The Accelerated Crash Course

This Accelerated Crash Course video condenses over 4.5 hours' worth of detailed material on the trends most likely to shape your future into an easy-to-follow exploration that takes less than an hour to view.

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The Crash Course

The Crash Course will provide you with the context for the massive changes now underway, as economic growth as we've known it is ending due to depleting resources.

But it also offers real hope. Those individuals who take informed action today, while we still have time, can lower their exposure to these coming trends -- and even discover a better way of life in the process. We'll show you how. » Read more

The Crash Course: "Classic" version

The Crash Course seeks to provide you with a baseline understanding of the economy so that you can better appreciate the risks that we all face. The Intro below is separated from the rest of the sections because you'll only need to see it tells you about how the Crash Course came to be. » Read more

The Crash Course

The Crash Course will provide you with the context for the massive changes now underway, as economic growth as we've known it is ending due to depleting resources.

But it also offers real hope. Those individuals who take informed action today, while we still have time, can lower their exposure to these coming trends -- and even discover a better way of life in the process. We'll show you how. » Read more

Transcript for Eric Janszen: We Are Witnessing the Death of the Dollar

Below is the transcript for the podcast with Eric Janszen: We Are Witnessing The Death of the Dollar.

Chris Martenson:  Hello. Welcome to another Chris podcast. I am, of course, your host, Chris Martenson, and today we are speaking to Eric Janszen, founder and president of iTulip. I have been a reader there for quite a while; it is a data driven economic analysis firm started as the website in 1998. Eric is a prolific economic and financial market analyst, and author of several notable books, including the most recent one, The Postcatastrophe Economy.

I have invited Eric to speak here today because he has made more right calls about the global economy than almost anyone I can think of or have been following in the past decade. Today we are going to discuss his "Ka-POOM" framework and what he sees next in his macroeconomic crystal ball. Welcome, Eric. I have been looking forward to speaking with you for some time now; it is great to finally have you as a guest.

Eric Janszen:  Well, it is great to be on, Chris. I guess we saw each other in Denver a couple years ago, so it is good to catch up.

Chris Martenson:  Yeah, we were at the ASPO Conference. And I know that Peak Oil is certainly a part of your framework, it is one of many pieces, and you have been sending warning signals about our macro economic predicament, if I could use that word, since you launched in 1998. So can you give our listeners here the background on the specific concerns that lead you to launch that site and your framework there?

Eric Janszen:  Well, Chris, at the time I was the managing director of a seed-stage venture capital firm called Osborne Capital. This is Jeff Osborn, an old friend of mine out of the technology industry, and he made a bunch of money when UUnet went public. He was the head VP of Sales and Marketing, and he started investing in startups, mostly people that he and I had known over the years in the industry. So he brought me in to sit on the boards of companies and help with the investments and so forth.

So we had what I would describe as a front-row seat into the technology bubble; we could see that something was clearly amiss. So I started to do my research that ultimately resulted in iTulip. And my real objective here was [that] we had all these investments, we invested in 20 companies and we had seven liquidity events, a couple IPOs, sales to Cisco, Microsoft, Nortel, and others. My job was to understand that we were actually participating in a bubble and to know when to get out. So my research led me to believe that it was time to get out in March of 2000, and I started writing about this on iTulip as a way to share some of the information we were getting with the public and to counter  what was coming out of the media at the time. That has really been the mission for iTulip ever since.

Chris Martenson:  Well, that new economy, of course, it is always some sort of false belief or some new adoption of a rationale that enables us to go a little further. Greenspan, of course, adopted many of those rationales, including the idea that risk could be off-loaded and potentially made to disappear. It was no longer a real structure of our financial system and mispriced money accordingly. So in that context, I guess you were just at a Fed meeting of some sort, and you have been clearly observing the Fed for a long time. Do you have any observations you can share from that meeting, and generally speaking, why you follow the Fed and what you think they are up to here?

Eric Janszen:  Well, this is a small conference, invitation-only, at the Boston Federal Reserve. It is on Atlantic Avenue in downtown, the financial district of Boston, and the title of it was "The Aftermath of the Greater Recession." The format was a bunch of academic papers presented mostly by academic economists, peer-reviewed, and then discussed with the group. So the audience is various kinds of economists from investment banks and multi-family practices and so forth to different kinds of funds, and the media of course, CNBC, and lThe Wall Street Journal, The New York Times, and all those guys were there to cover it.

Also, Bernanke gave a speech, and it was actually a very important speech. It was not particularly well covered and I will be happy to talk about that in a minute. But what was interesting about it from my perspective, having covered the cycle of asset bubbles and reflations and various kinds of distortions that we have seen in the economy for 13 years on the site, if you go to a meeting like this, it is kind of a game of make-believe; everyone is talking around the real issues. The best you can really get out of it is to show up and ask some questions and hope by asking the right questions, you start to get people focused on the right subjects.

Chris Martenson:  Are they focused entirely on just the economy, or are they looking at monetary interest rate, all these policy things? Do they have any sense yet of where oil and energy might be impinging on their world view any?

Eric Janszen:  It is not on their radar, at least not in the context of this particular conference. The conference was really about the lingering effects of the so-called Great Recession. For example, there was one paper on the long-term effects of consumer attitudes towards the housing market. It was a very academic analysis, extremely rigorous from a data standpoint, but somehow or other they managed to miss any correlation between the fact that we have massive negative equity in the housing market and the fact that people do not want to buy houses. Also of course, unemployment, which is one of the main drivers of housing prices and drives home sales.

So you have these extremely academic papers very rigorously done that are not really getting to the point of the problem. Simon Johnson was there -- he, of course, was his usual highly confrontational self -- and I asked him a couple questions and he was very forthright in his answers. I did meet Bernanke in passing, I shook his hand on the way out the door, but I did not get to ask him any questions because for some reason at this particular speech, he did not take questions, which I was told was quite unusual.

Chris Martenson:  So let us talk about the Ka-Poom Theory for a while, because this was really your larger framework, and you have held this framework for quite a while. Maybe you can date it for us when you first developed and got it out there, if that was right at the inception I would love to know that. But the Ka-Poom Theory is a way of understanding the macro cycles. If you could explain that for our listeners, I think that would be a real help, because I have a bunch of questions I would like to build off that framework as we try and peer into the future and address what might happen next.

Eric Janszen:  Well what the Ka-Poom Theory intends to do is understand how all the debt built up during the era of the credit bubble. It began in the early 1980’s and accelerated starting around 1995. How it eventually gets resolved in an environment where politically writing down debt is not likely to happen and that ultimately the way that debt is written down is to the exchange rate mechanisms where markets discount the dollar. We could have a sudden dislocation in capital flows commonly known as a "sudden stop" that would apply to the United States. This is an idea that I thought was one way of looking at how this could all turn out that I first developed that back in 1999. Since then I have changed it a couple times, I would describe it as phase shifting it forward, moderating it somewhat. And I think what I have learned from the last two times that we have begun a sudden-stop process and it has been reversed is that we have a system which is difficult to predict in terms of its resiliency. There are trade partners extremely committed to maintaining the system as it is. On the other hand, they have been actively hedging their investment in the system by buying gold, as well, since about 2001.

Chris Martenson:  Right, so in the Ka-Poom Theory, we have an enormous credit run-up eventually that has to give way at some point, It did in 2008 in a fairly spectacular fashion, and then you have the inevitable downward portion of that cycle where we see deflation, deflationary impacts. Certainly, we see that in housing right now, if we look at total credit market debt there is little blips there but it is really the financial credit that has taken a big hit. We have the Fed doing everything it can intervening, we have got trade partners helping. Still, in this Ka-Poom Theory, are we on the downward slope of that deflationary impulse that proceeds what you describe as the reflationary or massive or maybe even hyper inflationary wave that would follow?

Eric Janszen:  Well, Chris, the most important thing to understand to forecast what is going to occur in our political economy is that we have effectively two economies, not one. We have one economy that is called a Buyer Economy, which is oriented around the finance, insurance, and real estate industries, and then a second one that is oriented around productive industries.

And the reason that it is important to keep them separated in your mind is because from a monetary policy standpoint they are treated quite differently. From a monetary standpoint asset, asset price inflation is good, the wage and commodity inflation is bad. And so if you watch for example what the Fed is doing in response to deflationary forces, both in asset prices and in commodity prices, there are two different approaches, right? So Operation Twist is an effort directly to drive down mortgage prices, which is really, if you think about it, a form of price fixing. They are trying to create scarcity, and therefore drive up mortgage prices, and therefore yields down.

This is a direct attempt to try to affect a change in asset prices, in this case the collateral, which is homes of all the outstanding mortgage debt. So they are trying to prevent asset price deflation within the fire economy, and at the same time they are trying to raise inflation in the wage and commodities prices, and the way that is done is through exchange rates. It is not the explicit policy, but it is clearly the apparent policy, which has more recently been dubbed the "weak dollar policy." But the idea is if you can depreciate your currency through fiscal policy and through monetary policy. What tends to happen, particularly through energy prices, you can affect a change in the overall price level throughout the economy, and that’s what been done. So we effectively depreciated the dollar against oil starting in about Q2 2009, and that effectively halted a very brief period of deflation that we had.

Chris Martenson:  So what we are talking about here is a very interventionist Fed that feels like it has the right capability, or maybe the obligation, to then have one hand on the asset lever and one hand on the wage and commodity lever, and then they are going to affect the proper outcome. Is there in your mind any historical precedent to suggest that such a command-and-control approach is a useful approach or workable approach or has a good chance of long-term success? Where you do fall in that whole free-market versus these-things-need-to-be-managed spectrum?

Eric Janszen:  Well, a couple answers to that. Back in 2005 when I was doing my first forecast of how I thought the housing bubble would turn out, I had two forecasts, ten years and fifteen years to revert to the main. Ten years if there was a limited government intervention and the market was able to quickly correct and then come back, and much longer and more painful if it did get involved. I thought government interference in the correction was more likely, because from a political standpoint, the risks to the banking system under the current structure would have been too high, there is far too much concentration in our banking system to allow a “Natural” decline, the so called too-big-to-fail problem.

So you have to remember that Bernanke was the guy that inherited the mess from the Greenspan Fed, and it was really under Greenspan that we had these cycles of asset price inflation that were positioned and postured as free market phenomenon, when in fact they were simply, for the lack of a better term, rackets which were designed to shift risk fundamentally from Wall Street to the taxpayer. Now the way that Bernanke has had to respond to this, my view is that he was handpicked as the right guy to come in after Greenspan because Bernanke, you know, since he was relatively young and an undergrad at Princeton and was writing papers about the Great Depression and what went wrong and how to prevent deflation. So from my perspective he was picked specifically for his background and his interest in doing precisely what he did do, quite predictably, in response to the deflation that resulted from all the credit inflation that precede it.

Chris Martenson:  Yeah, you know, I have always known that we were going to go down this printing road, and I knew that as soon as I read Bernanke’s 2006 Jackson Hole paper, which, I think, was really his application essay for the job. He very clearly laid it out, and it, of course, has been quoted widely and famously, and this is where he gets the helicopter moniker and all that. I am just the kind of person that says look, if somebody says they are going to do something and then they actually do it, there is no real mystery as to what just happened there. I know people are still on the side of the view saying that deflation is still the more powerful force; it is going to overwhelm the ability for the Fed to respond. Bernanke can have his magic printing press all he wants, but the forces here are just too large, too structural, and too embedded. Perhaps something like we see going on in Europe; it is just too big for the system. So you call it a political economy, thinking of the Fed maybe as part of that, or if you want to parse that out further, feel free, but how do you fall on that spectrum? Do you believe deflation, the markets, etc., are larger than the Fed at all, or do they have a number of tricks up their sleeve yet? In fact, can they continue this game for a lot longer?

Eric Janszen:  Well, Chris, I have been hearing this argument from the deflationists since 1998 when I first started iTulip. I remember the first time was we had this big stock market bubble, and I was debating various economics analysts on the likely outcome event. And many of them thought that when the bubble finally collapsed we would have a deflationary depression like we had in the 1930s, the stock market bubble would crash like the stock market of 1929, and so forth.

I tried to explain to them that we, not being on the gold standard, that there was nothing limiting the ability of the Fed to expand its balance sheet to do two things. One to provide liquidity and also assume to take bad assets out of the market and put it on its own. Since most people did not understand that is how the Fed operates now and the situations are different, I understand why they would be confused. And then what I heard back in 2006 when I reopened iTulip was the same argument all over again, but this time, Eric, it is going to involve the whole banking system, the entire structure of credit. There are just too many trillions of dollars, and the Fed can’t possibly back it up.

I said, well, when you look at the Fed’s balance sheet a couple of years from now, you are going to see trillions of dollars of mortgaged back securities and all sorts of other stuff on it, because that is what they said they were going to do. So the answer is, it is a little bit like arguing with somebody over and over again about whether the world is round or flat and you go around the world a couple times and they still do not understand what that means. It means that the world is not flat.

Chris Martenson:  Right, you know, I do not know what the limit is to the Fed balance sheet. If you sat me down five years ago and said we are going to have the Fed balance sheet at 2.8 trillion, I would have said what, no way, but here we are. So could it go to five, or seven, or ten, sure; I cannot think of a technical reason why it cannot. Maybe a political reason, maybe a geo-political reason, so as I look at what the Fed is really up to here, though, maybe you could clear up one mystery for me. So Bloomberg does a big foia thing and pries out of the Fed the fact that they had either directly or through guarantees backstopped an ungodly amount of trillions and trillions of dollars in both domestic and foreign firms both official and private. My question to you is do you have any insight into why it is a lot of those guarantees never showed up in any of the statements I read? They did not show up in the Fed balance sheet in any way; are those extra off balance sheet things? Do they not count guarantees in sort of an accounting standard? Do you have any idea as to what we are looking at on the Fed balance sheet is truly a good measure of what they are on the hook for, or they any way guaranteed?

Eric Janszen:  Well, this is one of the other challenges in talking to economists about our modern economy, because we have a finance-based economy, and most universities have economics departments, and the finance is taught over in the business school. So most economists do not really understand enough about finances to understand how our economy really works.

So when they are confronted with this question of deflation and who is holding the bag, if you actually take a careful look at the Fed's balance sheet, the Fed -- unlike any other kind of bank -- can do magical things. For example, it can take what is a liability for a commercial bank and put it on its balance sheets simultaneously as an asset and a liability that cancels out to zero. So, for example, we will take a few hundred billion dollars in assets backed securities, put it in a Maiden Lane Fund (or whatever those funds are called) as an asset, and simultaneously on the ledger as actually a deposit is technically how it is listed. Before the crisis, the net holdings of the Federal Reserve were something like 35 billion, and after they took on a couple trillion dollars of bad assets, it is still 35 billion dollars. So it is much like some people, it is kind of magical, but in theory, as Greenspan said many years ago, the Fed can in theory expand its balance sheet infinitely. The unique characteristic of the way Central Bank operates is different from the commercial bank.

Chris Martenson:  Oh, that really clears up a mystery for me. So unless we had access to some sort of audit access or records access, we do not really know. I think the Bloomberg data, when I started poring through it, really opened up my eyes to exactly that dynamic that you just explained. So thank you for clearing that up.

So here we have the Fed, the ECB, Bank of Japan, also Bank of England, oh, let's not forget the Swiss National Bank, and probably some others I have forgotten to list, all basically printing at this point in various ways, or we can call it providing liquidity, but let's be fair. There is as much being created out of thin air, in many cases here, to manage all kinds of things, exchange rate risk, and dynamics, to buy up bad assets, to push liquidity back into the system, to recapitalize banks, whatever.

So all the way back from the time I first was aware of your work, you had been a pretty big proponent of gold, and I think you were there right at the second when the market was the beginning of the previous decade. Talk to us about the connection you see between monetary policy now in gold, if any for you, and as well you also talked about rising gold prices as probably going to have several distinct phases. Which phase are we in now?

Eric Janszen:  So, Chris, my thesis in waiting 20 years, I started watching gold back in the mid 1980’s and was very much a stock market bull for most of my career in the high technology industry from the late 1980’s until the early 2000’s. So it was not until 2001 that I finally made a decision to take a 15% position in gold; it was at the same time that we had sold our stock from our equity positions and technology companies and bought Treasury bonds in late 2000, and that wound up being the portfolio was gold and Treasury bonds and has been ever since. The theory behind it is that the system, a global monetary system, was very US-centric, was really designed back in a time when the United States was about 54 - 58% of the global economy. As of now, it is about 18%, so we have this US-centered monetary system attached to a much more broadly based economy.

So here we have this mismatch between the monetary system and actual structure of the economy, and here we also have the United States behaving with these asset bubbles in a way that is not consistent with the country that is the issuer of the world’s reserve currency. To qualify for that position, you have to really stand well above other countries in the world in terms of transparency and other factors that prove the legitimacy of that position, and I saw that beginning to erode back during the period of the stock market bubble and then accelerate during the housing bubble.

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.

Chris Martenson:  Right, so we have the United States here operating the reserve currency, doing it poorly at some point. Because another piece I would like to toss in here is the current account deficit driven by the trade deficits, primarily, which really started to the downside in the early 1990’s right around 1990-1991 and then just never looked back. With that, I also combined the fiscal deficit, which together current account plus fiscal deficit is a pretty whopping funding bill that needs to be supported and is half supported at this point by foreign official buyers and foreign central banks.

As we look into that, we see this thing called the custody account of the Fed, which is one main repository for some of those reserve Treasury holdings and also agency debt, and it is just a whopper. I mean, Eric, when I look at that account, what I see is it is not driven by the response of the crisis in 2008. In fact, you can start in 2002, put a ruler under that current account and just draw a line about 45 degree line up to about a little over 15% annual compounded accumulation in that. What was driving that -- and again, it is not in my mind linked to the crisis we’re in, because you cannot see any wiggle in the trajectory in 2008 or 2009 or 2007; there is no bump in it, it is just a ruler shot from 2002.

Are you saying that that was primarily driven by this, lets call it international global vendor financing, is that the mean dynamic behind that, or is there something else here?

Eric Janszen: Well, Chris, I think there are a number of theories to explain. Well, two things, the growth rate and the consistency of it. If you look at net capital inflows to the US, they grow when the US economy is growing, and the composition of those changes over time between official and private investors. But what is really important is that the growth rate overall be generally maintained in order to ensure markets that there is sufficient inflows to fund US economic activity.

It is probably not particularily well known, but back in 2003 when we had our earlier crisis, there was a point where 70% of the US government operations was being funded by foreign purchases of US debt. So the way the country operates is there are certain times when counting largely on domestic purchases, other times on foreign purchases but fundamentally we are kind of all in it together and this is the way the system works. The Chinese are not all that happy about having all the US Treasury bonds they have, but they know perfectly well what would happen if they were not buyers. On the other hand, they are behaving as if, okay, well, we will buy them, because you know we have to, to maintain the system, but we are going to buy more gold to hedge the risk that investment in US Treasury bonds represents.

Chris Martenson:  All right, so I wanted to cover that territory just a little bit, because if there are two places that a foreign official buyer or central bank is going to stash their money, one is in Treasuries and obligations like that to maintain the system, preserve the status quo. The other being the gold holdings, and so you saw that secular shift away from being net disorders of gold to net accumulators of gold, it is a fairly recent shift, historically speaking, to become accumulators again. Does that change where you think we are in terms of the phase of gold prices at this point? Do you see a sharper trajectory now as the world monetary system experiences the slings and arrows of the fortune here, of certain difficulties, or do you think we are still in a phase of steady rising prices if even that?

Eric Janszen:  Well, that is an interesting question, indeed. It has gone through a number of phases. When I first got into it in 2001, gold was widely derided as a terrible investment and had been going down in price for over 20 years. If you open the Wall Street Journal, you would have to dig around to find any price, never mind a mention of it, and it did not really become a topic of news until quite a few years later. But the fact is it has been going up in price every single year, year after year, for ten years, and in fact, the rise has been so consistent that it has, with respect to almost anything else, particularly stocks, has been much less volatile and more consistent with its rise.

So this is to me indicative of this overall trend which is, I would describe it as, a dissolution of the US Treasury dollar-based monetary system. And that process of dissolution is going through various stages, the most recent one being global central banks becoming net buyers, and you probably saw a recent jump in prices the last couple of days. You can be pretty sure that what is going on in Europe right now is driving some additional sales. I think it is important to understand also that what you can read about who is buying and who has what by looking at the bank for international settlements reports is somewhat limited. I am aware of individuals that as families that are buying very large quantities of gold, in the order of tens of tons, that are not going reported there.

Chris Martenson:  Well. it does not take very many families accumulating tens of tons to distort a market that is actually fairly tight when you look at the total gold market. I know a lot of dollar value of it flips every day, but in terms of the physical market, I have seen some work by Eric Sprott that really details what the physical market actually does, and it is a lot tighter than many sort of suspect the paper markets that give us some churn in the appearance of liquidity. But it is not a very big market. Lets put it that way, compared to the dollar flows that are available to siphon and funnel into one market or the other.

Okay. so I want to ask, so let's talk about for a second, does Peak Oil, I know Peak Oil factors into you macro view a little bit, but if you could just tell us how Peak Oil, maybe peak other natural resources, how do these play in? We have got Jeremy Grantham recently I think really going off the reservation in terms of his investing style to really put his mark down and say look, there is a big looming story here, and he calls it a paradigm shift. I am certainly in that camp of thinking that anybody that has got a, say, an endowment or a pension timeframe to their thinking certainly has to be considering this story, and I argue everybody should because we are there, that is my view. What are you views on this and how do you weave this into your macro view?

Eric Janszen:  Well, I met Jeremy Grantham, and he is obviously very wise and experienced veteran of the industry and has made some very good calls, particularly around the time when I was talking about the technology bubble -- he was, as well, and quite clearly and rigorously. He has also started to build what I call Peak Cheap Oil into his models. It is a term that we adopted back in 2007 to try to distinguish between the overall physical fact of a reduction in the total amount of oil endowment and its impact on prices and on the macro economy.

So the fact is that there is a lot of oil out there still, and when I was writing my book The Post Catastrophe Economy, and I was interviewing people like Joe Petrowski who is the CEO of Gulf Oil and others to try to understand the industry perspective on this process. It became pretty clear that we have gotten in a relatively short period of time, really the last 40 or 50 years, from all that was relatively inexpensively extracted with relatively primitive technology to oil that is increasingly more expensive to extract and produce with extremely sophisticated technology. So I think to understand how wildly sophisticated technology is these days for oil production, you have to look at what is actually done, that the big shift that improved oil production over the last ten years has been in computers.

So we had a lot of data about where the oil was, but not a lot of computing power to crunch the data to determine exactly where the most likely sources are that can be economically extracted. And he used to take a bunch of Cray computers and now just takes a couple workstations. So the good news is we know where the oil is; the bad news is we know where the oil is. Meaning that it is very unlikely to be any large quantities that have not already been located and the economics of their extraction been determined.

Chris Martenson:  And not just the dollar economics, but the energy economics as well, and clearly we are pouring a lot more energy in to get slightly less back out and increasingly less. And of course we run our economy on the net of those activities, whatever the price may be. It certainly is a view that I think anybody who has been solely focused in just the economics sphere really needs to start paying attention to it. It is one of my chief complaints, such as they are, around how the Fed operates. I am not aware that they have anybody with such a view anywhere in their stable of advisors, let alone voting members.

Eric Janszen:  Chris, let me interject. I am not entirely sure that is true. I think that at the moment they have bigger fish to fry; in their view it is a longer-term issue. But I do happen to know that they are thinking about how central bank policy can operate in an environment of persistently rising energy prices because that implies a long-term trend to increased cost-push inflation. And how do you manage monetary policy when input prices to production are continuously rising, which is acting as a tax on consumers? And at the same time, producers are unable to pass on those costs. So generally speaking it is going to be slowing the economy, so I think it presents challenges that they are thinking about, but within the framework of the way our current global central banking system works there really is not an answer.

Chris Martenson:  Right, so it is a very narrow way that they are addressing it, looking at the cost-push components and trying to understand the monetary aspects of that and other pieces. But if you take this other view and we step in from the side and say it is actually about the net energy, it is energy return on energy invested, and we have this central banking superstructure that requires this expansion for whatever reason because of how it is set up, debt-based money, and hey, we need exponential expansion of money and debt. We have a conflict there, so I just am always intrigued when I see who is really paying attention to this, and I see militaries around the world paying attention to this, so they are doing it.

Eric Janszen:  Yes.

Chris Martenson:  So I work with corporations that absolutely have their eye on the ball and are aware of it, do not know what to do with it yet, but certainly are starting to chew on it. So let me differentiate. So I do to know that our government is unaware of it. I would say the institutional career branch, there are people in there that get it; it is the elected portion that I am not quite as clear about at this point in time, and that goes for the Fed as well, at this stage.

Eric Janszen:  I think the explanation of that is just the career timeframes from the standpoint of politicians; it is something that is going to happen later. It is not like the foreclosure crisis, which is an immediate election-impacting issue. And today it looks like oil prices are as much driven by in dollar value is by demand and supply, so there is room for some debate, and if there is room for debate there are ways to avoid it.

Chris Martenson:  Yeah, I agree there are all sorts of reasons to understand the lack of response, and the political angle is an important one here. You have been increasingly vocal. I have noticed that our leaders really wasted the wake up call in 2008. Are there any steps in your mind that we really could take at this point to get the ship back on the right course?

Eric Janszen:  Well, Chris, my warning in my book was that we are going to have a relatively short period of time to get back on the right track starting in the second or third quarter of 2009. We needed to take fairly precipitous actions to get an annual growth rate up to about 4% GBP a year in order to get out of the output gap that was created by the recession. We have managed just north of 2%, so at this rate we will simply never get out of that, and what that means is that the long-term unemployment problem that we have will just get longer and bigger over time. That has political repercussions, as we can see from the Occupy Wall Street movement. And the knock-on effects of that, over time, are very counterproductive and unconstructive policy decisions that simply will pile one bad decision on top another.

Chris Martenson:  So if you are a concerned individual or corporation and you are looking at this framework right now, what steps can individuals, corporations take at this point to insulate themselves from these trends that we just have been talking about?

Eric Janszen:  Well, it depends on the industry, I talked to everything from insurance companies to commercial real estate firms to a lot of technology companies, of course, because that is the industry that I have come out of. It really depends on the industry, for if you are in the energy industry, of course, it is a boon. And I was writing articles back in 2008 when people were asking me, what should I go into to avoid this crash I see coming, and say go and move to Idaho, move to Texas, Oklahoma, places where there are going to be a lot of jobs still. Because despite the recession energy prices are going to remain high.

But aside from the energy sector and also the agricultural sector, which are clearly areas that are going to continue to improve despite of the impact of Peak Cheap Oil and of debt deflation, there are some industries, which I think are going to continue to suffer for the foreseeable future, including residential real estate. I do not see any end in sight for a decline in that industry. I will give you a specific, there was one of the presentations at the Federal Reserve last week by a very thoughtful economist who had a really good plan, I thought, for reprivatizing Sallie and Freddie getting them from being nationalized banks to fully private banks over basically a four-step process, so it might take five or ten years, something like that.

It all seemed very reasonable, except for one small problem: It implies that the mortgages in the secondary market would eventually have to reflect actual default risk, which today would probably put a mortgage around 9% or 10% in the secondary market, and I have friends out on the west coast still lending hard-money mortgages at about 9%. So the question is, how politically is Congress going to be able to push through these plans, reprivatizing Fannie and Freddie as mortgage rates go from 3%, to 6%, to 8%, to 10% or whatever they do, and the housing market goes down and down. Are the real estate lobbyists going to sit around and just watch this happen?

And the answer I got was not; they probably will not. So this is a perfect framework for the problems that we have today, which is we have a bunch of special interests, which likely produced a lot of the problems we have, who are not getting out of the way to allow us to implement policies that are going to address these problems.

Chris Martenson:  And for the concerned individual who has a portfolio, are you still advising gold as a portion of that, does Treasuries still make sense? Do you have advice there, or is that the kind of thing you provide?

Eric Janszen:  Well, you know, we are one with gold since 2001 for the duration, meaning until the end of the current monetary regime. I do not see how this particular regime will last forever, but you never know how much longer it could be maintained. But throughout that process I see gold prices going up back to 2001. My best estimate was somewhere between $2500 and $5000, which sounded kind of crazy back when it was at $270, a little less crazy today.

But in terms of Treasury bonds, it is a lot more tricky, that is one of those situations where you would expect Treasury bonds should decline in price, yields should rise, but Treasury bonds do not behave in assured fashion when they are the reserve asset issued by the world and where everyone is dependent on the stability of that system. So we always strongly advise anybody against shorting them; that is extremely dangerous. And also we are continuing to hold our Treasury bond positions but are gradually diversifying into other things such as funds that take advantage of rising rents and energy prices.

Chris Martenson:  Excellent. Okay, great advice; we are going to have to wrap here. We have been talking with Eric Janszen, Founder and President of iTulip Inc., and of course operator of, a great website. You should check it out if you have not. Lots of excellent advice there, as well as his subscription service, well worth the money. And author as well of The Postcatastrophe Economy. I hope that does well. Eric, it has been a real pleasure talking with you today.

Eric Janszen:  Glad to be here. Thanks, Chris.

Chris Martenson:  All right, have a good day.

Eric Janszen:  Okay, take care. Goodbye.

Chris Martenson:  Bye.

Eric Janszen is founder and president of Eric is a prolific economic and financial market analyst, and author of several notable books, including his most recent one, The Postcatastrophe Economy.


Our series of podcast interviews with notable minds includes:


Retha's picture

So...what does it really mean?

 Ok, so I started my 'education' process of things to come about a year ago.  Preps in progress...have food, water, security, garden, silver/gold, chickens...much more to do, I suppose.

gcruwitme's picture

Why not max out credit right now?

If someone had lines of credit available, why would it not make sense to maximize these at current historic rates and either use that money to be in cash, buy PM's, or foreign currency if the dollar temporarily climbs.

I am worried that credit will soon dry up and make accessing this liquidity difficult or expensive.

What are the upsides and more importantly, what are the down sides.

TommyHolly's picture

Need to finish off my list of items I NEED to have in an emergency...but is using credit a good idea?

Hey guys,

OK second time writing this.  The garbage forum software this site uses doesn't work with Internet Explorer 9 so I can't post or copy and paste...My main question is: Is it a good idea to make a small short term (24-48) month purchase on credit if you are really concerned about an economic collapse?

Transcript for Mapping The Fugly Future with David Collum

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Below is the transcript to Mapping The Fugly Future with David Collum:

Chris Martenson: Hello and welcome to another podcast – I am, of course, your host Chris Martenson. And today, we are going to be speaking with the author of a piece of work, which appeared on the web and also appeared in our forum areas and it is called 2010, Year in Review – Fugly Gives Way to Muddling. And this piece really caught me when I read it. I didn’t intend to read the whole thing, because it is fairly long and I did. I read through the entire piece. The author of that is David Collum and it's just a really interesting, brilliant piece of work. So we have Dave today and the idea here is to have a discussion around that paper and around other things he sees going on. So first Dave, welcome.

David Collum: Hi Chris.

Chris Martenson: How about a little background about who you are and how it is that you came to write such a paper like that?

David Collum: Well, I am currently an organic chemist at Cornell and I have a number of duties here, including primarily research and teaching. I am also the associate chair and I edit a scientific journal and things like that, so this is a pretty standard job. I got interested in economics actually as a kid. My father was a contractor and he knew economics at the ground level. He really knew how the system worked. We used to talk about it at the dinner table and I remember some amazing conversations we had about inflation and distressed assets and surviving highs and lows in the business cycle. So it always followed me and for some reason, I did not go to Wall Street, even though I thought about it. Maybe it was the 70’s as it was a pretty awful time when I was making fateful decisions.

So in any event, I don’t know something rekindled my interest in the 90’s, maybe it was the bubble, but I started reading about economics and politics and where the two meet. By the end of the 90’s, I started getting very nervous about what I was seeing. A little confession – this started with a concern about Y2K. It wasn’t that I knew anything about computers, but I started paying attention to the question, “What if?”. These are simple questions, what if these guys are right and I dug around and tried to find everything I could. My conclusion was that there were instabilities in the system and not from computer bugs, but actually the system in a much more broader sense. And I think many people who did that – that adventure - came to exactly the same conclusion: something was wrong and something was headed this way.

So in any case, I sort of went to the dark side and emptied my mutual fund voraciously and the computer bug was nothing, but the instabilities remained, so I started paying very close attention to these things as a hobby. So, I pretty much just do chemistry and this stuff. So I started communicating through the miracles of the internet with some incredibly smart people and some were remarkably accessible. I could get hedge fund manager. During my Y2K phase I actually got to the head of the Electrical Engineering Society’s Y2K Committee and spent hours talking to him, trying to figure out what he saw and he is very high up. So these were important. I started talking with all sorts of people and I discovered this connected world. So I discovered Austrian economics in the late-90’s and the principles behind it and the Austrian business cycle theory and things like that.

So after 2000 came and went, I bought a lot of gold. I was nervous about inflation and I held on to it and I don’t quite remember what gave me the stamina to stay in there, because it was pretty awful watching the NASDAQ go up 100% while your gold went down, but over time it paid. I started writing these little Year Reviews because at the end of every year I survey how I have done, because I am definitely off-beat in my views and I want to make sure that it doesn’t hurt. So every year I summarize how my accumulated wealth is doing and what my return on investment was. I started writing these little essays to share with people. I was chatting with on a couple of chat boards online and then they got a little more elaborate. And last year’s, when I put it out there, I thought it was going to an obscure site. I found out it wasn’t so obscure and my email box filled up. I got emails from some amazing characters. Guys who are famous and are hedge fund managers in what I would call the top five. They read the whole thing.

So I wrote another this year and it went out and actually got distributed to all the Bloomberg journalists, as best I can tell according to one of my friends in Bloomberg, Mark Gilbert, who I have had a long contact with, probably over a decade. He runs the London Office of Bloomberg. Again, the email box filled up and I had a lot of exchanges.

So that is the story and I find this fascinating. It's gigantic picture stuff and it's kind of curious. You and I have never actually met, right? But we made contact. I read something you said that really caught me and I sent you an email and through the years we have occasionally chatted a little. I found out we had a Cornell overlap and so you are a great example of just one of these bright people who caught my attention, and especially your Crash Course.

Chris Martenson: Well you know the similar part about us is that we both saw something that caused us some concern. Y2K was sort of a proximate cause for you to start digging into things. I had my own and really it doesn’t matter what the cause was, I started looking into the economy and had to put some framing around this. I am a scientist by training, so that defines a lot of how I approach life. I had discovered that there was just something about how the economy was put together that somehow I had not been taught, right? So I went through an MBA program and I had all these years in business. But once you really start looking at certain things, like the mismatch between liabilities and the assets of the United States in general, it's pretty easy to come to a conclusion that there is something unsustainable in that picture, right? But that is just one element and I kept scratching and scratching and of course, ultimately it led to this body of work that became the Crash Course, which involves energy as well and other resources.

So – but here’s the thing I wanted to talk to you about – what it is like to be on the outside and holding true to what you think is right? Here’s an example of that – I think it was 2007: I was actually short a bunch of homebuilders and mortgage insurers, because I had done a whole bunch of analysis and said, “Ah, this thing is done.” And I found myself in the uncomfortable position of being short a mortgage insurer on the very same day that Merrill Lynch bought them at a premium and so there was me, little ol’ me sitting down and analyzing things and there’s Merrill Lynch analyzing things. I presume that they have great teams of very smart people. I know they do and they have access to better information.

David Collum: This must have been Countrywide.

Chris Martenson: Well, yeah there was that. [Laughter]

But Countrywide is just a mortgage issuer, I was short an insurer.

David Collum: Oh, maybe Ambac?

Chris Martenson: Yeah, MBIA.

David Collum: MBIA, okay, got it.

Chris Martenson: Right and so – but I was short all kinds of things, Pulte Homes, you name it and not to pick on them, I was actually short almost all of the homebuilders at one point or another. It worked out very well for me. But at the time, I remember this uncomfortable position of saying, what did they see that I don’t see? How can we see this so completely differently? It's behind us now and it turns out that perhaps my view was more correct than theirs at that point. But here I am today and I am looking at this whole situation. I am looking at the amount of debt that the United States has. I am looking at the amount of debt that frankly, the whole world has, which I believe in review you called that “debt without borders.” There is just debt everywhere and the strategy seems to be for the Fed to say with the other central banks, what we are going to do here is we are going to dial up the debt, because this is our way out. And I am looking at that and I am having that same uncomfortable feeling of saying, “You know I am positioned against that working. Why is it that I see it so differently or more importantly, what do they see that I don’t see?” There is such a fundamental misalignment between my view and their view. I was wondering if we could talk about that.

David Collum: Yeah, I had a funny exchange actually. So in my contact, I used to read the stuff that Larry Kotlikoff did and Larry was one of the early guys to really dig into this question of unfunded liability. So I think at the time, we were said to have seven trillion dollars in debt and you go that’s a lot of money, but – and what Larry did is he did the math and said, look if you add up all the promises we’ve made and promises eventually have to be paid for, it came to forty-five trillion dollars. And so, one day I sent him an email and it turns out that I had spent the previous Sunday with his brother - a remarkably small world. But Larry was painting this apocalyptic picture and so one day I am talking to his brother. And I said, “By the way, Secretary of the Treasury O’Neill just mentioned these liabilities and your brother should be exonerated because they were remarkably similar numbers.” And his brother said, “Actually those were his numbers. He was commissioned by O’Neill to do that study.” So now, what are those numbers?

Well it turns out that the next thing you know David Walker appears on the scene, the head of the GAO, and he starts quoting numbers of a hundred trillion. So again, I asked Larry, “Do these square with your numbers now?” And he said, “Yeah, that is about right.” And now you are starting to hear numbers of a hundred and fifty trillion. Well you take the taxpayer base and you divide that by the number of legitimate taxpayers and it's a million dollars a piece. And I don’t know about you, but that would take a bite out of my budget, right? That is a serious number.

Chris Martenson: And those were present dollar values, so it's not like this is a million that you have to earn over your whole life, that’s million you have to cough up today into an interest-bearing account that would match the payout structure of that particular obligation.

David Collum: Yeah, no inflation adjustment, no nothing – yeah it's really a remarkable number. So Larry goes to the Federal Reserve and he writes a paper and he says he thinks the US is insolvent. This has happened now twenty times in the 20th Century or something, some number like that – I would really have to dig back deep. And he says, well here’s what happens. It was this very matter of fact, almost sterile presentation. And a lot of people misunderstood it, because they thought it was the voice of the Federal Reserve, when in fact it was Larry Kotlikoff on Federal Reserve letterhead, right?

But then subsequent to that, the Rogoff-Reinhart book comes out, which really matches up beautifully and they go through five hundred years of what happens when countries become insolvent and how does it play out and again, very sterile, very matter of fact, and their conclusion is really one you want to pay attention to. If I could whittle that down to one message it is that when we default on other countries, it will be deflationary. We will basically do what we call the “eat-and-dash” model, where we will basically say forget it, we are not paying.

Chris Martenson: Uhm, hmm.

David Collum: When they default on obligations at home, because of the politics, it will be inflationary. We will pay them, but we will pay them in Monopoly money and so you position yourself accordingly.

Chris Martenson: Well, it's amazing to me though, when I see – to me this seems completely clear that when you say a number like a hundred trillion, some people say listen, it's not really that bad because what’s going to happen of course, is the United States will just – well they won’t pay it. What they are going to do is they are going to raise the retirement age, so we will boost the taxes on it a little bit, we will pay a little less money out, but really I just look at it as a see-saw, right? On one side is the recipient of that money or the taxpayer and on the other side is the government. Everything the government saves ultimately is a cost that ends up being transferred over to the taxpayer. There is no gain in that story. The idea is that what has been promised is vastly out of alignment with what can be delivered. And as you mentioned, Rogoff and Reinhart made it clear – there are only two ways to do this; one is you default on the obligations outright, so raising retirement age and giving less benefits that’s a form of default in essence.

David Collum: Right.

Chris Martenson: Or you print your way out of it, which is inflationary. Those are the two ways that we go about this. In the world of politics, however, the inflationary path is almost always the preferred option, not that circumstances won’t force you elsewhere. But it is preferred because guess what, taxpayers are voters and they really hate knowing that you’ve directly voted them less funding. Inflation – much harder to detect. As Keynes said, not one man in a million can diagnose it. It's trickier, so that is a path that we tend to take. But either way, the bottom line to this is that if something is completely unsustainable, well it has to stop at some point, right?

David Collum: You bet, Stein’s Law.

Chris Martenson: Stein’s Law.

David Collum: The other appalling thing here is as we both dug into this, right? As you sort of left your world in finance that was sort of a comfortable place for you and you started to realize that it was a bit of a bubble you were living in and you sort of stepped outside and saw this very different world. And I discovered the world of finance from scratch – what you discover is that there is just an enormous amount of lying going on. It is so unimaginable the proportions of the lies. One that I was thinking of when you were chatting, were things like the social security lockbox.

Chris Martenson: My favorite.

David Collum: Not only is there not a lockbox, but there is only one mechanism to have with such a lockbox. There is only one that I can think of and no one has ever come up with another. And the only mechanism to have a lockbox is to put in that box, obligations from other sovereign states.

Chris Martenson: Uhm, hmm.

David Collum: Because you can no more claim that you are rich because your wife owes you money. You cannot claim you are rich because people within a town owe each other money. You cannot claim you are rich because you owe yourselves money in a nation state. You are rich when China owes you money or Europe owes you money, then you have accrued credits. So there is no such thing as a Social Security lockbox. QE is not even debatable.

Chris Martenson:  Well it's something that I have written about extensively and I chuckle because it's just so patently obvious. If it is not possible for me to owe myself money – in fact, if you are a corporation – in fact Enron tried this.

David Collum:  [Laughs] Yeah they did, didn’t they?

Chris Martenson: They went and they had their subsidiaries and they said, “Look, we made this loan to the subsidiary and that’s now an asset on our books, so we are going to record the asset on our balance sheet and then we are going to reverse it after the quarter is over, so that it actually makes sense, but we are going to report all these incredible assets. And look, we are going to use these incredible assets to get these loans out and lever ourselves up.” Dadada . . . this is exactly the same model, but when Enron tried it they went broke and got put in jail. And when the Federal Government does it, it's mysterious why there are just these chirping crickets out there.

David Collum: Crickets, [Laughter] – crickets, yeah.

Chris Martenson: Crickets.

David Collum: You know the funny thing about Enron by the way, you know the guys at Enron themselves were not smart enough to do this. These off-balance sheet accounts were set up by the banking system. There is no way that Andy Fastow set up those accounts.

Chris Martenson: Right.

David Collum: He is just some schmuck and so then the question is why, why at no point did the banking system end up on trial in the Enron case? That’s a fascinating question.

Chris Martenson: Well, they seemed to have dodged that bullet time and time again.

David Collum: That’s right. I hate to go conspiracy, but these guys own the world, right? I mean these guys have the power to create money and they have all the money and you will not see bankers get brought into the light of day, unless it somehow happens by mistake.

Chris Martenson: Well, I have been shocked even when they do get brought into the light of day what happens. So here was one thing that caught me in. I watched it and I watched it just disappear. I am just picking on one thing here and I don’t mean to just draw this one company out, but Goldman Sachs was caught in the full light of day, having helped Greece fraudulently, cook it's books to present a very different sort of a budget deficit scenario situation to the whole world, which was used to secure loans across – from investors and the whole system. They were flat out caught doing that. It was – I looked at it and said, wow this exactly fraudulent behavior. And what happened with that, do you remember?

David Collum: Nothing [Laughter] that is easy to remember, actually. Interestingly, you could actually argue and I don’t know if this is true and it might be a hyperbole, but you argue that Goldman Sachs therefore helped destroy the EOB – we don’t want the EOB destroyed, but bringing Greece in, in that way, certainly put a ticking time bomb in that system and they didn’t care. Goldman did another one that was kind of easier to grasp. They actually got caught on an illegal bond trading scheme that netted them three hundred and fifty million dollars, right? This is just peanuts. But the fine for doing this was nine million. So do the math. It's a 3% surcharge.

Chris Martenson: Yeah.

David Collum: And so this is somehow, I think, this somehow will be corrected. I actually have faith. It may take an unbelievable number of years, but somehow this will sort of rot it's way through the system. It will purge, I don’t know how.

Chris Martenson: Well you know, I have a – I really like one statement of Buffet’s which is that when the tide goes out, that’s when you find out who is wearing swimming trunks and who isn’t. So during a rising economy – when things were really rising, I think there are all kinds of things that got swept under the rug. So here is one of my favorite pieces to look at and you know when Charlie Brown tries to kick the football and Lucy pulls it away – how many times, an infinite number of times. Orange County, California gets completely taken to the cleaners to the tune of billions of dollars by a really, really bad shyster, derivative steal way back – when was that 90s?

David Collum: Yeah. It was a hint that the derivative world was a dangerous world.

Chris Martenson: Right.

David Collum: The first real big shot across the bow.

Chris Martenson: So any municipal manager – some sort of super outgunned individual who is responsible for managing – listen all you are trying to do is tax revenues come in and then you distribute them and you are trying to balance all that out. Anybody worth their weight would have looked at the Orange County thing and said, WOW! I do not want to get involved with these guys. But now you fast forward and look at what happened in Alabama, right? 

Yeah, they had this bond deal, which was around paying for a sewage treatment facility. It was way more than they could afford, it doesn’t matter. Here comes the bank – Bank of America is actually caught bribing people – no who was it, Bank of America actually gave money to somebody else to go away – one of their competitors and there were actual bribes and guess what? A couple of the people who were involved in that at the municipal level are in deep trouble and facing jail time. How many bankers are in that same boat?

David Collum: It never – it just – once in a while you will see some guy get hurled under the bus. This is like watching some spy show and ever once in a while they have to off one of the lead characters to keep the show spicy, I don’t know.

Chris Martenson: [Laughs] 

David Collum: When Elliott Spitzer arrived on the scene, he was cheered and he still seems to be relatively cheered. But if you actually look at his settlement – they were appallingly benign to the system and a sinister plot line would be if you look in the history of the 30s, when the Pecora  commission got put into place and they threw a lot of guys in jail. The banking system, I could have arguably said, okay we’ve had another collapse here with 2000 and now with 2008, we have a mess and we have to put on a dog and pony show. And so here you have this New York District Attorney, whose has political aspirations and the claim is that he is attacking Wall Street. Now, my smell check on that, says that’s not true. No New York City-based politically active guy is going to go against Wall Street. So then you say Well, what is he doing?” and so then what he is running around doing is making a big deal out of surcharges. The 1.4 billion dollar settlement of all the brokerages, the big one, the one that really got the headline on, was 3% of a single year’s profit for those houses. And so I think Spitzer basically front-ran the thing. I know it's sinister and maybe he didn’t know it, right? Maybe he thought he was Mr. Bigshot and the banks are going – we can take this pain all day long, just keep it coming.

Chris Martenson: I think we could carry on this conversation all day long, because it's how the world kind of works. The view I take of it – there is this parable which goes like this – a scorpion comes up to the end of a big river and sees a frog there and says, “Will you carry me across?” And the frog says, “No, no way. You are going to sting me.” Right? And the scorpion says, “Well, I won’t do that because if I sting you, then we both die.” And the frog says, “That makes sense.” He agrees and starts carrying the scorpion across and halfway across, the frog feels this enormous stinging pain in its back and he has been stung. And as they start to slip under the water, the frog says, “Why did you do that?” And the scorpion says, “Because I am a scorpion, it's what I do.”

David Collum: [Laughs] We have to stop reading this damn stuff. All these parables. And that’s what they do.

Chris Martenson: That’s my shorthand, because when you see them do it in Orange County and then they do it in Pritchard and it happens again and again and again or it's Lucy pulling the football away. It's just something I have come to expect now, which was part of my sort of maturation, as before I used to get outraged because I would say, how can they possibly be doing this? And now I have come to just acceptance, which just says that’s because that’s how the system rewards them.

David Collum: Well, if you read a lot of history, you realize that what it really is, is just history repeating itself. It's not like in ancient Rome – the senators of ancient Rome weren’t basically taking the system to the cleaners on a good day. And it's not like various kings and queens and the nobles – one of the reasons the Catholic Church was so powerful, was so important, and I am not a particularly religious guy, but through the middle ages the primary role of the Catholic Church at least at the time, was to keep the nobles in check. So they came up with all these reasons why the nobles would go to hell if they didn’t behave themselves, because they would have their little battles and burn peasant houses down and so this has been happening since the dawn of time. So somehow, I think we thought we had reached a point where the people in the highest levels of power were playing fair and that’s the silly delusion of a peasant.


Chris Martenson: I had that same delusion for awhile and it was part of my waking up process and you know what – we’ve just come off of what I think we have to recognize as a really wonderful unique period of history. When there were ample resources to go around so that there were no big squabbles over them. We had abundant energy and there was plenty of food. All the usual stuff. And so one of the big pieces of my framework is thinking that there are enough warning signs that there is an inflection point coming, that there won’t be quite enough – there certainly won’t be as much as we used to have. Whether we look at that purely through just the economic “E” and we say just on debt basis alone and viability to asset mismatchs as we can make a story that says, oh there is going to be a period of having to get by on less. Or if we decide to start putting in the resources story and particularly with energy at the top of that, then we can say oh that’s another headwind to this story.

Okay we put those two together and we go, wow this could be a period of less. And what I think we are lacking at this point is that the muscle memory might have gone away or just become flabby for sure – how to fairly go through this next period of time. And the early returns are not promising is the way I look at it because I come from a long line of bankers – my family still is involved in banking in upstate New York in Canandaigua. So I understand what small regional banking looks like. It's very safe, very solid. One of their complaints at this bank is that they are now being forced to compete with the big banks, who by the way have a cost of capital that is a fraction of their own because they don’t actually have to raise the money, it is handed to them by the Fed. They are too big to fail, which means that in many cases these small well-run regional banks are too small to succeed and that just sets up a really uncomfortable dynamic that I think is corrosive and is something that I actually would put a judgment on and I think it's wrong. And it doesn’t feel right and so to me, that’s part of the whole moment that we are living in right now. This is why this all feels so uncomfortable, because there are some things happening, which appear in both – no matter how far down you want to scratch at it, if you think about it from a cultural angle, a sociological angle, a political angle, or an economic angle – it just doesn’t feel right. What are your thoughts on that?

Chris Martenson: I think if you ask economists or money guys from the past, you only have to go back to Paul Volcker probably and you say, okay – hypothetically, let’s assume we give the dominant banks in the global banking system unlimited capital at zero cost. And it is zero, right? It is not low cost, it's zero and that they can take as much as they want – what would happen? I think anyone from looking at this from a historical perspective or someone from the past being handed this hypothetical – would have said “total catastrophe” – I am certain they would have said total catastrophe, because that is a system that is unmoored, right? That is a system for which there are no checks and balances. The most important free market in the world, bar none, is where people who save and people who borrow meet to exchange capital at a price. There is no question that is the core of capitalism all the way back to the guys who handled money in Christ’s time, right? And now that has been subverted. It has been subverted by the guy who is just despicable in my mind – Greenspan. I mean there are just not enough bad things I can say about Greenspan and I have asked through the years of hedge fund managers, “Does he know what he is doing or is he just so swallowed with arrogance and hubis that he is clueless as to what is going on here?” And it splits, no one knew. No one knew. They all knew he was a problem, but no one knew whether it was premeditated or whether he was just a fool. I don’t know which. But this will work out poorly. There’s no time in history that this type of system has worked out well. It won’t happen this time either.   

Chris Martenson:  Well you know the bubble dynamic or however you want to define a bubble. I loved your definition, by the way. A bubble is something that is rising significantly in price that I don’t currently have a position in. But a bubble represents ultimately the mispricing of something, right?

David Collum: Right.

Chris Martenson: And however we got to that mispricing, you actually need a number of factors to have a bubble, right? So you have to have a story that is compelling and by story, I mean it has to be something where there is no track record yet on that particular story. You know eyeballs during the internet piece, tulip bulbs at one point, railroads, whatever. But you have to have the ample credit. You just can’t do this without – you can’t create a bubble out of income or earnings, it's not possible. So you need this credit, right? And then you need sort of a compliant structure where there is no regulatory oversight or nobody preventing it from happening that is in a position to do so. All of those things are absolutely in place, under the Greenspan Fed and now I think we still have it obviously under Bernanke and the way – there are obvious things that get mispriced, right? We had a housing bubble, which was fostered by driving down interest rates to 1% and holding them there for a whole year in 2003. Thank you for that one Greenspan, right?

David Collum:  I actually think it started sooner.

Chris Martenson: I think it did too. But it was fueled –

David Collum: But it did not start to look like a bubble. James Grant wrote about the frothy real estate market in 2001. There are guys on record saying there’s something going on here that is not right.

Chris Martenson: I actually chase it back to 98, as when it really actually started.

David Collum:  It could easily be.

Chris Martenson: And that is just looking at house price appreciation to gains and income, so median to median. And the line started diverging there. So it is very obvious when house prices go off. Okay, we see strip malls that shouldn’t be there, other sort of very obvious tangible signs of misallocation of something and in this case capital. But what I think really goes off the rails is how we price risk.

David Collum: Yeah we stopped totally. I am trying to think of ways – as I said I love metaphors or similes – my students have noticed this. I have old students saying, God I remember all your metaphors. I am trying to sort of describe the misallocation of resources with a model. I said, imagine that you are sitting in Ithaca, New York and someone decides that Ithaca needs a boost, right? And so what would happen is let’s say that we all were told that as of Monday morning, we would have fifty thousand dollars in our bank accounts, right? So what would you see? Well right away you would start to see new cars appearing in people’s driveways. And say look they don’t have to pay it back for ten years, right? This is easy money. This is free credit and essentially the payback is in the future and you don’t need to worry about it. And you would start seeing renovations on people’s houses. You would see vacations and it is really curious you would start to notice that a lot of these things actually decrease your willingness to work. It decreases your output. It decreases your motivation. And you would see new grocery stores appear, because there was a rejuvenated consumer. You would see people starting businesses that maybe they wouldn’t have started before. And you would see three gas stations, where there used to be two. And then at some point, that debt would be paid back and all of a sudden what you have discovered is that the supply and demand was fiction. There was no real demand. It was not an organic demand. There was not an accrued capital, it was pulled forward. And then we would go through a depression and it would be that simple, because you don’t need three gas stations where there used to be two. And so all the big box retailers will go – we have three big box hardware stores in a town of forty thousand right now. There is no way that we can support that many.

Chris Martenson: Hmm. 

David Collum: And that’s what credit does. It causes people to make stupid decisions. Someone made an interesting observation – we talked about credit derivatives, right? And they are nuts – here’s Andromeda Strain model: credit derivatives have a doubling time of two and a half years. They have since they started. There are something like five hundred quadrillion sort of notional dollars – I don’t know how to wrap my brain around that. Some ridiculous number – actually a trillion or whatever – yeah, I think it's trillion. A lot of zeros. Someone said credit derivatives are the free market’s response to bad monetary policy. So in a sense they emerge because of the craziness. So you say, okay give me the money, I’ll do that.

Chris Martenson: Yeah but with that, that is part of my theme of mispricing of risk. So imagine this, so there is five hundred trillion of these things floating around notional, right? So who knows what the actual value of risk is on that.

David Collum: Right. We nest them away, that’s what they think.

Chris Martenson: Yeah and so, guess what? You don’t actually need – so if it is a credit swap or an interest rate swap that is one thing, so that is just two counterparties. But if it is a credit default swap, right? Or it's a default in some way, those inherently have enormous counterparty risk built into them potentially, right?

David Collum: Right.

Chris Martenson: So you have some hedge fund and it is operating out of the Jersey Islands and it's just selling these things all day long and it's selling them on Greek debts. This is just free money. People are giving me five hundred thousand for every ten million to insure these things for a year, awesome. So you just collect five hundred thousand dollar checks as fast as you can. Push comes to shove and things go pop and you fold up or whatever happens, because there is no possible way you could pay those off, depending on how well capitalized you are. So you just know with the number of players and with the number of tangled sort of counterparty things going on there, that we don’t actually know what the risk is at this stage. We just don’t know. I don’t think the Fed knows. I don’t think anybody knows what would really happen and I am sure that was part of the fear that was driving Paulsen’s behavior early on where he walked in and closed the door and said “Listen Congress, if we don’t get seven hundred and fifty billion right away, it's going to be martial law” and whatever other scary stuff he said. I think he actually believed that though. Which is that we don’t know what this looks like, but once this thing starts to unwind and unravel on it's own, that is a very fearsome place to be.

And so that is fine, you can say “Oh gosh we got to this point – oh, what do we do?” We just need three-quarters of a trillion dollars to fix it. That’s fine, but the next thing that should have happened was fixing it and that hasn’t happened. That is the most amazing thing.

David Collum: Yeah, the number has grown.

Chris Martenson: It's still growing and it's bigger than before. I don’t see any clearing house for these things. I don’t see any way of tracking these things. They are just as opaque as before. Literally I think the problem is now more pronounced than before.

David Collum: And then there was that horrific story of the late 90s where Brooksley Born, yhis really soft-spoken Stanford graduate who is running the CFTC - and she brings forward the idea that the credit derivatives are dangerous. And she says we somehow have to get control of these things. We have got to get them more regulated. We have got to get a marketplace for them. We have to get them pricing correctly and she was completely shut down by Summers and Rubin and Greenspan. It was a mob hit on her. Because there was way too much money being made and amazingly enough, there were something like fifteen guys at AIG that brought down AIG, with credit derivatives. All the way back to Nick Leeson, right? When was that, 96’ or something when Nick Leeson brought down Barings Bank with just his position. Do you remember?

Chris Martenson:  He was doing currency trading, if I remember the story.

David Collum: One guy brought down a two-hundred-year-old bank. That’s stunning that that could happen. There’s a failure to price risk.

Chris Martenson: If that is what a rogue trader can do, imagine what a rogue company can do 

David Collum: Or a rogue business – rogue industry. That’s exactly right.

Chris Martenson: So this is part of the larger framework, which is again – I don’t know how the future is going to unfold, but I look at risks. That’s my training. In my training, I took a lot of probability, a lot of statistics – so I am very comfortable living in this world of uncertainty on one side. On the other side, since I do understand it, I think it also puts me in a slightly more urgent position than people who don’t understand it quite as well, because I now assign a very non-zero probability of a pretty significant fiscal crisis in the United States to pick on my own country, but I could honestly be talking about other countries. But the United States in particular because that is where I live and because this is the world’s reserve currency, I could see a fiscal crisis morphing into a big bond market crisis or vice versus, I don’t know which leads, but both of those could happen together leading to a currency crisis within the world’s reserve currency.

Now some people might say that will never happen, so they put a zero on that from an effective standpoint. I think it's as high as 1/5. I think it's a 20% chance over the next ten years.

David Collum: It's arguable that it is going to happen. You have to put a probability on it, but it's arguable that at some point it will happen, period. 

Chris Martenson:  Exactly and if you told me, “Hey Chris, the house you are sleeping in is going to burn down one night over the next ten years – 20% chance of that.”

David Collum: Do something about it.

Chris Martenson: I am, I am going to get sprinklers, I am going a fire – I might move. I don’t know what is going to happen, but I am not going to go, “oh okay” and keep sleeping there. It's that serious and so when your currency burns up, all kinds of things happen, unpredictable things, but some predictable, right? Your standard of living is going to go down, it's not a comfortable place to live. It's more chaotic, disruptive, all sorts of things. How far we want to go down that, it's up to us individually, but that’s the world. So to pull it back, I have been sitting here looking at these things and they seem completely obvious to me and I am wondering why it is that – like how can either I have it this wrong or how can everybody else have it this wrong? It's an odd place to be.

David Collum: Well, I think – so here’s the funny thing there are some maxims that basically say that when your financial well being depends on you deluding yourself, you will. I think the Wall Street guys who basically have their hands on the rudder, right? They have their hand on the monetary system – okay so I think the Wall Street guys have so much at stake that they have to delude themselves. Apparently the psychologists say this is human nature, period QED. What I think the system is failing to underestimate, especially the Wall Street guys and I sometimes see it in their response to me when they are shocked by something I know and they don’t realize that you can walk into a 7-11 and the person behind the counter knows an awful lot about what is happening. And I mentioned in this article I wrote about this guy Wall Street Pro 2 and this is this guy who is videotaping from a trailer park and he takes baseball bats and smashes things and he swears and he cusses, but you listen to what he says and you go, this guy understands monetary policy. This guy understands economics and he’s probably got guns, right?


David Collum: This is crazy stuff and I think the guys in power are in kind of a “let ‘em eat cake right now,” and they are saying, wow don’t worry about it, right? Bread and fishes and whatever and everything will be fine. And they don’t understand that the masses are getting grumpier and grumpier and it's not going to get better. The head of fixed income from Bear Sterns came to Cornell to give a seminar and I went over to the B-school and it's a dog and pony show stuff, I gotta tell you. No one asked tough questions. I tried to and you would swear that I went up and scraped my fingernails on the blackboard.

So I get into a fight with this guy and I said, you don’t understand there’s so much capture here and there are so many people who are angry and the next time you need a bailout, you are not going to get one, because it's going to be so politically untenable. And his response to me was, next time when we need a bailout, it's not going to work. And I go, we agree. And that was the end of the fight. But I think Wall Street is underestimating the breadth and the depth of the anger and anxiety and at some point it will boil over.

Chris Martenson: Maybe they don’t, because maybe they are making hay while the sun shines or how did the head of Citi put it? I believe he said –

David Collum: Keep dancing.

Chris Martenson: Keep dancing – as long as the music is playing you have to keep dancing, right? So they are dancing and right now they may be dancing a two-step jig because they are like I don’t know how much longer this is going to go, so let’s get it going. Maybe that is it, too. So I guess the really puzzling part to me then is in trying to figure out where the political leadership is. And by the way, I am using the word “leadership” very loosely at this point in time. Because I just can’t believe that of the things that I see that need doing that can be done and that should be done – and by the way, let me be clear about something. We have plenty of resources to do fundamentally different things that will have an enormous beneficial impact on our future, if we choose to do them, but we’re not. Instead of “cash for clunkers” to get more people to ruin perfectly good cars and buy new ones, which is one way to approach this issue, I think I would have really fundamentally started to rethink at the governmental level, our transport system, but not happening, right?

So it's just a real mystery seeing the social mood darken with no response. No effective response and we can speculate all we want about why that is, but the fact remains that I am a data-driven guy, and I don’t see any evidence to suggest that we are on an alternate path or that there is enough critical mass in thinking yet to change this story in time. And by in time, I mean before an outside circumstance of one form or another comes along to force us to do things differently. And that is sort of coded speak – you can read a lot into what I just said. Part of that could be, we have a big bond market disruption in the United States as a treasury auction failure and it's unable to meet it's fiscal needs. Things change within days, if not weeks. One week everything was cool and the next week we are a much poorer country for it.

David Collum: So an interesting guy to watch on this point – two guys I like who talk about the historical backdrop of all of this; one is Jim Rickards and he is a self-taught historian, but a remarkably bright guy and he likes to bring in sort of past examples to say this is what it is starting to look like. He saw the Arizona battle over immigration as an analogy to Roman province starting to peel off. And the other guy who tells amazing stories is – I don’t even know how to pronounce his name – I would pronounce it Niall Ferguson. Ironically, if it's really Neil, since he is a Scot, I would expect him to pronounce it “Nile.” In any event, however he pronounces his name, he talks about empires. He is essentially an expert on empires. He is a historian, but he knows a lot of economics and he talks about the delusional view of empires as cycling and what is delusional about it is that we have this image that once the empire has reached it's zenith, that we will just sort of slowly slide down the other side of it as though we are on some sign or cosine curve. And that at some time in the distant future, we don’t care it will bottom out and then it will come back and it will come back and everything will be fine and dandy, he says the history of empires show much more catastrophic events. History shows that there can be this poof moment and you simple not see it coming so, trite phrase, “black swan”, you know and I think we focus on the British empire, which the end of that empire just looked slow and methodical.

But empires do end, Eurocentric empires all ended, and the interesting thing about those is that they always ended with finance dominating their economy in the final throws of the empires. That comes from Kevin Phillips. He pointed out, financialization of the economy is one of the sort of death rattles of an empire and we’re there.

Chris Martenson: Yep. These are all people that I have actually read and really thought through and they were really quite formative. It seems like we must have the same library.

David Collum: Oh, I am sure. 

Chris Martenson: It was Kotlicoff. When I read Generational Storm, when was that? With Scott Burns, I think that was forty-five years ago now. 

David Collum: I think it was even further.

Chris Martenson: When I read that book that just put a stake in it. It's all math and it's just laid out and I haven’t seen a credible counter argument to it yet, so it still stands as how things really are. And so we have all of these converging sort of stories. You can do it through pure economics, like Kotlicoff did or we can take history and see the parallels, like Rickards or Ferguson do, or Kevin Phillips talking about financialization, Rogoff – there are so many things that just suggest however we want to spin this thing, that there are really substantial things we should be doing and I don’t see this being addressed at the higher levels yet and in fact, that looks like that is dedicating itself wholly levels, be those financial, fiscal, monetary, or political – they are just dead set on business as usual, let’s just get back to that, that’s great. There are risks embedded in that model and so given the lack of their behaviors and I think it falls down on us to figure out for ourselves, how do we want to position ourselves. What are we going to do with our finances. Taking control and making our own business decisions about where our money goes and why. It's a really devilish position to be put in, I think, because life is complicated enough without having to try and guess or speculate about where our monetary policy is going.

But here we are and that is really the nature of the work I do and the nature of this podcast, to help eliminate where we are and to help move people however possible, toward actions that they take responsibility for, how their future is going to turn out, to the extent that they can. I don’t know what else we can do at this particular stage, because in one sense we’re on the train – we’re passengers. But at the same time, we can take control of some things in that story.

So that is how I have been viewing it. I think we are getting to the end of our podcast here and as you look forward into 2011, what are you looking for? What kind of things are you trying to keep your eye on?

David Collum: Well I am trying to follow the thesis of “get it right every ten years,” so 2011 is just a pixel in a ten-year period. The guys who say there is no inflation in sight – these guys need a CT scan, as far as I am concerned. It is conceivable that we will go into a catastrophic deflation. But when you have every single bank in the world saying our job is to create inflation and come hell or high water, we can print money and drop it from helicopters, you have to take them seriously. So whatever you do, in my opinion, you ought to be hedging against inflation.

The risk going forward is taxation. If you have a job or if you have assets, I would not assume that whatever current tax structure we have will exist. And I have been making this case for a while now and yesterday, the State of Illinois announces that they are going to raise State Taxes by a stunning 66%. That has got to be putting a crimp in a few budgets today, right? And by the way, that’s Kotlicoff’s thesis – in the coming generational storm – he points out that 401K’s look fine and dandy, but when that money comes out, don’t be shocked if it comes out at such a bad tax rate that you lost money. And so my ways of hedging inflations – I have my way of potentially hedging bad taxation, which I should probably leave unstated and I think that’s the risk. If we have a deflation, I will be protected, I have physical precious metals and they might deflate in dollar value, but they won’t collapse. Their price could in theory collapse, I guess, it's not often that something becomes cheaper in this world. But a far more destructive outcome is inflation and people think that somehow it is a zero gain – they are just completely out of their gourds.

Chris Martenson: Well, I think there are a number of people who are sort of waiting to watch the TV and think it's getting a little bit clearer and you say they need a CT scan. I am looking at a chart that you had in your 2010 interview – you got it from Casey Research and it shows the real cost of living –

David Collum: That’s a stunner, isn’t it?

Chris Martenson: There are a bunch of bars on there with things like wheat, corn, oats, heating oil, gasoline, and things like that and the shortest bar on there is corn at 14%, but that’s an old chart. [Laughter] Because I can tell you that corn bar is not at 14% anymore. Instead, I am looking at another one, which is a one-year relative performance and you have cotton up 102% over the past year, caladium comes in second at 91%, third is now corn at 67% - 67% increase in a single year and so on and there is nothing but green bars in here. The only thing that is down every year is natural gas on this whole chart that I am looking and there are probably thirty things on here.

David Collum: And if natural gas becomes the “go to” clean energy source while we try to figure out the tech problems, which at some point we are going to figure that out to the extent you can, but I think the interim place will be that people are going to divert their energy needs over to natural gas and it's not going to stay down.

Chris Martenson: No. No, there is a whole story there, which I don’t have time to get into, but there’s a temporary over-supply at the moment and there are a lot of reasons that I go into why I think it's quite temporary. These natural gas plays that we are currently pursuing are really, really bountiful at the initial part, but within eighteen months those wells have already peaked and are irrevocably on the down slope and they trail off for a while. But think of them as just very, very quick decay functions.

David Collum: If they peak like your propane tank and your gas grill, I mean that’s the problem with natural gas, it doesn’t peter out – pressure drops and the gas is gone and it's stunning.

Chris Martenson: Yeah, there is a whole story there. I truly think that energy is the big story as we go forward and it's the master resource. There’s nothing I have seen to shake me off of the view yet – it looks like 2010 is going to shape up for now the fifth year in a row we will not have as a world, gotten past the peak of crude production that we hit in 2005. So this is just crude oil and there’s a lot of ways we can look at – a lot of times what is reported is all liquids, right? That includes canola oil that was turned into biodiesel, tarsen, and stuff, but conventional oil – but for whatever reason, we got the most of it out of the earth, across all fields, all places, at 2005, at just over a little over 73.5 million barrels a day and we’re down. So five years – how long do we have to wait before we say, gosh maybe that’s a real thing? And so as we look at that, I see that energy is obviously a big thing and energy will just feed into literally every other price of anything we can imagine.

David Collum: Here’s a question I have for you before we go – I am dying to find someone who knows this. When they measure the CPI and they extract the energy, do they simply not include energy in the basket or do they take energy out of every component?

Chris Martenson: No, no –

David Collum: The latter leads to very nefarious bean counting.

Chris Martenson: No, it's the latter.

David Collum: It is?

Chris Martenson: So when they are counting energy, there are a number of subcomponents under there and they measure heating oil and they measure gasoline – they are measuring – and jet fuel – they are measuring the final consumption components. They are not measuring – the barrel of oil cost doesn’t feed in, they are actually measuring the output product prices. So when they take X energy, they are actually stripping that portion out.

David Collum: So for example, is beef being corrected for the energy input?

Chris Martenson: No.

David Collum: Okay.

Chris Martenson: No.

David Collum: Okay.

Chris Martenson: Not as far as I understand it. They have these huge teams of bean counters who run out and they collect sixty thousand prices a month – they’ve got these little electronic tablets – they used to have notebooks and they go into all these stores and all the markets, everywhere and they write stuff down and it comes back and it gets input into this big piece, but if you were the guy in the store with your little electronic tablet and you are looking at the price of beef, how would you record the oil component of that, right?

David Collum: Well, except my concern though is that all these hedonic adjustments – these could say, well beef is up, but it's because of energy, so let’s take it out. I wouldn’t put it past these guys, right?

Chris Martenson: Well I actually don’t know what sort of post processing they do. They might do that, I haven’t heard that they have done it.

David Collum: That may be the million-dollar question.

Chris Martenson: That’s a good one.

David Collum: Well actually, I am thinking we might get there. I actually sent an email off to a guy who knows this stuff and unfortunately, it didn’t come in, in time, so I was hoping to be able to tell you the answer.

Chris Martenson: I would love to hear that.

David Collum: I am dying to get it because I think they are in there tinkering with it. I think every good is considered to have an energy component and they are taking it out – that is my guess.

Chris Martenson: Oh, well that wouldn’t surprise me. 

David Collum: Well corn for example has a lot of energy input.

Chris Martenson: Sure.

David Collum: So the question is, is the contribution of corn to the CPI, which on your chart – the charts you mentioned – all these things are between fourteen and a hundred percent growth in a year. The CPI comes in at 1.1%.

Chris Martenson: Right.

David Collum: There is no sane person who can look at that, except for the fact that you say, well okay our salaries all stink, you know. That’s the argument that gets made, is that the good news is that everything is going up in price, the bad news is that our salaries aren’t keeping up. But I think the CPI is so flawed at this point, that it's a lie.

Chris Martenson:  Here, I can give you a very quick example of just how flawed it is – so healthcare is 17% of our GDP right now, right? The BEA will tell you that, well trundle over to a different portion of the government to the BLS and they are adding up healthcare and they weight it in the CPI at about 6.5%.

David Collum: They weight computers at 35%, I am told.   So for example, if you are not buying beef and instead you are eating worms from the backyard – you know inflation is very tame.

Chris Martenson: Very tame, if not wriggly.


David Collum: And they don’t adjust for the drop in quality.


Chris Martenson: No, there is a whole story there, gosh we could keep going with that. But we are going to have to close off now. It's been a real pleasure talking with you and when you get that information, I want to talk to you about it.

David Collum: I will pass it along.

Chris Martenson: I really want to make a whole conversation just about the inflation measure, because it's a huge part of the story. We have these enormous, raging inflation/deflation debates on my website. All across the web, they are everywhere and at the heart of that a lot of people do fall back on and try to use the CPI and say look, we’re clearly in a disinflationary period –

David Collum: Baloney.

Chris Martenson: Yeah, I think that is the final word on that subject. Thank you much, it has been a real pleasure.

David Collum: My pleasure, it's been great.

Chris Martenson: All right, goodbye.

David Collum: Goodbye.