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Friday, June 27, 2008

The Greater Depression and What You Should Do About It by Doug Casey FROM The Prudent Bear

As much as admire Doug Casey's views, and though I prefer to be overly cautious than reckless, he has been saying things along these lines for a long time.
Oddly enough, there’s one glaringly obvious thing that is not in the news today at all. That’s the fact that interest rates – nominal rates too, but especially “real,” after-inflation rates – are close to their lowest levels in history. And in today’s extraordinarily risky environment, they’re artificially low. This, and the reasons for it, should be headlines.

All over the world, but especially in the U.S., currencies are being inflated radically; M3 is rising at about 18% per year. Without exception, interest rates eventually reflect inflation. Therefore interest rates are going to rise radically. Governments are currently suppressing rates by lending money cheaply and promiscuously, to keep both borrowers and commercial lenders from going under. But rates are soon going to explode –especially long-term rates. My guess is that we’ll see at least the levels of the early ‘80s, which would mean 15%+ for long-term Treasury bonds. And I'll say that’s coming within a couple or three years at the outside.

The government wants low rates, obviously, because low rates make it a lot easier for homeowners to pay their mortgages, among other things. But they forget that low rates also discourage saving – which is the one thing that can actually bring down real rates. Officialdom is between a rock and a hard place, and they're choosing to inflate the currency, hoping to stave off an epidemic of bankruptcy among consumers who borrowed and among the financial institutions that did the lending. The effort will fail and both groups will go bankrupt, simply because the whole society has been living above its means. That will result in large-scale commercial bankruptcies and unemployment.

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