A look back on 18 months of analysis and reports on the European Credit Crisis

In 1999, 11 European countries surrendered their currencies for the euro and a shared monetary authority. Barely a decade later, the once-celebrated EU is in the midst of a credit crisis and its currency is facing collapse.

Elliott Wave International’s analysts have been anticipating and tracking the credit contagion across the European nations for the past two years. EWI subscribers were first alerted to the still-developing European debt crisis back in December 2009.

The following is excerpted from a December 2010 report from The European Debt Crisis, a new report from EWI. This free report provides important analysis from February 2010 through today that helps you understand what the European economic crisis can mean for your investments. Plus, you’ll get a unique perspective on what’s ahead. Find out how to access this free report below.

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The Credit Crisis Spreads — December 2010
The credit crisis is escalating as expected. Back in January 2010, when ratings agency Moody’s bestowed “investment grade” status on a widely followed index of sovereign bonds, The European Financial Forecast argued that a renewed Primary-degree decline would in fact aim the credit crisis directly at this critical new realm. Our case for the looming sovereign debt debacle rested primarily on two pieces of evidence: (1) Primary wave 3 (circled) had begun in Europe’s peripheral markets, and (2) premiums for credit-default swaps on European sovereigns (think of an insurance policy against a national default) were already signaling the next phase of the crisis by surpassing their 2008-09 price extremes. The February 2010 issue of EFF published a chart showing rising Greek, Spanish and Italian swaps and offered this description of how Europe’s credit crunch would escalate: “The theme during Primary wave 1 (circled) was default at the individual, corporate and quasi-government level. The theme for Primary wave 3 (circled) will be default at the sovereign level.”

Today, the credit crunch is clearly angling itself away from mere corporations and toward whole countries. On November 15, Bloomberg announced the escalation with this headline:

Companies Safer Than Sovereigns as
Crisis Cracks ‘Old Order’
– Bloomberg, November 15, 2010

London credit strategist Greg Venizelos tells Bloomberg that the “old order” was the one where investors believed large sovereign nations to be better credit risks than corporate borrowers. However, debt is being repriced, he says, and today “corporates are now better credit quality than sovereigns in the periphery.” Indeed, swaps on Italian government bonds are more expensive than 75% of the Italian companies contained in the iTraxx Europe Index of European corporations. In Spain, traders deem Spanish sovereign debt to be riskier than all six Spanish companies in the index. Even in the supposedly safe core European country of France, 5-year swaps tied to French government bonds climbed to an all-time high of 105 basis points in November. At that level, more than half of the 25 French companies in the iTraxx index trade tighter than the French sovereign, according to Bloomberg.

The chart above shows another way to view the escalation of the credit crisis. By plotting the difference, or “spread,” between swaps on European corporations versus those on European sovereigns, the rising line shows derivative traders’ increasing fear over sovereign default relative to corporate borrowers. So, yes, the old order of safer sovereigns is over. But notice, too, that the debt crisis began escalating when the continent’s peripheral markets started topping way back in October 2009. The billion-euro question is, “Who is next?” The media is clearly focusing on Portugal, as 5-year credit default swaps tied to Portuguese bonds are setting all-time records. But charts show that so too are swaps tied to Spanish and Italian bonds. Five-year swaps on Belgian debt also reached an all-time high last month. Either one of these countries could be next. Maybe they’ll all go down together, but in the larger scheme of things, it doesn’t matter. The most important thing to observe is that even core European countries like France and Germany exhibit spiking default insurance premiums, too. These countries are the largest contributors to the €440 billion Facility, the same one that backstops the rest of Europe.

The June 2010 European Financial Forecast said unequivocally that before the storm is over, “at least one, but more likely several, G8 nations will capsize.” We stand by our forecast.

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The European Debt Crisis is affecting investments across the globe. Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this FREE resource from Elliott Wave International. Read Your Free Report Now: The European Debt Crisis and Your Investments.

Prechter talks with Mind of Money Host Doug Lodmell

Robert Prechter offers a broad overview of the Wave Principle in this interview clip with The Mind of Money host, Douglass Lodmell. 

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Learn the Why, What and How of Elliott Wave Analysis Financial media use news and economic events to explain market moves. Steer clear of this misguided approach. Learn what really moves the markets with The Elliott Wave Crash Course. In this series of three FREE videos, Senior Tutorial Instructor Wayne Gorman demolishes the widely held notion that news drives the markets. Each video will provide a basis for using Elliott wave analysis in your own trading and investing decisions.

by Charles Petty

Investing in real estate requires investment of not only money but also time and effort. Real Estate investing requires that you buy a property, rehab, maintain it and then rent it out.

But if you want to enjoy the fruits of investing in real estate without all the hassle, then real estate securities is the place to look. Even if you have another business but yet wish to dip your fingers in real estate without investing your precious time, then you can choose from any of the following real estate securities.

Real Estate Limited Partnership

One of the ways to enter into the real estate market without any day-to-day hassles is to become a limited partner in a firm that actively deals in real estate. There can even be additional limited partners in one firm. A general partner will be assigned the task of managing the daily affairs of the company including buying and selling of properties, renting it out, collection of rent, managing expenses, etc. Limited partners can act only in case of any gross mismanagement by the general partner that would necessitate his or her removal from the firm. As a limited partner, you will be able to receive a portion of the profits that your firm generates. The returns in this mode are quite high but so are the risks since there might be many partners involved in a single company.

