The Gold Report: Richard, last month, you made a presentation at the Casey Research/Sprott Inc. “When Money Dies” Summit entitled “The War that Will Kill the Dollar.” You explained that the corrupting influence of power had sent our country’s leaders shopping for war, disregarding Westphalian respect for sovereignty and hastening the collapse of society. What are the signs that we are reaching a critical point? And, is there any way we can change course?

Richard Maybury: You can see the signs very clearly in the Middle East and North Africa. The Federal government is involved in several wars there that have nothing to do with America. One of the best examples is Libya. U.S. officials are taking credit for Moammar Gadhafi’s death just a year after they were bragging about having tamed the threat. Now Libya is a mess. It will very likely be taken over by some sort of Islamic government that isn’t going to be very friendly to America.

TGR: Why do we, as a country, do this? If it’s not going to end well for us, what’s the economic or political reason to get involved?

RM: The U.S. government gets into wars in far corners of the world that have nothing to do with America because the leaders like getting into wars. That is how presidents achieve greatness in the history books. A president has no prayer of going down in history as great unless he has won a war. Look at Mount Rushmore. All four presidents featured there won wars. That seems to be the number one criteria historians use for deciding whether someone is a great president. It constitutes an automatic incentive to go out looking for wars.

TGR: What is the incentive for the American people to go war shopping?

RM: Nothing. It’s absurd. During the First Gulf War, people had a tremendous good feeling about going to war with Iraq. They would come home from work, order a pizza, sit in front of their TV sets and watch the war like it was a football game. War became a form of entertainment.

TGR: Is there anything we could do to incentivize our presidents to act peacefully?

RM: I doubt it very much. People go into politics because they seek political power. Once they get the power, they naturally want to use it on somebody. What is the point of having power if you can’t use it? So, no matter what kinds of controls you put on, future presidents will find a way around it.

The ideal situation would be one where war is used as a last resort. Westphalian sovereignty, a set of agreements dating back in the 1600s, established the precedent that the European powers would only go to war in self-defense. You had to have a clear and present danger before you could go to war. And, even then, it was supposed to be the last resort. That was the basis of international law up until this year. That isn’t to say that the Westphalia treaties weren’t violated a lot of times, but they helped. After Iraq, Serbia and now Libya, it is pretty clear that the policy is we can just go out and hit anybody we want for any reason we want as long as we believe the other guy is up to no good.

TGR: If this is the new reality, then let’s talk about some of the economics around it. War is expensive. You have pointed out that since the Federal Reserve was created in 1913, the dollar has lost 95% of its buying power. You said, “War destroys currencies.” It usually leads to governments printing more dollars to pay for guns and tanks. How much debt and overprinting can the country take before the velocity of economics, which is something that you also talked about in association with how quickly dollars are exchanged, catches up with reality and the dollar loses that last 5% of its value?

RM: Velocity refers to the speed at which money changes hands, and it is a measure of money demand. When people don’t really want the money, they start trading it away faster, trying to get their hands on things they do want, things that have value that they trust. The cost of this war in the Islamic world will continue going up. At some point, it’s going to be a major contributor to people losing what confidence is left in the dollar and people all over the world will start dumping it. This is a psychological thing. It’s about emotions, so it is hard to pinpoint when they will lose all confidence in the dollar.

TGR: What would it look like if that last 5% were gone? Are we talking about hyperinflation? Are we talking about banks collapsing? Are we talking about bartering? What would it look like?

RM: We are talking about all of that. It would be chaos. We saw it in Zimbabwe when the Zimbabwean dollar became worthless because the government printed so many that people wouldn’t accept them anymore. The country experienced enormous runaway inflation where prices were rising 50% a day before the Zimbabwe dollar collapsed.

It would probably start with someone somewhere in the world selling off his dollars and begin trading them for whatever it was he had confidence in. The foreign exchange value of the dollar would fall. Other people would notice; they would get scared and start selling their dollars. The foreign exchange value of the dollar would drop more. This process would continue until you have panic around the world to get out of dollars. Americans would be the last ones to get involved. We are always the last to know what is happening to America. Suddenly Americans would wake up one morning and find that a gallon of milk that cost $4 the day before costs $6 today. The next day they would find that it costs $12. And the next day they would find that it costs $36. That is when Americans would realize that they are in deep trouble; their dollars are about to become worthless.

TGR: Of course the Fed wants to avoid that scenario. You describe yourself as a follower of Austrian economics made famous by the Nobel laureates Friedrich Hayek and Ludwig von Mises. They describe financial systems as complex processes run by billions of constantly changing individuals rather than something that can be manipulated from a central point, which seems to be what is being attempted right now. If that is the case, what will be the outcome if the central government tries to force a more Keynesian control of the flow of money?

RM: They will mess it up even worse than they already have. The world has been living under Keynesian economics since 1971 when Nixon took the dollar off the gold standard. John Maynard Keynes was a semi-socialist. He believed that the way to fix the economy was to print a whole bunch of dollars and dump them out there. This has been standard procedure for the past 40 years. All currencies have been dropping in value during that time. Another round of quantitative easing (QE) could further speed the rate at which the money circulates, something that has the same effect as increasing the supply of dollars, creating a larger demand for goods and services and having an inflationary effect. I think Fed officials are dropping hints about the next QE because they are trying to cause velocity to rise, a secret QE if you will.

TGR: What if the stealth QE campaign doesn’t work? What form might a real QE3 take?

RM: It is hard to tell what they will do. One of the myths that everyone is taught is that the government has some sort of tremendous understanding of economics and the ability to make adjustments to economic activity. The term fine-tuning is used sometimes. Actually, we are talking about a group of human beings who don’t know much more about real economics than anybody else. They think they do, but they don’t. They just bounce around from one attempt to control things to the next, making a mess of the country. The economy is not a machine. It is people, human beings. It is a biological system, not a mechanical system. But, the government treats it like a mechanical system, so they are always making mistakes.

TGR: If war and hyperinflation are the inevitable future, how can investors survive or maybe even thrive during a time like this? What are the opportunities? Natural resources? Commodity equities? Where can we be safe other than putting that $100 bill under the bed?

