Nick Giambruno: The entire European Union is looking shakier by the day. Donald Trump’s victory—which shocked Europe’s political and media elite—gives Eurosceptic parties, the Continent’s populists, even more political rocket fuel. What’s your take?
Doug Casey: The Social Democratic, Christian Democratic, Socialist, Communist, and similar parties have ruled Europe since the end of World War 2. They’re all pretty similar in that they promote massive welfare benefits, strong labor unions, large state bureaucracies, very high taxes, strict regulations, and an atmosphere of Cultural Marxism. Then, every few generations, the voters react and install a “fascist” regime. These keep most of the socialist characteristics, but tend to be supported by, and friendly to, Big Business. That, and they add on nationalism, xenophobia, and militarism.
The last time this happened was in the 1930s. In those days it was spurred by the Great Depression. This time it will be spurred by the Greater Depression, plus massive waves of Muslim migrants from the Near East and Africa. So I expect to see more neo-fascist political parties everywhere.
Oddly, the Europeans can’t seem to imagine a libertarian alternative of private charities, limited government, minimal taxes, an unregulated economy, and intellectual/psychological freedom. It’s another reason the Continent is a sinking ship.
Incidentally, people think of these countries—Italy, France, Germany, and so on—as though they are fixtures in the cosmos. But they aren’t. In their current forms, they’re all newcomers on the stage of history.
The average person doesn’t realize that the country we know as Italy today was only created in 1861, a consolidation of many completely independent and very different entities that had been separate states since the collapse of the Roman Empire.
Germany was only unified in 1871, out of scores of principalities, dukedoms, baronies, and whatnot. Both unifications were very bad ideas; World Wars 1 and 2 are just at the head of a long list of reasons why that’s true.
There are about 200 nation-states in the world. The international “elite,” the “intelligentsia,” the members of the Deep State everywhere, and organizations like the EU in Brussels, would like to see a much smaller number of more powerful states. Some of them want to work towards a one-world government that they control. Orwell anticipated just three mega-states in his dystopia. But the actual trend is in the opposite direction. The trend is the disintegration of nation-states everywhere.
Today, there are separatist movements in big Western European countries, like the Basques and Catalans in Spain. And the Scots in the United Kingdom, who wish it weren’t quite so united. There are many others.
You will rarely hear about this in the mass media, but there are dozens of secession movements throughout Europe. The colors of the map are always running.
That’s one more reason why (in addition to the interest rate risk and the inflation risk, which are both substantial) you should stay away from long-term government bonds.
Nick Giambruno: Speaking of Italy, the country’s banking system is insolvent, and now everyone knows it.
Shares of Italian banks have plummeted more than 50% so far this year.
Italian banks combined have a staggering $400 billion-plus worth of loans that are 90 days past due and unlikely to be repaid in full. These nonperforming loans (NPLs) account for over 18% of all outstanding bank loans and add up to over 20% of the Italian GDP.
By comparison, 5% of all outstanding loans in France are nonperforming… the figure is 1.5% in the UK… and 2% in the US. Italy’s NPLs are an enormous problem.
It took years to build up, but now the situation is coming to a head.
I think it’s quite clear the Italian banking system is headed for collapse. What do you think?
Doug Casey: All of the Italian banks are bankrupt truly and totally at this point, so who's going to kiss that and make it better? Is the rest of the European Union going to contribute hundreds of billions of dollars to make the average Italian depositor well again? I don't think so. At this point, there’s an excellent chance that Italy is going to get rid of both the euro and the EU. After the UK, Italy will be the next to go.
Europe’s terminal condition is increasingly hard to hide, its symptoms obvious; they are even making headlines now.
Deutsche Bank, one of the biggest banks in the world, is underwater by scores of billions of euros. In fact, most of the banks in the world are essentially bankrupt, and will go under once the economy turns down in earnest. What are the central banks going to do? Bail them out? Or let them go under? If they let them go under, it’s going to lead to an economic catastrophe without precedent. People will lose their savings, day-to-day commercial activities will be disrupted, businesses will collapse and the entire economy will come to a screeching halt. On the other hand, if they bail them all out through even more freshly printed money, currencies will lose all value. It’s a disaster either way.
