January 11, 2017; What Will “Trumpflation” Mean for the Rest of the World?

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“Yes, that’s why people do want gold. Why do they want it? Because it is, ultimately, the only financial asset devoid of counter-party risk. And so to look at 2017 and 2018 and say that things are getting so much better in the United States as a result of Trumpflation, the irony is, we may get Trumpflation here in the United States, and we may get the worst form of deflation globally as a result.”

– David McAlvany

Kevin: You know, there is so much talk, Dave, about the Trump administration and what is coming in. Are we going to be experiencing more protectionism? Are we going to experience growth? This Trumpflation is something that is a topic on everyone’s mind. Yet, there probably is going to be a deflationary impact to anything Trump does based on the fact that you have Europe, Japan and China, at this point, in a recessionary decline.

David: It’s fair to say that what Trump is going to do is good. The question is, is it going to be good enough? That’s really the issue. If you’re going to spend 1 trillion, which is what he is committed to, and perhaps it is more than that at the end of the day, but over a ten-year period, keep in mind, this is not all at once. So perhaps, just simple math, 100 billion dollars a year – that’s not that much more infrastructure spending than we had during the Obama administration, and to no real effect in terms of positively catastrophic impacts to the economy.

Kevin: Wasn’t quantitative easing the last few years, before they cut that off and tapered it, wasn’t that to do what this fiscal spending is doing? We were doing 100 billion dollars a month for a little while.

David: That’s what we have today, as a matter of fact. We have more than 100 billion dollars in stimulus, both from the European Central Bank and the Bank of Japan, coming into the global economy, cumulatively over 2 trillion dollars a year, which is quite a bit of liquidity, and yet, it’s not enough. So how does the Trump administration, in fact, trump QE, on both the domestic and international basis, it seems to me that the markets are assuming that he can do a lot more than monetary policy levers can do, cumulatively, from all the world’s central banks – we’re talking the People’s Bank of China, we’re talking the Bank of Japan, the European Central Bank, the Bank of England, and the Fed. So this is really something that is a Herculean task, and he would have to be something of a superhero to, in fact, do more than, cumulatively, all those central banks have been able to do.

Kevin: If the United States were in a bubble, and it was just us, we could see a lot of impact to the Trump administration. But I think the impact that we have to look at right now, Dave, has to do with Europe, and has to do with China, has to do with Japan. These countries are in big trouble. You’re talking about a Herculean task, how about being Angela Merkel at this point, who has a country that has a very low debt-to-GDP ratio, but is carrying everyone else in Europe? To pay off Portugal’s debt, to pay off Italy’s debt – it looks like it’s going to all fall on Germany’s shoulders, or we’ll see the dissolution of the euro.

David: What you are pointing to are the two critical factors that impact countries beyond our borders, and yet, they have everything to do with our own policies, fiscal and monetary in nature, things that drive the U.S. dollar higher, and U.S. interest rates higher, are directly relevant to every other country in the world. And you think, “How is that possible?” Because the world is interconnected, because we live in a globalized environment where free trade and the cost of goods and services and capital translates across borders.

It didn’t used to be this way. Keep in mind we used to live in a world where there were lots of capital controls, very little movement of goods and money across borders, and so you really did have sort of an isolated impact when a currency value changed or an interest rate structure changed. And yet today it is quite opposite. We have massive ripple effects into the emerging markets, massive ripple effects into China, massive ripple effects into Japan and Europe, as a consequence of Trump being elected, which is what has set the U.S. dollar and interest rates, in particular, on fire. Because of course, the U.S. dollar has been rising since the middle of 2014.

Kevin: An acquaintance of yours, Dave, Russell Napier, is a regular guest on the show. He is very, very accurate in his predictions. In fact, I was thinking back as I was reading his latest report, Russell Napier, four years ago, started talking to us about something that the world had never experienced before, but he predicted it. He said, “It’s certainly realistic to see government bonds go into negative yield territory, not just nominal rate negative territory, but actual real rate territory.” And sure enough, in 2015 – we’ve talked about this – for the first time in world history we started seeing government bonds in the trillions of dollars going into negative rates, where a person puts, say, $100,000 into a government bond knowing that ten years later they’re going to get $99,000 out.

David: It was with Russell Napier that I visited the grave of Adam Smith, and to some degree I think you would see Adam Smith rolling over in his grave today. The kinds of capitalism that are sponsored globally, and what we call capitalism – even what Trump sponsors as capitalism – there are things that you would say, more than just on technical distinctions, are anything but capitalism, but really do represent more of the corporatists, and overseas we’re talking about China, that command and control dynamic.

It’s fascinating to me, Kevin, right now we have Napier, who would suggest reflation is the trade of the day. We see reflation, inflation – the whole global community has decided that with Trump coming in, and a release of fiscal spending to occur here in the United States, that we will reflate the world on that basis. And he is arguing, no, quite the opposite. Deflation is the consequence of current fiscal policies being proposed in the United States. And you have the Fed’s Rosengren, who is calling for an even faster increase in interest rates. And again, this is where Napier would say, “Do you recognize the consequences, the negative feedback loops created, when you begin to increase interest rates?”

Kevin: Just look what has happened to the dollar so far. The dollar has strengthened to the point where the world already is at a breaking point, and we haven’t even begun to see these three interest rate rises that they are talking about for the next year. There is a give and take and a tug and pull between what we think the Trump administration may have as far as cooperation with the Federal Reserve, and possibly not. We have seen in the past, certain presidents snubbed by the Federal Reserve for monetary policy.

David: Prior to the election we saw global trade in pretty significant decline, and if you were looking at freight rates, if you were looking at some of your shipping companies, one of the largest ship manufacturers in the world in South Korea went bankrupt earlier last year. A number of things that would indicate that, in fact, global trade is subpar. We haven’t been above the 5% growth in terms of global trade since the global recession. And now we’re hugging, basically, the zero line.

What is interesting is that was all prior to the election. With the election of Donald Trump we have an increase in the U.S. dollar, an increase in interest rates, and as the U.S. dollar has been rising, that has had the same effect as tightening monetary policy all over the world. And tightening monetary policy in the context of slow economic growth – not just slow economic growth, we’re talking about transactions and movements of goods from one country to another, whether that is the emerging markets to China, China to Japan, Japan to the United States – we’re talking about a general malaise which is exaggerated by strengthening of the U.S. dollar. Because again, these are economies which cannot, at this juncture, tolerate a tightening of monetary policy, and yet, that is exactly what a strengthening U.S. dollar is effectively doing to them.

Kevin: Why don’t we go ahead and look at the model that has worked for China for the last 40 years, where they have a current account surplus which, basically, is the same thing as saying a trade surplus. They sell us more goods and collect more dollars than we actually sell them. Now, that trade surplus has benefited both the Chinese and us, and I use the Chinese as an example, but this trade surplus model has worked with other countries, as well. That surplus is then recycled back into the U.S. dollar, which supports the U.S. debt. So let’s say that there is a 400-billion dollar surplus of dollars in China, where they have sold us more goods. They then come in and buy 400 billion dollars’ worth of U.S. government bonds and it’s a symbiotic cycle. It’s a “you scratch our back, we’ll scratch your back” kind of agreement.

David: And it’s not just treasuries, it’s other U.S. denominated assets. At one point it was the GSE’s Fannie Mae and Freddie Mac. They liked that because it was higher yield, but with an implicit government guarantee.

Kevin: So it had a real estate impact, as well, here in the United States.

David: Yes. The reality is, the current system in China is not unlike the British system. We watched the landed gentry lose their grip on the economy in England, and they lost their grip to the new emergent merchant class. The British merchant class became the nouveau riche, and they were the ones who upset the landed gentry, in terms of position and power, in the country. We have that same kind of merchant class, or mercantilism, that we had in Britain, in China today, and that is what is being called into question. They’ve had monetary policy, in China, which has accelerated growth and given them a trade advantage by keeping the Chinese currency at a steady level relative to the U.S. dollar.

Kevin: But it looks like that might change, maybe even this year.

David: Number one, Trump says that they’re currency manipulators and we’re going to charge them as such, and there will be implications in terms of world trade agreements. So that is one component of it, but the other component, which you just mentioned, is that there is a deep-seated assumption that they will continue to sell, and we will continue to buy. And yet, what we’re trying to do is essentially say, “No, we’d like to manufacture more and more in the United States and buy from ourselves, and export.” That fundamentally alters our trade deficit.

Kevin: And that fundamentally alters the model that has worked for us, as well, for the last 40 years. We have run incredible deficits – 20 trillion dollar deficit – plus all the other things that you could add to that, based on the fact that we always knew that we had government bond buyers. We knew that we had a buyer already built in because we were going to continue to buy more goods from China. But let’s not even just look at China, let’s look at Middle Eastern oil. Talk about energy independence – that’s another thing that Trump ran on – yes, it would be great to be energy-independent, but we certainly do need those Saudi Arabian dollars coming back into U.S. treasuries.

David: You’re right, there is a change that is afoot, which is, petro-dollar recycling is sort of a thing of the past, and we’re talking about trade dollar recycling becoming a thing of the past. But if, in fact, we don’t have a trade deficit, we don’t have the corresponding trade surplus on the other side, whether those are surplus dollars in the Middle East, or in China, guess what? There is, then, no captive audience – no audience who would purchase our U.S. treasuries and fund our budget deficit.

And that’s the critical thing, we have to be able to fund this largesse. Government spending is with us. It seems to be the one thing that is constant since the closing of the gold window. From the late 1960s to the present we have basically had massive government deficits. And why? Because without the moorings of gold in the financial and monetary system, politicians can promise any quantity of money, and if they don’t have it, they simply print it. That’s what you give up when you move away from a true specie system.

Kevin: You talked about a captive audience – who then becomes the captive audience if we don’t have foreign buying?

David: We do. We become the captive audience, if you don’t have foreign buying. And this is one of the interesting things that Napier is also interested in as it relates to Japan, because Japan is also coming to a very intriguing point in time, where Japanese savers, for years and years and years, out of duty or some sort of social norm which I simply don’t understand, felt compelled to buy Japanese government bonds. And so Japanese savers have been the ones who have, on a voluntary basis, been funding the Japanese deficits. And now they are over 230%, almost 250% debt-to-GDP in Japan. And the big change is, as interest rates begin to rise in the United States, the differential between U.S. treasuries and Japanese government bonds – you begin to see what we call “grass is greener on the other side” begin to impact that thinking and behavior patterns of the Japanese investor.

Kevin: Even if it’s not just the Japanese investor, there are worldwide investors in the yen, are there not, that would then move to the dollar, as well, out of the yen, if they’re not going to get a return there?

David: Yes, this an issue when you have people who have thought of return of capital instead of return on capital for a generation. And yet, you’re talking about an aging generation that needs more income, specifically in Japan. You show me a ten-year treasury in Japan giving me 0% and a ten-year treasury here in the United States giving me 2% or 2.5%, and where is my money going to go? So, the problem is, you have the Japanese government who is already buying massive amounts of Japanese government bonds – massive amounts. They currently hold over 36% of the total of outstanding government bonds – that is the bank of Japan.

You could have a massive amount of government bonds in Japan sold into the market from savers who have been happy to hold them, but now, given a better alternative, with U.S. treasuries yielding 2.5%, maybe even 3%, on the horizon, what begins to happen? It forces mass monetization in Japan. And this is where Napier, I think, is spot on. You have the potential trigger for a massive inflation, or shall we call it devaluation, of the yen, which is highly destabilizing, not only to Japan, but ultimately to global trade.

Kevin: This brings us to the other side of the issue. We talked about current account surpluses running things, but capital controls, capital surpluses, or capital deficits – a capital control is simply when a country decides to shut the exits down. You can’t move your money out. We’ve seen this in so many countries. We’ve seen this in Cypress recently. We’ve seen them moving toward this in Turkey. But if Japan were to shut the exits down, or let’s say China were to shut the exits down – I know I’m jumping around here, but Dave, the wealthy Chinese, it is estimated, according to Napier, that two-thirds of all Chinese who have any wealth whatsoever, want to leave the country, and they want their wealth to come with them.

David: That’s right, and there is a potential concern about capital controls in Japan, but there is already an issue with capital controls in China, and there is a review right now of that $50,000 annual limit of buying other assets, other than Chinese assets, and taking that outside of the RMB, or yuan, universe. That is under review at present. It will probably stay $50,000, but they will probably increase the scrutiny on transactions done in terms of purchasing of assets and invoicing of trade with companies overseas.

So the big issue in China is really the big issue in Japan. Forced with a dollar which is appreciating, and with a currency system in China which is tied to the U.S. dollar and would naturally appreciate if it were not deliberately devalued or floated, and then we would get to see what happens next, the notion is that either Japan or China, or both countries, as a result of an increasing U.S. dollar, experience a significant devaluation 2017, 2018. And with that comes all of the same trends that we’ve seen in place.

You realize, Kevin, 2016 we broke the 2015 record in terms of capital flight out of China. We were just shy of a trillion dollars, actually just shy of 900 billion dollars, in China this year, which exceeded the 2015 all-time record. And so, we’ve got capital flight as it is. We’re talking about exaggerating those trends as people become even more concerned. This is, again, not exactly positive if you’re talking about world trade and the global economy. But why do people want to leave China? Repression avoidance, seeking opportunity elsewhere, diversifying into other currencies, wanting a place – I just showed some friends from my last trip to China, over the weekend, pictures – I said, “You’re not supposed to stare in the sun.”

Kevin: I remember, I could barely see across the street when you sent those pictures to me.

David: And yet, at ten o’clock in the morning, the sun has risen, and you can stare straight at the sun, and the fog, the smog, the nastiness in the air is so thick that you can barely see this thing that looks like a pencil eraser in the sky, because everything else is blotted out. Would you want, if you were wealthy in China, better healthcare? Would you want something that isn’t, ultimately, going to give you – I don’t know, what is it going to give you? Tuberculosis? Lung cancer? I have no idea, but I would want out.

And then you have corporate issues. We’ve talked in the past about rising wages, and how that is good for the growing middle class in China, but for those who own the corporations, guess what? It does represent a squeeze of cash flow and they are less likely to reinvest those dollars back into their companies. And of course, there is sort of the ongoing issue of the rule of law. It doesn’t really exist in China. And so, when you think of property rights, when you think of having a growing asset base in China, where you may or may not have political freedom, you may not have property rights, that kind of insecurity does also encourage money to leave the country.

Kevin: You had talked about devaluation. Let’s pretend for a moment, Dave, that you can open up the paper and you can read next year’s paper. Russell Napier points this out, that each country – you’re either going to default on debt that you can’t pay, or you’re going to devalue your currency. Now, in Europe they can’t really devalue their currency country by country because they’re stuck in the euro, and he basically points out that for them to be able to handle their own debt, the various countries, Portugal, Italy, you name it, at some point this euro is going to have to break up. And that way, they can, then, inflate their currency on their own without having to ask what the European Central Bank’s opinion is.

That’s not just Europe, though. We could see a devaluation in the Chinese currency, which we’re not used to. We’re used to the peg to the dollar. But he makes a clear prediction, Dave, and I think it’s interesting that Russell Napier felt so sure about this one. He said, “Japan – you may as well just short the yen, because the yen is going to devalue.” Now, again, going back to that paper where you’re looking a year ahead of time. You say, “Okay, look at the price of the yen. Oh my gosh, the price of the yen is much lower a year from now. The price of the Chinese currency much lower. The euro, possibly broken up and devaluations are occurring in their currencies.” At this point, where do you go? Russell Napier says to have dollars, but he also says gold.

David: Right – dollars, U.S. treasuries, gold, short the Japanese yen. You may want to own Japanese stocks and hedge the currency. There are a variety of things that he says do make sense in the context of deflation, which is very interesting. I was reading Kyle Bass the other day, and the suggestion was that we’re experiencing a tectonic shift, this move away from deflation toward inflation. And you can see it in terms of the inclination to use fiscal policy. And yes, there is a possibility that on a domestic basis we do unleash inflation via fiscal policy. Napier’s point is, the inflation which is stimulated here in the United States – is that sufficient to reflate these other areas of the world which are up against massive amounts of deflation?

And we’re talking about deflation of asset prices, because the larger context is, we’ve just set a new record in terms of global debt-to-GDP. We have 217 trillion dollars in debt – 217 trillion dollars in debt – which is about three times global economic activity. And just under one time is where Reinhart and Rogoff say the wheels begin to be unstable and you may actually come off the rails. But at three times, you’re talking about a global economy which is not large enough – it doesn’t have enough horsepower – to keep up with the debt that already exists.

Kevin: You either get out with growth, or you get out with devaluation, or you get out with default.

David: That’s right. Growth, devaluation, default, or inflation. And you can inflate away your debt, which is really what they need in Europe because they’ve already said that austerity and default are not in the cards. They’re not on the table. So the lynchpin in Europe is really a German acquiescence to inflation.

Kevin: And he brings an amazing point up, Dave. Germany doesn’t ever want to have inflation. Angela Merkel is under tremendous pressure not to allow that to happen.

David: But maybe the German people are actually okay with living with the kind of repression that the Chinese have had, financially speaking, for years. In China, you realize, they’ve had banking crises in the past and they’ve run real rates of return at a negative level, and they’ve basically extracted value from households to rebuild the economy and the banking sector. And we’re doing that, to a small degree, in Europe today, with pushing rates tremendously low. Could we see more of that? I think the German people and all of Europeans may be okay with that, but I’ll tell you who is not. Angela Merkel and her party are not willing to take the political sacrifice, because honestly, there would be a cost to it. If you say, “This is what has to be done, and it’s going to be painful,” you may lose your job in the process. And it may be exactly what needed to be done, and in the end you may be vindicated. That is certainly what happened with Alois Rašín in Czechoslovakia. He was a guy who came in and actually killed inflation, but created a recession to do it, and he was killed for it. He was murdered. He was assassinated. He ended up being correct in the end, but what he did was not particularly popular.

Kevin: So, it wasn’t just political suicide, it was suicide, itself.

David: Well, in a form, and I don’t think Angela Merkel is willing to commit political suicide or put her party at jeopardy to save the euro, which means that yes, you have a massive amount of debt in Europe – a massive amount of debt – and it can’t be repaid on the basis of growth, and it’s not going to be defaulted on, and you are seeing this trend of populism which kind of checks that last box – no, we’re not going to take care of it via austerity or you’ll end up with political revolt.

Kevin: Well, nobody gets away with austerity. Let’s face it, you never get re-elected if you’re an austerity candidate.

David: Right. So the only other alternative is to run negative rates for a long period of time, real negative rates, which means you keep interest rates as low as you possibly can, and run inflation as hot and heavy as you can, and extract value from household savers, and rebuild the economy that way. Now, I think it’s very unhealthy, but there are very few solutions. So again, you’re dealing with deflationary pressures, given the scale of debt and the inability to do anything about it. Typically, what you would do is allow households to take the hit via inflation, paying higher prices and having less in terms of return, and that is not possible today, given the monetary construct in Europe.

Okay, so what’s the next step? If the monetary construct in Europe falls apart, what happens? You do end up with capital controls again. You go back to the 1990s, which is not that long ago, when goods did not cross border without major tariffs, when capital did not cross borders without significant taxes. So you’re back to an age of capital controls which is very asset price deflationary, even though what you could have is monetary inflation at the same time.

Kevin: Well, Russell Napier is a European, not mainline continent European – he’s from Scotland – but Napier says that we probably face a dissolution of the euro because of what you’re saying with Merkel. Merkel probably will not take the hit. So you have the 19 member countries of the euro. His belief is that even a single one of those countries, if they continue with this Brexit mindset, the Trump exit mindset, then what we will probably see is the dissolution of the euro. That is where you get these countries going national again and creating their own currencies, devaluing, inflation, capital controls, all the things you’re talking about. He believes that when that occurs, the shock to the system worldwide will be more like 1914 than it was the Lehman shock.

Now, you and I have talked about 1914. That was an interesting period of time. The whole world changed. That was the beginning of World War I. Most people can’t even get their minds around why World War I started, but we’ve seen a century where World War I has progressed, and Dave, I’d like to just bring up something that I was thinking about when I was reading about this, because you interviewed Otmar Issing, who was one of the originators of the euro and the European Central Bank, and he headed the European Central Bank for seven years.

When you interviewed him, it was interesting to hear the human side of him say he never wanted to see what started in 1914 occur again. And his feeling was that unless the euro held together, first as a monetary unit, second as a political unit – he felt that was coming – and then third, as a fiscal unit – in other words, Europe start acting in concert as a political entity instead of a number of separate countries, he felt that if those three things were not in place we would experience the equivalent of World War III.

David: And it is interesting because that is exactly what Harold James argues in his book The End of Globalization, and this was a book that he wrote back in the year 2000 – not 2008, and not 2016. This is, I think, a very prescient look, and I cannot recommend that book strongly enough. Harold James, The End of Globalization – that was required reading here in the office a few years ago. And it’s the similarities of current issues, whether it is debt-related issues, whether it is political issues which are now emerging.

We’ve had Brexit, we’ve had the U.S. election with Trump, we have concerns about mobility of labor. We’re not very interested in immigration here in the United States. They have their own issues in Germany and in Europe. And these are the same kinds of things which were happening circa 1914. The last period of globalization ended World War I. That’s when it ended.

Kevin: Something seems to be very different this time, though, Dave. Back 100 years ago, if you ran out of opportunities in one place, you would just go somewhere else. You would migrate somewhere else. But when globalization starts to break down, like what we’re seeing here, you see the borders come up. Talk about building that wall, you really don’t have the opportunity this day and age.

David: Well, you not only have what we’ve described as sort of a monetary or economic Berlin wall, which is built to keep things inside, and you’ve got that in China to a degree, and you could see capital controls do the same thing, to keep capital contained inside a country. But you also have a lot less labor mobility today than you had in that period. So yes, the 19^th century and early part of the 20^th century, if you ran out of options in one country, in one field of endeavor, you just moved to another part of the world and found new opportunity there.

Kevin: Look at the expansion of America during that period of time, for that very reason.

David: Yes, in fact, it is not small irony that you have Frederick Trump, Donald Trump’s grandfather, who was born in 1869, and had to leave Southwestern Germany and emigrate to the United States, along with, actually, from that same area, from that same town, I believe, Henry John Heinz, who was born in 1811, who came to Pennsylvania and started the Kraft-Heinz company that we know today. There was disaster which occurred, and the ability to change your geography and start over. And now we have a different set of circumstances where disasters occur and you’re stuck.

And what I think that does is exaggerate a sense of nationalism, and ultimately, hostility, where politicians, on a domestic basis, are forced, in an even more exaggerated way, to blame someone else. And so, you see that in Turkey. You have the Turkish economy which is on the rocks. You have the Turkish lira, which is putting in new all-time lows.

And finger-pointing is occurring. It has nothing to do with the current administration, it has nothing to do with Erdogan, it has nothing to do with anything that they have ever done. It is foreign powers, it is non-Muslims. There are ten different reasons why Turkey is suffering, and it has nothing to do with Turkish domestic policy. And so the fingers are waving. That’s the kind of environment, harkening back to 1914, that creates for massive geopolitical disconnect, a disintegration, and ultimately, conflict.

I read through Napier’s most recent report, and I have to say, “The Solid Ground” is one of the most valuable resources that I look at on a routine basis throughout the year. About ten pages in, I wrote myself a note: “War is the answer.” Now, of course, war is not the answer. War is a terrible choice, always and anywhere, but war is the answer for desperate politicians. And as we look at things move in the direction of a deflationary outcome, whether that is in Japan, China, or the Eurozone, as a result of a rising dollar and rising U.S. interest rates, we have a variety of political actors who may be willing to go that direction, and again, play the blame game and make it someone else’s fault.

So you have the potential for very interesting things circa 2017, circa 2018, and we come back to that question. If these are tectonic shifts occurring right now, and the world is assuming that we are moving away from deflation and toward inflation, what if the real surprise is, we get price inflation? But we get asset price deflation, as there are greater concerns, less money moving around the world, less trade moving around the world, and you get the worst of both worlds where you have, again, asset price deflation which is balance sheet losses set against an increase in income statement expenses, if you will, where the cost of everything is going up, but the value of your assets is going down.

That, I think, brings us back around to Napier’s suggestion, that in the end, you want to own cash, and you want to own gold, which is what we’ve been saying now for about two years, only he gets more specific. You want to be long the U.S. dollar, you want to be long Japanese equities hedged in the U.S. dollar, you want to be long treasuries, you want to be short the yen, you want to be long the government debt of Singapore, he would say, and long gold. How does gold work with a strengthening dollar?

Kevin: That’s what I wanted to ask, Dave, because he is very strong on this. He says, “Look, the dollar will rise, and gold will rise. Go long on gold.” There is a misconception out there that when the dollar goes up, gold goes down.

David: Yes, but if the dollar goes up and it’s causing all kinds of mayhem in terms of asset price deflation globally, guess what you’re doing? You’re creating the equivalent of ten Lehman’s globally. So one Lehman causes a global financial crisis, what does ten Lehman’s create? It creates more counter-party risk and chaos than you can shake a stick at. An intelligent investor is going to say, “I can’t have all of my assets in the financial system. The financial system is coming unglued. What do I do? Where do I go?” And so gold becomes a safe haven asset, even as you’re looking at the assets that you keep in the system.

Kevin: It’s money without counter-party risk. That’s what it is.

David: Exactly, because even if you’re long U.S. dollars, or long U.S. treasuries, or long the government of Singapore debt, or short the yen, you still have counter-party exposure, you still have counter-party risk. The notion that we could, because of an increase in the value of the dollar and an increase in interest rates, find ourselves in a global deflation, that is, asset price deflation, with consequences to all of your counter-parties and over-leveraged financial players, yes, that’s why people do want gold. Why do they want it? Because it is, ultimately, the only financial asset devoid of counter-party risk. And so, to look at 2017 and 2018 and say that things are getting so much better in the United States as a result of Trumpflation, the irony is, we may get Trumpflation here in the United States, and we may get the worst form of deflation globally as a result.

Kevin: Dave, you’ve recommended Russell Napier’s report, but why don’t we just have Russell Napier on? I would love to hear it from the horse’s mouth. Could we have him on in the next couple of weeks?

David: You know, off the top of my head I could come up with ten pages of questions for him, in a more detailed fashion, because I do want to talk about what the “efficient markets” are telling us today about stocks and the future of growth and everything else. I would love to talk to him about the global monetary system. And I’d love to talk to him about the current account deficit, which, again, as we talked about earlier, has been one of the things driving the ultimate funding of our budget deficit.

There are a number of things which, if we change the dials and improve certain elements of the U.S. economy, it may have catastrophic consequences the rest of the world over. And we may, in a very cavalier fashion, say, “Well, who cares? That’s them, it’s not us.” But the reality is, we live in a very, very tightly interwoven global financial system. And just as we saw, we caused the global financial crisis – Lehman, Bear Stearns, then the rest of the world – that same kind of knock-on effect can occur. It doesn’t matter where it starts – the dominoes do fall.