May 11, 2016; So Long London & COMEX, China is the New Gold Exchange

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“It’s the same old disease. Why wait until tomorrow to purchase something when I actually have the savings instead of buying it today on credit? There are only two kinds of people in the world. There are those who pay interest and those who receive it, and those that pay it are not victims of the system, they are not at the end of an evil banking cabal, they are victims of their own ignorance.”

– David McAlvany

 

Kevin: Last week, Dave, I pointed out that we’re not just a gold perma-bull program. There are times when you can look and say, “I think it’s going to correct a little bit and it might be time to add.” Last week when we did the show, gold was pushing $1300 an ounce and we’ve had about a $35 correction to the downside since then, so I would have to say, good call.

David: Certainly, that kind of correction can extend itself even further, but the reality is, if you are looking at the big picture something significant changed in the month of April 2016 and it is something that is a part of history already, but people won’t see its significance probably for another six, 12, 18 months, and that is, the yuan-denominated gold contract that settles in physical kilo bars which is now sponsored by the Shanghai gold exchange was launched on April 19th.

So to me, what you are seeing is a continuation of a theme that has been in place for several years. Central banks have been accumulating gold since 2009. Individual investors throughout Asia, India always, but particularly China right now, have been taking physical delivery of metals, and now this is a specific contract denominated, again, in their local currency, but with a unique design. You don’t settle this contract in cash.

Kevin: In paper.

David: This is settled with physical kilo bars. It reminds me of the paper games which continue to be played in London and New York and the power trip that those traders have where they are working with 200 billion dollars in gold contracts – that is paper only – and those trade hands every day.

Kevin: That’s more than annual supply on a daily basis, but they’re playing a paper game. They don’t have to own the gold, itself.

David: It’s equal to 5,724 tons of purchasing each day. As you say, it is well above 2015’s mine production, 182% of 2015’s total mine production.

Kevin: On a daily basis.

David: A daily basis. 5,724 tons of purchasing – that is paper contracts. It more and more resembles a game of musical chairs. We have the physical players in China who suck out the above ground supply – that is coming off the markets – and it’s like chairs being removed from the game at a very rapid clip. When the music stops – again, 200 billion is the total number. If you look at the purchase side as opposed to the liquidation side, 100 billion, half of the total traded – that’s looking for a seat.

Kevin: I think the musical chairs analogy is perfect because that gold doesn’t really exist, in other words, that chair doesn’t really exist. Now, the London and the New York market have always had a back door approach. They said, “Well, if the gold doesn’t exist we’ll just go ahead and settle it in paper, cash. But like you said, Shanghai has to sell in gold. These are kilo bars. The kilo bar looks a little bit like a candy bar but it’s a little heavier.

David: It’s the exact size of the current iPhone.

Kevin: Well, there you go.

David: But it’s gold, and you’re right, it’s a lot heavier. You have evidence which is growing that the above-ground stocks of gold in the large global gold market, that is, in London – they’re moving into deficit. When you look at this group of paper traders, if there is any shift in preference for settlement in kind, which is to take physical metals instead of in paper, that will remake the gold market as we have known it over the last four decades. It just comes to mind, you should own what you want to own, because the Chinese are going to bring you true price discovery of an asset that has been controlled by paper, manipulated price, and quite frankly, very distant from any real supply and demand dynamics, for decades.

Kevin: Let’s unpack this a little bit then. You said if there is any shift in preference for delivery. The reason there hasn’t been a shift in preference for delivery is that people are perfectly fine taking paper assets as this point, but let’s look at what Deutsche Bank just now said about negative interest rates. It is not enough. People are not spending. At what point do people preferentially pull cash out of the bank and then go for the double run and actually move into gold, something that can’t be printed.

