The Greater Depression and What You Should do About It

For international investment expert Doug Casey, there’s more than a recession on the horizon. He recommends battening down now for the rough seas ahead…with some special information about making sure your investments can weather the coming storms.

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.


Doug Casey
for The Daily Reckoning
July 1, 2008

Doug Casey is a best-selling author and chairman of Casey Research, LLC, publishers of a variety of subscription-based advisories for independent-minded investors. The above article is an extract from the International Speculator, now in its 28th year.

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There’s a house on my block
That’s abandoned and cold
Folks moved out of it a
Long time ago
And they took all their things
And they never came back
Looks like it’s haunted
With the windows all cracked
And everyone call it
The house, the house where
Nobody lives

Once it held laughter
Once it held dreams
Did they throw it away
Did they know what it means
Did someone’s heartbreak
Or did someone do somebody wrong?
– Tom Waits, "House Where Nobody Lives"

This just in… Bloomberg reports that Americans continue to fall further and further behind on their mortgage payments.

Unemployment is rising. And now, carpenters, plumbers and even granite countertop installers are getting jobs with the banks. They’re finding work maintaining foreclosed houses.

Today, we’re still waiting for a bounce in the stock market, following last week’s big drop. But there was little change in the Dow. Nor was there any change in the oil market. The price per barrel stayed right where we left it last week – at $140.

No change in the dollar either – at $1.57 per euro. And gold? It stayed where it was too – at $927 per ounce.

Alan Greenspan was back in the news. He said, "risk was heavily underpriced," last summer. Shame he waited a year to mention it.

As you know, dear reader, we think Mr. Greenspan did somebody wrong. He did the whole nation wrong – by handing out money and credit far too freely for far too long.

But Mr. Greenspan is retired. No point in criticizing him. He went on to say that housing remains a "critical problem." Of course, housing is not a problem at all. It’s becoming more affordable. It’s only a problem for people who mistook the roof over their heads for a speculative investment. They thought it was something it wasn’t. Even for them, the current sell-off in the housing market is a good thing; it brings their feet back to terra firma.

The problem is that the correction in the housing market creates other problems. America is becoming a country of houses where nobody lives. Foreclosed and abandoned houses, and "see through" houses that never heard laughter and never knew dreams, are everywhere. Police say they are becoming a nuisance. Squatters move in. Transients. Drug users. Criminals and bums. Then, the houses become an even bigger problem for neighbors.

(We’re surprised. More people, as a percentage of the population, are behind bars in American than in any other country; it’s amazing there are even any jaywalkers or litterers still at liberty.)

Aside from that, the fall in housing values undermines the spending power of the typical American consumer. As Dear Readers know so well, Americans had become accustomed to spending money they hadn’t yet earned. They just used the rising value of their houses as collateral.

But he who spends what isn’t his’n,

Pays it back or goes to prison

You’d expect that they’d now have to become accustomed to NOT spending what they actually have earned. Debts have to be paid. Accounts have to be settled. Mistakes have to be reckoned with.

But heck this is the 21st century. There’s a report in today’s Financial Times that "consumers fail to save despite the gloom." How do you like those consumers? Are they dumb…or what? We don’t know. People think there’s some magic, sweet spot in the universe where the old rules no longer apply. Many seem to think they will never have to pay back what they’ve borrowed. They think the government will bail them out.

Good luck to them…

*** "One Rebate Not Enough," is the headline of an article written by Robert Shiller, appearing in the New York Times. Shiller says the feds’ attempt to bail out consumers with tax rebates is too puny to do much good. Besides, he says, much of it ends up stimulating others peoples’ economies.

You’ll remember our explanation of the world money system. The Fed is no longer America’s central bank. Now, it’s the world’s central bank. But it’s a funny old world. The Fed provides money – currently at less than half the rate of consumer price inflation – in order to stimulate the economy. And it does stimulate the economy…the Chinese economy! And the Russian economy! And the Iranian economy (the fourth largest oil exporter in the world)! And the economies of every sandy oil producer in the Arab world!

So do the feds’ ‘tax rebates.’ Americans spend the money on gasoline and other imports. Rebates were intended to be a "booster shot," for the U.S. economy, said President George W. Bush. But it’s the foreigners, not Americans, who are getting the boost. The foreigners build sparkling cities. They throw up huge factories. They roll more automobiles off the assembly lines…build more railways…pave more highways.

Yes…and even store more food. Comes an article in today’s International Herald Tribune that tells us the foreigners are "hoarding" food…and that his is pushing up food prices even more.

Meanwhile, in the U.S. of A., hearts break…and the lonely wind blows through empty houses.

*** Even the houses of disrepute are feeling a little abandoned. According to an item in the European press, "Credit Crunch Pinches Prostitutes." Brothels in Nevada say their revenues have been cut in half as truckers can’t afford the gasoline to make a detour.

What is this country coming to? We don’t know. But we don’t like the looks of it.

Still, what can we do? The subject came up this weekend. School has finally ended for summer. One son is back from Boston. Two others have finished their tests in France. We took them with us to Normandy for the weekend, so we could all work at painting the windows and doors of our old house, barns and stables. The nice thing about painting is that it is an invitation to conversation.

"Dad, what are you investing in?" one of the boys wanted to know.

We explained that we had put the family money in a variety of things.

"I’m not really an investor – except in the business," we began our explanation. "But I know some people who are good at it. They do research on individual companies – like Warren Buffett. And if they’re good, and if they’re lucky, they do a bit better than the market itself. In a single year, it wouldn’t matter very much. But over a very long time, it adds up. So, I gave them some of the family money.

"Emerging markets, for example. I don’t know about next year. Or even 5 years out, but it seems a reasonable bet that 10 or 20 years from now, those investments in emerging markets will have done better than putting the money into U.S. stocks. And if you have someone you trust on the case, you can take a long view, spread out among several different markets, and not worry about it."

"You mean, you put all the money into emerging markets?"

"No…no… only about a quarter of it. The rest is in gold, natural resources, and European stocks – same thing there, I have someone I trust making very long-term investments. I don’t know if gold is going up in the short run. But over the very long run, there’s never been anything better as a way to store wealth. And I think also that over the long run natural resources will be a good place to be – if you’ve got someone you trust making the choices. I’m in a very privileged position in that I get to see so many different people trying so many different ways to make money. In my business, I see them…I meet them…I study their theories and see their results. Most of them are a waste of time. Worse than that, they’re a danger to your money. But a few are real pros…people you can trust…and people who will do a good job for you."

"Yeah Dad, I’ve been reading The Daily Reckoning. My thinking is probably getting warped by it. Because I’m putting the money I save this summer into gold too. But Dad, what if gold goes down like it did in the ’90s…and what if those managers lose the money? What are you going to do? Shouldn’t you have a lot of money in the bank to retire on?"

"Nah…I’m not going to retire. And when I get too old to work…just ship me out to the ranch and let me dry up and blow away."

"Okay Dad…sounds like a plan."

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning