The “Rich Man’s View” of Gold

The big news in this gold chart isn't news at all...

The "NEWS" in the gold charts is the near-$100 per ounce decline over the past month, writes Brian Hunt in Steve Sjuggerud's Daily Wealth.

This price weakness has a lot of investors stressing out and searching for an explanation for what's happening to the No.1 form of "real money".

But here's a gold chart showing why stressing over the decline is crazy...

Remember, gold is one of the world's most difficult-to-price assets. The metal cannot be valued like a piece of real estate (using rental yields) or a share of stock (using book value). It can trade on all kinds of wild emotions.

Thus, huge swings in the Gold Price chart have proven to be the norm...not the exception.

Given gold's volatile nature and the recent price weakness, we again urge folks to take the "long view" (aka the "rich man's view") of gold...and note that the gold chart could show a fall all the way down to $900 per ounce...and still remain in the confines of its bull market.

It would also, I believe, be a wonderful chance to buy more.

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Tips on Junior Gold Miners

Putting money in the junior Gold Mining sector takes 3 things...

EQUITIES AND ECONOMICS analyst Victor Gonçalves is enthusiastic about some "undervalued" junior Gold Mining stocks, as he tells The Gold Report here.

Alongside his Equities and Economics Report, Victor Gonçalves now produces the Green Dollar Report and writes for a number of leading print and electronic finance publications, including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco.

Here he says that Gold Bullion as simply met its typical summer lull, and will generally see more strength than weakness this year...
 
The Gold Report: The price of gold has dipped to below $1,175 this morning [late July]; do you see this as a sign that the general economy is improving and that inflation is not on the horizon? Or perhaps it's just a summer lull?

Victor Gonçalves: This is basically the traditional summer lull, so I'm not overly concerned. In fact, I talked about this very thing in one of our previous interviews. There are certainly other factors involved. Typically when we have mid-term elections with a democratic president and what could be a republican house, this will be good for gold and the markets, but until that happens, the markets and the price of gold will be at a standstill.

TGR: In terms of Gold Investing, do you advise your readers to have a certain percentage of gold bullion along with gold equities?

Victor Gonçalves: In terms of Gold Bullion, I always say to have some, but the definition of "some" is a little ambiguous.

I like gold, but I also like the moves that occur in the junior Gold Mining sector. One of the issues with gold bullion is the spread between the buy and sell side; the built-in "lose" in the spread between the buy and sell prices. That is to say, for those who want to trade gold, I don't recommend trading it frequently. For somebody who wants to buy it now, in the summer, I think they will strongly benefit as the price is probably at one of lowest points we will see going forward. So to answer the question, for conservative investors I recommend 10-20%, and for aggressive traders, 0%, as they would have more opportunities with gold equities.

TGR: If an investor were building a gold portfolio today, would you recommend they start with a base of seniors, juniors and ETFs?

Victor Gonçalves: Juniors and emerging producers hands down. This is probably the best piece of advice that anybody can take from this article. If there is one asset class that will outperform, it is the emerging Gold Mining producers. Basically, these companies trade with the price-earnings multiple of a junior, which is basically none, but will more than likely have a producer's asset base and earnings in a reasonably short period of time. That, in my opinion, is a very sweet deal.

Having said that, however, I believe having one or two solid senior Gold Mining stocks in your portfolio is not a terrible thing. They will hold their value and perform according to the price of gold. Right now, with most equities prices being depressed, the best "bang for your buck" will be in the emerging mid-tier producers. There are some juniors that will be a great value eventually, but as a solid base, I don't recommend them as they carry much higher risk when compared to a company that has a mine, mill and production.

TGR: In terms of gold miner equities, I know you're partial to select juniors. What are the most important criteria to you? Management, project, jurisdiction, drill results or other factors?

Victor Gonçalves: There are several factors, but I can never stress the most important one enough – management. Management is the root of all that is good for any company. Good management will know (or have a reasonably good idea) where to drill and get the good results. Good management will do the right deals to acquire the right projects; proper management will know which jurisdiction to be in, and if the jurisdiction is poor, then they will know how to mitigate the risks. All the good news we hope to see on the newswires stems from the management team's calculated decisions. This is why this is the quintessential element of a company; the rest will follow naturally.

TGR: Victor, thanks for your latest insights. Much appreciated.

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Gold’s Fear-Based Trade

Imagine if you ran your finances like Washington runs the US...

JULY DIDN'T produce much in the way of excitement for stock-market investors, writes Dan Denning in his Daily Reckoning Australia.

But we have found out a few interesting things...

One, so long as sovereign debt woes in Europe persist, then US Treasury bond yields can go lower. Investors seeking a haven from Europe don't seem to have any problem buying US debt at near record-low yields. This is bizarre.

Of course, at a superficial level, if you were concerned that the European bank stress tests were a sham and that interest rates in Europe could go much higher unexpectedly, you might view US Treasury notes and bonds as "safe". This is only possible in a world of utter relativity.

After all, the US government ran a deficit of 9.9% of GDP in 2009. The Congressional Budget Office in Washington reckons next year's deficit will be $1.47 trillion. That forces the US government to borrow 41 cents of every Dollar it spends. Imagine if you ran your finances this way.

But it's a strange old world we live in. Europe's problems have been America's blessing. Demand for US Treasury bonds and notes is the highest on record, according to the Wall Street Journal. On July 23rd, the yield on two-year notes – a kind of near cash fight-to-safety proxy for big money – feel to 0.5516%. Ten-year notes briefly yielded less than 3% earlier this month, and for the entire month of July, the US Treasury managed to flog off $173 billion in bonds to investors.

This is an important development. As long as global savers – for whatever reason – are frantically bidding for US debt at auctions, US borrowing costs should stay relatively low. It should also allow the Federal government to run its absurdly large and reckless deficits. And most importantly, if investors are buying US debt it means the Fed doesn't have to, at least not yet.

This last point is the most important, we reckon, because it averts the dreaded hyperinflationary scenario in which Fed money printing leads to an inflationary shock. So far, investors (who may have gone wobbly on stocks) have decided there is safety in numbers in the US bonds market. We'll see how that works out for them.

All this has taken some starch out of the Gold Price. You will have known about this if you read the latest salvo in Michael Pascoe's increasingly strange vendetta against gold in today's Age. He points out that spot Gold Prices are at three-month lows in New York and down 8% from the June highs.

It's pretty obvious by now that Pascoe either doesn't understand gold's role as money or simply believes gold is an anachronism in which "money" can be created by central banks. Frankly it's a pretty unserious and mildly embarrassing argument to make given the last few years of economic events. But each to his own.

The bigger issue is what will happen with the Gold Price from here. Yesterday we spent an hour on the phone chatting about this and other things with Greg Canavan, the editor of Sound Money. Sound Investments. Greg pointed out that the Gold Price doesn't normally perform so well during the North American summer.

Our view? We'd be pleased to buy more gold on dips, even if for the year gold doesn't make a new high. Gold is insurance against financial disaster. And if you think there aren't any more financial disasters lurking, you're not thinking hard enough.

Yes, this is a fear-based trade. We are worried that bad fiscal and monetary policies worldwide can wipe out savings, depress share markets, and destroy purchasing power. Totally wacky of course. But there you go.

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Being, Acting & Entrepreneurs

Entrepreneurship is the foundation of society...

HUMANS ACT and they act purposefully: this is the axiom of action proposed by Ludwig von Mises, teacher of Hayek, writes Toby Baxendale at the Cobden Centre.

From this, Hayek claimed, the whole of economics could be deduced. Because as Mises shows, in order to be, we act purposefully. Not being, we would not act, indeed we would not exist. We act upon satisfying our most urgent needs first, then our second most urgent needs, and so on a so forth, ranking our preferences, with the most urgent needs/demands being satisfied first, the least urgent, and the furthest away in time.

From this hierarchy we derive the law of demand, the downward sloping demand curve, the law of diminishing marginal utility, and on and on it goes. Lord Lionel Robbins in his masterful 1932 book, The Nature and Significance of Economic Science shows in very clear terms how all the laws of economics are derived from the a-priori thought process.

To try to refute it, you cannot, as you act purposefully to do so. Just as Pythagoras's Theorem is implied in the concept of a right angle triangle – and we knew about the concept of the right angle triangle before Pythagoras "discovered" his Theorem – so, too, do the laws of economics flow from the one irrefutable axiom that humans act purposefully. It is a bit like saying Darwin "discovered" the Theory of Evolution, when what he actually did was articulate it and find very plausible data sets to help explain it to the sceptical mind. Evolution was always there.

So what can this Axiom tell us about entrepreneurship?

When we act, we choose to satisfy our most urgent needs first, and we forego other opportunities which form our subjective costs. Action implies a sacrifice: what opportunity you forgo is your cost, and what you hope to gain is more than your cost: this is your entrepreneurial profit. This entrepreneurial profit does not have to be measured in money; it can be the choice between going to the theatre or staying at home and watching a TV program.

The entrepreneur is someone who is good at generating entrepreneurial profit, not only for himself but in the way he/she can help many more others in achieving and consuming the results of entrepreneurial profit. He is more alert at spotting opportunities that will satisfy peoples most urgent needs in quicker and in better formats, and for this he is rewarded usually with more money for his efforts.

According to Jesus Huerta De Soto in his book called Socialismo Calculo Economico Y Funcion Empresarial (1992) – soon to be published in English by Edward Elgar in Association with the IEA, and called Socialism, Economic Calculation and Entrepreneurship – there are six characteristic of the information and knowledge that the entrepreneur captures to use to provide better goods and services to all in society.

#1. Knowledge is Subjective, not Objective & Scientific
I have just watched my local farmer bring in a grass crop frantically in 3 days as he assessed a window of opportunity for him to do so, since rain was coming. He could not send this up to a state planner to make a decision for him – only his local knowledge about this particular time and circumstance, and his informed intuition re the weather could lead to this decision. He has crop that he can sell now. A planner in Whitehall (or Washington, Brussels or wherever) would neither have all the information necessary nor respond quickly enough to make this all happen.

#2. Knowledge is Exclusive & Dispersed
In my farmer example, this knowledge about when to bring the crop in is exclusively his and resides in him alone.  In the same way, knowledge across the whole economy is broken up into little pockets of subjective knowledge held by millions of different people.

#3. Knowledge is Tacit; It Cannot be Articulated
My farmer's knowledge is tacit and in him, yet he probably cannot objectively articulate why he is doing it. Michael Oakeshott in Rationalism in Politics (1962) gave us a very good example of a chef who is after all only following a formulaic procedure of putting together a recipe, so we should all be able to add X of this to Y of that and cook at 200 degrees for 10 mins, but the latent talent and know-how of an uber-chef, such as Gordon Ramsey, will allow him to be a great chef – just as it will enable me, following those exact same instructions, to be a very average cook.

#4. Entrepreneurship is Creative
There is no cost to an entrepreneurial idea, it is created ex novo. Bill Gates, when he created his first operating system, had his vision and his thought process, the idea, and then he got creating.  Profits are thus created new and from nothing.

#5. The Creation of New Information
Each creative new act of entrepreneurship creates new information which is used by others to profit them as well. A new software solution created by the creative minds of Apple alerts all their users to new ways of doing things that benefit them in a quicker, faster and better way.

I recently had a conversation with a potential entrepreneur who has identified an abundant source of farm waste product that could be excellent for fish feed. If his business is developed, farmers will suddenly be made aware that what was once a cost to get rid of this waste product cannot be a source of revenue for him. Thus he will adapt his farming processes to now harvest this waste and costly product for profit. The fish farmers will eagerly await this new source of protein and adapt their newer and better buying accordingly.

#6. The Transmission of Information
Although the price system is objective and allows the allocation of resources, the fish farmer does not need to know all the subjective information of the entrepreneur who has developed the new feed out of the farms' waste, just that he can buy it.  Likewise, the farmer does not need to know the detail of how it is going to be made useful to the fish farmer. All this knowledge is subjective and the briefest communication of it happens to facilitate trade.

