It is a deal with the devil: Governments churn out more and more cash for the promise of continued prosperity. But the day of reckoning is near, according to Doug Casey, chairman of Casey Research and an expert on crisis investing. As the epic battle between inflation and deflation continues on, Casey discusses his predictions for the new world market in this exclusive interview with The Gold Report.
The Gold Report: There will be a Casey Research Summit on "Navigating the Politicized Economy" in Carlsbad, Calif., in September. The thesis behind the summit is that governments have made a Faustian bargain, a pact with the devil, that saves the empire with overspending, but drives it to the brink of collapse by creating fiat currencies. Doug, where in that story is the economy currently?
Doug Casey: It's extremely late in the day. Since World War II, and especially since 1971 when the link between the dollar and gold was broken, governments around the world have accepted the Keynesian theory of economics, which boils down to a belief that printing money can stimulate the economy and create prosperity. The result has been to create huge amounts of individual and government debt. It's become insupportable. All it has done is purchase a few extra years of artificial prosperity, and we're heading deeper into a very real depression as a result.
Let me define the word depression. It's a period of time when most peoples' standard of living declines significantly. It can also be defined as a time when distortions and misallocations of capital – things usually caused by government intervention – are liquidated.
We have been consuming more than we have been producing and living above our means. This has been made possible by 1) borrowing against projected future revenues and 2) using the savings of other people. The whole thing is going to fall apart. A new monetary system of some type is going to have to necessarily rise from the ashes. That's a major theme in the conference that's coming up.
TGR: Will more quantitative easing (QE) give us another couple years of artificial prosperity?
DC: Most unlikely. We're at the end of the story, not the beginning. More QE – I hate to call it that because it's really just printing money. I hate euphemisms, words that are intended to make something sound better than it really is. Euphemisms, like exaggerations, are the realm of politicians and comedians. Anyway, the next round of money printing is going to result in radical and rapid retail price rises. There is no prosperity possible from this, rather the opposite.
TGR: Last time we spoke, you said that we are entering into a depression greater than in 1933. Can you describe how it might be different?
DC: What we experienced in the 1930s was a deflationary depression where billions of dollars were wiped out with a stock market collapse, bond defaults and bank failures. Inflationary money that was created since the formation of the Federal Reserve in 1913 was wiped out. Prices went down. This depression will be different because governments have much more power. They'll try to keep uneconomic operations from collapse, they'll prop them up, as we saw with Fannie Mae and General Motors. They'll create more money to keep the dead men walking. They won't allow the defaults of money market instruments. They will make efforts to maintain the dollar mark on money market funds. They'll attempt to keep building the pyramid higher. It's foolish, indeed idiotic. But that's what they'll do.
TGR: Which they've been doing by printing money. The first rounds of money printing have gone into the banking system, but the banking system has not allowed it to trickle back out into bank loans. Does that open the possibility of deflation if money is not moving out into the general economy?
DC: That's right. The government created trillions in currency to bail out the banks. The banks have taken it in to shore up their balance sheets, but they haven't lent it out because they're afraid to lend and many people are afraid to borrow. That currency is basically in Treasury securities at this point. Although money has been created, it's not circulating.
At some point, it's going to move out. One consequence of this is that interest rates have been artificially suppressed so that retail inflation is running much higher than interest rates are compensating for it. At some point, rather than sitting on hundreds of billions of dollars that are going to be inflated from under them, the banks are going to do something with that money. It will go out into the economy. Retail prices will start rising.
TGR: Do we need to see another round of money printing to put us over the brink into a collapse? Or will it happen even if they don't print more, because it's currently sitting in the banks?
DC: They actually don't have to create more money. It's just a question of whether the banks start lending it and people start borrowing it. Another possibility is that the foreigners holding about $7 trillion outside the US get panicked and start dumping them. I don't see any way around much higher levels of inflation unless, of course, we have a catastrophic deflation, which we almost had with the real estate collapse.