December 28, 2011; Reminiscences of 2011 – Recap of the Year’s Amazing Subscructural Changes

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, this is the wrap-up for the year. It is also the week between Christmas and New Year, so we can’t be too depressed, or make it too dark.

We were talking about how we would characterize this year – a bird’s-eye view. You said, “substructural.” I have to admit, oftentimes, David, when you give me a one word answer, I really need more elaboration. What do you mean by substructural?

David: The primary changes that we have seen in 2011 are all substructural changes. They have to do with the undercurrents in the money system, and a slow erosion of confidence in fiat. When we are seeing that, not just in the U.S., but globally, that’s just one example of a substructural change.

Kevin: Would you say politically, it’s the same type of thing?

David: Oh, absolutely. And it doesn’t matter if you are in North Africa, if you are in Asia, if you are in Russia, in Europe, or the U.S., there are the substructural changes where lines are being defined very differently than they were, for instance, two or four years ago. The U.S. is a perfect case in point, where on one end of the political spectrum we have Occupy Wall Street, and on the other end, we have the Tea Party, and we are really looking at defined modalities of the far left and far right, saying, “We’re not happy with the status quo. We don’t think the Democrats are doing a good job,” or on the other hand, “We don’t think the Republicans are doing a good job.”

And there are these, now, greater clarifications being made in terms of what the priorities are, what the expectations are coming into 2012, which really make 2012 a difficult year to look at. We will do that in future weeks as we anticipate, as we try to look ahead, to what 2012 may hold, but today, what we are going to focus on is the major things that have happened in 2011, and the guests that we have had that highlighted those things.

Kevin: David, when I think of what has occurred this year, what we call the Arab Spring, and this supposed movement of the people. Then, of course, we had Occupy Wall Street, which people think of as an organic movement. Of course, there was some organization, but there are a lot of people out there right now sensing a lack of leadership.

When we talked about doing this program, we thought, why don’t we go back and look at some of the things that some of these guys have said, going back to the first of the year. One of the things we were sensing at the beginning of the year was this “headlessness” of the world. There doesn’t seem to be any leadership. There doesn’t seem to be any direction or long-term strategic thinking, governmentally. I think of our guests, going back to the beginning of the year – George Friedman of STRATFOR. He talked about how America is an empire, whether we like it or not.

But one of the things that we lack right now is the leadership that is required if you are an empire. In other words, we don’t have a Ronald Reagan right now. We don’t have an Abraham Lincoln or a George Washington. So, do we see right now, occurring worldwide, and here in America, this outcry for some sort of direction?

David: And the question is, what does that look like in a post 2012 world? As we have noted a number of times, half of the G20 leadership changes next year, and it is in the process of organizing itself for campaign bids and everything else. So, what the leadership looks like in 2013 and beyond is going to be very different.

The decisions taken in that period of time may be very different than the previous administration. And this is kind of a preview of our conversation today – when we had the conversation with Franck Biancheri, the gentleman from France. The issue there is that he sees the world after the crisis very different than the world before the crisis. He sees creative destruction.

Kevin: He sees creativity and more unity coming into Europe, not a destruction of Europe.

David: And that’s not predicated on present leadership somehow having an about-face or an epiphany of what should be done, but we are talking about a completely different kind of leadership to begin with.

Kevin: David, I think it is important to understand – we talk about Europe, we talk about China – you and your dad talk about China. We talk about these different regions in the world, but even with the problems America has, you brought up the point to me just recently that even if America’s GDP got cut by half, we are still larger than China by two times, and the European Union isn’t really, truly, a union. You still have to look at these nations individually, to a degree, as far as strength. So, the United States, even if cut in half, is still an empire, is it not?

David: It is, and that gets to Friedman’s point, which is, before you write off the West, and start writing a new script with the East and the rise of Asia in mind, you have to be careful. There is a lot of ground that they have to cover on the upside, and a lot of ground that we have to cover on the downside, to get us to parity.

Following a drop in the euro in 2012, which is something that is very probable, will the dollar regain some measure of strength, even if it is only on a relative basis? Again, that has to do with who is in a worse situation. I don’t think we are past the European issues. We have spent a lot of time on them, certainly in the commentary this year, 2011, but we have not seen any real resolution. So the issues remain. We still have the debts that have to be paid. We still have the inability of a lot of sovereign states to raise enough capital. And thus, we see the same thing overseas that we have had here in the United States – direct monetization by the central banking authorities. If there is excess, or overhang, of debt to be offered, rather than that, impair the debt markets and cause an increase in interest rates, those central bankers are just coming in as a cleanup operation and taking the scraps off the table and saying, “Hey, yet another successful bond auction.” (laughter)

Kevin: David, remember we did the program about three weeks ago called The Thirteen Days of Christmas? We were talking about how much debt actually comes due in Europe. Well, one of the things about the Europeans is that they don’t like missing their vacations, and they don’t like missing holidays. So people might ask, “Well, gosh, whatever happened to the thirteen days of Christmas, the demise of Europe?” Well, they did exactly what you are saying. They printed money, they went into more debt, they guaranteed low-interest loans to the banks, and they all jumped in.

