Podcast

Robert Wiedemer: Awaiting the Aftershock

Our financial future will be defined by the bursting of two
Saturday, December 1, 2012, 12:09 PM

Bob Wiedemer, author of the best-seller The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy, regards the 2007 puncturing of housing market prices and the 2008 financial market swoon as the precedents to two much larger and much more dangerous bubbles.

These more pernicious threats are the dollar bubble ("printing money") and the government debt bubble ("borrowing money"). While both are expanding at a sickening pace, in the near term they deceptively make things seem much better than they are.

But, like all bubbles, they are unsustainable. And when these collapse, they are going to take the entire financial system, and very possibly the currency, with them (a.k.a. the "aftershock")

Bob predicts that the rupture of both these bubbles will most likely happen in the next 2-4 years and accelerate astonishingly rapidly once it begins. Part of the reason for this is that the Fed, now boxed in by its committed course of action, will print like mad to slow the process down -- which ultimately will serve instead as fuel for the fire. This will be the point at which the Fed loses control of interest rates.

Wiedemer is fairly confident that the Fed is well aware of this dire probability, but finds itself increasingly stuck to avoid it. At this point, the major financial markets (stocks, bonds, housing) are so dependent on Fed liquidity that any efforts to withdraw the punchbowl will send prices lurching downwards, threatening the weak global economy. It's now a binary choice between damned-if-it-does and dammned-if-it-doesn't.

As Chris summarizes, the Fed's main strategic consists completely of "hope." It's backup strategy? "Panic." 

Not surprisingly, Bob and Chris discuss the wisdom of focusing on preservation of purchasing power, and positioning one's financial assets safely before the aftershock arrives. For many, that will include working with a financial adviser who understands the nature of the risks in play and can help you allocate your assets accordingly (a reminder that we know a few, if you're looking).

The main thesis in Aftershock is that these bubbles – this dollar bubble and this government debt bubble – will burst. It is not as if it will not burst for 15 or 20 years. We say it is somewhere in two to four years. You need to be prepared for it.

The debt will always be funded as long as the Federal Reserve stands willing to buy all the bonds that the government sells. At some point, that creates inflation: that pushes up interest rates. The Fed will fight those interest rates going up. At first, they can do it. They just print more money. That keeps interest rates down, but ultimately that inflation will force them up. We cannot just pull the money out and raise interest rates now; it's going to pop the real estate and stock bubbles. 

What is going to happen is the Fed is going to lose control of those interest rates. When you print too much money, it gets you control short-term, but it is a recipe for losing control long-term. With those interest rates going up, what is going to pop? The stock market and real estate bubbles. All of that is what kicks off the big problem going forward. Normally you would say the bond market is going to be the problem, but I would tell you that it is actually going to be more stocks and eventually even real estate combined. Then ultimately, the bond market starts to go down, and down quickly once it starts.

When the dam finally breaks, it will break quickly. Literally, it is in a matter of months or certainly no more than a year once it really starts to go. 

You get very, very high inflation. We could have stock market holidays and things like that. 

The big difference between now and the depression is that the government is also in trouble at this point. We are really not going to have a huge failure until the government kind of comes to its wits' end. It will, but it comes as a last massive orgy of money printing to try to save everything - unlike anything you have seen yet. QE1, QE2, QE3 is nothing like what the Fed has to do when this thing starts to fall. They have to print, buy, and buy, and buy, and try to keep up the falling house. They will not be able to do it, but that will be the reaction. 

Then at some point, it is not going to work and the whole thing goes.

Click the play button below to listen to Chris' interview with Bob Wiedemer (40m:50s):

Transcript: 

Chris Martenson:  Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson. Today I am really pleased to welcome Bob Wiedemer to the program.

Bob is the author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, which quickly became a New York Times and Wall Street Journal best seller. That of course came out before all of the big troubles hit. Just a month ago, his newest book, The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy, another Wall Street best seller, came out as well. Bob is the managing director of Absolute Investment Management, an investment firm that allocates capital based on his market insights.

I have met Bob before. We have talked extensively. We share many similar views. I have asked and invited Bob here to discuss his latest macro outlook for the global economy. Are developments progressing as he predicted in his book? What does he see coming next? I am really looking forward to this conversation. We will hear his advice for the individual investor, where one can find safe harbor, or even the potential for real gains. Where would you do that in today’s market? Bob, there are a number of foundational similarities within your book and mine. I know our views align somewhat. I am really looking forward to learning more.

Welcome, Bob. Thanks so much for joining us.

Bob Wiedemer:  Thanks, Chris. It is good to be on the show.

Chris Martenson:  Listen, I want to start – I did mention your book, Aftershock. I think let us rewind that tape just a little bit further. You had an earlier book, which talked about the bubble economy. You were in your own Paul Revere mode, I guess, trying to warn people that there was something going on. What were you looking at then? When did that book come out?

Bob Wiedemer:  America’s Bubble Economy was published in 2006. I actually wrote that back in 2004 and early 2005. We wanted to delay publication because not enough of the bubble economy had popped that we thought anybody would believe us and we would get any sales. We delayed it to 2006, which kind of worked out. What we said in that book is that there were four bubbles that were working interactively to push up the bubble economy. Those were the housing bubble, the stock market bubble, the consumer spending bubble, and the private credit bubble. There is a quick example of how these all work in a virtuous manner to boost the economy. It is like a home equity loan. As your house price goes up in value, you take out that home equity loan. You go out and you buy a car or you buy other things. That helps boost the economy. It boosts the stock market. It all works great until what we said would happen is that the housing bubble would pop or any one of the bubbles could pop. The housing was the one that popped. That brought the rest of the bubbles down in a vicious downward cycle.

We said that it would be offset though by two more bubbles that would essentially work as airbags. That is the dollar bubble or printing money, and the government debt bubble and borrowing money. It is the government borrowing money. This we talked about more in the Aftershock. In fact, the Aftershock is when those two bubbles pop. Right now that has not happened, but we are still pumping up those two bubbles just as we predicted earlier. In fact, we have added since 2008 almost two trillion. We almost tripled our money supply. We are now hauling over a trillion dollars more per year. This is about total net of about 600% increase in borrowing per year by the government of what we had prior. We have done that. We have done exactly what we said. We pumped up the money supply. We borrowed a tremendous amount of money. It has had the effect of helping to keep those bubbles up just as we said. It does not reinvigorate the economy so much as really help keep the bubbles up. I guess it depends how much borrowing and printing you do. The problem is of course you now have two new bubbles. We think those will pop. When those pop, you will get the aftershock. When that happens, of course all the other bubbles come down as well.

Chris Martenson:  That is, I guess, a train of thought, which says that you cannot really ever escape the effects of a bubble. Greenspan was famous for saying you could not spot one in advance. You could only deal with it after the fact. This seems a little bit self-serving, or ignorant, or both. I am not clear on which it was. How do you see that?

Bob Wiedemer:  I do not think Greenspan wanted to see the bubbles. That is why they are so hard to spot. It is because people do not want to see them. They want to think they are real. They want to think they are making tons of money. I mean come on, Chris. In reality, how many people wanted to see their house values collapse? How many people wanted to see stocks break down? We all thought it was real money. I mean Bob Shiller of the Case-Shiller Index did a survey of Californian homeowners, I think this was back in ’01 or ’02. The majority of them thought that the average increase in their home values for the next ten years would be 20% per year.

We all want to think it is real. That includes Greenspan. He wants to think that we are not really in a bubble. That is why they are so hard to spot. I say the same is true today. We do not want to see the bubble we are creating with all that printed money and with all that borrowed money by the government.

Chris Martenson:  I see it every day in the paper by people. Journalists will write in the Wall Street Journal, other places, New York Times, it does not matter. They will say if U.S. government borrowing were excessive, we would not see interest rates at 1.6% on the ten-year or whatever number they are quoting at that point in time. It is as if the price itself were an appropriate signal. They are failing to note something that you have already raised. That is that we have two new bubbles which is fresh money printing supporting fresh government debt purchases with the Federal Reserve stepping in and influencing – or whatever word we want to call forcing or manipulating – the price of money through the interest rate market. We are not really getting real signals out of those markets, are we?

Bob Wiedemer:  No, that is exactly right. Plus, the other thing is that – let’s face it – if you had told that same person that we would be borrowing over a trillion bucks a year in 2005, he would tell you that you are nuts and crazy. That would never happen. What is happening is people tend to want to assume that what is currently happening is normal and reasonable. That is part of that bubble mentality. They do not want to see the bubble.