Entrepreneurship is the foundation of society in that it insures the co-ordination of individuals' behaviors. Without it, society would not exist. There is always a competitive and on-going process of rivalry and discovery as this society-wide coordination process happens. It is limitless and produces progress if left uninterrupted. It is the single most important process which units society and permits its harmonious advancement.

The division of labor – as suggested by Adam Smith – shows us how, in a pin factory, if people concentrate on certain tasks and specialize, more production happens. This is an objective measure. Underneath this, and prior to it, is the subjective division of knowledge. In-depth knowledge is held in widely dispersed formats, often tacitly, precluding its articulation across society; thus it is impossible for any one person body or machine or government department to know all of this information.

Also, only tiny amounts need to be communicated to make coordination in society possible. So Huerta De Soto introduces a new concept into the body of knowledge concerning economics: the universal division of knowledge that exists as a deduction from the axiom that humans act and takes the subjectivist revolution started by Menger into our very understanding of the division of labor. He also moves man on from being the Robbinsian homo oeconomicus to the homo empresario. Acting man is entrepreneurship.

Once again, Huerta De Soto has given some great new insights into economics in the field of economics. He has built on the shoulders of Adam Smith , Mises, Hayek and Kirzner to great effect to knock the objective division of labor off its pedestal and put in its place the division of knowledge. This is what Einstein did to Newton in physics. Both still have their place, but the latter being of more fundamental importance.

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‘Tis But a Scratch!

The current drop in Gold Prices – so far, at least – barely shows against other sell-offs to date...

WHATEVER REASON you cite for this week's swoon in Gold Prices to $1160 per ounce and lower, 'tis but a scratch so far, says Adrian Ash at BullionVault.

The current options contract on Gold Futures expired Wednesday, guaranteeing volatility. Because as longer-term speculators moved to rollover their position in the derivatives market, banks taking the other side of the trade were only too happy to oblige.

More broadly, active traders would always expect to see a seasonal lull – if not drop – in Gold Prices between July and Sept. India's gold-hungry millions don't buy over the summer, but wait until autumn's post-harvest Diwali festival instead. And after the huge gains spurred by the Greek crisis of April and May, a pullback was long overdue.

That's not to say the Gold Price bull market starting a decade ago hasn't just met it's end. Some in the mainstream investment media certainly want to see it that way, even if – like this guy at the Sydney Morning Herald – they're driven more by resentment of gold's recent gains than analysis of its future.

But either way, and like Monty Python's Black Knight says, the gold market has had far worse cuts than this...

Losing a little over 9% from last month's top to date, the gold price in Dollars would have to reach $1073 an ounce before matching the 15% drops of Dec '09-Jan '10 and Feb-Apr '09.

Gold would need to hit $948 an ounce before matching the 25% drop of May-Jun '06. And it would have to reach $834 before matching the 33% Mar-Sept. loss of 2008.

This current swoon is also a good way from setting new records for pace, too. Top to bottom, it's nothing – so far – next to the 16% week-on-week drops of June 2006 and Sept. 2008.

Small comfort to investors or traders picking last week's dip as a bargain, perhaps. But so far, it's only a scratch.

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Broken Rules, Broken Budgets

US municipal "muni" bonds are over-valued and overdue for a slump...

OF ALL THE speculative excesses that misguided monetary policy and a prolonged recession has caused, the one that poses the most danger to investor wealth is the financial bubble in state and local municipal bonds, writes Martin Hutchinson at Money Morning.

Municipal bonds – usually referred to as "munis" – are very popular portfolio plays because of tax advantages that, in effect, enhance their rates of return. There's also an allure because of their local nature: Investors can invest in specific bond issues that provided the money for projects such as schools, highways, bridges, hospitals or housing that actually affects the community in which the investor lives. That makes them a very tangible investment.

But there's a problem.

State-and-local-government finances have taken a bigger beating during this economic downturn than during any other recession since World War II. Even worse, that beating came after the easy money available during this stretch encouraged those same governments to venture well beyond any reasonable limits in terms of their borrowing. They're now stuck with a bigger-than-warranted debt load – which can't be covered by the property tax stream that's been reduced by record-level housing defaults.

