Im back from Phoenix and our sold-out When Money Dies Summit. Ill have a bit more on the Summit, including some take-aways, momentarily.
First, I want to share my reaction to this mornings news on the radio.
Given the electrification/commoditization/dramatization of news, which has resulted in headlines popping up at you pretty much wherever you turn, I typically tune it out as little more than noise. This morning, however, after dropping my son off at his carpool and driving home undistracted through the shaded wee hours I actually listened. And what I heard being passed off as news was at best a faade, and at worst a dangerous fiction.
By faade I mean that the news writers tackle their topics by examining only the surface of the onion, almost never bothering to peel back even a single layer, let alone cutting the thing open in order to get to the heart of the matter.
And when I say dangerous fiction, I mean that these news outlets propagate nonsensical ideas and notions that, if mentally accepted as truth by their audience, will leave them woefully at risk when the reality of the situation becomes apparent.
Now, as time is limited and there is much to cover today, I dont want to go on overly long about the many failures of the news media, but I do want to linger just a bit longer and attempt show the differences between what people learn from their favorite news programs and the underlying realities.
To do so, I will for a moment step behind my very own virtual news desk
Welcome to the Casey Real News Network
Good morning and welcome to the Casey Real News for October 7.
In todays lead story, the US Senate has postponed until next week a vote on the Currency Reform of Fair Trade Act that, if passed, will institute a process allowing the US Commerce Department to levy tariffs when it is believed that the Chinese currency units are undervalued and therefore disadvantageous to US businesses.
[Back to the Casey Real News Network momentarily. But first, a quick recap of what most people will take away from the headline, which is:
- China is responsible for US unemployment.
- China is taking advantage of "our" goodwill.
- The US government is going to fix the situation by making the Chinese pay up.
- Therefore, the Chinese government is bad, and the US government is good.
- Once fixed, US manufacturing jobs will be kick-started, and it will be happy days again.
- Thank goodness the U.S. government looks after us or we'd sure be in a lot of trouble. We should vote these folks back into office!
Now, dear readers, let's return to the Casey Real News Network.]
Rather than jumping around like a toad on hot pavement to a story about a celebrity costume malfunction or some such, lets stay on this story a bit longer and try to peel back a few more layers.
Layer One: Its an election year.
Orwells classic novel 1984 didnt set the template for using the purported threats posed by an enemy state to rally the plebes to the governments flag that template was fashioned at the dawn of sentient humankind but it does a good job of laying out how the template is implemented.
In the current instance, both the Republicans and the Democrats are eager to dodge blame for the dead-cat economy by laying that cat on Chinas doorstep.
The propaganda machine has already caused a majority of Republican voters (55%) to now view China as an active enemy. Making the bill more likely to pass is that the Democrats are desperate to re-engage the trade unions that were so helpful to them in the last elections therefore its no surprise that the Currency Reform of Fair Trade Act bill is cosponsored by senators from three heavily industrialized, unionized states.
And they are being joined by a number of Republican senators who have crossed the aisle rather than being forced to publicly answer the question Democrat competitors would otherwise ask about why they supported Chinese commies over the hard working (or, not working at all) US voter.
Layer Two: Looking to blame someone, look in the mirror.
Lets assume that the Chinese have been manipulating their currency, as they most certainly have been. How did they go about doing it?
Well, one important way was by buying US Treasury bills in great quantities. But guess who sold them those Treasuries? Why, that would be the US government, thats who.
And why did the US government have to sell such excessive quantities of Treasuries? Why, that would be because the US government is addicted to spending.
And why is it addicted to spending? Why, that would be because the US public demands so much more from its government than was ever envisioned in the foundational days of this republic.
The Chinese along with the oil sheiks simply filled the gap between what US citizens were expected to pay in taxes or willing to buy in the way of Treasuries, to cover the governments mad spending.
Throw in a couple of insanely and massively misguided wars, and the spread between levels of spending that might be considered reasonable versus that of the sort favored by drunken sailors widens to the point where, absent the Chinese, the Fed would have been monetizing like crazy long ago.
The bottom line is, if you want to blame anyone for Chinas currency manipulation, look in the mirror and as you do, recollect all the many times you or someone you know have let the government slip a few notes into your pocket, or handle some aspect of your daily existence that you or someone in private enterprise could have taken care of (and done better).
