In PodCasts
  • Haircuts Up 66x in 100 Years – But So Is Gold
  • $11 Trillion In Debt Now Paying Less Than 0% Interest
  • Should A “Robust Economy” Need An Extra $1.3 Trillion A Year In Debt?


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


February 27, 2019

“We’re inseparable from the world of fiat currency. The banking system anywhere you go in the world is an entangling alliance. If you want to transact, you must bank. There is nothing wrong with the deposit and savings function of those institutions. The weakness comes from the currency, and the dependency on a home currency. Pick a reliable one.”

– David McAlvany

Kevin:Dave, I got a text from you Friday night that reminded me of my grandpa. My grandfather was cutting hair as a barber in Shamrock, Texas almost 100 years ago. In fact, his barber chair is still in a museum there in Little Shamrock, Texas on Route 66. He used to charge 50 cents for a haircut, and he’d shave you – 50 cents would take care of the whole thing. I think 50 cents would also buy a bathtub full of hot water. Those were the days when a haircut was only 50 cents, but really, what your text showed me on Friday night is that things haven’t changed much for the person who operates in gold.

David:When I was in college my roommate was teaching me how to play guitar. He showed me a few basic chords. He was a professional musician. He said to keep the rhythm, just remember this phrase, “Buzz and a haircut, two bits,” as you’re strumming the guitars. Dat-da-da-dat-dat, dat dat. Dat-da-da-dat-dat, dat-dat.

Kevin:My grandfather used to do that same thing.

David:So I went for a haircut on Friday and I found, to my surprise, a conversation on Carl Menger.

Kevin:The Austrian school.

David:Exactly. We talked about crypto-currencies, we talked about gold.

Kevin:And this is your barber.

David:Well, I’d never been to this barber before. This young man is raising the fifth generation in his family here in Durango, just returning from a 15-year spell or stint in Austin, Texas, and pretty well versed in monetary theory, both the older versions and the new versions which his interest in cryptocurrencies. As the conversation went on, I talked a little bit about what I do. He asked, and so I answered, and the topic of our Vaulted offering came up

Kevin:The gold Vaulted account came up.

David:Yes. And in the midst of that conversation he said, “Can you pay me today from your Vaulted account, from your gold holdings at the Royal Canadian Mint?”

Kevin:So he is basically asking for gold in payment for a haircut.

David:And I replied, “Yes.” And so I did. So $30 and $6 tip, so that’s $36 of gold today, which pencils out roughly to 50 cents, roughly, which I would have paid for that haircut 100 years ago.

Kevin:Yes, with my grandfather. It’s amazing, think about this, an old $20 gold piece – after I get the text on Friday night, I was with my son, and he said, “You know, I wonder if that is about what a haircut was 100 years ago.” So I got the calculator out and I divided $1320 gold by 20, because it used to be $20 an ounce and now it is over $1300 an ounce. Gold has risen about 65-66 times since my grandfather was cutting hair about 100 years ago, and if you take that 50 cents and take that by 60-66 times, that is exactly what you paid for your haircut. So haircuts are the exact same price, Dave, as they were 100 years ago, if you had kept your money in gold. Otherwise, you’re paying 66 times more.

David:Right. So some things are constant, more or less, and some things are rapidly changing, and this is the difference between real money terms where the haircut is still the haircut. It just is what it is. But in real money terms, the dollar is no longer the same dollar. So even if we fail to recognize the change for what it is in the present tense, the U.S. dollar is not the measure of all things, and you might even say it’s not a reliable measure of anything.

We tend to make little of the inflation target that we have today. It is very harmless, it is only 2%. We tend to make little of the debt that we accrue daily, at least that our government does, as big and as incomprehensible as it is, now 22 trillion or more. And we make little of the discussion between politicians, amongst themselves, about how they are going to spend money on this or that, even if they don’t have the money to spend, again, deficit spending, as if that was an acceptable or sustainable approach to governance.

Kevin:Last week I told the story that a man had approached me in church and asked if we were ever planning on paying the 22 trillion dollars in debt off. Actually, we are paying that debt off out of our pockets. It is not so much that gold has gone up 66 times over the last 100 years, it is that the dollar has gone down that much.

David:And it takes that many more dollars to buy the same amount. So it’s not the price of a haircut, either, that has increased 66 times over 100 years, it is the value of the dollar which has declined proportionally. So if you look at it from that standpoint, for the man paying in gold it doesn’t matter. It doesn’t matter. The cost is the same, or close enough.

So here I am getting a haircut and I was gratified, I was very satisfied, that the Vaulted program came to life as I have desired it to. It is reliable savings – that is its primary role, reliable savings for all – without the risks inherent to the banking system.

Kevin:Well, but you can’t eat gold. How many times do we hear that, Dave? You can’t eat gold.

David:No, it’s true, and that is the objection that some people have, but you can’t eat cash, and you can’t eat credit card or debit cards, either. But you can transact, at least I did with the barber. And I think what I would like to do as time goes on is refine this process of how do we use it for the purpose of not only savings, but transacting. If somebody has ever taken delivery of an ounce of gold, or a kilo bar of gold, or a 100-ounce silver bar, or what not, you look at it and you say, “How do I transact with this?”

