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where to find on the website... part 2 of the audio podcasts for enrolled members

I just enrolled and am trying to find the "part 2's" of the audio podcasts for members only.  If they are here somewhere on the site, it is not easy to find.  appreciate some help with this

Transcript for Charles Biderman

This is the transcript for the podcast Charles Biderman: The Problem with Rigged Markets

Chris Martenson: Welcome to another Chris Martenson.com podcast. I am your host of course, Chris Martenson. The issue before us as investors are as daunting today as they can possibly be. And my position has been that today, we are all speculators, not investors. Because we have been placed in the uncomfortable position of trying to guess what the Central Banks are going to do next. Also weighing on investors today is the fact that our official data is what I call fuzzy. That is, it is often statistically massaged to make things look a little bit rosier than they otherwise might. To help us sort through both of these investment challenges, is Charles Biderman, Founder and Chief Executive Officer of TrimTabs Investment Research, an independent investment research firm based in Sausalito, California. He is routinely interviewed on all the big financial media, and is someone I follow quite closely because his approach is to follow the base data and let that tell the story. Founded in 1990, TrimTabs Investment Research is the leading independent institutional research firm, focused on the supply and demand of shares and stock and money available for investment, that base data, I really want to get to that today. Welcome Charles, it is a real pleasure to have you as a guest today.

Charles Biderman: Well, good to be with you.

Chris Martenson: Thanks. Hey let us begin with your background so the people can appreciate first the depth of your knowledge and experience, and then why it is, that you follow the fundamental data sources that you do.

Charles Biderman: You mean you want me to fess up that I am really very old.

Chris Martenson: If that is how you want to approach it, sure.

Charles Biderman: Well my first job after graduating Harvard business school was not what everybody does. I became Alan Abelson’s Assistant at “Barron’s Financial Weekly.”

Chris Martenson: Hmm

Charles Biderman: And so as the terrific post graduate education in how the markets really work, and from there I ended up having to become an entrepreneur because Harvard wanted me to repay my student loans at the time, which you could not do on a journalist salary.

Chris Martenson: They did

Charles Biderman: So I actually had been predicting a collapsed in the REITS market in the early 1970’s so all the money had gone in and then a huge amount of construction and interest rates in 1973 went from 7% to 20% as the first energy price shock hit, and oil prices went from $3.00 a barrel to $30.00. And so I participated in the collapse of the Real Estate Market and then bought bunches of properties, six shopping centers, a thousand apartments, two office buildings out of foreclosure in the south when I was in my late twenties. And I moved back to New York, whatever, ended up going broke in ’87, when the real estate market, I had reinvested, sold most of the south, reinvested in Jersey, and when the REITS and the banks collapsed, the S&L’s collapsed, I mean in ’87 my banks went under. I had a positive net worth but I was forced to declare bankruptcy. And I realized that price as a function of liquidity having nothing to do with value. And I was not foreclosed on, and I could have sold my properties for a nice profit but my banks went under and the banks, and all the loans were called. So using that background, I decided to look at the market based on supply and demand and realized no one had ever been looking at the stock market in terms of well there is not a market, it is shares of stock, and there is money available to buy those shares. And so that is what we have been tracking ever since.

Chris Martenson: Well, I like that idea a lot, that price is a function of liquidity, not fundamental value. So let us move now to some of that data and what it is telling us. And that might be different from what, both I guess, two things I want to track today if we have the time. One is how our official unemployment numbers maybe are tracking differently from the based tax data. But for now, I would like to start with what stocks are signaling. Hey they are just 10% away from their all time highs. We are looking at that, is this truth or fiction.

Charles Biderman: Well, it, if the Fed and the other global central banks had not created ten trillion dollars of paper money in the last, since ’09, we would not be talking about a stock market 10% below the all time high. Since last October, last six months, the value of all stocks is up like almost four trillion dollars. And since last October, the increase in take home pay for everybody who pays taxes on a job, is up maybe 200 billion, at a 200 billion annual rate of increase. So we are talking about a huge increase in wealth, only for people who own stocks. And why did that happen, we the Fed pumped huge amounts of money into the economy, companies ended up with huge amount of cash on their balance sheets, and starting in August, they have been spending huge amounts of money, billion eight a day net of all new share sales, buying back their own shares. In other words they are reducing the number of shares out there, giving shareholders cash for their holdings, and so shareholders, 80% of the Russell 1,000, the largest companies, are held by institutions. And those institutions typically have 3% cash so if someone buys back their shares, they have to replace those shares, so there is more money chasing fewer shares. So supply and demand, more money chasing for your shares, the price of the remaining shares should go up.

Chris Martenson: So many of these companies have been tapping the capital markets as well for debt, obviously generational interest rate lows, so they have had access to this liquidity which is coming through the Fed. What did you say, a billion eight a day?

Charles Biderman: A billion eight a day since August.

Chris Martenson: Wow, where had the retail investor been in this story?

Charles Biderman: Taking their money out and spending it probably on living.

Chris Martenson: And what, how does those money flows track, how do they compare.

Charles Biderman: Well we see out flows of U.S. Equity Mutual Funds. I was just talking before we spoke with Bob Pisani from CNBC, him wanting to know, when are individuals coming back. I said well, they came back in the first quarter of last year and then got slammed as the market sold off in April. Last year the market was up over 10% the first four months and then got slammed, this year the market is up over 10% and individuals are saying, hey I have seen this movie already, I do not want, this sequel is not appealing to them.

Chris Martenson: Well in the work I do, I get to interact with a lot of people who are investors and they have, there is a fundamental lack of faith out there. There is actually more than that, there is fear. There is concern that the markets are rigged in some important ways, that there is asymmetry of information that the computerized bots, what ever it is that is going on out there, maybe that the regulators are not really watching out for everybody with equal interest. Whatever the source of fear is, I know a lot of people have lost faith in the markets, but not the institutions apparently and not the companies who are buying back shares, huh?

Charles Biderman: Well the market is rigged. I mean in January of ’10, I went on CNBC and on Bloomberg, that there is no money coming into stocks, and yet the stock market keeps going up. The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares. There is no other way in aggregate that that could happen. So I said it has to be coming from the government. And everybody thought I was a lunatic, conspiracy theorist, whatever. And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.

Chris Martenson: Uh-huh

Charles Biderman: And if I remember correctly, equities are an asset, and bonds are an asset. So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing, or not growing very fast or growing roughly at the rate of inflation, and I am talking about wages and salaries, I totally ignored GDP because it is a ridiculous number if anybody looked at it. And the only reason everybody uses it is because everybody does not understand what they are talking about, and no one wants to do the work to understand that GDP is a useless indicator. So we look at wages and salaries, real time income, to me is the best indicator of income.

Chris Martenson: What a preposterous notion, but since we are there, what are wages and salaries telling us right now?

Charles Biderman: Wage and salaries are growing at between a half, you know, under 1% faster than inflation. Wages and salaries, and our most recent data, like 3.5%, 3.7%, in that range, and inflation is whatever, 2.93%, pick a number. So if nominal wages and salaries for everybody who has a withholding, who has income taxes and employment taxes withheld from their paychecks, which is all 132 million people on the payroll, included in the payroll survey by the BLS, and emphasis on the word survey, that wages and salaries are barely growing. In reality, we are at about at $6.3 trillion after tax income for everybody. While that is up from $5.9 trillion at the annual rate of the early 2009 low, it is still well below the $7.1 trillion peak. In ’07, $7.1 trillion take home pay for everybody who pays taxes and the gap between the two right now is still a capital gains have disappeared as the real estate market disappears. And you know, the bureau of economic analysis does not include capital gains in their income data, because it is only dirty capitalists who have capital gains I guess, I do not know.

Chris Martenson: Uh-huh alright so, in this…

Charles Biderman: I do not know why they do not include it.

Chris Martenson: Alright well we do not include the increase in debt when subtract that off of our GDP, so I do not know, maybe we just ignore very big things sometimes.

Charles Biderman: Well they use that bogey again, GDP.

Chris Martenson: Yeah, I know, with the fourth quarter deflator at .8% I was, that was all I need to know about that number. It just, obviously very far off of my personal experience, but also what I think a lot of very solid inflation data is coming to us through the companies that actually have to buy things and report their cost of goods sold. It is, we are seeing some extraordinary inflation, especially on the commodity exposed companies out there, you know, double digit, 10%, 11% kind of stuff, it is amazing.

Charles Biderman: Yeah, well you know, if you think about it, the dollars being debased by the printing of hundred you know, U.S. Government is spending $300 billion a month on everything. It pays bills, salaries, it collects $200 billion a month in taxes and everything else and it borrows $100 billion a month. But it does not really borrow $100 billion a month, because the $100 billion is added to the debt. It prints $100 billion and calls that debt.

Chris Martenson: Uh-huh

Charles Biderman: And then, you know, I would like to be able to run my business by printing money to pay my bills, a third of them, that would be good.

Chris Martenson: I would too, I would too. So in their collection, you mentioned the $200 billion a month that is coming in, talk to me very quickly if you could talk to us about the tax receipts and what those are signalling. And can we compare those to the unemployment figures that have been released.

Charles Biderman: Well the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Department of Census, use 1960 technology, surveys of the present compared to hard data from the past. The same way they have done this for 40 years, to determine income, sales, consumer discretionary spending, the savings rate, all those numbers are fudgy at best, to use your phrase. Since they ignore real time data like they do, the bureau of labor statistics does a survey of 400,000 employers, of which say 70%, only 70% is backed by the time they report the number of jobs for the month. And they true that survey to hard data that comes from state quarterly unemployment insurance collections, which is a quarterly number that gets to the BLS. The soonest is five months from the end of a certain quarter. Five months later, the BLS gets the valid number and then it benchmarks the past to that data. So in other words, the real numbers that they use is just a survey, and it can get 50% to 100% modified with, nine months, a year later and nobody even realizes or even, those numbers are pretty much ignored, but everybody focuses on their initial guesstimate, which even they say is not meant to be considered a real number.

Nevertheless, the Wall Street Journal says oh, 200,000 jobs have been created, like that is the truth, and not even that it is a seasonally adjusted number, which is another chance for mischief. Because to do seasonal adjustments, you have to, you know, why do you not use year over year numbers and forget seasonal adjustments, and why do you not use, and so, I am sorry, I am going all over the place. But to go back to the wages and salaries we track, when anybody who is on a job that gets a W-2, when the amount of income and employment taxes are withheld from our paychecks, it gets wired to the treasury from our banks. And when that money gets wired to the treasury, they report how much they collected. And so we track that data to report in the daily treasury statement with a lot of other daily treasury activity. However, embedded in that income and employment tax, collection package is how many people were working, what was gross pay, what was take home pay

Chris Martenson: Uh-huh

Charles Biderman: And by zip code, and by industry classification. So you have this huge amount of real time data on what is really going on in the economy, available, but ignored. And when I have been, for six years I have been saying, why do you ignore this, and their answer pretty much is mind your own business, we do not care what you think, and this is the way we have been doing it. And we like our paychecks, thank you very much.

Chris Martenson: So this data though, I love the idea of real time data, are there flaws in this, what are the wrinkles in this data set or are these wrinkle…

Charles Biderman: Well there is a lot, it is a survey.

Chris Martenson: No, no, no, not the BLS one, but in the daily treasury statement, the W-2 flows.

Charles Biderman: Well it has to be, we only get what the actual amount withheld. There are three reasons why the amount withheld, year over year would change. One is, that the people with jobs made more money so the amount of withholding goes up. Two, the people with jobs might have changed brackets because they made more money and so they are at a higher bracket, that is called bracket creep. Three, there might be more employees or less employees as people get hired and fired. So each month, on average, 4,000,000 people enter and leave the job market. In other words, on average, four people are fired, 4,000,000 people are fired, 4,000,000 are hired, and then in January and February, there are huge seasonal adjustments because of the weather. And so based upon like 1.7 million seasonal adjustment adds, in other words, there is, according to the geniuses at the bureau of labor statistics, they add a 1.7 million phantom jobs to those people working in February to balance, to make it like a level number with the rest of the year. And why 1.7 million, well based on the past, that is our best guess. And the fact that the weather was so great this winter, that does not, they will factor that in next year where in the numbers will be worse, whatever.

Chris Martenson: Uh-huh, so on the one—

Charles Biderman: Does that make sense what I am saying?

Chris Martenson: --absolutely, so on the one hand we have this survey which is seasonally adjusted on top of that, and on the other hand we have this base data, which might change for a number of reasons, bracket creep, people might actually be earning more in that case, or hiring/firing, things like that. But generally speaking we have these two things that we can compare. One is a survey that is adjusted, and the other is this W-2 income flow statement stuff that comes through the daily treasury statement. What is that data telling us right now?

Charles Biderman:  Well, that the economy is limping along, it is barely growing, and if it was not for levitating equity and very low bond prices it probably would be even slower than it is. So in reality, all it looks to me what this $100 billion creation of new money a month, has been creating $200 billion a year increase in take home pay. Now, is that not weird, $100 billion, it takes $100 a month of newly created paper to boost take home pay by or a trillion deficit this year is going to be a $1.3 trillion I think is the current estimate.

Chris Martenson: Uh-huh

Charles Biderman: And it takes $1.3 trillion of newly created money to boost take home pay by $200 billion? What is wrong with this.

Chris Martenson: There is some sort of hole in the boat I guess.

Charles Biderman: You know, and if they stop the deficits, or and then now they want to increase taxes next year by about $200 billion to plug the deficit so wait a second. So incomes are up by $200 billion, and these smart people want to reduce incomes by $200 billion to raise taxes. And the stock market is within of 10% of all time highs, there is logic there isn’t there?

Chris Martenson: Well so this creates that growing sense of anxiety in the investor class, because obviously there is something that just does not quite add up here. And just to switch, open our view up just a tiny bit, jump across the pond for a second, is Europe fixed?

Charles Biderman: Well if by fixed you mean guaranteed to go down the toilet, yeah.

Chris Martenson: Okay,.

Charles Biderman: Yeah, Europe is the problem, I mean and Greece, the numbers I have read, doing some Google, is that of the little over 11 million Greeks still left who have not immigrated, close to 3 million are retired, and half of everybody else work for the government.

Chris Martenson: And of course with the austerity they are talking about slashing pensions and squeezing government salaries and thing.

Charles Biderman: And in Spain and Portugal, half the teenage, half the people under 25 apparently are unemployed. And what does that say for the future stability of that region.

Chris Martenson: Well, a generation lost, I do not know if that is a good thing or not. You know, my prescription on all of this, years ago, was that we suffered from something I can summarize in three words, which was too much debt. And this is a decades long phenomenon that this could build up.

Charles Biderman: Well I do not think it is really too much debt, I think it is the fundamental belief that government can be effective at providing cradle to grave, or even any services for its people. And all, even at that, name me one activity that government has ever been cost effective at providing one service. I mean the Post Office, fighting a war, look at these horrible tragedies, thousands, hundreds of thousands of people are being killed because this government thinks it knows how to fight wars.

Chris Martenson: Uh-huh well so when I say too much debt, what I mean is, well I do think an aggregator was too high, but I was watching our economy both at the private and the public levels, increasing its debt loads at a faster rate than nominal GDP growth, if we wanted to use that bogey right there. But however we track national income, we are increasing our debts faster than our income was increasing, and that is a math problem. Sooner or later that thing runs out of steam. And it was not just the U.S., it turns out a lot of Europe was doing that and Japan was a poster child for that. And it seems to be a phenomenon that is quite easy to fall into at the national, even the global level.  

Charles Biderman: Well I do not disagree with the facts as you state them, but if you go back to why, if you go back to like starting in ’82, when the IBM PC or the personal computer first showed up, through ’07 you had a period of very rapid economic growth globally, and incomes grew very rapidly. You know you had PC, the internet, broadband, all that stuff. So when incomes grow rapidly, people take on more debt because oh look, my income is going up, I can borrow more. So you take on more debt and then all of a sudden, incomes crash and you have taken on all this debt because we kept assuming that our incomes would grow so we could handle the debt service. But the problem with assuming incomes are going to keep growing, if they stop growing, you are broke.

Chris Martenson: Uh-huh, well sooner or later you are going to have a slowdown, right, that is…

Charles Biderman: Yes, so that is my point, my point is it is not just income growth by itself, but it was income growth, I mean debt growth supported by rapid income growth. But then the income growth disappeared.

Chris Martenson: Yeah, so let us pretend I am an investor, which I happen to be. What does an investor do in this market, particularly if they have kind of, I have lost faith in a number of dimensions, one that our official data is telling me useful things that I can trust. And the second would be that the markets are operating in a fundamentally fair way, meaning you know where I lost it, was when I watched the big banks turn in 100% win ratios off of their trading desks, for whole quarters. Anything that has even the slightest bit of risk in it, you cannot have 100% win ratio in it, it is statistically off the charts.

Charles Biderman: Unless the market is rigged. 

Chris Martenson: Unless the market is rigged. So I could go on, I have many other data points that suggest rigging is happening, so if we take that as an opening proposition, that the Fed is basically saying listen, we are going to do whatever it takes to get higher asset prices. Should an investor just say okay, I am along for the ride and follow, or how does somebody protect themselves against what seems to be a very, very risky proposition. If the Fed either succeed or fails at this, and if they fail, it is easy to conjure up some fairly dark scenarios for wealth destruction I think.

Charles Biderman: Well, we are going to be starting a retail newsletter where we are going to sell, I am going to sell my $10 a week, $9.99. What is Charles Biderman buying, selling, and thinking about the market. And so, if this were that, and the preamble to all of this is right now, well you have a situation where in reality the economy is not growing very fast but the government, but money is, paper money is, so a third of my assets are in gold and a small percentage of that in Silver, but mostly gold. And then given all that money printing, has to end up in inflation at some point in time. I have about a third of my assets in inflation-protected securities. And then since companies are shrinking the float, we started a fund called Trim Tabs Float Shrink ETF, traded on the New York Stock Exchange, ticker symbol TTFS, and it invested in 100 companies that are shrinking the trading float the most, and growing free cash flow and not borrowing to buy. So the average company in our portfolio is growing free cash flow at 11% a year, shrinking the trading float by 6.5% on an annualized basis, and while maintaining strong balance sheet. So we believe that the price of the share should go up by, in my opinion by 6% a year, even without more than the market, simply because those companies, the value of those companies, has not been diminished by the float shrink, if that makes any sense.

Chris Martenson: It does.

Charles Biderman: So I would dollar, if you are a long term investor, and I think that we are three to five years from the market bottoming, but I would still recommend buying stock if you have longer than a five time horizon on a monthly basis. And that is the type of equity exposure I would want. I also own some apple and some salesforce.com. Apple because you know the social media trends use it, everybody is using Apple, and salesforce.com is the most effective cloud participant. And those are two big growth areas, because I think the globe is going to continue to expand economically, but it has got this albatross of government created messes around our necks.

Chris Martenson: Uh-huh

Charles Biderman: And so I think I would have, I still have, even though I have a big loss, I have a small position and shorting the big banks. Shorting Europe and shorting the emerging markets, but totaling my 15% of my portfolio. So I am a little bit leveraged and the leverage is short, which I am losing money on but I am also making money on the other stuff.

Chris Martenson: Right, so that is your hedge in essence.

Charles Biderman: Yeah, I think at some point, when companies stop buying back shares and start selling more than they are buying, the market is going to crack regardless what the Fed does, at least initially.

Chris Martenson: Uh-huh

Charles Biderman: And so I just want to have some shorts in the water just in case I want to increase my exposure.

Chris Martenson: Okay, big macro question then, because a big exogenous risk here is that the U.S. Government has to fund $1.3 trillion a year, the Fed has been enabling that with their liquidity. Do you see anything out there that could force the hand of the Fed and the Federal Government, meaning is there any circumstance you can imagine, coming in the next year, where the wanted bond market could rebel. But what I really mean is that foreign participation in our bond markets would dry up and there would be some set of pressures that would prevent the Fed from doing QE3, QE4, QE5, whatever is necessary. Is there anything you could see that could create that kind of a risk. Because I still note that roughly 10% of our current GDP is deficit spending by the federal government. Maybe 8% I guess if I am being a little bit more accurate. But it is a pretty high number. Do you see anything that could possibly upset that gravy train as a real risk?

Charles Biderman: Yes, I think it will be, at some point the world is going to recognize the Emperor is naked. The only question is when, will it be this year, I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive. And I just do not see it happening soon. However at some point, hard money wins out over phony money. And of the investor class or the capital, those with capital, which right now seems to be the emerging markets, they are buying gold and bouillon and they are not buying dollars. Or China appears to have slowed their buying of dollars, even though China might be having their own growth problems, or their own bad debt problems. But Singapore and all those other countries with huge cash flows, the emerging world, I would not be surprised maybe by 2013 of 2014 a non-US Dollar alternative currency by those countries might, you know, something will happen.

Chris Martenson: Uh-huh so you know, a market that is fundamentally running on fumes or in this case liquidity, which you call the funny money coming out, this is not a market my grandfather would recognize at all.

Charles Biderman: This is a totally unique market, we have never before had a market officially rigged. And acknowledge as such, and what is amazing to me is when you watch CNBC or even or Bloomberg TV and these guys come on bullish, the look at PE. Well the PE from or, when was the last, what was the PE the last time the market was rigged.

Chris Martenson: Hmm, we do not know, do we?

Charles Biderman: And what happens when the market is un-rigged.

Chris Martenson: Right.