Real Estate Investment Trusts [REITs]

REITs are companies that must shell out at least 90% of their net income to its shareholders. Real Estate Investment Trusts purchase and oversee various real estate projects and the income generated from such ventures is subject to single taxation at the investor level. Thus, the returns to investment in such an instrument is quite high.

There are various REITs that specialize in acquiring, managing and disposing of several different property sectors such as residential homes, apartments, commercial offices, hotels, warehouses, etc, and you can even find  REITs segmented by different regions. This method of investing offers modest capital appreciation in the long run.

Real Estate Mutual Funds

Real estate mutual funds invest their money in select REITs and even in other publicly traded companies that are active in the real estate market. These mutual funds thus offer a high yield in the form of dividends. The only problem with real estate mutual funds is that due to the dual fee structure, you will need to pay management fees and expenses to the management of a REIT as well as an additional 1 to 2% fee to the manager of the real estate mutual funds.

High Yield Private Mortgage Notes

Professional real estate investors normally use these notes in the form of loans. They use them to buy, rehab or even equity cash out of various properties that generate income. These notes are also completely guaranteed by matching collateral in the form of productive real estate. These loans are normally for a duration of one year and never exceed 65% of the currently appraised value of property and the income generated is in the form of interest payments. Because real estate investors need this money to continue in their buisness they are often willing to pay high yields on these investments. Also these loans take less time to get processed as compared to traditional loans that are advanced by lending institutions so real estate investors often prefer them. Since these loan are backed by real estate, the borrowers credit is not a major problem while securing them. Investors have an opportunity to earn around 12 to 18 percent by investing in these instruments.

If you are new to such investments, then hire the right professionals to guide you on the best securities that can provide you with the highest returns with the lowest risk. Investing in real estate securities is thus a profitable alternative to directly dealing in real estate.

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Editor

 

On September 22, 2011, Karen Roche and JT Long of The Energy Report interviewed renowned speculator and financial author Doug Casey on his views about uranium. Read here why Doug thinks despite the recent bad press, “yellowcake” has a bright future.

The Western world’s skittishness, skepticism and staunch opposition when in comes to nuclear energy won’t stand in the way of its production elsewhere in the world. It will be full steam ahead in China, India and other developing nations, says Casey Research Chairman Doug Casey, and the Western world is tiny in comparison. In fact, “I’d say uranium is a great place to be for at least the next generation,” he tells us in this Energy Report exclusive. With ever-advancing technology enabling economic recovery in places where it previously wasn’t possible, he’s also optimistic about natural gas and oil. 

The Energy Report: Next month, at the sold-out Casey Research/Sprott Inc. “When Money Dies” summit in Phoenix, you’re on tap for a presentation entitled “The Greater Depression Is Now.” Your colleague, Marin Katusa, is on the roster too, talking about “Making Money in Energy.” Marin recently told us there’s a buying opportunity for uranium companies. Given Fukushima’s repercussions in terms of the nuclear energy industry, are you bullish on uranium?

Doug Casey: Absolutely. It’s unquestionably the safest, cheapest and cleanest form of mass power generation. That’s not to say that there aren’t problems, as the Fukushima incident made clear. As much of a disaster as that was—a combination of earthquake, tsunami and radiation leakage—so far it’s just been a big industrial disaster. I daresay that if government hadn’t been so involved in nuclear power these last 50 or 60 years, the technology would have been much further along. Nuclear power would be much safer, cheaper and cleaner than it is today. We might, for instance, be using thorium, which appears to be better than uranium in many ways. We would almost certainly have much smaller, cheaper, and robust reactors.

So, yes, I’m a huge uranium bull. If you want mass power, you need nuclear power. And today that means uranium. I’d say uranium is a great place to be for at least the next generation.

TER: But considering the fact that governments remain involved and people are even more squeamish about nuclear power post-Fukushima, won’t we see a stall in nuclear power and development?

DC: That’s possible. But, the hysteria is mainly going to affect the Western world. China and India recognize they have no alternative to nuclear power. As you know, the growth is in China, India and other emerging economies; it’s where the most of the world’s people live. The Western world is small by comparison, and getting smaller. These other places will continue full steam ahead with nuclear.

TER: Porter Stansberry, whom you know well, recently told us to expect the U.S. to become a net exporter of natural gas in the not-too-distant future. Do you see that as well?

DC: Quite likely. Let’s talk about peak oil first, though. I think that the Hubbert peak theory is accurate, and for good geological reasons—but understand that peak oil doesn’t mean we’re running out of oil. Rather, it means that we’re running out of easily available, cheap light sweet oil. And we are.

However, technology is always improving, enabling economic recovery of oil and natural gas in places where it previously wasn’t possible. Horizontal drilling and the fracking process have opened up gigantic reserves of gas, scores of trillion of cubic feet in some basins in the U.S. So, yes the U.S. could become a huge exporter of natural gas. It’s entirely possible. It could happen in other regions of the world as well, but probably not with gas at its current prices.

The gas is available, but because it’s very underpriced relative to other forms of energy, it probably won’t be produced until the price doubles or even triples from where it is now. That would bring it more into historical alignment with oil prices, which I expect will themselves go higher as well.

