It is a deal with the
devil: Governments churn out more and more cash for the promise of continued
prosperity. But the day of reckoning is near, according to Doug Casey,
chairman of Casey Research and an expert on crisis investing. As the epic
battle between inflation and deflation continues, Casey discusses his
predictions for the new world market in this exclusive interview with The Gold Report.
The Gold Report: There will be a Casey
Research Summit on "Navigating the Politicized Economy" in
Carlsbad, Calif., in September. The thesis behind the summit is that
governments have made a Faustian bargain, a pact with the devil,
that saves the empire with overspending, but drives it to the brink of
collapse by creating fiat currencies. Doug, where in that story is the
Doug Casey: It's extremely late in
the day. Since World War II, and especially since 1971 when the link between
the dollar and gold was broken, governments around the world have accepted
the Keynesian theory of economics, which boils down to a belief that printing
money can stimulate the economy and create prosperity. The result has been to
create huge amounts of individual and government debt. It's become
insupportable. All it has done is purchase a few extra years of artificial
prosperity, and we're heading deeper into a very real depression as a result.
"We have been
consuming more than we have been producing and living above our means."
Let me define the word
depression. It's a period of time when most peoples' standard of living
declines significantly. It can also be defined as a time when distortions and
misallocations of capital—things usually caused by government
We have been consuming
more than we have been producing and living above our means. This has been
made possible by 1) borrowing against projected future revenues and 2) using
the savings of other people. The whole thing is going to fall apart. A new
monetary system of some type is going to have to necessarily rise from the
ashes. That's a major theme in the conference that's coming up.
TGR: Will more quantitative
easing (QE) give us another couple years of artificial prosperity?
DC: Most unlikely. We're at
the end of the story, not the beginning. More QE—I hate to call it that
because it's really just printing money. I hate euphemisms, words that are
intended to make something sound better than it really is. Euphemisms, like
exaggerations, are the realm of politicians and comedians. Anyway, the next
round of money printing is going to result in radical and rapid retail price
rises. There is no prosperity possible from this, rather the opposite.
TGR: Last time we spoke, you said that we are
entering into a depression greater than in 1933. Can you describe how it
might be different?
DC: What we experienced in
the 1930s was a deflationary depression where billions of dollars were wiped
out with a stock market collapse, bond defaults and bank failures.
Inflationary money that was created since the formation of the Federal
Reserve in 1913 was wiped out. Prices went down. This depression will be
different because governments have much more power. They'll try to keep uneconomic
operations from collapse, they'll prop them up, as we saw with Fannie Mae and
General Motors. They'll create more money to keep the dead men walking. They
won't allow the defaults of money market instruments. They will make efforts
to maintain the dollar mark on money market funds. They'll attempt to keep
building the pyramid higher. It's foolish, indeed idiotic. But that's what
TGR: Which they've been
doing by printing money. The first rounds of money printing have gone into
the banking system, but the banking system has not allowed it to trickle back
out into bank loans. Does that open the possibility of deflation if money is
not moving out into the general economy?
DC: That's right. The
government created trillions in currency to bail out the banks. The banks
have taken it in to shore up their balance sheets, but they haven't lent it
out because they're afraid to lend and many people are afraid to borrow. That
currency is basically in Treasury securities at this point. Although money
has been created, it's not circulating.
"I believe that
governments have the power to create enough new currency to keep prices from
At some point, it's
going to move out. One consequence of this is that interest rates have been
artificially suppressed so that retail inflation is running much higher than
interest rates are compensating for it. At some point, rather than sitting on
hundreds of billions of dollars that are going to be inflated from under
them, the banks are going to do something with that money. It will go out
into the economy. Retail prices will start rising.
TGR: Do we need to see
another round of money printing to put us over the brink into a collapse? Or
will it happen even if they don't print more, because it's currently sitting
in the banks?
DC: They actually don't
have to create more money. It's just a question of whether the banks start
lending it and people start borrowing it. Another possibility is that the
foreigners holding about $7 trillion outside the U.S. get panicked and start
dumping them. I don't see any way around much higher levels of inflation
unless, of course, we have a catastrophic deflation, which we almost had with
the real estate collapse.
TGR: How much will Europe
play into this? It seems its governments are, at least according to the
popular press, more exposed to bankruptcy than the U.S. government.
DC: Europe is a full cycle
ahead of the U.S. Its governments and its banks are both bankrupt. It's a
couple of drunks standing on the street corner holding each other up at this
point. Europe is in much worse shape than the U.S. It's highly regulated,
highly taxed and much more socially unstable.
