Doug Casey on the Continuing Debasement of Money, Language and Banking in the Modern Age
Introduction: Doug Casey has appeared on hundreds of radio and TV shows and has been the subject of articles in People, US, Time, Forbes, The Washington Post and numerous other publications. His books include The International Man, Crisis Investing (17 weeks at #1 on the New York Times Bestseller list), Strategic Investing (seven weeks on the NYT list) and, most recently Totally Incorrect. He's the Chairman of Casey Research (caseyresearch.com), which publishes about two dozen newsletters and numerous special reports. Doug Casey, who's travelled to over 175 countries, and his team have been correctly predicting major budding trends in the overall economy and commodity markets for over three decades.
Daily Bell: Hello, Doug. Please update us on your perspective regarding the US economy? Is it a recovery yet?
Doug Casey: I don't see a real recovery until they stop debasing the currency, radically cut government spending and taxation and eliminate most regulation. In other words, cease doing the things that caused this depression. And that's not going to happen until there's a collapse of the current order.
Things have cyclically improved since the height of the crisis of 2008-09. The trillions of currency units created by the Federal Reserve have jammed the stock market higher and kept the big banks from going under. What surprises me is that retail prices have not moved as significantly as I would have expected. The reason, I believe, is that most of that money is still sitting in financial institutions. It has gone into cash out of fear, into stocks because they represent real wealth with earning power and into various speculative assets like artwork and collectible cars. Real estate has recovered somewhat, not because of strong fundamentals but strictly because of money creation.
This isn't going to last because the way you get wealthy is by producing more than you consume and saving the difference – not by consuming more than you produce, and borrowing the difference. With the Fed keeping interest rates at artificially low levels, hoping to increase consumption, they're making it very foolish to save – when you get ½% or 1% on your savings. So people are saving less and they're borrowing more than they otherwise would. This is a formula for making things worse, not better. They are, idiotically, doing exactly the opposite of what they should be. Although, I hasten to add, I hate to pontificate on what the Fed "should" do. In point of fact, the Fed should be abolished; the market, not bureaucrats, should determine interest rates. We wouldn't be in this pickle to start with if the government wasn't involved in the economy. In fact, if it wasn't for the state, I suspect we'd all have a vastly higher standard of living, and would be colonizing the Moon, Mars and the asteroid belt.
I expect that we'll go out of the eye of the storm this year; it's overdue, actually. The analogy I like to use is that the leading edge of the storm was in 2007, now we're in the eye of the hurricane, and when we move into the trailing edge it's going to be much, much worse and last much, much longer than it was in the leading edge.
Daily Bell: Is Janet Yellen going to do a good job at the Fed? They say she's the second coming of Ben Bernanke but even more level headed. What's your take?
Doug Casey: I don't know what "they" really believe, but everything that I've heard her say indicates that she has absolutely no understanding of economics, sound money, or banking. If Bernanke was bad, Yellen's likely to be even worse. I pity her having taken the helm just now because I think her entire tenure as Fed chairperson will be full of catastrophic monetary and economic conditions. And she's likely to be blamed for it. Of course, it will be partially her fault because all of her policies will be wrong. But it will truly be the fault of what's happened for years and decades before, because of people who came before her. Her timing on being director of the Fed is terrible and there's nothing she can do about the situation. It's totally out of control at this point. Perhaps they appointed her because she's a woman, and it would be unseemly to hang a grandmotherly woman from a lamppost, the way they might a male bureaucrat, after this all blows up...
Daily Bell: Is she going to do away with Quantitative Easing? Will it matter?
Doug Casey: Well, Janet and I don't stay in close touch, but I presume she'd like to do away with it, as evidenced by the "Taper," and even go into reverse by selling all the paper they've bought. But that's impossible at this stage; they'll have to buy more, not sell. The Chinese, the Japanese – everybody is selling, trying to pass the Old Maid card of US Government debt, which represents return–free risk. Nobody other than the Fed is buying, and interest rates would skyrocket if they stopped. The more QE there is, the more distortions it will cause, however, making for a bigger disaster the longer it goes on.
