Ron Paul Vs. Paul Krugman

It was interesting to see both Ron Paul an Paul Krugman on Bloomberg TV last week. Truly these two are polar opposites on money, the Federal Reserve's role and the level of involvement a government should play in the economy. Ron Paul supports "sound money" while Paul Krugman supports printing new money until the depression ends (His words not mine as you will see)Though I'm quite familiar with Ron Paul, I am much less familiar with Paul Krugman beyond him being an uber-Keynesian who has stated that Obama's $787 billion stimulus failed only because it was not "big enough". The two didn't really break any new ground in the "debate" but it was fairly interesting. For those interested in watching, it is below:

What was much more interesting was the interview with Krugman before Ron Paul came on. I was truly stunned by what he had to say. Here are the highlights:

1. We are in an economic depression.
2. We need higher inflation. 3-4%
3. Higher inflation is good for consumers.
4. Higher inflation is associated with job growth and higher markets.
5. High inflation during WWII wiped out consumer debt.
6. Governments never pay debt. They merely devalue currencies.
7. Britain is an advanced country with high debt and no problems during the 20th century.
8. "I actually was a deficit hawk during the Bush years".
9. Food and gas inflation is not driven by Fed policy. 
10. We have not had a depreciation of the dollar.
11. On QE: We need enough until we solve the problem.
12. Would be happy with national debt at 130% of GDP (Its at 100% of GDP now) or another $5Trillion in national debt.

You can watch some of the Bloomberg TV segments here:

 http://www.bloomberg.com/video/91690691/

http://www.bloomberg.com/video/91687961/

Now let me first just state that I am not a Nobel Prize economist nor did I go to Princeton. I have twenty years of experience in finance with about twelve of that in capital markets. Economists are often criticized for "living in an ivory tower" and not being connected to the real world. This seems to be the case with Krugman.

What I was most stunned by was Krugman's views seem to be entirely academic without any grounding in the real world. If the President is consulting with academics like Krugman on the economy then its entirely understandable why he's made so many poor decisions and why we are still in a depression.

I strongly take issue with some of his assertions. I do agree that we are in an economic depression. A depression is a period of both positive and negative economic growth, but growth that is anemic as we have now. I also agree that governments never pay debt. They simply roll it over and issue more debt.

But I was shocked to hear him use Great Britain as an advanced country with high debt and no problems during the 20th century. Has he ever read a history book? Britain was once the world's super power with a global navy and an empire that spanned the globe. It was once said, "The sun never sets on the British empire". It was literally true 100 years ago. And their currency of the time, the pound sterling, was the global reserve currency. But their profligate spending devalued their currency and made their empire unsustainable. Is this really the policy he suggests for the US, today's global superpower with the world's reserve currency? Perhaps the "conscience of a liberal (The title of his NYT blog)" has a different idea of America's role in the world. If so, let's have an open discussion about it rather than trying to reduce our role through economic decline.

I was additionally flabbergasted by his statements:

Food and gas inflation is not driven by Fed policy.
We have not had a depreciation of the dollar.

  Does Krugman not buy gas or food for himself? As I noted in a previous post the increase in aggregate supply of dollars is leading to more dollars needed for gas and food. General Mills reports 10-11% increase year over year! Did demand for gas increase during this economic downturn? No, Americans are driving less.  The demand for commodities hasn't changed. But the number of dollars in our economy has changed. He does qualify his statement on the dollar the way only an academic can: by comparing it to the Euro and other currencies that have also been defiled by their own massive currency printing. So if they're all dropping together through, in his book, they have not depreciated. He does not even try to explain why it is that twelve years ago you could buy an ounce of gold for about $200 but today, the same exact ounce of gold costs $1,600!

Finally, previously when he was asked about the effects of higher inflation and zero interest rates on savers and retired people, he responded that this, "just affected a small number of people". I guess the "conscience of a liberal" doesn't extend to retired Americans on fixed income.


From Jim Quinn of The Burning Platform via ZeroHedge

Despite the assertion by the good doctor Krugman that there are very few Americans living on a fixed income being impacted by Bernanke’s zero interest rate policy, there are actually 40 million people over the age of 65 in this country that might disagree. There are another 60 million people between the ages of 50 and 64 years old rapidly approaching retirement age. We know 36 million people are receiving SS retirement benefits today. We know that 49 million people are already living below the poverty line, with 16% of those over 65 years old living in poverty. Do 0% interest rates benefit these people? Those over 50 years old are most risk averse, and they should be. Despite the propaganda touted by Wall Street shills and their CNBC mouthpieces, the fact is that the S&P 500 on an inflation adjusted basis is at the same level it was in 1996. Stock investors have gotten a 0% return for the last 16 years. The market is currently priced to deliver inflation adjusted returns of 2% over the next ten years, with the high likelihood of a large drop within the next year.

