I’m writing you today from stunningly beautiful Cafayate, Argentina, where I have been enjoying the gorgeous scenery, the delicious local Torrontes and Malbec wines, and the company of some of the most interesting people in the world.
Yesterday we attended a small informal talk where Doug Casey shared with us his views on where we are currently in the global economic meltdown. Contrary to popular belief (which is the essence of Doug, and just one of the many things I love about him), Doug believes that things are not “getting better” but in fact we are close to exiting what he calls “the eye of the storm”…that somewhat calm spot in the middle of the financial hurricane that started in 2007 and continues to this day.
Despite the recent plethora of supposedly “good news” (a recent research paper from UBS reports that the economy is improving, and the DOW is over 13,000 so people are “happy”), Doug doesn’t see how we can avoid an upcoming catastrophic event (and I agree).
While nobody has a crystal ball, Doug believes that we will eventually have massive inflation in the U.S., although interestingly we might have a catastrophic deflation first.
There are trillions of dollars still “sitting on the sidelines” not being lent out…there is no borrowing, as anyone who has tried to obtain a loan recently has learned the hard way.
So how might we experience a massive deflation in the short-term?
Well, one of the biggest industries in the world is the financial industry itself—it makes up a huge portion of the world’s economy. And right now this industry is sitting on trillions of new currency units that governments and central banks from around the world have created out of thin air to save the financial institutions and attempt to stimulate the economies of the world.
However, this is neither normal in terms of world history nor healthy, and Doug believes that at some point all of this “make-believe capital” or funny money could be wiped out, causing us to experience a massive deflation in the short-term.
However, in the long-term, Doug doesn’t see how we can avoid massive inflation. The U.S. is still running an annual trade deficit of some $600 billion, and those dollars are going outside of the U.S. But countries such as Iran, Russia, China, and India have already started settling many of their transactions in gold, not in U.S. dollars.
Additionally, central banks around the world have been accumulating gold, and all it will take for the world to realize that U.S. dollars are nothing more than hot potatoes is for one country (Doug postulated that maybe China would be first) to introduce a gold-backed currency. If China introduced a gold-backed yuan, for example, who on earth would want anything to do with U.S. dollars?
These dollars would be quickly dumped by everyone holding them, and would necessarily and quickly find their way back to the U.S., where due to our legal tender laws all transactions must be settled in U.S. dollars.
This flood of dollars entering the U.S. would cause massive inflation, inflating American shares, property, wheat, etc…everything.
So Doug doesn’t see how things can really “get better” under these circumstances….and with the number of people on food stamps close to 50 million and the real unemployment rate as calculated by John Williams of ShadowStats close to 28%, it doesn’t seem like things are really even all that “good” now.
(And this isn’t even factoring in various “black swan” events that could happen…war with Iran or another country, riots, another terrorist attack, etc.)
But what if the government can somehow “save us” and actually raise taxes or cut spending to the degree needed?
Well, really, what can they cut?
A full 85% of our spending goes to:
- Social Security (politically impossible to cut),
- Medicaid (politically impossible to cut)
- Medicare (politically impossible to cut), and of course
- Military (politically impossible to cut)
“They” (the government) have put forth a plan to cut $1 trillion over ten years, but while this may seem like a lot of money, it’s barely a drop in the bucket…over ten years that is $100 billion per year which is only 8% of the current annual deficit!
But many people believe (and I hope you are not one of them, dear reader…) that governments have the power and do create prosperity. While I am not an anarchist per se (I’m still figuring out exactly what I believe in that realm!), I also don’t believe that governments create anything of intrinsic value.
Governments by their very definition produce nothing, and I completely agree with Doug when he says that the way you become wealthy is by producing more than you consume and then saving the difference. This creates capital, which you can then use to make investments and to create more wealth.
However, right now the government is encouraging and rewarding the exact opposite of this! By keeping interest rates so artificially low they are encouraging people to consume more than they produce, which destroys wealth.
Basically, just like Zimbabwe, Doug believes we are heading towards a dollar disaster. The Zimbabwean government printed all of the Zimbabwean currency units they so desired, but this didn’t create capital….instead, it destroyed their society.
I want to thank Doug for allowing me to share this small excerpt from his talk with you! He is a very, very smart guy, as is all of the Casey Research team, and if you haven’t subscribed to at least their free daily updates yet I would highly encourage you to do so. You can find them and sign up at CaseyResearch.com. (I’m unaffiliated, other than the fact that I’ve been a happy subscriber for years and do own a homesite with Kung Fu Guy at La Estancia de Cafayate).
What about you? What do you think lies ahead for the global economy and what are you doing to prepare yourself? I’d love to hear what you think!
To your financial success,
— Kung Fu Girl