Credit Crisis Turning Into a Currency Crisis as Governments Devalue Currencies to Devalue DebtCurrencies / Global Debt Crisis May 12, 2010 - 03:48 PM GMT
"We're heading toward government devaluing its currency to devaluate its debt in order to survive. That means you need to protect yourself. You can't just have savings accounts paying no interest. You need to go and buy gold," says Bud Conrad, chief economist with Casey Research, in this exclusive Gold Report interview. Despite the grim outlook for the U.S. dollar and other paper currencies worldwide, Conrad believes he and other speakers at the recent Casey Research 2010 Crisis and Opportunity Summit have information you need to both prosper and protect yourself during the coming economic storm.
TGR: Today we are talking with Casey Research Chief Economist Bud Conrad who recently presented a riveting talk during Casey Research's 2010 Crisis and Opportunity Summit. Here are four major points from his talk:
- The world economy is in a calm between a credit crisis turning into a currency crisis as the collapse of the private debt bubble is replaced by a government debt bubble that will also collapse.
- The world is at a point of no return for government debt as debt-to-GDP approaches 100%. When debt becomes too big, governments cannot control the interest rates and currency. The lead warning is Greece, much the same as Lehman Brothers was in the credit bubble crisis.
- Peak oil. The wealth of humanity has been built on energy. Half the world's conventional oil supply is already used. That means that the quantity of oil produced each year will not increase much from the current level even as demand from developing countries like India and China increases. Wars over oil have already started. Energy prices will rise. We will see a substantial rise in the cost of food, as food production requires energy.
- The U.S. can prosper and stay ahead of the rest of the world by developing and investing in three forms of technology—the Internet and cell phones, new medicines through biological breakthroughs and new sources of energy. All are good investment opportunities and are necessary for human expansion.
TGR: What lens were you using as you developed these themes?
BC: I was trained as an electrical engineer and I spent much of my career in the computer business, so I look at things from a total system point of view. Whenever somebody has an issue I say, 'let's look at the data.'
We have sort of a blue sky overhead right now, as people think things are improving, but I think we're in the eye of the storm. We had heavy winds blowing from the credit crisis and we all know what happened. The governments came along to bailout the problems and purchase all the toxic waste of sub-prime mortgages and bad debt from too much private lending. Governments now have a huge credit bubble, just like we had with the housing mortgage bubble. I think that the government debt bubble will burst and that will be the other side of the hurricane, as the winds swirl around and hit us from the other direction in terms of a currency crisis and government debt collapse.
TGR: Are you at odds with the strategy the U.S. government is using to stave off the recession?
BC: If we decide we're going to build a few roads, maybe build a bridge, hand out some money for basketball programs or some other idea that seems to be part of large government programs, then we won't have achieved much. Last year, the government spent about $1.5 trillion more than it collected in taxes. The Federal Reserve also spent $1.5 trillion buying mortgage debt to keep that market from further collapse. So the government spent $3 trillion dollars to give us the current blue sky of a small recovery. The current blue sky could be measured as 3% of GDP. GDP is about $14 trillion, so that's about $400 billion of economic growth. Well, $3 trillion spent for $400 billion of economic growth is a pretty bad return on your investment. Add to that several trillions of guarantees and future government obligations for Fannie, Freddie, FDIC, PBGC etc., and I have the basis for believing that these obligations are big enough to cause the collapse of the sovereign debt of the United States Furthermore, I don't think it's just the U.S.; I think it's worldwide. In other words, we're going to have debt crisis in the U.S. and Europe and other countries that have expanded their government debt too.
TGR: Is Greece the bellwether for this potential doomsday scenario?
BC: Greece is being bailed out, but it's one set of governments bailing out another set of government debt. Pretty soon the question is who's going to bailout whom? The U.S. debt is getting out of control at a spending rate approximately equal to Greece's (in terms of percentage of GDP per year.) I think we're in a far more precarious position than most people realize.
TGR: Did people examine similar themes at the recent 2010 Casey Research Crisis and Opportunity Summit?