At the end of the day, actions have consequences. They’ve been experimenting and tinkering with the world’s economy and monetary system for decades now and finally the price will have to be paid.
I expect a truly major banking crisis. Much worse than that of 2007–2009. Governments, who are all bankrupt, borrow money from commercial banks. Commercial banks have lent it to them because they believe it’s a risk-free loan. Governments encourage them to lend recklessly, hoping that will jump-start sluggish economies. Central banks, which are the arms of their governments, have taken interest rates to zero and below for that reason and to make it easier for governments to service their debts. This policy has encouraged businesses to take on debt. It’s an idiotic and reckless experiment that will end—likely in this cycle—with bankrupt central banks and governments bailing out bankrupt commercial banks and businesses. Just the way they did in 2007–2009. Except this time, the situation is much more serious.
Nick Giambruno: I agree. It seems the EU is headed for collapse. What are some of the investment implications?
Doug Casey: This has the makings of a classic speculative opportunity—one where politically caused distortions are liquidated and prices readjust.
Europe is a giant monument to socialism, where everyone believes they can live at the expense of everyone else. As a result, the average European sees his government as a magic cornucopia, a source of unlimited wealth. When something goes wrong, Europeans look to their governments to “do something.” With this in mind, European Central Bank President Mario Draghi made the front pages earlier this year by saying he is “ready to act” with a “whole menu of monetary policy instruments.”
This is central banker speak for “I’m willing to print an incredible amount of money in my attempt to keep my job and stimulate the economy by making people think they’re richer than they really are.”
Draghi’s money printing is a disastrously misguided attempt at creating prosperity. It will create bubbles, and cause people and companies to do all manner of things they’d never consider without the false economic signals he will send. If printing money were the path to prosperity, Zimbabwe and Venezuela would be the richest countries on earth instead of economic basket cases.
The euro will cease to exist. The Esperanto currency was doomed from the beginning. It’s a sure bet to join the ranks of many hundreds of defunct paper currencies. Not one currency in today’s world is backed by a commodity (like gold); they’re backed only by confidence (which can vanish like a pile of feathers in a hurricane). And, of course, the ability of governments to steal from the people. But the euro doesn’t even have that going for it. The European Union doesn’t have the power to tax. Right now, the Eurocrats in Brussels really only have the power to regulate. I’ve long said, “While the US dollar is an ‘IOU nothing,’ the euro is a ‘who owes you nothing.’”
The euro is on track to reach its intrinsic value—namely zero—long before the dollar does. The euro, in anything like its present form, will likely cease to exist within a decade, and probably far sooner. As it is, I’m short the euro, mainly via selling naked calls.
My favorite alternative for protecting wealth, of course, is precious metals: gold and silver. Draghi, who deserves the same fate meted out to Mussolini, is acting in a completely predictable manner. If you’re not out of the euro yet, get out as soon as possible.
Nick Giambruno: What will happen to gold as the euro and EU collapse?
Doug Casey: I expect there will be a panic into gold. You’ve heard this story many times before. But it’s truer than ever as we approach a genuine crisis. There are no stable paper currencies anywhere in the world. The dollar has been strong only because it’s liquid. Liquidity is good, but here, we’re talking about liquid like nitroglycerin. Hedge funds will start buying gold in size. As will central banks, who don’t want to hold each other’s paper. As will individual investors. Right now, few people even think about gold, much less understand it. How to profit? Buy gold.
It’s not $250/ounce, as it was in its last bottom in 2001 (when, in real terms, it was even cheaper than it was in 1971). It’s around $1,200/ounce right now. But I think it’s going to go much higher, because the situation now is much more serious than in the past. We’re in for another gold bull market. In the chaotic environment we’re going to be facing in the years to come, or what I call the “Greater Depression,” you ought to own a lot of gold. And you ought to put it in the safest place you can think of, in physical form, far removed from the reach of governments and outside the banking system.
I expect we’ll see it well over $5,000/ounce this cycle. Silver should do even better in relative terms. And gold stocks have explosive upside.
Nick Giambruno: I agree. There are potentially severe consequences in the currency and stock markets. We are approaching a global financial meltdown of historical proportions. It could strike America on December 4 as Italian voters decide the fate of the European Union itself.
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