Guest Post: Our Economic Future - From Best to Worst Case

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Submitted by Doug Casey of Casey Research

Our Economic Future: From Best to Worst Case

There is a great deal of uncertainty among investors about what the
future of the U.S. economy may look like – so I decided to take a stab
at what’s likely to happen over the next 20 years. That's enough time
for a child to grow up and mature, and it's long enough for major trends
to develop and make themselves felt.

I’ll confine myself to areas
that are, as the benighted Rumsfeld might have observed, “known
unknowns.” I don’t want to deal with possibilities of the deus ex machina
sort. So we’ll rule out natural events like a super-volcano eruption,
an asteroid strike, a new ice age, global warming, and the like.
Although all these things absolutely will occur sometime in the future,
the timing is very uncertain – at least from the perspective of one
human lifespan. It’s pointless dealing with geological time and
astronomical probability here. And, more important, there’s absolutely
nothing we can do about such things.

So let’s limit ourselves to
the possibilities presented by human action. They're plenty weird and
scary, and unpredictable enough.

THE MARKET FOR PROGNOSTICATION

People
are all ears for predictions, whether from psychics or from “experts,”
despite the repeated experience that they’re almost always worthless,
often misleading and more than rarely the exact opposite of what
happens.

Most often, the predictors go afoul by underrating human
ingenuity or extrapolating current trends too far. Let me give you a
rundown of the state of things during the last century, at 20-year
intervals. If you didn’t know it’s what actually happened, you'd find it
hard to believe.

1911— The entire world is at
peace. Stability, freedom and prosperity prevail almost everywhere.
Almost every country in Europe is ruled by a king or queen. Western
civilization has spread to nearly every corner of the world and is
received with appreciation. Stunning breakthroughs are being made in
science and technology. There’s no sign of a gigantic world war about to
come out of nowhere to rip apart the political and cultural map of
Europe and bankrupt everybody. Who imagined that a dictatorial communist
regime would arise in Russia?

1931— It’s early
in a disastrous worldwide depression. Attention is on economic troubles,
not on the virtually unthought-of possibility that in less than 10
years a new world war would be under way against Nazism and a resurgent
Germany.

1951— Except for Vietnam, all that
remains of the colonies the West had established in the 19th century are
quiescent. Nobody guessed almost all would either be independent, or on
their way, in 10 years. China has joined Russia – and many other
countries – as totally collectivist. Who imagined that Germany and
Japan, although literally leveled, would be perhaps the best investments
of the century? Who guessed that the U.S. was already at its peak
relative to the rest of the world?

1971
Communist and overtly socialist countries all over the world seem to be
in ascendance, soon to be buoyed further by a decade of rising commodity
prices. The U.S. and the West are entering a deep malaise. Little
significance is attached to rumblings from the Islamic world.

1991
Communism has collapsed as an ideology, the USSR has disappeared, and
China has radically reformed. Islam is increasingly in the news.

2011—The
world financial/economic crisis is four years old, but things are still
holding together. Islamic terrorism and collapse of old regimes in the
Arab world dominate the news. China is viewed as the world’s new
powerhouse.

BAD AND WORSE

Regrettably,
I’m not much of a linguist. But I do pick up interesting semantic
trivia. In Spanish they don’t say “in the future,” as we do in English,
which implies a definite outcome. Instead they say “en un futuro” – in a
future – which implies many possible outcomes. It’s a better way of
assessing reality, I think.

Here are three 20-year futures to
consider. There are, obviously, many, many more – but I think these
encompass the three most realistic broad possibilities.

BEST CASE – FACTS GET FACED

Realizing
what a disaster the complete destruction of their currencies would be,
most governments decide to endure the pain of allowing interest rates to
rise and limiting increases in the money supply. Poorly run
corporations and banks are left to fail. Talk of abolishing the Federal
Reserve, and using a commodity for money, becomes serious and
widespread.

Shaken, the U.S. ends its profligate ways, in part
because it lacks the means to continue, and in part because everyone but
collectivist ideologues has actually learned something from the brutal
‘10s and ‘20s.