Charles Biderman: You know, we are in strange, un-charted territory. You know the last thing I want to say, that I think is very important for people to realize, in 1981, before the market crossed 1,000, the Dow crossed 1,000 in early ’82, and stayed above that, the value of all U.S. Stocks was about $800 billion. And in October of ’07, it peaked at $22 point something trillion. And it is back up to $19.4 trillion. So in 1981, there was maybe 100 hedge funds or less, I am sure less. And maybe 100 or so equity mutual funds. And 3,000 stocks, you know, institutional size and sorts back then. Now there is still 3,000 stocks, but there is 4,500 equity mutual funds, 10,000 hedge funds. The real wealth created in the last 30 years has been in the equity market, not in earnings. I mean earnings are up several times, yeah, four or five times, take home pay is up, but the market is up 19-20 times.

Chris Martenson: Yep, on the back of all those boomers entering their peak earning years and pushing all that money into equity markets was one force.

Charles Biderman: Yeah, and we had technology breakthroughs.

Chris Martenson: Uh-huh

Charles Biderman: You know, the internet, broadband. Broadband, you know more people in the last 30 years have gone from calorie insufficiency to calorie sufficiency as a percentage of the population than going back to the first time we industrialized in the 19th century. So it is like this huge increase in wealth and calories and our goal across the globe, all that money went, a lot of that money went into the real estate markets and went into the equity markets, and boosted home prices, and stock prices dramatically, and now it is unwinding. All booms create excesses and excesses are painful as the excesses from the boom are worked off and worked out. And that is the process we are in, and in the past it has taken 13 to 17 years to work off those excesses. And we are still not even through year five.

Chris Martenson: Well in the past I think we also allowed some of that creative destruction to happen and this time we are fighting that tooth and nail and so…

Charles Biderman: Yeah well you cannot fight that forever.

Chris Martenson: Right, cannot fight that forever. So as a final question then. I am wondering, it feels like we are kind of, at least when it comes to deficit spending and then also with the QE efforts and the central balance sheet expansion of the Central Banks, that we are on a treadmill I do not know how we get off of. So the question is, if the Central Banks were going to get us back on a right path, what would they be doing that are not doing right now?

Charles Biderman: Well, they would have cut mark to market early on, and kept reserve currency at a dollar and kept the financial markets going, but let the big banks go bust. And then if the top five had gone under, then the next five would now be the, be the big banks. And the real estate market would have recovered. You have got to mark to market the bad stuff. We have been reluctant, like Japan, which still has not mark to market from its 1990 debacle. We are refusing to mark to market so when you maintain phoney levels, you restrict overall growth and you harm the overall economy. But you save the jobs of the big bankers and the politicians who created the messes. And so that is where we are at, the only people benefiting are equity holders and it is temporary as well as the big banks. And at some point, you know, gravity does work eventually. Even Wile E. Coyote had to come back to earth sooner or later. For those of you who are old enough to remember that cartoon character.

Chris Martenson: Everybody knows Wile E. Coyote, I hope, no matter how old they are. What you are saying then, is that you think we are going to perpetuate the status quo until there is some sort of a forcing function, gravity in this case of some kind, right.

Charles Biderman: Yes

Chris Martenson: Okay well this has been a very fascinating insightful and actually very pleasurable interview for me. And I am hoping we can do it again sometime. How do people follow your work and in particular find out about this new newsletter that sounds real intriguing.  

Charles Biderman: TrimTabs.com/blog is our blog site. I do a video three or four days a week and there is other stuff on our blog site, including access to our ETF for more information. And we will be posting information about the new market letter sometime in the next month.

Chris Martenson: Well fantastic, I am looking forward to that personally, and this has been very interesting and I am thankful that you look at the data the way you do and make it available to all of us.

Charles Biderman: You are welcome.

 

Transcript for Gretchen Morgenson

This is the transcript for the podcast Gretchen Morgenson: Wall Street Really Does Enjoy A Different Set of Rules Than The Rest of Us

Chris Martenson: Welcome to another PeakProsperity.com podcast. I am your host of course, Chris Martenson. Today we have the pleasure of speaking with one of the most well respected financial editors and journalists of our time, Gretchen Morgenson. Many of you know Gretchen from her Pulitzer Prize winning work at the New York Times in which she has written cutting exposes of the corrosive conflicts of interest on Wall Street as well as the reckless practices that led to the 2008 correction and its aftermath. I am looking forward to discussing with her how concerned we should still be about the stability of our financial system; what likely lies ahead and what solutions and safeguards a concerned society should be demanding most at this stage.

Gretchen it is a true honor to have you with us today.

Gretchen Morgenson: Well thank you for the invitation Chris, I am happy to be with you.

Chris Martenson: Well fantastic. You know to this observer, in 2008 the Federal Reserve and the Treasury Department scanned the wreckage of their failed policies and regulatory indifference and entered a form of triage. Only able to save one class of patient, they chose the big banks and other well-connected financial institutions and threw another class of patients under the bus. Those other patients represented savers and the prudent, retirees, pension funds, seemingly anyone who was prudent in perhaps knew how to defer gratification were asked to pay up in the form of negative real interest rates to help get the big banks, not only back in the black, but in a position to hand themselves record bonuses. At least that is how it appeared to me and continues to appear to me today. I think I represent a fair proportion of society. How do you see this?

Gretchen Morgenson: Well you could not have put it more succinctly Chris. Honestly the transfer of wealth that has been created, that has been taken from the saver and from the taxpayer do not forget to “mend the financial system” or to keep it from falling off the cliff is extraordinary. When you talked about savers, these are the people as you point out that really had nothing to do with the crisis. They were in fact, doing the right thing, not buying more house than they could afford, putting away money for college education, etcetera. They are the ones who are really paying the price now. I think that has led to a very angry populous but also a sense that there are two sets of rules in the country that one set applies to big and powerful institutions that when they go awry are rescued quickly. Then there is another set of rules for the rest of us who do what we are asked to do, do what we are supposed to do and really then become victims of the situation. It is very unfortunate and I think it is as you say corrosive.

Chris Martenson: You mention that there are different sets of financial rules apparently. I would like to talk about another set of apparently two sets of rules that exist. As I understand the Robo Signing scandal, forged signatures were applied to everything from loan applications to court affidavits. When I sign those documents there is a stern little boxed warning me under there that if I materially represent anything in that document it is considered fraud and subject to some pretty serious criminal penalties. Yet the recent mortgage agreement with the banks settled for, I do not know roughly twenty-five billion, seemingly removes criminal penalties entirely from the remedy. If a forged signature is not a material misrepresentation, I do not think anything can be. Is anyone at the top even slightly concerned that both the appearance and the even the application of the Rule of Law are vital components of our social fabric? Is this part of the conversation?

Gretchen Morgenson: It sure should be Chris. You again, really put it perfectly. The idea that forging signatures, that notarizing very important legal documents really improperly in thousands of cases, maybe millions. The idea that that is somehow is going to be allowed to go on with just sort of a penalty of some kind or a fine and not prosecuted in the criminal courts. I think it is amazing. It is really counter to what we have all been led to believe was the course of action in such a case. You have many small people, small fry mortgage fraudsters who are in jail. I mean we are talking about the people who were straw buyers for homes who defrauded banks. They are in jail for a reason because they perpetrated a fraud. These banks whose employees who were forging signatures should also have been prosecuted with vigor and they were not. They were simply allowed to negotiate their way out of trouble and negotiate their way with shareholders money. They are not paying it out of their own executive pockets; they are paying it out of the shareholders pockets. There really is no accountability here whatsoever Chris. I think that has just been a theme that has been very troubling to many people.

Chris Martenson: You know Gretchen, one thing that really caught me as well is if you do take a tour back through some of the prior settlements that have been negotiated often it is found that there is a pattern of what looks like an ironclad agreement, a settlement. It has money involved; it has certain actions that are agreed to be taken. The banks in many cases have been found to just sidestep those or ignore those and have to be re-sued or taken back to the courts in an attempt to get the remedy finally enforced. It is not just that we are allowing them to skate around some of it; it almost feels like they feel entitled to skate around every possible piece. There is no I do not know how I would put this, but there is no attending to the spear or the letter of the law in some cases.

Gretchen Morgenson: I agree and this is all done as you know in the framework of protecting the financial system. Many people are wondering why there have been so few criminal prosecutions of people who are centrally involved in the years leading up to the crisis. It is really quite an interesting question. You hear over and over again from those in positions of power whether they are regulators or prosecutors, we had to protect the financial system. Well if you are going to do that that is fine. Conduct the triage as you describe it during the years or moments when you must. Then you have to exact a price from the people who brought us to the cliff and almost over the edge. You cannot let them get away with this and expect them not to do it again in a few years in an even bigger way.

Chris Martenson: It has happened again and again and it seems to be more pervasive than ever. It is almost like if I look back through the history of financial crises they have just sort of grown increasingly larger and a little bit more abundant. As well though when we look all the way back to savings and loan crisis, what was it nineteen hundred people I think and many of them executives went to prison for their actions then. Today the number if it is not zero it is darn close at the executive level.

Gretchen Morgenson: Actually Chris the numbers are that we found in doing reporting on this very good, I think, comparison is that there were eleven hundred criminal referrals in the S&L crisis and there were eight hundred and thirty-nine convictions. That is a sizable number and far, far, far more than we have seen. I mean I think I can name one senior level person at a mortgage company who is in jail at the moment and that is Lee Farkus who was at Taylor, Bean and Whittaker, which is nobody’s idea of a household name company. It certainly was not at the center of the mortgage crisis.

Chris Martenson: How is it that this is occurring now? Is this sort of the natural endgame that happens when we have a system that begins to take care of its own? Is this just a function of the revolving door between regulatory bodies and the industries they are meant to regulate? How did we get to this point where so little interest and activity is happening in holding people accountable?

Gretchen Morgenson: I ask this of prosecutors whenever I meet them and they are as confounded as I am. I think the mentality among many of these people is that you do want to bring cases and you do want to have success and something to show for your years of effort. It really is the record is really dismal. I think you can only conclude that either there has been this sense that we had to save the financial system and therefore, put off doing anything until it was far too late to collect the material, the Statues of Limitations may have run on many of these crimes. Or some prosecutors have suggested to me that during the years leading up to the crisis the regulators were so inert and inept that they did not even collect the information that is needed to make cases after the fact. The regulatory failure it seems was twofold. It failed to reign in the practices in the years leading up to the crisis. Then by so doing, it failed in the aftermath by not being able to supply the information necessary to bring cases. It really is an extraordinary situation and the idea there is no penalty for these failures is again pretty discouraging.

Chris Martenson: Where does that leave us then? As I look back I think you have done one of the most outstanding jobs summarizing the various abuses and excesses that led up to the bursting of the mortgage market and the global economic chaos that resulted. Here we are several years later and to my assessment I think that we find many of the root causes have not been adequately if at all addressed. In some cases, the fundamentals of the system have only gotten worse. We have more debt today, derivatives are larger, imbalances seem to be there, and transparency is not quite where we were promised it might be. How much more less cure do you see things being today given the fact that we have allowed these transgressions, not only to transpire but also go unpunished if I could use that word. What are the concerns we should be aware of here?

Gretchen Morgenson: Again, I think you are dead on. The resolution to this crisis was supposed to be the Dodd Frank Legislation of 2010. Unfortunately, it was I think not even, close to what was needed to proscribe this kind of thing from happening. Again I think that first of all Dodd Frank did absolutely nothing about Fannie Mae and Freddie Mac. It was completely silent on those mortgage companies who were very central to the problems and are in to the taxpayer for a hundred and eighty three billion dollars. The fact that it was silent on that issue is very, very important to remember. We do not know, we have no resolution in place, no suggestion of one for either of those companies.

The second thing that I think is a big failing of Dodd Frank is that it did nothing about too big to fail

Institutions. That’s the powerful, politically interconnected financial institutions are not allowed to fail when they get in to trouble. If it had been me, I would have liked to have seen something that cuts these institutions down to a more manageable size and yet we did not force that on them at all. In fact, if you take a look at the assets at the top ten banks in the United States they are bigger; they are larger than they were before the crisis. Those are two elements that I think have absolutely not been dealt with that and leave us really vulnerable to another episode like this in the future.

Chris Martenson: I think what you are talking about then is that there is some failure of introspection here at some level to really stand back and ask the hard questions, what went wrong and why. At the macroeconomic level, I can summarize and I have summarized our global economic plate in just three words – too much debt. It was a very long multi-decade sort of expansion of credit, far faster than the underlying economy. As any family know when you take on debt faster than your income rises sooner or later you get in trouble. At the moment debt servicing as manageable for the U.S. but only barely and that is with interest rates at multigenerational lows. However when we include entitlement obligations not even a zero rate of interest can balance the books. We therefore find our options, if we peer into this, are limited to some form of default or printing. Do you come to the same conclusion and how do you see our situation playing out in the U.S. given what is happening politically?

Gretchen Morgenson: I think you are absolutely right that this was a crisis built on debt. For that very reason it is taking us way longer to get out of it than let us say a crisis built on internet stocks that were basically equities that people had made bets on. That was a large devastation of wealth when the internet bubble burst. It was by no means as devastating as this debt crisis because as you know the assets shrink in value but the debt that you carry took out to carry them does not. This is where you have people living in homes that are underwater that are worth less than the mortgage outstanding on them; people drowning in college education debt. So yes, we are in a really bad situation and with very slow income growth or slow job growth, you see how difficult it is to dig out. I think that is why we are in this long slow march out of the mess. It is very, very difficult to see how it is going to change any time soon.

Chris Martenson: In your recent book Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon that was co-written with Joshua Rosner, you wrote that “you felt compelled to write this book because we are angry that the American economy was almost wrecked by a crowd of self-interested, politically influential and arrogant people who have not been held accountable for their actions.” And that obviously stands true today of course I think MF Global sort of puts that into sharper relief than ever. At the same time, there are these structural issues which are caused by too much debt which are really, a lot of people are concerned about, but we do not know how to get traction on these because we are not actually having the discussion at the, what I will call the national debate level yet. It is certainly happening very vigorously in books, between individuals, on the internet, on blogs. It is happening all over the place, but kind of at the margins. What will it take to push this to the center? Does this require a crisis or can we get there on our own terms?

Gretchen Morgenson: Chris I am shocked that it has not led to a really honest dialogue already, this crisis because it was so large and so devastating and it hurt so many people that I thought wow this is really it. This is going to force the issue to be brought in to the open, to be discussed intelligently and to be resolved. It just has not been. I mean I lay it at the feet of Washington because I think they were crucially involved in the crisis in the years leading up to it. There is a reason why they do not want to deal with it. There is a reason why they do not want vigorous investigations because it could very well lead back to an understanding that they were major contributors to the crisis. You have this weird disconnect where the populous at large, many people are angry and concerned and discussing and dialoguing as you say on the internet and in coffee shops. Washington - it just rings hollow for them. They just do not want to address it. This is the failure I spoke of earlier about how no dealing with Fannie Mae and Freddie Mac. No resolution for the big banks that are too big to fail. It is a deep, I think, dysfunction in Washington that may be a result of their understanding of how deeply involved they were in laying the groundwork for the crisis.

Chris Martenson: It would be fair then for a prudent adult who is fairly rational to peer in to the systems, see its dysfunction, understand some of the risks that are then unaddressed, maybe even mounting in some cases and come to the conclusion that waiting for Washington to see the light and ride to the rescue is maybe not the most dominant strategy in their lives.

Gretchen Morgenson: I think they will be waiting a long time. I just do not see it happening. Even in an election year, we are not having these important conversations. As you said what is it going to take. Well I was shocked that a crisis of this size did not generate that discussion already.

Chris Martenson: Here we are, what would you advise say individual citizens to do in this particular landscape. Do you have any particular views on investing or just let us say return of capital rather than return on. How does one navigate this landscape?

Gretchen Morgenson: It is very difficult for people to not go out on the risk horizon to gain the kind of income that they are used to getting. Even on Treasury Securities for that matter relatively risk free. It is really an excruciating difficult time for people especially those living on fixed incomes, but also those who are saving for retirement. Again I would just say do not take risks, even though the Federal Reserve is essentially encouraging you to do so, we know how that can end, it can end badly. I think that is a pursuit that must be maintained at the ‘be safe not sorry’. Also pay down debt to the degree that you can because that would protect people from being hurt and being put in the situation where they really in vise and cannot get out.

Chris Martenson: I think that is very sage advice and it is advice that I have been promoting myself for a while. This is all the time we have today. I would encourage everyone to pick up a copy of Reckless Endangerment because knowing where we are and how our current system is dysfunctional is an important edge and because it is a very good read. Gretchen thank you for your time and insights today.

Gretchen Morgenson: Well thank you Chris I really enjoyed myself.                        

Chris Martenson: The pleasure was mine.

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How can I subscribe to Chris Martensons podcasts in my iTunes? Need podcast RSS URL please

Hi,

Can someone please give me the RSS feed url for Chris Martensons podcast page?

This is what I have tried so far but its not working...

I would like to subscribe to Chris Martensons Podcast page so I'm automatically updated in my iTunes whenever a new podcast is uploaded. I did the usual iTunes menu > Advanced > Subscribe to podcast > Pasted in http://www.peakprosperity.com/podcasts and also tried pasting in http://www.peakprosperity.com/podcasts/feed but neither of those urls produce a feed. Got any ideas?

Thanks

Off the Cuff with Mish & Chris - 2012 Podcast Archive

<p><i>2012 episodes of Off the Cuff are listed below:</i>&nbsp;</p>
<ul>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-crescendoing-crisis-confidence">February 16, 2012</a></li>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-things-just-arent-adding">February 8, 2012</a></li>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-some-us-banks-are-more-equal-others-taxpayers">February 1, 2012</a></li>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-its-mad-mad-world">January 25, 2012</a></li>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-sick-men-europe">January 18, 2012</a></li>
    <li><a target="_blank" href="http://www.peakprosperity.com/martensoninsider/cuff-knives-come-out">January 4, 2012</a></li>
</ul>

Transcript for Ben Davies Podcast

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Transcript for the podcast: Ben Davies: Greece is Just a Preview of What's Coming For the Rest of Us

Chris Martenson:  Hello. Welcome to another PeakProsperity.com podcast. I am your host, of course, Chris Martenson. And today we are speaking with Ben Davies, experienced money manager and CEO of Hinde Capital, a fund primarily focused on the precious metals and commodity sectors. Given his vantage point from Europe, I have invited Ben on the program to speak with him about Europe’s worsening debt crisis, the recent efforts to bail out Greece, of course, and what it all means for the world economy and for individual investors. We will also address his outlook for gold and silver, of course. Ben, it is a pleasure to have you as our guest today.

Ben Davies:  Hey, Chris, I am very flattered to be invited on and I am looking forward to a bit of a to and fro. That would be great.

Chris Martenson:  I am, as well. We have had a very interesting pre-conversation here. I am hoping we can surface some of that. But here we are with the recent developments in Greece, and I have just been absolutely astonished at what I have seen going on there with the ECB now crowing about how they are going to make a substantial profit on the bonds that they had purchased at a steep discount in the open market. And those bonds magically are going to be repaid in full because, of course, the ECB spared itself from taking any losses on those bonds and pushing those losses off onto private investors. This is just a very interesting dynamic that is going on. What are you seeing from your vantage point? How is this playing in your corner of Europe? And what is your view of where we are going to go with all this?

Ben Davies:  Well, I mean, that is an interesting segue to introduce there. I mean, I think it is fair to say that State intervention is the key word here, and the concepts of self determination and the rights of the individual have been thrown out the window. Clearly, the interesting dynamics of the ECB is that all bondholders and all equity holders, in many respects, should have equitability or they should have equities, so to speak – equality, sorry, that is the word I am looking for. And clearly in this case, they have given themselves seniority. The private sector is subordinate, and I mean, quite frankly, it is disgraceful. Clearly, there is a political expediency going on here. They do not want to denigrate that balance sheet. They, bizarrely, are trying to keep credibility of [the] ECB balance sheet, which has been ballooning monstrously and now stands at some almost thirty, thirty-five percent of the GDP of Europe. And that is an exponential growth, something that you talk about extensively in your book and something we focus on, as well. And I would go so far as to say that this exponential growth in the balance sheet is actually going to a rate of exponential of the exponential. And that sounds like a mouthful, but that gets very frightening because it becomes unsustainable. And politicians and the ECB, they totally understand that in the case of Europe.

But if we just circle back to specifics, actually the ECB, they bought a lot of these bonds around eighty cents to par. So I think they bought around fifty billion, so the value they paid was, call it forty billion. Now, they have – as you say – they started to… I would not say they are crowing about it, but what happened is – because a lot of these bonds are short-term maturity – that actually, you get a pull to par. So as you come into the maturity period, which is March 20th when the redemption and roll over of the two-year bond, actually you are getting that pull to par. So in many respects, with the interest payment that they have received on it, they have made this and amortized this return. Now, they have foregone that as is they want to try and help Greece reduce that debt to GDP to a hundred and twenty percent by 2020. But they have done it at the expense of the – as you say – the private sector bondholders, which, obviously, it rips up the legal framework by which we really exist within financial markets and within the rule of law. And this is really going to be an ongoing process. And a word I would really use, it is financial repression, to refer to this.

At the end of the day, capital is scarce. So governments who need to keep funding themselves in order to keep a welfare state going need to find capital. And they will move at nothing to achieve that. And in this case, they have written off the rulebook.

Chris Martenson:  Let’s extrapolate, then. If the situation, if I am now a holder of Portuguese bonds, say, or Italian bonds, I am looking at this rule change that is happening in the context of the Greek bonds. Potentially, it is specific to the situation in Greece. But if I am a private holder of Portuguese bonds now, I am wondering if the same rule change won't be coming down the pike. I am going to be slightly less willing to hold these bonds, meaning I am going to want to sell them, I am going to expect the price to go up. Would you expect this action where the collective action clause has been unilaterally and retroactively applied by the ECB to the Greek situation, doesn’t that extend potentially to other bonds? Will this not just make… Are they not solving the problem in Greece – I am putting air quotes up – "solving the problem in Greece" with this rule change? Are they not just then transferring a larger problem to much larger bond markets? 