Europe is going to be
the epicenter of the coming storm. Japan is waiting in the wings, as is
China. This is going to be a worldwide phenomenon. Of course, the U.S. will
be in it, too. We're going to see this all over the world.
TGR: If Europe finally does
go over the brink, where it's been headed for more than a year, would that
also cause inflation in the U.S. or would you expect to get catastrophic
DC: This is an argument
that's been going on for at least 40 years. How is this all going to end:
catastrophic deflation or runaway inflation? The issue is still in doubt,
although I definitely lean toward the inflationary scenario. But will it
start in Europe? How will it start? These things only become obvious after
TGR: When you say
"lean," are you pretty convinced it's going to be inflationary?
DC: I think it's going to
be inflationary; in the 1930s, it was a deflationary collapse. Governments
are vastly more powerful and much more involved in the economy now than they
were then. I believe that they have the power to create enough new currency
to keep prices from going down. Somehow, moronically, they've conflated
higher prices with prosperity.
"Investors need to
look for real, productive wealth and consistent growth."
If we had a completely
free market economy, prices would constantly be dropping. That's a good
thing, because as prices constantly drop, it means money becomes more
valuable. That induces people to save money. When people save, it means that
they are producing more than they are consuming—that's a good thing.
The way governments have it structured today, however, prices are always
going up. That discourages people from saving because their
money is constantly worth less, which encourages them to borrow.
Inflation induces people to try to consume more than they produce, which is
unsustainable over the long run.
TGR: You are saying that if
the current value of your money is higher than the future value,
that encourages borrowing.
DC: Exactly. I don't see
any possible happy ending to this. We're approaching the hour of reckoning.
TGR: You have said that the
titanic forces of inflation and deflation are fighting an epic battle that
leads to extreme market volatility. But I am looking out there this summer
and thinking it's pretty calm. It seems like a very slow recovery. Gold is
settling around $1,600/ounce. The S&P 500 index is testing the 1,400
mark. Is this just a pause in the epic battle?
DC: Nothing goes straight
up or straight down. I just took a cross-country car trip from Florida, up
the East Coast to New York, and then out to Colorado. It was actually rather
shocking that many times I had trouble getting a motel room—even in the
middle of nowhere. The restaurants were full. The highways were full of cars.
It looked more like a boom than a depression. At the same time, our real
unemployment, figured the way they used to figure it in the early 1980s, is
about 16–20%. People are living off their credit cards. I believe it's
the same in Europe.
TGR: It seems as if we
haven't had much market volatility other than the technical glitch at Knight
Capital this month. Do you expect market volatility to come back into play?
DC: On the one hand, some
people are going to go into the stock market when inflation reasserts itself
because at least it represents real value. They can invest in companies that
actually produce things and have real assets. On the other hand, the stock
market itself by any historic parameter is overvalued right now in terms of
dividend yields, price-to-book value and price-to-earnings ratio.
I have no interest in
being in the broad stock market. I feel very confident that the bond market,
especially, is going to be very volatile. That's the one place where it seems
that there's a real bubble, and it's one of the biggest bubbles in history.
It's the worst possible place for capital right now. It's a triple
threat—higher interest rates, default risk, and currency risk.
Even reading the popular
press, you can see investors in a desperate reach for yield. They're only
getting a fraction of a percent in their bank accounts. So, to get some
income, they are buying all kinds of bonds, even those of low quality, just
to get 2, 3, 4 or 5% in yield. The bond market is trading at insane levels as
a result of the government having driven interest rates down close to zero in
a vain effort to stimulate the economy.
The bond market is much
bigger than the stock market. When interest rates start heading up, trillions
in bond values will be wiped out, in addition to causing a lot of corporate
bankruptcies—that's why deflation isn't completely out of the question.
In addition, higher rates could really further devastate the real estate
market, which has been making a mild recovery. And, of course, higher
interest rates are the enemy of high stock prices.
TGR: One of the keynote
speakers at the upcoming summit is Thomas Barnett,
author of "The Pentagon's New Map: War and Peace in the Twenty-First
Century." He's going to be talking about geopolitics today and tomorrow.
From your viewpoint, in today's age of nationalism and conflicts among
nations, is it important for investors to know about geopolitics in order to
pick junior mining stocks?
DC: Most certainly. Very
few investors are putting any money into the junior mining stocks right now,
which tells me that it's a good time to start looking at them. However,
investors need to have a grip on geopolitics in order to intelligently assess
which companies to buy. There are 200 nation states in the world and they all
have different policies. Investors have to avoid putting money into a
location where a company will never be able to develop a mine even if it's
lucky enough to find an economic deposit.
