by Doug Casey, International Man:
There are a lot of questions people are asking themselves today. Among them: How serious is this economic downturn likely to be? How long will it last? How can it be ended? Whose fault is it?
The answers to these questions being given by pundits, economists, money honeys, and politicians are, almost without exception, totally incorrect. This is most unfortunate because it means the actions taken by the US (and, it appears, every other government in the world) are not only going to be ineffective but counterproductive.
For years, I’ve predicted something I’ve called the Greater Depression. I’ve seen its arrival as being completely inevitable. Only its exact timing was in doubt. So let me be as clear as I can be about what’s going on in the world right now.
I believe this is it.
We’ve entered a downturn that is going to be longer, deeper, and different than the unpleasantness of 1929-1946.
I sincerely hate to stick my neck out by saying that. Clearly, the longest trend in existence is the Ascent of Man, and it’s usually a mistake to buck any trend; the trend is your friend. But no trend rises like a straight line. That said, it seems to me this is going to be a really, really serious correction – I suspect, the worst since the start of the Industrial Revolution.
You’re going to be bombarded by a barrage of misinformation, misinterpretations, wishful thinking, and snake-oil economics over the next few years. It’s critical that you rationally decide exactly what is happening and why.
My answer, in brief, is that the Greater Depression is almost entirely due to the intervention of government into the economy. The current hysteria over CoronaVirus is simply the pin that broke the bubble. In any event, State intervention takes three forms – taxation, regulation, and currency inflation – all of which are disastrous.
But of these, inflation is likely the worst, since it’s not only an indirect form of taxation, but it causes the business cycle, and that results in huge distortions in the ways people produce and consume, and causes huge misallocations of capital.
The best general definition of depression is: a period of time when most people’s standard of living drops significantly.
What you’re looking at is the Greater Depression. This isn’t a drill or an academic exercise woven out of airy fabrics.
Why the Depression is Happening
The physical world is unlikely to be changed much by the Greater Depression, but the way people relate to the world will change a great deal.
A real-estate collapse doesn’t mean buildings will tumble – but their prices will, and their owners may change.
A corporation’s bankruptcy doesn’t mean that the factories or technology it owned will vanish; they will become the property of a different corporation.
A government default on its bonds doesn’t mean the country (which is not at all the same thing as the government) is bankrupt. It just means that those who held the bonds are poorer and those who otherwise would have been taxed to pay the bonds are richer.
In other words, all the real wealth will still be there, but its ownership will change. And some commodities will become more (or less) valuable relative to other commodities.
The people who wind up wealthy as the Greater Depression unfolds will, predictably, be those who understand what’s going on. A grasp of the business cycle is essential to that understanding.
The business cycle is the phenomenon of boom and bust caused by inflation. It has been labeled as one of capitalism’s “internal contradictions” since the time of Karl Marx, but it is in fact the work of government. In a pure laissez-faire economy, the business cycle would not exist because there could be no politically driven inflation.
How does inflation cause the business cycle and, in turn, a depression? Let’s perform an autopsy.
Stage One: Inflation and Boom
Suppose that the city of Santa Monica, California, is an independent nation.
People are producing and trading to get what they want and need out of life. With no welfare, everyone is forced to work to support himself. The government concerns itself with maintaining the police and the courts and pretending that its little army keeps the rest of the world at bay.
Life is mellow, and the weather is good.
Let’s further suppose that the re-election campaign strategist for some local politician persuades some of the government’s economic advisors that Santa Monica is not as prosperous as it ought to be.
The economists opine that because there is a pool of “unemployed” (recent graduates, bored retirees, fire-ees, and recent job quitters), the economy suffers from a lack of consumer demand.
Creating demand seems like a good idea, so the government credits the bank account of every Santa Monican with $10,000.
The picture changes rapidly. Although there is no more wealth, there is a lot more money, say 20 percent more.
Everyone feels, and starts acting, much richer. They spend more. The economy is “stimulated.”
We’ll follow the fortunes of the swimming-pool industry, although every business in Santa Monica would have a similar tale.
The first business to prosper because of the government’s new monetary policy might be the telephone company, because all the phone lines are jammed with citizens trying to call the local swimming-pool company to place an order.
Believing that their ancient “reach out and touch someone” marketing campaign is finally catching on, phone company executives make plans to put in more lines and hire more operators.
But the telephone company’s expansion isn’t nearly as dramatic as that of the swimming-pool company, which is soon swamped with orders. Its owner is gratified that the market is finally rewarding his skills. It never occurs to him that the government’s actions might be causing a temporary upsurge in demand.
In any event, he raises prices to take advantage of the increased demand and then runs down to his bank to borrow some money for expansion.
The suppliers of swimming-pool materials, such as concrete, copper pipe, and earthmoving equipment, also go out and borrow money to expand.
Because the banks have just taken in billions of dollars, courtesy of the government, they have plenty of money to lend, and at very low rates.
“Interest” is the rental price of money, and with money in such ample supply, the price drops. Like any other businessmen with excess inventory, the bankers have a “special” on money.
All the expanded companies need new workers but have trouble getting them, since everyone willing to be is already employed.
To induce workers to change jobs, the pool suppliers offer higher wages. Late-night television is filled with ads for schools who will train people to drive heavy equipment, pour cement, and lay pipe to take advantage of those great new jobs.