Bernanke Versus Deflationary Collapse
L: So, Ben Bernanke just got named ”Person of the Year” by Time magazine. I know you must have some thoughts in response to this auspicious event?
Doug: I just don’t know where they find these people… On the other hand, Slime magazine has always said that those named Person of the Year are not necessarily the most laudable people, but those who’ve had the greatest impact on the events in a given year. That would explain Hitler’s achievement of the same honor, and Stalin getting the nod twice.
L: Not to mention Bin Laden.
Doug: Yes, let’s not mention him. This is different: Bernanke isn’t being held up as a villain, but as a hero.
L: The tagline Time puts on it is: ”The story of the year was a weak economy that could have been much, much weaker. How the mild-mannered man who runs the Federal Reserve prevented an economic catastrophe.”
Doug: Right. And Bernanke is always presented as a Ph.D., a scholar of the Great Depression, its causes, and how to cure such an economic downturn. But he hasn’t prevented an economic catastrophe — he’s done just the opposite of what needs to be done, and there’s going to be hell to pay.
It’s quite perverse. Look at Alan Greenspan. In the 1960s, he was an acolyte of Ayn Rand and wrote a famous essay defending the gold standard, which I read in her book, Capitalism: The Unknown Ideal. And then he goes on to become the most inflationary Fed chairman in history until Bernanke superseded him.
The really shameful thing about Greenspan is, not only were his policies the igniters of the giant bubbles we saw in the stock market and then in real estate, but since he was associated with pure capitalism through Rand, his failures through government intervention in the market have falsely discredited capitalism as a system in many people’s view.
L: The same could be said of Ronald Reagan. He got elected on a libertarian platform, speaking of free enterprise and getting the government off the back of the little guy. So now many people think that the chronic deficits and other problems of the Reagan years proved that limited government doesn’t work. It’s the same swindle you see in intro economics courses that teach young people that the Great Depression proved that laissez-faire capitalism doesn’t work when it was, again, government intervention in the market that created the Great Depression.
Doug: That’s right. Reagan allowed Congress to run gigantic, greater-than-ever-seen-before deficits that still have to be paid for, either through higher taxes or debasing the currency, or both or selling off the assets of the United States to foreign creditors. The Reagan deficits are nothing, of course, compared to the current ones.
L: I wonder how much we could get for the Statue of Liberty? She’s got to be feeling uncomfortable in a country that no longer wants anyone’s tired, poor, huddled masses, yearning to breathe free.
Doug: That’s a good question. The copper alone is worth a lot of money at this point.
L: A quick web search shows two frequently cited figures for Miss Liberty’s copper skin: one of about 60,000 pounds, the other 179,000 pounds. At three bucks a pound of copper, that’s either $180,000 or something over half a million bucks — a drop in the ocean of America’s national debt.
Doug: I would have thought it was more, but of course the dollar isn’t worth a damn anymore. The real value would be as a work of art, of course. Although it must be said that considerations like that didn’t stop peasants in the Middle Ages from melting down Roman bronzes and disassembling classical buildings because they needed the raw materials. I wonder what it would fetch at a Sotheby’s auction? I’d guess the Chinese might be willing to pay half a billion or even a billion dollars to take the lady home. It’d be a good deal, since the ideals behind the statue are as dead as the Constitution itself.
L: Yes… we’re not using the Constitution either, maybe we should sell that to them as well. But even a billion dollars would still be a drop in America’s ocean of debt.
Doug: A billion is only a thousandth of a trillion, and they’re now thinking in trillions. Obama may soon have to ask his science czar what comes after a trillion.
Getting back to Bernanke, the situation just shows one more time how corrupt the U.S. educational system is. That someone can get a Ph.D. and become known as a scholar of the depression era, and draw exactly the wrong conclusions about absolutely everything concerning it — what caused it, how to cure it — and then be held up as a model of relevant and useful academics… It just goes to show how utterly beyond hope the situation is.
