There is an old story about a rich gentleman who was walking down the street one day when he comes upon a homeless man. The rich man felt pity for the man and decided to help him. He asked the homeless man how much he collected in a good day. The homeless man replied $50.  The rich man told the homeless man that since he walked that way to work every day, if the homeless man were there on that street corner at 8:00 AM he would give him $50. And so that is what happened. Naturally the homeless man was happy to get the money. He no longer had to stand on the corner all day to get his $50.  This went on for  quite a while, every day the rich man would give the homeless man $50. But one day the rich man became ill and could not go to work and the homeless man did not have his $50 for the day. The next day when he arrived the homeless man demanded $100. since he hadn’t received his $50 from the day before. After all he was there at the appointed time it wasn’t his fault the rich man was sick. The rich man refused saying, he hadn’t been able to work so he didn’t earn any money the day before either…

The homeless man became angry and hit the rich man and took $100 from him.

The rich man called the homeless man ungrateful and decided walked to work a different way from then on.

History tells us that once a subsidy is instituted there will be riots if you try to remove them. Once people become used to getting something they feel entitled to it. If you try to stop the “entitlements” people become angry and riots ensue. We saw this in Greece and more recently in Nigeria. And it may become more widespread as governments try to cut back on expenses.  In the following article our friends at Casey Research shed some additional light on the subject.

Tim McMahon~ editor

The Telling Tale of Nigeria’s Fuel-Subsidy Riots

The series of events that just transpired in Nigeria makes for a familiar tale – and a telling lesson. The tale tells of a poor, developing nation endowed with oil riches that, on the advice of international economists, tries to eliminate gas subsidies. The lesson is that the populations of oil-producing nations will inevitably erupt in rage against any such notions.

Nigeria is the biggest oil producer in Africa, pumping out 2.2 million barrels of crude oil a day to sit 10^th in the global crude-production standings. But the average Nigerian gets little benefit from his country’s oil riches. There is an enormous gap between rich and poor in Nigeria, mostly because 80% of the economic benefits from producing all that oil flow to just 1% of the population. Politicians in the country’s infamously corrupt government have pocketed billions in oil profits, while three-fourths of Nigeria’s 160 million people live on about a dollar a day.

For the poor, a fuel subsidy provides the direct benefits of cheap gas plus an important indirect benefit: a small sense of ownership in a national resource. That statement is true from Venezuela to Nigeria, from Indonesia to Ukraine. And if ever a politician – undoubtedly a member of that elite group who has felt the benefits of a thriving domestic oil industry – tries to take those benefits away, there will be hell to pay.

Nigerians have been enjoying subsidized fuel since 1973. Subsidized gasoline not only reduces transportation costs, it also lowers food costs and fuels the millions of small generators that provide homes and shops with power in a nation with a failed power grid.

The subsidy was eliminated on January 1. Within a week fuel prices had more than doubled, shooting up from $1.70 a gallon to at least $3.50. Demonstrations against the dramatic price increase soon turned into riots. By January 8, Nigeria’s labor unions had launched an indefinite, nationwide strike in protest. Then police shot three people dead and wounded 24 others while dispersing protestors in the commercial hub of Lagos. The next day the strike gained momentum, with banks, gas stations, and airports closed down. Oil workers did not join the strike, though they threatened to do so, immediately adding a premium to the Brent benchmark price of oil.

On January 16, President Jonathon reduced the subsidy cuts in a terse announcement, saying he recognized that people were rightfully angry about the suddenness of the change but adding that “other interests beyond the implementation of the deregulation policy have hijacked the protests.” In response, the Nigeria Labor Congress and Trade Union Congress told workers to return to work. It seems the crisis has abated.

Subsidies will now reduce the price of gas to about US$2.27 a gallon, still more than 50¢ a gallon higher than it was 16 days earlier. With fuel prices still elevated and the government having deployed troops into the streets to quell what many viewed as valid demonstrations in a young democracy with a sensitive history of military coups, many Nigerians are not appeased. And President Jonathon insinuated that the partial subsidies reintroduced on Monday are temporary and will be phased out in perhaps April, at which point the riots could well start again.

An Economic Idea Lacking in Social Graces

The government of Nigeria spends about $8 billion a year on fuel subsidies. Getting rid of this financial burden would be an “important first step” in stabilizing the country’s finances, according to a 2009 International Monetary Fund report. The IMF and other global financial institutions are opposed to fuel subsidies in general because the biggest benefits do not go to the poor, but to the owners of large cars and big generators.

To look only at the absolute size of the benefit, however, misses a major point. For the poor, the fraction of their income that goes to pay for fuel is much greater than it is for those who own the big cars and generators. As such, it’s the poor who feel the elimination of subsidies the most, and it was the poor who rioted in Lagos.

Of course, erasing an $8-billion drain from Nigeria’s balance sheet would allow the government to spend money on badly needed public projects, and that is precisely how the government explained its move. But to the poor – whether rural or urban – the subsidy is one of the only benefits they glean from their nation’s strategic oil wealth. Corruption has stolen most of the other benefits: Nigeria’s roads are cratered with potholes; many live without access to clean drinking water; and electricity is unreliable where access to the grid even exists. Why should they believe the money the government would save by not subsidizing fuel would actually pay for infrastructure, when so much of Nigeria’s wealth simply disappears down the black hole of corruption?

More generally, taking away ingrained fuel subsidies from a developing country is like taking a crutch away from a cripple. After years of subsidies, Nigerians are completely reliant on cheap gasoline, from nationwide economic systems all the way down to personal needs. Even if taking away the crutch is the only way to force a patient to use his injured leg, it is nevertheless going to make him hopping mad (pun intended) because it will hurt like hell.

Don’t blame Nigeria for trying: failed attempts to remove fuel subsidies are written in the histories of many oil-producing nations. In Bolivia, protestors burned photos of President Evo Morales and vandalized government buildings in late 2010 after he tried to cut fuel subsidies; Mr. Morales backed down within days. In 1989, Venezuelans incited days of riots in which hundreds of people died, to protest a rise in fuel prices. Now, even though he has openly criticized his country’s subsidy program, President Hugo Chavez presides over one of the most generous fuel subsidies in the world.

The examples go on. In Jordan, widespread demonstrations forced the government to rescind its proposal to eliminate fuel subsidies. In Indonesia, a 30% increase in fuel prices led to bloody riots, even though the government sweetened the shift with direct cash-support programs for the poor. Such tactics can work: Iran has eliminated its fuel subsidies but cushioned the blow with cash payments of roughly $45 a month. Other Middle Eastern countries stuck paying fuel subsidies they can barely afford, such as Egypt, are looking at Iran’s plan as a model.

Nigeria’s Struggles Run Deep

Most situations are more complicated than they first appear, and such is certainly the case with Nigeria’s fuel subsidy riots. The country is also facing a surge in religious violence: at least 85 people have been killed in bomb and gun attacks since Christmas Day. An Islamic group named Boko Haram is behind the attacks and is targeting the country’s Christians, who primarily live in the north. The group’s name translated from the Hausa language means “Western education is a sin.”

These attacks are threatening to fracture the country’s sensitive north-south, Muslin-Christian divide, a religious fault line that has sparked sectarian violence responsible for killing hundreds of thousands in the past. While sectarian stresses rise, the fuel-subsidy protests provided an outlet for Nigerians, emboldened by the Arab Spring, to vent their grievances against a deeply corrupt ruling class and an incompetent government.

Whether Nigeria – a dynamic but troubled country encompassing a wide range of ethnic and religious groups – can hold together is becoming a pressing question not only for Nigerians but also for the world. It would be devastating to see Nigeria descend back into the sectarian violence that killed a million people between 1967 and 1970. On a more banal level, another civil war would almost certainly disrupt the country’s oil machine, a possibility that is adding yet another premium to current oil prices. Of the 2.2 million barrels of oil produced in Nigeria every day, 1.9 million are exported; 800,000 of them are sent to the United States. It is yet another example of how relying on oil produced in unstable countries on the other side of the world is not a recipe for US energy security.

So here’s to hoping against hope that Nigeria’s leaders can dig themselves out from the pressing weight of sectarian divisions, endemic corruption, and massive infrastructure needs and keep their country together. Just one piece of advice: leave the fuel subsidies alone.

[Petroleum-producing nations will increasingly be forced to keep more of their oil to fuel their economies. Coupled with production numbers falling in almost every country that exports crude, $5/gallon gas is a fait accompli.

This article is provided by Casey Research.

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.

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.

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.

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, a lot of readers have been asking for guidance on how to know when it’s time to exit center stage and hunker down in some safe place. Few people want to hide from the world in a cabin in the woods while life goes on in the mainstream, but nobody wants to get caught once the gates clang shut on the police state the US is becoming. How do you know when it’s time to go?

Doug: Well, the first thing to keep in mind is that it’s better to be a year too early than a minute too late. David Galland recently read They Thought They Were Free: The Germans, 1933-45, by Milton Mayer. He quoted a passage in his column of last Friday. It goes a long way in explaining why Americans appear to be such whipped dogs today. They’re no different from the Germans of recent memory. For those who missed it, let me quote it:

“You see,” my colleague went on, “one doesn’t see exactly where or how to move. Believe me, this is true. Each act, each occasion, is worse than the last, but only a little worse. You wait for the next and the next. You wait for one great shocking occasion, thinking that others, when such a shock comes, will join with you in resisting somehow. You don’t want to act, or even talk, alone; you don’t want to ‘go out of your way to make trouble.’ … In the university community, in your own community, you speak privately to your colleagues, some of whom certainly feel as you do; but what do they say? They say, ‘It’s not so bad’ or ‘You’re seeing things’ or ‘You’re an alarmist.’

“These are the beginnings, yes; but how do you know for sure when you don’t know the end, and how do you know, or even surmise, the end? On the one hand, your enemies, the law, the regime, the Party, intimidate you. On the other, your colleagues pooh-pooh you as pessimistic or even neurotic… the one great shocking occasion, when tens or hundreds or thousands will join with you, never comes. That’s the difficulty. If the last and worst act of the whole regime had come immediately after the first and smallest, thousands, yes, millions would have been sufficiently shocked… But of course this isn’t the way it happens. In between come all the hundreds of little steps, some of them imperceptible, each of them preparing you not to be shocked by the next. Step C is not so much worse than Step B, and, if you did not make a stand at Step B, why should you at Step C?”

The fact is that the US has been on a slippery slope for decades, and it’s about to go over a cliff. However, our standard of living, while declining, is still very high, both relatively and absolutely. But an American can enjoy a much higher standard of living abroad.

On the other hand, if I were some poor guy in a poverty-wracked country with few opportunities, I’d want to go where the action is, where the money is, now. Today, that means trying to get into the United States. The US is headed the wrong direction, but it’s still a land of opportunity and a whole lot better than some flea-bitten village in Niger.

L: By the time things get worse than some Third-World dictatorship in the US, such a person could have remitted a whole lot of cash back home.

Doug: And you’d have a whole lot of experiences that would give you a competitive edge back where you came from, or in the next place you go to. The one-eyed man is king in the valley of the blind. People have to lose that backward, peasant mentality that ties them to the land of their birth. Sad to say, although the average American has somewhat more knowledge of the world – mainly due to television – his psychology is just as constrained as that of some serf from central Asia or some primitive village in Africa. It’s all a matter of psychology.

But if you’re not poor, you want to go someplace that is safe, nice – whatever that means to you – and with a lower cost of living. As most readers know, for me that’s Cafayate, Argentina, but one size does not fit all. It needs to be a place you actually enjoy spending some time, with people whose company you enjoy.

L: Fair enough. But our readers want to know if your guru-sense is tingling yet, or how close you think we are to it being too late to leave – or at least too late to leave with any meaningful assets.

Doug: I’m a trend observer. This is one of the advantages of studying history, because it shows you that things like this rarely happen overnight. They are usually the result of trends that build over years and years, sometimes over generations. In the case of the US, I think the trend has been downhill, in many ways, for many years. Pick a time. You could make an argument, from a moral point of view, that things started heading downhill at the time of the Spanish-American War. That was when a previously peaceful and open country first started conquering overseas lands and staking colonies. America was still in the ascent towards its peak economically, but the seeds of its own demise were already sewn, and a libertarian watching the scene might have concluded that it was time to get out of Dodge –

L: [Laughs] That would have been a bit early…

Doug: [Chuckles] Yes, that would have been way too soon. As Adam Smith observed, there’s a lot of ruin in a country.

L: On the other paw, it would have gotten you out before the War between the States, a disaster well worth avoiding.

Doug: No, the Spanish-American War was in 1898.

L: Oops! Sorry, I was thinking of what Americans call the Mexican-American War, but which Mexicans call the “American Invasion” –

Doug: [Laughs]

L: I’m not joking. That’s what they called it in the history books I was given in Mexican schools when I lived there in the ’70s. It has long seemed to me that that was an ominous turn for the worse for the US and a clear example of conquering a weaker neighbor purely for pillage – not just Texas, but everything from there all the way to California.

Doug: That’s right. Davey Crockett and the boys, we love them, but in many ways they were the equivalent of today’s Mexicans who want to recolonize the southwest and turn it back into part of Mexico, in what they call the Reconquista.

L: Indeed, but this is ancient history to most US taxpayers today – I’m reminded that it’s not correct in many cases to call them Americans.

Doug: Yes, just as it was a misnomer to call the people who lived in the Roman Empire after Diocletian Romans – because Roman citizens were once free men. After about 300 AD most of them were bound to the land or their occupations as serfs. But the slide for Rome started at least 120 years earlier, after the death of Marcus Aurelius. Politically, the decline started with the accession of Julius Caesar 240 years before that. So, when did the slide – politically, economically, and socially – really start for the US? When were there no more trends going up?

L: FDR? The New Deal was really a moral, economic, and political turning point.

Doug: You could make that argument, but the US still grew economically, despite the roadblocks FDR threw in its path. US military power and global prestige continued growing from that point, although, paradoxically, the accelerating growth of the US military was directly responsible for the decline of the US economically and in terms of personal freedom. One reason for the ascendancy of the US after World War II was that we were the only major country in the world not physically devastated by the war.

L: Ah. Right.

Doug: So it seems to me that the peak of American civilization was in the 1960s. As for evidence, well, I like to put my finger on the 1959 Cadillac. Those twin bullet taillights, the opulence of it… In terms of then-current technology, things couldn’t get much better.

L: “Opulence. I has it.”

Doug: [Laughs – a real belly laugh] That’s my favorite TV commercial! Anyway, that was the peak, in my mind. Though things continued getting better for a while, the US started to live out of capital.

L: Had to pay for guns and butter.

Doug: That’s right. The Johnson administration’s so-called Great Society created vast new federal bureaucracies that promised Americans free food, shelter, medical care, education, and what-have-you. Americans became true wards of the state. But the real, final nail in the coffin for America was in 1971 –

L: Nixon taking the US off the gold standard.

Doug: Nixon taking the US off the gold standard – open devaluation of the dollar, combined with wage and price controls for some months. And that was not long after the so-called Bank Secrecy Act, which abolished bank secrecy, and required the reporting of all foreign financial accounts. Nixon was, in many ways, even more of a disaster than Johnson. Republicans are usually worse than Democrats when it comes to freedom, partly because they like to couch their depredations in the rhetoric of defending the free market. While everyone understands that Democrats are socialists just under the surface, Republicans actually give capitalism a bad name. Baby Bush is a perfect, recent example.

L: But don’t you worry your pretty little head about devaluation – it’s just a “bugaboo” – and as long as you’re not one of those unpatriotic people wanting to buy imports or vacation abroad, your dollar will be worth just as much tomorrow as it is today. The scary thing is that the Belarusian dictator Lukashenko said almost the same thing when the Belarusian ruble lost two thirds of its forex value earlier this year, asking his countrymen why they need to go on vacation in Germany or buy German cars…

Doug: You see why I like to study history? It doesn’t repeat, but it sure does rhyme…

L: With a vengeance.

Doug: So, anyway, since 1971, some things have improved largely due to technological advances, but the America That Was has been fading into the past. It was a decisive turning point. You can see that in the accelerated proliferation of undeclared wars we’ve had since then. I don’t just mean the penny-ante invasions of Granada and Panama – the US has always lorded it over Caribbean and Central American banana republics; those are just sport wars. But Iraq and Afghanistan are alien cultures on the other side of the world – apart from never posing any threat to the US. Now it looks like Iran and Pakistan are on the dance card, and they’re big game. The War Against Islam has started in earnest, and it’s going to end badly for the US. I explained all this at great length in the white paper, Learn to Make Terror Your Friend, that I wrote for The Casey Report last month.

Domestically, saying that the US is turning into a police state when you started this conversation was quite accurate. You can see more and more videos spreading over the Internet, not just of police brutality, but demonstrating the militarization and federalization of police, who are being inculcated with both disdain for and paranoia about ordinary citizens.

