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About this week’s show:
- US pressure triggers Treasury dump
- Sanctions inspire dollar boycott
- Gold inoculates against black debt
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin:David, I was talking to my wife the other day and we were looking at Crimea, and it was like, gosh, this could be the start of something big, and looking back at history, it has been the start of something big for Europe and the Western world in the past.
David:1346, and that’s not the price of gold, that was the year, coincidentally, that the spread of black death was funneled, basically, through Crimea.
Kevin:That’s right, the City of Plague.
David:The City of Calla was under siege from the Mongols, and, amazingly, this besieged city ends up having these dead bodies thrown over the walls.
Kevin:Right. Yes, David, it was the Genoans from Italy, and they were traders at the time, and they had a double-walled city and the Mongols were losing almost all their men. Hardly anyone survived once they contracted this black plague. So the Mongols decided to catapult these bodies over the walls of the city, and of course, where did the Italians go when they fled the city?
David:They went home, and they took the black plague with them, to not only Italy, but the rest of Europe.
Kevin:Well, what I was talking to my wife about was that the situation that we have right now seems military, it seems political, with Putin and the West, but actually, what we are talking about here is the weakness, actually, of the dollar. Remember when we talked to James Rickards the last time, he had written the book, Currency Wars, and he said that wars these days are fought financially and economically first.
David:The weakness that we see in the world system today is driven by deficits, it is enabled by debt, and the oil in the gears, if you will, is the dollar. And these are things that have long been taken for granted, but are certainly being questioned by a lot of folks around the world today. We have issues this week, certainly with our debt markets, the overseas treasury holdings, this from the Wall Street Journal, the Fed posted a record drop this last week, U.S. government bonds held at the Fed for foreign central banks and other overseas investors plunged last week by a record of 104 billion dollars.
Kevin:I read that story and they said that that was three times larger than any other time, that what had happened was treasury debt, from what I understand, Dave, was taken out of the Federal Reserve’s custodianship and moved to another bank. The most that had ever been was in the 30 billion range before.
David:Yes, the Financial Times was suggesting that Russia may have shifted its treasury holdings to a third party custodian, in case a broader set of assets ended up being frozen by either the Europeans or the U.S., so this may be just a transfer out and not an outright liquidation, of 104 billion in U.S. treasuries, but it still raises the concern, we in the United States are dependent on either the kindness of strangers, or the largess of the Fed, and that is, their printing, and their asset monetization. This is really what has put us between the proverbial rock and a hard place.
Kevin:I’m wondering if that is why John Kerry is having to use such careful language. If you looked at the Finance Minister of Russia day before yesterday, he made some offhand passing comments that the Kremlin later said were not official, but he basically said, “Gosh, you know, we may not be able to pay back that debt that you Americans have with us, and we may not continue to buy debt from you all.” So what he is doing is playing chess, financially, with what actually is a military situation.
David:Well, yes, sanctions. And this was sort of light work for, in the U.S., what we have is the heavyweights in the foreign relations.
Kevin:Uh-oh, John Kerry is a heavyweight, huh?
David:Well, I mean look at him. He’s proving his all-star status this week. What was his comment? “We hope President Putin will recognize that none of what we are saying is meant as a threat. It’s not meant in a personal way. It’s meant as a matter of respect for the international multilateral structure which we have lived by since World War II.” That’s an actual quote. If you think about that, not only does it capture the naïveté of Chamberlain, September 1938, but it also captures, and is the perfect caricature for our opposition in the world, the epitome of weakness. It is like Chamberlain is back on tour.
Kevin:I was just watching that clip recently, Dave. It’s on YouTube, it’s about a minute and seven seconds, anyone should look it up. Neville Chamberlain getting off of the plane, coming back to those who absolutely did not want to see any contention or war, and he said, “There will be peace in our time.” We have the signed document from Heil Hitler, himself. (laughter)
David:Again, we don’t mean to offend, we certainly want to be respectful, and this is nothing personal, Mr. Putin. Well, in fact, it’s really not personal because none of the names listed to be sanctioned, there were only seven on the U.S. list, and 21 on the EU list, none of them are in Putin’s inner circle, none of them. So it was a soft volley back to the Russians, and I think, ultimately, he’s going to want Eastern Ukraine. He’s going to want it because it has long been sympathetic, really, since the 1930s and 1940s, Eastern Ukraine has been sympathetic to Russia. Stalin, you might recall, brought in a loyalist population, basically, replaced the population after he starved out seven million people, starved them to death. Seven million people died in Eastern Ukraine because of Stalin’s deliberate starvation.
Kevin:It was because they needed the land, as well. It’s not right that they did that, but these guys are chess players, Dave, and as Dr. Friedman, who has been a past guest a number of times, has said, in fact, he said five years ago that Russia was going to come into the Crimea and ultimately take Ukraine, and they have to have Belarus back, because there is a thousand-mile buffer between them and the West that they lost when the U.S.S.R. fell, when the Soviet Union fell. All they are doing is going back and reasserting what they believe is theirs in the first place.
David:We’ll talk about a few examples of how the world community is growing disenchanted and concerned with U.S. foreign policy, and the application of financial weapons in the context of foreign policy leverage.
Kevin:Well, think about it. If it’s not currency that they are worried about, and that’s how we’ve maintained our leverage in the past, China, Russia, Iran, these countries don’t depend on us militarily for protection, either, so if they don’t really need our currency, or they’ve found a way around it, by buying gold or moving to other currencies, then they also don’t necessarily need our military, so this disenchantment, really, is two-fold, is it not?
David:Yes, and I think what we are creating is a bit of a PR problem. The developing world gets to look at our current policy implementation, in Russia, specifically, with Crimea and Ukraine, and it illustrates to the world, which is already disenchanted with the U.S. dollar-centric finance system, that an alternative is paramount. We need to come up with something, and come up with it fast. Otherwise, they will be subject to the whims and fancies of the U.S. Treasury and State departments.
Kevin:What’s the time frame on that? We’ve talked about the hollowing out of the dollar, but what is the time frame on maybe shifting to another type of currency system?
David:I think you could have a plug-and-play option, something that is completely suited and ready to go in 12-24 months, and that is something that is directly competitive with the U.S. dollar. Look at it this way. When people on the street are unhappy, you get social unrest. When people in positions of power are unhappy, re-engineering occurs.
Kevin:That reminds me of what George Soros has been talking about here recently. He acts like he is not a world leader, just a billionaire who is concerned, and a philanthropist, but he is very much into systematic re-engineering. Is this something that maybe we’re moving to that the world has been wanting for a while, but the United States has been bucking?
David:Sure, and right now, certainly, there are diplomatic relationships that are under pressure, but sometimes that re-engineering is sort of the political and economic underpinnings and we’re witnessing in real-time the undermining of the U.S. dollar system. Think of it what you may, whether you like the dollar system, don’t like the dollar system, here in the U.S., without it, the wealth in the United States that we take for granted is in jeopardy.
Kevin:Is this why China and Russia have been buying so much gold?
David:Yes, China is buying gold, India is buying gold, Russia is buying gold, in large part, as an offset to anticipated losses in paper assets. Obviously, there is the more extreme end of seizure, but I think that the real concern is something they’ve already encountered. If you have an inflation target, the Fed has set an inflation target, and this is a form of soft default. They are getting paid back. Creditors of the United States are getting paid back with cheaper and cheaper dollars. And by the way, it is not only the U.S. Federal Reserve, our central bank, that is doing that, it is the Bank of England, it is the Bank of Japan, they’re printing nonstop. So if inflation is the coming pandemic, then gold is really the inoculation for the disease.
Kevin:It’s funny that we used the analogy earlier on Crimea and black death, but actually debt is the new black death. We could call it the black debt of the dollar, and the inoculation is gold.
David:The only protection is ounces. That is absolutely the case. There is not only, really, a deep antipathy over the U.S. presumed role of global cop, because nobody likes it. Nobody likes the fact that we kind of stick our nose in everywhere, but with it, there a desire to break the World War II bonds that still sort of linger, those remnants of the Bretton Woods era. Granted, things changed in the 1970s. They changed dramatically. The dollar is still, however, king. We have rumblings today, and they are growing greater by the day, of moving away from that. Today, we have the dollar index at about 79 and change. All eyes are on a move below 79. We talked about this maybe a month or two ago, and had a dollar rally up into the low 80s. 82, not even 83 or 84, but listen. The next line in the sand is 70, and these are numbers which correspond to the breaking of global confidence in the dollar which we saw about 40 years ago.
Kevin:It’s something that the world leader, I mean the high and mighty U.S. dollar is now, really, vulnerable to the very thing that we used as a currency war against one of our enemies, Iran. We helped create the inflation in Iran that broke their back.
David:Whether it’s Russia, Crimea, in real-time, and granted, these sanctions are paltry. They do nothing. They’re frankly symbolic and embarrassing. But, if you look at this as sort of the first salvo, leaders around the world took note of the U.S.-induced hyperinflation in Iran last year. We caused better than 100% inflation in one year, the U.S. cut them out of the dollar payment system known as SWIFT.
Kevin:That was through Brussels, wasn’t it?
David:Originally through the U.S., and then there is a secondary SWIFT system in Brussels, and the Treasury shut down that system by pressuring Belgium to no longer facilitate transactions in euros. So Iran was out of the dollar universe, out of the euro universe because of Treasury pressure, and what was their choice?
Kevin:They had to trade in other things, commodities.
David:Right. So they went to their trading partners, their oil trading partners, and their other tradable goods partners, Turkey, India, Russia, China, and gold was a part of that transaction settlement. It took on the role that it has always played. In the final analysis, gold is simply money, and it’s not a part of a financial structured system. Again, you have the emerging markets, which are growing more and more concerned over the controlling nature of the Treasury, the controlling nature of the U.S. State Department, and wondering how they can work around the system. We’ve talked about bilateral trade agreements until we are blue in the face, but this is, again, how governments work around, and basically retrofit, the world financial system, with a new set of pipes, so that the liquidity, as and when it flows in different currency terms, basically skirts around the U.S. dollar as the middleman currency altogether.
Kevin:It is reminding me of a body, and you can give it antibiotics, but it begins to adapt, and the antibiotics no longer work. What we are really doing, Dave, by putting sanctions on these countries, and what we did with Iran, we are training them, actually, to remove the dollar from their needs.
David:And I guess this is presumption on our part, that the dollar is a fixed element in the universe, and it cannot be changed, and I say presumption because we know from history that, in fact, reserve currencies, well, we’ve had five or six of them in the last 500-600 years, so like clockwork, every 100 years or so you get booted and somebody else gets put in your place. And it would seem that the euro may be that currency. Consider the fact that it has yet to trade below its pre-launch levels, with all of the stress and strain in Europe over the last 3, 4, 5 years, it never sunk below 1.2, which is a good 20-25% higher than its original release value back in 1999. So even with an immense amount of pressure and strain, it did not disappear, it did not collapse, it did not fold, and again, I think that speaks to a world that is hungry for an alternative to the dollar monopoly system. The point, again, is that the world sees that the U.S. controls, not only the global financial system, but we operate like a cartel, and they simply need or want an alternative in response to that.
What are the long-term ramifications? Long-term ramification is a compromised dollar in terms of its security, a stronger euro, relatively speaking, and frankly, a radical shift in influence and power away from the U.S. Our friend who is on the program from time to time, George Friedman, would disagree with us on that last point. He would say, no, no, no. As long as we have the military, we have the might, and we will not be compromised. The long-term trajectory of U.S. power is in place, is in play, don’t worry about it.
Kevin:Well, Dave, it’s not just currencies. I think back, you were talking about reserve currencies changing. The dominant currency, we sell Dutch guilders, and remember, the Netherlands was the strength economically, hundreds of years ago, and then it transferred to Spain, and then, of course, it transferred to England, and we sell the British sovereign. A lot of our clients have British sovereigns in their portfolios. And then it moved from Britain to the American dollar, and like you are saying, there is a transition in the works.
But also, you mentioned military, and military techniques have large shifts, too, and we are very, very competent. I think of Dr. Friedman when he talks about the Navy, and he talks about our carrier groups, but I also think of Agincourt, the French being defeated by the British with the longbow. They didn’t expect those arrows to be able to reach them. They were still fighting with techniques that they had used for hundreds of years. If, indeed, the U.S. military strength is either gutted out by the debt that we’ve created, or by some new technology that comes up with a new way of fighting warfare, boy do we have a paradigm shift.
David:While I’m intrigued by Friedman’s ideas of being able to maintain global dominance and power, the U.S. maintaining its position, the shift in political power in the past has had this strong financial and economic component to it. It didn’t matter that the Romans had one of the greatest militaries of all time. They were in decline at several levels. Not only sort of a moral, spiritual decline, but you could also say a financial, monetary, economic decline, as well, which represented sort of root rot, and ultimately undercut the legitimacy of the military and its ability to continue to pay what was essentially a bought force.
Kevin:So, in a way, just like Jim Rickards has said, a currency war is very, very important. Isn’t the kind of financial war that we fought with Iran, isn’t that very similar to just an old-time siege of a city?
David:Yes, back to the Mongols and the fact they just surrounded the city and waited, and nobody was coming out, so they starting hocking dead bodies over the double wall. Financial war in Iran was no different. This was last year, just last year. Our financial war on Iran was no different than an ancient city siege. We’ve destroyed the currency, we’ve starved them into submission by making basically all imports too costly. We did the same thing with Syria, as well. We created, in the instance of Iran, 100% inflation. In one year, in Syria, between June 2012 and June 2013, we created a 66% decline in the Syrian pound. This is a very serious issue. Would you be at all surprised to see the Saudis, right now, start pumping more oil at the behest of the U.S. State Department again? Because we are talking about a financial war and what is our response to the Russians?
Kevin:Well, Russia needs high-priced oil. They have to have high-priced oil. It is interesting, there was a threat, talk about threats and chess playing, last week the United States was just testing to see if we could release some of our strategic oil reserves into the market. I don’t know if you saw that come across the line, but it was like, heh-heh, well, there’s some timing, huh?
David:Well, I mean, Russia is already in a tough spot fiscally. Yes, they need oil to be 5%, 10% higher than it currently is, just to stay in the black, and on top of that, things are getting a little bit more expensive in terms of imports. The ruble is already down 9% year-to-date. All kidding aside, John Kerry may be a clown, right? But we do know how to play dirty. Even if the voice of government can’t really be taken seriously, we do know how to play dirty. Would it surprise us at all for there to be calls to the House of Saud saying, “Listen, quid pro quo, we do expect a little bit more oil on the markets right now. We need the price $5 to $10 lower than current market prices.” That’s our way of pressuring the Russians into acquiescence, because how did we break them during Cold War? We broke them financially. We broke them via low oil prices.
Kevin:Reagan understood that. You make it look like you’re building up a nuclear arsenal, but that’s not what broke them, it was economics. Let me ask you, Dave, what does Russia think of the sanctions?
David:It’s an act of aggression. Now, an act of war, that’s probably taking it too far, but I think David Stockman had some interesting comments. He was quoting one of Reagan’s former ambassadors, Jack Matlock, who said, “What are we going to return? Some meaningless praise from George W. Bush, who then delivers the diplomatic equivalent of swift kicks to the groin, further expansion of NATO in the Baltics and the Balkans, and plans for American bases there, withdrawal from the Antiballistic Missile Treaty, invasion of Iraq without U.N. Security Council approval, overt participation in the color revolutions in the Ukraine, Georgia, and Kyrgyzstan, and then probing some of the firmest breadlines any Russian leader could draw, talk of taking Georgia and Ukraine into NATO. Americans, inheritors of the Monroe Doctrine, should have understood that Russia would be hypersensitive to foreign-dominated military alliances approaching or touching its borders.” Again, Jack Matlock, quoted from David Stockman here recently in the Washington Post.
Kevin:Well, you wonder if they even understand the unintended consequences of what is developing, because let’s face it, when Yanukovych was in the Ukraine, he was sympathetic to Russia, and so I’m sure the inner workings of the West were saying, you know, we need to get rid of Yanukovych.
David:Well, exactly. If Yanukovych is sympathetic to Russia, Russia needs, now, to retain a cooperative government in the Ukraine. When an overthrow and a very swift and almost silent replacement government steps in, quite frankly, you know the U.S. State Department is not far away. What we saw happen prior to Crimea had the earmarks of a U.S. and European cooperative effort to basically undermine the Yanukovych regime, which was sort of the lapdog of the Russians. We have been in the business of political destabilization for 120 years. This is nothing new in terms of U.S. foreign policy. We are not blaming the Kissingers, or current State Department heads, this goes way back.
Kevin:Actually if you think about the power that we wield with money, you see the Army commercials, the Navy commercials, the Marines’ commercials. They’re talking about the military side of things, but really, if you think about it, that’s sort of the last shoe to drop. We have already been working the greater power. If you talk about the Marines being the first ones on the beach, that’s not really true. It’s the financial guys and the economic guys underneath the scenes that are working. They’re getting rid of political leaders, they’re talking about how to get a country so deep into debt, or to disrupt the currency, like you said, with Iran. That is far more effective than sending in the Marines.
David:And I’m not saying that destabilizing Ukraine and establishing a pro-Western government isn’t serving our interests. It does serve our interests. It’s a win for the West to have Yanukovych out and a pro-Western government in. But obviously, Russia is not happy. The EU said, in their response to this annexation, “Any further steps by the Russian Federation to destabilize the situation in Ukraine would lead to additional and far-reaching consequences for relations in a broad range of economic areas between the European Union and its member states.” And ironically, Kevin, I would suggest it was the West that destabilized Kiev, and then quickly restabilized with a more cooperative partner, again, a Western-oriented partner. There was no question as to the legitimacy of the Yanokovich replacement government. This is, I think, what is ironic. We don’t like the outcome of what happened in Crimea, but it was just weeks ago that we were very satisfied with the outcome in Kiev. How is that?
Kevin:We talk about democracy, and actually, there were more voters that showed up, over 70% of the Crimeans showed up to actually vote that Russia would reunite with them. That is a larger percentage of showing than we’ve had since the year 1900 for a presidential election here in America!
David:(laughter) Well, remember the Crimea was a part of Russia until the mid-1950s, and then they were given to Ukraine. That was negotiated, and they were given to Ukraine, but something never changed. Sebastopol remained a very significant port for the Russian navy. Russian troops were already there, they have been for a long time, and now this notion that Ukraine will join the EU, or join NATO. Russia? Yes, they feel pressure from the West, and this goes back to the comments of Mr. Matlock that yes, we’ve been aggressive for probably 10 years on Russia’s southern front, and the fact that Ukraine, as you mentioned, used to serve as a land buffer between the European NATO forces and the West, and the major cities in Russia, that buffer has largely gone away, if there is a government in Ukraine which is, again, sort of working at the behest of the West.
Kevin:And I think we have to go back to what really is the long-term consequence of all of this, Dave. From the Iranian situation, to what’s going on with Russia, the Ukraine, the Crimea, the European situation, and frankly, all this quantitative easing that we have here, the real consequence for the United States long-term, is a new monetary system, is it not?
David:Right. Well, a financial paradigm that selectively excludes the U.S. from trade settlement, that’s what we’ve been talking about, bilateral trade agreements.
Kevin:So we might be included in a basket of some kind, but not the primary.
David:Yes, and where the backbone somehow skirts our systems. You have Brazil, who is putting in a fiber optic cable from them to South Africa, to China, to Russia, because they don’t want to use the internet which exists today. I don’t know how they secure that. I don’t know how they make that work, exactly. I’m not technically proficient there. But the fact is, Brazil committed, this last year, to a work-around. They don’t want data flowing through the United States, or through anything that is controlled by the United States. Again, whether you are talking about U.S. trade settlement in U.S. dollars, currency transfers, a new monetary system, yes, you have Russia and Asia, which will develop the equivalent of the SWIFT bank settlement system, which will be non-dollar based. We may think we are like cops on the beat, keeping things in line. What our government officials do not appreciate is that they are on the cusp of triggering a global stampede out of the dollar.
Kevin:So like what we were talking about, the Russian Finance Minister, he just sort of had a hint, but you could have a Russian retaliation, dumping treasuries, those types of things, or it could even be worse. They have nuclear materials.
David:Well, sure, and I think they already are talking about, and again, this is how you play chess. If you start to see some pressure put on one piece, you may not address the pressure that was put on your piece on the board, you may create pressure somewhere else. In this case, it’s delivery of two nuclear reactors to Iran. “Lock, stock and barrel, we’ll get them built for you. You need the materials? We’ll get you up and running.” So there is sort of this shift in the balance of power. If our policy in the U.S. is one of displacement of power, and disruption of relationships as they are currently growing and maturing, then you have the Russian retaliation. Sure. Dumping of treasuries, providing nuclear materials for reactors in Iran, codifying opposition to all your U.S. initiatives.
Kevin:It’s like a chess game. It’s your move now, Dave. You’re the Russians, let’s say.
David:Yes, we can’t forget. They’re a permanent member of the U.N. Security Council, the Russians are, so they can block us on anything that we want to do and force us to operate on a strictly unilateral basis. Now, it’s the Russians’ move. We offered sanctions, now it’s the Russians’ move, and frankly, they’re not afraid of either bluster or blood.
Kevin:This takes me back. Let’s look back almost 40 years, Dave. There were tensions between Russia and the West at the time, but let’s look at the dollar during that period of time, because this is not the first time that the dollar has faced a possible loss of reserve currency status or at least, a credible place in the world monetary system.
David:No. And just by way of preview, this next week we will be interviewing Jim Rickards, best-selling author of the book Currency Wars. We’ve had a conversation with him in the past and have a lot to talk with him about this time, as well, The Death of Money: The Coming Collapse of the International Monetary System. He points out that the dollar was so discredited that the Treasury, in 1978, was unable to issue I.O.U.’s in dollar terms.
Kevin:Didn’t they actually have to denominate bonds in Swiss francs at one point?
David:That’s right. So you had purchasing power losses in that period of 1977 to 1981, we lost 50% of the purchasing power of the U.S. dollar. The IMF was sort of the stand-in liquidity provider of last resort. They were issuing SDR’s, that synthetic currency held by central banks to create enough liquidity so that the wheels simply would not come off in the world economy. The 1970s was a period that has a lot of echoes to what we have today, problems with the dollar, problems with debt, problems with deficits. And so far we’ve been able to paper over those issues. We’ve not structurally reformed anything, we haven’t changed anything in terms of the nature of those problems. They, in fact, over the last 5-6 years have gotten far worse. Rickards’ view is that we’re moving toward a complete collapse of the monetary system and a complete re-engineering of the world monetary system.
Kevin:Isn’t it interesting that in 1979 the Russians went into Afghanistan? Gold doubled in six weeks. They were able to get the reins pulled in. Paul Volcker came in and raised interest rates dramatically, but this is a different situation. Our country had one trillion dollars in debt, that was it, at that time. We were the largest creditor nation in the world at the time.
David:Yes, so you take short-term rates to a very high level and you pay a high interest expense on a one trillion-dollar base of debt, but now we’ve got 17 trillion and you can’t raise interest rates considerably should inflation become a core issue. We’ve explored just the nature of even a 1% interest rate increase, but you’re talking about adding hundreds of billions of dollars in interest payments, and we don’t have enough revenues to afford that, so you are talking about something that, again, the circumstances today mirror much of what we had in the 1970s, and the only way to really understand where we are and where we’re going, is to look at the world from sort of a blended disciplinary perspective. There is a field of study uniquely focused on the issues of our day, and frankly, there are very few academics doing work there. It’s the field of political economy. It blends the worlds of international affairs with international economics. It’s really the marriage of politics and financial policy-making.
Kevin:David, when you were in Oxford, didn’t they have a program that blended those disciplines together so that you could start to look at the world as more of a broad-brush perspective versus just tiny disciplines, or tiny specialties?
