About this week’s show:
- Is the drop in money velocity permanent?
- If velocity increases, hyperinflation is a risk
- Is the next step more liberty or slavery?
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: David, you are just coming back from the New Orleans investment conference and you had a chance to talk to the person who calls himself the 2500-year-old man, Richard Maybury.
David: It is, when you reflect on history, and look back, in order to have an appreciation for current events today, look back and reflect on both the similarities that there are today, as well as the lessons that we can learn from earlier periods in time, that you get the kind of perspective that Rick Maybury brings to the picture. He has been writing his newsletter for decades, and does bring that historical overlay, which is so helpful trying to understand where we are, and where we are going.
Kevin: One of the things I’ve always liked about Rick Maybury, Dave, is that we all need a paradigm that we look at when we are looking at history. His is unique. He has come up with a phrase called Chaostan, and he looks at what a lot of people call the 1040 window, what have you. But it’s that place on earth, as it runs across the band, that really seems to create an awful lot of geopolitical chaos. He does the same thing economically. He seems to look at things in a way that brings new perspective.
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David: With us again is Richard Maybury, with a perspective we’ve always appreciated, and I think many of our listeners have, as well, as subscribers to the U.S. and World Early Warning Report, subtitled, if you will, Insights From the 2500-Year-Old Man. The interesting thing, as many of you know from reading it for many years, is that history does stay very, very relevant and fresh, even going back 2,000, 3,000, 4,000, 5,000 years, as a means by which we understand current events and their implications.
How do humans choose and zig and zag in relation to events as they are unfolding? We have something of a record here and that’s why history is so important.
Richard, thank you for joining us again.
Richard Maybury: Thank you, I’m glad to be here.
David: You point out that there are a number of things which are changing, and a number of things which are constant. The two things which seem to be constant here are that the United States continues to be at war at so many different places around the world, and we continue to see currency debasement. That’s not something that is exclusive to the United States, but is really a global theme. Any thoughts as to why these are recurrent themes that we continue to deal with?
Richard: You mean, recurrent historically, over many centuries?
David: Yes, war is something we just can’t seem to shake, and currency debasement is something we can’t seem to shake. Is the common denominator politicians?
Richard: Yes, the common denominator is political power. I don’t see the problem in terms of liberals versus conservatives, or left versus right, or Democrats versus Republicans, that sort of thing. I see it in terms of liberty versus power. Political power corrupts. There is any number of commentators over many centuries that have made that observation. You can take a perfectly intelligent, fine, honorable, upstanding person, and you stick him into politics, and six months later he’s a crook and a liar, and his family doesn’t recognize him. He’s just a real mess.
The reason political power corrupts both the morals and the judgment is that it is, itself, corruption. Political power is the legalized privilege of using brute force on persons who have not harmed anyone, and the best example of that is taxes, but there are numerous other examples were governments are able to just reach into your life and forcibly make you do something that you wouldn’t ordinarily be doing in your life, just because they think that’s a good thing to do.
Governments have that privilege, but nobody else does. Political power is the privilege that sets government apart from all other institutions: Churches, charities, fraternal organizations, individuals, companies. No one is allowed to initiate the use of force on another person except in self-defense. But government is allowed to do it any time they feel like it, and that has such a terrible corrupting effect that it’s a temptation that the person who is in power just cannot avoid. He eventually succumbs to it, it makes him think that he is somehow superior to other people, and he begins making stupid mistakes.
And you see that all through history, which is why the commentators all through history have talked about the fact that political power corrupts. The American founders’ solution to that was that there is no 100% solution, but there is a partial solution, and that is to keep the amount of power very, very small, so that no matter who gets control of it, he can’t do much damage. But we now have a government that, using Jefferson’s terms, has slipped the chains of the Constitution, and is pretty much a totalitarian government. They can do anything they want, all they have to do is declare an emergency and they’re off and running toward some new scheme.
