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By Doug Casey
Created 6 Oct 2010
Submitted by Doug Casey [1] on Wed, 6 Oct 2010
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.

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 in retrospect:

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

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standard of living.

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 here.

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 brief.

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 Russia.

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 thing.

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.

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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 Argentina.

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?

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.,

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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 quickly.

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 coming. Or, for that matter, what’s going to
happen to interest rates.

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 followed.

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

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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 savers.

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 miles around.

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.

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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 term.

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 about.

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
exchange.

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
reasonable compromise.

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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.

---- What you just read is the content of Doug Casey’s speech at the just-concluded Casey’s Gold &
Resource Summit [2]. Doug and dozens of other experts on gold and resource investments gathered to
share in-depth analysis, economic forecasts, and their top stock picks with a captive audience. You can
hear this priceless advice – from John Hathaway, Eric Sprott, Richard Russell, Robert Prechter, Ross
Beaty, Rick Rule, and many more – on more than 17 hours of audio, from the comfort of your
home. Details here [2].

Doug Casey [1]

Casey Research LLC Chairman, Editor, Author
Primary Tel 802.253.8767
Fax 802.253.9456
166 South Main Street Stowe VT 05672
info @ caseyresearch.com http://www.caseyresearch.com/ [3]

Other Articles by Doug Casey [1]

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