Submitted by Doug Casey of Casey Research
No Way Out
I really dislike sounding inflammatory. Saying that things are going to
go terribly wrong runs a risk of being classed with those who think
the world will end in December 2012 because of something Nostradamus or
the Bible says, or because that’s what the Mayan calendar predicts.
This is different. In the real world, cause has effect. Nobody has a
crystal ball, but a good economist (there are some, though very few, in
existence) can definitely pinpoint causes and estimate not only what
their immediate and direct effects are likely to be (that’s not hard; a
smart kid can usually do that) but the indirect and delayed effects.
In the first half of this year, people were looking at the U.S. economy
and seeing that some things were better. Auto sales were up – because
of the wasteful Cash for Clunkers program. Home sales were up – because
of the $8,000 credit and distressed pricing. Employment was up – partly
because of Census hiring, and partly because hundreds of billions have
been thrown at the economy. The recovery impresses me as a charade.
Let’s get beyond what the popular media parrots are telling us and
attempt to derive some reasonable assumptions about how things really
are and where they’re headed.
A Brief Summary of Our Story So Far….
Before we get to where things stand at the moment, let’s briefly look at where we‘ve come from.
That a depression was in the cards has been foreseeable for decades.
The distortions cranked into the system in the ‘60s – the era of “guns
and butter” spending by the government – resulted in the tumult of the
‘70s. Things could, and one could argue should, have come unglued then.
But they didn’t, for a number of reasons that have only become clear
- Interest rates were allowed to rise to curative levels;
- The markets were non-manipulated and so, as they became quite depressed, were left to send out real distress signals;
- The U.S. was still running a trade surplus;
- The dollar had only come off the gold standard in 1971 and was still relatively sound.
Then, starting with Reagan and Thatcher, the world’s governments
started cutting taxes and deregulating. The USSR collapsed peaceably.
China, then India, made a shift toward free markets. And on top of it
all, the computer revolution got seriously underway. All told, a good
formula for recovery and a sound foundation for a boom.
But sadly, taxes, government spending, and deficits soon started
heading much higher. Despite the collapse of its only conceivable
enemy, U.S. military spending continued to skyrocket. Monetary policy
encouraged everyone to take on huge amounts of debt, much more than ever
in the past, and everyone soon found they could live way above their
means. The stock, real estate, and bond markets got pumped up to
ridiculous levels. The main U.S. export became trillions of paper
dollars. Worst of all, the U.S. devolved into just another country,
undistinguished by anything other than a legacy of a high standard of
The standard of living in the U.S. is now going down for these reasons,
and others. But most disturbing to the average American is the falling
position of the U.S. relative to the rest of the world. In brief,
Americans won’t take kindly to the notion that they can’t continue
earning, say, $10-40 an hour, for doing exactly the same thing a
Chinese will do for $1-4 an hour.
What’s going to happen is that the Americans’ earnings are going to
drop, while those of the Chinese are going to rise, meeting someplace
in the middle. Especially when the Chinese works harder, longer, saves
his money, and doesn’t burden his employer with all kinds of legacy
benefits, topped off with lawsuits. This is a new threat, one that
can’t be countered with B-2 bombers. It’s also something as big and as
inevitable as a glacier coming down a valley during an Ice Age.
This, along with other problems presented by the business cycle have ushered in the Greater Depression.
How Long Will the Greater Depression Last?
Let’s briefly recap two definitions of a depression, along with a
couple of examples, with an eye to seeing how things may evolve from
One definition is that a depression is a period of time when most
people’s standard of living drops significantly. Russia had this kind of
depression from roughly 1917 to 1990, so more than 70 years. A second
definition is that it is a period of time when economic distortions and
misallocations of capital are liquidated. Russia had this kind of
depression from 1990 up to about 2000. It was very sharp but relatively
The difference between these two examples is that, during the first,
the state was in total – or even increasing – control. By the time of
the second, the country had greatly liberalized. As a result, the
depression was a period of necessary and tumultuous change, rather than
drawn-out agony. A depression can be a bad thing or a good thing,
partly depending on which definition applies.
Today, things are problematic in Russia for a number of reasons that
aren’t germane to this article. But people can own property,
entrepreneurs can start businesses, and the top tax rate is 11%. The
depression of 1990-2000 resulted in greatly improved conditions in
Let’s look at a couple of other examples: Haiti and Mozambique.