David:I think one of the best degrees they offer there is the PPE – Politics, Philosophy, and Economics. And again, it is sort of broad-based. The PPE degree was for the sort of budding statesman or someone who was going to be moving abroad to represents British interests somewhere around the world, because, after all, the sun never set on the British Empire, and this was really the breeding ground, the training ground, as it were, for the diplomatic core. But today, we have folks who are focused, too much focused, on either economics, or politics, or foreign affairs, and they don’t bring all of this in together, and I think that’s one of the things I like about Rickards’ newest book, and our conversation with him this next week, is that it does encompass geopolitical outcomes and the economic, financial, and political guts that make those changes occur.
Kevin:Let’s just go to one of the things that he talks about as far as the printing of money. Inflation, as Jim Rickards points out, is a tool to boost the GDP. It’s a monetary illusion. Talk to me a little bit about what Jim Rickards is seeing in the future on that.
David:It’s one of the reasons why there aren’t very many people in the public today who are concerned about our economy. You have GDP which is doing fine. We basically have the ability to create an illusion, and that is done by the printing press. You print money, and that money creates the illusion of wealth, tied to an increase in nominal prices. And people don’t really factor in the cost of inflation over time, so if you have 5% growth in an asset class, but there is a 3% rate of inflation in the backdrop, that leaves you with only 2% real growth. And then remember, that government taxes you on the full 5%, not the 2% that you actually got to keep post the inflationary bite. So you see tax authorities favor inflation because it gives them more to tax. Deflation is the opposite end of the spectrum, and it is accompanied by a shrinkage in prices, which is, in essence, your paycheck going farther. You increase your purchasing power. It’s almost like getting a raise, but you don’t have any additional dollars that your local tax authority can tax.
Kevin:So from a government perspective, you would have to say they are definitely working toward inflation, no matter what the talk is.
David:We are working toward inflation, we’ve got more inflation in the pipeline than you can shake a stick at, and it is in this context of our monetary system coming under intense pressure. Not because we’re going to default on our debt, but because we already are defaulting on our debt by pulling the wool over our creditors’ eyes and calling … this is fascinating. This week we’ve got inflation at a 10-year low as of this week. Core CPI, which excludes food, energy, and shelter. Again, think about this. We’re not concerned about inflation because we don’t think of things like food, energy, and shelter being included in. The basic necessities of life are no longer factored into core CPI. What is this? What is this?
Kevin:That’s why John Williams says that just using Volcker’s numbers we would still be at 8% or 9%.
David:Right, right. But again, I think the rest of the world is figuring out, “Hey wait a minute. You can’t print trillions and not have some inflation. There’s something woefully inadequate with the Bureau of Labor Statistics’ methodologies and practices. What’s missing here? What’s missing here is the fact that they are massaging the numbers and obscuring the truth, which gets to the bottom line for our foreign creditors. We are already defaulting. Is it 2%, 4%, 6%, 8% per year, but we’re taking our bite out, almost like they did in Cyprus, a 10% bank tax. We’re doing that with our foreign creditors each year and it’s just a matter of time before the game is up, the confidence in the currency collapses, and we have a rout in the bond market.
Kevin:Dave, your dad started this company back in 1972, just a year after we went off of the gold standard. The inflationary cycle of the 1970s was a high inflationary cycle, but it was obvious to guys like your dad in 1973, 1974, but it takes a while for people to catch on.
David:In the mid-1960s he was working with a small boutique Wall Street firm, Boettcher and Company, in Denver. They did a lot of municipal bond underwriting, and it was very clear to Denver’s wealthy, who wanted large positions in municipal bonds, tax-free income, that there was an inflationary threat on the horizon, and they started clamoring for gold very early. And it was, frankly, the audience that was there demanding a gold exposure because they had too much fixed income, too much debt in instruments, but of course, the beauty was the tax-free income, but too much exposure to a potential rise in interest rates and rise in inflation. So you have that inflationary cycle of the 1970s. What became obvious by 1974, my birth year, had already been in the making for nine years. That inflation, again, was building, it was building, it was building, but the public’s awareness was not there. And then you can add to that, not only the public’s naiveté on the issue of inflation, but the fact that in 1974 and 1975 the news media did everything within their power to argue against there being inflation of any kind.
Kevin:Yes, so this manipulation is not new. I remember the “Whip Inflation Now” campaign. In other words, “Yes, we’re printing money, yes inflation is going up, but you, as a business owner, you’d better not raise prices. You’re going to ruin the company.
David:Rickards makes the point that momentum was gaining while the public remained oblivious. And then once people were aware of inflation it took another nine years to shake it. The ultimate purpose of the Fed in targeting inflation is to ease the burden of debt repayment. As we mentioned, it’s a soft default, if you are paying back that liability with cheaper dollars. It’s essentially like you’re renegotiating the debt, but you don’t have to sit down at the table with someone else to sort of hammer out the negotiation points.
Kevin:I think it is interesting, his solution in The Death of Money, he has no illusions that it would actually be employed. He says what you really have to do is break up the big banks.
That’s one of the keys…
David:Reduce systemic vulnerability, eliminate your too-big-to-fail institutions, ban derivatives, open regional stock exchanges so that there are fewer concentrations, institutionally, of wealth and systemic vulnerability. This is, I think, where we look back at 2013, the acquisition of gold in 2013, was primarily among emerging markets. Why is that so significant? China, of course, was the largest among them. But with every new purchase comes a degree of insulation from U.S. foreign policy, and the threat of dollar devaluation to those sovereign currency reserve assets. You’re talking about the countries that have the greatest at stake. This is the first time, for many of them, that they have had this much money in the bank as a consequence, or as a result, of doing business with the West.
Kevin:It makes me think, Dave, what if you were in this Genoan trading post, and you knew the Mongols were going to come. You didn’t know if it was going to be this year or next year, but you knew they were going to try to catapult bodies over the walls. What you would do is, you’d start building higher walls. You’d build higher, and higher, and higher walls. There is a point where Russia and China and India and Iran, these countries are realizing, we’re teaching them, to build higher walls. We’re putting sanctions on them. We’re doing the things that ultimately they are going to insulate themselves from later.
David:The Defense Department officials are seriously concerned over Chinese stockpiling of gold, as a potential tool to undermine the value of the U.S. dollar. You have, today, financial war, as Rickards says, which is the future of warfare. What the Treasury has done for several years now, in terms of creating, essentially, capital controls, through forced intimidation of financial institutions all over the world. Now, U.S. persons cannot open accounts in almost any part of the globe. Why? Because the U.S. Treasury has so intimidated the financial community. So will it be any surprise, two months from now, six months for now, 12 months from now, 24 months from now, when there is a new monetary regime, with the dollar being marginalized, with credits and debits being exchanged in other currencies than the dollar? We are stepping on so many toes, at some point, is it natural to expect someone to pull their feet back, to say, “No more, we don’t need this. We don’t want it, we’ve found work-arounds, and we’re implementing those as we speak.” That’s what we have, that’s what we had in 2013, I think, a major clarion call to the world of “the dollar system is dying, and you do something to get in line with the new currency system, whatever it may be, or be left with worthless script.”
Kevin:David, this takes me to, just wrapping up, we are finally going to be getting our DVDs in called, “What Is Real Money?” It really is the answer to what we are talking about at this point. When are we getting those, next week?
David:We’ll have them in house, and of course, where are they duplicated? All things are duplicated in China, right? So off of the slow boat from China. The digital version has been available here for a week to ten days and feel free to send that on to friends and family members.
Kevin:That can be found at mcalvany.com or YouTube McAlvany Financial, you can type in that.
David:But for sure, if you prefer a physical copy then call us and request one.
David:It’s free, it’s complimentary. We’re paying the postage, we pay the production. You don’t want to know the amount of time, energy, effort, and resources that go into producing these kinds of quality pieces.
Giulio Gallarotti, one of our guests on the McAlvany Weekly Commentary, sent me an email this morning, saying “Great work, looks great, it’s going to require a studied audience, an intelligent audience.” And I think that’s our listenership today, some of the best and brightest out there. We hope that you are blessed in your endeavors and make wise financial choices. We look at this as a tool that not only will buttress your efforts, but enable you to carry a message further, for you to be able to inform, now, while it is very, very time-critical to do so, your friends, your family members, your colleagues, as to the changes which are imminent in the world monetary system, and what you can be doing about it.