 

A fixed income senior citizen living off their meager $15,000 per year of Social Security and the $100,000 they’ve saved over their lifetimes was able to earn a risk free 5% in a money market fund in 2007, generating $5,000 or 25% of their annual living income. Today Ben is allowing them to earn $150 per year. From the BEA info in the chart above you can see that Ben’s ZIRP has stolen $400 billion of interest income from senior citizens and prudent savers and dropped it from helicopters on Wall Street. This might explain why old geezers are pouring back into the workforce at a record pace. Maybe Dr. Krugman has an alternative theory.

Amen!

I don't believe that Krugman is a stupid man that doesn't understand basic economics. I do believe, however, that Krugman is speaking more from the perspective of politics than economics. And this troubles me. We have enough politicians squabbling amongst themselves. We need real answers to get this economy moving again.

We need real honest debate on economic policies not political grandstanding. When he says:

"I actually was a deficit hawk during the Bush years".

He seems just a little disingenuous.

Odds of Greece Leaving the Euro Just Went Up

Greece is unlikely to form a government that will meet austerity demands under the last EU bailout agreement.

“Without a functioning government, it seems highly unlikely that Greece would be in a position to present the Troika with plans for additional budget savings worth 7 percent of GDP by the end of June,” said Guillaume Menuet, an economist at Citi, in a research report on Monday.

And time is running out:

 “The Troika is likely to delay the disbursement of the next tranche of the program. Note that for the second quarter of 2012, disbursements of 31.3 billion euros ($40.7 billion) from the bailout program are scheduled,” he said. “If Greece does not make progress, in a second step, the Troika is likely to stop the program. If that happens, the Greek sovereign and its banking sector would run out of funding.”

As a result, Greece would be forced to leave the euro area, according to Menuet, who said the chances of such an outcome are now rising fast.

 More here.

 While leaving the Euro would be good for Greece, just as it was for Iceland and would likely be bullish for the Euro, it would also likely lead to a new banking crisis in Europe as it would end any question as to whether Greece has truly defaulted.

You may recall previously that Greece first did not default and then did.....sort of. The 70% "haircuts" were offered in exchanged for more Troika bailout money from the EU.

Leaving the Euro will end any and all doubt, but will almost certainly have global implications to both European and US banks that hold their debt.

Jim Rickards Interview

James Rickards is back with a new interview. Here are the highlights:

• Obama doesn't understand economics.
• Obama doesn't understand the importance of gold.
• Central banks "manage" the gold price.
• Gold is going to $5,000 to $7,000 in the next several years.
• QE 3 is coming. Possibly as soon as May or June.

The COMEX is Dying

The Comex, the commodity exchange which is part of the CME is dying.

I have previously mentioned that I and others have a suspicion that the Comex, ;largely manipulated by paper contracts rather than an exchange of real commodities, is dying.

With little comment, I present the following graphs:

Though the fall in open interest began to fall before the 2008 crisis, it has almost certainly accelerated since the collapse of MF Global and the outright theft of client segregated accounts by Jon Corzine.

The gold ETF, in my mind represents demand for "paper gold" compared to physical. Of course, it does not include gold derivatives which make up a huge amount of the "paper" that accounts for the 100 to 1 ratio of paper to physical. Physical gold demand was relatively constant until the 2008 crisis.

You may recall previous posts where insiders have indicated they had to pay large premiums to buy large, physical positions in gold.

A bifurcation between the physical market and the paper market has begun.

Gold Revisited Part II

Earlier today in part I of Gold Revisited I described how gold had fallen throw its long term trend, described why this was happening and gave my opinion on why I'm still bullish.

After reading this story on King World News I'm even more bullish as this may very well explain why the gold take down on Monday failed.

In addition, its been my thesis that 2012 may very well be the year that the "paper" price of gold set on the COMEX diverges from the physical price of gold. There were already reports of this last year describing how large purchases of gold had to be bought at substantial premiums.

Egon Von Greyerz of Matterhorn Asset Management describes (bold print emphasis is mine):

Today Egon von Greyerz told King World News that Swiss refiners are “working round the clock because demand for gold is so massive.”  Egon von Greyerz is founder and managing partner at Matterhorn Asset Management out of Switzerland.  Von Greyerz also said the financial world is headed into trouble that will be much worse than 2008.  But first, here is what Greyerz had to say about Swiss refiners:  “The gold market may appear quiet right now, but underneath the quiet there is a great deal of action in the physical market.  Swiss refiners are telling me they are working ‘round the clock’ because demand for gold is so massive.”