BC: I think there was a general attitude in the conference that our government debt is so serious that we can't recover to as stable level. I call it "beyond the point of no return" because interest on the debt continues to grow even if the government tries to cut spending. Other speakers like Sprott Asset Management's John Embry and Bill Bonner, who heads the AGORA set of newsletters, worry about our government and the debt. Bonner talks about the "collapse of empire." Embry talks about the corruption in our banking system. And we had a whole section on energy.
TGR: Let's go back to your "point of no return."
BC: The point of no return is when government debt gets so big that it can never be paid off. That's the problem that happened in Greece. Government debt is so big that the other countries of the European Union have had to come in with a $110 billion bailout, which I believe is probably not enough, over a three-year period, to try to put the Greece situation back on track. What happens when Spain, Portugal and Ireland are added to Greece?
TGR: And in the U.S.?
BC: In the U.S. I think we are past the point of no return in the sense that the government debt and obligations for retirees from baby boomer times of $75 trillion dollars cannot be paid off with dollars that are now denominated at the value that most people think they should be. In other words, we're heading toward government devaluing its currency to devaluate its debt in order to survive. That means you need to protect yourself. You can't just have savings accounts paying no interest and the purchasing power of these dollars declining. You need to buy gold.
TGR: Is peak oil another reason to buy gold?
BC: One of the best discussions in our conference was about how the explosion of the offshore oil rig in Louisiana is much like what Three Mile Island was for nuclear energy. This kind of deep water oil drilling is potentially far more dangerous than we thought it was; not only dangerous in the short term for the investors who build rigs and spend hundreds of millions of dollars putting these things together, but now for the environment. It's going to affect our ability to do offshore drilling, which we had hoped could be one of the new sources of oil to keep the wealth of the planet and humanity growing.
TGR: Explain the role energy plays in the growth of humanity.
BC: We have grown to 6.5 billion people from 1.5 billion people over the last century because we could take the work off the backs of men and animals and put it onto machines. We created electronics, computers, medicine and so forth to improve our lifestyle. We have lived truly in the most abundant time for humanity, but we have used up half of the oil. You cannot grow energy production at the level that Asia and India would like in order to have the kind of lifestyle we have here in the West. The result is a worrisome situation politically because it can lead to wars over resources. It could also lead to starvation because the production of food is dependent on energy. Energy is used to provide everything from fertilizer to diesel fuel to food storage to transportation. Energy has allowed us to move from my father's time of 50% of the U.S. population scratching food out of the surface of the earth to only 3% of the population producing food, much of which we export.
TGR: Why aren't more people talking about the dearth of oil and the collapse of the paper money?
BC: The combination of energy as a problem and the financial collapse of paper money systems are a reason for much more concern than is generally disseminated in the normal business news. This is really important. We really need to find new sources of energy.
TGR: Yet in the midst of all these looming crises, you see opportunities for investment. Tell us about some of those.
BC: The basic question of most investors who come to our conference is: What should I be doing in terms of investment opportunities? Casey Research focuses heavily on extracting resources. We have two newsletters talking about gold, one on junior mining stocks and one more about big stable mines. We offer similar services in the energy sector. The point of these is to give people the ability to protect themselves from what governments are doing to us.
TGR: But in terms of a sector, what is one that you focus on?
BC: One of the most important things to think about is the future of technology. In some sense, technology is the savior for mankind. It's brought us this great abundance and I think can continue to do so.
TGR: With that in mind, what are some specific ways one can invest?
BC: I don't usually pick companies myself because I tend to look at the macro-picture. I think it's necessary to have a good understanding about how all these things tie together. My new book Profiting from the World's Economic Crisis: Finding Investment Opportunities by Tracking Global Market Trends gets to how this whole system works and how can find ways to protect yourself. For example, I believe the dollar is doomed; and, along the way to its collapse, there will be much higher interest rates to compensate lenders for the potential inflation. You should expect interest rates to rise, and there are ways to invest in that either through futures or ETFs.
TGR: What about opportunities in high-tech?