TER: How is it that the oil prices have remained relatively high and gas is still so low? Given the differential of the two price points, why aren’t we seeing a conversion from oil-dependent cars, for instance, to natural gas?

DC: Oil has much a greater density of energy than natural gas, and a much more convenient energy-based fuel, so of course we’ve all gravitated toward it. It’s not really feasible for aircraft, for instance, to be able to run on natural gas, so they’ll continue to use oil-based derivatives. In addition, gas is much harder to transport than oil. So it’s tended to be a local market, whereas oil is international.

But since most all the easy, cheap oil’s been found—mostly in the 60s and 70s—and those old oilfields are going into decline, gas is probably the next thing. Gas has some advantages as well. For one thing, it burns cleaner. Remember that these fuels, these petrochemicals, basically contain just hydrogen, oxygen and carbon. As technology advances, we should be able to manipulate these very simple and well-understood molecules and put them into a form we want. We’ll be able to do it ourselves in various ways as nanotechnology, for instance, develops further in the future. Then maybe we won’t have to rely on nature doing it for us over billions of years.

TER: Despite criticism of the effects of government involvement—stifling nuclear energy advancement over the years, as you mentioned earlier, or printing money to paper over enormous amounts of debt, as you’ve pointed out in other interviews—you’ve indicated that improving technology is a countervailing trend that actually will increase the standard of living.

DC: Exactly. There are more scientists and engineers alive today than have lived in all previous history put together; that’s a huge cause for optimism. Technology is very likely to solve many, many problems—as long as the scientists and the free market are allowed to develop these things, and as long as there’s capital available to manufacture the tools they need to do so.

TER: What are you hoping attendees come away with from next month’s summit?

DC: People come to these conferences is to get ideas about intelligent places to put their capital. Today those places are harder to find than has ever been the case before in my lifetime. With the dollar’s imminent demise, staying in cash is also very dangerous. There are very few bargains to be found in the world of investment today. Stocks today are quite overpriced by almost any parameter. Bonds will implode; that’s especially serious because they’re a much bigger market than shares. Property prices are still headed down. So people are looking for answers, and I think we have some.

Beyond answers along those lines, we also host these summits to discuss some investment principles so that our attendees don’t have to rely on us for answers. They’ll be equipped to deal with these things on their own.

TER: What are some things that investors can do to protect themselves? 

By Robert Allen
Best-selling Author of
The One Minute Millionaire and Nothing Down

An enlightened millionaire is a person who always strives to be the best they can be, who knows no boundaries, and knows that there can be abundance for all. They know that creativity is unlimited. That the application of creativity to everyday needs is the basis of providing value, which in turn creates wealth. They live in balance. Their life is a life devoted to living and sharing abundance through service that allows them to give their unique gifts–for the benefit of themselves, their families, their communities and the world.

The world is shifting. No longer will our society support the pursuit of money for money’s sake. We are entering a time when we recognize that none of us exists in isolation. We invite you to step into this new world with us.

“What is the opposite of abundance? It’s not scarcity. It’s greed. Greed is the belief that there is not enough for everyone, so you’d better grab yours now. What is the opposite of love? It’s not hate. It’s fear. Fear is the belief that someone or something can hurt you.”

“Ultimately, the product you sell is love—manifested and materialized.”

- Robert G. Allen

Tragic news about the United States economic atmosphere has been inescapable throughout the country and world for quite some time now. With constant debate over raising the debt ceiling, shocking losses in the stock market, devastating unemployment rates, and a downgraded national credit rating, it’s no wonder the country’s economic health has been in question. After a series of blows to the U.S.’s economic wellbeing, things don’t seem to be getting much better. The country’s credit rate fall has been of great discussion ever since Standard and Poor’s downgraded it by a full point on Monday, August 8th 2011. To add to the blow, the U.S. stock exchange ended the day that Monday down more than 600 points.

Standard and Poor’s downgraded the United States’ national credit rating from AAA to AA+ (a full point down) in light of the recent Budget Control Act of 2011. This act, passed by congress on August 2nd, responds to the recent drama over raising the national debt ceiling. The act raises the debt limit initially by $400 billion and makes several other increase provisions for the future. However, Standard and Poor’s downgraded the U.S. because they say the deficit reduction plan passed by Congress does not go far enough. With a score of AA+, the U.S.’s investment grade is described as high quality, with very low credit risk, but more susceptible to long-term risks. Specialists worry that the downgrade could negatively impact investors’ confidence in the world’s largest economy (as it should).

The question now is what will the Standard and Poor’s downgrade mean for the United States economy? Standard and Poor’s is a financial services company operating in the United States with well known stock market indices in the U.S., Australia, Canada, Italy, and India. Importantly, Standard and Poor’s is one of the three major credit-rating agencies in the United States alongside Moody’s Investor Service and Fitch Ratings. These credit-rating agencies issue credit ratings for the debt of both public and private corporations. Standard and Poor’s, alongside the two others, have been designated by the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization. Standard and Poor’s gives long-term credit ratings on a scale from AAA (as the highest rating) to D (as the lowest rating). These credit ratings are used to inform lenders about how reliable and stable those particular borrowers may be.

