 Casey Files:
The Greater Depression
and What You Should Do About It
Doug Casey
The
International Speculator
Jun 26, 2008
For international investment
expert Doug
Casey, there's more than a recession on the horizon... he
recommends battening down now for the rough seas ahead... with
some special information about making sure your investments can
weather the coming storms.
I believe in the existence
of the business cycle. That's partly because almost everything
in life is cyclical, which has been recognized at least since
the tale about Joseph and the seven fat years and seven lean
years. The Austrian school of economic thinking explains why
the business cycle keeps coming around and does so without relying
on a soothsayer to interpret your dreams. I urge you to read
the appropriate chapters in either Crisis Investing for the
Rest of the 90's or Strategic Investing for a full
explanation. But, in a nutshell, government intervention in the
economy - through taxes, regulation and, most importantly, currency
inflation - causes distortions and misallocations of capital
that must eventually be unwound. The distortions degrade the
general standard of living, and the economy goes into a recession
(call that an incomplete cleansing). Or it goes into a depression
- wherein the entire sickly structure comes unglued.
The last real depression took
place in the 1930s. The economy very nearly went over the edge
again in the early '70s and again in the early '80s. Both times
massive re-inflation of the currency papered the problems over
(but at a cost). Meanwhile, most importantly, continuing technological
innovation and increased savings (motivated by the fear of bad
times) led to recovery. Since then we've had 25 years of what
Herman Kahn predicted would be "The Long Boom."
Unfortunately, much, much more
severe taxes, regulations, and inflation have caused much, much
more severe distortions in the economy - especially over the
last 15 years. And the boom was financed largely by debt, which
made everybody feel and act much wealthier than they really were.
It's as though you borrowed a million dollars and spent it all
on wine, song and high living. For a while, you'd have a high
standard of living and perhaps have a lot of fun. But eventually,
when you either paid the money back with interest or were forced
into bankruptcy, your standard of living would take a painful
drop. The U.S., in particular, has been living far above its
means, burning up its own capital and trillions more borrowed
from abroad.
This isn't news to readers
of International Speculator or even the intelligent layman
who follows the news. Oddly enough, there's one glaringly obvious
thing that is not in the news today at all. That's the fact that
interest rates - nominal rates too, but especially "real,"
after-inflation rates - are close to their lowest levels in history.
And in today's extraordinarily risky environment, they're artificially
low. This, and the reasons for it, should be headlines.
All over the world, but especially
in the U.S., currencies are being inflated radically; M3 is rising
at about 18% per year. Without exception, interest rates eventually
reflect inflation. Therefore interest rates are going to rise
radically. Governments are currently suppressing rates by lending
money cheaply and promiscuously, to keep both borrowers and commercial
lenders from going under. But rates are soon going to explode
-especially long-term rates. My guess is that we'll see at least
the levels of the early '80s, which would mean 15%+ for long-term
Treasury bonds. And I'll say that's coming within a couple or
three years at the outside.
The government wants low rates,
obviously, because low rates make it a lot easier for homeowners
to pay their mortgages, among other things. But they forget that
low rates also discourage saving - which is the one thing that
can actually bring down real rates. Officialdom is between a
rock and a hard place, and they're choosing to inflate the currency,
hoping to stave off an epidemic of bankruptcy among consumers
who borrowed and among the financial institutions that did the
lending. The effort will fail and both groups will go bankrupt,
simply because the whole society has been living above its means.
That will result in large-scale commercial bankruptcies and unemployment.
Higher interest rates will
absolutely hammer the economy.
It seems to me a near certainty
that we're about to enter something I have long called "The
Greater Depression." I suspect it will be inflationary (in
the direction of what Germany underwent in the early '20s, or
Zimbabwe today), rather than what the U.S. had in the '30s. I
should somehow trademark the term "Greater Depression,"
except that I'm sure Boobus americanus would then blame
me for it.
Here I'd like to pinpoint my
prime candidate for the Decline and Fall of the Roman Empire,
since it almost seems America has been reading pages from their
playbook since day one. Many reasons have been evoked for the
fall: moral turpitude, immigration, barbarian invasion, Christianity,
lead pipes, etc., etc. My candidate is economic stagnation brought
on by taxes, regulation and inflation. I'd love to discuss that
assertion in detail, but that's not what this article is about.
What should you do?
Reduce your standard of living
now (while the situation is still under control), greatly increase
your savings (in gold, which is real money) and rig for greatly
changed patterns of production, consumption, employment and business
for a considerable time. The hurricane that's just starting to
hit the economy will both trigger and worsen problems in other
areas. Starting with politics, because nearly everyone today
believes the ridiculous notion that the government should guide
the economy.
 Doug
Casey is a best-selling
author and chairman of Casey Research, LLC., publishers
of a variety of subscription-based advisories for independent-minded
investors. The above article is an extract from the International
Speculator, now in its 28th year.
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