Actually, using the digital trade, it is very easy. I sent him a gift card direct from my account, and all he has to do it open an account at Vaulted, redeem it – he can buy gold at the current price.

So we did it on terms that the government, through the years, and since 1971, has conveniently rejected. We took money back, so to say. And as a barber, his work is valued on those terms, as it always has been. I think we need to remember this. We should never forget that when a currency is devalued, so is the work of every person.

Kevin:Let’s look at that, because a man, no matter how much the Federal Reserve wants to print, or the Treasury wants to go into debt, a man’s hours are still the same as they were 100 years ago. If we were to look at the economy of our life, we don’t get to inflate the minutes that we live.

David:No, so to me, inflation is inherently undignified and insulting, even if inflation is expedient for those that use it, and tend to abuse it.

Kevin:One of the things that I was explaining to this same gentleman was, if we earned interest greater than the inflation rate, then we actually could get ahead. So let’s say that we had 2% inflation but we could earn 4% on our money. Even with tax we would be getting a little bit ahead. The problem is, financial repression is the Federal Reserve, the Treasury, the central banks all know that they cannot pay the interest that the inflation rate is, so they pay just a little less, even to the point of zero.

David:You remember, we talked to the California economist and academic, Mr. Taylor, who they named the Taylor rule after. He created this process by which you can figure out where interest rates should be. This is the Taylor rule.

Kevin:Which was always a little above inflation.

David:Yes. And so, if you look at the Taylor rule today, we are a behind the curve. We are not at, and we’re not above – we’re behind the curve. Interest rates are lower than where they should be, and that does have a real cost. That has real costs for savers, that has real costs for depositors in the bank. People are being undercompensated for the risk that they are taking, not only in the banking system, but as it pertains to inflation risk.

Kevin:It’s not that we’re even getting a positive rate. There is a lot of debt out there that is actually negative-to-zero at this point.

David:Jim Grant, in his most recent letter, looks at the 11 trillion dollars in debt which is a global stock of debt, 11 trillion which yields less than zero. That is, 22.6% of the debt outstanding around the world has an interest rate smaller than the number zero.

Kevin:Dave, are we going insane? If I was a kid and somebody said to put money in the bank so that you can get negative rates, so that you can get less out than what you put in, what in the world is the motivation?

David:It begins to change the nature of the market because as global debt grows, what you have is interest rates which now are failing to carry a message, and the message implicit to an interest rate, and to the borrower of that money, is that there is a cost to borrow, and there is a risk with having too much of this debt. So what we have now is old ideas about the state assigning value to currency, and being able to create it in infinite amounts, both in terms of the currency itself, and debt itself, to pay bills and finance government spending. These ideas are resurfacing. We talked about modern monetary theory, and the argument goes, amongst the modern monetary theory crowd, that deficits are zero concern. You don’t have to worry about running big deficits when the government controls the printing press. And so, the Fed prints, they simply hand it over to the Treasury to take care of the business of paying for things, and granted, if you look at that, there is a simplicity to it, an elegance. But there is also an insanity to it that chooses a limited time slice, this present time slice, as evidence that no evils will come from the printing press or from a ballooning budget deficit. What I mean by evils is, damage done to the financial system, damage done to investors, damage done to savers, those living on a fixed income. And again, this is not really in direct support of modern monetary theory, but you have the contemporary monetary policy choices, the folks at the Federal Reserve and the central bankers, and they are justifying themselves.

The San Francisco Fed wrote a report. Again, Grant points this out. The report dealt with this question. How much could negative rates have helped the post-2008 recovery? And the argument there is that it would have helped a lot. They are arguing that one of the things that we weren’t aggressive enough with was getting negative enough. Again, if you listen to that, they are telling you ahead of time what they are going to do again. And in the not-too-distant future, as they move toward QE, one of the things that you can count on is that rates go negative.

I don’t know how this works, exactly, with the market judging where the risk in terms of inflation, and the risk in terms of default – how that is priced into the bond market. But I think insofar as the Fed and the European Central Bank and the Bank of Japan are trying to play with specific set numbers – we’re talking about the Fed Funds numbers – they’re going to try to batter them down into the negative territory, again.

Kevin:What is amazing to me in these conversations is when they are saying to themselves, “Well, gosh, negative rates have worked in the 2008 post recovery,” funny that the conversation doesn’t include the saver. I was talking to some clients yesterday, Dave, and they had a reasonable amount of money in savings. It was less than $500,000, and they asked me, “Are we going to be able to retire and live off of the interest of our money?” They were in their early 60s. The truth of the matter is, years ago – yes. When they could get interest – yes. Today – no. I just told them, “Stay healthy, keep doing what you’re doing.” Because they do not have enough money to live on the interest on their money. Why? Because the saver hasn’t been asked in this conversation.