And it always does, whenever this happens in history the government gets carried away, starts doing stupid things, and winds up with projects that are beyond its means to be able to handle, and one of those projects is wars, and the other one will be meddling in the economy in one way or another, and the way they try to patch up their mistakes in the economy is by counterfeiting money. And so you have this double trend all through history that is just carved in stone, which is more war and more currency debasement, until the government is in a crisis situation and you have some sort of revolution.
My newsletter, Early Warning Report, has been reporting about this and making suggestions for coping with it, for well over 20 years, and so far we’ve been making a lot of money because we stick to those two trends. We try to make investment suggestions and other kinds of financial suggestions that are based on those two carved-in-granite trends. We don’t assume that we can predict other kinds of trends, but we sure can predict those two trends.
David: Richard, there is an interesting issue here in that double trend, more war and more currency debasement. Right now we have evidence of credit expansion, which is today’s modern version of running the printing presses. It inherently should be inflationary, and yet we have velocity of money, that is, the turnover of currency, the footprint of the dollar, if you will, in the economy, at six-decade lows.
So there really is little evidence of inflation. Of course, they’ve changed the metrics by which they measure inflation, we’re well familiar with that, and maybe it is officially 1.6 to 1.8, while actually 8-10. But just taking their numbers, let’s talk about velocity, let’s talk about the perception in the marketplace because these perceptions are every powerful. They lead people to believe we should be in equities today, general equity space, that’s where we should be. Gold? Well, that’s kind of unnecessary, given the fact that there is no inflation. Why don’t you dive in on velocity and we can meander around a little bit?
Richard: Right, and one of the things that comes out of this double trend that you see all the time is that governments eventually debase their currency to the point that velocity breaks loose from being stable and the government really no longer controls what happens, because the population is spending the money differently than they did before, and they are spending it in ways that are not predictable.
Velocity refers to the speed at which money changes hands, and that is an indicator of money demand. The financial press now pays quite a bit of attention to money supply, you see lots of articles about that. Back when I was young, they did not, they didn’t understand the connection between rising prices and rising money supply. But they pretty much have that now, and so they do report on it, but they still don’t say much of anything about money demand, and money demand is, if you will, the flip side of the coin of money supply.
If there is a supply of money there must be a demand for it. But what is that demand, and how much do people really want to have the money, as opposed to having goods and services? And that factor, that demand for money, is governed by fear. If they are afraid that the value of the money will decline, then they will have less demand for the money, they will try to trade it away more quickly than if they have confidence in the value of the money. And so, when they accept a dollar from somebody in trade, they at that time, or maybe later, are deciding whether or not to get rid of it quickly, or whether or not to hang onto it. And that is measured mostly by the turnover of the money, how fast it changes hands.
What has happened in the United States and around the world, I suspect, pretty much everywhere, is that we have an unusual manifestation of this money demand. The world is pretty much still more afraid of other currencies than they are of the dollar, and so the dollar is something that they have been running to when they get scared. And so they have been grabbing hold of their dollars and hanging on more tightly for five years now.
And this tends to nullify the increases in the money supply that the Federal Reserve has been creating. And the Fed, no matter how much money they pump into the economy, which ordinarily would cause prices to rise, they seem to get very little effect from it because people are hanging onto the money.
It’s the same as if the Federal Reserve had a big airplane and they flew over your house and they dropped a million dollars into your back yard, but you are so scared of what the federal government will do next, because you have no idea what these crazy, powerful people will do next, you’re so scared, that you don’t spend the million dollars. You gather it all up and you take it to your garage, and you put it in your garage, and you store it there because when people are scared they want to run to some form of cash, so people are hoarding their money, essentially, and they feel that the government might do something crazy and they’re going to need that cash to help protect them in the face of whatever it is the government does.
So the government, while at the same time it is increasing the money supply, it is increasing the fear supply, and people are hanging onto the money instead of spending it. So it’s not having an inflationary effect on the economy because that money that is stashed in your garage isn’t having an effect on anything. You’re not spending it, and it does not affect prices, or wages, or anything else. It’s just sitting there.
In the modern economy today that money is in the banks and it’s just staying in the banks because the bankers are afraid to lend it and the borrowers are afraid to borrow it. The Fed keeps printing money, 85 billion dollars a month, they are continuing to pump into the economy, which means there is this enormous overhang of money that is in the financial system that is just sitting there doing nothing, and we cannot expect that condition to last forever.
The day will come when the fear will decline for some reason. It could be a very trivial reason. You might have, for instance, Janet Yellen, when she comes into office, she may give some sort of wildly inspirational speech about how everything is going to be okay, and it might be so convincing to most of the population that they will go out and spend their money. And you’ll have this 2.8 trillion-dollar avalanche into the economy, of money that’s been printed, just suddenly being poured into the economy by the people who aren’t so afraid any more.
And in my opinion, all of this is just one man’s opinion, that’s what economics is, it’s a very soft science, but in my opinion, we are set up for a runaway inflation that could hit at any time, in practically an overnight situation, where you just go from what we have today, consumer prices rising at somewhere between 1% and 5%, let’s say, that could be rising at more than 100% a week from now. All it will take is an increase in optimism among the population, for those dollars to avalanche into the economy, and you’re on your way. It’s a hyperinflation that’s there, a potential hyperinflation that will become a reality when people become optimistic.
David: I had an interesting conversation with a gentleman from Turkey just the other day, and his comments on the gold market in Turkey were fascinating. He said that every day you go to their marketplace and there are 500 major vendors under one market area. It’s a little bit like what you’d find in Dubai, with the gold souk there, and many places that you’d find also, in Hong Kong, and India, and what not.
And it seems that we have the happy holders holding onto U.S. dollars here, but the opinion is different in other parts of the world, and maybe there’s a greater suspicion of those managing the rupee, managing the Turkish lira, managing the yuan, and more people are interested in being happy holders of ounces, that is, physical gold, elsewhere in the world, as opposed to in the United States, where as you describe, it’s a dollar bias. If you are afraid, you go to greenbacks.
So, if you have this increase in optimism and money starts coming out of the mattresses, so to say, that, at the front edge, is going to seem like an increase in economic activity, and maybe even a full-blown economic recovery. What you are suggesting is that immediately behind it are the consequences which could be superinflationary in nature.
Richard: Yes, absolutely. You’ll have this period where everything looks like it’s going to be really fantastic, finally the recovery has arrived, and life is going to be wonderful for everybody. And that will feed on itself. People who feel that way will be more inclined to let go of their money, and they will go out and start buying things, and companies will start hiring, the unemployment rate will drop precipitously, and it will just look like Obama has worked a miracle. And it will look that way for maybe a few weeks (laughter) and then everybody will notice that, “Gee, prices are sure starting to rise,” and at some point they will get through their heads that their dollars are losing value and they had better let go of them in a hurry, trade them for something real, before they lose even more value. And then there will be this stampede to start spending money.
Now, a factor that is new here that I don’t think very many people have looked at is the internet. It used to be that the word about what was happening in the economy took a while to get around, and that the individual on the street never learned very much of anything about economics, he was in the dark all the time, and he was always taking a bath in one way or another, because he just didn’t know what was happening. Well, today he’s going to know what’s happening. There will be material on the internet that will explain to him why his money is losing value. And so the odds of the money deteriorating slowly, I don’t think are anywhere close to the odds of it just crashing over a period of a few days or weeks.
And I think that it is the really big kicker. The Fed thinks that they can do something about this, that they can withdraw enough money quickly enough to stop a runaway inflation, but I really rather doubt it now. (laughter) Everything these days moves at the speed of an electron, and I don’t think they’re going to be fast enough when it really cuts loose.
David: We’ve talked a little bit about money, we’ve talked about the debasement that occurs, has and continues to. We’ve talked about velocity being flat and the increase of velocity bringing about a major inflation with the liquidity, the credit that’s already been created. One thing we haven’t talked about is current politics. If you look at the Affordable Care Act, obviously a misnomer, but there are political consequences, potentially, here in the midterm. If you had to look ahead and say who wins and who loses as a consequence of this attempt by government to step into one-sixth of the economy, almost a forced takeover of one-sixth of the economy. Maybe that succeeds, maybe it doesn’t. How do you think it plays from here?