Amidst massive protests, the government closes much
of its counterproductive apparatus, eliminates many taxes, and lets 30%
of its employees go. It also, albeit reluctantly, liberalizes its
regulation of the economy because it has become impossible to deny that
the U.S. has been falling behind in all areas.

Although there is a
resurgence of libertarian thought – reminiscent of the Reagan-Thatcher
era – simple practicality is mainly responsible for forcing the
government's hand. For one thing, it can’t afford the bureaucracy needed
to enforce detailed interference. For another, entrepreneurs are
increasingly just doing what they please, partly from necessity and
partly from a growing sense of righteousness. Interest rates go to 25%,
to compensate for high levels of inflation. That's high enough to make
it worthwhile for people to save, and the capital base starts growing.
The stock market has collapsed to its lowest level in living experience
(in real terms), but the values available encourage people to become
investors. Business is restructured on a sound, debt-free basis, with
little speculation.

The U.S. radically cuts its military spending
and pulls almost all troops out of their foreign bases and wars. The War
on Drugs comes to an end, and the crime rate in both the U.S. and
Mexico plummets.

The government solves most of its overhanging
financial problems with a seriously devalued – but not hyperinflated –
dollar. The Social Security deficit is eliminated by abstaining from
benefit increases and by inflating away much of what had been promised
before. Most Americans suffer a severe drop in their standard of living,
as they’re forced into new patterns of production and consumption. A
generation of college students find that their degrees in sociology,
political science, economics, English lit, Black studies, gender studies
and underwater basket weaving are of no real value.

When it's all
over, the tough times that started in '07 prove to have been no more
than a cyclical bump in the road, like all the other recessions since
WW2, just much bigger.

A rough and memorable ride, but it ends with a return to prosperity.

MIDDLE CASE – FACTS ARE IGNORED

The
world’s governments continue under the delusion that printing massive
quantities of paper money will solve problems when, in fact, printing
lies at the base of the problems. Most currencies lose most of their
value. Some lose it all. This destroys the most productive people in
society, the middle class, who produce more than they consume and save
the difference... in currency.

And it injures successful
corporations that have billions, or even tens of billions, in cash. Few
of their managers know what to do with such sums other than to hold
currency; at best they’ll buy their own and other companies' stock. The
result is a stock market boom in the midst of a grim depression. But
only one person in a hundred will be in a position to benefit from it,
because most will be living too close to the edge, and the stock market
will be the last thing on their minds. The destruction of capital sets
technology back quite a bit in the U.S., Japan and Europe. Chindia
increases its relative strength.

The U.S. government, believing it
has both the obligation and the ability to “do something,” redoubles
its control of the economy. Price controls and capital controls are the
order of the day. Petroleum products are rationed. Enforcement of new
regulations is assigned to a new agency, the “Economic Recovery
Administration,” which resembles the TSA in most regards – except it has
many plain-clothes employees, to better ferret out violators.

People
think increasingly of politics as the way to get what they want. More
and more Americans move abroad – although things are deteriorating in
most places in the world. Poor, backwater countries offer the best
opportunities because their governments are either weak, or corrupt,
enough to allow new economic activity.

WORST CASE – WAR

War
is the worst thing that can happen to an economy, but it’s also the
most likely thing at this point. When the going gets tough, the people
in charge like to blame somebody else for the problem. That’s compounded
by the foolish – but widely accepted – notion that war is good for the
economy and that, for instance, it pulled the U.S. out of the last
depression.

Like all wars, this one results in a complete stifling
of civil and economic freedoms. If my second scenario is unpleasant,
this alternative is grim.

The big conflict has already been teed
up – the continuation of the Forever War between Islam and the West.
I’ll hazard the major situs will be Europe – which has pretty
much always been the case for wars in general for the last 2,000 years.
Europe will be the worst place to be over the next two decades. And
North America will be locked down like a police compound.

China
will have serious social turmoil as it is forced to reorient an
export-driven economy catering to Europe and the U.S. As in the past,
South America will be out of the conflict and in a position to benefit
from it. India will also be a net beneficiary, largely uninvolved, and
happy to watch their ex-colonial masters rope-a-dope themselves into
poverty.

People will always argue who really started it. Was it
the Muslims when they poured out of Arabia in the 630s? Or was it the
West when it invaded the Near East with the Crusades starting in 1099?
Or was it the Muslims when the Turks took Constantinople in 1453
(although only 40 year later the Muslims would lose Grenada, in Spain,
as the reconquista was completed) and then moved on to almost conquer
Europe before being turned back at Vienna in 1683? Or is it more
relevant just to look at recent history, starting at the beginning of
the 19th century, when the West conquered and colonized every single
Muslim country? Or the very recent past, when Muslims were
counter-attacking, using a new military approach popularly called
“terrorism”?

My bottom line is that the next twenty years may be
dominated by the Forever War that started in the 600s, being resumed in
earnest. At least in Europe, it has the prospect of becoming a war of
survival, much nastier than either WW1 or WW2.

That resumption is
being accelerated by what is going on in the Middle East now. The
chances that the upheaval in the Arab world will just peter out and
everyone will return to the status quo ante are about zero.
It’s a culture-wide affair, much as the revolutions in Eastern Europe
were. Or, for that matter, the revolutions against Spain in South
America at the beginning of the 19th century.

The Arab revolutions
are a good thing, in that they’re getting rid of criminal regimes. Some
will be replaced with equally repressive cliques, although manned with
different criminals. I suspect a few might be more like the French
Revolution of 1789; good riddance to the old regime, but then came
Robespierre. And after him Napoleon.

Regardless of how the tumult
plays out in any particular country, the erstwhile docile collaborators
with Europe and the U.S. are being elbowed aside, and the regimes that
replace them are going to accommodate the vast public constituency for
hostility toward the West, if only for the sake of internal political
advantage.

The war is not going to be fought with conventional
armies. First of all because the Islamic world doesn’t have any that
would last more than a day or two against a Western army. But also
because a Western army is useless against an amorphous mass of millions
of people.

So what will the conflict be like? Amorphous and
disjointed, chaotic and without fixed fronts. Millions of Muslims are in
Europe – Pakistanis in the UK, Turks in Germany, North Africans in
France, Indonesians in Holland. Europe’s destructive conquest of the
world has come back to bite. These people will approach majority status
over the next 20 years, both because they reproduce at several times the
rate of the Europeans and because they’re not being absorbed. And
because, now, millions and millions more are going to arrive as boat
people.

The natives aren’t going to like it, for lots of reasons.
And the outcome will likely resemble what always happens when large
numbers of unwelcome foreigners invade a territory: violence.

One
consequence of the war, and especially of the collapse of the regime in
Arabia (in 2031 it’s no longer called Saudi Arabia, because the ruling
Saud family – at least the ones who couldn’t get to their jets in time –
has been massacred) is a cut-off of oil until the U.S. invades.

I
hate to overemphasize oil, but the world still runs on it. When
something does happen in Arabia, you can count on a disruption in the
shipment of oil. And absolutely count on active U.S. intervention.

A
prolonged guerrilla war, similar to those in Iraq, Afghanistan, Libya
and other Arab countries will follow. But there won’t be any cover story
about ousting a bad guy or bringing democracy to the oppressed. It will
be pretty obvious to everybody that, from the West’s point of view, it
will start out simply to answer the question: What’s our oil doing under
their sand? But from the Muslim’s point of view, it will be a different
question: How can we rid ourselves of these aggressive infidels once
and for all? Then the West will rephrase their question to: These people
want to kill us! How can we stop them once and for all?

You may
be thinking that the U.S. can’t lose a war because it has a large and
extremely high-tech military. All those expensive toys can be useful
from time to time; they can win lots of small battles. But they’re
basically useless for winning the next generation of warfare, as useless
as cavalry in WW1, battleships in WW2, tanks in Vietnam or nuclear
missiles today.