In the old days, if you were stopped for speeding, the peace officer was polite – you could get out of your car, meet the cop on neutral ground, and chat with him. You didn’t have a serious problem unless you were obviously drunk or combative. Now, you don’t dare make a move. You better keep your hands in plain sight on the steering wheel and be ready for a Breathalyzer test without probable cause. The law enforcement officer will stand behind you with his hand on his gun. And you’re the one who’d better be polite.

L: There has been a polar reversal. The cops used to address citizens as “sir” or “ma’am.” Now, the correct response in a traffic stop is: “Yes, sir! I would love to inspect the bottom of your boot, sir!”

Doug: [Laughs] That’s right. My friend Marc Victor gives out magnetized business cards. People ask, “Why?” He answers that it’s so clients can put them on the bottom of their cars or refrigerators, so they can see it when the cops throw them to the ground.

L: Marc’s a good man. There’s a handy video on Marc’s website, offering advice on what to do if you’re pulled over by the police in a traffic stop.

Doug: A good public service announcement. At any rate, I think there’s no question that the US has turned the corner on every basis: politically, socially, morally, and now, economically…

L: Okay, but, Doug, you said that in 1979 too. The question is, how do we know when the door is going to close?

Doug: [Laughs.] Well, sometimes I feel a little like the boy who cried wolf. But Roman writers like Tacitus and Sallust saw where Rome was going before it got completely out of control. Should they have said nothing, for fear of being too early? Here in the US, it should have gone over the edge back in the 1980s, but we got lucky. There was still a lot of forward momentum, which can last for decades when you’re speaking of civilizations. There was the computer productivity boom. The Soviet Union collapsed, China liberalized, and Communism was discredited everywhere except on US college campuses. The end of the Cold War opened up vast areas of the world to the global market. And most surprising of all, Volker tightened up the money supply and interest rates went high, causing people to save money and stop borrowing to consume.

L: That’s not happening this time.

Doug: No. We got lucky back then. Since the ’90s we’ve had a long and totally phony, debt-driven boom that’s now come to an end. I feel very confident that there’s no way out this time. There are huge distortions and misallocations of capital that have been cranked into the system for two decades. And not just in the US this time, but in Europe, China, Japan, and elsewhere.

The US is very clearly on the decline. The fact that in spite of bankrupting military expenditures to no gain for the American people, those in power are talking overtly and aggressively about attacking more countries – Iran and Pakistan in particular – is extremely grave. The fact that they attacked Libya – which, incidentally, is going to turn into a total disaster, a civil war that will last for years – shows it’s not stopping. Sure, Obama brought troops home from Iraq – another disaster that’s going to remain a disaster for years to come – but at the same time he put a company of combat troops in Uganda, of all places and Marines in Australia, to provoke the Chinese.

Back home, I’ve read reports that people are being stopped for carrying gold coins out of the US, in Houston in particular. Now we have authorization of the military to detain US citizens, on US soil, with no trail, and indefinitely, on the verge of becoming law. And Predator Drones have been used to hunt down farmers on their own ranches.

I could go on and on. This is not like spotting early signs of decay in America’s expansionist wars of the 19^th century or things getting worse with FDR. Most people can’t see it with all the noise and confusion, but we’ve reached the edge of the precipice.

L: Don’t worry about exactly where the edge is, just assume it’s there and take appropriate action?

Doug: Yes. It really is there. It’s a clear and present danger. But most Americans are as oblivious as most Germans were in the ’30s. In fact, most of them support what’s going on, just as most Germans supported their government in the ’30s and ’40s.

L: So… don’t worry about figuring out exactly when the gates will shut. Assume they are shutting now?

Doug: That’s right. One should be actively and vigorously looking to expatriate assets, cash, and even one’s self. A prudent person will always be diversified politically and internationally.

L: What about people who have jobs they can’t continue doing from abroad and who need the income?

Doug: They should still prepare, as best they can, to be ready to go on a vacation when things get hot – a vacation from which they might not return for a long time. All that needs happen, with the hysteria that’s building in the US, is for a major terrorist incident – real or imagined – to occur. Homeland Security will lock the country down. I hate to admit it, but I’m almost starting to credit the stories about those FEMA camps.

Look, I know it sounds extreme, and the comparison to pre-WWII Germany has been made many times, but it bears repeating. Germany was the most literate, civilized, and even mellow, in some ways, country in Europe. It was much admired all around the world – a nation of shopkeepers, small farmers, and scholars. But the whole character of the place started changing in 1933, and it just got worse and worse. By the end of 1939, if you weren’t out, you were done.

L: [Pauses] Well, not a cheerful thought. Actions to take?

Doug: Things we’ve said before: Set up foreign bank accounts in places you like to travel, while you can. Set up vault arrangements for physical precious metals outside the US. Buy foreign real estate that you’d like to own, because it can’t be forcibly repatriated. Offshore asset protection trusts are a good idea too. Become an International Man. Let me emphasize that US taxpayers should stay within all US laws, because the consequences of breaking them are unbelievably draconian.

Generally, one simply must internationalize one’s assets. The biggest danger investors face, by far, is not market risk – huge as that will be – but political risk. The only way to insulate yourself from such risk is to diversify yourself politically and geographically.

L: Right then… words to the wise. Thanks for your insight.

Doug: You’re welcome. Most won’t, but I just hope readers listen.

[For more specific investment advice and big-picture observations from Doug – as well as insightful analyses from other Casey Research experts, including Chief Economist Bud Conrad – give The Casey Report a test drive. It is absolutely risk-free for ninety days… and will give you a solid boost in becoming a rational speculator.]

EWI’s free EU debt report sheds some light on what’s in store

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone. 

(click for larger image)

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

*****

European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

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Gary Johnson, 2012 Presidential Candidate

Gary Johnson is running for the Republican nomination for president. If you didn’t know that, you’re not alone. Precious few people do. He is the longest of long shots, with little money, a bare-bones grassroots organization and parsimonious media coverage, to say the least. He has had to fight through the indignity of being uninvited to most of the candidates’ debates. When polls are taken about voters’ choices, his name is often simply omitted from the list, lending him little chance to develop support momentum.

That he’s being ignored is not surprising, given his shoestring budget in a campaign where others are already spending countless millions. And it doesn’t help that the mainstream Republican establishment can’t stand him. It might seem like he’d be embraced as a very popular, two-term GOP governor of New Mexico, a state with a 2-1 Democratic voter registration. (He’s the only governor running who maintains a better than 50% approval rating in his home state.) Obviously, he attracts the Independents and crossover Democrats that Republicans covet. He would probably beat Obama handily.

The problem is, in addition to his lack of cash and flash, that he’s honest. This is a guy who presided over job growth in his state that exceeds that of any of the other governors now running. Yet – with all the others shouting about all the jobs they’re going to create if elected – he says simply (and truthfully), “I didn’t create a single job.” In fact, he cut jobs – government jobs. The New Mexico state government was smaller after eight years of Johnson than when he started. All he takes credit for is creating a low-tax, low-regulation environment in which businesses could create jobs. That’s what he thinks the federal government should do too. As the only candidate who has an actual track record of cutting the size of government, he scares the establishment. 

They also have a stake in keeping him marginalized because he exposes the shallowness of their “conservatism.” He’s the real deal, believing that government has absolutely no business in our private lives. Thus, in addition to the expected support for the Second Amendment and school vouchers, he’s pro-choice, believes that all Americans should have equal rights, and recognizes that, with over 2.3 million people behind bars in the US, a great many of them nonviolent offenders, it’s way past time to rethink the criminal justice system. His opponents may also be just a wee bit jealous that he’s the most physically fit man ever to run for president. At 58, he’s a triathlete, excellent skier and accomplished mountaineer. In 2003, he summited Mount Everest.

All or parts of this may not resonate with you. But the fact stands that he’s the most unique presidential candidate of the past… well, probably ever. He also has a plan to cure our economic malaise. It’s radical. You won’t hear anything remotely like it from anyone else. And the thing is, it just might work.

We caught up with Governor Johnson at his home in New Mexico and hit him with a tough question right out of the gate.

The Casey Report: Everyone wants to know about the budget, and you’ve been reported as saying that President Johnson will balance the budget by 2013. How on earth are you going to do that?

Gary Johnson: No, what I am promising as president is to submit a balanced budget in the year 2013. To do that, I’m going to have to reduce spending by 43%. Medicare, Medicaid, military spending, everything. My promise is to submit that budget my first year in office, because what is America shouting if I’m elected? I think they’re shouting that they want a balanced budget. And I believe we really have a 43% largesse built into government spending.

TCR: That’s rolling it back to what, Clinton-era levels?

