Finding undervalued blue chip companies with exposure to Asian growth ranks high on Porter Stansberry's to-do list these days. And it works as a hedge against inflation, too, according to the fellow who founded Stansberry & Associates Investment Research, because the companies' earnings and assets would grow as prices climb. There's a caveat, though. "If you're not willing to short stocks as well, don't buy stocks at all," he cautions readers of The Gold Report in this exclusive interview. "Stay in cash and gold."

The Gold Report: The National Bureau of Economic Research announced last week that not only are we out of the recession but that in fact, it ended in June 2009. They did note that it was the longest recession since the Great Depression. Did this announcement surprise you?

Porter Stansberry: On one hand, I expected the authorities to come out and say everything is getting better at some point, and I also expected that pumping enough money into the economy could stimulate some economic activity. So, I guess in that way, I was expecting it.

Then, in a deeper, more intrinsic way, I wasn't expecting any significant improvement to the economy whatsoever. I would argue about the meaning of this conclusion, too, and point to measurements of our national net worth as being the appropriate gauge to measure whether we're experiencing any genuine economic growth. America's net worth continues to fall in terms of the average household net worth, and also, of course, our government's net worth is growing in the red dramatically every quarter.

So while I'm pleased that there is more economic activity, I wish there was more employment, and that we were heading in the right direction in terms of growth of median incomes and net worth. But I'm unfortunately very pessimistic that any real increase to net worth, either measured by the government or by individual households, can be achieved when the government continues to paper over our problems with more credit and more money instead of making our economy more competitive on a global basis.

TGR: But measuring net worth as the true driver, hasn't individual net worth really been decreasing over the last decade? Wasn't the perceived net worth really based on debt?

PS: It's very interesting that ever since the whole U.S. economy came off the gold standard in 1971, the average household income has really stagnated. For a while, it continued to increase in terms of statistics, because more and more families had two wage earners. During the '70s, household income looked as if it was still increasing, but factoring in the additional wage earner, it didn't change at all. And then it began to decline in the late '90s, and has continued down for the last 10–12 years.

So in terms of household incomes, we've definitely gotten much poorer over the last 30 years, and that's just a measure of income. In terms of net worth, meaning all of our balance sheets—our assets minus our liabilities—America was richest on paper in the spring of 2007 before the start of the mortgage crisis and the real estate bust.

TGR: You're talking about individual net worth, not corporate net worth?

PS: Exactly, talking about median household net worth, median household income. So, individual incomes have been stagnant and/or declining for more than 30 years, and individual net worth has fallen precipitously since 2007 and continues to do so.

You can survive your income falling if it's not dramatic. Your income can decrease for a long time before you start living beyond your means. I think what's happened to America, in a cultural sense, is we stopped getting richer as a country in the early 1970s, but we haven't adjusted our consumption patterns in any way, shape or form to meet the realities of the new lower income. As a result, debt has piled up over the last 35 years. And of course as you add debt without increasing income, you're reducing your net worth.

TGR: Is what you've described unique to the U.S. or would you put other leading countries in that same bucket?

PS: In scale, I'd say it's unique to America. The scope that we have continued to consume above our level of income is oppressive, and it was enabled by the fact that our paper currency is the world's standard. So we had no barriers to credit, which meant that we could borrow a heck of a lot more than anybody else and end up with a lot more debt than anybody else.

The macroeconomic problem of stagnant to falling median household income is common throughout the developed world. That has only one cause, which is poor competitiveness. We don't work as hard as our Asian competitors, to put it in plain terms. But in America, unlimited access to credit exacerbated the problem.

TGR: To what extent has government debt increased to cover the increased credit provided to individuals?

PS: Over the last three years, what's happened is a huge transfer of obligations from private balance sheets to public balance sheets, right? The biggest and most important example—which isn't even discussed in Congress or in Washington as being a problem, which is truly amazing—was shifting $10 trillion of obligations owed by two private corporations, Fannie Mae and Freddie Mac. We shifted responsibility for all those credits onto the U.S. Treasury. That had the impact at the time of doubling—doubling!—our entire national debt in one swipe of the pen. That's just an incredible transformation that took place when the government decided to guarantee all of Fannie's and Freddie's creditors, when you know what Fannie and Freddie really own with all that money they borrowed is pretty much every mortgage in the United States.

You can see that we as a nation have decided that the government ought to be responsible for our mortgages. In a way, that's us saying we believe the government ought to be responsible for all of our private debts.

TGR: And where does that lead?

PS: It's interesting, isn't it? That was the goal of every socialist regime in history, right? And yet, here we are in America living in the new socialist utopia where no private citizen is really responsible for their private debts. It all becomes a matter of social obligation.

You know, I don't think it's any really great surprise to any thinking person when I say I doubt this experiment has a happy ending. I don't think you can socialize everyone's private obligations and end up with a good economic result.

TGR: Is some big train wreck the likely outcome?

PS: I'd argue that we're in the midst of the train wreck. We're going to see a continual increase in sovereign debt around the world, even though according to any standard model of repayment, all the leading sovereign debtors are already bankrupt. Just to give you an example, if you look at the size of the U.S. federal government debt outstanding today—not the unfunded obligations, just the bonds that are outstanding—and you look at the federal government's annual revenue, the debt is now 356% of the revenue.

If the federal government didn't own the world's reserve currency, you can imagine that it would be impossible for that government to get credit anywhere. No one would lend to an entity that's so far in debt as the government already is. And yet it's the government that continues to provide additional stimulus to the economy by adding to its already swollen obligations.

So what I think that you're seeing is that the government continues to pump money into the economy via expansion of credit and/or straight out printing money (via quantitative easing). That has a diminishing-returns effect, so people would argue now that "cash for clunkers" and TARP, etc., didn't do anything.

In the middle of this train wreck, our currency is gradually being debased and efforts to restart the economy with additional spending aren't working. They probably can't work. How long does this continue? How much debt gets racked up before real, true panic sets in and people simply start to flee the currency at all costs?

TGR: How long? How much?

PS: I don't know the answers. But I don't believe the current strategy is feasible. I think the only thing that really can be done—it would be painful, but less painful than the calamity we're heading toward—is to demand that people be responsible for their private obligations. No more bailouts, no more stimulus, no cash for clunkers. You, the American people, have to live within your means starting on this date.

If we then defaulted on the U.S. government bonds, we'd tell our creditors, "We're going to give you a certain percentage of our tax receipts, but we have to renegotiate our debt because we can't pay it back." It would be really bad for six or nine months, but then I think things would be great because you would have washed out all the excesses, people could get back to work and the dollar would fall to a value that would make our economy very competitive on a global basis.

TGR: Demanding people live up to their private obligations on a par with the defaulting on U.S. government bonds strikes me as curious. On one side, I see individuals who have benefited least from any stimulus—in fact many of them are unemployed, losing their homes and going into bankruptcy. The banks are the ones getting bailed out.

PS: When I say that people have to be responsible for their private obligations, I'm talking about the big banks, right? If a bank actually had to be accountable to its depositors, there's probably not a major bank in the United States that would be open tomorrow. I mean we're all comfortable with the banks because we know that the printing press stands behind them. But that's no way to run an economy. For the economy to work, there has to be winners and losers and people have to be responsible for their obligations. We're living in a socialist dream right now, and it's going to end up becoming a socialist nightmare. These dreams always do.

So, when I say individuals have to be responsible for their obligations, really what I mean is the creditors of people cannot continue to expect the government to guarantee every obligation. It simply isn't feasible. It can't be done. You can't guarantee every mortgage in the United States. You can't do it. Likewise, the U.S. government's creditors have to understand that there is such a thing as government default on debt; it happens all the time. If you make a loan to a government that is in as far over its head as our government is, you're making a bad bet.

TGR: The default discussion has been going on for quite a while, and with elections coming up, it seems there's more talk about either additional stimulus coming out or quantitative easing. What's the straw that finally breaks the camel's back?

PS: I can only tell you that no one really cares about a creditor's debt load up until the moment that everyone cares. The Greek bond yields didn't move at all until the market went into a panic six months ago over them, and yet the creditors all had the data on the way the Greek economy was working for years. I vividly remember reading commentary in the late 1990s of well-known economists saying there's no way Greece should ever be part of the EU because they have a kleptocracy, basically a government of thieves. But they still were able to borrow money on ridiculous terms up until the moment people decided not to lend to them anymore.

TGR: Well, they're actually still lending them money.

PS: Yes, but only with that $185 billion bailout fund standing behind the Greek credit. Otherwise, no one would have lent them any more money. Greek bonds that are denominated in euros are not going to default. Rightly or wrongly, creditors believe that they can get an extra 200 basis points at yield by buying Greek debt instead of German bunds, because to the creditor it's the same thing. Now that the Germans have not allowed the Greeks to default, in reality the credit risk of the Greek bond is no more or less than the German bund. So you're giving speculators all the basis point difference for free. That's the way they see it.

Even more interesting than the fact the Greeks were bailed out, the stock market has picked up noticeably in the last several weeks, which coincides exactly with the beginning of the latest European quantitative easing. The same thing happened in the spring of 2009 in the U.S.—asset markets and asset prices of all types start going higher every time there's more quantitative easing. It's not because those assets are becoming more valuable, but because people are fleeing the currency every time the printing presses come on.

TGR: And is more quantitative easing in the cards in the U.S.?

PS: The answer is absolutely, 100%, for sure, yes, there will be. And I think it will cause asset prices to rise. I don't think it will cause our economy to have any real benefit.

Of course, it's not just the federal government that's in big trouble. If there were a real rating agency, California's rating would be lower than Greece's. I read somewhere that something like 300 separate agencies have the power to issue bonds under State credit in California. And there are going to be bankrupt municipalities all over the United States; Harrisburg, the capital of Pennsylvania, declared bankruptcy this month.

TGR: Earlier this year you advised your readers to not be upset to be sitting in cash and be really careful about the markets because there's tremendous volatility. For those who didn't want to truly hedge themselves in equities, you recommended short-term Treasuries and gold. If asset classes are going to increase in value in every quantitative easing, why wouldn't you recommend equities?

PS: When the quantitative easing started in March of 2009, I was wildly bullish, the most bullish I've probably been in my entire career. I told people straight out that equities are much cheaper than precious metals; they're cheaper than bonds. I did put my readers into a lot of stocks in 2009, and we made a lot of money.

In early 2010, the Fed announced it would stop its quantitative easing, which made me very cautious because I believed as soon as the quantitative easing stopped, asset prices would resume falling again. And so I've recommended more individual short positions this year than I have ever recommended before.

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