One thing that amazes me is how they've created all these terms, like Quantitative Easing, and The Taper, and how the booboisie and the lapdog media unquestioningly accept them. Quantitative easing is just a euphemism for currency debasement, of course, and the taper is their word for inflating somewhat less. Quantitative easing – they've created this term so the destruction of the dollar doesn't sound so bad – and everybody idiotically parrots the term. It's shocking and disgusting the way the bad guys have captured the language that's used to discuss these things, just as the CIA came up with "terminate with prejudice" and the Soviets came up with "liquidate" as alternatives to an honest word like "murder." It's further proof to me that there's really no hope. Western society is corrupt to the core. Perhaps it needs to be flushed ...
Daily Bell: Will the Fed continue to inflate the money supply?
Doug Casey: They have to, because with the huge amount of debt in the world – and the amount of debt in the world has increased something like 40 or 50% just since the Greater Depression started – if they don't keep increasing the amount of money in the world then nobody's going to be able to service the huge amount of debt that is out there. So I don't see anything changing in the years to come. They've truly painted themselves into a corner. They're caught between Scylla and Charybdis, and we don't have Odysseus steering the ship of state.
Daily Bell: There are those – especially these days – who don't believe that central bank monetary inflation matters. The argument is that commercial banks provide the monetary inflation via loans. What's your take?
Doug Casey: Both are very bad. Let me say, again, that the Fed serves no useful purpose and it should be abolished. Central banks create "super money" by buying government or other debt with new currency units that they credit to the sellers' accounts at commercial banks. That's the actual engine of inflation. But it's greatly compounded in the commercial banking system through fractional reserve lending – which would not be possible without a central bank. Fractional reserve lending allows banks to multiply the money supply several times. If $100 of Fed super money, freshly created, is deposited in a commercial bank like Chase or Citibank, then $90 can be lent out with a 10% reserve, the current number. That money is redeposited. They'll then lend out 90% of that $90, or $81, and then 90% of that $81, so it multiplies. Central banking and fractional reserve lending go hand-in-hand. Without a central bank, any bank that engaged in fractional reserve banking would be considered guilty of fraud and, when discovered, would be punished by a bank run, followed by criminal charges. The point to be made here is that the entire banking system today is totally unsound and totally corrupt.
In a sound banking system you have two types of deposits – checking account (or demand) deposits, and savings account (or time) deposits. They are completely different businesses. With demand deposits, you pay the bank to store your money securely, and write checks against it. A bank should no more lend out demand deposit money than Allied Storage should lend out the furniture you're paying them to store.
Savings accounts are completely different. Here you lend money to a bank, perhaps at 3%, and they relend it at 6%, making 3% to cover costs, risks and profits. A sound bank not only has to match the maturities of its deposits with the maturities of its loans, but must insure loans are both highly secured and self-liquidating.
These principles have been totally lost. Today banks operate as hedge funds. But it's important to understand the way banks used to work and should work. As an aside, if someone were to set up a well-capitalized 100% reserve bank in a tax haven, especially using gold as an alternative currency, it would be immensely successful in the years to come – when most all conventional banks will fail.
Daily Bell: Where are gold and silver headed?
Doug Casey: Back in 2001 I was telling people, "If I could call your broker and buy these metals for you, I would." Gold at $260 an ounce and silver at $4 an ounce were cheaper then, in 2001, in real dollars than they were in 1971, at $35 and $1.29, before the first big devaluation. Since then gold ran up to $1900, and silver to $50. It was a wonderful bull market from 2001 to 2010. Now they're $1300 and $20, respectively.
At this point they're no longer selling at giveaway levels, but I consider both good, sound value. Both metals have bottomed, and you have to be bullish. At this point you don't buy gold for spectacular capital gains the way you could ten years ago, but you buy it for prudence, for safety, for insurance, for savings – which are the most important reasons to own gold anyway. The same argument goes for silver.
Daily Bell: What would you suggest people do now with their investments?
Doug Casey: By all historical, normal parameters, the stock market is greatly overvalued. The trillions of new currency units that the Fed is creating are creating bubbles, and one of them is in the stock market. The biggest bubble, of course, is in the bond market – that's a super bubble.
So I'm not interested in the stock market, and absolutely not interested in bonds – they're a terminal short sale, perhaps the biggest bubble in history. Nor am I interested in real estate in any OECD country, because it floats on a sea of low interest borrowed money. Actually, we're in an economic twilight zone, where almost everything is overpriced and even holding cash is dangerous because inflation could just explode overnight. Not only does the dollar have no real value but the banks you keep it in are all insolvent.