RM: Well, I wouldn’t put $100 under the mattress, at least not for very long, because it will soon become worthless. But commodities, stocks of raw materials firms, gold and silver and platinum coins have value. Generally, I try to see the world in terms of two kinds of investments: dollars and non-dollars. You definitely want non-dollars, things that do not have their value tied to the value of the dollar. An example of a dollar asset is something like a bond or bank CD. Their values are tied directly to the value of the dollar. If the dollar falls, then their values fall.

Gold is a non-dollar asset. When the dollar falls, usually gold rises. The same is true with silver and oil. All of these things have values that are not tied to the dollar. My advice is to invest in non-dollar assets. Gold would be at the top of the list, silver and platinum and then oil.

TGR: In your Early Warning Report Newsletter, you predicted that gold will top $3,000/ounce (oz), silver will hit $50/oz and oil will exceed $300/barrel. Gasoline will go to $9/gallon. When will we see these rises? And what will be the catalysts that take them there?

RM: The next QE, which I expect to come along no later than March, could set off a flight from dollars. Then we could see those predictions realized within 18 months.

TGR: You said that once we have had this loss of the entire value of the dollar and people are looking for another way to trade, money could be based on some collection of metals with currency acting as a receipt for the tangible gold, silver, platinum and whatever else happens to be in that basket. What would that transition look like? How painful would that be? How would it be orchestrated?

RM: It doesn’t have to be painful. The markets are moving in that direction. People trade exchange-traded funds (ETFs) for practically everything now. I can envision a mutual fund or an ETF that is a collection of various things. It could be gold, silver and platinum. It could have oil in there. It might include Swiss francs. It could even have various patches of real estate. The ETF itself would then become a currency, not because anybody has it planned that way, but because the markets will see that there will be a demand for something that is a non-dollar asset that is easily tradable and seen as a store of value. There would probably be hundreds of these baskets of assets at the start. Some would work better than others would; the less workable ones would shake out. You might wind up with maybe a half dozen ETFs or mutual funds that are baskets of various assets circulating in the world. They would essentially become the currencies.

TGR: Would investing in ETFs now be a good way to prepare?

RM: No. I don’t know of any that are arranged that way. It may be a while until somebody catches the idea and decides to give it a try.

TGR: What about the precious metal equities? Would that be a good way to prepare?

RM: Yes. There are lots of good precious metal stocks. I own quite a few. That is another way to protect yourself. However, be sure to deal with a broker who really knows natural resources. You have to have some skill in picking those stocks. It’s not like going down and buying a gold coin where you just walk into the coin dealer and tell him I want a handful of American Eagles or Canadian Maple Leaves. You really have to know what you are doing when you are buying gold stocks.

TGR: Any final thoughts you want to leave with The Gold Report readers?

RM: The world has changed. When you look at the news and you say to yourself, “My God, America isn’t what it was; the world isn’t what it was,” have the confidence to know you are right. We are probably not going back to what America or the world was anytime in my lifetime. Therefore, you want to start learning everything you possibly can about this new condition and adapt to it.

TGR: Thank you for sharing your thoughts.

RM: Thank you, JT. I appreciate being here.

Richard Maybury, the author of the U.S. & World Early Warning Report, has written 22 books, including the Uncle Eric series, which focuses on economics, law and history. He has been interviewed on more than 250 radio and television shows. He is a Vietnam War veteran who served in the Air Force’s 605th Air Commando Squadron, a special operations unit involved in covert warfare in Central and South America. He has since lived and traveled the world, visiting 47 states and 45 countries. He considers himself a “juris naturalist” who believes in a natural law higher than any government’s law. You can visit his website at or phone 1-800-509-5400.

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Quote Bloomberg

Fed Vice Chairman Janet Yellen said yesterday that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” A day before, Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”

They join Charles Evans, president of the Chicago Fed, and Boston’s Eric Rosengren in calling for consideration of further stimulus to boost growth and bring down a jobless rate stuck around 9 percent or higher for 30 months. A stock-market rally and gains in manufacturing and retail sales may convince the Federal Open Market Committee, which meets Nov. 1-2, to decide that it’s too soon for a third round of bond purchases.

You see, the recent initiative of the Fed in the form of Operation Twist is not quantitative easing since it does not involve an expansion of the balance sheet. In stead, it is what we refer to as qualitative easing as the bonds the Fed intends to buy on the long end (to move long rates down to help the mortgage market) will be paid for by proceeds of selling bonds on the short end.

The biggest problem for the Fed here is not necessarily that Operation Twist is a bad idea. Indeed, to the extent that it fixes the effort squarely on halting the slide in the housing market and supporting volume and price in the primary and second market for mortgage securities I think it is an excellent idea.

But we are forgetting the auxiliary objective of QE by the Fed; to weaken the USD. Make no mistake that this is an important objective for the Fed even if they have never declared this formally. And herein lies the rub.  Quite simply, with the recent announcement by the BOE of another round of QE worth £75 billion, with the ECB now willingly or unwillingly being forced into increased support of peripheral debt markets and with the BOJ also pledging more stimulus, the Fed is starting to look like the conservative central bank in the G4. [1].

In my opinion, this is very significant and also one of the reasons why Fed officials are busy ensuring markets that they have plenty of ammunition left should economic conditions merit it. But investors should not take anything at face value I think. Before the Fed actually starts to buy those MBS and/or moves to lower interest rates on excess reserves there is a real chance that especially the JPY will start to act more like the JPY of old, a.k.a global carry trade anchor of choice. Of course, this requires the BOJ to back up all the pledges with real action. For now though, the only thing we can say is that the Fed looks set to be outgunned by its peers in the G4.

EMU Outflanked

Is Europe now finally getting down to serious business or is it just another round of fudge from the fudge factory that investors have learned to respect for its ability to produce relief rallies out of nothing. Looking at the evidence I thoroughly inclined to go for the latter even if each failed attempt to shore up market confidence brings Europe closer to full fiscal union.

Even if Merkel and Sarkozy, and rightly so, appear most concerned with putting pressure on Italy, the most significant issue remains Greece which is now in default a fact that was un-sanctimoniously confirmed by the leaked bailout document which has the Troika admitting that the medicine they were mandated to administer would only make the patient worse and not better.

Quote FT

Greece’s economy has deteriorated so severely in the last three months that international lenders would have to find €252bn in bail-out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in their debt repayments.The dire analysis, contained in a “strictly confidential” report by international lenders and obtained by the Financial Times, is more than double the €109bn in European Union and International Monetary Fund aid agreed just three months ago.

The most recent estimate of haircut has now risen to 60% and this, mind you, would only reduce the debt to GDP to 110% and this without any consideration on how Greece is supposed to grow itself out of this level of debt while simultaneously dealing with the default. In addition and only adding to my disdain for the ECB, Reuters reports that the central bank opposed a 60% haircut on account that it  the private sector would refuse likely refuse this leading to a “fullscale” Greek default.

I am continuingly amazed by the denial here. Ever since the first Private Sector Proposal (PSI) was put on the table, Greek has been in default and figuring out who would pay for recapitalising banks as a function of how large the final haircut ends up are merely steps in the actual default process.

The second issue on the table is what to do with the increasingly freakishly looking EFSF. There has been no shortage of suggestions on how to increase the scope of the fund using the same guarantee by the same countries for the same amount of money (currently €440 in effective capital). The suggestion that might actually work came from France which has aired the suggestion that the EFSF be turned into a bank which would then allow it to access liquidity from the ECB. Both Germany and the ECB however have vehemently denied this which indicates that there is still notable reluctance to allow the ECB to wield the full arsenal of quantitative easing.

The proposal which currently seems to have most traction is to turn the EFSF into a monoline insurer which would essentially use its capital to insure anything from 10% to 30% on any new issuance of sovereign debt by Italy and Spain. Crucially, the idea is that this “leverage” would bring calm to markets as this insurance could cover as much as 2 trillion worth of debt.

I really struggle to find adequate words here. I think this is madness and if any Eurozone politician were afraid that an equivalent of AIG would certainly enter the scene, they now seem content on creating one. The first and most widely flagged issue is this would obviously create a two tier bond market.

Quote Reuters

This would create a division between insured and non-insured debt, that could split a country’s investor base and suck liquidity out of the market unless new bonds were carefully constructed to allow them to trade on a par with existing debt.”The issuer would have to create a new curve of insured debt, limiting the liquidity in both curves with risks that investors would dump the old non-insured bonds,” said Commerzbank rate strategist Christoph Rieger.

Based on a 20 percent insurance model, JPMorgan estimates that insured bonds issued by Italy would trade at a yield around 100 basis points below existing debt with new, insured Spanish debt likely to be priced 80 bps lower than existing bonds.

I think this is significant, but we are missing the main point here. If this is set ut Spain and Italy will likely never be able to issue un-insured debt again and the contingent liability here is not only complex but will lock in future capital commitments to this aim of providing first loss insurance. For me, this is a horrible way to spend already scarce capital.

Another issue is obviously that it assumes that it will make the Spanish and Italian problem go away which it clearly won’t. However, much more fundamentally; while the idea is to ring fence Italy and Spain it almost guarantees painful haircuts in the case of Ireland, Portugal and Greece and once again, who will pay for those I might ask.

The only silver lining I have seen in the latest reports is that it seems to me that while the imminent objective is to fiddle with the EFSF, there has also been serious talk about bringing forward the ESM which would have a much stronger mandate and essentially constitute a first step towards socialising of sovereign risk in the euro zone. Until that happens, the EMU and her politicians will be continuously outflanked by economic realities.

—

[1] – I repeat that with the ECB not formally in ZIRP mode, the Fed still has the yield disadvantage here but do we really expect the ECB not to lower going forward?

Risk asset markets however made no mince of the recent stabilisation of the euro land crisis as well as the better news flow from the US economy. Just take the following headlines from Bloomberg and you know exactly what kind of sentiment I am talking about.

Quote Bloomberg

U.S. stocks advanced, giving the Standard & Poor’s 500 Index its biggest weekly gain since July 2009, as retail sales beat economists’ estimates and the Group of 20 nations began discussions on Europe’s debt crisis.

(…)

U.S. 30-year bonds capped the longest weekly losing streak since January as concern eased that Europe is unable to curb its debt crisis and U.S. retail sales climbed, damping bets the country will fall into a recession.

The question is then whether it signals a decisive and lasting breakout or whether it was simply a rally to the top of a choppy range before we start another descend to test the lows. Recent weeks’ market movement will suggest that you sell the current levels as top of a post crash range and I, for one do not think we are out of the woods yet. It is important to emphasize two issues on the US economy when it comes to the likelihood of a recession.

Firstly, the US housing market has never recovered and inventories remain low. This means that there is not much room for the economy to slump even if it does enter a recession. Any recession is then likely to be relatively short. Secondly, all liquidity gauges we are watching are pointing strongly upwards which is likely to provide strong tailwinds for risky assets 9-12 months out. Excess global liquidity, US broad and narrow measures of money are all shooting up.

In addition, we should consider the slow but sure movements by all four major central banks to increase either the short term liquidity or simply re-starting QE.

The BOE put itself at the front of the pack with the recent addition of another bn 75 GBP worth of QE, but likewise at the ECB it was interesting to see that long term liquidity operations was re-instated together with an expansion of the covered bond purchasing programme. Additionally, the ECB has been and will continue to be more or less forced to support bonds in the periphery, particularly in Spain and Italy, in order to ring fence the periphery from the coming Greek default. In comparison, the Fed’s latest much debated Operation Twist looks almost modest since it is, by the letter of the theory, not quantitative easing but rather qualitative easing [1]. Of course, the market is fully expecting the Fed to act aggressively should the economy falter further with a joint financing programme with the Treasury for long duration mortgage products as the most likely initiative alongside the more technical move in the form of reducing interest rates on excess bank reserves to negative.

I think it is important to realise that the Fed, with its latest actions, have its gaze firmly fixed on stimulating a recovery in the US housing market which is seen as the most important missing leg in an already faltering US recovery.

In Japan, the BOJ’s situation is different in the sense that economic has been distorted by first the devastation of the earthquake and then obviously the technical recovery as supply side disruptions have eased off. I take note of the fact that the BOJ has verbally put a lot of promises on the table in terms of stimulating the economy not least, one would imagine, in relation to the ongoing strength of the JPY. Finally, it is worth pointing out that the BOJ’s balance sheet has actually expanded briskly in the past two months.

The main conclusion to draw here I think is that while it is certainly not over yet, developed market policy makers are starting to open the floodgates. The euro zone crisis will remain a severe drag and like an almost chronic illness will continue to flare up. A disorderly Greek default can still not be ruled out and as the euro zone policy makers seem to take comfort on even a second of calm it seems to me that the market will have to push harder before we get a realistic proposal for a Greek default.

