At the recent Casey Research conference in Tucson, AZ, Chris sat down with Casey chief economist Bud Conrad to discuss his concerns about the latest and potentially most destructive bubble in danger of popping.
At the conference, Bud stepped up to the podium, reached into his pocket, and pulled out a balloon, which he proceeded to inflate. As it grew, it become clear the word "BONDS" was written across it. For dramatic effect, Bud continued inflating the balloon until it popped. He then looked at the audience and said, "I hope I'm making a point."
Like many critically-thinking analysts today, Bud is watching the growing U.S. debt bubble with alarm. And now that the Fed is monetizing an ever-greater percentage of American debt issuance, he sees no way out for our current policies other than stalling for time until the inevitable happens:
Interest rates are at the lowest they have ever been; that includes the Great Depression.Our Federal Reserve is buying up all the government debt, as well as buying up the mortgage-backed security debt, such that the buyers and sellers in the bond market have driven all interest rates down. Complicit with that is the advantage that banks get with very low borrowing rates and moderately low, but still higher, other rates. The spread for banks is huge. It is sometimes called “financial repression.” And it has destroyed the income of older folks' fixed income, and given that largesse back to the banks.So, the Federal Reserve’s policy has greatly benefited the large banks and they have done it by stealing from old folks.I also want to get to a little bit about the other beneficiary of low interest rates. That is the government. Who has the biggest debt? They almost cannot survive if rates were to get back to even natural levels. Government debt, $17 trillion; increasing $800 million a year in four years gets you to $20 trillion. Nice round number. Let’s pick 5% as a long-time historical basis for what interest rates probably should be. And I think even you could do the math on that: a trillion dollars a year of interest payment.About $2.5 trillion in round numbers. So it is almost – or getting there – to half the taxable income of the Federal Government.The point is under normal circumstances, without this huge support from the Federal Reserve, our government is very close to bankrupt. And I would say it is easy to put a trajectory. Just add a few more years onto that of compounding that trillion dollars of interest (which then has to be borrowed), to the basis, to you saying you have a completely broke government, and you discount that back to now. These rates should already be well above 5%.
We are an empire that I think is weakening, not crashing. But would you want to be confident in the credit-worthiness of the U.S. Government this year as much as you would have 20 years ago? Obviously not. And that is my point about why rates are really under-pricing the risk going forward.
What happens to the 30-year Treasury? It has got to be bought by the Fed. And that means there is no exit policy. Yeah, they could taper to $10 billion a month somewhere, but I suspect the Fed is going to continue marching over the cliff of destroying our currency. And when people wake up to that, that is why interest rates must rise, and why, I suggest, that people should invest in – to protect themselves, maybe gain and prosper from – the fact that interest rates will rise.
When people find that they are losing money [as bond prices fall as rates rise], they say, I don't want these bonds: Sell them. Then the question is, To whom? The Fed is the only answer. So they cannot taper. But where does that lead us to? Worldwide destruction of currencies, often called currency wars. So that is the backside of the bursting of the bubble.
And I will go one step further. We are in the bursting now because interest rates – instead of falling during the last year’s biggest rate of QE – a trillion dollars a year, $85 billion a month (Treasurys and MBS) – that rate rose. It did not fall this year, 2013. As the Federal Reserve increased its purchases and increased its balance sheet, rates tended to go exactly the opposite direction because they are driving them down. They are driving the price of bonds up as they buy them.
This year it went the other way. Now, is that just a fluke or is this it?
My claim is: This is it. We have already passed the bottom of rates.
Click the play button below to listen to Chris' interview with Bud Conrad (34m:50s):
Chris Martenson: Welcome to this Peak Prosperity Podcast. I am Chris Martenson. I am at the Casey Research Summit here in Tucson, Arizona, in 2013. And I am having the great privilege of talking with Bud Conrad. Are you Chief Economist at Casey? Is that how you describe yourself?