David, I think it was a trade like in 2008, where all of a sudden just the garbage collateral, if you can call it that, got thrown onto the central bank, and the loans and the nice liquidity, so to speak, goes back into the hands of the banks.

David: Kevin, you and I discussed this several weeks ago, the idea that somehow creating an unlimited – using that word, which they now have used – an unlimited backstop for the banks in terms of a lending facility, would somehow be healthy for the banks. All that allowed for was for speculators to come in and dump the products which they had hesitantly held in their portfolios, unable to sell because they couldn’t get a good enough price, and now they have the central bank guaranteeing a stable price, and a stable market, for the product that they have been trying to ditch, and that is exactly what they did.

Kevin: So how do you say, “moral hazard” in German, or French, or Belgian? Because that is exactly what you have when you guarantee any loan.

David: Right. Well, I think what we are going to get to experience in the U.S., and this isn’t the definition of “moral hazard,” but schadenfreude [pleasure derived from the misfortune of others] is certainly something that we will be able to smile and say, “Ah, well, it is pretty bad still in Europe, although we have our own issues pending.

Kevin: David, it is interesting, as we went into February, we had a return guest on. I always love it when Marc Faber is on, because he just doesn’t mince words. Marc said the Germans weren’t happy with the bailout of the PIIGS. We’ve seen that this year. But he said something, what we are seeing now, where they are just papering over these debts in Europe. He said, “Guys, get it, here. The budget never, ever, will be balanced, period. Just get used to that.”

David: And that supports the thesis that it is either going one direction or the other. Default, as one alternative, where you run up the debts to the point where you just have to walk away, or you pay off the debts with cheaper and cheaper currency via the printing presses, so you print your way out of it, rather than have an outright default.

Faber’s point is, in Europe, they are now in the same place that we are in the U.S. We actually are in the same boat. This is a real challenge. It is an either/or.

What we would suggest is that we probably have an advantage over them in that we still maintain the world’s reserve currency. We have an extra layer of abuse that we can bring to the marketplace, and I say abuse, because it is an abuse of the privilege, it is an abuse of the trust, it is an abuse of the position that we are in, a position of power in the world’s monetary system. The dollar is still the king of the world’s monetary system.

Kevin: Even though the dollar is still king of the monetary system, you brought out a great point earlier, that the dollar isn’t gaining in value, even though relative to the euro it is, the buying power of the dollar dropped. Marc Faber, when he was talking to us back in February, when gold was just a little above $1300 an ounce, said, “Look guys, even if commodities drop this year, gold should rise.” Sure enough, even though gold has had a volatile year, it is finishing up very nicely.

David: What was interesting about his comment on February 23rd, is that the first quarter actually saw a huge increase in commodity prices, and gold wasn’t doing much. So this was a counterintuitive comment at the time.

Kevin: That is like Marc, though.

David: Right, you actually had a return to growth in the economy, supported by industrial commodities and agriculturals going crazy. It was as we headed into the second and third quarter that we went from robust growth to a massive contraction. On our trip to London we had met some folks and they said, “Listen, as far as our businesses in Africa are concerned, we are seeing a cutback of up to two-thirds of business orders.”

We are talking about nickel, we are talking about copper, we are talking about molybdenum – the basic stuff that goes into other stuff. So the front of the edge of the economy is slowing, not speeding up. We had an indication in the first quarter that ended up being completely thrown out just a few months later, and that’s what Faber was implying. We are going to see a decline in these commodities. Meanwhile, I think gold will do quite well, as it differentiates itself, not as another one of the mix. It is specifically a commodity, but actually different, being a currency.

Kevin: That is what Marc Faber has always pointed out. Richard Russell has pointed this out. A number of people who have seen this thing and analyzed this thing for decades, don’t look at gold as a commodity, they look at it as a currency.

But what is interesting, too, Dave is this. I am going back to the dollar, because I heard this analogy the other day and I thought it was brilliant – people moving out of the euro and into the dollar, which is what we have seen over the last month, especially, and seeing the dollar rally against the euro. The analogy is like jumping off of the Hindenburg, which took less than a minute to crash to the ground, and onto the Titanic, which took just a little over two hours to sink. You still have declining outcome. It is still a death outcome.

Here is my question: What happens when capital has to fly out of the dollar and go somewhere else? The dollar right now has a false buoy with the European situation, but the dollar, itself, has a deficit problem.