L: Well, given what you’ve said about the education system teaching mostly worthless BS, especially when it comes to business and economics, why should we expect anything other than BS from someone who’s got it Piled High & Deep?
Doug: [Chuckles] Yes, that is what Ph.D. stands for, after all. In areas other than hard science, it has value mostly as a trade credential with the chattering classes. Its value in the real world is usually negative.
L: Is it possible that he actually does know what really caused the Great Depression and our current economic difficulties, but is caught by politics and can’t do or say anything other than what he is doing? Back in Greenspan’s day, there were people who thought Greenspan still believed everything he wrote in his essay on the gold standard and was trying to balance what was politically feasible with what he knew to be right that he was doing things he knew were harmful because if he didn’t do them, someone worse would do much more harm.
Doug: I asked Barbara Branden that one time, and that was her opinion. She thought he still believed in the free market and gold money. But a person who believes one thing and does another is usually called a hypocrite.
L: I think it was Ron Paul who once told me that he’d asked Greenspan about his essay defending the gold standard, and that Greenspan had told him that he still believed everything he wrote in the essay.
Doug: I think I’ve heard that story too. It’s an interesting conundrum. I’ve thought about what I’d do if I were president of the United States, or chairman of the Fed, if my choices were limited to what’s politically possible. The right thing now, which is to bring on a deflationary collapse that would liquidate much of the malinvestment of recent decades, is not politically possible. With more than 50% of the people in the United States being net recipients of government largesse, no one can get elected, nor stay elected, who applies the breaks to the gravy train. The system is totally corrupt at this point.
I think I read the other day that something like 15% of the population is now on some level of food stamp subsidy, and another 15% are eligible but don’t know it, or are not yet willing to accept the stigma. In the face of these kinds of facts, if anyone in power did what was necessary to liquidate past mistakes and get the economy back on a sound and sustainable path upwards, it would probably bring on a social revolution.
We’re going to have a social revolution anyway, and it’s probably better to have it sooner rather than later. This whole house of cards should have been collapsed back in the ‘60s, as opposed to having been built 40 stories higher since then. That just means it’ll be an even bigger mess when it does collapse. But it would take immense courage to set that collapse off deliberately. Whoever did it might well end up dead. And the same people who are cheerleading the current leadership’s disastrous moves would blame that courageous person for bringing on the United States’ second and Greater Depression. So, from at least a personal point of view, there’s nothing to be gained by doing the right thing. Although history would vindicate you, you’d be ostracized now.
L: That just raises an already impossibly high bar. The U.S. won’t be able to pay, when the bill comes due.
Doug: Yes. One of the most distressing things about this whole debacle is the total lack of intellectual honesty among any of the participants and decision-makers responsible for what’s going on with Bernanke being perhaps the worst of all.
On July 1, 2005, Bernanke stated with great confidence that the U.S. was not experiencing a housing bubble, saying: ”I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”
L: Wow could he possibly have been more wrong about anything more important?
Doug: In November of the same year, he talked about derivatives, saying, ”With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” He also said, ”The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”
And a couple months after that, back on housing again, he said, ”Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
L: So much for the wisdom of the expert…
Doug: Well, he’s not stupid, not in the sense of being unintelligent (he’s obviously very intelligent) but I would say he’s stupid in a better, more sophisticated sense of the word. One that I think is more useful, that being: an unwitting tendency towards self-destruction. And I’m afraid his stupidity is not just going to drag down the U.S. financial system, but the U.S. itself with it.
What he said about the housing and derivatives bubbles shows that he either has no idea what’s going on, or he’s a pathological liar. Reality was totally absent from those two statements.
And in February of 2008, he said, ”I expect there will be some failures of smaller banks.” Bear Stearns collapsed just a couple weeks later…
L: You’re kidding!
Doug: I wish I were. I’d like to believe the second most powerful man in the world weren’t either a knave, or a fool, or both. Remember, this is the same guy who told the world that Fannie and Freddie were ”adequately capitalized” and ”in no danger of failing.”
