“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:
1. 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.
2. 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.
3. 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.
4. 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. More...
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