Ben Davies:  Very good question. Not an easy answer. I am going to try to answer it – best efforts. But I would say it is very specific to each country and it is very specific to what positions are in the marketplace, not only by investors, but banks. In the case of Greece – so let’s use that as an example – a lot of people have been under the misinterpretation that ISDA has not wanted a credit event to take place there. That is not the case. The market has been pricing it on these two years, which are maturing, to your Greek bonds, which are maturing on March 20th. They have been pricing in with the package, which is your longer two-year Greek bond and your long, some credit default swap on Greece. That package is known as a basis. And the probability assigned of a credit event is ninety-three percent.

Now, that is an interesting dynamic, because clearly people get paid out. The private sector has been holding out in the voluntary debt restructuring because they actually want the credit event to take place. They want to get paid out on the credit default swap, and clearly they make more money in that scenario. And the market is pricing that. And also, I would say about ISDA – seeing as I bring it up – is that ISDA, there are five banks effectively in charge or a committee in charge of the credit default swap market and the derivatives market. They do not want to ruin that market; the CDS market and the derivatives market is a big market. It is a big earner for the banks, and it is what is part of keeping this whole casino credit going. So there is no way they want to endanger that.

So I think people who have been talking about ISDA not wanting a credit event in this occasion are barking up the wrong tree. So I digress slightly, but I think it is pertinent to this, because it then comes down to what are the positions at any time for participants in the private sector.

So actually, it kind of flies slightly in the face, I was saying, about the ECB in terms of the hedge funds. They have not lost out in this at all. They have positioned themselves smartly. But certainly, I think it is very unfair on the Greek banks that they have to experience such a debt restructuring. They get a haircut when the ECB does not. And certainly, that applies to any other banks who have had Greek bonds. But to be fair, this can go on for a long time, and positions have been pared down over that time.

So in some ways, I hope I am answering your question. I think it is very specific to each country and who the holders are, whether it be the private sector or the public sector, clearly a lot of peripheral debt is held, has been held with the public sector, i.e., the bank – sorry, the private sector, banking sector. And it has been paramount for the ECB to make sure that that system does not implode. And so they introduced the LTRO for three years as a mechanism by which they could effectively keep these banks afloat and so they would allow them to fund themselves on an ongoing basis.

Now we have had one LTRO, which is about five hundred billion. We are going to have another one, which I suspect will be bigger, because I think that with all the downgrades we have seen recently, we are going to see actually more collateral will have to be put up by the bank. So I think some of the people will take this free money with all the hands they can get on it. They will grab it and put it onto their balance sheet. It was a very clever piece of work by the ECB because ultimately it stabilized the system, just for the medium term. Because now they have an inordinate amount of liquidity. And as I say, it is for a three-year period. But unfortunately, it just kicks the can down the road. What happens in three years’ time? Does the ECB have to roll over, give back all the toxic assets it has taken on in return the cash? So all that is doing is paving over the cracks in the short term. I hope that answers your question.

Chris Martenson:  It does. So I am interested in this kicking-the-can-down-the -road phenomenon. Because as I look at it very specifically again, what the IMF is projecting for Greece and how it gets down to a hundred and twenty percent debt to GDP by, I think, 2020 or somewhere around there. They have them returning back to reasonably nominal two, two-and-a-half percent growth, starting next year and carrying forward. What happens to all of these debt rescue plans if it turns out that the signals that I am reading in the world right now say recession is again stalking the global landscape and certainly visiting Japan, it is visiting parts of Europe at this point in time. How does recession and the debt rescue plans, how do those two come together?

Ben Davies:  Look, as I think we are both agreeing here, they are trying to buy time. I think I may first step back here and paint a bigger picture, which is the fact is that we are going to have a cataclysmic end to this. The mathematics does not add up. You have talked about exponential debt trends just as we have and at this point, if the policy prescription is more of the same, you will see that from 2007 that actually we have not deleveraged at all. Actually, the total credit has increased as a percentage of global GDP. Part of that is the common denominator has gone down to over a little bit as the GDP has fallen. But actually, total credit has expanded quite dramatically.

So what does that mean? I have forgotten what you asked me.

Chris Martenson:  You are going exactly where I was hoping we were going to go with this. Which is, we started by looking at Greece, and there are some nice specifics there, and we can talk about what is happening in the credit market, specifically, and specific policy tweaks that are being done or whatever the ECB is doing with the collective action clause. This is useful… In microcosm, Greece is a useful way to get at this larger issue, which is what I am really interested in. Which is that if we look at Greece and we try and pencil it out, it just does not add up. Mathematically, there is a problem in Greece. And the problem really centers on the idea that Greece, like much of the developed world – the United States, Japan, OECD in general – has been growing its debts far faster than it has been growing its income. And we have been enabled in this, I think, with the abandonment of the gold standard in 1971, and there has been really no tether. Just it was sort of convention, I guess, in an agreement as to how much we were going to allow ourselves to grow our debts. Well, eventually, that pops, right? A credit bubble always finds a pin at some point in time. Potentially that was in 2008 with rising oil prices. It does not matter; somehow it found its pin and started to collapse.

And so here we are today and looking at Greece. And for me as an outside observer, I cannot make the math work. Somebody is going to have to take extraordinary haircuts and losses on that. And again, Greece, just a microcosm for what I think is a larger systemic problem, which is that we are going to have to take some pretty extraordinary losses across the whole system.

Against that, all of our fiscal and monetary authorities doing everything they can apparently to just paper it over, patch it up, keep the system going, status quo sorts of solutions. But from your perspective – I know you have written about this to some extent – that really, we have to get right into the center of this and look at money itself. The fiat money system, the process of credit creation, the degree to which we, in essence, are fooling ourselves by borrowing from the future on a constant and increasing rate. Are we not, at heart, talking about the idea that we have a systemic problem that needs to be addressed that is really going to be immune to whatever sort of minor policy tweaks can be envisioned, which is really that, to me, is the story of Greece. It is an attempt in small ways and with whatever agreements and sorts of complexities can be dreamed up, it is really still avoiding the larger issue, which has to do with our money system itself.

Ben Davies:  Wow. You answered the question for me, I think. But yes, I think it is systemic. I think the monetary regime that exists today which is – let’s face it – has been around for forty years. It is a paper currency system, which means by decree of government, and when we say paper that has no backing to any real assets such as gold or silver. So when we say by decree of government, we mean that you have to pay your taxes, so it is your money.

And I think that really when you talk about Greece, we get lost in the minutiae about tax and collective action clauses, etc., etc. But really, we need to go to the bigger picture and perhaps get – seemingly existential for some people – but actually, we have to understand what money is. And money is created through the debt system. It is created out of thin air. A central bank or the Federal Reserve Bank, for example, creates money on the liabilities side of the balance sheet by buying existing Treasurys off the US Treasury itself onto the asset side. And as an accounting procedure, it puts down some paper money, on the liabilities side against it. That is how you create money.

Now, money creation is one methodology. How does that get into the system through something called fractional reserve banking? Every pound we hold on deposit is lent out multiple times, maybe the base is ten times. Now, this is a very insidious situation, really, that unfortunately, human beings cannot be trusted to keep it at appropriate levels of lending or borrowing. And why is this? Well, if it goes all the way to government, whereby effectively, a democracy starts off with all the right intentions. But if it is predicated on a fair currency system, eventually – in order to get re-elected, welfare will be paid for, wars will be paid for, other Social Security and Medicare/Medicaid as you have in the US, healthcare – will all be provided for. And they will buy their way into election.

So obviously, each year the debts just keep going up and up and up and up. And obviously, there is a servicing to that debt. But eventually, the math does not add up, and doubling rates – as you talked about in your book – is exactly what goes on here. At some point, we actually create so much debt that we are not able to service them.

And today – although we talk about Greece at this particular point – the reality is we have actually hit a debt saturation for the entire world. Now, we have had other situations where, let’s say, Argentina or Russia have had similar situations, perhaps even far worse. But they have been in isolation, so there has not been a systemic fallout. But this time, we actually – I believe – we have got to a situation where rather like, if you take Zimbabwe, Zimbabwe is a microcosm of the world. We actually had hyperstagflation there. We had debt deflation, as we are seeing now. And in order to really try and offset that, they primed the printing presses and they specifically printed paper. The only difference today in the US, the UK, Japan is that they do something called quantitative easing, which is a euphemism for printing money electronically. And quantitative there and qualitative, they are expanding balance sheets at the central bank and also, in this case, I would argue they are denigrating the quality of the balance sheet because they are actually taking a lot of assets at par that are not worth par.

So this is the difference today is that it is a global phenomenon in which case, we actually have a situation where capital is scarce. So every nation is trying to get capital. So this is going to lead to a lot of friction – not only domestically, but internationally. You can see that not only is the private sector being crowded out, but actually, sovereign to sovereign is getting crowded out. And herein lies the problem, and herein is why each central bank is having to step in.

Why is the UK printing inordinate amounts of money? Why is the European Central Bank printing inordinate amounts of money? Why is now Japan started again printing so much money? And actually, I mention Japan and that is interesting. They printed constantly after their credit induced bubble that collapsed in 1989, 1990. And they have been in the mire for over twenty years now. And everyone said, oh, well, we never saw inflation in that country. Well, guess what? Because that was in isolation at that time, the rest of the world was doing just fine, thank you very much. This was a very specific credit-induced bubble. The problem there is they exported inflation to the rest of the world.

Now we have a situation where every country is effectively going down the same routes as Japan and most are following a similar policy prescription, as you can see. Well, Japan is a thirty-trillion size economy, and they definitely have hit the tipping point. They are twenty years down the line. So they are the one to watch, where they cannot service their debts anymore. And if you notice, the Bank of Japan is just back in announcing that they are going to have to ramp up the size of their balance sheet. They are buying JGB, they are buying REITs, they are buying everything but the kitchen sink. They are not trying to tacitly inflate that system. Well, if the whole system is trying to do the same thing, I have to say that once you have debt deflation on one side of the coin, on the other you have gross monetary inflation.

So all those factors that have a finite supply – whether it be oil at the margin, whether it be gold at the margin – and I say at the margin because demographics are rising globally. As you wrote in your book, we have gone from three billion by 1961, and from 1961 to 2012, we have gone to six billion. That is an exponential rate. So there is a strain on resources. And it is not that we are running out of resources, perhaps, in the next millennia. That is not the point. It is the cost, in my mind, of extracting it and making that timely.

So in an era of just-in-time inventory, this is going to put pressure on the price of goods and force them to go up, especially when you are increasing more of the numéraire against a dwindling or not-so-readily available supply. And that is when you get hyperinflation. So people who are calling for debt deflation or hyperinflation, I think both can happen simultaneously.

Chris Martenson:  Well, it did happen, as you mentioned, in Zimbabwe, where I have heard people say inflation is really in check because look at capacity utilization. You know, until capacity utilization, the factory really ramps up. We are not going to experience inflation. But in Zimbabwe, I believe, their cap utilization was down to ten percent, even as inflation was in the millions of percent. So you clearly can have a disconnect between those. And this means that, in my mind to widen that out, very interesting time in history right here – anything that we might have formed as opinions or ideas or beliefs around how the world works over the last twenty years, we might have to crack that open or even chuck it out the window. Because here, what we are facing now is –widen it all the way up – we have to ask the question, well, really, what is wealth? Ultimately, money is a marker for wealth, it is not wealth itself. And what it is making markers for? Well, it is the stuff we need, the stuff we want. And as you noted, global supplies of critical resources are strained at the moment in time – China now consuming half of the world’s coal, I believe, last year, and shooting upwards from there.

With other critical resources, maybe we can find ways to adjust and to produce more of these resources for a period of time – maybe decades even – but not in all cases and not in all circumstances, with, for me, the standout story being oil. Very mysteriously, we have not managed to increase production of regular oil – I will call it conventional crude oil – since 2005, despite some very nice hefty market pressures and pricing that it would really encourage, you would think, quite a bit of production.

And it is not just oil itself. We have to look at the different grades. It is light sweet is what the world wants. We seem to be in short supply of that. Plenty of sour crude kicking around. And this is what the data is suggesting to us at this point. And so from my perspective, I see a world where real wealth represented in real resources with the absolute cornerstone of that story being oil – particularly the grades of oil we want – sitting right there in plain sight. And all the central banks just blissfully unaware of that, apparently, and cranking the printing presses because their model says if we can just create enough liquidity, the economy will grow again. It seems like a colossal set of forces that are lining up on two sides of the field here. I am going with reality and oil as the potential winner of this match. How do you see it? 

Ben Davies:  Well, you know, I think you bring up some pretty pertinent points. I think we are on the same page here. I do think that people will say that obviously productivity will improve, and as a consequence, some of these energy sources will be made more readily available more quickly. And I think that is the pertinent point. But you are up against a very challenging demographic. Obviously in the developed world, we have collapsing demographics in terms of aging demographics in parts of Europe. You have got this monstrous growth happening in the Asian economies, particularly. And as we have already highlighted in just talking now, we just talked about the exponential growth, worldwide growth. Clearly, that rate comes into conflict with the rate of productivity. And for me, that is really the big issue.

Now, I think we are hitting a perfect storm, unfortunately, where you are having inordinate amounts of money created electronically around the world in order to maintain a monetary regime that is clearly beginning to fail. I am under no illusion that this is the start of this particular regime failure. I have seen in history that it is amazing how governments can often band together ultimately to keep the illusion. But I think as people are now really beginning to assess that validity of credit on what – as you have talked about – what is wealth? And, what is the value of my daily labor? Well, guess what? You know, it is really under threat when I see that it is being debased every day. So how do I impute what a value of oil is? How do I impute an ear of corn? What is the value of that when you are constantly changing the yardstick or the currency or that numéraire? That has become the very difficult aspect to ascertain.

And so clearly, we have got this very interesting dynamic where you have got positive demographics and you have just an inordinate amount of money being primed into the system. And they are at odds with each other.

Now, the feedback mechanism there, clearly, for oil, is actually, works as a tax on us in terms of traditional economics as the oil price rises, because we are still so heavily dependent on it worldwide. That actually has an impact on our disposable income.

Now, even if we start talking about replacement energy – natural gas is obviously the… clearly, shale gas, etc. – these are alternatives and I can see that there is a major disconnect between what the price of European gas is and US gas, natural gas. And I am sure that as they realize, find more sophisticated or clever ways to transport liquified gas around the globe that price will move up. So again, all the time, I just see that there is a constant strain. 

Now, I know you are rightly fascinated with energy dynamics and I think what they have are hugely pertinent, even in our lifetime. But for me right now, as a fund manager, I am just concerned with trying to preserve wealth for my clients and for myself and for my family. And markets are so distorted today that I really throw my hands up in despair. I cannot with any conscience put people into bond markets, because they are effectively – and wholeheartedly – run by the financial system, which is now run by the government, the US government buys US bonds. The UK government buys government bonds, they buy MBS.

So what we are seeing here in reality is interest rate premiums are being squeezed lower. So interest rates are being set at face value that is really not reflective of the true marketplace. Interest rates are based on human preference of where people want to lend or borrow. And the reality is, when they are so artificially low, it distorts the whole term structure of financial systems.

So to just extrapolate that all and extend that thought process, look at equity markets at the moment. It is just incredulous. They seem to be rallying – I call it the Reluctant Rally, because most people are not invested at this point because there is just a huge disconnect between the credibility of what is actually happening in the real economy, which is effectively events in Greece and people are losing their jobs. Aggregate demand is falling. And globally, there are issues in China. It is not just even that economy is really starting to – I would say – starting to slow down, grinding to a halt, and its terms moving from ten percent GDP down to seven percent GDP. It is a material shift. So things are slowing down considerably around the world.

So I think that you have this dynamic where for equity markets, they are rallying, because the discount rate – which has been set by bond rates, which has been set by government – is artificially low. And so that discount mechanism is driving equities higher, that debasement of the currencies are underpinning these equity markets.

Now at times, you get this risk-on-risk-off. And the reason why we are seeing such high correlation between asset classes is that very reason. The term structure is being shriveled to a very low yield, which effects all markets converge to a return or a yield or a productive asset. And really, when you go to the zero bound, every asset class ultimately moves towards that. So axises [sic] are rallying to such a point in which there will be a zero yield return for you. Likewise, bond assets have gone to actually, they have now gone to a negative yield. So it is absolutely just, for me, there is absolutely, I know I am going to lose not only capital but after inflation I am losing three, four percent. Or whichever bond market in the developed world that I want to invest in.

This is the insidious part of the financial system for me right now, which is what do I turn to? How do I grow my business for my investors? Well, unfortunately, I just keep coming back to gold, which protects me in an inflationary environment and it protects me in a deflationary environment – probably more so because it has zero risk of default. And that is a really important point for me.

Chris Martenson:  Absolutely. And so in gold, I assume we are talking not ETFs but physical gold or something where… I guess where I am going with this is MF Global, that debacle really sort of changed my perspective on the safety of assets and whatnot. So a bird in the hand is worth two in the bush, I guess. How do you invest in gold in this particular landscape?

Ben Davies:  Well, you bring up a very interesting point, MF Global, and I just want to address that before I talk about ways of investing in gold. But something that we have not talked about but is at the root cause of the problem with our financial system today – fractional reserve banking and excessive credit spending beyond just central bank money creation is the concept of rehypothecation. And clearly, what has happened with – and well, I should probably define what rehypothecation is or I should say what hypothecation is. Hypothecation is where a borrower pledges collateral to secure some debt. So i.e., the borrower retains ownership of that collateral. But obviously, hypothetically, this is controlled by the credit group. A good example would be, I guess, consumers enter into a mortgage agreement, for example, in which the consumers house becomes the collateral until the mortgage loan is paid off. So that is hypothecation.

Rehypothecation is the practice that occurs in financial markets and I think, to some extent, first came to everyone’s attention with the Lehman debacle and the repo 101s. This is where the banks or a broker dealer can reuse that collateral that has been pledged by a client. And they can reuse that collateral as collateral for more borrowing. So this is what’s happened in the case of MF Global.

And interestingly, talking about, we just talked about income and yield. What were they trying to do? Corzine was an ex-Goldman Sachs individual. He was trying to create an income statement just like Goldman Sachs does, which is borrow in the short-term, lend long-term, you get the yield curve pickup. Now that yield curve has been narrowed. So he had an opportunity to purchase high yield and peripheral debt on the belief that he could… that the ECB or governments would step in and save the day, as we have to some extent. You know, they bought them that significant discount, they get a yield so that the likelihood of a default is already priced in to some extent. So they have got some cushion there. But all the time, there are earning that yield and that pull to par, except they were using collateral that had already been placed by clients and placing that as collateral to borrow more. And so you can see the insidious circle here.

MF Global is, again, it is a microcosm but it just exemplifies everything that is wrong with a credit-based system, the whole rehypothecation process. But what scares me most is how much collateral has been pledged and where it has been pledged. It is almost impossible for us to ascertain that – very, very, very difficult.

And that brings you on to the whole layer of – I think you called it part of your tertiary wealth. Well, I would not call this wealth, but all the credit derivatives are out there. Everyone talks about netting. And sure, you have banks that have now, if they have got shorter swap and longer swap, they have made sure that it is with the same counterpart to try and reduce some of that risk and they do not have to put up as much collateral. Well to me, it is the growth risk is really the most frightening element of it. That exponential growth in derivatives which, by the way, has just ballooned since 2007 because it has really been the only way to try and keep the deleveraging from taking place, and the consequence of which would be a collapse in aggregate demand. Clearly, it would just be default process right across the board – corporate, at the retail level, etc., etc.

So you have had this constant buildup of the credit market, and we have now probably got over a trillion worth of derivatives, I am sure. That, to me, is a great example of a complex system. And from what I can see in nature, complex systems, you sow the seeds of their demise within the buildup of that structure.

You know, for example, there is a great book by chap called Sornette, a physicist, and he talked about stock markets crashing and how we could predict them. Now, he actually predicated some of his predictions on behaviors that happen in nature. For example, Ariane 4 and 5 rocket ships that they have these… they kept rupturing. And it was actually the Kevlar bonding matrix that they used. Actually, the way it bonded together, it almost bonded in an imitative behavior like we get imitative behavior in markets. And that ruptured and just very minor fissures and then under severe stress, they would blow up.

And that is really very analogous to what we are seeing today except you can see the imitative behavior that we are all following the same, we are all herding in the same way in terms of how we are being forced to borrow at lower and lower rates. Because that is the only way we can service our own mortgages, etc., etc.

So we are constantly reinforcing the system until such time as, let’s say, the main buyer has to stop – i.e., government – and then what happens? Who is the buyer in the bond market then? What happens when people go to sell? There is no buyer. The system collapses. Rates will go through the roof, people not being able to service their mortgages. Does that articulate the cataclysmic element of markets today?

Chris Martenson:  You know, a couple of very important concepts in here. One, that our system obviously is a complex system – the economy, the financial system – is a complex system, which is interesting to hear that Sornette believes that you can predict these things. Something we do know about complex systems is it is not that they are fully unpredictable, so waves crashing on the shore, we know that these are a complex system. But you can be pretty reasonably certain if there are three-foot waves coming in, you will not see a twelve-footer in the mix. But within that boundary, it is impossible to predict how each wave will individually break.

So we have a complex system. I think that to even a very, very close observers such as yourself or anybody who is in the system, you just peer into it and you go oh, nobody really understands how the whole derivative market is fully put together. And certainly, if that escapes the architects of it, it has got to escape, say – I do not know – your average ECB bureaucrat who is trying to manage within that system.

