The Casey Files
 Two More Reasons a Monetary Crisis
is Inevitable and Gold is Going to the Moon
By Doug Casey
Oct 9, 2006
Even a casual observer can
see that the Fed is now caught between a rock and a hard place.
If it lowers interest rates to head off the economic devastation
that would come with a collapsed housing bubble-housing is estimated
to have, directly and indirectly, contributed 57% of U.S. economic
activity over the past 5 years-the Fed risks triggering a wholesale
rush by foreigners to dump their trillions of U.S. dollars. But
if it raises interest rates to protect the dollar, the Fed risks
turning an economic downturn into the most serious recession
since the 1930's.
It is our view at Casey Research
that, for a number of reasons, not the least being that we are
soon to enter the presidential election cycle, the government
will take the course of inflation.
A couple of other factors lead
us to that view. One is demographic.
The first-born baby boomers
are turning 60 this year, and they and their little brothers
and sisters will soon have their hands out for the Social Security
and Medicare entitlements they've been promised. But the boomers
represent an extraordinary bulge in the age profile of the U.S.
population. The bulge means that the share of the population
receiving government retirement benefits will grow, while the
share of the population paying for them will shrink. To paper
over this gross imbalance and still keep the entitlement checks
going out, deficits will have to increase at a stupendous rate-and
the engine of monetary creation will have to ramp up to entirely
new and increasingly dangerous levels.
The second factor promising
more inflation is the "Forever War" against Islam-already
being called World War Three in many quarters. As the chart by
our own Bud Conrad shows, the dollar has been a casualty of every
U.S. war. War costs are paid for with deficits, and the deficits
translate into rising price inflation every time.
Contrary to Wall Street's opinion,
these aren't problems the Fed can sweep under the rug. Fed Chairman
Bernanke is an academic with a reasonable understanding of the
technical details, but his career bias has been to dodge recessions
by cranking up the presses that print all those $100 bills. "Helicopter
Ben" is the nickname he earned for facetiously proposing
to drop cash out of helicopters to stave off a deflation.
Given the options in front
of him, and his bias toward monetary expansion, we are convinced
that the Fed will return to loose monetary policies - masked
by ongoing tampering with the CPI indicators and by obfuscating
the truth about the money supply. That's the path of least resistance.
In the short run, no one gets hurt, and it delivers the U.S.
government its daily fix of billions needed to keep the ship
of state afloat.
Monetary expansion will buy
some time, but then the real trouble starts. A loose monetary
policy eventually produces price inflation. As the inflation
becomes noticed, foreign holders will lose confidence in the
dollar. Then, as they head for the exit, the Fed will face a
stark decision: either raise interest rates to economy-crushing
levels to save the dollar, or let the dollar collapse and tolerate
even worse inflation a little further down the line.
There's room in the Fed's lifeboat
for the dollar, and there's room for the economy, but there isn't
room for both. Bernanke has already all but announced that it
will be the dollar that gets thrown overboard.
While no one can say how long
it will take for a monetary crisis to emerge or what will ultimately
trigger it, now is the time to acknowledge the risk - and in
fact the likelihood - that it will occur in the next few years.
That potential is confirmed with each newsflash telling us that
the housing slump is accelerating and that signs of recession
are appearing. Those are code words for the Fed to begin pumping
more paper money into the system.
Don't put off preparing for
what's coming. Start by salting away some physical gold and silver
for wealth preservation - precious metals being the only real
form of money worth considering today. Then, for sheer profit
potential, assemble a diversified collection of high-quality
gold mining stocks such as we follow in the Casey
Gold Stock Companion. We go for stocks that should out-perform
gold bullion by a wide margin, to put the most profit into your
pocket.
And remember, the time to rig
for stormy weather is before the tempest hits, not in the middle
of it. Buy
your rigging now, while it's still cheap.
-Doug Casey
The International Speculator
Casey Archives
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