In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, we are joining you today in Argentina. Argentina is a country that has shown the extremes of some of the things that we may be facing today. They have shown the extremes of debt default. They have shown the extremes of inflation. They have shown laissez-faire, and then they have shown full government control. That is one of the reasons you are in Buenos Aires right now, it is not?

David: Well, certainly, I think when you look back at history, there are lots of things to see, similarities, and also differences, and we have plenty of differences, as well, in our own debt structures in the United States, but looking at the loose credit which has preceded crises in the past, it hasn’t really mattered whether it was a full-fledged, developed country or an emerging market. It is fascinating to look back and see what loose credit creates, and the problems that it creates: Banking crises, and currency crises. We can certainly see quite a few similarities between us and them.

Kevin: David, I think it might be wise to bring in historical perspective. If we were to go backward 100 years, or a little over a 100 years ago, Argentina was an economic engine in Latin America. It was the economic engine in Latin America. Then they experienced mismanagement of funds, mismanagement of debt, and mismanagement of currency and politics. You were mentioning something that happened to you last night in the cab, when we were talking before the program. You said it was sort of indicative of the attitude of the people on the street right there in Buenos Aires.

David: Kevin, I guess what you are describing is the underlying discontent with their ability to make ends meet, an underlying desperation. I was coming from the airport and paid my taxi fare, which was roughly $40 in U.S. dollar terms, for a 40-minute taxi ride, and the conversion to pesos. I handed him two bills, and he turned on the light, and said that I had underpaid him, and in fact, it appeared I had. I had given him two tens, instead of two hundreds, but I thought I had given him two hundreds. As it turned out, there was a little bit of a swindle, as I realized that when I got to my room and counted the remaining pesos in my pocket. It had been picked, and I then, more or less on a voluntary basis, just handed him that many more dollars, because I thought I was behind in scheduling the payment.

I guess, when you look back, this is an interesting place. I look outside my window and see a place that, on the one hand, is beautiful, on the other hand, is tragically behind. It has not been maintained. It has echoes of Eastern Europe, in the sense that you can see former greatness. There was something here that was amazing in terms of wealth generation, and in terms of creativity and in terms of real dynamism.

Unfortunately, that was probably prior to World War I, and I guess that is where you see the beauty of the place, and the mystique, the European appeal of the place, all took place prior to 1920. That was really when they peaked, if you will, and they went into a serious decline from 1920 forward. A lot of this goes back to the Argentine Barings crisis.

Kevin: That was back in the 1880s, was it not?

David: Barings was considered the sixth great power, one of the most influential groups of people the world over, more important and influential than most political entities at the time. It is interesting that the Argentine Barings crisis was preceded by a decade of low interest rates throughout the major money centers.

Kevin: Would you say it was artificially low interest rates, like we have experienced over the last decade or so?

David: I would say, yes, in fact, it was artificially low, although higher than the rates that we are used to today. It was just a different interest rate environment at the time. As the Bank of England began to raise rates and tighten their monetary policies, moving them from 4% to 6% in a short period of time, that is when they went into a period of institutional failure. This is one of those things that we can learn, looking throughout South America, Latin America, and the rest of the world, that credit booms often fuel unsustainable growth.

You generally see, during these credit booms, an attraction of foreign capital. Sometimes you could even view that as naïve capital, or naïve money, and that money increases growth rates and becomes sort of a self-reinforcing cycle. A little bit of money comes in and it attracts even more hot money, and all of a sudden you end up with this great growth story, and when the credit environment changes, when the credit boom ends, all that hot money goes away. Investors flee the other direction, and you end up with serious collapse.

Kevin: The definition of hot money is money that is not necessarily going to be loyal to that country for long. We call hot money, in banking systems, money that is chasing the next great high CD rate, if that even exists any more. But the bank, itself, identifies that money as hot money, and they say, “Look, we can’t count on this always renewing, because this could go somewhere else for a fraction of a percent, and that same thing happens to countries. When a country is going through a credit boom, a lot of capital flows into that country, and just as things start going bust, not only does the normal amount of capital that would flow out of that country come out, but much, much more. Is that what you are saying?