The recovery in the periphery (or obvious lack thereof) is still not working. The internal devaluation in the European periphery is alive and well when it comes to nominal wage increases which is getting a beating but in the context of lingering inflation in core and headline it leads to a squeeze in real wages and further depresses the recovery. The problem is that a sharp reduction in living standards through a decline in real wages to restore competitiveness is needed but if it occurs without any form of nominal currency depreciation not to mention in the context of very sticky core inflation, it just becomes counterproductive. Absent a fiscal union to socialise the risks it is difficult to see how the euro zone policy makers will be able to come with a fudge that will satisfy markets. In that regard I agree with Chris Wood here.

Ultimately, GREED & fear’s view on all of the above remain the same. This is that the only coherent end game for Euroland remains a formal move towards collective fiscal responsibility, which would ultimately address the fundamental cause of the present crisis. This is the financial fault line represented by monetary union without fiscal union. Euroland either has to go down this path or it has to confront all the problems associated with a break up since in GREED & fear’s view there is no “middle way”

One positive development on Greece is that the private sector involvement (PSI) proposal originally envisioned seems to have been abandoned for a much more realistic haircut.

But more challenging issues remain.

It was hardly surprising that the S&P downgraded Spain last week which only serves to underline the issue that while Greece may be the imminent worry the real problem lies in Spain and quite possibly Italy. There is a limit to the amount of Italian and Spanish bonds that the ECB can buy as long as it is evidently clear that growth prospects continue to remain difficult.

In emerging markets and touching on the theme I dealt with in my last installment the recent inflation data from India indicate why I continue to think that investors may hold too high expectations for easing in big emerging markets.

Quote Bloomberg

India’s inflation exceeded 9 percent for a 10th straight month in September, maintaining pressure on the central bank to extend its record interest-rate increases.The benchmark wholesale-price index rose 9.72 percent from a year earlier after a 9.78 percent jump in August, the commerce ministry said in New Delhi today. The median of 21 estimates in a Bloomberg News survey was for a 9.75 percent increase.

Elevated inflation in India and China are crimping room for policy makers to ease monetary policy and support global growth amid Europe’s debt crisis and a faltering U.S. recovery. India’s central bank Governor Duvvuri Subbarao said yesterday that a more than 9 percent inflation is above “comfort level.”

Of course, the picture is not uniform here with notable economies such as Brazil and Indonesia already lowering interest rates but all eyes are currently on China (and secondarily India) and here I think that we will have to see stronger signs of a hard landing or a relapse into a more severe global slowdown we can expect policy makers to actively stimulate.

In summary, I think that we are indeed nearing an inflection point at which money printing in the developed world will once again provide relief to risky asset markets but the problem is that the underlying economic backdrop has not improved much. In particular, the ongoing lack of resolution in the euro zone represents an issue but Eastern Europe as well as a housing bubble in Australia (and perhaps even in Denmark) are also potential sources of uncertainty not to mention the unravelling of credit excess in China. As such, “it” is far from over but a tradable bounce in risky assets which goes beyond the current choppy range may soon represent itself.

–

[1] – The distinction between quantitative and qualitative easing is simple. The former refers to an expansion of the balance sheet through the central bank increasing its liabilities and adding a corresponding amount of assets. The latter refers to changing the composition of the asset side of the central bank’s balance sheet and as I am reading the gist of OT the Fed has committed to keep its balance sheet unchanged by selling short term bonds and buying long term bonds. Try this one for a good recap of what QE is and isn’t.

The Gold Report: Since we are at a conference called “When Money Dies,” please explain who killed money and how, after all these years of governments around the world trying everything from quantitative easing to bank bailouts, we are still in the midst of the weakest global economy in this generation’s history?

Rick Rule: The answer is in an old Pogo Cartoon that reads: “I have seen the enemy and he is us.” Collectively in the West, we have lived beyond our means for a substantial amount of time. We rely on a government that we have paid to steal from our neighbors. Money is how we deal with transfers. Dealing with transfers dishonestly by making more of the medium that isn’t backed by any value is the process by which money dies.

Louis James: The problem is that you are asking the guardian who has stolen the goods to recover them. Government has been in charge of money for hundreds of years. When it is debased, you have to ask: “Who was watching the hens in the hen house?” When you discover who the fox is, you don’t want to put him back in charge.

TGR: We are looking at quantitative easing 3 (QE3) in the U.S. Europe is considering the same thing. Even China is doing its version. Will money actually die or will it all inflate together?

Marin Katusa: I am going to take the contrarian view. With all this quantitative easing, there is actually asset deflation occurring right now if you look at the valuations from an equity standpoint. Trillions will be printed, but look at the deflation in the assets. He who has cash will be king because he can afford to buy these discounted stocks. If you do your homework and be sharp, you will make a fortune in the next three years.

TGR: But money is an asset; cash is an asset. If you are holding your wealth in money wouldn’t it all deflate?

MK: It’s all about purchasing power. Look at Canada’s largest oil company. It is just as good of a company as it was three months ago, but it has lost half its market cap, which means your dollar will buy more of a great company. It isn’t inflationary all across the board. It’s an asset deflationary market. That is a current example of equity asset deflation in the market right now.

TGR: So cash will deflate less rapidly than physical equities?

MK: Yes, right now.

RR: It is likely that the purchasing power of Western currencies will lose 5%–7% compounded for a long while, maybe until they go extinct. But in the interim, when you are experiencing incredible volatility, that is demonstrably better than losing 30% per anum in assets that are illiquid. Despite the fact that money is going to die, perversely you have to have lots of it to take advantage of the liquidity crisis.

LJ: You see, inflation figures are averages. Asset price destruction in a certain area doesn’t negate monetary inflation, nor its impact on other prices. Tremendous money creation is going on. This has economic consequences. The guy at the supermarket can see it even if his house is worth less. It is the worst of all possible models. Necessities cost more, but once trusted assets—the store of wealth in real estate and pensions—are depreciating. This has investment and economic consequences. The government is creating all this money and blowing it out the window. You have to figure out where to stand with a net.

TGR: How do you know what way the wind is blowing so you know where to place your net?