What? Nuclear missiles obsolete? Of course.
They’re expensive, clunky, and the enemy can tell exactly where they
came from. A plane, or a boat, or a truck – or a FedEx package – is a
much neater delivery system. And there will be plenty of nuclear devices
to deliver. If they’re within the grasp of tiny countries like Israel
and North Korea, they’re within the grasp of anyone.

In fact, the
centerpieces of today’s military are well on their way to the scrapheap
or to museum displays. There may well be a few aircraft carriers,
nuclear missiles, B-2 bombers, F-22 fighters, and the like around in 20
years. But they’ll be oddities reserved for special purposes, like
typewriters. Laser, electronic and robotic weapons will have replaced
those using gunpowder, and they’ll be readily available to anyone (an
accelerant in the collapse of the nation-state). The military's reliance
on centralization and on computer power will prove an Achilles heel; a
gang of teenage hackers (not only the best kind, but the most common
kind) can devastate a military for pure sport.

Conquest of wealth
or territory will be pointless; that’s one thing even the Soviets
suspected in the ‘80s, when they still had the power to invade Western
Europe. It’s now nothing like in the old days, when a successful war
yielded lots of gold, cattle and slaves. This lack of an economic return
will obviate one reason for a military. The hollowing-out of
nation-states will obviate another; governments will find they just
don’t have either the financial means or the popular support for serious
military establishments.

The military, as the cutting edge of the
nation-state, is in serious decline. Conflict between groups will still
exist, of course, but it will be more informal, more the kind of thing
that a Mafia or an Al-Qaeda might conduct. The growth of private
military contractors, like Blackwater (now Xe), which only need be paid
when in use, is indicative.

A BASIC PLAN

Sorry
I can't do any better than a best-case scenario that just isn't very
rosy – at least over the near term. And there’s a high likelihood of the
worst-case scenario. There will probably be some overlapping elements
from all three, if I’m on the right track.

From an economic point
of view, I see only two things as being predictable: One, that many
people will always produce more than they consume and save the
difference; this will create capital, which is critical for not only a
higher standard of living, but for the advancement of technology.

Two,
that since there are currently more scientists and engineers alive than
have lived in all previous history combined, technology will keep
advancing; technology is the major force to advance the general standard
of living. So that’s essentially why I’m an optimist. Let’s just hope
the savers aren’t wiped out, and the scientists don’t do too much
government work.

The most sensible plan for the next 20 years is
to plan to survive. The days of “He who dies with the most toys wins,”
and of two whole generations living way above their means, are over. 

20
years isn't forever. Think of it like a bear market, when the best
thing to do is take your chips off the table, grab some books and retire
to the beach for a year – except that this is going to be a lot longer
and more serious. Nonetheless, I expect my fundamental optimism to get
through it undamaged, as should yours.

For one thing, the
long-term trend is favorable. Mankind has risen from subsistence and
living in caves as little as 12,000 years ago, to reaching for the stars
today – and the rate of progress has been accelerating. Why should that
stop now?

But, as I mentioned earlier, thinking too far in the
future is perhaps pointless. So what should you do now? The essential
advice remains the same:

  • Own gold and silver. At Casey
    Research, we’ve made a lot of money on them – and they’re no longer
    cheap – but they’re going higher, simply for lack of alternatives. Look
    at them as you would cash.
  • Produce more than you consume, and save the difference. This is no longer the time for promiscuous, conspicuous consumption.
  • Be
    alert for speculations. Some markets will collapse (for instance, I
    wouldn’t want to own a McMansion in the suburbs or a “collectible” car).
    Other markets will likely turn into manias, benefiting from trillions
    of new currency units (I suspect mining stocks will be one of them).
  • Diversify
    your assets (and yourself) politically and geographically. As big a
    risk as the markets will be, your government is an even bigger one.

And,
incidentally, we’re going to be looking carefully at the stock markets
in the Arab world. It’s too early to buy. But there’s a time and a price
for everything.