In the second half of his classic play, Faust, Johann Wolfgang von Goethe (goo-tah) describes a pact made with the devil by a young scholar named Faust, whereby the devil agrees to save an empire that is in a state of collapse due to overspending.
The devil’s solution, enthusiastically embraced by the empire’s rulers, is to adopt a Fiat currency based on the idea that within the dirt of the empire there is a sufficient amount of un-mined gold to back the issance of unlimited amounts of money.
Of course, in the end this Faustian bargain ends up backfiring as the ruling elite, in love with the idea of creating money from nothing, go on an even bigger spending binge --- ultimately bringing about total collapse.
For the record Faust was written in 1832.
Hello, my name is David Galland. Along with Doug Casey and Olivier Garret I am a partner in Casey Research.
Today I want to talk briefly about an important topic: the hijacking of the world’s largest economies by their respective governments. And, I want to talk a bit about what you can do to protect yourself against the consequences of that hijacking.
The reference to Faust in the introduction is particularly relevant because it shows so clearly that excessive governmt spending and a willingness to go to extreme lengths to continue that spending, is not a new phenomena.
What is a new phenomena is the scope and the scale of the excessive spending in our modern times.
As you can see in this map of global debt from The Economist, the vast majority of countries in the world are now struggling under high debt loads.
Never before in history have so many governments simultaneously engaged in such extraordinary levels of irresponsible spending.
And never before have the debts resulting from that spending been so extreme on a global basis.
Just as was the case with Faust’s fictious empire, the cause of all this debt has been an extraordinary increase in government spending at all levels.
Over the past fifty years total federal, state and local government spending here in the United States has steadily crept up to where it now represents over 40% of GDP.
At the beginning of the 20th century, it was under 10%.
And it is poised to only get worse worse: With the passage of Obama care, the government’s share of the economy is expected to grow to the point where it tops 50%.
Let that sink in a bit.
The majority of the economic activity in the United States, purportedly the bastion of free markets, will soon be under the direct control of the federal government.
Of course, governments don’t actually produce anything, so the role they play in the economy comes at the expense of the free market, and by deficit spending.
As you can see in the chart here, in the United States the deficits have reached previously unimaginable levels – over .2 trillion annually. And even according to the government’s own projections, the deficit spending will continue at these levels for many years to come.
So how does the government spend money it doesn't have and in such large quantities?
One way is to issue debt and hope that others will buy that debt at an interest rate that the government can afford. This allows the government to continue funding its operations while spreading the risk to bondholders.
The real problems begin once bond buyers begin demanding higher interest rates, as they inevitably will as the deficit spending continues at such high levels.
Generally speaking, once interest rates on government bonds rise past about 7%, meeting even interest payments becomes problematic. That’s one reason that Greece is in such trouble: today the interest rate demanded by investors for Greek government bonds is over 25%.
Under normal circumstances, once bond investors begin demanding interest rates the government can’t afford to pay, the government is left with essentially just one alternative to keep the doors open – other than cutting spending, that is, and they never want to cut spending – and that is money printing.
This next chart, again shows the extent of money printing in recent years, and that the phenomena is global.
With all of this debt, and with continuing high levels of deficit spending worldwide, you would expect interest rates to be much higher than they are.
However, with the exception of the outliers, for example Greece, Spain and Portugal, interest rates in the large western nations are remarkably low.
In fact here in the US, government interest rates are at record lows. This despite the fact that the US government is, by a wide margin, the world's largest debtor. So what’s going on?
Now, it is not my intention to go on a great length about the current economic set up - if you are watching this, the odds are good you are already fully aware of the situation.
That said, the disconnect between the world's largest debtor nation, running the world's largest deficits yet enjoying the lowest interest rates in history is worth a bit of reflection.
There are a number of reasons for low US interest rates, starting with the reality that the US dollar is still considered as "good money" by people and governments around the world.
Thus, as their own economies run into trouble, people look to buy US government treasury bills as a safe harbor. That helps drive interest rates down.
But what happens when foreign buyers stop buying a sufficient quantity of U.S. Treasuries, as has been the case in numerous occasions in recent years?
Simple, the Federal Reserve Bank, or Fed as it is more commonly referred to, has stepped in to purchase U.S. Treasury bills directly or indirectly. In short, working closely with the U.S. Treasury, the Fed will do whatever it takes to keep interest rates from rising. That’s because once interest rates rise on the trillions of dollars in debt, the whole house of cards will come crashing down.
In the meantime, savers who rely on the yields they earn are being hugely disadvantaged by the government’s suppression of interest rates. Just this morning I reviewed the statements of a relative and calculated that his annual interest income came to just 80 cents on each 00 he has on deposit at the bank.
Unfortunately, the problems of a politicized economy are not just fiscal or monetary in nature.
During a recent trip to Europe I was shocked to see for myself how much damage the 30,000 employees and contractors of the European commission have done to that continent's economy.
Based on my research and personal observations, virtually all of the problems in Europe are the result of the move toward the economic central planning that came as part and parcel of the creation of the Eurozone.
To varying degrees, it is this same trend towards central planning at the expense of the free market that is plaguing all of the major world economies.
And when you layer on the costs associated with complying with bureaucratic regulations, the indirect costs of the government’s dead hand on the economy soar.