There are few sound investments out there. Today there are no investments; there are only speculations. And a speculation is an allocation of capital to capitalize on distortions caused in the markets by various kinds of political intervention. From the economist's point of view, the bubbles created by central banking are a disaster, but from a speculator's point of view they're a godsend. It's becoming harder and harder to be an investor; I define an investor as someone who allocates capital to productive business. It's hard to be an investor because you now have to spend more money on lawyers than on engineers and workers if you want to produce something. You're increasingly forced to be a speculator in today's climate. The markets are going to be extremely volatile, the economy is going to become very ugly, and it's going to make classical investing very hard.
Daily Bell: Tell us how your Argentine property is doing, La Estancia de Cafayate.
Doug Casey: As we speak, we've just had a large owners' event; owners are from 25 countries, and mostly successful entrepreneurs, libertarian-oriented, of all ages. There are about 60 houses built or under construction, in addition to 20 townhomes at the 5-star Grace Hotel we've co-ventured on our property. And last week 30 more potential buyers visited; eight joined the party as owners. So it's doing extremely well. Anybody who's in a position to, and who has any sense, will get themselves a second residence outside their home country. Political and geographical diversification are critical in today's world.
I like Argentina because they're quite used to handling the stupidities of government and nobody takes the state seriously. I like it because it's the eighth largest country in the world but only has 40 million people, and most of them live right around Buenos Aires. So once you're here in the provinces, in a quiet vineyard, in a grape-growing wine producing region, basically in the middle of nowhere with perfect weather – it's great. I'm delighted to be here with a vast array of amenities – like the superb golf course and world-class gym and spa – and really nice people to socialize with. The town has lots of sidewalk cafes around the plaza, and it's isolated from most of the bad things that are likely to happen in the world at large. Once you're out of the vineyards, you can ride your horse for 50 miles in any direction and not see another person. People should come down and take a look.
Daily Bell: How is Argentina doing? Is it coming back economically?
Doug Casey: Argentina itself, of course, is run as badly or worse than it has been the last 60 or 70 years, and they're destroying the currency again. But that's not only irrelevant to a foreigner living here, but beneficial. The cost of living is about 25% of what it is in North America or Europe, and the quality of life is higher. Eventually the Argentine government will reform, out of necessity, as did that of New Zealand. When I moved to New Zealand in 1999, mainly to play polo, it was about the cheapest country in the world; we bought a bunch of property. Now it's more expensive than the US, and we benefitted not only from the ultra low cost of living, but from huge capital gains on the property. The same thing could happen here in Argentina. But, in the meantime, the country is very nice, more European than Europe, in a good way, and extraordinary value.
Daily Bell: What about the BRICs? How about China? Are they headed for a soft landing or a hard one?
Doug Casey: Stock and bond markets all over the world are overpriced – with the exception of Russian stocks right now; they could be a very interesting speculation. I wouldn't touch anything in China yet, because all the Chinese banks are going to go bust. The Chinese have been more profligate inflating the yuan than the Americans have been with the dollar. It's fantastic what the Chinese have done since Deng liberalized the economy in the early '80s, but now's not a time to be in their markets. I'm not interested in Brazil; it's very expensive, and extremely bureaucratic – the government there is out of control. Remember, we're on the point of going back into a world-class economic hurricane.
Daily Bell: Let's turn to Russia, then. What just happened? Did the West provoke the Bear?
Doug Casey: Yes, of course. The US Government has been incredibly stupid and reckless, as usual. Everybody knows at this point – at least, I hope they do – that Crimea has historically been Russian for centuries, and it was only because of a gift in the 1950s by Khrushchev, who himself was Ukrainian, that it was taken out of the Russian SSR and put into the Ukrainian SSR. They had a legitimate poll where a large majority of the people wanted to go back to Russia from the Ukraine.
Of course, this whole idea of nation-states is a stupid construct, and if I was a Crimean, as a first step I would vote to be totally independent, not part of either Ukraine or Russia. Ideally the world should have seven billion independent little states. But that said, the Crimeans voted to go back to Russia – so the US has absolutely no business sticking its nose there. Anything that goes wrong is going to be the fault of the US government. They're meddling everywhere, even while they're on the edge of a catastrophic bankruptcy at home.