David:That’s right. The magic 5% is gone, so if you saved a million dollars and earned 5%, you were never eating into your seed capital. But you had an extra $50,000 added to social security, and if you were debt-free by the time you retired, making $60,000, $80,000, $90,000, you could live off of that, certainly, and in retirement live pretty well without any debt encumbrance.

Kevin:Well, but they have tried these socialist types of maneuvers over in Europe – I keep saying theybecause it is the elite – and they seem to tell us that we should do this, too, because it worked.

David:Well, in this case, it is the academic elite. It is the central banking elite. It wouldn’t be the first time that we have had inflation. Again, these are monetary policy tools – inflation, financial repression, which we are describing with low rates – it wouldn’t be the first time that these have been used to resolve debt issues. So we had the experiment with Europe. We had the experiment in Scandinavia – still do. The problem is this. Not having blown up the world, merely – and I say that tongue-in-cheek – merely destroying the price mechanism in the world, economists are feeling pretty bold right now. And they are promoting inherently inflationary policies.

You look at the structure of the debt and it is very favorable, and it will continue to be very favorable for the current borrower. Economists have long held this assumption. There is a rational element underscoring the decision-making of economic participants. This is the study of economics. It is a study of choice. And it assumes a certain rationality. And they seem to have forgotten that excess money and excess credit promote, not rational decision-making, but irrational exuberance – not rational risk-taking, but irrational risk-taking, where all of a sudden, the measure of success is lowered. The bar to success is lowered when free capital is being thrown around. It is being subsidized. Risk is being subsidized by a below-market rate, that is, the rate of interest.

And ultimately, the possibility of a very rational choice does emerge, and that it is a possibility that most economists don’t consider. It is the possibility of opting out of a system that is rigged and managed from the top down. So the economy, based on an ever-increasing quantity of dollars and debt – what is it today? It’s a great game. It’s a big game, and some would call it a confidence game.

Kevin:Which is shortened to a con game. That’s where con game came from, a confidence game.

David:That’s right. What traders in the marketplace recognize is that you don’t invest in the stock market today, you don’t invest in negative-yielding paper. You trade it. You speculate in it.

Kevin:Hoping that rates go more negative, and the bond value goes higher.

David:That’ right. So that value equation has been substituted with a game of odds, and a speculation. And in this era, the game has not ended. So the academic voices, because the game has not ended, and not ended terribly, have begun to justify the recent policies as a starting point for a new version of Keynesian demand management.

Think of this. This is important, because if Keynesianism works in a crisis, so the current thinking goes, why not allow government deficit spending as an economic pillar in normal times, too? If you look at what has happened over the last ten years, we went from being on a crisis footing to now, we’re supposed to be in a healthy place, from an economic standpoint, and yet we’re continuing to deficit spend as if we are in the throes of crisis.

Kevin:It’s a painkiller addiction. When I had the operation on my eye, I started getting to like the painkiller that they were giving me, and I remember reasoning with my ophthalmologist, saying “You know, I think I might need just half a dose more, if you don’t mind.” He looked at me knowingly, and he said, “No, that was really just for the surgery. You’ll be fine,” because it’s human nature.

It’s the same thing when a doctor gives someone morphine right after a major accident. It’s because it’s an emergency. The only other time a doctor is going to administer morphine is right before a soldier dies on the field. That’s what this is. This quantitative easing, these negative rates, this is an emergency morphine procedure that has been continued, and it has turned into an addiction.

David:Yes, so now we have this debt addiction in what is supposed to be a robust economy. I ask the question, “Why do you need 1.3 trillion extra dollars to operate if you have a robust economy?” The Treasury was forced to issue 1.336 trillion dollars last year, 2018, to fund its operations because there wasn’t enough money coming in, and this is a robust economy. So what does deficit spending look like when it’s not so robust?

That’s for another conversation, but this is the current administration. Just like the one that preceded it, they see no trouble in spending what they don’t have (laughs). The problems with this approach, I think, are lost on the average stock investor, because most stock investors are saying to themselves, “How can I make money? How can I make money?” And they are distracted by the allure of speculative short-term trading profits.

Kevin:And they know the morphine is coming. All they have to do is hit the button one more time.

David:And frankly, the long-term doesn’t exist for them. They pushed it out of their consciousness, both the long-term in terms of the past, and the long-term in terms of the present, leading to this future which they don’t really care about. In our portfolio management meetings the last two weeks, last week and this week both, I think an interesting observation came out that I want to share with you. We have had the march higher in the equity indexes since early January, and if you look at any of the charts, whether it is the mid cap stocks or the biotech stocks or NASDAQ, let alone the S&P 500 or the Dow, you look at the chart and the steepness of that climb is completely abnormal.

Kevin:Back in the game. They hit the button.

David:Yes. So I think what is fascinating is not the steepness of that march higher, but if you look at the yields on German treasuries, if you look at the yields on Japanese government bonds, if you look at the yields on U.S. treasuries, in the last 6, 8, 9 weeks of relentless ascent higher, the treasury yields in these three jurisdictions have hardly budged.

