Our Economic Future: From Best to Worst Case

Reddit

There is a great deal of uncertainty among investors about what the future of the US economy may look like – so I decided to take a stab at what’s likely to happen over the next 20 years. That’s enough time for a child to grow up and mature, and it’s long enough for major trends to develop and make themselves felt.

I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things.

So let’s limit ourselves to the possibilities presented by human action. They’re plenty weird and scary, and unpredictable enough.

THE MARKET FOR PROGNOSTICATION

People are all ears for predictions, whether from psychics or from “experts,” despite the repeated experience that they’re almost always worthless, often misleading and more than rarely the exact opposite of what happens.

Most often, the predictors go afoul by underrating human ingenuity or extrapolating current trends too far. Let me give you a rundown of the state of things during the last century, at 20-year intervals. If you didn’t know it’s what actually happened, you’d find it hard to believe.

1911 – The entire world is at peace. Stability, freedom and prosperity prevail almost everywhere. Almost every country in Europe is ruled by a king or queen. Western civilization has spread to nearly every corner of the world and is received with appreciation. Stunning breakthroughs are being made in science and technology. There’s no sign of a gigantic world war about to come out of nowhere to rip apart the political and cultural map of Europe and bankrupt everybody. Who imagined that a dictatorial communist regime would arise in Russia?

1931 – It’s early in a disastrous worldwide depression. Attention is on economic troubles, not on the virtually unthought-of possibility that in less than 10 years a new world war would be under way against Nazism and a resurgent Germany.

1951 – Except for Vietnam, all that remains of the colonies the West had established in the 19th century are quiescent. Nobody guessed almost all would either be independent, or on their way, in 10 years. China has joined Russia – and many other countries – as totally collectivist. Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century? Who guessed that the US was already at its peak relative to the rest of the world?

1971 – Communist and overtly socialist countries all over the world seem to be in ascendance, soon to be buoyed further by a decade of rising commodity prices. The US and the West are entering a deep malaise. Little significance is attached to rumblings from the Islamic world.

1991 – Communism has collapsed as an ideology, the USSR has disappeared, and China has radically reformed. Islam is increasingly in the news.

2011 – The world financial/economic crisis is four years old, but things are still holding together. Islamic terrorism and collapse of old regimes in the Arab world dominate the news. China is viewed as the world’s new powerhouse.

BAD AND WORSE

Regrettably, I’m not much of a linguist. But I do pick up interesting semantic trivia. In Spanish they don’t say “in the future,” as we do in English, which implies a definite outcome. Instead they say “en un futuro” – in a future – which implies many possible outcomes. It’s a better way of assessing reality, I think.

Here are three 20-year futures to consider. There are, obviously, many, many more – but I think these encompass the three most realistic broad possibilities.

BEST CASE – FACTS GET FACED

Realizing what a disaster the complete destruction of their currencies would be, most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply. Poorly run corporations and banks are left to fail. Talk of abolishing the Federal Reserve, and using a commodity for money, becomes serious and widespread.

Shaken, the US ends its profligate ways, in part because it lacks the means to continue, and in part because everyone but collectivist ideologues has actually learned something from the brutal ’10s and ’20s.

Amidst massive protests, the government closes much of its counterproductive apparatus, eliminates many taxes, and lets 30% of its employees go. It also, albeit reluctantly, liberalizes its regulation of the economy because it has become impossible to deny that the US has been falling behind in all areas.

Although there is a resurgence of libertarian thought – reminiscent of the Reagan-Thatcher era – simple practicality is mainly responsible for forcing the government’s hand. For one thing, it can’t afford the bureaucracy needed to enforce detailed interference. For another, entrepreneurs are increasingly just doing what they please, partly from necessity and partly from a growing sense of righteousness. Interest rates go to 25%, to compensate for high levels of inflation. That’s high enough to make it worthwhile for people to save, and the capital base starts growing. The stock market has collapsed to its lowest level in living experience (in real terms), but the values available encourage people to become investors. Business is restructured on a sound, debt-free basis, with little speculation.

The US radically cuts its military spending and pulls almost all troops out of their foreign bases and wars. The War on Drugs comes to an end, and the crime rate in both the US and Mexico plummets.

The government solves most of its overhanging financial problems with a seriously devalued – but not hyperinflated – dollar. The Social Security deficit is eliminated by abstaining from benefit increases and by inflating away much of what had been promised before. Most Americans suffer a severe drop in their standard of living, as they’re forced into new patterns of production and consumption. A generation of college students find that their degrees in sociology, political science, economics, English lit, Black studies, gender studies and underwater basket weaving are of no real value.

When it’s all over, the tough times that started in ’07 prove to have been no more than a cyclical bump in the road, like all the other recessions since WW2, just much bigger.

A rough and memorable ride, but it ends with a return to prosperity.

MIDDLE CASE – FACTS ARE IGNORED

The world’s governments continue under the delusion that printing massive quantities of paper money will solve problems when, in fact, printing lies at the base of the problems. Most currencies lose most of their value. Some lose it all. This destroys the most productive people in society, the middle class, who produce more than they consume and save the difference… in currency.

And it injures successful corporations that have billions, or even tens of billions, in cash. Few of their managers know what to do with such sums other than to hold currency; at best they’ll buy their own and other companies’ stock. The result is a stock market boom in the midst of a grim depression. But only one person in a hundred will be in a position to benefit from it, because most will be living too close to the edge, and the stock market will be the last thing on their minds. The destruction of capital sets technology back quite a bit in the US, Japan and Europe. Chindia increases its relative strength.

The US government, believing it has both the obligation and the ability to “do something,” redoubles its control of the economy. Price controls and capital controls are the order of the day. Petroleum products are rationed. Enforcement of new regulations is assigned to a new agency, the “Economic Recovery Administration,” which resembles the TSA in most regards – except it has many plain-clothes employees, to better ferret out violators.

People think increasingly of politics as the way to get what they want. More and more Americans move abroad – although things are deteriorating in most places in the world. Poor, backwater countries offer the best opportunities because their governments are either weak, or corrupt, enough to allow new economic activity.

To be continued…

Regards,

Doug Casey
For Daily Reckoning Australia

Doug Casey
Doug Casey of Casey Research, author of the best sellers Strategic Investing, Crisis Investing and Crisis Investing for the Rest of the 90’s, has lived in seven countries and visited over 100 more. He has appeared on scores of major radio and TV shows and remains an active speculator in the stock, bond, commodity, and real estate markets around the world. In his spare time, Doug engages in competitive shooting and plays polo.
Doug Casey

Latest posts by Doug Casey (see all)

Reddit

Comments

  1. Doug. I guess we all assume that the best case is DOA but I’m interested in your middle case scenario.

    The governments have been “printing” trillions in the last few years but there has been precious little inflation (surplus cash chasing the same number of goods) because wages have stagnated or, if you lost your job, falling sharply, hence the increasing inability to service previously doable mortgages.

    So if governments resort to printing their way out of facing the facts, how, precisely, do you propose that the money is put into circulation?

    You are proposing that government staff be fired and services cut so there is no way to use that as a channel, tax cuts mean nothing to the unemployed and since most social services will go as well, there is no way to make that a channel to fill pockets and inflate away the debt.

    Of course it could flow into the banks but since they are the only source of funds/debt anyway, they would have to lend it into existence and that ain’t gonna happen either since they will know for certain that most of us will not be able to pay it back.

    The day of the printing press is over because the oligarchs have cornered the bottlenecks where any new money might flow into the real economy and make sure that they get most, if not all of it.

    So tell us, HOW does this money get printed and HOW does it get into circulation? Or do most of us just exit the cash economy entirely and live, like the North Koreans, on grass and propaganda?

    Reply
  2. Last week I sat on Kuta Beach in Bali and watched the sunset with some chilled out Javanese dudes selling Bintang on the beach. They were probably Muslims, people who we are conditioned to believe are bad apples. These guys were seriously cool though; happy & friendly, relying on those key trader skills to make a dollar in a competitive market where there are other beer stalls up & down the beach. They had regular customers from around the globe, mostly young travellers. We all agreed that airport stops with all the security was the worst part of travelling, unnecessary friction in the system of life.

    Stage 1 of the phase transition
    Checkout bitcoin; harder to trace by big bro & will offer lower transactional friction than current transaction system.

    Stage 2 of the phase transition
    Western Governments are exposed with the hands of our puppet masters far up their South poles. The whole hurting middle class rises from its slumber, catches on to the game & governments and their minders are pulled down from their ivory towers & given a right public flogging, a metaphorical one of course!

    Say good bye to an old paradigm;)

    Reply
  3. Reagan-Thatcher years were a return to the robber baron years. Public debt and the military industrial estate running on cost plus with phoney lowered bids and with all the escalation risk on the public tick, and/or disbursement of state assets to insider cronies at phony suppressed valuations. As for cutting the public service, have a look at the numbers under the offload the government owned enterprise line. More managers, more law, more nannny state.

    It really is a disgrace that so many that call themselves libertarians can’t model a future without the worst of the bankrupt crony capitalism. The debt curve under Reagan was even worse than it is now. The export the brown belt to China but bank the profits from the lower cost of production and retain the marketing and distribution clip was any better than the Clinton-Rubin-Summers funny money trick.

    I’m all almost all flamed out now. But this rubbish thinking and revisionist history has to be attacked. Productivity growth discipline and regulation of anti competitive rackets including the financial ones is essential. Fractional or not fractional is the question. The choice is clear. You can’t have fractional without regulation and capital formation without it is likely too tardy.

    And with all your support for wealth redistributionists the big trick of the ETS goes under the radar. Globally that is the redistribution from producers to non producers. It is the export the brwon belt and clip the – the ticket trick all over again but this time the poor sods that produce what white anglo service economies need get taxed at home and the proceeds get exported to the white anglo nanny states and their service industry citizens that spend their days giving themselves pedicures like the old Thai elites. The problem for the Oxford dons and their Garnault-Stern professional ticket clipper spruiking team? Producers make weapons.

    The US is starting to stir, the robber baron military industral class versus the bankster class. The robber barons want every dollar of carbon tax spent on infra-structure that increases their productivity. The banksters want a new wealth redistribution fiat currency.

    Grrrrrr, Tue after long weekend!

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au