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"We are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like 12% right now. China is doing something new every couple of days to scale back bank lending and consumer spending. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Have them have to spend more and more of their money on food and energy so we can keep on borrowing and growing.
Clearly that is unsustainable. At some point these countries are going to say “No, we want our currencies to depreciate, too. We want to be able to continue to export to you.” So what we will end up with is sort of like what happened in the Depression. Everybody was trying to cut the value of their currencies at the same time. What that leads to, obviously, is global inflation, instead of just localized inflation where a few countries are debasing their currencies. You have got everybody doing it at once. That is because the US, with the world’s reserve currency, basically controls this process. We have chosen to decrease the value of the dollar dramatically over the next few years. That is going to force the rest of the world to do the same thing or endure an overvalued currency and recession. No elected politician can put up with that.
So what’s out there? Maybe after a mini-recession or some kind of correction in the next year or two is another round -- an even bigger round -- of global inflation. Basically all the fiat currencies of the world start decreasing in value at an accelerating rate. At some point, the whole concept of fiat currency, of governments in charge of their own monetary printing presses is going to be discredited."
So states John Rubino, proprietor of DollarCollapse.com. In his eyes, the demise of the dollar and other world fiat currencies via inflation is now a sure bet. There is simply too much debt that needs to be repaid, and our political leaders are not going to willingly choose the short-term pain of austerity and/or default. Of course, the resulting collapse of our monetary system will be much more painful and destructive in the long run.
Click the play button below to listen to Chris' interview with John Rubino (runtime 45m:22s):
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Chris Martenson: Welcome to another Chris Martenson.com podcast. I am your host, Chris Martenson. Today I have the pleasure of speaking with John Rubino, publisher of DollarCollapse.com, a popular online hub for news impacting the economy. John is the author of several well-received books fortelling years in advance the collapse of the housing market and the decline of the US dollar. Before starting his website, John was a featured columnist with TheStreet.com, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a eurodollar trader. He knows what he is talking about. He was an equity analyst and a junk bond analyst in the eighties. There is lots of experience here. With the dollar recently sliding to what I consider dangerous lows, I have asked John to come and share his thoughts on where it goes from here. Welcome John.
John Rubino: Hey Chris. Thanks for having me on.
Chris Martenson: Oh, my pleasure. To set the stage, let’s talk about what led you to write The Coming Collapse of the Dollar and how to Profit from It way back in 2004. I am sure way before that was a popular thing to do. I like to think of myself as having been an early warning siren on this same subject, but you and your co-author James Turk; you were way out in front with this message. It was much earlier than most, including myself. So how did you see that? What dark clouds did you see on the horizon? What were you looking at that made you arrive at that conclusion?
John Rubino: During the couple years before that, I had written a book on the coming real estate bust. I went into that piece of research with the idea that it was just the real estate market that was the problem. It would blow up and the US economy would go on as before. But as I dug into the research, I realized that we really had systemic problems. Things were much more serious than just home prices getting a little out of hand and mortgage money getting too easy. We were across the board taking on massive amounts of debt, which would inevitably lead us to do something extreme. Either we would collapse under all that debt and have a 1930s style depression, or we would inflate our way out of it, destroy the currency in order to pay back the debt in cheaper dollars, and have some kind of an inflationary episode.
I knew James Turk, the founder of GoldMoney.com, because we had done a couple of articles together. I had interviewed him and found him to be brilliant and also a nice guy. I approached him and asked if he'd like to write a book on gold and the dollar. He liked the idea and we worked out a deal. So we spent the next year basically putting that book together. A lot of the writing is mine. A lot of the really deep ideas in that book are his of course.
The timing was a little early. It was only by about a year or so. It came out in 2004, and the dollar went up for the year after that. So had it come out a year later it would have been perfect. Even so, gold was about $400 an ounce at the time. Silver was $4 or $5 dollars an ounce. So in the ensuing six or seven years, most of the book's predictions have come true. We have been inflating away the dollar in order to pay off our debts. That has been causing precious metals to go up, which is to say that precious metals have held their value while the dollar has been going down. This process has really just begun. The US has done nothing to manage its finances in the meantime. Things have actually gotten a lot worse, since we have clearly made the decision to try to inflate our way out of all of our debt.
Going forward I know there are a lot of other things going wrong in the world, but just looking at the US finances would be enough to lead you to say that the world was headed for some kind of a catastrophe. When it’s the biggest economy, the issuer of the world’s reserve currency, doing stupid things on this scale and clearly trying to destroy its own currency, you get a global crisis out there somewhere. That is really what we are looking at now.
