Some-one else humming my tune… R.
Guest Post: No Way Out [redacted]
Zero Hedge 10/07/2010 09:49 +1200
Submitted by Doug Casey of Casey Research
No Way Out
I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts.
This is different.
In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy.
The recovery impresses me – as a charade.
Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.
A Brief Summary of Our Story So Far….
Before we get to where things stand at the moment, let’s briefly look at where we‘ve come from.
That a depression was in the cards has been foreseeable for decades. The distortions cranked into the system in the ‘60s – the era of “guns and butter” spending by the government – resulted in the tumult of the ‘70s. Things could, and one could argue should, have come unglued then. They didn’t, for a number of reasons that have only become clear in retrospect:
But sadly, taxes, government spending, and deficits soon started heading much higher. Despite the collapse of its only conceivable enemy, U.S. military spending continued to skyrocket. Monetary policy encouraged everyone to take on huge amounts of debt, much more than ever in the past, and everyone soon found they could live way above their means. The stock, real estate, and bond markets got pumped up to ridiculous levels. The main U.S. export became trillions of paper dollars. Worst of all, the U.S. devolved into just another country, undistinguished by anything other than a legacy of a high standard of living.
The standard of living in the U.S. is now going down … It’s also something as big and as inevitable as a glacier coming down a valley during an Ice Age.
This, along with other problems presented by the business cycle have ushered in the Greater Depression.
How Long Will the Greater Depression Last?
…everything the U.S. government is doing – raising taxes, increasing regulations, and inflating the currency – is not only the wrong thing to do, but exactly the opposite of the right thing.
This is really serious, because the government is the 800-pound gorilla in the room. What governments do makes all the difference – I say this because there’s no realistic possibility the Obama regime is going to change course. To the contrary, they’re likely to accelerate in the present direction. They believe the government should direct society – as do most Americans at this point. They feel government is a magic cure-all and not only can but should “do something” in response to any problem. Most complaints aren’t that they’re doing too much, but that they’re doing too little. Everything on the political front, therefore, is a disaster.
What are the chances they’ll make a 180-degree turn, in the direction of someone like Ron Paul? I’d say close to zero, and libertarianism will remain a fringe movement, at best. Will Boobus Americanus vote for someone who says the government should actually do less – much less – in the middle of a crisis?
Simply, the chances of a reversal in what passes for the philosophical attitude of this country are slim and none. And Slim’s left town. While there are some who hope for an improvement on the political front, I think that’s very naïve.
The Tea Party movement? Its ruling ethos appears to be a kind of inchoate rage. They feel bad that it’s no longer the America portrayed in Jimmy Stewart and John Wayne movies, but many are quick to blame the changes on swarthy immigrants. They’re desperately looking for a political solution. These folks tend to be highly nationalistic and atavistic, with a tendency to worship their preachers and the military. I just hope some popular general doesn’t get political ambitions…
So, how long will the Greater Depression last? Quite a while, at least for the U.S.
Over the years I’ve been agnostic as to whether this depression would be inflationary or deflationary. Or both in sequence, with inflation first, followed by a credit collapse deflation; or a deflation followed by a runaway inflation. Or perhaps both at the same time, just in different sectors of the economy – e.g., prices of McMansions collapse because people can’t afford to live in them, while the prices of rice and beans skyrocket because that’s all people can afford.
At the moment I’m leaning towards a deflation in most areas.
Even so, contrary to popular opinion, deflation is much better than inflation.
[However] Because today’s dollar is just paper and credit, and because deflationary conditions will create a clamor for many more of them, the government will eventually succeed in its inflationary efforts.
Here’s a speculative scenario. To solve these deflationary problems and resolve Ben’s helicopter conundrum, maybe the Fed will go into the retail banking business by directly taking over the hundreds of institutions that are now failing. The average American would feel safe depositing directly with the Federal Reserve. And the Fed could lend as much as they want, without the restrictions imposed by actual capital or pesky shareholders.
Ridiculous? I think not, certainly not after GM, Fannie, and the rest. Certainly not when you consider that this depression is still in only the second inning. It would be one way to head off deflation.
Be that as it may, or may not, at some point after the deflationary waters have receded as far as possible, an inflationary tsunami is going to wash ashore, to the surprise of all.
Everybody knows how bad things were in Weimar Germany, and what a catastrophe hyperinflation has been in Zimbabwe. If it hits in the U.S., as highly specialized and urbanized as it is, it will be an unparalleled disaster.
And not just for the U.S., because the reserves of almost all governments are mostly U.S. dollars. And dollars are used as the de facto currency by the average man in about 50 countries. All told, there may be as many as seven trillion of the things held outside of the U.S., and, at some point, everybody will be trying to unload them at once. At which time they’ll lose value very, very quickly.
the dollar is going to be a lead player in the catastrophe called the Greater Depression.
And all the other paper currencies are going down with it. Pity the fool who doesn’t see this coming. Or, for that matter, what’s going to happen to interest rates.
The government is doing everything in its power to keep interest rates as low as possible. Low rates make it easier for people to support their debt burdens and borrow more. Low rates inflate the value of stocks, bonds, and real estate.
But, perhaps even more important, it’s a lot easier for the government to service $12 trillion of official debt at 2% than at 12%. That much of a rise in rates alone will add over a trillion$ to what they need to borrow to keep the giant Ponzi scheme going.
Of course it’s a fool’s game. Eventually (I’ll guess between six and 24 months), when their creation of dollars eventually overcomes the credit markets’ destruction of dollars, consumer prices will go up. That evidence of inflation will cause interest rates to rise, with all the short-term negative effects the government so fears. But higher rates are absolutely necessary to get out of the depression.