Bud Conrad: Yes, and author of the book Profiting from the World’s Economic Crisis.
Chris Martenson: Profiting from the world’s economic crisis. Great theme for this year. Doug Casey opened up this whole conference with a parallel to our situation in United States, with Rome. We saw some parallels with that. You had the honor of giving the first talk after Doug’s. You had the first presentation. And you had “bubble” in the title. And part of your opening routine, we saw you blowing a big blue balloon, and it got bigger and bigger. And frankly, we were worried whether you were going to run out of air or not. That thing got bigger and bigger, and said “bonds” on it. And then what happened?
Bud Conrad: What happens to any bubble when you blow it up too big? Even if you are inside it and cannot see it, you know what happens when it bursts. And, of course, it went off with a bang. And I had a lot of people come up and say, that is the way to make it memorable; that we are about to have – and I might even say beginning right now – a breaking of a bond bubble.
Chris Martenson: I have had a lot of people talk to me about it, saying that was a very memorable part. So, great part. I am wondering how I can work that into my shtick, you know. Something like that. But this bond bubble, you had a lot of great charts in there. And it is something that we have heard a lot about from many of the other presenters here. Jim Rickard is talking about it. Of course, QE (quantitative easing) is on everybody’s minds. What is it that makes you say that bonds are in a bubble, from your perspective?
Bud Conrad: The major one is the sort of inverse of the bond itself. The interest rates are at the lowest they have ever been. I mean, that includes the Depression. This is like a beach ball being pushed under the water, shall I say – another analogy. We could have a swimming pool on the stage. I am going to try that one, too. But you know what happens. If you push it down, it can kind of wiggle and squoggle for a while, and then when it pops up, it comes back with a vengeance.
And that is why I think this, as an investment opportunity, is perhaps one of the biggest things that has really ever been this far distorted by our Federal Reserve buying up all the government debt. Then buying up some of the mortgage-backed security debt, such that the buyers and sellers in the bond market have driven all interest rates down. Complicit with that is the advantage that banks get with very low borrowing rates and moderately low, but still higher, other rates. The spread for banks is huge. It is sometimes called “financial repression.” And it has destroyed the income, of older folks, fixed income, and given that largesse back to the banks.
So, in some sense, the Federal Reserve’s policy has greatly benefited the large banks and they have done it sort of by stealing from old folks.
Chris Martenson: That is what they have done. It has been a great transfer of wealth, I have noted. The trillion-dollars-plus in interest payments that were not paid to savers went to somebody, of course, and that went to the banks, because the whole thing is about repairing bank balance sheets. Well, of course, the Fed has a lot of clients out there. They present it as if the American people are the clients. But, actually, they have got a frontline of clients who come first, and that is the banks and the banking systems. So they are really charged with making sure that is healthy and whole and all of that. Of course, they never say boo when the banks are out there making super record profits, doing some fairly shaky, maybe ill-advised things, risk-wise. But still they will come back and say, Now everybody has got to help bail these poor people out, and we will do some financial repression.
And when you say bonds are high, at all-time highs – I was really shocked. This past year, we saw two things. We saw gilts in the UK – which is their version of a Treasury bond – hit lows in interest rates that had not been seen in the 400-year series of those bonds. Four hundred years of wars and depressions and recessions and this’s and that’s, and never had an interest rate as low as they currently are. And the second thing, in May of this year, was junk bonds hitting all-time lows. Triple-C-rated bonds were never, never lower in all of their history.
So when something is at an all-time high price – where are we?
Bud Conrad: Before we get to what is next, Chris, I want to get to a little bit about the other beneficiary of low interest rates. That is the government. Who has the biggest debt? They almost cannot survive if rates were to get back to even natural levels. Government debt, $17 trillion; increasing $800 million a year in four years gets you to $20 trillion. Nice round number. Let’s pick 5% as a long-time historical basis for what interest rates probably should be. And I think even you could do the math on that: a trillion dollars a year of interest payment.
