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Doug Casey: Profit from the Euro-Crash

March 3, 2010

(Interviewed by Louis James, Editor, International Speculator)

A Skype window opens on my computer screen. I see Doug o n his ranch in New Zealand. He looks serious.

Doug: Lobo, there's a Greek fire burning in the Eurozone, and people should take immediate action, or they're going to get burned.

L: I gather you've seen the headlines about the EU moving towards bailing Greece out of its financial difficulties and don't think much of the idea. Let's talk.

Doug: First off, I think it was inevitable, from a number of points of view, that the euro would burst apart at the seams, sooner or later. This isn't the first straw in the wind by any means, but it's a major, unmistakable sign that the EU currency union is going to break up and the euro itself is on its way out. And the EU itself will meet its inevitable doom not too long after that.

When you stop to think about it, the EU was really a stupid idea to begin with. It started out as a coal and steel free-trade zone, which made a lot of sense. But as time went on, as people in general often seem to do, and Europeans in particular seem to love to do, they bureaucratized the thing and made it into a pseudo-government. They wrote a constitution hundreds of times longer than the one that served the U.S. so well until it was abandoned. They took on micromanaging everything, down to producing huge, phone-book-sized regulations on the composition of French cheeses, and so on. There's a burgeoning bureaucracy in Belgium trying to consolidate the 27 member states into one giant country, and it's absolutely not going to work.

L: Why?

Doug: Well, for starters, the people in question don't just come from different countries that speak different languages " they come from different cultures. That's far more profound a difference and one that, historically, takes centuries to harmonize " if even then. From an economic perspective, it's important to understand that these different cultures have different economic patterns. They just don't do things the same way. People in some cultures don't save, for example; they'd rather borrow and spend. Other cultures don't get the concept of sustaining capital at all, and the things they build start running down immediately. Swedes think, act, work, play, and live quite differently from Sicilians.

L: What are the implications for the current situation?

Doug: There are two possibilities. One, they bail out Greece. But if they do that, I don't see how they can keep Greece, which is still an independent country, from doing what it has always done in the past " which is to spend like there's no tomorrow on public servants' salaries and the like. And worse, if they bail Greece out, the other so-called PIIGS " Portugal, Ireland, Italy, Greece, Spain " will be knocking on the door, hat in hand, in short order.

L: So, if they bail one out, how could they say no to the others " but do they even have the kind of money it would take to bail the whole lot of them out?

Doug: No, they really don't. All of these governments are in trouble. It's really just a matter of whoever is in less trouble looking relatively strong. It's out of the question. Spain's problemas alone could bring the whole house of cards down.

L: How's that?

Doug: In many ways, Spain is in worse trouble than Greece, because in addition to embarking on the same profligate spending that Greece has, they had a property bubble. The bubble was actually predictable " Andalusia is the most southern place in Europe, and everybody piled in. I recommended it strongly in my letter in the mid-‘80s, as well as in Crisis Investing for the Rest of the '90 s. But it became very overdone. Anyway, I don't see how they can bail these places out without compounding the problem and inviting a total financial catastrophe.

L: You spoke of two possibilities...

Doug: Yes, the other option is that Greece leaves the European currency union and goes back to using the drachma. But if they do that, capital will flee the country because it's obvious the drachma would be destroyed in short order, as they were and would be printed by the billions. The Greek government would probably, stupidly, want to put on foreign exchange controls " but couldn't, because that's against basic EU rules. So they might just leave the EU entirely if there are no more goodies coming their way. It could be the same story for the other PIIGS, and the EU itself would then be visibly falling apart. Which it should, especially the currency union; the whole idea of the euro is a dumb idea " for the reasons we've discussed before.

L: Yes, your famous line: worse than the dollar being an "IOU Nothing," the euro is a "Who Owes You Nothing." But the headlines here say the EU is pushing Greece into economic reforms in order to help...

Doug: That probably just means they'll make the Greeks raise taxes, since none of them are cutting spending. Cutting spending is what should be done... but it contradicts Keynesian policy " which is itself largely at the root of all this. Raising taxes will just further slow the economy and drive capital out of the country.