Chris Martenson: You know, John, if you said five years ago, “Chris, we are going to get to a point where US Treasuries are going to be at about the 3.4% range and the US government is going to be running its third consecutive multi-trillion dollar fiscal deficit (actually it is going to be 1.6 trillion) and the world has not sort of burst into economic flames”, I would have said that is insane. It is not possible.
Is any of this surprising to you? I mean you saw the structural imbalances. You see the debt. Then you see the responses, and then here we are. What is surprising to you in this story? What is not?
John Rubino: Well the general shape of the world right now is pretty much what seemed likelky at the time. But the numbers are still shocking. You know the trillion dollar deficits? I would have kind of agreed with you back then that it was almost physically impossible. We would be violating laws of physics to have Treasury bond yields where they are now and a deficit where it is now. It did not seem possible.
What has happened of course is that we have got the government intervening in the bond market to keep rates low by buying massive amounts of bonds with newly created money. This is a situation that is really unsustainable. You have got massive amounts of new dollars flowing into the system in order to keep interest rates low. But the supply of new dollars pushes the value of the dollar down, which inevitably will push up interest rates. Who wants to own a thirty-year treasury bond yielding 4.5 percent when the dollar is being debased by more than 4.5 percent? You get a negative long-term yield in an investment like that. So the people who are buying treasury bonds right now are not doing it with an investment return in mind. They are doing it with other objectives. China has been accumulating US bonds for years because they want to keep US interest rates low so we will borrow money in order to buy their stuff.
Chris Martenson: Non-economic participants. Is that what we call them?
John Rubino: Yeah, basically. It is vendor financing. It is like when Cisco lends money to some company so they will buy Cisco’s networking gear. The works until the company you are lending the money to goes bankrupt. Then you are stuck with that debt. China is looking at something like that right now. Basically the money they are lending us is going to have to be written off at some point. They are starting to figure that out now. The reason this is unsustainable is that all the guys who are buying treasuries out there, they have more than they want. They are worried about it and are trying to figure out how to get out of their Treasury positions. China especially has been making a lot of noises about shifting out of their dollars and into other currencies and into real assets. They're buying oil wells, gold mines, and farmland around the world.
Click here to read the rest of the transcript.
John Rubino is publisher of DollarCollapse.com, a popular hub for news impacting the economy. John is the author of several well-received books foretelling (years in advance) the collapse of the housing market and the decline of the US dollar.
Before starting his website, John was a featured columnist with theStreet.com, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a Eurodollar trader, equity analyst and junk bond analyst in the 1980s.
Our series of podcast interviews with notable minds includes:
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Comments
Thanks Chris and John.
When Reality was created in the Big Bang an exact amount of powder had to be used. Too much and the Cosmos would have would have blown itself to dust. (Inflation)
Too little and it would have imploded on itself, Crunch. (deflation). The allowable error was infinitly small. God is comfortable with infinities. Ben and the boys are not.
This debt bubble of fiat money collapse has to be ballanced exactly by the power of the moving decimal point on Ben's magic computer. The chances of Ben producing a miracle are zip.
So which infinity does one bet on? The horns of the dilema. I throw sand in the eyes of the bull. I am considering buying Zimbabwe dollars, now that they are going to back them with gold. Max Keiser said an interesting thing. Once one country goes to a gold standard, they will have have first mover advantage.
A lot of Zimbabwe dollars can be baught with a few Australian dollars, and when Bob falls off his perch I might be allowed to live in the land of my birth.
"Common sense is the collection of prejudices acquired by age eighteen." Einstein. ""Absolute certainty is a privilege of uneducated minds-and fanatics. It is, for scientific folk, an unattainable ideal." Cassius J. Keyser ."
Chris,
I think you confused two Texas entities when you mentioned the Texas $1 Billion gold purchase.
The University of Texas endowment fund bought the $1 billion in gold.
The Texas teachers retirement service (TRS) did not buy the $1 Billion in gold.
Trust me, they are not that smart.
http://blogs.forbes.com/robertlenzner/20...
Hth,
Gak
'I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!' Peter Finch as Howard Beale in Network (1976)
The entire structure of our economy is based on CREDIT and continuing INflation and we have passed the point of debt saturation. After a 97% depreciation, should we worry about the remaining 3%? I think not because our money supply is CASH and CREDIT with the latter being gargantuan (90%?) as compared to the former. Leverage cuts both ways. The problem to be resolved is "how does this out-of-control debt based economic system restructure? Will the Fed MONETIZE (hyperinflate) the bad debt or will default wipe out the lenders too? I don't think it is possible to monetize ALL the outstanding debt because that means complete collapse of the entire economic system where no one is spared. Any serious monetization will also result in a collapse in bonds / lending i.e. higher interest rates which will make debt burdens untenable and makes default the only viable option. Clearly there will be pain as we restructure. A collapse in lending may force the Fed to back the reserve currency with gold or some valuable resource to inspire confidence in future lending.