“At the same time, we are reading that a number of central banks are buying gold.  So the nonsense coming from the mainstream media that people are not interested in gold is completely false.  We are seeing massive accumulation of physical gold.  This decline today is clearly only in the paper market.

Once people wake up to the fact that the paper market is not even a real market, meaning it’s a false market that can never deliver the real goods, once investors realize this, that is when people will really panic....

“The paper market will then be either non-existent or we will see a massive premium between physical and paper.  I think those days are not far away.

I don’t think people are focusing enough on the long-term consequences.  The masses are just living day-to-day and hoping the current problems will go away, but they won’t.  The same people who did not see the problem in 2007/2008 are now saying, ‘It’s over.’  Nothing is over.  

We are actually going to go into a situation that is much worse than in 2008.  Once again, people are in total denial, and that includes governments and central bankers.  The first consequence of the enormous deficits and massive credit bubbles is going to be hyperinflation.

      

The hyperinflation will come as a result of governments printing unlimited amounts of money.  During this hyperinflationary depression, people will see currencies falling in value against real money, gold.  In a hyperfinflation, nobody benefits from the money creation except the ones standing nearest to the printing press.

So governments will help themselves and banks will get some benefit, but by the time the money gets to the people it will be worthless.  Pensions will be wiped out as well.  When Germany went through the Weimar hyperinflation, at that time people were more self-sufficient.  Today, many people are dependent on governments.

This is why we will have more social unrest and anarchy.  I don’t think governments will be able to control it because people will be poor, hungry, and homeless in many cases.  The consequences of all of this reckless behavior is going to be very serious for all of us.

This is the first time in history that we will see hyperinflation occurring simultaneously in many countries.  Previously, this type of event has been isolated to one country at any one time.  Gold will be an extremely important means of survival and payment during this hyperinflationary period.”

This why I say you must own physical gold, not an ETF. As one person said, "If you can't stand in front of it and defend it with a gun, you don't own it".

Just ask former account holders at MF Global.

Gold Revisited

Gold has broken to below its multi-year trend after hitting a peak around $1,800 in August of last year. Its a good time to re-evaluate gold investment and ask what, if anything, has changed.

I have noted on several occasions how both the gold and silver markets are manipulated but the Federal Reserve, and likely, by other Western central banks around the world. In those previous posts I pointed out that the Fed seeks to stimulate growth by promoting higher stock prices, low interest rates and relatively weak precious metals prices. As pointed out previously, this is because consumer confidence is linked to higher stock prices which has a "wealth effect", that is, we feel more confident in spending money when our 401k's are going up. Low interest rates make it easier to buy new cars and homes. A gradual (rather than quick) rise in precious metals does not raise the alarm of coming inflation.

Gold now seems to have broken its gradual rise that it has exhibited for about 12 years. Over that time gold gave its investors a huge gift of both low volatility and stock market beating returns. For those of us that held gold, you could not have asked for a better (and pardon the pun) "goldilocks" environment.

This period of easy returns is, at least for now, over. The Fed has realized that the cost of gold and silver rising has lead to alarm bells ringing for those of us who are rightly concerned with profligate spending and zero rate interest, easy money policies (ZIRP).

For those not familiar with commodities and futures markets, its worth taking a moment to explain the difference in commodity markets. After all, certainly you are wondering, "If central banks can manipulate commodity prices, why are food and gas going up? Why not manipulate those prices down too"? Its a fair question that deserves some explanation.

Commodity futures markets are made up both of speculators and end users who need those commodities as inputs for the products they make. Each future contract trades with an expiration date. At expiry, the final holder of the contract can settle in cash or take delivery of the commodity. With oil, wheat & rice, the commodity will likely be consumed by those producers who need the product as an inputs for their product. After all, refineries need the oil to make gasoline and companies such as General Mills, need wheat and rice to make breakfast cereal. Now contrast this with precious metals. Though some companies use gold, silver & palladium for electronic devices, most precious metals are kept in their pure form and held in vaults. These contracts are rarely held for "physical delivery" the way oil or wheat are. Thus, the global supply does not change in any significant amount with any month's futures contract expiration.