L: Probably. It always makes me laugh when I see news of some European government giving some other country a stern lecture on economics " what do these people know about enterprise? The ones in power are almost all socialists!

Doug: [Chuckles] It's perverse. It's hopeless. It's the blind leading the doubly dismembered. Either they bail the Greeks out - and the Greeks won't change...

L: Wait a minute. The IMF lends money to poor countries and imposes conditions that those countries do make efforts to meet. Not that I'm any fan of the IMF, but why couldn't the EU do the same thing?

Doug: They might, but it won't do any good " they haven't the first clue of how to fix economies. The IMF and the World Bank are disasters themselves. They get capital from rich countries, loan it to poor ones to do things like build steel mills a world away from iron and coal supplies, and then counsel the local government to raise taxes to repay their loans. You know what I'd recommend to them?

L: Besides privatizing every function of the state?

Doug: Yes, besides that - which is so obvious it shouldn't even need to be mentioned. What they should do is default on their debt. And I don't just mean a gentle default, like Argentina's of a few years ago, in which people got some fifteen or twenty cents on the dollar back " I mean a 100% default. And that would be a good thing.

L: How so?

Doug: First of all, it would punish people stupid enough, or immoral enough, to lend governments money. They don't deserve to get their money back " they've been supporting these governments and their bad habits...

L: Some of which involve killing people. And all of them make tax-slaves out of their subjects. Sounds like just desserts to me.

Doug: Yes. Why should future citizens be effectively made into serfs in order to pay for the excessive consumption of people today? It's completely unjustified to foist the debts of the father on the sons and daughters. Most of that money has been totally wasted. A huge amount of what's been spent on foreign aid has been siphoned off by officials in the recipient countries. Just as much has gone into the pockets of "consultants" from the West, in payment for giving them rotten advice. Huge amounts have been skimmed in profits of companies who sold them projects that should never have been undertaken. So I say, default on it. Absolutely! To start with, it would bankrupt the IMF and World Bank, which would be a good start.

L: And the consequences?

Doug: Almost all good.

L: Care to expand on that a bit?

Doug: Sure. The thing to remember is that we're talking about governments, not individuals. When we talk about a country defaulting on its debt, we're really talking about its government defaulting on its debt. And the consequence of that is that that government isn't going to be able to borrow money again, not for a long time.

L: I can see that as a good thing; it would impose some fiscal discipline.

Doug: Exactly. So, it's a good thing for the citizens in the country, as the government will lose a source of money to spend harassing them. And longer term, because they won't have a millstone of taxes around their necks " the taxes that would have been raised to pay off all the debt. It would also mean that whatever the government wants to buy would have to be paid for from current tax revenues; people might get the idea that the state isn't a cornucopia. Of course governments will still try to inflate their currencies to buy what they want - but that game is rapidly coming to an end as well... although these miscreants still think they can avoid the fate of Zimbabwe if they keep inflating.

Businesses needn't falter, because it's not their debt that would be defaulted on. They'd just carry on.

L: What about "essential" government services?

Doug: I'm not sure there's any such thing. There's actually nothing government does that the market wouldn't do cheaper, better, and for a profit. But assuming that police, courts, and a military are essential, those constitute such a tiny fraction of most government budgets, even a government on a starvation diet should be able to afford them.

The real question to ask is: "Who owns the Greek government's debt?"

L: Who will get burned.

Doug: I don't really care. And neither should anyone else who actually wants to see the problem solved. Whoever they are, those people should be punished for having encouraged the government to act so irresponsibly.

L: [Laughs]

Doug: Other governments are not going to want to see this happen, of course. I'm pretty sure EU banks own most of that debt. The way things work in today's world, governments where those banks are domiciled are going to have to bail those banks out. The whole thing is vi ciously circular - they'll feel they have to bail them out one way or another. Of course, they shouldn't. Because it's the average guy who has to foot the bill for these huge, corrupt institutions.

That gets us back to something we've said a few times: the whole world's financial system is built on quicksand, and it's got to collapse. And it should collapse.

L: Financial apocalypse now.

Doug: For governments, yes, but not necessarily for the people who see it coming and take steps to protect themselves.

L: Or profit.