LJ: It’s all about stuff. Stuff people need is, in general, good when paper or theoretical money is bad. In certain asset classes, including real stuff, there will be price destruction. Real estate, for instance, still has a speculative side to it and has not yet bottomed. But fundamentally, real stuff that has value can’t just blow away. The world will go forward. People will need food and raw materials. Gold is another vehicle with intrinsic value. These things can’t be inflated out of existence. When prices on valuable stuff goes down ridiculously, that should be seen as a godsend. People will still need copper, steel and timber. Buy when that stuff is priced low and wait for it to go high, then sell.

TGR: Oil is priced in dollars. Is there a dollar price above which demand stops?

MK: Yes, that is why you have to put the price into perspective when considering an investment. Are you valuing a company at $60, $70 or $80/barrel (bbl.) oil? If a company isn’t making money at $60/bbl. oil, you don’t want to own that stock.

TGR: The market in the last six months has been volatile, but it seems to be like a roller coaster coming back to where it started. Is there a bigger trend moving daily prices?

RR: Dramatic volatility will lead to higher highs and lower lows. Despite the fact that it may look like a mean on a chart, people who experience it don’t experience a mean. They experience extraordinary discomfort. The fact that a $10 stock becomes a $7 stock in a few days causes people to speculate less frequently. It tames the animal spirits. The volatility will act as a depressant on the market.

That is why it is important to understand the causes of these fluctuations. QE is a polite way of saying counterfeiting. If you debase the denominator, the numerator doesn’t seem to matter much. You are actively debasing the currency by making it less rare. In the process, the government has declared a war on savers, reducing the utility they could get through traditional savings, forcing them to make more speculative investments.

The problem is even deeper than that, however. At the same time you have plentiful money, you have restrictive credit. People assume prices get set across the whole spectrum, but they get set on the margin and dramatically on the margin based on the psychology of the participants. It makes no sense. Look at the downdrafts in commodities. Nothing about the utility of copper caused it to fall. But interdraft lending dried up and when credit goes away, fabricators, traders and shippers can buy. Economic dislocations like this cause the market to be really volatile for substantial periods of time, which will unnerve many market participants.

I am actually fairly excited about it. I believe if it is going to happen anyway, find a way to enjoy it.

TGR: Marin, you are skilled at mathematics. Your models help assess equities. In a market driven by psychology and government policies, how relevant are your models and have you changed the factors you use to value companies?

MK: Since so many people are investing on emotion in the resource sector, you have to take your profits in a bull market and have lots of cash on hand to take advantage of deals in a bear market. In the program I created, there are literally thousands of variables you can analyze and interpret, but one of my favorite metrics for the junior exploration sector is the Casey Cash Box Indicator. One year ago, three companies were trading for less than cash on hand. Now I know of a little over 30. But, we are no where near the low of March 2009 when over one-third of all the companies on the TSX and TSX-V were trading less than cash. The Cash Box Indicator is what I use to give me a “feel” of the psychological sentiment in the market. When there are lots of companies trading under cash, people are fearful, and that is good if you’re looking for value.

For the junior exploration companies that do not have any tangible assets, the models I use for producing projects with cash flow are not as relevant.

TGR: Louis, you are out there visiting companies all over the world. In this market, how important is management?

LJ: It is and it isn’t. Having competent people to run the show is imperative. The alternative is non-competent people. Who wants that? Incompetence shows up quickly in performance. But just because a company has good people and a good project doesn’t mean it will do well; nature may not cooperate with exploration, or it could run out of money. When fear is in the driver’s seat, people are less willing to take chances, even on good people.

In the end, volatility is your best friend because you know that a market that’s down will go up again. When your favorite wine or something you value goes on sale, you don’t complain. You celebrate and buy two. We have that opportunity now. Wall Street hates volatility, Howe Street loves volatility—or it should, even on the downside, because that is a sign that it’s shopping season.

TGR: In the 1970s, we saw a bullish precious metals market, followed by a big upside. This time we had a big upside and now extreme volatility. Have we already experienced the extent of the bull side?

RR: You have to acknowledge the fact that despite volatility’s unpleasantness, it can be an opportunity. Gold and silver still have a long way to go although it may not be straight up. Even if it were to go to $2,500/ounce (oz.) eventually, it could test $1,000/oz. first. You have to have an understanding of history in order to understand what you might face. Keep cash on hand to take advantage of the volatility. Prepare yourself to have the courage to take advantage of the dips. A lot of people have been responsible investors and studied everything about the market except themselves. They haven’t prepared themselves. You need the cash and courage to use volatility.

Be careful, however. Don’t get your information from the market. The market is a mob. It is a facility to buy fractional ownership of businesses. But you have to get a sense of the value of the business to make good decisions. Take advantage of the idiocy of the other players. Other players only drive value of the stock in the short term. In the long term, the company fundamentals will determine the value of the business. What the three people in this room have become good at is buying companies that will be taken over by the industry at higher prices later. Playing foolishness is fun, but that is less important than the fundamentals associated with the valuations of the companies. The safest and most consistent money is made when you find discrepancies in the valuation of a company and the market valuation and play the arbitrage.

TGR: How can you value gold in a volatile market like this where the price of gold can vary between $1,000/oz. and $1,900/oz. Do those lows wipe out some companies?

LJ: The average cost of production for most companies is $600/oz. Even at $1,000/oz. gold, a 40% margin in any industry is considered pretty good. A lot of mining companies are making lots of money right now, which means they are fundamentally strong. In the face of that, when the market fluctuates, it’s a good thing; it brings opportunity. I have stocks in my portfolio that we have been able to take profits on when they were high and buy again when they were stupid cheap. We have been able to make doubles this way multiple times—on the same stock.

But not all gold stocks are production stories. How do you value an exploration play where there is no particular asset? That is difficult. You can use peers, or speculate about what the company might have in the ground if it is successful and try to estimate a value. Whatever path you choose, you should have some kind of metric, a sense of what is reasonable.