David: True, and one of the similarities that we have between Argentina and a number of the BRIC countries, at least Brazil and Russia, is the fact that their economy is dependent on, or the largest component of their GDP, is based in commodity exports. Just as Mexico and Argentina had booming economies prior to 1920, that blessing became a curse as their natural resource exports began to shrink, and then the debts that they had carried – this is very common among booming markets – you generally see an increase in leverage at exactly the wrong time.

With the success comes the opportunity and the willingness for investors to leverage up that success, essentially borrow in the context of growth. Then when the growth goes away, you are left with massive amounts of debt relative to a shrinking economy, and your debt-to-GDP numbers are still upside-down. They cannot be supported by existing revenues, and that is when you end up with some sort of default. That is a pattern that we see and it is something that we anticipate, looking at, at least Brazil and Russia, certainly not China and India, at least in that category, because they are not natural resource or commodity exporters.

Kevin: So, what you are talking about is this borrowing being ramped up – sounds very much like the United States, all the way up to 2007, 2008, with the real estate market. It grew, it was a massive bubble. It is sort of funny to me when I read these articles that say gold is in a bubble, when in reality, gold is going up because currency is going down. It doesn’t have much to do with people taking debt out, like they would with a mortgage, but debt, itself, creates bubbles, doesn’t it? It can be a bubble in real estate, it can be a bubble in tech stocks, but one way or another, when that debt, or the ability to borrow, goes away, that bubble pops.

David: That’s right. I think one of the things that is worth noting, and we have made mention of this before on the program, is that prior to 1914 – which is essentially when the gold standard was abandoned by European countries who were the big, heavy-hitters in the financial markets up to that point – currency crises were far less severe, and that was partly based on what was called the restoration rule, or the resumption rule, which was that if you had to leave the gold standard for any particular reason, there was always the assumption that you would resume or restore that point of stability. So you had confidence, not in man, but in this immutable thing which was almost a self-managing function within the economic or financial picture of the country.

It also happened that recoveries occurred much faster, and this is quite fascinating. In banking crises, prior to 1914, it took two years afterward for there to be a full-fledged recovery. It began to change after 1914, and most radically, it began to change after 1972. In looking at what happened in 1971, the complete suspension of the gold standard, moving into a completely free-floating currency system, now we have, 1914 to the present, and 1972 to the present, where there is this deep connection between banking crises and currency crises, and in the case of a banking crisis, it now takes twice as long to resume the growth cycle after a banking crisis.

Kevin: David, you have brought up in the past that the financial travels to the economic, travels to the political, and then, of course, the geopolitical, or geostrategic. It seems to be a progressive pattern. But do banking crises have to be tied in with a following currency crisis? Before 1914, weren’t they separate events?

David: They were completely separate events, Kevin, and that was the issue. You may have an individual bank balance sheet which may be impaired because of poor lending standards, and if that bank goes under, so that bank goes under, but it was not related to the currency markets at all. That didn’t mean that you didn’t have currency crises. In fact, you did have currency crises, but it was usually related to war, or some sort of military incursion, a one-off event, a huge spike in expenditures that could not be afforded, and so you had a currency crisis in the making, but there really was no connection, at least under the gold standard era, between banking crises and currency crises. Now, on the other hand, you have the money mandarins who will manage the economy, if you will, and try to keep banking crises from becoming systemic. A lot of it has to do with what has changed on bank balance sheets. Bank loans used to always be carried at their current face value, and we have something very different today.

Kevin: David, you have pointed out that when we were on a gold standard, up through 1914, these crises were separate, but when you merge a banking crisis and a currency crisis, aren’t we really just saying that the government is printing money to try to solve the problem?

David: That is correct. The gold standard had prevented central banks from using monetary policy to absorb macro-economic shock. It also prevented them from being the lender of last resort in the banking system. If you asked a central banker how he thought about that, he would say, “Well this is the problem with the gold standard,” and I think our side would be very different, we would say, “No, actually, that is the virtue of the gold standard.”

I think of the climbing that I have done in younger years, most of it at the end of a rope, and occasionally, not on the end of a rope, and I climb very conservatively, if I am not attached to a rope. If I have no safety net, something that is keeping me from my own demise, then I tend to be very, very conservative in the management of each move. And I think bankers, in general, will tend to take fewer risks and we will see less risk in the banking system as a whole, if there is no safety net, if the central bank cannot just print, ad infinitum, in order to solve its own problems. So, I think boldness is in proportion to the protections in place. That is certainly the case when I am climbing. I tend to be much more bold at the end of a rope, and not the kind that is hanging me, the one that is supporting me safely. So, yes, I think we would see a very different change in the banking community if the central bank could not be the lender of last resort to the banking system, as it is today.