So, what comes next? Reports state that the other two major credit-rating agencies, Moody’s and Fitch, have no plans to follow Standard and Poor’s example. While losing its triple A rating for the first time in history is a significant blow to President Obama and the United States government, it should not necessarily have come as a huge surprise. The country’s economy has been sloping downward for some time now. With unemployment at over 9%, significant debt, feuding governmental parties, and the threat of a double dip recession, the United States may need to shake off the shell shock of losing their top credit status and work harder to fix it for the future.

Author Bio:

Stella Walker is a freelance writer of credit score where she writes about topics including credit, debt, investment, bankruptcy.

Over the weekend, I went shopping for Halloween decorations. In the store, one of the clerks was wearing a white T-shirt with a puff-paint rendering of the Dow Jones Industrial Average. The line representing prices was the color of blood red, dripping and splashed across the front. When I asked him what it was, he said “the October Curse.”

‘Tis the season of stock market adages; those age-old Wall Street platitudes that claim stock prices perform a certain way during certain months of the year. The problem is, such correlations are hardly a guarantee.

Take October, for example. Yes, this month has marked some of the darkest periods in stock market history: 1929, 1987 and on. Historically, however, it’s not the worst performing month. For example, the supposed “Halloween Jinx” failed to bring a deathly pallor to stocks in 2008, as the final days of that year’s October saw the biggest weekly gain since 1974.

Then there are these familiar saws of seasonal wisdom:

“As Goes The First Week of January, So Goes The Month”– In the first week of January 2010, the stock market enjoyed a powerful winning streak. Yet, by the end of the month, prices were back in the red, circling the drain of a two-month low.

“Sell In May And Go Away” — And don’t come back ’till St. Leger’s Day (September). If investors heeded this wisdom this year, they would have missed one of the strongest uptrends in stocks of the entire year from July to September.

“September Curse” – If you think October is supposed to be bad, September is widely assumed to take the financial killing cake. Yet this year, U.S. stocks enjoyed their strongest September in 71 years!

Bottom line: Don’t “buy” your trading strategy before the trend actually arrives. The choice comes down to old adages, or objective analysis. Pick the latter.

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This article was syndicated by Elliott Wave International and was originally published under the headline October Curse Vs Objective Analysis: The Choice Is Yours. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

EWI’s Wayne Stough adds another Flash opportunity service to the line-up: ETFs

Every trader or active investor at times wishes they could pick the brain of a pro that has “pulled the trigger” on real-money trades before.

EWI Director of Analysis Wayne Stough is one of these pros. For several years, several times per month, he’s been alerting his Flash service subscribers to opportunities in futures markets.

And now, there is a new addition to the Flash service line-up: ETF Opportunity Flash. We caught up with Wayne in his office and asked him a few questions:

Q: What method do you use when looking for high-probability trade set-ups?

Wayne Stough: My main approach is The Elliott Wave Principle. I look for clean, precise wave counts — usually ones that other analysts can confirm, so there is a general consensus on market direction. Once the market meets my other criteria for a high-confidence trade, I send out a Flash recommendation to my subscribers.

Q: How do you define a “high-confidence” trade?

WS: That’s a good question, because no market forecast is ever guaranteed, whether you use Elliott or some other forecasting method. Having said that, there are definitely moments when probabilities (or odds, if you will) strongly suggest a particular move. For example — and this is just basic Elliott — the Wave Principle says that markets move in a series of five waves in the direction of the larger trend (labeled on a chart 1, 2, 3, 4, 5) and three waves against the trend (labeled A, B, C). Also, there are certain proportions between these waves that markets often adhere to. So whether I’m counting a 1, 2, 3, 4, 5 pattern in a rally or a decline (i.e., in a bull or bear market), I focus on where the fifth wave should end, according to Elliott wave guidelines.

Once I’ve identified that price termination point, it becomes a matter of waiting for the market to get there. Fifth waves come at the end of the pattern and are usually weaker than third waves. So once I see certain technical indicators diverging (e.g. the RSI), my confidence grows: We are near the end of the pattern, and prices are about to reverse. That’s just one example of a high-confidence situation. But I do suggest a protective stop with every new Flash alert, in case the forecast doesn’t come true.

Q: Are you aiming for a particular percentage gain?

WS: Absolutely. When I send a Flash alert, I’m typically looking for a 3-to-1 ratio, at a minimum.

Q: Does that always work out?

WS: No. I monitor the recommendation for warning signals that let me know when a different scenario is unfolding in the charts. In those cases, I send out another Flash alert suggesting to lower or raise the stop-loss level, or exit the recommendation entirely.

Q: They say you love the S&P Mini as a trading vehicle. Why?

WS: I’d put it differently. I have traded the S&P for a long time, I understand that market’s nuances, and I like the leverage and volatility. But while the S&P comes naturally to me, I’ve also made many Flash recommendations on other markets, like gold and currencies. So, a better way would be to say that I love any market that gives me the desired risk-reward ratio. Now I’m also “looking for love” among various ETFs.

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Q: If traders expect a bear market, should they still consider Flash Services?

WS: Absolutely. I think we’re at the cusp of something very big in the stock market. And this is the time to act. Just keep in mind that speculating in severe bear markets (or during extreme volatility) carries additional risks. So be sure you do your research and know how your financial instruments behave under these conditions. And anyone who chooses to trade in this environment must only risk the money they absolutely can afford to lose.

Q: Who do you think should consider subscribing to EWI’s Flash Services — including the newest addition, the ETF Flash?