BC: We've just gone through a credit crisis. We've watched General Motors collapse. We've watched the airlines struggle for decades. One of the things that is nice about technology, for example, is that Apple (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Google Inc. (NASDAQ:GOOG) and Intel (NASDAQ:INTC) all have cash in the bank. They have no debt. Apple just blasted through to being the third-largest company in the U.S. in market cap. I'm not making Apple a recommendation for investment as it is already so high, but it shows how important technology can be with new iPads and so forth. For anybody who wants to see how these forces all hang together, I have five chapters of recommendations in my book. My message is to fear for the dollar and prepare for a future wherein stagflation is the watch word for guiding your investment principles.
TGR: Won't the collapse in the value of the dollar drive the technology companies that you just listed to move to other countries? Aren't we at risk there?
BC: They've already gone. There is no production of anything done in Silicon Valley; all the plants for semiconductors and so forth are in Asia. But there will be competition for intellectual resources in the future. I think we have an edge on the front end of the invention of technology. There are plenty of foreigners here in Silicon Valley. Indians and Chinese are starting their own companies. I think we still have the leading edge in our education and development of new things; and I think we should emphasize and support it. I'm even going to take a libertarian's antithesis here by suggesting government support of our invention and creativity would be a very good investment. If we don't, Asians are no dummies. They'll figure out how to do things on their own and, in fact, they are.
TGR: How so?
BC: One of the reasons for China's great leap forward was active participation in new technologies. China moved from being the low-cost producer to doing their own offshoring to Indonesia where they get cheaper labor. They're trying to move up the food chain to the more complex things like electronics rather than cheap consumer goods. Watch the sweep of anointed society moving from the West toward the East.
TGR: What about other sectors where technology is key?
BC: We need a new way to do medicine. If we actually push forward on biotechnology, I think there are opportunities for humanity. Cracking the genome means that we have figured out how to use biological methods so that people can repair parts of their bodies with living tissue rather than pills. Pills are based on chemistry that, hopefully, has some kind of molecule that makes us feel better. There is a whole new trajectory for the biological sciences that can be used to improve the human condition.
You can see an overwhelming need for new energy sources. We need new ways to absorb the sun's energy to extend humanity's position on this planet. The U.S. is in the best shape technologically to prevail and keep its empire from collapsing in the way so many large and successful collections of society and empires have in the past. I'm not sure we will, but I think that's the best opportunity for us both as a nation and as individuals. If we invest in finding the right technologies, we will all do better.
TGR: Where is a low-risk place to put your money?
BC: I think you'll do well by investing in gold. In some sense, gold is just plain a stable island. It doesn't change when you invest in it; you are really just making a solid savings position.
TGR: Are there any other metals that you see as being a safe harbor?
BC: All of them. Silver is a cheap man's gold but more volatile. As gold goes up, silver goes up more. As gold goes down, silver goes down more.
Think about energy. Oil is often called "black gold." I think of it as an opportunity for investment that isn't just about savings, particularly if you're investing in not just the material but also the new ways of generating energy. Perhaps then you are adding to humankind's knowledge about how to improve its situation, as well as getting good returns.
TGR: What were some major investment themes in talks during the summit?
BC: Gold, energy, interest rates rising, agriculture, water, methods of investing, personal considerations of living in the U.S. or other countries and how to do it, how to handle passports, how to handle your money in a different country than where you live, etc. Most people said it was one of the best conferences they had ever been to.
TGR: Great, this has been very informative. Thanks so much for your time, Bud.
Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl and Tandem. Bud, a futures investor for 25 years and a full-time investor for a decade, is also sought after as key note speaker in Dubai, New Zealand, Vancouver, New York and many other cities. He has appeared on TV on CNBC, FOX, and on many radio shows. As Chief Economist at Casey Research, he produces original analysis.
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1) Brian Sylvester and Karen Roche of The Gold Report conducted this interview. They personally and/or their families own shares in the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview is a sponsor of The Gold Report: None.
3) Bud Conrad: Doug Casey, Casey Research, LLC, Casey Early Opportunity Resource Fund, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in this interview, Casey's publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
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