An Ill Wind Indeed

I don't know what I did before YouTube. With just a few mouse clicks, I can pull up literally hundreds of interviews, editorials, and broadcasts about anything that suits my fancy. And lately, my fancy consists of interviews with some of the most vocal and compelling minds daring to speak out against the atrocious fiscal policies the U.S. is employing to battle this economic crisis.

I have seen Jim Roger dress down countless reporters and anchors bent on defending the status quo. I've seen Marc Faber confidently proclaim that 2009 is the year to "massively short Treasuries." I've seen Peter Schiff stand firm while being publicly jeered at by the likes of Art Laffer, as well as Ben Stein (who proudly proclaimed that investment banks were undervalued in late 2007), only to be vindicated within months.

And now, Ben Stein has even reversed course, jumping on the "Schiff Bandwagon," as it were, predicting nothing less radical than the possible breakup of the U.S. as we know it. Where were you, Ben Stein, when I proposed such a dissolution in 2001? Would you have jeered at me too?

Our critics call us pessimists, defeatists, and killjoys. They attack our characters and our intentions. They say we're trying to destroy the world. And yet nothing could be further from the truth. Yes, I do believe the dollar will soon be reduced to only a fraction of its former value -- and it certainly will lose its status as the world's reserve currency. It's also true that I believe other major currencies – like the euro and the yen – will suffer similar fates.

The United States used to be one of the largest manufacturing and creditor nations on earth. It exported vast amounts of goods. Over the last several decades, however, the U.S. has transitioned to being the largest debtor nation on earth, manufacturing relatively little, and consuming far more than any other nation in history. It has become soft.

Unfortunately, contrary to the popular belief -- that this is a mere secular economic correction -- what we are witnessing is only the beginning of an economic collapse deriving from decades of mismanagement and mal-investment; for over a century, the U.S. government has employed gimmickry and sleight of hand to prop up a bogus consumer class that couldn't, in any other context, afford the goods and services put before them in such quantities. The result has been a gluttonous spending-spree that has bankrupted the nation.

The Obama administration, along with Fed Chairman Bernanke, have committed an unprecedented amount of money – more than $12.8 trillion – to battling this economic crisis. You may be one of the multitudes still clinging to the Keynesian status quo, remembering relatively minor recessions of the recent and distant past, desperately clamoring that we got through it before, and we will get through it again.

Did you read what I just wrote? $12.8 trillion. I'll give it to you another way: $12,800,000,000,000.00. If you are a citizen of the United States, and you have a pulse, your share of the commitment is just a little over $42,000. And that sum has nothing to do with previous obligations, nor will it be included in future budgets. Your $42,000 share only applies to this economic crisis.

I'll say it again: the U.S. is now the largest debtor nation on earth. Credit card and housing loans have all but disappeared. The country has no savings. There are no more sources of capital left to feed the fires of consumption. We have only seen the beginning -- the U.S. economy has no option but to unwind – for a very long time. Add to this the fact that the government is "fighting" this crisis by using the same rotten policies that got us here in the first place, and the economic outlook only becomes gloomier.

You can see I'm not terribly enthusiastic about the prospects of the United States. But before you dismiss me as the quintessential pessimist, you should know that I actually do see a prodigious number of opportunities out there. I certainly don't believe the entire global economy is simply going to disappear; I simply cannot think in such absolute terms.

The first law of thermodynamics requires the conservation of energy – that is to say, that energy can neither be created nor destroyed. And this is perhaps the closest metaphor I can procure: capital is like energy; I don't see wealth simply drying up and blowing away so much as I see it transitioning to a new paradigm.


Who Wants a Job?

Where the United States is full of overweight union workers who believe it is their God-given right to work a mere thirty hours a week, collecting exorbitant wages, Asia is full of very thin, motivated people, who are not only willing, but actually want to work six or seven days a week -- for a mere fraction of the wages enjoyed by their western counterparts.

Almost every country in Asia boasts net savings. And while these countries may not be able to export to the U.S. and Europe in the mass quantities they have enjoyed in recent decades, they will make up for much -- if not all -- of the shortfall by fulfilling the needs of their own burgeoning middle classes. Compare it, if you will, to the U.S. from say, 1875 to 1925. As the financial center of power shifted from London to New York, The U.S. prospered in spite of England's downward slide.


How Will the Money Go?

As technology has improved in recent decades, capital flows that might have -- only forty years ago -- taken days to move from one point to another can now occur in a fraction of a second. The ability for people to transfer wealth from medium to medium has grown exponentially faster, and as the world's major currencies disintegrate, people and institutions will quickly find alternatives – some public, and some private – with which to make transactions.

