By Jeff Clark
Casey's Gold & Resources Report

 How many IMF officials does it take to change a light bulb?

As you probably read, the International Monetary Fund announced they would proceed with selling the remaining 191.3 tonnes of gold from the 403.3 tonnes planned. The money is to be used for lending to poor countries. Lending implies the money will be repaid, which, in the case of the IMF, is a joke that isn’t funny. But that’s a topic for another day.

Doug Casey: How to Profit from the Euro-Crash

(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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Doug Casey: A Major Turning Point

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, a hot topic of conversation this week is the man who flew his airplane into the IRS building in Austin, Texas. What do you make of it? Is the guy a hero for the downtrodden taxpayer? Or a terrorist? Or just some lone lunatic?

Doug: First, I’d say we have to define what terrorism is. The generally accepted definition being that it’s the use of violence to create fear in a society in order to induce political change. I don’t think that’s the case here. So I’d say this was just an angry man, acting as an individual, attacking those he saw as destroying his life. The fact of the matter is that it was an act of revenge, not terror.

But according to the FBI, terrorism is the unlawful use of force or violence against persons or property, meant to intimidate or coerce a government or the civilian population as a means for achieving political or social goals. It’s to their advantage to see this as an act of domestic terrorism. It makes their jobs seem important and will result in more personnel to fill their gigantic new Homeland Security complex in DC, and more funding to look into Americans’ comings, goings, and thoughts.

L: Heh – so if it’s lawful use of force to intimidate the population, it’s not terrorism.

Doug: Of course; that’s a key word, completely unnecessary to the real definition of the word, and one that opens a real Pandora’s Box. From Big Brother’s point of view, it’s always “do as we say, not as we do.” Based on the FBI definition, state terrorism apparently isn’t terrorism, because it’s lawful.

L: Okay, so, given that the explanation the guy left behind goes beyond simply saying “I’ve had enough” to stating that violence is now the only solution, and calling for revolution, I guess that makes him a terrorist, by the FBI’s definition.

Doug: Well, I suppose. His call to violence seemed like an afterthought to me. In reality he’s just calling for the righting of egregious wrongs. However, it’s getting to the point in the U.S. that you have to be careful about even complaining, or you might be put on some kind of “watch list.” You actually better be careful about what you say, and how, and to whom. The walls have ears, as the Soviets, among others, used to say.

The media has downplayed his letter as a “rant” or a “screed” penned by a lunatic, partially to be self-righteous and partially to discourage others from reading it and thinking about it. But it’s actually worth reading and thinking about. It’s not that often you get to read a suicide note written by what appeared to be quite an intelligent guy. His letter is a little disjointed, agitated, and a bit ungrammatical at times – after all, it is a suicide note – but it’s not at all irrational. And I suspect he put his finger on what is probably going on in the minds of a fair percentage of the population.

You know the old saw people once used, but don’t anymore, as it’s become politically incorrect? Three guys are doing the same thing, and one says, “I’m a freedom fighter. You’re a rebel. He’s a terrorist.’” So, bandying these terms around makes conversation difficult. The FBI’s definition is self-serving and, in this case, serves – perhaps not accidentally – to obscure the truth of the matter.

L: It was always darkly humorous to me that in the Reagan years, the same people the lawfully constituted government of Nicaragua called rebel guerillas, the U.S. called freedom fighters – and yet the U.S. helped Saddam Hussein put down rebellion when he was an ally. Not that I cared for the socialist government of Nicaragua. The point is that if “we” like them, their opponents are terrorists, and if “we” don’t like them, their opponents are freedom fighters. It’s so hypocritical.

Doug: It’s perverse enough to be black comedy. I think this needs to be looked at from a personal point of view. Here was a man who was apparently just going about his business. He quite justifiably resented the government taking forty-plus percent of everything he produced. And worse than that, they were making it hard for him even to produce. They made his life miserable. He spent much of his time and money trying to fight within the system and got nowhere. Perhaps that was foolish of him, perhaps he should have just rolled over on his back and wet himself… just done what he was told and paid what he was told to. It’s the New American Way.

