The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: Our guest today, David, we had on this program two years ago, and what I loved about his perspective is that he brought science into the mix. He understands the logarithmic progression of debt, of population, of energy usage. It’s something that we don’t really perceive, as human beings, but when you do 10 to the 2nd, 20 to the 3rd, 10 to the 4th, those are massive, massive changes, and that’s what he is looking at as far as economic change coming up.
David: I’m always fascinated by people who have a particular background, and have a passion about something that is not necessarily in their background. I think of T. S. Elliott. He was a banker. He was also a great poet. You could say, how can you be both? Isn’t it sort of different sides of the brain? No, actually, it is interesting, when you begin to dig into the world deeply in one area, you have the ability at that point, to then go laterally, and look at other areas with the same level of depth.
That’s one of the things I appreciate about Chris Martenson’s background as a scientist, and yet, his interest in the world of finance and economics has opened up to him here in the last 10-15 years, in a self-educated way, but taking his ability to rigorously think about an issue, the process that he would apply, scientifically, to go through and unpack an issue, even though it may not be in the realm of science. It gives fresh eyes to something that can be fairly sterile.
The work of an economist, done by an economist, is really hard to read by a noneconomist, (laughter) but the work of an economist done by a scientist, actually, is very intriguing to read, because it brings new light to the old issues, and I think that’s why, again, I continue to be fascinated by the work that Chris does.
Kevin: The book that Chris wrote a couple of years ago, Crash Course, is written to the layman, we don’t want to discourage that. It is a layman’s look, from a scientist, at economics. So, I’m looking forward to the talk today.
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David: Chris, thanks for joining us again. It is something that is really obvious, perhaps, to you and I, but not so obvious to the rest of the world, that complacency is a factor in the marketplace today. We have recovery. Clearly, we have recovery. Clearly, we have economic growth. Clearly, according to those new GDP statistics, we have had, actually, economic recovery for many years now. The recession wasn’t quite as bad as we thought. At least, the revised numbers would tell us that.
Let’s discuss this as a social issue, complacency. You’ve described this as the unwary, the careless, maybe even the reckless, and it puts us in somewhat of a vulnerable position. Maybe you can just address that notion of complacency, where and how you see it today.
Chris Martenson: Absolutely. I think that quite a number of people – investors, particularly, some of the larger investors out there – have just gone along with the idea that not only do you not fight the Fed, but you can really trust the Fed. This lesson, I think, was well learned, right? We had Long-Term Capital Management, big bailout in 1998, and then we had the rescue with ultra-low interest rates following the stock market correction of 2000-2001, then we had the housing bubble.
And then, of course, the Fed, after Bloomberg showed us the FOIA-released articles and transcripts that they got, that the Fed had engaged in 21,000 separate transactions with businesses all over the world, other central banks, just basically providing liquidity. So there is this sense now that no matter what happens, there’s the Bernanke put, or collectively, the central bank put, there’s not a lot of downside, and then everybody’s just going to try and scoop up as much of the upside as they can.
So, this complacency, I think, is well earned, in the sense that, as long as all you are doing is looking at price action, there is a pretty good case to be made for “might as well just follow the price action.” But when you look at the macro trends underneath all of that, and you look at things like, not just the total level of unemployment, but how that is distributed across the society, really concentrating on the under-30 crowd, in most countries where it’s showing up.
And you look at the level of sovereign indebtedness. Is that going up or is it going down? Obviously, it’s still going up. The United States, of course, has a much better comparison to make because the OS waved its magic wands and statistically revised the entire GDP data series, so we can’t even compare fruit to fruit on that one anymore, year to year. And magically, we’re 300 billion dollars richer. In common, we have a much stronger economy than we thought.
And yet, when we look under that, what’s really going on in the overall economy, we’re not seeing the kinds of things that I like to equate with real, sustainable, fundamental growth that I can really believe in, which includes good capital expenditures, reinvestment in new technologies, people being hired for full-time jobs so that there is a real commitment to developing a strong work force, and education. There are some big, big pieces missing here.
