money printing

Transcript for James Turk: Gold Is Our Defense Against the Fiat Currency Graveyard

Below is the transcript to James Turk:  Gold Is Our Defense Against the Fiat Currency Graveyard:

Chris Martenson:  Welcome to another Chris podcast. I am your host of course, Chris Martenson. And today we have the distinct privilege of speaking with James Turk, founder and chairman of GoldMoney which offers investors an easy and inexpensive online solution for buying precious metals with international storage options. James is one of the foremost authorities on precious metals and has long offered market forecast commentary including co-authoring The Coming Collapse Of the Dollar and How to Profit From It, with our good friend, John Rubino, of He has built his career on decades of experience in international banking and finance spending many of those years living outside of the US, which gives him a critical advantage to look at our economy with an outsiders eyes. I am really delighted to have you here, James, and I have a tall stack of questions prepared for you. Are you ready to dive in?

James Turk:  I sure am, Chris. It is a pleasure to speak with you.

Chris Martenson:  The pleasure is mine. So, short-term, what I’m really interested in here is to start diving into where gold is going to go short-term. Where do we buy gold? Do we buy it now? Over the short-term people are very concerned about the price of gold and where it’s at and where it might be headed. So with QE2 ending here at the end of this month – we are in June right now – how do you expect the precious metals to be impacted?

James Turk:  Well I think the precious metals are going to do quite well this summer. And I don’t agree that QE2 is going to end in June. It may “end” in June, but it is not going to end on August 2nd because on August 2nd the US government is going to increase its spending limit probably by $2 trillion and the Federal Reserve is going to have to step in and start buying some of that government debt and run the printing presses again with all this new money creation. And I think that is what is going to light a fire under both gold and silver this summer. 

Chris Martenson:  So you are of the view that QE whatever, 3, is a done deal because they are in something of a box. The federal government has enormous borrowing needs and you are of the opinion that really without the Federal Reserve being there, there is insufficient buying power for all the borrowing needs they have?

James Turk:  Yes that’s exactly right. Look at what has happened since August of 2010 when the Federal Reserve announced QE2. During that period of time, up to the present, the US Government debt has increased about $900 billion, about $500 billion of that has been purchased by the Federal Reserve. What is happening is that the US Government is spending so much money it is forcing it to borrow more money than the market is willing to lend to it. When that happens, only two things can happen: spending has to be cut back or the Federal Reserve steps in and buys that government debt and turns it into currency. And that is what QE is all about. This policy of buying government debt is going to continue once the debt limit is increased on August 2nd. Maybe the Federal Reserve will claim victory and say that they will stop QE on June 30th but the reality is it is only going to happen until the debt limit increase is approved. And I do believe at the end of the day, despite all the posturing we are seeing now Congress and the President are going to approve a $2 trillion debt increase by August 2nd

Chris Martenson:  So really we are talking about July as a possible pause. And I have my concerns about that because we are looking at the data here for the first week in June roughly and what I’m seeing is a lot of weakness out there. The Fed’s so-called mandate around employment, around economic growth, there is a lot of weakness in that data right now. So you are of the opinion that QE if it does pause will only maybe for a month. 

James Turk:  Yes, maybe for a month unless Congress finally chooses to act sooner than August 2nd, although I don’t expect that to happen. It is really just a question of numbers and mathematics, Chris. The US Government has to stop spending so much money or the Federal Reserve has to come in and turn that government debt into currency, those are the two alternatives. And I don’t see any discipline or intent by Congress to stop spending.

Chris Martenson:  Yes, everything they have done so far is a bit of a dog-and-pony show without much substance; $30 billion, $90 billion. Please, that is meaningless at this point. And when we go over to the other side of the pond, we see that Europe also has just extraordinary funding needs right now. They are using all sorts of fancy terms for a Greek default which will probably be the first of several shoes. But when you add it all up, it looks like there is, again, enormous funding gaps there and the need for a massive amount of liquidity. What is your view of Europe then? Is Europe going to print? The ECB – are they too in a box or will they actually go for austerity and allow the chips to fall where they lay?

James Turk:  No, they have been printing all along and, in fact, I think they are going to continue to print as well. You know, the turning point here in Europe was last May, May 2010, when the politicians got together when the Greek crisis sort of erupted and became quite serious. And on Monday morning after the politicians met, Mr. Trichet, the President of the European Central Bank, said that he is going to start buying Greek bonds, despite his pledge not to buy sovereign debt of any country. And despite the fact that it is against the EU Constitutional Principals for the ECB to be buying and sovereign debt. You know, the law is basically just being ignored. It is being ignored by 13 of the 16 Euro-zone countries who have debts exceeds 3% of – deficits, excuse me – 3% of GDP. So the rule of law has basically been thrown out the window. Money printing is the order of the day. And when politicians take control of central banks, which they have done in the United States and they are also doing in Europe, that basically destroys the currency. It puts the currency on the road to what I call the Fiat Currency Graveyard, so I expect there is going to be some massive currency problems as we go forward. The financial crisis that we have been dealing with for the last several years has not been solved. 

Chris Martenson:  I agree completely, and so similar dynamics in both the US and Europe, also Japan, let’s not wade into that too much. What we see is the advanced, developed nations all pursuing the same rough policy which is to try to print their way out the great credit bubble that they all got enmeshed in. So let’s switch then to the end game. So you agree I think if I can put it this way, that the political will doesn’t really exist or the structural or institutional processes aren’t really there to enforce any sort of law in the area that printing is the path of least resistance, always been true historically, probably today is not different in that regard. Given that, what do you see as the endgame here? Many call for a deflationary collapse and crunch and other people call for an inflationary and some call for hyperinflationary. You mentioned that it ends in the Currency Graveyard, how do we get to a currency graveyard if all the currencies are pursuing the reckless policies? Who falls against whom?

James Turk:  Yes, that is all of the currency for the exception of one, which is gold. So to answer the inflation/deflation question you have to actually first decide which currency are you going to use to measure prices. In other words, if you measure prices in terms of dollars you are going to see a hyperinflationary blowoff and the dollar will end up in the Fiat Currency Graveyard that way. The hyperinflation will come because of continued quantitative easing by central banks around the world. But if you look at the price of goods and services in terms of gold you are going to see a massive deflation. In other words, the purchasing power of gold will continue to increase in the years ahead which is basically what happens during the deflation, the purchasing power of the currency increases. So we are going to have deflation when prices are measured in terms of gold or inflation when prices are measured in terms of dollars or Euros or British Pounds or Japanese Yen. So clearly, everybody should be focusing on owning as much as gold as possible within the liquidity part of the portfolio. 