Earlier this year he said, ”Currently, we don’t think [the unemployment rate] will get to 10 percent.” Wrong again and if you actually count people who are out of work, rather than the government’s phony subset of that number, we already have over 17% unemployment.
This guy is truly pathetic but nobody points any of this stuff out. That he can be so dead wrong about so many vital things and not get called on it is simply amazing to me it makes me feel like I’m living in some sort of demented parallel universe.
L: This has to be the worst case of ”the emperor’s new clothes” on record.
Doug: Quite possibly. After all, who can gainsay the word of the second most powerful man on the planet? And a Ph.D. expert on the Great Depression to boot. Which makes perverse sense, as only an expert can screw things up as royally as he has.
I’m afraid the U.S. dollar is going to be totally destroyed. The consequences of that are going to make everything that’s going on now pale by comparison. I mean, as bad as the consequences of propping up all these dinosaurs like General Motors and AIG and General Electric and Goldman Sachs, among many others, might be next through direct theft from the U.S. taxpayer are, that’s nothing compared to what will happen when things get really bad, which they haven’t yet.
It’s really going to be bad when they destroy the dollar that’s when it’s really going to hit the fan. Runaway inflation is bad enough in a place like Zimbabwe, where most of the people are still living on a subsistence level. And it was bad enough in Germany in the 1920s, when most Germans were still living on farms or making things with their own hands. But in an advanced industrial society, as heavily urbanized as the U.S. is, runaway inflation is going to be unbelievably disastrous. As dim as the average American is, he’s bound to get perturbed when his quality of life nose-dives, and who knows what the social consequences of that will be.
L: Social revolution… Massive social change.
Doug: Yes. Runaway inflation in the U.S. would be the ultimate disaster. Think about all those people who have dollars set aside, which is to say the prudent middle class; they’ll be totally wiped out. Even huge corporations that have massive cash reserves, like Microsoft and McDonald’s, if they don’t hedge that cash with the utmost skill, could find those hoards wiped out and themselves bankrupted as well. Remember that people all over the world are holding U.S. dollars. There’s far more U.S. currency outside the U.S. than there is inside the U.S., and all those foreigners are going to resent it personally and hold it against Americans when their U.S. dollars are wiped out. On top of that, most central banks around the world hold U.S. dollars as their main asset, and that will be wiped out as well. It’s going to be a complete, worldwide disaster.
It’s going to be much worse than what happened in Germany or Zimbabwe. This is a couple orders of magnitude greater seriousness and it seems to me that this is almost certain to happen with a monumentally stupid person like Bernanke steering the ship of state into a reef.
L: Is there really any possible way he could not see the reef he’s got the U.S. pointed straight at?
Doug: Another interesting question, because, as I say, he’s not an unintelligent man but a stupid man, as I use the word.
L: But some people don’t see the world the way we do. Is it possible that he actually believes his own spin? Some people see price destruction and asset devaluation in some areas offsetting the inflation of the money supply, and believe there is some super-economic formula that really smart people like Bernanke can figure out, for the U.S. to spend its way back into prosperity.
Doug: I just don’t see how someone who’s studied the history of economics can so completely set aside its most pertinent lessons. It’s possible that he knows he’s caught between a rock and a hard place in technical economic terms, that he knows he and the economy are totally screwed and sees no choice but to carry on as long as he can and hope for a miracle. He probably knows that giving the economy the medicine it really needs would bring on a deflationary collapse, and losing his job would be the least of his worries.
As I’ve explained before, deflation is not only not a bad thing, it can be a very good thing. In a deflationary environment, the purchasing unit the dollar becomes worth more. That rewards people who have saved dollars, the prudent middle class upon which so much in modern society depends, and makes them prone to save more. Inflation makes people very loathe to save because what they’re saving is going down in value. And the solution to this depression we’re entering is not more spending, it’s not more consumption, it’s just the opposite of what these morons in Washington are saying: it’s less consumption and more savings. Savings are capital accumulation, and that’s what’s needed to start new businesses, create more jobs, and so forth in a sustainable way. Creating phony make-work jobs with more debt only serves to make things worse, come reckoning day.