David: You’ve pointed out that bubbles require a certain set of beliefs, and you’ve just touched on some of those beliefs. There is this notion in the world of traders and investors that you should not fight the Fed. Is that a part of this ingrained belief system, that as long as the Fed has your back, as long as the central bank community has your back, is putting wind into the sails, you just have to go along with it, a little bit like musical chairs? The music plays, and we play the game, and we assume that we’re not going to be the unlucky one that is left out when the music stops. What other kinds of beliefs do you think are propelling the current bubble dynamics?
Chris: Besides those, it has to be something along the lines of “this time is different.” I think you really have to believe that this time the Fed is going to be able to control the macro-economy, that it actually is in control, that it has the capability of translating fresh money-printing from their magic computer keyboards, that that will somehow make it into the economy in the right way and do the right things, and that’s not a set of beliefs I’m willing to hold.
Instead, I hold a slightly different view. I look at the large sweep, I think. We came from former Fed Chairman way back, Arthur Burns, then we came into Volcker, two men who, I believe, really, really had the political independence of the Fed at the core of their operating principle. The Fed had a role, and it was separate from fiscal policy, it was separate from standard politics, all of that.
Then Alan Greenspan came along. You know, we had a hiccup in 1994. That was really, I think, where I traced the beginnings of this whole scenario that we happen to be in. He had an opportunity there. We could have done a couple of things: One, we could have faced a bubble that was existing at that point in corporate bonds. He decided to turn away from that, implementing something called the Sweeps program, enabling banks to, effectively, fully evade any sort of reserve requirements, whatsoever. That allowed this huge explosion in the money supply, which, of course, led to the tech bubble.
So when I look at the sweep of this, I think that LTCM was kind of a little hiccup. The bubble blow-up in stocks, mainly in the tech side, that was a large crisis. Then we had this housing bubble. That was an even larger crisis than those, and we’re going to have one that is even larger than those. So, in this story, what I see as I look back in history is a little error, that then got compounded into a larger error, that got compounded into a larger error, and now we’re faced with – it really is do-or-die time. The Fed either gets this right, or it gets it horribly, horribly wrong. That’s the risk, and that’s why I think complacency is not really a good, solid investing trait to be holding at this point.
David: We have both, I think, been familiar with a little bit of science background, you with the Ph.D., mine with just some undergraduate classes, but I did take time to read Thomas Kuhn’s, The Structure of Scientific Revolutions, and plenty of philosophy classes, and what not. He focuses on the fact that communities are stuck with a set of assumptions, and that for a time, those assumptions allow them to answer questions and do good work, whether it’s in science, or in this case, if you want to borrow the concept and apply it to our central bankers.
Then you have issues that come along, and the assumptions no longer really address everything that you’re dealing with. You have problems that can’t be solved, given the current issues in front of you. And ultimately, there is a paradigm shift. There is a radical re-look at everything that you based your science on. And we have central bankers today that play a massive role.
One of the things that you have pointed out recently is that the role that an Einstein played, close to 70-80 years ago, is in the public sphere. Everyone knew who he was, and he was a bit of a scientific rock star. The rock stars of today are bankers and hedge fund managers, and we are still pretending, like you said, “This time is different. We can print. We can continue to create money as if that’s as good as creating real things.”
What made this country great a long time ago was industrial capacity, new and innovative ideas, a business cycle that, yes, had booms and busts, but allowed for there to be a cleansing, if you will, and a restart. We don’t have that. This time, in some respects, is different, but only because we’re trying to promote a set of ideas and ideals, and it’s gone viral. It’s not just the Fed. Maybe that’s what’s different.
If you go back, as you mentioned, to Arthur Burns, Arthur Burns would have stood alone as a man who was monetizing debt in the early ’70s, and who was running the printing presses, albeit from a politically reserved or removed place. But he was alone in that. Now you have Abe, and Mr. Kuroda. You have Mario Draghi, you have Mark Carney. All of the world central bankers are doing the same thing. Where do you see this paradigm coming to pieces? Is it, perhaps, Japan and this notion of Abenomics, as we experiment with it? Is that, perhaps, the final straw on the camel’s back where we just say, “You know what, this actually doesn’t work?”