Chris Martenson:  You know, I started accumulating gold in 2002 and I did it principally as a way to preserve my wealth. And it turns out, it has also been a way to enhance my wealth for this dynamic you have described. We are closing in on 10 years in my personal experience with gold and in each one of those years it has been a great way to not only protect my wealth but also increase my wealth on a purchasing power basis and you are predicting that that dynamic is going to continue. 

James Turk:  Yes. And let’s put it into a bigger term perspective because what you have been witnessing over the past 10 years is just a recurring pattern that has occurred throughout monetary history. You know we have these – what economists called booms and busts. During the boom banks lend and lend and lend borrowers borrow and borrow and borrow until both banks and borrowers become over-leveraged and then you have the collapse. You have the boom in the 20s, the collapse in the 30s, the boom in the 50s and the 60s, the collapse in the 70s. The boom in the 80s and 90s and we are in another collapse. Now when you are in a collapse, be it the 30s, the 70s or the present period that we are in you want to own gold because gold preserves your purchasing power during this financial reckoning.

And when we get out of this particular financial collapse or bust that we are in, which is going to take a few more years, you will then have your wealth and purchasing power preserved by owning physical gold. And you will then use that gold to make investments, acquire consumer goods because by that moment in time gold’s purchasing power will be at a maximum. Gold will be over-valued compared to where it’s been these past couple of years which is under-valued and gold is still very under-valued. So that is the biggest strategy to what everyone should be aiming toward and looking for.

Chris Martenson:  Well, so let’s talk about that. I’m interested in your timeline here. I was going to ask you when you think the wheels are going to come off but it sounds like you are saying the lug nuts are off and the wheels are already wobbling on the axles here. So the question becomes when do you need to have your core position in place before it’s too late? Is it too late? A lot of people think that gold is in a bubble, it is really hard to buy at all time highs and I completely sympathize with that, but given where we are in the story you said there is still a few more years in it. How many years and is now an okay time to begin establishing a core position if you don’t have one? 

James Turk:  Yes, you know, your question is a good one. And I get this one all of the time. In fact, I have been getting it since I started GoldMoney back in 2001. Is it too late? And my answer is: don’t look at the price of gold, look at the value of gold because that is what is really important. What has been happening over these past 10 years the price of gold has risen but the dollar is being debaced every year by policies that are destroying the purchasing power of the dollar. You know the purchasing power of the dollar has been constantly eroded by quantitative easing and all types of other things that the Federal Reserve and the government is doing. So the question is: is gold still good value? And to answer that you have to say well what does gold do for you? And what it does is it preserves purchasing power over long periods of time and it does this when you have physical gold, it does this without any counter-party risks. In other words the value in your gold is not dependent upon someone’s promise. Now what happens during a bust like the one we’ve been going through is promises get broken. People who had money at Lehman brothers saw that promises were broken at Lehman Brothers. People who own Greek debt are seeing those promises being broken. This is going to continue recurring until balance sheets are brought back down to leverage, and we are nowhere near that.

I did an interview back in 2003 and they asked me to forecast the price of gold and I said it was probably going to be $8,000 an ounce at some point between 2013 and 2015. I’m sort of sticking to that price target and I am also sticking to that time frame because normally a bust lasts about anywhere from 10, 12, 15 years so 2015 would be 15 years from the peak of the last bubble in 2000. Now, it could be longer than that. If government continues to intervene and prevents the free market from cleansing all of the bad debts and all of the bad decisions that have been made all along, we probably would be much closer to the end of that had the bailouts not taken place back in 2008 and let the system cleanse itself then.The people who had made right decisions would be doing okay, the people who made bad decisions would be bankrupt and as a consequence of that, we wouldn’t be dealing with these ongoing problems with the banking system that we have today.

So as government continues to fiddle around and intervene maybe it is going to be six years before we finally get to the end of this but on the other hand if we get a hyperinflationary loss on the dollar and I think that could happen here as well, maybe the end is finally going to come sooner when people start to realize that what we are addressing here is the point that you are raising. This is not a cyclical issue it is a structural issue. It is a structural issue that there is too much debt. And the system of allowing governments to just borrow, borrow, borrow and put the debt on the backs of the taxpayers that is just about to come to an end. I think that is what we are facing presently in Europe and will soon be facing in the States when that August 2nd decision is made.

Chris Martenson:  One of the things that truly surprised me so far, James in all of this was how long we have been able to kick the can down the road. And you mentioned that one of the things that will happen is gravity eventually takes over so that maybe the timeline extends or contracts a little bit depending on the decisions that are made. I have one other thing I want to get your view on, which is I see that the longer we continue to kick the can down the road and pile up the public debts that the greater the risk we have of something even worse happening that might have happened otherwise. That is I see a risk of the loss of the dollar’s reserve currency, maybe in a fairly dramatic way, maybe transpiring over a couple of months. Something really dramatic. Low probability still in my mind, but it is now possible. And that I am growing more and more concerned that the more reality is attempting to be denied I guess with all of these policies is that the risk to these currencies is now growing larger and larger. And I don’t have a really great way to quantify that yet but it is certainly something that is very strong in my gut and it is something that I think I’ve got a reasonable handle on looking at historical examples and looking at how these things have played out. What is your view on the risks here?

James Turk:  Yes, I agree with what you are saying completely except I think the risk is much bigger than just the dollar’s loss of status as the world’s reserve currency. The real risk when you have a currency collapse is ultimately political. If you look at the issue of currency collapses more often than not you move toward dictatorship and totalitarianism. And just to give you a couple of examples: after the Weimar Republic collapsed at the Reichsmark in the 1920s it ultimately led to increasing fascism and we all know how that worked out.  But I mean if you look at the collapse of the French during the period of the French Revolution, you know, ultimately led to chaos and Napoleon. Now if the US Dollar collapses it is not the first time that a currency has collapsed in America. During the War of Independence, the currency was the Continental and it collapsed because it was over issued. Politicians were spending too much money, nobody wanted to lend to the government and they put that currency, they printed the currency and put it into circulation. What they call bills of credit at the time but it was basically what we call paper currency. But because the Continental collapsed one of the reasons why the framers got together to create a more perfect union was to create a common market with a common currency. Much like Europe tried to do with this common market. And the common currency of course was the silver dollar, which was confirmed – first of all, it was put into the Constitution but it was reconfirmed in the Coinage Act of 1792 which was one of the new acts of the Congress which had just been created under the Constitution.

And that system worked more or less pretty well. There were some problems along the way but it worked more or less pretty well up until 1971 when the last remnants of precious metals were kicked out of the monetary system. And what those metals did is they put an external discipline on the spending by Congress. And without that external discipline you run into problems. Getting back to the political issues I’m making; when you have a currency collapse you can go the right way or you can go the wrong way. Germany went the wrong way. America after the collapse of the Continental went the right way. And I hope after the dollar collapse this time we will go back in history and look and see where it errs and by abandoning the precious metals and get back on the right track.