GJ: You know, I’m not sure, something like that. [Actually, only back to the 2002 Bush budget.—TCR] But coupled to the promise to submit a balanced budget is a promise to veto any legislation where expenses exceed revenue. Now, you may argue that Congress will just override the veto, and that’s possible. But what I just described to you is a scenario where we will have less spending than any other scenario possible. And Congress is going to have to do everything it can to accomplish that. Hopefully, we will get close. I draw a contrast to electing a president who’s going to promise to do this over a 15- or 20-year time frame, because “that’s the only realistic way to get it done.” To me, all that means is, “No, we’re not going to get anything done.” And nothing will change.

TCR: Your plan doesn’t involve raising new revenue. Do you see any need to raise revenues?

GJ: No. What I am advocating for, in addition to balancing the budget, is throwing out the entire federal tax system and replacing it with the Fair Tax. I’m sure you’re familiar with it. [Anyone who isn’t can go to fairtax.org to learn more.—TCR] By all free-market economists’ reckoning, a consumption tax is really the way to reform the system. It is, as the name implies, fair. It simplifies everything, does away with the IRS, does away with income tax and corporate tax, FICA, estate, capital gains and dividend taxes. It taxes goods, new goods, and services, and is administered by the states. So this is a reboot to the American economy. Given a zero corporate tax environment, why as a business would you start up, grow, nurture that business anywhere on the planet other than the United States? This isn’t government. This is private businesses hiring tens of millions of people because we’ve created this kind of environment.

TCR: Let’s get back to that in a minute. But before we leave the budget, we’re currently running something like one trillion six in yearly deficit spending. Some people have suggested that the only way out of that mess is simply to default on the debt and carry on from there. How do you feel about that?

GJ: I think we’re on the verge of a monetary collapse. But I don’t see us ever defaulting on the debt. I see us printing the money. Last year, the Federal Reserve was printing, out of thin air, up to 70% of the money it was using to purchase Treasuries. And the monetary collapse comes at the point at which we’re printing 100% of the money used not only to incur new debt, but also the rollover of existing debt. When that happens, in my opinion, it’s “Katie, bar the door.” We need to stop printing money, and that’s not a very sexy message… Or maybe it is sexy, because unless we fix this, we’re all going to find ourselves with nothing.

TCR: So what you’re saying is that you’re going to honor the debt but inflate it away and destroy the dollar.

GJ: No, I’m not going to do that. But that’s going to be the reality of what happens if we keep printing money.

TCR: A hyperinflationary depression is much worse than a deflationary depression because it hurts everyone, especially the most prudent ones, the savers. So why not default? That would be painful, but it’d be preferable to hyperinflation.

GJ: Or the third alternative, that being balancing the budget and stopping the printing of money.

TCR: We’re skeptical that would work.

GJ: Well, you also have to have tax reform, which brings us back to the Fair Tax. It promotes savings. And the more money you save, the more you’re going to consume and the more tax you’re going to pay. Borrowing money is OK when it comes to the debt, as long as you’re borrowing. But we’re printing money to do that. If we stop printing, we still have the rollover debt, and I have to believe the money will be there for the rollover.

TCR: Well, your balanced budget deals only with the deficit, not with the federal debt, which is nearly 100% of GDP.

GJ: And if interest rates return only to normal levels, interest on the debt nearly triples. It becomes unbearable when the largest ticket item in the budget becomes interest on the debt, and that is fast approaching.

TCR: Right. So your deficit reduction program, while it’s great if it’s achievable, doesn’t deal with the fourteen going on fifteen trillion in debt we’re piling up. Do you believe that with an end to deficit spending and implementation of the Fair Tax, we could generate enough in revenue to begin paying down the debt?

GJ: I do.

TCR: What about the Fed? Do you favor abolishing it, as Ron Paul suggests?

GJ: No, it should be audited. But if you abolish the Fed, the Treasury would take over the money printing the next day. I would like the Fed to return to its original mandate of price stability, as opposed to trying to control price stability and employment, which are contrary purposes.

TCR: OK, a further question about the Fair Tax. People who oppose it contend that it’s unfair because it’s regressive. How do you respond to that?

GJ: Everyone in the country would get a prescribed prebate that would pay all Fair Tax up to the poverty level. And, of course, everyone would have their paychecks freed from income and the highly regressive FICA tax. We estimate that those spending at twice the poverty level would pay only 11.5% Fair Tax, much less than they’re paying now.

TCR: And what’s the ceiling tax rate?

GJ: 23%. And here’s another thing. There’s a theory, I don’t know if it’s beyond that yet, but there’s a theory that the cost of all goods and services contains about 23% in taxes already embedded in them. I don’t know if it’s exactly that, but it’s a lot. I believe that over a very short period of time, that embedded tax would bleed itself out, and that this would actually be revenue neutral to what we’re currently paying. In addition, because it doesn’t tax used goods, all of our possessions arguably become worth more. There’s going to be less of an inclination to throw away your used toaster instead of putting it on Craigslist and selling it.

TCR: How does all this interface with state and local taxes?

GJ: It does not. State and local taxes are what they are.

TCR: So there’s no plan for funneling some of this revenue back to the states and localities, in lieu of their taxes.

GJ: No, it’s revenue neutral with regard to the states.

TCR: OK, to a different but related subject, what do you think about banks that are “too big to fail,” and how would you have gotten us out of the financial crisis of ’07-‘09?

GJ: I would not have bailed out these institutions. I talked about this one afternoon at Chapman University with a group of economists, including Vernon Smith, a Nobel laureate, and the 100% consensus was that the system would not have collapsed if these financial institutions hadn’t been rewarded for their bad decision making and been allowed to fail. And that if we would have had that, markets would have established a bottom very quickly. The decline might have been much steeper, but the recovery we would be engaged in today would be real, as opposed to the economy just being artificially propped up. We should have had a fire sale. The problem with the mortgage market is that we never had a fire sale.

TCR: So you don’t think we came within an eyelash of chaos, a situation some say we barely avoided, with no money in ATM machines, banks closing their doors all over the place and the whole system freezing up?

GJ: Well, I’m basing this on the Ph.D. economists who are advising me, all of whom say there would not have been that meltdown. [Johnson’s chief economic advisor is Dr. Jeffrey Miron, a senior lecturer and director of undergraduate studies in the Department of Economics at Harvard University, a senior fellow at the Cato Institute, and author of the book Libertarianism from A To Z.—TCR.]

TCR: What about Glass-Steagall, the law repealed in the last year of the Clinton administration, that had kept the investment banks and the commercial banks separate? Some people blame the crisis largely on the loss of that law. Do you think we should reinstate it?

GJ: I understand how that may have exacerbated all this, so I think reinstating it might be a good thing.

TCR: There are a lot of people who believe that the Obama administration has collaborated with Wall Street in covering up and refusing to prosecute fraud. Would you go after the fraudsters who’ve been caught lying and cheating and stealing?

GJ: If I was absolutely aware of that, yes. Absolutely. If there’s something there.

TCR: We’re just asking if you’d order your Justice Department to look into it, since so many people have made that charge.

GJ: Well, I have to say this – I have to believe that they have done that. If they haven’t done that, then that, in and of itself, is treasonous.

TCR: But there hasn’t been a single prosecution. How can that be?

GJ: I’ve talked to my economists, and they would chalk it up to really bad decision making, rather than criminal activity. Just made some really stupid judgment calls that they were not allowed to reap the benefits of. Meaning failure.

TCR: OK, it’s a complicated subject, and we won’t resolve anything today. Let’s let that go and turn to another subject. The Fed is now paying interest on deposits, and a lot of banks are just leaving their money there, in excess of reserve requirements. How do we get that money out of the Fed and to people who really need it?

GJ: That brings us back to the monetary collapse. We’re all watching this, and banks may be holding that money there for liquidity, in the fear that we’re going to have a repeat of the last crisis and they’ll have to have it for their balance sheets.

TCR: They’re also borrowing money at around zero interest and putting it back into Treasuries for whatever they’re paying. It’s free money.

GJ: Right, I mean, holy cow, that’s the criminal activity… No, I mean that tongue in cheek. But that’s where we’ve gotten to. It’s a giveaway. A giveaway to the banks.

TCR: Let’s go on to Social Security and Medicare. Are you in favor of means testing on these two?

GJ: I oversaw the reform of Medicaid as governor of New Mexico. We went from a fee-for-service model to a managed-care model, and we ended up establishing a much better health care network, and we saved a lot of money by doing that. It’s my belief that if the federal government would have block granted New Mexico all of the Medicaid funds – at 43% less than we were currently spending – that I could have delivered health care to the poor in New Mexico without any strings, without any mandates, with 43% less money, I believe that. And I believe that if you apply that same model to Medicare – block grants to the states at 43% less than what the government is currently spending – that we would be able to deliver health care to those over 65. That’s basically how I would handle Medicare and Medicaid.