And while you think about it, think about the many times you have voted back into office an elected representative based on seniority, even though that very seniority proves their complicity in bringing the country to its knees even if only to beg for money from the Chinese.
Absent the Chinese buying US treasuries, you might want to remember the old store sign, You Break It, You Buy It.
Well, you broke it, and without the Chinese, it is yours and your childrens childrens children who will be buying it, through their agents at the Fed.
Layer Three: It is much ado about nothing.
In 1992 at the time that Michael Crichton published his inflammatory best-seller Rising Sun it was the Japanese who were being accused of being currency manipulators and worse. In fact, at the time, the reputation of the Japanese in the West had fallen back almost to levels last seen around the time of the Bataan Death March.
But the situation with the Japanese then and the Chinese now offers a powerful corollary that reveals that all the arm-waving over Chinas currency manipulation is much ado about nothing.
Why? Simply because if government intervention in currency markets provides a plausible long-term advantage, the historical record doesnt prove it. In the case of the Japanese, Crichton, always sensitive to public sentiment (thats how you get to be a serial best-seller), began writing Rising Sun in 1990 which you can see coincided almost exactly with the peak in Japans fortunes. Thus, rather than a rising sun. Japans currency manipulations helped set the stage for the countrys economy to more closely resemble a sinking ship.
(Click on image to enlarge)
This, of course, led the Japanese government to escalate its already-energetic interventions in its own economy, with equally predictable results.
(Click on image to enlarge)
That the cadre of commies in charge of Chinas commerce have followed down much the same path as the Japanese provides no breakthrough in our understanding of economics, but rather showcases yet another example of unsustainable government folly.
Glancing at the one-year performance of the Shanghai Stock Index shows that the long crash in China has already begun.
(Click on image to enlarge)
Layer Four: China is the least of the problems being faced by US manufacturing.
If I were a Michigan union employee, I would take a great deal of comfort from the charts above. After all, if China breaks its rice bowl through misguided government actions which in turn could lead to a lot of rice bowls being literally broken, should the unsettled masses decide its time for a change then the far more stable Western societies should profit.
But before I settle back into my easy chair of complacency, I might want to take a look at the following chart of the exponential increase in computational power since 1970, overlaid with the precipitous drop in US manufacturing jobs. Simply put, if your next loaf of bread is dependent in any way on any kind of choo-choo manufacturing here in the US, the trend is actively against you.
(Click on image to enlarge)
And the creative destruction of technology is about to take things to a entirely new level, thanks to 3D printing, a topic that our own Alex Daley spoke about at some length at the just concluded Summit, and which he and his team follow carefully in our Casey Extraordinary Technology service.
I believe this video of 3D printing has been highlighted in this service previously, but in case you missed it, its a must-watch if you want to understand how fast the technology related to 3D printing is moving.
Tellingly, Alex pointed out that there are now 3D printers that print other 3D printers. In short, the future will be increasingly dominated and enhanced by technology and that technology is speeding at us far faster than most people can imagine or many business can even prepare for. Anyone who tries to cling to the past will find themselves clinging onto little more than wreckage.
Meanwhile, if you think the US is going to have a hard time adapting to the new realities, just be glad you are not Chinese, because as Rick Maybury pointed out in his Summit speech every time China has entered a period of significant social change, the death toll has reliably run to the millions.
Layer Five: Actions have consequences.
Recapping our story so far, politicians who try to gain votes by appealing to native xenophobia and ignorance are using their positions of power to try to introduce a broad-reaching protocol for slapping tariffs on pretty much everything China exports. After all, if Chinas offense is linked to its currency, and its currency is linked to everything it produces, then all Chinese products become candidates for retaliatory tariffs.
In the interest of completeness, heres a look at the US trade profile with China:
(Click on image to enlarge)
(Click on image to enlarge)
Summing up the data, at present the US exports about $92 billion worth of goods and services to China, and the Chinese export about $364 billion back into the US, for a net trade deficit of $273 billion in Chinas favor. Big deal, right?
Sure, but to keep things in proper context, one has to snap in a wider lens.