WS: Anyone who has some risk capital but not enough time or experience to find their own opportunities. Anyone who understands and accepts the fact that when you bet your money, there will be winners and losers. (Sometimes more of one than the other.) Anyone who knows better than to risk all their capital on a single recommendation; the old “all eggs in one basket” situation. I think in terms of quarters: I want all my subscribers smiling at the end of a quarter.

EWI ETF Opportunity Flash service now brings you potential high-probability opportunities in exchange-traded funds (ETFs). Don’t miss this special offer.

This article was syndicated by Elliott Wave International and was originally published under the headline EWI’s Newest Service Picks ETFs: Interview with the Editor. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

By Doug Casey, Casey Research

I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts.

This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects.

In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade.

Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.

A Brief Summary of Our Story So Far….

Before we get to where things stand at the moment, let’s briefly look at where we‘ve come from.

That a depression was in the cards has been foreseeable for decades. The distortions cranked into the system in the ‘60s – the era of “guns and butter” spending by the government – resulted in the tumult of the ‘70s. Things could, and one could argue should, have come unglued then. But they didn’t, for a number of reasons that have only become clear in retrospect:

• Interest rates were allowed to rise to curative levels;
• The markets were non-manipulated and so, as they became quite depressed, were left to send out real distress signals;
• The U.S. was still running a trade surplus;
• The dollar had only come off the gold standard in 1971 and was still relatively sound.

Then, starting with Reagan and Thatcher, the world’s governments started cutting taxes and deregulating. The USSR collapsed peaceably. China, then India, made a shift toward free markets. And on top of it all, the computer revolution got seriously underway. All told, a good formula for recovery and a sound foundation for a boom.

But sadly, taxes, government spending, and deficits soon started heading much higher. Despite the collapse of its only conceivable enemy, U.S. military spending continued to skyrocket. Monetary policy encouraged everyone to take on huge amounts of debt, much more than ever in the past, and everyone soon found they could live way above their means. The stock, real estate, and bond markets got pumped up to ridiculous levels. The main U.S. export became trillions of paper dollars. Worst of all, the U.S. devolved into just another country, undistinguished by anything other than a legacy of a high standard of living.

The standard of living in the U.S. is now going down for these reasons, and others. But most disturbing to the average American is the falling position of the U.S. relative to the rest of the world. In brief, Americans won’t take kindly to the notion that they can’t continue earning, say, $10-40 an hour, for doing exactly the same thing a Chinese will do for $1-4 an hour.

What’s going to happen is that the Americans’ earnings are going to drop, while those of the Chinese are going to rise, meeting someplace in the middle. Especially when the Chinese works harder, longer, saves his money, and doesn’t burden his employer with all kinds of legacy benefits, topped off with lawsuits. This is a new threat, one that can’t be countered with B-2 bombers. It’s also something as big and as inevitable as a glacier coming down a valley during an Ice Age.

This, along with other problems presented by the business cycle have ushered in the Greater Depression.

How Long Will the Greater Depression Last?

Let’s briefly recap two definitions of a depression, along with a couple of examples, with an eye to seeing how things may evolve from here.

One definition is that a depression is a period of time when most people’s standard of living drops significantly. Russia had this kind of depression from roughly 1917 to 1990, so more than 70 years. A second definition is that it is a period of time when economic distortions and misallocations of capital are liquidated. Russia had this kind of depression from 1990 up to about 2000. It was very sharp but relatively brief.

The difference between these two examples is that, during the first, the state was in total – or even increasing – control. By the time of the second, the country had greatly liberalized. As a result, the depression was a period of necessary and tumultuous change, rather than drawn-out agony. A depression can be a bad thing or a good thing, partly depending on which definition applies.

Today, things are problematic in Russia for a number of reasons that aren’t germane to this article. But people can own property, entrepreneurs can start businesses, and the top tax rate is 11%. The depression of 1990-2000 resulted in greatly improved conditions in Russia.

Let’s look at a couple of other examples: Haiti and Mozambique.

Haiti has been a disaster since Day One and has no current prospect of improvement. The billions of dollars Obama is idiotically about to send them will evaporate like a quart of water poured into the Sahara – just like the billions of aid and charity that have gone before it. Worse, it will eliminate the necessity of Haiti making meaningful reforms. Additional aid actually precludes the possibility of liquidating distortions, misallocations of capital, and unsustainable patterns of life. It’s counterproductive.

Mozambique went through a long and nasty civil war from about 1970 to the early ‘90s. The war made conditions worse than anything even Haiti has seen. But when it came to an end, the Mozambicans changed things simply in order to survive. The place is hardly a beacon of the free market today, but duties and taxes have been reduced, most parastatals have been privatized, and entrepreneurs can operate. It’s a good sign that the country is drawing foreign investment but very little foreign aid, which always just cements people in their bad habits while ensuring government officials stay in office.

Why do I bring up these examples? Because it’s clear to me the U.S. is heading in the direction of Russia before 1990, or Haiti today. Not in absolute terms, of course. But everything the U.S. government is doing – raising taxes, increasing regulations, and inflating the currency – is not only the wrong thing to do, but exactly the opposite of the right thing.

This is really serious, because the government is the 800-pound gorilla in the room. What governments do makes all the difference – actually the only difference – in how countries perform. How else to explain that Haiti and Singapore were on pretty much the same level after World War 2, and look where they are now.