Kevin: David, we just recently had a guest who said it very succinctly. He said that the system, as it is designed today, allows the gains that the banks take to be privatized, but the risks that they take to be socialized. I think about being a parent. We were diligent to discipline our children. You are a parent. You are diligent to discipline your children. It doesn’t have to be overdone, but a spanking creates a certain amount of pain, and it can save that child, when they grow up, from a major catastrophe later.

I think about the spankings that banking failures caused back in the 1880s, when we were under the gold standard – 1890s, early 1900s. There were some spankings, there were some financial crises, and I am thinking even of the financial crisis in 1907. But we did not have the kind of worldwide currency crisis tied to it that we are facing today. The person in the street right now is saying, “How in the world do we get out of this? Are we going to default?” In fact, I’m going to raise that question to you, Dave. As Americans, are we looking at a default right now on foreign debt, or is there another way that we are going to solve this problem?

David: Kevin, not only the time spent down here in Argentina, but a lot of the reading that I do on debt restructuring and the structure of U.S. debt, I am more convinced than ever, if you wanted to sum up this whole program, you could do it with this one statement: I am more convinced than ever that the government will default via inflation, not via the outright default that we have seen in past episodes. I look at banking crises for that determination. I look at currency crises for that determination. And I look at the structure of our own debt.

All of our debt in the United States is dollar-denominated, which is a privilege, a privilege which we explored in conversation with Barry Eichengreen, a privilege which no country has ever been afforded in the history of the world outside of Great Britain, and this is the key point: When you look at the serial defaulting countries, including Argentina – five times they have defaulted since 1950 – this is common. Defaulting on foreign debt is very, very common. It is not going to happen in the United States. It is not going to happen in the United States because our debt is not denominated in foreign currencies. I don’t think people realize just how significant that one variable is, in the structure of our debt.

Kevin: So, they are not going to default outright, like we have seen with the talk about Greece, or Spain, or Italy, or some of these other countries that may default, but the default is still insidious. Didn’t John Maynard Keynes talk about a different form of default in the form of inflation? I don’t know if you have that quote or not, but it is something that most people don’t understand. Ultimately, it makes them poor, and they don’t know why.

David: John Maynard Keynes said this: “There is no subtler, no surer, means of overturning the existing basis of society, than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Specifically, we are talking about inflation.

We really have two issues to address here. One: Why fiscal measures are not sufficient, nor will they be employed. Two: We have the privilege, so why not abuse it? Specifically, of inflating away our debt.

First, on the point of austerity. If you look at the economic policy continuum here in South America, there are the extremes of government intervention on the one hand, and control – that would be Venezuela, Brazil, certainly to a lesser extent Mexico. Then if you move toward the other side of the continuum, speaking past and present tense, Argentina, and then ultimately, the laissez-faire Chile, you see that there is more of a market orientation on the Chilean side, and a more government interventionist and controlling element in places like Venezuela. What you end up with is an emphasis, if you will, on the owners of resources, versus labor, and government tends to cater toward the government interventionist side. The central planners of the world, tend to cater toward labor, whereas the free market-oriented tend to focus their energies and comply with a different constituency group, the owners of the resources.

This is important because when you look at austerity measures, these are fiscal measures which are being employed in certain parts of Europe, it is the debate that we have had in the United States over where we should cut spending, and you end up with a payment crisis. This is the problem with austerity. I think it is something that should be considered, but the problem is that it becomes politically untenable. It represents a payment crisis with organized labor. It represents a payment crisis with government employees. It represents a payment crisis with certain protected industries, and so we have seen instances in the past, even here in Argentina, where they have attempted to rein in their financial problems via fiscal measures and austerity and it has simply failed. It has failed because enough people have voted, either voted at the poles, or voted through political violence, and said, “This will not work for us. Take it out on someone else, but it won’t be on our dime.”