David: That’s something we talked about last week, in terms of a migration and a preference away from cash, away from bonds, and in the direction of gold. There is an analyst, Dominic Konstam, from Deutsche Bank who said recently, and frankly, we’ve kind of anticipated this a little bit, credit growth, in his opinion, is not happening right now with low rates. So really, what he suggests as a necessary solution is to lower rates even more. Take them negative, and in his words, penalize savers via a negative retail deposit rate and introduce a wealth tax.

I know that in somebody’s twisted economic theory, that may work, but you are disconnected from the way people think and behave, as if more lending is going to occur, as if it is somehow inspirational, this notion of a stick versus the carrot. It reminds me of how you know when you’ve come across an addict, when the cure for every ill is some kind of external stimulant. In this case we’re talking about stolen money from the average saver. Negative rates is nothing more than stealing money from a depositor.

And I’m telling you, there are enough policy-makers that think like this particular bank analyst. And I don’t think they have studied behavioral psychology. I don’t think they recognize that stealing from people is not endearing, and it is not even inspiring, as that concept, to them, looks so clear as a solution on paper. Yes, if we just lower rates into the negative territory, that’s going to stimulate more credit expansion in the economy and less growth in the economy. It seems to me that they didn’t study broadly enough because we are really talking about someone, at the behavioral level, at the psychological level, responds to something the equivalent of economic electroshock therapy.

Kevin: Yes, but they have equations that allow them to think insanely. I hate to say it, but sometimes when you have an equation that works mathematically, but it doesn’t work practically, it allows somewhat irrational thought to continue. I’m going to bring something back up, Dave. Your dad taught me back in 1987 – this goes back almost 30 years, but he was explaining the bank runs of the 1930s, and here is what he said. He said it came in three forms. First, you had a lateral run. In other words, what happened was people started looking at the institutions and they moved from one bank to another, be it for interest rates, bit it for safety. In this case, back in the 1930s it was for safety.

And then, he said, it moves to the second step. He called it the in-and-out, which people realize they aren’t getting enough reward for that risk that they are taking leaving it in the bank, so they pull it out in cash. But there is something that your dad called a double run, and this was actually occurring in the 1930s, and that is when a person prefers something tangible to the actual cash. Back in the 1930s, of course, before the confiscation, a person could hold a 20-dollar bill, or they could hold a 1-ounce 20-dollar gold piece.

We have a sequence, very similar, occurring, maybe for different reasons, but you have first this lateral run. We’ve been seeing money moving since the crisis from place to place. Now we’re seeing the in-and-out. There is cash coming out because people are getting either zero or negative rates. The double run, however, is the third phase of an all-out bank run, and that’s when you are talking about people changing their preference from cash payment to physical settlement. This is where they move out of cash, itself.

David: I think that’s very interesting. I’m glad you mentioned that because that’s not something I’ve ever heard from my dad before, and there are all kinds of things that I think he shared around the office that, frankly, I wish he had shared around the dinner table and just never got around to it, I suppose. That is very interesting, the notion of a double run, because really, what you do have, in terms of the exchanges being shy of gold, the London market currently operating in sort of a deficit position, when you count all the metals that are held for various parties and then consider the amount of metals that are traded each day, it is interesting, because all of it ties to one word – confidence.

As long as confidence is there, you don’t have a run. We’ve seen the erosion of confidence starting back in 2000-2001, and it has been gradual, and it has migrated, and yes, it accelerated with the global financial crisis in 2008 and 2009, but for investors, confidence began to be challenged when you had the likes of Arthur Andersen, who all of a sudden was caught in this fraudulent behavior relating to Enron, and Pacific Gas and Electric, and price fixing, and price of natural gas and energy, and the dirty trade that was happening there. All of it was being obfuscated, not only in corporate America, where people said, “Well, caveat emptor.”

But you could always trust the accountants. And so this major fissure in the minds of investors is, “Wait a minute. Maybe you can’t trust even the most trustworthy.” That was, I think, what started a multi-decade decline in confidence. Of course, that was exaggerated and accelerated in the 2008-2009 period, and in the last stage, which I think does encompass the double run, the stage of a breaking of confidence will tie to people’s views of the central bank, people’s views to the monetary instrument, itself.

Kevin: Dave, like this Deutsche Bank analyst is suggesting, lower rates, and if that doesn’t work lower rates, and if that doesn’t work lower rates. But we also know that he is going toward some sort of form of people control. Now, we’re not used to people control here in the West because of democracy, republic, representative government. But we’ve seen this experiment for the last 30-40 years in China. There has been an enormous wealth effect in China based on the fact that we decided to go into debt and buy their stuff and they decided to buy our debt. The problem is, China, itself, is running so much debt they are probably going to have to resort to good old-fashioned Chinese, possibly communist control of the people, because the prosperity is leaving the country.

David: Depending on what side you take, if you are a China watcher you may view things through the lens of international relations, you may view them through the lens of economics and economic statistics, you may view them through the lens of an investor looking for an opportunity, either because you see a currency that may appreciate, or a stock or a bond that looks like an opportunity. It has been a number of years, but we interviewed Martin Jacques, and we explored the idea of China economically and geopolitically dominating the world in the 21st century.

Kevin: He was pro-Marxist. You have to understand, this is a man who felt like control of the people was the right thing to do.

David: I know. Again, we don’t always agree with the guests that we have on the program, but as a neo-Marxist Jacques saw what he wanted to see in the growth figures. That may have been five to seven years ago but he concluded that a command economy was superior to the free markets and his exhibit A for that was that China came rocketing out of the global financial crisis long before Europe and the United States. As it turns out, rocketing out of the global financial crisis was just a question of the rocket fuel they were using in the form of massive amounts of debt, which brings us to this idea of a coming debt bust in China. Does that happen?

When writers discuss the collapse in China instead of its unstoppable progress, they usually conjure up some catastrophic terms. Yes, certainly, things could turn out very poorly. Yes, Chinese GDP, that is, debt-to-GDP, exceeds 290%. Yes, Chinese credit growth reflects the law of diminishing returns. It takes four of their local currency units, the yuan or the RMB, in new debt for one yuan in GDP growth.

Kevin: So what you’re saying is, “I’ll gladly borrow four yuan today for just 1 yuan in growth today.”

David: Right. And now you have bad debts which are rising. So are we worried, or aren’t we? And I have to say just as a disclaimer, I haven’t had any direct investments in China since selling a Chinese life insurance company several years ago. But what we are worried about is the seemingly endless ability of governmental authorities, authoritarian or democratic, either on this side or the Pacific or that, to sweep problems under the carpet. In essence, to cater to the now, and the constituencies of the present, at the expense of future generations. It is a universal issue.

Back to China. The numbers are bad, the numbers are getting worse. However, the numbers are not far off from the U.S. figures. Look at private, corporate, governmental debt, inclusive of the financial sector here in the U.S., and the U.S. is awfully close to 300% debt to GDP, and it does take us over $4.50 growth in debt to create a dollar of GDP growth. So we, frankly, are both in a tough spot. I think China is more practiced at crowd control. They are more practiced at limiting expressions of discontent. And so, to some degree, by threat of force, they may be able to control a process of unwinding bad debts.

It’s not like we can’t do that, or haven’t done that. I’m sure they have learned from what we did here in the West, that the value of vehicles like Maiden Lane I, Maiden Lane II – the special purpose vehicles that the Fed established to absorb the bad paper until the storms blew over. So collapse is not a concern as much as the continual practice of tinkering to create a perfect economic machine. And then more tinkering when the machine has problems.

Kevin: Let’s talk about that for a second. Yes, the U.S. government is in the same trouble. They have to borrow more than $4 to get $1 worth of growth. We still control the world, militarily. We still control the world with a reserve currency. Now, China has been knocking at that door, but it seems that the U.S. has gotten away with it because we borrow in our own currency and let the rest of the world borrow in our currency.

Remember what Michael Pettis said. When you have a command economy, or when you have an economy that is sort of a mixture of both, when it snaps one side or the other, it’s going to be violent.

David: It’s more violent.

Kevin: That was his concern.

David: That’s exactly right. I think the PR campaigns of virtually every government and central bank around the world have included the message, “Move along, everything’s fine, we’re the experts, we have it under control.” Which, to a degree, they do. But only to a degree. That’s where the real problems crop up, not only here but in China. If everyone believes you are the master of the universe and you turn out to be a mere mortal, there is a breaking of confidence. There is a breaking of social trust.

Back to that issue of confidence. What keeps everything in motion is one word. So you realize why there are so many games that are played to create impressions in the hope that those impressions will change behaviors.

Kevin: Let’s talk about a time when confidence was suddenly broken, Dave. Let’s go ahead and go to Germany in the early 1920s. In Germany in the 1920s you actually had slight deflationary pressures – 1%, 2%, 3% inflation at the max. And then confidence was broken in the paper mark at that time and we went into a hyperinflationary change. I’m thinking about what Albert Edwards was outlining, what he sees going forward, when that break of confidence occurs.

David: Yes, the sequence of events was interesting because you had deficit spending, and obviously the Germans were in a very difficult position dealing with war reparations from the Treaty of Versailles. It was basically an unbearable burden. So, massive deficit spending. They exhausted the debt markets domestically because they didn’t have access to the international debt markets, and as soon as the debt markets were full to capacity – imagine a sponge that just can’t take another drop of water, it is fully soaked. That is the domestic economy in Germany.

Kevin: You can’t borrow another mark, and it won’t help.

David: Then the printing presses were the only solution. The only way that they could pay bills and get anything done was following the Haverstein message of, “We can print our way to prosperity.” Albert Edwards – he is kind of the uber bear at Societe Generale – suggests that this chapter in economic history, winds down to social and political chaos for precisely this reason. He says this: “As the equity markets spiral into a deep bear market, as it ends with corporate bond spreads exploding (in other words, the yields on corporate bonds getting much bigger than what you would see relative to a risk-free rate like the interest rate you would see on treasuries). It ends with social unrest, it ends with double-digit budget deficits. It ends with investors losing faith with the Fed. It ends with deeply negative rates, with currency and trade wars, with helicopter money, and ultimately, inflation.” I think it is an interesting time, and again, it ties back to this issue of confidence.

Kevin: Yes. When confidence is broken, you don’t go into a deflation, Dave, you go into an inflation, because the confidence has been placed on the value of a promise. And that promise is just a piece of paper. So when we talk about a break in confidence – this is why I was bringing up Germany earlier – it is sort of a shock to the system when you don’t have any inflation. Look at our central bankers now. They have taught the people to fear deflation. They’re not even mentioning inflation, except for when they say, “Well, we’d like a little of it, that’s all.”

David: Another one of our Commentary guests, Harold James, last month, put together a piece of the puzzle which I thought was fascinating. He put the piece of puzzle right in the right place. What he describes as Europe’s generational war – generational, not class – where the demographic pyramid is rapidly inverting.

Kevin: Which is where the older people are outnumbering the young people?

David: That’s right. He argues a war of generations is as likely as that of a war between classes. He sees it already emerging in Germany and Poland. I don’t know if he has coined this phrase or not, but what he calls a gerontocracy. And here is the puzzle piece. What does helicopter money look like? When we listen to Ben Bernanke 2002 when he packaged that concept, and Draghi’s 2016 suggestion of the same, here it is in real time in both Germany and Poland. What does helicopter money look like? Governments are catering in these geographies to a bloated constituency – a very large group of people that determines the outcome of an election.

So when you look at Germany, when you look at Poland, it is the old people that determine elections. If you have ever imagined a helicopter just dropping money from the sky and the indiscriminate, just hold out a bucket and it is going to be filled with C-notes, 100-dollar bills, or 500-euro notes, which by the way were done away with as of this last week in Europe, will go in effect in 2018. When you imagine this sort of money for all – that’s not really the nature of helicopter money. Germany recently announced a 5% increase in retirement age pension benefits.