To my thinking, the U.S. is now clearly on the path Argentina started down with the Peron regime. Cause has effect. Actions have consequences, and the result will be much the same. Except I believe the descent of the U.S. will be  much faster, much scarier, and will end in a much harder landing than that experienced by Argentina.

I say this because there’s no realistic possibility the Obama regime is going to change course. To the contrary, they’re likely to accelerate in the present direction. They believe the government should direct society – as do most Americans at this point. They feel government is a magic cure-all and not only can but should “do something” in response to any problem. Most complaints aren’t that they’re doing too much, but that they’re doing too little. Everything on the political front, therefore, is a disaster. There’s absolutely no prospect I can see that it will get better, and every indication it will get worse.

I’m not going to try to predict what will happen in the 2012 elections, but it’s fair to say the last several elections are indicators of the degraded state of the average American. What are the chances they’ll make a 180-degree turn, in the direction of someone like Ron Paul? I’d say close to zero, and libertarianism will remain a fringe movement, at best. Will Boobus americanus vote for someone who says the government should actually do less – much less – in the middle of a crisis? Especially if the current wars expand, which is quite likely in this kind of environment? No way.

Simply, the chances of a reversal in what passes for the philosophical attitude of this country are slim and none. And Slim’s left town. While there are some who hope for an improvement on the political front, I think that’s very naïve.

The Tea Party movement? Its ruling ethos appears to be a kind of inchoate rage. I sympathize with the fact that many seem to be honest middle to lower middle-class Americans who see their standards of living slipping away and don’t know why, or how to stop it. They feel bad that it’s no longer the America portrayed in Jimmy Stewart and John Wayne movies, but many are quick to blame the changes on swarthy immigrants. They’re desperately looking for a political solution. These folks tend to be highly nationalistic and atavistic, with a tendency to worship their preachers and the military. I just hope some popular general doesn’t get political ambitions…

The only bright spots – but these are very major bright spots – are in the areas of individual savings and technology.

As things get worse, the productive members of society will redouble their efforts to save themselves by producing more while consuming less; the excess will be savings. Those savings create a pool of capital that can be used to fund new businesses and technologies.

The problem here is that with the dollar losing value quickly, the savers will be punished for doing the only thing that can really improve the situation. And they’ll be discouraged by wrongheaded propaganda telling people to consume more, not to save. Funding new business and technologies will be harder with more regulations. But still, people will find a way to set aside a surplus. And that is a factor of overwhelming importance.

As are breakthroughs in science and technology. Don’t forget that there are more scientists and engineers alive today than have lived, altogether, in all of previous human history. These are the people that will wind the main stem of human progress. And their numbers are going to grow. So there’s real cause for optimism.

The problem is that most young Americans now go in for things like sociology and gender studies, whereas the up-and-coming scientists and engineers are primarily Chinese and Indians who, even if they get advanced training in the U.S., tend to go back home afterwards. Partly because the U.S. discourages hiring non-Americans for “good” jobs, but mostly because they can see more opportunity abroad.

So, how long will the Greater Depression last? Quite a while, at least for the U.S.

But wait. Aren’t there other bright spots? How about the dollar?

The Dollar

Over the years I’ve been agnostic as to whether this depression would be inflationary or deflationary. Or both in sequence, with inflation first, followed by a credit collapse deflation; or a deflation followed by a runaway inflation. Or perhaps both at the same time, just in different sectors of the economy – e.g., prices of McMansions collapse because people can’t afford to live in them, while the prices of rice and beans skyrocket because that’s all people can afford.

At the moment I’m leaning towards a deflation in most areas. Why? Because the purchasing media in the U.S. is primarily credit based. If a mortgage defaults, what happens to the dollars it represents? They literally disappear, which is deflationary. If a bond defaults, the same thing happens. If stocks and property prices crash, the dollars they represent vanish. If people or businesses don’t borrow, the money supply fails to expand; in fact, many are trying to pay back loans, which is deflationary. Even so, contrary to popular opinion, deflation is much better than inflation.

Because today’s dollar is just paper and credit, and because deflationary conditions will create a clamor for many more of them, the government will eventually succeed in its inflationary efforts. It’s true, as Bernanke has said in a moment of wry wit, that they can dump $100 bills from helicopters to prevent deflation. But it’s not likely since, in our fractional reserve banking system, the primary way the money supply is expanded is through the granting of loans, not the printing of paper, the way it was done in Weimar Germany and Zimbabwe.

One problem with credit-based inflation is that at some point, banks become afraid to lend, and people afraid to borrow – a time like right now. In fact, people may even become too afraid to leave their dollars in banks. They’re coming to realize the FDIC is thoroughly bankrupt.

Here’s a speculative scenario. To solve these deflationary problems and resolve Ben’s helicopter conundrum, maybe the Fed will go into the retail banking business by directly taking over the hundreds of institutions that are now failing. The average American would feel safe depositing directly with the Federal Reserve. And the Fed could lend as much as they want, without the restrictions imposed by actual capital or pesky shareholders.

Ridiculous? I think not, certainly not after GM, Fannie, and the rest. Certainly not when you consider that this depression is still in only the second inning. It would be one way to head off deflation.

Be that as it may, or may not, at some point after the deflationary waters have receded as far as possible, an inflationary tsunami is going to wash ashore, to the surprise of all.

