Doug Casey: “This is Going to be One for the Record Books”

Using the first definition, any natural disaster can cause a depression. So can living above your means for long enough. But the worst kind of depression has not just economic effects, but economic causes. That’s where definitions 2 and 3 come in.

What can cause distortions in the way the market operates, causing people to do things they’d otherwise consider unreasonable or uneconomic? Only government action, i.e., coercion. This takes the form of regulation, taxes, and currency inflation.

Always under noble pretexts, government is constantly directly and indirectly inducing people to buy and sell things they otherwise wouldn’t, to do things they’d prefer not to, and to invest in things that make no sense.

These misallocations of capital subtly reduce a society’s general standard of living, but the serious trouble happens when such misallocations build up to an unsustainable degree and reality forces them into liquidation. The result is bankrupted companies, defaulted debt, and unemployed workers.

The business cycle is caused mainly by currency inflation, which is accomplished today by the monetization of government debt through the banking system; essentially, when the government runs a deficit, the Federal Reserve buys its debt, and credits the government’s account at a commercial bank with dollars. Using the printing press to create new money is largely passé in today’s electronic world.

Either way, inflation sends false signals to businessmen (especially those who get the money early on, as it filters through the economy), making them overestimate demand for their products. That causes them to hire more workers and make capital investments—often with borrowed money. This is called “stimulating the economy.”

Inflating the currency can actually drive down interest rates for a while, because the price of money (interest) is lowered by the increased supply of money. This causes people to save less and borrow more, just as Americans have been doing for years. A lot of that newly created money goes into the stock market, driving it higher.

It all looks pretty good, until retail prices start rising as a delayed consequence of the increased money supply, and interest rates skyrocket to reflect the depreciation of the currency.

That’s when businesses start failing. Stocks fall. Bond prices collapse. Large numbers of workers lose employment.

Rather than let the market adjust itself, government typically starts the process all over again with a new and larger “stimulus package.” The more often this happens, the more ingrained become the distortions in the way people consume and invest, and the nastier the eventual depression.

This is why I predict the Greater Depression will be … well … greater. This is going to be one for the record books. Much different, much longer lasting, and much worse than the unpleasantness of 1929-1946.