The US economy as measured by GDP rang in at $14.7 trillion last year. While its not an apples-to-apples construct, it is useful for comparison purposes to mention that the Chinese manufacturing deficit, therefore, amounts to just 1.8% of the US economy.
To put that number in perspective, the US currently exports about $105 billion in petroleum products but imports $432 billion a year from countries such as Canada, Saudi Arabia, Mexico, Venezuela, Nigeria, and Iraq (the top six sources of US oil, in order of importance anyone see a potential problem in that list?), leaving a $327 billion deficit there. Again, compared to the US economy, petroleum imports represent 2.2% of it.
Again, thats not nothing, but not an overwhelming factor in the broader context. So, what is important?
Even according to the US governments understated numbers, government-sanctioned inflation is now running at about 3.2%. Thats 3.2%, or $470 billion off the top of the economy. If Shadow Stats is correct and I believe it is actual inflation is running at about 7%, so the number rises to $1.03 trillion in other words, an awful lot of currency units.
Then, there are the taxes that just the federal government collects; thats another $2.16 trillion, for a drag on the economy of over 14%.
I could keep on going, but I think you get the idea.
Was there any positive impact the Chinese might have had on the US economy?
Now this gets real fuzzy, because its nearly impossible to quantify the benefit to US consumers that has resulted from being able to buy cheaper Chinese-manufactured goods, but theres little doubt there was a benefit. Walmart shareholders certainly benefited.
Then theres the savings in US government interest-rate costs, thanks in no small part to the foreign purchases of Treasuries. Going all the way back to 1881, the yields on a 10-year US Treasury note were 4.67%, using the mean. This month, those yields reached a record low of 1.92%. With total US government debt at $14 trillion (ignoring another $50 trillion or so of unfunded obligations), the savings in interest costs alone come to $385 billion annually.
Or, put another way, absent the Chinese, US interest rates would likely be much, much higher than they are affecting not only the governments deficits, but that of individual and corporate borrowers. Of course, higher rates would also put more income into the pockets of savers and pensioners, so getting to an accurate assessment of the positives vs. negatives of Chinese currency manipulation is almost impossible but it is certainly not as black and white as the government would like you to think it is.
(Editors Note: In the upcoming edition of The Casey Report, our own Bud Conrad climbs under the hood of US interest rates and distinguishes fact from fiction. This may be the most important issue of the year dont miss it.)
The bottom line is that, when considered in the broader context, the Chinese trade deficit is not all that consequential. That is not the case with the potential consequences of pulling the trigger on a trade war, which passing the Chinese tariff legislation almost certainly will accomplish.
Once that shot is fired, as it was in 1930 with Smoot-Hawley, the knock-on consequences, while unpredictable, are almost certain to be dangerous. That the politicians would even think about risking getting into a pissing match with the worlds largest holder of US debt and very likely setting off a global trade war (for some reason, other countries still follow the US lead) at this tenuous point in history is stunning to me.
But, hey, I just report the news. If you, dear fellow citizen, are content to fluff up the cushions on your couch to enhance your temporary comfort, as opposed to letting these morons in Washington know in no uncertain terms that theyll be chased out of office and maybe even tarred and feathered if they dont stop meddling in the economy, thats up to you.
Layer Six: Beware the Aggressor Apes.
I hate to break it to you, but since were trying to get to the heart of the story, its kind of hard to avoid a quick comment on the fact that we as a species are little more than evolved apes.
Members of the Senate are nothing more than a more-aggressive sort of ape, at least aggressive enough to have climbed over the more placid members of the shrewdness in order to enjoy the most comfortable nest and attract the most comely mates.
And once on top, they will do whatever it takes to stay on top, no matter how counterintuitive, malevolent, or misguided their actions might be.
Whether that means starting a war with another shrewdness, or debasing their own currency, or passing mind-numbing legislation that inhibits or even completely blocks individuals from engaging in exchanges in the free market, these apes are capable of it.
I can well remember Barney Franks in 2007, railing loudly on National Public Radio for the FHA to increase its mortgage lending to individuals who on a good day would be considered a poor credit risk, even though at that point in time the two quasistate corporations of Fannie Mae and Freddie Mac which he had energetically championed were already well on their way down the drain. Yet, it is this very same Barney Franks who has subsequently been made the chairman of the House Financial Services Committee and is among the loudest critics of the greedy mortgage bankers. In 2007, it was politically expedient to champion housing for all, just as in 2011 it is politically expedient to pile on the greedy bankers.
