Doug Casey: “It’s a dead-man-walking economy”

Doug: Lobo, get out your mower; it’s time to cut down some green shoots again, and debunk a bit of the so-called recovery.

Louis: Ah. I have to say, Doug, the so-called recovery is looking more than “so-called” to a lot of smart folks. Even our own Terry Coxon says the recovery is real, albeit weak.

Doug: Terry’s probably looking at it by the numbers, some of which are reported to be improving. But let’s come back to the numbers later and start with fundamentals. The first order of business, as usual, is a definition: a depression is a period of time in which the average standard of living declines significantly. I believe that’s what we’re seeing now, whatever the numbers produced by the politicians may seem to tell us.

L: I was just shopping for food and noticed that the bargain bread was on sale at two for $5. My gas costs almost as much per gallon. That’s got to hurt a lot of people, especially on the lower income rungs. I don’t need to ask; a member of my family just got a job that pays $12 per hour – about three times what I made working for the university food service back when I was in college – and it’s not enough to cover his rent and basic bills. If his wife gets similar work, they’ll make ends meet, but woe unto them if anyone in their family crashes a car or requires serious medical treatment.

Doug: That’s just what I mean. Actually, the trend towards both partners in a marriage having to work really started in the early ’70s – after Nixon cut all links between the dollar and gold in August of 1971. Before then, in the “Leave It to Beaver” era, the average family got by quite well with only the husband working. If he got sick or lost his job, the wife was a financial backup system. Now, if something happens to either one, the family is screwed.

I think, from a very long-term perspective, historians will one day see the ’60s as the peak of American prosperity – certainly relative to the rest of the world… but perhaps even in absolute terms, even taking continued advances in technology into account. Maybe the ’59 Cadillac was the bell ringing at the top of that civilizational market.

My friend Frank Trotter, president of EverBank, was just telling me that the net worth of the median US citizen is only $6,000. That’s the median, meaning that half of the people have less than that. Most people don’t even have enough stashed away to buy the cheapest new car without going into debt. It used to be that people bought cars out of savings, with cash. Now they have to finance them over at least five years… or lease them – which means they never ever have even that trivial asset, but a liability in the form of a lease.

The bulk of the 49 percent below this guy don’t even have that – with the concentration of wealth among the top one percent, most of those below average have seriously negative net worth, at least compared to their earning capacity. In other words, the US, Europe, and other so-called First-World countries are in a wealth-liquidation cycle that will be as profound as it will be protracted.

By that I mean that people are on average consuming more than they produce. That can only be done by living out of capital – consuming savings – or accumulating debt. For a time, this may drive corporate earnings up, and give this dead-man-walking economy the appearance of returning health, but it’s essentially, necessarily, and absolutely unsustainable. This is an illusion of recovery we’re seeing – the result of our Wrong-Way Corrigan politicians continuing to encourage people to do the exact opposite of what they should do.

L: Which is?

Doug: Save. People shouldn’t be getting new cars, new TVs, and new clothes. They should be cutting expenses to the bone.

The Obama administration, just like the Baby Bush administration before it – there really is no great difference between the Evil Party and the Stupid Party – and its minions in the US and its cronies around the world, stubbornly stick to the bankrupt idea that economic growth is driven by consumption. This is confusing cause and effect. Healthy consumption follows profitable production in excess of consumption, resulting in savings – accumulated capital – that can either be spent without harm or invested in future growth.

Consumption doesn’t cause an economy to grow at all. To paraphrase: “It’s productivity that creates wealth, stupid!”

L: Policies aimed at encouraging consumption, instead of increasing production, are what turned the savings rate negative in the US and resulted in the huge sovereign debt issues we’re seeing in supposedly rich countries…

Doug: Well, the governments themselves have spent way more than they had or ever will have, and that’s par for the course when you believe spending is a virtue. However, it’s the false signals government interference sends to the market that caused the huge malinvestments that only began to go into liquidation in 2008. That has to do with another definition of a depression: It’s a period of time when distortions and malinvestments in the economy are liquidated.

Unfortunately, that process has barely even started. In fact, since the bailouts started in 2008, these things have gotten much worse. If the government had gone cold turkey back then, cut its spending by at least 50% for openers, and encouraged the public to do the same, the depression would already be over, and we’d be on our way to real prosperity. But they did just the opposite. So we haven’t yet entered the real meat grinder…

L: Those false signals the government sends to the market being artificially low interest rates?