So what will be the world's new reserve currency? Well, as I said, it won't be the euro or the yen – or any major fiat currency, for that matter. One of my astute readers reminded me this week that no fiat currency has ever survived for very long in this world, and yet every major currency on the planet today holds that status. The people who use these currencies are about to get burned – and burned badly; we're going to see a massive return to currencies backed by assets, and that probably means gold, primarily.

People laugh and say silly things like, "Have you ever tried to by soap with a gold coin?" And I throw my head back and laugh with them. For a moment or two. And then I remind them that it doesn't take much effort to put gold in a vault and issue a piece of paper representing a fixed amount of that stockpile. In fact, it's not difficult at all.

As I said, capital is more efficient today than ever in history, and I see no reason why private institutions wouldn't issue currencies backed by their own assets. Why shouldn't they – especially in the wake of demonstrable failures by governments charged with protecting their citizenry's wealth? It's going to be profitable as hell, and how much credence do you think people are really going to give legal tender laws after this party is over? My guess is not much.


Where Will the Money Go?

Asia, of course – for all the reasons I've already listed, and more. And everyone on earth knows it.

Once the most powerful sources of capital in the world recognize that efficiency, innovation, and productivity are going to create colossal rates of return in Asia, the mass exodus will be unstoppable. We will finally see the return of real investment and true wealth creation – nothing like this fraudulent house of cards that's been perpetuated in the United States for so long. Further, I believe the shift is coming soon, and that it will be explosive and unrestrained.

Asia will be the world's next financial center, and I am a strong believer that any investment in these economies will provide superior returns over the next 50 to 100 years. But equity investment in the east is by no means the only place where I see huge returns.

There are two reasons why I'm extremely bullish on energy and agriculture. First, people are never going to stop needing these commodities. Demand may continue to wane a bit as we transition into the new economic paradigm, but as major currencies fall, energy and agriculture will not only keep pace with inflationary price increases, but they will outperform – if for no other reason, simply because investors tend to overshoot intrinsic value when they become exuberant. And when the bottom falls out of world currencies, investors are all but certain to become exuberant about energy and agriculture.

As I'm sure you are well aware, loans are extremely difficult to come by these days, and the second reason I'm so optimistic about these sectors is that farmers and energy producers are no exceptions to this difficult truism. It doesn't take a Nobel Laureate to recognize that, if producers can't produce, then supply will suffer, and prices will go higher. Coupled with my reasoning in the previous paragraph, I see nothing but upside in these commodities.


The Ill Wind…

Over the last few nights, I've been watching a documentary about Benjamin Franklin. I was surprised to find out that he remained a loyalist for so long -- despite the fact that many of his fellow Americans were already starting to rebel. Finally, however, he recognized that change was inevitable, and that his perception had been flawed. He thus became a champion of the American cause – even at the expense of his relationship with his son -- the person to whom he was arguably closest in the world.

Gloom-and-doom may be unpalatable, but sometimes, no matter how much it hurts, it represents the state of the universe. And when these conditions arise, we would do better to acknowledge them and face them with courage, rather than to simply ignore them – or worse still, waste valuable resources trying to "fix" them. Sometimes the only way to deal with a fire is to simply let it burn itself out.

The other side of this equation is the immutable fact that with every tragedy, there is opportunity. It might be easy to blame the people whose perspectives offer the most accuracy, but it is likely more prudent to simply listen to the message, and then to react appropriately by finding those opportunities.

No matter how you choose to see it, there's no question that for the last year members of the Austrian School of Economics – of which I am a proud and vocal member – have been correct at almost every turn. Every day that passes only offers more evidentiary confirmation of our theories. And yet, despite the pain that comes with the actualization of our predictions, there are still bright spots in this story.

Unfortunately, finding those bright spots is going to take the courage and conviction to admit that the U.S. government not only caused this crisis, but that it is only perpetuating it by employing the same rotten policies that got us here in the first place. There are ways to ride this out, and even prosper, but clinging desperately to the broken ideas -- based only on the tattered shreds of empiricism -- is a sure means to financial devastation.

Pledging allegiance to the flag and eating apple pie aren't going to get us out of this one. The only way to prosper is to embrace change. And change is surely coming.

Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies. Paco has been a financial analyst and a portfolio manager for 18 years. You can buy his novel Discipline wherever books are sold. Or visit www.DisciplineNovel.com. Email your questions or comments to questions@pacoahlgren.com. Copyright 2009, Paco Ahlgren. All Rights Reserved.