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February 2009
In their annual forecast edition, the
editors of
BIG GOLD asked Casey Research Chairman and contrarian
investor Doug Casey to provide his predictions and thoughts on
issues everyone’s thinking about these days. Read what he has to say
on the economy, deficits, inflation, and gold…
The $1.1 Trillion Budget Deficit
My reaction is that the people in the government are totally out of
control. A poker player would say the government is “on tilt,”
placing wild, desperate bets in the hope of getting rescued by good
luck.
The things they’re doing are not only unproductive, they’re the
exact opposite of what should be done. The country got into this
mess by living beyond its means for more than a generation. That’s
the message from the debt that’s burdening so many individuals; debt
is proof that you’re living above your means. The solution is for
people to significantly reduce their standard of living for a while
and start building capital. That’s what saving is about, producing
more than you consume. The government creating funny money – money
out of nothing – doesn’t fix anything. All it does is prolong the
problem and make it worse by destroying the currency.
Over several generations, huge distortions and misallocations of
capital have been cranked into the economy, inviting levels of
consumption that are unsustainable. In fact, Americans refer to
themselves as consumers. That’s degrading and ridiculous. You should
be first and foremost a producer, and a consumer only as a
consequence.
In any event, the government is going to destroy the currency, which
will be a mega-disaster. And they’re making the depression worse by
holding interest rates at artificially low levels, which discourages
savings – the exact opposite of what’s needed. They’re trying to
prop up a bankrupt system. And, at this point, it’s not just
economically bankrupt, but morally and intellectually bankrupt. What
they should be doing is recognize that they’re bankrupt and then
start rebuilding. But they’re not, so it’s going to be a disaster.
The U.S. Economy in 2009
My patented answer, when asked what it will be like, is that this is
going to be so bad, it will be worse than even I think it’s going to
be. I think all the surprises are going to be on the downside; don’t
expect friendly aliens to land on the roof of the White House and
present the government with a magic solution. We’re still very early
in this thing. It’s not going to just blow away like other post-war
recessions. One reason that it’s going to get worse is that the
biggest shoe has yet to drop... interest rates are now at all-time
lows, and the bond market is much, much bigger than the stock
market. What’s inevitable is much higher interest rates. And when
they go up, that will be the final nail in the coffins of the stock
and real estate markets, and it will wipe out a huge amount of
capital in the bond market. And higher interest rates will bring on
more bankruptcies.
The bankruptcies will be painful, but a good thing, incidentally. We
can’t hope to see the bottom until interest rates go high enough to
encourage people to save. The way you become wealthy is by producing
more than you consume, not consuming more than you produce.
Deflation vs. Inflation
First of all, deflation is a good thing. Its bad reputation is just
one of the serious misunderstandings that most people have. In
deflation, your money becomes worth more every year. It’s a good
thing because it encourages people to save, it encourages thrift.
I’m all for deflation. The current episode of necessary and
beneficial deflation will, however, be cut short because Bernanke,
as he’s so eloquently pointed out, has a printing press and will use
it to create as many dollars as needed.
So at this point I would start preparing for inflation, and I
wouldn’t worry too much about deflation. The only question is the
timing.
It’s too early to buy real estate right now, although a fixed-rate
mortgage could go a long way toward offsetting bad timing. It would
let you make your money on the depreciation of the mortgage, as
opposed to the appreciation of the asset. Still, I wouldn’t touch
housing with a 10-foot pole – there’s been immense overbuilding,
immense inventory. And people forget: a house isn’t an investment,
it’s a consumer good. It’s like a toothbrush, suit of clothes, or a
car; it just lasts a little bit longer. An investment – say, a
factory – can create new wealth. Houses are strictly expense items.
Forget about buying the things for the unpaid mortgage; before this
is over, you’ll buy them for back taxes. But then you’ll have to
figure out how to pay the utilities and maintenance. The housing
bear market has a long way to run.
The U.S. Dollar and the Day of
Reckoning
It’s very hard to predict the timing on these things. The financial
markets and the economy itself are going up and down like an
elevator with a lunatic at the controls. My feeling is that the fate
of the dollar is sealed. People forget that there are 6 or 8
trillion dollars – who knows how many – outside of the United
States, and they’re hot potatoes. Foreigners are going to recognize
that the dollar is an unbacked smiley-face token of a bankrupt
government. My advice is to get out of dollars. In fact, take
advantage of the ultra-low interest rates; borrow as many dollars as
you can long-term and at a fixed rate and put the money into
something tangible, because the dollar is going to reach its
intrinsic value.
The Recession
This isn’t a recession, it’s a depression. A depression is a period
when most people’s standard of living falls significantly. It can
also be defined as a time when distortions and misallocations of
capital are liquidated, as well as a time when the business cycle
climaxes. We don’t have time here, unfortunately, to explore all
that in detail. But this is the real thing. And it’s going to drag
on much longer than most people think. It will be called the Greater
Depression, and it’s likely the most serious thing to happen to the
country since its founding. And not just from an economic point of
view, but political, sociological, and military.
For a number of reasons, wars usually occur in tough economic times.
Governments always like to find foreigners to blame for their
problems, and that includes other countries blaming the U.S. In the
end, I wouldn’t be surprised to see violence, tax revolt, or even
parts of the country trying to secede. I don’t think I can
adequately emphasize how serious this thing is likely to get.
Nothing is certain, but it seems to me the odds are very, very high
for an absolutely world-class disaster.
Gold’s Performance in 2008
The big surprise to me is how low gold is right now. It’s well known
that even if we use the government’s statistics, gold would have to
reach $2,500 an ounce to match its 1980 high. I don’t necessarily
buy the theories that the government and some bullion banks are
suppressing the price of gold. Of course, with everything else going
on, the last thing the powers-that-be want is a stampede into gold.
That would be the equivalent of shooting a gun in a crowded theatre;
it could set off a real panic. But at the same time, I don’t see how
they can effectively suppress the price. Either way, the good news
is that gold is about the cheapest thing out there. Remember, it’s
the only financial asset that’s not simultaneously someone else’s
liability. So I would take advantage of today’s price and buy more
gold. I know I’m doing just that.
Gold Volatility
Gold will remain volatile but trend upward. I don’t pay attention to
daily fluctuations, which can be caused by any number of trivial
things. Gold is going to the moon in the next couple of years.
Gold Stocks
Last year, it seemed to me that we were still climbing the Wall of
Worry and that the next stage would be the Mania. But what I failed
to read was the public’s indirect involvement through the $2
trillion in hedge funds. On top of that, while the prices of gold
stocks weren’t that high, the number of shares out and the number of
companies were increasing dramatically. Finally, the costs of mining
and exploration rose immensely, which limited their profitability.
The good news is that relative to the price of gold, gold stocks are
at their cheapest level in history. I still have my gold stocks and
the fact is, I’m buying more. I’m not selling, because I think we’re
starting another bull market. And this one is going to be much
steeper and much quicker than the last one. I’m not a perma-bull on
any asset class, but in this case I’m forced to go into the gold
stocks. They’re the cheapest asset class out there, and the one with
the highest potential.
***
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***
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