Richard: I think we will have periods when it looks like things are getting better, but basically, the reason there is no more Union of Soviet Socialist Republics is that socialism doesn’t work. We are set up now for this situation where the federal government is trying to force a new layer of socialism into the medical industry that is so enormous that it doesn’t have a prayer of surviving except in a very mangled form. It is hard to imagine how effectively governments can screw up things like medical industries when they decide to do good. They have an astounding capacity for it. And it comes from the fact that they are using brute force.
There is another even more fundamental reason why this situation with the medical industry cannot turn out well, and that is that it violates the very principle of insurance. This idea of medical insurance came about in the United States during World War II when there were wage controls and the manufacturers knew that they had to be able to raise wages because the government was debasing the dollar, and they went to Roosevelt and said, “You know, we’ve got to find some way to be able to raise wages. You’ve gone and capped wages, and we can’t cope with this inflation of the dollar.”
And Roosevelt came up with this idea, “Well, we’ll give them a disguised wage increase in the form of free medical insurance.” And that’s where Kaiser Permanente came from. It was the first organization to offer this free medical insurance through the employers to the workers as a way of getting around the wage controls, just beating the wage control. Roosevelt set that up, and ever since then people have had this idea that you are supposed to have this thing called medical insurance, where all of your medical needs are taken care of, health insurance. Well, let’s take another analogy.
David: Come back to that analogy in just a second. It dawns on me that what you are describing was originally a coverage which insured that nothing catastrophic could impact a family and take them out of the economic equation, destroying them completely from an economic or financial standpoint. It seems to me that we have morphed from that into something that is more like a medical service contract, where even down to the smallest hangnail, we expect to step in, and with a $25 co-pay, get professional care from an MD for said hangnail, so that this concept of insurance really has gone from the catastrophic to the service contract, which is unsustainable on any scale.
Richard: Right. We can use the example of house insurance. If your house burns down, you have insurance, and the insurance company pays off, or rebuilds your house. Houses burning down are catastrophic things, but they are a rare thing. Very few people ever experience it. So everybody is covered by the fact that we each put a little bit of money into a pot somewhere, which is the insurance company, once a year, and then the people who do have house fires get their houses rebuilt for their amount of the pot. It only works as long as house fires are a rare thing. If everybody had house fires, then you couldn’t get very much money out of the pot. That’s how insurance works, that’s how it has always worked, it by way of spreading the risk throughout the population, so that everybody takes a very small hit in order that a few people can be covered when they take a big hit.
Well, what this medical insurance has evolved into is this assumption that everything about your health should be taken care of through this insurance, and that’s the same thing as having house insurance that covers everything that can go wrong with a house, not just a fire, but light bulbs burning out, and crabgrass growing in your lawn, plumbing leaks, other minor kinds of things. Well, everybody has those problems. So there is no way you can have everybody putting a small amount of money in the pot and then everybody also taking out the money for these things that are very common and that happen to everybody. It’s not economically possible to do.
It’s just a straightforward mathematical fact that you cannot have comprehensive health care insurance. It cannot exist. And so the government is in the business of trying to make something that can’t exist, exist. And no matter how hard they try, it’s going to bust. There is just no way that this thing can work, and they are going to default on the whole thing at some point down the road, we don’t know when, but they are trying to create something that is impossible.
That’s an even more fundamental fact about the medical care situation that you have to keep in mind, that there can’t be insurance for everything, there just can’t. And they won’t swallow that fact. They have this idea that because you are human you have a right to medical insurance. Well, what they are saying is that you have a right to something that can’t exist, and they are going to try to make it exist. I can’t imagine anything more crazy than this situation, and it’s only going to keep getting worse as they try to fix it, because it can’t be fixed. No matter what they do, they cannot make the math work out.
David: Yes, if this is an example of governmental over-reach, and what ultimately is unsustainable, this current scale and the future scale and scope of government, leviathan has grown and continues to, it seems that there is a question ahead. When you get to a period of crisis, financial and economic crisis, it’s not uncommon to have that followed by a period of political, and even geopolitical, crisis. We may play the blame game and say, “Hey, well, it’s the Chinese. They’re not participating, they’re manipulating their currency. They’re to blame.”
Let’s say we don’t point the finger at someone else across the border, but the blame game gets played inside our own borders. The revolution of 1776 in the U.S. was very different than that of 1789 in France. Maybe, number one, you could comment on the differences between those two revolutions. And two, are we moving unavoidably toward something like revolution in the United States, yet again?
Richard: I think we definitely are. Actually, I think we are in the early stages of it. The comparison between 1776 and 1789 is one of my favorite ones. From studying history back 2500 years, what I see is a pattern in which revolutions usually go in one of two directions. Sometimes they go in the direction of 1776, which is an overthrow of the government, a severe shrinkage of the government until its power is much, much less, and you have a new era of liberty that breaks out, and the system of liberty produces great prosperity for everybody.
The other direction is 1789, which was the French Revolution, which led to the so-called Reign of Terror, in which mobs were just massacring people indiscriminately, and that was then followed by the Napoleonic Wars, because the French had Napoleon come to power, and he set off to conquer the world. Those are the two directions they generally go in, either a great reduction in the power of the government, or a great increase in the power of the government.
The United States today, I was very gloomy about it ten years ago, but there has been such a magnificent increase in the interest in the system of liberty now over the last ten years, it’s just almost miraculous, in my mind, especially when you look back to the 1920s and 1930s when socialism was taking over the world. At that time, the number of professional libertarians was 3 or 4, or maybe half a dozen. You have Ludwig von Mises, Friederich Hayek, Henry Hazlitt, those were the three leading lights at that time, and then there were a few other people, and that was it. Probably the whole libertarian philosophy and movement boiled down to a dozen people at the most. The philosophy of the American founders was only being held alive by that group of people, and that’s in the whole world I’m talking about.
In 1946 they created The Foundation for Economic Education, and that began the growth of the revival of the interest in the system of liberty, and it just stumbled along and made very, very slow progress, decade after decade after decade, until you get to the 21st century, and my gosh, it has just exploded now, it’s just astounding how fast it’s growing!
So I am getting more and more optimistic that this thing is going to go in the right direction, that it really is going to go in the direction of 1776. There is going to be an economic catastrophe that will be so awful it will cause the population to say, “Where did we go wrong, we’ve got to back up and start over, and get back to the economic model that produced the Industrial Revolution in the United States and made the United States the leader of the world for so long.”
As I say, the movement is growing really fast, because pretty much everybody realizes now, something is really seriously wrong with this socialist model that was crammed down our throats during the 20th century. The great worldwide socialist experiment is falling apart. That grew up at the end of the 1800s and in the early 1900s it came to maturity, and it just swept the world, and the whole world went into this socialist experiment, and it just kept making things worse and worse until it demolished the American system. And we’re living with the results of that now, and the trouble you see all around the world is the socialist experiment collapsing.
So I’m expecting, and of course I could be wrong, again, this is just one man’s opinion here, but I’m expecting to see revolutions in practically every country, because every country, in one way or another, to some extent, tried a socialist model, and it’s falling apart everywhere. The people have been taught for decades and decades that the government will take care of them, the government is the solution to their problems, the government is their own personal super-hero, like Batman and Wonder Woman, and it will take care of them.
And there’s trouble now, and the government’s not taking care of them. It’s welching on that promise in every country, and I think that these people are all coming to realize, millions of them already do realize, they’ve been defrauded, that the socialist promise was empty. And they’re angry, and that spells revolution, and I think there will be a revolution in pretty much every country, and some, I hope, will go in the direction of 1776, probably a lot of them will go in the direction of 1789, the Reign of Terror.