Chris: Such great questions and observations there. After having watched this unfold for about a decade now, I’ve been paying very close attention, and I’m seeing that Detroit is my metaphor. I think what we do is, we run it until it completely breaks and you finally have to admit it. I’m not seeing anything that says that central banks are willing to entertain the harder question.
Here’s the harder question. Starting in the early 1980s, let’s peg it at 1980 just to make it clean, what happened in the United States, and across the rest of the OECD countries, was that we started to accumulate debt. This is total credit market debt across our entire set of institutions. This isn’t just your usual debt-to-GDP, meaning federal debt or sovereign debt. This is all manner of debt, household, corporate, the state and local, all the forms of debt you could think of. And we started to accumulate that at a rate of about twice nominal GDP growth. So if nominal GDP was 4-5%, we might be having 8-10% growth in total credit market debt.
And we’ve lived, since the 1980s, as if that’s just how things are, and the whole world has sort of bought into that and cultures got conditioned to that. Call it a sense of entitlement, what have you, but the issues that we have looming here, around our pensions, around Social Security, around Medicare, all the entitlement programs, are the same as the ones that they have in Japan, the same as they have in Europe, which is, there is this extraordinary mismatch between what has been promised, and what can possibly, reasonably, be delivered, even under some really robust assumptions of a return to rapid growth.
That’s, I think, the larger piece that’s not really being admitted, not really being looked at hard. So when you mention you have a Carney, and a Draghi, and an Abe, and a Bernanke, all conspiring, if I can use that word, to just print, so that we can continue this practice of getting our credit markets growing faster than underlying GDP, that’s what they are trying to do.
Whether that is wise or not, I have an opinion, I don’t think it’s terribly wise, because I know something. I know that I personally cannot increase my debt faster than my income forever. It has a math function, it breaks at some point. I think well before you get to that mathematical hard limit, though, it breaks for other reasons. The stresses and strains of it just show up, and sooner or later, at least one of these parties is going to say, “Enough, we have to begin the process of living within our means, we’re going to have to begin the process of making sure that our total accumulation of credit matches our actual output.”
And the way you skate around that story for a little while, the way you extend and pretend on that story, is that you drop interest rates, because if you were paying 4-5%, and you can get that down to 1%, you can continue to accumulate more debt, because the servicing costs are less. But even that has a run-out function. Here we are, three years into 0% interest rates now, and we still don’t have the economic growth we had hoped for, and the Fed, I know, is just fingers-crossed, double-praying, “Please let that growth come back,” but it hasn’t.
And if I could get ten magic minutes with the Fed, I would just point to them a chart of the price of oil, and I would say, “Here’s why you are not going to get a rapid resumption of growth. We’ve never had rapid growth with oil at $100 a barrel, inflation-adjusted. This is a new reality. We’re not getting cheap oil ever again, and what are you going to do about that? It means you have to rethink your whole paradigm, and that’s what I think they are missing. They want the 1980s again, they want the 1990s again, they want the 2000s again. But it is a new landscape, and oil, to me, is the lynchpin of that story.
David: It’s interesting, when you look at a long-term chart of the commodities market, say the CRV, just as an index, and maybe the CCI is a better one, but we are two times what we were at in terms of prices back 10-12 years ago, and we have had a major correction in industrial commodities. We’re not at the peak prices we had in oil at $147.
We certainly have natural gas well off its peaks from a few years ago, and yet, you look at the commodities index, and we’re still better than twice what we had ten years ago, and as you say, you bring those input costs into real goods, and things that are delivered, services that are delivered to us, this is an issue. You are looking at a dramatic step-up in cost.
You mentioned nominal GDP. I happen to have a chart of that in front of me. It began to break down in 2000, and next thing you know, you have the S&P following suit. Nominal GDP began to break down, it began to move lower, considerably, in the year 2006, and was very much a canary in the coal mines. It took some time, but there you had some sort of levitation process, the Bernanke put, in play, until the inevitable could not be held back. And actually, we began to see nominal GDP break down off of peaks in the first quarter of 2012.
Now we’ve actually seen it break support here at the beginning of 2013, and no one seems to be noting the divergence between nominal GDP and the S&P. The S&P continues to motor higher, as if everything is just fine. Meanwhile, it’s not in free-fall today, but it has broken support. Every time in the last 12 years that that has happened, “Katie, bar the door.” There were major issues, mean reversion, and what you have described as potential energy. That’s what we have today in the stock market. Unfortunately, it is potential energy that could become kinetic, and quite deadly, if someone is not careful.