In that regard, along with another long-serving ape, Christopher Dodd, Franks has pushed to passage a new telephone-book-sized clump of legislation aimed at the financial services industry, containing over 400 new rules and regulations that no one in the industry actually understands, and no one anywhere can guess their implications any more than they can guess at the consequences of kicking off a trade war with China during the depths of an economic depression.
There are few things that we can be certain about these days, but we can be certain that there is a deep disconnect between politicians doing whats right and doing whats politically expedient. Whats right is to massively shrink the size of government and limit its ability to meddle in anything outside of national defense (not national offense, which is where all the money is being spent these days) and maintaining a fair judicial system (which is well down the slippery slope at this point).
Of course, that is diametrically opposed to the goals of the apes in charge, and so the government will continue in its misguided policies. This means that, as bad as the economy is, its only going to get worse, as the apes chase each other around hooting and panting and passing counterproductive and anti-individual legislation.
Anyone who is not actively taking measures to protect ones wealth, and maybe ones freedom, is going to get trampled underfoot.
And that, dear readers, is the real story behind the headlines.
Observations from the Summit
Where does the time go? (No need to answer, I know how easily distracted and long-winded I can get.) In any event, turning on the boosters, I now turn quickly to some of the more interesting observations from the Phoenix Summit:
- The decline in easily/inexpensively extracted natural resources is accelerating exponentially. Chris Martenson, author of The Crash Course, gave a fantastic presentation on rising global demand vs. steeply falling supply of many of the worlds natural resources not just oil, but many of the industrial metals as well. While demand continues to rise with a growing global population and generally rising prosperity in emerging countries, supply remains finite. Whether things are going to become as hard-pressed as soon as Martenson predicts may be debatable, but there is no denying the base case for maintaining resource investments in your long-term portfolio.
- The eurozone as now constituted is toast. A number of speakers touched on this. While the exact timing and/or ultimate consequences of the end of the eurozone as we know it are impossible to predict, its breakup raises global financial risk by a considerable degree over the next year.
- China is headed for a crash. Gordon Chang went into great detail on the dire outlook for China in the months and years just ahead, an assessment that Rick Maybury and others concurred with. We have been writing about this in The Casey Report for many months now, but the seriousness of the situation is becoming more evident by the day. This, of course, is another source of escalating risk in the near term.
- Well get through it. The Crash Panel featuring individuals who have lived through modern-day financial catastrophes in Argentina, Yugoslavia, and Zimbabwe shared their stories; as they did, I was reminded just how resilient we humans are. While the Greater Depression is far from over, there are measures we can (and most will) take to see us through to the other side in reasonable shape.
- And then things will get really good. Alex Daley of our Casey Extraordinary Technology service gave what many agreed was one of the most powerful and certainly upbeat speeches at the event. In his presentation, he talked about some of the amazing technological advancements now speeding to the market, including cures for cancer and the 3D printing mentioned earlier. As Doug Casey likes to say, the future isnt going to be better than you imagine it will be, it will be better than you can imagine it will be. After hearing Alexs speech, its hard to disagree with that assessment.
There was so much more and so many more important presentations, but Im now so far behind that I have to stop there. Here is the entire list of presentations; from that page one may preorder the complete Summit speeches at a great discount.
A quick and final observation is that there are a lot of black swans flying overhead in Europe, in China, in the Middle East (where, Rick Maybury points out, the US is again war shopping), and here in North America. This gives rise to the very real potential for another 2008-scale stock-market wipeout, with an attendant liquidity crunch, bank failures, and more.
Having raised a fair bit of cash earlier this year, I have begun redeploying some of that cash through deeply under-market bids on already deeply undervalued resource stocks. But I am doing so only in the certain knowledge that the companies I want to own have a tangible value that will allow them to ultimately transcend any sort of market downturn in the months just ahead.
While you have to make your own decisions, you may want to spend the next few days reviewing your portfolio and unloading anything you own that you dont fully understand or which has already significantly appreciated (in which case, you might sell enough to at least get your original investment off the table). And while you are at it, you might want to focus on the best of the best companies in your portfolio and consider placing some additional stink bids or even using options strategies in the hopes of dollar-cost averaging.
It is clear that the trend toward further currency debasement is solidly intact and made clearer by the United Kingdoms announcement yesterday that it will unleash yet another big wave of quantitative easing.
Precious metals remain an essential core for our portfolios, and the recent, steep correction will be helpful in mitigating any further downside, but the risk is there nonetheless.
So, a bit of extra caution over the next couple of months is a good idea.
The Definitive Video Guide for Internationalizing Your Life and Assets
Recently, on behalf of the up-and-coming new website built around the concepts in his book The International Man, Doug Casey sat down and did what I consider a definitive update on the importance of internationalizing your assets, and maybe your life, to mitigate the growing risks in the global economy.
Dougs presentation, The Urgent Need to Internationalize, is 39 minutes long, but well worth the time youll spend listening to it, and passing it along. You need to enter your email to access the video, but internationalman.com is not a spamming operation, so the tradeoff is well worth it.
Friday Funnies
Having completely blown my time budget at this point, Friday Funnies will be hastily assembled with a quick dip into my email inbox for an entry or two from some of my regular contributors starting with a list of memorable quotes, one of which I note with satisfaction comes from Doug Casey.
1. In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress. John Adams
2. If you dont read the newspaper you are uninformed, if you do read the newspaper you are misinformed. Mark Twain
3. Suppose you were an idiot. And suppose you were a member of Congress. But then I repeat myself. Mark Twain
4. I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. Winston Churchill
5. A government which robs Peter to pay Paul can always depend on the support of Paul. George Bernard Shaw
6. A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. G. Gordon Liddy
7. Democracy must be something more than two wolves and a sheep voting on what to have for dinner. James Bovard
8. Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries. Douglas Casey
9. Giving money and power to government is like giving whiskey and car keys to teenage boys. P.J. ORourke
10. Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. Frederic Bastiat
11. Governments view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. Ronald Reagan
12. I dont make jokes. I just watch the government and report the facts. Will Rogers
13. If you think health care is expensive now, wait until you see what it costs when its free! P.J. ORourke
14. In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other. Voltaire
15. Just because you do not take an interest in politics doesnt mean politics wont take an interest in you! Pericles
16. No mans life, liberty, or property is safe while the legislature is in session. Mark Twain
17. Talk is cheapexcept when Congress does it. Anonymous
18. The government is like a babys alimentary canal, with a happy appetite at one end and no responsibility at the other. Ronald Reagan
19. The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. Winston Churchill
20. The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. Mark Twain
21. The ultimate result of shielding men from the effects of folly is to fill the world with fools. Herbert Spencer
22. There is no distinctly Native American criminal classsave Congress. Mark Twain
23. What this country needs are more unemployed politicians. Edward Langley
24. We hang the petty thieves and appoint the great ones to public office. Aesop
Five Best Sentences
1. You cannot legislate the poor into prosperity, by legislating the wealth out of prosperity.
2.What one person receives without working for another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it.
5. When half of the people get the idea that they do not have to work, because the other half is going to take care of them, and when the other half gets the idea that it does no good to work, because somebody else is going to get what they work for, that is the beginning of the end of any nation!
Asian Vegetable Market
While not particularly funny, it is rather incredible, the way that the locals in this market in Asia have set up shop along the tracks of a train. I have seen other versions of this, but not this one which shows just creative we humans can be.
Thats It for This Week!
There was so much more I wanted to get into this week, but the clock has now struck the proverbial midnight for this edition of Casey Daily Dispatch.
As I sign off, however, I would like to say once again how much I enjoy spending so much time with so many of you at our Phoenix Summit. For me and I suspect for many of those who attend these Summits have become akin to family reunions only better, because you dont have to deal with the usual stresses associated with such gatherings.
Our next event will be held in Cafayate, Argentina in connection with the Discover Cafayate celebration at La Estancia de Cafayate, November 1-6. Ill be there, as well as Doug Casey, Marin Katusa, and perhaps Louis James. I understand that the event is either sold out or soon will be. If you are interested in participating, drop Dave Norden an email today.
Thanks for reading!
David Galland
Managing Director
Casey Research
Doug Casey - Casey's Daily Dispatch posted Friday, October 7th, 2011.