Podcast

Bud Conrad: Japan Is Forcing Us out of the Eye and into the Storm

Friday, March 18, 2011, 11:10 AM

Bud Conrad, Casey Research's chief economist, believes that our historic paradigm of continuous economic growth has reached an end.  In his view, we have been funding growth in recent decades via first issuing an unsustainable amount of public and private debt, and more recently by runaway money printing. This has led to a temporary sense of calm - which Bud calls the 'eye of the storm' - which he believes we are now emerging from into much more troubled waters.

The tragic developments in Japan are likely to serve as one of (probably several) the catalysts that will trigger market dislocations that will accelerate the collapse. He and Chris are concerned that the global economy is unprepared for the world's third largest economy to quickly shift from being a net exporter of goods and funding to a consumer of them.

Click the play button below to listen to Chris' interview with Bud Conrad (runtime 43m:33s):

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In this podcast, Bud and Chris explore: 

  • Excessive debt creation and money printing 
  • The risk of currency collapse
  • The energy and economic impacts of the Fukushima disaster
  • The growing global energy crunch
  • The spectre of resource wars in the future
  • The prudence of personal preparation

Click here to read the transcript for this podcast.

Chris Martenson:  Yeah, that one. [Laughter]

Bud Conrad:  It requires something like fifteen thousand nuclear reactors to meet it. We can’t do it just with nuclear. We need many more sources of energy. The only ones that are sort of – call it – creation or renewable are solar. But everything and you have a chapter on this – all these things added together from ethanol to switch graft to mirrors to photovoltaic to tides to geothermal – don’t amount to enough to make a difference. Even when added together. That doesn’t mean that we shouldn’t be trying on all of them. And I think one that probably will work in probably a backward way, is conservation, because in fact we are somewhat egregious, particularly in the United States in our usage. We are doing some things to insulate houses better and maybe drive smaller cars, but by and large we haven’t hit the wall in the normal cultural methods that could make a difference of conservation. But that will happen when the price of a gallon of gasoline hits ten bucks, not necessarily just because we are all good guys trying to help the planet of our friend and neighbor.

Chris Martenson:  And here’s the thing, conversation is absolutely the number one thing we can and should be doing. It's a no-brainer.

Bud Conrad:  I just want to emphasize that with a big "agree" – yes, go on.

Chris Martenson:  And here’s the thing I can’t figure out – how do you create more debt through conservation? [Laughter]

Bud Conrad:  I haven’t quite thought of it that way.

Chris Martenson:  That’s the –

Bud Conrad:  – create debt and is creating debt and will do so, but yeah I think of that somewhat separately. Now what is your method of linking them together?

Chris Martenson:  Well, here’s the thing: I just have this view that unless our economy is growing by which I mean unless our debt is constantly expanding, prior debts can’t be serviced.

Bud Conrad:  Yeah.

Chris Martenson:  So there has to be a story, which says that we have to continually be increasing our debts. Conservation, to flip over to the other side of the story, is absolutely the right thing to be doing on every dimension, except one. You can’t support the expansion of debt through conservation. I haven’t figured out how to do it yet. Because conservation is fundamentally about not creating – it's about not using something and so that is why I think we are not even looking at it in this country, because it doesn’t support our dominate narrative, which is this is who we are. We are a nation of consumers. We have a growth story. We link prosperity and growth – we want that story to continue going. Conservation doesn’t fit into that story. It has no place, it's the odd man out, and it gets pushed on the sofa in a corner at the party.

So I think that we still have a really big disconnect between what we should be doing and what we are still trying to do, because we just fundamentally have the wrong narrative in our heads. I look at what happened at Deep Water first, at Fukushima second, at who knows what third – maybe Bahrain – all of these things are around telling us something about our energy infrastructure, about the role of energy and the warning if we are going to heed it I think, is to say – wow something has shifted, what do we have to do to prepare for that? What should we be doing differently? What should we stop doing? What new things should we be doing. There is all kinds of stuff that comes up from that, but only if you have the right story. So long as we have this other story playing, which is – you know what we really need is we need to get people working again and we need to get our economy growing before we can have that conversation. So we are going to support QE1, 2, 3 . . . QE18, I think is how Mark Faber put it on TV the other day.

Bud Conrad:  Yeah, I saw that interview. [Laughter]

Chris Martenson:  So we are going to just keep trying the things that don’t work, you know definition of insanity, all of that, right? So I am jut wondering from your position, what is it going to take for us as a nation or maybe as a globe to start really getting – I am not saying we have the right story, I am saying this story deserves a place at the table though. What will it take A; to get that place at the table and B; what are you seeing with the people that you work with in terms of number of people who are now getting it, from different sectors and parts of society?