You are absolutely right; the borrowing bubble is being made possible by the fact that we are buying bonds. That absolutely will keep rates low. In fact, it means that you really could never have a government debt meltdown in the traditional sense of let us say you have a failed Treasury auction. If the Fed – or whoever is head of the Fed – is going to always buy the bonds that the government issues, well, there is always a market. As long as that never creates inflation, I guess you could say that that is fine. In fact, you could ultimately just get rid of all taxes and just borrow all of your money. Right, Chris? Then have the Fed buy all the bonds. As long as it does not create inflation, that is fine. It is just that, of course, I think it will. What has enabled all this borrowing is the fact that the Fed has been willing to go in starting in 2009 and save the government’s borrowing ability.

Chris Martenson:  You spotted the bubbles coming in advance. You were one of the few who did that. You did that right. Then it all comes down quite kind of as you expected. Then you write this book, Aftershock. Also, it has done extraordinarily well. What is the main thesis in Aftershock?

Bob Wiedemer:  The main thesis in Aftershock is that these bubbles – this dollar bubble and this government debt bubble – will burst. You need to be prepared for it. It may not happen tomorrow. It may not happen in the next year, but it will burst. Probably it is not going to be your grandchildren’s problem. I think that is the thing we emphasize. It is not as if it will not burst for 15 or 20 years. We say it is somewhere in two to four years. It could be a bit longer, but you are going to see problems even before then. The good thing is that this is all being held up by unsustainable economics. You cannot keep borrowing and printing and expect that nothing will go wrong. Otherwise, why did we not just do this ten years ago? In fact, we could have boosted our economy an extra trillion bucks with the borrowing. We are only doing it because we are forced to now. Do not think that makes it right. Do not think that means it is going to work.

It is just that the government has already felt forced to do this, as a way to sort of bail out the bubble and keep it from popping. You have to kind of see the economy for the reality it is. It is not that it is going to collapse tomorrow, but it is being based on those big four bubbles that are being held up now by the two new bubbles. It is not that. We have been borrowing for a while, but now we are borrowing a whole lot more per year. That will burst. That is just the reality. You are not going to be able to keep it up forever, and I do not think you are going to be able to keep it up for more than two to four years.

Chris Martenson:   I have this theory, Bob. It is that if you could print your way to prosperity we would all be speaking Latin. The Romans would have figured it out. They were very clever. They did all kinds of incredible things. They built roads you could still drive on, which seems to elude us, at least in my part of the world. I am thinking that if you cannot print your way to prosperity, I believe with your central thesis that these bubbles have to burst. It feels to me that the Federal Reserve is now stuck. They have painted themselves into a corner. By which I mean it is not possible for the Federal Reserve to suddenly and aggressively start raising interest rates. That will completely destroy the government funding apparatus at this stage. That would be one way we could look at that.

Let us talk about these bubbles bursting then and what you think that is going to look like. Whether that is in two minutes from now, two weeks, or two years, it is somewhere, coming along. Is this one big burst that you want to talk about? Do you want to separate the dollar bubble from the government debt bubble?

Bob Wiedemer:  Unfortunately, you cannot really do it, because that dollar printing is an enabler of the government debt. Again, it is not only in theory, but also in practice. The debt will always be funded as long as the Federal Reserve stands willing to buy all the bonds that the government sells. What really happens then is the real defining bubble is that money-printing bubble. At some point, that creates inflation. That pushes up interest rates.

When that happens – and again, the Fed will fight those interest rates going up. At first, they can do it. They just print more money. That keeps interest rates down, but ultimately that inflation will force them up. It is just as we had in the late 1970s and early 80s even before Volcker starting cutting back on money supply. Our interest rates were going up with inflation. You are absolutely right; we cannot just pull the money out and raise interest rates now. They certainly would never want to do that because that is going to pop the real-estate and stock bubbles. That would be terrible.

What is going to happen is, the Fed is going to lose control of those interest rates. It is going to lose control, essentially, of being able to control interest rates by printing money. When you print too much money, it is basically a recipe for not getting control. It gets you control short-term, but it is a recipe for losing control long-term. Those interest rates going up; what is going to pop? The stock market and real estate bubbles; all of that is what kicks off the big problem going forward. Normally you would say the bond market is going to be the problem, but I would tell you that it is actually going to be more stocks and eventually even real estate combined. Then, ultimately, the bond market starts to go down. It goes down quickly once it starts going down.

What is happening is, just as everybody does not want to see a bubble today, it is amazing how quickly they will see the bubble once it really does start to burst. It is just like housing. I mean, nobody wanted to see that bubble. Once it started to pop, people did start to change rapidly. The housing values went down rapidly. In this case, I think it will be even faster. Yes, the government will try to intervene for a while. Most of that intervention will work to kind of keep the bubbles up. When the dam finally breaks, it will break quickly. Literally, it is in a matter of months, or certainly no more than a year once it really starts to go.

Chris Martenson:  I think that is a fascinating idea. We saw that some of the big players like Goldman Sachs were edging away from the housing market as early as 2006 by taking the other side of the CDS trades that they had created. Some of the big players were positioning themselves. They saw it as well. The housing market, though, is this other dynamic; it takes time for prices to fall because it is actually real people holding very illiquid assets. This is relative to big players holding onto extraordinarily liquid assets, meaning bonds. Those things can be traded in a microsecond if necessary. I could agree that when it starts to unfold it will probably go fairly rapidly.

How will the Fed fight this? We have a bond market route. The Fed has been fighting it as long as they possibly can. They are trying not to let interest rates go up. Suddenly the Fed, as usual, has to follow and not lead the market. It is following the market up, but at some point that creates extraordinary difficulties for federal financing, state financing, housing market prices, stocks, and everything. How do you see that playing out?

Bob Wiedemer:  Exactly; you have it. What happens is, it becomes a much more difficult battle over time. What you are having is that the people are losing a lot of money in the bonds they bought earlier. They are falling in value. Many numbers of people want to sell. There is really no market for them. The Fed has to print money to buy them. You are also finding that some foreign investors are getting increasingly worried about all of this. They are selling U.S. bonds. The Fed has to buy them, which it will. The Fed is starting to print an enormous amount of money. Like you have not seen anything yet. QE1, QE2, QE3 is nothing like what the Fed has to do when this thing starts to fall. They have to print, buy, and buy, and buy, and try to keep up the falling house. They will not be able to do it, but that will be the reaction.

It does mean that you have to keep it up for a while. Ultimately, it is like trying to keep up a house falling on you. You can sort of maybe hold it up, but eventually you are crushed. The Fed will do all sorts of things like printing money to try to keep that foreign money in, to try to keep the bond market stable, and to try to finance the government, which is having increasing problems. Ultimately it does not work. You get very, very high inflation. Pretty quickly, they cannot keep the stock market up. They cannot keep the real estate market up. As you say, that takes longer to react, but ultimately the interest rates go up. The massive amounts you have to print, it is pretty obvious to everybody that the gig is up. Then it basically pops. During this, we could have stock market holidays and things like that. People may say everybody is rebounding; we will just solve the problem with short-sellers, or high-frequency traders. You have got a more fundamental problem and it is not going to get solved.

Ultimately, the original asset bubbles all pop, but now with a whole lot of inflation added on top of it and a government that has basically gone bankrupt. Their debt – well, how do they pay it at that point? Is it with printed money? It just does not work. The big difference between now and the [Great] Depression is that the government is also in trouble at this point. We are really not going to have a huge failure until the government kind of comes to its wits end. It will, but it comes as a last massive orgy of money-printing to try to save everything. Then at some point, it is not going to work and the whole thing goes. You can keep it going for a while, and then one last blast of money printing and it is over.

Chris Martenson:  Let me test that. I am thinking back to the late seventies. You have Paul Volcker. He had to make some pretty hard decisions. He was the only Fed chairman ever to have been burned in effigy on the mall in Washington. He took some pressure, obviously, but here is the thing. The Fed is not like General Electric (GE) – a big diversified company with an awesome product portfolio. They have got one product. It is the dollar. At some point, doesn’t the Fed have to choose between destroying its only product – the only thing it is charge of? It is the dollar – it has to choose between defending that and enabling what the politicians want on the other side.

One of my critiques of the Fed is they have gotten very politically cozy and operate more like a political function than a monetary function. Where do you see them? If push comes to shove, does the Fed really print? Or do they go all Paul Volcker, reel everything in, and let things come crashing down in attempt to preserve the dollar?