Washington should give it up to the 50 states, 50 laboratories of innovation and best practice. In that context, if some states chose to apply means testing, those would be very viable experiments. In a process where you have 50 states working on this, in different ways, I think there’s going to be some fabulous successes that’ll get emulated, and there’ll also be some spectacular failures that will be thereafter avoided. Because we are very competitive, and we can put that to work for us.

TCR: And a block grant for health care means they’re mandated to use it for that.

GJ: Yes, they have to use it for that. But no strings or mandates about benefits that have to be given out… Now, Social Security’s another animal completely. It’s a problem that just pales in comparison with Medicare. Medicare is the 800-pound gorilla. Social Security is simply a system that needs to take in more money than it pays out. So without raising taxes, under the Fair Tax Social Security would not be a withholding anymore, on the part of the employee and the employer. You could put it on a sound basis by raising the retirement age, by implementing means testing. There are a lot of iterations of that, of means testing, but bottom line is, you put money in, you get money out. It should be fair. Also, we should change the escalator built into Social Security from the wage index to the inflation rate. That also does miracles, actuarially. And also add the ability to direct funds in your own Social Security account. That ought to be part of it.

TCR: Now we’ve got to talk about foreign policy. Let’s start with defense. I know you want to cut defense and end the wars we’re in right now. Correct?

GJ: The important question is: Can we cut military spending and still provide for a strong national defense? Yeah, we can, the operative word being defense rather than offense. And as opposed to nation building. So how do you do that? Well, you go down the line, looking at: military in uniform; civilian support to the military in uniform; the conflicts we’re currently engaged in; decisions on research and development, how we’re going to spend our money going forward; a reduction in our base levels all across the planet; a reduction in nuclear warheads from 2,300 to 500. Given all that, I believe we can provide a strong military defense with a 43% cost reduction. Recognizing that the biggest threat to our national security is our overspending.

TCR: It doesn’t quite sound like you’re saying you’d bring the troops home on Day One.

GJ: Yes, I would bring the troops home on Day One. Afghanistan, Iraq… and Libya, if we become more involved there.

TCR: Would you close all the overseas bases?

GJ: No, but I think within the context of a 43% reduction, there are some that are warranted and some that just aren’t. I’d look at our troop presence in Europe, Japan, South Korea.

TCR: A 43% reduction in military bases in the US means the towns that depend on them are going to be economically decimated. What are you going to tell those people?

GJ: [sighs] Well, there is going to be some real shared pain, some sacrifice, in all of this, it’s going to be shared by everybody. But if we don’t do it, we’re going to find ourselves with nothing. That’s a hard sell, but it’s also something that I think people generally recognize. It’s just, who oversees doing this? And I think I’m the guy to oversee it. We accept the sacrifice to save the republic.

And you know, I’m not advocating an across-the-board 43% cut in everything. Because there have to be areas… You take veterans’ benefits, for example. I have a hard time cutting one cent from veterans’ benefits, given what they’ve been asked to do and what they’ve done. So maybe it’s not a 43% cut in one area, and maybe it’s more than that in another. I do favor abolishing the federal Department of Education and Housing and Urban Development. There may be more, but at the moment those are the only two I’m advocating eliminating.

TCR: Speaking of eliminating, a lot of Republicans want to kill the Environmental Protection Agency. But I think we all agree that the environment we bequeath to our children is our most important legacy. Do you think the federal government has a role to play in protecting the environment?

GJ: I do, but looking at the EPA, I think the agency has a 43% largesse built into it, too. We do need some regulations. From my years as governor, I know that there are some bad actors out there. There are companies that would pollute the environment and would continue to do that to… whenever, without any accountability to anyone. Government’s role is to protect us from individuals who would do us harm, whether that’s monetary, from a property standpoint… from a personal-health standpoint… the environment kind of touches on all of those.

TCR: Another issue that is important to our readers is the extraordinary expansion of the surveillance state. Would you favor repealing the Patriot Act?

GJ: I would. And I would never have established Homeland Security. I think that it’s completely redundant. I would have never established the TSA. I would have left security to the airports, to the airlines, and I dare say that today travel would be as safe and absolutely less intrusive. Or hey, maybe there’d be an airline that says you have to strip naked and you won’t be able to carry a single thing onto the airplane. I’m not gonna fly on that airline, but maybe some would do that.

TCR: And maybe we’d have another that said, “We won’t even look in your bag, come on, get on. If you’re willing to take that risk, we don’t care.”

GJ: Maybe. [Laughs.] And I probably wouldn’t fly on that airline either. I think that the important thing is, since 9/11 we’ve beefed up the cockpit door, so a commercial aircraft can never be used as a missile again. And maybe even more important than that is, as passengers now, we don’t put up with any kind of aberrant behavior on a plane. You know, the underwear bomber, he was accosted… accosted isn’t even the right word, he was pummeled, beat up and pinned to the floor for the rest of that flight.

TCR: As a former border state governor, you’re particularly qualified to speak to this one. What’s your immigration policy?

GJ: Immigration needs to be about work, not welfare. Leave it to the states to not be delivering any welfare services to illegal immigrants. I think we should make it as easy as possible for somebody who wants to come into this country to work, to get a work visa. Not a green card, not citizenship, but a work visa that would entail a background check. And I’d like to point out, if we adopt the Fair Tax, there wouldn’t be any question about them paying taxes because everyone would. Legal, illegal, nobody avoids that.

For the 11 million who are here now, I think we need to set up a grace period whereby we can document them and give them a work visa. And if you’re here working, where we’ve made it easy for you to get a work visa, it needs to be one strike and you’re out. If you’re working illegally, you’ll be arrested and deported, you won’t come back and work again. I don’t believe that building a fence would be cost effective in any measure whatsoever, but I would put more boots on the ground on the border. I’m of the belief that Mexicans will stand in line to get a work visa, as opposed to crossing illegally.

Then, legalize marijuana. It’s the root cause of the border violence, which is prohibition related. If we can’t now connect the dots between prohibition and the 30,000+ deaths that have occurred over the past four years in Mexico, then I don’t know if we ever will. These are disputes that are being played out with guns. So don’t discount how rational drug policy would eliminate so many of the issues that are currently associated with illegal border crossing and violence.

TCR: Let’s touch briefly on Islamic terrorism. Do you think it’s a major threat to the US, and what would be your policy in dealing with it?

GJ: I think it’s a real threat, and we should be vigilant against it. But I think other countries need to share in this war on terror, instead of us always picking up the tab. Of military spending worldwide, we’re spending half of every dollar and we’re 5% of the population. So within the context of reducing military spending and maintaining vigilance against terrorism, against countries that would raise arms against the United States, this becomes more of a shared responsibility.

TCR: Under what circumstances do you think it’s proper for us to project force outside the borders?

GJ: I wouldn’t rule it out. The specifics would have to include imminent threat to the security of the United States. Or not even imminent, if it’s an actual, live threat to the US.

TCR: Want to say a few words about Israel and our relationship?

GJ: Israel has been an ally and will remain an important ally.

TCR: And you’re in favor of continued support for them?

GJ: I’ve been to Israel several times. I’ve met with Netanyahu. I get the sense that Israel could care less about foreign aid. I’m opposed to foreign aid. I would draw a differentiation, though, between foreign aid and military alliances. And we should be a military ally with Israel. We should also be looking at our worldwide military aid and military alliances, in the context of their cost effectiveness in our vigilance in the war on terror.

TCR: What would you do about Pakistan?

GJ: I would really love to understand what’s going on there. But speaking about foreign policy without knowing exactly what the particulars are… if you want to give me what you think the particulars are, I can respond based on that premise.

TCR: If we pull out of Afghanistan, maybe the problem will go away. Are you opposed to continued foreign aid and military aid to Pakistan when that happens?

GJ: I can’t really speak intelligently on that because I don’t know how much money we’re spending there and what we’re getting for that money. How effective that spending is. I don’t get the sense, from my vantage point, that’s it’s being spent effectively at all. That it actually makes the situation more unsafe, rather than safer.

TCR: I know we’re near the end here, but I want to go back for one more question about the surveillance state. It seems like it’s exploding, with more and more control over our lives, and less and less freedom. How can we even start to reverse that?

