L: So, Doug,
we’re sitting here in Vancouver, epicenter of
many of our investments, thinking about the future. Meanwhile, the U.S. Treasury has announced some
mind-boggling debt auctions for next week. Any comments?

Doug: Yes, the size of
this auction coming up, $235 billion, is really rather shocking – especially
when you consider that that’s roughly
the cost of the entire Viet
Nam war. That was considered off the scale and lasted ten years.
This action is just in one week. It’s
an amount that annualizes to $12 trillion – and it’s still just
starting.

They are going to
have to borrow even more money to
bail out all of the other banks that are going to fail (which is going to completely bankrupt the FDIC) and
all the pension funds that are going to fail (which are insured by the Pension Benefit Guarantee
Corporation). And there are lots of other financial catastrophes still on the
runway.

This $235 billion
is just a drop in the bucket – and I’m not entirely sure where they’re going to get this money. If I
were a foreigner and I already
owned massive amounts of U.S.
debt, would I want to buy that much more? That’s especially
questionable when any intelligent
person can see that interest rates are being artificially suppressed. That makes
buying this debt a guaranteed loss. It just doesn’t make any sense to me.

The Chinese have,
say, $2 trillion in foreign-denominated reserves, of which they say about $1.4 trillion is U.S.
paper. They realize they’re holding a burning match; they want to get rid of what they have, not buy more. But here’s the scary
thing: even if the Chinese lent the U.S. all their $2 trillion of FX, it
would only cover this year’s
U.S. borrowing. Where is the U.S.
going to get next year’s? Because next year, it’s going to need even more.

Let me be as clear
as possible. There’s no way out of
this without major structural
changes. It’s not going to be just a disaster. Catastrophe is a better
word.

L: Well,
we heard today that the government of
Dubai did a public offering of debt, and it had
to be rescued by Abu
Dhabi, because no one else would take it. We’ve heard other, similar stories.
You’d think that at some point, these people would begin to worry that there might be a limit to
how much debt they can
peddle.

Doug: It seems to me
that it’s almost the endgame for this financial system. Since the depression of
1929 to 1946, we’ve had a
worldwide economic boom; in its early stages it
was quite real, since it
was based on the savings that
were accumulated during the
depression. But over the last generation, starting in the 1980s, we’ve had a phony boom, driven entirely by
debt.

The whole world is awash in debt. Individual consumers are head over
heels in debt. State and local governments are head over heels in debt and going
bankrupt. National governments all over the world are deeply in debt. And businesses that are
catering to old patterns of consumption are going to find they have no earnings
to service their debt with, and their
assets are unsalable at acceptable prices.

One of the problems
we’ve got here is that people confuse
paper money with real capital. This
is an important distinction that’s being overlooked. Capital is actually just
another word for “savings” – the
excess of production over consumption. I can’t emphasize that
enough.

Unfortunately,
people are used to thinking of capital as being the same as the dollar bills or
other paper money in their wallets –
and that can be created out of thin air. But capital can’t be created out of
thin air.

So, I’m very
concerned that all these governments are going to destroy the world’s monetary system in tandem. I don’t
know exactly how it will
end up, but it’s going to be really ugly. This is compounded by the fact
everybody is looking to the governments to solve these problems. Government is
the cause of these problems. And the people it employs are not the best and the
brightest (how that ridiculous canard
ever got traction astounds me) but the poorest and worst part of humanity.

Boobus americanus
is looking to the type of people employed by their DMV or the TSA – albeit
sporting prestigious degrees and expensive suits – to solve a millennial
economic crisis. Good luck, suckers.

There are lots of
reasons I say that the Greater Depression is going to be even worse than I think it’s going to
be.

L: That’s a pretty
negative view, Doug. What about all
these green shoots we keep hearing
about? Improved housing numbers, improved unemployment figures, the
Dow up over 9,000 again… There are
all these signs of recovery, but you say you don’t see any green shoots. Are you
myopic, or is everyone else in the world wrong?

Doug: I don’t
want to be seen as a perma-bear
who’s negative on the economy no
matter what happens, but this is a
time when I’m very happy to be a
contrarian. In fact, I’m not negative. The future should be, and can be, better
than all but what the most optimistic
science fiction proposes.

So let me put it
this way: I’ve believed for many
years that the Greater Depression was
in the cards, simply because I believe that cause has effect, and actions have
consequences. All the distortions and misallocations of capital caused by
government interventions in the economy have to be liquidated. So, no, I don’t
see any green shoots.

The talk of green
shoots is all PR, because the morons running the government actually believe the
economy is based on psychology. In fact, psychology has zero to do
with it. If it did, then all the
Zimbabwe government
would have to do to solve their
depression would be to slip everyone
a Prozac tablet every day. But maybe we’ve already tried that here, since something like
50 million Americans are already on
antidepressants….

There may seem to
be green shoots in the same way it
seemed that way for a while in 1930. After the stock market went down
for six or eight months, it reached a temporary plateau and bounced back up.
People thought it was just another
recession, that they’d pull through as they did after World War
I.

L: Safe to get back
in the water.

Doug: Safe to get back
in the water. But that’s not the
way it is this time. For example,
people are now saying that housing is
looking up because the rate of collapse has slowed. Of course, nothing goes straight
down – or up – without retracements. The fact is that there’s been
immense overbuilding in housing for a long, long time. It’s been the
epicenter of speculation in the U.S. and many other places around the
world.

There’s a huge
supply of square footage that people simply can’t afford to live in. Even if
Obama were to freeze people’s
mortgages, so they don’t have to move out of their houses and into tent cities –
who’s going to pay the real estate
taxes on those houses? The local governments are bankrupt, so, if anything,
they’ll want to raise real estate
taxes.