Bob Wiedemer:  I think in the end they are going to really relate for it. We found that has been true in past history. I think it will certainly be true today. At any given time, Chris, if you pull the plug out even today and you decide that we are not going to buy anymore; we are going to sell all of our bonds back. Interest rates start to soar and the stock, bond, and real estate markets all come tumbling down. Two years from now, it is even worse. We are even more vulnerable. It is harder to pull that money out. When you put two trillion out and we are already basically almost guaranteed to put out another trillion over the next year with QE3 and probably more after that, it is just too tough. You have brought yourself, as you said, between a rock and a hard place. You really have no good alternative. If you pull the plug, the impact is increasingly so big that it is sort of unthinkable. So you continue going down the path until it basically melts down around you. It takes the dollar with it.

Again, I have always wanted to say the dollar will not become worthless, but it will become worth a lot less. It does not take much before it basically kills the stock, bond, and real estate markets. If you took one dollar that you have in your pocket today and turned it into ten, that would pretty much be it for all three of those markets. Even though I think we will have high inflation, it does not take that much inflation to really knock the heck out of our markets today. They are not anticipating much, if any, inflation.

Chris Martenson:  Let us take where we are in current reality. One of the great surprises in my life has been seeing just how long this charade has been able to go on. If you had taken Chris from five years ago and said, hey, here is where the Fed balance sheet is going to be, I would have thought you were nuts. I would have expected some fairly significant impacts. Here we are. Inflation is apparently pretty tame right now. The stock market has been magically levitated. The S&P is sort of hugging the 1400 mark right now, which is not too bad. So some might say, look, it is working. What do you say to that?

Bob Wiedemer:  It is just what I said in my introductory piece. It is working. In other words, when you pump up those two bubbles, it will work. That is the whole point. It does work. Frankly, Chris, if I wanted to get housing sales back up to $2 million, print me enough money right now and I could do it. Do you want me to? Could we borrow another half trillion instead of $1 trillion? Let us borrow $2 trillion. Yeah, we could do that too. It will work at first. It is just that what happens at a certain point is enough people all get together and say, hey, I think this is fundamentally going to blow up. Right now, what everybody is saying is let us just get through a down cycle. We will all come out of this and then it will be fine. We will be able to reduce our deficits, reduce our money printing and we will all be fine.

We are assuming that this is just sort of a big down cycle. What I am saying is, fundamentally it is a bubble pop. You are just pumping up bubbles. It is not going to upcycle. By the way, you guys never said we are in an up cycle now. We will just be in a down cycle in five years. They kind of know it is not really a cycle. They are just hoping beyond hope that it is a cycle. We will just have to cycle out. I am saying you are not; you are just pumping up bubbles. It is going to pop, but yes, it does work for a while.

Again, we can print more money and you are not going to see inflation. I think inflation is higher than it is being reported. I am not the only person who is saying that. There are a lot of ways that you can keep it down. Ultimately, even if you have bad reporting and all of that, if what I am talking about is true, you will get inflation that everybody can see will become obvious. It will ultimately panic the markets, essentially. That is kind of the destiny you are going down. Yes, it will work now, and it will work for a while; as I said, it will work. This is as we said in America’s Bubble Economy and Aftershock. This stuff works initially. Initially does not just mean six months. It could be years and years. If anything, if I am wrong, it will be (as you said) that it lasts a bit longer than I expect. Maybe it will last more than four years. I think we will find that there are a lot of problems before then, just as we found there have been some problems in the economy now. Even though it is working, it is not working perfectly. Even in the last few years, we still have a troubled economy.

Chris Martenson:  Obviously, there are some cylinders that are not quite firing in this story. We have this macro backdrop now, which includes the idea that we have been a serial bubble nation. All bubbles tend to burst without exception, so far, historically speaking. You have painted a picture that all we have really done is traded the past bubbles for the next ones. By the way, these bubbles just get larger and larger and larger. You take a NASDAQ bubble, replace that with a housing bubble, and replace that with a government bond bubble, and you can just see the trajectory of this story. We have all that in the backdrop. Here we are. You are saying on one hand we might be waiting for inflation, so we are watching out for those signs. Here we are. It is almost 2013. What are you looking out for here? Are you just trying to ride the wave until you see clearer signs? Is there something you are really keeping an eye out for as you look into this next year?

Bob Wiedemer:  I think in the next year that it really will be just riding it through. I am not worried about a big panic in the coming year, to be honest. I think we are going to ride through it. I think that if $40 billion a month – which they pledge to do in QE3 of money printing and of bond buying – I think if that does not work, they will raise it to $70 or $100 billion a month. This will have some positive effects. Does that mean it is going to push the stock market to 16,000? No, probably not. Will that keep it from going below 10,000? Yeah, quite possibly. That is the whole idea. I think the Fed will react if the stock market has big problems or anything like that. It will react by printing more money.

Actually, I am not that worried about it this year. That is kind of the weird part of this whole process, Chris. It is that basically you keep doing this until you cannot. Once you cannot, everything changes very rapidly. When people lose faith that this is going to work, it can go very, very quickly. It does not take 100 percent of people to change before the market really starts to have problems. If 20 or 30 percent change, as we all know, everybody else cannot get up at the same time.

I think we are going to find people are still hoping that this year things turn around. I do not anticipate a huge problem. But then again, that does not mean I am a big fan of the stock market right now. I am also not short on bonds right now either. It could change in six months. I might start shorting bonds, but I am not now.

Chris Martenson:  That is excellent. Where does gold fit into your strategy? Maybe there is silver, too, and other resources as you look into this.

Bob Wiedemer:  It is very, very important. I think gold has done well. That is one of the great things about gold as opposed to, say, shorting a stock market or a bond market. You could have lost a lot of money doing that – shorting either one in the past few years. With gold, heck, it has done great. We have been up 10% in the last year. We will probably be up 10% this year. We are up over 400% since 2001. That was, by the way, up every year, as I am sure you know very well. It has been up every year since then. It has been a great player in the past. I think it will continue to be. I mean that if gold can do this well in a period of low inflation, the stock market has been okay. It has not gone anywhere, but it has not collapsed. The bond market is actually even pretty good. What would happen if those changed? If we have high inflation, a not-so-good stock market, and a bad bond market, I think gold could do very well. I am still very bullish on gold. I like it. It is certainly a big part of our portfolio. I am pleased with that.

I am also pleased with silver. Silver has a lot of volatility. I still think long-term it will do well. However, on a shorter-term basis, we are still down from I guess what was our peak back in the spring of 2011. I think silver will do well long-term, but gold has just been a lot less volatile, so I generally tend to much prefer that. Other commodities, like agricultural commodities, are great. I think they have done well in the past. I think they will do well in the future. If our dollar falls, I think Ag commodities will do well. I think those kinds of commodities will do well.

The one issue I have with, say, oil – although I think that could be good with oil or other metals – they are in fact in a recession, particularly as it kind of slows down. Yes, we have a lot of demand for metals and oil in the past, and certainly in the past few years, I should say. If that demand slows down a lot, that could hurt some of the metals and oil. Again, a falling dollar – this could be a really weird situation – could help domestically produce oil and natural gas. Commodities overall are an interesting play, but a lot of the demand last year has been driven by China. I think that is going to slow down a lot over the next few years.

Chris Martenson:  I get that. I do like silver as well, because it is my Rip Van Winkle metal. It is an extraordinarily beautiful industrial metal. We use it. We consume it. We pull it out of the ground. It gets lost at the molecular level into the oceans or wherever it goes, and that is that. So as long as we can keep pulling it out of the ground, that is awesome. It has got a story of scarcity built in. if you wander over into the mining sector and look at ore grades, look at known deposits, look at rates of extraction and you say, oh my gosh, there are not that many years left before all known deposits are gone. Maybe we will find others, but the story that is inescapable at this point is falling yields off ore grades. There is just a story of depletion and eventually scarcity showing up there for me. This, of course, translates into price at some stage. That is one of the reasons I like it. More broadly, are you looking at the idea of resource scarcity as you go out through the years and decades?