Haiti has been a disaster since Day One and has no current prospect of
improvement. The billions of dollars Obama is idiotically about to send
them will evaporate like a quart of water poured into the Sahara – just
like the billions of aid and charity that have gone before it. Worse,
it will eliminate the necessity of Haiti making meaningful reforms.
Additional aid actually precludes the possibility of liquidating
distortions, misallocations of capital, and unsustainable patterns of
life. It’s counterproductive.
Mozambique went through a long and nasty civil war from about 1970 to
the early ‘90s. The war made conditions worse than anything even Haiti
has seen. But when it came to an end, the Mozambicans changed things
simply in order to survive. The place is hardly a beacon of the free
market today, but duties and taxes have been reduced, most parastatals
have been privatized, and entrepreneurs can operate. It’s a good sign
that the country is drawing foreign investment but very little foreign
aid, which always just cements people in their bad habits while
ensuring government officials stay in office.
Why do I bring up these examples? Because it’s clear to me the U.S. is
heading in the direction of Russia before 1990, or Haiti today. Not in
absolute terms, of course. But everything the U.S. government is doing –
raising taxes, increasing regulations, and inflating the currency – is
not only the wrong thing to do, but exactly the opposite of the right
This is really serious, because the government is the 800-pound gorilla
in the room. What governments do makes all the difference – actually
the only difference – in how countries perform. How else to explain
that Haiti and Singapore were on pretty much the same level after World
War 2, and look where they are now.
To my thinking, the U.S. is now clearly on the path Argentina started
down with the Peron regime. Cause has effect. Actions have
consequences, and the result will be much the same. Except I believe the
descent of the U.S. will be much faster, much scarier, and will end
in a much harder landing than that experienced by
I say this because there’s no realistic possibility the Obama regime is
going to change course. To the contrary, they’re likely to accelerate
in the present direction. They believe the government should direct
society – as do most Americans at this point. They feel government is a
magic cure-all and not only can but should “do something” in response
to any problem. Most complaints aren’t that they’re doing too much, but
that they’re doing too little. Everything on the political front,
therefore, is a disaster. There’s absolutely no prospect I can see that
it will get better, and every indication it will get worse.
I’m not going to try to predict what will happen in the 2012 elections,
but it’s fair to say the last several elections are indicators of the
degraded state of the average American. What are the chances they’ll
make a 180-degree turn, in the direction of someone like Ron Paul? I’d
say close to zero, and libertarianism will remain a fringe movement, at
best. Will Boobus americanus vote for someone who says the government
should actually do less – much less – in the middle of a
crisis? Especially if the current wars expand, which is quite likely in
this kind of environment? No way.
Simply, the chances of a reversal in what passes for the philosophical
attitude of this country are slim and none. And Slim’s left town. While
there are some who hope for an improvement on the political front, I
think that’s very naïve.
The Tea Party movement? Its ruling ethos appears to be a kind of
inchoate rage. I sympathize with the fact that many seem to be honest
middle to lower middle-class Americans who see their standards of living
slipping away and don’t know why, or how to stop it. They feel bad
that it’s no longer the America portrayed in Jimmy Stewart and John
Wayne movies, but many are quick to blame the changes on swarthy
immigrants. They’re desperately looking for a political solution. These
folks tend to be highly nationalistic and atavistic, with a tendency
to worship their preachers and the military. I just hope some popular
general doesn’t get political ambitions…
The only bright spots – but these are very major bright spots – are in the areas of individual savings and technology.
As things get worse, the productive members of society will redouble
their efforts to save themselves by producing more while consuming
less; the excess will be savings. Those savings create a pool of capital
that can be used to fund new businesses and technologies.
The problem here is that with the dollar losing value quickly, the
savers will be punished for doing the only thing that can really
improve the situation. And they’ll be discouraged by wrongheaded
propaganda telling people to consume more, not to save. Funding new
business and technologies will be harder with more regulations. But
still, people will find a way to set aside a surplus. And that is a
factor of overwhelming importance.
As are breakthroughs in science and technology. Don’t forget that there
are more scientists and engineers alive today than have lived,
altogether, in all of previous human history. These are the people that
will wind the main stem of human progress. And their numbers are going
to grow. So there’s real cause for optimism.
