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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


September 5, 2018

“The Navy Seals will say, just at the point when you feel like you are physically going to die, you have 40% more to give, but your brain has told you that you already are dead, and you need to stop it. There is nothing in the financial system today which represents a governor, a warning system. We will go until, as you suggest with Das Boot, the rivets start popping.”

– David McAlvany

Kevin:I have to admit, I don’t mind a long weekend here and there. I am fortunate. I have a 27-year-old son who races mountain bikes. He is very, very good. That is probably an understatement. But he slows down for his dad, and he likes to take his dad on mountain bike rides. That is what we were doing on Monday when I probably would have normally been at work. It was nice. It was nice to be in the mountains. How about for you?

David:I was talking about you and your son this weekend because this happened to be a very social weekend. We got Mary-Catherine back. She is doing her recitals, or whatever you call them, for Sense and Sensibility. She has a lead role in that.

Kevin:Yes, she’s a lead.

David:So she has a lot of evenings now taken with that and so we had her back for family night Friday night. Then we had guests on Saturday, guests on Sunday, guests on Monday (laughs), so it was super busy. But one of those guests, we were talking about his son who just started the Devo program, which is the local mountain biking team for 8-year-olds, 9-year-olds. They start really young these days. I just told him, “You need to get a mountain bike. You don’t understand how important it is for you to create some common ground with your son. If that’s what he’s interested in, it doesn’t hurt to dive right in.”

Kevin:It is interesting, I remember when my son was racing with Devo. He was in the first year when they first started that team. There were 12 guys, a little bit like the leader and the 12 disciples of bicycling. They went all over the country racing and it actually produced several Olympians. Howard Grotts came out of that team. He raced with my son. So here in little Durango it is amazing some of the things that can come out. But I’ll tell you something that I’ve told fathers for years. It brings this to mind. At first, of course, with any sport, whether it is snowboarding, skiing, mountain biking, what have you, if you are taking your son out if they are real young you can probably outperform them. But what I found early on was, my son did best if he led me. If you let them lead, it is amazing how ultimately they are having to wait up for you later.


Kevin:And that’s sort of what happened with me.

David:And here we are ending an entire season. We started Memorial Day, and you go through Labor Day, and this was a great season for Oscar Meyer. Apparently seven billion hot dogs get eaten between Memorial Day and Labor Day, and this is sort of the unofficial end of summer. I know there are a few that certainly don’t mind moving toward fall. It happens to be my favorite season. But here we are, the end of the hot dog season.

Kevin:I look at some of those hot dog eating contests that occur on Labor Day, and it’s just like, “Are you kidding me?” Talk about excess. Now, I guess that can transition us into the excess of printing money. There is an old saying, “Loose lips sink ships.” But if you think about it, loose monetary policy floats everything at first, and then it sinks everything for good afterwards. We expanded the monetary policy during the global financial crisis, and then afterward, this last decade, is it any mystery that tightening now is actually going to start sinking things?

David:I sat and enjoyed a really good cigar this weekend and was reading through the Bank of International Settlements literature. It was rather tedious, at least to me.

Kevin:You really were doing that on Labor Day? You were reading the statistics and the mathematics from the Bank of International Settlements?

David:Econometric regressions over the weekend.


David:And the simple conclusion from recent studies from them is that our monetary policy tightening has a direct tightening effect globally.

Kevin:Well, duh.

David:But I mean, yes, we’re the world’s reserve currency, but they were looking at the U.K., the pound sterling, Europe and the euro, and the U.S. along with the U.S. dollar, as the drivers of global monetary policy knock-on effect. So what we do here matters. What the Europeans do matters, not just in Europe, but elsewhere. So while we have been tightening here in the U.S. since 2015, there has been some cross-border lending which has shifted to the Eurozone.

And now – this is where it gets really interesting – the prospects of tightening in two of the three most important central banks, and with that occurring at the same time, lo and behold we have the impacts that we have been witnessing in the emerging markets. And I think we can assume that that will continue.

Kevin:Not to mention the dollar strength. When you have dollar strength, it is not just tightening that is causing a problem for these markets with interest rates rising, but they also are having to pay it back in a rising currency.

David:Yes. And I guess they could, just like you might pray for rain, they can pray for a weaker dollar, and they might get it intermittently.

Kevin:Let me ask you, how does that affect gold, though, because usually people associate dollar increases with gold decreases?

David:Yes, so if you had dollar strength, you’re right, some people would assume that that equates to an ongoing gold market weakness. And that might work out that way for a little while. That might not be true moving forward. I think this is why, if you consider the implications for global economic and financial market stability of the dollar rising, and then you consider the primary motivation for owning gold, particularly for the investor, as an investment which is outside the financial markets, as an investment that has no counter-party risk, as old-fashioned money.

You can look at banks and central bankers today, and they are really the ones almost doing the robbing. We think of the banking system and ask, why did Bonnie and Clyde go to banks? Because that’s where the money is. Why are the bankers there? Well, it’s because that’s where the money is, too. And it’s your money. And it actually is you, the depositor, which to some degree is being fleeced. Gold is an opt-out from the savings and banking system. We wouldn’t have to think in these terms if it wasn’t for perpetual inflation, which is really a part of the system that we have today, and puts the system as sort of rigged against the saver.

Kevin:An old family friend who has been on the Commentary several times, Jim Deeds – he and I were talking the other day and he said, “Kevin, make sure you keep buying your gold and silver.” He said, “If printing money created real wealth, we would all just quit working and start printing money.” That’s really the truth. You cannot create real wealth by just printing money. Now, the banking system can do it for a season. This is what I’m talking about. Loose policy does float everything at first, but it sinks everything in the end.

David:Yes. I was fascinated by this paper – it wasn’t a super long one – by the BIS, and if anyone is interested, it is their working paper #737, Transmission of Monetary Policy Through Global Banks: Whose Policies Matter?That’s the title of it.

Kevin:That sounds incredibly intriguing. How about we move on to creating tightening in our own country is not isolated. Or creating tightening in Europe – that is not isolated. It translates all across the world.

David:Yes. We are creating a tightening pattern, and we are seeing that monetary policy ramification elsewhere. And it has to matter when you consider the development of monetary policy here, from the global financial crisis, that timeframe, up until the present. Because monetary policy has become very homogeneous. Our monetary policy, being highly accommodative, is reflective almost everywhere else. So everyone has accommodated. We’re talking about trillions more in debt, and trillions more in easy money liquidity.

Kevin:Right, floating everything.

David:And that’s given economic and employment realities here in the U.S. Today, where are we? We are, indeed, behind the curve in terms of tightening. Yet, the impacts of that tightening cycle here in the United States are grave. They are grave globally, and ultimately, if they are bad for the rest of the world they are bad for us because they do recycle into our own financial markets.

Kevin:Dave, we haven’t had a recession in ten years, so we don’t even remember what that really feels like. But I was reading in the Durango Herald that Colorado has 21 days of emergency funds. They have 21 days that they can run in case of a recession like we had during the global financial crisis. Now, that is nothing, but here is what is amazing. That is actually above the national average. Every state was tested and the national average is 20½ days. So if we go into another recession, states, which by the way cannot print money – the Federal government can, but states can’t – they have about 20½ days on average if we have a downturn.

David:My reference to the Gave/Cal research a few weeks ago, and in their opinion, the greatly increasing probability of a global recession in 2019…

Kevin:So there is the recession we’re talking about.

David:Yes, it ties into not only tightening in global liquidity, but acutely to these knock-on effects and to other geographies, and really, we’re thinking of the emerging markets, in particular. What it means for the borrower elsewhere is that following the global financial crisis, and following that proliferation of debt instruments on the best of terms – they went to those cross-border loans because they were low rates and they were in reliable currencies, predominantly, too, the U.S. dollar and the euro.

Kevin:Crisis is a strange thing. It is almost like a logarithmic progression. At first you start very, very slow – 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 – that’s how a logarithm looks. It goes straight up. You could liken it to popping popcorn.

David:Particularly, if you’re talking about what you might find on the old stove (laughs).

Kevin:The old Jiffy Pop.

David:You can’t see anything inside a bag inside a microwave, but if you throw popcorn kernels into a pan with flame and oil, at first you have nothing that happens. Then you have a few kernels which go. And then finally, they all let loose, you’re right. So following that logarithmic pattern, it’s fantastic. It’s a spasmodic sequence. And what do you have? It’s due to having the right amount of heat ultimately permeating to the core and causing an explosion.

The Bank of International Settlements, the BIS paper, what it merely confirmed for me using higher math skills that I’m really comfortable with before a full pot of coffee…

Kevin:Make sure you order that paper, folks. Make sure you order that paper (laughs).

David:(laughs) Well, it’s just that there is this credit issue, and the nature of our credit issues today are ubiquitous. This is not just a U.S. issue, this is a global concern. And not only were the critical lessons of the global financial crisis not learned, in response to the crisis we put at risk the entire banking financial system. And of course, maybe this is no big deal because nobody is ever going to check the underbelly of the beast, but if the underbelly is ever revealed, we find all kinds of weaknesses.

Kevin:And loose monetary policy isn’t just printing money. It’s not quantitative easing. So speaking of loose monetary policy floating all things, that loose policy is also keeping rates too low, too long.

David:Yes, and keeping them too low for too long accelerates asset appreciation, and that was by design. But if you accelerate asset price appreciation to records that were never imagined before, and of course this is all following the global financial crisis, what we have had is price appreciation and mass quantities of loans which have, in the interim, been made on the basis of balance sheets which have been strengthened by that asset price appreciation, and the assets on those balance sheets which are now part and parcel to this asset price appreciation. And what do you think happens when rates go up and all of a sudden the lending variables change?

Kevin:Right. Everybody is deep in debt and now they have to owe more in interest.

David:Yes, so you have tightening which is felt via the new, or should we call it, more limited availability of credit? Or at least, credit on more realistic terms with rates somewhere above the negative to zero levels of recent times. Then you have markets which take assets and market them down – asset values move lower. What do you suppose that does to balance sheets?

Kevin:That is where the loose policy floats everything at first, and then sinks everything for good after that.

David:That’s right. So what appears to be a virtuous cycle in the early stages of an inflation is actually a vicious cycle on the other side. Banks are in the same boat here when we are talking about balance sheets and what not, and not all banks are created equal here. You have some which are much better capitalized. You have some which have a more secure depositor base, so they’re less likely to be at risk than those that have depended on this virtually free credit as a lifeline, or something that has allowed a certain vitality which otherwise wouldn’t have been there.

Kevin:But the emerging market countries are on the leading edge of this recession you’re talking about.

David:Sure. We have South Africa officially going into recession this week. We have Turkey, Brazil, Argentina, China, with significant economic slowdowns. We’re talking about a huge deterioration economically in multiple geographies, and the concerns thus far have been limited in the financial markets, specifically if we’re talking about the equities markets.

Kevin:Dave, you watch a lot of things, but one of the things you do is you watch what the speculators are doing – the guys who are just trading momentum. They don’t know much about history, but they certainly know about direction in charts. Then you watch the other guys who are the commercials. These are the guys who have to be right in the long term because they are hedging bets of much larger enterprises, like gold miners – they are going to go long or short based on the fact that they have inventory in the ground. They’re not speculating on a market, they are actually having to survive in a market. So the commercial interests are usually right in the long run. The short-term speculators are right in the short run, and then they get their lunch handed to them.

David:Yes. This is one of the things that Doug Noland and I do spend some time looking at. When you look at what hedge funds do, and they are part of the speculator group, hedge funds are opportunistic, and they are very short-term and they are trend-following, generally speaking. And they tend to create exaggerated flows within particular asset classes. This isn’t technically accurate, but it’s almost like the old money versus the new money. The old money is not quite as excitable, the new money is like the hedge fund crowd. It is very excitable, like what’s the trade of the day? Think of Jim Cramer, a guy who appears to be on drugs 24 hours a day – da-da-da-da-da-da-da-da-da!

Kevin:I think of patient money versus anxious money. Anxious money is, like you said, always just jittery.

David:And I apologize – these are caricatures, obviously, but your commercial interests in treasuries right now do reflect anticipation of harder times ahead. Commercial interests are long the ten-year treasury, and then you have your traders on the other hand – the traders’ position. These are speculators who typically miss the major market turns while they are playing momentum. They are the most net short the ten-year treasury they have been in five to seven years.

Kevin:Because they are confident.

David:They are confident that everything is going to go well. Again, the equity markets reflect peace and calm ahead. Treasuries – you are beginning to see this major divergence of opinion between the speculators who end up getting all loaded on one side of the boat and then shift. So when I talk about creating exaggerated flows, they can create massive volatility in asset prices as they shift from one side of the boat to the other. The commercials are the ones who are generally taking the other side of the trade.

Kevin:And so the commercials are going long on treasuries right now.

David:They own treasuries in anticipation of a market downturn. But it is also interesting because the commercial interests are very committed to the gold trade, as well. Commercial interests in gold are similarly on the opposite end of the spectrum from speculative positions, which we have discussed in recent weeks. Speculators, the hedge fund crowd and others, are at record short levels in gold.

Kevin:They’re betting gold is going further.

David:While commercial interests in gold are taking the other side of the trade, suggesting that the next move is up, and possibly up in a major way, intriguingly, right alongside treasuries. So frankly, whatever the Fed does with rates, it appears that the smarter segments of the market – I’m going to call those the commercials – they’re getting ready for a move toward treasuries. They’re getting ready for a move toward gold. If you think about a market environment where both treasuries and gold do well at the same time, what could that look like?

Kevin:How about for the stock market? That’s a slaughter for the stock market.

David:Potentially, yes, because you are talking about two of the classic safe havens and the commercials already getting in a position to benefit from flow out of equities and into safe haven. So it’s not without surprise you have the equity markets which are very relaxed at this point. They anticipate nothing but blue skies. And if you’re looking at commercial activity in the treasury market and the gold market, I would say grab your jacket, the rain storms are coming.

Kevin:I know we quote him often, but he is worth quoting often – Richard Duncan. We don’t necessarily agree with his conclusions of keeping this ship going, continuing to create loose policy because we have to keep the ships afloat. He says, “Do you realize what will happen if we don’t keep those ships afloat?” He’s right, but what he would say is, “Inflate or die at this point.”

David:There are times when I feel that more acutely, where the gravity of Duncan’s version of inflate or die really becomes obvious. The financial system is so highly leveraged, with leverage being one of the primary drivers of financial market progress over the last 12-24 months, maybe stretch that back to even 36 or 48 months, it is difficult to see how problems in one geography can be contained from spreading to others. Noland has talked about this on our team as the spread from periphery to core. We saw that happen in Europe during the global financial crisis.

And what we have today are transmission mechanisms within the banking system, and this is really what this BIS paper was all about, the transmission mechanisms within the banking system, and beyond that, which they cannot measure within the shadow banking system, they are reflective of a connected world similar to what the modern traveler has available to them. You’re only two to three flights away from anywhere on the planet. You can go from Lagos to Las Vegas in no time. You can go from Seattle to Sierra Leone in no time.

Kevin:Is that why you can catch a cold from China, literally, a couple of days after someone gave it to somebody in China.

David:This is what is odd, because the BIS is far less concerned with the existing debt and derivatives daisy-chain than, say, the CDC, the Center for Disease Control would be, with transmission of disease. And I think it is, in part, because the Bank of International Settlements doesn’t recognize the inherently destabilizing and dangerous effects of excess debt in the system. They are participants in the pushing of the product.

So perhaps like Duncan, the conclusion is, we’ve gone too far to turn back now. The risks are too great to allow an unwind. It would be anything but orderly. So, deeper in we go to the depths of debt accumulation, and yes, we remain contingently tied to debt-drive growth. We have, in fact, gone past reasonable levels of leverage. I think that is objectively observable. I still can’t concede that more of the same is the solution.

Kevin:Right. It may be the easier solution. It’s like giving drugs to an addict. It will quiet them down but you’re not going to solve the problem.

David:There are times when I feel the gravity of the global financial market backdrop. And for whatever reason, this last week was one of them. What I want to recall, what I want to try to keep in mind, is that within the human spirit there is an ability to innovate and problem solve and create solutions regardless of the challenges we might have to manage in the context of crisis. And I would prefer that rather than be governed by fear – fear of the unknown. And that, in large part, is why we continue to press forward, or if we want to lean heavily on fiscal largesse at this point, it is because we fear the unknown.

Kevin:So let’s say some of the listeners actually do want to go buy a really good cigar and download this document from the Bank of International Settlements.

David:(laughs) I gave it the ten-cent tour.

Kevin:Let me ask you – if they read that, are they going to find out that the Bank of International Settlements is concerned right now?

David:No. Again, deficit spending on a grand scale – back to Duncan’s solution for a moment – in the end is a very probable outcome. In the end, the reason why I object to it is because you’re playing with a psychological function that ties back to the underlying currency. Major inflations reach an inflection point and then they snap. And when they snap there is a repudiation of the currency and there is a repudiation – a market scolding, if you will – of the policies that launched that currency and that financial system toward oblivion. The idea that you can, through deficit spending or other means, march toward success just doesn’t make sense.

You asked a question about the BIS. I don’t think they are concerned. No one in official circles discusses the problematic or flawed nature of our current global monetary regime. It is what it is, they take it on face value, and they are operating in the game by the rules of the game. They’re not asking questions about the legitimacy of the game. So here we are, in a system based on fiat currencies, propelled by an ever-expanding mountain of debt. It is a system which, to a degree, implodes.

And this is Duncan’s point. I find this fascinating. If you’re not growing debt levels by more than 2% net of inflation, you’re either in recession or depression. And he does a great job of demonstrating why the system is so dependent on more debt – in an unhealthy way, but it is what it is. No, whether it is the BIS, or the soiree at Jackson Hole, the discussions that are there, Basel to Wyoming, when they are concerned, what are they concerned about? They tend toward optimization. They want to discuss reporting and accountability. Yes, they want to measure imbalances and lopsidedness, and of course, they would say, “Look, here’s the problem, and here are the policies and laws that can be crafted to address those concerns.”

Kevin:Doesn’t it always lead to the increase in size of the leviathan?

David:That’s what is seems like because you have a bigger financial market machine, which, if it has bigger problems then it also requires a bigger leviathan to deal with the bigger financial market. And that seems rational to them. I am certainly not wanting this to be a humbug rant. It is something that I think about. Maybe Labor Day and the cigar gave me pause to think about this, but you think of means and ends. Where are we going from here? What is the design of the plan? What are the possible outcomes? Duncan’s view of deficit spending, yes, it is highly probable that our economic planners are going to do that because it is either the fiscal version of largesse, or it’s another round of QE.

A question that Mark Faber asked recently is, “How will central bankers react when the economy weakens, and when asset markets decline?” And this comes back to this issue of who’s on first? Is it going to be the politicians who instigate via fiscal policy, or is it going to be the monetary policy mandarins who instigate the next round of largesse via monetary policy?

Kevin:Don’t you think it’s actually going to be whatever is in their best interest at the time? The government is not run, or the central banks are not run, necessarily, by people who are trying to do it for the little guy. They are actually trying to protect the elite.

David:I think even 20 years ago I had a different opinion of politicians. I think there were a few more statesmen and a few less people who were there simply on the basis of self-interest. But I think the politician there for personal gain is entirely pragmatic.

In either case, whether it is fiscal largesse or the next round of quantitative easing and monetary largesse, what we are talking about is preserving the current elevated position of assets. You want to do that so that you can avoid bankruptcies. You want to do that so you can avoid disruption of the wealth which is attached to the 1%, 2%, 3% in our culture, the wealthiest in the world.

Politicians globally – what have they tasted of in the last 20 years? The fruits of money and power hardly imaginable before. It’s not uncommon for a politician to have 5, 10, 15, 20 million dollars in net worth. But now we have many politicians with 100, 200, 500 million dollar net worths, and it is a fascinating thing to watch. They are not interested in doing what they do for the benefit of the common man. This is for them. So again, maybe I’m just reflecting on the rich and the poor, and it’s Labor Day (laughs) – I’m not a communist, I want you to know.

Kevin:I asked you before we started the program, Dave, how should we really view Labor Day? Because if you go back to 1886, the Haymarket Affair, labor, rightfully, in some ways, protesting people who were dying on the job and child labor, that type of thing. A bomb was thrown there in Chicago. And later, the communists took this idea and said, “Let’s make it May Day. Let’s honor, in May, this particular event that occurred in Chicago.” So worldwide, you have this May Day celebration that goes on in China, goes on in Russia.

We have our own version of Labor Day, and I don’t want to sound like we’re saying our Labor Day is a communist type of outcome, but it is hard these days, Dave, because what we are experiencing, and Duncan has pointed this out – we don’t live in a capitalist society, so it’s not like we’re talking about the opposite of capitalism here. What we are talking about at this point is this strange debtism where you have the elite who can create money out of thin air, cause the entire world to go incredibly into debt, and it’s abusive. So the little guy has to be taken into account.

David:Right. I find myself at points identifying with the common man, but that is not to necessarily identify with some fringe or progressive element. So at home we discuss it in as nuanced a way as we can to say, what was the Haymarket Affair? We look at the late 19thcentury and early 20thcentury rise of the labor movement. The leadership within that movement was driven by the realities of injustice. There was child labor, there was a merciless grinding of humanity through the cogs of industrial production. And unfortunately, no one stepped in, no one championed their cause.

Kevin:Except for the communists. They were there.

David:Exactly. There was the socialist, communist element of the day, and a communist set of principles was growing more popular at the time, bent on redistribution of capital, a leveling of the playing field between labor and capital. And that was fertile ground in Chicago. So today, what happened in the Haymarket Affair we would call domestic terrorism, but history records it a little bit differently. Seven police officers died. We don’t know who threw the bomb. They took in eight people I think, hung four of them.

Kevin:Hung four of them. One of them committed suicide to keep from being hung.

David:So, following the expansion of industrial production there were legitimate concerns over things like child labor laws, the parameters set around a workday. Think about what we have. 40 hours is the norm. I explained this to my kids. I looked at all three of my kids and I said, “Three of the four of you would be working 14-16 hour days, seven days a week, if it wasn’t for changes in labor laws which occurred. You would already be there. That’s the world where you would likely be.”

So it was no surprise to see a critique of the system emerge. There was a problem with the system. But you had a growing readership, at the same time, of Engels and Marx which imagined a worker’s paradise, a utopia. So this was a part of our conversation at home. The labor movement at the time could never have imagined that the substitute for rotten working conditions was the gulag and the death of 100 million people based on an instinct for equalization between rich and poor.

Kevin:All for the common man. You were talking about the common man. That’s how the communists sold it. They said, “We’re going to come in for the common man.” Well, the common man – 100 million have died with this experiment that has failed.

David:Revolution, as my wife mentioned to the kids, has never been bloodless. Sometimes a drive toward justice includes its own blindness to nuance and the possibility entailed within it of grave consequences. And that is where you start counting the bodies – 100 million bodies – because the ideas had consequences far beyond the injustice that they were trying to address.

Kevin:So Labor Day – you see it as a balance here in America?

David:I think it is fair to concede the wretchedness of working conditions at the time, the lack of dignity with which workers were treated. And so today, it’s almost like Labor Day is a form of social penance (laughs), we acknowledge the sins of the past – whatever.

Kevin:Do we deceive ourselves, though? Are we not yet slaves to, maybe not a communist system, but at this point, a debt system?

David:Fast forward to the current days and I think most people don’t know the roots of what I would argue represents the cause of the greatest move toward inequality in centuries. If you want to talk about rich and poor, you really have to focus on that moment of radical departure in 1971 when our money, and thus the entire world monetary system – the worlds’ money – go back to Bretton Woods. The Bretton Woods system tied all global currencies to the value of the dollar, which up until 1971 was backed by gold. So you have the world’s monetary system, on the basis of the dollar becoming unhinged, everything comes unhinged, and allows for the financial system to expand beyond its former function.

The monetary system, the financial markets, served a function. They were a support function to the economy. The financial markets were a mechanism that allowed for transactions and capital formation and the movement of capital. So it goes from a supporting role to finance becoming an end in itself. And the removal of monetary limits translated into a removal of a reliable relationship between stuff and its market price. Does that make sense?

Kevin:Yes, it does. If you’re printing, infinitely, currency units – call it dollars, call it bitcoin, call it Chinese yuan, call it Japanese yen, euros – if you’re creating infinite units, how in the world do you price anything?

David:Right. Or you could say you can price them infinitely. Imagination carries the price as high as you want it to if you have access to an infinite number of currency units. So the front edge of that is alluring, particularly for the owner of the assets, because it looks like asset price appreciation. This goes back to your floating all boats and then ultimately having a different outcome.

So the consequence in time is precisely what we’re trying to tame, what we’re trying to control, what we’re trying to manage into the future – precisely this – asset prices which are inflated cannot be allowed to decline without implicating the debt instruments which are associated with those assets. There are potential solvency concerns with the asset owner and with the financial intermediaries which have created the loans connected to those inflated assets.

Kevin:So in a way, you’re connected. If you’re deep in the system, if your assets are all tied to the system, in a way it is like being chained to the system. You go down with that ship that goes down. It may be floating right now, but when it sinks, when that loose policy that floated the ships sinks the ships later, you have to be disconnected from the chain.

David:I don’t remember if it was Ben Hur or Spartacus where you have the slave ship out on the ocean, I just have this childhood memory of one of the movies.

Kevin:I remember that scene, but I don’t remember either.

David:I don’t know if it’s Charlton Heston or the other guy.

Kevin:But he’s chained to the ship.

David:He’s chained to the ship, and they’re taking on water, and everybody is in a panic to get unchained, but everyone is chained together. Everyone is linked in.

Kevin:I think it’s Ben Hur.

David:Maybe it is. But the financial market daisy-chain is precisely because the interconnections exist between debt and the asset price inflation which has just occurred. So you add to that the Wall Street penchant for complexity, and you have one asset that via the derivatives market has been resold to ten separate parties. The derivatives market is this magical thing, right? But truly, is that the creation of value or is that the necessary precondition for the destruction of value?

So yes, the BIS and the central bank community operate within the system as it is. They operate not as if it might be otherwise. They are not operating in light of what could be, but instead, just what is. So we are left with the argument for normalcy in the current context. What we have is normal, it’s just a question of dialing things up or dialing things back. They’re not really asking about the inherent weaknesses.

Kevin:“Is it sustainable?”

David:Which may go back to that issue of sustainability and may go back to the creation of the financial system as we know it based on 1971 math where we don’t have any real tie to anything real within our currency system anymore. Yet, left with the argument of normalcy, I would say we kind of operate there by necessity. It is nothing normal. We may adjust to it, we may perceive it as normal, but we’re actually sort of in that Duncan cycle of necessity. But the risks in play include a scenario that is far more grave than the global financial crisis of 2008-2009.

Kevin:One of my favorite movies is Das Boot, about a German submarine crew in World War II. The original book that was written by the captain of the submarine that that movie is about has drawn me to other books about submarines. I’ve never been in a submarine. I’ve been in one of the tourist ones in San Francisco from World War II, but it was above the ocean.

I would think it would be amazing to be underwater and really not understand the threat. Everything is normal. Once they close that hatch, everything is normal. In Das Boot, one of the things that almost occurred to the crew was that they sunk to a pressure that they could no longer withstand, and oftentimes when submariners do that their normal instantaneously turns to being crushed by the water around them.

I think, in a way, this debt system is the same way. You have the Bank of International Settlements sitting at one of the stations in the submarine. You have the European Central Bank. You have Mario Draghi. You have Ben Bernanke, and Janet Yellen and Powell. Everybody is doing what they are supposed to be doing, yet we’re falling, we’re sinking, we’re going 200, 300, 500, 700, 1,000 feet. I have no idea what the breaking point is, but normal turns to abnormal very quickly.

David:You know I love to be under water.

Kevin:You do.

David:I love spearfishing. And I think it’s a little bit like talking about the system that we have – I have to constantly recognize limits and consequences, and they are always in front of me, in part, because you have to hold your breath to dive down, and you have to maintain calm at 20, 30, 60, 80 feet under water. But you are constantly aware of your limits and consequences.

When you can define a world where you are not aware of limits and consequences, and you can pretend as if they don’t exist – I guess some of this relates to being connected to your body. Your brain starts to communicate to your body that you need to stop long before you get to the point where you can do terrible, irreversible damage. And that is hard-wired into us.

The Navy Seals will say, just at the point where you feel like you’re physically going to die, you have 40% more to give, but your brain has told you that you already are dead, and you need to stop it. There is nothing in the system today in the financial system which represents a governor, which represents a warning system. We will go until, as you suggest with Das Boot, the rivets start popping.

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