Chris Martenson:  Well this is a subject near and dear to my heart now because I own gold for two main reasons. One is wealth preservation and the second is, I think there is an option value on it and like all good options this one is pretty far out of the money but boy it has got a really attractive strike price if it hits and that is that gold and maybe silver might be remonetized at some point. That I truly believe we are at risk of a major currency failure, particularly in international settlements, and in a time of crisis often what happens is that you refer to the last thing that you know that worked The last thing that I am aware of in the international financial scheme that really worked was gold as backing. Do you see that as a possibility? What are your views on re-monetization and what might that look like and how would that happen?

James Turk:  You know it’s a really good question and it is basically what we intended, what we are arguing really with GoldMoney. You know when you have money you can do two things with it: you can save it or you can spend it. Right now when it comes to gold and silver most people are saving it rather than spending it. But within GoldMoney based on the patents that we have we enable gold and silver to circulate as a form of digital currency instantaneously 24/7 anywhere in the world, completely outside the banking system. So will gold and silver become currency once again in the future. As an aside, you used the term monetization. You know, gold is money because it is still useful for economic calculation and the same thing with silver. They just didn’t they were stopped by governments as circulating as currency but they can still be used to calculate the price of goods and services. They still are money and that is basically where gold’s value arises – for monetary use not from any other application. 

In terms of having them circulate once again as currency, this is the interesting part. Are they going to circulate again as coins? I don’t think so. I think they are going to circulate again digitally. In Gold Money for example, you can use your iPhone to click gold from your holding to someone else’s holding and I think ultimately a new form of gold currency that we are making available in GoldMoney will be how the precious metals will once again circulate in commerce globally.

Chris Martenson:  So you don’t have to flip bits of actual metal from one person to the other but there would be in your system 100% gold backing for whatever amounts are being transacted. 

James Turk:  It’s even better than backing. You know, when you talk about backing you are talking about banks where there is al inability circulating as currency that is backed by an asset on the bank’s balance sheet. But in Gold Money you are using what is in effect a digital gold coin. If I put a gold coin across the counter top to pay for some good and service, the exchange is extinguished at the moment that I get the good and the shop keeper gets the gold coin. There is no lingering obligations like you have in the banking system when you use checks or plastic cards. There is a lot of payment risk in the banking system. But with digital gold currency, the gold and silver remain in the vault and you just click the ownership of whatever weight you are transferring from your holding to another person’s holding. So it is extinguished at the moment that you receive the good and click a payment to the other person’s holding. It is like a gold coin but you are not bound by any physical location.The gold and silver remain in the vault and that ownership of gold and silver is being transferred instantaneously.

Chris Martenson:  I really like, I mean I love the whole concept and it appeals to me greatly. I want to shift here to talking about investing in precious metals. So you mentioned before a portion of a person’s assets definitely should be in gold and silver; absolutely a song I have been singing. Let me get this for you, what would your percent portfolio recommendation be, maybe there is a range you have given where people are in life. What is that percentage for you?

James Turk:  It is hard to make a sweeping generalization, Chris, because everybody’s circumstances are different. What might work for one person may not work for another person. Age is a big factor, the older you are the more conservative you should be so the higher percentage of gold you should actually have in your portfolio. A younger person may want to be focused more or less on savings, having less liquidity having less gold and silver, and more in investments maybe mining companies or tangible assets like timber land and other types of tangible assets that produce cash flow. But the older you are the more gold you basically want to have in your portfolio. And so that by the time you are in your 70s or 80s and near the end of your life, I kind of think you are getting closer and closer to 100% gold to make an easy transition of any assets you want to distribute to your heirs as well as have liquidity available for any needs you might to make your retirement years as comfortable for you as possible.

Chris Martenson:  So for me I think everybody ought to have at least 10% exposure to start. I am much higher personally but I totally recognize and understand and support the idea that individual circumstances vary a lot. But assuming somebody wants to build some exposure, starting even now at gold at $1,500+ How would they go about doing that given that where gold is today? How would you personally coach somebody to build a portfolio?

James Turk:  The best way to do it is through a dollar cost averaging program. In other words determine what portion of your portfolio you want to put into gold. And then divide it by six or 10 or 12, some number representing months at which you will accrue or accumulate. You know, maybe you want to do it just over three months. So you decide that – let’s say for example, you have $100,000 dollars that you want to put into gold and you want to do it over four months. So you divide that by four, you have $24,000 and you choose to make the purchase, for sake of argument, the 20th of each month. So regardless what the price is on the 20th of the month on the first month you buy $25,000 on the 20th of the month, the second month another $25,000 on the 20th of the month, the third month and fourth month you do the same thing, regardless of what the price is and you will have averaged in. Because what we are talking about here Chris, is a major bull market. And one thing that a bull market does is regardless of when you buy that you are going to come out whole or you are going to have your position improved as the bull market continues to move forward. 

That is why I come back to this point about the difference between price and value. The price of gold may seem high but the value of gold is still – by all of my historical measures – very, very low. In other words, gold is very under-valued. So as this bull market moves further the price will go up and it will become less and less valued but we are still years away from gold becoming over-valued.

Chris Martenson:  So, somebody has done this they are putting away $25,000 on the 20th of every month. They are fortunate enough to be able to do that for 12 straight months. How do you recommend allocating – there are all these various ways of owning precious metals. We have got gold in hand, maybe you got gold and bars and in gets or junk coins in the case of silver, numismatics, where you buy it from, where you would store that kind of stuff? Compared to say allocated storage or paper gold or miners you mentioned maybe there is other derivatives. How would you advise somebody to sort of structure that? Let’s say they are just starting. 

James Turk:  Okay. Let’s first look at a from a big picture point of view; when you have your portfolio you have two different asset groups in your portfolio. You have investments and you have liquidity. Your investments are you wealth-producing assets. You put your money at risk in order to generate some kind of return. And then you have your money, your liquidity – where you have either sold an investment and you are waiting to buy a new investment or you sold an investment and you are waiting to make the purchase of some kind of consumer good. Gold mining stocks are an investment. They have to be treated like all stocks. You have to look at management, the quality of the balance sheet, the quality of the company and all those types of things. But buillon is not an investment, it is really money. So you compare bouillon to other monetary alternatives like the dollar or the Euro or wherever you happen to live. Now in an environment where you are not earning any interest income on your dollars, as is the present case, you may want to have a much larger holding of gold because there is no cost in holding gold. And in fact, because gold has been going up in dollar terms, 18% per annum on average for the past 10 years. You are much, much better off owning bullion than owning dollars in this environment. The broader sense is investments are your mining stocks, bullion is your liquidity position. 