Doug: Yes, and Helicopter Ben’s foolish leadership in the wholesale printing of trillions of currency units all around the world – I don’t really want to call dollars, euros, yen, and so forth money anymore. When individuals and corporations get those currency units, they think they’re wealthier than they really are and consume accordingly. Worse, those currency units flow first to the state – which feeds it power – and favored corporations, which get to spend it at old values. It’s very corrupting. There is also an ongoing regulatory onslaught – the government has to show it’s “doing something” – which makes it much harder for entrepreneurs to produce.

In addition, keeping interest rates low encourages borrowing and discourages saving – just the opposite of what’s needed. I don’t believe in any state intervention in the economy whatsoever, but in the crisis of the early 1980s, then-Fed Chairman Paul Volcker headed off a depression and set the stage for a strong recovery by keeping rates very high – on the order of 15-18%. They can’t do that now, of course, because with the acknowledged government debt at $16 trillion, those kind of rates would mean $2.5 trillion in annual interest alone – more than the government takes in taxes.

At this point, there’s no way out. And there’s much more tinkering with the system ahead, at the hands of fools who remain convinced they know what they’re doing, regardless of how abject their past failures have been.

L: And yet, the interventions seem to be working. The “orderly default” in Greece seems to have saved the Eurozone for now, and critically important employment figures in the US show definite signs of improvement.

Doug: Perhaps, but let’s take a closer look. I advocate the Greek government defaulting, overtly and immediately, on 100% of its debt, for several reasons. First, it would punish those who lent it money to do all the stupid and destructive things it’s done. Second, it would ensure that the Greek government wouldn’t be able to borrow again for a very long time. Third, it would liberate young and yet unborn Greeks, who are being turned into serfs by all that debt. It would also mean that most European banks would fail. Tough luck for those who relied on them. When new banks are established, it will serve as a lesson to people to be more careful about where they put their capital.

Anyway, it would be much less of a catastrophe than the way we’re currently heading.

Here in the US, the twelve-month fiscal deficit is still over $1.2 trillion, an extreme situation that is gutting the value of the dollar, because it’s mostly financed by the Fed buying US debt. It’s temporarily expanded the eye of the storm we’re in, but it’s done nothing to dissipate the storm itself. Their easy-money policies may have bought them a little more time, but they will only make it worse when we do exit the eye of the storm.

There’s a third definition of a depression that I use: a depression is the end phenomenon of an inflation-caused business cycle. Inflation is the sole cause of business cycles, and inflation is caused by governments and their central banks printing money. The government – the state – is 100% responsible for society’s economic problems. But it arrogantly represents itself as the cure. And people believe it. There’s no hope until the psychology of the average person changes.

L: As Bob LeFevre used to say: “Government is a disease masquerading as its own cure.” Want to update us on when you think the economy will return to panic mode?

Doug: Earlier this year, I was expecting it sooner than I do now. Unless some black-swan event upsets the apple cart suddenly, I would not expect us to exit the eye of the storm at least until after the US presidential elections this fall. Maybe not until early 2013, as the reality of what’s in store sinks in. I pity the poor fool who’s elected president.

In a way, I hope it’s Obama who wins, mainly because the worthless – contemptible, actually – Republican candidates yap on about believing in the free market, which means if one of them is somehow elected, the free market will be blamed for the catastrophe. Too bad Ron Paul will be too old to run in 2016, assuming that we actually have an election then…

L: So, what about those numbers, then? Employment is up, and the oxymoronic notion of a “jobless recovery” was one of our criticisms before…

Doug: Yes, but look at the jobs that have been spawned; they are mostly service sector. Such jobs can create wealth for certain individuals – it looks like we’ve put more lawyers to work again, as well as waiters and paper-pushers – but they don’t amount to increased production for the whole economy. They just reshuffle the bits around within the economy.

L: Unlike my favorite – mining – which reported 7,000 new jobs in the latest report, if I recall correctly.

Doug: Yes, unlike mining, which was more of an exception than the rule in those numbers. But that’s making the mistake of taking the government at its word on employment figures. As we’ve discussed before, if you look at John Williams’ Shadow Stats, which show various economic figures as the US government itself used to calculate them, unemployment has actually reached Great Depression levels.

The US government is dishonestly fudging the figures as badly as the Argentine government – which is, justifiably, viewed as an economic laughingstock in most parts of the world. One reason things are going to get much worse in the US is that many of those with economic decision-making power think Cristina Fernandez Kirchner is a genius. A little while ago, there was an editorial in the New York Times – the mouthpiece for the establishment – written by someone named Ian Mount. Get a load of this. I’ve got it in front of me.

If you can believe it, the author actually says: “Argentina has regained prosperity thanks to smart economic measures.” The Argentine government “intervened to keep the value of its currency low, which boosts local industry by making Argentina’s exports cheaper abroad while keeping foreign imports expensive. Argentina offers valuable lessons … government spending to promote local industry, pro-job infrastructure programs and unemployment benefits does not turn a country into a kind of Soviet parody.”