Bob Wiedemer:  I am, but maybe in a somewhat different way. I think there is definitely resource scarcity. I am about to publish an article. We all kind of know it, but this does prove it. The days of three-dollar-a-barrel oil are long gone. The days of ten cents per thousand cubic feet of natural gas are long gone. I think it is all going to get more expensive. What did you just say? Ore grades are going down. What does that mean? That essentially means it is getting scarcer or more expensive to extract. I mean yes; I forgot the exact number. However, in a cubic mile of ocean water, there is a lot of gold, but it is very difficult to get it out of there. It means it is very expensive. I think we will see the cost of getting those resources going up. Yeah, we will be able to find and work with lower yield ores. We will be able to work with lower-yield oil and gas deposits. However, it is all going to come at a cost, Chris. Those costs are going to go up on probably all of our resources. This is from helium, to iron ore, to oil, and everything in between.

Chris Martenson:  It is an interesting part of the inflation thesis. A lot of times, the Fed and the government only track inflation through its terminal impact on prices. There are a number of things, obviously, that can push prices, and scarcity is one of them. Let us just wander over into the energy sector, which you mentioned for a minute. All of the people I talked to in the oil and gas business say, listen. The Bakken plays have been there. We have been drilling them since the fifties. They have been very marginal. We have had fracking for 20 years. We have had multi-stage fracking. We have had horizontal drilling for 30 years. What we did not have was $75 to $80-a-barrel oil so that we could deploy these technologies there. That is just a story that says listen. By the time you are doing these horizontal drills at 10,000 feet down and another 15,000 feet across, potentially, and a 20-stage frack, you would need pretty expensive oil to get there.

That oil price then feeds over into prices. That is a different impact in inflation. Inflation might be adding to that dynamic. There is just a story here which just says certain resources are now becoming more and more expensive. They are more dilute. They are more diffuse. They are more distant. They are deeper or whatever those things happen to be. That starts to play into this.

One of the things I would like to get your point of view on is, we have built an entire credit market system, and how the world is supposed to work. We have blown serial bubbles all with the idea that we could safely ignore resources. They will be there, you know? If prices go up, then that will create a certain amount of demand. Supply will follow. The idea here that I want to sort of tease out is, in your mind, when you look at the efforts to reignite the credit bubble – I see potential resource scarcity as just more sand in the gearbox. Does that fit into your view? What I am trying to get at here is, what is the chance that we are going to be able to get the animal spirits back? We are going to be able to re-inflate not one, not two, but maybe all four of those virtuous bubbles that you had articulated all the way back at the beginning of this. What is the chance that we are going to get that firing up again?

Bob Wiedemer:  I have a number of issues here. Let us deal with that last one first. Can we re-inflate the bubbles? You can by pumping up those other bubbles. Ultimately, the more you pump those up – and we both know it. If we really did try to basically borrow our entire federal budget every year, we would scare people. We would scare people investing in the U.S. We would scare people overseas. We know that you just cannot go too far. Just if we printed $500 billion a month, we would scare people. You would also find we would get inflation pretty fast. We can kind of pump them up. We can sort of stabilize them, as – what I said before – I think you will find it is hard to really pump them up without scaring people that you are inflating those other two bubbles too much too fast. I think that theoretically we can do it. I think in practicality it is just not going to work. Again, the only way you are inflating them is you are kind of pumping them up from something else.

How does resource scarcity play into it? Absolutely, no matter what happens, resources are getting scarcer. You are absolutely right. We do have a lot of oil in oil shale. We do have a lot of gas in gas shale, but it is expensive to get out. My dad was in oil and gas drilling back in the fifties. Yeah, actually, hydraulic fracking is what they used even back then. It is 60 years old. It is nothing new. What is new is exactly right. It is we have higher prices now for natural gas and oil. I mean that when he was working there, it was ten cents per thousand cubic feet. Now even the cheap price is three or four dollars. All of that helps make a difference. My guess is most of that gas shale is not a problem until six dollars per thousand cubic feet.

The point is, what you are saying is quite true. Those resources are getting thinner. Our cost is basically due to supply and demand. Supply is getting tighter. Demand is still relatively high compared to your supply. You are going to have higher prices and inflation will be on top of that. That is a real price increase. All of that is salt in the gearbox as you said – or sand in the gearbox. It is salt or sand in the gearbox. It makes the situation even more difficult.

Fundamentally, what is really going on is you are trying to pump up bubbles that ultimately cannot last. You are doing it by creating other bubbles that will pop. It just makes the whole situation much worse. It is like somebody who is trying to save his or her business by borrowing and borrowing more money without fundamentally solving the problem of why this business is losing money. He is just making the situation a whole lot worse in the end.

Chris Martenson:  This is probably an unanswerable question, but does the Fed have a game plan here? I mean the story you have just articulated says there is no exit to this thing. The question is, how bumpy is the road between here and there? Potentially we are making the road even bumpier by just adding more fuel to the fire, as it were. There are more imbalances and dislocations that have to ultimately be reconciled at some point. If you are painting a picture that says we fundamentally overdid it and now we are going to have to re-equilibrate and find a new equilibrium, which is at a lower point, we will potentially live below our means to account for the years we lived beyond our means. Do you think the Fed is aware of this? If so, what is their plan?

Bob Wiedemer:  I think the Fed is aware of it, honestly. I think they do know what this is. What they are doing is not something they would like to do. I think they felt forced to do it, especially in 2009. I think they felt they had to do it to save the financial markets. What I think they are hoping is that, again, we are just in a down cycle. It will cycle out just like the good banker.

Let us say some of you lent money and got stressed out, down turned, with a problem in the economy. Rather than pull his credit, you are going to give him more. You are trying to give him more to get him through the down turn. Then when the down turn is over, this guy is making money again and he pays you back. I think that is kind of what the Fed is sort of thinking. They are giving a little stimulus – a little boost to get through the down turn. Then they will be able to pull that money back when it gets better.

The reality is an exit plan. We actually used to talk about an exit plan after QE1. How are we going to pull this money back out? We do not even talk about it anymore. The Fed does not mention it. I do not see it much in the financial press. There is certainly no exit plan talked about. There used to be. It was an issue. Now it is not. I think we are kind of seeing the reality of it.

The Fed also is increasingly stuck. Any time you try to pull that money back out, you are going to instantly start to throw the bond markets, stock markets, and real estate markets into trouble. They do not want to do it. Just like a good banker who maybe is starting to throw good money after bad, they are hoping that by giving this client more money he will get through the down turn. Then when he gets back out, he will get his money back.

I think just like a regular banker, the essential bankers in the U.S. are going to eventually start getting more and more worried. I think they already are. The fact that they are not talking about exit plans should tell you that their view and their reality of this money trend is changing. It is harder to get it back out once you put it in. We might have both thought that was obvious a few years ago. For the Fed, I think they felt pressure to do this because their client – like a bad business – was going under. They felt pressure to save them. Now they are hoping that business will turn around. I do not think it will. It is bubble business and not a real business.

Chris Martenson:  The Fed’s main strategy is hope. That is okay. They have a backup plan, which is panic.

Bob Wiedemer:  I might quote you on that one in an upcoming book. That is awfully good.

Chris Martenson:  All right, I think we have summarized that all in a sentence. Here is the most important question – I have to know now. Let us pretend I am somebody who is listening to this. I am a private investor and I am thinking about shelter at this point. How am I going to protect what I have got? Maybe it is preservation of purchasing power, or maybe even how I grow my wealth. I am in a position where I actually need to find ways to grow my wealth. That should be a legitimate goal of investing at all points in time. It is not just protecting it. What do you say to a person who is listening with those concerns?

Bob Wiedemer:  Okay. The first preservation of capital is not always compatible with growing your wealth. I agree it is reasonable. To me, I am going to 1928 when Charlie Merrill of Merrill Lynch came out and said guys, get out of the market. You know I think this market is in trouble.  He was wrong. 1928 actually worked out pretty good. Most of ’29 worked out pretty good. I mean, the last part of ’29 did not work out so well. Charlie was right. He did not say let us get out of this market and let us move into this market. There is a bull market born every day, somewhere in the world. He did not say that. He said it is time to pull out and preserve. In that case, it turned out to be pull out and preserve for years, and years, and years. The stock market really did not come back until the late fifties and early sixties. In terms of making money, even then, it was not a barnburner.

You know that sometimes there is a great way to make a lot of money in difficult times. In this case, I think we are in a better situation than they were in, say, 1928. I think there are some ways to make money, but they are never easy. I do think gold is one good buy. I do think shorting the bond market at some point will work. Do not do it too early. Shorting the stock market will work. I think there will be some commodities placed that will be good – some agricultural commodities. Commodities are still going to be tricky, so there is no easy way to do it. What people really like is what they have had before. It is a stock market where they just throw darts at the wall. In 1980 and by 1999, you are basically up 1000 percent in blue chip stock. Heck, if you are in high-tech stock you would be up 2500 percent. I think it is what they are really looking for, and I am saying I do not think you are going to get it. I think you can make money, but it is going to be by being in things that are naturally difficult or socially difficult.