Because of this, banks have realized they can create "paper contracts" in large amounts without any great fear of having to stand for delivery. the ratio of "paper gold" to real gold is not known for sure but is estimated to be about 100 to 1. That is, there are contracts worth 100oz for every actual physical ounce of the actual precious metal. The banks only have to keep a small fraction of the physical metal to back the massive amounts of "paper gold" they have sold. If you think about it, its a fractional reserve system exactly like banks regularly do with money. When you deposit $100 with your bank, they must, by law, hold 10% in reserve. That means they can loan $1,000 for every $100 deposit they hold. Gold however is not regulated this way. Banks can write as many derivative contracts (their value is derived by the value of the metal) as they feel is prudent. This is exactly what they did with mortgages but instead of being leveraged 30:1 they are leveraged 100:1!!!!!

Bank Runs
In the 1930's many banks closed when there was a "run on the banks". That is, depositors demanded their money back but the banks had loaned all the money out and did not have the cash on hand to give back to their depositors. In a similar way, a gold run could happen as people and institutions realize that there is not enough gold to back all those derivative contracts they sold. This is why I advocate that investors hold physical gold rather than through an ETF which may or may not be backed by the real thing. Just imagine a game of musical chairs with 100 people. when the music stops, there is only one chair, one winner.

If the concept of holding physical gold became public wisdom the way internet stock investing was in the 1990's or buying real estate was in the 2000's then you would see the price of gold skyrocket as the banks had to deleverage their 100:1 positions.

To prevent this, the Fed is doing what it failed to do in the 1990's with stocks or with real estate in the 2000's, its smashing the price to prevent too much "irrational exuberance". This is what we saw one year ago when silver had accelerated from $11 per ounce to nearly $50 per ounce. Lately we've seen it happen again and again where huge volumes of contracts were dumped into the market in a way no sane seller would do, in order to take the price down. There is no rational reason any trader would dump such a huge volume of contracts unless the only objective was to take the price down.

This has been very effective over the last year. As I have stated in previous posts, it has also enabled China to buy huge amounts at a discount. I believe countries like China have placed a strong floor under the price, as they are buyers on every take down.

On Monday another take down was attempted.....but failed! Just how big was the trade? The Wall Street Journal reports:

The CME Group Inc.’s Comex division recorded an unusually large transaction of 7,500 gold futures during one minute of trading at 8:31 a.m. EDT. The sale took out blocks of bids as large as 84 contracts in one fell swoop and cut prices down to $1,648.80 a troy ounce. The overall transaction was worth more than $1.24 billion

Yup, one trade worth over a billion dollars. It also followed an additional pattern of "interventions" timed in thinly traded markets.

 At 750,000 troy ounces, such large trades are rarely conducted amid very thin trading volumes. Monday trading was expected to be quiet as market participants in China and Japan are out on holiday and many European traders are preparing for a holidays there.

This was the MO as the silver take down one year ago that occurred during thinly traded Asian trading hours on low volume. When large trades are made on low volume they have a disproportional impact on the price in the market. If you were a normal trader seeking the best price, this would be exactly the wrong time to place a trade so obviously the intent to take the price down is quite clear.

But on Monday, the reaction was not typical in gold. The price immediately bounced back!

 

 Trader Dan has more here

My suspicion is that the Fed is losing its ability to keep PM prices artificially low. They will not give up though. They implement their policies through primary dealers like JP Morgan who despite the Frank-Dodd bill, are still being allowed by the CFTC to hold larger than legal limits in metals contracts.

Conclusion
In the short term we are no longer benefiting from a gradual increase in the price of gold and silver as the Fed has been successful in depressing the prices. These actions have likely been taken to prepare the groundwork of more quantitative easing should we begin going back into a recession. Going forward they may be losing the ability to keep the price down or may allow the price to rise once a new round of quantitative easing begins.


Either way, the fundamentals for investing in gold and silver have become stronger in 2012 rather than weakening.
 

Doug Casey on the Coming Meltdown

Mr. Casey has a dark outlook for the next one to two years. Some might call it doom and gloom, and I believe he may under-estimate the ability of central banks to keep the world markets together but he does provide some excellent food for thought and he touches on some important themes. The italics are my emphasis.