David: We had, in the last 20-30 years, an increase in the socialist experiment, and it seems to be moving that direction, where government is getting bigger, not smaller, and I would agree with you, the experiment is failing, and we’re seeing fractures even within the economy – a greater recurrence, more rapid recurrence, of major financial problems, three crises within about a ten-year period, which, frankly, in the last hundred years, is unheard of.
So things are beginning to come unglued, and the ability to control, manipulate growth, smooth the business cycle, all of these things in a sort of top-down experiment are coming unglued. But wouldn’t you also say that as the powers that be begin to lose control you begin to see behavior which is much more vindictive and much more vitriolic, much more dangerous? And in that regard, couldn’t you expect the leviathan to do everything it can to stay alive, and what sort of behavior might we see? How do we prepare for the last gasps of Western welfare state?
Richard: My newsletter, Early Warning Report, is changing its emphasis a little bit to deal with exactly that question. I’ve been warning for all these years that this day was coming, and now I’m thinking the day is here, and so there is an imperative to get ready yourself, personally, to ride through this period of turmoil. So we are adjusting our mix of information now a little to help people get by, not only financially, with their investments, but also physically.
You have to make preparations. There is going to be trouble. I think it’s a lead pipe cinch that there are going to be riots in all the big cities, and you’ve got to be ready to ride through that. That will involve, for instance, the cutoff of food supplies for a while, and maybe water supply. All sorts of things are going to go wrong, and they’re not going to last forever, I’m not a doom-and-gloomer, I don’t think this is the end of the world, but big history didn’t stop just because we happened to be born.
This is another one of the situations that you read about in history books. It’s going to be really big, and it’s not going to be fun for a while, so you want to be prepared for it. In all of the other catastrophes that have happened in history, there have been some people who have come out of them in very good shape, and even much more wealthy than when they went in, and I see my job with my newsletter is to help people get through this and come out in good shape and maybe even be a lot richer. It is possible to do because it always has been done in catastrophes before.
So the first thing you wanted to be thinking about is the safety of your family. All of life’s necessities, you want to have a stock of, the food, water, medicines, and on and on. Have a lot of blankets (laughter), the very basic necessity-type stuff. You want to be ready to be self-sufficient for some number of weeks or months. You want to have the ability to defend yourself and be trained for that.
It’s a very big subject, there’s a new movement in the country that’s referred to generally as the preparationists, or the preppers. They aren’t the old survivalists. It’s a new group. It’s very largely made up of professionals: Doctors, lawyers, people who are highly educated and have good incomes, and they are making preparations. They see that something very bad could happen, and they are making preparations to get their families through it comfortably. I think everybody should be a preparationist, to the extent that you can be, because these things do happen in history, and I think another one is going to happen here, and it’s going to happen not only in the United States, but all around the world.
David: Richard, we would agree with you that, the notion that big things do happen in history, and, if you’re not nimble, if you haven’t given some thought to the future, though you can’t predict it, as Pericles said, you can certainly prepare for it, and we would agree, there are changes coming.
Maybe just a last comment as we wrap up today. What we have talked about may have something of a somber tone to it, but the stock market today is putting in new all-time highs, which if that is any indication of what lies ahead, you could argue quite the opposite to our conversation, “Happy days are here again, and it’s only tulips and sunshine tomorrow, which we can expect. Listen, I mean, we’ve got gold on its back, $1250, $1300 an ounce, in that range, which again, is an indication that all is well. The stock market, which is at all-time highs – again, an indication that all is well.”
Is it possible that we’re simply insane and see these concerns, and are frankly overblowing them, blowing them up out of proportion? Or is there another possibility, that we have a reality out there that simply is fiction? That is, the stock market does not represent the economy, and it does represent the footprint of the Fed, leveraged speculation, but not really an all-clear signal in terms of the U.S. or global economy.