Chris: I absolutely agree, and there is really one person who does track that, out of many who don’t, and that’s John Hussman. I’ve seen a nice chart that he has put up where he shows that whenever nominal GDP dips below 3.7%, every time, 6 out of 6 times, we’ve had a recession that followed. And we are basically at that threshold again. So you would think there would be some room for caution, there would be some room for investors to wonder how they were going to begin to maneuver in this space. And I think we got our first warning shot as to how this is going to play out. That was June 19th and 20th. Bernanke came out with some comments and we saw everything get sold in those two days. Everything. Commodities, stocks, bonds, you name it. Everything got sold. That’s what we saw in 2008. That’s your classic liquidity crisis.
We know we have a lot of leverage, a lot of margin, a lot of different compounding, ways that people are playing in the markets right now, so yes, when you get a flushing moment, everything tends to get washed at once, and you see everything get sold. That did get reversed, but it is really important to note here that that dynamic can still exist and that this whole market now is just keying off of what the Fed says, what it doesn’t say. And that’s not investing, that’s speculating, so we’re speculating grossly, everybody in aggregate, with the markets.
And the faith is that, not only are the central banks going to be able to undo what they have done, gracefully, but they are going to continue this long enough that somehow economic growth catches up with it. But when you wander over to that part of the story, it’s not there. In fact, it looks to be going the other direction. The economic growth is just not there, in Southern Europe, it’s not there for Europe, in general. It’s really not there very strongly yet for Japan, I have questions as to whether it ever will be.
In the United States, let’s be honest. The reason we’re not in recession is the level of deficit spending by the federal government, which is emboldened and enabled by a central bank that prints money out of thin air to monetize that borrowing. And without that dynamic, we would be in a very different circumstance. So, when I look at the overall macro landscape, what I see is at least enough warning signs that intelligent people should be saying, “Why don’t we have growth? Where is it? Will it ever come back again? Is something structurally different now?”
And there are economists who are starting to wonder if, finally, ten years later, something really has shifted in the story, and maybe it’s something more than just demographics and debt and things like that. So they are starting to pull these pieces in. And to me, that’s what you have to do. We have to look at where we are in the energy story, we have to look at where we are with demographics, we have to see where we are with the overall debt loads. And then, increasingly, we have to factor in that we are having more and more costs show up because our weather has been a little crazy lately.
These are just maybe normal factors of life, but when you put them all in one spot, and then see the stock market just power to all-time new highs, that’s where my personal sense of disconnect starts to show up, and that’s also where I start to get more and more concerned, because my personal preference is that I would much rather fall off the third rung of the stepladder than the eighth. It feels like we’ve really gotten ourselves pretty high up in a place where, if I could use this, I think the markets are priced for perfection, and I don’t think they are going to find perfection.
David: I was watching a Bloomberg interview just a few weeks ago. They had a guest on from the Economic Cycles Research Institute, and they would hardly give him a word edgewise, just to say, “Here’s what we think,” because they already kind of knew what he was going to say, and it was that the ECRI has seen us as entering into a recession as of 2012.
That flies in the face of official statistics, but the ECRI has been pretty reasonable at calling recessions, and they would argue that, yes, we are already in a recession. But it was fascinating to see, it’s a bias going back to that notion of a paradigm or a mindset that just doesn’t allow for anything to the contrary, and they just didn’t want to have anything to do with it. There is no possible way.
It was an outright rejection of what I thought were very clearly stated facts. “Here’s what we look at, here are the variables, this is why we believe in recession.” No countering of those facts, mainly just a blanket statement of, “That’s absurd.” Obviously. Look at jobs. That was one of the comments made. “Look at jobs. We’ve got this massive increase in jobs, and therefore, how could we be in recession?”
Of course, I think you would agree with me. U3, U6, we can scratch our heads and say, “That’s a far cry from an accurate picture of the employment backdrop.” But we do have what I think will be the shocking reality, as and when we do have mean reversion in the equity market, everyone is going to be scratching their heads and saying, “But I was told we were fine.”
I am very intrigued by the book that you wrote, because it really does, more or less, lay a roadmap out for saying, “No, you really do need to bring all these factors in and consider disparate data points, and see how interconnected they are.” We have major issues to deal with, and I think the challenge will be for many in the general public to grasp, “I’ve been lied to,” or “I’ve been deceived,” or “There has been a bias in the information as it was presented, and I wasn’t given a very clear picture.”
What do people do at this point, in your opinion, to take away the veil? Without seeming radically inclined, there are, I guess, so many people who have thought that there would be inflation on a grand scale, and therefore gold and silver, for instance, would go up. And here within the last two years we don’t have that. We have had people who have thought that when Reagan came into power and we saw massive deficit spending, that would be unsustainable. And yet, as you mention, we had 5 trillion dollars in credit market debt about 1980, we’ve expanded that to 55 trillion, right along with a massive expansion in GDP. Why can’t we just continue this forward?
Chris: Well, the reason we can’t just continue this is that it’s not possible to print real purchasing power out of thin air, it’s just an accounting identity. So when the Federal Reserve prints 85 billion, and goes out and buys a mortgage-backed security or a treasury note, or something like that, let’s trace out what is really happening here. The Federal Reserve created that 85 billion out of thin air, went out and bought that mortgage-backed security. Let’s say that’s all they bought, 85 billion in MBS paper.
That MBS paper, if we trace it all the way back, at some point there was real activity that was associated with that. At a point, a house got built, and a house got sold, and it got furnished, and all of these things happened that are very real. But what happened here is that the Fed purchased that 85 billion, and it did it by just creating it out of thin air, and everybody acts as if that’s just monetary policy, and in fact, you can’t just print purchasing power out of thin air. Purchasing power has to come from real activities by real people.
So, when the Fed does that, by definition, they are taking it from somewhere else. And this is where the story is different now, and it is different because 20 years ago we didn’t have the extraordinary concentration of wealth that we do today, and this provides a big mitigating factor to seeing a rapid rise in inflation, because when you take 400 of the wealthiest people in the world and they own 25-40% of the world’s wealth, whatever it is, some silly number, then if you make them twice as rich because Bernanke has printed all this money up, they don’t increase the world’s consumption by twice, according to the formula that we would have to use there.
So we have this extraordinary concentration of wealth that allows huge pools of this money that the Fed is printing to just basically go land in already very, very large pools, and let’s be really clear about something. The middle and lower classes are not participating in this. Real median wages are going backward. We have more and more people on food stamps. This growing tension between the very, very wealthy and everybody else is an unhealthy tension, in my estimation, and it explains why we don’t see the explosion in inflation like we would expect. We don’t have a wage spiral this time, which is the usual and necessary component for actual inflation.
So there are a lot of pieces missing, but what is not missing is this idea that with the Fed printing money out of thin air, they are just adding additional stresses on an already stressed system. I know it looks helpful, and it makes the markets feel better and all of that, but they are just piling up more and more claims on an economy, that, if we are honest with ourselves, is not growing like it used to, and we should be really honest, and maybe adult, and ask ourselves, “Can it ever grow that way again?” And if not, what would be the best course of action?
And if we have a lower growth economy, we definitely need less money printing. We do not need more claims on that future economy being created out of thin air, we need fewer. That’s the conversation nobody really wants to have, so you’ve got the Fed, pump, pump, pump, pump, nobody really wants to look at it too closely, because for now, everything’s okay. And then when it breaks, it will be just like every other bubble that has ever broken. By definition, the vast majority of people will be surprised, and the vast majority of people will lose, and lose badly, when it bursts.
David: I liked your article, “Bankers Own the World.” There were two quotes that stood out to me. One, Josiah Stamp, Bank of England Chairman from the 1920s, saying, “Take away from them the power to create money, and all the great fortunes, like mine, will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of bankers, and pay the cost of your own slavery, let them continue to create money.”