GJ: Well, rolling it back is one thing, but stopping it in its tracks is another thing, and that’s very doable. It’s what I did in New Mexico. I stopped onerous rules and regulations, and by that I mean those that end up costing us time and money and have no benefit whatsoever. So don’t underestimate the executive ability to positively impact rules and regulations. Because I controlled all the agencies in New Mexico, because I controlled all the boards and commissions, rules and regulations got better, on a daily basis. The same thing applies to the president of the United States, head of the executive, controlling the agencies. Clearly, Obama has no idea of the effect he’s having, with the people he’s appointing to all these positions. And they putting into effect rules and regulations willy-nilly, that have us in this complete state of uncertainty. There was absolute certainty in New Mexico that rules and regulations weren’t going to get worse, they were going to get better. And they did.

TCR: All right, I see we’re out of time. Just quickly, one last question. What’s your position on gun rights?

GJ: I believe that the right to bear arms is guaranteed by the US Constitution and that we should preserve this fundamental right. I openly advocated concealed carry as governor. It was a new concept at the time, but I felt the statistics showed it would result in less crime.

TCR: Thank you, Governor. You’re talking about things no one else will touch, and I think you may have won over some of our readers today. Where should they go for more?

GJ: GaryJohnson2012.com.

TCR: OK. Good luck with the campaign.

GJ: Thank you.

[Unfortunately, we can't waste our time waiting to see whether Gary Johnson becomes president or not… while the US economy keeps crumbling. The time to act is now – read all about the 6 most important steps to protect your assets and profit from the ongoing crisis. Learn more.]

Gary Johnson’s track record as governor of New Mexico, 1995-2003:

• Gross state product (in current dollars) grew from $38.6B to $53.5B, up 38.6%.
• State budget went from $6.33B to $7.95B, 2.9% annual compounded growth.
• State revenues rose from $5.01B to $7.74B, a 5.5% compounded annual increase.
• Inherited a budget deficit of $1.32B. Submitted a balanced budget in 2003, the legislature added spending to produce a $209M deficit, which he vetoed, but the veto was overridden. Taking into account general reserves, left NM with a $1B in surplus funds.
• Taxes: cut top rate for personal income tax from 8.5% to 8.2%. Cut gasoline tax 6 cents/gal. Also cut state capital gains tax and unemployment tax.
• Per-capita personal income rose from $17,772 to $24,977, a gain of 40.5%.
• Unemployment rate dropped from 6.5% to 5.7%.

By David Galland, The Casey Report

While I haven’t made a scientific study of the topic, I suspect the leading genre for popular entertainment – and for popular delusions of crowds, for that matter – revolves around magical worlds. As illustration, the Harry Potter series will serve.

The problem is that there is no such thing as magic, at least not in the mystical sense (versus sleight-of-hand variety). Rather, the physical world, and even the metaphysical world constructed by humans in their ancient and long-running quest for protection from the physical world, operates within the boundaries of certain irrefutable truths.

In the first instance, the laws of physics are only rarely found wanting; in the second, basic principles of economies are inviolate, or should be if you actually want an economy to succeed for any length of time. 

This unblinking faith in an all-caring, omnipotent “Godvernment” is terrifyingly misplaced: it not only runs contrary to many of those truths but runs contrary to nearly every important lesson history has to teach. Look no further than the debts and deficits of Godvernments around the world to see the consequences of trying to keep this myth alive.

That this faith is on the increase, versus the opposite, should be very concerning… both to those who believe in the rights of individuals and to those trying to build and maintain a reasonable standard of living in this age of deep uncertainty.

Especially in that most, if not all, of that uncertainty, as well as active threats to the general well-being, emanates from the very Godvernments people look to for salvation and sustenance. The graphic shown here demonstrates this point vis à vis US security policies soberingly well.

Now, I am sure that some of you view these remarks as just another libertarian tirade, and I guess to some degree, they are.

Yet, I think there is an important underlying point that requires serious reflection. Namely, with people the world over trapped in a delusional and self-destructive cycle of believing that the Godvernments can solve all that ails – even though almost all that ails is caused or made worse by those very same institutions – then things can only get worse from here.

It’s like all but the tiniest minority of the world’s population have been brainwashed into joining a dangerous cult. A cult whose leaders are unscrupulous about stripping their followers of their wealth, their dignity (see cartoon above) and their sense of individuality, while rewarding their most ardent supporters with pensions, tax breaks, a leg up over competitors and, if push comes to shove, hard cash in the form of bailouts.

Viewed through this lens, the thinking individual – you, for instance – should see the need to take certain self-protective measures. And since few things are as useful as a high net worth when it comes to protecting your independence, there are opportunities to chase down as well.

Some suggestions, a number of which you may have heard before.

1. Expect the latest eurozone patch-up job to come unglued. When you have the heads of the eurozone’s largest countries talking about levering up bailout funds or ringing up the Chinese to ask for money, you know the latest “solution” to the eurozone’s intractable problems is little more than a hastily concocted plan to kick the wine bottle just a bit further down the road. The problem is that nothing suggested begins to resolve the structural problems of the eurozone – because nothing can be done to resolve those problems. Thus, a heads-up speculator will look for ways of betting on failure and place those bets during brief flare-ups of euro-optimism.
2. Likewise, expect the US government’s new Super Committee to fail. Sure, they may come up with some optics in an attempt to mask the dire nature of the situation (for instance, by pushing the impact of any proposed measures out for five or more years – time enough to ignore them), but the fundamental truth in this case is that the Godvernment is hopelessly broke, at the same time the population expects it to do ever more.

   On the prospects for the Super Committee, and how the bond markets are likely to react if it fails, Casey Research Chief Economist Bud Conrad sent me an email:

David,

What do you think will happen when the Super Committee fails with deficit reduction and S&P follows through with its promise for another debt downgrade? Probably not that much, as the last time it didn’t wreck the markets, but if rates rise, it would not be a good call to be long stocks.

We have had good auctions from the Treasury until a very bad acceptance today that drove the 10-year Treasury to 2.4%. When I wrote my recommendation at the end of September confirming that rates were too low (for the October edition of The Casey Report), the rate was only 1.8%. This kind of move up would normally take months, not days. Here is the pretty dramatic chart:

Rising US interest rates will be a stake through the heart of the US economy. Even just a return to more normal historical averages will skyrocket the costs of servicing the US Godvernment’s mountain of debt, wreak havoc in the bond markets, and simultaneously smash any prospect of recovery in the hugely important housing sector. The key point is that this is big, important stuff you have to be preparing for.

By Bud Conrad, Casey Research

Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody. Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion. At this rate of selling over several months, interest rates would go higher – if other things were equal. Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs. QE2 was $600 billion over nine months, or an annualized rate of $800 billion per year. Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary. 

(Click on image to enlarge)

Here are the data on the amount of Treasuries purchased in the last quarter of the year at an annualized rate: Foreigners have decreased their holdings for the first time since 2007.

(Click on image to enlarge)

Here’s another chart worth considering. This is a comparison to the ten-year Treasury, with the purchases of Treasuries inverted.

(Click on image to enlarge)

In my latest article in The Casey Report on interest rates, I discuss the above chart and cover the broader issues driving interest rates.

What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for “currency manipulation” which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.

[Whether this shift is temporary or a long-term reversal remains to be seen – but the end of the US dollar as the world's reserve currency is all but certain. One can start preparing for such life-changing events by listening to experts like Adam Fergusson and Doug Casey. The audio recordings of the recently held Casey Research/Sprott Summit, When Money Dies, are now available; they’re filled with insights and actionable advice that will help you not just survive what’s coming, but thrive. Order your set today.]

An excerpt of Doug’s musings on why “the problems we’re facing are 100% caused by the US government” – from the recent Casey/Sprott Summit When Money Dies.

Source: Karen Roche and JT Long of The Gold Report

When the currency system as we know it dies, some people will become very wealthy. In this special report from the Casey Research/Sprott Inc. Summit “When Money Dies,” The Gold Report cornered Global Resource Investments Founder and Chairman Rick Rule, Casey Research Senior Editor Louis James and Casey Energy Opportunities Senior Editor Marin Katusa for a roundtable discussion on the best strategies for thriving during the coming economic transition.

Companies Mentioned: Extorre Gold Mines Ltd.

The Gold Report: Since we are at a conference called “When Money Dies,” please explain who killed money and how, after all these years of governments around the world trying everything from quantitative easing to bank bailouts, we are still in the midst of the weakest global economy in this generation’s history?

Rick Rule: The answer is in an old Pogo Cartoon that reads: “I have seen the enemy and he is us.” Collectively in the West, we have lived beyond our means for a substantial amount of time. We rely on a government that we have paid to steal from our neighbors. Money is how we deal with transfers. Dealing with transfers dishonestly by making more of the medium that isn’t backed by any value is the process by which money dies.