The problem is that most young Americans now go in for things like
sociology and gender studies, whereas the up-and-coming scientists and
engineers are primarily Chinese and Indians who, even if they get
advanced training in the U.S., tend to go back home afterwards. Partly
because the U.S. discourages hiring non-Americans for “good” jobs, but
mostly because they can see more opportunity abroad.
So, how long will the Greater Depression last? Quite a while, at least for the U.S.
But wait. Aren’t there other bright spots? How about the dollar?
Over the years I’ve been agnostic as to whether this depression would
be inflationary or deflationary. Or both in sequence, with inflation
first, followed by a credit collapse deflation; or a deflation followed
by a runaway inflation. Or perhaps both at the same time, just in
different sectors of the economy – e.g., prices of McMansions collapse
because people can’t afford to live in them, while the prices of rice
and beans skyrocket because that’s all people can afford.
At the moment I’m leaning towards a deflation in most areas. Why?
Because the purchasing media in the U.S. is primarily credit based. If a
mortgage defaults, what happens to the dollars it represents? They
literally disappear, which is deflationary. If a bond defaults, the
same thing happens. If stocks and property prices crash, the dollars
they represent vanish. If people or businesses don’t borrow, the money
supply fails to expand; in fact, many are trying to pay back loans,
which is deflationary. Even so, contrary to popular opinion, deflation
is much better than inflation.
Because today’s dollar is just paper and credit, and because
deflationary conditions will create a clamor for many more of them, the
government will eventually succeed in its inflationary efforts. It’s
true, as Bernanke has said in a moment of wry wit, that they can dump
$100 bills from helicopters to prevent deflation. But it’s not likely
since, in our fractional reserve banking system, the primary way the
money supply is expanded is through the granting of loans, not the
printing of paper, the way it was done in Weimar Germany and Zimbabwe.
One problem with credit-based inflation is that at some point, banks
become afraid to lend, and people afraid to borrow – a time like right
now. In fact, people may even become too afraid to leave their dollars
in banks. They’re coming to realize the FDIC is thoroughly bankrupt.
Here’s a speculative scenario. To solve these deflationary problems and
resolve Ben’s helicopter conundrum, maybe the Fed will go into the
retail banking business by directly taking over the hundreds of
institutions that are now failing. The average American would feel safe
depositing directly with the Federal Reserve. And the Fed could lend
as much as they want, without the restrictions imposed by actual
capital or pesky shareholders.
Ridiculous? I think not, certainly not after GM, Fannie, and the rest.
Certainly not when you consider that this depression is still in only
the second inning. It would be one way to head off deflation.
Be that as it may, or may not, at some point after the deflationary
waters have receded as far as possible, an inflationary tsunami is
going to wash ashore, to the surprise of all.
Everybody knows how bad things were in Weimar Germany, and what a
catastrophe hyperinflation has been in Zimbabwe. But those were agrarian
economies, with people still quite close to the land. If it hits in
the U.S., as highly specialized and urbanized as it is, it will be an
unparalleled disaster. And not just for the U.S., because the reserves
of almost all governments are mostly U.S. dollars. And dollars are used
as the de facto currency by the average man in about 50 countries. All
told, there may be as many as seven trillion of the things held
outside of the U.S., and, at some point, everybody will be trying to
unload them at once. At which time they’ll lose value very, very
So, far from being something to rely on, and very far from being as
good as gold, the dollar is going to be a lead player in the
catastrophe called the Greater Depression. And all the other paper
currencies are going down with it. Pity the fool who doesn’t see this
Or, for that matter, what’s going to happen to interest rates.
The government is doing everything in its power to keep interest rates
as low as possible. There are many reasons for this. Low rates make it
easier for people to support their debt burdens and borrow more. Low
rates inflate the value of stocks, bonds, and real estate – and the last
thing the government wants to see is a meltdown of the markets. But,
perhaps even more important, it’s a lot easier for the government to
service $12 trillion of official debt at 2% than at 12%. That much of a
rise in rates alone will add over a trillion to what they need to
borrow to keep the giant Ponzi scheme going.