Kevin: David, it makes me think that we should probably talk about the last 50 years, just briefly, in Argentina, because we see this fluctuation between control and release of control, but it seems to get worse and worse. It is a frequency that increases. I am thinking, there is a famous musical that Andrew Lloyd Weber wrote, called, Evita. It is about Eva Peron. It started with her husband, and it ultimately went to military control and then ended in war, so this seems like another reason to maybe talk about Argentina a little bit, because it does give us a model of the pattern of things.

David: Kevin, I think this is where there are some similarities, and also, some critical differences, because what we saw with Argentina, and what is certainly reflected in the United States, as well, is an unwillingness to look at fiscal measures as a part of the solution to any real degree. So we are left with, in the case of the Argentines, default, default, default – banking crisis, and currency crisis, on a repetitive basis. The last 100 years have been rife with it.

I think the key distinction is that they had no other choice, because they had seen a collapse in commodity prices, and because they had to finance themselves on external debt, they had to consider default on that external debt, as a real means of return to normalcy. We are in a different position, although fiscal measures are off the table for us, as well, and we are also financed heavily on external debt, our debt is not denominated in foreign currencies, it is denominated in the currency which we can print an infinite amount of, so the reality is, we can continue to make payments, whereas they could not. They did not have access to a British printing press. They had to print in pesos, and pesos had to ultimately translate into British pounds, which was where they were at a disadvantage. We maintain the extreme advantage of financing ourselves on external debt, but paying it back with domestic dollars. That is an absolute coup, and that is one of the key differences between us and them.

You are suggesting the Peron era, Kevin. He was actually in office as president twice. The second time he came into office was in the 1970s, and he did attempt a redistribution of the countryside wealth, if you will, to the city. It was a real emphasis on moving the resources from the landowners, the wheat farmers, the cattle ranchers, directing those resources to labor, and to city interests. He died in 1974, and his wife took over, which is really funny, because it is almost the same kind of thing that happened with the current president today. Mrs. Kirchner is president, whereas Mr. Kirchner used to be. That same sort of translation happened with the Perons back in the 1970s. I don’t think this could happen – well I guess maybe it could happen in the United States if Hilary is elected, where Mr. is retired, for whatever reason, and Mrs. comes into power.

What happened next was kind of interesting. Things spun out of control, there was 499% wholesale price inflation between 1974 and 1976. That led to a breakdown of society, essentially, and they had urban violence, which was escalating. That caused the military to come in and take over, to bring some sort of control back into the system. Violence was just off the charts by 1976. Why were people rioting? Why were people unhappy? Because they couldn’t feed themselves. We weren’t calling it a democracy movement here. We weren’t calling it the Latin American Spring. This was just flat out inflation-driven, just as it is, frankly, in the Middle East and North Africa today.

Kevin: Sure. It’s the insidious effect of not being able to buy your own rice, or buy your own bread.

David: You bet. But Kevin, they saw a deterioration in per capita GDP, and it did not recover for many, many, many years. External debt during that period of time here in Argentina, talking about 1975 to 1982, went up seven times.

Kevin: Wow.

David: Prior to the military incursion into the Malvinas, there was nationalization of over 71 financial institutions, domestically, to attempt to hold the financial system together.

Kevin: And did it work?

David: No, it didn’t, and I think, frankly, we could learn a thing or two about that. Nationalizing Fannie Mae and Freddie Mac has done us no good. They will lose 9 billion dollars this year. They are bleeding, and the problem is we haven’t fixed anything structurally, within our lending system, within the real estate system in the United States. So, no, nationalization, while it may buy you time, is not a real solution, and as we found was the case in Argentina, they nationalized 71 financial institutions in an attempt to prop up the financial system. That, ultimately, failed as well, and on the verge of collapse, they launched an offensive against the British – the Falkland Islands.

Kevin: I remember that war. That was 1982. I had just graduated the year before. I couldn’t believe a country like Argentina thought that they would be able to come up against the British Empire. It didn’t seem like a fair fight.

David: And they still do not call it the Falklands. They call it the Malvinas Islands, because they still assert their right to the islands. But that incursion jumped that 499% – nearly 500% annual inflation rate – to over 1000%. By 1982, they were in complete collapse. This goes back to fiscal measures and austerity. They came up with what was called the Austral plan. The Austral plan was effective for almost a year-and-a-half. They brought the inflation rate from 1000% a year down to 100% a year, which is still very high, of course, but they were making improvements.