The bottom line: At the present time, "munis" may not be the benign – or even alluring – investment that they've been in the past. In fact, thanks to continued fallout from the worst financial crisis since the Great Depression, some munis may be more akin to bombs than bonds – ticking away and just waiting to blow up your portfolio.

Brokers will tell you that particular state and municipal bond issues are "safe," meaning that they are rated highly by the rating agencies. However, the rating agencies got it wrong on subprime mortgage instruments, and it seems pretty clear that they are getting it wrong on states and municipalities.

Theoretically, state governments should not have this problem. All the states – with the sole exception of Vermont – have prohibitions against running budget deficits. Those prohibitions are in place for a reason: By avoiding deficits during healthy periods, the budgetary strain won't be nearly as severe when tax receipts and other revenue drops off during a downturn.

Defensive Investing Unfortunately, states have discovered various accounting dodges to get around the deficit prohibition, meaning the supposed safeguards aren't all that tight.

The state "funding gap" for the fiscal year that began July 1 is $144 billion, which is 8% larger than the $133 billion shortfall for the just-concluded 2009-10 fiscal year.

But the outlook is actually going to get even worse: The federal stimulus spigot gets turned off in December, ending a flow of funds that states had been using to offset their revenue shortfalls and narrow their budget deficits. Make no mistake: The end of the stimulus money will leave a huge funding gap going forward.

In most cycles, energetic economic recovery rescues state budgets, although state budgets typically lag – for example the state budget gap peaked in 2004 after the 2000-2001 recession.

Given the poor current financial condition of so many of the U.S. states, a drawn-out/sluggish recovery – or even worse, a "double-dip" recession – could upend state finances for years to come.

Recession Hammers At the municipal level, the primary revenue source – aside from "direct transfers" from state coffers – is local property taxes. Property-tax rates are set as a percentage of home values. When the housing bubble caused stratospheric increases in housing values in the middle part of the decade, property-tax revenue soared in kind – enabling municipalities in thriving areas to expand lavishly.

Since 2007, needless to say, this has all been reversed. What's more, if municipalities respond to declining house prices by jacking up property tax rates, as many are doing, they run the risk of causing a wave of regional mortgage delinquencies.

Homeowners who were already struggling to make ends meet now find themselves facing an additional cash-flow demand that they cannot meet. Some in this predicament may gamely stick with it for awhile, attempting to meet the additional demand in order to keep their mortgage current – before finally succumbing to the inevitable realization that they just can't do it. Others literally walk away from an asset that has declined in value and become a burden.

In either case, the homeowner defaults on their mortgage. And needless to say, any further decline in house prices following the ending of the $8,000 buyer subsidy will strain municipal finances further.

Municipalities – like many homeowners – are struggling to make ends meet. Municipal-bond defaults may soar well beyond 2009's $6.4 billion, the most since 1992.

Last year, the state in most difficulty appeared to be California, because of the severity of the real estate decline and because of its dysfunctional state government, in which spending restraint appears to be almost impossible.

This year, investors should turn to Illinois, where the recession has been severe, producing a current unemployment rate of 10.4%. Here the quality of state government is indicated by five of the last nine governors having served prison sentences (not counting ex-Gov. Rod Blagojevich, who's currently on trial).

Illinois just borrowed $900 million in a bond issue that was very well received, being priced at a yield 0.15% lower than expected. However, that is much more a function of the high yield offered – nearly 7%, or 4% above equivalent US Treasuries – as well as the excessive liquidity in bond markets right now. Much of the demand for the bonds came from foreign institutions, which have a strong preference for government over corporate financing, because they don't understand the risks involved.

In reality, the $900 million bond issue was borrowed to make Illinois's required contribution to its state employee pension fund. This came in addition to a $2.4 billion bond issue earlier this year to fund previous contributions to the pension fund, and an earlier issue of as much as $10 billion in 2003 – for this very same purpose.

Meanwhile, on the spending side, Illinois state spending has risen from $56 billion to $80 billion in the four years since 2006, according to National Review's Kevin Williamson, who has been following this case.

