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This week we continue answering your questions, covering topics like: What is the future of Central Banks? When will precious metals manipulation end? What comes after a monetary collapse? Why is wealth flowing from the west to the east? Where is the best place to store cash? What will government intervention look like during the next financial crisis? Thanks for listening!

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“In a certain phase, you can pretend that gold has no role in the system. Then later in that same cycle or stage, you know what you have? A reminder of gold’s value as you pick yourself up off the floor, because boom goes to bust. And in that environment you find that gold is the only thing that restores confidence to the financial and monetary system.”

– David McAlvany

Kevin: Our continuation of last week’s program, continuing to answer the questions that have come in on YouTube through the last year. I want to restate the question, Dave, from Terry, who wrote in and said:

“A question for someone – if gold goes up, like Mr. King says (she is talking about Bill King), what do you buy?”

David: An interesting conversation that we had with a couple of our clients, and I love the fact that one of them brought his 11-year-old son to the Naples meeting. I loved it, because we had a similar conversation – a different question, but it led to the same answer, which is, this young man tried to say, “What should I do in terms of saving money and investing? What would you advise?”

What I would say is that if you look at the world of investment very simply in terms of four buckets, where you have a cash bucket, a real estate bucket, a stock and bond bucket, and a precious metals bucket, these four buckets, over your lifetime you are going to work on filling to the brim. But there are points in time where you may not choose to fill proportionally, and here would be a reason why. Take, for instance, the artificial demand from the Japanese in the 1980s, and you had certain places in California and Hawaii…

Kevin: You’re talking real estate here.

David: Yes, because in the real estate sector things were getting so over-priced that it just simply didn’t make sense to proportionately fill and say, “Well, I bought a dollar’s worth of gold, I should buy a dollar’s worth of real estate, too, because ultimately I want to fill the buckets. No, I think you look, and you say, “I want to fill them all in my lifetime. I’m going to do so on an opportunistic basis, but only when value presents itself in a compelling way. So, if gold is cheap, if silver is cheap, you buy it. If real estate is cheap, you buy it instead. If stocks and bonds are cheap, you buy them instead. And gradually, you create this diversified portfolio.

When you are faced with things being over-priced, then you default to cash and you say, “I’m not forced to fill the buckets, I’ll just sit and wait for value to present itself in a compelling fashion. So when gold goes up, like Mr. King says, what do you buy? I think the question is, what is the value proposition, and which of those buckets is under-filled for you?

Kevin: So you are saying, if gold is over-valued at that time, and something else in one of the other buckets is under-valued, that is where you are going to naturally take some of the proceeds from the gold rise.

David: That’s right. So it may be acres of land, or square feet of real estate. It may be stocks and bonds. It may be a privately owned business. There is a variety of places that you can go. The answer, to me, is ultimately going to be, what is the value that is presenting itself in a compelling fashion? Why? Because you ultimately make money on the basis of the price that you pay, not on the price that you are paid for it on the exit side. So you always have to be concerned about where an asset class is cyclically, to try not to buy the peaks and sell the trough, but do the exact opposite – buy the troughs and sell the peaks.

Kevin: That’s interesting, because normally you would think that people need to know when there is a peak, but actually, the better knowledge – it’s a little like Doug Noland’s knowledge – the better knowledge is when is something under-valued? One of the things that I’ve always loved about working here the last 30 years is the group of people here are continually looking at ratios. What is undervalued relative to gold? What is overvalued relative to stocks? All the way down the line.

You’ve mentioned this in last week’s show, and I’d like to mention it again. If a person who is listening wonders how to do this, the best way to do it is to just give a call. There is no charge. It is an 800 number – 800-525-9556 – and there is somebody here who can probably answer that question more specifically, especially at the time.

David: I think if I had to say one thing that sets us apart from everyone else in the industry, it is our ability to engage in relationship in a way that is consultative and sensitive to a client’s needs and expectations. So when you are dealing with someone in our office you are getting to tap into decades’ worth of experience. That is, I think, a very critical element, as well.

Kevin: And we love those conversations. That’s what we live for.

David: Relationship, experience, education. Think about what this Commentary is and has been for nearly ten years – our best effort to educate a public that we don’t know, but we hope that they take an interest and get to know us. That is an initiative that they have to take, and I think that they will find that in many other ways beyond the Commentary content we can add value.