David: It does. Before we get there, Kevin, there is one other point to make, because there is this whole issue of 2011 really being a judgment of the concerns in Europe and the U.S., being concerns related to liquidity. So why did the dollar see lots of traffic? For the same reason that the yen saw lots of traffic. The whole world says, “Where can I park money, and not disrupt the market? I need to be able to come in with a couple of billion dollars, or a couple of hundred billion dollars, and leave, as well, without making huge ripples.” The yen and the dollar are really the only places that have that depth, outside of the euro. Those are the three that have this immense liquid pool, if you will, where you can come and go as you please.

Again, coming back to substructural changes, this is what a lot of people have recognized in 2011. It has been kind of a divide between those who have continued to judge this as a liquidity crisis, and thus go to dollars and yen, and others who have said, “Liquidity crisis today is solvency crisis tomorrow, and I’m not going to wait around, whether it is the Hindenburg (as you say, Kevin), or the Titanic. We’re concerned about solvency, not liquidity.” So I would judge 2012, and maybe it stretches to 2013, as the wakeup call for the general public that this is, in fact, a solvency issue, and now all of a sudden the judgment, on the basis of liquidity, to be in yen or in dollars – that was a mistake, and has to be reversed.

Kevin: It reminds me of the game, hot potato, where they heat the potato up to boiling temperature, and then you play the game and whoever holds it the longest gets burned. Liquidity is a little bit like that, isn’t it? The security issue is a longer-term issue. Frankly, I would have jumped out of the Hindenburg, myself, onto the deck of the Titanic, knowing that it was going to sink because it was hot in the Hindenburg.

David: Yeah, because you’ve still got time. (laughter) I think that is an accurate statement, Kevin, that I think it is 2013 that there will be a broader awareness that solvency issues are obvious, because frankly, 2012 is sort of a blackout year. It is a distractable year, where people are more concerned about politics, politicians are trying to claim success on the basis of 2011 numbers, they are trying to look forward to 2013, and they are courting constituency groups. There is really not going to be anything that happens of a productive nature in the economy, because it is all about politics. So for where the rubber really meets the road, I think we really are looking at a year of white noise, where we actually see traction, or lack thereof, come 2013.

Kevin: But there will come a time when people say, all right, I’ve been holding these dollars, it is a hot potato, it is time now to move to securities.” This takes us to March.

David: Yes, because we talked to Richard Rahn. Richard is an interesting guy. We talked to him about FATCA, which is the Foreign Accounts Tax Compliance Act. That comes into effect in 2013. It is something that could have a major impact on the U.S. equity markets, as we see foreign holders of U.S. based securities, whether that is bonds or stocks, now brought into our compliance framework and essentially being proxy IRS agents. So you have the world’s global financial system saying “no” to the U.S. financial system, because the IRS and Treasury Department are over-stretching their boundaries.

Kevin: David, we have really seen that this year. How many bank accounts of Americans, that were completely legal, have been shut down by the Swiss because they just don’t want to play anymore?

David: They don’t. They don’t want to have anything to do with the U.S. because we represent a huge liability. Anything that puts them in the daily operations, if you will, of the Treasury or the IRS, they want nothing to do with. We also have the new FBAR rules, and what is apparent is that the Treasury and the IRS are getting very, very aggressive, making laws so complex that essentially everyone is a lawbreaker, and it is just a question of whether or not they can put you in under the microscope, to be proven such.

Kevin, I think what we are really seeing, when we look at the Treasury and IRS getting as aggressive as they are, is that they are anticipating capital flight, whether it is 2012, or 2013.

Kevin: It’s when they are jumping off the Titanic.

David: Exactly. When you see the dollar become anathema, the Treasury and the IRS have already set up the structure so that you cannot take U.S. based capital and re-domicile it. You can’t take it into a foreign currency, you can’t take it into a foreign bank, and you can’t take it into a foreign institution. You are on deck, and there is not enough room in the lifeboats. They have already sailed.

Kevin: With these rules coming up, I think you are saying there is an anticipation for this time to come. Barry Eichengreen, our guest in April, wrote a book called, Exorbitant Privilege, in which he was talking about the history of how we have gone to the dollar, purely the dollar, as the world’s reserve currency. You have to go back almost 100 years to watch that cycle play itself out. Eichengreen is saying that 2013, he felt, is a potential day of reckoning for the dollar, where this capital flight might actually start moving out.

David: What we are seeing is a growing competition amongst central bankers who have to figure out how to finance these independent treasuries. So for us, it is the Treasury and the Fed trying to figure out how to recycle debt, how to renew, or roll over, the debt. So you have the debt that is coming due, plus new financing needs.

Kevin: Whether a person agrees with Eichengreen’s ultimate outcome, which he believes is ultimately the dollar having to be moved into another basket of currencies to make a reserve currency, that may or may not happen. But one of the things that we do know is that there are trillions and trillions of dollars that are coming due – not new debt, but this is stuff like you were talking about, rollover debt. You still have to have a buyer for that, as well.

David: There was an interesting point that Barry did not mean to make, but he did. He is an economist, he is at University of California, Berkeley. He was not intending to give social commentary, but he did. Will the dollar, as the world’s singular reserve currency last? Do we have this monopoly that continues heretofore? He is saying that, no, it is not going to. But the way he is packaging it, the way he sold it in Exorbitant Privilege, is by saying it is not stable, it is not safe. To have one currency as the hub is not safe.

That, in itself, is similar to our social structure today, in that we have been conditioned, over a period of 30-40 years, to consider bike riding a hazard to our children’s health, if they don’t have a helmet on. You grew up without a helmet, and actually, I think you turned out pretty well, in spite of a few spills. We all did! We all did.

Kevin: We don’t even imagine anything else.

David: We couldn’t even imagine it, because we are that much more safety-conscious and risk-aware. But it is not real risk-aware, it’s these strange little quirky things that we are very afraid of, and I think it has been framed such, that on the next major catastrophe, we have the money elite in America which get to say, “See, this is the problem, and here is the solution. And we could have told you this, and we tried to tell you this. In fact, we did. Here is the literature in which we explained that this was not safe, and now we will effectively regulate this toward safety, where you don’t have to worry anymore, you don’t have to worry about loss or ultimate demise.”

Kevin: “Here’s your helmet,” basically, is what they are saying.

Okay, now David, isn’t this really just a repeating cycle? I am thinking of our May guest, Neil Howe. He talked about how all through history there are seasons in 80-100 year cycles that continue to repeat. There is the spring season, and then the summer season, the fall, and then the winter, which he calls the fourth turning, and then you go into the next spring season. I am thinking of Eichengreen now before we move to Neil Howe, but going back to 1913 to 1922.

David: In the last 100 years, it’s not an exact overlay, but it is interesting in terms of the development of our currency system, that period of 1913 to 1922, when the Federal Reserve was created and before the conference of Genoa, when we still had, more or less, a gold standard, and we still had to have gold as the primary backing, the primary serve asset at all your world central banks. That changed in 1922, and then from 1922 to 1944, before we launched into the Bretton Woods era, we left the gold standard, went to a quasi-gold standard.

Kevin: And the other countries did, too. Britain left the gold standard. France left the gold standard. We were seeing each one drop off the discipline band wagon.

David: And then we went to 1944-1971, the Bretton Woods era. The Bretton Woods era was defined by the post war peace, and we negotiated it very handsomely for ourselves, that all the world’s currencies would relate to the U.S. dollar.

Kevin: Why? Because it was backed by gold.

David: So, basically, we guaranteed all the world central banks, if we owe you money, you can have it either in dollars or gold – it’s the same thing.

Kevin: And then Nixon, just temporarily, reneged on that. But, it’s temporary, still. (laughter) But in 1971 he closed the gold window, Dave.

David: And we launched into this fourth period of time which defines the present monetary instability. That is a period in time when paper has nothing backing it, and yet everyone still has confidence, to some degree or another, that it is what we use to transact business. Whether it is credit or debit, at the end of the day, we are really talking about dollars and greenbacks, and behind that stands nothing, in stark contrast to all of world and monetary history, in which people, having learned the lesson the hard way, could not have confidence in their central banker, and actually wanted something backing, dollar for dollar, their representation of wealth.

Kevin: So do you think the understanding of real money is coming back? Dave, you enjoyed the book, The Fourth Turning. Not to talk about fourth turnings, or the third, or the second, but you were interested in the next first turning, because you said, “All right, what about after all this mess occurs, every 80-100 years?”

David: Just so we are not getting too close to the book without someone being familiar with it, that fourth turning is a period of social decay. Basically, these are all short cycles. For instance, in the Roman Empire, they could have had three or four of these periods of expansion and decline within their total empire, in terms of that 400-year stretch when they were around. In Great Britain, we saw at least two of these periods of expansion and ultimate decline, social decay. But following that period of social, political, and moral decline, came a period of renewal and rebirth, and again, it was along economic lines, it was along political lines, and it was along even social and spiritual lines.

Kevin: So, rather than just being doom and gloom about the period we are in, it is basically looking forward and saying, all right, what can we set up now, what can we start thinking about now, after this thing completely destroys itself, so that we can see a system that actually brings about, maybe, equal weights and measures?

David: Well, that’s very true, Kevin. I think, with that awareness, and that expectancy, it ties to what we have encouraged our clients to consider, which is, what is their responsibility? Not just in terms of surviving very difficult financial and economic times, but thriving, now and into the future. If you lack the imagination to see the future, you are locked in a strange, strange trap. It’s a deadly trap, and one that we would encourage you to try to extricate yourself from as quickly as possible. See the future for what it is. As many challenges as we have in our immediate present, the future holds something very different.

Kevin: That takes us to our next guest. We had Bill King on just last week. We love to have Bill King on at least twice, maybe three times a year, because he has an overview mentality, longer-term, but he also trades on the short-term. Bill King was saying, “Look, we are currently seeing the collapse of Western socialism, right now in front of us, over in Europe, and actually, to a degree here in the United States.

David: And what we mean by that is just that you can’t continue to borrow from Peter to pay Paul, and expand your largesse in terms of government spending without increasing revenues. And actually, what we have had in the last three or four years is the final wake-up call. As long as there is exponential growth, and we talked about this with Chris Martensen, exponential growth in the economy supports exponential growth in debt. But if the economy slows and you don’t have exponential growth, but you continue to spend beyond your means…

Kevin: You don’t have a slowdown, you have a collapse.

David: That is what precipitates a financial collapse. And that is what King is talking about, this idea of Western socialism. You can’t continue to spend more and more, governmentally, without that, in lockstep, growth in the economy, and now we don’t have the growth in the economy to support it, and yet, we are not tightening our belts.

Kevin: Being a professional trader, we have asked him each time, “Okay, Bill, what do we do right now with our money if we are seeing this collapse?” He keeps going back to something that sounds fairly boring, but he talks about cash, and gold. In other words, keep your powder dry, make sure you live through this financially, so that you can capitalize on that next opportunity, that first turning, whatever we want to call it.

David: It’s a defensive posture, one that insures you against the stupidity of governments making bad decisions under pressure, and frankly, from a lot of change that cannot be anticipated. So how do you preserve value during these periods of compression? His opinion would match ours, in that regard, keeping a very defensive posture.

Kevin: That takes us to our July guest, Felix Zulauf. That was a great interview, for our listeners who want to go back and listen to one interview from this last year, it was one of my favorites, on July 6th. One of the things that he brought out was this: We are looking at, in the next 3-5 years, an inflationary depression. Up to this point, we can point out that there has been some monetary inflation, prices have risen, but we haven’t had a hyperinflation. It has not occurred on a worldwide basis, really, in many years. What he is talking about, however, is a sudden event, at some point, where we will have high hyperinflation.

David: And it goes back to Haverstein’s dream, the idea that if you don’t have the money, you just print it. This is what happened in 1919-1924.

Kevin: Is that Helicopter Ben Bernanke, as well?

David: I think they are actually related, Haverstein and Bernanke. If you go back, there is actually a tie. (laughter) He was head of the central bank in Germany from 1919-1924, and all of his economic cohorts and colleagues thought he was a genius. “We don’t have enough money in the system? Not a problem, we’ll just print more money.”

Kevin: Could we call him, maybe, the Maestro?

David: Well, that’s a lot of what we have today. If we don’t have the money we just print it. The ECB has fallen prey to that. If you want to look at them as the soldier that we were counting on to not go this route, they fell prey to the temptation in 2011. The ECB has monetized and printed beyond the scope that they are comfortable with, but they still did it. So we have passed beyond the boundary line that they set for themselves, and really, there is no central bank in the world today which is not willing to, and is not actively, printing, to solve their economic problems.

So whether we know it or not, we are at the front edge, call it a 1919, if you will, when inflation was only 6% in Germany, at the beginning of the year. By the end of 1919, it was pressing 200%. As it went into 1920-1921, it was moving from triple to quadruple digits, and then of course it went into triple and quadruple digits on a monthly basis, which made their annual inflation rates just off the charts.

Kevin: To put that in perspective, because most of us don’t think in percentages, we think in terms of the price of bread or gasoline, but what we are talking about is a loaf of bread going from $3-4, to $30-40 very quickly, to $300-400, to tens of thousands of dollars. I am talking a loaf of bread. People can look at their assets right now and they can say, “Well, I’ve saved for my retirement, I’ve got X amount.” If you go through a hyperinflation, you can just pretty much kiss all that goodbye.

David: Inflation sets an economy back by at least a generation.

Kevin: Unless you are in gold.

David: And that’s what I am saying, is that for individuals it is different. For a nation, in terms of the social and political dynamics, it is very unhealthy. In fact, the hyperinflation in Germany led to the ultra-nationalistic rise of the National Socialist Party and ultimately, of Hitler. It gave the Germans the ability to reclaim some dignity. That is a very dangerous road to go down. It is a very dangerous road to go down, but it was filling the void of humiliation following the Treaty of Versailles, and the payments which had to be made. So basically, pride was stripped from the people, and pride returned, and it was tragic that it happened in the way that it did.

But again, back to Felix Zulauf’s comments, the fact that the next 3-5 years represent a ramping up of an inflationary depression on a global basis. Zulauf is an asset manager in Zurich, Switzerland. It is beautiful, sitting right on the lake, and if there was an inflationary depression, I can think of very few places I would rather be. There is a lot of gold in Switzerland, and it’s a beautiful place, as the same time.

One of the points that he made was, again, something we have mentioned earlier today, and many times this year, which is that gold is a currency, not a commodity. This is something that is, again, a substructural change. It is a change in perception. People did not appreciate it as such. We spent 25-30 years considering it the same as orange juice contracts, pork bellies, and things that you generally have no interest in, other than consuming for one purpose or another, maybe breakfast on a Saturday morning. Why do you need gold? It’s just another commodity, and frankly, it’s not as enjoyable as coffee.

Kevin: Right, but it does hold its value. David, just so that we don’t sound fatalistic here, as if to say, “Oh, we have to have hyperinflation, we have to have a complete unwind of the debt, it’s all coming to an end,” I mean, maybe it is – but you did get together with Laurence Kotlikoff in August, and that was an interesting interview because Kotlikoff was saying, “Yes, this system is a mess. The tax code is way too complicated, the printing of the money, the way the Federal Reserve works with the banks, the way the banks speculate, without any real risk behind them because of the moral hazard, because it’s printed up. But Kotlikoff said, “Look, we don’t have to have this collapse, necessarily, if we change and simplify.” In a way, it was refreshing. Whether it works or not, it was refreshing to talk about an answer to the problem before maybe the complete, utter destruction of the system.

David: He has taught economics at Boston University for several decades, and I think the most refreshing part of the conversation with Mr. Kotlikoff was that he brought a moral component into the work of an economist. He said what is important is not the work that we have seen of economists of late, where they will put together numbers which help a political campaign make an argument, such as, “Here’s what we’re going to do for you.” He said, “No, it’s actually this deep, moral need to tell them what is happening, not necessarily what they want to hear, so that they can make adequate preparations, and take care of the people that they are responsible for taking care of.

There is the idea that the work that he does has a moral component to it, which I thought was very refreshing. I don’t know that I have ever heard that from an economist before. Simplication of the tax code, simplification of health care, simplification of the financial and retirement systems – this is what he is arguing for, as a way of lowering our current costs, and in fact, bringing about an increasing future income.

Because what he is looking at, again, going back to Felix Zulfauf and saying there is an inflationary depression ahead, that is an inevitable outcome if we don’t change the structure of our debt, because as Kotlikoff says, we have 211 trillion dollars, in terms of a spending gap. The spending gap is what he defines as the net present value of all future incomes and all future expenses, and when you look at those two numbers, there is a difference of 211 trillion. We are spending 211 trillion more than we will ever bring in.

He is underscoring the point that this is a structural issue, and we have to change it. And what Zulauf is assuming is that it’s not going to happen. We are not going to reform it, which is why he would say, “Inflationary depression, full steam ahead, we don’t have the political will.”

Kevin: My question to Kotlikoff would be about the special interest groups, because it really is the lobbying of the special interests that keeps this system from changing. Talking about simplifying taxes, and health care, and financial and retirement, the problem is, that cuts out all the guys who are on the take.

David: Right.

Kevin: We can pray for that kind of outcome, but right now it doesn’t look promising.

David: When we talked to Hunter Lewis September 21st, he stated the biggest obstacle was changing the flawed status quo in government.

Kevin: Just a reminder, Hunter Lewis was the man who wrote, Where Keynes Went Wrong, speaking of John Maynard Keynes.

David: Right, and he wasn’t being critical of the voting public, as much as he was saying that special interest groups are refusing to give up privilege. They have taken on a role in our society, and in our political lives, that we are not even cognizant of. When you go to the voting poll, you assume that you are letting your voice be heard, and he is saying, “No, no, no. That’s once every two years, that’s once every four years. But lobbyists show up at the doorstep of Washington every day, and they spend tens of millions of dollars to make sure that someone’s voice is heard every day.” So it is special interest groups who are actually speaking, not us. It is the lobby efforts of these special interest groups which he considers really toxic to the body politic.

Kevin: David, we really are seeing a polarity right now, of the people. I am not talking about the parties. The Democrats, and the Republicans, they are still talking like Democrats and Republicans. But we also have Occupy Wall Street on one hand, and we have the Tea Party on the other, and they are complaining about the problem, because there is a problem, but I think some are probably seeing the solution as more socialism, and others are seeing it being the complete elimination of the government.

David: Right, well there is certainly an application for the rule of law, and if laws are not being enforced, then they need to be enforced. But it is not a question of growing government to accommodate what should have been done, but understanding laws as they are already recognized.

That is certainly where I think the Occupy Wall Street folks would say that something has to change, and we would wholeheartedly agree. We just have to enforce the rules that already exist versus giving a free pass, and someone needs to send a memo the SEC and say, “Quit destroying your own documents. It doesn’t help with the idea of transparency.” 18,000 documents on one go – that doesn’t do anything in terms of credibility, whether it is the Occupy Wall Street crowd, the Tea Party crowd, or anyone in between who just simply cares about knowing what is happening on Wall Street.

Kevin, I think the issue with Keynes and what Hunter Lewis was pointing to is that we are still attempting to spend our way to recovery. This is being disproven as we speak, as the means of solving our fiscal and economic problems. And yet, bad ideas die hard. It is not going away. The Fed and the Treasury are still trying to prop things up via government spending. This year, instead of seeing a 1% to 2%, or even 3% GDP growth, we have the government spending between 1 and 1-1/2 trillion dollars, and that has kept us at the 1%, to 2%, to 3% growth.

Kevin: So what happens when you pull that out?

David: We would be worse than the Great Depression today. We would be in a 6-8% contraction. And that is where Keynes would argue, “That’s the point. The government has to step in and ‘prop up aggregate demand.’” That’s the idea. The problem is, we are getting to an end game, and this goes back to that 2013 date which Barry Eichengreen was discussing, and what was he fixated on? He was fixated on the rollover of debt. He was fixated on all of these obligations having to be made right, and paid on, at any particular point in time, 2013 being a very significant date. We can’t spend our way to recovery if it is adding to our total stock of debt, without complicating a 2013 comeuppance.

Kevin: It is sort of gallows humor here, and I hate to say this is funny, but I am going to say it’s funny, that not only are we trying to print our way out of our own problem, but here recently, we have been helping Europe try to print their way out of their problem, and I think of our next guest in October. Franck Biancheri. He is the one who sees creative destruction in Europe. He actually does want to see some of this creative destruction occur so that they can have a workable longer-term solution. Whether you agree with him or not, it is more of an optimistic plan than just saying, “Look, let’s just try to keep this thing from dying as long as we possibly can,” both with European currency, and also with U.S. dollars.

David: It was fascinating talking with Franck, because there is the decidedly European perspective, set against the decidedly American perspective with Barry Eichengreen, and they are coming at this from very different philosophical bents, and yet they are seeing the same thing happen – the dollar reserve system being replaced by a completely new monetary order in that 2012-2014 period. We have seen this consistent theme, both amongst academics, and writers, from around the world.

I just want to make mention of something, because Franck had called me and invited me to do an interview on his behalf. It is a January 2nd interview. It has been taped, and it is going to be aired January 2nd with Fox News, on their Power and Money segment. Again, it was Franck who had asked me to share the views of the team, and the ideas that he wrote about in his #58 report.

Kevin: That is his Global Economic Anticipation Bulletin #58, you are talking about, where he actually discusses this transformation.

David: Right, and it is a transformation that starts with the banking system in Europe. It becomes acute in terms of the U.S. banking system, and then has people scrambling for a whole new set of answers. He went so far in that conversation back in October to assume that over the next 2-3 years we would see a transnational referendum pass in Europe, taking Europe into a new era of leadership, globally, but consolidated strength, as well.

For us, it is question of sometimes stepping outside of our own skin and saying, “What does someone else see? What does someone else view, from a different, and, granted, biased perspective – his European, ours U.S.? But from those different centricities, how do they view the world and the things that are happening? And it is very helpful to try to gain an objective view.

Kevin: David, I think you can’t have any of this progress without having a sound monetary system, and this goes back to everything we have been talking about with Eichengreen.

Ian McAvity has been a friend of your family’s for 40 years. He also really clearly sees that there is going to be a basket of commodities discipline brought to whatever this new currency solution is, whether it is in Europe, America, or both. Your thoughts on that, Dave? Are we going to see gold backing the currency again before these things can change?

David: That was a great interview with Ian. He has been a gold bug for a long, long time. Our conversation with him reminded me of a conversation that we had with Giulio Gallarotti in 2010, in which the conversation was, again, currencies – stability of the U.S. dollar, its role on the global scene. Will it maintain its role of leadership? And his answer was that no, something has to give. Something has to give, but what will replace it is not the gold standard. Again, this is Gallorotti’s view, but there has to be some element within the new monetary system which represents a discipline so that the world central bankers cannot print ad infinitum and destroy a currency system over time.

Kevin: This is that equal weights and measures I was talking about. We all have to play on equal ground. If I can print money and you can’t, it doesn’t really work for a long time.

David: The greatest criticism of the gold standard is that it is a disciplined system which ties the hands of central bankers and does not enable them the flexibility that they “need.”

Kevin: Yes, that’s what the Keynesians say.

David: Right, but if you look at the history of money, every time that a central banker has abused the privilege they have been given, the general public ultimately insists that we go back to something that represents a disciplined system that doesn’t favor the rich, that doesn’t favor the politically connected, that doesn’t favor anyone, so that everyone is on an equal playing field, and so that money system ends up being a vital component toward the application of the rule of law, as it is applied equitably across society.