Here, you were just describing central banks creating money. They are the pushers, if you will, creating fiat money, but then you also have the distributors in the system, that’s Wall Street and the banks, and one of the things you pointed out in this article is that there has been a massive concentration of wealth, both financial assets, as well as productive assets, amongst just a few corporations. Maybe you could expand on that, the strange nature, that concentration of wealth amongst just a few companies in the world today, ironically, most of them banks.
Chris: It’s interesting, if you go back to the era known as the time of the Robber Barons, people will look back at that and generally agree, or have been taught that it was not an optimal sort of a situation. The Robber Barons, they were just rapacious industrialists who happened to just accumulate monopolistic power, and that was detrimental, so we broke them up, and that was a good thing.
So we look back on that period of history, and let’s be clear, those so-called Robber Barons were taking real things and creating real wealth with them. This was Standard Oil figuring out how to manufacture and distribute oil and petroleum products, which was a vast boon to our society. These were railroad magnates, and the like. But we look back at that time and say that wasn’t so good, having that concentration of power in so few people’s hands, and so we wanted to go a different way.
The exact same condition exists today, except that the people and institutions and corporations that are the primary holders of the majority of the world’s identifiable wealth today, in extraordinarily concentrated fashion, none of them actually make anything. Seventeen of the top 50 companies are banks. When we look at this dynamic right now we see a company like Blackstone going out and buying up thousands and thousands of properties in areas like Atlanta and Miami and places like that.
And if you really chase that dynamic down you find out that you have the Federal Reserve creating money out of thin air, driving interest rates really low, creating a really low cost of capital for a big company like Blackstone, who then borrows money at these extraordinarily favorable rates, and then buys these properties.
If you followed that trail along, what happened was, money got printed out of thin air, went through this distributor network, as you called it, and ended up buying real things that you and I, real people, need to work very hard to try to live in, and own, and accumulate, and finally pay off, hopefully.
So that dynamic has run so long, so far, that there are 147 super-companies in the world that, basically, control about 40% of the entire identifiable net worth of the whole network of corporations out there. It’s a pretty big chunk. And that’s just 147 companies. And of those, you look at the top 50, and 17 of those top 50 are banks, and quite a number of the rest of them are insurance companies, financial services, and brokerage houses, places like that.
But, fundamentally, they are just moving paper from point A to point B. That’s their job. And that’s where all of the wealth is concentrated right now, more concentrated than it was at the height of the Robber Baron era, with the difference being that this time it is concentrated in the hands of people who fundamentally, and I hope I don’t make too many of them mad by saying this, but they don’t create value. They harvest value. They move paper from point A to point B.
When you think about J.P. Morgan earning 24 billion dollars in a year, you have to ask, “What do they make? What do they do?” Twenty-four billion, that’s a huge amount of profits. That’s 30% more than G.E. is going to make, and they make a lot of identifiable things, millions of things.
So what did J.P. Morgan do? You can’t point to a single bridge that they built, or a single house that got constructed, or a single grain of food that got onto a table because of what they did. They moved paper from point A to point B. That’s the world we live in, and we can moralize about it, but really, I see that that level of concentration is an extraordinary risk to our stability – social stability, potentially, worldwide or intercontinental stability – and it needs to be talked about.
Unfortunately, it’s really not being addressed anywhere within the political sphere right now in the U.S. It’s certainly not being discussed in any of the newspapers, but if you understand who owns them and how many of those are held by those top 50 companies, it all makes sense. But we’re really not having the dialogue that we need to have around that, and that’s the part where I’m glad that at least you and I have the opportunity to talk about it.
David: I would guess that the last 13 years have allowed for a greater consolidation and concentration of that productive ownership and control. We had the end of Glass-Steagall, and then we had the Commodity Futures Trading Act in 2003, and what it really set in motion, it was almost like going back to the wild, wild west, and saying that the rule of law that has been adopted, the change in behavior that we have had since the wild west, which has tamed things down a bit, throw it all out.
We’re back to the wild west, and guess who’s in charge? It’s the banks. The things that held them in check, actually, the restraints that were put on them in the 1930s as a result of what we saw in the 1920s, and by the way, in the 1920s what did we have? We had that massive concentration of wealth that you were describing. Isn’t that interesting? You mentioned Plutarch, an imbalance between rich and poor is the oldest and most fatal ailment of all republics.
That’s what was being addressed in 1932, with the implementation of Glass-Steagall. Now it is repealed, and, lo and behold, we have more “creativity” in the banking community and in the financial community than we have ever seen before. It is very interesting that we are even considering, Larry Summers, as a potential…
David: For a position as head of the Fed, after his role with Robert Rubin. Here’s a guy who set Wall Street loose to do the things that it’s doing, creatively, and ultimately, destructively. He was one of the fathers, working right alongside Rubin to make this happen. Isn’t it ironic that we actually want to give him the keys to the kingdom?
Chris: Well, I have to tell you, I have been following Mr. Summers’ career for quite a while, and I think that he has been fire-able in every single situation he has ever been in, for malfeasance, and just incompetence, and yet, here he is. And so, here is one way I do admire him. He is nothing if not a political animal.
So the idea that this administration would be considering him in the chairmanship slot for the Federal Reserve tells me that they are looking for a political beast to go in there, because they are looking for an even tighter association, if that is possible, between the Fed and the government, and Larry Summers would be the perfect choice for that. He would absolutely make sure that he was defending the interests of Wall Street and the current administration, whoever that happened to be. He would be very good in that role.
Would he be a good steward of the nation’s wealth and finances? This passes any prediction of the future. The answer to that is a big NO. But it is astonishing to me that he is even being considered at this point in time, because of everything we have just talked about. It is as if there is zero accountability, and in fact, there is the opposite of that. The more you make a mess of things, the more the system seems to trust you at the top. I’m not sure what is going on there, but it is absolutely the opposite of how my own personal life and my business run, so it is a very strange thing to me.
David: As we wrap up, there are a couple of things that I would love to get your comments on. I know you have been bullish on the metals for some time, and you particularly like silver, and that would imply to me that you do see the continuation of the theme from the Fed and the world’s central bankers, that default is probably not the way we get out of this debt problem, unless you are talking about subtle default through inflation and financial repression. Maybe you could just briefly highlight your views on the metals, where they are, where they are going, from your vantage point.
And then segue over to another commodity, one that you have written extensively on, and try to address this, and I’m just throwing this out, perhaps as a devil’s advocate. Many have assumed, and I’ve heard this argument a couple of times now on Bloomberg, that the dollar is going to be very strong in light of the energy revolution which is afoot. This is not my position, but I think it is worth discussing, because you hold strong views on both the currency and peak oil running counter to this idea, that somehow we are going to have a revolution in strength within the dollar because of this energy revolution in the United States, bringing us toward energy independence, becoming a net exporter, etc., etc., etc.
As we finish on a commodities note, maybe your brief overview of gold, silver, and then addressing a strong dollar as a result of this “revolution in energy.”
Chris: Let’s start with gold and silver. It’s not one word to me, it’s two separate words. Silver, I just love silver, and I always have, and I probably always will. It’s a long-term investment for me. I have ridden through a number of gut-churning moments in my career in accumulating silver, because that’s all I ever seem to do. And I love it because, really, when you look at where it comes from and where it goes to, it is consumed. It is consumed industrially, it is irreplaceable, it has a number of functions and features.
Assuming I live to a ripe old age, within the next 20-30 years, all identifiable known stocks of silver are going to be depleted, and the desire for it will not be depleted. It is not a substitutable element in a variety of critical industrial processes, and we are discovering more and more of those every single day. So silver is my bullish call on this idea that we are going to have a robust industrial economy in the future after we get through some rough spots. That is my personal view.
Gold is a different substance. It is a monetary metal. It has a monetary role. It has very low other roles in my world, and I’m holding gold still and it would be very difficult for me to part with it at this point in time because everything that I track and care about, in terms of monetary policy and fiscal policy, all suggest that there is a really strong reason to hold gold from a fundamentals standpoint, including negative real interest rates, high levels of deficit expenditure, other things that have correlated well with nice gold prices in the past.
But more importantly, I think that the risk of an actual monetary accident on the world stage is growing larger, it is not being lessened. And it won’t take much for that to get set off. You mentioned it before. There has to be some agreement between all the major central banks, at least in the OECD countries, to do what they are doing, and we have that agreement for now. Will we have that agreement forever? I’m not comfortable saying yes, so gold is me saying no.