Kevin:So the bond guys are basically not playing.

David:Right. So if you look at the stress that we had in the 4thquarter in the financial markets, it got the attention of the bond community, and they’re not buying the current hype in the equity markets. There is a lingering concern, and still a very risk-off mode within the bond community, that stands in sharp contrast to your equity speculators and your equity players who are risk-on. They are in that mode at present. I think it is always important to recall that the bond investor is generally regarded as the more sober-minded, perhaps even the more intelligent of the two. But again, the bond market is sending a very different signal than the equity markets. And then just stack that up with the IQ associated with who is making which bets. My guess is that there is going to be some pain and suffering.

Kevin:We were talking about home schooling the other day and how there are life lessons. When you live a deliberate life and you are teaching your kids as you go – and I know you are very deliberate with your kids – when you are doing that, you can actually teach, or codify, the important things in life. I remember hearing this when I was a kid – “Money doesn’t grow on trees.” Well, our government doesn’t behave that way – the code of: what you borrow, you pay back.

I was talking to a client yesterday and she said, “I was raised that way. When I borrowed, I always knew that I would pay it back, even if I missed a meal to pay my debt.” That’s not what we’re showing our kids as far as what the government does. Like you were saying, 1.3 trillion extra dollars to operate, yet we still come out and say, “Oh, it’s a robust economy, and there is more of this to come.”

David:The code that you are describing – we used to have the sense of moral obligation to the things that we obligated ourselves to. There was a moral component to it. Now instead of moral obligation we have moral hazard because we have found ways out, and with a way out there is a leniency in our approach to those obligations. So go back in time, if you wanted to start with the Code of Hammurabi, or the Ten Commandments, and move through the development of Roman law and British common law.

Kevin:Magna Carta.

David:These are formal rules, and there are informal expectations that we associate with particular time periods – again, the code, if you will. (laughs) The Victorian era was a classic example. But the code that we have to keep in mind today is a different code altogether. It is summarized in chapters. It’s chapter 7, it’s chapter 9, it’s chapter 11.

Kevin:You’re talking bankruptcy.

David:(laughs) Right. Yes.

Kevin:That’s the code. Just the expectation of bankruptcy.

David:It’s the room that one needs to wiggle out of owner’s debt. It is what ultimately can create moral hazard. It is the new code we live by, and we have a poster boy for it. It happens to be the President of the United States. So the new code prioritizes the present moment, and growth at the expense of the future, on the mistaken belief that the debt burdens left for those either young or yet born can be pragmatically managed the same way as debt in the present tense.

The phrase that is used oftentimes in debt circles is evergreening. Evergreening is what they call refinancing on an indefinite basis. Debt comes due, you roll it over, debt come due, you roll it over, because you don’t have the money to pay it back, and you still have more needs to finance current expenditures.

Kevin:Dave, I was looking at a definition of addiction. I’m reading a book on how addicting Facebook and some of the social media is. They had a basic definition of addiction in there, and I think it applies to what you are talking about, where you are more concerned with the present than the future ramifications. Let me just read this to you. It’s short. “Addiction is a condition in which a person engages in the use of a substance, or in a behavior, for which the rewarding effects provide a compelling incentive to repeatedly pursue the behavior despite detrimental consequences in the future.” That’s addiction. The future is nowhere to be found. The present is the only thing that we care about.

I think about that and I hope I don’t offend some listeners who are smokers, but when it gets to be 5 or 10 degrees below zero and I drive past Walmart or one of the stores where people are taking a break and they are smoking, they are standing outside.


Kevin:Negative 5-degree weather because of an addiction. It can’t be pleasant. But that’s what happens. And ultimately, some of them will end up dying from that addiction. Debt is just like that.

David:And we’ve gotten to the point where debt is so large, it is fascinating to me that economists still struggle with how we have tepid growth rates, and how the official rate of inflation – we can talk about the legitimacy of that some other time – is still so low. We’re not hitting our target of 2%. And what they are really saying is that there is not enough economic activity to keep up with – and I think this is the element that they are ignoring – what it takes to maintain the debt obligations, both interest and principle, and what it takes to maintain the value of those assets and keep them functional, keep them with a positive present value.

Kevin:Last week you pointed out that China decided to open up the wallet again and just come out with almost 700 billion dollars’ worth of credit infused. I looked at that chart in Grant’s letter – we talked about that yesterday – and it’s just a straight up line of how much credit China has come up with. Why? Because of that tepid growth. The tepid growth that you are talking about, they couldn’t handle. They knew, politically, they have to keep this robust growth story going, and they are doing it with debt.

David:And the hope is that if you put that debt, if you put that credit, into the system, it will create economic activity. So, it was 685 or 687 – something like that – billion U.S dollars that was released into the economy in China in January. 447 billion of that was direct bank lending. This is not merely a U.S. domestic issue of being cavalier with mass quantities of debt. It is different than Havenstein’s conception of liquidity creation. If you remember, Havenstein was the central bank responsible for…

Kevin:The German hyperinflation.

David:Right, and he had ideas which justified the need for more liquidity being created and put into the system.

Kevin:He had an excuse, though – the Versailles Treaty. They said that Germany couldn’t have existed unless they came up with an economic plan, and so he had an excuse at the time to at least try the experiment. They were in a crisis.

David:And I think he looked at the increasing cost and he had cause and effect confused and he said, “Look, we have increasing costs for goods and services. People need more money to be able to pay their bills and to allow the gears of the economy to move more easily, so we will increase liquidity and ease the strain of a money scarcity problem because of the increase of costs. We have a money scarcity problem.” He didn’t realize that as he created more money he was adding to the flames of inflation (laughs).

Kevin:He had not read about John Law.

David:Again, there is no excuse like the Versailles Treaty’s owner’s payments today, and yes they were forcing the central bank to figure out ways to finance those payments and then ultimately inflate the system. That was a part of Havenstein’s problem. And you don’t have that today. What you instead is a very critical concept that we discussed with Tomas Sedlacek, which is this being enraptured with the idea of infinite growth, and how it is actually a very dangerous concept. Everyone loves the idea of growth, but no one really asks, “At what price? And how much is enough?”

There is a desire to grow and embrace a world of limitless growth where all of a sudden whatever ends are necessary are justified as long as the means and the objectives are met. And so, this is where the long-term costs of growth are irrelevant. All that is focused on is the present tense, and so the future is discounted proportionately to the short-term benefits created by limitless quantities of money and credit, because as you know, credit is the new money.

Kevin:Sedlacek talked about that as being a false religion. The false religion of continual growth doesn’t work anywhere else in nature. Could you imagine if you were awake all the time and never slept? Could you imagine if we never had fall or winter before spring and summer? Continual growth, continual growth. But thinking about it, when Tomas Sedlacek was talking about this, he said it was a false religion, and the central bankers are actually the high priests of this false religion.

But it is debt, Dave. You have to continually grow once you go into debt. I have learned this in the past when I was young. When I went too far into debt I had to continue to make more and more money because the debt was costing more and more. So this religion is fomented by living in a deficit society.

David:I just want to say, there is maybe an exception within nature to infinite growth, and it is the crocodile (laughs).

Kevin:Oh really?

David:Well, if the crocodile is the last of the great dinosaurs alive, it is said that a crocodile never stops growing, and it is believed that some of the great dinosaurs of old were a very old age, and they had the same genetic predisposition to continue growth throughout their life.

Kevin:I’ve heard about people’s noses, too.

David:(laughs) Well, this comes to mind because the boys insisted that I read the chapter on crocodile deaths from Death in the Tall Grass. They love this kind of stuff. I don’t know where they get this morbid sense.

Kevin:It must be from their dad.

David:Oh, it’s definitely not.


David:But the reality is, we’re all Keynesians now. We’re all Keynesians now, and the Keynesian demand management is not for the exclusive times of crisis, it’s for all times, right? The more extreme expressions of this hyper-Keynesianism are promoted by the modern monetary theory group. It distracts from the reality that our current monetary backdrop is highly experimental. When you look at it in a very short, condensed period of time, and focus only on the present benefit, you lose the backdrop. You forget that this is very experimental, and in all likelihood, will prove to be highly detrimental in the long run. Who cares about what happens in the long run? Anyone who cares about something, someone beyond themselves – perhaps that is the person who cares about the long run. But we’re not dinosaurs, we’re not crocodiles, we live a short period of life and all we want is the good life right here, right now.

Kevin:What’s pressing the button? It’s the morphine button over and over. The problem is, that will kill you.

David:And I think rarer by the day is the person who is legacy-minded, who cares about the actions of the moment, and what it means for the future, not just in the present moment, and is concerned about what may be foisted on future generations by the decision-makers in the present moment.

Kevin:Let’s just look at modern monetary theory just for a second before we move on, Dave, because in a way, they’re calling our disingenuous methods out. These modern monetary theory people, really, are socialists. And it is beyond socialism, it is “money grows on trees so you may as well just print it.” But what they want to do is actually calling the guys on Wall Street for what they are already doing because you have the Federal Reserve who is giving money to the Treasury but they are using Wall Street to do it. So the guys on Wall Street are getting fat in the interim. They’re the middle guys. All the MMT people are doing is saying, “You know what? Take Wall Street out of the equation. Let’s just call it what it is. You’re drinking from the bottle. Stop saying you’re drinking from a glass slowly. You’re drinking from the bottle at this point, let’s just throw the glass out. The glass is Wall Street.” Do you see what I’m saying?

David:Absolutely. And so the inflationary consequences of monetary and credit expansion get focused in on Wall Street because they get to handle the flow. They get to touch it before it goes into paying the bills and that process.

Kevin:Just call it what it is. It’s the Fed giving the Treasury money.

David:Right. My guess is, however, that you would see less inflation of assets and more inflation of goods and services if the MMT people get what they want, which is, again, a direct hit, a direct flow of money from the Federal Reserve to the Treasury to pay bills, and to do so even if it means running massive deficits.

Kevin:This exactly what the South Americans, especially the Venezuelans, have found out recently.

David:At dinner last night I was sharing some current events highlights. Occasionally we will do this. And Venezuela and the contradiction of poverty in that country, set aside the country having the greatest oil reserves on earth.

Kevin:It’s a rich country, as far as reserves.

David:So in-ground resources, they are very rich.

Kevin:But the people are starving.

David:And that is where you see that ideas have consequences. So for us, as a family, to talk about socialism and see what the consequences are of an ideology, they have a third more in reserves, at a minimum, than Saudi Arabia. And it should not surprise us that our foreign policy target is very much on the Venezuelan government right now, as we partner, and granted, this is on a unified basis with other leaders around the world. We want Maduro out, and it remains to be seen who will be in on a long-term basis.

Kevin:We definitely want access to their oil.

David:Well, this is the point, isn’t it? We have never done anything on a very, very generous basis. There are places in the world that have had problems and we have ignored those problems for decades, and there are places with much smaller problems that we give sharp attention to, and it really does deal with the bottom line. If you look at the decline rates in the shale oil fields here in the United States, even though we have healthy production today, I think it is no surprise that when we think of tomorrow, at least from a strategic oil perspective, that we are very interested in Venezuela.

Anyway, Venezuela was one of the topics of conversation, ideas having consequences, and this weird thing of abject poverty in a country that has tremendous amounts of wealth and potential cash flow. Then we talked also about the 22 trillion dollars in debt that we have accrued, 1 trillion from George Washington through the timeframe when Jimmy Carter was in office, another trillion plus – a little bit more than that – when Ronald Reagan was in office.

And then 11 times that amount since I was a boy and you had Nancy and Ronald fighting both the drug war domestically, and Star Wars with the Russians, and an arms race that ultimately bankrupted the Soviet Union. What was that trade? If you put it in terms of a trade, what was Ronald Reagan making a bet on? I was a speculative trade, and it was that we had deeper pockets. We had larger credit lines.

Kevin:And he was right.

David:We did. We won. But here is one of the things that transformed through the 1970s and 1980s, now everything is a speculative trade. Everything is a speculative trade. From the 1980s to the present, we spent what we had, and we spent was we wished we had, knowing that credit would flow. So we have, in this new financial physics, the assumption of unlimited credit.

Kevin:Right. We haven’t had to pay the price, at least, visually. We’re doing it slowly through inflation, but we haven’t really seen this crash of debt that we keep talking about.

David:So my ten-year-old interrupts me as I’m talking about 22 trillion dollars in debt, and he says, “This is why I prefer to save in silver.” (laughs)

Kevin:(laughs) There is that deliberate education there, Dave.

David:Education – some may accuse me of indoctrination. We’ll see. But Bill Dudley from the New York Fed pointed out last week that sovereign debt is much more manageable today. Again, this is just kind of the attitude – I don’t want to say it’s cavalier, it’s very studied, there are numbers to support and justify this – but who cares about the 22 trillion and growing number, as long as economic growth exceeds our borrowing costs?

Kevin:But, we had some tax cuts. Are we not getting an economic bump, at least from businesses being able to keep a little bit more money?

David:Oh, thank God for the tax cuts. And I guess I’m wondering what we will do in 2019 for an encore because the burst of growth that we saw in 2018, late 2017-2018, from the tax cuts has largely run its course. So here we are back to Dudley’s comments. Dudley is right, we’re actually not even hitting that number where economic growth is exceeding our borrowing costs if you factor in inflation. In real terms, we’re not hitting that number, even with that temporary tax cut boost.

But this is right, you look back in history, and you have serial defaults, you have debt restructurings which go beyond the limited period of time that we’re looking at, the 1980s to the present, interest rates have been declining, that has accommodated the increase of debt. Economic growth is variable. Economic growth has always been variable. You can’t control it like you control a thermostat. This year we wanted it 68 degrees. No, let’s make it 72, so you’re a little more comfortable.

Kevin:It’s not like a crocodile. Economic growth doesn’t happen every day. Growth is the wrong word. Economic growing is part of the cycle after economic shrinking.

David:That’s right, so we assume that we’re going to continually compound debt, and we can, and that’s going to be matched, and that’s going to be offset by continual growth rates in the economy. Listening to Dudley, I’m just thinking to myself, “So you’re okay with the amount of debt that we have, one thing that is permanent, set against the only thing that supports it, which is variable, and can go away or go negative. And how does that work, exactly?”

Kevin:Yes, but if people stop spending – talk about Keynesians. The Keynesians not only believe in monetary theory, they also believe in fiscal stimulation. You just go spend government money.

David:That’s the idea that we can smooth the economic cycle. This is borrowed from Keynes, that governments can spend to fill the gap when consumers go on strike – that’s during a recession, or some sort of economic slowdown – and that assumes that government spending lessens in the good times so that it can again be increased during the bad times.

Kevin:Right, that’s the theory.

David:Dudley seems to have forgotten the permanent fiscal footprint of the crowd in D.C. 1.336 trillion dollars is not a small amount to have to borrow in 2018 in the context of a robust economy. You see what I’m saying? We now have the idea that monetary expansion and debt-to-GDP ratios no longer matter.

Kevin:Money grows on trees.

David:So you have the acronyms in the public sphere, Modern Monetary Theory, which is saying, “That’s exactly right. We don’t have to worry about debt-to-GDP ratios. Understand the power that you have always had and release it!” And Kevin, we edge closer to the day where either rational choice expresses itself to exit the system – and I think that’s what we saw with Ray Dalio and Sam Zell. They’re beginning to buy gold in recent months, and I think that gives you some idea of their end game vantage point. But you have either this rational choice to exit a system which is more frail than people appreciate, or irrational fear which emerges in response to aberrant behavior within the financial system.

Kevin:Well, it’s panic.

David:That’s right.

Kevin:Panic occurs when something is unexpected. You don’t see it coming. You’re talking about rational exiting the system right now into gold. And you mentioned the bond buyer, as well. Bond markets are doing the same things. They’re rationally staying out of the stock market. There are people who are taking cover, including China. China has been buying all the gold for the last 6-8 years.

David:Anyone who likes the study of history of things financial and economic will know that pain and confusion are things that you do see in the social context. We have Alan Newman telling us about his father who experiences the pain and confusion of the 1929 stock market collapse and is unwilling, based on the shattering of his psychology, to even look at his stock positions for 30 years. Even at that point, he assigns his son to go figure it out. “Hey, tell me if this is worth anything.”

Again, we’re talking about the aberrant behavior within the financial system, and panic or pain being felt by those who put their faith in that ever-increasing price of assets. And the ever-increasing price of assets is tragically dependent on the continuation of credit flows.

Kevin:Let’s look at fiscal spending for a moment. Let’s take China as an example – the whole “If you build it they will come” mentality, because China has been building an awful lot of stuff, and that does allow for an economic bump when the building is occurring. The problem is, there are an awful lot of empty apartments at this point in China. That’s an understatement.

David:I think it remains to be seen how transformative some of that investment is over time, but it is obvious that they have overbuilt. They have pumped in hundreds of billions of dollars in credit in the month of January – a single month. Why? If you had 65 million empty apartments, that’s more than a couple dozen.

Kevin:That would be a sign that says, “Vacancy.” Here in Durango the hotels, if they are empty, they say “Vacancy.” That’s 65 million vacancies.

David:Right. How many people live in the Los Angeles Valley? We’re talking maybe 20 million? So three times the entire stretching mass of suburban Los Angeles, more than three times that, every residence empty.

Kevin:Neutron bomb. Completely empty.

David:65 million empty apartments. Oh, and then add to that, you have the largest 25 developers reporting a 34% decline, year-on-year decline, in volume of sales in commercial property in the month of January.

Kevin:I’d call that a downturn.

David:So you ask, why did they pump in hundreds of billions of dollars? This is why. You can ask yourself, without a massive infusion of credit, can the prices of those assets stay where they are, or do prices in a market economy – and I realize they have sort of a hybrid of market/command and control.

Kevin:Yes, but you would think the price would fall. If you have 65 million vacancies the price should fall.

David:Are prices going to reflect sales volume at some point?

Kevin:That’s called economics, Dave.

David:I think it is simplistic, but adequate, in turns of a supply and demand model. And that is, actually, how basic banking and financial problems are. You have too much credit on the front end, and that creates too much supply of some asset. In this case it is unused apartments. That supply exceeds demand, and then prices correct and bring balance back to the equation.

In this case, though, just like our playbook, more credit is infused, and then more, and then more, like the fighting of the tide. And it is an ugly picture.

Kevin:Press the little red button – the little red morphine button. As long as it lasts, you may as well press the button. But not everybody is thinking this way, Dave. Let’s say China is the new thing, and somehow they figure out a way to replace the United States economically. Could all this building actually turn into expansion?

David:I never want to discount the guy who spent the better part of five years as head of Asian operations for Morgan Stanley, Stephen Roach. A very critical thinker, he has been on our program multiple times. When asked a question he is very clear in his thinking and his reasoning, very fast on his feet. To me, he combines the best of an academic with a market trader, in terms of blending those perspectives. He points out that Chinese investment and savings here in recent years – what have they done? They have built stuff. And maybe it gets used in the short run, maybe it doesn’t, but they have built stuff that didn’t exist before.

Kevin:In contrast to what we use the money for, which is just speculating and paper markets.

David:If you go back to your phrase a few minutes ago, “if you build it, they will come,” that seems to be the operative philosophy. And here in the U.S., Stephen Roach would point out that 85% of our gross savings goes toward replacing a worn-out capital stock. If you’re talking about plant and equipment and infrastructure, we’re just replacing the old stuff that is broken down. We’re not enhancing capacity as the Chinese are.

Kevin:We’re maintaining the old jalopy and they’re building new cars.

David:They’re building new stuff, which creates a different picture in terms of productivity, in terms of their ascendancy, in terms of how technology and infrastructure end up moving vast quantities of people who, prior to, had been stuck in a rural agrarian poor category, and are now being introduced into an urbanized and developed setting.

So his caution – and I think this is wise, regardless of how you parse it and agree or disagree with him – is to never underestimate the Chinese, and to never overestimate yourself. I guess by yourself, I mean the U.S. I think he would look and say, we have long-term structural issues which we have to deal with as a mature economy. And they have short-term issues, but long-term, a growth trajectory which beats ours, no question. That is his perspective.

Kevin:What changes if we get a trade deal with China? That has been in the news continually. What changes for us? What changes for them?

David:One of the things that changes is Groundhog Day goes away. How many times have you woken up in the last six months and it is the same theme, “We’re this close to a great trade deal.”

Kevin:It is like the movie, isn’t it? “Trade deal with China.”

David:“Trade deal with China.” And so the markets have gone up and up and up, every day with the same announcement, and it really has felt like Groundhog Day. “We heard this yesterday. This is not an excuse for the stock market to go up another 150 points.” And yet, it will go up 150 points because people are enthusiastic about the trade deal. Buy the rumor, sell the news, may, in fact, be what happens when a trade deal is announced.

Kevin:It’s funny, Dave, as you were talking about how we hear about this over and over, I remember the Segway, remember that machine that has two wheels?

David:A gyroscopic people mover.

Kevin:Yes. The way they advertised it, they didn’t tell you what was coming out, they just announced that something was coming, something was coming. They had billboards and everything else. They wouldn’t tell you what it was, but they said it would be bigger than the Internet. And then it came out and it was this two-wheel machine that a lot of times people would just fall over on and get hurt. It never turned into anything. I’m sorry, but the Segway – we’ve segued to other things. The trade deal – I’m wondering if that is the same thing. It’ll come with a bump, when it does come. But is it really all that it is made out to be?

David:Roach points out that you are talking about a bilateral trade deal with China. If you have a bilateral trade deal with one other country, it doesn’t resolve what is, for us, a multilateral trade deficit which will still exist with over 100 trading partners.

Kevin:So, it’s not just China. It’s 100 other trading partners.

David:Yes. In his view, our short-term economic boost – this has been the benefit that we have had, this is why growth rates have improved slightly there in 2018. The first quarter doesn’t look like it is going to be all that great. Tax cuts have added momentum to a trade on Wall Street, but that is running its course. It’s rapidly slowing. He contrasts that with China where, in spite of the credit and the banking risks which you have in China, obviously with the growing stock in debt that is there you can have a financial catastrophe

But I think he is looking beyond that, looking from one peak to the next and over the valley, and saying that the fundamental foundation for growth still exists in China. So again, if you assume that there is a trough between here and there, there is a reasonable peak on the other side, and he is far more hopeful in terms of the prospects of China than he would be for the U.S., growth rates and all considered.

Kevin:Let’s face it, everything we are talking about is just spitting in the wind if infinite money will continue to work, right? The old economics only works if it is economics, not just creating money out of thin air. Economics – even the word itself tells you that you have to sacrifice one thing to get another. That is what economics is. What we are basically saying is, you just get another, and you get another, you get another. There is no sacrifice. And so, this whole program – I would ask our listeners to stop listening to it, honestly, if indeed, infinite money will work forever, because we’re just a waste of time.

David:Modern. Modern is the key word. It gives you the sense of newness. And my sense, Kevin, is that this is really not that new. We have seen it before. It’s just been called something else. So to me, if you listen to the choir of proponents for infinite money and credit, whether it is the socialists here in the United States – that is not a criticism, that is self-proclaimed socialists – set them right alongside the majority of Republicans who never met a dollar they didn’t like to spend, or communists overseas.

Again, this is in China, where they would say, this is exactly who we are. We are the Chinese Communist Party. Every additional voice added to the global choir of infinite money-printing and infinite credit creation, is one more reason to stabilize savings, and to stabilize savings in a form and in a format that removes the long-term consequences of too much money and credit.

Kevin:It sounds like your barber gets its. It sounds like your ten-year-old son gets it.

David:I paid for a haircut in gold, from savings held in gold, so that the game that is being played on a global scale does not entangle me. When I think of the words of Washington, reiterated by Jefferson, both discouraging entangling alliances – of course the reference was to foreign powers, but I think there is an application with our modern banking system. We’re enmeshed, and we’re inseparable from the world of fiat currency. The banking system, anywhere you go in the world, is an entangling alliance. If you want to transact, you must bank.

There is nothing wrong with the deposit and savings function of those institutions. The weakness comes from the currency, and the dependency on a home currency. Pick a reliable one, because the global problem is now that none actually exists in absolute terms. If you’re thinking about a currency choice which you would prefer above another, reliability today is only judged on a relative basis, not an absolute basis. So, where predictable meets reliable, that’s where I am going to be most comfortable.

In my world, I’m still paying 50 cents for a haircut. How much are you paying?

Recent Posts

Start typing and press Enter to search