Everybody knows how bad things were in Weimar Germany, and what a catastrophe hyperinflation has been in Zimbabwe. But those were agrarian economies, with people still quite close to the land. If it hits in the U.S., as highly specialized and urbanized as it is, it will be an unparalleled disaster. And not just for the U.S., because the reserves of almost all governments are mostly U.S. dollars. And dollars are used as the de facto currency by the average man in about 50 countries. All told, there may be as many as seven trillion of the things held outside of the U.S., and, at some point, everybody will be trying to unload them at once. At which time they’ll lose value very, very quickly.

So, far from being something to rely on, and very far from being as good as gold, the dollar is going to be a lead player in the catastrophe called the Greater Depression. And all the other paper currencies are going down with it. Pity the fool who doesn’t see this coming.

Or, for that matter, what’s going to happen to interest rates.

Interest Rates

The government is doing everything in its power to keep interest rates as low as possible. There are many reasons for this. Low rates make it easier for people to support their debt burdens and borrow more. Low rates inflate the value of stocks, bonds, and real estate – and the last thing the government wants to see is a meltdown of the markets. But, perhaps even more important, it’s a lot easier for the government to service $12 trillion of official debt at 2% than at 12%. That much of a rise in rates alone will add over a trillion to what they need to borrow to keep the giant Ponzi scheme going.

Of course it’s a fool’s game. Eventually (I’ll guess between six and 24 months), when their creation of dollars eventually overcomes the credit markets’ destruction of dollars, consumer prices will go up. That evidence of inflation will cause interest rates to rise, with all the short-term negative effects the government so fears. But higher rates are absolutely necessary to get out of the depression. Remember, it was the high rates of the early ‘80s that set the stage for the boom that followed.

Rates – the price of money – shouldn’t be controlled by the state, up or down, any more than the state should control the price of oil, or bread, or toothpaste. One of the major reasons the USSR collapsed was an inability to make correct economic calculations, and much of that was due to their arbitrarily fixed interest rates. One reason why Japan has been fading into the economic background over the last two decades is that the government has artificially suppressed rates, in the vain hope of stimulating the economy. All they’ve gotten is excessive levels of government debt, which will result in the destruction of the yen. And what will be tens of millions of impoverished, and very angry, Japanese savers.

The same thing is in process of happening in the West due to suppressed interest rates.

The Next Steps Down in the Markets

With interest rates depressed to near zero, stocks, bonds, and property in the Western countries are as good as they’re going to get – especially after a very long boom in all three. When rates inevitably go higher, stocks, property – absolutely bonds – are likely to head much lower. That’s entirely apart from the fundamentals under them, which are truly ugly. In turn, that will bankrupt pension funds across the economy, many of which are already severely underfunded.

These pension funds are likely to be the centerpieces of the next leg down of the evolving crisis. Will the government bail them out? Perhaps, although after the misadventure of poor taxpayers throwing money at rich traders at Goldman and AIG, the public doesn’t like the ring of that term. More likely it will nationalize them, assuming their assets in exchange for a special class of its paper. In the interest of “fairness,” that will happen to small and solvent funds as well as large and bankrupt ones.

After that, the next problem area will be insurance companies. And not necessarily because they’ll suffer from the same problems, like derivative trading, that sunk AIG. Even the well-managed ones have their assets invested primarily in commercial loans, commercial property, bonds, and stocks.

How This Will End

Nassim Taleb has popularized the concept of the Black Swan: an event that no one thought was possible, actually happening. Naturally, it takes everyone by surprise. To that lesson from zoology, let me suggest one from astronomy. Let’s call it the Financial Asteroid Strike theory.

It’s well known that there are millions of pieces of sizable space debris floating around the solar system. It’s just a matter of time before something crosses our path at an inopportune moment, as has happened so many times in the past. Unlike the Black Swan, it’s well known that Financial Asteroids exist. It’s just that really serious ones appear so rarely that people conduct their lives as if they never will. It’s been such a long time since the last depression that people see it as something distant and academic – like the Chicxulub or Tunguska asteroid strikes. Until the actual moment it hits, everything is completely normal. Then everything changes radically.

I’d sum it up by saying that a Financial Asteroid Strike takes much longer to happen than you might expect, but once it actually gets underway, it happens much more quickly than you could have imagined. We had a strike in 2008. But they tend to come in clusters. I expect more to enter the atmosphere fairly soon.

The question is whether the next one is going to wipe out all the economic and financial dinosaurs or just flatten the trees for some miles around.

Either way, it’s far from being all gloom and doom.

How This Could Be a Good Thing

Everyone, certainly including myself, prefers good times to bad times. But much of the good times of the last two decades were a result of an entire civilization living above its means. It was great fun while it lasted, but the party is over. The result will be massive unemployment, lots of business failures, and huge investment losses. These things are most unpleasant, but inevitable. That said, I always like to look at the bright side.

And what might that be?

Let’s restrict ourselves to just one of the lead actors in this drama: the United States of America.

The bankruptcy of the U.S. government will, at least at some point, lead to a big drop in the number of government employees. This is a good thing, since little of what they do serves a useful purpose; most are an actual impediment to production.

