as the middle class gets squeezed, we're likely to get class
warfare between those on top and those on the bottom.
L: One way to look at the inflation/deflation debate
is that even if we do in fact have financial asset destruction – a kind
of deflation – on a scale necessary to outdo the truly phenomenal
amounts of money creation the U.S. and other governments are engaged in, the
implied destruction is just as bad as hyperinflation. The number of banks and
other financial institutions that would fail – and with so many people
having 401Ks and online brokerage accounts, the number of people whose
savings and pension plans would be wiped out – would be truly
cataclysmic. That's what it would take to balance the wanton inflation of the
money supply we now see in progress. If that's the cure, it, too, is deadly.
Doug: I think that's fair to say.
Either way, it's going to be really serious. As I pointed out a few minutes
ago, when you have runaway inflation in a place like Zimbabwe, where most
people are living on a subsistence level, people with gardens and chickens
will get hurt, but they'll still get by. It's not the same when the
world's wealthiest and most advanced economies are falling apart. Americans
are going to see a serious drop in their standard of living, which they are
completely unprepared for, and it's going to be a disaster. They don't have
gardens and chickens to tide them over. There's no way around it.
L: Which brings us back to why.
I mean, I'm sure many people can see the picture you've painted, but why is
it inevitable?
Doug: Because the U.S. government
and others like it are between a rock and a hard place. It is simply not a
politically acceptable option to step back and let the market correct the
gross misallocations and distortions the government has imposed on the
economy. They must "do something" – even if they know full
well it's the wrong thing. And "doing something" means spending
without raising taxes too much, because they know too much of that will slam
the coffin on the economy they are trying to resuscitate. Spending on
"stimuli" to "fix" the economy – direct spending on
bribes to voters, like extending unemployment "benefits" to years
and offering them "free" health care, etc… the way things are
structured, the government must spend. Not spending is unthinkable.
There are only two ways to pay for that. They can borrow, which they
can only do if they raise interest rates enough to make their bonds
attractive, and that, too, would pull the plug on what you so colorfully
called the "iron lung economy." And they can print money, which
they can do with some impunity, hoping the bill won't come due until some
other poor fool is in office – but that destroys the dollar sooner or
later.
Everything we've seen shows that they are doing what is predictable
for politicians, since they can appear to be "doing something" with
the consequences left to the future: they are destroying the dollar.
The U.S. government is going to be running trillion-dollar deficits as
far as the eye can see. Again, they can't borrow it while keeping interest
rates low, so they are going to sell their bonds to themselves, which is to
say the Federal Reserve, and inflation is going to
explode. There simply is no painless choice, and it's very close to being
totally out of control.
L: What about the apparent recovery of the economy?
You dissed "green shoots" in one of our conversations last year, but they seem to be growing more numerous.
Doug: That's because the
government bribed people with that ridiculous "cash for clunkers"
program. They gave people $8,000 to buy houses. They are hiring three times
as many people to do the census as last time, and the population is not three
times as large. And many more bribes. But that's going to come to an end, and
it's going to get much more grim than it was
in the fall of 2008.
L: And this financial apocalypse now, as we termed it
last week, is the natural endgame of using fiat currencies instead of real
money – this is why you can't use debt as money.
Doug: That's why you don't use
debt – IOUs – for money. And those people who are complacent
about this, those who read these words and know we're right but take no
action because they can't believe things will get that bad in America, are
going to be very unhappy in the near future.
Readers should do something now, while we're still in the eye of the
storm, while there's a small cyclical improvement happening, and when most of
boobus americanus
thinks happy days are here again.
Not only do we have to go through the other side of this storm, but
then there's an even bigger hurricane after that. This is just the beginning
of the troubles ahead. Take action now.
L: Financial self-defense 101 – that's what we
teach Casey Research subscribers. But let's walk through some of the
generalities here. Reasonable actions to take would include: buying gold,
diversifying assets offshore, and… would you
still recommend going to cash with inflation on the way?
Doug: Here's an easy way to
remember it: I would liquidate, consolidate, speculate, and create.
Liquidate: Get rid of any
assets you have that might have been favored by the old economy but are
likely to be blown away by the new one. That would include speculative real
estate holdings in formerly hot markets. Maybe even sell your house, if you
can, and rent instead. Or, for sure if you keep your house, get a big
mortgage at a fixed low rate that will probably be inflated out of existence.
And get rid of your houseful of stuff – the junk filling your basement,
your attic, that storage unit you're renting – anything you don't
really need. Turn it into cash.
Consolidate: Cut your
expenses to the bone and consolidate your assets. The best way to do that is
to buy gold and silver in cash form (coins) and put them away as savings. The
other critical element is getting a major portion of your assets offshore.
Speculate: With the
government creating bubbles through its mammoth spending programs, and other
bubbles popping, like the collapse of more major corporations, take chances
on winning big on bets placed on these trends. It's possible in such volatile
times to make a lot of money, just as you do for subscribers to the International Speculator, and Marin does for the Energy
Report.
Create: In the coming years, the
world is likely to change as radically as it did entering the industrial
revolution. This is going to be a really major change, economically,
politically, technologically, demographically, socially, militarily –
the whole ball of wax. This is a good time to look around and ask yourself, not, "Who will give me a job?" but,
"What goods and services can I provide that people will need in the
future and pay me for?" What worked during the late Long Boom won't work
– in order to create, you're going to have to
think creatively.
L: I guess I won't be working on a business plan to
become a personal trainer.
Doug: [Laughs] Nor is becoming a
barista a good plan for personal survival at this point.
L: Seriously, I've listened to you, Doug. As you
know, I've decided to buy a lot in your Estancia de Cafayate
project in Argentina, I'm consolidating, liquidating, and creating –
and speculating, that's what I breathe, drink, and eat. Thus far, it's made a
huge, positive difference in my life. I sincerely hope our readers are doing
or will do the same.
Doug: I know you are. I just wish
everyone was as quick a study.
L: Thanks boss. Until next time.
Doug: Talk to you soon.
[To read the full 8-page interview with Doug Casey and what he thinks
will happen to the American middle class, sign up here.]
Doug Casey
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