Chris Martenson: Let’s see. What are total income tax receipts?
Bud Conrad: About $2.5 trillion in round numbers. So it is almost – or getting there – to half the taxable income of the Federal Government.
Chris Martenson: Yep.
Bud Conrad: The point is under normal circumstances, without this huge support from the Federal Reserve, our government is very close to bankrupt. And I would say it is easy to put a trajectory. Just add a few more years onto that of compounding that trillion dollars of interest (which then has to be borrowed), to the basis, to you saying you have a completely broke government, and you discount that back to now. These rates should already be well above 5%.
Chris Martenson: Right. But who is buying a 30-year Treasury at a little over 3%?
Bud Conrad: The Federal Reserve.
Chris Martenson: That is right. Who else could do that? You have to be economically insensitive to be buying at this rate.
Bud Conrad: There are two other components I want to get to, to what is going to happen. The first is, why are we having such a deficit? There are two components to that. One is the forever wars. There is no justification or ability for our government to continue to pay roughly, I would say, $1.2 trillion for Defense. It is officially $700 billion on the books of the Defense Department. There are little other things like Veterans Affairs, Homeland Security, Black Ops, interest on the debt that has been accumulated because we have had the wars. My calculation is more like $1.2 trillion per year. And I would say that cost to our government is at the level where it hurts our economy and damages our strength as a nation more than the value of benefit we get from the military being one of the biggest in the world. It is, in fact, as big as all the other spending in the world, and it is feeding back on itself being the military-industrial complex that cannot be denied. Every congressman says, Oh, I am not going to close this base in my neighborhood. I get that contract from my whatever-it-is. It feeds on itself, and it is destroying our economy.
The other piece of that – there are two – and you know this better than anybody – social programs that you have for the retirement folks created by demographics of World War II – Baby Boomers – saying, Look, I expect my Social Security and Medicare. They are out of control. But when 20% of the population – the number of people that are retired compared to the number of people working – moves to 35% over the next couple of decades, you have a huge demand on society, regardless of how you fund it. And it looks like it is $70 trillion, for our discounted cash flow now to the present, that we have no way to pay.
So we have two ways to not have anything happen but the government to go bankrupt. And the question is, How do we fund this?
We get back to a minute ago, when you asked, What happens to the 30-year Treasury? It has got to be bought by the Fed. And that means there is no exit policy. Yeah, they could taper to $10 billion a month somewhere, but I suspect the Fed is going to continue marching over the cliff of destroying our currency. And when people wake up to that, that is why interest rates must rise, and why, I suggest, that people should invest in – to protect themselves, maybe gain and prosper from – the crises, the fact that interest rates will rise. Quite different from many people who just say, Oh, get out of safe bonds once you see you are losing a little money. The problem with that one is the kind of feedback loop you can have as an all-time return. An investor looks at his quarterly statement and says, Gee, it went down. Why is that? Because I have this bond fund? Whatever that is. I don’t understand it. I did not know you could lose money in bonds. Yeah, you can lose money when rates rise and bonds fall for any long duration.
If, when people find that they are losing money, they say, I do not want these bonds. You sell them. Then the question is, [sings] To whom, to whom? The Fed is the only answer. So they cannot taper. But where does that lead us to? Worldwide destruction of currencies, often called currency wars. So that is the backside of the bursting of the bubble.
And I will go one step further. We are in the bursting now because interest rates – instead of falling during the last year’s biggest rate of QE – a trillion dollars a year, $85 billion a month – Treasuries and MBS – that rate rose. It did not fall this year, 2013; I do have a chart. I would love to do it. I am waving my hand around. I wish I had something done. The chart is: As the Federal Reserve increased its purchases and increased its balance sheet, rates tended to go exactly the opposite direction –
Chris Martenson: Of course.
Bud Conrad: – because they are driving them down. They are driving the price of bonds up as they buy them.