And even if the
federal government pays the local taxes – who’s going to pay the utilities? Right
now, oil and natural gas are at
relatively low levels. When you see
oil going back up over $100 – which I
think you will in the next
few years – and when you see natural gas doubling, or even tripling,
in the next few years, people aren’t
going to be able to pay their utility bills.

Besides, all these
McMansions are going to have a lot of deferred maintenance. The fact is that
people have been living way above
their means in terms of housing.

The same thing is
true of cars. People have bigger, newer, more expensive cars than they did during the
last recession, and they have lots more of them. Cars are on average of much
higher quality now, unlike those of
the 1970s – which you might call the
first federal period of auto manufacturing; those were perhaps the worst cars ever made. During the 1980 – 1982
recession, the average car in the U.S. fleet was something like seven years old, and the average
family didn’t have more than one or two cars. Today, most cars are way above those of past years in quality. They
basically last forever, the car fleet is almost brand new, and Americans have lots of
cars.

What makes that
even more troubling is that cars are no longer minor assets on most people’s
balance sheets. Back in those days, if they didn’t buy them for cash, most
people bought cars with a
two- or maybe three-year financing.
Now, everyone finances cars for five
years or even leases them for that long. They’ve gone from being a minor asset
to a major liability on families’ balance sheets.

So, forget about
the auto industry recovering. That’s not going to happen. No green shoots there.
In addition to the fact the cars that will be made by a nationalized and bankrupt GM and
Chrysler will be politically correct
crap. Nobody but people like Barney Frank and Nancy Pelosi will want
to be caught dead in them.

Forget about
housing, forget about autos, forget about almost anything you hear about on the
news. For years, the whole world has overconsumed and lived above its means. It
was great fun while it lasted, but now the party’s over – and for a long time. You
won’t see any green
shoots.

What you are going
to see is lots more corporate bankruptcy and lots more
unemployment.

All those people
giving $150 massages and $40 haircuts are going to find that people can no
longer afford them. Professions like personal trainers are going
down the toilet. There are going to
be lots of unemployed carpenters, financial planners, mortgage brokers,
department store clerks, and car salesmen.

On the bright side,
there will be legions of unemployed
lawyers – unless they’re bankruptcy
specialists.

There are so many
businesses – almost everything you look at, from restaurants to car
washes – that are still catering to
old patterns of production and consumption.

Many people are
simply not going to be able to afford these things anymore, so lots more people
who have been hanging on by their
fingernails are going to fall off the cliff. What are they going to do to
provide goods and services in a new
world? I think the world is going to change more radically in the next
ten years than it did from 1929 to 1945.

So, forget about
green shoots. If you believe in them, you’re going to be in for a sucker
punch.

L: What about the
companies that are rebounding, like Goldman Sachs?

Doug: Goldman is a
special situation. Much of their competition has gone out of business, so a lot
of what business there is, is going
to Goldman. And they’re very politically connected, so they’ll be handling lots
of state-sponsored deals. It’s so brazen as to be shameless. I wouldn’t be surprised if the American hoi
polloi – with
no jobs, no houses, no money, and no prospects – react in a most unpleasant
manner against people who appear to
be profiting from their distress.

L: Do you even
believe Goldman’s numbers, or is it all a function of them being able to change
the rules that govern how they book
things?

Doug: That’s a good
question. What can you believe today? The government has a vested interest in
casting everything in the most favorable light possible. And the
newspapers, magazines, and TV more or
less parrot what they’re told. I
prefer not to clutter my mind with
what official sources say but make my
own observations and interpretations
of what others put together. And my
view is that the Greater Depression
has barely even started.

L: What about recent
reports that Americans actually have started saving
again?

Doug: I believe that.
That’s definitely a major part of the cure, a very favorable thing. It’s a
sine qua
non – critically important. Naturally, and stupidly, the
government and mainstream economists are all against it. I say stupidly not as a
pejorative, but in the sense that “stupid” means “an unwitting tendency towards self-destruction.” They don’t want to see people saving (the only cure), they
want to see people consuming and
spending. They’re trying to prolong the totally unsustainable patterns of
production and consumption the Long Boom
engendered.

Fortunately, the
average person is watching out for
his or her own welfare, despite that being the opposite of
what conventional economists are
telling them to do. Saving is the only solution to the depression. In addition
to massive deregulation, huge tax cuts, and the institution of a sound currency.
But since those things are totally in the hands of the government, you can
forget about them happening.

Look, you can’t
solve the problems created by decades of building debt with a few
months of higher savings. It has to go on for years to rebuild the capital
base.

L: Okay then, for the
person who’s expecting the sucker
punch you mentioned, what’s the best
way to play it? Shorting masseuses
and restaurants? Wall Street? What?

Doug: I want to go for the low-hanging fruit. What the stock market does and
what the economy does are really
two different things. Stocks could
actually skyrocket because of all the dollars the government is creating. People
might want to buy stocks because they
actually are equity; they represent real wealth. I suspect that in this depression, the stock
market isn’t going to bottom until we’re looking at dividends in the ten percent range
across the board, after being cut from present levels, which implies a much lower stock market.

But do I
want to make a bet that
way?

Not particularly.
All that money creation could drive the stock market up in spite of much
lower earnings and a bad economic
situation.

It seems to me that
the sure bet is to be short bonds. Interest rates are going way up. Why? There will be tremendous demand for capital, of
which there’s a limited supply.
Interest rates are the price of capital. So they’re going up for that reason –
and because of the trillions of paper dollars the government is creating,
inflation is going to skyrocket. High inflation will itself guarantee high interest
rates.

So, the trade of
the decade is going to be to short long-term bonds and to go long precious
metals (which are the only financial
assets that are not also simultaneously someone else’s liability). These are
two excellent investment plays, but
there are many others.

L: Great advice –
thanks Doug.