Louis James: The problem is that you are asking the guardian who has stolen the goods to recover them. Government has been in charge of money for hundreds of years. When it is debased, you have to ask: “Who was watching the hens in the hen house?” When you discover who the fox is, you don’t want to put him back in charge.

TGR: We are looking at quantitative easing 3 (QE3) in the U.S. Europe is considering the same thing. Even China is doing its version. Will money actually die or will it all inflate together?

Marin Katusa: I am going to take the contrarian view. With all this quantitative easing, there is actually asset deflation occurring right now if you look at the valuations from an equity standpoint. Trillions will be printed, but look at the deflation in the assets. He who has cash will be king because he can afford to buy these discounted stocks. If you do your homework and be sharp, you will make a fortune in the next three years.

TGR: But money is an asset; cash is an asset. If you are holding your wealth in money wouldn’t it all deflate?

MK: It’s all about purchasing power. Look at Canada’s largest oil company. It is just as good of a company as it was three months ago, but it has lost half its market cap, which means your dollar will buy more of a great company. It isn’t inflationary all across the board. It’s an asset deflationary market. That is a current example of equity asset deflation in the market right now.

TGR: So cash will deflate less rapidly than physical equities?

MK: Yes, right now.

RR: It is likely that the purchasing power of Western currencies will lose 5%–7% compounded for a long while, maybe until they go extinct. But in the interim, when you are experiencing incredible volatility, that is demonstrably better than losing 30% per anum in assets that are illiquid. Despite the fact that money is going to die, perversely you have to have lots of it to take advantage of the liquidity crisis.

LJ: You see, inflation figures are averages. Asset price destruction in a certain area doesn’t negate monetary inflation, nor its impact on other prices. Tremendous money creation is going on. This has economic consequences. The guy at the supermarket can see it even if his house is worth less. It is the worst of all possible models. Necessities cost more, but once trusted assets—the store of wealth in real estate and pensions—are depreciating. This has investment and economic consequences. The government is creating all this money and blowing it out the window. You have to figure out where to stand with a net.

TGR: How do you know what way the wind is blowing so you know where to place your net?

LJ: It’s all about stuff. Stuff people need is, in general, good when paper or theoretical money is bad. In certain asset classes, including real stuff, there will be price destruction. Real estate, for instance, still has a speculative side to it and has not yet bottomed. But fundamentally, real stuff that has value can’t just blow away. The world will go forward. People will need food and raw materials. Gold is another vehicle with intrinsic value. These things can’t be inflated out of existence. When prices on valuable stuff goes down ridiculously, that should be seen as a godsend. People will still need copper, steel and timber. Buy when that stuff is priced low and wait for it to go high, then sell.

TGR: Oil is priced in dollars. Is there a dollar price above which demand stops?

MK: Yes, that is why you have to put the price into perspective when considering an investment. Are you valuing a company at $60, $70 or $80/barrel (bbl.) oil? If a company isn’t making money at $60/bbl. oil, you don’t want to own that stock.

TGR: The market in the last six months has been volatile, but it seems to be like a roller coaster coming back to where it started. Is there a bigger trend moving daily prices?

RR: Dramatic volatility will lead to higher highs and lower lows. Despite the fact that it may look like a mean on a chart, people who experience it don’t experience a mean. They experience extraordinary discomfort. The fact that a $10 stock becomes a $7 stock in a few days causes people to speculate less frequently. It tames the animal spirits. The volatility will act as a depressant on the market.

That is why it is important to understand the causes of these fluctuations. QE is a polite way of saying counterfeiting. If you debase the denominator, the numerator doesn’t seem to matter much. You are actively debasing the currency by making it less rare. In the process, the government has declared a war on savers, reducing the utility they could get through traditional savings, forcing them to make more speculative investments.

The problem is even deeper than that, however. At the same time you have plentiful money, you have restrictive credit. People assume prices get set across the whole spectrum, but they get set on the margin and dramatically on the margin based on the psychology of the participants. It makes no sense. Look at the downdrafts in commodities. Nothing about the utility of copper caused it to fall. But interdraft lending dried up and when credit goes away, fabricators, traders and shippers can buy. Economic dislocations like this cause the market to be really volatile for substantial periods of time, which will unnerve many market participants.

I am actually fairly excited about it. I believe if it is going to happen anyway, find a way to enjoy it.

TGR: Marin, you are skilled at mathematics. Your models help assess equities. In a market driven by psychology and government policies, how relevant are your models and have you changed the factors you use to value companies?

MK: Since so many people are investing on emotion in the resource sector, you have to take your profits in a bull market and have lots of cash on hand to take advantage of deals in a bear market. In the program I created, there are literally thousands of variables you can analyze and interpret, but one of my favorite metrics for the junior exploration sector is the Casey Cash Box Indicator. One year ago, three companies were trading for less than cash on hand. Now I know of a little over 30. But, we are no where near the low of March 2009 when over one-third of all the companies on the TSX and TSX-V were trading less than cash. The Cash Box Indicator is what I use to give me a “feel” of the psychological sentiment in the market. When there are lots of companies trading under cash, people are fearful, and that is good if you’re looking for value.

For the junior exploration companies that do not have any tangible assets, the models I use for producing projects with cash flow are not as relevant.

TGR: Louis, you are out there visiting companies all over the world. In this market, how important is management?

LJ: It is and it isn’t. Having competent people to run the show is imperative. The alternative is non-competent people. Who wants that? Incompetence shows up quickly in performance. But just because a company has good people and a good project doesn’t mean it will do well; nature may not cooperate with exploration, or it could run out of money. When fear is in the driver’s seat, people are less willing to take chances, even on good people.

In the end, volatility is your best friend because you know that a market that’s down will go up again. When your favorite wine or something you value goes on sale, you don’t complain. You celebrate and buy two. We have that opportunity now. Wall Street hates volatility, Howe Street loves volatility—or it should, even on the downside, because that is a sign that it’s shopping season.

TGR: In the 1970s, we saw a bullish precious metals market, followed by a big upside. This time we had a big upside and now extreme volatility. Have we already experienced the extent of the bull side?

RR: You have to acknowledge the fact that despite volatility’s unpleasantness, it can be an opportunity. Gold and silver still have a long way to go although it may not be straight up. Even if it were to go to $2,500/ounce (oz.) eventually, it could test $1,000/oz. first. You have to have an understanding of history in order to understand what you might face. Keep cash on hand to take advantage of the volatility. Prepare yourself to have the courage to take advantage of the dips. A lot of people have been responsible investors and studied everything about the market except themselves. They haven’t prepared themselves. You need the cash and courage to use volatility.

Be careful, however. Don’t get your information from the market. The market is a mob. It is a facility to buy fractional ownership of businesses. But you have to get a sense of the value of the business to make good decisions. Take advantage of the idiocy of the other players. Other players only drive value of the stock in the short term. In the long term, the company fundamentals will determine the value of the business. What the three people in this room have become good at is buying companies that will be taken over by the industry at higher prices later. Playing foolishness is fun, but that is less important than the fundamentals associated with the valuations of the companies. The safest and most consistent money is made when you find discrepancies in the valuation of a company and the market valuation and play the arbitrage.

TGR: How can you value gold in a volatile market like this where the price of gold can vary between $1,000/oz. and $1,900/oz. Do those lows wipe out some companies?

LJ: The average cost of production for most companies is $600/oz. Even at $1,000/oz. gold, a 40% margin in any industry is considered pretty good. A lot of mining companies are making lots of money right now, which means they are fundamentally strong. In the face of that, when the market fluctuates, it’s a good thing; it brings opportunity. I have stocks in my portfolio that we have been able to take profits on when they were high and buy again when they were stupid cheap. We have been able to make doubles this way multiple times—on the same stock.

But not all gold stocks are production stories. How do you value an exploration play where there is no particular asset? That is difficult. You can use peers, or speculate about what the company might have in the ground if it is successful and try to estimate a value. Whatever path you choose, you should have some kind of metric, a sense of what is reasonable.

A great example of how volatility can create opportunity and profits is Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:Fkft), the spin out from Exeter Resource Corp. (XRC:TSX; XRA:NYSE.A; EXB:Fkft), operating mostly in Santa Cruz, Argentina. I have been there and looked at the main asset. I have no doubt the flagship Cerro Moro project is going to be a highly profitable mine, unless the government goes completely insane. Extorre had good exploration success there and has started getting very positive results from a second project. Based on this work, Extorre went from CAD$2 to CAD$14, so naturally we took profits along the way. I love Extorre, but at CAD$12, its market cap was greater than some profitable producers with cash flow and it was still just exploring. Now, with no bad news from the company, the market correction has the stock down to CAD$7. We know more about its assets now than we did when the shares were higher, but it’s selling cheaper, so it’s a better value now. We don’t know when things will go up and down, we just know they will. We know when they are cheap it is a good time to buy; when they are expensive, it’s a good time to take profits.

