In PodCasts

About this week’s show:

  • The markets signalled Obama win before polls opened
  • What is stagflation? And why you should care
  • Inflation’s are caused by unpayable government debt

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, this is our first recording after the election. As you recall, we were recording during the election last week. There are some things we definitely need to cover.

David: Not only is this a fascinating period of time, now to the end of the year, but 2013 promises to be full of adventure. We have a number of things to cover today, the election results, of course, both elections, and the implications.

Kevin: Let’s talk about both elections, because while we were recording last week, of course, people were going to the polls. We were recording just as they were beginning to go to the polls, but there was another election going on at that time, and the markets had already told us who was going to win.

David: That’s right. And actually, the voting with the feet, as people were exiting the stock market said, “I think we know who’s going to win, and we don’t like this.”

Kevin: And gold was going up at the same time.

David: Exactly. And we’ve got market implications, we’ll cover that. We want to look at stagflation, and some thoughts on inflation and deflation, perhaps an interesting perspective that will shed some light on where we are and where we are going, and the gold market.

Kevin: Also, there are so many people who are not only looking at the government, but they are looking at the Federal Reserve, and just how much power they have. What does this change with the Federal Reserve, and does it have the teeth to change things if something goes wrong?

David: Kevin, perhaps the strangest events of the last week relate to Benghazi. Strange events, now, are either being uncovered or buried deep in the wake of General Petraeus’s retirement. The rumors are interesting, and we’ll keep our eyes and ears open. Only time, or perhaps Star magazine (laughter), will tell us if they are true, but we have either illegal CIA activity, or perhaps an interrogation facility. We may even have Bill Clinton working on a new biography, considering Paula Broadwell as a writer. (laughter) There are a lot of strange things coming out of Washington right now.

Kevin: It seems like we may have another “gate” in the making. I remember being a teenager when Watergate was occurring, and that can really change the focus of an administration very quickly.

David: We wonder at the speed of his departure.

Kevin: You are talking about Petraeus.

David: Exactly. Scandal may be afoot, and here’s the thing. Sex is not a scandal. That’s not scandal material in Washington.

Kevin: That’s nothing new in Washington.

David: That’s nothing new in Washington, unfortunately – regardless of the general’s confession. But it is scintillating enough as a headline to be an effective red herring, and that would really be the question. What are they trying to divert attention from? What really did happen in Benghazi?

Kevin: I think we’re going to have to keep watching. But right now, David, let’s go to the election results, because there are some counties, we are finding out, that actually had better than 100% turnout, which I just have to thank the voters for doing.

David: Yes, that’s fantastic. And other counties where we have had up to 100% that voted for Mr. Obama, which is fascinating, because statistically – well, I guess it’s not impossible, because it did happen.

Kevin: Right, I guess it did. But let’s just take things as if there wasn’t a controversy. The popular vote was close.

David: And the Electoral College was, of course, a blowout in favor of the incumbent. The second vote, as you mentioned a few minutes ago, was that of the market, and I think it was telling. The market is unhappy with another four years of Obama. In summary from last week, we said that the primary issues are still the primary issues, regardless of the victor.

Kevin: It could have been Romney or Obama, but these two issues still stand in front of both of them.

David: Yes. And in the short-term, we have the fiscal cliff, as we head toward 2013 and 2014, that longer-term perspective. Next year or the year after, 2015, we still have the budget deficit, and our looming debts, and longer-term liabilities, and these are issues that have to be addressed.

Kevin: Yes. Take us back to last Tuesday morning. Gold was up about $30, the stock market was down, so that was the vote that was going on that was a precursor to the actual events in the election. Here’s what is interesting. After we found the result, and of course, we found out the result very quickly this time, the next few days those markets continued to move in that direction, so they weren’t wrong at that point.

David: Right. The market response was interesting, definitely worth reflecting on. Equities were down, and have been subdued since the election. Bonds up, with yields heading lower once again.

Kevin: That is the expectation of lower rates, then.

David: Not necessarily the expectation of lower rates, but maybe just the rotation out of equities and into something that represents a liquid pool.

Kevin: Including gold and silver.

David: Gold and silver definitely were up, I think, actually, on a different basis. We’ll talk about that in a minute. What does it mean? There are several currents that are in effect. First, I think the most powerful man in the world got to keep his job.

Kevin: Not Obama?

David: No. Ben Bernanke is still at the helm of the Fed, and he will continue the central bank’s extraordinary monetary measures with perhaps a few variations on the theme, into the next four years, and when he retires, I think the likely replacements are all dovish on inflation, as well. So, in all likelihood, we’ll continue that same legacy of interventionism in the market. Janet Yellen is sort of the heir apparent, and fits that prescription precisely.

Kevin: She likes the word infinity as well.

David: To infinity and beyond. Yes. (laughter)

Kevin: Okay, well, with that in mind then, gold and silver were up. Was that in expectation of that infinity that we’re talking about?

David: They were up sharply on the news that monetary policies of a loose nature would be with us. There wasn’t so much an equity shift to gold as it was, “Good. Ben’s still in power and we know that the money is going to be flowing,” so some of the “risk-on” trades definitely caught traction – but particularly interesting was the fact that, in the context of those risk-on trades, equities were down.

Kevin: That’s amazing, because if you think you are going to have unlimited stimulation of the economy and unlimited printing, why are the equities now reacting to the downside?

David: Right. On the one hand, there are monetary issues, and we talked about Ben B. On the other hand there are fiscal issues, and this is where, again, stocks sold off heavily, with dividend payers getting hit particularly hard, in anticipation of the Treasury sucking more investment dollars into its vortex. That is, specifically, capital gains taxed at a higher rate, about a 60% increase, and dividends, too, will be taxed at a higher rate, up from the current 15% to over 43%. That’s an increase of 180%.

Kevin: That’s going to have a huge, huge effect on people’s stock portfolios.

David: With less reward for ownership, the risks in the market are less justified, and a number of investors are opting to harvest long-term gains ahead of January 2nd. We can’t blame them. It’s never a good idea to stay on the side of a limited and dwindling reward when risks are becoming unquantifiable. Yes, we know that taxes are the known element, those are quantifiable. But the market adjustments to a different level of taxation – that’s unknown. What does it look like as the government gets more and more grabby? We don’t have tax certainty, we don’t have regulatory certainty. These are the same issues which were plaguing us as we came into the tail end of 2012.

Kevin: When money moves out of stocks, it has to go somewhere and you are saying that the bond market was the recipient of the benefit at that point.

David: Bonds moved higher, in large part, because of the rotation out of stocks, because in honesty, when you have more monetization, when you have more easy money, arguably, other than the initial purchase of asset-backed securities, which can distort pricing, we are really talking about something that is going to hurt bond yields and press them higher eventually.

Kevin: Can we see this as a trend? We’ve seen the bond market rise for close to 30 years, but in this case we are starting to see it again. Is this a longer-term trend, or is this something that may change?

David: I think the trends are likely to continue. The markets are voting with their feet. This is perhaps controversial, but the markets are voting with their feet in recognition that the 47% got their man. Now we are not talking about Ben. We are talking about Mr. Obama. And the rest will be doling out a greater share to pay for the bills of others as a consequence. Regardless of the rhetoric, taxing the wealthy isn’t sufficient to fill the fiscal gap that we have.

Kevin: Let me ask you this. Let’s say you took everything from the very wealthy. Would that take care of the issue?

David: You’re talking about 100% tax on their income, 100% tax on their capital gains.

Kevin: That would be Soros working for free.

David: Yes, well, while that’s an interesting idea, and I think that is actually worth thinking about (laughter), maybe I just like thinking about that, but no, that’s not enough, and along with all of the other folks who are very, very, very well-to-do, they still, if they donated 100% of their wealth, cannot fill this gap. And we’re not even talking about donating 100% of their wealth, we’re just talking about income and capital gains taxes going up. There simply aren’t enough of the well-to-do’s to make up the gap between tax income and spending outflow.

Kevin: I hear a little voice in the background saying, “Middle class, middle class.” They’re the people who are always supposedly protected, but the middle class is always the ones who are thrashed.