Rates – the price of money – shouldn’t be controlled by the state, up or down, any more than the state should control the price of oil, or bread, or toothpaste.
One reason why Japan has been fading into the economic background over the last two decades is that the government has artificially suppressed rates, in the vain hope of stimulating the economy. All they’ve gotten is excessive levels of government debt, which will result in the destruction of the yen. And what will be tens of millions of impoverished, and very angry, Japanese savers.
The same thing is in the process of happening in the West due to suppressed interest rates.
The Next Steps Down in the Markets
When rates inevitably go higher, stocks, property are likely to head much lower. That’s entirely apart from the fundamentals under them, which are truly ugly. In turn, that will bankrupt pension funds across the economy, many of which are already severely under-funded.
These pension funds are likely to be the centerpieces of the next leg down of the evolving crisis. Will the government bail them out? More likely it will nationalize them, assuming their assets in exchange for a special class of its paper. In the interest of “fairness,” that will happen to small and solvent funds as well as large and bankrupt ones.
After that, the next problem area will be insurance companies. Even the well-managed ones have their assets invested primarily in commercial loans, commercial property, bonds, and stocks.
How This Will End
Nassim Taleb has popularized the concept of the Black Swan: an event that no one thought was possible
Until the actual moment it hits, everything is completely normal. Then everything changes radically.
Either way, it’s far from being all gloom and doom.
How This Could Be a Good Thing
Everyone, certainly including myself, prefers good times to bad times. But much of the good times of the last two decades were a result of an entire civilization living above its means. It was great fun while it lasted, but the party is over. The result will be massive unemployment, lots of business failures, and huge investment losses. These things are most unpleasant, but inevitable. That said, I always like to look at the bright side.
And what might that be?
The bankruptcy of the U.S. government will, at least at some point, lead to a big drop in the number of government employees. This is a good thing, since little of what they do serves a useful purpose; most are an actual impediment to production.
Internationally, it seems to me a sure thing that organizations like the UN, the IMF, the OECD, and so many more, will be totally hollowed out or even disappear. At a time when governments are straining to maintain themselves, they’re unlikely to ship scarce capital abroad. So the people who are worried about the UN taking over the U.S., One World Government and such, will have to find something different to fret about.
As domestic currencies the world over are inflated away, some medium of exchange and store of value will have to be agreed on. I don’t see any realistic alternative to gold. China is going to be a focus of change in this regard
But if the U.S. and governments of other advanced countries lose power, governments in places like Africa will collapse; Somalia is a model of things to come there.
That may sound like a horrible thing, but – notwithstanding teething pains – it’s a big step forward.
Deprived of free money, free weapons, and lots of free bad advice that have entrenched kleptocracies, the Africans are likely to make real progress after the Greater Depression plays itself out. [emphasis added ~ Recision. ...” if you don’t want people doing something, don’t pay them to do it ” ]
The transition period, however, is likely to be messy almost everywhere.
Can we prevent the status quo from falling apart, and preclude these messy changes? Further, should we, if we could?
Entirely apart from the fact that change is an essential part of life – and I think the status quo is in dire need of some real change (although absolutely not the kind Obama and his posse might have in mind) – I actually don’t think there’s a[nother] realistic solution to the problems the world is facing in this [next] decade.
Yes, there are solutions that the government could proactively bring about – almost entirely by doing less, rather than more. But the odds of the U.S. voluntarily defaulting on its debt, abolishing the Fed, using gold as money, abolishing all agencies not specifically designated in the Constitution, eliminating the income tax, and cutting back on military expenditures by about 90% — among other things – are so small as to be considered a fantasy.
In fact, the concept of invoking changes of that scale are too scary for most to even contemplate. But they’ll happen anyway.
Which means these things aren’t going to happen voluntarily, under some kind of control, and in a more or less orderly manner.
Even so, because anything that must happen will happen – all these things and more will actually happen and, in the happening, will be most unpleasant and dangerous.
It seems to me that the upset we’re looking at could be the biggest thing since the Industrial Revolution. we could have another American Revolution,
But it’s hard to see how it could be anything like the first one, which was led by thoughtful, rich, free market-oriented farmers and merchants. More likely this one will center on people like Sarah Palin and Sean Hannity on the one side, and Michael Moore and Nancy Pelosi on the other – strident, antagonistic, and bent, but also full of charisma and certainty. I don’t see much chance of collegial and reasonable compromise.
The best advice is not to be around the watering hole when two antagonistic groups of chimpanzees are hooting and panting at each other, getting ready to fight for control of it.
I’m afraid the current state of affairs is corrupt through and through. there’s no feeling of shame in gaming the system any way possible. [there is no] escape from the very unpleasant consequences of very stupid past – and current – actions.
I’ve just scratched the surface of the possibilities for the next ten years here.
What’s clear is that some patterns of production and consumption are unsustainable; they will stop. What’s not clear is what new patterns will replace them.
But that’s not so worrisome; what is a matter of more concern is what forms of political and social organization will appear.
But let me leave you with a final bit of good news. Most of the real wealth – science, technologies, capital and consumer goods – will still be here. There’s just going to be a change in ownership.
Based on the above, what looks good to me on a long-term basis…
In general, stocks, bonds, and property are dead ducks, and headed much lower.
But when a real bottom arrives, perhaps even in this decade, fortunes will be made buying back into them. Gold and silver, even though they’re no longer cheap, are going much higher; they’ll be what you’ll trade for things that are cheap.
Agricultural commodities are going to do well. The trillions of currency units being printed all over the world will definitely ignite more bubbles, which should present fantastic speculative opportunities.
And because the political situation will be hairy, diversify your assets outside of your home country.