But those four buckets – I just want to say again, don’t feel compelled to fill them equally at the same time. Do it on the basis of value. Today real estate is expensive, stocks and bonds are expensive. I would be favoring cash, I would be favoring gold and silver. And at some point that will reverse. In fact, I may take a little bit out of the gold and silver bucket and cash bucket and move to real estate and stocks and bonds. But that is going to be where I am most price sensitive. I’m willing to exchange ounces for acres on the right value exchange.

Kevin: Yes, when it comes back down. The next question is from Phil, and he is addressing something that has been a frustration for a lot of us for the last few years. He says:

“When will precious metals manipulation end?”

David: “We’ll get there when we get there!” (laughs)

Kevin: (laughs)

David: That’s a quote from The Incredibles. But, no, it ends when it ends, and what I like to see is that the effects of manipulation are diminishing. If you look at the 2013, 2014, 2015 and 2016 timeframe, let’s break that into chunks – actually 2013 to the present, you had manipulation in the market where major chunks of gold were sold in a very thinly traded market – Australia, Singapore if you are going overseas, less volume can be accommodated in the futures markets, and that is where it was dumped considerably. So we would see overnight trading, mass dumps of futures contracts and a major price move lower. 2013 and 2014 – that would impact the price between $50 and $100 every time they would roll up their sleeves and get nasty.

Then 2015 to 2016 the same kind of nastiness in the market gave us $20 to $50 dollar declines. This year, 2017, the same kinds of manipulation happened in July, and happened again in October and November. They are giving us $10 to $20 price swings, and my guess is by the time we get to 2018 it is $0 to $10. So what I like is the trend of diminishing effect. We are seeing a tremendous appetite for the physical metals in the overseas markets, so whatever manipulation and chicanery is happening in the futures market is really restructuring who owns the actual metal in the context of playing with price. And as my dad has said repeatedly in the conferences with our clients all year long, “He who owns the gold makes the rules.”

What we don’t realize in the context of doing what Paul Volcker felt was necessary – bludgeoning the price of gold, manipulating it lower, which he mentions in his memoires he should have done more of – what we don’t realize is that we are ceding long-term financial credibility to the East, while we are assuming that if we just break the barometer and take away the signaling function that gold has in the economy of what is happening of a negative nature, either of monetary policy or fiscal policy, we are trying to mute that signal.

That’s what the manipulation is attempting to do, to say, “All is well, you should be owning stocks and bonds, don’t worry about it, we’ve got this covered.” The central bank community wants you believing that. But at the same time what they don’t realize is the unintended consequences. We actually are seeing a mass migration of ounces, tons actually, to the East. And if my dad is right, that he owns the gold makes the rules, then we are setting up a generational shift of financial and ultimately political and geopolitical power to the East.

Kevin: That takes us to the next question, which is just perfect timing. It says:

“Why is the West unloading their gold and silver to the East?”

I’m going to add to that, Dave. You have China, Russia, Turkey, India – you mentioned tons are going over there. It’s not hundreds of tons, it’s thousands of tons. It’s amazing the migration of physical gold while we just play these paper games here.

David: I don’t know, maybe there is some cobble of people who believe that everything should done, and can only be done effectively, on a multilateral basis. What we have seen through time is that there is a dominant player on the world scene. We see that in the currency system, we see that in the geopolitical system as the top dog. We shared the post with Russia during the Cold War and became the unipolar power after that.

But why is the West unloading their gold and silver to the East? I think, to some degree, it is ignorance of cycles, and to some degree it is indifference as to what the consequences are. I don’t necessarily believe that there is a cobble trying to undermine who we are as a country. I would lean more heavily on the idea that the West is unloading its gold because of an ignorance of the cycles and a belief that we don’t need it anymore – we live in a brave new world and era where gold is anachronistic, antique, a barbaric relic. There really are people who believe that it is a barbaric relic.

What that must ignore is the cycles of boom and bust where, in a certain phase you can pretend that gold has no role in the system. Then later in that same cycle or stage, you know what you have? A reminder of gold’s value as you pick yourself up off the floor, because boom goes to bust. And in that environment you find that gold is the only thing that restores confidence to the financial and monetary system.

Kevin: And it could be, Dave, that it is just greed right now that is keeping us focused on the debt-fueled party which is this boom. If gold were going up right now that party would be ending pretty quickly because people would see that there is a danger.

David: That, I think, is worth mentioning, because again, I don’t see a bunch of guys smoking cigars in an oak-paneled room saying, “We’re going to destroy the price of gold so that we can all get wealthy.” But I do see a central bank community that says, “We need to target a certain increase in credit, and it is to our benefit to do so. And it is to our detriment if gold is ever introduced into the system because that places limits on the amount of debt-driven growth that we can create.”