So I believe that there is a general feeling of angst that we have got this large, exponentially growing complex system. Nobody quite has their arms around it. We do not exactly know what it going to happen – when it might break or what the trigger would be. But we have a sense that it cannot keep just growing forever. And you have articulated, thought, there are these risks, there are these strains, there are these pressures that are being placed upon it that the derivative market is now larger than when the crisis started. That I think we are looking at overall debt levels are actually now, in aggregate, larger than when this crisis started. The complexity, if anything, seems to be greater – not lesser – than when we started. So these are all just sort of risks.

And in the context of that, how do you do your job? How do you preserve or even grow capital during this tumultuous period? And specifically, how do you invest in gold given what we just talked about with the hypothecation/rehypothecation scandals?

Ben Davies:  Well, I am going to answer that second, and remind me to answer that second. But I want to address the… We actually wrote a piece called Silver Criticality. And we were able to ascertain actually using Sornette’s work and some of our own work on fractals, actually quite basic concepts of you have something called self-similarity. An example would be when you magnify on a snowflake, at every level they look the same. We call this scale invariance or self-similar. Now, it was very clear that you could see imitative herding-like behavior occurring within the silver market. And the point about just before a crash is actually the preceding months, years leading up to a critical change in the state of the market, for instance, its endogenous. You can see it building and you can mathematically predict it. Now that is an example of a complex system where we can predict it.

I think the difference today is that not one person on the planet, in my opinion, can really ascertain every asset or derivative out there so that they can make a mathematical probability of when it will happen. And that is the difference.

So I could say that overnight we could have a trigger that would catch us and we would think it would come out of nowhere. But clearly in hindsight, we will be able to say well, we saw the endogenous effects of buildup of credit, etc., etc., etc. It was clearly going to happen. An example would be something that just happened recently, the downgrade of all banks. Now, it was not news to market participants. In many ways, it was already priced in the market. The market is reasonably efficient.

But actually, you have unintended consequences often arise within complex systems. An example in this case would be you have provisions within derivative contracts from one counterparty to another – not bank-to-bank – I am talking about a bank to a pension fund. Where the pension fund now can come back and say hang on, you have been downgraded. I need more collateral or I am going to reassign or just tear up this swap agreement. So it is an immediate loss for that bank.

Now, that is the kind of behavior that I have started to hear about recently, only in recent weeks. And before you know it, that snowball effect… And a good example is that [grain] of sand on the larger slope of sand that suddenly – inconsequentially, but very catastrophically – sends the slide down the mountain, you know, an avalanche. And you do not understand why it is that particular grain. So there is this whole buildup.

So to me, the system is very free-for-fall and at any point, it can collapse. So this comes back to what do we have to do as human being in terms of protecting wealth? And you did a great job in your book, and this is a book I wish I had written. I think it is a beautifully written book and you have managed to not only assimilate and disseminate a lot of information in a very concise manner, but I think you have addressed very eloquently some key aspects, which is, you know, how do you define wealth. And I am not going to label them off, but primary, secondary, and tertiary wealth.

But I have also… Wealth for me is not just how I value my day’s labor. Wealth is also connected to my relationships. I believe fundamentally – outside of being a fund manager – that I need to have the ability to be self sufficient, I need sustainability. In many ways, I need to make sure that I achieve the first stage of Maslow’s hierarchy so I have food, shelter, fire, etc., etc. And then I go up the levels and maybe the second one is, I think I believe it is safety, second stage. And part of safety for me – and this is where I see gold – physical allocated gold is, by definition, outside the constructs of the financial system. It comes from primary wealth, it is dug out of the ground. So it is a resource that cannot easily be created, and that is a very key thing in regard to why it is a great protection against inflation. You cannot produce inordinate amounts of it, and arguably, there is a finite amount.

But as importantly – and probably more importantly for me – is that it has no default risk – particularly in a credit environment where there clearly is debt deleveraging going on. Now I could lose my capital. I cannot lose my gold. And I will not lose my gold if I hold it within an allocated form, which means it is in the name of the holder.

Now, as a fund manager who hopefully believes that somehow we will get through this unholy mess and the system will survive, I am going to continue to ply my trade, because that is how I earn my living. And I want to protect my clients and myself; my family’s purchasing power.

Now, one thing I want to be positive. Despite looking at the math and despite the fact that I think the system is going to be a huge monetary regime, it is completely possible this can spin out over decades. It is amazing how government can obfuscate the situation. And perhaps we can come back to talking about financial repression and how I think they can do that. It is completely possible we can spin this out much longer, but then, that is not my best case.

But in the interim, I want to be positive. So I want do what I think is right by investors which is – for me – running a gold fund. And we store our gold in allocated form, and we try and create a return in excess of the gold price. We do not need to go into how or why we do that, but we have managed to create a return of, I think it is fifteen percent annualized above the gold price, which we are very proud of. And I definitely feel that I am doing a more worthwhile job than sitting there as a bond trader as I was once, perhaps, a decade ago.

Chris Martenson:  Well, fantastic. I would be interested to hear more about that. And of course, I think people could go to your website at Hinde Capital and explore that more if they are interested, and I am interested.

And you also focus on commodities in general, and I was intrigued noting here that some of the earnings reports I was just sort of checking out – Kraft, for instance. So Kraft sells a lot of food items. Their sales rose because prices went up 7.6% and volume actually fell one and a half percent. Go figure. You know, rising prices ended up having a softening on volume impact. And they had price increases in all kinds of categories. By lunchmeats, they actually ended up offering smaller sizes to address the sticker shock people were feeling. And in others like bacon, they nearly doubled the price because of cost spikes but then, of course, sales struggle. I mean, this is serious. We are talking about bacon now. And I am looking at all of this and I am seeing inflation coming through very clearly in a lot of the reports I am reading.

It is not coming through in the official statistics, of course. And you mentioned that gold will do well in an inflationary regime, and even probably better in a deflationary regime, because of how it will protect against that default risk, meaning it is an asset you can count on, which is a pretty dear asset indeed when the system itself is struggling.

So as you look across the landscape, are commodities and gold, are these a way to just sidestep what is going on as we wait for happier times? Or do these have another story in there, as well, which is related to, I guess, what we were talking about before with seven billion people on the planet and potentially limited and limiting supplies of critical items. How are you approaching commodities right now?

Ben Davies:  Yes, it is very interesting. One, I agree with you that clearly, report statistics bear no relationship to the reality. I would say in the UK at my personal run rate -- and I consider myself a pretty average middle-income individual, contrary to what people might think about hedge fund managers earning vast fortunes – we ply an honest trade. I have an above-average income perhaps but nonetheless, I have very similar outgoings to most people in this country and obviously, my inflation rate is nearer ten percent, absolutely. And obviously, the old games of reducing packaging have been going on for years and keeping the price the same, and you know, it is just scandalous. And I think people have caught onto it to some extent, but there is not a lot they can do about it.

I actually feel very strongly that my wealth really should be assigned with gold, because I believe that to be my true operational wealth. I personally do not hold commodities. We just wrote a report, actually – it is on our website – called the Myth of Commodity Diversification. And I think that in classic portfolio management that – particularly within a fiat currency system – that actually, commodities are not a very good way to diversify your portfolio. You know, this is we are strictly talking about portfolio management. I have to be clear here.

So I feel that I have to have a large holding relative to if I have equities and bonds portfolio, which actually, I do not. I have a large proportion of my wealth – I would say eighty five percent – in physical gold because I believe that is true money. And I believe that despite people like Buffett, who is an incredibly erudite and smart individual, I – unlike Buffett – just because gold has no seeming yield, I actually think it keeps up with the rates of money supply. In fact, it is actually undervalued relative to the monetary base because it is only backed at fifteen percent. To give you a clue, in 1981, that backing was a hundred and forty percent, which is when we knew gold was overvalued.

So today, gold looks extremely undervalued relative to the monetary base and, effectively, the leverage that has been created in the system. So it seems like a very cheap way if you just want to participate just from a capital appreciation perspective. But for me, I do not look at that. I just look at it as a means of protecting my operational wealth. I also can use it much more readily. If I go and buy a basket of commodities at a firm, to be honest, I have got counterparty risks right now I do not want to be putting myself at risk because I believe that we are ensuing debt deflation and we have not even begun to seeing the deleveraging yet. So I do not want to take on that added risk. At least I feel that I have a physical ownership. And I am – with my partner – one of the largest shareholders in our fund. So I am heavily aligned. So I feel that the structure that we have, it is very sound because we have physical gold held in a Swiss vault in a private bank. So it is outside the investment banking system and that is very important to me.

And some people say to me, well, don’t you need to own it in your house or in safety deposit boxes? And I do not feel that, because at my core, I believe the system will ultimately continue to exist, although in a bastardized form, and hopefully, it will have a new beginning whenever that will be. But I think you will be amazed at how society continues – even under the extreme duress. You just have to look at Latin America. You know, I just talked to a lot of the businessmen there and how they coped with hyperinflation. They continue to run their businesses. They just manage their billing system and their receipts and they made it work for them. So it is amazing how ingenuous we can become.

So I think the system in… I don’t think that banks are going to be falling whole-scale, partly because, actually, transactional banking will continue. It is just that what you are transacting will not be worth anything.

Chris Martenson:  Well, fantastic. This is all the time we have for today. I want to give people an opportunity, though, to find some very nice writings you have on your website. How do they get there, and are there any pieces you would direct them to?  

Ben Davies:  Well, if you want to understand gold, I would read a piece called Gold: The Currency of First Resort. If you want to understand the relationship of the State and how they are trying to conscript capital and the solution that we propose for the monetary system, I would look at something called Monetary Singularity. Actually, I think it is called Singularity Transcendent Money on the website. It sounds a bit pretentious and it is not meant to be. And I gave a speech on this and I was thankful that afterwards everyone said oh, you know, I thought that was going to be really pretentious, but it was not, it was spot on and I felt very relieved about that. Because I think very easy for us to overcomplicate and be over-verbose, as often I can be. But this is actually a very simple subject matter.

But you can find that at our website and it is called www.HindeCapital.com and Hinde is H-I-N-D-E Capital dot com. And thank you for that plug, I appreciate that.

Chris Martenson:  And thank you so much for kind words about my book. Obviously, this conversation could go on a lot longer, and I hope to do that at some point; particularly there are a number of subsectors that we opened up that we did not really get to address. There is so much to discuss here. The system itself needs to be understood, and then within that, how do we operate and maneuver given what we know? And by the way, what we know changes – for me, at least – almost every week now, as rules get changed, as new things are revealed, as data becomes into sharper focus, and as we learn more, and as the various players are maneuvering around. It is a very interesting time. And I think for me, the lesson is, I am both hunkered down and extremely alert. And I am like – I am hunkered down, and my gold holdings are about seventy five percent of my core holdings right now. And at the same time, I am just remaining as alert as possible to all the things that are just changing daily, it seems at this point.

Ben Davies:  You know, I would echo those words. I think being alert is key. I mean, one thing I would say as we sound off – or sorry, round off – is that really unfortunately, a credit-based system or a fiat currency system where the welfare looks after so much of your needs, what tends to happen is that we have effectively had responsibility for ourselves expropriated from us. So I would say the most important thing for myself and my family and hopefully, people will echo this who are beginning to understand something is that you have to take responsibility for yourself. And that involves providing sustainable resources for yourself. And when I say sustainable resources or wealth, I mean by that, that can be social wealth, that can be gold holdings that protects your day’s labor, and obviously, being self-sufficient because we have just-in-time inventories and that really is an issue; we need to be able to fend fully for ourselves in terms of food and shelter. And that is not to be doom and gloom at all. I just think that is very sensible insurance.

Chris Martenson:  Absolutely. Prudent, prudent, adult-sized responses to what is a very uncertain time. And the cost of doing these things is not high. The social cost might be for some people; it feels weird and awkward. But the physical and financial cost is not typically all that large. To me, it is like an incredibly cheap insurance policy, you know? You pay a dollar or a pound to get ten thousand of coverage. It just seems very reasonable.

So that is all the time we have today. Ben, thank you so much for your time. And it has been just fascinating and I look forward to doing it again.

Ben Davies:  Thanks very much for having me on. Cheers.

Transcript for Jim Rickards

Transcript for the podcast: James Rickards: Paper, Gold, or Chaos?

Chris Martenson:  Hello, this is another PeakProsperity.com podcast. and I am your host, of course, Chris Martenson. Today is February 10, 2012, and the world is in a bit of economic turmoil. Greece is flat out busted, the EU is in recession, Japan is struggling with a too-strong yen, and the US government is spending at least forty percent more than it is taking in revenue for the fourth year in a row.

To help us make sense of all this is Jim Rickards, seasoned financier, risk manager, and author of the recent bestseller, Currency Wars: The Making of the Next Global Crisis. In his book, he describes how currency wars are one of the most destructive and feared outcomes in international economics and that history shows they always end badly. He warns that today we are engaged in a new currency war posing risks that every prudent individual should be aware of. For those of you with smoldering concerns about the viability of the world’s fiat currencies, I sense this interview is going to toss some gasoline onto that fire. Jim, welcome. It is a pleasure to have you as a guest today.

Jim Rickards:  Thank you, Chris. Thanks for inviting me.

Chris Martenson:  Your newest book, Currency Wars: The Making of the Next Global Crisis is doing extremely well. It is sitting this morning at number two eighty on the Amazon booklist, I checked. Congratulations.

Jim Rickards:  Thank you, yes. We have been very happy with the result. It has been a New York Times, a national bestseller and very highly ranked on Amazon. And they have some subcategories in the international economics category. We have been number one for three straight months. Very, very happy with the reception.

Chris Martenson:  Well, fantastic. And the headline summary of your book, if I could, is that the Fed and other central banks are making a very dangerous gamble that might end well. But if history is any guide, as we have said, has a better chance of ending quite badly. Before we get to that endgame, though, can we set the stage? What does history tell us about currency debasement and these sorts of trade wars?

Jim Rickards:  Sure. Well, a currency war in the simplest form, Chris, is basically when there is too much debt and not enough growth. The overhang of debt impedes growth because it clogs up bank balance sheets and clogs up the savings to investment mechanism and has a lot of negative effects. So there is not enough growth to go around. So countries, in effect, try to steal growth from their trading partners by cheapening the currencies. One way to think about it, imagine you live in a small town. There are four stores, they all sell sort of the same thing and one of them has a half-off sale. Well, naturally, everyone is going to go to the place that has the half-off sale.

It is no different in currencies. You know, you are looking out at the world, there are certain countries that manufacture aircraft. We have Boeing in the United States, there is Airbus in Europe, Embraer in Brazil, and China has got an up and coming aircraft industry. Well, imagine you are Thailand or Indonesia, a country that needs aircraft but does not manufacture them. You are going to buy them from one of those countries. And if you can cheapen the dollar, it makes the Boeing aircraft a little cheaper and helps with sales. From that, you get exports, which contributes to growth and you probably get some additional jobs on the Boeing assembly line. So it sounds good. It is very tempting. It sounds like a free lunch, why not do it?

And indeed, the Fed and the Treasury are trying to do that right now. They are trying to cheapen the dollar, probably for the reason I mentioned. The problem is it does not stop at that. It invites retaliation and this is where I give some of the historical examples, as well as analysis.

A couple things happen. Number one – we cheapen our currency but other countries try to cheapen their currency also, so you get into these tit-for-tat devaluations where nobody wins. All you do is unleash inflation, restrict world trade without anyone getting an advantage. I like to say that in the currency wars, all advantage is temporary. You give it up pretty quickly.

The other thing is that for countries that cannot necessarily devalue, they can use capital controls, they can use import excise taxes. Currency wars can turn into trade wars. Ultimately, they can even turn into shooting wars. So you get all these bad effects.

So if the US could cheapen the dollar in isolation, if nothing else happened, maybe there would be some quick advantage. But that is not what happens. But it is a temptation that politicians and policymakers cannot resist, but it ends very badly.

Just to give two specific examples I talk about in the book, I give a history of what I call Currency War One from 1921 to 1936 and Currency War Two from 1967 to 1987. And Currency War One was co-terminus to a great extent with the Great Depression. World trade collapsed, currencies collapsed, unemployment skyrocketed – just a set of disastrous outcomes. And Currency War Two, we had the opposite. We had borderline hyperinflation. You know, when President Nixon took the dollar off the gold standard in 1971, at the time his aides predicted this would create five hundred thousand new jobs over the next two years. Instead, the United States had one of the worst periods of economic performance in its history outside the Great Depression. We had three recessions back to back to back in 1974, 1979, 1981.

So what these historical examples show is that you either get depression or inflation, but either way it is a bad outcome. But you would think the policymakers and the politicians would understand and learn the lessons of history. But they do not and they just attempt to launch these currency wars over and over again, but they always end badly.

Chris Martenson:  You know, right at the beginning, you said the debt is the original reason that we start these currency wars. So maybe in the first period you mentioned in the ‘20s, early ‘30s, that was arguably debt left over from World War I. And so ever since the 1970s, debt levels worldwide – but in the US, specifically – have consistently, year after year, risen faster than GDP. You know, just a few percentage points each year, but debt trumped income. And enabling all of that, I feel, was the steadily falling interest rates from the peaks in 1980 all the way on down through to current. And now, Bernanke has signaled rates are going to stay pegged at zero on the short end until 2014 and be lower than otherwise on the long end because of Operation Twist and whatever else might come next. How long can they keep playing this game, do you think?

Jim Rickards:  Well, they can play it until they cannot. I mean, not to be glib but the problem I see – and Chris, you are absolutely right about the debt, going back to Currency War One – the debt, in that case, consisted of German war reparations, reparations that came out of the Treaty of Versailles that ended World War I and Germany owed un-payable debts to England and France. But England and France also owed un-payable debts to the United States because they had borrowed money to fight World War I. So you had the spectrum of the entire world in debt. None of it could be repaid. Ultimately, none of it was repaid. I mean, eventually, Adolph Hitler repudiated the reparations and the United States forgave the war debt and we ended up in World War II and the whole thing was forgotten. Then in 1944, we rebooted the international monetary system at the Bretton Woods conference. But that was one contributor to the Great Depression. There were others, but that helped to start the currency wars.

And in the 1970s, you had a different set of debt. You had what was known as the Guns and Butter policy really started by President Lyndon Johnson in 1965. But the effects of it were first seen in terms of currency wars in 1967. The Guns part was the massive expansion of the US presence in Vietnam. We had been in Vietnam for a long time, but Johnson started to send tens of thousands and ultimately, hundreds of thousands of troops there and that was very costly. But at the same time, they launched the Great Society program of entitlements and benefits, which added to the domestic spending. The combination caught up with the United States very quickly to the point that we were, as I said, the dollar was suffering and inflation was breaking out in the 1970s.

So debt was the problem in both cases, no different today. I see the same thing today when you look at the European sovereign debt crisis, Japan’s debt to GDP ratio over two hundred percent – far worse than Greece, by the way. The United States, it is officially a hundred percent, but that only counts the bonded debt. When you throw in Medicare, Medicaid, Social Security, Fannie Mae, and Freddie Mac, FHA, and Federal home loan bank systems, student loans, and all the other liabilities that the government has underwritten, the actual ratio is a thousand percent, meaning ten times GDP.

None of this debt can be repaid, by the way. So what will happen is governments are going to try to inflate their way out of it. It is as if we will say to the Chinese, “Hey, we owe you a trillion dollars. Here is your trillion dollars. Good luck buying a loaf of bread because we have completely debased the currency.

So there is no question. It is quite clear that the Treasury and the Fed are trying to inflate their way out of the problem and debase the dollar. The problem I see is they might not get there, and here is why. The Fed thinks they are playing with a thermostat. You know, you can, if the room is too cold you dial it up. If the room is too hot, you dial it down by adjusting the money supply and working a little bit with expectations on the behavioral side that can gradually tweak economic behavior and lending and spending velocity and money supply that achieve a desired result. The problem is they are actually playing with a nuclear reactor. They are playing with a complex system that is in or near the critical state. Now, you can dial a nuclear reactor up and down but if you get it right, the consequences are worse than having to put on a sweater. The consequences are catastrophic. You can melt down a reactor and ultimately, the entire financial world.

So the danger I see is the Fed thinks they are playing with a thermostat. They are playing with a nuclear reactor and they risk collapsing the entire system.

Chris Martenson:  So this idea of complexity and stability, very important, I believe. Our economic and financial systems, they are complex systems, which means they are inherently stable until they are not. At which point, they often – and historically we can find they rather rapidly find a new equilibrium point once we are past some sort of disturbed threshold. How do you see the world financial system going forward? Is it a binary event? Either it survives or it crashes? Or is there some happy slower medium in there?

Jim Rickards:  Well, I do not think there is necessarily a happy medium. I agree completely, Chris, with the way these things play out. You either have a catastrophic collapse or you do one or more smart things to step back from the brink. You know, sometimes in making my recommendations, people say you know, “Hey Jim, you want to go backwards.” And my answer is if you are about to drive off a cliff, going backwards is a very good idea.

But the other thing, you are right about how complex systems collapse. But the thing that is less well understood is that the risk or the degree of collapse in a complex system is not just a linear function of scale, it is an exponential function. And what that means in plain English is that if you triple or quadruple, let’s say, the amount of derivatives on bank balance sheets, Wall Street would tell you are not increasing risk at all because you have long and shorts offsetting. It is very clear that that is incorrect, that is not a proper understanding of the statistical properties of risk. In fact, the risk is not in the net, it is in the gross. So if you increase the gross volume of derivatives – let’s say by five times – you have increased the risk.

But a lot of people would say well, maybe then you have increased the risk by a factor of five. But the answer is no, if you increase the size by five times, you probably increase the risk by a hundred times or a thousand times. In other words, it is an exponential function. This is the way complex systems work. But again, it is not understood on Wall Street and this is why policymakers are surprised over and over.