The problem is that those fiscal solutions were politically charged. What I mean by that is that it affected certain groups within society. It affected certain interest groups, and those interest groups raised the angst and ire that they were experiencing, brought that to the political process, and they did away with Austral plan about a year-and-a-half into it. Lo and behold, inflation started clipping back toward 500% pretty quickly. It was 300% within six months’ time, and they saw massive capital flight in the country.

It is interesting, because traveling around a bit, you get the sense that if one has money, it is kept hidden, and it is a really bizarre thing, because this is a beautiful place. As I mentioned earlier, the buildings are fantastic, straight out of Western Europe, in the sense that the architecture is absolutely stunning, but it has that reminiscence of Eastern Europe, in the sense that there has been so much control, there has been so much social betrayal. There is a grayness to it, and a hiddenness. Anyone with money does not keep their money in this country, because they don’t trust the system. The political system has swung back and forth so many times between favoring the owners, the haves, if you will, to favoring the have-nots, that there really is a breakdown in trust, and it means that basic infrastructure has been neglected for a long time. It means that technological innovation has been neglected for a long time. It means that, at this point, even now, their educational system is deteriorating.

What you have is the slow degradation of the social structures of this country. And yes, crime is a huge issue, drugs are a huge issue, disenfranchised youth is a huge issue, and you see this deterioration on the other side of both a banking and monetary crisis. I fear that our banking and monetary crisis will have similar social effect, although the nature and characteristics of that banking and monetary crisis, as mentioned earlier, are very distinct, very unique, and much more inflationary, as opposed to seeing a default, deleveraging, and a deflationary scenario.

Kevin: David, you have been recently talking about something that you feel is looming on the horizon. In the past, we have seen, just to distinguish the risk that we have in today’s society versus the risks that maybe banks had 100 years ago. As a bondholder, when I buy a bond – I’m an individual, I go out and I buy a bond, I know that I am looking at the country that I am buying the bond from, or the company that I am buying the bond from and I say, “What is the likelihood of payback?” If I lose on that bond, if there is a default on that bond, I, as an individual, lose, but I don’t take the whole country with me.

We will have a guest on next week who discusses this danger, but I would like to bring up, and have you discuss this right now, the point that the bond market, itself, is an individual moving market. It displays a transparency when you can see it rise and fall, because people are buying individually. The opposite of that is bank loans, which are not transparent. In the past you have brought up that banks could keep bad loans on their books for long periods of time and it would not necessarily show up because no one really knew that they were a bad loan. There seems to be a merger at this point, where with the big banks, this whole too-big-to-fail thing, is really true. Bank of America, Wachovia – we could go on, and on, and on, but if these banks actually failed, because they hold so much in the way of bond holdings, they could take a country down with them. Would you address the bond market a little bit, the transparency, and something that is casting a larger shadow than even the bond market failing? Talk to me about that a little bit right now.

David: Kevin, I think this is important, because the banking system that we have known in the past is very different than the banking system that we have today. The banking system now, as we suggested earlier, being directly tied to banking crises, and currency crises, being one and the same, inextricably linked – this is an issue in our modern era. If we, in fact, have a banking crisis today, which I would argue we do, and I think we can look at Western Europe and the U.S. over the last few years and say that, clearly, we have had one, then, yes, a currency crisis is looming, not only here, but globally.

Let’s just back up and say, “What is so different about the banking system today, than the banking system in past years?” It is mainly this: A majority of banks’ assets used to be loans. Today, a majority of their assets are securities, and by securities, we are talking primarily about different fixed income instruments, specifically, bonds. This is very different, because bank loans, as you suggested, can be carried on their balance sheet at face value, for the duration, and if they have to renegotiate something with a particular debtor they can do so, and maybe even throw on principle payments at the tail end, extend the terms, renegotiate, etc. But it never affects their solvency, per se, because they can always carry it at face value.

Bonds are very different. Bonds have a signaling function. What I mean by that is that with bonds, you have an asset that trades in the secondary market. It trades publicly, and you can track its current value. This is a complicating factor for anyone who owns corporate bonds, for anyone who owns sovereign paper, and this is why we have such a concentrated emphasis, particularly in Europe right now, with the renegotiation of sovereign paper. The impact to the banking community in Europe is absolutely profound.