Now, looking at gold, people say they “own” gold, but when you actually analyze it they don’t own gold they own paper gold. Paper gold is different from physical gold. Paper gold is the various representations out there where you are exposed to the gold price but you don’t actually own metal. And that exposure to the gold price comes with counterparty risk, options and futures and even the ETFs – they are basically paper gold products. Because you don’t own physical gold, you have a stock in funds that supposedly owns gold on your behalf. What I recommend when it comes to your bullion part of your portfolio, the liquidity of your portfolio, you own physical gold. And there are only two ways to buy physical gold, you buy it and you store it yourself or you buy it and you have someone store it for you, which is what we do in Gold Money. Now each approach has advantages and disadvantages just like anything in life. You got to weigh the pros and the cons and make some decision that best suits your needs. When you buy it to have it at hand, store it at home, you have it right there at hand which is an advantage but that comes with disadvantages too. What is the risk of theft? Can you get insurance, is the insurance expensive? If you have to sell because you need the money you have to take the coins or whatever you have back to the shop. If you own bars that might force the dollars to be refined and you incur that cost. So there are disadvantages to storing it yourself. Also, if you store it in a bank safe deposit box there is a risk of confiscation. Gold was confiscated in 1933 who is to say it couldn’t happen again in the future?

If you store the gold with others there is also advantages and disadvantages. The disadvantage is that you don’t have it in hand. But there are advantages like GoldMoney: you have the gold stored for you outside of the United States, which is useful because when the gold was confiscated in1933, gold held by Americans outside of the United States was not confiscated. Whether it happens again in the future, who knows? It is worth noting historical precedent for it. The other thing is it is in a secured bullion vault, it is insured. But most importantly you have liquidity. If you need your money for any reason you can sell your gold and silver and have the money wired to your bank account, the proceeds wired to your bank account the same day.  

So what you have to do is look at these different alternatives between buying and storing yourself and buying and having someone store it for you and see what or probably both methods make sense. If you are going to store $5,000 in gold at home that is one thing you might be prepared to take the risk. But you are obviously not prepared to store $100,000 in gold in your basement – it just doesn’t make any kind of sense. What you have to do is make your decision between two alternatives but there is one thing to keep in mind because if you are using other people to store your gold and silver for you there are certain things you have to be careful about. You have to make absolutely certain that your gold and silver are there in the vault and the only way you can do that is to have independent third party audits, and you have access to these audited reports, showing that the weight of gold and silver is exactly equal to the quantity of gold and silver that you own. This is one of the backbones of GoldMoney. What I basically recommend to people is if you are looking to store others make sure that you have the same industry-leading governance principals that we follow in GoldMoney so that you know that your gold and silver stored with others is not at risk. 

Chris Martenson:  Excellent. And if people want to find out more about that they can go to and you got a great website there and it explains a lot. What I have heard so far is that gold is in a major bull market here and there are probably several years left to it. And in the near term what we are looking at is the QE, that is the printing of money in Europe, whatever they call it and in the US is really set to continue and by the way it will continue in Japan as well. We have more and more defacement of money in a vain attempt in my opinion to sustain the unsustainable which is a credit market that went too far. So here we are and it looks for a variety of reasons there is time left in that particular story. You have set a target that we can slide the date a little bit depending on what policy decisions get made but that $8,000 gold is not an unthinkable number to you; that re-monetization works as a international policy option at some point across major nations. And that gold already exists as money through for individuals to use and to trade use as money. 

So that is where we are in the story right now. What I’m interested in hearing from you is so let’s assume somebody has a big PM position, a big precious metal position; how would they protect that or do you advise protection? Limits, stock options, futures, offsetting positions, do you at all get involved in any of that?

James Turk:  I don’t recommend trading the precious metals. Making money by trying to pick the fluctuations correctly in the price of gold or the price of silver is a very, very difficult full-time job best left to professionals and speculators. The way you want to preserve wealth is to accumulate an asset that is undervalued, continue accumulating it throughout the bull market. And when the bull market is finally over and the asset becomes over-valued then use that asset to invest in other things that become under-valued at that future date. That is really my approach. And gold is the insurance, I don’t think you need insurance when it comes to gold and silver for that matter because they are so undervalued. The insurance that you need is the insurance on being reliant upon the dollar because it is the dollar that is over valued and over owned and existing because of its legacy not because of its underlying fundamentals. The precious metal fundamentals suggest that the dollar should be much, much lower and gold should be much, much higher and I think it is just a question of time for the market to perceive that and that is what has been happening over the last several years and I think it is going to continue into the foreseeable future. 

Chris Martenson:  This brings me to something very near and dear to my heart, I personally have an exit strategy for precious metals and I will know when that date comes. It is a ratio for me and I will share that in a minute. I am wondering tell me about your exist strategy. You mentioned at some point gold will be over valued. Will you know that by price, how will you detect that? What are your sign posts there and what would that look like? When will you know it’s time to begin reversing that trade?

James Turk:  I have some mathematical models. There is a lot on the internet about my fear index, once my fear index gets into a high territory that will be a clear warning sign which is really a simple approach anybody can follow. It is a response I give to the question I get frequently. People say “if I buy gold how will I know when to sell it?” They are immediately thinking about January 1980 which is the peak of the last bull market, 20/20 hindsight, how can I pick the top? I think this time around it is going to be pretty easy to pick the top because you are not going to sell your gold, you are going to spend it. Think about what I am saying there. It’s that gold again is going to become currency. Once gold becomes currency again it is going to become overvalued you are going to use your gold to buy consumer goods, houses, you are going to use your gold to buy farm land, office buildings, stocks, all kinds of investments you can think of that are undervalued at some point and time in the future relative to gold itself. 

So gold is going to reemerge as currency. I think the 20th century, let’s say the last half of the 20th century or maybe even just the last few decades of the 20th century, are going to be an aberration in monetary history where people largely thought that gold had no role to play. When you stop to consider that gold has been money for 5,000 years and it has only been dealing with the world reserve currency without backing by gold for only 40 years, and given the problems we are seeing today with the dollar, one has to assume that gold’s rightful role as the center of commerce is going to reemerge once the silliness with fiat currency and government printing presses ends, which I think is going to happen within the next two years. 