You know, they did not see the crash in 2007, 2008 coming. When it started, they underestimated the severity of it. When they responded, they underestimated the duration of it. They got everything wrong. Well, again, if you are looking through the wrong end of the telescope, you are going to get everything wrong. It just comes as no surprise because they are using the wrong paradigms and the wrong methods of understanding how the world actually works. You know, I hear these Wall Street guys and they say they have this catastrophic so-called black swan type events. And they say well, you know, I need to go back and fix my models. And my answer is no, your models are fine. Your paradigm is wrong. In other words, you have correctly modeled a false reality. And until you understand how things actually work, you are never going to get it right.

So therefore, that kind of collapse is a likely outcome. You can step back from it, and the key is to descale the system, break the system into pieces so that if individual pieces fail it does not cause contagion and take down the system as a whole. My favorite example is JP Morgan. JP Morgan Bank today is the result of five different banks, each one quite large in and of itself. When I started banking and you had Manufacturers Hanover, you had Chemical Bank, you had the Chase Bank, you had an old version of JP Morgan, and other banks all merged into one. Why not break them up into pieces and why not ban over the counter derivatives? I think exchange trader futures are fine because they have a lot of controls around them. But the over the counter derivatives do not. And get rid of dangerous products, break up the big banks and then move forward. You still have an economy and a financial system, but you have a lot less risk.

Chris Martenson:  So let me ask you something very specifically around this, which has been puzzling me for a while and I have dug and I cannot find an answer that satisfies me. So the ISDA and European regulators bent over backwards in order to avoid triggering a default event, a credit event on the Greek CDS paper that is outstanding. And so I looked at that and there is seventy eight billion notional on it, of which the net exposure was said to be in the vicinity of maybe three point eight billion of which at auction – if they settled that out at fifty cents on the dollar – there is maybe one point seven billion of total exposure. Why are they bending over so hard to avoid such a nominal amount of money?

Jim Rickards:   I would not say the bending over hard, I would say they are utterly corrupt, meaning clearly it is a default. Their failure to call it that just shows how corrupt the system actually is. But to get into your specific question, Chris, the reason is that if you actually did declare a default, the exposure is not the net of you know, kind of one to two billion that you described. The exposure is the whole seventy eight billion because that is taking a single institution. Let’s say I am five billion long and I am four point nine billion short and I am going to lose the entire value of my four point nine billion short. Well, the only way I preserve myself if I can go to the five billion long and collect. But what if I cannot collect? What if it is AIG? In other words, this is not just about market risk and notional risk. It is also about credit risk. So the only way the net is meaningful is if I am certain that I can collect on my long in case my short has lost value. But they are not certain about that. When you start having institution go to institution to collect the entire gross value of the debt, you are going to have failures. You are going to have people who cannot pay, then that will have a set of dominos to collapse the entire system. 

So the reason they are trying so hard to posture the way you describe, which is netting out the longs and shorts, going to the net amount, marking it to market, you know, sum value, etc. It is because the reality of the gross exposure is one that would take down the entire system. But that is the reality and otherwise, it just shows how desperate they are.

Chris Martenson:  So let’s talk about the desperation then. Because if we take this dynamic of the past four decades which, simply enough, was just one of debt growth exceeding income growth, this seems to be what Bernanke, ECB, Bank of Japan, everybody is trying to preserve the system. But I think anybody with a sixth grade math skill and a calculator can tell you that that game ends sooner or later. Does the Fed lack sixth grade math skills? Or what is their end game here? I do not even understand how this game plays out. Sooner or later, you have to get your debt back in line with your income, period.

Jim Rickards:  Right. Well, when you have this much debt overhang – and I think you described the problem correctly, Chris – there are only three ways out. The first way out is default, and we are seeing that increase today. The second way out is inflation, and this is the preferred method of the Fed and the Treasury. Now, you will never hear a Fed chairman say we are working really hard to get some inflation in the system. Although interestingly, Bernanke has said some things very recently that were very revealing along those lines. He said we do not want too much but he is very candid about targeting two percent inflation and has gone on to say you know, we might overshoot the target a little bit and things might get a little bit out of control and we could have something higher. To me, that is revealing because there is no doubt that what they are really shooting for is four percent inflation. They want the shock factor. In other words, they want to guide your expectations to two, then actually produce four so that people will sit up and take notice and say gee, you know, I had better do one of two things. I had better go out and buy that car or buy that refrigerator before prices get out of control, or buy that new house just to prop up asset values. The other thing is that at that point, you will have steeply negative real interest rates meaning if the nominal rate on the loan is one percent but inflation is four percent, then the real cost of borrowing is negative three. The lender is paying you to borrow. You can pay them back in cheaper dollars. So I like to say it is like renting a car, driving it around and returning it with the gas tank half empty without having to pay for the gas.

So that is what the Fed is trying to do. They are trying to get that lending/spending machine going again, get the velocity of money up and kind of inflate their way out of this problem. A couple problems with that. Number one, two percent inflation is not so benign. Two percent inflation cuts the value of a dollar in half – I am sorry – cuts the value of the dollar by seventy five percent in the course of a typical lifetime. So it cuts it in half in thirty-five years and then in the following thirty-five years, cuts it in half again. So now, you are down seventy five percent from where you started. So from the time you are born to the time you die, your dollar is going to lose seventy-five percent of its value. That is at two percent inflation. At four percent inflation, it will cut the value of a dollar in half by the time your children go to college.

So these are cancerous rates of inflation. Two percent sounds warm and fuzzy. It is not. The other thing economists say is, you know, who worries about inflation because your wages are going up and it all comes out in the wash. Well, I mean, this is the kind of thing that only an economist could say. But the fact is some of it does come out in the wash on average. But we do not live on average. We live our individual experiences. And the fact is in inflation, there are winners and there are losers. The winners are people who can see it coming, who understand what you and I and hopefully the listeners are talking about and hedge their position by getting gold or silver or land or fine art or investing in railroads as Warren Buffett is doing, some kind of hard asset play. The losers, those are savers, people with insurance policies, annuities, pensions, retirement plans – anything denominative dollars that are not going to go up when the inflation kicks in.

So inflation is really a form of theft, taking from everyday Americans and giving to leagues, hedge funds, bankers, and other people who understand, again, what we are talking about. So these are not benign numbers, but they do reveal the Feds’ hand. The Fed is out to inflate away the debt.

The third way out – in addition to default and inflation – is growth. And what happened to growth? And the neo-Keynesian economists like to talk about the tradeoff between consumption – which is just individual spending – and government spending. They have this concept of aggregate demand where they say well, gee, aggregate demand is falling short of target, like we are not spending enough money and consumers will not step up. So government has to step up and fill the gap between what consumers are doing and the theoretical aggregate demand. Well, whatever happened to investment? I mean, investment is part of GDP. The economists act as if consumption and government spending were the only two things that mattered. Of course, and exports is another part of it, but that is where the currency wars come in.

But what about investment? Investment is double beneficial. When you spend it, you get GDP immediately. And then if it is productive, you get improved productivity, GDP down the road so it is kind of a twofer. So we are going to move from a consumption driven economy to an investment driven economy. But instead, the neo-Keynesians just want to substitute government spending for individual spending and that is, yes, it is just part of this road to ruin.

Chris Martenson:  Well, I think part of their flaw, as I see, is they were expecting that a couple of trillion dollars poured into the gas tank would have gotten us revved up and moving and it has not. And one explanation for that is when I check out an oil chart, I can find exactly zero historical examples of a recovery happening at the inflation adjusted equivalent of a hundred dollar per barrel oil.

Jim Rickards:   Right.

Chris Martenson:  Do you have any thoughts on peak oil or energy prices and how those factor into this pile of debt?

Jim Rickards:  Well, certainly, high-energy prices are going to impede recovery and we are getting that not just from the kind of the prospect of inflation – which we talked about – but also because the geopolitical concerns in the Middle East. And I think those concerns are going to become more acute as the year goes on, the prices will go a little bit higher. So I am not really an expert on peak oil, but I am an expert on geopolitics and I can see that driving the price of oil significantly higher. And again, the data is unquestionably what you described, which is that is not the foundation or the basis for recovery. So in addition to all of the other headwinds I talked about, which is low money velocity, negative home equity, excess debt at the consumer level, deleveraging – in addition to all that, we have this high price of oil, which is just another headwind.

So again, it is all the more reason to think that the Feds have got their work cut out for them. But what concerns me is that instead of just sort of acquiescing to deflation and letting prices find the level, letting the housing market find its level to the point where people actually want to buy housing or buy stocks for fundamental reasons. Instead, they insist on propping up the asset bubbles to asset price inflation and ultimately, consumer price inflation. That will end badly, but it is hard to say when.

Chris Martenson:  So let me back up, then, to where you said that Bernanke said two percent is what we are targeting – wink wink – but he would not be unhappy with four percent. So they have already got interest rates at zero, they have already got as much liquidity in the system as I have ever seen. It expanded their balance sheet by a factor of three. They have done all these things and we do not have a whole lot of inflation going on by official measures. Do we interpret that as another round of QE is on the way? And if so, when would you think that might happen, given politics or election cycles or anything else?

Jim Rickards:  Sure. I think there are two interpretations, Chris, that we are consistently showing. I would like to say it is a sad thing, a sad sight when the Fed is trying to get inflation and cannot get it. So you are right. We have not – despite printing over two trillion dollars in the last three years – we have not seen much inflation in the United States. But there are two reasons for that. Number one; there is a very, very powerful deflationary vector coming out of the fact that we are in the depression. I do not really think in terms of double dips and recession cycles. I think we are in a depression. I think it began in 2007. It is probably going to continue until 2014; perhaps longer depending on policy. So there is a natural rate of deflation coming from that as balance sheets to leverage, assets are shed, prices get marked down, you know, etc. But then there is inflation, which is induced by the Fed through policy.

So what you have is sort of like two giant tectonic plates pushing against each other. It is the North Pacific plate pushing against the North American plate. Just because there is not an earthquake right now does not mean that tensions are not building up below the surface. I think the same thing is true when I see a CPI report coming in around two percent where it tells me that deflation is probably five or six and inflation is probably seven or eight. And it may net out to two, but the powerful, the underlying forces is very powerful and that could break one way or the other. So that is one reason.

But the other reason is that until recently, until about a year ago, China was maintaining a peg to the dollar. What that meant is that as the Fed was printing more and more money, a lot of those dollars were finding a way to China in the form of direct foreign investment, portfolio investment, and China’s net export account. And the People’s Bank of China said to Chinese companies and others that you cannot keep the dollars, you have to give them to us and we will give you our currency, the Yuan, the Chinese Yuan in exchange and then use that to pay your bills and your payrolls and all that. Well, what that meant was that the faster the Fed printed dollars, the faster the Chinese Central Bank had to print yuan to soak up the dollars. So the inflation actually broke out in China. Inflation took off with a vengeance in 2010 – say 2010, 2011 – which is highly destabilizing and worrying to the Chinese leadership because traditionally, it is the cause of political instability in China. So finally, they threw in the towel and did allow their currency to appreciate, go up, against the dollar. But that just means the inflation is now going to come back to the United States. Those chickens are going to come home to roost in the form of higher import prices.

And this is the flip side of the currency war. You know, currency wars start because people want to cheapen the price of exports. But they forget that the United States imports more than it exports and when you cheapen a currency, the price of all the things we buy from abroad – whether it is iPads, iPods, clothing, textiles, European vacations, etc. – all go up. So I think you can expect to see that inflation creeping in as a byproduct of the currency wars.

But yes, we are going to see QE3. They are not going to call it QE3. They are going to call it nominal GDP targeting, which is a fancy way of saying we want nominal GDP to go up and we do not care how much is inflation and how much is real. We just want the thing to go up because the debt is nominal. And you talked about fifth grade math. This is actually third grade math. You know, one plus four equals five and four plus one equals five. What the Feds are going to say is they care about the five. They care about that nominal growth. If it is one percent inflation and four percent real, that is a very happy outcome. But they are saying if it happens, it will be four percent inflation and one percent real. We do not care; we have to get to the five, one way or another.

So that is a signal that the Fed does not care about inflation. They are just going to print as much money as they have to. And you will see that probably at the April/May meeting, certainly before the summer. So yes, that is on the way.

Chris Martenson:  All right. In your book, you describe the end game as paper, gold, or chaos. Give our listeners a brief summary of what you think that endgame looks like.

Jim Rickards:  Yes, paper would basically be substituting a new global reserve currency. This is sponsored by the IMF, it is called the SDR, which stands for Special Drawing Rights. So basically, people understand that the Fed is a printing press and they can print dollars. Well, the IMS is a printing press, also. They can print SDRs and flood the world with liquidity that way. Except there is even less accountability at the IMS level than there is at the Fed level. This will happen the next time we have an acute stage of a financial crisis something like 2008. You know, the Fed papered it over the last time but the next time is going to be too big for the Fed. You know, the Fed increased their balance sheet to three trillion dollars. What are they going to do the next time, increase it to nine trillion? And there are political and practical limits to that. But the world has no limits, so we can just print this new world money on global money called the SDR.

So it is nothing new. They have been around since 1969 and some of them were issued, a couple hundred billion were issued in 2009. So that will be the new world money. Competing with that would be some kind of return to the gold standard where people do lose confidence in paper money and the SDRs do not do the trick, it is just another form of printing. Countries may have to go to the gold standard – not because they want to but because they have to restore confidence.

Third possibility – chaos – is the one I think that is actually the most likely. Not because anybody wants it or anyone plans for it but because of human nature, denial, wishful thinking, delay, kicking the can down the road, that things just collapse. As we have said before, these catastrophic collapses and complex systems come out of nowhere. They happen very suddenly and when you least expect it. And I think that may be what happens here.

Chris Martenson:  Yes. Certainly, I love the description of the pressures are building because that is what I see. I see the derivatives are actually higher today than they were in 2008. I see debt levels are actually higher, especially at the official or sovereign level. So these are all just pressures that are building. I cannot find any historical examples – maybe you know of one – where a reserve currency has been on the path of trying to weaken itself. I am not quite clear how that turns out and I do not know if the world has a better view how that is going to turn out either.

So here we are and today we have been talking with Jim Rickards, author of Currency Wars, bestseller, The Making of the Next Global Crisis. I highly recommend people read it. Jim, if people want to follow you further after they get your book, how would they do that?

Jim Rickards:  Thanks, Chris. I have a very active Twitter feed. The account is @JamesGRickards, all one word. Rickards is R-I-C-K-A-R-D-S. You can just following @JamesGRickards. You do not have to join Twitter yourself. You might want to, but you can just type in that handle and my account will come up. And I put quite a bit on the international monetary system. So that is one way to follow along and I would like people to do that.

Chris Martenson:  Excellent. Well, it has been a real pleasure talking with you today and we will certainly be tracking your book, how that does, and also what the Fed is going to do before summer.

Jim Rickards:  Great. Thank you, Chris.

Transcript for Charles Eisenstein

The following is a transcript for the podcast: Charles Eisenstein: It's Time for A Better Narrative

Chris Martenson: Hello. Welcome to another PeakProsperity.com podcast, I am your host, of course, Chris Martenson. I am really looking forward to today’s podcast. While every generation feels its own time is extraordinary and perhaps each time in history is unique. We, today, are facing a set of predicaments unlike any phase before. Never has humanity been so far out past the edge of the earth’s caring capacity. Never have we faced a globe without appreciable new resource horizons to cross over and exploit. And never has humanity had to envision a better future while moving away from a high density energy fuel source, like oil, and towards a more diffused energy source such as the sun or the wind. All of this is shorthand for the idea that there is something wrong about our current national and even global narrative that is out of alignment with the facts and data that we can easily access today and perhaps even with our own internal compasses that let us know there is much more to being a fully alive and conscious human than our culture typically encourages.

Here to talk with us about where we are with this story and where we are headed and the joys and pitfalls we might expect to find along the way is Charles Eisenstein, lecturer and the author of the books The Ascent of Humanity and Sacred Economics. I am very excited to have Charles as our guest today because he writes beautifully on an area that I find very few have been able to or are willing to explore openly which is the intersection between economics and philosophy.

Today, we are going to explore his thinking on the shortcomings of our current monetary system and why he sees us at an important juncture where, should we want to, we have the opportunity to transition to one more authentic with the laws of nature and the post peak oil future we are likely headed towards. I’m not sure where we will end up in this conversation, but I do predict it is going to be a very interesting ride. Charles, welcome. I am so glad to have you with us today.

Charles Eisenstein: I am really happy to be here.

Chris Martenson: Let’s begin by characterizing the predicament in which we find ourselves. I have said something is wrong with our narrative and there are a lot of pieces to that. A central one, that can prove to be highly disruptive, is when a cultures money system breaks down. I love what you wrote about money as a sacred object and that our high priest and priestesses of money are in danger of being revealed as powerless frauds. Can you please paint for us your picture of how money operates and how it is failing now?

Charles Eisenstein: Yes. I think everybody has a sense that the failure of money is an expression of the failure of something even deeper. So money might not be the deepest thing that is failing, but certainly it is pretty central to everything else that is going on. What I see, we talk a lot about peak resource use or maybe even more relevant, peak environmental degradation, but I think that underneath all of that the failure is of the basic mythology of our culture that money is an expression of. You can even say we are going through peak separation where the kind of money that we have today pushes us into competition whether we want to be there or not because of the way that it is created and circulated as interest baring debt there is always more debt than there is money. Everybody is competing for not enough money and it kind of makes into the truth something that isn’t fundamentally true, which is the kind of Cartesian version of self that we are these kind of bubble psychology competing with each other in an external universe for never enough. And the money system reifies that and drags us into that way of being. And it also necessitates economic growth because if there is always more debt than there is money the only way the debts can be paid what would have to happen is either that lots and lots of people go bankrupt and default and everything falls apart or you have to create even more money to pay the debts that were created from creating the existing money as you and your readers all know, maybe even better than I do, how this all works.

That can only continue as long as there is a basis for creating new money. I feel like I am kind of wandering off a little bit here. But basically, and I can get into that a little bit more. Basically, what is happening is that our money system is deeply implicated in separation and growth and both of these have reached their extreme. Therefore, money isn’t working anymore.

Chris Martenson: And money is certainly breaking down. I love the image you have us before of how our high priest Ben Bernanke is up and he is doing his rain dance, right? And he pours trillions of dollars into the landscape and what is supposed to happen next is an economic revival and it doesn’t happen. So what we take from that is uh oh, it looks like our priest’s magic is gone and indeed it is gone. From my point of reference I think once you have hit where we are in the energy cycle and we are getting less and less high net energy back it is just an absolute guaranteed prediction you are going to get less and less economic activity regardless of what you do with the monetary policy. Whether it is tight or loose or all of that, ultimately, the real driver of economic activity is not money itself, it is real goods and services that people actually need and want and are going to consume going from point A to point B and energy is just sand in the transmission of that as it is rising in price.

So through that framework we can see that it is an enormous structural shift and it goes beyond, it goes so far beyond that, of course. The money system is breaking down. Europe is discovering that right now. We were going to hit a mathematical limit with our debt expansion which is about four decades in the making. That was going to happen anyway. But we were going to have this whole peak oil thing happening at the same time, plus other resources are getting tight. We have global food supplies and aquifers and we are looking at certain minerals. There are just enough warning signs there any prudent person can look at this and say gosh, this is a new landscape. And yet, my perception is that our current cultural and political leadership is just so far away from understanding that the game has changed that my personal assessment is that what they are going to do is continue to perpetuate the status quo as long as possible until it is painfully obvious that we can't do that anymore and by painfully obvious I mean, reality has somehow prevented us from going any further. Our liver gave out, that’s it. We are all done in our time as alcoholics.

So what in your writings and from your perspective, what is going on here? How can people like you and I, thousands and if not millions of other very intelligent, well meaning people look at this data and go "Whoa, something really has to change here."? This is serious and yet we find this gap between what we are seeing in the data and what we are receiving as messages in cultural conditioning messages from everything around us, in essence. What is going on here?

Charles Eisenstein: I think you are right, that the power elite is very much trapped in their obsolete paradigms across the political spectrum. Everyone’s solution is we have got to reignite economic growth. So when housing starts rise that is trumpeted as great news. No one really bothers to mention that we already have like double the housing capacity per capita that we did in the 1950’s. There is something like 19 million vacant units. But as long as we are starting to build new houses then that is going to be employment and everything is going to be "OK". They are trying to squeeze a little bit more growth out of the system. But as you mentioned, it comes at a higher and higher cost.

It is very much like an alcoholic. In the early days you can maintain the addiction quite easily. Maybe you will have to take a second mortgage out on your house, you will have to lie to your boss a little bit but you can kind of hold things together. Eventually, things fall apart. Eventually, it is your liver. And you can only get that next fix at greater and greater cost. Now, to extend the metaphor to our system, we have gotten all of the easy oil. We have depleted all the easy resources and the ones that we can easily escape the consequences of. Up until now, or up until recently if you are creating industrial pollution, radioactive waste, etc., etc. social turmoil. Well, you can move away from it. You can move to a gated community. You can escape it.

Well, today it is becoming impossible. The consequences are invading even the fortresses of the wealthy in various forms. And if we want to keep growth going there is not that much more of nature that we can convert into product and not much more human relationship that we can convert into services. What we can convert comes at a much, much higher cost. You have to excavate the Alberta tar sands and devastate that ecosystem. You have to clear cut the forests the fifth time or sixth time and they aren’t really recovering anymore. Trees are dying everywhere and we just – the planet can’t take much more of that.

Sometimes economists will say is we can grow the economy of services instead and we can actually have economic growth with less energy because of miniaturization and other technological innovations. So energy really isn’t a constraint and I think that to meet that objection you have to kind of extend the peak argument to include community as well and understand that a lot of the growth and services come at the expense of things people once did for each other and that technology -- just like in the material realm and the social realm -- has extended the reach of monetized services.