Daily Bell: What is Putin's future? Has he outsmarted the West or outsmarted himself?
Doug Casey: He's vastly smarter than Obama, who was just a small-time community organizer; I don't know how they come up with these people. It's not that I'm a fan of Putin, or any national leader that I can think of, but when it comes to both intellectual smarts and street smarts, he's totally outclassed the Americans. As long as the nation-state exists within the current framework, I think he did the right thing and is backed up by a poll of the people who live in the Crimea.
Daily Bell: Is the Great Game being resuscitated?
Doug Casey: I don't think it should be treated as a great game. And you shouldn't call it that, because it validates the machinations of these horrible people. You've got to remember there are two types of people in the world: people who want to control material reality and people who want to control other people. It's that second type who go into politics. They play games – here it's called the Great Game, which dignifies it in a way it shouldn't be – with other people's lives and property. It's been this way ever since the state was created about 5,000 years ago, and I don't think you should play games with other people's lives. Forget about the "great game"; it's a fool's game.
Daily Bell: Where is the West headed economically? Will it ever recover?
Doug Casey: On the bright side, there are more scientists and engineers alive today than in all of human history put together, and so technology is advancing more rapidly than ever for that reason. That's a huge plus. The second good thing is that the average person, at least those who aren't on welfare, tries to produce more than he consumes. That creates capital. Although he is discouraged in that by state policies, artificially low interest rates and the state provision of welfare, Social Security and so forth.
But I'm afraid that Western civilization reached its peak before World War I. World War I destroyed a huge amount of capital and, more importantly, it changed the moral bases of so many things. Then World War II institutionalized the State as the most important part of society – which is perverse, because the state is actually the enemy of civil society. I think Western civilization reached its peak in 1913, when it reached its maximum geographical extent. That was coincidental with the peak of its technological and philosophical influence on the world, much the way the Roman Empire reached its peak at about the end of the first century, then went down, slowly at first and then quickly. That's what's happening to the West. Relative to the rest of the world, and contribution to world production, our piece of the economic pie is getting smaller and smaller. If we have another serious war it would be absolutely smaller, and the final nail in the coffin. Meanwhile, the US, with its bloated military, is just itching for another war. It's out of control, and unlikely to change at this point. That's a big trend that is in motion that I think is going to stay in motion.
Daily Bell: Hence your decision to live in Argentina, away from much of civilization.
Doug Casey: Well, it's very civilized here, but away from any likely nuclear targets. It's very enjoyable down here, eating grass-fed beef and fresh fruits and vegetables. I pay my maid $500 a month to cook and clean and do everything for me, and a bit more for my groom, who takes care of my horses. It's the way life ought to be; I don't miss the US at all. And I don't have to worry about a SWAT team kicking down my door at 3:00 in the morning, either.
Daily Bell: How about Europe?
Doug Casey: Europe is in particularly bad shape. The place is a fascist/socialist disaster. It was possible for the average European to keep his head above water through tax evasion in the past, but now those governments have broken bank secrecy everywhere, and it will destroy a lot of capital. Europe, as I've often said, will be nothing but a source of maids and houseboys for the Chinese in a couple of generations. The US is little better. You've got to remember, the US today barely resembles the US of 50 years ago. It's changed that radically.
Daily Bell: Perhaps the question of secession efforts in Scotland as well as other places now is related to that. Is Scotland going to secede from Britain?
Doug Casey: I've said for years the colors of the map are going to be running, as Al Stewart sang in one of my favorite songs, "On the Border." I certainly hope the Scots get out of the United Kingdom. There's every reason why they should and no reason why they shouldn't.
And it's not just Scotland. This is one of the few favorable trends in Europe. It's also happening in Spain, in the Basque regions, and now in Venice and the surrounding region, where there was a poll in which 93% voted to leave Rome and the rest of Italy. And in Sardinia. Of course, Brussels and the government in Rome are going to disregard it. But when 93% of the people vote to do something, I suspect something's going to happen; it's a groundswell type of thing.