Kevin: That is huge. Look at social security here in America. They didn’t even raise it a percent this year.

David: It’s the largest rise since 1993. And as James points out, the reason there was a big increase in 1993 is because Germany was battling an inflation beast. So no such beast or excuse exists today. You have Poland, which has done the same thing. It is decreasing their pension age, and increasing payments, and both of these are places that are struggling with public budgets. The public budgets are under pressure, yet they have no problem spending money on these particular constituency groups. Isn’t it interesting that Angela Merkel is in a fight for her political life? She is under a tremendous amount of pressure and is being blamed for many of the missteps.

Some of it is related to the migrant issue, but generally speaking, the economy is not booming. They’ve done everything that they can to see a minor up-tick in inflation. In fact, you see more deflationary trends all the time. So again, why a 5% increase? I think you get some clarity on this when you come back across the pond and go south. Dilma Rousseff in Brazil has a different bloated constituency group that she is wanting to influence. You may know that impeachment proceedings are in motion based on the Brazilian leader’s very close ties to a number of people at the center of the Petrobras camp.

Kevin: Any time you’re about to be impeached it’s a good time to print a little bit of money and give it away.

David: That’s right. So as the proceedings have intensified, it’s no surprise, there she is, while she still can, increasing housing subsidies and offering other freebies to the working poor. And lo and behold, the negative numbers which she did have just two weeks ago are improving. They may not improve enough to get her out of the hot seat, but again, it’s this combination of fiscal measures with – if you consider the source, Mario Draghi and Ben Bernanke, kind of the ideal leaders of helicopter money, when you can use the public treasury and then deliver to a particular group, you get the benefit of not only giving money away, but also guaranteeing a certain political longevity.

Kevin: This is not a new concept. We have all heard of the giving away of bread and circuses in Rome. As Rome was completely crumbling from the foundations, the bread and circuses were flowing freely.

David: It was a combination, because with Diocletian you had not only the experiment with price controls, but ultimately, dealing with a collapsing currency, he pulled out all the stops and said, “You know, the real reason for the chaos that we have financially…”

Kevin: Is the Christians.

David: “Is due to this group over here who believes in one versus many gods. So he actually played the scapegoat card, and so the bread and circuses, a part of those circuses was watching human beings being eaten, in real-time, by lions. To what extent do politicians do whatever it takes to stay in office?

Kevin: To satisfy the constituency. I was thinking about this this morning. My wife and I were talking about the election. I have to admit, Dave, I was just lamenting the futility of the way this election is playing out here in America. It seems that we don’t really have any good choices. But it hit me, we still have representative government. It’s not like the United States has lost representative government. The problem is, the people that they are representing are not me.

David: (laughs)

Kevin: I realize that I am a minority at this point and the government is going to represent the constituency that has the most power, the most sway. It’s just not a constituency that I particularly agree with.

David: And ultimately the most votes. James argues that the war to be fought is over the spoils of the national budget, and that takes place at the ballet box. And he believes that young people tend to stay home while older generations are the ones that determine and win elections. So you have politicians which are focused on the present, which James argues has very far-reaching consequences. And when any generation focuses primarily on their needs, they are, in essence, breaking what Edmund Burke saw as a social contract. Harold James argues this, quoting Edmund Burke, who says, “A social contract is not just among those who are living,” as he said a few hundred years ago,” but with those who are dead, and those who are to be born.

And Harold then asks, “What motive would government have to be a trustee for unknown people at the expense of real and present voters?” This is the puzzle piece. The puzzle piece in question is how do you make helicopter money seem legitimate to the greatest number of people? How do you hand out cash and make sure that it is spent immediately? This does not have an egalitarian theme, this is not about equality. That doesn’t come into the frame at all. If a politician is going to hand out dollars, it will be for votes. So you must ask, what are the groups where these handouts would be accepted without question? Try the experiment on anyone you know who is living on a fixed income today? Ask them this: Could you use an extra $2500 of income this year?” This is getting to what James is talking about, a gerontocracy in Europe, it applies to many parts of Asia, and within a few years it might even apply here in the U.S. Certainly the most powerful lobby group today in D.C…

Kevin: Is the AARP. It’s funny that you’re bringing this up, Dave, because I’ve been surprised talking to clients who are very constitutionally oriented. They are very balanced budget oriented. But they are also very retired. And when anything looks politically like it might threaten their Social Security or Medicare, it doesn’t matter the party, they are typically going to vote their pocketbook. I’m not saying that’s for everyone, but I’ve been shocked, the people who seem to live by a strong ideal but compromise that ideal when it has to do with the monthly budget.

David: Right. Principle becomes secondary to the practical needs of paying bills. It was a recent GAO study, a Government Accountability Office report, which confirms that 60% of all U.S. households have no savings in individual retirement accounts, whether that is a personal retirement account or a company-sponsored one. Again, this notion of retirees who need a little extra income, you know that it is going to get spent, and that was a part of the problem with this last QE experiment, boosting asset prices hoping that the wealth effect would cause massive amounts of spending. And it didn’t. But if you give to a whole host of people who are living on a fixed income a little bit more money, do you think it’s going to go into savings? No, those years are past.

Kevin: But the younger generation is going to have to end up paying for the excesses, necessarily, that are applied to the older generation.

David: So it seems like there are two forks in the road which are ahead of us. Should this form of helicopter money become too much for a younger generation to tolerate, assuming that the younger generation connects these dots and knows that from their paycheck to the direct income of a social security recipient here in the United States, or, as we mentioned, in Germany, the same thing is happening in Poland. What do they do? Labor mobility is the best form of protest. You move away. You drop out. You quit. You just say, “Look. No, I’m not doing this. I’m going someplace else.”

I guess the second fork in the road is like what we saw in Ireland. Years ago Ireland decided to implement unique policies, encourage innovation, encourage capital formation, encourage capital investment, and the brain drain that they saw all throughout the 1980s where a lot of talented Irish men and women who had left the country – guess what? They came back, and Ireland was able to draw on those skills. And the workers, young, and at every age, really had lots of opportunity.

Kevin: I think, Dave, it is important to point out that this is not an indictment of the elderly. They have to have some means of living, but it is a picture of constituency controlling political choices, to the ill effect, sometimes, of future generations.

David: It is not an indictment of the elderly, it is an indictment of a global political class that will stop at nothing to maintain power, and opportunistically look around and survey the voting landscape to see where money should be handed out. Helicopter money does not, nor will it in the future, fall from the sky on everyone equally, but is targeted to not only boost aggregate demand, as the economist would say, but also to perpetuate political power, which is far more meaningful to an elected official. If you’re Merkel, if you’re Rousseff, if you’re Clinton or Trump, call it a shovel-ready project, a housing subsidy, or change in Social Security payments. These are political choices which reflect not merely party politics, but individual politicians maneuvering to survive from one election to the next.

Kevin: Dave, we wouldn’t have this discussion if we weren’t able to print money or go into unlimited debt. Savings – what happened to the old days when savings were actually what paid for future retirement, paid for future projects. People used to have to save before they spent. Now that’s really not part of the economic model, is it?

David: No, it’s not. One of the guys that has highlighted this, John Templeton, ten years ago said, “Look, the Chinese are saving roughly 51% of their income.” Savings can be understood in a slightly different way than just households socking away that much dough in the mattress. They aren’t actually saving 51%, but his point, I think, was well taken. They are a saving culture. We have become a spending culture. And someone who echoed this recently is Stephen Roach. He has spent a lot of time in Asia, as well, understands China very well. He was an economist at Morgan Stanley while I was with the firm. Now he teaches at Yale. He was one of those guys that flew a million miles a year while with Morgan Stanley. I can’t blame him for wanting to teach and enjoy the East Coast a little bit more.