Of course it’s a fool’s game. Eventually (I’ll guess between six and 24
months), when their creation of dollars eventually overcomes the
credit markets’ destruction of dollars, consumer prices will go up. That
evidence of inflation will cause interest rates to rise, with all the
short-term negative effects the government so fears. But higher rates
are absolutely necessary to get out of the depression. Remember, it was
the high rates of the early ‘80s that set the stage for the boom that
Rates – the price of money – shouldn’t be controlled by the state, up
or down, any more than the state should control the price of oil, or
bread, or toothpaste. One of the major reasons the USSR collapsed was an
inability to make correct economic calculations, and much of that was
due to their arbitrarily fixed interest rates. One reason why Japan has
been fading into the economic background over the last two decades is
that the government has artificially suppressed rates, in the vain hope
of stimulating the economy. All they’ve gotten is excessive levels of
government debt, which will result in the destruction of the yen. And
what will be tens of millions of impoverished, and very angry, Japanese
The same thing is in process of happening in the West due to suppressed interest rates.
The Next Steps Down in the Markets
With interest rates depressed to near zero, stocks, bonds, and property
in the Western countries are as good as they’re going to get –
especially after a very long boom in all three. When rates inevitably go
higher, stocks, property – absolutely bonds – are likely to head much
lower. That’s entirely apart from the fundamentals under them, which
are truly ugly. In turn, that will bankrupt pension funds across the
economy, many of which are already severely underfunded.
These pension funds are likely to be the centerpieces of the next leg
down of the evolving crisis. Will the government bail them out? Perhaps,
although after the misadventure of poor taxpayers throwing money at
rich traders at Goldman and AIG, the public doesn’t like the ring of
that term. More likely it will nationalize them, assuming their assets
in exchange for a special class of its paper. In the interest of
“fairness,” that will happen to small and solvent funds as well as
large and bankrupt ones.
After that, the next problem area will be insurance companies. And not
necessarily because they’ll suffer from the same problems, like
derivative trading, that sunk AIG. Even the well-managed ones have their
assets invested primarily in commercial loans, commercial property,
bonds, and stocks.
How This Will End
Nassim Taleb has popularized the concept of the Black Swan: an event
that no one thought was possible, actually happening. Naturally, it
takes everyone by surprise. To that lesson from zoology, let me suggest
one from astronomy. Let’s call it the Financial Asteroid Strike theory.
It’s well known that there are millions of pieces of sizable space
debris floating around the solar system. It’s just a matter of time
before something crosses our path at an inopportune moment, as has
happened so many times in the past. Unlike the Black Swan, it’s well
known that Financial Asteroids exist. It’s just that really serious
ones appear so rarely that people conduct their lives as if they never
will. It’s been such a long time since the last depression that people
see it as something distant and academic – like the Chicxulub or
Tunguska asteroid strikes. Until the actual moment it hits, everything
is completely normal. Then everything changes radically.
I’d sum it up by saying that a Financial Asteroid Strike takes much
longer to happen than you might expect, but once it actually gets
underway, it happens much more quickly than you could have imagined. We
had a strike in 2008. But they tend to come in clusters. I expect more
to enter the atmosphere fairly soon.
The question is whether the next one is going to wipe out all the
economic and financial dinosaurs or just flatten the trees for some
Either way, it’s far from being all gloom and doom.
How This Could Be a Good Thing
Everyone, certainly including myself, prefers good times to bad times.
But much of the good times of the last two decades were a result of an
entire civilization living above its means. It was great fun while it
lasted, but the party is over. The result will be massive unemployment,
lots of business failures, and huge investment losses. These things
are most unpleasant, but inevitable. That said, I always like to look
at the bright side.
And what might that be?
Let’s restrict ourselves to just one of the lead actors in this drama: the United States of America.
The bankruptcy of the U.S. government will, at least at some point, lead
to a big drop in the number of government employees. This is a good
thing, since little of what they do serves a useful purpose; most are
an actual impediment to production.
With some luck it could result in the sale of agencies that have some
value, e.g., NASA, the Smithsonian, and the National Parks – to private
enterprise. It will also force a vast retrenchment of the military,
although only after more costly wars make that necessity very obvious.