I mean, the number of financial advisors who will tell you to put even 20% in gold is pretty few. It would have been a great investment in the last ten years. They will all agree with that. It is proven. They will say for the next five years to forget it; I would not put any money in gold. It is uncomfortable from a lot of standpoints. I think that at this point you make money. The days of making comfortable money are gone. In some cases for many people, it may be better just to go into capital preservation mode, as Charlie Merrill recommended in 1928. Do not worry about making five or ten percent a year. That might just be better for some. It is not great, but it might be the better alternative than having your money stuck in a stock and bond market that ultimately you lose a big chunk of your money.

Chris Martenson:  Well, if we are being honest about it, stocks have gone nowhere for I guess about 12 years in nominal terms. In inflation-adjusted terms, it would be a different number. Maybe inflation and dividends sort of cancel each other out roughly.

Bob Wiedemer:  That is for your mainstream stocks. However, NASDAQ, Chris, they are down 40% if you are all NASDAQ stock.

Chris Martenson:  That is right. If stocks are not the path, one thing I am really unhappy with is just how overvalued all the bond markets are. The various central banks have gone out and basically crammed safe yield so low that all the other yields have followed. Obviously if you are a pension, you are an endowment, you are somebody with an actuarial responsibility that has real impacts to it and you have got 0% or something close to it in what we might term a safe yield, that just makes everything else just that much more unattractive. That becomes really just an extraordinarily difficult problem. I had always expected that maybe the Fed – if you want to cram interest rates down to 0% for a little while, like three months or six months, here we are. What are we – four years into this experiment? Anything under 1% is 0% as far as I am concerned. It is the same. If there is really no safe place to put your money in the financial sphere, what else is available, especially for the big institutional investors? What do you do?

Bob Wiedemer:  As I said, gold has actually proved to be relatively safe. I think it will do well in the future. In terms of bonds and stocks, it is not so good. Now, for big institutional people, they can short these things more easily. I think some shorts will come up and be a nice opportunity in the next few years. Again, it is not easy. It is not easy to time that right.

I think there are ways to make money. As you mentioned, John Paulsen and the shorting on the mortgage trade is the most profitable lucrative trade ever. I think it netted John personally over $10 billion or $15 billion. You can make a lot of money on these things, but it is not comfortable money. It is not the money how we made it in the old days. I think there are ways to make the financial markets. Outside, in terms of hard goods, you do not really want to hold a bushel of grain. I am not sure how well it is going to do. You can hold the silver and gold. Those, I think will do very well long-term.

Yes, ultimately stock and bond markets will come back. It all depends how much we decide to damage them now. Every day that we keep this money printing, we are damaging them further long-term. Yes, eventually they will come back. I think we have got a ways to go before that, because I think we are going to decide to damage them an awful lot, unfortunately. That is not good. Every day we do this, it is not good to help our long-term recovery.

I started rambling a bit here, Chris. Yeah, I mean in terms of things other than financial instruments, as you said, there is not an easy way to make a lot of money. I do think gold is probably the easiest and simplest of any of those – or silver.

Chris Martenson:  That is excellent. I certainly concur with that, and I have for a while. I am just waiting patiently for the time when investing can come back. Obviously, we are not really investing quite as much, in my view. We are speculating. How much is the Fed going to dump? Is it $100 billion or $40 billion? That is a guess. Your most recent book, Aftershock Investor – I assume you are covering a lot of these principals in there. People can find that, I assume, just about anywhere.

Bob Wiedemer:  Yeah, in fact, I think in Barnes and Noble it is in the “Best of Business” section through Christmas. It is certainly on Amazon. It is pretty easy to find. It is at most major bookstores, online, at barnesandnoble.com, and all of that. Yes, it is all out. It is pretty easy to get a hold of, fortunately.

Chris Martenson:  That is excellent. If people wanted to follow you in other ways, do you have other venues that you write or communicate in?

Bob Wiedemer:  We do. You can go to our website, AftershockPublishing.com. It is pretty easy to remember. It is AftershockPublishing.com. We have got newsletters you can sign up for and audio conferences. There are a lot of ways they can follow it.

Chris Martenson:  That is excellent. Bob, it is really just a pleasure to have you on and to hear your views, many of which I do concur with. I just love the framing which is that bubbles burst. That is all you really need to know.

Bob Wiedemer:  That is all you need to know.

Chris Martenson:  History has never dodged them before. The odds are low this time, so maybe you should have something in your own personal strategy besides hope. Just understanding is an important part of that. Thank you for helping us to understand these issues.

Bob Wiedemer:  Thank you, Chris. It has been fun.

About the guest

Robert Wiedemer

Robert A. Wiedemer co-wrote the landmark book that predicted the current downturn in the economy in 2006,America's Bubble Economy, published by John Wiley. As Paul Farrell, Senior Investment Columnist at Dow Jones MarketWatch recently said, “In short, America’s Bubble Economy's prediction, though ignored, was accurate.” Kiplinger’s chose it as one of the best business books of 2006.

His following book, Aftershock, was published by John Wiley in November 2009. It was chosen by Smart Money magazine as one of the five best investment books of 2009. Aftershock Second Edition was published in August 2011 and became a New York Times and Wall Street Journal Bestseller.  Aftershock has also received widespread international interest.  It has become a bestseller in Korea and has been translated into Chinese and Japanese.  Aftershock and America’s Bubble Economy have been the subject of articles in the major press including the Wall Street Journal, Financial Times, The Hedge Fund Journal, Euromoney, Barrons, Reuters, AP, and others.

He speaks to groups of investors, financial analysts and economists including the New York Hedge Fund Roundtable, the World Bank, and the National Press Club. He is a frequent commentator on TV including CNBC and Fox Business News.

He graduated from the University of Texas with a BS in 1982 and from the University of Wisconsin with an MS in Marketing in 1988.

Related content

26 Comments

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
What a well timed Podcast this was for me...

...The Fed HAS to buy all Debt with the printing press! After all our Debt is backed by the full faith and credit of the United States (the people) All entitlements where no cash now exists as a savings HAS to be printed up and these entitlements are spent into the economy. 78 million Baby Boomers enter retirement age starting now. Yikes!, that's allot of printing.

I know it looks as though I am stubborn about this Inflation beast but I am not. I am just not going to submit, until I understand. even if I sound foolish, and I will sound foolish still, no question about that. Chris even intimated that if he was told that we would have printed this much money five years ago he would have said "you're nuts". I presume because he would have thought massive Inflation, and thus would be proven foolish. Of course you're not proven foolish Chris nor am I. Check this out:

So, I learn from the Professor Man. Don't ever let your biases fool you into thinking you;re perfectly sane. 

More dollars chasing fewer and fewer goods. Now I see the Inflation and possible Hyperinflation! I love it when things come together, but, that's if the Fed is allowed to print, and we just don't let free markets correct themselves. DEBT is STILL a huge part of the balance sheet.

OK, I see the landscape better now. It's a race then to print and to Debt destruction. Who wins, well, that's a toughie because I have lived through Carter Inflation, and I seen 2008 sooooo, I'll be a watching.

Great Podcast.

Hey!, a quick thought: Are we really going to kill the dollar? What will Japan, Europe, and the UK do to this equation of Inflation and Hyperinflation when these countries fail? They will, before the U.S. I'm guessing. More questions still, and astute observations are still required but at least I am secure with this whole Deflation-Inflation beast (es-ses) thing-a-ma-bob. I got Gold and Silver. Gold in particular buys the same thing relative to the same thing today, as it did way back in the day. and likely way into the future. Cool.

Adam and gang, I love your work ethic, and everything you all provide. Turned on still to just, everything. Done for the weekend now, perhaps.

Merry Christmas

BOB

PaulaJane's picture
PaulaJane
Status: Member (Offline)
Joined: Aug 25 2012
Posts: 2
Thank You

I lost my husband the begining of November and I just wanted to thank you for your site and pod casts etc. This one was especially helpful as I have a small child and planning for her future is my number one concern at the moment. This pod cast was especially helpful because with all the drama I have had in my life lately the 2-4 year time range discussed is actually comforting as it allows me more time to add to my current preparations.