For example, people never used to pay for communication, now we pay for almost all of our communication. People never used to pay for entertainment but now we pay for almost all of our entertainment. Even when my father was a child he says that in his suburban neighborhood, his whole neighborhood, every Sunday, would get together with guitars and sing folk songs. To imagine that happening in my neighborhood today is ridiculous because we all buy all of our entertainment.

There is almost nothing that we don’t pay for anymore. What is happening is there is just not that much room for economic growth. We are never going to go back to the normal of the 50s and 60s when like there were years where there was like 7 or 8% GDP growth. No way. Now we are having trouble getting up to 2.5%. And that is just not enough to allow lending. The banks would rather just sit on their money. Why would you lend it to build a widget factory when the market for widgets is flat?

The money is stagnating as excess reserves. No matter how much they create it is, as Keynes said, like loosening your belt in hopes you will get fat.

Chris Martenson: It is interesting to me that during a period of time in which everybody is in a position of leadership today grew up was one of the more extraordinary economic periods of history where somehow in the decoupling of gold from the international exchange system in 1971 through to current roughly, about 2008 when it broke apart, but up to say between 71 and 2008 we were increasing debt much, much faster than GDP and that is even ignoring all the ways GDP as a number is factiously padded and otherwise fuzzified. So we have, even by our own data, such as it is, this idea that we can compound our debts faster than we can compound the underlying economy and perpetuity and that is sort of the environment in which, the culture in which the people who are currently in power grew up. So that is normal to them. This very distorted, grotesque, Daliesque landscape to them looks perfectly reasonable and square and flat and it is not. It is actually a very unusual period in history and that is coming to an end.

There are really only a couple of ways to end it. This is debt we are talking about, so you pay it back or you don’t. If you don’t pay it back you are defaulting on it in some form with inflating or printing it away being a form of soft default that spreads the losses over everybody instead of a few. That is our choice at this point in time and if we go the pay it back route we have to accept a much, much lower standard of living than we have come to expect. That whole born on third base and think you hit a triple thing. Right? We have come to expect that life – this is just how life it is. No, that is just how it is when you are spending beyond your means. Spending beyond your means is really not a very normal place to live forever.

Charles Eisenstein: Third solution would be to grow the economy so much that you can keep paying it back and increase the standards of living. That is one thing I really appreciate about your financial commentary because you are one of the few out there, really, that has integrated the understanding of the limits of growth into this money picture; that is the only way out and it is not a way out anymore.

Chris Martenson: We have enough years under our belt at this point to say it hasn’t been working for at least three or four years and you are right – there is precious little commentary and connection out there that says wait a minute, maybe it is more than the debt overhang. Maybe there are some other factors at play here. How about this $100 oil? Anybody thinking about that right now? We haven’t had a single instance of economic recovery of oil prices at this level. It hasn’t ever happened. So how it will be different this time is a mystery.

Charles Eisenstein: Well, we all know it won’t be. It really is hard to know what is coming. You had asked before about how do we grapple with this as individuals when we see the world falling apart. The understanding that the world is falling apart hasn’t reached everybody yet. It is still possible today to cling to the illusion that things are basically normal or that normal is coming back, but more and more people are realizing that it isn’t coming back. And then, the question is well, what do you do with that?

I was at a conference a while back. For some strange reason I was invited to speak to a group of investors and the guy before me he spoke on how the financial system is going to collapse so you better buy gold, he said. Better be physical gold, like actual bars of gold. That is the only safe investment. So then I give my talk after that and someone in the Q&A asks me well what do you think about gold, Charles, do you agree with that? I said if things fall apart to the extent that the US dollar no longer has any value the worst investment you can have, the worst thing you can have would be a whole lot of gold in your basement because men with guns will come and take your gold. Those men with guns will probably be the government, but could be warlords, thugs, thieves and so forth. Unless your temperament is cut out to be a warlord and hire your own private army to protect your gold in your basement and then deal with the fact that they are probably going to think well, "why don’t we just take his gold?" Unless you are cut out to be a warlord, gold is probably the least safe investment you can have under those kind of conditions. The only thing that you could invest in that can survive such a transition would be to invest in your community, to create a reservoir of gratitude out there to be someone who is valuable to other people who has valuable resources, valuable skills which you share. Basically, the only kind of wealth that can persist through this transition is what you give. Wealth would be how much you have given.

This shift, this different approach also resonates with where we want to go anyway. Even when people achieve a lot of wealth and they have kind of won this war of all-against-all that is dictated by the money system, what do they want to do? They want to give. It is in our nature to want to give and I think on a deep level what we are seeing is resurfacing of a much more ancient kind of economy. All ancient economies were gift economies where indeed, the wealthiest person was the one that gave the most. That is how you became a big man in a potlatch society. Our desire and even on a deeper level it goes down to understanding that we are not these separate beings in an objective Cartesian Newtonian universe. But that something of you is in me and that our beingness is interdependent.

Chris Martenson: This is something that I think in the United States is a particular challenge. So I have the opportunity and the fortune to be able to travel and see other cultures. We in the United States have a particularly isolationist sort of a view and it is heavily reinforced in our practices here whether it is creating false dichotomies in a political divide so that we can get along there or through any other isms or divisions or what not. It really struck me, I was talking with a woman who is a psychiatrist in one of the tonier zip codes in California and she said that it was her experience that her practice was actually booming, she said all these people are hanging on by their economic fingernails but there are still two cars in the driveway, the lawn is perfectly manicured, everything looks great. But the people who are coming to her can’t even talk about their own difficulties with their family members sometimes or certainly they can’t let their neighbors know. There is this extraordinary pressure to just sort of deal with it as their world is collapsing around them and in fact, that is historically speaking a really, really unusual condition to find yourself in. I would suggest it is unnatural.

Charles Eisenstein: Yes. This alienation from everything. First from community and now from even the family. It is truly remarkable that now like a confidant, like wise advice; that is something that has been commoditized. You pay for that today. And you don’t get it from the people who are most intimately involved. This is kind of an extreme, but still. I think it is symptomatic.

Chris Martenson: It is something I have become aware of, a lot recently, is that on some level almost everybody I talk to has got the awareness that something is wrong, maybe desperately wrong. Some of them have the intellectual framework, some of them just have a raw feeling in their gut that something in our narrative that we have agreed to live by is just broken. I am not just referring to the American narrative anymore at this point or the European or Japanese, I mean human, global narrative. I mentioned it before the data suggests that we are past carrying capacity of the globe. What this means to me is that there needs to be – if you say you are past the carrying capacity, the next sentence is "well, I guess there is going to be fewer humans at some point in the future" or "we are going to have to really, enormously change our habits and practices". Yet, the deepest messages we are still giving to ourselves every day in the newspapers and on TV and in the media and whatnot and in our religious text are things like well, "be fruitful and multiply", "our economy needs to grow this year and every year and next year forever", that "resources are there to be consumed".

None of these things are truly sustainable meaning, they can continue at their current trajectories for even another 10 generations. Whether it is this year or 100 years the final consumption of non-renewable natural resources means that’s it, its gone. Aren’t we also wired somehow as humans to really care about our children, I mean really and those who come after us even if we don’t know them? Is not stewardship somehow a human capability?

Charles Eisenstein: I think we are caught in the grips of a myth and a story and you put your finger on it to be fruitful and multiply, I call that myth "ascent". It says basically that we were once very few on earth, basically animals, helpless and ignorant. Then we developed, thanks to our big brains, science and technology and we covered the earth, we transcended natural limitations. We harnessed natural forces. We turned the whole world into ours. We domesticated it. The story says, someday our conquest of nature will be complete. We will have synthetic food, we will upload our consciousness into computers, we will conquer all disease, we will conquer old age, we will move on into space and we won’t need nature anymore. We will have completely transcended it and fulfilled our destiny. That narrative, it is all over the place in very subtle ways. We don’t explicitly talk about conquering nature very much anymore, but the very fact that we refer to nature as "resources" also comes from that mindset. And that is becoming obsolete in so many ways.

The money system is part of that myth, it embodies it and it enforces it -- for one thing because it generates, it necessitates, compels economic growth, the conversion of nature into property, into goods and services. So the breakdown of the money system is one symptom that this myth, or this story, has run its course. Other symptoms are the outbreak of all kinds of incurable diseases. In the 50s and 60s it looks like we really would conquer all disease by the year 2000. It looks like we just conquered small pox, cholera, plague and polio and everything and cancer was going to be next. Now we have all of these new diseases, life expectancy is starting to go down.

Look at any institution that is facing a parallel crisis and our trajectory of ascent is slowing down or maybe even beginning to descend. Now will that descent be a crash or will we level off into some kind of steady state, that is an open question. But I think that if you look at the growth trajectory of natural systems, like immature ecosystems or children. You have a period of rapid growth and then it levels off. One way I like to frame it is I like to say okay, maybe what is happening is that humanity is entering its adulthood. We have been children this whole time on earth with a relationship to the planet of mostly receding. Which is the same relationship a child has to the parent.

But when you enter adulthood, then your love relationship takes on a new dimension. You fall in love with somebody who is not your parent and you no longer simply desire to receive but you also desire to give a gift to your sweetie. Then at some point, you desire, to co-create.

I think that humanity is transitioning into that relationship to earth, which means that we are falling in love with earth. I think it started as a mass consciousness movement in civilized society. Envisionist cultures are another matter entirely, but it started maybe in the 60s with the environmental movement. When the astronauts brought back those photographs of earth, the first pictures anyone had ever seen that didn’t have borders drawn on them, the first map that didn’t have borders drawn on them. And people really were struck by those images and they fell in love with earth and the environmental movement was born.

The problem that we have is that all of our institutions are based in an obsolete myth in an era of growth, of conquest, of ascent. But our desires and our intuitions are shifting. We no longer are excited as we were 100 years ago to contribute to the conquest of nature. An idealistic young person 100 years ago, yeah, I mean, I am going to invent a way to cut down trees faster and you would be a hero for doing that. But today, the idealistic young people are going into permaculture.

But the money system is still based in the past. You can still make lots of money if you can discover a way to cut down trees faster, but there is not a lot of money in permaculture. And that means that the money system is obsolete and we need to change it to align it with a steady state or de-growth economy. And that is what I write about. But basically, none of the policies that are on the table as far as legitimate political discussion go, nothing is on the table, yet. It is still way off in left field.

Chris Martenson: I have noticed it at first as I was thinking of it as a cultural but then I realized it is actually a generational breakdown happening. It first became startling to me about four years ago or five years ago when I was lecturing, the audience would be exclusively boomers unless they accidentally dragged somebody young along and then over time it began to shift a little to younger and younger people. The dichotomy that existed was that the boomers were typically asking me a flavor of this question almost invariably, which is "how can we preserve the status quo?". And the questions would be framed in terms of who do we vote for so that we can keep this moving or where do I put my 401k or some version of countless, "I invested my whole life into this thing. Can it please just not fall apart right now? Thanks."

Young people were peering into the same system and saying I see nothing to gain by preserving the status quo. You racked up all of the debts and I am being left with all of the wreckage from it - no. I am not playing along so I am going to go into permaculture or something like that. There is a real generational gap here that idea of separation is alive and well I think across the ages.

I love this idea that humans are at some point of initiation, one of those magic boundaries in life where if you have an intact culture you would have somebody walk you into manhood from boyhood. Or into womanhood from girlhood and here we are at our adolescence and I really, truly believe that it is up to us to decide either to shift our culture on our own terms or nature will shift it for us on her terms.

We face a future shaped by disaster or design, I am a design guy. I think design would be awesome if we could do that here.

The trajectory I see though is that we are really still very, clearly, headed towards a hard landing at this point. Largely because it is so hard to shift a culture. So hard for the status quo to let go of what it knows how to do. The institutional inertia, the personal inertia, all of those things are really much in play. But I know that any of these big changes we are talking about that we need to have. So if we are going to be living as a part of, not apart from, nature that we are going to be living in balance in a way, that we could see credibly what could be sustained for another thousand years. If we are going to maneuver into that landscape that first step for me was required for me to break from the culture and in my own small way, I did this, right? Along with my own small family I left the comforts of the life I lived into. The vice presidency, the big salary, nice, tidy bedroom community. I actively crossed the grain of my culture and I did all of these different things, very bold.

Yet, as anybody who has read Ishmael by Daniel Quinn -- and I think everybody should, that is a great book --he says “that mother culture whispers to us so seductively and so comprehensively at all moments that it takes near super human effort to step back and even recognize what the messages are”.

So my big break from culture was really nothing more than a series of very miniscule steps. Yet, we have to take those steps if we are going to close that gap between what we know to be true and what our actions are at this point.

Charles Eisenstein: I am kind of a disaster and design guy. The designs are coming out. Like some of them are in my book, very few of them are original actually. I pull them from various traditions of economic thought and there are tons of solutions out there for every single problem that we face. They aren’t actually that hard to implement theoretically. It is just a matter of our inertia of our perceptions and our habits, our ways of being and how do those change? Personally I don’t usually change anything in my life until there is some kind of crisis or disaster. It is actually not that I made any superhuman efforts to change. It is that I clung on to normal as long as I could until various events made that impossible. I think on a collective level we are going through that. You mentioned initiation, I think that is the other thing that happens when one enters adulthood. You go through an initiation where the world falls apart and even your identity falls apart. And, again, like you were saying primitive tribes they had these initiation ordeals where they would purposely make your world fall apart. Everything that seems so secure and so permanent and so real became revealed as nothing but illusion. I think that is a really good metaphor for what is happening today with the money system. Things that seem so real, nothing was more practical than a blue chip stock or a triple a bond. These things, that is how you did it, you know, you bought your annuities, your insurance, your long-term investments. That was security. That was the very essence of practical, of real. Now we are seeing that these things are just numbers in computers. They are just this swirl of bits. People are almost having a sense of vertigo when they contemplate that all of this could dissolve.

I think it really is a – just the financial aspect of this – it really is an ordeal and you could call it a hard landing. I think it will be frightening for a lot of people. Fundamentally we still live on a very rich planet with incredible abundance and you see it even here in Harrisburg. I live here in Pennsylvania you know and last year the Susquehanna River rose 30 feet. And neighbors who didn’t even know each other’s name were basically flooded out of their houses and they just started helping each other. They were able to achieve things that seemed impossible a few days before. I think that our capacities are kind of dormant right now, but when a crisis hits we will become capable. All the things that are politically impossible today, if we really turn our minds to it we could achieve them very quickly. If we really had our minds set on it we could reduce CO2 emissions by 90% in 10 years. Most of them aren’t going toward anything that serves real human happiness anyways. Wouldn’t be worse off. People in India aren’t less happy than people here even if their ecological footprint is a tenth or a twentieth.

I was doing some research into organic agriculture; usually it is criticized as well. It is kind of this you know, bourgeoisie indulgence, but you couldn’t feed the world on it because the yields are much lower. Turns out that actually, the yields are much higher per unit of land, but not per unit of labor. For units of labor the yields are much lower. So we have to have lots more people having gardens and working on farms. That is where people want to go anyway.

I just increasingly, when I look into it I get the feeling that this scarcity is an illusion, but it is also a very real illusion because it is built into the money system, but it doesn’t have to be that way.

Chris Martenson: So here we are, we have got this idea that there are these big changes coming. Whether our money system was due for a breakdown anyway because we have been putting too much gas into the engine too quickly for too long or whether we note that we are at the caring capacity of the planet or whether we note that there are certain ecological limits that we seem to be hitting or whether we just note that it is time for us to settle into the idea that we pretty much conquered the globe and it is time to shift into that next stage of whatever our existence is going to be. Somehow, we have come to the idea that there are these big changes coming and I was really taken, I just read an article, I don’t know maybe three or four months ago that noted that when the USSR collapsed, alcoholism became the number one cause of death for people between the ages of 18 and 52, no 18 to 54 because the number was 52% of all deaths that were recorded were alcohol related.

So here is an example; we have a major economic super power, fell apart, right? Still hugely endowed with all kinds of resources. Natural resources, well oil and gas. But not the least of which is people still have their government housing and for the most part there was still government supplied food. So they had a place to live, they had food, they had the basics. But there was this narrative running for the people there that was I am a pipefitter whatever I do. I am a pipefitter, that job is no longer available, I am useless I am going to numb myself and drink. So it wasn’t the economic collapse that really hurt the people there as much as their response to it. It was the idea that I have a story running that I am a pipe fitter, I can’t do that. I have nothing else to do, my purpose was embedded in that. If you had a different story that says wow, I am out of work, look at all of this free time I have. Here is this huge list of things I have always wanted to do in my free time and I am going to grow as individual extraordinarily in this period and take this as a gift. That is a different story from saying I am useless I am going to drink myself to death. Fundamentally, it is the story you are carrying not the circumstances that really dictate our experience of the time.

Now, I want to turn to the idea if however we have come to – we have to the idea there was this big set of changes; possibly disruptive, possibly with things like scarcity and lack and other sort of scary things built into it. Possibly, we are excited about all of the changes that are coming. However we see these changes coming, the question is what can we be doing today, what should we be doing today, in this moment to be in essence, preparing ourselves internally for living into that new future, whatever it happens to be?

Charles Eisenstein: Yea, I think that it really is the story that we are carrying and the perceptions that we take into these changes. I mentioned that the really deep story underlying all of this is the story of separation. The story that answers the question who am I and why am I here. The old story was who are you is a skin encapsulated soul, a Cartesian mode of consciousness in a robot made of flesh. You are in this objective universe that operates by force and the purpose for you being here, there isn’t one, but you are programmed by your genes to survive and maximize reproductive self interest and that was the story of self. And we are learning now that that story is falling apart in so many ways; it is falling apart scientifically, it doesn’t align with quantum mechanics, the observer, subject object distinction breaking down, it doesn’t align with ecology, it doesn’t align with the new genetics, doesn’t align with psychology, the new spirituality and some of the new paradigms of economics, that Self and all that is built upon it is breaking down. So the new story of Self, I think really to answer your question is that we need to align ourselves with the new story of Self, which I would say you could call it the connected Self. It says we are not these separate beings, but there is something of you in me where maybe you can even say that we are the same being looking at the world with two sets of eyes.

It is not just that we are interdependent. That is one word for it, but its that my very being depends on the being of other – other beings. It is something that you can feel when you read about a species going extinct. You see the bulldozers knocking down swaths of virgin forest or you read about a child in Haiti eating dirt because he is so hungry. It hurts. Why should that hurt?

From the perspective of separation it is irrational for it to hurt. This is happened to somebody else. In fact, that is good because that is one less competitor. But the fact that it hurts I think hints at our true nature as connected beings, which is really what mystics and spiritual teachers have been telling us for thousands of years is that as you do unto others so you are doing unto yourself. You could say that the expansion of Self to include others is almost a definition of love.

I think that anyway that we can align ourselves with that truth will help us in the transition and help society through the transition too. Sometime with a lot of people I speak to almost anybody in the audience will raise their hand, every time I speak someone will ask the question, what about all of those people driving around in their SUVs that don’t get it. How do we make them get it? I think that most of the ways that we try to make them get it are counter productive. Most of the ways are through guilt or shame. How could you be using up more than your share of resources. But really, to change people and to bring them into a new story you have to puncture the bubble of the old story. Love is emphatical to the story of separation; it doesn’t make sense, it does not compute. I think about that secret Santa last Christmas who went around to the K-marts and paid down people’s layaways you know? Somebody goes in there and like oh, someone already paid this for you. That just doesn’t fit in. No one is getting an advantage over you by doing that, there is no strings attached. It just makes the story of separation, the story of everyone who is in it for themselves, everyone who is trying to maximize their financial self interest. This is an explicit ideology in economics. It makes that story a bit less compelling and anything that we do to generalize that, anything that we do that increases the amount of love in the world, it makes the story of separation less compelling and it eases the transition for the entire civilization. And that is not to say that political action and various kinds of activism aren’t necessary too.

Really what I am saying is that even these small, personal acts are also political acts. They are part of this transition into the connected Self and a civilization built on that Self. It goes deep. It sounds like hey, I am supposed to be talking about economics here. We have to go all the way to the bottom because economics as we know it are built on a deep, deep structure. Plus, I think we understand that everything is changing. We have an intuition that the crisis is a spiritual crisis as well as an economic crisis, a political crisis, energy crisis and so forth.

Chris Martenson: Well, the gift of any crisis is the opportunity to work with whatever comes up and what has been revealed. This idea of separation is certainly going to be revealed as something that is really the source of a lot of suffering. When I work with individuals, I am very cognizant of the idea that when I first had this world view of mine shaken up. When everything was fine and hunky dory and I had the entire illusion and then I discovered some information and it shook everything to its core and led to extraordinary changes in my life. I am sensitive and very empathetic to the idea that those first few months were rough for me, personally. Uh oh - very much a lot of anxiety and fear. I recognize the stage people, not always, but sometimes, quite often go through and that first stage is how do I protect myself and it is very natural. It is like uh oh everything just got shaken up. Let me make sure I got shelter, food, warmth. You do that and after a little bit of time you poke your head up and you go okay, I have that and the world is still spinning, now what? You go to part two of this story which is to say well, it is really we are going to need community which is a shorthand way of saying I think what you are saying which is that it is time to step into the idea that we are going to be doing as well as our neighbors and vice versa and that brings us closer to the idea that we are in this together. And then maybe it extends even further out of humans into the rest of the biosphere and we say well, actually we are doing as well as my watershed is doing and the soil on my property is doing and the depth of the other connections that are out there around me in the ecological sphere.