A great example of how volatility can create opportunity and profits is Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:Fkft), the spin out from Exeter Resource Corp. (XRC:TSX; XRA:NYSE.A; EXB:Fkft), operating mostly in Santa Cruz, Argentina. I have been there and looked at the main asset. I have no doubt the flagship Cerro Moro project is going to be a highly profitable mine, unless the government goes completely insane. Extorre had good exploration success there and has started getting very positive results from a second project. Based on this work, Extorre went from CAD$2 to CAD$14, so naturally we took profits along the way. I love Extorre, but at CAD$12, its market cap was greater than some profitable producers with cash flow and it was still just exploring. Now, with no bad news from the company, the market correction has the stock down to CAD$7. We know more about its assets now than we did when the shares were higher, but it’s selling cheaper, so it’s a better value now. We don’t know when things will go up and down, we just know they will. We know when they are cheap it is a good time to buy; when they are expensive, it’s a good time to take profits.

TGR: It seems like investors have to be more active now, going in and out of stocks. They can’t just buy and sit on them.

MK: You have to be careful in this volatile market. An investor needs to understand what type of investor he/she is. If you are a day trader, this is your type of market, because the volatility and big swings are present. I don’t believe relative valuation. I think it is important to distinguish between intrinsic valuation and relative valuation. But the answer to your question really depends on what type of investor you are and why you bought the specific stock. In my experience, my biggest gains have been buying big positions in companies where I believed in management and the projects, and bought more when the stock was down, and held the stock for more than a few years.

LJ: There is a distinction between resource investing and mainstream investing. Tried and true Graham-Dodd analysis was never applicable to our industry because the underlying commodities change too quickly, making even the biggest companies too fickle for that sort of securities analysis. However, I would posit that Wall Street is becoming more like Howe Street in a post-Lehman Brothers world. Everyone is taking more risk. There is no safe place anywhere in the world where you can buy a stock and forget about it.

RR: The two central tenets of Ben Graham’s book The Intelligent Investor deal with evaluating the margin of safety and management. You have to speculate in companies that have the financial wherewithal to weather the most immediate risks. In today’s volatile market, you are competing against manic-depressive traders who show up one day wanting to pay more than what you have is worth and the next day willing to sell for less than their assets are worth. In a devotion to net-nets, one of the best indicators of when you ought to be all-in is when it is full of people so disgusted in the market they are selling for less than they are worth. It’s a great time to be an investor.

TGR: If a lot of these companies are worthless, how does the average investor know which companies can go the distance?

LJ: You have to make your own decisions based on your risk tolerance. Your mileage will vary. Read the financial statements, talk to management. At some point you have to act, but you can and should wait until you are fully confident in your investment decision, so your confidence won’t be easily shaken by market volatility. It’s not like baseball; you can wait for the perfect ball, so don’t swing until you’re sure you’re buying low.

MK: Great tools are available. Watch the legends and insiders to see what they are buying and selling.

TGR: My last question is how does a new investor start in this industry?

RR: Go for a walk. Have a conversation with yourself. Do a personality audit. How hard are you willing to work and what is your risk tolerance? If you aren’t willing to work and don’t like volatility, try owning physical trusts, ETFs or seniors. If you have a longer-term perspective and stomach for volatility, you can take advantage of the opportunities in the junior space. But you need to have a plan.

MK: You can’t succeed unless you are passionate in whatever you do. If you don’t really like the sector, then you won’t go as deep as you need to have success and you won’t make the best decisions. Make sure you have a passion for mining. And have fun. Life is short.

You also have to be willing to make lonely trades. When everyone else says you are wrong, that is when investing becomes very interesting.

RR: Just because everyone else’s money dies, that doesn’t mean your money has to die. You are responsible for your future.

Founder and CEO of Global Resource Investments and President of Sprott Asset Management USA, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker and asset manager specializing in mining, energy, water utilities, forest products and agriculture. Rule’s company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. In 2011, Rule closed a landmark deal with Eric Sprott, Founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors opportunities in segregated managed accounts, mutual funds, hedge funds and private partnerships. The collective organization offers unparalleled expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S.

Louis James is chief metals and mining investment strategist at Casey Research, where he is also the senior editor of Casey’s International Speculator, Casey Investment Alert and Conversations with Casey. When not in meetings with mining company executives in Vancouver, B.C., James regularly travels the world evaluating highly prospective geological targets and visiting explorers and producers getting to know their management teams. For more than 25 years, Casey Research, headed by investor and best-selling author Doug Casey, has been helping self-directed investors to earn returns through innovative investment research designed to take advantage of market dislocations.

Investment Analyst Marin Katusa is the senior editor of Casey’s Energy Report, Casey’s Energy Opportunities and Casey’s Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Katusa’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Katusa has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Katusa also manages a portfolio of international real estate projects.

Indeed, what seems to be main question now is whether the US economy will avoid a recession and, as a consequence, just how bad it has to get before the Fed starts another round of shock and awe QE. In this sense, I also always thought that expectations of emerging market foreign exchange reserves bailing out Europe and/or central banks easing aggressively to support the global economy were pinned on expectations that after all were too high.

(Quote Bloomberg)

The world’s largest emerging economies will not act as a bloc to ease Europe’s financial crisis, Russian Deputy Finance Minister Sergei Storchak said.“It’s impossible, I’m certain of that,” Storchak told reporters today in Washington. “If the BRICS are going to act to overcome the euro zone’s financial problems, then it will be based on the possibilities presented by working through the International Monetary Fund.”Finance ministry and central bank officials from Brazil, Russia, India, China and South Africa met before this week’s IMF annual meeting to discuss coordinating policy as Europe reels from a sovereign debt crisis and growth slows in the U.S. There is a “high” danger that Greece will not fulfill all of its debt obligations, Storchak said.

As for the EM tightening cycle I think that while we may certainly see an easing of pace or perhaps even a full stop of tightening measures I think a reversal is out of the question. This is especially the case as the recent strong correction in commodities and the global slowdown is likely to make inflation a non issue going forward. However, inflation lags the cycle and if the central banks are fixed on this measure it will take some time before the data allows decisive action unless of course the future is suddenly discounted in a radically different way due to rising downside risks.

In India, the tightening cycle is surely near its end with the yield curve already flat as a pancake, but with sticky inflation and fiscal policy continuously loose, there is limited scope to the central banks’ ability to maneuver.

(Quote Bloomberg)

India’s central bank is close to the end of its record series of interest-rate increases as inflation will probably slow next year, Deputy Governor Subir Gokarn said.“You could say that the cycle is nearing its end,” he said, “given the projection that inflation will start coming down and will continue to move down from December onwards.” He declined to specify when the Reserve Bank of India may stop raising rates.