David: The middle class will feel it most, certainly on an indirect basis, and probably on a direct basis. I think this is where anyone who thinks otherwise is a bit politically naïve. Not meaning to be insulting here, but who says that the government has to keep its word?

Kevin: Well, I thought they did. Didn’t they give their word that they were going to protect the middle class?

David: Frankly, this is not a partisan issue, it involves Republicans and Democrats. Who says that government has to be consistent with what it promises, and with what it does? This is the nature of politics, talking out of both sides of your mouth. Doing one thing, talking a good game on the other. You don’t have to deliver on your promises, you just have to talk a good game.

Kevin: Right. It is interesting, Dave, we talked about how the markets sort of knew who was going to win on Tuesday, even before the vote was counted. But the markets actually had guessed the other direction, if you go back to the Friday before the election. What made them change, or what gave them the difference?

David: It was interesting. The market perception of the election results was one thing on Wednesday, but the Friday before the election the market was guessing at the opposite.

Kevin: They were looking for Romney.

David: They were looking for a Romney victory, and bonds, equities, and precious metals traded in the exact opposite directions they did on Election Day.

Kevin: The markets were wrong the week before, and then they got it right on Tuesday. But let’s just pretend now for second that Romney had been elected. Why did the markets react the way they did when they thought Romney would win?

David: We can’t live our lives in the ifs or the could-have-beens, but clearly, a different Fed chief, promoted by a different president in the oval office, could have sent monetary policy in a direction that complimented the necessary, needed reforms, at the level of fiscal policy.

Kevin: Once again, we’ve done this before, but let’s define the difference between fiscal and monetary, because there is a big difference, and as we go on in this conversation, I think you are going to want to focus on the fiscal. The fiscal is the government, it’s the amount that the government spends, it’s the amount that the government takes in, in revenues.

David: We said there were several currents in effect. This would be that second current that is in effect. We have rules which could have been applied by a new Fed chief, and we are talking about rules, specifically, versus the discretion that is being applied by the present leadership – and we are talking about Ben Bernanke – with results continuing as before. What is that exactly? A business community which is unable to plan its hiring and spending initiatives.

That’s the bottom line, that we have paralysis among the business class. We are talking about the leadership executives and managers or corporations all across the country. On the other hand, we have risk assets that like the status quo. Again, easy money policies promote speculation without there being any recourse.

Kevin: You’re talking about the shorter-term traders. The long-term investor was selling on Wednesday, getting out of the stock market, but traders were just loving the spread.

David: Exactly, and actually, what they do like is the idea that cheap and easy money will be with them in 2013. Why? Well, they’re playing with borrowed money? Playing with cheap money, frankly, is in the end, very different than what you could call costly capital, which is money that has either been hard-won and earned, or hard-borrowed in terms of the cost. If you are borrowing at 7% or 9% you care about that debt much more than you do the money that you borrowed at 0% or 1%.

Kevin: So what you are saying is that without an “all clear” on predictable monetary policies, the speculators are going to continue to hope for more juice.

David: And on the other hand, we have business operators who will remain cautious in their commitments favoring, unfortunately, firing over hiring. We note 45 official layoffs, some of size, which have been announced since last week’s political decision. This leads us to our main topic today, which is stagflation, and progress toward an inflationary outcome, which we think is in the next several years.

Kevin: David, if you would, please define stagflation. We hear it a lot of times, but what is the actual definition of stagflation?

David: When the economy of a country is failing to grow, but prices are going up, that’s a problem. That’s where you have stagnant growth, stagnant employment, and rising prices.

Kevin: That’s where you run out of money before you run out of month. Prices are going up, but wages are not keeping up.

David: To reflect on this, you can look at the periods of stagflation that we had in the ’70s as a useful model for the current period, 1973 to 1975 being one of those periods of stagflation, and 1978 to 1981 being the second. 1973 to 1975 was a time frame very much like this one in the present. The early warnings of inflation became irrelevant, and that was just from a few years earlier. In other words, inflation rates had been rising in the late 1960s, about 1966 to 1969, and then inflation flatlined and started to drop. It dropped from 6% to back under 4% by the time we got to 1973, the recession, rising inflation rates, they ran in a parallel track, with gold moving from under $100 to $180 an ounce.