Chris Martenson:  Well you mentioned August 2nd as a date to watch because that is when the debt ceiling gets bumped up by a couple of trillion. I am watching August 15 because that means this is the 40th anniversary – I love round numbers when it comes to these things – the 40th anniversary of the slamming of the gold window and when we look back historically there are a lot of currencies that failed including even metallic currencies through the process of actual debacement or clipping. And 40 years is not an unthinkable amount of time for a currency experiment to run historically and so here we are. And the idea that the dollar can continue its current role for another 40 years is actually a really, really tiny probability to me. I am seeing larger stresses, increasing structural imbalances, an absolute failure of floating exchange rate fiat currencies to manage international trades and goods and services in any reasonable fashion. So all of these things are building, and here we are. And one of the concerns that comes up for many people, many of my listeners, I am wondering if you could touch on this now, is, they accumulate this position in gold because they read all of these tea leaves right, they got their position, and then all of a sudden the rules get changed. And the gold either gets confiscated, kind of a funny word, as it did in ‘33. Actually they gave you dollars in return for it so it wasn’t like a full-complete confiscation with no return. What do you see as the risk of such an event? Maybe its too broad, maybe it will vary by location. Certainly probably will by country. But what are your views on that confiscation fear or worry or idea that gold will be appropriated or be declared an international reserve asset therefore it is too important for people to own individually, it belongs to the nation or the globe, what are your views there?

James Turk:  Yes, it is really sort of sad that the big risk today to owning gold is government. Government is supposed to be there to maintain the rule of law so that we operate in a level playing field so that no one person is at an advantage to another person. The key to that is protecting property rights. This is the basis of traditional Anglo-Saxon common law. The last decade or two we have moved so far away from that, a lot of what is called law today is hardly recognizable in terms of in a historical precedent and the traditions up to traditional Anglo-Saxon common law. But yeah, government has become the big risk today for anyone who owns not just gold but silver in many respects, any asset. It is sort of unfortunate but it is a sign of the times and what we have to deal with. I think the only answer that one can pursue to deal with this increasing unlawfulness that governments are pursuing or unlawfulness in historical standards is global diversification of your assets. Just try to fight as much as you possibly can because when you do that you are mitigating risk. 

There is no really one right answer because the future is unknowable. There is no one right answer as to how to plan for the future other than to diversify. Diversification mitigates your risk and I think that is the thing that everybody should be keeping foremost in their mind.

Chris Martenson:  I absolutely agree with you. It is awkward at this moment in time to see some of the changes that have happened and are continuing to happen and it is all accelerating and this is a point of view I have which is that things are going to speed up. What a really unusual moment in history. We have been sticking to just the economic side there is a really interesting story when we put energy into this mix and the notion that we have a world economy, a money system that really needs to expand to be happy and there are real adult-sized challenges to expansion as we have known it in the past. 

And it is unclear to me how those are going to play out but I am convinced that how things used to work is not how they are going to work in the future. So we are now describing that there will potentially be a change in government, in policies, maybe a change in leadership that can accompany a hyperinflationary collapse of some kind a la Weimar, Germany leading into World War II, in essence. Many of these risks, I see a well-diversified portfolio in gold and silver as a reasonable way at this point in time to protect as best we can knowing that we don’t know what is going to happen or how this is going to unfold but we do the best we can.

The rules have changed though. The old rule of having a reliable yardstick that we can count on and measure things by which we used to call the dollar or the euro depending on where we live. And that’s really shifted and we are in the period of that shifting. And that makes it really challenging and its difficult and its uncomfortable and its awkward and I find in many cases, people become paralyzed through all of that change and my advice has always been as soon as you get the first gold coin in your hands, first of all you are going to connect with 6,000 years of human history, which is magic. And the second thing is you are going to start feeling that first a bit of relief by saying I know own the only monetary asset known which is not simultaneously someone else’s counterparty risk which you have already mentioned. One of the great, great reasons I believe in owning this particularly monetary asset of gold.

James Turk:  I agree with you completely, Chris. And I think what you said is very well stated. You have hit the nail on the head and captured exactly the reason why people should be looking at the precious metals.

Chris Martenson:  Exactly, so as we close up here, tell me, are there any best keep secrets out there? What do you see as the least understood aspect – maybe pro or con – of owning precious metals? Let me put it this way: what advice would you give to kids if they were going to buy into this market? 

James Turk:  There are a couple of keys, we already discussed some of them like buy physical metal and not paper gold or paper silver you want physical gold and physical silver. But there is another important key: you want to get the most gold for your money. In other words you want to look at the cost of buying that gold relative to other alternatives. You want to get the smallest markup over the spot price of gold. To do this typically the larger the bar you buy the lower the cost to you. And this is because smaller coins or smaller bars have fabrication, shipping and handling costs, and they can be quite considerable.

So for example, if you are buying a one of coins or several one of coins you may be paying 7 or 8% over spot. If you are buying a one-quarter ounce coin you might be paying something like 15 or 20% over spot. Because the cost of fabrication is a much higher percentage of the smaller gold content in a one-quarter ounce coin than it would be in a one ounce coin.  And this logic continues to follow all the way down to 400-ounce bars which is the international standard which is what we sell in GoldMoney as well as parts of a 400 ounce bar. So you can buy gold and silver in GoldMoney for nothing greater than 2.5% you can buy $100 worth of gold for $102.50 and you can’t buy physical gold any other way for such a low mark up over spot.

So what you basically want to do is get the most gold for your money. The way you have to do that is to get the largest bar as possible when you are making your purchase.

Chris Martenson:  Excellent. And it is always the bid and the ask in that whole transaction so there are transaction costs to gold and silver as you mentioned but when people trade it between themselves now, they are on the system and they trade it where are they trading it at the ask or are they trading it at gold spot? How does that work?

James Turk:  First of all, if you are a GoldMoney customer and you want to sell some gold and convert it into US dollars or euros or some other national currency and have the money wired to your bank account, you get the spot price of gold. So we don’t take any fees when you are actually selling. And the reason why we have created GoldMoney that way is we don’t want the fee to be an impediment to liquidity. If you need the gold or you need the silver go ahead and sell it and don’t pay a fee for it.

If people are actually using it between themselves, they can do it one of two ways: they can either agree to do it in a contract between themselves in terms of ounces or grams of gold or silver or platinum and palladium for that matter too because we offer those metals as well. So let’s say you and I have a business deal and I agree to pay you three ounces of gold; I just click three ounces of gold to you. On the other hand, you and I have a business deal and I agree to pay you $4500 and you are willing to accept gold in GoldMoney as payment. On the day I agree to pay you, I have to go into my GoldMoney holding, put in $4500 as the amount to be paid, what is the gold equivalent. The system based on the spot price at the time you are actually making the payment and that weight of gold is then clicked from my account to your account and transferred instantaneously so you can actually do it that way. We are actually using 16 different currencies in GoldMoney for tracing back to the spot price when you are doing an exchange using it for purchases or sales or something else in the GoldMoney system.

Chris Martenson:  And is this useful for small dollar amounts? I mean, how many decimal places to the right do you go when transferring gold?