So, switching from an inflationary policy to a deflationary one would be the right thing to do, but it would be such a sharp adjustment, this whiplash would hurt a huge number of people in the short term. And though most people don’t see it, the U.S. is on such a shaky political foundation at this point… It’s really become a question of ”Do you want to die by fire or by ice?” Either way, the U.S. is going to crash into a brick wall at high speed.
L: So, caught between the rock and the hard place, maybe he doesn’t believe anything he’s saying he’s just trying to hold off the noose as long as he can.
Doug: That’s a possibility. You and I will never get an interview with him, of course, and whoever does get an interview with him will get the kind of meaningless convoluted answers that Fed chairmen are notorious for giving. Answers so opaque as to be worthless. The only solution to this problem is, ultimately, to abolish the Federal Reserve. As we’ve argued many times in The Casey Report, it serves no useful purpose whatsoever it’s nothing more than a convenient instrument for inflation, which is to say, indirect taxation. But is that going to happen? I don’t think so. And that’s why I think the whole socio-political system in the U.S. is on the ragged edge of being overturned at this point.
L: The hollow oak that looks so mighty to all but is so rotten through its core that it collapses in the next storm. Do you suppose Bernanke could be doing it on purpose? Could he and Greenspan before him (who apparently claims to still believe in the gold standard) be orchestrating this crash on purpose, deliberately doing everything opposite of what’s necessary, carefully postponing the catastrophe each time to make it bigger and bigger, so that when it finally does all come crashing down, it does so in such a spectacular way, it teaches the world an unforgettable lesson on why you should never ever use paper for money?
Doug: That might explain their actions, but the odds on that scenario are slim to none. And Slim is out of town. Besides, I’m not a fan of conspiracy theories. I don’t think anyone could pull such a scheme off… But the bankruptcy of the U.S. government is baked in the cake. And that’s a good thing, in that they’ll have less ability to intervene in everyone’s lives domestically and in foreign countries. The bad news is that the government may bankrupt the country in a vain effort to keep itself alive.
L: So… Investment implications?
Doug: Everything we’ve been saying for years now and as Casey Report readers know, we did see and write about a credit crisis leading to a currency crisis before it happened about rigging for stormy weather is all the more vital now that the storm is upon us.
What, specifically, does that mean?
First and foremost, all of your savings, money that you don’t want to lose but need in a liquid form, should be in gold or gold proxies. To a lesser degree, silver as well, silver being a sort of poor man’s gold. That’s number one. You should have a very large position in these two things.
Second, regarding the speculative funds that you have, remember how much money Washington is creating. That’s definitely going to inflate other speculative bubbles to be on the watch for. I think it’s possible to make serious money spotting these early and cashing in before they pop. That’s number two: position yourself for taking advantage of speculative opportunities.
Third and I can’t emphasize this enough is that since what we’re really looking at is a political disaster causing the economic disaster, you must diversify your assets politically. And since the epicenter of this meltdown is the U.S., it’s absolutely vital that you diversify your assets, including the gold and the speculative investments, outside the U.S. That’s number three, but not third in importance there will be foreign exchange controls, and once we have those, your alternatives will be severely circumscribed.
These are the three most critical pieces of advice I can think of to give to anyone.
L: Heavy stuff, Doug thanks for laying it out so clearly.
Doug: You’re welcome. I just hope our readers will actually act on this, because it can not only make the difference between going under and surviving, but this basic approach and the details we spell out in The Casey Report can help them to turn crisis into opportunity. Some people will prosper during these difficult times; I hope it’s our readers who do.
Gary’s Endnote: This Conversation with Casey was originally released in December of last year, just after Time announced Ben Bernanke as its Person of the Year.
January 27, 2010