Kevin: That’s right. Gold almost doubled during that short period of time.

David: Then 1975 and 1976 saw a demoralizing consolidation in gold, as it dropped back to $120 an ounce. By 1977, inflation was back on the rise, and gold was, too, and the rest is history, as they say.

Kevin: Of course, gold ran up. By the time we got to 1980, we had already gone over $800 an ounce.

David: But I mean from 1976-1977, we are talking about $120 to $875, in a fairly short period of time, 24-36 months, to be precise.

Kevin: David, when I went to school for economics, I remember they talked about inflation being a problem when you have too much growth. When things are going well in an economy, you have to really watch that inflation, and the Federal Reserve has to control that. Is that a correct perception?

David: When you look at 1973-1975, and that second period, 1978-1981, these are two periods that stand in contrast to what you just said. Economists assume that inflation occurs in a growing economy and, as wages increase, which is the culprit, really, for driving up the cost of limited goods, this can include an increase in the money supply, which banks are supposed to be lending, and households are supposed to be integrating into the economy. But in a period of stagflation, like these two periods just mentioned, quite the opposite occurs. Wages are stagnant, economic growth is stagnant, and prices, nonetheless, are on the rise.

Kevin: Trillions of dollars have been printed recently, so I would imagine the supply of money factors into that. I know that they were printing money back during the 1970s to pay for the Vietnam War.

David: Absolutely, and here’s a different perspective. A greater issue, perhaps, than supply of the money, is the demand on the currency. Think about this, this is a different way of approaching it, but a far greater issue is currency demand. In other words, people want to get rid of the currency in question, and the normal pockets filled with dollars are, in certain circumstances, trying to be emptied as much as possible, as quickly as possible. It’s not just the quantity of money in question, but it is also the turnover of the quantity in question.

Kevin: It’s a little like playing hot potato. There is a time when you don’t want to hold cash.

David: Exactly, and who wants to hold the stuff? Mind you, we are a ways off from this kind of currency purge. We’re not on the verge of a collapse in the dollar, or a no-confidence vote, but we should keep in mind that it’s not a result of policies, but rather of popular belief. There is a shift in sentiment from trust to distrust of the money itself, and of course, distrust of the money mandarins, specifically, the Fed.

Kevin: It reminds me of a definition that someone who works here brought up one time. I thought it was brilliant. He said that inflation is something that happens over time, but hyperinflation is something that happens in a moment. There is something that changes when a person says, “Oh my gosh, my dollar might not be worth anything.”

David: “I’d better spend it while I can get something for it, get anything for it.” That’s a psychological event. That’s a sociological event, not an economic one, and that’s why the models fail to capture it.

Kevin: That’s something that cannot be controlled by any government or Federal Reserve, I would assume.

David: You are exactly right. The Fed can do nothing to stop that from occurring. Plosser recently said, “We have all the excess reserves sitting in the banking system, a trillion plus in excess reserves, and as long as the excess reserves are just sitting there, they are not the fuel for inflation, they are not actually causing inflation. If they flow out too rapidly, we will potentially face some serious inflationary pressures.”

Kevin: It reminds me of a stick of dynamite. It is very benign when it is sitting on your desk. It’s just a stick of dynamite. It just looks like a toilet paper roll, or something like that. But it’s potential…

David: And this is what we are talking about with turnover, something that can go from 0-60 very quickly. We are sitting on a six-decade low in terms of the velocity of money. This is a somewhat esoteric idea. We have discussed it on the program before. The velocity of money is what we were just talking about, the turnover in the quantity of money. How many times does a dollar bill go through the economy? It gets spent, redeposited with a bank, lent out, spent, redeposited with a bank, lent out. How many times does it get spent?

Velocity picks up when people don’t want to hold onto the money because they fear it is going to be worth less tomorrow than it is today. Some economists are not concerned about inflation and the potential for these excess reserves quickly entering the larger economy because of this very point. They look at velocity and they look at how low it is. And it is, in fact, low. It is at a six-decade low.