Bud Conrad:  Boy, I wish I had a simple clean answer to it all.

Chris Martenson:  Yeah, me too.

Bud Conrad:  I can’t let me try a few little pieces. We at Casey Research do have a pretty good reading through multiple newsletters and we put on conferences. I will be speaking in Boca Raton and unfortunately the conference is now sold out – at the end of April. The title of my speech will be Economy, Empire and Energy. Not a little unlike your book, with three “E’s,” different “E’s” but they are talking about some of the same things. You mentioned Mark Trevor, he also spoke at our conference in Las Vegas a couple a years ago and I had a chance to chat with him a little bit afterwards, but anyway – we do have people that get it and that was my starting point. We have even something called, “Casey’s Files” where we get together with local groups and people just trade idea that are typical subscribers and just want to chat with other friends and scribers around, to try, and pass the word around.

But let’s back up a little bit as to what is going on here. Some of this has been done before. Certainly, fiat currency collapse and how we get there. We are on the standard old path that everybody has been on. This is going to happened sort of regardless of what happens to everything else. Governments have the ability to print up money, take the advantage of it for themselves, and the incentives are all there for the politicians to print up more money. It keeps them in office and therefore, we can expect more destruction of our currency eventually. That will happen with or without the destruction of energy sources and the world competition, which I call resource wars, which I think is going on in the Middle East. In other words, we are fighting over their oil.

And I think that will continue and I think we are losing that battle, that’s the problem I see. Gaddafi is winning. I don’t know who created and implemented the protests and what’s going on. Saudi Arabia backing up the Bahrain government, because they don’t want Sheikh Muslims in their Eastern territories to want to break away from a Saudi-type – Saudi tribal, so we say of Arabians, not necessarily a country, it's a funny name. We put them in power and said you run the country and we will support you and give you your military and you buy our treasuries. This is a game that has worked for forty years pretty successfully for us, but there are limitations that are breaking out across the planet. I got a little off-track.

The track I want to get to is the “E” called Empire. We are a late-stage empire in my view. I think we have learned more about our future from studying the Romans than we would from trying to figure out a technology, which we should, to replace fossil fuels for an energy source. Hopefully, we do all that. But I think to some extent in watching the collapse of our great nation from a view that it is almost inevitable. I don’t have any confidence at all that the people in Washington know what they are doing or are going to fix it. I wish I were more optimistic. But the reason I bring this up is that I suggest that we, as individuals, have to protect ourselves, particularly against the most immediate one of currency collapse and a new sovereign debt crisis coming. I don’t know when that will happen or how it will get through or will unravel. But that is kind of the subject of well, your book and mine, in terms of how do people once they recognize this, get a little farther along that road of survival, recognizing that perhaps our children are not going to be able to live a lot better than we did, as was the case for most of the country from colonial times to now. I think it's going to be a decreased in lifestyles, unless you are a little ahead of the wave to understand how to protect, at least yourself.

Chris Martenson:  I am in complete agreement. My view of the economy and it's a complex system and therefore, it's inherently unpredictable. Even simple complex systems if I can use that term are unpredictable and this is a complex, complex system.  [Laughter]  So – we don’t know –

Bud Conrad:  Is that like an unknown, unknown?

Chris Martenson:  It is. 

Bud Conrad:  To quote Rumsfeld who was quoting McNamara.

Chris Martenson:  I was going Rumsfeldian on you there. But – so we don’t know the timing and this is one of the central themes that I continually push. I do not and I have never tried to set myself up as a guru that says on this date that will happen, follow me. I am just classifying risks. My background is a scientist and came out of neurotoxicology, which is a branch of pathology, everything is risks to me, that’s it, right? So I want to try and control and mitigate risks as much as possible. And what I see are accumulating, not decreasing risks. I see QE as accumulating more pressure that is pushing on the dollar, which someday, like all fiat currencies will give way. Is that tomorrow, is that twenty years from now, is it 200 years, I really don’t know. But what I do know that is when you pile up risk after risk after risk, what you are doing is you are increasing the chance that you are going to have a big event. It's like the quake in Japan, the subduction zone is just like grinding away, and it is not releasing. And the longer it doesn’t release, the more violent the actual release when it comes. I can feel these pressures building, whether it is in the fiscal policies – if you told me Chris, five years ago – this is five years ago you are saying, “Chris, in five year’s time, the US government is going to be running 1.6 trillion-dollar deficits year after year and the Federal Reserve is going to be monetizing that and the dollar is mostly going to be fairly quiet.” I would have said you are nuts.

Bud Conrad:  I did, I did that scenario and said – I thought four hundred billion was some sort of impossibly high deficit level when it first came out of the Bush Administration and guess what – I am sort of – it's now four times higher. The system hasn’t been broken. Yes – I have to say that’s the one area where I am absolutely amazed. I think though, we have had pretty large increases in prices. We got 1.6% PPI yesterday or something like that, including food and energy, which should be included. I am getting a little detailed here. But yes, we are not that far from potential financial collapse. You are a technologist, I am too. I think that humanity isn’t going to die off. I think we are going to have some optimism for our future, particularly through the technology side of things. We will figure out pebble reactors. We will figure out how to use solar energy. We will use some of the technologies that are absolutely fabulous in communications and computers that came through the generation that is now kind of slipping aside, but the new kids are picking this up faster than I would have imagined possible. There are some optimistic aspects, particularly through some of the new technologies. My son is getting a degree using the words complex systems PhD at Oxford right now. We have these great discussions about how things connect up more or less around social networking and things like that. But these are things I never dreamed of when I started in the computer industry and give us some sense of potential optimism. I think I am more optimistic about our youth finding new ideas, than I am about our old politicians kicking the can down the road about our financial system.

I fully expect complete financial collapse. But unfortunately, financial collapse doesn’t kill people like a WWIII. What I hope is we don’t move towards conflict on a massive scale that would destroy humanity, might save a planet’s environment, but it wouldn’t be too good for society. That is kind of extreme, maybe we should be careful about even talking in terms like that. But my point would be, let’s leave slivers of significant optimism through technology, new energy sources, new communications ways of dealing with ourselves on the planet and maybe even social organization structure of maybe not using the nation’s state as our central focal point, but local communities and a better understanding of human between humans, on a broader scale of better communication to be our organizing roles in the future. And what is clearly a very complex system, namely human society and our relationship to our planet.

Chris Martenson:  Well, you have raised an incredibly important point for me, which is that a lot of what I do is really trying – first I do shake people up a little bit and say listen, things are really about to change. And a very understandable first response of people is to say, oh my God, that’s really making me anxious or fearful or there’s an element of gloom and doom to this, which I don’t like. So that is okay that emotion settles out. And then we can have the second part of the discussion, which listen, this is just about change. It is change that is happening whether we want it to or not. But if you can foresee it, you have the opportunity to mitigate the risks, alter things early on and actually I see enormous opportunities in this story. Just huge opportunities and many of them are quite different from the past opportunities. I just want to illuminate the path a little bit so that people can say, wow if I can see this change coming just a little bit a head of time, I will be able to actually maybe even do quite well. So I have personally cut my standard of living in half, but our quality of life has increased. That is one example.

Another example – I went wholesale into gold and silver in 2003 and I have people tell me today, yeah but that was an easy decision to make then, look at how low it was. [Laughter]

Chris Martenson:  I am like no, no, no.

Bud Conrad:  An easy decision???

Chris Martenson:  No, that was one of the hardest decisions I ever had to make. There were people at the time telling me – what few people were talking about gold.

Bud Conrad:  "Barbarous metal…"

Chris Martenson:  Yeah, it's a hated thing. You are going to be fighting the Fed. It's already in a bubble. You could lose all your money, it's a volatile. All this stuff.

Bud Conrad:  "Twenty years of decline…."

Chris Martenson:  All of that, it was a horrible decision. Now, today people look at it and say buying gold at $1400 or silver at $34, it's just – it's too hard of a decision. Yep, it's always hard. But if you can make the decision – I made that decision based on the idea formed back then, which was a little bit crudely formed as compared to today, but here it was that I thought that my government was just going to keep printing and I thought that was how they were going to respond to all the things I saw coming. It turned out to be the right course of action. I still see that same dynamic in play in spades. I don’t see anything to change me off of that particular story at this time.

So there is really – there is tremendous opportunities here for people to protect, preserve and even grow their wealth. To do things that most people won’t be doing, which is where the discomfort comes in for a lot of people, but still I think figuring out the trajectory around is not that hard. The US is going to have a fiscal crisis at some point. I don’t know what is going to trigger it. I don’t know if it is going to be this Japan event, with liquidity sucking out and all of sudden the treasury market starts to see yields shooting up and that triggers a fiscal crisis. I don’t know, right? But it will be something like that and these narratives are getting closer and closer – these stories – it's how this great – I am just in search of a white swan. [Laughter]

There are a whole flock of black swans, right? You check off all these things on the list and it is incredible what we are facing right now, with Japan representing multiple black swans with what’s going on with oil, what’s going on in the Middle East, with the fiscal stuff. It's amazing. All I know is that these are all risks and people should protect themselves against these risks, if they can and they should do that. The decisions won’t be easy that they have to make. Do you go into this in your book, Profiting from the World’s Economic Crisis? The title is quite –

Bud Conrad:  I certainly talk about the financial situation. My book covers both my theories of how the world works and then got fairly specific into making investment recommendations, which would be very much in line with the kinds of things we have been talking about here with energy and precious metals and being fearful about the currencies of the world. That almost seems secondary, because what I sensed in the last pieces of what you were talking about Chris, and it sort of drew me to you personally, is that this is sort of a personal life work – it is for me. It started as a major shift in career to dedicate my life to these sorts of things and a few more things on the fringe that you just can’t get to in an hour or half-hour discussion like you would have here. But I felt warmed by that – what do I call it – personal story of yours that matches mine of trying to be almost – taking a cause on trying to explain to the world what the world is that we are living in to wake up and at least understand what is going on, if not necessarily change other people’s lifestyles, but hopefully to improve the planet a little bit by just describing it. Yeah sure, your book, my book, we are soul mates in some sense in this quest, shall I say, even if it is a little quixotic to try and explain to the world how important these things are. And hopefully that maybe the world itself will improve itself, as it understands the risks and problems here. And certainly as people become aware of it, they can hopefully live their own lives in a way that works a little better.

Chris Martenson:  Yeah, well said. Let’s create a world worth inheriting.

Bud Conrad:  I like it.

Chris Martenson:  We’re on a path that needs changing, so when is a good time to change? Well, sooner is better than later. So that is the path I am on. This has just been a fabulous illuminating conversation. I really want to thank you for your time. I am hoping we can do it again at some point. We have just scratched the surface and I know that world events are going to give us plenty of fodder for the cannon as we go forward here. So really, thank you a lot and again, your book is Profiting from the World’s Economic Crisis and your work with Casey Research is just fabulous. So thank you again, I really appreciate this conversation.

Bud Conrad:  It's been great talking to you, Chris and it is really fun to have somebody who really understands it on the other side of the line when doing these things. Three-minute sound bites from Maria Bartiroma really don’t do it for me. [Laughter] I appreciate the chance to chat, good luck with all the work.

Chris Martenson:  All right and thank you. This is your host, Chris Martenson, and we are signing off on another PeakProsperity.com podcast. Good day.


Bud Conrad is Chief Economist for Casey Research, a popular investment research firm, where he publishes frequent macroeconomic commentary and analysis. Bud holds an Engineering degree from Yale and an MBA from Harvard, and is also the recent author of the book Profiting from the World's Economic Collapse. He serves as a local board member of the National Association of Business Economics, teaches graduate courses in investing at Golden Gate University, and is also a regular lecturer for the American Association of Individual Investors and a frequent contributor on Fox Business News.


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15 Comments

louisash's picture
louisash
Status: Member (Offline)
Joined: Feb 6 2010
Posts: 1
Conservation creating debt?

Chris,

Great to hear a conversation between my two favorite economists. I am an Electrical Engineer / MBA like Bud and have a fundamental world view similar to both of yours.

You raise an interesting question about how can conservation create more debt.  I have two thoughts on that:

1. The system is going to break no matter what.  M. King Hubbert figured this out decades ago.  The monetary system is based on infinite growth, but we live in a finite world.  This will lead to a break in the monetary system and some sort of reset.

2. I believe conservation can increase net output and thus create GDP growth.  If I save a dollar on energy costs by reducing my energy waste (i.e. turning off the computer when I'm not using it), my output hasn't decreased, but I now have an extra dollar to spend on purchasing other items or investing in productive capacity to create GDP growth.

Thoughts?

dps's picture
dps
Status: Martenson Brigade Member (Offline)
Joined: Jun 27 2008
Posts: 442
Please consider watching

Please consider watching this important documentary about natural gas fracking, where you will see people who can turn on their tap water (from a well) and light it on fire, before you get too enthusiastic about fracking for natural gas.

http://gaslandthemovie.com/

I first saw the film on 3/16/2011.  It’s very disturbing, not very surprising.

Hugs … dons

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Excellent interview Chris. 

Excellent interview Chris.  I liked Bud's image of moving out of the eye of the storm. 

Travlin

himanshutiwari's picture
himanshutiwari
Status: Member (Offline)
Joined: Aug 18 2009
Posts: 1
Great Interview

Hi Chris,

Thanks for the great interview. I am a trained engineer (like Bud Conrad) as well and have worked in polymer and auto industries. Bud and you spoke about Black Swans...maybe you could get Nassim Taleb on your podcast at some point...just a suggestion.

Thanks,

Himanshu

jturbo68's picture
jturbo68
Status: Silver Member (Offline)
Joined: Aug 4 2009
Posts: 193
Thanks

Chris, 

That was a really enjoyable interview!

John

mrobinson's picture
mrobinson
Status: Bronze Member (Offline)
Joined: Jan 13 2009
Posts: 71
rphanidhar's picture
rphanidhar
Status: Member (Offline)
Joined: Nov 3 2009
Posts: 1
hello louisash

hi

i just read your comment and u have mentioned that u r an electrical engineer./mba . i am also an electrical engineer . i completed my graduation last month . i am very interested in getting an mba could you suggest a course of action for me to get an mba from a u.s university. i too have similar views of the world's systems and would like to know more...

expecting a positive reply :)

have a nice day

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2502
White Swans

White Swans? You want white swans? I'll give you white swans.

But you are going to have to do your homework.

Honerable scientist works on doggedly in appalling conditions, using his own money to save the world. Gets invited to his own caneing by his enemies.  Sounds like science fiction, but is science fact.

Buy the book, its cheap.

Read it, it won't take long.

You will learn something new.

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 420
Sharp and Intelligent Interview

The most notable, and arguably most powerful aspect of the interview is his humanity.

He came across as getting the big picture as well as anyone.

We need more folks like him.

Good choice Chris.

Nichoman 

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 420
Also endorse this book

Also endorse this book (somewhat dated now).

As I've stated before, Cold Fusion (aka Low Energy Nuclear Reaction <LENR> or Chemically Assisted Nuclear Reaction <CANR>) is a real phenomena.

Remain optimistic we will eventually have successes here.

Nichoman

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 1876
Transcript of Bud Conrad interview

The transcript of this interview is now available (click the link at the bottom of the post above - it will expand, showing the full transcript)

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1027
Great interview, keep these

Great interview, keep these podcasts up!  I can relate to Bud that practicing engineering gives one the tools to get a handle on the big picture.  I agree that we'll most figure out some solutions problems like  Peak oil, but that doesn't mean "technology will save us"; there will be a very rough long transition on the way and the solutions might not be ones we are able to accept yet for a while. 

Good point Chris on the difference between the 40 year old nuclear plant design in Japan vs modern reactor designs we have ready to build today.

bman's picture
bman
Status: Member (Offline)
Joined: Jan 16 2011
Posts: 2
In defense of economics...

Lots of engineers commenting here!  I think there is something about studying engineering that allows us to spot systemic problems.  I wanted to make one point about the discipline of economics though.  My first bachelor's degree was in economics, and I think there is a lot of misunderstanding about the discipline at large, and particularly about the concept of equilibrium, which Chris evidently rejects.  Equilibrium is appreciated by economists to be highly theoretical.  It is considered to be a level of price, or production, or some other economic factor that does exist at any given moment, but is always changing and can never be known with certainty.  It is a static idea, but it's used to understand dynamic systems in the same way engineers use mechanical statics as a basis for understanding mechanical dynamics.  It's an important concept because it gives us an idea of what the various factors will trend towards.  Bud's comment about negative feedback was great, because it's the constant negative feedback that pushes economic levels towards equilibrium.  Output voltage from an op-amp is almost never dead on the theoretical value, but it will always be trending towards it.

Another point I would make is that not all economists believe you can manipulate an economy.  Those that enter the public sphere do, or why else would they bother entering the public sphere?  Many though, appreciate that the economy can be studied, and even understood, but not manipulated.  As an engineer who happens to have an economics degree, I can honestly say that the two disciplines are very similar.  I think the economists at the Fed will defend their ability to manipulate the economy to the end, because it would be hard to admit their carreers have been wasted on a futile effort. 

Since I've gone on longer than I intended already, I'll make one more point.  A major mistake made by economists is the assumption that if new technology is demanded, it will automatically be created.  "Don't worry about the future of energy.  When alternatives are needed, the market will provide them."  They give all of us in the engineering world way too much credit.  We're pretty smart, sure, but we can't work miracles. 

martinricky719's picture
martinricky719
Status: Member (Offline)
Joined: Jan 5 2012
Posts: 1
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