Great interview, thanks.
A couple points. One is regarding the idea that the Fed wants to inflate its way out of the US’s debt burdens. I don’t think this could work, even if the holders of that debt would allow them to do so without dumping it, because the US is a major import addict; it needs its foreign oil to function. So by devaluing the dollar all it does is make energy more expensive for Americans which hurts the economy from the other end. Then the government tax reciepts go down and this requires further printing and / or more debt creation (and now all debt creation is the same as money printing because only the Fed is willing to buy the debt). So eventually the money-printing party will end when energy becomes too expensive that stifles the rest of the economy. All money printing does is buy America some time. The US is precariously walking along a very craggy and narrow ridge line, climbing up up up, and both sides fall precipitously down to the same place – economic ruin.
Can anyone explain to me why the money printing is exporting the inflation to other countries like Brazil, before it hits the US so hard?
I am of the camp that sees this thing unwinding fast once the final string is broken – that being the world’s decision to give up the dollar as the reserve currency. Once that happens, the dollar would instantly devalue several times over, and then imported goods would skyrocket in price way beyond that initial devaluation shock because the US would no longer be able to afford to import them with its worthless currency. This will trigger a panic in the public, and hyperinflation would result very quickly ….. IMHO.
And here’s a little chain of thoughts I have been pondering lately. Let’s say this rapid hyperinflation happens in autumn or early winter. (It doesn’t even have to be a complete devaluation – just enough so that international suppliers no longer accept dollars for payment).
Therefore, the US wouldn’t be able to grow any food until, at the soonest, six months down the road. And because of its devalued currency, it would no longer be able to buy food internationally. And it could no longer buy foreign oil either (although Canada would probably come to its rescue for that).
The US would then need to somehow be able to feed itself off its stored food reserves to get it through the winter. How much food does it have stored? Thanks to the wonderful Just-In-Time efficiency craze of late, storage of goods along the supply lines is kept to a minimum. I seem to remember hearing there’s about a month’s worth of storage but I could be wrong, maybe someone can confirm for me? I think these are important numbers to find out, Chris do you have any insight into this?
What is the implication of this? Millions of people starving? What are they going to eat after the food reserves are gone, in the middle of winter? How can this be avoided? Is there any other factor that I have not considered which would save the US from this nightmare scenario?
One possibility would be for the US to use its gold reserves to buy foreign goods …. assuming it still has the gold, which I find highly unlikely.
Because of this conclusion, I am now making plans to leave the continent and get as far away from both the US and China as possible. The writing is on the wall; it is going to get bad. And it will not simply be the usual currency collapse and re-institution of a new currency, just like what has happened hundreds of times before throughout history. In the olden days people were tough and largely rural. They could take care of themselves. Now we have several cities with 20 million iPad addicts stuffed into sardine cans in the middle of baking hot deserts, totally unversed and unprepared for self survival.
It also means that the US will no longer be able to run a perpetual trade deficit, which means that it won’t be able to buy foreign oil, which means that in the time it takes to re-organize the country’s infrastructure to accommodate Peak Oil, the US will show little improvement in its economic predicament. This could take decades.
And add on to this the incredibly charged political atmosphere in the US which likes to blame everyone else but themselves for the problems. The people who slam the government for running trade deficits (the “right”) tend to be the same people who resist a transition to electric transportation, since it tends to be “liberals” who want to move away from an oil based economy to something more sustainable, but the political climate has become so polarized that no one on the “right” wants to admit that anyone from the “left” has a valid point (that a fossil fuel based economy is not sustainable), and vice versa (that perpetual deficits are not sustainable).
This vicious political environment is not conducive to solving problems; rather, as Chris points out, it tends to lead to fascist dictators rising to power and starting new world wars. So I don’t see the situation improving in the US for decades, maybe not even in our lifetimes, so I see no point in remaining in North America or Europe.
Actually, money does grow on trees. To be more accurate, wealth grows on plants. http://markbc.net
If things get ugly (i.e. US hyperinfaltion), there is no way the commodities will continue to be traded in $'s. For foreigners that will create way to much volatility for their economies so maybe Yuan or Euro will take over.
I would rather do quick pain. Let the US fall apart. Groups of States will reform other countries. It is the only way. Currency collapses end in about 1.5 years. Productive persons will reconstitute life. Bring it on.