Richard: Yes, again, as I said earlier, economics is a soft science, and there is no guarantee that we are right. There is a lot about economics that we don’t know, but I would point out that the Federal Reserve doesn’t know it, too. They are flying blind. They don’t know what they are doing. Now, if you have trouble believing that this is a new situation, I urge you to get on the St. Louis Federal Reserve’s website and look at their statistics on the monetary base, and go back as far as you can. Their numbers go back to World War I, or close to it.
Look at that chart and try to tell yourself that something hasn’t changed. It is just stark, it is amazing what has been going on in the last four or five years, and that chart shows it to you. That’s a chart of the money that is backed up in the banking system waiting to come out, and the Federal Reserve is still injecting 85 billion dollars per month into the economy, despite what you see in that chart. To my mind, you’ve got to be a real Pollyanna to look at that chart and not see a catastrophe coming.
David: In a nutshell, the monetary base is your commercial bank reserves and currency in circulation, and for anyone looking at the chart it’s one of the few that you will see as relatively stable from 1940 forward, and then, all of a sudden, circa 2007-2008, it literally explodes off the right side of the page.
Richard: Yes, right.
David: That’s one that we’ve certainly used in our presentations before, but is, you are right, without precedent.
Richard: Yes, well, when you look at, for instance, real estate prices that have been rising recently, and stock prices that have been rising recently, I think what you are seeing there is the first movement of that avalanche. Those prices are rising because some money is starting to come out of the banks and circulate, and it’s chasing real estate and stocks, which should be no surprise because the Fed announced a year ago that they planned to accomplish exactly that, that they were going to inject enough money to cause a boom in stocks and real estate. They said that, specifically. So this is no big surprise here.
Again, I think that what you are seeing is the money starting to move out of the banks, so the avalanche is starting to creep, and when it’s going to cut loose completely, I don’t know, but it’s very likely to lead to an economic catastrophe that will lead to a revolution. And I do not use that word revolution lightly. When my wife and I were first married, back in the 1960s, we lived in Central America and we went through two revolutions. I know what I’m talking about when I use the word revolution, and I don’t want to do that again, believe me. That’s a horrible situation.
But I think it’s going to happen, around the world, because people will only tolerate just so much before they rise up. And it’s going to be nasty in a lot of places. It’s not going to last forever. It’s only going to be temporary, but it’s going to be nasty, and you want to be ready to ride through it.
David: Richard, it was in less than a ten-year period, 1789 to 1796, that the French assignat, the currency of the day, went from being full value to being worth nothing. And it was right in the middle of that, about 60% of the way through that period, both of time and depreciation, in 1793, when the heads started to roll, 17,000 heads. The nobility was blamed for the inflation, there was social chaos, everyone searching for an answer as to why they were experiencing pain, personal dislocation, unemployment, desperation, inability to feed the mouths at home, and somebody had to be blamed.
I would agree with you there are inklings of a more positive outcome, but a real tussle ahead in terms of the socialist welfare state wanting and driving toward one particular outcome, and there not being a guarantee that we do end up with a 1776 consequence. One where, as you described earlier, we have liberty as a consequence, we have shrinkage in government, we have opportunity for all versus just the politically connected, those connected to a top-down oriented state.
I would suggest that, for those not familiar with Richard Maybury’s Early Warning Report, begin with a sample copy. I think it is $15 per copy for back issues and I would suggest getting a regular subscription to the U.S. World Early Warning Report. It is a fantastic look at history. As we wrap up, your last letter looked at Rome and a number of the challenges faced, the colossal destruction which occurred in the Roman Empire, but also, a look at how grand, in fact, the accomplishments were of the Roman Empire, industrial sophistication in that day and age, which was not rivaled until the 1800s in Europe.
And so to think that greatness only goes one direction, into technological innovation, inexorably, on a multiplied future growth curve, that’s not always the way it happens. We appreciate your perspective, we appreciate the historical tie-ins and today we hope that your cold quickly passes and you are feeling better tomorrow.
Richard: Thank you very much. I would like to point out, on our website right now we are running a special offer for subscriptions and you can get it at just a little above half price, I believe. So, people might want to take a look at the website, too, and that’s richardmaybury.com.