Kevin: Right. Keep the complacency going at all costs.

David: Absolutely.

Kevin: Even if it means we lose our gold to the East.

David: And in that case, they’re just playing with new ideas and untested theories in a world which I think has already proven, again in terms of its cyclicality, to require gold at a certain point in the business cycle.

Kevin: I think this next question, Dave, might be more targeted to your dad because he lives in the Philippines. Here is how the question goes:

“I’m not sure if you read these comments, but can you buy precious metals in the Philippines? I heard you mention that you have family there, so this is why I ask.”

David: I can answer that. It is very difficult to buy or sell gold in the Philippines. It just happens to be a freak of that geography. But it is not difficult in Singapore, it’s not difficult in Hong Kong, it’s not difficult in Kuala Lumpur. There are other geographies in Asia where it is very easy to buy or sell. Just going through the Beijing or Shanghai airport as I do, and as many of our listeners probably have, you can buy gold at the airport just like you can buy Hello Kitties and stuffed animals and a bottle of whiskey at your duty-free. You actually have places in Chinese airports where you can buy bullion. And it’s really kind of an interesting thing that it’s that common in that culture.

Kevin: That’s amazing. The next question – Dave, this is interesting because a couple of weeks ago you addressed this. This question actually came in before this. The question is:

“Why do we need inflation? Deflation is the one that helps the people. It’s the natural order in a free economy. Inflation is a theft between banks and governments to steal your wealth.”

He gives an example. He said:

“A 2% inflation target means they will steal 40% of your wealth in the next 15.6 years.”

Even though the entire show was addressed to this a couple of weeks ago, restate why in the world we need inflation, or is it just really a ruse to keep us from understanding that deflation would be the preference?

David: Nobody wants high levels of inflation, but low levels of inflation is what they are targeting. And it is absolutely accurate. You are talking about reducing wealth, stealing 40% of your wealth over the next 15 years. I honestly don’t have to say anything. The question has the answer in it. But why do they need inflation? I say they, versus we, because we don’t, but they – governments, that is, sovereigns, and big banks do. It helps them paper over debt, keeps big banks in business, and that is why they need it.

Deflation – you are absolutely right – helps people, and is the natural order in a free economy. You’re absolutely right, couldn’t agree more – inflation is theft, and it does keep banks going, and it does keep governments with the ability to paper over unsustainable levels of debt. We have been convinced that we must have inflation and we have been convinced that all forms of deflation are evil. And I think that is where we have to be more careful. There are forms of deflation which are damaging to the financial system. There are also forms of deflation which are helpful to the consumer, and ultimately, helpful to the economy as a result.

So when you are talking about an over-indebted system, too much leverage in the system and a collapse, that kind of collapse in asset value – “deflation” of asset values – is catastrophic, and causes destruction within the banking and financial system. That is the kind that they are trying to say is to be avoided. I would agree, you would like to avoid that if you can. But if you paint with too broad a brush stroke and forget that low levels of deflation are actually massively beneficial to the consumer, then I think that is where you have to just be a little bit more careful – paint with a broad brush stroke on occasion, and a very small one for fine strokes here and there.

Kevin: Dave, a question that we have heard at every conference, and we’re hearing it continually – I think it is good for you to give your explanation that you addressed at the conferences. The question goes this way:

“What do you guys think about cryptocurrencies, bitcoin in particular?”

Dave, what do you think of cryptocurrencies?

David: I’ve gone back to the blockchain and that technology and see it as something that is entirely disruptive. It will remake Wall Street as we know it, and the transaction processing that we see, the trading processing that we see there. It will have an impact in the banking community, and you can see major banks taking an investment in blockchain technology because it does, via the distributed ledger, offer a more stable platform for tracking credits and debits. It is a brilliant and beautiful thing.

What we don’t know is what ways in which bitcoin and the cryptocurrencies will be integrated into a transaction process. The value of the currency is in being able to exchange that particular item, or unit, for goods and services. So you would have to see a mass expansion of reception. There is no doubt that in the process of maturing the cryptocurrencies will be controlled, regulated, and we really haven’t seen that come into play yet. So is there an adjustment in price or value to the bitcoin or other cryptocurrencies, up or down, on the basis of regulations and compliance requirements?