This year it went the other way. Now, is that just a fluke or is this it? My claim is, this is it. We have already passed the bottom of rates. I am not predicting cataclysmic rise yet, but we have talked here, and – maybe you can explain why things, when they start to move, keep going. What happens if the Fed says, Well, we would like to get back to normal. Let’s sell off some of our assets?
Chris Martenson: Well, this is where the Fed gets into trouble. We have heard a lot at this conference about how QE is a permanent program now. There are maybe some social reasons that people hate to admit they are wrong, and maybe the Fed would have to admit they are wrong a little bit. There might be political reasons that the Federal Government is in some sort of gridlock, and maybe they are going to violate a debt ceiling and they have got all sorts of deficits they have to spend. And so the Fed is now wedded to whatever the policy that is, and has promised them – the Federal Government – they will help take care of it there. But there is a technical reason, which is that the Fed has been there buying bonds with the intention of driving down interest rates. Right? That is the easing part of the “quantitative easing” statement. And with those lower interest rates, they wanted to see things like more auto loans, more student loans, more housing loans, including a rise in house prices.
Because what the Fed has been targeting all along, at least on the retail side, is to get more people borrowing more money. And so they are going to claim a little success. Look, the housing market is back. Of course, that may be mostly large private equity firms buying huge slots of distressed real estate off of bank balance sheets. But the Fed has been spending trillions to get interest rates down to where they are. And what you noted, what happened this year in 2013 that is certainly noteworthy; we should have at least one eye half-open looking at it – is that even with the Fed continuing that program, interest rates went the wrong direction. And not just a little bit, but a lot – over 100 basis points on the 10-year – and it did it very rapidly.
Bud Conrad: Doubling the rate, 1.5% to %.
Chris Martenson: Doubling. That is amazing.
Bud Conrad: It is an inversion. You know, you can take a number and turn it upside down.
Chris Martenson: Yep.
Bud Conrad: It is a big change in the price of the bond.
Chris Martenson: Yep. Well, thank you. And so in your view, was this welcome or unwelcome news by the Fed?
Bud Conrad: I think the Fed knows more than it tells us it knows, because it cannot really be that stupid. But they do not know everything, and it seems like they do not want to defend the basic job that they are supposed to do to the dollar. They are willing to give that up in favor of short-term economic stimulus.
I guess one other piece that is part of my talk that I want to throw out. Doug Casey talked about the decline of the Roman Empire. In our own situation, we are an empire that I think is weakening, not crashing. But would you want to be confident in the creditworthiness of the U.S. Government this year as much as you would have 20 years ago? Obviously not. And that is my point about why rates are really under-pricing the risk going forward.
And I think the listeners have their own reasons for being concerned about whether our government is strong and should be invested in, that they can maybe take ideas back from the cost of forever wars, the cost of entitlements, the cost of surveillance, just the plain old corruption of the best government money can buy. There are many reasons to be critical. I do not have to cover them all. But I think it is another set of important long-term reasons to be concerned and pretty confident that we are not going back to the kind of lows that we had even six months ago.
Chris Martenson: Interesting. So a lot of what you talked about so far is that there are structural reasons that the United States, if it is not going to end with a bang, is certainly whimpering at this point in time. We have got military spending that is just structurally way too high. Technically, it should be peacetime. We are not really technically at war with anybody at this point in time. Of course, we are fighting wars all over the place. And we have got a structural issue with the entitlement programs. And then, soon enough, when interest rates rise, we are going to have a structural problem with interest payments alone as a portion of the federal budget.
And with all of that, that leaves the Fed at least locked into trying to perpetuate that paradigm. But the Fed, if I am going to back up four or five years, I am sure they were peering into this part of the future and imagining that right now we would be in robust growth again. That they were thinking they could help us through a cyclical downturn, get us back into a nice cyclical period of growth. But it is structural. They have run into something I do not think the Fed truly appreciated or understand. It is clear they did not understand how bad the housing bubble was going to be. They did not really understand financial markets. I do not think they understood what shadow banking was really up to and how profound it really was.
And with all of that, I think they are missing something at this point, which is, you cannot solve a problem rooted in too much debt with more debt. But they are trying; bless their hearts. And you cannot solve a problem that is rooted in insolvency with more liquidity, because that is really what they are doing. They have helped to make some of the big banks solvent, I believe, by taking dodgy assets off of their books. And also through regulations and encouragement, allowing us to go to these marked-to-fantasy balance sheets rather than marked-to-market, which is still part of the banks.
And people say, Oh, look at JP Morgan’s earnings. Oh, they took a $3 billion charge. I do not think that is the half of it. I do not know what is on their books. I have looked at their 10Q’s. I cannot make sense of them. They are not marking to market. They have these huge 200-page annual reports or whatnot for JP Morgan. And then the part you care about most is a paragraph, a footnote, that says, At management’s discretion, we have just decided to value things at what we think makes a lot of sense. I am paraphrasing, but that is pretty close.
And so the Fed is the enabler of all of that, and I am sure that at this point in time, they were expecting very different results. And they are not getting it when we look at the labor-force participation rate, when we look at the kinds of jobs that have been created up to this point in time, when we look at the number of people who are on food stamps. We look at where the money is actually going and seeing the growing wealth in equity, which happens. Is not that just a feature of when you print and dump money into a market? Is it not by definition true that those closest to the money make the most gains from that? Guess what? Those are all the big firms. Guess what? They are doing great. But everybody else, not so much. I mean, this is all perfectly understandable and predictable. And, given that, now would be a good time, I think, to step back and go, It was not working. But is the Fed going to do that?
Bud Conrad: Well, we have been saying for years, the Fed is between a rock and a hard place. Meaning whether they defend the dollar, or try and improve the economy by creating more debt doing the things they are doing. And they are not going to try and defend the dollar, is my point on that. People often ask me, Oh, Bud, when? I say, Well, I am not sure when.
But I want to at least point out one additional problem, which is that we have a huge derivatives market of $600 trillion, $400 trillion of which are interest-rate related derivatives. People sort of forget that the housing bubble started in the CDOs (collaterized debt obligations) on the subprime market in that derivatives bubble. I am sure there is not just one, but maybe ten disasters to occur when rates move dramatically. It does not even – you could have it be a disaster if rates could go lower. You cannot. This was the mechanism by which the large banking system transmitted the low rates to the Federal Reserve throughout the whole system. You mentioned the decline in rates in the high yield market from a really weak bond – 40% down to 10%. That is pretty dramatic.
Chris Martenson: That is.
Bud Conrad: The lowest ever. They do that because they swap. We will take your floating rate, because you cannot even get a fixed rate. We will give you a fixed rate at a much lower level, give you liquidity, because we can borrow for nothing. They transmit it through the whole market. And as long as the Fed keeps its rate at zero, that is a moneymaker for the swaps derivatives issuer, in this case. The banks get hugely rich.
But if the interest rate moves the other way, then there is a self-feedback of crash around it. I think that is also likely, although I cannot predict when. But it is sort of, like, impossible between now and the crash that destroyed the dollar. The probable trigger is buried in that $600 trillion – a number even hard to think of when our own GDP is $15 trillion. The ratios are mindboggling, numbing, more difficult to absorb than the two-inch thick JP Morgan annual report we were just talking about.
Chris Martenson: Absolutely. You know, I was talking with somebody who is actually in the derivatives market. I am very critical of what derivatives might bring us at some point in time. And his point to me was, Look, these things work perfectly. They work all the time. I see it happen. The junk companies go out; the credit default swap gets triggered. It will get paid. He said, They are working like they are supposed to. And I said, that is fine. They are insurance in a market that does not really need insurance. But the whole market collectively is using them as insurance for something that if the whole market turns, it will completely make the entire insurance pool go bust. So it is like a false insurance.
Bud Conrad: It becomes [sings] From whom? Where do you get the money to pay those derivatives if they all collapse? Obviously there is no creation of wealth in any of this that is going to back it up. We are unregulated, due to the Federal Reserve’s position that if they regulate it, then they would probably find something wrong and cause a crash.
Excuse me. The Maestro did not say that. What he said: There is no need to regulate. They are self-regulating. Because if there were a problem, they would crash and then somebody would never do that again. That is the kind of Greenspan doubletalk that did not make sense. That’s just like your trader guy had just said, Oh, these CDO’s work. In small amounts, they work, but in aggregate, you and I can just sort of measure it and say, You cannot have these kind of rates of huge change and not major disruption. I am sure there is major disruption. Sometime in our future. In other words, the country is now bankrupt. If the country is now bankrupt, why would you want to hold its bonds?
Chris Martenson: I guess because you have no other choice. That is how some people feel about it. I do not know what I would do if I was in a pension-fund, fiduciary-responsibility sort of position, or if I was in an endowment. What would you do? We have been hearing about Detroit and its insolvent pension fund and all of that. But if you are the fiduciary for that pension fund and you are still looking out across this landscape – and, by the way, they are forbidden from investing in certain things like, potentially, gold or something like that. And so they have to be in a universe of stocks and bonds in order to meet the fiduciary responsibilities, not be sued, not even go to jail, potentially – so they have to be in this market, and they have to buy bonds. And you scan across this thing and you are like, Well, I will take these junk bonds at six percent. I will take a 30-year at 3%. What do you do? I do not know what you do in that point in time. I really do not.
Bud Conrad: Tick, tick, tick, tick, tick. Chris, you know as well as I, those guys that are called ‘fiduciary responsibility’ are making a paycheck. They do not want to do anything that will get them fired. It is not their money. They do not really care. The way I think you thought this through, and many of the people in this conference – about the fundamental structural imbalances – of not, by the way, just the U.S.; it is just about as bad in Europe. And I think it is worse in Japan. You add to it the Bank of England and a whole country that has a debt-to-GDP ratio of more like 600% in England. Ours is like 350%. The world has just thought that they can squeeze the golden-egg goose out of golden eggs, make themselves rich first – that is, the bankers and the governments and the people closely allied with them; military-industrial complex – at the expense of everybody else and not hurt the whole system. The goose is going to be killed by the structure of the tracks that this is on right now.
Sell your bonds. Profit from selling short bonds and at least hide anything that could be grabbed as an asset by the government in paper form in something more solid. And that is, in my view, gold. It is probably things like real estate in the long-term, but that is damaging in a high interest rate market. It may be a whole lot of different ways to think about what wealth is that is not something that is a bunch of a zeros on a digital entry in a computer that is not worth the paper it is not printed on.
Chris Martenson: Very well said. So if we cannot exactly say when, because nobody can say when, let’s talk about the how. What are your indicators to know that we might be turning into another phase of this? How will you know that the bond bubble is bursting? You said you have been watching very carefully the rise in interest rates, maybe the 10-year, as your preferred indicator, but what should we really be looking at here?
Bud Conrad: All the things we have been looking at today in this discussion are part of it.
Chris Martenson: Interest rates, looking across the whole credit structure. So we would look at interest rates on junk bonds to triple A’s, you are saying, and what else?
Bud Conrad: One of the speakers here, Nick Graziano, came up to me afterwards. And he had shown a large number of technical indicators on charts. And he sort of laughed, because one of the guys that was in the audience asked me about one of the government numbers. And is this real? And is this the right inflation rate? Can you tell me what the real definition of money supply is? What is the money supply growth? And we started having an intellectual debate.
And Nick sort of leans back and laughs. He says, You know, we get a price of the stock market every day. We know what it is. They do not have to revise that with the latest GDP revision up unemployment rate. What is the unemployed? What are all these things? He said, Look, I look at this thing, and is it going up or going down? And with the market we are talking about, watch the interest rate itself. It is not devised by the government. Somebody is paying it. Whatever it is, the market clears it. It is already turned.
So I think we are into it. We will see. The big-picture economic indicators are – what is the best word – unreliable. I think the stock market is a good measure of the health of the economy, and interest rate is a very good measure of the direction in health of the bond market, which I am now claiming is going in for a 10- or 20-year collapse.
Chris Martenson: Wow. And there are ways to play that, of course. You can play the inverse of the bond funds. And what advice would you give? Let’s say somebody’s got a typical portfolio. They have got stocks and they have got bonds. If you saw something – here is what would make my hair catch on fire. If all of a sudden I saw the 10-year vaulting up by 10, 15, 20, 30 basis points at a clip in a day, and it really was running for a different territory, that would be a point where I would tell people, You have got to protect yourself. This would be a time to get insurance on your portfolio, go neutral to the market, maybe go inverse. Something like that. Would you agree with that, or is there some other way to position yourself here?
Bud Conrad: Let me say, you might not think about a portfolio allocation as a way to think about investing. I think that is a crutch for a young kid who does not know what to tell a client. We will put some in real estate. We will put some in structured letter Munis. We will put some in high-flying tech. And I am sure you would like to have this fund over here that is good for the environment. A little of everything, and the guy makes his commission, and who cares?
I say just about the opposite. Steve Jobs grew up in the house across the street from where I raised my kids. He said, There is a common saying, ‘You should not put all your eggs in one basket.’ He said, Put all your eggs in one basket and watch it very closely. In that light, if you really believe my scenario, you go out and mortgage your house to the hilt. You borrow. You do not just own bonds in your portfolio; you become short by buying. And go buy stuff. A leveraged gold investment in the futures market is much more likely to return an income than anything you have in a bank account.
Now that is advice that I give lightly to moms and pops who say, I want to look at my statement once a year. And anybody who has traded futures will know that about 90% of the people who trade them lose. What that means, of course, is if you are the 10% who watched your basket very closely, you can prevail very positively. But it is a hard game, and unless you are willing to work at it to become the guy who watches the eggs closely, you can lose your shirt. But my basic point of view is this idea of protection. Sell off your bonds is inadequate.
Chris Martenson: Right. I have talked to a lot of people who manage money. There are several here at this conference and elsewhere in my life. There is a sense of resignation now, which boils down to Do not fight the Fed. It is the oldest statement in the book. And so there is this sense of resignation that somehow that somehow the system is going to keep doing what it does, and that if you run up against that, you are just going to get killed.
And so really what it boils down to, there is almost like a paralysis – novice to sophisticated investors alike do not really know what to do anymore. Which just underscores the main point, which I think came out in your talk and in several others I saw, which is these are not ordinary times. These are extraordinary times. Keep a journal. We are in the middle of one of the most amazing monetary experiments in all of history.
So if it is a little confusing, that is okay, because it is wildly confusing. Because I believe nobody has any idea exactly what is happening right now, and that includes the Fed, which gives me a little bit of comfort and a lot more fear. And it is a reason to be concerned, because the Fed is playing with something it has no clue about, which is, they are playing with the trust that society has within and among itself. That’s what money is to me – it is an article of trust. And they are saying, We are going to erode trust.
Of course, they target monetary stuff and tell you it is all scientific, and they have got Taylor rules and other monetary rules. But what they are really doing is they are eroding your and my trust between and with each other and the markets and hoping that they can erode it just enough so that you and I will take our wallets out and spend just fast enough to give them the inflation rate they want.
But these feedback mechanisms that have been sort of coming through our conversation, I think, are the important ones here. Because once that genie gets out of the bottle, history says, it is out – and who knows what happens next? But, boy, the opportunity for wealth destruction in transfers in this next period of time are as high as you could possibly find in history.
Bud Conrad: I will start by agreeing that this time is not a normal four-year business cycle recession.
Chris Martenson: All right.
Bud Conrad: But what is happening is not that unusual. It happens all the time. By all the time, I mean, a hundred currency regimes have been destroyed in the last hundred years. Across the major countries, it is about once a generation. One of the things I did in the talk was show the value of the Argentine peso from 1950 to now.
Chris Martenson: Oh, great graph on that one.
Bud Conrad: And it was a little hard to look at as a graph because it was long-scale with lines going across it for every ten multiple of loss in purchasing power. And there are 12 of them, which turns out to be a trillion revisions. So that if you had a trillion pesos in 1950, your purchasing power today would be one peso.
Chris Martenson: Imagine that. You were a trillionaire in Argentina, got a bad knock on the head, woke up, and, uh-oh.
Bud Conrad: There never was a trillion pesos, just to put a little perspective, but the country never had that many at any point. It is only a mechanical calculation on the destruction and reissue of new currency, which is fairly regular. My point of this is there is plenty of models that say where the U.S. is, debt-to-GDP ratios are right now over the cliff, Carmen Reinhart and Ken Rogoff’s very popular book, 90% debt-to-GDP is when risks get very high and collapse.
We are on the track of – this is very predictable. It is not that unusual. We are going to have currency collapse. In fact, my assertion – people make different ones – Michael Maloney has got his. His is a decade. Mine is that in my lifetime, we will see the destruction of our currency and the reissue of new currency. And for Americans, that is a big deal. Ours is the second oldest currency in the world.
But for Argentineans, they send the money to Switzerland. They send the money to the U.S. In fact, the numbers I just gave you, the 12 trillion, was based on the dollar, which lost about a factor of 40 over that timeframe measured in gold. So if you were to, say, your trillion dollars and then divide that – I gave you one peso in purchasing power gold, divide it by another 40. If you had had one ounce of gold denominated in pesos, it would now be – nevermind.
Chris Martenson: I know where you are going with that.
Bud Conrad: Maybe some Federal Reserve people are acting like they do not know what is going on, but it is available. The world has told us, We are going onto destruction of our dollar.
Chris Martenson: And that is a pretty big deal, and that is what we are in the middle of. So, Bud Conrad, Chief Economist, Casey Research, thank you so much for your time today. And I just want everybody to know that the room is actually in color; it is not in black and white right now. It is a beautiful day here. And what I love is that there is a lot of optimism still about how as individuals, if we can see all of this coming, that we can navigate our own course and find a way. But in aggregate – oh, boy – this is going to be a doozy, is it not?
Bud Conrad: Chris, you and I have something in common that I did not know was going to be so at this conference. Both of us concluded our talks with, Let’s look around the world and see what is going on. You just did with the room, and there is some sunshine outside. Well, I will say my own first. I have looked at people after this doom and gloom, and just went through and said, Hey, look, there are things in the world that are important to us. This is mine. And I showed my family. You did something like that at the end of your talk. You said, This is my community. It was your family and your environment and friends out having a wonderful time growing things, and a wonderful summer. Is that Massachusetts?
Chris Martenson: Yep, that is right.
Bud Conrad: And I think all of us need to somehow get out of – at least I, green eyeshade, warrior doom-and-gloomer, once in a while go get out on my sailboat, go grow things in my garden, have some fresh tomatoes that are fresher than you ever get in the store, and enjoy the life we do have, recognizing what is going on and prevailing against it, in some sense.
Chris Martenson: Well, and there was a quote that somebody put up, which I believe was F. Scott Fitzgerald, which is, The mark of an intelligent mind is to be able to hold two opposing views without going insane. And so what we have to do is hold where the world really is – and that is a pretty interesting point of view to hold – and then also live our lives fully and completely, noting that the sun comes up, and focusing on what is really important to us. This is tricky business, to really pay attention to where the world is going and just live your life as fully and as happily as possible. I believe that that is why there are so many intelligent people here who are not insane.
With that, I want to thank you for your time today.
Bud Conrad: Great – always good talking to you, Chris.