With some luck it could result in the sale of agencies that have some value, e.g., NASA, the Smithsonian, and the National Parks – to private enterprise. It will also force a vast retrenchment of the military, although only after more costly wars make that necessity very obvious. It will force a decentralization of power, with more devolving to the states and municipalities. It will mean much less regulation, since there won’t be the personnel or money to enforce it. It will also mean much less taxation for the same reasons, even though the state will try desperately to collect more, and will absolutely succeed in the near term.

Internationally, it seems to me a sure thing that organizations like the UN, the IMF, the OECD, and so many more, will be totally hollowed out or even disappear. At a time when governments are straining to maintain themselves, they’re unlikely to ship scarce capital abroad. So the people who are worried about the UN taking over the U.S., One World Government and such, will have to find something different to fret about.

As domestic currencies the world over are inflated away, some medium of exchange and store of value will have to be agreed on. I don’t see any realistic alternative to gold. China is going to be a focus of change in this regard (among many others). The stupidity of the Chinese government buying U.S. government paper in order to enable Americans to continue consuming the things Chinese factories produce will come to an end. That will be an impetus to demands for an alternative medium of exchange.

But if the U.S. and governments of other advanced countries lose power, governments in places like Africa (in particular) will collapse; Somalia is a model of things to come there. That may sound like a horrible thing, but – notwithstanding teething pains – it’s a big step forward. Deprived of free money, free weapons, and lots of free bad advice that have entrenched kleptocracies, the Africans are likely to make real progress after the Greater Depression plays itself out.

The transition period, however, is likely to be messy almost everywhere.

Can we prevent the status quo from falling apart, and preclude these messy changes? Further, should we, if we could?

Entirely apart from the fact that change is an essential part of life – and I think the status quo is in dire need of some real change (although absolutely not the kind Obama and his posse might have in mind) – I actually don’t think there’s a realistic solution to the problems the world is facing in this decade.

Yes, there are solutions that the government could proactively bring about – almost entirely by doing less, rather than more. But the odds of the U.S. voluntarily defaulting on its debt, abolishing the Fed, using gold as money, abolishing all agencies not specifically designated in the Constitution, eliminating the income tax, and cutting back on military expenditures by about 90% — among other things – are so small as to be considered a fantasy.

In fact, the concept of invoking changes of that scale are too scary for most to even contemplate. But they’ll happen anyway. Which means these things aren’t going to happen voluntarily, under some kind of control, and in a more or less orderly manner. Even so, because anything that must happen will happen – all these things and more will actually happen and, in the happening, will be most unpleasant and dangerous.

It seems to me that the upset we’re looking at could be the biggest thing since the Industrial Revolution. Or perhaps the French Revolution is a better analogy, although I expect it’s going to be a bit of both. It seems entirely possible to me that we could have another American Revolution, as unlikely as that seems among a nation of commuters and suburbs-dwelling reality TV watchers.

But it’s hard to see how it could be anything like the first one, which was led by thoughtful, rich, free market-oriented farmers and merchants. More likely this one will center on people like Sarah Palin and Sean Hannity on the one side, and Michael Moore and Nancy Pelosi on the other – strident, antagonistic, and bent, but also full of charisma and certainty. I don’t see much chance of collegial and reasonable compromise.

The best advice is not to be around the watering hole when two antagonistic groups of chimpanzees are hooting and panting at each other, getting ready to fight for control of it.

I’m afraid the current state of affairs is corrupt through and through. From the top of the financial world in New York, to the top of the political world in DC, right down to the average man on the street, 50% of whom aren’t obligated to pay income taxes but feel entitled to be net recipients of government largesse at the expense of others. Even among those that have assets, there’s no feeling of shame in gaming the system any way possible. There’s no longer any onus to being one of the 40 million people on electronic food stamps, or defaulting on one’s mortgage and continuing to live in the house, and collecting indefinitely extended unemployment benefits. Bankruptcy is just something you do when needed.

Frankly, it’s a mystery to me how the U.S. in particular, but most of the developed world, is going to escape from the very unpleasant consequences of its very stupid past – and current – actions.

I’ve just scratched the surface of the possibilities for the next ten years here. What’s clear is that some patterns of production and consumption are unsustainable; they will stop. What’s not clear is what new patterns will replace them. But that’s not so worrisome; what’s a matter of more concern is what forms of political and social organization will appear.

But let me leave you with a final bit of good news. Most of the real wealth – science, technologies, capital and consumer goods – will still be here. There’s just going to be a change in ownership. And it’s possible to position yourself to get more than your share.

Based on the above, what looks good to me – on a long-term basis – over the years to come? In general, stocks, bonds, and property are dead ducks, and headed much lower. But when a real bottom arrives, perhaps even in this decade, fortunes will be made buying back into them. Gold and silver, even though they’re no longer cheap, are going much higher; they’ll be what you’ll trade for things that are cheap. Agricultural commodities are going to do well. The trillions of currency units being printed all over the world will definitely ignite more bubbles, which should present fantastic speculative opportunities. And because the political situation will be hairy, diversify your assets outside of your home country.

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What you just read is the content of Doug Casey’s speech at the just-concluded Casey’s Gold & Resource Summit. Doug and dozens of other experts on gold and resource investments gathered to share in-depth analysis, economic forecasts, and their top stock picks with a captive audience. You can hear this priceless advice – from John Hathaway, Eric Sprott, Richard Russell, Robert Prechter, Ross Beaty, Rick Rule, and many more – on more than 17 hours of audio, from the comfort of your home. Details here.