Podcast

Eric Janszen: We Are Witnessing The Death of the Dollar

Friday, October 28, 2011, 4:11 PM

What do you get when the producer of the world's reserve currency takes on too much debt? Nothing less than the end of the US Treasury-based monetary system.

So says Eric Janszen, economic and financial market analyst and proprietor of iTulip.com. In chronicling the decline of the global economy over the past decade, Eric has formulated a framework called the "Ka-POOM" theory, which endeavors to understand how the immense run-up in global debt will be resolved.

In short, it looks at the credit bubble that began in the early 1980's, started accelerating in 1995, and has now reached epic proportions. The amounts are so staggering at this stage that Eric believes it is too politically undesirable to let natural market adjustments clear them away -- the magnitude of the deflationary pain this would create is simply unacceptable for politicians looking to get re-elected. The only other available option is to service these debts via a dramatically devalued currency. Hence the key role the Fed is playing today.

The Fed is at the epicenter of this process, intervening heavily to keep the natural corrective market forces at bay. In this, it has a dual strategy. The first is to keep asset prices high (i.e., fight asset deflation), which it is doing by keeping interest rates historically low. The second is to keep wage and commodity costs under control, which it primarily does via devaluing the currency (maintaining a "weak dollar").

And, of course, through its intervention, the Fed is doing all it can to keep the current financial system in place to perpetuate the process for as long as possible. The end result is a fundamental shift in risk from Wall Street to the taxpayer.

So the big question is: How long can this last?  Is there a point at which confidence in the system breaks and market forces finally overwhelm the intervention?

Eric's answers: "Much longer than most people expect." And "Yes."

First off, as the most important central bank in the world, the Fed has supernormal powers. In theory, it can expand its balance sheet infinitely. Its ability to absorb massive amounts of new liabilities is theoretically limitless, much of which can be easily concealed from an accounting standpoint.

And since the US is both the world's largest economy, as well as the provider of its reserve currency, other countries are compelled to support the current regime. A mortal crack-up in the US economy would deliver undue pain to all its trading partners, so they continue to buy Treasuries in sufficient amount to fund US economic activity.

But that's not to say they're happy about it. And here's where attention should be paid (and where the importance of gold comes in).

For much of the past century, the United States comprised approximately 54-58% of the global economy. Today, its share has shrunk down to about 18%, meaning its relative importance to the global system has diminished.

Issuing the world's reserve currency is a privilege that must be continually earned through transparency and sound stewardship -- qualities the US has flagrantly lacked in the past several decades as it has been blowing asset bubbles and running trillion-dollar deficits, via incurring massive debts and increasing its money supply tremendously. So, even as they continue to support the current Treasury-backed monetary regime, the world's central banks have begun hedging their exposure.

After several decades of being net sellers, the world's central banks became net buyers of gold in the second quarter of 2009. As Eric puts it:

There was no Plan B in the global monetary system when it switched over to the US dollar reserve basis for global monetary reserves. The only fallback is gold, gold is the only reserve asset that central banks hold other than dollars, and to some extent euros, but it is mostly gold. So gold is the fallback. So what I thought was going to happen is that over time, gradually, that there would be an increase at some point in gold holdings by central banks as they hedged the marginal increase and the number of Treasury bonds that they needed to hold as a result of conducting trade with the US and also simply maintaining the US economy through low interest rates and providing sufficient investment to continue to offer the US government.

So what is very interesting to me is [that] starting in the second quarter of 2009, right after the financial crisis, is when global central banks became net buyers of gold, which to me indicated that they had as a group, determined that it was time to more seriously hedge their dollar assets, even as they continue to buy Treasury bonds to increase their hedging.

Before that, there were effectively two teams: There were the buyers, who were countries like India and Russia and China, and the sellers, which are most of your European countries. And that structure of the gold market occurred and was maintained until the second quarter of 2009, and it shifted to a much broader base increase in the number of governments participating in the gold market, including Saudi Arabia, Mexico, and other allies of the United States.

Eric sees this move by central banks, of positioning themselves closer to the door, as a natural step to the inevitable endgame here, which is the dissolution of the US Treasury dollar-based monetary system. Due to entrenched special interests, politics, escalating commodity scarcity, and other factors, he does not see the US taking necessary corrective action before confidence in the solvency of the US and its currency collapses.

As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices.

Click the play button below to listen to Chris' interview with Eric Janszen (runtime 43m:46s):

 

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Eric Janszen is founder and president of iTulip.com. Eric is a prolific economic, financial market analyst and author of several notable books including the most recent one, The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.


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19 Comments

data gatherer's picture
data gatherer
Status: Member (Offline)
Joined: Nov 1 2009
Posts: 8
U.S. gold reserves

Chris - you may have discussed this in the past, but clearly what the subject of this discussion with Eric and a lot of your other research points to is a return to some form of a gold standard.