Kevin: Dave, you mentioned that it is a currency, or that’s what they are calling it – a currency. But like you said, it’s not really a currency if everyone is buying and no one is really spending it. I think one of the things that you will find with a currency is that you have to be able to go use it as money. Try to find businesses right now that on a regular basis accept bitcoin. They exist, but they are scarce. And really, bitcoin right now is a speculation, not a currency. It doesn’t mean it is not a good speculation, but it is just a speculation.

David: Right. It may morph and transform itself into something that has more of the traditional characteristics of a currency, in which case maybe its usefulness increases. It would have to, to take on those qualities and characteristics. So my focus has probably been more on blockchain.

Kevin: Which is the technology behind the bitcoin versus the coin, itself.

David: Right. Because it has future disruptive possibilities there. If I think about what ethereum allows using the same blockchain, or similar blockchain technology or iteration of it, for contracts, and for escrow, and for a variety of things that today have to be done through a very laborious legal process – you have a series of 1s and 0s in the digital ether that takes care of contracts and escrow and it is implicit to that code. That is not only brilliant, but it is also entirely detrimental to companies that are in the contract and escrow business. If you think about title companies, if you think about escrow companies – these are buggy whip companies 20 years from now. And blockchain is the death of those kinds of companies.

Kevin: Because blockchain is like a DNA strand that contains all the information that that company can provide.

David: It contains all the information that you need. On that basis, blockchain may also be the building block for a one-world currency because it contains all the information that you need to know who is doing what, when, where and how. So we’re talking about a transformed form of blockchain technology. Today the merits of bitcoin are that it has some anonymity like a cash transaction which is one of the reasons why we can’t conduct business in it because our anti-money laundering policy won’t allow for it. So as a cash transaction, it just doesn’t hold muster for us. But the reality is, it is going to lose, completely, that anonymity feature, and then we get to see what its value is without that anonymity feature.

And does it serve a larger purpose in terms of a global monetary system. I’m all for innovation and change. One of the things that you have to be aware of is that when you have somebody who can look into, and have knowledge of, transactions, there is the possibility of manipulating, and to some degree, controlling the decisions that precede and follow any financial transaction. And that is where you hope for benign, instead of malignant or malevolent government, because when you gain access to information you are gaining control.

That is, I think, ultimately my concern with the blockchain, and maybe this is a problem 20 years from now – it is so effective at what it does that it allows for information, which is invaluable to the financial system and to the people who are monitoring, managing and controlling the financial system, and you’d just better damn well hope that the people who are in control are benign and not malignant.

Kevin: Dave, this last April I was talking to a man who owned a bitcoin wallet company. He was telling me that bitcoin was very, very anonymous. I shouldn’t say just bitcoin, he traded in a lot of currencies – ethereum, and some of the others. He was talking about the anonymity being so important and I think a lot of people have that perception. But in the same conversation I asked him, “How do you get away with people wanting to do transactions that the government might say are illegal?” He said, “Well, I have to tell you that the government comes to see me two to three times a week and asks for information.”

So there was an irony there. He was telling me about anonymity, but he was also telling me that he has to give information if subpoenaed. Well, if it is anonymous, what information is he giving? How are they extracting the information from the system? So like you say, one of the things that makes bitcoin so incredibly powerful, and blockchain so incredibly powerful, is the fact that it can store this information like a DNA code, but if a person knows how to break the code, or if they have the key, they have everything.

David: They have everything. This is sort a dystopian idea as it relates to bitcoin, which is very ironic because people who tend to like it the most are the folks who think they are exiting from a dystopian possibility with fiat currencies and the current system of credit that we have. They are assuming that bitcoin is the way out. The irony is that it is the way into deeper levels of control. All you have to do is crack the code, and then you control everything. I’m sure we will have comments on this topic like, “Dave, you don’t know what you’re talking about.”

No, in some respects, I don’t know what I’m talking about, so save your breath and realize that you probably don’t know what you’re talking about either, because we don’t know what the future holds, and so you’re talking about future contingent events. What we do know is that government doesn’t like a challenge to their monopoly. What we do know is that government ultimately, if it cannot control it, will co-opt it and use it completely. So the historical record would be on my side, saying that there are future contingent events which don’t play positively for us, using and abusing us via blockchain. Again, these are future contingent events. We’re not there. So I’ll admit, this is entirely speculative in terms of my opinion, and it may or may not be right.

Kevin: This next question brings me to Europe. Years ago you interviewed Otmar Issing, who was one of the founders of the euro project. He was the head of the European Central Bank for seven years. Even he saw that there were vulnerabilities in the system. This question is from Michael – I would guess he is probably from Europe:

“Guys, I’m asking you to speculate as to what happens to gold the day and the week after the euro collapses or vanishes, which seems imminent, but not immediate. Considering the euro comprises 57% of the U.S. dollar index, would a dollar moonshot represent our next generational buying opportunity?”