Well, no, I guess it turns it into something the US can ape. He goes on: “Argentina is hardly a perfect parallel for the United States. But the stark difference between its austere policies and low growth of the late 1990s and the pro-government, high-growth 2000s offers a test case for how to get an economy moving again. Washington would do well to pay attention.”

The guy has obviously never been here, though he admits that “Argentina is far from perfect.” His modest concession is that the taxes to imports and exports have “scared away some foreign investment, while high spending has pushed inflation well over 20 percent. And it would be laughable to suggest that the United States follow its lead and default on its debt.”

When I first read the article, I thought I was reading a parody in The Onion. I love Argentina and spend a lot of time down here. It’s a fantastic place to live – but not because of the government’s economic policies. Its only competition in state stupidity is Brazil, which regularly destroys its currency.

Fortunately, though, the Argentine government is quite incompetent at people control, unlike the US. It leaves you alone. And there’s a reasonable chance the next president down here won’t be actively stupid, which isn’t asking much. But it’s amazing that the NYT can advocate Argentine government policy as something the US should follow. A collapse of the US economy would be vastly worse than that of the Argentine economy – the US dollar is the world’s currency.

Here in Argentina they’re used to it and prepared for it to a good degree. Very unlike in the US.

L: In the US, the welfare state has bloated beyond imagination. The damage already done is less visible because where there used to be private charity soup kitchens, there are now “food stamps” that look like ordinary credit cards, making the destitute among us look like everyone else at the supermarket. There are 50 million recipients, and that number is growing, not declining.

By the way, John Williams is a speaker at the Casey Research Recovery Reality Summit we have coming up, April 27-29 in Weston, Florida. Perhaps this would be a good time to invite our readers down to hear John’s take on what the numbers really are – and to meet us. We’ll both be there.

L: What are the investment implications if the Crash of 2012 gets put off until the end of the year, or even becomes the Crash of 2013?

Doug: There are potentially many, but generally, the appearance of economic activity picking up is bullish for commodities, especially energy and raw materials like industrial metals and lumber. That’s not true for gold and silver, so we might see more weakness in the precious metals in the months ahead. I wouldn’t count on that, however, because government policy is obviously inflationary to anyone with any grasp of sound economics. That will keep many investors on the buy side.

Plus, the central banks of the developing world – China, India, Russia, and many others – are constantly trading their dollars for gold. There are perhaps seven trillion dollars outside the US, and about $600 billion more are sent out each year via the US trade deficit.

L: I know I bought some gold and silver in the recent dip and would love to have a chance to do so at even lower prices ahead.

Doug: That’s the logical thing to do, given the fundamental realities we started this conversation with, but a lot of people will be scared into selling if gold does retreat. A good number will sell low, after buying high – happens every time, and is a big part of why commodities have such a tricky reputation.

Most investors just don’t have the strength of conviction to be good speculators. Instead of looking at the world to understand what’s going on and placing intelligent bets on the logical consequences of the trends, regardless of what anyone else says or does, they go with the herd, buying when everyone else is buying and selling when everyone else is selling. This inverts the “buy low and sell high” formula. They let their thoughts be influenced by newspapers and the words of government officials.

L: In other words, everything you see calls for gold continuing upward for some time – years – making any big retreats along the way great buying opportunities for those with the guts to act on them. Same for silver, and doubly so for the precious-metals mining stocks, and triply so for the junior stocks.

Doug: Just so. I look forward to the day when I can sell my gold for quality growth stocks – but we’re nowhere near that point. But silver might correct less than gold if gold corrects due to the appearance of economic recovery – silver is, after all, an industrial metal as well as a monetary one.

L: Agreed. And I can see the positive implications for energy as well, but Marin – Casey Research’s chief energy investment strategist – was just saying that natural gas has dropped below $2. That’s apparently starting to force oil and gas companies to remove reserves from their books – because reserves need to be economic, not just exist – which the market isn’t going to like. He sees some great bargains on solid companies ahead, and not just “gas” companies as many oil companies, including the major ones, produce both. Marin said one major company gets half its top line from gas sales. This is a huge shift.

Doug: The devil is always in the details – it’s dangerous to oversimplify things, painting with a broad brush, as in, “A recovering economy will be bad for gold” or “A recovering economy will be good for energy.” You have to understand these markets well enough to really see how different forces and factors will affect them.

Marin is unquestionably one of the sharpest analysts I’ve met in my life. He’s actually something of a genius, both academically smart and very street smart, in addition to being a workaholic. He runs a lot of my money. He’s done spectacularly well, and I expect him to do even better, because he constantly learns. Not much gets by him.

