03/18/10 La Estancia de Cafayate, Argentina – Doug: There’s a titanic battle right now between the forces of inflation and deflation. When a big corporation like General Motors, or Fannie or Freddie, defaults on its debt, hundreds of billions of dollars disappear. Assets people thought they had and could have been converted into cash disappear. That’s deflationary. In a sound banking system, in which money is a commodity like gold, money can’t disappear. It can change ownership, but it can’t disappear. But in our current system, it can dry up and blow away as easily as it can be created.
One major problem that stems from this is that some people benefit from government money creation and some don’t. Who gets to spend it first, when it’s most valued, and who gets stuck holding the Old Maid card when it vanishes? It’s usually the little guy – the middle-class guy – who gets hurt when this happens. And in the US, the middle class is contracting. The financial gyrations we’re going through are destroying the middle class, which naïvely believes that traditional American values still hold sway and that their government is honest. The lower class has long since lost any values, and the upper class is way too cynical and self-interested to really care. Most middle-class people will end up joining one or the other of these two classes, and that’ll be a moral disaster for the country.
America used to be a place where class wasn’t really important, and you could move between classes easily – not at all like Europe or the Orient. But as the middle class gets squeezed, we’re likely to get class warfare between those on top and those on the bottom.
Louis (Senior Editor, Casey Research): One way to look at the inflation/deflation debate is that even if we do in fact have financial asset destruction – a kind of deflation – on a scale necessary to outdo the truly phenomenal amounts of money creation the US and other governments are engaged in.
Doug: I think that’s fair to say. Either way, it’s going to be really serious. When you have runaway inflation in a place like Zimbabwe, where most people are living on a subsistence level, people with gardens and chickens will get hurt, but they’ll still get by. It’s not the same when the world’s wealthiest and most advanced economies are falling apart. Americans are going to see a serious drop in their standard of living, which they are completely unprepared for, and it’s going to be a disaster. They don’t have gardens and chickens to tide them over. There’s no way around it.
Louis: Which brings us back to why. I mean, I’m sure many people can see the picture you’ve painted, but why is it inevitable?
Doug: Because the US government and others like it are between a rock and a hard place. It is simply not a politically acceptable option to step back and let the market correct the gross misallocations and distortions the government has imposed on the economy. They must “do something” – even if they know full well it’s the wrong thing. And “doing something” means spending without raising taxes too much, because they know too much of that will slam the coffin on the economy they are trying to resuscitate. Spending on “stimuli” to “fix” the economy – direct spending on bribes to voters, like extending unemployment “benefits” to years and offering them “free” health care, etc… the way things are structured, the government must spend. Not spending is unthinkable.
There are only two ways to pay for that. They can borrow, which they can only do if they raise interest rates enough to make their bonds attractive, and that, too, would pull the plug on what you so colorfully called the “iron lung economy.” And they can print money, which they can do with some impunity, hoping the bill won’t come due until some other poor fool is in office – but that destroys the dollar sooner or later.
Everything we’ve seen shows that they are doing what is predictable for politicians, since they can appear to be “doing something” with the consequences left to the future: they are destroying the dollar.
The US government is going to be running trillion-dollar deficits as far as the eye can see. Again, they can’t borrow it while keeping interest rates low, so they are going to sell their bonds to themselves, which is to say the Federal Reserve, and inflation is going to explode. There simply is no painless choice, and it’s very close to being totally out of control.
Louis: And this financial apocalypse now, as we termed it last week, is the natural endgame of using fiat currencies instead of real money – this is why you can’t use debt as money.
Doug: That’s why you don’t use debt – IOUs – for money. And those people who are complacent about this, those who read these words and know we’re right but take no action because they can’t believe things will get that bad in America, are going to be very unhappy in the near future.
Readers should do something now, while we’re still in the eye of the storm, while there’s a small cyclical improvement happening, and when most of boobus americanus thinks happy days are here again.
Not only do we have to go through the other side of this storm, but then there’s an even bigger hurricane after that. This is just the beginning of the troubles ahead. Take action now.
Louis: Financial self-defense 101. But let’s walk through some of the generalities here. Reasonable actions to take would include: buying gold, diversifying assets offshore, and… would you still recommend going to cash with inflation on the way?
Doug: Here’s an easy way to remember it: I would liquidate, consolidate, speculate, and create.
Liquidate: Get rid of any assets you have that might have been favored by the old economy but are likely to be blown away by the new one. That would include speculative real estate holdings in formerly hot markets. Maybe even sell your house, if you can, and rent instead. Or, for sure if you keep your house, get a big mortgage at a fixed low rate that will probably be inflated out of existence. And get rid of your houseful of stuff – the junk filling your basement, your attic, that storage unit you’re renting – anything you don’t really need. Turn it into cash.