James Turk:  We go down to what we call a mil. A mil is approximately equal to four US pennies. We can always go down much further, because once you digitalize it you can take it to as many decimal points as you want. But we find that three decimal places works very, very well and it is something that people are very familiar with. We also operate in terms of ounces, we show you the weight of gold two ways, either in metric or in Troy. So regardless of whether you are European or British American, you will be familiar with what you have in terms of how much metal you own. And you can also report for you on internal purposes a reference currency. So if you have a specific weight of gold you can see when you log in to your holding what the value of gold would be in regard to your reference currency that you choose.

Chris Martenson:  Excellent. Well, I really want to thank you for today and I know that you have a lot of writing out there and other – you got your Fear Index and all of the wonderful work you are doing to help educate people. How do people follow you and how do they find out more about maybe your Fear Index and other things that you are sharing with the world?

James Turk:  Look at, we have got a big research section there. I contribute there as well as other people contributing there from time to time. I also have a number of videos where it is interviewed money managers and things like that that people find useful. And if you have specific topics like the fear index, just Google ‘Fear Index James Turk’ or just Google ‘James Turk’ and I am sure you are going to see some articles on the Fear Index and then they will just continue to other articles as well on the Fear Index so that is probably the best way to do it.

Chris Martenson:  Well, excellent. Thank you so much for your time today. This has been very helpful and I’m sure people will get a lot out of it, like I have. So thank you again, and it has been my pleasure. 

James Turk:  Thanks, Chris. It was a pleasure speaking with you.

Transcript for Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar (Part 1)

Below is the transcript to Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar:

Chris: Hello and welcome to another Chris podcast. I am your host and today we have the distinct privilege of talking with Bill Fleckenstein. Bill is the president of Fleckenstein Capital a money management firm based in Seattle. He writes a daily market wrap column for his subscription-based website as well as the popular column Contrarian Chronicles for MSN Money. Bill began writing a daily column on the Internet in 1996 - oh, those were the early days indeed - demonstrating a quite early adoption of the most transformative technology of our lifetime. And from his website we get these words, “Initially the market wrap was a daily recap of market events with an added “yes – but” emphasis. I quickly learned that the contrarian view point was often misrepresented and under reported. Since then my daily column has always called it like I see it. I have tried to write the column in a way that even a novice investor can understand. I believe it’s better to teach someone how to fish rather than just give them an occasional fish.”

He’s also the author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. A classic and a critical look and I think necessary look at the disastrous tenure of the man once lauded at the maestro. Welcome, Bill.

Bill: Hey Chris thanks for having me. Thanks for the glowing introduction.

Chris: Well it’s all deserved. Absolutely.

Bill: Thank you.

Chris: You know you were one of the very first that I’m aware of to voice concerns over the economy, the housing market, the great credit bubble - when virtually everybody else in the profession saw nothing but blue skies. When did you first become concerned and what specific things led you to what was then a contrarian point of view and I guess can now to be referred to as the correct point of view?

Bill: Well I learned early on in the money management business that if you can find the right ingredients on the other side of an argument, oftentimes you get a better risk/reward profile with an investment because you’re taking other the side of what are other people’s emotions. So the contrary investment strategy-type approach was something I adopted early in my career after reading one of David Dreman’s books called Psychology and the Stock Market back in 1979 or something. That kind of explained why it gives you a bit of an edge. It doesn’t make you “righter” it just means that if you’re right you're likely to get to get a bigger return. And more importantly if you’re wrong you’re likely to get hurt worse. In any case, as to when I started to really get concerned was a little bit on the early side and that being about 1996, I had never been a Greenspan fan and I had thought he was a proponent of ridiculously easy money and had nowhere near the acumen that people thought. And in 1996, I set up a short fund because I felt that his policy was going to lead to disaster and that people were going to get badly hurt. Needless to say I was about four years too early in coming to that conclusion. Little did I know that the policies and the ideas and the things that Greenspan did up to ’96 were just rounding errors relative to what he would do in the rest of his career. As the equity problem intensified it became more and more obvious it was going to end in a huge bust. I just didn’t know when, of course. And that’s the way manias are. You can’t know how high they’re going to go or how long they’re going to go. You just know they’re going to end in disaster. And then consequently they bailed out that bubble with the housing bubble and now we’re trying to print our way to prosperity.

The thing that Greenspan, Bernanke and all the proponents and fans of the Feds continually miss is – it’s the bubble that creates the nasty bust. The busts don’t happen in isolation. Much the same if you drink a quart of water and you get up in the morning, you’re not going to be hung over. But if you drink a quart of Vodka you will. And the Fed does not understand that and they continue to pursue the wrong policies to this day.

Chris: So do they really not understand? I understand being caught short once. Twice, and we’re starting to wonder about your mental faculties. Three or four times I mean – they’ve been serial bubble blowers for as long as I’ve been around in the investing world. What’s going on there? Do you have a unique insight to their culture? Is it their institution? What’s going on there?

Bill: Well, I think it’s a couple of different things. First of all, they believe in the infallibility of the Fed. I think it’s probably what draws you to the place and gets inculcated in your viewpoint. Bernanke has been very, very clear that – I’m not going to get his quote exactly right - but he said a few years back that Anna Schwartz and Milton Friedman were right and the Fed caused the Depression and he wasn’t going to let it happen again. Except that they all think the Fed caused the Depression by not pushing the right buttons after all hell broke loose. They do not understand that the reason we had the Depression was partly because of the easy money policies. You know, it was much harder to have easy money policies in those days because we were still on the gold standard, but nonetheless you could do that to some degree. And Benjamin Strong in ’26, ’27 and ’28 – they were trying to boost the economy. And the other thing people don’t understand is when you have a bubble it changes people’s attitudes and the way they behave. In the ‘20s they got leveraged up in bucket shops and we had lots of leverage. In both of our bubbles people abandoned good paying jobs to do something kooky and took on debt. So it’s not just the price action of the bubble that does the damage. It’s the way it modifies people’s behavior when you get misallocation of capital. And that’s part of why bubbles have such long clean up periods. So these guys don’t understand that. They simply do not and it’s not debatable that they don’t. Why they don’t, I can’t get into their heads that far, but they don’t. And thus, their policy response is the same thing. You got hungover by drinking too much alcohol – let’s give you some more.

Chris: Well you know, it’s mysterious to me though. It’s not a central banking defect, let’s be clear. During the housing bubble run up, the head of the New Zealand Central Bank was famous to me for noting that they were having a property price bubble – he called it as such, undertook policies to limit it because they saw asset inflation as a form of inflation. They saw bubbles developing. So this is, I think, something that was unique potentially to the Greenspan Fed and maybe that’s been continued along. But I remember being shocked: there was a paper that came out in 2007. It was from a couple of Fed staffers, very bright gentleman, PhDs both – and they basically asked the question “Is housing in a bubble?” and said “no”. And they’d compared it to income and all kinds of things. And I was just wondering - at that point in time I was one of the people that was writing pretty caustically about the housing bubble. - it seemed so obvious to me. How did they miss that?