David: That’s richardmaybury.com, and we would strongly recommend the subscription to your letter. Thanks so much for joining us.
Richard: Thank you, I enjoyed it very much. It was a good time.
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Kevin: One of the things, David, that you have been talking about as you have been traveling the country, and on national and international TV, is the lack of velocity in the money. You can print all the money you want, but if it’s not moving from hand to hand, it’s not necessarily creating any kind of economic growth. It seems like Rick Maybury is looking at the same thing.
David: That’s right. The transmission mechanism in the banking system is broken, and right now, the liquidity that has been created by the Fed is not working its way into the economy. The deception here, the deceiving element, is that as and when it begins to come into the economy, at the front edge it will look like economic recovery, it will look like robust economic growth.
And yet what you have, in terms of the tide coming in, is the tidal wave that follows it, the deluge of liquidity which represents super- or even hyperinflation. Does that become an event that we are cognizant of, or concerned about, in the period of 2016-2017? It may not be immediate. We have still these deflationary trends in place, a tremendous amount of debt, potentially an unwind, selectively, of debt. We’ve already seen that in Puerto Rico, in terms of their bond market. We’re beginning to see other pockets of weakness in the debt markets, but that doesn’t mean that we have a complete deflationary collapse, and yet, those deflationary concerns remain. Perhaps it is a 2016-2017 time frame where the inflationary impact of the monetary policies which are already in place and are being reinforced by Janet Yellen as she brings her leadership to the Fed, will be something that is consequential into the future.
I think one of the things that we talked about today with Rick that is so important is this notion that there are political and geopolitical consequences to the current financial issues, and while we talk about revolution and the potential for revolution, frankly we don’t know that that is the way it does play out.
Going back to the conversation we had with Neil Howe, the author of The Fourth Turning, there is this idea that when you get to the final season of growth and then ultimately a roiling in the political system, sometimes you do, in fact, have a revolution, in the streets, and it is domestic in its orientation, as Rick Maybury was talking about today. And sometimes it’s international and you blame the neighbor and you have the accusatory finger pointed at someone else. Again, it remains to be seen how this plays out, but over the next 3-5 years, much of what Rick is concerned about, and what we talked about today, will become more obvious.
Kevin: David, this brings into perspective again the way that Rick looks at the world. He looks in a historic pattern, from empire to empire, how do things start, how do they grow, and how do they end? I was talking to my wife the other day, saying, “As long as this country respects the rule of law, and as long as we understand that the Constitution and law is what keeps us from bloodshed, we still have hope.” Of course, no one is talking here about revolution in this country, and I certainly hope it doesn’t happen, but we want to make sure that we keep the focus on what has made us civilized up to this point.
David: You are exactly right, Kevin, the respect for the rule of law, the upholding of the Constitution, these are things that keep everyone on an equal playing field, and to the degree that we lose that respect for the rule of law and respect for the Constitution, then you do see the abuse of power. You have what Frederic Bastiat described as plunder, legalized, but clearly still immoral.
Kevin: David, from this point forward, you are moving now, I believe, to Shanghai. You are going to spend time there at the Shanghai Exchange. I am looking forward to talking to you then. Do you have any comments for the listeners until we hear from you in Shanghai?
David: The notion that the power in the gold market has moved from the West to the East is something that we are very intrigued by, very concerned by, and ultimately, do see that being a trend that continues on for the next 2, 3, 4 years, as a defining factor, in not only the price of gold, but really, the reconstitution of the world monetary system, and this is one of the reasons why we will be spending time in Shanghai next week, and if you want to join us for next week’s commentary, it will be live from Shanghai as we interview folks from the China National Gold Exchange, the Shanghai Gold Exchange, the World Gold Council, their division in Asia, and just look as much as we can, under the hood, to see exactly how this new system of gold demand and distribution is operating in that part of the world.
Kevin: In the meantime, David, Happy Thanksgiving, and safe travels.
David: Thank you, sir.