Consolidate: Cut your expenses to the bone and consolidate your assets. The best way to do that is to buy gold and silver in cash form (coins) and put them away as savings. The other critical element is getting a major portion of your assets offshore.
Speculate: With the government creating bubbles through its mammoth spending programs, and other bubbles popping, like the collapse of more major corporations, take chances on winning big on bets placed on these trends.
Create: In the coming years, the world is likely to change as radically as it did entering the industrial revolution. This is going to be a really major change, economically, politically, technologically, demographically, socially, militarily – the whole ball of wax. This is a good time to look around and ask yourself, not, “Who will give me a job?” but, “What goods and services can I provide that people will need in the future and pay me for?” What worked during the late Long Boom won’t work – in order to create, you’re going to have to think creatively.
Louis: I guess I won’t be working on a business plan to become a personal trainer.
Doug: [Laughs] Nor is becoming a barista a good plan for personal survival at this point.
Doug Casey and Louis James
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I’m convinced that buying gold coins is a good idea. But please explain how this works. I need money for groceries, but not $1,000 or whatever each coin may be worth. So do I shave off a chip or a flake and hand it to the cashier? I would appreciate an explanation of the process of paying my bills with a hoard of gold coins. They seem somewhat illiquid.
Silver for the small stuff…
This idea that debtors can win by putting a big mortgage on their houses is wrong.Debtors always lose. Lenders change the rules ,governments break the contracts to protect the lenders. How hard would it be for the financial institutions to index your mortgage principle to the inflation rate.? Cha ching you have a 25 trillion dollar mortgage now ,you know the one that used to be 25 billion.
I have my 401k in TIPS but, I am torn with the deflation debate argued by Bob Prechter…who also predicts Gold going to $680 an ounce… In short I see both on the horizon… Any advice? How is it possible to move money to Singapore?
To louise: You wont be able to go to a grocery store, or pay your cable bill with gold just as you would not be able to use 55 gallon drums of oil either.
What you can do is sell your gold on ebay, or craigslist. I am always looking for gold and silver to buy on those sites because they can be bought at spot and sometimes below spot.
you are right to say that debtors lose.
Some years back, I took out an investment loan for equities buying, with my interest then at 3% plus the going rate for 30-day bills. Without more than a month’s warning, the lender recently changed the rate to above 8%, nearly doubling my monthly interest payment. So borrowing to invest in stocks – even bluechip stocks – is very risky.
It is interesting as Louise Weiss points out the problems of paying for things with gold coin or even silver coin. That implies that the paper currency has more or less disappeared when it comes down to paying with gold or silver, or barrels of oil. The question is why does anyone think there will be stores open to buy anything in that scenario. Trucks will have stopped running and the shelves will have been emptied out very quickly. The government will have declared Marshall law and will confiscate anything of value any way. If not fiat currency will still be in play or probably plastic cards will be issued.
Like .99 cents is so much lower than $1.00. Pitiful
99,I agree with you,I think its hard to see the consequences of our situation nowbecause for a going to the store and buying cheao food (relativly cheap anyway) is the norm.Itts hard to wrap our heads around the basic things we take for granted,not being available to us.So many are going to be caught by surprise and unprepared.Im doing what I can to preppare and hoping the Titanic will stay afloat just a year or two longer.
I have been waiting on hyperinflation since 1972. Now, 38 years later, I can honestly see that its closer, but I’m not sure how much closer. I don’t wish for it, but I’d like to have some hint of the timing of its arrival. Tomorrow? Next year? A decade from now? Articles like this upset people, but they don’t offer any real, useful answers. And that’s what people need.
Could you please explain further the “big fat mortgage” comments. I’m doing many of the suggestions, but am on the fence about our house: great neighborhood, holding its own, 4.75% 30yr fixed (refi a year ago)could sell fast for apprx $375K, 200K mortgage. Friends just bought a HUGE house $700K foreclosure way south of Denver, prev sold for 1mill – they think when inflation does hit, they’ll be way ahead of the game. Are they right? PLEASE – some words of wisdom !!!!
I always like the concept of investing ‘offshore’ with very little detail on where. Iceland? The UK? They both sound bad to me.
Watch out you don’t make the same mistake as Peter Schiff, who talked about US stock doom for years, and then invested clients’ money in foreign markets that went down at an even faster rate.
I suppose that, in the final analysis, the important thing is not to be rich, but to be richer than your neighbor.
I agree JTC except maybe not richer but to be better armed.
Like .99 cents is so much lower than $1.00. Pitiful