It will force a decentralization of power, with more devolving to the
states and municipalities. It will mean much less regulation, since
there won’t be the personnel or money to enforce it. It will also mean
much less taxation for the same reasons, even though the state will try
desperately to collect more, and will absolutely succeed in the near
Internationally, it seems to me a sure thing that organizations like the
UN, the IMF, the OECD, and so many more, will be totally hollowed out
or even disappear. At a time when governments are straining to maintain
themselves, they’re unlikely to ship scarce capital abroad. So the
people who are worried about the UN taking over the U.S., One World
Government and such, will have to find something different to fret
As domestic currencies the world over are inflated away, some medium of
exchange and store of value will have to be agreed on. I don’t see any
realistic alternative to gold. China is going to be a focus of change
in this regard (among many others). The stupidity of the Chinese
government buying U.S. government paper in order to enable Americans to
continue consuming the things Chinese factories produce will come to
an end. That will be an impetus to demands for an alternative medium of
But if the U.S. and governments of other advanced countries lose power,
governments in places like Africa (in particular) will collapse;
Somalia is a model of things to come there. That may sound like a
horrible thing, but – notwithstanding teething pains – it’s a big step
forward. Deprived of free money, free weapons, and lots of free bad
advice that have entrenched kleptocracies, the Africans are likely to
make real progress after the Greater Depression plays itself out.
The transition period, however, is likely to be messy almost everywhere.
Can we prevent the status quo from falling apart, and preclude these messy changes? Further, should we, if we could?
Entirely apart from the fact that change is an essential part of life –
and I think the status quo is in dire need of some real change
(although absolutely not the kind Obama and his posse might have in
mind) – I actually don’t think there’s a realistic solution to the
problems the world is facing in this decade.
Yes, there are solutions that the government could proactively bring
about – almost entirely by doing less, rather than more. But the odds
of the U.S. voluntarily defaulting on its debt, abolishing the Fed,
using gold as money, abolishing all agencies not specifically
designated in the Constitution, eliminating the income tax, and cutting
back on military expenditures by about 90% -- among other things – are
so small as to be considered a fantasy.
In fact, the concept of invoking changes of that scale are too scary for
most to even contemplate. But they’ll happen anyway. Which means these
things aren’t going to happen voluntarily, under some kind of control,
and in a more or less orderly manner. Even so, because anything that
must happen will happen – all these things and more will actually
happen and, in the happening, will be most unpleasant and dangerous.
It seems to me that the upset we’re looking at could be the biggest
thing since the Industrial Revolution. Or perhaps the French Revolution
is a better analogy, although I expect it’s going to be a bit of both.
It seems entirely possible to me that we could have another American
Revolution, as unlikely as that seems among a nation of commuters and
suburbs-dwelling reality TV watchers.
But it’s hard to see how it could be anything like the first one, which
was led by thoughtful, rich, free market-oriented farmers and
merchants. More likely this one will center on people like Sarah Palin
and Sean Hannity on the one side, and Michael Moore and Nancy Pelosi on
the other – strident, antagonistic, and bent, but also full of
charisma and certainty. I don’t see much chance of collegial and
The best advice is not to be around the watering hole when two
antagonistic groups of chimpanzees are hooting and panting at each
other, getting ready to fight for control of it.
I’m afraid the current state of affairs is corrupt through and through.
From the top of the financial world in New York, to the top of the
political world in DC, right down to the average man on the street, 50%
of whom aren’t obligated to pay income taxes but feel entitled to be
net recipients of government largesse at the expense of others. Even
among those that have assets, there’s no feeling of shame in gaming the
system any way possible. There’s no longer any onus to being one of
the 40 million people on electronic food stamps, or defaulting on one’s
mortgage and continuing to live in the house, and collecting
indefinitely extended unemployment benefits. Bankruptcy is just
something you do when needed.
Frankly, it’s a mystery to me how the U.S. in particular, but most of
the developed world, is going to escape from the very unpleasant
consequences of its very stupid past – and current – actions.
I’ve just scratched the surface of the possibilities for the next ten
years here. What’s clear is that some patterns of production and
consumption are unsustainable; they will stop. What’s not clear is what
new patterns will replace them. But that’s not so worrisome; what’s a
matter of more concern is what forms of political and social
organization will appear.
But let me leave you with a final bit of good news. Most of the real
wealth – science, technologies, capital and consumer goods – will still
be here. There’s just going to be a change in ownership. And it’s
possible to position yourself to get more than your share.
Based on the above, what looks good to me – on a long-term basis – over
the years to come? In general, stocks, bonds, and property are dead
ducks, and headed much lower. But when a real bottom arrives, perhaps
even in this decade, fortunes will be made buying back into them. Gold
and silver, even though they’re no longer cheap, are going much higher;
they’ll be what you’ll trade for things that are cheap. Agricultural
commodities are going to do well. The trillions of currency units being
printed all over the world will definitely ignite more bubbles, which
should present fantastic speculative opportunities. And because the
political situation will be hairy, diversify your assets outside of
your home country.