Remember, he started with a question on gold, and ends with a question on the dollar. What is your thought?

David: A next generational buying opportunity in gold – does that imply that gold is in free-fall as the dollar is going up? That is, I think, what I am inferring from the question. So the dollar moonshot and the gold price lower – I would probably go along with Russell Napier on that and say, no you could have gold rise, and the dollar rise at the same time. So there is a disconnect in the context where you have more European demand for gold as a no-confidence vote on the euro currency system.

Remember that demand for gold in any geography is really a no-confidence vote on the people who are managing that particular market, that particular monetary system. And so, if it is free-fall, and the demise of the euro, then you are really talking about a massive increase in gold demand there in that particular geography. The gold market is made or broken with about a 2-3% margin of buying or selling. Every market is like that.

Kevin: It’s very thin. Isn’t that amazing?

David: It’s the case with every market – Japanese real estate, California real estate. If you have 2-3% more sellers than buyers, the market price is going down. More buyers than sellers, the market price is going up. And it doesn’t take much at the margins, but that is what defines a trend. And so I think you could see euro demand for gold break the negative correlation that people believe is always there between gold and the dollar. And that negative correlation – again, we see a disconnect between the dollar and gold with some frequency, so I would not count on euro demise being a generational buying opportunity in gold. I would say you have a pretty good opportunity at these prices.

Kevin: While we’re in Europe, why don’t we go ahead and continue here. This is a person who lives in the United Kingdom. He says:

“How would I compound my ounces if I live in the United Kingdom?”

David: I think one way to do it very tax-effectively, is to look at one of the tax code benefits that you have in the U.K., which is when you own British sovereigns, as a British resident and citizen, you don’t pay capital gains tax on the “coin of the realm.” So there is a way for you to arbitrage current bullion issue sovereigns with the older sovereigns minted in India and Australia and Canada.

Kevin: From a hundred years ago.

David: Particularly, I would say Canada and India where the populations are miniscule, and you can see premiums on those coins occasionally get to 30% or 50% over the bullion content. So, if you’re going to be able to bounce back and forth between bullion sovereigns currently minted and the older sovereigns, pre-1933 sovereigns, where you can see premium gains, of course you have to be looking at the older sovereigns not just by age but also by quality. You have to be in uncirculated condition coins otherwise you do not see the premiums emerge. But that would be a way for you to capture premium and compound your ounces in the U.K. and do so on a completely tax-free basis, given the U.K. tax code.

Kevin: This next question is from Ms. Taylor”

“Thank you for continuing to educate the little guy like me. I really appreciate it. How do you hold cash in the United States when the banks may not be a safe place to keep it in because they have the ability to take your cash through negative interest rates. They will use your cash to pay of their debts. They will create a digital cashless monetary society, etc. If you believe holding cash is a good idea, how do you do it? I’m really confused.”

David: I think there are several ways to view cash. You can view it as a tactical allocation inside an investment portfolio where you may be moving to neutral ground and out of stocks and bonds, which I think at this juncture here in late 2017, early 2018, makes a good bit of sense. To reduce market exposure, cash is a tactical allocation par excellence. What you are really talking about is sort of a savings account, and in that sense, cash, in terms of savings, functions as the means by which you pay your bills and manage your household affairs, and you have to have some in the bank just to pay your bills and manage household affairs.

So to me, I think one to three months of liquidity inside a bank does make sense, and then if you want additional cash that is not in the banking system, I would consider the same, between one to three months of liquidity in small denomination bills – that would be $50 bills or smaller – because we do have this issue, the discussion, whether it is the IMF or others in Sweden, here in the United States directly at Harvard, of de-cashing. What that is talking about is moving away from having cash in the system at all. They would like to move toward transferrable deposits. This is what you are mentioning in the question in terms of a cashless society.

But that means abolishing large-denomination bills. That means imposing a ceiling on cash transactions. It means creating a tax for cash transactions, and reporting requirements on any tax payments exceeding a specified amount. These are the things that would occur to cash to disfavor it. And certainly, one of the arguments that they are making is to get rid of money laundering, drug dealing and all of this, we should also get rid of cash. Well, they are really talking about $100 bills. They have already phased out 500-euro notes. “De-cashing” deals with large-denomination bills.

I mention all of that to say, what you have in your personal possession, whether it is in a home safe or squirreled away in a coffee can, you’re looking at tens, twenties, fifties, etc. I still think you should have one to three months in that form in your physical possession. Yes, they can change the current system as we like, I own that particular “savings” position in cash for one reason. In the context of there being no access to the digital transference of value, using a debit card, using a credit card, I don’t want to have to stand in line with 50 people, wondering if I’m going to get five bucks, 25 bucks, 125 bucks from a local bank or an ATM which has already been drained. I just don’t like lines, particularly lines of angry people. To me, having a few months’ worth of cash on hand means that I never have to stand in line with an angry crowd.

And I frankly don’t think it’s that extreme to think that with our electric grid tied into our infrastructure which is very aged, we could have an issue with our electric grid. Or maybe you’re thinking that it is more of an issue of vulnerability – we have an EMP or terror attack, like 911 – that has an impact on the ability to transfer information, and thus, our ability to transfer money in the digital world. So how to you carve out some cash outside the banking system in my physical possession? Yes. And I’m not talking about an excessive amount.

Kevin: Now to Australia, Dave. This next question comes from Mr. Kim in Melbourne. He says:

“David and Kevin, thanks for a wonderful economic commentary over the years. Usually I re-listen to your show at least a couple of times to make sure I understand it fully. I have quick question that perhaps you can consider answering for the next episode. I have been living in Melbourne, Australia for nearly 30 years after migrating with my family from South Korea. When I came in 1988 it was all about the Japanese. The Japanese were buying all of the apartments in Queensland. I still remember the new, fancy Japanese department store, Daimaru, opening in central Melbourne in 1991, and I also remember after several years, it closing down in 1999. Not surprisingly, we had our last recession in the early 1990s. I still remember really worrying about my job prospects in the University.

Now, you rarely hear currently about the Japanese. Instead, it’s about the Chinese. From my point of view, there seems to be a lot of, at least superficial, similarities between the 1980 to 1990 Japanese-focused, and now when asset markets are highly elevated, especially in real estate, thanks to the enormous foreign investments from Asia. For a while, I’ve been pondering about the implications of China either having a soft or hard landing as it de-leverages from the level they currently are, and see if I could draw some parallel to the current time and the 1990s. Could you two wise men perhaps educate us on what are similarities and differences between the 1980s and the 1990s, and now, and perhaps speculate on the outcome this time around, especially in a country like Australia?”

David: Well, clearly, there is an over-inflation in real estate values in Australia, and in other hubs, given Chinese demand. Some of those other hubs – when I think Canada, I think the Pacific Northwest, and there has been a huge influx. So just on the basis of supply and demand, if the demand goes away, there is going to be a change to pricing structure both in Canada and Australia. So I think one of the differences between what we saw with the Japanese in the 1980s and what we see with the Chinese today is that many of the dollars leaving China today represent flight capital. And it is illegally skirting Chinese capital controls, which was not the case with the Japanese. This was just wealth being transferred, and leverage being utilized on the basis of an increase in assets values, to go buy other assets.

And so they were leveraging off of the increase in Japanese real estate to go buy the world. So I don’t necessarily see the same. You’re right, there are some superficial similarities. We have seen a major increase in the value of real estate in China, but nothing like what we saw in Japan. It was said at one point that the royal palace there in downtown Tokyo – the value of that land had a greater value than the entire state of California.

Kevin: Wow.

David: Again, you were talking about an inflation of one asset and then taking that, leveraging off of it to go buy the world. That’s what the Japanese were doing.

Kevin: Dave, I remember a meeting with your dad back in 1988. This was back when the company was still in Denver. He said, “A square foot of Tokyo real estate in the main office area was $10,000 a square foot.” Japanese real estate had gotten to be where it was indescribable. It was sort of the bitcoin of the era as far as gains go.

David: I think we do have some vulnerabilities from China, and you’re right to be cautious with Australian real estate because you have Xi Jinping who is probably one of the most powerful Chinese leaders since Mao. If you said Mao, Deng Xiaoping and Xi Jinping, these are the three great Chinese leaders in modern Chinese history. And there will be a continued consolidation of power.

I don’t know that you are going to see the same kind of capital exiting China because I think you will see more controls placed on that. And the ways that has been done, whether it is through false invoicing, or through merger and acquisition of companies overseas, there is a variety of ways that that is going to be more scrutinized by the People’s Bank of China and the Politburo, and I think you will see less capital coming out of China.

So that means that yes, those hubs, whether it is Australia or Canada, those real estate markets are vulnerable to a diminishment in flows from China. So there are other issues, if you are looking at emerging market countries with a tie to China, specifically, countries that are mass exporters of commodities to China, I think they also are very vulnerable should we see a similar retrenchment or credit market collapse within China circa 2018 and 2020.

Kevin: Our next question says:

“Good show. As always, one point that I am still unclear of is the central banks. The central bank radicalism – is it a mixture of arrogance, stupidity, flawed models, and kick-the-can-down-the-road thinking? Or is it actually intentional, creating a society of kings and serfs?”

What do you think, Dave?

David: I think it’s a great question. Again, this is on the edge of conspiracy, and there is no doubt that conspiracies do exist. My tendency is to see more of a coalescing of interests where people want the same thing – the billionaire class is looking at a certain level of concerns and risks that the millionaire class or the middle class certainly don’t have at all. And so to see interests align – is that a conspiracy or is it a coincidence of interests that are collapsing in on each other?

I do think it depends on how you view the world. Please don’t take this as a crackpot response, because your question is a very good one, but there is an idea that we live in an entirely naturalist world. If we live in an entirely naturalist world, then you would have people who may be good and think that they are doing things for a good purpose. They could be doing them inadvertently toward bad ends. Or you have bad people doing bad things, and there is plenty of room for conspiracy theories in the context of evil people doing evil things that might benefit them, specifically, back to that idea of creating a society of kings and serfs.

There is another possibility, and this is what might step us out of the naturalist world view to say, if there is something beyond the natural world, a supernatural reality, in which case there were powers and principalities which we are not aware of, that we don’t encounter on a daily basis, is it possible that there are leaders in the world today that really are just pawns? They don’t know what they’re doing, but they are participating in a much larger picture, again, powers and principalities, and of plans that go on in a different dimension?

Again, I know that sounds funky, but let me just ask you the question, going back to, are we certain that all we have is the natural world, or does the supernatural exist? I am willing to concede that there is, in the natural world, the possibility of good people trying to do good things and inadvertently hurting people, and bad people doing bad things, selfishly driven, which can hurt us, too. That would be the case of creating a society of kings and serfs, and that that possibility exists.

What I’m asking is the question, is there a third alternative? And does that alternative include really bright people all over the world, the central bank community and prominent leaders, doing what they think pragmatically is the best, without them even being cognizant, aware, playing a part as a pawn in a larger game that goes far beyond what we can understand or appreciate in naturalist terms?

Kevin: Unintentional consequences in this dimension.

David: I’m not going to close on that thought. I am going to close on the thought that goes to Thomas Kuhn’s book, The Structure of Scientific Revolutions, where he would argue that, periodically, you have a group of intellectuals that only have a conversation with themselves, to the point where they don’t know that other possible explanations of the world, or the problems they are trying to solve, exist. And that kind of groupthink does get to the heart of what you are describing as a radical mixture of arrogance, stupidity and flawed models, where you have a paradigm bias, and ultimately, a radical shift from one paradigm to the next.

It is because the paradigm is dominated – textbook dominance – by arrogance, stupidity and flawed models. And they are only revealed through time, gradually, as you see little cracks and fissures emerge with those idea structures. So, if you haven’t read Thomas Kuhn’s, The Structure of Scientific Revolutions, I think it does explain why you can have people over-confident with a certain set of ideas. It is because they are not willing to think outside of the particular box they have operated in, and they have learned in, and they have practiced their trade in. And that is where some vulnerability exists.

Kevin: A couple of more questions, Dave:

“What is the future for central bankers? Are they out of ammunition?”

We have seen central bankers intervene in an incredible way. A couple of weeks ago you were quoting Stephen Roach, that the central banks took on over eight trillion dollars onto their balance sheets to save the system last time. That was a lot of bullets. Lowering the interest rates – that was a lot of bullets. Printing the quantitative easing money that they did – that was a lot of bullets, 300 billion a quarter worldwide for the central bankers. How many bullets do they have? Are the out of bullets, and when does that happen, if not?

David: The effectiveness of their tools depends on our level of confidence in them and their ultimate impact. So if the banks are doing what they are doing, how effective is their ammunition? We mentioned this last week, that this comes down to a continuance of confidence. Their tools will be effective as long as we believe in them.

Kevin: It’s the confidence game.

David: Right. But when we start to question their tools, that is when the effectiveness of those tools erodes. Does that make sense?

Kevin: Sure.