Doug: Yes. People think that all the wealth in the world will go away if some institutions that shuffle paper go bankrupt. It won't " it will just change hands. And that's a good thing; mismanagement of capital should be corrected. If that happened, the politically connected would be hurt the most.

L: Couldn't happen to a nicer bunch of people!

Doug: In a real free market, those who create the most, and provide the most desired services, become wealthy. But the system is now such that those who hold political power, directly or indirectly, become most wealthy. They're the ones who've created the corrupt system we have today, and they set it up to make sure they can profit from it through their political connections, so it stands to reason that they will suffer the greatest losses when the system breaks apart. I have no problem with that at all. There's always been an element of this, of course, but it's gotten completely out of hand. It's reminiscent of Rome in the late republic (see CWC on Rome).

L: But the Little Guy would be affected as well...

Doug: Yes, there'd be a wave of bank failures, and the people who a re keeping their life savings in banks would be wiped out. With today's low savings rates, that's actually a small number. It's unfortunate, but reality is what it is, and actions have consequences in the real world. But the fact is that capital has already been lost. People's bank accounts sitting in the major currencies are zombie capital. The walking dead just don't know it yet.

Foremost among them is the euro. It will blow up regardless of whether or not they bail out Greece.

L: Because if they don't bail Greece out directly, they'll have to bail out their own banks that lent to Greece. They're stuck either way.

Doug: Right. Plus, if they don't bail out Greece, the Greeks will likely walk on the EU. Then, once they realize there's no more free-flowing milk in the teat, the other net recipients will leave. That'd leave the Germans and maybe a few others in a currency union " and what good would that do them?

I think the chances are excellent that at some point Europe will go right back to what they've been doing for 2,000 years.

L: Fighting.

Doug: Military conflict, as outlandish as that may seem. Why should the Europeans change now? Bosnia and Kosovo are recent eruptions. There are still plenty of folks alive who remember WW2. We haven't experienced The End of History, as that idiotic book of a few years back predicted. Nor will we, until the psychological aberrations that have plagued humanity since Day One somehow vanish. Who can tell what could set something off? People get angry easily when the economy is bad. Perhaps the War on Islam will heat up and expand beyond Iraq and Afghanistan.

L: Hm. Not to overuse last week's phrase, but that would seem like much more than a straw in the wind. If a country were to actually leave the EU, it would be a huge about-face - a major turning point.

Doug: Just so. You know, people ask me: "But isn't the EU a good idea? They haven't had a war since the advent of the EU." Of course. It was easy to be peaceful during the long boom since the end of WW2. People find it easier to get along in good times.

L: Like the Billy Joel song: "They started to fight when the money got tight, and they just didn't count on the tears."

Doug: Poetry set to music often gets to the heart of the matter. What is good about the EU is the free- trade aspect of it. That people could travel throughout Europe and work in different countries, and transfer goods without duties - that's what's enabled what little real wealth creation there has been in Europe lately. But you don't need a super-government - and certainly not one as bureaucratic as this one - to do that.

L: All you need is for the state to get out of the way.

Doug: Right. All they needed to do was tear down their border checkpoints and the bureaucracies. But what these stupid people in charge are doing " and I use "stupid" in the sense of an unwitting tendency towards self-destruction " is writing more and more regulations, each the size of a New York City telephone book. Meanwhile, they're ballooning the money supply and promoting make-work. This is not just wrong but so precisely the opposite of what's right, it's entirely perverse.

L: [Laughs] And these guys are going to teach the Greeks how to build prosperity in their economy. Maybe that should be the sub title of your next book: "How to Profit in a Perverse World."

Doug: [Laughs] Maybe. Well, the good news about this is that the nation-states that compose the EU are on their way out. As we've discussed, primarily due to the I nternet, and secondarily due to jet travel, people are forming associations and developing loyalties to one another based on many things " religions, ideas, hobbies, professions, etc. These are becoming much stronger than their connections to those they have nothing in common with, other than a passport issued by an arbitrary authority.

L: An arbitrary authority more and more productive people see as being parasitic in nature.

