02/12/09 British Columbia
The $1.1 Trillion Budget Deficit
My reaction is that the people in the government are totally out of control. A poker player would say the government is “on tilt,” placing wild, desperate bets in the hope of getting rescued by good luck.
The things they’re doing are not only unproductive, they’re the exact opposite of what should be done. The country got into this mess by living beyond its means for more than a generation. That’s the message from the debt that’s burdening so many individuals; debt is proof that you’re living above your means. The solution is for people to significantly reduce their standard of living for a while and start building capital. That’s what saving is about, producing more than you consume. The government creating funny money – money out of nothing – doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency.
Over several generations, huge distortions and misallocations of capital have been cranked into the economy, inviting levels of consumption that are unsustainable. In fact, Americans refer to themselves as consumers. That’s degrading and ridiculous. You should be first and foremost a producer, and a consumer only as a consequence.
In any event, the government is going to destroy the currency, which will be a mega-disaster. And they’re making the depression worse by holding interest rates at artificially low levels, which discourages savings – the exact opposite of what’s needed. They’re trying to prop up a bankrupt system. And, at this point, it’s not just economically bankrupt, but morally and intellectually bankrupt. What they should be doing is recognize that they’re bankrupt and then start rebuilding. But they’re not, so it’s going to be a disaster.
The U.S. Economy in 2009
My patented answer, when asked what it will be like, is that this is going to be so bad, it will be worse than even I think it’s going to be. I think all the surprises are going to be on the downside; don’t expect friendly aliens to land on the roof of the White House and present the government with a magic solution. We’re still very early in this thing. It’s not going to just blow away like other post-war recessions. One reason that it’s going to get worse is that the biggest shoe has yet to drop… interest rates are now at all-time lows, and the bond market is much, much bigger than the stock market. What’s inevitable is much higher interest rates. And when they go up, that will be the final nail in the coffins of the stock and real estate markets, and it will wipe out a huge amount of capital in the bond market. And higher interest rates will bring on more bankruptcies.
The bankruptcies will be painful, but a good thing, incidentally. We can’t hope to see the bottom until interest rates go high enough to encourage people to save. The way you become wealthy is by producing more than you consume, not consuming more than you produce.
Deflation vs. Inflation
First of all, deflation is a good thing. Its bad reputation is just one of the serious misunderstandings that most people have. In deflation, your money becomes worth more every year. It’s a good thing because it encourages people to save, it encourages thrift. I’m all for deflation. The current episode of necessary and beneficial deflation will, however, be cut short because Bernanke, as he’s so eloquently pointed out, has a printing press and will use it to create as many dollars as needed.
So at this point I would start preparing for inflation, and I wouldn’t worry too much about deflation. The only question is the timing.
It’s too early to buy real estate right now, although a fixed-rate mortgage could go a long way toward offsetting bad timing. It would let you make your money on the depreciation of the mortgage, as opposed to the appreciation of the asset. Still, I wouldn’t touch housing with a 10-foot pole – there’s been immense overbuilding, immense inventory. And people forget: a house isn’t an investment, it’s a consumer good. It’s like a toothbrush, suit of clothes, or a car; it just lasts a little bit longer. An investment – say, a factory – can create new wealth. Houses are strictly expense items. Forget about buying the things for the unpaid mortgage; before this is over, you’ll buy them for back taxes. But then you’ll have to figure out how to pay the utilities and maintenance. The housing bear market has a long way to run.
The U.S. Dollar and the Day of Reckoning
It’s very hard to predict the timing on these things. The financial markets and the economy itself are going up and down like an elevator with a lunatic at the controls. My feeling is that the fate of the dollar is sealed. People forget that there are 6 or 8 trillion dollars – who knows how many – outside of the United States, and they’re hot potatoes. Foreigners are going to recognize that the dollar is an unbacked smiley-face token of a bankrupt government. My advice is to get out of dollars. In fact, take advantage of the ultra-low interest rates; borrow as many dollars as you can long-term and at a fixed rate and put the money into something tangible, because the dollar is going to reach its intrinsic value.
The Recession
This isn’t a recession, it’s a depression. A depression is a period when most people’s standard of living falls significantly. It can also be defined as a time when distortions and misallocations of capital are liquidated, as well as a time when the business cycle climaxes. We don’t have time here, unfortunately, to explore all that in detail. But this is the real thing. And it’s going to drag on much longer than most people think. It will be called the Greater Depression, and it’s likely the most serious thing to happen to the country since its founding. And not just from an economic point of view, but political, sociological, and military.
For a number of reasons, wars usually occur in tough economic times. Governments always like to find foreigners to blame for their problems, and that includes other countries blaming the U.S. In the end, I wouldn’t be surprised to see violence, tax revolt, or even parts of the country trying to secede. I don’t think I can adequately emphasize how serious this thing is likely to get. Nothing is certain, but it seems to me the odds are very, very high for an absolutely world-class disaster.