The chart here comes from a 2008 study that showed the regulatory cost per employee here in the US. While the number today is certainly higher, with the passage of Obama care it will get higher still.
Among the many problems this creates is the tendency for business operators to look to reduce costs by outsourcing to countries with lower labor costs, or by adopting labor saving automation to avoid having to hire people altogether.
As a consequence, today's high unemployment numbers are likely to persist. In fact, as governments deepen their involvement in the workplace, and new more efficient technologies become available, unemployment is likely rise to a permanently high plateau.
The situation is exacerbated by a dangerous demographic reality, especially in many of the aging western democracies, with the number of aging citizens ballooning, placing ever greater demands on healthcare and government pension schemes and leaving a smaller population of younger workers to pick up the tab.
Thus, globally, we have historical levels of sovereign debt and deficit spending, a demographic crisis, and a structural problem in terms of unemployment.
Now, believe it or not, I’m not trying to worry you – but rather to make the key point of this presentation. And that point is that the situation is serious, and that governments around the world will do everything in their power – and today they have a LOT of power - to maintain the status quo.
It is this fundamental reality that has been driving the political takeover of our economies.
To put this point perspective, consider for a moment the right thing to do to foster much needed economic growth. The right thing to do is to set the free market free again by dramatically reducing the role government’s play in their respective economies, starting by slashing government spending and regulation.
The free market is, we would contend, the only way to wipe out the malinvestment and misappropriation of resources that has brought us to this challenging point in history.
Of course, reducing the role of government is easier said than done. Thanks to state run schools and propaganda, the average person now believes that government is the best way to solve any and all problems encountered in a modern society.
When times get tough, therefore, people don't expect nor do they want their government to do less for them... they want it to do more. The recent riots in Spain and elsewhere were not caused by individuals in favor austerity, but rather by people wanting the government to spend more.
This gives rise to a catastrophic conundrum. Do the right thing and trigger an economic depression and social unrest, or do the wrong thing and kick the can down the road to the point where a truly serious collapse becomes almost inevitable.
Without a doubt you can expect today's politicians to make the Faustian bargain of trying to pay their obligations through money creation and by launching all manner of schemes to avoid the consequences of their actions.
A classic example is provided by Argentina. Now I happen to love Argentina, and am even building a house there, but if you want to witness the sorts of frantic scrambling governments can get up to when faced with problems of their own making, pay attention to Argentina where hardly a week goes by without the announcement of some new hair brained and completely counterproductive scheme.
Similarly, in the US and other big economies, there is literally almost nothing that these governments and their functionaries will not do at this point to maintain the status quo as the crisis deepens.
And to remind you that there are personal motivations for the federal government workers, here and around the world, to maintain the status quo here's a look at the steady increase in federal pension obligations here in the U.S.
And there is this next chart...
This shows that the amount of money being spent on the military industrial complex in the United States has reached absolutely epic levels. To unwind this level of spending, would mean devastating the large defense companies that are so tightly intertwined with Washington, not to mention having to reintegrate tens of thousands of soldiers back into the US economy.
Now, a minute ago, I stated that there is literally nothing that the bureaucrats won't do at this point in their attempt to maintain the status quo. I did not make that statement for dramatic effect.
How will the US government react to interest rates starting to ratchet upwards? Print money like crazy? Sure. What if that's not enough? Could they require all US pensions to hold at least 50% in U.S. Treasury bills for the ‘safety’ of investors? Why not?
And what happens when millions of investors come to the realization that the sovereign debt crisis can only lead to much higher levels of inflation and begin to rush into gold? Higher taxes on gold? Limits on purchasing gold? Gold confiscation? Sure, why not?
The point is that, as is the case in Argentina today, nothing off the table. New taxes, more regulations, more tampering with key economic data, levying confiscatory fines against corporations, monetizing Treasuries... starting a war with Iran? All of the above? Sure.
It is important to recognize that we are living in a new reality – a new economy where markets operate at the convenience of a central planning government. This is not arm waving, but a straightforward statement of fact about the world we now live in.
Which begs the question, with virtually no rules or principles the government won't violate in order to keep the Ponzi scheme going, how are we as investors supposed to chart a course that conserves our capital and grows it in order to finance a secure future?
While the government meddling at this point is stifling the economy and aggravating to any thinking person, imagine how much worse – dangerous even – that meddling will get as the sovereign debt crisis worsens and even the largest of the Western economies begins to suffer a fate similar to Greece.
These are serious questions requiring serious contemplation.
And that brings me to a quick discussion of one aspect of my work here at Casey Research that I'm especially fond of, namely planning our periodic Summits.
If you'll bear with me just a bit longer I like to share a bit about what we have been working on for the next Summit that we will be co-hosting with the Sprott Group of companies in Carlsbad, California this September 7, 8 & 9.
Per my comments to this point, the focus of the Summit will be to focus on how we as individuals and investors can navigate the politicized economy.
Given the challenges of predicting the future actions of the government, and how they may affect us all, the first order of business is to identify the right faculty. Which, as I think you'll see, we have done.
It gives me great pleasure to share the names of the faculty now confirmed to speak at the Casey Research/Sprott Summit. More bio information on each of the faculty is available at CaseyResearch.com, but here are the highlights.