Doug: This EU trouble could be an early, visible sign of a much bigger megatrend: the end of the era of the nation-state as we know it. What good are they, actually? They're a ridiculous fiction, whether it's one like China that absurdly claims to represent 1.3 billion people, or Kiribati, which gets the same vote in the UN. The world would be vastly better off with 7 billion little sovereign entities.

L: That could be the beginning of a beautiful relationship.

Doug: [Laughs]

L: Phyles, as discussed in our conversation on Speculator's Fiction.

Doug: I'm convinced that's going to be the Next Big Thing in the evolution of human society.

L: We'll definitely have to come back to that topic and explain why it's not as crazy as it may sound. But what happens next in the here and now?

Doug: The euro goes bust, probably within five years, and then the EU falls apart, probably not more than five years after that.

L: All because, one way or another, they'll bleed themselves to death trying to bail out their weaker members? No way out?

Doug: No. With the world economy the way it is today, these tax revenues are going to be dropping. At the same time, government outlays, for welfare and so forth, are going to be growing. The pressures are not going to decrease; they are going to increase over the next few years. I just don't see any way out for Europe.

L: A dire prediction. Backing up a bit, you mentioned the politically connected fat cats getting their just desserts " and I am with you on having no problem with that " but what about the Little Guys who get wiped out as collateral damage? No way out for them either?

Doug: The ones that stay wedded to zombie currencies better look out. Unless they wake up and take action now " they are walking dead too. Regrettably, the masses are unlikely to do that. They are not equipped with the understanding necessary to see the problem accurately, let alone know what to do about it. They are more likely to keep voting for bread and circuses, until, like a cartoon character, they realize they've run off the edge of a cliff and their feet are treading on nothing.

L: Ouch. Well, whether or not they know it, admit it, or like it, every human being is responsible for his or her own actions. It's necessary to rely on experts such as doctors and engineers in some areas of our complex modern lives. But the one area of life in which each human being must be an expert is the morality of his or her own actions. If you trust in some expert to tell you what's right and wrong - be it a philosopher, priest, or politician - you will find yourself acting in ways you cannot justify. You eventually will be held accountable, and "He told me to!" or "Everyone was doing the same thing!" won't spare you the consequences of your poor choices.

It may sound harsh, but while I have sympathy for a battered woman, I can't respect her if she allows it to happen by going back to her abusive mate. Similarly, given the unmistakable track record of duplicity among politicians, I can't respect voters who listen to their idiotic, totally unrealistic promises and keep trying to vote themselves into prosperity. And they certainly don't deserve my sympathy if they try to vote themselves a free lunch at my expense.

If you do that - if you sanction and participate in this morally corrupt system, taking from others by delegated force what you have not earned yourself " then seeing your plunder wiped out is not a tragedy. It's justice.

Doug: Well stated. The great mass of people - the voters - will simply have to reap what they've sown. The thing is that anything that must happen will happen. Very few banks in the world " and no major ones " operate with sound classical principles. Those went out the window with the advent of central banks and the fractional reserve system. The whole thing's got to fall apart.

L: Because most of the money people think they have - even the fiat paper certificates, backed by nothing, like those in their wallets - doesn't actually exist. It's a fiction.

Doug: It's inevitable that some people are going to get hurt. So, the best thing you can do is recognize it and prepare for it. It's like knowing a tsunami is going to hit the shore in 24 hours. Yes, a lot of people are going to get hurt, but you can't vote for it not to happen, and no amount of getting upset or wishing it weren't so will help. You head for higher ground, or you get washed away.

Make no mistake; the green shoots everyone is so ecstatic about are not healthy economic activity. It's more like the way the water retreats first before the tsunami hits.

L: Another sobering assessment. You said a moment ago that the euro wouldn't last five years " do you think things could blow up sooner than that?

Doug: Well, you know what they say; when making predictions, don't give both the event and the time.

L: Heisenberg would agree.

Doug: [Chuckles] The uncertainty principle, yes. So, I don't know, and neither does anyone else. But it seems to me that this trouble with the euro, which is much bigger than just Greece, is the first crack in the dam. The whole thing could go very quickly when it reaches its limits.

L: Okay then. Investment implications... Obviously, get out of the euro.