On a moral plane, I think it’s important to remember that groups of people can have no rights that the individuals who compose the group don’t have. In other words, if an individual does not have a right to do something himself, then neither can he delegate that right to a politician, policeman, nor some other authority. If it’s not his to give, he can’t give it.

If I don’t have the right to take money by force from my neighbor, I don’t gain that right by teaming up with others. A bunch of people voting for it doesn’t make it any more right. Suppose, for instance, a neighborhood voted to hire a motorcycle gang to defend it and “authorized” that gang to levy taxes by force, including on residents who didn’t want to go along with the plan. Most people would say that’s wrong. But somehow, if the government does exactly the same thing, people see it as okay.

There’s no difference in this instance, morally, between the motorcycle gang and the government. Of course, this calls to question the legitimacy of the state itself, as an institution.

L: Indeed. And I’d like to talk to you about your anarchist tendencies, but that’s a long topic, perhaps for another day.

Doug: Okay, but one other thing I’d like to point out about this incident. It’s a clear sign of the direction in which warfare is going – we talked about this very sort of thing in our conversation on the military. Warfare is becoming what you might call “open source.” You no longer have to get an army together, teach them how to spit-shine boots, and attack another army. We’re approaching the end of direct conflict between standing armies. This trend has its roots at least as far back as the American Revolution, during which the British were outraged that the Americans wouldn’t stand and fight. They’d take potshots from behind trees and then run. They even shot officers – officers! – from hidden positions. Most ungentlemanly.

Today fighters no longer need the aegis of a government. Instead, they organize loosely, for ideological or other reasons, and strive to sting with maximum effect, while presenting the smallest, least useful target for retaliation. They realize that with $100 they can cause a million dollars of damage. Wars are won on economics, in the long run. It is, for instance, quite stupid of the U.S. government to think that it can quash Al Qaida or the Taliban the way the Spanish took over the Aztec and Inca empires – by grabbing the guys at the top. There is no head to strike off.

To head off flaring tempers and angry letters, let me make it very clear I am not defending these groups. I’m very much opposed to them. If either the Taliban or Al Qaida came to power where I live, no doubt I’d be among the first they’d want in front of the firing squad.

But quashing individuals in such loosely organized groups, no matter how important they might be, doesn’t quash the reasons why such groups exist. It’s like whacking a hornet’s nest. Once you whack one, you don’t have just one hornet’s nest to deal with – now you have hundreds of completely unrelated hornets to deal with, all attacking you, because each sees you as his enemy.

L: It occurs to me… the U.S. Army has, or had – I’m not sure if it’s current – a slogan: “An army of one.” The idea was that each U.S. soldier’s training would make him or her so capable of individual devastation, each one counted as an entire army.

Doug: I remember that.

L: Well, I wonder if it’s dawned on any of these geniuses in the Pentagon that the same is true – much more true – for their opponents…

Doug: [Laughs]

L: This incident in Austin is an example. This individual man decided to strike out at the U.S. government. Whether you approve or not, you have to admit that he created quite a stir, especially for a simple impromptu action. He made an army of one of himself – and since one individual can keep a secret, that sort of army is all but unstoppable.

Doug: And it’s the way things are evolving all over the world. In previous times, you needed to organize a bunch of people to do serious damage. But with today’s – and especially tomorrow’s – technology, the individual is increasingly empowered. Let’s look at the big picture. This guy, Stack, was just one individual; but at this stage in the deepening crisis, there are a lot of people in similar circumstances. Millions of Americans have lived on maxed-out credit cards for years, and more than six million have lost their jobs since the current bout of crisis started. These people were already on the ragged edge. And the single largest expense in everyone’s life is the government.

At least that’s true for productive people. In my own case, it costs me far more to support the U.S. government – which does absolutely no good for me whatsoever – than all the rest of my living expenses combined.

L: Hm. Let’s see… My earnings are far more modest than yours, and I pay about three times more in taxes than on housing – and that includes two houses. I hadn’t thought of it, but I can’t imagine that food, utilities, and other bills would even match my housing expenses. So I guess that the direct cash cost of the U.S. government is also much more than all my other living expenses combined. And that’s not even counting the cost of regulation, indirect taxation through inflation of the money supply, etc., etc.