There has been neither a state moratorium on payment since Arkansas in 1933, nor a full default since Pennsylvania in 1841. Nevertheless, the combination of poor-quality state governments, reckless overspending during the boom years, state pension systems that are totally out of control and a deep-and-prolonged recession following a severe housing downturn have lined the stars up for one or more state defaults in the next few years, unless the U.S. economic recovery really gains strength.

Some states, like New Jersey under new Gov. Chris Christie, may be able to drag themselves back from the brink – but it will require Herculean efforts to do so.

Nevertheless, it seems hopelessly unlikely that all the vulnerable states – and there are perhaps a dozen with considerable degrees of vulnerability – will be able to save themselves this time around. Only a few states – such as North Dakota, which is conservatively run, and which has oil-shale and mineral resources cushioning its recession – seem completely invulnerable at this time.

This will all come back to bite investors. With interest rates at historic lows (the U.S. Federal Reserve continues to hold the benchmark Federal Funds rate target down near 0.00%), investors have been searching for – and often reaching for – higher yields to boost their returns.

Last year, for instance, investors in that predicament poured $7.8 billion into high-yield municipal bond funds, pushing assets to a two-year high. But they may pay for that aggressiveness this year as default risks grow.

"People are starving for yield because rates are at zero," Paul Tramontano, co-chief executive officer of New York- based Constellation Wealth Advisors, which manages about $4 billion, told Bloomberg News. "They're taking [on] more risk than they think."

As we mentioned earlier, just because brokers say that the muni bonds they're trying to sell you are "safe" because they were rated as such by the credit-rating agencies, those are the same agencies that got it wrong on the subprime-mortgage sector.

They're getting it wrong again on states and municipalities.

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Deleveraging in Irish Style

Post-bubble, Ireland has gone back to exporting people...

AS WE WERE saying, there are several schools of thought regarding the present economy, writes Bill Bonner in his Daily Reckoning.

• We're recovering... (Geithner, Summers, et al);
• We're not recovering...we're headed into inflation (Faber, Stansberry, Casey);
• We're not recovering...we're headed into hard-core deflation (Prechter, Shilling);
• And then, there's the solitary Daily Reckoning home-school view – that we're not recovering...we're headed into soft-core, Japanese-style deflation.

Who's right?

Long-time readers will recognize our point of view as the same thing we were saying 10 years ago. Of course, we changed our mind about it – more or less – once or twice in the intervening years. Because after the big build-up of debt in the mid-00s, we didn't think the US could afford a long, soft, slow de-leveraging a la Japan.

The Japanese had savings...and a positive trade balance. They could afford an order on-again, off-again recession...while their government squandered the savings of an entire generation.

But the US has a huge negative trade balance...and little in the way of savings. How could it survive a Japan-style slump?

Well, things evolve...and our views evolve with them... And in this case, they've evolved right back to where they were in the first place. Savings rates are going up. Most other governments – other than the USA – are making an effort to reduce their reliance on borrowing. This leaves enough money available to finance US deficits – not indefinitely, but perhaps for a year or two more...maybe even for 5 or 10 years.

Could we be wrong about this? You bet. Should you bet your future on it? No sirreee...

But we're probably right.

The following item will seem like we're changing the subject. Au contraire. It was reported in The Globe and Mail that the Irish have gone back to exporting what they export best – people.

You'll recall that the late, much-regretted boom had completely transformed the Emerald Isle. All of a sudden, the Irish were the richest people in Europe (based on the value of their houses, mostly)...and hundreds of thousands of Poles and other immigrants were streaming into Ireland in order to find work.

Practically all the waitresses and barmaids in Dublin seemed to have an Eastern European accent. And there was even a Polish-language TV station. Can you believe it?

But then came the bust. Suddenly, the Irish had to come back down to the bog. The jobs disappeared. Housing prices fell (though not yet as much as you'd expect). And the immigrants began to go home.

And along with the immigrants are many native-born Irish, too.

Yes, "The Irish Exodus" has resumed, reports The Globe and Mail:

"Hundreds of thousands of immigrants used to flock to Ireland, looking for work at the door of Europe's strongest economy. But after two decades and a stunning collapse, Ireland is once again a nation of emigrants, seeking employment elsewhere to escape the sad reality at home."