TGR: You developed the
concept of the "8 Ps" for stock evaluation. Typically, you say that
the people are the No. 1 thing that you look at. Is politics starting to move
up in importance as a determining factor?
DC: People are still the
most important because good people who are running a company will choose an
intelligent jurisdiction to develop. It's also a question of whether the
world at large is becoming more stable or less stable. I think it's becoming
less stable, because all the governments in the Western world are really
bankrupt and are, therefore, going to be looking for more tax revenue. Mining
companies are going to be in its sights because mining companies can't move
their assets; they are the easiest thing in the world to tax. The good news
is that makes mining stocks very volatile, and sometimes extremely cheap.
Volatility can be your best friend.
But economically, as
things get tougher in the Western world, that will hurt the developing world,
too, because it depends on marketing its raw materials. If the Western world
is using fewer raw materials, it's going to put pressure on those developing
TGR: Doug, you're talking a
lot about geopolitical unrest. The world is becoming less stable. In 2010, I
heard a lot of discussion about gold going into a mania stage, specifically
for many of the reasons we're talking about now. As we approach 2013, will we
run into that discussion of gold mania again?
DC: It's not likely to
happen until we reach much higher levels of inflation and we have something
approaching financial chaos—but that's exactly where we're headed, and
soon. The mania is likely to be fear-driven much more than greed-driven. Gold
is still in the climbing-the-wall-of-worry stage. Mania is still in the
future. It's going to happen. I feel confident of that. There's going to be a
rush to gold.
TGR: One of the people you
like to quote quite often is Richard Russell. There's a specific quote I've heard
you say a couple of times: "In a depression, everybody loses. The winner
is the guy who loses the least." In order to be that guy
who loses the least, is it a viable strategy to stay out of the markets?
DC: It's almost impossible
to stay out of the markets because almost everybody has a pension program, an
investment retirement account or something of that nature. You have to put
the assets of that pension into something—the stock market, the bond
market or cash. Most people own real estate or their home. If the real estate
market gets hurt, you get hurt there. If you have wealth, what are you going
to do with it? It's not a good option to put $100 bills under your bed. Even
then, you're in the market for currency. That's one of the biggest problems with
inflation: It forces people to direct their attention to gambling in the
markets, as opposed to productive business.
There has been way too
much concentration on the financial markets over the last 50 years. This is
shown by the fact that roughly 22% of the U.S. economy is in financial
services, which is basically just moving money around. The financial services
business doesn't weave, spin or sew; it doesn't
produce anything. In a sound economy, the financial services sector would be
tiny, just big enough to facilitate transactions. It wouldn't be the mammoth
that it is today. It seems as if everybody is in the business of moving money
around, but the money they're moving around is just paper currency. It's
TGR: They are producing new
financial instruments. In a way, financial services companies are coming up
with alternative methods to build wealth.
DC: I question that.
Financial services don't actually build wealth. Real wealth is created by the
production of new technologies, food, metal or products. Financial services
serve a purpose, of course, but it isn't a real wealth creator. Today the
sector is more of a moving-paper fantasy.
Even what I do, which is
advising people on where to allocate their wealth, has always made me feel a
little bit sheepish because I'm not actually building a bridge or creating a
new engine or technology. I'm just telling people how to move things around.
If the economy were sound, 90% of the people in my line of work would be
doing something else. A speculator, basically, is someone who capitalizes on
politically caused distortions in the market. If we had a sound economy, the
government wouldn't be causing these distortions—and it would be much
harder to be a speculator.
Anyway, the whole
financial sector is bloated. By the time the bottom hits, the last thing that
people are going to want to hear about is the stock market, the bond market
or where to put their money. They're not going to want to read financial
newsletters because they're going to be so sick at the very thought of those
things. People won't ask how the markets are doing; they won't even care if
they exist. They're going to get back to the basics. That is the foundation
for the next boom. But that time is a good many years in the future.
TGR: But you are still in
the business of helping investors move around assets. What would you say to
investors now on how they can protect or grow their wealth through the next
phase of volatility?
DC: First, it's very hard
to be an investor in a highly politicized environment. Investors need to look
for real, productive wealth and consistent growth. Speculators, on the other
hand, try to capitalize on the chaos that is caused by the myriad of
destructive government regulations, taxes, and, of course, currency
inflation. That's why I look at all markets, in all countries. But right now
there are very few bargains. At some point, for instance, real estate is
going to be of interest again. Not right now because governments everywhere
are going to raise taxes on it.