I think there are chances to see how that network could break down, how it could get frayed, how one party or other could decide, enough, and bolt with us and turn toward what I will call monetary sanity. So, on that basis, I’m holding gold, because when that happens, not if, but it is when, when that next financial accident comes along, we are going to discover that we’ve lost something that was irreplaceable and we have less of it to work with, and that is trust. People are going to trust the system even less next time.
We saw, post Lehman, in 2008, interbank credit markets just froze. Nobody trusted anybody. Even among the den of thieves, the thieves all did what they did best, and trusted only themselves for a little while there, and Lehman was a pretty big moment in time, but I think there could be bigger ones coming. So gold is just my insurance policy. I don’t see any reason not to have my insurance policy.
It’s kind of like if I had a house up in the ridgeline in Colorado, and it hadn’t rained in three years, and I just saw tinder and brush piling up around me, the chance of a fire coming through is very low, but still, I would want to be prepared for that if it came to pass.
So the dollar, especially related to the commodities piece, here is the thing. It is absolutely a great thing if the United States produces a million barrels more per day this year than last year, which is close to right, that’s a million barrels a day we don’t have to import. At $100 a barrel, that’s a hundred million dollars a day that we no longer have to import.
A lot of people would look at that and draw one simple conclusion, which is to say, “Oh, because the United States is going to have falling import costs, then this will actually be supportive of the dollar, because we are exporting fewer dollars, we’re running a lower trade deficit, a lower current account deficit.” That’s all good reason for a currency to go up. That’s true.
The downside on this, which is interesting, is the idea that more and more and more countries no longer need the dollar in order to trade for what they want, and, in particular, it’s not true that the dollar is not backed by anything. It is, it’s backed by oil. The petro-dollar was set up by Kissinger, a brilliant concept, and it worked just fabulously. It meant that we could export lots and lots and lots of dollars because people needed them, countries needed them. If you wanted to buy oil, you needed dollars.
Who doesn’t need oil? Well, nobody. Everybody needs it. That was the real support mechanism for the dollar for a long time. But as the United States produces more, we are going to walk away from needing oil on the world market, and so there is less pressure from the United States for what is available out there, and secondarily, you are going to find that more and more countries are finding ways to trade for and get that oil, not using dollars at all, with China being a very active, behind-the-scenes participant, and standing up bilateral currency trade pairs, and trying to figure out other mechanisms for accumulating the oil that it wants in a non-dollar way.
So that whole field is shifting and changing, and I’m not comfortable enough to say it’s as simple as noting that the United States imports less oil, therefore exports fewer dollars, therefore the dollar gets stronger. That’s just one of several dynamics at play here, and it remains to be seen which will be the stronger one.
David: Great answer. I think you are right, the bilateral trade agreements are very significant in terms of re-plumbing the world’s monetary liquidity system, and as we see more and more countries circumvent the dollar, whether that’s for purchase of oil, or just selling and buying gismos and gadgets, we become less relevant. That’s less pockets to be filled with dollars, and it’s a significant thing when you lose an audience.
We want to thank you for joining us on the commentary again, we love to have you on as a guest, and it’s been too long. Thank you for joining us again. We’ll look forward to having you back.
Chris: Well, thank you, it’s been a real pleasure, and I look forward to that, too.
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Kevin: David, it’s unfortunate, but Detroit truly is a metaphor. What Chris was saying about running it until it breaks, and then finally admitting it after it’s broken, it’s too late by then.
David: The stakes are too high to admit too early, and that’s really what we see, that everyone is in an all-out fight to maintain the status quo. Even if they have doubts about the methods being employed, the stakes are simply too high to do anything else except continue on.
As Chris points out, this sort of run-out function, it’s fascinating.
Detroit is a metaphor for what we have on a grander scale across the country, unsustainable debts, a GDP that isn’t supporting the growth in debt that we still have, and yes, the idea that somehow we will, someday, look back and say, “We were broke a long time ago, we just couldn’t ’fess up to it until it was just so painfully obvious, that it was something akin to a social revolution. Might we have that? Just an awareness, social revolution in terms of an awareness that this system is truly broken.