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Doug Casey is the chairman of Casey Research, LLC., publisher of the International Speculator.
I believe
in the existence of the business cycle. That’s partly because almost everything
in life is cyclical, which has been recognized at least since the tale about
Joseph and the seven fat years and seven lean years. The Austrian school of
economic thinking explains why the business cycle keeps coming around and does
so without relying on a soothsayer to interpret your dreams. I urge you to read
the appropriate chapters in either Crisis Investing for the Rest of the 90’s
or Strategic Investing for a full explanation. But, in a nutshell,
government intervention in the economy – through taxes, regulation and, most
importantly, currency inflation – causes distortions and misallocations of
capital that must eventually be unwound. The distortions degrade the general
standard of living, and the economy goes into a recession (call that an
incomplete cleansing). Or it goes into a depression – wherein the entire sickly
structure comes unglued.
The last real depression took place in the 1930s. The economy very nearly went
over the edge again in the early ‘70s and again in the early ‘80s. Both times
massive re-inflation of the currency papered the problems over (but at a cost).
Meanwhile, most importantly, continuing technological innovation and increased
savings (motivated by the fear of bad times) led to recovery. Since then we’ve
had 25 years of what Herman Kahn predicted would be “The Long Boom.”
Unfortunately, much, much more severe taxes, regulations, and inflation have
caused much, much more severe distortions in the economy – especially over the
last 15 years. And the boom was financed largely by debt, which made everybody
feel and act much wealthier than they really were. It’s as though you borrowed
a million dollars and spent it all on wine, song and high living. For a while,
you’d have a high standard of living and perhaps have a lot of fun. But eventually,
when you either paid the money back with interest or were forced into
bankruptcy, your standard of living would take a painful drop. The
U.S., in
particular, has been living far above its means, burning up its own capital and
trillions more borrowed from abroad.
This isn’t news to readers of International Speculator or even the
intelligent layman who follows the news. Oddly enough, there’s one glaringly
obvious thing that is not in the news today at all. That’s the fact that
interest rates – nominal rates too, but especially “real,” after-inflation
rates – are close to their lowest levels in history. And in today’s
extraordinarily risky environment, they’re artificially low. This, and the
reasons for it, should be headlines.
All over the world, but especially in the
U.S., currencies are being inflated
radically; M3 is rising at about 18% per year. Without exception, interest
rates eventually reflect inflation. Therefore interest rates are going to rise
radically. Governments are currently suppressing rates by lending money cheaply
and promiscuously, to keep both borrowers and commercial lenders from going
under. But rates are soon going to explode –especially long-term rates. My
guess is that we’ll see at least the levels of the early ‘80s, which would mean
15%+ for long-term Treasury bonds. And I'll say that’s coming within a couple
or three years at the outside.
The government wants low rates, obviously, because low rates make it a lot
easier for homeowners to pay their mortgages, among other things. But they
forget that low rates also discourage saving – which is the one thing that can
actually bring down real rates. Officialdom is between a rock and a hard place,
and they're choosing to inflate the currency, hoping to stave off an epidemic
of bankruptcy among consumers who borrowed and among the financial institutions
that did the lending. The effort will fail and both groups will go bankrupt,
simply because the whole society has been living above its means. That will
result in large-scale commercial bankruptcies and unemployment.
Higher interest rates will absolutely hammer the economy.
It seems to me a near certainty that we’re about to enter something I have long
called “The Greater Depression.” I suspect it will be inflationary (in the
direction of what
Germany
underwent in the early ‘20s, or
Zimbabwe
today), rather than what the
U.S.
had in the ‘30s. I should somehow trademark the term “Greater Depression,”
except that I’m sure Boobus americanus would then blame me for it.
Here I’d like to pinpoint my prime candidate for the Decline and Fall of the
Roman Empire, since it almost seems
America has been reading pages from
their playbook since day one. Many reasons have been evoked for the fall: moral
turpitude, immigration, barbarian invasion, Christianity, lead pipes, etc.,
etc. My candidate is economic stagnation brought on by taxes, regulation and
inflation. I’d love to discuss that assertion in detail, but that’s not what
this article is about.
What should you do?
Reduce your standard of living now (while the situation is still under
control), greatly increase your savings (in gold, which is real money) and rig
for greatly changed patterns of production, consumption, employment and
business for a considerable time. The hurricane that’s just starting to hit the
economy will both trigger and worsen problems in other areas. Starting with
politics, because nearly everyone today believes the ridiculous notion that the
government should guide the economy.
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