We have our warning signs you know, the frogs disappearing and being born with three legs; it tells us maybe not all is cool with the chemicals we are putting into the environment. Through this, I think we come to this point of I hope we can get to this point of understanding that we need to start understanding that the old way of doing things is really, fundamentally, not serving us anymore in total. And it is good time, a crisis is a great time to pick up the pieces of your life and look at it and say this isn’t serving me, neither is that. Oh this still works, I will keep this. And I am going to get rid of that and I am going to keep these four things and it is time to see what works and what doesn’t.

First, you have to get to that point of saying what we are doing isn’t working. And that is the first stage of the conversation, I think.

Charles Eisenstein: Yea. And it sure helps to realize that it is not working when the crisis begin to come home and you actually start seeing those three legged frogs. Today, like you said, our well being is only as good as that of the watershed that we live in. But today, money, as we know it contradicts that. Money says it doesn’t matter what has happened to the watershed as long as you have enough money to buy organic food shipped in from somewhere else. Buy water or to move away. Money can insulate you from what is happening to the earth and you can make money in fact, by destroying the watershed. I think that part of – at least part of what I am working toward is to realign the money system so that is no longer true. So one way to look at that is to internalize these external costs. The business model of ‘I get the profits and somebody else pays the costs’. Even if you are a wholehearted believer in capitalism, that is not fair. You just have to pay the costs and not the people downwind or downstream, or in future generations.

I guess I just mentioned that because I want to short circuit the conclusion that what we should really pay attention to is this spiritual aspect. I think that in itself, the idea that the world is divided into two parts spiritual and material is itself a very toxic idea and an example of separation. We definitely need to implement the spiritual or ecological understandings in every way including in an economic monetary way. I’m glad to see that people are beginning to discuss these ideas more and more even in the mainstream. There is still a long way to go.

Chris Martenson: My great source of hope is that the people I find having these conversations most deeply are younger, on average, and they have really as with bright, facile, energetic minds and a compelling interest in the future looked into things and said we really have to do things really differently. Enough of them have evolved far enough they can look at the pure, consumptive economy and say that looks soulless to me. I am not interested. Maybe I am just in a hotbed of where this is happening, but I see a lot and I am very excited by it because there is a clear, some of these kids are thinking thoughts that would have been unimaginable to me to be having at 17, 18, 19, 20 years of age.

Charles Eisenstein: Tell me about it. I run ito that all the time too. It is like nobody was having those thoughts when I was 20, imagine what thoughts they are going to have when they are in their 40s.

Chris Martenson: I know. It’s incredible. I take great hope from that and when we talk about this idea of building community I have come around to the idea that I am not going to hold anymore workshops on how to build a community because it is not an event. It is a process and you build community every time you have an interaction with somebody. So all I actually care about are the actions that bring us back together whether it is the guitar playing that we talked about from your father’s age or anything else that we might do sort of in community. That is one of the things that I see young people doing a lot of is actually finding ways to interact with each other a lot and doing fun stuff, cool stuff, interesting stuff, permaculture things, nature walks, whatever they happen to be doing but I see a lot of it and to me that is the – when I say how do we live, that is it right there. Those are the things we need to start doing. It is not something to buy, it is not the next thing to read or anything. It is to literally get out of your house and go find somebody to do something with and it could be anything, literally anything. I think those are some first steps that make a lot of sense to me right now.

Charles Eisenstein: Yea. It has to be – I think the way to build a community are things that are we are not just consuming together. A lot of I have seen a lot of attempts to build community or to create community fail because people don’t need each other and aren’t giving each other anything, but just getting together and consuming drink, consuming entertainment, consuming food, but you aren’t actually co-creating and they are not creating ties that you have in say in Pennsylvania in an Amish community where you really need the other people in that community. You can’t just delete them from your friend’s list and pay for the things that they were once giving you. There is an actual dependency which we aspire, you know when people aspire to financial independence they are aspiring to not need anybody. I think that community is impossible when we don’t need each other and community, in fact, is woven from gifts. When you give somebody something then it creates a tie that person wants to give you something too, so there is an ongoing relationship which is not present in a financial transaction. And that is why I say that economic growth has happened through the strip mining of the community. The conversion of these bonds into free chemical energy kind of into money. And that is starting to reverse. As you say, with the young people, a lot of what is going on is they could be paying for entertainment but they are getting together and making films, putting it on YouTube or they are doing re-skilling kinds of workshops, teaching each other a new skills. They are doing things – reclaiming things from the money economy.

I think that is really interesting that anytime you find a way to replace money transactions with self sufficient or give transactions. Like if you make a neighborhood childcare coop or some kind of way to share things in the community, Zipcars in Baltimore, anything that reclaims these paid services. You are actually reducing GDP by doing that. Thereby hastening the financial crisis because it just intensifies when there is no new good and services and in fact, the economy is shrinking. Even Craig’s List, you know, by one estimate so far replaced something like $100 billion in ad revenue. That all comes off of GDP too. And so open source software, all of these – not all on a community level, some of them are more on a global level. All of these are ways of reclaiming the commons and reclaiming relationships. They hasten the demise of the financial system, but they also mitigate the severity of the collapse because now we have some wealth that hasn’t been incinerated. Or when you reclaim nature, when you protect it from development or stop a pipeline or do anything to prevent something from being converted into a product. Then you are also hastening the collapse.

In a way, the conservatives almost have it right, shutting off the oil development in the Alaskan Wildlife Refuge does hurt GDP and it does cause fewer jobs to be created, but that’s good. If we can preserve some biodiversity and some habitat and some of the wealth of earth then it will be much easier to rebuild after the collapse and we won’t have to have a really hard landing with billions of casualties. There is still a lot of richness left, I think.

Chris Martenson: Oh, there is so much and I love this, this is very practical advice, how do I live into this? You go out and find something that would have taken money before and do it without money. In entertainment, hold a book club. Everybody gets the book, go to the library and get the book if you want to spend no money and then talk about it; hold a salon on a set of topics. Figure out how to do the childcare collective you talked about or whatever this thing happens to be. You are building a community, you are getting resilience, you are forming those threads with each other, gift things if you can.

Along the way that is happening, subtly is that we are rewriting the narrative of who we are and how we are and taking it away, reclaiming it if you will, from the main narrative which says, you are a device that needs to accumulate as much wealth as you can. And if you do that you will be really happy and if you fail at that you will be miserable and stripping it of some of its power which is an important thing to do here.

Charles Eisenstein: Yea. When you are embedded in a gift community it is insanity to think more for me, less for you. In a gift community if somebody has some great talent or some great success or some good fortune, that is good for you too because they are contributing to your life. It is much easier to understand we are not these separate beings in a hostile universe.

Chris Martenson: Oh, how comforting that would be. Well, listen this has been a fabulous conversation. We have been talking to Charles Eisenstein author of two books, The Ascent of Humanity is the newest one and also Sacred Economics, excellent books. I am not al the way through Ascent of Humanity yet, but the introduction and first couple of chapters are fantastic.

Charles Eisenstein: Sacred Economics is the most recent one, actually.

Chris Martenson: Oh, sorry. Sacred Economics being the most recent one, okay, so Charles how can people find out more about you and follow your work and get these books?

Charles Eisenstein: I think the best way is CharlesEisenstein.net has links to my other sites and I will mention that the text of both books is online as well as in print. If you are practicing a radical reduction of money in your life, you need not buy the books. Most people do anyway, but you never know.

Chris Martenson: I like that model. I hope it is working for you. It has worked for other people, I know. Fantastic and thank you so much for spending time to talk with us, I hope we can do this again.

Charles Eisenstein: Yea. Thanks, Chris.

The following is a transcript for the podcast: Charles Eisenstein:  It's Time for a Better Narrative

Chris Martenson:  Hello. Welcome to another PeakProsperity.com podcast, I am your host, of course, Chris Martenson. I am really looking forward to today’s podcast. While every generation feels its own time is extraordinary and perhaps each time in history is unique. We, today, are facing a set of predicaments unlike any phase before. Never has humanity been so far out past the edge of the earth’s caring capacity. Never have we faced a globe without appreciable new resource horizons to cross over and exploit. And never has humanity had to envision a better future while moving away from a high-density energy fuel source, like oil, and towards a more diffused energy source such as the sun or the wind. All of this is shorthand for the idea that there is something wrong about our current national and even global narrative that is out of alignment with the facts and data that we can easily access today and perhaps even with our own internal compasses that let us know there is much more to being a fully alive and conscious human than our culture typically encourages.

Here to talk with us about where we are with this story and where we are headed and the joys and pitfalls we might expect to find along the way is Charles Eisenstein, lecturer and the author of the books The Ascent of Humanity and Sacred Economics. I am very excited to have Charles as our guest today because he writes beautifully on an area that I find very few have been able to or are willing to explore openly which is the intersection between economics and philosophy.

Today, we are going to explore his thinking on the shortcomings of our current monetary system and why he sees us at an important juncture where, should we want to, we have the opportunity to transition to one more authentic with the laws of nature and the post peak oil future we are likely headed towards. I’m not sure where we will end up in this conversation, but I do predict it is going to be a very interesting ride. Charles, welcome. I am so glad to have you with us today.

Charles Eisenstein:  I am really happy to be here.

Chris Martenson:  Let’s begin by characterizing the predicament in which we find ourselves. I have said something is wrong with our narrative and there are a lot of pieces to that. A central one, that can prove to be highly disruptive, is when a cultures money system breaks down. I love what you wrote about money as a sacred object and that our high priest and priestesses of money are in danger of being revealed as powerless frauds. Can you please paint for us your picture of how money operates and how it is failing now?

Charles Eisenstein:  Yes. I think everybody has a sense that the failure of money is an expression of the failure of something even deeper. So money might not be the deepest thing that is failing, but certainly it is pretty central to everything else that is going on. What I see, we talk a lot about peak resource use or maybe even more relevant, peak environmental degradation, but I think that underneath all of that the failure is of the basic mythology of our culture that money is an expression of. You can even say we are going through peak separation where the kind of money that we have today pushes us into competition whether we want to be there or not because of the way that it is created and circulated as interest baring debt there is always more debt than there is money. Everybody is competing for not enough money and it kind of makes into the truth something that isn’t fundamentally true, which is the kind of Cartesian version of self that we are these kind of bubble psychology competing with each other in an external universe for never enough. And the money system reifies that and drags us into that way of being. And it also necessitates economic growth because if there is always more debt than there is money the only way the debts can be paid what would have to happen is either that lots and lots of people go bankrupt and default and everything falls apart or you have to create even more money to pay the debts that were created from creating the existing money as you and your readers all know, maybe even better than I do, how this all works.

That can only continue as long as there is a basis for creating new money. I feel like I am kind of wandering off a little bit here. But basically, and I can get into that a little bit more. Basically, what is happening is that our money system is deeply implicated in separation and growth and both of these have reached their extreme. Therefore, money isn’t working anymore.

Chris Martenson:  And money is certainly breaking down. I love the image you have us before of how our high priest Ben Bernanke is up and he is doing his rain dance, right? And he pours trillions of dollars into the landscape and what is supposed to happen next is an economic revival and it doesn’t happen. So what we take from that is uh oh, it looks like our priest’s magic is gone and indeed it is gone. From my point of reference I think once you have hit where we are in the energy cycle and we are getting less and less high net energy back it is just an absolute guaranteed prediction you are going to get less and less economic activity regardless of what you do with the monetary policy. Whether it is tight or loose or all of that, ultimately, the real driver of economic activity is not money itself, it is real goods and services that people actually need and want and are going to consume going from point A to point B and energy is just sand in the transmission of that as it is rising in price.

So through that framework we can see that it is an enormous structural shift and it goes beyond, it goes so far beyond that, of course. The money system is breaking down. Europe is discovering that right now. We were going to hit a mathematical limit with our debt expansion which is about four decades in the making. That was going to happen anyway. But we were going to have this whole peak oil thing happening at the same time, plus other resources are getting tight. We have global food supplies and aquifers and we are looking at certain minerals. There are just enough warning signs there any prudent person can look at this and say gosh, this is a new landscape. And yet, my perception is that our current cultural and political leadership is just so far away from understanding that the game has changed that my personal assessment is that what they are going to do is continue to perpetuate the status quo as long as possible until it is painfully obvious that we can't do that anymore and by painfully obvious I mean, reality has somehow prevented us from going any further. Our liver gave out, that’s it. We are all done in our time as alcoholics.

So what in your writings and from your perspective, what is going on here? How can people like you and I, thousands and if not millions of other very intelligent, well meaning people look at this data and go "Whoa, something really has to change here."? This is serious and yet we find this gap between what we are seeing in the data and what we are receiving as messages in cultural conditioning messages from everything around us, in essence. What is going on here?

Charles Eisenstein:  I think you are right, that the power elite is very much trapped in their obsolete paradigms across the political spectrum. Everyone’s solution is we have got to reignite economic growth. So when housing starts rise that is trumpeted as great news. No one really bothers to mention that we already have like double the housing capacity per capita that we did in the 1950s. There is something like 19 million vacant units. But as long as we are starting to build new houses ,then that is going to be employment and everything is going to be okay. They are trying to squeeze a little bit more growth out of the system. But as you mentioned, it comes at a higher and higher cost.

It is very much like an alcoholic. In the early days you can maintain the addiction quite easily. Maybe you will have to take a second mortgage out on your house, you will have to lie to your boss a little bit but you can kind of hold things together. Eventually, things fall apart. Eventually, it is your liver. And you can only get that next fix at greater and greater cost. Now, to extend the metaphor to our system, we have gotten all of the easy oil. We have depleted all the easy resources and the ones that we can easily escape the consequences of. Up until now, or up until recently if you are creating industrial pollution, radioactive waste, etc., etc. social turmoil. Well, you can move away from it. You can move to a gated community. You can escape it.

Well, today it is becoming impossible. The consequences are invading even the fortresses of the wealthy in various forms. And if we want to keep growth going there is not that much more of nature that we can convert into product and not much more human relationship that we can convert into services. What we can convert comes at a much, much higher cost. You have to excavate the Alberta tar sands and devastate that ecosystem. You have to clear-cut the forests the fifth time or sixth time and they aren’t really recovering anymore. Trees are dying everywhere and we just – the planet can’t take much more of that.

Sometimes economists will say is we can grow the economy of services instead and we can actually have economic growth with less energy because of miniaturization and other technological innovations. So energy really isn’t a constraint and I think that to meet that objection you have to kind of extend the peak argument to include community as well and understand that a lot of the growth and services come at the expense of things people once did for each other and that technology – just like in the material realm and the social realm – has extended the reach of monetized services.

For example, people never used to pay for communication, now we pay for almost all of our communication. People never used to pay for entertainment but now we pay for almost all of our entertainment. Even when my father was a child he says that in his suburban neighborhood, his whole neighborhood, every Sunday, would get together with guitars and sing folk songs. To imagine that happening in my neighborhood today is ridiculous because we all buy all of our entertainment.

There is almost nothing that we don’t pay for anymore. What is happening is there is just not that much room for economic growth. We are never going to go back to the normal of the 1950s and 1960s when like there were years where there was like 7 or 8% GDP growth. No way. Now we are having trouble getting up to 2.5%. And that is just not enough to allow lending. The banks would rather just sit on their money. Why would you lend it to build a widget factory when the market for widgets is flat?

The money is stagnating as excess reserves. No matter how much they create it is, as Keynes said, like loosening your belt in hopes you will get fat.

Chris Martenson:  It is interesting to me that during a period of time in which everybody is in a position of leadership today grew up was one of the more extraordinary economic periods of history where somehow in the decoupling of gold from the international exchange system in 1971 through to current roughly, about 2008 when it broke apart, but up to say between 71 and 2008 we were increasing debt much, much faster than GDP and that is even ignoring all the ways GDP as a number is factiously padded and otherwise fuzzified. So we have, even by our own data, such as it is, this idea that we can compound our debts faster than we can compound the underlying economy and perpetuity and that is sort of the environment in which, the culture in which the people who are currently in power grew up. So that is normal to them. This very distorted, grotesque, Dali-esque landscape to them looks perfectly reasonable and square and flat and it is not. It is actually a very unusual period in history and that is coming to an end.

There are really only a couple of ways to end it. This is debt we are talking about, so you pay it back or you don’t. If you don’t pay it back you are defaulting on it in some form with inflating or printing it away being a form of soft default that spreads the losses over everybody instead of a few. That is our choice at this point in time and if we go the pay it back route we have to accept a much, much lower standard of living than we have come to expect. That whole born on third base and think you hit a triple thing. Right? We have come to expect that life – this is just how life it is. No, that is just how it is when you are spending beyond your means. Spending beyond your means is really not a very normal place to live forever.

Charles Eisenstein:  Third solution would be to grow the economy so much that you can keep paying it back and increase the standards of living. That is one thing I really appreciate about your financial commentary because you are one of the few out there, really, that has integrated the understanding of the limits of growth into this money picture; that is the only way out and it is not a way out anymore.

Chris Martenson:  We have enough years under our belt at this point to say it hasn’t been working for at least three or four years and you are right – there is precious little commentary and connection out there that says wait a minute, maybe it is more than the debt overhang. Maybe there are some other factors at play here. How about this $100 oil? Anybody thinking about that right now? We haven’t had a single instance of economic recovery of oil prices at this level. It hasn’t ever happened. So how it will be different this time is a mystery.

Charles Eisenstein:  Well, we all know it won’t be. It really is hard to know what is coming. You had asked before about how do we grapple with this as individuals when we see the world falling apart. The understanding that the world is falling apart hasn’t reached everybody yet. It is still possible today to cling to the illusion that things are basically normal or that normal is coming back, but more and more people are realizing that it isn’t coming back. And then, the question is well, what do you do with that?

I was at a conference a while back. For some strange reason I was invited to speak to a group of investors and the guy before me he spoke on how the financial system is going to collapse so you better buy gold, he said. Better be physical gold, like actual bars of gold. That is the only safe investment. So then I give my talk after that and someone in the Q&A asks me well what do you think about gold, Charles, do you agree with that? I said if things fall apart to the extent that the US dollar no longer has any value the worst investment you can have, the worst thing you can have would be a whole lot of gold in your basement because men with guns will come and take your gold. Those men with guns will probably be the government, but could be warlords, thugs, thieves and so forth. Unless your temperament is cut out to be a warlord and hire your own private army to protect your gold in your basement and then deal with the fact that they are probably going to think well, "why don’t we just take his gold?" Unless you are cut out to be a warlord, gold is probably the least safe investment you can have under those kind of conditions. The only thing that you could invest in that can survive such a transition would be to invest in your community, to create a reservoir of gratitude out there to be someone who is valuable to other people who has valuable resources, valuable skills which you share. Basically, the only kind of wealth that can persist through this transition is what you give. Wealth would be how much you have given.

This shift, this different approach also resonates with where we want to go anyway. Even when people achieve a lot of wealth and they have kind of won this war of all-against-all that is dictated by the money system, what do they want to do? They want to give. It is in our nature to want to give and I think on a deep level what we are seeing is resurfacing of a much more ancient kind of economy. All ancient economies were gift economies where indeed, the wealthiest person was the one that gave the most. That is how you became a big man in a potlatch society. Our desire and even on a deeper level it goes down to understanding that we are not these separate beings in an objective Cartesian Newtonian universe. But that something of you is in me and that our beingness is interdependent.

Chris Martenson:  This is something that I think in the United States is a particular challenge. So I have the opportunity and the fortune to be able to travel and see other cultures. We in the United States have a particularly isolationist sort of a view and it is heavily reinforced in our practices here whether it is creating false dichotomies in a political divide so that we can get along there or through any other isms or divisions or what not. It really struck me, I was talking with a woman who is a psychiatrist in one of the tonier zip codes in California and she said that it was her experience that her practice was actually booming, she said all these people are hanging on by their economic fingernails but there are still two cars in the driveway, the lawn is perfectly manicured, everything looks great. But the people who are coming to her can’t even talk about their own difficulties with their family members sometimes or certainly they can’t let their neighbors know. There is this extraordinary pressure to just sort of deal with it as their world is collapsing around them and in fact, that is historically speaking a really, really unusual condition to find yourself in. I would suggest it is unnatural.

Charles Eisenstein:  Yes. This alienation from everything. First from community and now from even the family. It is truly remarkable that now like a confidant, like wise advice; that is something that has been commoditized. You pay for that today. And you don’t get it from the people who are most intimately involved. This is kind of an extreme, but still. I think it is symptomatic.

Chris Martenson:  It is something I have become aware of, a lot recently, is that on some level almost everybody I talk to has got the awareness that something is wrong, maybe desperately wrong. Some of them have the intellectual framework, some of them just have a raw feeling in their gut that something in our narrative that we have agreed to live by is just broken. I am not just referring to the American narrative anymore at this point or the European or Japanese, I mean human, global narrative. I mentioned it before the data suggests that we are past carrying capacity of the globe. What this means to me is that there needs to be – if you say you are past the carrying capacity, the next sentence is "well, I guess there is going to be fewer humans at some point in the future" or "we are going to have to really, enormously change our habits and practices". Yet, the deepest messages we are still giving to ourselves every day in the newspapers and on TV and in the media and whatnot and in our religious text are things like well, "be fruitful and multiply", "our economy needs to grow this year and every year and next year forever", that "resources are there to be consumed".

None of these things are truly sustainable meaning, they can continue at their current trajectories for even another 10 generations. Whether it is this year or 100 years the final consumption of non-renewable natural resources means that’s it, it’s gone. Aren’t we also wired somehow as humans to really care about our children, I mean really and those who come after us even if we don’t know them? Is not stewardship somehow a human capability?

Charles Eisenstein:  I think we are caught in the grips of a myth and a story and you put your finger on it to be fruitful and multiply, I call that myth "ascent." It says basically that we were once very few on earth, basically animals, helpless and ignorant. Then we developed, thanks to our big brains, science and technology and we covered the earth, we transcended natural limitations. We harnessed natural forces. We turned the whole world into ours. We domesticated it. The story says, someday our conquest of nature will be complete. We will have synthetic food, we will upload our consciousness into computers, we will conquer all disease, we will conquer old age, we will move on into space and we won’t need nature anymore. We will have completely transcended it and fulfilled our destiny. That narrative, it is all over the place in very subtle ways. We don’t explicitly talk about conquering nature very much anymore, but the very fact that we refer to nature as "resources" also comes from that mindset. And that is becoming obsolete in so many ways.

The money system is part of that myth, it embodies it and it enforces it – for one thing because it generates, it necessitates, compels economic growth, the conversion of nature into property, into goods and services. So the breakdown of the money system is one symptom that this myth, or this story, has run its course. Other symptoms are the outbreak of all kinds of incurable diseases. In the 50s and 60s it looks like we really would conquer all disease by the year 2000. It looks like we just conquered small pox, cholera, plague and polio and everything and cancer was going to be next. Now we have all of these new diseases, life expectancy is starting to go down.

Look at any institution that is facing a parallel crisis and our trajectory of ascent is slowing down or maybe even beginning to descend. Now will that descent be a crash or will we level off into some kind of steady state, that is an open question. But I think that if you look at the growth trajectory of natural systems, like immature ecosystems or children. You have a period of rapid growth and then it levels off. One way I like to frame it is I like to say okay, maybe what is happening is that humanity is entering its adulthood. We have been children this whole time on earth with a relationship to the planet of mostly receding. Which is the same relationship a child has to the parent.

But when you enter adulthood, then your love relationship takes on a new dimension. You fall in love with somebody who is not your parent and you no longer simply desire to receive but you also desire to give a gift to your sweetie. Then at some point, you desire, to co-create.

I think that humanity is transitioning into that relationship to earth, which means that we are falling in love with earth. I think it started as a mass consciousness movement in civilized society. Envisionist cultures are another matter entirely, but it started maybe in the 60s with the environmental movement. When the astronauts brought back those photographs of earth, the first pictures anyone had ever seen that didn’t have borders drawn on them, the first map that didn’t have borders drawn on them. And people really were struck by those images and they fell in love with earth and the environmental movement was born.

The problem that we have is that all of our institutions are based in an obsolete myth in an era of growth, of conquest, of ascent. But our desires and our intuitions are shifting. We no longer are excited as we were 100 years ago to contribute to the conquest of nature. An idealistic young person 100 years ago, h, I mean, I am going to invent a way to cut down trees faster and you would be a hero for doing that. But today, the idealistic young people are going into permaculture.

But the money system is still based in the past. You can still make lots of money if you can discover a way to cut down trees faster, but there is not a lot of money in permaculture. And that means that the money system is obsolete and we need to change it to align it with a steady state or de-growth economy. And that is what I write about. But basically, none of the policies that are on the table as far as legitimate political discussion go, nothing is on the table, yet. It is still way off in left field.

Chris Martenson:  I have noticed it at first as I was thinking of it as a cultural but then I realized it is actually a generational breakdown happening. It first became startling to me about four years ago or five years ago when I was lecturing, the audience would be exclusively boomers unless they accidentally dragged somebody young along and then over time it began to shift a little to younger and younger people. The dichotomy that existed was that the boomers were typically asking me a flavor of this question almost invariably, which is "how can we preserve the status quo?". And the questions would be framed in terms of who do we vote for so that we can keep this moving or where do I put my 401k or some version of countless, "I invested my whole life into this thing. Can it please just not fall apart right now? Thanks."

Young people were peering into the same system and saying I see nothing to gain by preserving the status quo. You racked up all of the debts and I am being left with all of the wreckage from it - no. I am not playing along so I am going to go into permaculture or something like that. There is a real generational gap here that idea of separation is alive and well I think across the ages.

I love this idea that humans are at some point of initiation, one of those magic boundaries in life where if you have an intact culture you would have somebody walk you into manhood from boyhood. Or into womanhood from girlhood and here we are at our adolescence and I really, truly believe that it is up to us to decide either to shift our culture on our own terms or nature will shift it for us on her terms.

We face a future shaped by disaster or design, I am a design guy. I think design would be awesome if we could do that here.

The trajectory I see though is that we are really still very, clearly, headed towards a hard landing at this point. Largely because it is so hard to shift a culture. So hard for the status quo to let go of what it knows how to do. The institutional inertia, the personal inertia, all of those things are really much in play. But I know that any of these big changes we are talking about that we need to have. So if we are going to be living as a part of, not apart from, nature that we are going to be living in balance in a way, that we could see credibly what could be sustained for another thousand years. If we are going to maneuver into that landscape that first step for me was required for me to break from the culture and in my own small way, I did this, right? Along with my own small family I left the comforts of the life I lived into. The vice presidency, the big salary, nice, tidy bedroom community. I actively crossed the grain of my culture and I did all of these different things, very bold.

Yet, as anybody who has read Ishmael by Daniel Quinn – and I think everybody should, that is a great book –he says “that mother culture whispers to us so seductively and so comprehensively at all moments that it takes near super human effort to step back and even recognize what the messages are”.

So my big break from culture was really nothing more than a series of very miniscule steps. Yet, we have to take those steps if we are going to close that gap between what we know to be true and what our actions are at this point.

Charles Eisenstein:  I am kind of a disaster and design guy. The designs are coming out. Like some of them are in my book, very few of them are original actually. I pull them from various traditions of economic thought and there are tons of solutions out there for every single problem that we face. They aren’t actually that hard to implement theoretically. It is just a matter of our inertia of our perceptions and our habits, our ways of being and how do those change? Personally I don’t usually change anything in my life until there is some kind of crisis or disaster. It is actually not that I made any superhuman efforts to change. It is that I clung on to normal as long as I could until various events made that impossible. I think on a collective level we are going through that. You mentioned initiation, I think that is the other thing that happens when one enters adulthood. You go through an initiation where the world falls apart and even your identity falls apart. And, again, like you were saying primitive tribes they had these initiation ordeals where they would purposely make your world fall apart. Everything that seems so secure and so permanent and so real became revealed as nothing but illusion. I think that is a really good metaphor for what is happening today with the money system. Things that seem so real, nothing was more practical than a blue chip stock or a triple a bond. These things, that is how you did it, you know, you bought your annuities, your insurance, your long-term investments. That was security. That was the very essence of practical, of real. Now we are seeing that these things are just numbers in computers. They are just this swirl of bits. People are almost having a sense of vertigo when they contemplate that all of this could dissolve.

I think it really is a – just the financial aspect of this – it really is an ordeal and you could call it a hard landing. I think it will be frightening for a lot of people. Fundamentally we still live on a very rich planet with incredible abundance and you see it even here in Harrisburg. I live here in Pennsylvania you know and last year the Susquehanna River rose 30 feet. And neighbors who didn’t even know each other’s name were basically flooded out of their houses and they just started helping each other. They were able to achieve things that seemed impossible a few days before. I think that our capacities are kind of dormant right now, but when a crisis hits we will become capable. All the things that are politically impossible today, if we really turn our minds to it we could achieve them very quickly. If we really had our minds set on it we could reduce CO2 emissions by 90% in 10 years. Most of them aren’t going toward anything that serves real human happiness anyways. Wouldn’t be worse off. People in India aren’t less happy than people here even if their ecological footprint is a tenth or a twentieth.

I was doing some research into organic agriculture; usually it is criticized as well. It is kind of this you know, bourgeoisie indulgence, but you couldn’t feed the world on it because the yields are much lower. Turns out that actually, the yields are much higher per unit of land, but not per unit of labor. For units of labor the yields are much lower. So we have to have lots more people having gardens and working on farms. That is where people want to go anyway.

I just increasingly, when I look into it I get the feeling that this scarcity is an illusion, but it is also a very real illusion because it is built into the money system, but it doesn’t have to be that way.

Chris Martenson:  So here we are, we have got this idea that there are these big changes coming. Whether our money system was due for a breakdown anyway because we have been putting too much gas into the engine too quickly for too long or whether we note that we are at the caring capacity of the planet or whether we note that there are certain ecological limits that we seem to be hitting or whether we just note that it is time for us to settle into the idea that we pretty much conquered the globe and it is time to shift into that next stage of whatever our existence is going to be. Somehow, we have come to the idea that there are these big changes coming and I was really taken, I just read an article, I don’t know maybe three or four months ago that noted that when the USSR collapsed, alcoholism became the number one cause of death for people between the ages of 18 and 52, no 18 to 54 because the number was 52% of all deaths that were recorded were alcohol related.

So here is an example; we have a major economic super power, fell apart, right? Still hugely endowed with all kinds of resources. Natural resources, well oil and gas. But not the least of which is people still have their government housing and for the most part there was still government supplied food. So they had a place to live, they had food, they had the basics. But there was this narrative running for the people there that was I am a pipefitter whatever I do. I am a pipefitter, that job is no longer available, I am useless I am going to numb myself and drink. So it wasn’t the economic collapse that really hurt the people there as much as their response to it. It was the idea that I have a story running that I am a pipe fitter, I can’t do that. I have nothing else to do, my purpose was embedded in that. If you had a different story that says wow, I am out of work, look at all of this free time I have. Here is this huge list of things I have always wanted to do in my free time and I am going to grow as individual extraordinarily in this period and take this as a gift. That is a different story from saying I am useless I am going to drink myself to death. Fundamentally, it is the story you are carrying not the circumstances that really dictate our experience of the time.

Now, I want to turn to the idea if however we have come to – we have to the idea there was this big set of changes; possibly disruptive, possibly with things like scarcity and lack and other sort of scary things built into it. Possibly, we are excited about all of the changes that are coming. However we see these changes coming, the question is what can we be doing today, what should we be doing today, in this moment to be in essence, preparing ourselves internally for living into that new future, whatever it happens to be?

Charles Eisenstein:  , I think that it really is the story that we are carrying and the perceptions that we take into these changes. I mentioned that the really deep story underlying all of this is the story of separation. The story that answers the question who am I and why am I here. The old story was who are you is a skin encapsulated soul, a Cartesian mode of consciousness in a robot made of flesh. You are in this objective universe that operates by force and the purpose for you being here, there isn’t one, but you are programmed by your genes to survive and maximize reproductive self-interest and that was the story of self. And we are learning now that that story is falling apart in so many ways; it is falling apart scientifically, it doesn’t align with quantum mechanics, the observer, subject object distinction breaking down, it doesn’t align with ecology, it doesn’t align with the new genetics, doesn’t align with psychology, the new spirituality and some of the new paradigms of economics, that Self and all that is built upon it is breaking down. So the new story of Self, I think really to answer your question is that we need to align ourselves with the new story of Self, which I would say you could call it the connected Self. It says we are not these separate beings, but there is something of you in me where maybe you can even say that we are the same being looking at the world with two sets of eyes.

It is not just that we are interdependent. That is one word for it, but it’s that my very being depends on the being of other – other beings. It is something that you can feel when you read about a species going extinct. You see the bulldozers knocking down swaths of virgin forest or you read about a child in Haiti eating dirt because he is so hungry. It hurts. Why should that hurt?

From the perspective of separation it is irrational for it to hurt. This is happened to somebody else. In fact, that is good because that is one less competitor. But the fact that it hurts I think hints at our true nature as connected beings, which is really what mystics and spiritual teachers have been telling us for thousands of years is that as you do unto others so you are doing unto yourself. You could say that the expansion of Self to include others is almost a definition of love.

I think that anyway that we can align ourselves with that truth will help us in the transition and help society through the transition too. Sometime with a lot of people I speak to almost anybody in the audience will raise their hand, every time I speak someone will ask the question, what about all of those people driving around in their SUVs that don’t get it. How do we make them get it? I think that most of the ways that we try to make them get it are counter productive. Most of the ways are through guilt or shame. How could you be using up more than your share of resources. But really, to change people and to bring them into a new story you have to puncture the bubble of the old story. Love is emphatical to the story of separation; it doesn’t make sense, it does not compute. I think about that secret Santa last Christmas who went around to the K-marts and paid down people’s layaways you know? Somebody goes in there and like oh, someone already paid this for you. That just doesn’t fit in. No one is getting an advantage over you by doing that, there is no strings attached. It just makes the story of separation, the story of everyone who is in it for themselves, everyone who is trying to maximize their financial self-interest. This is an explicit ideology in economics. It makes that story a bit less compelling and anything that we do to generalize that, anything that we do that increases the amount of love in the world, it makes the story of separation less compelling and it eases the transition for the entire civilization. And that is not to say that political action and various kinds of activism aren’t necessary too.

Really what I am saying is that even these small, personal acts are also political acts. They are part of this transition into the connected Self and a civilization built on that Self. It goes deep. It sounds like hey, I am supposed to be talking about economics here. We have to go all the way to the bottom because economics as we know it are built on a deep, deep structure. Plus, I think we understand that everything is changing. We have an intuition that the crisis is a spiritual crisis as well as an economic crisis, a political crisis, energy crisis and so forth.

Chris Martenson:  Well, the gift of any crisis is the opportunity to work with whatever comes up and what has been revealed. This idea of separation is certainly going to be revealed as something that is really the source of a lot of suffering. When I work with individuals, I am very cognizant of the idea that when I first had this worldview of mine shaken up. When everything was fine and hunky dory and I had the entire illusion and then I discovered some information and it shook everything to its core and led to extraordinary changes in my life. I am sensitive and very empathetic to the idea that those first few months were rough for me, personally. Uh oh - very much a lot of anxiety and fear. I recognize the stage people, not always, but sometimes, quite often go through and that first stage is how do I protect myself and it is very natural. It is like uh oh everything just got shaken up. Let me make sure I got shelter, food, warmth. You do that and after a little bit of time you poke your head up and you go okay, I have that and the world is still spinning, now what? You go to part two of this story which is to say well, it is really we are going to need community which is a shorthand way of saying I think what you are saying which is that it is time to step into the idea that we are going to be doing as well as our neighbors and vice versa and that brings us closer to the idea that we are in this together. And then maybe it extends even further out of humans into the rest of the biosphere and we say well, actually we are doing as well as my watershed is doing and the soil on my property is doing and the depth of the other connections that are out there around me in the ecological sphere.

We have our warning signs you know, the frogs disappearing and being born with three legs; it tells us maybe not all is cool with the chemicals we are putting into the environment. Through this, I think we come to this point of I hope we can get to this point of understanding that we need to start understanding that the old way of doing things is really, fundamentally, not serving us anymore in total. And it is good time, a crisis is a great time to pick up the pieces of your life and look at it and say this isn’t serving me, neither is that. Oh this still works, I will keep this. And I am going to get rid of that and I am going to keep these four things and it is time to see what works and what doesn’t.

First, you have to get to that point of saying what we are doing isn’t working. And that is the first stage of the conversation, I think.

Charles Eisenstein:  And it sure helps to realize that it is not working when the crisis begin to come home and you actually start seeing those three-legged frogs. Today, like you said, our well-being is only as good as that of the watershed that we live in. But today, money, as we know it contradicts that. Money says it doesn’t matter what has happened to the watershed as long as you have enough money to buy organic food shipped in from somewhere else. Buy water or to move away. Money can insulate you from what is happening to the earth and you can make money in fact, by destroying the watershed. I think that part of – at least part of what I am working toward is to realign the money system so that is no longer true. So one way to look at that is to internalize these external costs. The business model of ‘I get the profits and somebody else pays the costs’. Even if you are a wholehearted believer in capitalism, that is not fair. You just have to pay the costs and not the people downwind or downstream, or in future generations.

I guess I just mentioned that because I want to short circuit the conclusion that what we should really pay attention to is this spiritual aspect. I think that in itself, the idea that the world is divided into two parts spiritual and material is itself a very toxic idea and an example of separation. We definitely need to implement the spiritual or ecological understandings in every way including in an economic monetary way. I’m glad to see that people are beginning to discuss these ideas more and more even in the mainstream. There is still a long way to go.

Chris Martenson:  My great source of hope is that the people I find having these conversations most deeply are younger, on average, and they have really as with bright, facile, energetic minds and a compelling interest in the future looked into things and said we really have to do things really differently. Enough of them have evolved far enough they can look at the pure, consumptive economy and say that looks soulless to me. I am not interested. Maybe I am just in a hotbed of where this is happening, but I see a lot and I am very excited by it because there is a clear, some of these kids are thinking thoughts that would have been unimaginable to me to be having at 17, 18, 19, 20 years of age.

Charles Eisenstein:  Tell me about it. I run into that all the time too. It is like nobody was having those thoughts when I was 20, imagine what thoughts they are going to have when they are in their 40s.

Chris Martenson:  I know. It’s incredible. I take great hope from that and when we talk about this idea of building community I have come around to the idea that I am not going to hold anymore workshops on how to build a community because it is not an event. It is a process and you build community every time you have an interaction with somebody. So all I actually care about are the actions that bring us back together whether it is the guitar playing that we talked about from your father’s age or anything else that we might do sort of in community. That is one of the things that I see young people doing a lot of is actually finding ways to interact with each other a lot and doing fun stuff, cool stuff, interesting stuff, permaculture things, nature walks, whatever they happen to be doing but I see a lot of it and to me that is the – when I say how do we live, that is it right there. Those are the things we need to start doing. It is not something to buy, it is not the next thing to read or anything. It is to literally get out of your house and go find somebody to do something with and it could be anything, literally anything. I think those are some first steps that make a lot of sense to me right now.

Charles Eisenstein:  h. It has to be – I think the way to build a community are things that are we are not just consuming together. A lot of I have seen a lot of attempts to build community or to create community fail because people don’t need each other and aren’t giving each other anything, but just getting together and consuming drink, consuming entertainment, consuming food, but you aren’t actually co-creating and they are not creating ties that you have in say in Pennsylvania in an Amish community where you really need the other people in that community. You can’t just delete them from your friend’s list and pay for the things that they were once giving you. There is an actual dependency which we aspire, you know when people aspire to financial independence they are aspiring to not need anybody. I think that community is impossible when we don’t need each other and community, in fact, is woven from gifts. When you give somebody something then it creates a tie that person wants to give you something too, so there is an ongoing relationship which is not present in a financial transaction. And that is why I say that economic growth has happened through the strip mining of the community. The conversion of these bonds into free chemical energy kind of into money. And that is starting to reverse. As you say, with the young people, a lot of what is going on is they could be paying for entertainment but they are getting together and making films, putting it on YouTube or they are doing re-skilling kinds of workshops, teaching each other a new skills. They are doing things – reclaiming things from the money economy.

I think that is really interesting that anytime you find a way to replace money transactions with self sufficient – or give transactions. Like if you make a neighborhood childcare coop or some kind of way to share things in the community, Zipcars in Baltimore, anything that reclaims these paid services. You are actually reducing GDP by doing that. Thereby hastening the financial crisis because it just intensifies when there is no new good and services and in fact, the economy is shrinking. Even Craig’s List, you know, by one estimate so far replaced something like $100 billion in ad revenue. That all comes off of GDP too. And so open source software, all of these – not all on a community level, some of them are more on a global level. All of these are ways of reclaiming the commons and reclaiming relationships. They hasten the demise of the financial system, but they also mitigate the severity of the collapse because now we have some wealth that hasn’t been incinerated. Or when you reclaim nature, when you protect it from development or stop a pipeline or do anything to prevent something from being converted into a product. Then you are also hastening the collapse.

In a way, the conservatives almost have it right, shutting off the oil development in the Alaskan Wildlife Refuge does hurt GDP and it does cause fewer jobs to be created, but that’s good. If we can preserve some biodiversity and some habitat and some of the wealth of earth then it will be much easier to rebuild after the collapse and we won’t have to have a really hard landing with billions of casualties. There is still a lot of richness left, I think.

Chris Martenson:  Oh, there is so much and I love this, this is very practical advice, how do I live into this? You go out and find something that would have taken money before and do it without money. In entertainment, hold a book club. Everybody gets the book, go to the library and get the book if you want to spend no money and then talk about it; hold a salon on a set of topics. Figure out how to do the childcare collective you talked about or whatever this thing happens to be. You are building a community, you are getting resilience, you are forming those threads with each other, gift things if you can.

Along the way that is happening, subtly is that we are rewriting the narrative of who we are and how we are and taking it away, reclaiming it if you will, from the main narrative which says, you are a device that needs to accumulate as much wealth as you can. And if you do that you will be really happy and if you fail at that you will be miserable and stripping it of some of its power which is an important thing to do here.

Charles Eisenstein:  When you are embedded in a gift community it is insanity to think more for me, less for you. In a gift community if somebody has some great talent or some great success or some good fortune, that is good for you too because they are contributing to your life. It is much easier to understand we are not these separate beings in a hostile universe.

Chris Martenson:  Oh, how comforting that would be. Well, listen this has been a fabulous conversation. We have been talking to Charles Eisenstein author of two books, The Ascent of Humanity is the newest one and also Sacred Economics, excellent books. I am not al the way through Ascent of Humanity yet, but the introduction and first couple of chapters are fantastic.

Charles Eisenstein:  Sacred Economics is the most recent one, actually.

Chris Martenson:  Oh, sorry. Sacred Economics being the most recent one, okay, so Charles how can people find out more about you and follow your work and get these books?

Charles Eisenstein:  I think the best way is CharlesEisenstein.net has links to my other sites and I will mention that the text of both books is online as well as in print. If you are practicing a radical reduction of money in your life, you need not buy the books. Most people do anyway, but you never know.

Chris Martenson:  I like that model. I hope it is working for you. It has worked for other people, I know. Fantastic and thank you so much for spending time to talk with us, I hope we can do this again.

Charles Eisenstein:  Thanks, Chris.