The Good The Bad and The Ugly

Tuesday, October 5, 2010

The Daily Reckoning:Thoughts on the Greater Depression and Should The US government defaults on its debt?

By Doug Casey

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10/04/10 The Gold Report: Doug, at a recent conference you said that the US ought to default on its national debt now. Why that rather than letting it play out?

Doug Casey: Several other things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons. To start with, once the US government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it’s criminal to make indentured servants out of people who aren’t even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.

The debt will be defaulted on one way or another. The trouble is they’re almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That’s because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of dollars, they’re going to wipe them out financially.

It’s just horrible. Runaway inflation will reward the profligates who are in debt – people who’ve been living above their means. And punish the producers who’ve been saving and trying to build capital. That’s in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were.

TGR: But your belief is we’ll try to inflate our way out of it to pay for it.

DC: Don’t say “we.” Say the US government. I don’t consider myself part of the problem. Americans have to learn that the government isn’t “us.” It’s an entity that has its own interests, its own life, its own agenda. It views citizens as milk cows – or perhaps even beef cows – strictly as a means to its ends.

TGR: Whether it’s overt or by default, doesn’t that end up in the same place down the line?

DC: There are two ways they can default – one by saying, “We don’t have the money and we’re not going to pay you,” and the other by continuing to print up money and giving people the number of dollars that they’re owed, except the dollars are worthless. The first alternative is by far better, for many reasons we can’t fully explore now. But it’s going to be traumatic either way.

TGR: But the assumption that we could actually just print more dollars and pay off the debt implies that somewhere the debt will stabilize.

DC: Oh no. It doesn’t have to stabilize. To pay interest on the national debt, and to pay for additional spending, all the Federal Reserve has to do is buy bonds from the US government. It doesn’t have to stabilize at all. The government is most unlikely to cut back on its spending, most of which has become part of the social fabric – Medicare, Social Security, unemployment benefits, food stamps, corporate bailouts, continuing foreign wars, domestic “security”…These people are crazy enough that it could get like Germany in the ‘20s or Zimbabwe a few years ago.

 

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TGR: At what point do we tip over and turn into a situation such as Zimbabwe or the Weimar Republic?

DC: At the moment we’re in an economic twilight zone or, if you wish, the eye of a hurricane. There is apparent stability in the economy. The stock market’s high. The bond market’s high. Only the real estate market is in visible trouble. Retail prices are level; they’re not going up and maybe they’re even going down in some cases. This is a temporary situation. We will inevitably – and soon – hit the other side of the storm. At some point those trillions of dollars created by the US government – and many other governments around the world have created trillions of currency units – are going to have an effect. When will that be? The timing is uncertain. But I think it’s going to be soon.

TGR: Will it be rapid?

DC: If these things were perfectly predictable, it would be easier to dodge the bullet. This is an almost unique time in world economic history, and I think we’re not only going to have economic consequences, but social and political consequences, and very likely military consequences. So hold on to your hat.

TGR: To protect what individual wealth we may have, you’ve recommended selling real estate and renting, holding assets outside the United States, owning gold, etc. When we’re out of the eye and in the thick of this economic hurricane, what types of equity investments should people be holding?

DC: Now is a very bad time to have most kinds of equities; stocks in general are very overpriced, by almost every parameter. I’m not looking to sell my gold until I can buy solid blue chip stocks for dividend yields in the 8% to 10% area. That’s after they cut their current dividends. Although it’s certainly not the bargain it was 10 years ago. Nonetheless gold will go higher. Stocks will go lower. I don’t know exactly when I’ll sell my gold and buy stocks, but it will be when there’s a panic into gold and when stocks are bargains.

I’m sure I’ll be afraid to make the trade when the time comes – but good trades almost always run counter to your emotions. Perhaps the tip-off will be when Newsweek or Time – if either still exists then – run a front cover with a golden bear tearing apart the New York Stock Exchange. I think it will be a generation before American real estate is a solid buy again. And the world at large will likely have quite a different character then.

TGR: I take your point about equities in general, but are you also staying away from gold equities? Or do you maybe see an opportunity there?

DC: They’re a special situation; on the one hand they are a play on gold, but on the other hand they’re stocks. There’s an excellent chance that with the trillions of currency units being created, the government inevitably will wind up inflating other bubbles. There’s a very good chance for a bubble in gold and a very big bubble in gold stocks. So I would say that they are an exception to other equities. We could see these juniors go up by an order of magnitude or more, even while most other stocks are going down. Historically, junior resource stocks are the most volatile class of securities in existence.

TGR: Might other sectors also be in that situation?

DC: My crystal ball is hazy, but it seems to me that junior resource stocks are the best speculative place in the equities market. There’ll probably be others, but I don’t see them very clearly at this time. I’m waiting to see what materializes. You have to look at all markets of all types, everywhere in the world, to find things that are overpriced, as well as things that are underpriced.

Most of the time the trend in any given market is uncertain. I prefer to act only when, in my subjective opinion, the odds are greatly in my favor, and when the potential return is a multiple of my investment. In other words, most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return. As to what’s going to happen over the next few years, I feel confident that we’ve entered upon the Greater Depression in earnest. It will be an extended period of time when most people’s standard of living drops significantly. But as I said, I think there’s an excellent chance of a bubble igniting in resource stocks. That will build on the bubble that’s going to come in gold.

 Darkbird18 like the Daily Reckoning because they help me keep my eye on “The Bad” and how they have mess up this Nation and the why behind this Economic Tragedy. It looks like the NWO is making the US Dollar worthless therefore it time to make a New World currency? This article talks about how for the debt have gone and what we made have to do to save our Nation and the way of life, which is Freedom and the American Way! But ready this Article by  Doug Casey of the Daily Reckoning and he will open your eyes to the truth so read on………………

Thoughts on the Greater Depression

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