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 466
you have friends on this site

Hi PaulaJane,

I am so sorry for your loss. It must be incredibly difficult. I think that you will be okay though, because barely one month after losing your husband you are already looking ahead to plan, and find ways to look out for you and your daughter. You must be a very strong lady and I applaude you for being courageous enough to begin taking steps to prepare yourself for this next phase of your life.

I like to think that you will always find words of wisdom here on this site, and that the online PP community will, I am sure, provide encouragement as you go.

Good luck to you and your daughter.

Jan

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2310
Ben's Bathtime.
It is a priviledge  to be able to listen in to two inteligent people discuss that which is alien to me.
It is especially alien coming off the back of a 12 hour night shift.
 
My impressions are these. That precious metals are a short on the dollar, which is fortunate for me because the concept is simple and easy to impliment with no counter party risk.
 
Well, that is not quite true. I feel a lot of unwanted attention from the citizens who will become desperadoes when things turn pear-shaped. With this uneasy feeling in mind I have decided to convert the silver into a bigger yacht. Then my counter party will be the rageing, indifferent ocean, which will get angrier as the thermal gradient that drives the winds becomes greater. (Until the ice is gone and the gradient moderates.)
 
My fiat money model is Donella Meadow's bath-tub. There is an optimum amount of fiat in the economy as there is an optimum amount of water in the bath. Due to the laws of entrophy the bath became cold and miserable. So the FED filled up the bath with more nice warm water. But if the water flows over the top of the bath, the party is over. (Money destruction and a lot of angry mothers) So fiat has to be drained from the economy. But if Ben pulls the plug to drain some water  (Debt defaults, taxation) and can't control the process the party is over and he sits naked and sad in an empty bath. (Deflation). So there Ben sits. Does he pour more hot money or does he pull the plug? Hurry up Ben. The water is getting cold again.
 
What do you do if you discover the note that you have in your hand is counterfeit? You go and spend it as fast as possible and transfer your bad luck onto someone else. The Chinese steel making venture is no longer profitable, but still the ships keep coming into port here in Australia to load up on iron ore. I guess that the Chinese are keen to spend their $US.
Spot the Patsy in this story.
 
Here is a picture of the late professor's book.
RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Yeah Arthur, but the Edmond

Yeah Arthur, but the Edmond Fitzgerald stopped floating just down river from where I used to live. There wasn't a day she didn't seem to run her route from Minnesota to the Rouge except after her fateful day. City is now a ghost town as the money machine ended with off shoring. Is this the same as the export model drying up, and no internal economy to pick up the slack?

Can Ben figure out every single time when the bath tub needs hot water, and can he get there quick enough? How about Japan, UK, Europe? We'll certain know that I'm guessing soon enough. Will our Congress work together? That's a big if, and Ben can't help there or can he?

Bob

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2310
Not the Real Deal.

Hi Rob,

Let us pretend that the Chairman of the FED could judge the amount of fiat that the economy needed to be circulating out in the wilds. And that there were no other complicating issues such a political favours, rabid ideologies, nationalistic chest thumping etc.

He would still be sitting in the bathtub with too much liquidity. Nothing about his situation would be different. Once he attempts to drain the excess out of the tub by confiscating dollars  and burning them (Taxation), or by allowing dollars to evaporate (Defaults and debt retirement), the economy siezes. This is what happened in 2008. The situation nearly got out of control when defaults removed liquidity down the proverbial plughole.

Do you see Ben running naked down the street shouting "Eureka"? This is why there is no more talk of an exit strategy.

That is the best model I can come up with.

And now I must stop  pretending to be something that I am not. An economist.

Good luck with the repatriation of your local economy. Burning fuel to import cheap products has got hairs on it.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Arthur my immediate thought this morning was...

...everyone is debasing!, They are all doing as Ben is. It appears (and I have no idea about this) that Ben is letting some water out in order to put fresh hot water in. I can only guess that Debt destruction and new printing are a Push (cancelling each others out) but I really don't know about such things or how to measure this. The World is now in a serious CONTRACTION, and all the NUMBERS tell a baffle them with BS tale. We have more Inflation than stated, Europe is in greater need of Capital than is reported and they have NO COLLATERAL, Japan and the UK are beyond any previously known rational, and China is NOT the Miracle Child. I have to then conclude that things are beyond what can be controlled right now, and me thinks the Central Banks have their collective fingers crossed, and from time to time have to lift one wet index figure to the wind and see which way the wind is blowing. It is so amazing to me as Dr.Martenson mentioned in yesterdays Podcast yet again, "if you told me that this much printing would have happened then I would have said you were nuts", (I hope I quoted properly Chris). If Chris is nuts (he isn't but he's definitely baffled) then I feel like I'm in pretty good company when I think anything can happen.

What if the Congress of the United States actually screws things up so badly that they themselves by default changes the equation, and we get a massive default by the American people through the courts for instance, Bankruptcies? Could the Fed get control of this? So many ifs that I just will take a look see, not put all my eggs in one basket but will ABSOLUTELY prepare and become more Resilient (if that is possible) as this just makes the most sense to me right now. We are entering Spring on the other side of the world and what weather events are in store their? Mother Nature is seldom factored for but is a huge player in this crazy game.

I absolutely love this drama in my life. I just do.

Regards my Friend

Merry Christmas Arthur

BOB

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 466
here is a link for more perspective

This link is from an older article, which pre-dates my time on this site, so it may very well have previously been published here. But timing aside, this is still a very relevant article. As with all predictions, nailing timing for events to happen are educated guesses at best.

http://inflation.us/hyperinflationwarningsigns.html

As I try to wrap my head around some of these complex subjects, I come to but one simple conclusion that I can buy into: the only thing standing in the way of hyperinflation is confidence in the US dollar. As we have seen in the past couple of years, as the SHTF globally, there was a large scale flight into Treasuries, as they were seen as being the best horse in the glue factory, due to reserve currency status. Those purchases are based purely on the confidence factor, as US Treasuries are largely, if not totally un-secured. Therefore our turning point, the one where we move to a hyperinflation scenario, is the moment when that confidence falters, and money starts shifting out of Treasuries and into the only real, secured things left: commodities. The increase in sovereign purchases of gold and other commodities, as well as increased foreign investment (e.g. China, trying to lock up Canadian, Australian and African resources) tells me that this ball is indeed already rolling and heading down the pipeline. The fact that there is even talk of a gold backed Yuan, that some countries are already exchanging gold for oil, and China has created agreements with some countries to conduct trade using Yuan instead of dollars is incredibly serious stuff.

So it is a waiting game. We know there is a high probability of it happening, we just don't know when. I think what we need to do is firmly establish what our "trigger points" will be. What will have to happen to let us know hyperinflation is starting, it is for real, and to brace ourselves for impact? The problem in trying to figure this out is that so much of the information we are fed is manipulated, and therefore not to be trusted. E.g. consumer price index - we all know how heavily manipulated that is.

How then can we as individuals establish good and credible trigger points to let us know it is really and truly starting to come apart at the seams?

Jan

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
What a great time for me to have all these pieces...

...come together and then paint a landscape that after I put my glasses on showed the deeper meaning of things as the background (the unseen) really sets in motion the meanings of things. It really has been a joyful period for me. Then I read this today from a Man I have come to not only enjoy but respect for his sensibility and prose. If I could put to paper as the Big Guys do this might have been something I would have liked to have written because it sure fits my awakening recently.

From Mark. Grant:

http://www.zerohedge.com/news/2012-12-02/mark-j-grant-its-me-baby-your-wake-call

I have a first edition copy of the "Grapes of Wrath", I think I will read it again.

OT: Jan, I just think you are one terrific, sweet, sensible, and compassionate Girl I have read here at PP or anywhere.. safewrite comes to mind also. Girls, you have my deepest respect. I share many of your comments with my Lady and she is of the same character as you good Folks.

No comment is necessary, just let the compliment resonate and make you smile.

Merry Christmas

BOB

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Many here have mentioned how China and other countries...

...have stopped using the dollar, and this is somehow a "TELL" that indicates the dollar reserve currency is a doomed currency (in so many words). I will only ask that you read this from Michael Pettis, and see that there may be another explanation.

http://www.mpettis.com/2012/11/17/is-there-an-asian-rmb-bloc/

Then you might want Jim Chanos take:

http://www.businessinsider.com/chanos-chinas-credit-situation-is-worse-than-greece-and-spain-and-the-micro-is-even-worse-2012-7

Our biases or wanting something to be the definitive answer causes us to miss what just might be the real answer.

Respectfully Given

BOB

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Exchanging Gold for OIL...