But what he was saying basically reflects on economic growth, and what he posits is that savings are the seed corn of economic growth, because savings precede investment, and investment is what goes into infrastructure, new capacity, technology. And without the pool of capital that is created by people living beneath their means, which allows for savings to accrue, the middle class, he would argue, is at risk. The flip side of that is if you live beyond your means all you are really doing is bringing tomorrow’s enjoyments into the present, and you are leaving nothing but interest payments and memories for the future.

Kevin: That’s the thing that we’re starting to face here in America. We’re not just paying back our debt. As soon as interest rates rise we’re going to be paying just interest on that debt. We’re not really paying any debt back. It reminds me of when you first buy a house and you look at the difference between principle and interest, all you’re doing is paying interest in the beginning of paying for a house. The problem is, let’s flip that. At the end of a debt cycle, all you are doing is paying interest, and you’re not getting any of the principle paid down at all.

David: It certainly is money that could go toward other things more productive than just paying off the banks. So in China, the high percentage of Chinese corporations, 16% of the thousand largest corporations in China, have interest payments which exceed their income. Interest payments which exceed the amount of money that is coming in. So in good times debt seems like a way to stay ahead of the competition, to grow faster. Or from the consumer’s vantage point, to stay ahead of the Joneses.

But in bad times, or just to say, leaner times, those debt obligations become outsized burdens, and you can see that in real-time with certain Chinese corporations. I think you will see it with certain U.S. corporations, as well, who have decided to leverage up and take on a lot of debt at these low rates. I don’t blame them for being interested in the low rates, but what they have to consider is how they are going to roll over that debt in the future, how they are going to extinguish the liability, as and when rates increase. Unfortunately, what Roach is concerned about is a cultural issue. It is a cultural issue of priorities before it becomes an economic issue with consequences.

Kevin: We talked about equations that actually allow you to think irrationally. There is an equation that tells you that you have to take on a certain amount of debt to be able to grow. Richard Duncan brings that out. He says, at this point, because we have so much debt we have to take out a certain amount of debt every year in addition to that just to show growth, otherwise we sink into a depression.

David: And this is where, clearly, we’re on the horns of a dilemma, as a group. Do we like that? No. Do we recognize that the system is debt-addicted, and without more of it we might end up with paralysis or death? Yes. So pragmatically, what do you do? How do you respond to that? We have consumer debt which is on the rise again. It is growing at the fastest pace since 2001. And that is viewed as a good thing, according to the modern paradigm. So from the Richard Duncan perspective, if debts don’t grow fast enough, we’ll face a financial reckoning of cataclysmic proportions.

Kevin: And he is probably right.

David: Right. But is it good to see the consumer spending more? From the vantage point of a father – I am one, you are. And someday grandfathers. It is the same old disease. Why wait until tomorrow to purchase something when I actually have the savings, instead of buying it today on credit? If you step back you can see that there are only two kinds of people in the world. There are those who pay interest, and those that receive it. And those that pay it are not victims of the system, they are not at the end of an evil banking cabal. They are victims of their own ignorance, lacking, perhaps, a preceding generation to tell them, as a father or grandfather would, as a mother or a grandmother would, that it is better to save than to spend.

You have the graying generation in America today which rebelled against an earlier American practice of thrift, and they have proven to not be the greatest generation of the years past, but the most selfish, frankly. And their children know only that as a paradigm, that by example. The legacies we leave, you know this, they will either pay homage to the sensible things life has taught us and we pass on from one generation to the next, or they will be a permanent testament to social amnesia and foolishness. And I fear that the addiction to debt at every level in our society today, it supports the latter.

Kevin: Dave, for many years I had a fortune that I had kept from a fortune cookie that had a simple concept on it, but I think it is what you are saying. “Better a hen tomorrow than an egg today.”