Why most Americans will get poorer in 2006

What will 2006 be like? Let me set the mood with my favourite Einstein joke.

Einstein dies and goes to heaven. Since heaven, for obvious reasons, is a centrally planned economy, Saint Peter sheepishly informs him they have a temporary housing shortage. He'll have to bunk with three other guys for a while.

Of course his new roomies are thrilled. The first one comes up to him and says: 'Mr Einstein, it's an honour to meet you. But I'd like to get to know you better. I have an IQ of 130'. So Einstein says: 'Great. After lunch, let's bounce around some ideas on astrophysics I've been working on.'

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Then the second one comes up to him, and says: 'Mr Einstein, it's an honour. I'd also like to get to know you. I have an IQ of 100.' So Einstein says: 'Fine. Let me put my grip away, and we'll have a game of chess.'

Then the third one walks up, and says: 'Hi, Mr Einstein.

I'd also like to get to know you. But I'm afraid I'm not as smart as those other guys; I've only got an IQ of 70.' Einstein says: 'So where do you think interest rates are going?'

On the one hand, discussions of the economy and the markets should be for amusement purposes only. Since it's impossible to know what the finances, motives, constraints, and desires of six billion people might be, it's impossible to know what they're going to do, or when. On the other hand, there is such a thing as human nature. Actions do have consequences. The madness of crowds exists. And both history and markets exhibit definite trends over time. Like many things in life, looking at the markets can lead you to paradox.

When establishment economists prognosticate, their guesses are typically gussied up with convoluted theories and complex mathematical formulae. Their predictions are overwhelmingly bullish, partly because they're really just extrapolations of the prevailing trend, and partly because that's the politically savvy view to hold. This is not to accuse most economists of being idiots, even though I think most of their theories and formulae are idiotic. On the contrary, it's highly intelligent to be bullish - because throughout history things have always gotten better, albeit punctuated with setbacks, ranging in length and depth from the recent recession to the Dark Ages.

Clearly, the longest trend in existence is the ascent of man, and it's likely to continue. Indeed, despite my cynicism on the world as it is, I think the ascent will likely accelerate.

But all this having been said, I think the United States is riding for a serious fall; that opinion has historically constrained my ability to capitalise on domestic stock, bond, and property bull markets. At the same time, I like to play to the strong suits in any game. That has led me to the opinion that over time, some foreign countries will do better than the US, the world's largest and most liquid stock market. And it's only common sense, considering the fate of the dollar, to keep a close eye on commodities in general and precious metals in particular.

It's just a question of timing. In brief, the US stock, bond, and property markets had a fantastic run from roughly 1980 to roughly 2000, with most of the gains made towards the end, as confidence built. Precious metals - notwithstanding some spectacular bear market rallies - did the opposite. I, and hopefully most Daily Reckoning readers, used those years to build large positions in metals and mining stocks. I don't expect to liquidate these things wholesale for at least a few years. And at vastly higher prices.

Oh, I almost forgot. What about 2006? I rather expect to see gold well over $700, silver closing in on $20, oil at where it now is - but likely closer to $100 - the stock market resuming the downtrend it started in 2000, interrupted since October 2002. Interest rates will be heading up decisively. And the US property market is headed down decisively - along with the dollar. All of which should result in a quintuple whammy on Americans' standard of living, which will likely be compounded by a turnaround in the balance of trade (fewer free goodies from abroad in exchange for paper money) and higher domestic inflation (as some of the trillions of dollars Americans have shipped abroad come home, to be redeemed for real goods).

I'm not necessarily expecting the Greater Depression to be announced on CNN this year, but I'll be surprised if the average American doesn't become more concerned about his standard of living and financial future.

The big X factor, as always, remains the government. Frankly, I never expect anything good from government. And here I refer to the institution itself. How can you, considering that its main products are wars, pogroms, prosecutions, persecutions, taxation, regulation, inflation, and assorted idiocy. These aren't just accidental characteristics; the actual essence of government is coercion, and coercion is not a good thing.

Worse, the people drawn to 'service' of the State aren't the 'best and brightest' as their propagandists put out, but the worst and dullest; they're people who believe in organised coercion. Who else could even consider working for such an organisation? That's why 'throwing the bums out' is a pointless exercise in self-delusion.

America's long slide towards authoritarianism has greatly accelerated since our version of the Reichstag fire on 9/11, and I see no prospect of it even slowing, much less reversing. It makes me nostalgic for the days of Reagan; even if the reality was two steps backward for one step forward, he at least seemed good-hearted.

What's likely to happen with the wars that George Bush and Dick Cheney have started? My guess is that they'll grow and spread. Maybe the catalyst will be another big event in the otherwise phoney War on Terror. Maybe it will be some type of airstrike on Iran, because of their nuclear program. Certainly, the numbers of Iraqis and Afghans who join the guerrilla resistance movements will grow. It's foolish to think they like foreign troops running around their countries any more than we'd like an Islamic army in the United States, however well intentioned.

Will the United States and Britain pull out? That's the best case, of course, although it would result in some type of civil war in both countries. The US will eventually leave, of course, but I don't expect that to happen until it literally can no longer afford to stay.

The generational theory of history I've outlined in the International Speculator seems to be developing fairly accurately, and truly titanic war would seem to be in the cards in the decade to come. Maybe with the Islamic world, more likely with the Chinese. Perhaps with some government, or group, that seems most unlikely right now. Who would have guessed, in 1941, that we'd be fighting the Koreans in 1951? And who would have guessed, in 1955, that we'd be fighting the Vietnamese in 1965? The current dust-up with Iraq was certainly off the radar screen back when Saddam was our ally.

Fortunately, those were, and are, among the smallest and most backward countries in the world, even though the wars were quite unpleasant. In the next one, it might turn out the US gets into a tangle with somebody our own size.

I guess my bottom line prediction is that you should rig for stormy weather. But you'll be well able to afford it with the profits you'll make in selected gold and gold stocks in 2006. Which should be an excellent year for us, even if not the world at large.

By Doug Casey for The Daily Reckoning

Doug Casey, the legendary US investor, is editor of the International Speculator now in its 26th year. He is a regular guest on US radio and TV shows including Letterman, Charlie Rose, NBC News or CNN. He's also featured in periodicals such as People, US, Time, Forbes and the Washington Post. To find out more about his investment strategy, see:

https://www.caseyresearch.com