You often ask these guests about Treasuries and gold and other ways of insulating, but I think one fundamental question or fact that I have never seen any information on is how much gold is held by the central banks of each country, including the United States.

If we believe there will ultimately be an end to the fiat based system, what would inform whether I should hold on to dollars or not would be whether the U.S. has sufficient gold reserves to make my dollars useful relative to other currencies when buying imported oil, for example.

I'm sure part of the problem is that this type of information is very closely held by governments around the world.  (I recently watched a History Channel video - from this site I think - that suggested Fort Knox might secretly be empty.)

Conspiracy theories aside, it would be interesting to share or discuss an anlysis of the levels of gold reserves in central banks around the world.

My 2 cents - thanks.

data gatherer's picture
data gatherer
Status: Member (Offline)
Joined: Nov 1 2009
Posts: 8
U.S. gold reserves

Chris - you may have discussed this in the past, but clearly what the subject of this discussion with Eric and a lot of your other research points to is a return to some form of a gold standard.

You often ask these guests about Treasuries and gold and other ways of insulating, but I think one fundamental question or fact that I have never seen any information on is how much gold is held by the central banks of each country, including the United States.

If we believe there will ultimately be an end to the fiat based system, what would inform whether I should hold on to dollars or not would be whether the U.S. has sufficient gold reserves to make my dollars useful relative to other currencies when buying imported oil, for example.

I'm sure part of the problem is that this type of information is very closely held by governments around the world.  (I recently watched a History Channel video - from this site I think - that suggested Fort Knox might secretly be empty.)

Conspiracy theories aside, it would be interesting to share or discuss an anlysis of the levels of gold reserves in central banks around the world.

My 2 cents - thanks.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5353
Re: U.S. gold reserves

 Interesting question.  

However, I have very little faith that the reported official gold reserves are what actually exist.  

For some reason, pick your favorite, the actual, audited amount of gold in Ft. Knox is a more closely guarded secret than plans to build a nuke (whihc leaked out over the web a long time ago).

Further the level of opacity surrounding official swaps and leases is extraordinary.  Who actually holds what is a rather unknown set of variables.

So any analysis of what a gold standard might mean in fiat money terms is hobbled by this lack of transparency.  

However, I am rather comforted by all this jealous guarding of gold data by TPTB.  It means that instead of gold being a barbarous relic of the past, it is actually quite near and dear to a central banker's heart.  So dear, that they cannot part with even the most rudimentary of what should be quite public data.

Watch what they do, not what they say.

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1233
It's so great to see EJ here!

I'm a loyal subscriber to both iTulip.com (Eric Janszen's site) and of course CM.com, and have long thought you guys would make an excellent team. You're both miles ahead of the MSM and the blogosphere, and you both bring some of the finest, most objective analysis I've ever seen to the table. You guys are, hands down, my favorite sources of forward-looking economic analysis. Bar none.

Chris and EJ, I hope this will mark the beginning of a long relationship between you guys. Your views differ slightly, but are very complimentary. Quite a few of us subscribe to both sites, and follow both of you on our own. Having a "one stop shopping" opportunity to benefit from your brilliance is a real treat.

A request... What I'd absolutely love in a future podcast is a frank (but of course polite) discussion of the areas were you disagree. You are both really, really smart guys, and I think that your followers would really benefit from a discussion that focuses on the areas where you see things differently, and a discussion of why your views differ. For example, I know EJ feels that a U.S. hyperinflation is a near impossibility, whereas Chris thinks it much more plausible. I would so love to hear you guys discuss why you see this differently.

Thanks again for doing this, and I look forward to more!

Erik
a/k/a xPat on iTulip.com

 

Retha's picture
Retha
Status: Bronze Member (Offline)
Joined: Aug 13 2011
Posts: 67
Gold reserves by country

This is interesting, although not sure how accurate it is...also check out the energy output tab.  

 http://www.usdebtclock.org/gold-precious-metals.html

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Thanks
retha wrote:

This is interesting, although not sure how accurate it is...also check out the energy output tab.  

 http://www.usdebtclock.org/gold-precious-metals.html

Thanks for the link Retha.

Travlin 

joelandsonia's picture
joelandsonia
Status: Bronze Member (Offline)
Joined: Mar 25 2010
Posts: 30
EJ and Chris podcasts

Seconded.

(jpatter666 on iTulip)

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 6 2009
Posts: 556
"As such, Eric advises

"As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices."

Eric mentions that RE will be down for quite some time.  What is he refering to when he says "assets tha take advantage of rising rents"?

Nate

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1233
Nate wrote: "As such, Eric
Nate wrote:

"As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices."

Eric mentions that RE will be down for quite some time.  What is he refering to when he says "assets tha take advantage of rising rents"?

Nate

That one really took me aback when EJ first started touting it on iTulip about a year ago. I remain convinced (as is, apparently, EJ) that the rout in U.S. residential real estate is anything but over, and has a long way left to go.