Oh well, it was bad while it lasted. Now, the Irish can give up property development and go back to poetry and alcohol. The country may not be as prosperous, but it will surely be prettier.

Seventy thousand people are expected to leave the island this year. By 2015, the total is expected to rise to 200,000, if unemployment trends continue.

Where are they going? Canada. New Zealand. Australia. No mention was made of the USA. But what is most interesting to us is the story behind the story. Ireland is not only the European nation the farthest out to the West. It is also the one the farthest out in front in the fight against deficit spending. While others dilly-dallied, Ireland cut. It bailed out its big banks...and then had to protect its own credit. But despite deep cuts, the deficit remains stubbornly high. At 11% it is in line with the US, which hasn't made any effort to cut at all.

What went wrong?

It appears that the neo-Keynesians Krugman and Wolf are right about at least one thing. Cutting government spending while the private sector is de-leveraging is a hard way to go. (In our opinion, it is the right way to go...but that's another issue!)

What happens is that as the feds cut back it reduces income to the private sector, which is itself in cutback mode. This then causes tax revenues to fall – which increases the deficit...

You end up with a vicious cycle of cuts, deficits and more cuts...which doesn't worry us...but the feds don't like it. And the public doesn't care for it much either. Better to wait until the private sector has finished de-leveraging, say most experts.

Of course, then you are only building up public sector debt – which will have to be repaid sometime. You are also wasting resources – forever – making people absolutely poorer than they otherwise would be.

But we're going to let it slide, today. The point we are reaching for is that de-leveraging isn't easy. It's like growing old. That's not easy either. Still, it's better than the alternative.

And as for which of the views is correct – recovery, inflation, hard deflation or soft deflation – we'll just have to wait to find out.

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Big Promises, Little Hope

How to invest when government's grown too big to deliver on its promises...

SO I JUST got back from the 2010 Agora Financial Investment Symposium in Vancouver, writes Byron King of Whiskey & Gunpowder, and this year's theme – "Assault on Enterprise" – provided a fascinating context for a wide range of investment insights and recommendations.

According to many of this year's presenters, the assault on American enterprise is intensifying. Because the government has been overpromising, overcommitting and overspending for decades, it is hurtling toward a fiscal train wreck. The numbers have stopped adding up. Looking out, there's NO WAY that most Western governments can ever pay their ongoing obligations or pay off past debt. But that doesn't mean that governments won't try to maintain their expensive and intrusive invasion of the private sector.

In fact, the odds point to rising taxation and tightening strictures on all aspects of capital formation. The effects will be to make you poorer, either by taking your money or by blocking you from pursuing your dreams.

On the first day of the Vancouver conference, for example, former US comptroller of the currency David Walker summed things up, saying, "Government has grown far too big, promised far too much and delivered far too little for far too long."

Mr. Walker backed up his claim with slides showing how, over just the past nine years, unfunded liabilities on the government's balance sheet – Social Security, Medicare, Medicaid, etc. – have tripled. For example, Medicare alone has a $38 trillion hole in its future.

Yes, "trillion". No typo.

Meanwhile, according to Mr. Walker, Social Security is now cash-flow negative. That is, Uncle Sam is paying out more out than he receives in revenues. Uh-oh. So where does the "extra" money come from? Out of general revenues. Which means that the federal deficit makes up the difference. Which means that the government just borrows the money and papers over the hole in the budget.

On this track, the nation's key social safety net – a "retirement fund" (ahem) for elderly people – is moving further and further into the red, forever.

What's the answer? Well, you could ask the always understated Doug Casey. In Doug's view, it's all good – for the moment. That is, he believes we're in the midst of a "Greater Depression" and right now we're basking in the calm eye of the hurricane.

The problem, according to Doug, will come when we go through the eye and get hit by the other side of that storm. But Doug is not one simply to identify a problem and fail to offer solutions. Indeed, he shared five ways reduce the inevitable damage:

• Abolish the Federal Reserve and return the US to a Gold Standard;
• Reduce government spending by about 95% – give or take;
• Withdraw US troops immediately from across the world, and end the ongoing wars in which the US is involved;
• Abolish the income tax;
• Do the "honest, ethical thing" and default on national debt. "After all," says Doug, "We're never going to pay it back. Or if we do, it'll be with Dollars that are utterly worthless..."

Sad to say, according to Doug, none of this will happen. These proposals are mere "pipe dreams," he admits. "The government is doing the exact opposite," says Doug, despite the clear evidence that "the very idea of the nation-state – which has been around only since the 17th century – has failed."

Thus, instead of a somewhat orderly, controlled financial collapse as governance across the world restructures, we'll experience the chaos of decline and collapse. Doug's recommendation? For the individual, Buy Gold and silver. Doug is also big on productive agricultural land – in remote parts of the world, far from the looming unpleasantness. Otherwise? Well, you just have to do the best you can.

Gloomy, right? In my mind, "provocative" is more like it. That is, if there's one thing that Doug Casey can do, it's push the edge of the intellectual envelope. There's no failure of imagination with Doug and his views of where the economy is headed.

In my talk to the 1,000 or so Vancouver attendees, I discussed the failure of imagination that brought about the explosion and sinking of the Deepwater Horizon (DWH) and the subsequent well blowout in the Gulf of Mexico (GOM).

I noted that when I was in Houston in May for the Offshore Technology Conference, I had a discussion with some people from the maritime insurance industry. One guy told me that before the DWH exploded and sank, the insurance industry rated the risk of such an event as zero. Zero? As in no large deep-water drilling vessel would ever sink. "We thought it could never occur," he said. "Never."

In my talk here in Vancouver, I analogized how that sort of failure of imagination was right up there with the idea that the Titanic was unsinkable. Thus did the British Board of Trade not mandate enough lifeboats on the vessel.

I looked back at two other disasters, both in January 1969. I reviewed the terrible fire aboard the nuclear-powered Navy aircraft carrier USS Enterprise on Jan. 14 of that year. The flight deck was an inferno, with 500-pound bombs cooking off. Dozens of sailors were killed, with hundreds more injured. The ship suffered severe damage, and for a time, there was a distinct possibility of the vessel – and its eight nuclear reactors – sinking in the middle of the Pacific Ocean. Yes, heroic actions by the crew saved the ship. But it was a close call.

Then I discussed the Santa Barbara, Calif., oil blowout about two weeks later, on Jan. 29, 1969. No lives were lost, but the environmental impact was severe. Political pressures all but closed off the West Coast of the US to future energy exploration.

Out of these two disasters, the Navy, of course, kept on going with nuclear power, but with much-changed procedures to improve safety and harden against damage. The oil blowout was a key factor in the rise of the modern environmental movement. The offshore industry redoubled its efforts to drill safely, in deeper and deeper waters.

For the past 41 years, since Santa Barbara, there was all that oil coming from offshore, and from deeper and deeper waters, and with equipment that seemed to work safely. It was, to go back to Doug Casey's notion, like being in the eye of a hurricane. Things seemed OK, for the moment.

In a sense, looking back over the decades, it was almost easy to imagine big, expensive, well-built drilling rigs would never blow up and sink. It sure fooled the normally flinty insurance industry.

Also, considering the track record of operations, it was easy to believe that deep-water wells would never blow out. It apparently fooled the engineering and regulatory community. Surely, no one was ready to deal with the current Gulf of Mexico blowout. As I've noted many times, in the past couple of months, we've witnessed decades of R&D all compressed into an emergency-level time frame.

The hastily imposed GOM drilling "moratorium" is just one more energy problem for the US. It compounds an already dysfunctional national energy policy. It's as if we would shut down the entire airline industry just because one airliner crashed – due almost certainly to pilot error, by the way.

The GOM drilling moratorium is terrible policy for medium- and long- term US energy production. We're already seeing rigs leave the GOM destined for other continents. We won't see those rigs back here for many years, most likely. And GOM oil output is now destined to fall, meaning that US oil imports will rise – if we can find the oil in a competitive world.

Meanwhile, I discussed how some other energy sources might help the US, but with a hard cautionary note: These other energy supplies might not offer as much as many people believe.

The short version is that there's not as much shale gas as people believe, although there are some great shale gas investments.

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