This is happening everywhere. Most of the countries in the world – all of those in South America and even to a much greater degree all the countries in Africa, all the countries in the Middle East, all the countries in central Asia – are all totally artificial constructs. They were put together by politicians in boardrooms, with little or no regard for ethnicity, language, or traditions, so most of these countries are going to break up because they serve no useful purpose. The "nation-state" is a really stupid and dysfunctional idea, and I'm glad it's on its way out.
That said, even the US, which from a cultural point of view is as much of a country as any place in the world, should actually break up into at least five or six regions. Canada should break up into at least five or six regions initially. But, again, my idea is to not just see 1,000 more countries in the world but 7 billion more countries in the world, if you follow my meaning.
Daily Bell: Until that happens, do you think some of the emergent political parties like UKIP will have more influence in the near future?
Doug Casey: I don't think politically; politics is the problem, not the solution. I think that the ideal solution is for every individual to opt out of the current system. When they give a war, you don't come. When they give a tax, you don't pay. When they give an election, you don't vote. You even try not to use their currency and their banking system. The ideal thing is to let the system collapse under its own weight as opposed to starting a new political party and then continuing to act politically, which is to say to use force on other people. That said, Nigel Farage is generally on the right side of the issue, so his political party would be preferable to any of the others that I know of in that part of the world. However, it's not an ideal solution.
Daily Bell: What do you think about private money?
Doug Casey: Well, bitcoin is a nice innovation, although it's useful mainly as a medium of exchange, not a store of value. And, of course, it has no utility in and of itself. I wish it well, but am inclined to wait for version 2.0. That said, I wish I'd backed up the truck when I was promoted on it at $15. Oh well, there's always another train leaving the station.
As for conventional currencies, there shouldn't even be things like the dollar, the franc, the marc, or the pound. Originally, they were just names for a certain amount of gold, in a given region. Then people started to confuse the paper currency with gold, which is actual money. That said, people should use whatever they'd like for money; the market will decide what's most acceptable and convenient. Chances are, in a free-market world that would be gold. It might be some other commodity, possibly silver. There really aren't any other good alternatives, that cover the five Aristotelian measures of a good money. But this isn't for governments to decide; it's for the markets to decide.
Daily Bell: Will we see private money again in our lifetime?
Doug Casey: I believe we will, because all over the world currencies are going to be destroyed over the next generation, over the next 20 years. People will go back to gold simply because they don't trust paper money, which will prove to be a costly failed experiment. It will be intellectually gratifying to see paper money disappear, although the transition to gold will also likely be scary, unpleasant, inconvenient and costly for a lot of people. But like I said, the intellectual gratification alone might be worth those passing tribulations. After all, we do live in an entertainment society...
Daily Bell: What might that look like and what could people be doing to prepare for that, now?
Doug Casey: Market risk is huge today, but political risk is even bigger. One indication of that was, when the banks in Cyprus went bust some months ago, the government essentially confiscated everybody's account above 100,000 euros, in what they called a "bail-in." You could see that happen absolutely anywhere. The same thing could be true of your pension fund. The government could confiscate that and tell you they'll give you something on the never-ever plan, like some form of Social Security in exchange for your private pension plan. It's already happened in a half-dozen countries, without very much press coverage.
When they start doing things like that, it's close to "game over." The world's economic/financial system is going to reset, and you don't want to have significant assets in a form that they can easily confiscate. So I think owning real estate in the right places in the world is important, as is having gold and silver abroad. You've got to be diversified politically and internationally. That's absolutely critical because if you aren't, you can't escape from your masters' tax farm.
You need several options. It seems like people haven't learned anything from what happened in Russia in 1917, Germany in 1933, China in 1948, Cuba in 1959, or Vietnam in 1975. Rwanda, Cambodia, Yugoslavia, Zimbabwe, Ukraine, Syria ... there are lots of examples and these things can and will eventually happen almost everywhere. When the chimpanzees go crazy, you don't want to be where they are. You've got to have a Plan B. You've got to have a crib out of that political jurisdiction. Acting like a plant, and staying put, isn't a good survival strategy for a human.
Daily Bell: How can people live more prosperous lives with less impact from wars and military actions?