The weakness of that view is simply that low turnover in the existing stock of money, and looking back at what has been the case over the last two months, two years, as if the past and future already determined, one on the basis of the other, this can change instantly with people’s perception of the desirability of that money shifting.

Kevin: That brings us to the current Federal Reserve, which has a Keynesian approach.

David: The current Fed doesn’t link money supply, or the national debt, to a potential rise in inflation. They focus on some esoteric things like costs, “slack” in the economy, the expectations of inflation, which Ben has famously described as well-anchored. In other words, we don’t except them to change anytime soon.

Kevin: That’s a perception that they would like to employ, which is that they can change the perception of the people with simply just stating things.

David: What they are accomplishing very effectively is controlling perceptions, and the Fed is in control, because we believe they are in control. Any change in expectation will be present in the bond market. That’s the assumption. You are going to see the price mechanism in the bond market, and yields change value as bonds re-price to reflect the real rate plus expected inflation. That is not occurring and we are getting a good line from the Fed, therefore we should be very comfortable with their current monetary stance.

Kevin: Isn’t there just the thought process that the bond market and the interest rate markets are going to anticipate inflation early enough for the Federal Reserve to take action?

David: (laughter) I’d like to think so, but the long-term interest rates did not anticipate the inflation of the 1970s and this current period of stagflation leading to higher rates of inflation is not likely to be anticipated, either. If inflation can surprise the Fed, it can certainly surprise the bond market, as well.

Kevin: You are talking about a shock.

David: This is because both groups have put ideas in front of market realities.

Kevin: And John Cochran is not the one who was in the O.J. trial.

David: No, no, no, he is from the University of Chicago. He says that, “on occasion, events outpace ideas,” but leaving clean economic theorems scrambling to explain events that were not, or could not be, predicted.

Kevin: Your dad, all through the years, has explained the definition of panic. That is the definition of panic, when expectations are suddenly changed and people have to recalibrate completely.

David: And if you look at any of the Latin American bond markets, you can see a shock to the system, where what was being priced in was perfection, and what they got was, really, hell on earth, in a very, very short period of time. Arthur Laffer, in a 2009 Wall Street Journal Op-Ed piece, said, referring to the 2008 cash scramble, “The panic for money has begun to, and should continue to, recede. Reduced demand for money, combined with rapid growth in money, is a surefire recipe for inflation and higher rates.”

We don’t see this as imminent, but it is a near certainty in the next four years, this idea of reduced demand for money. We have printed it. It’s sitting on bank balance sheets. They have redeposited it with the Fed. It’s sitting there as excess reserves.

Kevin: But it’s not turning into velocity of money. It’s like what you’ve talked about before, David. It’s like water being held back in a dam. Once that dam breaks, there is an awful lot of water going down the canyon.

David: So pick one of a dozen different issues which could change people’s perception of the desirability of that money in question.

Kevin: Yes, but Ben Bernanke would say, “Okay, so that happens. I’m going to just raise interest rates.” Can he?

David: Right, the idea that the Fed can raise rates when needed to fight inflation. The budget deficit would explode higher, bearing the added costs of higher interest rates on the U.S. debt obligations. The interest alone – we aren’t taking about paying off the debt – the interest component alone would suck the life out of the economy, gobbling up a very large percentage of national income, that is, tax revenues. The debt we have, the deficits that we are running each year, can, in fact, cause inflationary concerns. How will the deficits be paid back?

Kevin: That’s what the person buying Treasuries would ask. How in the world are they going to pay these deficits back?

David: Right. And this is where this argumentation in Washington is critical to the valuation of the U.S. bond market and the stability of the U.S. dollar. What they don’t realize is they are playing with fire. They will probably put something together between now and the end of the year. It probably won’t be a long-term solution, but will just kick the can into 2013 or 2014, buy a little time, maybe six weeks, maybe six months, maybe it’s longer than that, but I would severely doubt it. They want to get past this critical juncture. They want to get past the inauguration and into the first 90 days, at least.