TGR: Would you put things
like technology, pharmaceuticals and healthcare in the category of real
DC: Very definitely. That's
why we have a technology letter. I've always been kind of a boy scientist;
technology interests me from an intellectual, as well as a financial, point
of view. Technology is the real mainspring of human progress. No question
The problem with the
medical industry is that it's being nationalized. It's very hard to do
anything with the U.S. Food and Drug Administration (FDA) as it is. It costs
$1 billion to develop a new drug today. Developing medical devices can be
almost as expensive. Even if something is approved by the FDA, if something
goes wrong, count on being sued by the plaintiff bar. It's a very high-risk
business, which is a pity. Living longer and better physically is one of the
most important things there is; medical businesses should be encouraged, not
pilloried. I've always said that the FDA kills more people every year than
the Defense Department does in the typical decade. But Boobus
americanus still thinks it's protecting him…
(Editor's note: Read more about investing in The Life Sciences Report.)
TGR: Are there other areas
for real or productive wealth?
DC: I read science
magazines all the time. There are more scientists and engineers alive today
than in all the history of the world put together. Hopefully, with the
continued blossoming of India and China—where students are generally
going into science and engineering as opposed to things like gender studies,
political science and English literature, which students idiotically are
doing in the West—there will be even more scientists and engineers 20
years from now.
What areas are they
going into? Nanotechnology, microbiology, robotics—these things will
blossom the way computers have over the last few decades. The problem when it
comes to investing in them is that they're increasingly highly specialized.
Investors need at least a sound layman's knowledge in order to know if
they're barking up the right tree or not, and that's hard. There's just not
enough time in the day to gain enough expertise for this type of thing. Of
course, that's the value of magazines and newsletters. The editors condense
information for readers to give them an intelligent layman's opinion.
TGR: Now we're back to the
importance of people. You do have to have some sense of the person who is
doing that analysis for you. It needs to be someone who's credible.
DC: Absolutely. That's the
advantage of having a newsletter over a magazine. In a magazine, you don't
always know what's going into the sausage that that writer of an article is
making. When you're dealing with a newsletter, you can get to know the editor,
what he's thinking, how expert he really is and what is his psychology. You
can learn if you can trust his opinion. Although I read both magazines and
newsletters, newsletters are much more valuable.
TGR: To bring this full
circle, I would imagine attending conferences where you meet these newsletter
writers or analysts face to face is also beneficial.
DC: Yes, it gives you a
smorgasbord of views. It's helpful in assessing the validity of the views to
be able to assess the personality of the writer and have a better
understanding of whether his views are actually credible. And it's a great
opportunity to ask questions.
TGR: Doug, you've given us
quite a bit of your time. I greatly appreciate it.
Read Doug Casey's
thoughts on the energy sector in The Energy Report exclusive, "Doug Casey Uncovers the Real Price
of Peak Oil."
Even if you can't attend
the "Navigating the Politicized Economy Summit," you can still
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Collection. Right now you can save $100 when you pre-order the 20+ hours of audio.
Doug Casey, chairman of Casey Research LLC, is the
international investor personified. He's spent substantial time in more than
175 different countries so far in his lifetime, residing in 12 of them. And
Casey literally wrote the book on crisis investing. In fact, he's done it
twice. After "The International Man: The Complete Guidebook
to the World's Last Frontiers" in 1976, he came out with "Crisis
Investing: Opportunities and Profits in the Coming Great Depression"
in 1979. His sequel to this groundbreaking book, which anticipated the
collapse of the savings-and-loan industry and rewarded readers who followed
his recommendations with spectacular returns, came in 1993, with "Crisis
Investing for the Rest of the Nineties." In between, Casey's
"Strategic Investing: How to Profit from the Coming Inflationary
Depression" broke records for the largest advance ever paid for a
Casey has appeared on
NBC News, CNN and National Public Radio. He's been a guest of David
Letterman, Larry King, Merv Griffin, Charlie Rose,
Phil Donahue, Regis Philbin and Maury Povich. He's been featured in periodicals such as Time, Forbes, People,
US, Barron's and the Washington Post—not to mention countless
articles he's written for his own websites, publications and subscribers.
Casey Research currently produces 11 publications on a variety of investment
sectors and maintains two websites.
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From time to time, Streetwise Reports LLC and its directors, officers,
employees or members of their families, as well as persons interviewed for
articles on the site, may have a long or short position in securities
mentioned and may make purchases and/or sales of those securities in the open
market or otherwise. Interviews are edited for clarity. Doug Casey was not
paid by Streetwise Reports for participating in this interview.