L: Good reminder. So, if we’re looking at signs of economic recovery for a time, would you buy into copper, nickel, or other base-metal plays?

Doug: Well, just because we might see signs of a temporary economic recovery, that doesn’t mean we will – and even if we do, they could easily be swept aside by any number of events, such as Europe taking another turn for the worse, or Japan or China starting to come apart at the seams. But, as a hedge, some near-term bets on industrial metals might not be a bad thing.

L: How about agriculture?

Doug: That’s one thing for which demand can never go down. Economic upturns or downturns may affect the mix of what people eat, but they won’t stop people from eating – or, if they do, we’ll have more pressing concerns than which way to play the markets. I remain especially bullish on cattle.

L: Anything else?

Doug: [Laughs] Many things. The right technology companies should do well; finding ways to do things faster-better-cheaper always adds value. Select mainstream equities in currently profitable sectors might do well as well – but I’d be very careful there. I can’t stress enough how close to the edge of collapse the global economic house of cards is – it could take another year or more to topple, or it could be starting today.

L: Which leads to the other reason for owning precious metals – not as a speculation on skyrocketing prices, nor as an investment for good yield, but for prudence.

Doug: Yes. Gold remains the only financial asset that is not simultaneously someone else’s liability. Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naïve, foolish, or all three.

Look, we saw it coming, but everyone in the world could see Humpty Dumpty fall off the wall in 2008. Now we’re just waiting for the crash at the bottom, and no amount of wishful thinking otherwise is going to change that. It’s a truly dangerous world out there, and blue chips are no longer the safe investments they once seemed to be. You don’t have to be a gold bug to see the wisdom of allocating some capital – and not just a token amount – to cover the possibility that I’m right about what’s coming.

There’s some opportunity cost associated with taking out this kind of insurance, but it’s not catastrophic if I’m wrong, and the cost of failing to do so if I’m right is catastrophic. That really is the bottom line.

L: Financially. If you’re right about the coming Greater Depression, people also need to take steps to batten down the hatches on their physical life arrangements.

Doug: Right. As we’ve said many times now, your government is the greatest threat to your well-being these days. If at all possible, you should be taking steps to diversify your political risk. Foreign bank accounts are not illegal for most people in most countries, though they need to be reported. Getting one is a good start.

Buying real estate I like in various countries is one of my favorite ways to diversify risk in my life. That’s partly because I like speculating in real estate, but much more so because whichever government thinks you’re its tax slave can’t force you to repatriate real estate you own abroad. Most of all, it’s because it’s good to have places to go if things get ugly wherever you happen to be.

L: Very well. Any particular triggers you think we should watch out for – warning signs that we really are about to exit the eye of the storm?

Doug: In the US, the Fed being forced to raise interest rates would be one, or inflation getting visibly out of control – which would force a change in interest rates – would be another. Who knows – Obama getting reelected could tip the scales. War in the Middle East could do it, or, as we already mentioned, China or Japan going off the deep end. The ways are countless. Black swans the size of pteranodons are circling in squadron strength. A lot of them are coming in for a landing.

People will just have to stay sharp – sorry, there’s no easy way to survive a depression. As my friend Richard Russell says, “In a depression, everybody loses. The winner is the guy who loses the least.” It will take work and diligent attention to what’s going on in the world and around us. We at Casey Research will do our best to help, but each of us is and must be responsible for ourselves.

L: Okay then, thanks for the guru update. No offense, but in spite of the investments I’ve made betting that you’re right, I hope you’re wrong, because the Greater Depression is going to destroy many lives, and the famines and wars it spawns even more – millions, I’m sure. Maybe more. The mind balks.

Doug: Oh, I agree. I only wish I could believe otherwise, because I’m sure it’s going to be even worse than I think it will be… although I hope to be watching it in comfort and safety on my widescreen TV, not out my front window.

L: I think we need to find something more upbeat to talk about next time.

Doug: [Chuckles] Maybe. If there’s something important in the news, we should cover it. It’s sure to be fodder for comedy – at least black comedy.

L: As you say. ‘Til next week then.

[Do you think the economic recovery is real – and how do you protect yourself from the potential fallout? Meet 31 financial superstars in person and hear what they have to say: David Stockman, former director of the Office of Management and Budget under President Reagan… James Rickards, Tangent Capital Partners, author of Currency Wars… Lacy Hunt, Hoisington Investment Management… John Williams, Shadow Government Statistics… Porter Stansberry, investment advisor… John Mauldin, renowned financial expert… and many more.

You can see and rub elbows with all of them, at the Casey Research Summit “Recovery Reality Check,” April 27-29, in Weston, FL. There are only a few seats left – get yours now.]