Going back to your point of how the bond market perceives all of this, if the payback is not due to economic recovery and an increase in tax income, then how are they going to pay off their loans? How are these IOUs going to be settled? And if the question enters into the mind of the creditor, either domestic or international: “Money-printing? Is that the solution? You’re going to pay off these loans with additional money-printing?”

Again, this deals with the judgment of the market, the shifting of a perception. The fiscal and political intransigence over issues like the fiscal cliff, like our budget, like taxation, over the coming years, could all serve as a trigger for greater inflationary concerns, taking us into what Ben Bernanke would describe as unanchored expectations.

Kevin: And you don’t want to lose your anchor when you are in a storm, that’s for sure. (laughter)

David, I’m going to go back to John Cochran for a moment. He talked about the value of bonds being directly proportional to the people who buy them realizing that you are going to be able to pay that off with a surplus. That surplus could come from productivity. Ultimately, it’s going to come from revenue, though. If they don’t see that it is going to be paid off with a surplus, and they believe that it is going to just be printed out, that’s when you are saying that perception can change, and that can change on a dime.

David: This is why the major explosions of inflation throughout the world have been tied to fiscal problems. Inflationary expectations are nil when a government keeps its fiscal house in order, and they can rise very rapidly when governments show that they are mishandling their finances. I think it is plain for everyone to see that this has been the case in Europe. No one was asking the question about Greek solvency in 2003-2005, but now everyone would assume, “Are you crazy? They do not have their house in order. Who would lend them any amount of money?”

That’s not the perception of the U.S. today. The question is, by the time we get to 2015-2016, of course, we will have resolved the fiscal cliff, but what of our other issues, the deficit? What about our long-term spending and liabilities?

Kevin: David, there is the fiscal cliff. You talked about 2015, getting out that far, but actually, in the next couple of years, in 12, 24, or 36 months, we have an awful lot of our debt coming due that we are going to have to deal with, as well.

David: And that adds an extra layer of inflationary concern. It is built into the structure of our debt. As you said, in 24-36 months, we have the majority of our bonds coming due. Our debt structure is not being tilted toward long-term loans. What that means is that we face the continued threat of rollover, of a liquidity crunch, and the only expedient resolution being another round of monetization.

Kevin: Which is printing money.

David: We have the Fed purchasing IOUs with money that, two seconds before, did not exist.

Kevin: David, there are some very, very smart people that you have had dinner with, you have gone out with, you have had meetings with, who are what we would call deflationists. We are talking about inflation or stagflation here. What do the deflationists think?

David: Taking the other side of the argument, the deflationist argument runs like this. Given the total stock of debt, which some count as high as 131 trillion, a more conservative estimate might be 70 trillion. This is current liabilities plus future unfunded liabilities. We are talking about a long-term balance sheet adjustment that needs to take place. It is enormous. We ran up the bills. Now, how much time will it take to pay them off?

Once you move into the terminal state of over-indebtedness, paying down, or unwinding debt, in fact, takes a long term. Historically, if one is trying to intentionally honor these long-term liabilities, it takes roughly 23 years to get caught up on one’s bills. Twenty-three years is a long time. Inflationists would argue, therefore, nothing will change the course of the bond market, lower and lower rates. Therefore, greater and greater demand for dollars, the instrument used to pay back those obligations.

Kevin: But that is assuming that we plan on paying back the obligations.

David: Enter the Fed into the equation as the weakest link. We are dealing, not just with economic realities, we are dealing with, over the next several months, of course, the fiscal realities, but we are dealing with psychology, and we are dealing with perception, which can change, depending on social mood, and an intangible, commonly held belief. Today, we believe that the Fed is capable of managing our money system. Tomorrow, we may not. This is where the notion that we may find default, not as in, we call our creditors and say, “Sorry, we’re not sending you this month’s payment,” but we say, “We’re sending you this month’s payment and next month’s payment ahead of time,” and we hope that they don’t ask, “Where did you come up with that money?” In fact, if it came off the printing press, if it is hot off the printing press, they may be a little upset.

Kevin: That’s not a surplus, that’s just printed out of thin air.