Doug: Yes, forget about the euro, if you haven't already. The yen is in a huge amount of trouble as well, though for different reasons. The British pound is in big trouble. And the dollar as well. I'm profoundly bearish on all paper currencies at this moment. That's why this current crisis is unique - it's worldwide. So... Get out of them into what? Once again, I really see no alternative at this point other than gold.

L: I won't disagree, but until the local grocery store starts taking gold for my groceries and giving me change in silver, I need to keep enough in my local currency to function, for living expenses.

Doug: Sure, but any other wealth you want to preserve should be in gold. Stocks, bonds, real estate - you can't look at any of these as investments any longer. They're all speculations now. For the foreseeable future, you're going to have all markets going up and down like an elevator with a lunatic at the controls. All financial asset classes are going to be exceptionally volatile, and they're all high-risk. Add to that that none of them look cheap today, and it makes for a terrible investment environment - from a conventional perspective.

L: Except for gold, of course. It's got speculative upside, to be sure, but it's still a long way from its previous high in real dollars.

Doug: I'm very sorry, for those new to the gold sector, that it has gone up four times since the bottom in 2001. But, certainly in inflation-adjusted terms, it's still relatively cheap. And you have to look at things in relative, inflation-adjusted terms. No Argentine keeps track of prices in pesos - except for the very short term.

It's almost inexplicable to me that someone like George Soros could have said that gold is in a bubble. The only reason I can imagine someone that smart would say something like that is that he's talking his portfolio, hoping to buy more at lower prices because his words create some short-term weakness. But given that, still, very few people own gold today, it makes no sense to call the current market a bubble. Almost nobody owns gold - the number may even be statistically equivalent to zero.

L: Well, you've talked about people fleeing other investment classes having no choice but to get into gold eventually leading to a gold bubble. Could he have meant his remark in the same way?

Doug: There will be a gold bubble. Definitely. But I don't think it's even started to inflate yet.

L: Well, Business Week and other publications have pointed out that Soros has been buying gold, in spite of his bubble talk. Okay, we'll leave Soros to Soros. What about shorting opportunities? If the euro is toast, there must be an inverse-euro ETF or something...

Doug: Indeed. This is the sort of thing we cover in The Casey Report, where I'm more comfortable making specific recommendations. But yes, I think shorting the euro might be a good speculation at this point. For one thing, the eurozone is extremely expensive. Everything there is overpriced; there are no bargains in Europe, in good part because of the overpriced e uro, and it's got to correct. It's a spec, to be sure, not money in the bank " to use an unfortunately ironic phrase. One thing that makes it a good spec at this time is that there's a lot more debt in the dollar right now than in the euro. That debt needs to be paid, and that creates an extra demand for the dollar, because debt in dollars means dollars are needed to pay it off. That's an argument for the dollar staying strong relative to the euro " but they're both going down. Along with the pound and the yen.

L: It's like the old saying: if you run into a liquidity crunch and you owe the bank a little money, you have a problem, but if you owe the bank a lot of money, the bank has a problem.

Doug: Exactly. The euro has already lost a lot of ground, so it may rebound in the short term, but once these currencies get going in a certain direction, they tend to build and maintain some momentum. The euro's final curtain call is coming, so shorting the euro should work out well, in time, for disciplined speculators. We can check back in a few months and see if we're right about it.

L: I guess that momentum is a matter of mass psychology. Once a large number of people get to feeling bearish about something, that's not going to change overnight. Unless some extraordinary shock hits the market in a way that changes large numbers of people's thinking suddenly. Like this earthquake that hit Chile " that took one of the world's biggest copper producers offline for a time, and so the copper price jumped.

Doug: And since you bring up Chile, I've got to point out that even though that quake was something like 80 times more powerful than the one that struck Haiti a few weeks ago, the death toll was a tiny fraction of that in Haiti. That's because of just the reasons we discussed in our conversation on that topic: Chile's government has let Chileans build wealth, and that's made a huge difference.

L: I'm sorry to see that demonstrated so graphically, but you're right. If you're as right about the euro, the shock could be even bigger.

Doug: Time is working against all fiat currencies. And those that are relying on them.

L: Okay then. Thanks for your insight " we'll talk next week.

Doug: Till next week.

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