But his thesis seems to be that while single family homes - particularly high-end - will continue to slump, more and more people will be taken out of the ownership market and thrust into the rental market. EJ advocates a fund he has personally invested in that is all about large rental developments.

I'm still a little skeptical about why this would make sense now, but EJ is as brilliant as CM, and he seems very committed to the idea. I suggest reading the relevant posts on iTulip.com for more.

ET

 

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Silvertooth.

That one really took me aback when EJ first started touting it on iTulip about a year ago. I remain convinced (as is, apparently, EJ) that the rout in U.S. residential real estate is anything but over, and has a long way left to go.

The value of real estate is between 6 and 16 kg silver for a three bedroom house are figures I have encountered.

Please don't confuse yourselves by converting to meaningless fiat money unless you are going to buy silver with the stuff.

If we were are firmly committed to an inflationary future then we can put our money where our mouths are and borrow to the max to buy silver.

I for one will not. (Until I change my mind.)

 

John Steinsvold's picture
John Steinsvold
Status: Member (Offline)
Joined: Jan 27 2009
Posts: 16
An Alternative to Capitalism

If the people knew about it, they would demand it

 
Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.
 
I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:
 
http://evans-experientialism.freewebspace.com/steinsvold.htm
 
John Steinsvold

Perhaps in time the so-called dark ages will be thought of as including our own.
--Georg C. Lichtenberg
JohnH123's picture
JohnH123
Status: Bronze Member (Offline)
Joined: Apr 14 2010
Posts: 33
Eric, you say rents will go up -what do you mean?

Thanks for your insight Eric.  Can you say more about real estate prices and rent? I understand that residential real estate will be going way down, and I assume commercial real estate will also go way down.  Why do you say rents will be going up?

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Coincidence?

I did not see a Mish and Chris segment for this past week and there is this front page Eric Janszen interview.  Seeing as EJ recently dissed Mish, is that why there is no Mish and Chris segment this week?  Just curious.

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 2737
Nothing to read into

goes -

No changes afoot to read into.

Mish was on the road last week, hence no Off The Cuff then.  There may not be one this week either if Chris' power doesn't get restored soon.

A

AstroTurf's picture
AstroTurf
Status: Member (Offline)
Joined: Mar 15 2011
Posts: 2
Get a Backup Generator!

There may not be one this week either if Chris' power doesn't get restored soon.

After a few years of procrastination, I finally installed a whole-house backup generator last month.  It's a 20 KW Generac generator with an automatic transfer switch that runs on either natural gas or propane.  It senses when the electricity goes off and automatically starts the generator within 30 seconds of the outage. 

As these power outages become more frequent and last longer, it's going to be very difficult to find these generators and when you do, the price is going to be much higher than it is today. 

I live in the San Francisco Bay Area and whole house back up generators are not common here.  My neighbors thought I was crazy.  Even the electrician who installed it was kind of raising his eyebrows and asked me why I thought I needed such a thing. 

One day they will figure it out the hard way. 

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Think365 wrote: There may
Think365 wrote:

There may not be one this week either if Chris' power doesn't get restored soon.

After a few years of procrastination, I finally installed a whole-house backup generator last month.  It's a 20 KW Generac generator with an automatic transfer switch that runs on either natural gas or propane.  It senses when the electricity goes off and automatically starts the generator within 30 seconds of the outage. 

As these power outages become more frequent and last longer, it's going to be very difficult to find these generators and when you do, the price is going to be much higher than it is today. 

I live in the San Francisco Bay Area and whole house back up generators are not common here.  My neighbors thought I was crazy.  Even the electrician who installed it was kind of raising his eyebrows and asked me why I thought I needed such a thing. 

One day they will figure it out the hard way. 

+1 to that! I have a 15KW generator wired into my control panel. It's way, way more than I need, but well worth it, since I am able to write this now using said generator.

eexpo's picture
eexpo
Status: Bronze Member (Offline)
Joined: Jun 30 2011
Posts: 51
back up generator

I too live in the Bay Area and have been thinking about a 20kw generator. How much was the installation cost? Where did you order yours from?I am ready to bite the bullet and get one.  Thanks for your post

treemagnet's picture
treemagnet
Status: Gold Member (Offline)
Joined: Feb 13 2011
Posts: 344
generators

Wherever housing exploded there will be gensets for sale.   Go online - Las Vegas or Arizona for example, has barely used ones for sale.  Find one, go see it load tested if possible/buy it/put in a rental truck and haul her home.   Generac is popular, but I've heard nothing good when you need post sale service/maint./repair.   Liquid cooled is best running at 1800rpm (vs.the 3600 rpm option).  Go big.  You'll be a valuable neighbor others will want to see alive and well - who wouldn't barter/pay for power, they do so now so I say go big.  If the world goes madmax then yeah, all bets are off.  Also, if propane - buy your tank, don't listen to the "you've got to bury it" morons, and go big.  good luck.

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