Kevin: What you are saying is that what we have is the problem that bank balance sheets are impaired, or even worse, by the write-down of bonds. But we have a market out there that is larger than even the bond market that starts to trigger. It’s the insurance policy on those bonds, or the insurance policy on the possibility of a default, and we call those derivatives. How does the derivative market react when the banks have these defaults right there on their books?

David: This is what is particularly interesting, because when you look at the renegotiation of the old bank loans, those could be done in a way that was fairly isolated. There were no dominoes to fall on the basis of a default affecting a particular bank loan.

Kevin: Lending party to creditor party, but it was an isolated case.

David: Exactly. What you are really talking about is maintaining the integrity of the contract. With a bond, yes, you need to maintain the integrity of the contract, and here is where we have added a new dimension into the bond market, and into the banking system. The debt markets today are dwarfed by their own shadow. What I mean by that is that the shadow within the debt markets is the derivative market, which is, as you have suggested in conversations with me before, like Jupiter outsizing any one of its moons. It pales in comparison. So, you have not only the contracts, which are legally binding contracts in the bond market, where you have a creditor and debtor relationship. Those are not as easy to renegotiate, particularly when you have a contract behind the contract, which means you have to respect the original contract for the CDS, the credit default swap, or derivative contract, to be respected, as well.

Kevin: David, what you are saying is that we may, in fact, have a much larger crisis in the derivatives market than in the bond market. This all leads me to believe that this is completely unsolvable without a worldwide default, or a worldwide hyperinflation. Am I missing something?

David: My concern is the same as yours. I don’t see a way out of an inflationary scenario. I don’t see a way out of U.S. dollar-denominated debt being taken care of via inflation, and it will not help them, if it is a hyper-inflation, or even a super-inflation. But if they can get away with 5-10%, or very surreptitiously, even a 15% inflation rate, lying to the general public about the current state of inflation, the Chinese are dealing now with nearly 15% inflation, but the official rate is stated at 6½%. Our inflation is already double digits, and close to 11%, while we are stating it is at around 3%. This is very common. We need to inflate our way out, and we need to try to maintain a sense of normalcy in the process. The problem is, the general public is taking it on the chin through this inflation, but not only are we taking it on the chin through the inflation, but we have something that has been used by monetary authorities, over, and over, and over again, in past episodes of financial and banking crises.

Kevin: Financial repression means, not only can you not go out and buy enough bread, or pay for the things that you need, but if you do have savings, and you try to put it in some sort of fixed investments, like the retirement community does, they are not going to make the interest that will keep up with the reduction of the buying power of their currency. That is the repression, is it not?

David: That is correct, and this is what is fascinating, because we essentially have the Fed doing the Treasury’s work. We have the Fed acting as tax collector. Financial repression, in other words, keeping interest rates extraordinarily low, is a form of taxation. Essentially, what the Fed has done, is that banks have become instruments of the state, squeezing indirect taxes from citizens, by monopolizing both the savings and payment systems, on top of the currency monopoly that they already have.

The Fed is now more in charge of our financial system, and is closer to being a direct tax scheme, than we have seen in all of U.S. history. This low interest rate which Bernanke has said he will keep in place until 2013, according to academics like Reinhart and Rogoff, is defined historically as financial repression, a tax which monopolizes the savings and payment systems on top of the currency monopoly. That is very important as a concept to wrap your mind around. Taxes have already been increased. You didn’t know it, but the redistribution of income is very similar to the redistribution of wealth, whether it is coming from current income, or income that you should have received, but are not receiving due to the Fed’s actions in the marketplace.

Kevin: The Federal Reserve and the government may be able to hide this inflation, to a degree, and they may be able to keep interest rates artificially low for a period of time. I don’t know how long they can do that, where there is a negative rate of return, but the one tattletale that is out there, and it has always been a tattletale of truth, is the gold price. We have been watching gold hitting new highs, David.

This is my question, and I think I probably know the answer to this, but is the only way a person can hedge themselves from what we have been talking about on this program to own some sort of physical asset – gold, silver, some sort of resource that would be redeemable in more currency down the road?