...why? Plus this doesn't seem like a good idea if we are conviced that Gold will back some future currency. Lets take a look see, and make up our own minds.

Mojofabulous
User ID: 1476210
 United States
01/24/2012 01:59 AM
Report Abusive Post
Report Copyright Violation

Re: I CALL BULLSHIT: What country can pay for oil in Gold Bullion

If you got Gold at $1600 an ounce and Oil at $100 a barrel,

1 ounce of gold buys 16 barrels.

If you need 1 Million barrels A DAY,

That means you need:

1,000,0000 divided by 16 barrels = 62, 500 ounces of GOLD

PER DAY

Now how long can anyone keep that up?

Quoting: CaptainZero 8770715

Well. There's a couple problems to address first, then we'll go with it. First, you're pricing gold in US dollars, which is what these countries are trying to escape in the first place. Second, you're assuming these countries are dealing with prices similar to spot market prices. History tells us this isn't the case. Third, gold is closer to $1700 an ounce at this point and that's the paper spot price. Physical premiums bring the actual value to $1700+ per ounce at current spot.

So lets say it's 17 barrels per ounce, even though iran is probably desperate and would give up 20 barrels or more for an ounce at current prices.

I think it was india that announced the gold for oil purchase right? They are currently consuming about 1million barrels per day from iran like you said. Replace 16 with 17(really it should probably be 20) and you get 58,824 ounces of gold. There are 16 ounces in a pound and 2000 pounds in a ton. So 1.84 tons of gold per day if they completely replaced all currency purchases with gold transactions.

If we assume 20 barrels per ounce, that would be 1.56 tons.

As of December 2010 official indian gold holdings were reported at 558 tons. Obviously that total is a LOT higher today. I'll try to find a more accurate number.

558 tons of gold divided by 1.84 = 303 days

558 tons of gold divided by 1.56 = 358 days

Respectfully Given

BOB

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 466
yes, but...

I do not think for one moment that any one country would contemplate exchanging gold for oil on a regular and ongoing basis, for the very reasons that you point out Bob. However, that does not mean that some transactions are not being done, as in some trade between Iran and Turkey or Iran and India, which I understand is merely to get around sanctions

Here is a partial part of an article on Wikipedia:

"... The Chinese yuan or renminbi (RMB) cannot be used as a reserve currency as long as the Chinese government maintains capital controls on the conversion of its currency.[32] The currency would not be attractive to central banks for holding unless China develop a strong open bond market.[33] The Bank for International Settlements estimates that in 2010 around 0.9% of all currency market transactions were carried out in renminbi.[34] Chinese President Hu Jintao has said that it would be a long process before the yuan will be accepted as a global currency.[35] However China has taken modest steps in this direction with currency-swap agreements with a few western Pacific nations.[36]"

The article had also said that it took a long time for the US dollar to overtake the British Sterling as reserve currency. So while I do not see anything happening to threaten the dollar's reserve currency status any time soon, that is not to say that moving in that direction is not on the radar screen of certain nations.

This of course brings me to the next point, which is how all of this talk about trying to undermine the US dollar increases the potential for war. A loss of reserve currency status would mean game over for the US, so it goes without saying then, I think, that it will do anything and everything to maintain that status, including military action. There is speculation that incursions into Iraq and Libya were more related to those countries making attempts to use other currencies for oil transactions. So some muscle was flexed to dissuade others from thinking of doing the same thing. Food for thought.

War is not a subject that gets talked about much, however, I think it is a very real possibility. There are tremendous global power struggles all arising out of the need for increasingly scarce resources. Some nations are more desperate than others. Who or what might be the fuse in the proverbial keg?

And Bob, thanks for the nice compliment!

Jan

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1464
Kyle Bass agrees with Jan

source:  http://www.scribd.com/doc/113621307/Kyle-Bass        page 9

"Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion.  We believe that war is the inevitable consequence of the current global situation." 

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 2736
reserve currency status

Jan,

The USD is already losing reserve status, it's not all or nothing.  See

http://www.peakprosperity.com/forum/80133/reserve-currency-status

Doug

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 364
Jennies out of the bottle

Jan, since you mentioned the role of the US military and it's support of the US dollar, that's the last stage of the enforcement of the US empire mechanism:

It's a much uglier world than we would all like to imagine when you get close to the centers of power.  

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
au contraire

westcoastjan wrote:

War is not a subject that gets talked about much, however, I think it is a very real possibility. There are tremendous global power struggles all arising out of the need for increasingly scarce resources. Some nations are more desperate than others. Who or what might be the fuse in the proverbial keg?

Actually, it gets talked about a lot, depending upon where you are reading and who you are talking to.  Going back many hundreds (if not thousands) of years, large scale economic crises (and this is the biggest ever) of this type that occur roughly every four generations are inevitably followed by a large scale conflict in about a decade's time.  The two obvious looming areas are the Middle East and the South China Sea. 

Russia is scaling up their military courtesy of burgeoning gas and oil revenues.  Recent news coverage has shown the resumption of Bear bomber patrols off the US west coast and nuke sub surfacings just off the US east coast.  Norway reports the same in the Arctic in an area of known sub-oceanic natural resources that Russia is openly and aggressively staking claim to.  Putin is no fool.  He is planning on doing to us what Reagan did to him in the 80s.  He is creating a challenge to get us involved in a military spending war at a time when we can least afford it, knowing what the outcome will ultimately be.  And don't believe any of the MOPE about how the US is going to be the top producer of oil and gas in a couple of years.  It isn't going to happen. 

Also, while Obama is foolishly promoting nuclear disarmament and Russia is getting rid of many of their old nuclear armaments, as we are, they are also building a whole new, updated generation of them, a fact that the MSM seems to conveniently ignore.  If Obama has us disarm to the extent that he is expressing, it's an open invitation to future aggression.

I've written about the China issue on CM before but my guess is that they will make their moves in the South China Sea after the US and Israel get embroiled in escalated affairs in the Middle East.  China knows it just has to bide its time.  They are letting us do their work for them (i.e. they are allowing time for the internal "rot" infesting this country to do its work of destruction).  You will see Russia, China, and the Islamic countries working in a coalition to unseat American hegemony.  It will be interesting, to say the least.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
War!, is on the table, no

War!, is on the table, no question about that.

My point to all research is knowledge and preparations, and resilience. I do not want to be that person who gets caught up in believing anything so hard that I miss something.

I would have given Inflation a 90% absolute outcome to printing all the money we have since 2007, possibly more. I would have been wrong as we speak.

Kyle Bass is a BIG TIME favorite.

Jan, my threads were not a direct answer to your posting even though they seemed eerily direct. I have posted these same articles before, and that's the truth. My mindset this weekend has been to destroy each argument, pro and con, as I fight to take each sides position. That's it. I am still uncertain, and I'm glad about that. 

If we go off the Cliff and we actually set a course that is responsible then this changes Folks. I understand the odds on this are not 50-50 but who really knows. To many moving parts.

I know this, Gold is a hedge, insurance, is Money, and physical is what should be owned because to not own it is just plain irresponsible. Plus it cannot go to zero and it's purchasing power is consistent.

I also believe that the dollar stands a very serious chance of going up as the dollar will be viewed the safest currency/haven, and nothing can change that based on what is going on out there. No question about that.

The U.S. military are not buffoons by any stretch. We may have left Iraq but what did we leave behind that is the property of and controlled by the U.S. military? Rocket defense shield? Other toys? Who knows but we sure as hell didn't leave there with our pants down. Saudi Arabia is a commitment and we will dance. Interesting? You bet.

Bed time, maybe.

Respectfully Given

BOB

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 466
Loving the discussion...

Because this is how I (we) learn. No worries Bob, I appreciate each and every comment whether in direct response to something I post or not. And I am also learning that there are some fine, engaged minds on this site which bodes well for shaping my thinking smiley I believe one has the best chance of learning when they are open to all perspectives, weighing them against their own and deciding if that is something worth buying into. This is the school of life, and there are no better teachers than some of the people on this site, from Chris and his team right on down to the many enlightened posters. Thanks everyone!

As to the thread, we do indeed live in interesting times, and those who are aware and preparing accordingly will be the least surprised as things unfold.

Cheers,

Jan

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Absolutely Jan, and these

Absolutely Jan, and these times we live in are interesting.

My goodness, sometimes I think from conversations around here you would think that the United States is the home of the Prince of Darkness himself. Whoever and whatever that is. I just don't buy it. I cannot think of any War that was not a resource War. Ideology is seldom the reason. OIL is the reason for this season, I am sure of that.