David: I’ll give you a case in point. The current argument for moving toward a de-cashed, or cashless, society – a part of it is, if we do this and we have only transferrable deposits, that is, digital credits and debits, we gain something. The argument is we gain more effectiveness with our monetary policy because there is no way for people to opt out of the financial system which we have constructed. Right now it’s a confidence game. We vote yes, we vote no. We’re in, or we’re out. And to the degree that we’re out or opt out of the system, their monetary policy tools begin to fail and become less effective.

Kevin: Is that why Carmen Reinhart said you have to create a captive audience – shut the doors.

David: That’s right – the corralling of people into a financial system that they cannot get out of makes their monetary policy tools more effective. And that would basically mean, no, they’re not out of ammunition, but it does require them to change the rules in the middle of the game and limit our financial freedoms, that is, our opportunities and expressions which would say, I want in, or I want out. This is where, I think, gold and silver are an interesting opt-out. They have not been made illegal to date. Perhaps that is a part of the grand scheme – eliminating all options, but it is not really on the radar screen today. Far more on the radar screen today is de-cashing – getting rid of cash. That way they’re not out of ammunition because any of their monetary policy tools stay effective.

Does that first point make sense?

Kevin: It makes sense, and I’m just looking at this last question, Dave. I think you already answered it. The last question says:

“When the next correction or crash occurs, do you think the government will be more aggressive in regard to intervention? And if so, what would these steps be?”

I think you just named it. They’re going to close the gates of exit.

David: Kevin, you know occasionally I will read something that is somewhat obscure, and the book on interest rates by Michael Woodford was my first introduction to a Knut Wicksell meets John Maynard Keynes synthesis, which says, “We will be able to expand our debt limits if we can control interest rates.” So, drawing on Wicksell, what is the natural rate of interest? The argument in Woodford’s book is that we can define and control the “natural” rate of interest and define what the natural rate of interest is, even if it is negative. So the idea is, in the future world of tomorrow you have Woodford on this road, you have Rogoff on this road, you have the IMF which is exploring ways that this might work on a broad basis around the world, Larry Summers in 2016, “Time to Kill the 100-dollar Bill” in the Washington Post. There is a whole host of technical literature, as well as more popular articles which have been written on this. And it goes back to, in the context of the next correction or crash, as the question is asking, the government is not going to concede defeat. They will be far more aggressive and it will represent the final closure of the financial system, in my opinion. And that does mean that ten-cent word we have been talking about for the last four years, Kevin, going back to when I read Woodford in the first place – financial repression. Financial repression is the key. It is the key, and you can only effectively implement financial repression if you have closed the doors, or closed the options, for economic actors to do as they please, rather than us saying, “I can choose A through Z.” No, in the world of tomorrow, it’s A and B and C, and that’s it.

Kevin: You can envision closing the cell block of the financial system. In a way it reminds you of those prison movies where there is no exit, and that is what they are trying to do, Dave. They’ve got the bars up, they’re closing the doors, and you can hear the clanking as we speak.

David: This is just to reveal a family bias, but this is the stuff that I’ve created, a multi-generational family bias. I sat with my son, nine years old, at breakfast the other day, and we were talking about cash. He said, “Dad, I’d much rather own real estate. At least you have something that you can walk around on. I don’t like cash.” I thought, “Well, the apple didn’t fall too far from the tree, or the fruit DNA was absolutely corrupted.”

I look at the world that we have today, and the way I was raised is, keep your options open. Keep your options open. What I have witnessed in my adult life is a shift toward homogenizing financial products and services, limiting choices, and ultimately saying, “You have option A, you have option B, and you have option C.” All within a system which says, “This is it. This is all you have to choose from.” Maybe I studied too much philosophy, but to me, that is the fallacy of false alternative. There is A through Z, not just A, B, and C.

And one of the reasons I prefer gold and silver, not as a way to make money, but it preserves my autonomy. It preserves my ability to choose, and to make economic and financial choices anywhere in the world with an asset that has had value as money for 5,000 years. I don’t care what the system looks like tomorrow, I don’t care how it changes, I don’t care what changes to the U.S. dollar or the global monetary system, I know that on the other side of compression, or change, or manipulation, or control, I still have something that has already been through multiple cycles just like this one.

The only difference to this iteration is that technology is being applied. But control has always been there, and systems of control have always been there, and freedom and autonomy, when it comes to individual actions – that is only guaranteed in the financial markets through instruments like cash or precious metals, and I take precious metals to the bank every day over cash because of its enduring value through history.

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