David: Credibility is something that is fairly easy to keep, but once it is lost, it is nearly impossible to regain. The Fed’s extraordinary measures, looking back over the last three years, we are not questioning. They have been successful in terms of holding things together. Recovery? No. Fixing the problem? No. But largely, if we look at these measures, throw them under the microscope, the man-on-the-street simply doesn’t understand what has been happening already. If they were fully understood, if these measures over the last three years were fully understood, I think credibility would at least be on the table for discussion, not that full discrediting would yet have occurred, but could be the feature for 2013-2015, that kind of a time frame.

It really has to do with our creditor relationship, and if they perceive us running a hot and heavy inflation rate, in spite of the official numbers which we are lying about, if they see behind the veil, and start doing what Jacques Rueff told Charles De Gaulle to do, “Adjust the equation, take gold, don’t take dollars, you are at risk, they are paying you off with worthless currency,” that perception changes, and it’s not just central banks that cause a run out of the dollar, but the man-on-the-street follows suit.

Kevin: So there really is a difference between the quantity of money and the demand for money. There is a time when a person is going to run to cash and they are going to want as much cash as they can have, which is what we saw in 2008-2009. But we are seeing that change, and it could change very rapidly, when a person says, “Oh my gosh, I’m not holding cash at all.”

David: So on the table today are a variety of fiscal issues which have to be addressed, and if our legislators don’t address them or if they lean too heavily on the monetary mandarins to fix the problem, and the Fed has to step in and start printing again, we are on the cusp of disenfranchising our creditors. And when our creditors are disenfranchised, they will begin to play a game, perhaps even a war, where we may not win, even though we have all the tanks, and bombs, and guns in the world, we have a strange and unhealthy dependency in the currency realms with creditors, who frankly, have a lot of control, a lot of influence, a lot of power, and we just hope they keep their mouths shut as they fight their wars, because if the man-on-the-street panics, that’s when you have hyperinflation. It is a singular psychological event, not an economic one.

Kevin: That is when events overwhelm ideas. All through history good ideas could not be employed because something happened, someone attacked, there was an invasion, or a natural disaster.

David: An oil shock.

Kevin: Right, or terrorist attacks, these days.

David: Even a political shift where you just change the status quo relationship. There are so many things that could change, and I think the backdrop is perfectly set for what seems like a disconnected event somehow having ripple effects into the world of finance, and this time on a very dramatic scale in terms of the outcome.

Kevin: We are talking about demand for money, we have had a reserve currency in dollars for so many years, through the Bretton Woods system, yet we are starting to actually see this, Dave. We are not just talking about some sort of hypothetical theory that in the future there could be a sudden change. We are seeing dollars being converted to gold overseas right now, in India, in China, and in Europe, the central banks are net buyers of gold. How does this affect gold, as we talk about this?

David: While I may not have been supportive of the Obama bid for the White House, he has been very supportive for the gold market and our business the last four years. He gave us the move from $820 an ounce to $1920, about a 134% move. And frankly, I think, following the re-election, a quick move higher, $50 following the days after the election, we have a preview of coming attractions, if you will. It wouldn’t surprise us if the price, starting in early January, and coming into the next four years, is up 134%. We are almost certain to see the same thing, a 134% move. This man will get us there.

Kevin: You are talking over $3000 gold.

David: If only on the basis of Ben Bernanke and Mr. Obama. If there is more to the story, then I don’t know how to peg the price.

Kevin: David, we really shouldn’t neglect plain old supply and demand. We have had guests on over the last month who have said, “It doesn’t matter if gold goes over $3000 an ounce, we are not going to be able to produce much more gold than we are getting right now.” The demand, over the last ten years, was not really due to stagflation, hyperinflation, or deflation. The demand has just been simply moving into gold, new economies and old economies moving back into gold, and the supply not keeping up with the demand.

David: These policies that we are talking about, fiscal and monetary in nature, simply get us there much quicker, and perhaps to numbers that we couldn’t have imagined prior to.

Kevin: So this is just icing on the cake for the gold market.

David: You’ve got it.

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