Kevin, what you have is, yes, a basket of commodities in Gallorotti’s view, and in Ian McAvity’s view, gold playing some component part. It has already been recognized as a currency, not a commodity. We are heading into a global currency crisis. Why? Because, as we said earlier, that transformation from 1971 to the present, where we left the Bretton Woods standard, where gold and the dollar were essentially one and the same, if nothing else, by perception, we now have just paper – we call it fiat – and that can be dollars, that can be yen, that can be British pounds, that can be euros – but it is just paper. And frankly, I like the euro better than the dollar, because you can’t tear it, it’s kind of like plastic. It’s kind of fun. It has durability. (laughter)

Kevin: David, I am thinking about this while you are talking. We have talked about the Arab Spring, we have talked about Occupy Wall Street, the Tea Party, and these movements that we are seeing in Europe and in Russia. The people are starting to actually do these things individually. The governments need to wake up and say, “Look, our system is not working.”

I think about your comments with your dad. While you were sitting (I hate to do this, but…) on the beaches of Hawaii, and you had the boldness to ask me if I heard the waves in the background when we were doing the interview, and it was cold here, snowing in Durango. But this is what your dad and you were talking about: Being pro-gold is actually just saying that you are anti-fiat currency. The governments haven’t done that yet, because there is too much at stake for them and the special interests. But the people themselves, in China, the Middle East, Americans here who have been buying gold, Europeans – and it’s harder to buy gold coins even in Europe right now – there is a movement right now of people putting themselves on a gold standard. Maybe the world will follow.

David: Again, Kevin, we are talking about these substructural changes – nothing obvious, we haven’t seen dollar flight or things that would be very obvious, but there has been a change in disposition, and it is a growing anti-dollar disposition, both by our foreign creditors, and emerging market leaders. If you look at the vast majority in the G20, they would say, “We need to create a work-around, as in, we don’t want to have to go through the dollar to succeed. We don’t want our success to be predicated on someone who has foreign policy constraints that we may not be interested in. So how do we work around that?” They work around it, first and foremost, by creating a new monetary regime.

Kevin: David, the people who are buying gold right now, the ones who are doing it as a currency, as safety, as security, are not watching the daily price move up and down. They are not speculating.

David: McAvity pointed this out. He said that the biggest mistake a gold buyer can make is to watch the price every day. Buy it for the long term, for its value as a preservation tool. Don’t become a day trader now that you own it, because what is happening is now in on a substructural basis, but ultimately, a structural basis, wherein, you need to know that it was worth owning over the next 3-5 years, not the next 3-5 nanoseconds, minutes, or days. So, if that is your perspective, don’t bore yourself with the daily fluctuations, and even weekly or monthly volatility in the metals market.

Going back to our conversation with Marc Faber, gold started the year at $1300. It is finishing the year nearly $300 higher. This will be the eleventh year, if we finish the next three trading days positive, of double-digit positive returns in the gold market. This remains the only bull market in town. The question is: When will it have run its course?

And we are talking about the things that define the course for gold over the next several years, which is the remaking of the world monetary system. Geopolitical instability is just a part of the story. Continued financial instability is just a part of the story. Governments not being able to keep their books straight – that is the economic side of the story.

Kevin, all of these things weave in, and we see, yes, a meltdown in Europe and in the United States, at least in terms of our debt structures, but ultimately, a redefining of the game altogether, with the most basic of parts being redone.

That means that this period in time is really like one of those defining moments, like we have talked about repeatedly – 1913, 1922, 1944, 1971. We are on the cusp of one of those defining moments, from a monetary standpoint, which will determine the trajectory of our economy, and our role of leadership in the world. That is important. And coming into 2102, and frankly, more 2013 and 2014, this is what we get to anticipate further.

Kevin: It is amazing to me, David, looking at this last year, and as we said, this is a reminiscence of the last year, I have to admit, of the years that we have been doing this program, this one is the most confusing. If you are just watching the ups and downs of the market, it is very difficult, but it makes me think that this is probably, of any person’s lifetime, the simplest time to invest. Because in reality, if all you had this year was cash and gold, U.S. dollars and gold, which we have been talking about, keeping the powder dry, not trying to predict the next movement of the European Union, or what have you, what we find is that gold has gone from $1300 to near $1600, and the dollar has rallied. Yes, we have lost a little bit of buying power, but keeping the powder dry for the period of time that is really, really confusing, and simplifying your assets, allows you to be able to take advantage of opportunity at the time down the road.

David: Kevin, we have talked about monetary regime change, and political regime change. With the Arab Spring, we have had a dynamic introduced into the political equation that we haven’t seen in a long, long time, in which, in essence, social media has redefined what that change looks like, and the rapidity with which it takes place.

That may be the summary statement. Substructural changes that we have seen have pointed us toward one thing, ultimately, regime change in 2012 and 2013.