David: This underscores the point, Kevin, that for the Fed, while they have a monopoly on our currency in the United States, gold represents a problem for that currency monopoly. It represents a problem for any currency monopoly, because it essentially breaks the monopoly. It gives someone the ability to choose a currency outside of the world of fiat currencies. They can choose the currency that is its own anchor, as opposed to the free-floating world of fiats.

Relative to each other you may be doing better today in euros, or better tomorrow in British pounds, or better the next day in U.S. dollars, but we have monetary authorities the world over which are using financial repression, which are, in fact, inflating away their debt problems, that have gone through a 30-40 year credit boom. It is no wonder that we are in the context of a credit bust.

It is no wonder that we are seeing massive changes within Europe and they have to use fiscal measures and austerity measures because they don’t have monetary independence anymore. But in the areas where there is monetary independence and monetary control, they are abusing the inflationary thematic very significantly. Sophisticated investors have seen this coming for a long time, but there are a number of people for whom it is just dawning on them, and maybe they are equally sophisticated, but just have a higher trust in the system, and higher trust in their own government.

What people all around the world have forgotten is that governments consistently and regularly screw their own people. This is just classic historical fact. I don’t care if you are talking about the Greeks, the Romans, the British, the Spanish, the Portuguese, the Argentineans – you can go anywhere in the world, and go back 5,000 years, 2,000 years, 100 years, or yesterday – and find that governments screw their people. This is what we are seeing happen, and this is why I think you are seeing a global move into gold. The monopoly is being broken, and it is the only place that you can go if you don’t want to be subject to the arbitrary diminution of your purchasing power.

Kevin: David, I’m sure it is helpful, traveling the world, especially going to countries where we have seen similar patterns to what we are seeing in the United States right now. I am bringing up Argentina. You happen to be there, observing, on the scene, and talking to the people on the street, as well as reading the histories and the economic analysis. It seems that if people would learn from history, they would see the patterns repeating over and over. You were talking about government abuse of the people. It is a recurrent pattern.

I am looking at a chart from the Reinhart and Rogoff book right now that shows that over 40% of the countries, worldwide, that actually had money, defaulted on their debt in 1830, 1880, 1930s, 1990s. It was over 40% each time. If you could see this chart, it is recurrent, and it looks like a heartbeat. What seems to happen is that you have a default, or you have a high inflation, you have some sort of theft, and that is what it is, from the people, and they don’t forget for a while, because they have lived through it, and then the next generation comes along and gets duped completely, again. The frequency in Argentina is just a little bit more rapid than what I just mentioned, and I am sure you are observing the after-effects.

David: The unfortunate thing is that bad policies hurt good people. I look back at a book that Richard Weaver wrote years ago, Ideas Have Consequences, and the title echoes through to this day. Ideas have consequences, and bad ideas have really bad consequences. We are dealing with that in the banking system. We are dealing with that in the global currency markets. We are seeing that reflected in the positive move in the gold price.

Kevin, we can hope for a better day, with better policy-making, and where policies are supportive of good people, not only here in Argentina, but also in the United States. We have our challenges ahead, probably a few more hurdles to get over, before we are on the other side of this. I think what people the world over will have to come to terms with, is that government has never been benevolent. It doesn’t matter if it is your party in office or not, there comes a point in time when survival is more important to them than you are. So, yes, I think we are in a period of time where the benevolence of government can be utterly discounted, or recognized for what it is – nonexistent – in political history. That means that individuals are going to have to fend for themselves in terms of faring well financially, and hope for a much better day.

In the office we are reading a book right now that we have discussed on our program, The Fourth Turning. I think it is a profound, profound look, at what we have ahead. The book is written by William Strauss and Neil Howe, and it is one that I would encourage all of our listeners to get a copy of and study through.

It is discouraging, on the one hand, that there are difficult times to face. It is very encouraging, on the other, that on the other side of difficult times there are periods of rejuvenation and renewal, that countries find themselves and find their identities again, on the other side of difficult times. That is a must read, and certainly being in Argentina, I recall one of our earlier reads this year, When Money Dies. If you, as a listener, have not gotten a copy of When Money Dies, that is an absolute must-read, to understand the social and cultural dimensions of inflation.

Kevin: David, thanks for joining us from Argentina. It is always better to talk about a place when you’re there rather than talking about it from afar.

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