The Gold Report: You told us about two ticking time bombs last September, Doug—the trillions of dollars owned outside the U.S. that could be dumped if the holders lose confidence, and the trillions of dollars in the U.S. created to paper over the 2008 liquidity crisis. It's been six months since then. Have we averted the disaster or are we closer than ever?
Doug Casey: Things are worse now. The way I see it, what's going to happen is inevitable; it's just a question of when. We're rapidly approaching that moment. I suspect it will start in Europe, because so many European governments are bankrupt; Greece isn't an exception, it's the norm. So we have bankrupt governments trying to bail out the European banks, which are bankrupt because they've loaned money to the bankrupt governments. It's actually rather funny, in a perverse way.
If it were just the banks and the governments, I wouldn't care; they're just getting what they deserve. The problem is that many prudent middle class people are going to be wiped out. These folks have tried to produce more than they consume for their whole lives and save the difference. But their savings are almost all in government currencies, and those currencies are held in banks. However, the banks are unable to give back all the euros that these people have entrusted to them. It's a very serious thing. So European governments are trying to solve this by creating more euros. Eventually the euro is going to reach its intrinsic value—which is nothing. It's the same in the U.S. The banks are bankrupt, the government's bankrupt and creating more dollars so the banks don't go bust and depositors don't lose their money.
I'm of the opinion that if it doesn't blow up this year, the situation is certainly going to blow up next year. We're very close to the edge of the precipice.
TGR: Is the problem the debt, or all of the currency that has been pumped in?
DC: It's both. We have to really consider what debt is. It's the opposite of savings because savings means that you've produced more than you've consumed and put the difference aside. That's how you build capital. That's how you grow in wealth. On the other side of the balance sheet is debt, which means you've consumed more than you've produced. You've mortgaged the future or you're living out of past capital that somebody else produced. The existence of debt is a very bad thing.
In a classical banking system, loans are made only against 100% security and only on a short-term basis. And only from savings accounts that earn interest, not from money in checking accounts or demand deposits, where the depositor (at least theoretically) pays the banker for safe storage of his funds. These are very important distinctions, but they've been completely lost. The entire banking system today is totally corrupt. It's worse than that. Central banking has taken what was an occasional local problem, a bank failing from fraud or mismanagement, and elevated it to a national level by allowing fractional banking reserves and by creating currency for bailouts. Debt—at least consumer debt—is a bad thing; it's typically a sign that you're living above your means. But inflation of the currency is even worse in its consequences, because it can overturn the whole basis of society and destroy the middle class.
TGR: What happens when these time bombs go off?
DC: There are two possibilities. One is that the central banks and the governments stop creating enough currency units to bail out their banks. That could lead to a catastrophic deflation and banks going bankrupt wholesale. When consumer and business loans can't be repaid, the bank goes bust. The money created by those banks out of nothing, through fractional reserve banking, literally disappears. The dollars die and go to money heaven; the deposits that people put in there can't be redeemed.
The other possibility is an eventual hyperinflation. Here the central bank steps in and gives the banks new currency units to pay off depositors. It's just a question of which one happens. Or we can have both in sequence. If there's a catastrophic deflation, the government will get scared, and feel the need to "do something." And it will need money, because tax revenues will collapse at exactly the time its expenditures are skyrocketing—so it prints up more, which brings on a hyperinflation.
We could also see deflation in some areas of the economy and inflation in others. For example, the price of beans and rice may fall, relatively speaking, during a boom because everybody's eating steak and caviar. Then during a subsequent depression, people need more calories for fewer dollars, so prices for caviar and steak drop but beans and rice become more expensive because everybody is eating more of them.
Inflation creates all kinds of distortions in the economy and misallocations of capital. When there's a real demand for filet mignon, there's a lot of investment in the filet mignon industry and not enough in the beans and rice industry because nobody is eating them. And vice-versa. And it happens all over the economy, in every area.
TGR: But inflation rates don't seem to reflect the vast amounts of currency that central banks have injected into the U.S., European and other economies. The U.S. inflation rate was 2.93% in January and 2.87% in February. We haven't seen signs yet either of a hyperinflation or a serious deflation that we were warned would come with quantitative easing (QE). Does that mean QE is working after all?
DC: No. It's not just the immediate and direct consequences of what they do—everybody loves it when trillions of dollars are created. It feels good to have lots more purchasing media. The problem arises with the indirect and delayed consequences. All these dollars and euros—and Chinese yuan and Japanese yen—that have been created have basically gone into the banks, but the banks are not lending them out. The banks are afraid to lend and a lot of people don't want to borrow because they're afraid of taking on more debt. So the dollars that have been created, mostly invested in government paper, sit on the banks' balance sheets. They are not circulating in the economy at the moment. That's why prices aren't skyrocketing right now.
That's point number two, though. Point number one is that I wouldn't trust those inflation figures in the first place. The governments of Western Europe and the U.S. fudge inflation figures as certainly as the Argentine government fudges them, just less overtly and outrageously. They do that because they want to keep the perception of inflation down; they don't want people panicking, which is a pity, because the public should urgently do something to protect their capital. They also don't want to see Social Security payments and other payments that are tied to the consumer price index go up. They don't have the tax revenues to pay for them and will have to print even more money, which just exacerbates the problem. Official inflation numbers are unreliable; only somebody very naïve—like a TV anchorperson—could possibly believe them.
If you think of inflation as an increase in the money supply above the increase in real wealth—which is actually what the word means—the inflation rate is actually quite high at the moment. Real wealth is being created at lower rates than it historically has been, while the money supply is increasing tremendously. It's just a question of when that inflation rate manifests itself on a retail level. You've got to think like a real economist, not a political hack like Joseph Stiglitz or Paul Krugman. You have to see not just the immediate and direct consequences of something, but the indirect and delayed ones.