TGR: It seems like investors have to be more active now, going in and out of stocks. They can’t just buy and sit on them.

MK: You have to be careful in this volatile market. An investor needs to understand what type of investor he/she is. If you are a day trader, this is your type of market, because the volatility and big swings are present. I don’t believe relative valuation. I think it is important to distinguish between intrinsic valuation and relative valuation. But the answer to your question really depends on what type of investor you are and why you bought the specific stock. In my experience, my biggest gains have been buying big positions in companies where I believed in management and the projects, and bought more when the stock was down, and held the stock for more than a few years.

LJ: There is a distinction between resource investing and mainstream investing. Tried and true Graham-Dodd analysis was never applicable to our industry because the underlying commodities change too quickly, making even the biggest companies too fickle for that sort of securities analysis. However, I would posit that Wall Street is becoming more like Howe Street in a post-Lehman Brothers world. Everyone is taking more risk. There is no safe place anywhere in the world where you can buy a stock and forget about it.

RR: The two central tenets of Ben Graham’s book The Intelligent Investor deal with evaluating the margin of safety and management. You have to speculate in companies that have the financial wherewithal to weather the most immediate risks. In today’s volatile market, you are competing against manic-depressive traders who show up one day wanting to pay more than what you have is worth and the next day willing to sell for less than their assets are worth. In a devotion to net-nets, one of the best indicators of when you ought to be all-in is when it is full of people so disgusted in the market they are selling for less than they are worth. It’s a great time to be an investor.

TGR: If a lot of these companies are worthless, how does the average investor know which companies can go the distance?

LJ: You have to make your own decisions based on your risk tolerance. Your mileage will vary. Read the financial statements, talk to management. At some point you have to act, but you can and should wait until you are fully confident in your investment decision, so your confidence won’t be easily shaken by market volatility. It’s not like baseball; you can wait for the perfect ball, so don’t swing until you’re sure you’re buying low.

MK: Great tools are available. Watch the legends and insiders to see what they are buying and selling.

TGR: My last question is how does a new investor start in this industry?

RR: Go for a walk. Have a conversation with yourself. Do a personality audit. How hard are you willing to work and what is your risk tolerance? If you aren’t willing to work and don’t like volatility, try owning physical trusts, ETFs or seniors. If you have a longer-term perspective and stomach for volatility, you can take advantage of the opportunities in the junior space. But you need to have a plan.

MK: You can’t succeed unless you are passionate in whatever you do. If you don’t really like the sector, then you won’t go as deep as you need to have success and you won’t make the best decisions. Make sure you have a passion for mining. And have fun. Life is short.

You also have to be willing to make lonely trades. When everyone else says you are wrong, that is when investing becomes very interesting.

RR: Just because everyone else’s money dies, that doesn’t mean your money has to die. You are responsible for your future.

[Listen to the Casey Editors, Rick Rule, Doug Casey and other well-known experts like John Hathaway, Mike Maloney and Richard L. Hanley – their assessment of what’s next in the ongoing crisis, how to protect yourself, and their favorite investments today. More than 20 hours of audio recordings from the Casey/Sprott Summit When Money Dies, on CD or MP3… get the details now.]

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By Jeff Clark, BIG GOLD

My local newspaper ran a story about the escalating battle between Amazon.com and the state of California. At issue is the collection of sales tax: Governor Jerry Brown signed a law requiring online retailers to collect state sales tax on purchases made by CA residents.

Before the ink dried on the legislation, Amazon severed ties with its estimated 10,000 affiliates in CA. These are – or were – small businesses that earned commissions on customers who clicked through their website to the online bookseller.

The immediate effect, of course, is not an increase but a reduction in tax revenue for the state, due to the loss of taxable income from the affiliates. And Amazon isn’t the only company that’s taken action; Overstock.com is doing the same thing, as well as others that don’t make the news. As usual, the government overlooked the unintended consequences of their legislation.

But the issue is greater than just the immediate tax ramifications. And it’s bigger than just Amazon. There are long-term consequences for tax revenue, employment, and perhaps even the quantity and quality of the goods and services being offered in the state.

With the biased newspapers, it starts with the “fairness” issue. Most seem to make no distinction between the type of businesses operating within the state, pointing to the “unfair advantage” Amazon has over storefront locations like Barnes and Noble. If B&N has to collect the sales tax, why shouldn’t Amazon?

This reasoning is typical shallow journalism and overlooks previous Supreme Court rulings. The high court ruled in 1992 that an out-of-state retailer cannot be forced to collect sales tax unless it has a physical presence in the state. It’s not the level playing field that prejudiced reporters try to claim; brick and mortar retailers use roads and other resources paid by local taxpayers, while the out-of-state company has an almost zero footprint. This was the crux of the Supreme Court ruling.

Nevertheless, California tried to tax the Internet in 2000 and again in 2009, with legislation declaring that affiliates, even though not employees of the company, constituted a “physical presence.” Both governors at the time vetoed it. The third time was a charm, though, and CA is now the ninth state to pass a law taxing Internet sales.

Amazon has already introduced a ballot referendum to overturn the law, though some lawmakers (all Democrats) claim the ballot initiative is unconstitutional. It’ll likely go to court, and if it qualifies for the ballot, voters like me will probably see it next year in our little white booklet.

Let’s not forget that the tax is already supposed to be paid by the consumer. I add sales tax for Amazon and other online purchases to my income tax return every year. I’m sure many people don’t, but I’m also certain the government’s projected tax revenue from this law is overblown.

In my mind, there’s a more fundamental question for those making the fairness argument: Who is responsible for whose mistakes? Government is in desperate need of revenue – but whose fault is that? Why should Amazon be responsible for the fiscal irresponsibility of the California legislators? It’s no secret the state has major financial shortfalls – but how’d they get there? Under Gray Davis, the state went from a budget surplus to a budget deficit in less than four years. We’ve never recovered. Why is that suddenly the problem of a business that works in a different state? Shouldn’t the government be cutting back on their budget?

The long-term consequences on tax revenue are obvious. It seems a tenet of common sense that lowering tax rates attracts more business and thus more tax revenue. That’s a simplistic view, but the direction is correct. More businesses would move here if the state government passed laws that enticed them to do so, and maybe I would spend some money on these goods and services and thus create more tax revenue.

Amazon decided against moving to the San Francisco bay area, in spite of it being one of the best sources for technical talent, due largely to the tax structure of the state. “It didn’t pass the small state test,” said CEO Jeff Bezos. It’s a well-known fact that many businesses decide against headquartering in the state due to the high-tax/high-regulation atmosphere. And many are leaving for the very same reasons. This all reduces long-term tax revenue.

Then there’s the employment issue. Current actions by state leaders are driving this source of employment away, along with many others. Think about it: if the primary source of your revenue came from businesses and workers paying taxes, wouldn’t you do everything in your power to attract businesses and employ workers? This certainly doesn’t seem to be the path government leaders are pursuing.

Last, these actions ultimately lower the quality and number of goods and services available to me and my fellow Californians. This is not the case with Amazon and most other online retailers, as we can still place orders. But the underlying message to businesses considering CA as home is the same: You better think twice about coming here.

This trend is well underway, and with fewer companies wanting to do business in the state, the eventual result is fewer products, scarcer services, fewer choices overall, and lower quality. If you doubt that, just look at how difficult it is to open a bank account in Switzerland; it’s almost impossible now for a U.S. resident to do this, and it wasn’t that long ago that the Swiss would do anything to attract U.S. customers. It’s the same principle here; you make it too onerous to do business here, they’ll go elsewhere, reducing the options available to residents.

What can be done? Reversing this vicious cycle will have to include government leaders. And it starts with them answering one simple question: Businesses and consumers will always react to new laws and revised tax structures; what reaction do we want them to have? Do we want them to react like Amazon? Or do we want them to be knocking on our door to come here?

Until government leaders understand, on their own or through voters, that it is businesses and workers they want to see prosper, no one will, including the State. And that applies to the U.S. of A., too.

[It’s not just state governments that are broke, though – the staggering debt of the federal government and the Fed’s pumping newly printed greenbacks into the economy make the dollar lose more and more of its value. Protect yourself with gold, silver, and sound large-cap precious metals stocks that can weather any storm. Try BIG GOLD today for only $79 a year… and find the best investments to preserve your nest egg.]