Bill: That’s one of the things about bubbles and human nature is that they grow to the point where everyone thinks that it can’t possibly be a bubble. Hell, Greenspan made a speech and said real estate specifically couldn’t experience a bubble because it wasn’t fungible and you couldn’t arbitrage: Portland, Maine isn’t Portland, Oregon. They had a whole bunch of reasons all of which I debunked in my book, but it’s just – they start with a false premise, I believe, and that is "We can’t create a problem of this nature and thus it has to come about some other way." And let’s be clear: psychology has an important role to play. The individual has some culpability here. But when you have these back-to-back bubbles and you have the appearance of free money and people thought they learned a long lesson from the equity bubble they decided, “Oh geez, we shouldn’t have bought those crazy dot coms. We won’t do that again.” And then real estate came around and they didn’t realize anything; they just thought it was peculiar to the dot com stocks and they forgot all the other crazy things that they did. And then they did they did the same sorts of crazy things only this time they used leverage . How anyone could miss the real estate bubble, Chris, I don’t know. In fact, I think any supposed investment professional that did not see that coming and act to protect their clients shouldn’t be allowed to practice the art of managing money. I mean, how could you miss anything so huge?

Chris: Well you know: a flood of liquidity, bailouts, backstops, Greenspan puts, bubbles, all of that – it creates this overly-optimistic atmosphere, which you described using your words here: “Psychology gets deranged and nonsense passes for knowledge.” So I think we did have a lot of that derangement. The visible manifestation of that is we saw – “Okay, we can all identify the malinvestment in housing”: okay there are strip malls we shouldn’t have, maybe too many square feet of retail. We’ve got all these developments were maybe we shouldn’t have them. That’s all the obvious stuff. Can you talk to me about what’s unseen in a bubble? What else gets mispriced out there?

Bill: That’s a very good point. So behavior gets modified. So let’s say that your housing is always going to appreciate in price. You’ll always be able to take your money out, so you don’t really have to worry about saving money. And therefore you buy a third car, a ski boat, maybe a vacation spot – and you start to take more vacation. And everyone seems affluent so somebody else starts a business that walks dogs and plans parties. And there’s an incrementally extra number of restaurants and those people have employees and they get to go to things. So the knock-on effect and the piling up of jobs and things like that that really wouldn’t exist were it not for the bubble is why the job creation mechanism - we haven’t been able to really create any this time - because we had a illusionary economic recovery last time in that it was fueled by debt and equity extraction and the creation of jobs that would never exist but in a fairy-tale-like economic environment. So those are some of the things that occurred and they’re not readily obvious, but if you stop and think about it for a second and say, “Oh gee that makes sense.” So those are some of the consequences of having a bubble. In my view I have always believed that to call something a ‘bubble’ you really need that market to get so crazy that people modify their behavior such as I just described. In the equity bubble people quit jobs to day trade and do other things. The word ‘bubble’ gets tossed around all the time now. Bonds are a bubble, gold’s a bubble. This is not true. It’s the people – and the people that are using the word are the ones who tend to be the people who missed the really big bubbles. They say that pejoratively because the big price gains are in commodities and they don’t like that fact. It doesn’t fit with their bullishness on paper assets. That’s part of the reason why I think they say that.

Chris: Right. So a bubble then is technically something I’m not personally invested in.

Bill: Exactly, exactly.

Chris: I understand. I think I’ve seen that quite a bit. I’ll tell you – one of the things that I’ve been noticing looking across the world of investments is just how frighteningly correlated everything has become. I mean, especially for people who are looking for safe harbor. You want to have some money that you can put in places where it’s not all going to go up or down in the same stroke. Unless you’re playing the short side, it really feels like most of the risk assets out there are highly positively correlated. They’re trading off of dollar/Yen/Euro. They’re trading off of paper, flicking around kind of maddeningly. Where do you fall in that? I mean – those are my thoughts. I would say investing is out. I think we’re speculating. So what do you think?

Bill: I would agree with you. I think most investment specialists would agree that there seems to be – well in fact, Jim Bianco of Bianco Research was here in town and he and I had dinner. And he had done some research and it is actually a fact that the correlation between the average stock and the market is at the highest it’s been in about sixty years. It kind of fluctuates between twenty, twenty-five percent of the return is correlated with the market, and say eighty percent now. And so it’s very, very high now. I can’t say exactly why that is. My sort of lame answer is in a money printing environment – who knows what sort of relationships will take hold especially when you’re printing money as brazenly as we are now or have been and still are? The other part of it probably has something to do with the proliferation of quantitative investment techniques – computer-driven this, that, and the other thing - some combination of the two. I don’t think it’s a trend that will be with us forever. I think it’s a mindless thing that will end in tears and a debacle. Sort of like the flash crash with maybe a wake up call. I wouldn’t be a bit surprised to some variation on that theme again somewhere down the road. Don’t know when. Don’t know what would cause it, but I think it’s probably a high probability we would see something like that again.

Chris: Well that high frequency trading possibly being the culprit for that flash crash – I’ve been really disturbed with what I’ve seen. Not just in the HFT algos that are outrunning and doing these little penny pinching routines in front of all the orders, but the fact that the SEC has chosen to essentially look the other way. They need to gather information. They’re not really biting down on it. As far as I read the rules and laws – as far as I understand – maybe this is incorrect  - but it’s kind of not legal to put a quote in that you have no intention of filling. And so these guys are trading on non-public information using quote streams that seem to bend the rules, if not break them.

Bill: Yes. I haven’t really paid close attention to the gory details because I don’t care that much. But it doesn’t seem quite right. Having said that, about the SEC: they were sound asleep at the switch for a very long time. Post the 2008 catastrophe – finally, they seem to be getting after all manners of things, so perhaps they’ll address that. They have a pretty full plate I think and I’m glad they’ve finally woken up. I hope they don’t take it too far and create witch hunts. But basically it was almost as if we had no SEC for fifteen years so things got really carried away and I don’t really understand this whole purpose of high frequency trading. To me it seems like portfolio insurance did. Can’t possibly work in the end, but in the meantime it all it seems to. And I look at all of these high frequency quant trading strategies as something that will work for a moment in time – or appear to work for a moment in time - but won’t over time.

Chris: Yeah it feels like it’s not really a strategy that adds a whole lot of value to the situation. In fact, it just scoops money off the trades. I think the ultimate payees on that are probably the pension funds and the retail investors and other people who are getting front run.

Bill:  Well either that or the HFT guys all picking each other’s pockets - who knows?

Chris: Yeah that could be true too. All right, so let me shift back to the Fed a second. It feels like a lot of what we’re expecting about the future hinges on us sort of tossing a coin and guessing what the Fed’s going to do next. Luckily we know what they’re going to do for the next six to seven months and that is they’re going to monetize a hundred percent of all new incremental federal debt. Can they keep doing that? I’ve been surprised that they’ve been able to get away with it this long without the world rebelling, but they have. And our custody account keeps growing by leaps and bounds. So where do you see this going? How long can this go on?

Bill: You know, Chris, I wish I knew. I am just like you. I know it can’t go on forever. I’m a little surprised that we’ve been able to continue along this path as far as we have. And I don’t really know when it will stop – and it will stop. And I expect at some point the bond market or the currency market will revolt and we’ll have a weak dollar and bond rates will back up despite what the Fed wants. My nickname for that is the funding crisis – kind of like what the Greeks went through, but on a slightly different scale and for slightly different reasons. A lot of people may not know this, but in the late seventies we were forced to issue a bit of debt in yen and also in deutschemarks. I wouldn’t be a bit surprised if we get to that point. I mean – there’s obviously no way that you can print your way to prosperity like we’re trying to do. It’s mind-boggling that so many people seem to think that it’s okay and it’s going to work and the Fed is ever going to exit any of these strategies.

So – I mean, it’s similarly mind-boggling that people discuss deflation when you look at the prices of most everything with the exception of housing really – increasing in price. And yet, people still talk about deflation as though it was an imminent threat. But we saw in the housing bubble – people were delusional for years – same with the equity bubble. The collective crowd – once they get a silly idea in their head - seem capable of rationalizing it for a very long time. And thus, we just can’t know. I think we can know with the same degree of certainty that the equity bubble would burst and be a big problem, and that the real estate bubble would burst and be a big problem. This printing money is going to lead to huge trouble. It’s going to lead to higher interest rates. It’s going to lead to more inflation and at some point there is going to be a train wreck an the currency and the bond market, I think.

Chris: Right. So how did Herb Stein put it?

Bill: If something can’t continue it won’t? Except he forgot to say to say, “But it might go on a hell of a lot longer than you think possible.”

Chris: Which is absolutely true. I’ve been absolutely shocked watching. If you took me three years ago and said, “Chris is there any chance that the Fed could – and then you showed me a mock up of their current balance sheet - I would have said no way, no way, not a chance. The dollar is going to be toast.

Bill: And that. was my thought. At the end of the equity bubble if we had talked about it I would have said, “Well gosh take me here back here in time.” I would have said it couldn’t go here. But what was really surprising even more so was how long the real estate/credit bubble continued on. And I used to keep wondering who the suckers were that were buying all this bad paper. Little did I know it was Merrill and Lehman and all the big banks and brokerage houses buying this ridiculously worthless paper simply because the rating agencies were dumb enough to think housing prices would always go up.

Chris: These are the smartest guys in the room you’re talking about.

Bill: Yeah, those guys.

Chris: Those guys, right. I remember I was in the uncomfortable position at one point of being short a mortgage insurer at the same time that Merrill was buying it. We saw things very differently.

Bill: Yeah. I was short them also when that occurred. And it was just madness. It was utter madness. I mean – and so, but if you look back then you know what you knew, which is why you were short those things. And then you saw Merrill buying them. You think about the disconnect that had to take place. That was really monstrous. So for the currency markets to be a little slow on the uptake to get after disciplining the Fed and all that is not surprising given the level of disconnect before that got overlooked, if you see what I mean. And I think also one thing that has helped the dollar is: there’s a lot of people that think the Euro is binary in that they might wake up one morning and it might not exist or some variation of that theme. I don’t think that is going to be the outcome. But they’re probably going to up the size of the bailouts to get all the pigs at the trough past this point. Well if people can conclude the Euro won’t cease to exist or will exist in a way that is similar to what it is now then you can start to restart the race to the bottom between these two pieces of paper, i.e. the Euro and the dollar. And I think that just because of the way they are in Europe and the fact that they’ve got different countries not wanting to do this, but being dragged into it – they are being more disciplined. So if we just said okay, “Which one of these two currencies is going to race to the bottom the fastest”, I think would be the dollar. But what gets the dollar bid up is people say, “Well, God, the Euro might not exist.” So once we get past that point in time, Chris, then we might have to start thinking about, “Okay maybe the dollar is really going to come under pressure.” That’s my theory. I don’t know if it will work out that way.

Chris: It might not. I share that theory. I’ve heard a lot of people talk about currencies and relative positions. So they – I think it boils down to this statement: the dollar is the best horse in the glue factory. And so they’re looking at the relative proportions and where you want to be. But on an absolute basis it’s pretty clear that the United States is printing like crazy. And what’s been interesting to me is seeing that everybody fights their last battle. So deflation is ours – the thirties. We’re not doing the thirties again.

Bill: Exactly.

Chris: But what’s Germany fighting? Well they really don’t want to repeat the thirties as well. . . 

Bill: Exactly.

Chris: . . .but from an inflationary standpoint. So they’re going to fight that battle. And that’s just going to continue to increase the strain and the stress across those two relative currencies until I think people are going to see the absolute difference between them, which is, “Gosh, one is being created in unlimited quantities. And this other one is being managed – if you want to put. . .

Bill: Right.

Chris:  . . .value term on it: maybe more sanely or rationally.

Bill: Well, I think that’s exactly right. And the perversity of it all is we get rewarded for using a printing press rather quickly and we believe we don’t have to make many changes. Europe is struggling to fix things and raise retirement ages and all that sort of stuff and yet they get penalized. So I totally agree with you. It’s that German mentality versus our mentality. And in the end if the Euro doesn’t facture, which I don’t think that it will, then the race to the bottom is going to won by the dollar, which at some point is going to cause a huge problem.

Chris: Well on that note what I want to do is draw this portion of the podcast to a close and thank you very much for your participation and note that we’re going to continue this conversation in an area for enrolled members because I really want to find out how does that play out and what would that look like knowing that timing is unknowable, but I think that if we at least understand what the breadcrumbs are that we’re going to be looking out for and what you’re looking out for in particular in your head would be a fascinating conversation.

Bill: Great.

In Part 2: Outlook for 2011 (for enrolled members - click here to enroll), Bill gets specific about what he predicts will happen in the bond and currency markets, as well as his specific outlook for 2011. 



William Fleckenstein is author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve and the president of Seattle-based Fleckenstein Capital. He also writes a daily Market Rap column and a weekly Contrarian Chronicles column and has his own website. In 1980, he left the computer business to become a stockbroker. He founded a money management firm in 1982, and has been bullish (and bearish) on almost every industry group, commodity, and asset class at one time or another during his investment career. His time horizon as an investor is long-term (three to five years).

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