This Pandora's Box you opened (unintentionally) tonight is one that is perhaps avoided because there's some serious tonnage of the Nuke kind out there and, well, oops. It should be brought up but I'll betcha a dollar the testosterone level gets really elevated pretty quick.

China, China, China, why is everyone so worried about China. I love China. I do know this, they have one Air Craft Carrier and we have 12 (my information is maybe dated but it's a big gap I know that). We have two on the docks. What China does is fine, but again, do they really want an END scenario? If so then start lighting up the War Room switch boards now. See, just silly are my thoughts. If not silly then I'll see you Folks on the other side, and peace will be a beautiful thing.

It is nearly 70 years that no nuclear device has been deployed aggressively, and my guess 70 more years.

As reserve currency I do believe that other countries want it to succeed, why ruin a good thing. Just business. I'm tired now so I may have changed my mind on this in the morning.

Russia may very well want vengeance on the U.S. as they lost the cold war. However, looking at a World map now above my desk, I see they still have the same issues they have always had, Water. How to get into the open Sea! That's a big issue, China too. Now, if the Russians put some sleds on the bottom of them boats they could go anywhere they wanted. Maybe that's what they have been doing with their Oil and Natural Gas. It would be easier for China to attack Russia frankly and that is just the truth. To take on the United States is plane foolish.

I've heard stories of subs popping up here, there, and everywhere while the U.S. is in battle exercises, from Russian and China. Off our coasts even and shooting off dummy rockets! Ewwww scary. It happened in California not long ago. Well, I hear they came up undetected until you realize they were detected by coming up! How dumb is that? The best plan of attack is surprise, well they just surprised us, and thank you very much. Honestly, that is like saying Boo! Thus alarming us to tighten up, and the Boo is no more. Just, plain, STUPID, and so are those reporting this as the U.S. is incompetent. Maybe, just maybe, we are not this stupid, and we want you to think we are stupid. Honestly. We have military uniforms that can mimic the natural surroundings of what is behind us so that we look invisible to the naked eye as you peer straight ahead during the day light!

Hey, I have been thinking this for a while and figured why not share this now. If you had all the cash as the Elite have, then why not a Deflationary event? They could BUY EVERYTHING, and not tear everything down to do it, and do all the buying on the cheap too! This seems so much easier than HYPERINFLATION doesn't it? Jus' sayin'.

Anyways, this muse could go on all night, and I am now tired. Good night Folks

Respectfully Given

BOB

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
reality

RJE wrote:

Absolutely Jan, and these times we live in are interesting.

My goodness, sometimes I think from conversations around here you would think that the United States is the home of the Prince of Darkness himself. Whoever and whatever that is. I just don't buy it. I cannot think of any War that was not a resource War. Ideology is seldom the reason. OIL is the reason for this season, I am sure of that.

This Pandora's Box you opened (unintentionally) tonight is one that is perhaps avoided because there's some serious tonnage of the Nuke kind out there and, well, oops. It should be brought up but I'll betcha a dollar the testosterone level gets really elevated pretty quick.

China, China, China, why is everyone so worried about China. I love China. I do know this, they have one Air Craft Carrier and we have 12 (my information is maybe dated but it's a big gap I know that). We have two on the docks. What China does is fine, but again, do they really want an END scenario? If so then start lighting up the War Room switch boards now. See, just silly are my thoughts. If not silly then I'll see you Folks on the other side, and peace will be a beautiful thing.

It is nearly 70 years that no nuclear device has been deployed aggressively, and my guess 70 more years.

Russia may very well want vengeance on the U.S. as they lost the cold war. However, looking at a World map now above my desk, I see they still have the same issues they have always had, Water. How to get into the open Sea! That's a big issue, China too. Now, if the Russians put some sleds on the bottom of them boats they could go anywhere they wanted. Maybe that's what they have been doing with their Oil and Natural Gas. It would be easier for China to attack Russia frankly and that is just the truth. To take on the United States is plane foolish.

I've heard stories of subs popping up here, there, and everywhere while the U.S. is in battle exercises, from Russian and China. Off our coasts even and shooting off dummy rockets! Ewwww scary. It happened in California not long ago. Well, I hear they came up undetected until you realize they were detected by coming up! How dumb is that? The best plan of attack is surprise, well they just surprised us, and thank you very much. Honestly, that is like saying Boo! Thus alarming us to tighten up, and the Boo is no more. Just, plain, STUPID, and so are those reporting this as the U.S. is incompetent. Maybe, just maybe, we are not this stupid, and we want you to think we are stupid. Honestly. We have military uniforms that can mimic the natural surroundings of what is behind us so that we look invisible to the naked eye as you peer straight ahead during the day light!

Respectfully Given

BOB

Bob,

IReading the above, I'm reminded of this tune.

I'm also reminded that at the start of World War 2, the French had an impenetrable structure called the Maginot Line.  Also, at the time, the Allies had an army that greatly outnumbered the German Army. 

When the first modern (i.e. nuke) US carrier is sunk, it will be recognized as the dinosaur that it will have become.  Ever considered the old adage about fighting the next war with the weapons of the past?  Read Unrestricted Warfare for a bit of enlightenment in this area. 

Regarding sea access, do the northern, and western borders of Russia escape you and, oh by the way, where has that Arctic ice cap gone?

I could go on but time is limited.

P.S.  I like China as well and have been a student of it for many years.  I also like tigers.  Capcihe?

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
ao, I love the tunes...My point...

ao, we have solutions we just gots to Man up, and let all this crap reset. Every country in the World is guilty of this mess. Germany, Russia, China, all of them counterfeited our currency to rebuild after the War and took advantage of the United States tax payers and I say enough. Europe, introduced a flawed currency from its inception, and we pay. I say GROW UP PEOPLE, call a spade a spade, and be GROWN UP about this.

Lastly, the United States can more than handle her stuff, and I am RED, WHITE, and BLUE to the core. Mom, apple pie, and baseball. I am honest too, and hopeful, and that is that.

Merry Christmas ao

With Deepest Respect

I have no time to debate ideology, but the "REALITY" is what it is. Kaboom! Bring on the Rats. I am a results oriented persona, and prefer PEACE above all.

God, is this really our future?

The End.

BOB

ao: I just read how I used the word Stupid and I will refrain from that word again as anyone could read this as whoever don't agree with me is Stupid. This is not the case at all, as I respect everyone who voices their opinion. I was STUPID for using this word frankly. My Bad.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
johnbryson's picture
johnbryson
Status: Bronze Member (Offline)
Joined: Aug 13 2008
Posts: 54
PaulaJane, I am very sorry

PaulaJane,

I am very sorry for your loss. I have said a prayer for you and you daughter, so that you will get through this difficult period in your and your daughters life.

John

KugsCheese's picture
KugsCheese
Status: Platinum Member (Offline)
Joined: Jan 2 2010
Posts: 638
Perkins

Is John Perkins insane?   One weird dude.

KugsCheese's picture
KugsCheese
Status: Platinum Member (Offline)
Joined: Jan 2 2010
Posts: 638
War

Well, suddenly Peaksters start discussing the likely scenario of a large war.  Guess I have been gone for awhile.   When many large events make no sense a non-linear event will happen including possibly military war. 

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 364
Too much to worry about

I try not to think of such things, but the risk of military catastrophy is increasing.  Invation of Syria looks imminent, Iran looks like its not to far behind.  We have 737 military bases in over 130 countries and spend as much on the military as the rest of the world combined. We continue to posture and threaten every other country on earth while our own infrastructure, health and education system sink to third world status.

The rule of law is missing in our financial system and the disparity between the rich and the poor in the US are now comparible to the ratios in Cameroon and Uganda.  We have traded short term profits for long term economic stability by off shoring our manufacturing capacity and have a debt to GDP ratio of around 500% when you count unfunded long term liabilities.  Yet cuts to military spending are off the table and it is still suggested that we have antiquated military hardware?  Russia has repeatedly asked that we not add the missle "defense" shield in Europe at the cost millions because they have stated that they didn't want to pushed into another arms race with us, yet we continue to pursue this course of action.  They are smart enough to know they can't afford it, they have already learned the hard way.

Russia is trying to bankrupt us by engaging in another arms race?  To late, we are already bankrupt, and we have done that all by ourselves.

Turning to a more important subject.  If anybody is in the CT area, I have a bunch of everbearing raspberry canes that keep spreading that I can give away to anybody who want to come get them in the spring.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments