Transcript of Interview with Jim Rogers: Why Inflation is Raging Worldwide And He Shorted US Treasury Bonds

Below is the transcript to Interview with Jim Rogers: Why Inflation is Raging Worldwide And He Shorted US Treasury Bonds:

Chris: Hello, it’s Monday, January 17, 2011. And this is your host, Chris Martenson. I’ll now introduce a man who needs no introduction: Jim Rogers. Jim is a renowned author, financial commentator, Guinness World Record holder and successful international investor. He lives in Singapore with his wife and two young daughters for whom he wrote the recent best seller, A Gift to my Children – A Father’s Lessons for Life and Investing. It’s an incredible book. Welcome Jim, we’re delighted to speak with you.

Jim: Well, I’m delighted to be here, Chris.

Chris: I’m worried that some people in the U.S. are beginning to tune out on the subject of inflation, believing the official story that it’s both contained and falling. But I think that’s an insular point of view. I want your reaction to these six data points. So in Vietnam inflation is now at a twenty-two month high – 11-3/4%. China is experiencing 5.1% inflation raising reserve ratios. South Korea just hiked rates. India just hit 8.4 percent inflation. A rate hike there looms. And Thailand just hiked rates and are trying price controls. Sounds like the world is lit on fire; at least your part of it plus India. What’s going on?

Jim: Yes. There is inflation going on throughout the world. You could have listed other countries as well. Norway – I mean, everybody knows. Nearly everybody acknowledges that there is inflation. The U.S. doesn’t, the U.K. doesn’t, but most people know that there is inflation in the world. U.S. lies about it. It’s going to get worse. We have shortages of most commodities developing – plus the Federal Reserve in the U.S. is throwing gasoline on the fire by printing money. So it’s going to be a real mess before it’s over.

Chris: So inflation is really out of the bag. Then why is it that the U.S. seems to be experiencing what they claim to be no inflation. What is going on there?

Jim: Well Chris, if you shop in the U.S., you know that there is inflation – whether it’s taxis or tolls or insurance or education or entertainment or food. I mean, the price of everything is going up. It’s only the U.S. Government that says prices aren’t going up. I guess CNBC says that too, but shop – I impore you. Go and try to buy something. Go see that there is inflation in the U.S. just as there is everywhere else. I mean, Chris, people in American pay the same for cotton or rubber or tin or oil as everybody else in the world. So when they say there is no inflation – I mean, I don’t know how there could be possibly no inflation because prices of nearly everything are going up.

Chris: Well, certainly if we look at a chart of commodities going back from about 2002, there was a little spike in ’08, which sort of rippled there, but otherwise you can draw a line with a ruler from 2002 to now. It’s almost ten years where we’ve been in almost double digit commodity inflation – it’s been a very impressive run there.

So one way to look at this then is the U.S. is exporting this inflation and expecting the rest of the world to shoulder that pain. Either the rest of the world accepts higher inflation, or they have to accept a stronger currency to fight it. Either of which is a form of past and current U.S. monetary and fiscal excesses. As a student of history, are their any parallels to tell us what happens next in this story?

Jim: What happens next is the rate of inflation continues to grow eventually; even the U.S. and U.K. will have to acknowledge it. You will see one more price increases make it through to the public. It will lead to higher interest rates. It will lead to a lower standard of living for all of us. Except the ones, of course, who have figured out what’s going on and can invest to protect themselves. But no, this is going to get worse. This has happened many, many times. There is nothing unusual about it. I’m not a very smart guy, I just looked it up. Your listeners can look it up too. Throughout history when it started happening, eventually politicians and economists started saying, “Oh well, don’t worry, it’s a one-shot thing. It’s just because of a bad harvest or bad this or a bad that and don’t worry, it won’t last." But of course, since they either don’t realize what’s going on or because they’re lying about what’s going on, it gets worse before anybody tries to do something to solve the problem.

Chris: Well, they’re really playing with fire on this. History suggests that inflation has a bad habit about getting out of control before it can be brought back under control. So I can see the U.S. exporting this inflation. Tell me, how is Asia managing this at this point? And what sort of reactions can they actually pull forward to make their own situation better?

Jim: Well, Asian countries are trying to do something about it. They know that there is inflation. The Chinese have raised interest rates twice. They’ve raised reserve requirements six times. People in Asia know what’s going on. The governments haven’t learned to lie about it yet, I guess, is the real answer to your question. They are trying to do something about it. Koreans raise interest rates. Everybody is trying to do something about – the Indians. It’s here and they know it.

Chris: In India, et al, if they raise their rates, they’re trying to control the demand-pull portion of inflation, but if the cost push is due to the fact that the United States dollar is being speculated with, it’s weakening. Crude prices are set in NYMEX and in London. So there’s not much that raising rates in China is going to do about the crude oil prices.

Jim: So they certainly can reduce demand. Pricing comes from two things: supply and demand. And so if you reduce demand, it helps. But the only way you are going to take care of supply is to increase supply. But that hasn’t happened yet. And some people are trying to encourage increased production. But, you can’t snap your fingers and open a new zinc mine. It takes ten years to open a mine

Chris: Well, China and other countries can control a little bit of the demand side, but if the United States is creating a cost push through – while there is a supply and demand at the heart of it all - but it looks like the money situation is what’s really driving the train into some extent. There's a lot of people who would prefer to not hold paper dollars right now; they would rather hold things.

Jim: Yes. That’s demand. You call it cost push; no, it’s demand. Prices go up because of supply and demand. That leads to inflation. You can call it cost push and inflation or whatever you want, but the costs are going higher because demand is increasing the price of cotton, of sugar, of tin, of cocoa, of everything else. If you cut demand, eventually you can cut the price increases. But you have to cut demand a lot, especially when supply is going down. You can have demand going down and still have price increases if you have supply going down faster than demand. And in many commodities right now you do have supply going down. So you really are going to have to cut demand a lot in order to kill inflation.

Chris: This whole. . .

Jim: When Paul Volcker came to the Fed in 1979, he had to hit us with an ax – with a hammer – to cut demand and cut inflation, but he did so. So far most – well I won’t say most - but some countries are starting to cut to demand. U.S. is not, U.K. is not, Japan is not, but other major countries around the world are trying to cut demand.

Chris: So you’ve touched on another portion of this story for me, which is that there are indications now that certain minerals, sources of energy, fertilizers, and crops, to name a few things, are not in sufficient supply right now to meet projected demand over the next years and coming decades – and some of these are kind of unique in human history, potentially. Tell us your views about resource scarcity and how you think might shape our lives going forward?  

Jim: Well, we have shortages of everything developing. There’s been only one lead mine open in the world in twenty-five years. The last lead smelter built in the U.S. was built in 1969. No major elephant oil field discovered anywhere in the world over forty years. So why is everything is going down? That’s going to continue until prices go high enough to encourage new productive capacity. But as I said, it takes ten years to open up a mine these days, on average, around the world. Somebody is going to have to spend lots of money and time to build new nuclear power plants or solar plants or whatever. This all takes time, money - you just can’t snap your fingers and change the world.

Chris: Any concerns about Peak Oil? The International Energy Agency came out and said, “Oops; looks like we’re past Peak Conventional Oil. We’re going to have to make up the difference with all these exotic forms.” ‘Non-conventional,’ they call them. Is that on your radar screen at all?

Jim: I don’t know if there is Peak Oil or not, but I know that known reserves of oil have peaked. Maybe there is a lot of oil out there somewhere, Chris, but we don’t know where it is. If it’s there, it may be extremely expensive to get it. So yes, the known the reserves of oil are in decline. The IEA has been very vocal about that, pleading with governments to listen. And it’s going to get worse before it gets better. And so in the meantime, the prize is going to be how high the price of energy stays and how high it ultimately goes.

Chris: So a lot of people, myself included, are in a ‘wait and see’ mode wondering if or when the rest of the world will stop buying U.S. Treasury bonds. Is that a concern to you at all, or can the U.S. continually fund the fiscal deficits as far as the eye can see? Or do you see any sort of event that would sort of stop that?

Jim: Well I’m short U.S. Treasury bonds. It’s my view that people will cut back. I mean, the U.S. is the largest debtor is the history of the world. And I’m not the only person who knows that. And the debts are getting bigger, if not worse. And Bernanke is printing a lot of money. So you combine money printing with big debt issuance and normally people say, “I don’t want to lend you money for thirty years, not in that kind of environment.”  I’ve sold the bonds short: that does not mean interest rates will continue going higher, but it might. [*note: Jim has informed us he closed out this short position a week after recording this interview, given the increases in international social unrest]

Chris: The Federal Reserve is trying very hard to keep interest rates down. It’s kind of an interesting program they’ve got going on there. I’ve been very critical that I don’t believe we can print our way to prosperity. Several people disagree. So I’m glad that to hear that – thank you for telling us that you’re short, there. It’s important to know. You have a front-row seat on the rise of Asian economy from your home in Singapore then. If or when the U.S. defaults on its debt obligations somewhere either through devaluation or pure default, what specific steps do you see China, Japan, the rest of Asia taking to protect their interests?

Jim: Well, if the U.S. defaults on its obligations, which it may, it may well someday, Asia’s got a whole lot more on its plate than just trying to protect their interest. And by then the world is in pretty serious turmoil currency turmoil, economic turmoil, and I presume that those governments will start public works projects in order to try to pick things up. Because if the U.S. dollar collapses, which it will someday, it may make the U.S. more competitive, but you have to have something to sell. You can only sell so much on price, and it will take a while. Conceivably, other countries will then become protectionists. We already see protectionism rising, and if that happens, then of course it’s all over. If you have serious turmoil in the currency markets and the rise of protectionism, that’s called serious, serious economic collapse. Then economic collapse of course usually leads – usually has led – to war in the past. So it wouldn’t be a pretty picture if and when the U.S. defaults.

Chris:  Well, it would be a fairly rare event, obviously. It’s historically not a very common thing, but the pressures are certainly building. And I think of default in two forms. There’s a hard default, of course, if they don’t raise the debt ceiling in time or something silly. But the more likely default is a soft default through inflation and printing, which is the path we’re currently on, and that’s a knife edge. A really tricky knife edge to walk and get that story exactly right.

Jim: By the way, default is not such a rare event. I think the average has been a country defaulting every year for the past century or two. So the U.S. obviously hasn’t, but other people – default is not so uncommon even by nature.

Chris: Yeah, well, not – I don’t think we’ve had one where the reserve currency has defaulted, but it certainly is a possibility at this point.  

Jim: The U.K. could not sell bonds back in the 1970s, because it had begun to lose its status as the reserve currency country by then. So I guess technically you’re correct.

Chris: We’ve been hearing from other commentators located outside the U.S., like Marc Faber, that the long standing U.S. view is that ‘the rest of the world needs us more than we need them.’ That that view is becoming obsolete. For instance, China’s economy has surpassed America’s now in terms of purchasing power parity or in the production of real things. Do you see these same trends and the same hubris as you look inside the U.S. from outside?

Jim: No, it’s very clear - we all need each other. So the argument that the world needs U.S. more or the U.S. needs the world more: we all need each other. The U.S. is the largest economy in the world and if it collapses, it’s going to affect everybody. Likewise, if other economies collapse, it’s going to hurt the U.S. We’re all in this together. Now, the U.S. is not as dominant powerful as it was maybe fifty years ago, but I mean, this is 2011, not 1961. And more and more people are understanding that U.S. is overextended militarily, politically, economically, financially. You don’t have to be a genius: Look to your left and look to your right, or look straight ahead, and you’ll see the U.S. is very over-extended.

Chris: Yep. So what do you think the U.S. could, should be doing to regain it’s competitiveness in this new century?

Jim: Well, the U.S. has to change its tax code dramatically. We in the U.S. tax savings and investing – other countries don’t. We need to tax consumption instead of saving and investing. We need to dramatically change the whole litigation scene, which affects education, affects health care, affects everything. And we have to slash spending. We have to – not with an ax; with a chainsaw. Because as long as we continue to run up these gigantic debts, our standard of living is going to continue to decline. You cannot borrow to prosperity. Maybe for a while you can, but eventually your standard of living is going to continue to decline because more and more of your effort is spent paying off previous debts. There have been studies which showed that once you get up to ninety percent of debt to gross national product, you really aren’t able to grow at all, because everything you do goes to pay off the past. Americans are at that stage; our standard of living has been declining because we’re all running to just stay in place. People who are deep in debt know that. Your credit card debt is too high or student loans or whatever – everything you make just goes to pay off the debt instead of to improve your standard of living.

Chris: And you believe so strongly that you moved your family from New York to Asia and advised that one of the greatest gifts we can give our children is to teach them Mandarin, as you’re apparently doing with your own daughters.

Jim: We moved to Asia for our daughters. I want my daughters to grow up speaking Mandarin and knowing Asia because I’m of the view that twenty-first century Asia will be much more important that it has in the past. And the only way to do that is to move to Asia. We moved to Singapore. And as you probably know, many parents do all sorts of things for their children. People move their kids to other schools so they can play football or whatever. We moved to Asia so that our kids can get an education in Mandarin and get a very strict, rigorous, demanding education. As you know, Asian education is the best education. We moved here to take advantage of that.

Chris: That’s absolutely true. The U.S. competiveness in that sphere - there’s a lot of room for introspection on education, certainly in this country. I want to turn to the future a little bit. What are the big themes you see for 2011? What are you watching most closely?

Jim: Discussed it – more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – This is where the assets are, and the debts are in the West. That’s got to be, those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems and especially inflation that is going to cause more social unrest.

Chris: So we have inflation, more currency turmoil, there’s assets in the East, debts in the West. You’re painting a fairly fundamental structural picture that’s going to take a while to resolve, obviously, under the best of circumstances. And my question is: Imagine for a moment that you’re in the West somewhere and you’re not an exceptionally a wealthy person and you couldn’t move out from the West to the East. What specific steps would you advise for somebody to think about financially, physically, emotionally – what would someone do in that circumstance?

Jim: I’d try to make sure that my kids get a good education, but I would also want to learn about investing in real assets, whether it’s rice or silver or natural gas. That’s the only way to protect yourself from currencies being debased. And I’d also learn about investing abroad, whatever your country – whether you live in England or whoever. Everybody should learn about investing abroad as an insurance policy.

Chris: One of the things I work very hard to do is try to educate people on exactly this – understanding what the big sweeping changes are – and I think everybody owes it to themselves to know what the Fed is up to and watch it very carefully and watch what the fiscal guys are up to. And once upon a time you could work and ignore that stuff, but these days it seems you have to really also put those things on your plate and pay very close attention to them. So rice, sugar, silver, farmland, agricultural commodities – does history suggest that this is where you want to be when you get into an inflationary regime?

Jim: Don’t invest in anything unless you know what you’re doing.  If you don’t know anything about sugar, don’t think about investing in sugar. But if you know about sugar or other assets, you might consider investing in them.

Chris: Well, Jim, thank you so much for your time and for giving us so much to ponder. So good luck in 2011, and may sixty percent of your trades be winners.

Jim: Thank you very much.