TGR: Given that this is an election year in the U.S., won't the government do everything possible to maintain a stable market and stop inflation?
DC: Sure, the government wants things stable. I have no doubt it is trying to keep the stock market up. It wants the stock market to stay high because pension funds and insurance companies and the public at large are invested in the stock market. It wants interest rates low, although artificially low interest rates are an economic disaster in that they encourage people to borrow more and save less. It would prefer to see precious metals, and all other commodities, at low levels. The argument is made that the governments of the world, especially the U.S. government, are manipulating the prices of gold and silver to keep them down, because when they increase, it's like financial alarm bells going off.
But they can't control the prices of the precious metals. In the real world, cause has effect. When you create trillions of currency units, eventually the price of those currency units relative to other things will go down. That's called inflation. Whether he's lying or he really believes it, Fed Chairman Ben Bernanke said he can control the levels of inflation. When it gets too high, he thinks he can rein it in somehow.
The current world monetary system is going to come undone. That's my prediction, and I'm betting on it massively, personally.
TGR: You've talked about the possibility of abandoning paper currency altogether and going to a digital system.
DC: The most important thing is to get the government out of money. There should be a high wall between the state and religion and an equally high wall between the state and the economy. I don't even like to talk about what governments "should" do as far as money is concerned because the governments shouldn't be involved in money—period. Money is a medium of exchange and a store of value. It shouldn't be a political football, nor should it be used as an indirect form of taxation, which is what inflation is. It should be a pure, 100% market phenomenon. Central banks should, therefore, be abolished. Paper currency should cease to exist—except as a receipt for money held on deposit. Historically, that's how it originated.
You could use any kind of commodity as money, but gold has proven since the dawn of civilization to be uniquely well suited for use as money. It's a market, which is to say a voluntary, phenomenon. Whether you represent that gold with bank notes printed by individual banks or by digital currency—which I'm sure the world is going to—makes no difference. But having the state in charge of currency is idiotic.
TGR: You've written about China moving away from the dollar. Do you see that happening gradually or all of a sudden? And would it be in favor of its own currency or more investment in gold? What impact would that have on gold prices?
DC: First of all, I think the nation-state as a form of organization is on its way out, and that a 100 years from now people will look back at countries like China and the U.S. the way we look back at medieval kingdoms today. In the meantime, the dollar is important because it's the numéraire for trade all over the world. At the same time, fewer and fewer people trust it, and they increasingly realize that it's the unbacked liability of a bankrupt government.
Eventually, it's going to be replaced by something else. India and Iran are trading between each other using gold and oil. Why use a piece of paper issued by a hostile and unreliable third party? The Russians and the Chinese can see how crazy it is to trade between each other using dollars, which all have to clear in New York. But people are still accustomed to using currencies issued by nation-states, and the U.S. dollar is everywhere and is therefore convenient. But it's a hot potato. People no longer trust it. I suspect the Chinese yuan will replace the dollar gradually—assuming the Chinese don't destroy the yuan as well. They're also creating trillions of the things to keep the economic bubble in China from imploding.
Before the Chinese yuan can replace the dollar, people must have confidence in it. The best way they can gain confidence in it is if the volume of yuan is limited and redeemable by the issuer in something real, something tangible. That's going to be gold. So I expect China will continue buying large amounts of gold to back its currency. China is already the world's largest gold producer. Considering that only about 6–7 billion ounces of gold have ever been mined in all the world's history, China alone could drive the price of gold much higher.
TGR: At your Recovery Reality Check summit in Florida April 27–29, you'll be talking about how business cycles have been turned on their heads. Is this the time for investors to sit tight, making only small adjustments to portfolios, or must they take more drastic action to protect their wealth or, better yet, profit from volatility?
DC: I think volatility is going to go way up in the future as the titanic forces of inflation and deflation fight with each other. This is a very poor time to make big bets in almost any conventional market because it's impossible to tell how things will finally settle, where the next major war will be and so forth. Stock markets around the world are not cheap now and bond markets are fantastically overpriced. Currencies are no more than floating abstractions. Commodities have been in a long bull market, so they're no longer a low-risk bet. Real estate—the most obvious thing for bankrupt governments to tax—is dangerous. In the developed world—especially in the U.S.—it floats on a sea of debt, which has driven it to artificially high levels. It's coming down as we speak, but it's nowhere near a bottom.
So there are very few places where people can still attempt to preserve capital. Everybody is going to be almost forced to be a speculator to try to stay in the same place. Speculating means capitalizing on politically caused distortions in the marketplace. That's the proper definition of the word.
TGR: What can people speculate on?
DC: Unfortunately, they have to second-guess where the money will go. I've always liked resource stocks, especially resource exploration stocks. It's a tiny market. If a fire gets lit under gold and silver, and I think it will, companies in this nanosector could explode 10, 20 or 50 times upward in price. It's happened many times in the past. Right now, these stocks are relatively cheap, so I like that as a speculative vehicle.
TGR: Rick Rule has cautioned against generalizing about the entire junior mining sector as a whole, because so many of these companies don't find anything. How do you decide which resource investments are worth looking into? Are there criteria? Is there some kind of a litmus test that you use?
DC: Rick is absolutely correct about that. Although the sector is capable of going upwards 10 or 20 times as a whole, most of the stocks in it are total garbage. The only gold, uranium, silver or whatever appears on their stock certificates, not in the ground they control. There are thousands of these little stocks, and yes, we have criteria we use to evaluate them. We use a tried-and-true due diligence process we call The Eight Ps of Resource Stock Evaluation to separate the wheat from the chaff among speculative investment opportunities.
TGR: Would you share that with us?
DC: Sure. This is a guide to help investors ask the right questions about every individual company they're considering. This list comprehends the essential, but you could write a book about each of these eight points.

• People: Who are the key players in the company and what are the track records of the companies they've managed? This is by far the most important criteria.
• Property: What resources are in hand, and what (if any) are the additional resources they expect to find? How well proven are they? Assessing this takes geological and engineering expertise.
• Phinancing: Does the company have enough cash to meet its next-phase objectives or have the ability to finance the cost of reaching those objectives? It's no longer a case of grubstaking a prospector and his mule.
• Paper: Capital is almost always raised from the issuance of new shares. Is there a lot of cheap paper out there that will keep the share price down? Will new or existing warrants or new shares dilute your own shares? Who owns most of the paper?
• Promotion: How and when is the company going to get itself (and its stock) noticed?
• Politics: Is the country or region mine friendly and stable? Are foreign investors welcome? Is there environmental resistance?
• Push: What's going to move this stock? Drill results, merger or acquisition, increase in the price of the underlying commodity, resolution of a legal issue?
• Price: What are the potential price moves of the underlying commodity that could have either a positive or negative impact on the value of the company?

TGR: How hard is it to find a company that passes muster on all eight counts?
DC: It's very hard. It's hard enough to look at the basic statistics of thousands of companies. Then you look at the people behind them. Generally, we try to find the people first. We stay away from those who have no history of success and have established that they have questionable characters. We look for people with long histories of success or appear to be about to embark on a lifetime of success. The most important piece is people. That's what we really look for most of all.
TGR: Based on all the calamities that could occur, how will you adjust your investing philosophy?
DC: Let me put it this way. We're going into something that I call The Greater Depression, much worse and much different than what happened in the 1930s. I think my friend Richard Russell said it best: "In a depression, everybody loses. The winner is the guy who loses the least." It's very tough to keep capital together today, much less make it grow in the years to come.
But I think it's possible. The thing to remember is that most of the world's real wealth will remain in existence regardless of what happens. The key is to position yourself so that more of it falls into your hands as opposed to falling out of your hands. That's what we're trying to do, to increase our relative share of the wealth in the world. We're not looking at boom times. What's coming will be the opposite of what we experienced during the artificial inflationary boom of the 1990s, where everything was going up—stocks, real estate and so forth. This is a time when, in real terms, most things will lose value. Most people will experience a real decline in their standard of living.
TGR: As we've discussed, at its root, paper currency is a substitute for something of value. Energy, similar to gold, has intrinsic value. It's always in demand. In the past, you've expressed optimism about uranium, natural gas and oil. As the dollar becomes suspect, do you foresee sources of energy becoming more valuable?
DC: Absolutely. I'm very bullish on oil. The world runs on fossil fuels today because they're ideal sources of highly concentrated energy. Unfortunately, all of the easily available, cheap fossil fuels have basically been found. The low-hanging fruit is gone. This is what the peak oil theory is about. Plenty of oil remains, but it's going to be more expensive to get it. To find oil now requires going to exotic places without infrastructure and with big political problems. It requires going much deeper into the ground, exploring under the ocean, using new technologies, and so forth.
Gas is secondary to oil when it comes to concentrated sources of energy. Of course, with the development of new technologies, primarily horizontal drilling and new fracking techniques, a huge amount of natural gas has become available all over the world. But it takes tremendous capital to retrieve it, and it also faces political problems.
But in summary, I'm bullish on energy of all types. There is plenty of fuel out there. It's just a question of the price level, so it becomes economic to retrieve it.
TGR: So how do you invest in finding the rest of what's out there?