Doug: I think there are millions of people out there like you, in that regard. But unlike you, most of them are also deeply in debt. A large number of them are close to the edge – and many could easily go over it, like this guy in Texas. There’s a rage out there, largely incoherent but real and powerful, and some are starting to strike out against this grasping octopus of a government that’s reaching its slimy tentacles into every aspect of their lives.

It could be that we are reaching a critical mass of such people, the so-called “100th Monkey Effect.”

L: It’s a question of how much of an anomaly this guy really is. I know that in the pro-gun community in the U.S., many people feel that the U.S. government lost any shred of moral legitimacy as a result of the Waco massacre. And some have wondered why people who are, by definition, armed and trained in the use of weapons, have not dropped the hammer on the government thugs that come to take their guns (in blatant violation of the Constitution and the human right of self defense).

I suspect that the gilded cage most Americans live in has just been too comfortable for them to toss everything and turn violent. But that may be changing now, with more and more people being pushed over your ragged edge. Clearly, a guy who flies an airplane into a building, as in this Austin case, thinks he has nothing to lose. If a lot of people who think they have nothing to lose are pushed beyond the edge, things could get pretty ugly in the U.S. very quickly.

Doug: Entirely possible. People forget that this type of thing has gone on in many countries, across history. As bad as the Greater Depression promises to be, anything is possible in the U.S. Americans don’t expect anything… weird… only because they’ve been uniquely blessed so far. It’s too early to say whether this act will spark other similar actions, but there’s already another story of a man who decided he’d had enough and wasn’t going to stand by while a bank seized his home. So he bulldozed it, while it was legally still his.

L: I heard about that. Apparently the guy even found a source to pay off what was owed, but the bank refused because the man owed less than half of what the house was worth, so they could get more by foreclosing and selling the house.

Doug: You know, when individuals start taking actions like this, it can change things. An army of one can sting, but what happens when you have 100,000 armies of one? Or a couple million? Just think of what would have happened back before WWII in Germany if each one of the millions of Jews and Gypsies and others the Nazis rounded up had fought back. The death camps were made possible by people who, although they had the capacity to act like wolves, acted like sheep. I’m not saying things will go that way in the U.S. But I do think there’s increasing resentment on the part of the average citizen against those who work for “The Man.”

L: It comes back to hope. As long as people have a shred of hope that things might get better, or at least that they themselves might survive, most won’t embrace violence, because that sets you irrevocably on a path that can very easily get you killed.

Doug: Although it’s true that nobody gets out of here alive, it’s natural to want to delay the eventuality as long as possible. But when you push a person far enough, he doesn’t care anymore – as recent events have shown.

L: That’s pretty scary, Doug. Given how few Americans have savings – or even a work ethic – and given what we’ve been saying in this conversation, a protracted economic crisis seems like a recipe for violence in the U.S. What happens to a people who think that the Good Life is winning a lottery or suing McDonald’s for millions of dollars, when their jobs go away and don’t come back? And if, on top of that, the cost of government goes way up, to pay for all the so-called stimulus programs and social spending the government has on tap… Well, a lot of rage seems inevitable.

Doug: We didn’t talk about this in our conversation on movies, but there was a movie made about 25 years ago, starring George C. Scott, called Rage . In it, the government killed the hero’s herd of animals in some sort of nerve gas experiment gone wrong. The hero decides to take the fight, as an individual, to the army base that did the test.

The interesting question is: at what point do such actions reach a critical mass that renders a society non-viable? Although the average person doesn’t seem to have a clue what really caused this crisis, he deeply resents the bailouts and the worthless corporate “suits” who continue reaping multi-million-dollar bonuses. The system is rapidly losing legitimacy. What little is left of the free market will be blamed for what was caused by government intervention.

That in mind, it’s worth noting that the government’s response to the current crisis has been to do more of the exact same things that caused the crisis. These buffoons are not just doing the wrong thing; they’re doing exactly the opposite of the right thing. Too much debt sent the economy into a tailspin, so the government throws more debt at it. They are printing more and more dollars, which is going to result in widespread capital destruction. And they are hiring swarms of bureaucrats to gum up everyone’s lives – while paying them about 60% more, on average, than people make in the private sector.

L: And it just piles on – like in a Rugby game. Speaking of movies, there was a movie made back in the early ‘90s, called Falling Down .

