The Printing Press: A Great Way to Fool People – Peter Schiff’s Gold Videocast with Albert K Lu (Video)
In his most recent Gold Videocast for SchiffGold, Albert K Lu interviewed John Rubino, founder of DollarCollapse.com. Rubino had a pretty compelling explanation for why there wasn’t a massive, sustained economic collapse a decade ago, and why he thinks it’s still lurking on the horizon.
The reason that we’re still here, when we really should have fallen apart based on how much debt there was out there, and various other measures of instability, is that a printing press has turned out to be a great tool for fooling people.”
Rubino pointed out that this is the first time in human history that all of the world’s governments are armed with a basically unlimited fiat currency printing press. The ability to create money out of thin air has allowed governments to take on more debt than anybody imagined feasible. Rubino noted that economists 20 years ago couldn’t have imagined $7 trillion of bonds trading at negative interest rates, and global debt at 300% of global GDP, but that’s where we are today. He went on to explain how the entire world pitched in to help the Federal Reserve keep things limping along after the 2008 meltdown. For instance, post 2009, China borrowed more money than any country has ever borrowed in history.
Rubino said there’s no way to know when the economy will hit the wall, but it will likely be pretty soon. At some point central banks and governments will run out of the ability to borrow and print, and they will have to start living within their means again.
According to Rubino, It’s going to be a painful transition. So, what does this mean for gold? Lu and Rubino share their insights.
Follow along with the full transcript:
Albert: Gold storms up as U.S. stocks struggle to extend streak. Hi, I’m Albert Lu, welcome to SchiffGold. That was a headline out of MarketWatch, and as the global financial turmoil continues, interest in gold appears to be growing. Gold is up nearly 16% this year, and as we approach the Fed’s March meeting, it’s looking more and more like that highly anticipated rate hike could be off the table. Joining me now is John Rubino, who manages DollarCollapse.com, and he’s also the co-author, The Collapse of the Dollar and How to Profit From It, as well as many other fine books. John, thanks for joining me today. How are you?
John: Good, thanks for having me on, Albert. Good to talk to you.
Albert: Good to talk to you, John. I have to ask you, first of all, when you went out and got that domain, dollarcollapse.com, were you thinking a two-year lease?
John: Yeah, I actually did expect this particular gig to last just a couple of years because this was 2004 when I set up the original dollarcollapse.com website. And it really did seem like the global financial system was on the precipice. I thought I would chronicle our descent into financial chaos for a couple of years, and then move on to something else. But the story has turned out to have legs. We have kept it together more or less in ways that I never expected us to be able to. And that the reason that we’re still here, when we really should have fallen apart based on how much debt there was out there, and various other measures of instability, is that a printing press has turned out to be a great tool for fooling people. This is the first time in human history that all of the world’s governments are armed with basically an unlimited fiat currency printing press. And so, it’s allowed them to take on more debt than seemed feasible based on history. And to manipulate interest rates down to levels that I don’t think anybody really expected. We’re in a negative interest rate world now, or we’re entering it. And if you’d gone back 20 years, and asked 100 economists if today’s world was possible, they would have said, “Nah, no way. You’ll never have $7 trillion of bonds trading at negative interest rates, and you’ll never have global debt at 300% of global GDP; that’s just not possible.” And yet here we are. My sense and my take on this is that we didn’t actually fix anything. We basically just bought ourselves time in which to build up even more debt to leverage ourselves even more catastrophically, and then make the eventual reckoning that much more serious. I think what’s coming is going to be unlike anything that has happened in living memory, certainly, something comparable to the Depression, but probably much worse. And so we’ve got very interesting decade ahead of us, Albert. And I wish that the details were easily predictable, but they’re not, except to say volatility and chaos are the rule for our immediate future here.
Albert: Yeah. I think you hit on something very important there. Basically, we have I think, it’s close to half of a sovereign debt trading in negative yields. Negative yields persisting up the yield curve, all the way to five years in some cases. I think it has helped a lot, and maybe this is what was not factored into some of our calculations is how much the world, the rest of the world would assist the US central bank in this game that we’re playing. If the US had to carry the entire economy on its back, I think we would have seen that, maybe not hyperinflation, but we would have seen something very bad. By spreading it around, by having the Bank of Japan help, by having the ECB help, I think this has kind of spread the symptoms of the catastrophe that you and James wrote about.
John: Yeah. Post 2008-2009, China for instance borrowed really more money than any country has ever borrowed in history. And that was the big driver of the “recovery” of the last few years. They just bought up all the natural resources in the world and drove the prices of iron ore, and copper, and timber, and oil through the roof. And that created a global resource boom. And that basically pulled us out of the, what would have been a depression after 2008-2009. But of course, that was done via huge amounts of new debt. And so, now the world is something like $60 trillion more in debt than it was back when debt was so accessible that it almost blew up the global financial system in 2008. And yeah, the European Central Bank and the Bank of Japan, and the US Fed, along with the People’s Bank of China, and the Chinese government have kind of gone back and forth borrowing money, and then lending it to each other. And they’ve enabled the system to hold on for much longer than it would have if it was just one country doing things like this. But that’s not a perpetual motion machine; we can’t keep going on like this forever, because we are building up more and more debt. And the big banks are bigger than ever, they’re more leveraged than ever. This time, the emerging markets have been pulled into it with something like $9 trillion of dollar denominated debt that they can’t manage. So at some point, it blows up. And then the question is, is it this year, or is it 2017, or 2020? There’s no way to know when we hit that wall. But I think it’s highly likely if not absolutely guaranteed that we do hit the wall pretty soon. We can’t go on for decades more as we’ve gone on for the past three decades. At some point, we basically run out of the ability to borrow, and print, and we have to start living within our means again. And at that point, we have to go through a transition from what is today unsustainable, to whatever we do after this that is sustainable. And it’s going to be a really painful transition. And there’s really only two ways to get there; either all the debt or most of the debt that we’ve taken on defaults, and we have a 1930s style deflationary depression, or we inflate our way out of it. That is we create enough new currency to make today’s debts manageable, but in doing so, we risk people losing faith in the fiat currencies that we’re creating with such abandon, and end up with a currency crisis, and that’s it. Those are our two choices. The next few years will determine which of those courses that we end up, and which kind of crisis we’ve chosen, but we can only chose one or the other, that’s all that’s left.
Albert: And clearly the preference of the big thinkers at the world central banks would be to inflate the debt away, hence to target positive inflation rates, those are supposed to be a good thing. It’s 2% now; I can see that very well going higher. But the consequence of that, of course, is that the market recognizes the price inflation. Now, gold has not been responding, but it seems like perhaps this correction is coming close now because gold is starting to respond the way you would expect it to respond. And part of the consequence of having this be a worldwide effort, all of the central banks participating in different currencies is sometimes the appreciation in gold is masked, meaning that the US dollar as a unit of account, the US dollar has not been participating in this currency war, but in other currencies, I believe you would have seen gold rising.
John: Yeah. Well, the US dollar has been the strongest currency in the world for the last few years. And that’s largely because…we’re not in great shape, but we look relatively good compared to the rest of the world. So a lot of capital is flowing in to the US and that creates demand for dollars, and pushes up the value of the dollar. But yeah, as you said, if you value gold in virtually any other currency it’s up now. So gold’s bear market ended some time in 2013 or 2014 depending on the country that you’re focusing on, and it’s been going up ever since. And finally, at long last, it has started to go up in dollars. So, whether that’s the beginning of a new leg in the gold market, or just a kind of a fake out before we get one more down leg before the gold market resumes, we can’t know that until retrospect, until afterwards. But when the gold bull market resumes, this is what it’ll feel like, this is what the early stage will be like. And so now the question is, will it continue through the rest of the year? I don’t know. But eventually, because gold is the form of money that humanity has used for the last 3,000 years, and it’s held its value for that entire time, it tends to be where we hide out when things get crazy. And as things get crazier, and crazier, and more and more capital is going to flow into gold, and also into silver, so other things being equal, you’ll see upward pressure on their prices even when priced in dollars over the next few years. Whether it’s a gradual kind of, a little at a time bull market, or a parabolic one when all of a sudden in the space of a couple of months we see another $1,000 added to gold’s dollar price, we can’t know, because that depends on the other stuff that’s going to happen out there. Will we have a raging war in the Middle East that distorts global trade? Will China have a hard landing credit crisis? Is the European Union or the Eurozone going to spin apart? And is the dollar going to do something crazy like spike from here or fall from here? We can’t know any of these things. But we can say with a fair degree of certainty based on history that things are going to be really volatile, and they’ll get crazier and crazier as this debt really bites. As our bad decisions of the past come home to roost, and the globe will be one of the beneficiaries of that, because that’s the way it’s worked in every previous currency crisis. You can go back to the Roman Empire, and France in the 1700’s, and Weimar, Germany; it’s always been the same. Money flows out of these mismanaged fiat currencies, and into real money like, gold and silver. There’s no reason to think it won’t happen again, and the only question is timing.
Albert: John, with just a minute left, I want to get your thoughts on two points. We got a fairly important decision coming up in March; the Fed is going to decide whether to pause or to go ahead. I think that this time, it may be different, meaning that this time, gold will win either way at least relative to the stock market, because if the Fed eases, sure stocks will get a break. But investors seem to be sensitized to inflation now, so I would expect gold to go up more. If the Fed tightens, gold may go down, but I think the stock market will just be obliterated. And so, I want to get your thoughts on that. And then finally as we close out, where do you see gold going by the end of the year?
John: Well, let me take the second question first. I am terrible at making short-term predictions, so I have absolutely no idea. Gold can be $900 or $2,000 by the end of the year. And both crises would be justifiable based on what’s going on immediately in the financial markets. But the first part of your question, I think, is very interesting, because it is possible that no matter what happens to the stock market and bond yields, and things like that, that capital is going to flow into gold going forward, because gold responds not to any particular set of economic data, but to the volatility and the stress in the markets. So if things seem really unpredictable, and really volatile, and people get scared, they will move some of their money into gold. And lots of things can scare people out there – a parabolic rise in stock prices that coincide with a bear market in bonds that might send people into precious metals. But a collapse in the stock market, same thing. What we saw in January of this year, when stocks went down hard, and a lot of that money that was taken out of the stock market flowed into precious metals; so gold went up, that could happen too. I think in the longer-term, I have no idea about this year, but in the longer term gold is a beneficiary of the instability that necessarily flows from borrowing too much money. And so, I think people who buy gold gradually, right now, not all at once at any given price, but a little at a time over a long period of time are going to be glad they did that five years from now. And who knows what the world will look like, but I think it’ll be a more stressful world than today’s, and gold will be an antidote to the stress of the world in that time.
Albert: That’s very good advice, John. We’re out of time, so I’ve got to let you go. Thank you very much for joining me on the program today. I really appreciate it.
John: Thanks Albert enjoyed it.
Albert: My thanks to John Rubino. Please visit his website at dollarcollapse.com. And be sure to subscribe to our Gold Vdeocast to receive our top stories and expert guest interviews, as well as exclusive commentary from Peter Schiff. Go to schiffgold.com. I’m Albert Lu, until next time, take care.
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