DC: You look for companies that are exploring for it. One of the important things that makes me very bullish on oil is that most of the oil in the world today—something like 80%—is not owned and produced by BP Plc (BP:NYSE; BP:LSE), Exxon Mobil Corp. (XOM:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and companies like that. It's mostly owned and produced by national oil companies such as those in Mexico, Iran, Saudi Arabia and Venezuela. These state oil companies are universally corrupt and inefficient. The profits from the oil are generally used as piggybanks by those governments, not to build capital and find more oil. Furthermore, where governments allow private exploration, such as Iraq, they take about 80–90% of the potential profits from oil, which of course discourages exploration and exploitation of the resource. The problems are almost entirely political, but they're big problems.
TGR: Speaking of the politics of energy, are you still bullish on uranium in light of the politics of what's gone on since the Fukushima meltdown?
DC: Yes. I've said it before and continue to say it. There's no question that nuclear power is by far the safest, cleanest and cheapest type of mass power generation available. Fukushima survived one of the most severe earthquakes in recorded history with no problem; it's just a pity they didn't adequately plan for a 45-foot tidal wave on top of it. In addition, those plants basically were 50-year-old technology. If it weren't for political obstructions, we'd be using vastly improved technology. But it's not just uranium. Thorium is actually a much better fuel from many points of view and probably would have been used as a fuel instead of uranium except that the governments of the world found uranium useful for nuclear weapons as well as nuclear power.
Nuclear power is definitely the answer, but as you point out, it's a question of political problems. Across the resource industry, in fact, it's all politics. When you find a gigantic resource of some type, you can count on lawsuits, not-in-my-backyard opposition and political theft. Those are among the reasons that I don't see the resource industry as a place to make investments. It's only a place where you can speculate.
TGR: So what should long-term investors do to protect themselves?
DC: Because the big problems in the world today all are political, the critical thing is to diversify politically and internationally. You can't have all your assets under the control of one government or in one country. Then, of course, you have to find the right place to put the money within that framework.
TGR: How do you do that?
DC: I can write a book on that.
TGR: Or stage a summit? You have quite a faculty lined up.
DC: It is an impressive group. Actually, this summit has dual overarching purposes. As we've discussed, the massive amounts of money the world's governments have unleashed in their economies have lit a small fire of recovery. We're going to talk a lot about whether the world is truly on a path to recovery or whether investors wouldn't be wise to develop and implement Plan B now, given that the extreme levels of debt that were such a major factor in creating the current crisis have not been reduced. To me, that strongly suggests that this so-called recovery is unsustainable and calls for moving into Plan B. Part of Plan B involves identifying optimal investment strategies for the markets ahead.
TGR: What sorts of takeaways are in store for people who attend?
DC: Let's have David Galland, who's been instrumental in preparing for this summit, respond to that. (A senior market strategist, Galland is managing director of Casey Research LLC, managing editor of The Casey Report, International Speculator, Casey Investment Alert author of Casey's Daily Dispatch.)
David Galland: We expect the takeaways will be good answers to many burning questions. As Doug has suggested, the government says the recovery is real and your broker will tell you it is, yet the underlying data suggests that it may be a paper tiger. So, what's the hard truth? Should you be moving aggressively into rebounding equities? Or is the recovery a mirage that will dissipate in a second crushing leg down for the economy and traditional investment markets? What are the road signs you need to pay close attention to? How can you position your portfolio to do well in either scenario and, most importantly, to hedge against the worst case? Should you worry about inflation or deflation? Neither? Or both? Will the gold and silver you've been holding turn to lead and pull your portfolio down? Or is loading up on corrections still the right thing to do?

TGR: These summits are always sold-out affairs. Is this one full already?
DG: Just a few spots remain as we speak.