Doug: With Michael Douglas – I saw that.

L: The protagonist is just some unemployed guy who gets pushed over the edge and “goes postal.” But what you’re saying is that there’s a pattern here, and that even though the actions are individual, a large wave of them is… predictable? Inevitable? You’re talking about blood in the streets, Doug – is that really where you think things are headed?

Doug: I’m sorry to say it, but I find myself coming to the conclusion that we may well be reaching such a point. I don’t see any way out, not without a lot of pain and turmoil, at this point.

L: That brings us to the concept of unintended consequences. Not least because the Austin case seems related to incidents in the book by John Ross by that name .

Doug: Governments are constantly passing laws with certain stated objectives; the real objective, however, is to further the interests of the politicians behind them. Sometimes the stated objectives are met, sometimes not, but there are always unintended consequences, and they are usually unwelcome. In the case of the government meddling with the economy, including an increasingly rapacious tax code, the unintended consequences can include a violent backlash, like this one. We’re talking mostly about the U.S. here, but the problem is not limited to the U.S., by any means.

In his book, John Ross explains how one thing can lead to another, and unintended consequences can get totally out of control – even to the point of revolution. Ross couldn’t get the book published – it was considered too much of a political hot potato. So he self-published, and it’s sold something like 75,000 copies in hardback, by word of mouth. That’s an incredibly large number, especially for a novel. And that tells us something about what a lot of people feel.

L: One of the connections between that book – written in the mid-‘90s – and the Austin case is that Stack takes a pot-shot at the FAA in his note. Coincidentally, it’s excessive and abusive action by the FAA – an agency most Americans barely even know exists – that’s one of the sparks of revolution in the novel.

Doug: The book was worth reading before and is all the more worth picking up now. And there’s another book that deals with this theme, by my friend Boston T. Party, a well-known gun-guru. It’s called Molon Labe , after what the Spartans told the Persians at Thermopylae. When the Persians demanded their arms, the Spartans responded: “Come and take them.” What’s particularly pertinent in that book is that individuals pushed too far by the government fight back – not to start a revolution, but as individuals responding to individual thugs, who just happen to work for the government.

I hate to say it, and I’m not encouraging it, but the truth is that it’s entirely possible that this could happen, even in the United States.

Another work of fiction that deals with this is, of course, V for Vendetta, which we spoke of in our conversation on movies. Incidentally, at about the time when that movie was supposed to be released in England, there was apparently an act of terrorism, and they decided to delay the release of the film.

L: Another novel along these lines is Vin Suprynowicz’s The Black Arrow . Have you read it?

Doug: No, but I know Vin is a solid libertarian thinker.

L: So, government action may have unintended consequences. But even though they’re unintended, we can’t say the consequences are unimaginable, or even unpredictable, since all of these authors clearly saw the possibilities for the sort of thing that this Austin event might lead to.

Doug: As angry individuals lash out, feeling a kind of inchoate rage, it’s entirely predictable that an increasing number of those targets are going to be in government. Back in the early ‘80s, when there was a serious tax revolt brewing, before the Reagan reforms, I was told a first-hand story about a guy who, when confronted by a threatening IRS agent, collared him and took his driver’s license. He looked at the address, then grabbed a tomahawk he happened to have, smashed it into his desk, and said: “Pal, it’s you and me. It’s not me and the government. I expect you to go away, or you’ll have to deal with me in a very personal manner.” Of course the agent could have reported the incident, but he figured it would be wiser to just close the case and go on to the next guy. Who needs the risk?

L: That is very much the theme of books such as we’ve been talking about, especially Unintended Consequences, in which taxation and regulation become very difficult for the government to enforce, because individuals who’ve been pushed too far start fighting back. Once the badge and the uniform stop intimidating everyone into compliance, and especially once uniformed thugs face personal, physical danger, being a thug stops being much fun anymore.

Doug: And very few of the people who wind up taking radical measures will actually be radicals, as they generally were in the ‘60s. Most will have no philosophical or theoretical basis for their actions; they won’t think of themselves as revolutionaries. But a lot of these ordinary Joes will act. And if they act in large numbers, it could turn into a major social upheaval. Could we be getting to a tipping point? I don’t know, but there are straws in the wind.

Another book on this subject is a rather hefty new one by Jim Davidson – not James Dale Davidson, but the other James Davidson who deals in similar subject matter – called, Being Sovereign . Unlike the others, it’s non-fiction and runs to more than 600 pages, with a lot of very cogent material related to what we’re talking about. It’s quite eclectic, well researched, and full of interesting gems of data. I wonder if the memes in books like these will start spreading through society more, now that the economy is on the rocks – now that the gilded cage you mentioned is no longer so comfortable.

L: Could be… such books would have appealed only to anti-government types before, but now, with fear and anger sweeping through the population, who knows if such seeds won’t be much more widely dispersed?

Doug: I don’t know – but it’s as interesting as it is horrifying to watch the slow-motion train wreck of the U.S. and global economies continuing.

L: Okay, Sunshine. Investment implications?

Doug: I would have to say that, generally, they’re not very good. At least not for the kind of stuff your broker at Merrill is told to recommend.

L: [Laughs] I think I’ve heard this song before… But can you be more specific?

Doug: Well, I sure wouldn’t want to own any government bonds…

L: [Laughs]

Doug: [Chuckles] No bonds. And owning the government’s currency is going to be an extremely bad idea when inflation gets really bad – which it will do. If they wind up destroying the dollar, we’re in for really serious trouble – which looks like exactly what’s going to happen. And I don’t think people are going to panic out of greenbacks and into the stock market, not when corporate America is looking so shaky.

L: Don’t hold your punches, Doug...

Doug: I won’t. I think we’re on the ragged edge, and this Austin thing is a clear warning shot across the bow. It’s absolutely time to start rigging for stormy weather, if you haven’t already.

L: Which leads us to your mantra of diversifying one’s assets, and entire life, out of a single political jurisdiction, especially the U.S.

Doug: For openers. And if you don’t have a significant part of your assets, wherever you are, in real money – that’s to say, gold – you’re putting your neck on the block. Real estate is going to get taxed to death, paper currencies are circling faster and faster down the drain, government debt is a joke. This is a really, really serious set of circumstances that’s building up.

People need to start thinking in terms of a major turning point approaching.

I won’t try to predict all the details, but I will say you better prepare for big changes over the next decade, or you will get run over by events.

L: Got it. Note to self: avoid becoming roadkill. I guess you’ll have more specifics in future editions of The Casey Report?

Doug: Yes. I’m working on an article on China for the next issue.

L: Can you give us a sneak preview? Are you bullish or bearish on China?

Doug: I’ve been a bull on China and the Orient for many years, but times have changed. China could be in even bigger trouble than the U.S. The problems in Greece are going to spread; I’ve been predicting the euro was going to disintegrate for some time. What’s going on is a worldwide phenomenon.

L: Well, that sounds pretty grim. But it is what it is. It may seem pretty extreme to think about, let alone plan for, the U.S. busting apart at the seams, but if this Austin thing – and the guy who bulldozed his house – are the leading edge of a wave of action and not just isolated incidents, it would be stupid, by your definition, not to think and plan.

Doug: It always pays to plan for the worst while you hope for the best.

There are times in history when sweeping social changes seem to come out of nowhere – to most people. But we can clearly see signs of this one coming, and there’s still time for people to get their own houses in order. Get out of debt. Accumulate capital. Protect yourself from currency destruction with gold. Diversify your assets across political jurisdictions. All the things we’ve talked about.

L: Okay Doug. Thanks for another interesting, if not exactly cheerful, conversation.

Doug: Till next week. The world will still be here. It’s not going to disappear.

While the world as we know it will not end tomorrow, it may well become unrecognizable in the near future. The Casey Report helps you prepare for a scenario like that – its editors, including Doug, have been accurately predicting economic, market, and societal trends for decades. Don’t let a crisis catch you unaware… and learn how to profit where others lose everything. Learn more.

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By Vedran Vuk
Casey Research

Ben Bernanke has got to be laughing it up after being reappointed to another term as Federal Reserve chairman. What else could we expect from the ex-lawyers and lifetime Beltway bandits voting on global monetary policy?

As he starts his second term, I’m once again reminded about how supremely unqualified this man is for the job.