Gold’s Performance in 2008
The big surprise to me is how low gold is right now. It’s well known that even if we use the government’s statistics, gold would have to reach $2,500 an ounce to match its 1980 high. I don’t necessarily buy the theories that the government and some bullion banks are suppressing the price of gold. Of course, with everything else going on, the last thing the powers-that-be want is a stampede into gold. That would be the equivalent of shooting a gun in a crowded theatre; it could set off a real panic. But at the same time, I don’t see how they can effectively suppress the price. Either way, the good news is that gold is about the cheapest thing out there. Remember, it’s the only financial asset that’s not simultaneously someone else’s liability. So I would take advantage of today’s price and buy more gold. I know I’m doing just that.
Gold Volatility
Gold will remain volatile but trend upward. I don’t pay attention to daily fluctuations, which can be caused by any number of trivial things. Gold is going to the moon in the next couple of years.
Gold Stocks
Last year, it seemed to me that we were still climbing the Wall of Worry and that the next stage would be the Mania. But what I failed to read was the public’s indirect involvement through the $2 trillion in hedge funds. On top of that, while the prices of gold stocks weren’t that high, the number of shares out and the number of companies were increasing dramatically. Finally, the costs of mining and exploration rose immensely, which limited their profitability.
The good news is that relative to the price of gold, gold stocks are at their cheapest level in history. I still have my gold stocks and the fact is, I’m buying more. I’m not selling, because I think we’re starting another bull market. And this one is going to be much steeper and much quicker than the last one. I’m not a perma-bull on any asset class, but in this case I’m forced to go into the gold stocks. They’re the cheapest asset class out there, and the one with the highest potential.
Okay, you’ve put the fright into me. But one major question, what about silver as an alternative for some of us who are having a hard time coming up with $900 for an ounce of gold? Is it possible silver can also be a good hedge against the impending inflation triggered by the government’s misguided battle (an economic Iraq war) against this “Greater Depression?” Even “junk silver” could help put food on the table when purchasing such items through the impending black market, yes? These truly are the times that test our souls (and pocket books).
Doug, you and I are on the same page for the very long term. What worries me is the probable strength of the USD over the next 1-2 years. Your thesis rests on self destruction of USD via unrestricted printing. But every country is printing like a bandit in order to stimulate its economy. This is a worldwide boxing match. And despite the flooding of markets with money, prices are going down for the next year or two, not up. Maybe gold will continue higher, maybe not, but for sure in 2009 we are staring lower prices for most goods in the face. As you say, timing is the key. (When was it ever not??) Since there is so much pain to come, why not put in lowball bids on precious metals stocks, and lowball bids on short equity ETFs at the same time? Then sit back and smile.
Sir, Platin had , incredibly(!) the same price as gold in october and has since outperformed by mor than 10%. No onder. Platin, not Gold, is the cheapest thing in the world. It was already at $ 2400 so people are used to that level – gold beyond $ 1000 is still uncharted and psochologically difficult turf. Pt is nobler than gold, 10% heavier and 10 times rarer. And there a no huge stocks of it sitting in the Fort Knoxes which can be thrown on the market. Car production is down and this is prized in by it’s recent fall of 70%. If car sales (industrial use will pick up, which it will, this will add more to the sprint in pt prize.
The crowd’s buying gold – the smart guy PLATIN.
Doug Casey,
It is refreshing to find someone who has their head on straight.
If when you say the dollar is going to reach it’s intrensic value, you mean zero, I will agree with that.
Gold is out of my league, so I am involved with silver (the actual hard metal). I don’t know much about gold stocks but I do think shares in mines are good, if you pick them correctly.
Thanks for putting this out there for everyone to see Doug. I know people (including you) who have been warning of this for years, and we were laughed at in 2005.
But no more. I agree that the dollar is going to zero – or at least close enough to be effectively zero – and I’m with John Crowe in that I’ve been buying physical silver. As much as I can afford each month.
I wish I had the money to do that with gold, but with Eagles going for around $1000, I’d have to purchase the smaller coins and they carry a very high premium.
In regards to The Swiss comments about platinum, my response is that platinum may prove to be very hard to exchange for goods when the you-know-what hits the fan. In my opinion, gold and silver are more recognizable and hence more liquid.
Great article – I quoted part of it in a post on my blog at:
http://www.effor.com/blog/index.php/2009/02/13/2009-shock-and-awe
Imagine living with such a negative outlook. This character must go home each night, kick the bejesus out of the Cat and pull the wings of flies. Its a depression the world is comming to an end !! I told you so … the same idiotic comments from the people who brought you ” Y2K and why the world will end in 2000″. Lets all pack our bags and join the author of the drivil in Jamestown and take a long pull of the Red cordial !
I really stopped reading this apisle of doom after this gem : ” The bankruptcies will be painful, but a good thing, incidentally. We can’t hope to see the bottom until interest rates go high enough to encourage people to save.”
1. There is a human element to bankruptcies, its someone having a go with their capital to make their life better for themselves and their family. Its the foundation of Capitalism.
2. Funds saved in Banks should be discoraged – the inefficant use of Capital not put to work in creating enterprise will create an dead economy. Look to Japan – an economy of the best Savers in the world – its been dead for Ten years!
Shelve the negativity and encourage business – its the life blood of the economy !
How will farmers come out of this? I grow
corn wheat and beans. Will my business
still be viable in the future?