Worryingly, recent news out of China appears that the country may be turning Indian or at least that the expected easing may not come as expected. Especially, it is bad news for the global economy in the near term (but perhaps good in the long run?) that Chinese authorities seem to be engineering a crack down on property developers which will not only lead to an acceptance of lower growth in order to effectively quell off balance sheet lending.

It seems that investors hoping for emerging markets to drive forward the global economy may, for the moment, be guilty of too high expectations.

The Gold Report: Unless Congress approves and President Obama signs an increase in the $14.29 trillion debt ceiling, the U.S. Treasury is set to begin defaulting on payments starting August 2. That threat launched months of competing big deals to cut spending and/or raise taxes. To add to the pressure, in mid-July the credit rating agencies Moody’s and Standard & Poor’s threatened to downgrade the U.S. credit rating from its historic AAA status if the debt limit isn’t raised in time to avoid defaulting on interest and bond payments. That could raise interest rates for the government and trickle down to consumer mortgage loan and credit card payments. John, what kind of deal would be good enough to satisfy bond rating agencies and avoid a double-dip recession?

John Williams: First of all, the chances are nil that the government actually will default. There is some talk that if the debt ceiling were not raised by the August 2 deadline, the government could avoid default for a while by playing games with its payments—pay interest and debt first instead of paying other obligations. That could trigger a rating downgrade, if one had not occurred otherwise. Also, I don’t think global investors would view non-payment of general obligations as a plus and could engage in dumping the dollar. I think Congress will agree, however, to something by the deadline. I have no expectation, though, that the deal will be of any substance; nothing that has been proposed would improve U.S. fiscal conditions meaningfully.

A country’s credit rating is a measure of the risk of debt default. The U.S. dollar, as the world’s reserve currency, is considered the benchmark instrument for an AAA rating. That generally is considered the riskless category. It would be very unusual for rating agencies to downgrade a benchmark. Yet the credit rating agencies now are seeing risk of a U.S. default and are talking a possible downgrade of U.S. Treasuries. A downgrade would have about as much negative impact as an actual default. You don’t want to see a downgrade. You don’t want to see a default. Those actions would have all sorts of implications, very negative implications for the financial markets, particularly for the U.S. dollar. You would see heavy U.S. dollar selling and dumping of U.S. dollar-denominated assets such as Treasury bonds. You would see a spike in dollar-denominated commodity prices such as oil. Gold prices would rally sharply, as would silver, as traditional hedges against inflation.

TGR: Is printing more money really what the government is going to do to pay its debt?

JW: That is what countries that spend beyond their means usually do if they can’t raise adequate tax revenues. I can tell you that the current government cannot raise enough taxes to bring the actual deficit under control. It could tax 100% of income, take 100% of income and corporate profits, and it would still be in deficit. In terms of generally-accepted accounting principles (GAAP) that include annual increases in the unfunded liabilities on a net present value basis, the U.S. is long-term bankrupt. A true balanced budget approach would require excessive overhaul—I’m talking massive cuts in the social programs because cutting every penny of government spending except for Social Security and Medicare would still leave the country in deficit. We are spending well beyond the bounds of reason in a number of areas. The country just does not have the ability to pay for all the services it provides.

TGR: In a July 14 commentary, you said that, “In the event of an actual default or downgrade, the United States position as the elephant in the bathtub of sovereign risk likely would cause the dollar to plummet against all major currencies irrespective of any ongoing concerns related to Euro-area debt.” What would this mean for the U.S. dollar and the price of gold going forward?

JW: Already stocks are down because the markets are frustrated with the lack of a deal. The U.S. is such a large player in the world markets that if the dollar is downgraded, the impact will be felt globally. The dollar should sink against most major currencies, including the euro, and gold prices would experience a big bump up. It should be very positive for gold long term. It doesn’t mean that Central Banks aren’t going to intervene and that the Treasury or IMF are not going to try to keep gold prices down. But, over the long haul, you’ll see much higher gold prices.

TGR: What would default or downgrading mean for the dollar?

JW: If the U.S. defaults or gets downgraded, that likely will end the U.S. dollar as the global reserve currency. That’s not a viable option for the United States. People involved with getting the country to that point should be removed from office. If you are the most financially powerful country on earth, you don’t fool around with your creditworthiness.

TGR: So, if the dollar isn’t the benchmark, would it be the euro? Would it be the yen? Would it go back to a gold standard? What would happen?

JW: It would probably revert to some kind of a basket of currencies, probably including gold. The dollar would tend to suffer against the new benchmark and gold would tend to increase relative to the dollar in such a circumstance. But I can’t tell you exactly what would happen.

TGR: The new European Union plan for reducing the debt burden for Greece, Ireland and Portugal offers longer-term and low-interest loans and allows some bonds to go into temporary default. Does that set a precedent? Will it contain Europe’s debt crisis?

JW: The euro never should have been put in place. Anyone who ever thought that the Germans and the Italians could coordinate fiscal policy didn’t know the Germans and the Italians very well. The euro would have been disbanded or at least realigned by now if we weren’t in the middle of a systemic solvency crisis. The European Union will do anything to keep Greece afloat, as long as it is viewed as a threat to systemic solvency. Once the system stabilizes, I’d expect to see a breakup of the euro.

TGR: In our conversation with you last January, you talked about the difference between the true deficit and the cash-based deficit published by the government. What is the true deficit and what can be done to deal with that?

JW: The GAAP-based deficit is running around $5 trillion a year right now. That includes the numbers popularly looked at in the press and the year-to-year change in the unfunded liabilities for Social Security and Medicare adjusted for the present value of money.

To bring the true deficit into balance, there is nothing that can be done short of slashing Social Security and Medicare programs, and I see that as a political impossibility. Again, I mention the entitlement programs here, because you could eliminate every penny of government spending except for Social Security and Medicare, and the government still would be in deficit.

TGR: One of the other things that we’ve discussed with you before is quantitative easing (QE). Federal Reserve Board Chairman Ben Bernanke said there will be no more quantitative easing. In your July 8 commentary, you said the Fed will likely find the markets and banking system pressuring it into some form of QE3. What form might that take? And, how might that impact the dollar and precious metals?

JW: Well, Mr. Bernanke hemmed and hawed about the status of QE3 at his Congressional testimony earlier this month. The economy is weak enough; he will use that as an excuse. I can’t tell you exactly what the Fed is going to do. I imagine it will go back to buying Treasuries, once the debt ceiling is raised. That will cause weakness in the dollar and strength in gold. Generally, anything the Fed does to debase the dollar, which it continues to do on an ongoing and very deliberate basis, means higher gold.

TGR: So, what is your prediction for the final solution?

JW: In terms of the debt ceiling, the solution is going to be to continue raising the debt ceiling. Either that or eliminate the debt ceiling. I don’t know what can be done politically on either side there. But, the government is committed to certain obligations. It doesn’t make sense that it wouldn’t follow through and borrow the funds to pay what it has already committed to spend. As to bringing the U.S. fiscal circumstance under control at present, there simply is no political will by the president or by the aggregate sitting Congress to do so.

TGR: Isn’t it strange that instead of having this debate when they were voting about the budget and whether to spend the money, they are talking about it when it is time to pay the bill for the spending decisions already approved?

JW: No, we’re just dealing with a group of individuals in Washington who are politicians first, second and last. Most of them have very little real interest in the nation’s fiscal condition. They are looking at getting reelected and serving their special interests wherever they can. That has been evident to anyone who has watched the system in recent decades. There are some new, good people in Congress, but not enough to change things, yet. As Congress stands right now, there is no chance whatsoever of putting the U.S. fiscal house in order.

TGR: You look at a lot of numbers. We have really only talked about the debt limit. Anything else that you would like to leave us with that could impact the price of gold?

JW: Well, I think you have covered them. You are going to see ongoing weakness in the economy. The government is going to respond with more stimulus before the 2012 election, despite the so-called efforts at reducing the deficit. The Fed is going to ease liquidity more. All those actions to address the economic problems will tend to be inflationary, and that is generally positive for gold.

TGR: Thank you John.

Walter J. “John” Williams was born in 1949. He received an AB in economics, cum laude, from Dartmouth College in 1971, and was awarded a MBA from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies. For 30 years he has been a private consulting economist and a specialist in government economic reporting. His analysis and commentary have been featured widely in the popular media both in the U.S. and globally. Mr. Williams provides insight and analysis on his website, www.shadowstats.com.

1. The 2011 deficit (estimated at $1.5 trillion) and the accumulated national debt (over $14.3 trillion) are not the most pressing economic issues facing the country right now. They are important, but several notches down from the top of the list. This year’s deficit is just over 10% of GDP, which is high, but not crushing. There are ways to deal with these issues, as I’ll share further down. They are presented as a crisis only because the Republican Party and the Tea Party are using them to push a small government agenda. While I don’t agree with that goal, it’s fine for some to support it, but holding the economy hostage by manufacturing a crisis tied around the debt ceiling makes no sense.
2. Investment in economic growth has slowed dramatically. This is particularly true in education – at all levels. It is also true in basic research. Up until the last 20 years or so the U.S. has surfed the wave of economic change, by investing in new thinkers, and making infrastructure and other investments that will improve productivity. These seem left out of current debate options.
3. The slow recovery and weak demand for goods and services is the number one problem facing the country. The Federal stimulus is winding down, the Federal Reserve has decided that they don’t need more quantitative easing, and government at all levels is cutting employment. All the while personal consumption dropped in the most recent quarter, along with the fixed asset portion of Investment (inventories increased as a partial offset.) The uptick in unemployment and the very slow growth in employment drags down demand for goods and services. We are sliding down the same hill that the U.S. economy did in 1937-38, when Congress and President Roosevelt worried more about public concern for the debt than about sustained growth. Then we slid into a quick, nasty recession. That’s a danger now, too.
4. Inflation is not a pressing problem. The inflation we have seen this year is in food/commodities and energy. The food price spiral might well continue for awhile – I don’t have an independent sense of the true drivers. Even if food prices rise there are other elements of the Consumer Price Index that are holding steady. The rising energy prices are probably related to uncertainty about political conditions in the Middle East. Those concerns should soften soon.Inflation is something to watch out for, particularly with all of the money created by the Federal Reserve in the last three years – money created to help stabilize the economy. It is important that the Fed watch for signs of incipient inflation, driven by very high money supply, but I am confident they will act correctly and aggressively when that happens. That point is not now.
5. Bond investors are not abandoning US Treasuries for fear of default. US bonds respond to typical market forces, though they have an element of future gazing in them. If you hold a 10 year bond, and a potential buyer thinks the US might default on that bond, then the buyer will expect a higher yield (lower price/higher interest rate). That isn’t happening now. The bond market for US Treasuries is not showing signs of investors being worried about US debt.

So, what to do….

1. To tackle the most pressing problem – the slow recovery – the Federal government should be stimulating demand, through more government spending (on the part of Congress) and more quantitative easing (on the part of the Federal Reserve). Tax cuts can be part of this but they should not be across the board. The most effective, stimulative tax cut on the Federal level is the payroll tax for Social Security and Medicare. Those funds need help, and there are ways to fix them, but a payroll tax benefits mostly working people who will use the increased take home pay to consume.
2. To help with the deficit, we should remove the Bush tax cuts, and speed our exit from Iraq and Afghanistan. The Bush tax cuts disproportionately benefited higher income families, who use the extra money for non-consumption activities. When some politicians complain that raising taxes on the wealthy takes money away from job creators, there is no empirical evidence and scant theoretical basis for that claim. Along with repealing those tax cuts there are plenty of opportunities to strengthen the tax code and reduce the dreaded loopholes. Despite what many politicians say and the media parrot, this is not hard. It just takes clear headed thinking and political courage.
3. The real budget deficit challenge, at the Federal and State levels primarily, is the cost of healthcare. Increasing costs and inefficient uses of services put pressure on Medicare, Medicaid (which impacts states as well), the VA, the Dept. of Defense, and government employment costs at all levels. We should be strengthening and extending the healthcare reform efforts beyond just extending coverage – to include incentives for cost efficiency and efficacious treatments.
   
4. Restore and enhance funding for education at all levels. Resist the temptation to make education accountable on a short term basis, while hobbling it from producing the long term benefits derived from basic research and liberal arts education. This is an area in particular where Federal spending, even if they result in deficits, is a good investment. Cutting taxes on the wealthy is not a good use of a deficit. Deficit spending should support short term stimulative needs and long term productivity enhancements.