Criminals have cars and trucks for food raids. It is not so obvious that a farm will be safe. But it looks like the Founding Fathers' advice still applies: arm yourself, form militias, and remove your government when it no longer represents the interests of the people. And there is no proof that gold will function the same way in the future. Many countries have went through multiple currencies (the US: "Not Worth a Continental" and Greece: 5 currency collapses in 1900's and China for millenia).
Speaking of being prepared we may need calculators that handle plenty of zeros.
Zero stroke From Wikipedia, the free encyclopediaZero stroke or cipher stroke was a term used to describe a mental disorder reportedly diagnosed by physicians in Germany under the Weimar Republic and which was caused by hyperinflation that occurred in the early 1920s. The disorder was primarily characterized by patients' desire to write endless rows of zeros, which are also referred to as ciphers.
CauseThe disorder was supposedly caused by the dizzying speed of hyperinflation and the calculations required to conduct commerce under its effect. It has been said that during the worst period of hyperinflation that in the time it took to drink a cup of coffee, the price for the cup could double.[2] The fast pace of hyperinflation caused people to quickly buy goods when they received their wages.[2] Workers would demand to be paid at the beginning of the day for their work and after they were paid, they would be given half an hour to run off to buy goods before their earnings became worthless.[2] The requirements to calculate and recalculate commercial transactions in the millions and trillions made it practically impossible to do business.[2]
DescriptionZero stroke has been described in slightly different terms by various authors.
One Time article that reported on the condition described it as follows:
Another newspaper article at the time described the condition as:
Cashiers, bookkeepers, and bankers were reportedly the most prone to this affliction.[2] Besides a compulsion to write endless strings of zeros, individuals that suffered from this condition would reportedly become confused when referring to numbers and would state that they were ten billion years old or had forty trillion children.[2]
Later John Kenneth Galbraith would describe the condition in his 1975 book Money: Whence It Came, Where It Went:
Rubino thinks the US is at fault for exporting inflation, but I disagree.
The US exports too little and imports too much. The US needs to increase its exports and decrease its imports. The simple way to do that is by devaluing the US dollar. The ROW (rest of the world) has the opposite problem, but the solution is the same, for ROW currencies to rise in value relative to the dollar. Although printing more money may not be the best way to go about devaluing the dollar, it is certainly one way to do that and the devaluation in itself is the right thing to do. This causes problems for the ROW because adjustment is painful and in an effort to avoid an adjustment, which in the long run is necessary, they inflate their currencies as well. That is their choice.
So, in a sense, the US is doing the right thing, trying to lower the relative value of the dollar and the foreign countries are doing the wrong thing in resisting that relative devaluation.
Instead of inflating, countries could go through the pain of adjustment by relying on changes in wages and prices, but the sad fact is that workers tolerate inflation better than they tolerate nominal wage reduction. And bankers always of course prefer inflation because they get the new money first. Politicians like inflation too, because they prefer to have voters angrier at the businessmen who have to raise their prices and the ever unpopular "speculators" than to have them angrier at the politicians. They also like to protect the bankers, because the bankers bankroll the politicians, while the lower classes typically have no interest in politics until it is too late.
Now, in fact, the US doesn't export ALL its inflation, just some of it. That's why the dollar is falling relative to other currencies over the long haul. The devalution of the dollar relative to the Chilean peso, for example, creates stress on Chile. The Chilean leaders know that the US has to devalue, but they also have to contend politically with the stressed factions in their own countries. So, Chile prints up some pesos to buy dollars to resist the relative devaluation, but they don't let it go as far as it need go to completely offset the devaluation. Then, they have done something, and they tell the stressed factions: See what we have done for you, but you have to be realistic, we have to let some relative devaluation occur. This delays adjustments, smoothing things out politically. Then the Chilean peso begins to climb again and the cycle begins again with the factions being stressed again. So, the dollar goes up and down, the peso goes up and down, and over the longer term, the dollar falls relative to the peso.
This up and down motion with a declining trend (for the dollar) is reminiscent of the problem of boiling a frog. You can't squeeze people relentlessly. They may rebel, whether politically or violently, if you keep squeezing them, but if you put in a period of relaxation, like when you are acting to delay adjustment, the political problem doesn't get out of hand. Economists don't like this, because it seems irrational and inefficient, but it seems so only because they fail to understand the political problem.
"What has happened of course is that we have got the government intervening in the bond market to keep rates low by buying massive amounts of bonds with newly printed money or newly created money."
Chris, minor point in a good interview, but surely it's the Fed intervening? I agree it's the Government issuing, but it's the Fed buying them in, it now being the the World's largest holder of US Treasury bonds.
How the UK can be the number 4 largest holder, with all our problems, defeats me!
DavidC