Perspectiva económica: Doug Casey

What does the Fed recent interest rate cut signal about the current state of the US economy?

Let me introduce the subject with a joke.

Einstein dies and goes to heaven. St. Peter greets him effusively and says, "Unfortunately, Mr. Einstein, because we're a centrally planned economy —for obvious reasons— we have a temporary housing shortage, and have to put you up with three roommates for a while."

Einstein goes to his new apartment, and the first guy comes up to him and says, "Mr. Einstein, I have an IQ of 130, and I'd love to get to know you better." Einstein says, "Great. After lunch, let's bounce around a few concepts of astrophysics that have been on my mind."

The second guy comes up and says, "Mr. Einstein, I'm not as smart as that first guy. I've only got an IQ of 100, but I still want to get to know you better." Einstein says, "Great. Let me put away my grip, and let's play a game of chess."

The third guy comes up and says, "Mr. Einstein, I'm not as smart as those other guys. I've only got an IQ of 70, but I still want to get to know you." Einstein says, "So, where do you think interest rates are headed?"

That says a lot about guessing the direction of interest rates, but they're actually the most important single indicator in an economy. Rates are the price of capital, the lifeblood of an economy. Interest rates are analogous to blood pressure and pulse readings for a human. When a central bank lowers rates, it's equivalent to giving a human amphetamines; when they raise them, it's like a dose of barbiturates. Central bankers are like a quack doctor, poisoning the economy by distorting economic signals.

I understand why Trump wants lower interest rates. They encourage people to buy things, consume, and borrow money. That increases consumption, business earnings, and employment.

Recently, we've seen the "Yellow Peril"  escalate across media and politics. There's always been a fear of China, perhaps starting with the immigration of laborers to California in the 1860s, then Sax Rohmer's Fu Manchu novels. It's logical enough. China has always seemed alien to Americans—their language, their script, their clothing style, and their congregating together in Chinatowns. They were painted as inscrutable and devious. Mao's Communist ideology and the Korean War, which was really a war between the U.S. and China, certainly didn't help.

Now China's newfound prosperity is seen as a threat. China, however, isn't the problem; it's the U.S. government's attitude towards China, combined with visible U.S. decline, while China is advancing rapidly on every front. So, the U.S. Government is trying to suppress China and throw up roadblocks to its progress with sanctions and tariffs, while denying it imports and trying to pen it up militarily. As with Russia, the U.S. is provoking them on many fronts.

However, the current U.S. policy is not only doomed to failure, but is actively counterproductive.

Is China truly an existential threat to the U.S., economically, militarily, or ideologically, or is it just a manufactured enemy?

During the recent Iran–Israel war, the US used up to 20% of its global stockpile of Terminal High Altitude Area Defense (THAAD) ballistic missile interceptors, each costing over $18 million. THAAD isn't effective against hypersonic missiles, which both Iran and even Yemen's Houthis now possess.

War, in the long run, is a matter of economics. If you can't afford to fight a war, you'll lose the war. Missiles are now the preferred weapon for taking out enemy targets, and the only effective counter is anti-missile missiles. The problem is that both are brutally expensive. Can the costs be kept down, so war is more… affordable?

Generals, politicians, and "defense" contractors, however, love expensive high-tech toys. But if you're going to afford a war, the most cost-effective weapon is an ignorant teenage boy—something the Third World, especially the Muslim world, is awash in. They're cheap and stealthy delivery systems, far more effective than multi-million-dollar missiles. There's an endless supply of them, and they can be employed in a myriad of ways. From an economic point of view, it makes no sense for technologically advanced countries (like the US) to use ultra-expensive weapons to attack primitive countries, as we've done for the last 75 years.

Regardless of the weapons used, the thing to remember is that war amounts to setting wealth on fire. Missiles are about taking real goods, manufactured at great expense, and using them to blow up other real wealth; there can be a perverse logic to it. However, despite their rhetoric to the contrary, I'm not sure governments are too concerned about lots of young men dying. A surplus of unemployed young males is destabilizing, especially in poor countries.

Let’s look at the definition of what makes a good money. There are basically six characteristics. A good money has to be durable, divisible, convenient, consistent, have use value, and have a limited supply. Using those six key characteristics, gold ranks first, silver second, and copper third. That’s why those three metals have been preferred money throughout history. They were superior to seashells, salt, cows, paper, and other commodities. In today’s world, it makes sense to bring Bitcoin, which also satisfies those six characteristics into the mix.

Silver has always been a monetary metal, and it likely will remain so. A great deal of silver used to be consumed in photography and X-rays, until a generation ago, but it's hardly used there at all anymore. Digital photography has nearly replaced it.

About 850 million ounces of silver are mined every year, and about another 150 million ounces are recycled. The available supply of bullion, therefore, is about a billion ounces versus about 100 million ounces of gold. That's roughly a ten-to-one ratio on the supply side, although most of the silver is "consumed," whereas almost all the gold is added to inventory. Since 2019, silver has been in deficit. Roughly 150 million ounces a year have been taken from various stockpiles. That explains why its price has risen to a new base level in the $30 to $35 range, and has done better than gold, percentage-wise.

And while we're talking about silver’s unique qualities, it’s worth mentioning that gold also has unique metallic properties. It's the most non-reactive of all metals; gold doesn’t oxidize. It’s the most ductile, meaning it can be drawn into the thinnest wire of any metal. It’s the most malleable, meaning it can be beaten into the thinnest sheet of all metals.