Doug Casey: Personally, having visited over 175 countries and having lived in 10, I had to decide where I wanted to settle. It came down, for me, to either the Orient or to Latin America, which are very different places. They're antipodal both geographically and culturally. Despite that, I like them both. But I decided I wanted to be some place with a very low population density, but all the advantages of modern technology, entirely self-sustaining, inexpensive, stable and with good weather. That's how I wound up here in Cafayate, in the Calchaqui Valley, where we have all the infrastructure a Renaissance Man would want but in a quiet and peaceful place, not near a city. It's like Aspen used to be. Hopefully, it will remain that way as the rest of the world devolves into war. And I do expect war is coming because these governments always like to blame somebody else for the problems they create. That's a big cause of war.
Daily Bell: Any other things you'd like to mention, books or publications, more information about what's happening at La Estancia de Cafayate?
Doug Casey: In terms of speculation, I'll take back something I said about there not being any bargains in the world. I actually just managed to put a little bit of money into a stock trading on the Mongolian stock exchange that is investing in North Korea that makes sense to me. There are always anomalies out there; there are always speculations. Recently, before coffee doubled, I was suggesting going long coffee vs. short Starbucks. My cattle herd here in Argentina keeps growing, and cattle are a truly great investment now – especially here. Next week, I'm flying to Albania to scope out what might be a major oil deal. Perhaps a mania will develop in the companies that are legally growing marijuana in Canada, a space where I recently made an investment. I'm getting involved in a private deal, to export jade from Guatemala to China. And, of course, I'm always looking for private placements with warrants in well-positioned mining explorers; I'm of the opinion there will likely be a super bubble in their shares, again, at some point.
So there are always situations that come up like that, always anomalies and exceptions out there. I'm just not interested in the kind of stuff they squawk about on MSNBC. When we re-enter the economic hurricane those blow-dried zombies are going to get what they deserve. Then again, almost everybody eventually does ....
Daily Bell: Thanks, again, for your time.
Doug Casey: It's always a pleasure.
The Daily Bell
Doug Casey says a great many things we agree with in this interview. We wrote not long ago that Janet Yellen could end up living a nightmare given the precarious position of the Fed and the US dollar – and Doug says something similar.
He also points out that the terms the Fed creates for its increasingly insane activities are astonishing from a standpoint of euphemism and media acceptance. That the Fed – and the Bank of England – can come up with so many dishonest terms for currency debasement and that the mainstream media parrot them incessantly is one of the wonders of the age.
But for us, one of the best things in this article was Doug's lucid description of how modern banking ought to work versus how it IS working. He writes:
In a sound banking system you have two types of deposits - checking account (or demand) deposits, and savings account (or time) deposits. They are completely different businesses. With demand deposits, you pay the bank to store your money securely, and write checks against it. A bank should no more lend out demand deposit money than Allied Storage should lend out the furniture you're paying them to store.Savings accounts are completely different. Here you lend money to a bank, perhaps at 3%, and they relend it at 6%, making 3% to cover costs, risks and profits. A sound bank not only has to match the maturities of its deposits with the maturities of its loans, but must insure loans are both highly secured and self-liquidating.
This is probably an excellent description of how one type of banking can – and should – behave. It's a lucid but terse description of real banking in the modern age, and as Doug says, its methodologies and practices have been basically abandoned.
Here at The Daily Bell, we've never taken the position that anything less than full-reserve banking is criminal. In a free market, we've always believed people should have a choice – and that the choice might be influenced by higher rates. In other words, banks engaged in "riskier" lending would end up compensating customers with higher returns.
Doug also points out that inflation is a phenomenon of monopoly central banking. In doing so, he makes clear that while money creation can take place at the commercial banking level, the entire process of fiat-money creation would collapse without today's egregiously active central banks.
This puts the lie to the recent study issued by the Bank of England that tries to blame inflation on commercial bank processes. Those who run central banks are growing increasingly desperate and looking to blame any other party – Wall Street, commercial banks, hedge funds – for their own misadventures and currency depredations.
But in the long run, history will record this Dark Chapter in the history of humankind as one generated out of the lie of central banking and the idea that ten good, gray men in a room can fix the price of money for the rest of us.
They can't. They don't. They won't. Thanks to people like Doug Casey for eloquently explaining the lie and reminding us once more that one day truthful economic and financial processes will be available once again, as before.