October 22, 2014; Cry for me Argentina! A Tearful Inflation

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“The difference, really, between Argentina and the United States is, they look at the U.S. dollar as the gold standard because we are only inflating at a slow pace, while they are inflating at 35-40%. The question will remain for me: What does that world look like for us, when not only in Argentina, but in the United States, we are all operating as currency speculators to survive.”

–David McAlvany

Kevin: Well, David, are you a little bit fatigued from our trip last week to Argentina and Uruguay? The insights we found while we there, just trading on the streets, talking to people, were amazing.

David: It is fatigue of a different sort. If I am losing sleep, or if I am dreaming too much, it is because it was very intriguing, what we saw, what we experienced, the conversations that we had, and what we walked away with. Many of the basic economic laws that you would learn in Economics 101, 202, 303, 520, whatever the class is, we got to see in real time.

Kevin: What you are talking about, some of the laws that we were taught in college, Dave, in Economics – I am thinking of Gresham’s Law. We had a chance to actually see Gresham’s Law in action. The law says that bad money drives out the good money.

David: And what that means is that money in circulation, when, for instance, the Argentinians are running a 40% rate of inflation…

Kevin: Because they are printing…

David: No one really wants to hold the bad money, so to say, the inflated currency, and so they try to get rid of it as fast as possible. Guess what goes out of circulation? Guess what people hold instead? They hold the good money.

Kevin: You wouldn’t get dollars back in change. Boy, I tell you, when we would pull a dollar out to buy something…

David: They wanted to give us pesos back in change.

Kevin: Exactly.

David: That illustrates something that is, I think, very critical. There are two markets that you operate in. You can operate according to the official market, and that is the white market, and then there is the black market, which they don’t call the black market.

Kevin: They call it the blue market, that is, the street rate for the dollar versus the peso.

David: That’s right. So now we have, blue is the new black. If you are fashion conscious, blue is the new black. And if you are currency conscious, blue is the new black.

Kevin: And the difference was almost double, Dave. The government, basically, is trying to convince the people that it is eight pesos to the dollar.

David: When on the street, if you could get the best possible rate, it was 16. That is something that is very interesting because everyone is willing to say that they are going to operate outside the system, but in a world of black and white, where the white decision is the good decision, the black decision is the wrong decision, guess what they have done? They have redefined the decision-makings that they make and say, it is not black and white; it is white and blue. Does this make sense?

Kevin: And it is negotiable. You found, in various places, how you had to negotiate for your rate, and a lot of that has to do with how well the business is doing. Wasn’t it interesting? When we got into the van, when they came and picked us up, a lady named Maria was talking about the tough times, and she was talking about the good old days in Argentina. Really, all the architecture in Argentina that is still the nice stuff came from the 1920s, didn’t it?

David: Exactly. It goes back to the golden era, the late 1800s, let’s say the 1880s to 1920s period. Those were the glory days. That is when money was flowing, that is when you had wealthy farmers with tracts of land 50,000 to 100,000 acres, and they were shipping their products overseas, and those were the glory days. They would vacation in Europe and they would bring back their ideas of what they wanted the home town to look like, and they said, “I’ll fund it. I’ll build it.” And they erected these giant, beautiful buildings that look like they are straight out of Paris, or London, or Copenhagen. You name it, these are beautiful, beautiful old buildings.

Kevin: It was a high time in Argentina, but you pointed out something interesting, Dave. Even the cars – we look at Cuba and how the cars in Cuba go back to the 1950s, but really, even in Buenos Aires the cars were 15, 20, 25-year-old cars. We didn’t see many new cars, did we?

David: No, we didn’t. There was an exceptional car here or there, maybe every 10, 20, 30 cars, 1 in 10, 1 in 20, something like that, which was new. Everything else, as you say, was a good 15-20 years old. They are just getting by with what they have, so everything looks a little rusty, everything looks a little faded. Everything looks suggestive of a time when there was money flowing, but that hasn’t been the case for a long, long time. I shot across the border to Montevideo, the capital city of Uruguay, and it is very different – much more of a broad distribution of wealth, and with a stable currency.

Kevin: They don’t have inflation there do they, or nearly what Argentina does?

David: Not nearly what Argentina does, and so, with a stable currency you have a very different spending pattern. And I was seeing the average car, probably three to five years old. Very rarely did you see an old car, because when you have currency stability, you also have the ability to arrange finance. That is to say, you can borrow money. Consider this. If you are a banker, and I want to borrow $1,000 from you, if there is an unstable currency, what does that mean for you, and what does that mean for me? For me, the borrower, it means that I am going to pay you back over a period of time…

Kevin: With devalued currency.

David: Cheaper and cheaper dollars, which means that you take the currency risk, and I basically get money up front and pay it back at a discount. So, what happens is, in a place like Argentina, you have a very frail and broken, shattered, in fact, banking culture, where you can’t borrow money to buy a home. You have to be someone other than Ben Bernanke to borrow money to finance your home.

Kevin: Because a bank is not going to loan you money that they are going to get back as worthless money.

David: That is right, so you actually have a shutting down of the financing structure. Banks play a very different role. Contrast that with Uruguay, or even our own country, where you can finance a car loan. Look at the numbers that we have had year-to-date here in the United States – massive purchasing of cars, most of it on credit, and a high percentage of the credit loans for cars have been subprime. In other words, you don’t have to prove that you can pay it back, you just have to be able to fog a mirror. That is reminiscent of what we had in 2005 and 2006 in terms of home financing.

But the interesting thing is, we are assuming bankers in this country, the United States, and a place like Uruguay, just to contrast with Argentina, are assuming currency values which are stable, or at least destabilizing on a slow enough time frame that it is still worth it for them to clip the coupon, make the loan, package it up, sell it off to someone else. And it changes the game completely when you are dealing with 10, 20, 30, 40, 50% inflation rates per year.

Kevin: One of the things that really struck me, Dave, is that you have people who don’t really do much in the way of mathematics, who can all do a quick calculation on currency exchange. Everywhere we went, these guys had little calculators, and when you would buy in pesos, it was no problem, they could do that transaction. By the way, it very expensive to be an Argentinian, trying to operate in an inflationary environment because you can’t save money, so whatever you earn you have to spend on whatever you need at the time. But what is interesting, as an American, don’t you find that it was fairly affordable? When you were using dollars you were getting about twice what an Argentinian would get with pesos.

David: That’s right. And so it is interesting, just to go back to your comment about everyone being able to make these calculations, whether on a calculator, or in their heads, it is not high math, and yet, we are not used to the currency conversion game, being here in the United States. There, it is vital to be able to do that, to be able to squeeze out a few extra percent profit, because that may be what makes your month. So it was interesting, Adam Ferguson, when we talked to him a few months ago, said that in the context of inflation everyone becomes a currency speculator.

And that is essentially what we had, as you walked into any store front, and their advertising was not really to sell a product. Their advertising was to do a currency exchange and make the difference between what they were going to work for you, and what they could actually get in the market. So, the contrast that I noticed – I’ll give you an idea. We walked into a leather goods store, and this leather goods store, we were told, had one of the best blue dollar rates.

Kevin: Right. They didn’t tell us it had the best leather, they said it had the best exchange rate.

David: In other words, this leather store was operating as either a money exchange, the equivalent of a Western Union, or a Cambio. It is just interesting that leather was the means by which they were moving money, and so they appealed to the tourists coming in, because again, an Argentinian doesn’t buy a new pair of shoes every day. This is really oriented toward the tourist who wants leather goods, they know that this is one of the world capitals for beef, and if you are serving up steak, guess what you have as a byproduct?

Kevin: Quite a bit of leather.

David: So you go down there and you have high-quality leather products. But the reality is, their business is only one-third to one-half leather. The remainder is currency exchange. I noticed this contrast between companies or businesses that do high volume oriented to tourists where the volume is going to be higher in terms of the product that you are selling. The spread, if you will, the difference between the real black market rate and the rate that they were willing to work at, is much smaller. And then going into a wine shop, I bought a bottle of Malbec for us to enjoy, and it was interesting. The vintage was older, I knew the winery, and it was a 2009. Well, this vintage was about three years; they have released three additional vintages since then. That said to me that this is old inventory.

Kevin: You said, a vintage every couple of years.

David: Yes, exactly, so it is older inventory. It has been sitting there. And with lower volume through that wine store – these are all assumptions on my part, observations made and assumptions and conclusions driven from them – with lower volume of turnover in the product, they were unwilling to budge on their peso dollar exchange rate.

Kevin: I remember you were negotiating for the dollar exchange rate, and I think he only wanted to give you about 11, rather than the 14-15 that you were getting elsewhere.

David: And so we were at loggerheads in terms of what the rate should be, and what he was offering was not particularly a fair rate. Of course, it was better than the official rate, which was highway robbery.

Kevin: But he needed to make something up in the currency market.

David: As a currency speculator, and as someone who is sitting on inventory, losing money with time, because again, inflation is eating his lunch. And by the way, when he is paying his utility bills, it is getting marked up every year. So, he has to somehow make it up, and he is making it up with a wider transaction exchange differential with the currency exchange between pesos and dollars.

Kevin: Something that is interesting from a government control point of view, the government has already just staunchly said, 8-to-1, eight pesos to one U.S. dollar, yet Dave, just as soon as the van door closed, we were handed a brochure for a leather factory. We never came down with the idea of buying leather, but they were trying to teach us how to operate in the black market, or the blue market, immediately. That shows that the government is losing control.

David: And in terms of sentence structure, they didn’t end the sentence, it may have been a run-on, but it was leather goods and fair exchange. It was the same concept: This is where you need to go for fair exchange, and you might buy something. So, there was a fascinating insight there, again, reinforcing this notion that everyone is a currency speculator in the context of inflation.

Kevin: Somebody might say, “Okay, well, that’s fine and dandy for Argentina, why are we talking about this?” But, we have a currency, the U.S. dollar, and it may be seen as good as gold right now in Argentina because they are ruining their own currency, but our U.S. dollar, of course, has unsustainable debts. It is running unsustainable deficits, and we are ending QE-3, probably going to see QE-4 or QE-to-infinity, really, by the time we are done. Americans are going to have to understand how they can operate around their own currency at some point in the future.

David: And it is also with insights from history. When we are critical of Rome for destroying the denarius, in our conversation with Joseph Tainter a month or so ago, and The Collapse of Complex Societies, one of the things that he was commenting on in his book and in our conversation was this decline in the denarius. You know, on average, it didn’t exceed about 2-3% per year, but 2-3% over 100 years was enough to destroy the denarius.

I reflected on that, sitting on the plane, scratching my head, thinking to myself, “It destroyed the denarius, one small cut at a time, and over time, guess what it did? It remade an entire country, an entire culture. It ultimately changed the trajectory of their ability to operate and fund an expansion project, that is, continuing to take on more and more land, the Roman Empire.” And here we are, with a stated monetary inflation goal of 2% per year. We consider this … in the modern era of money and finance, 2% inflation, we will tell you, is healthy and good for you. Take your medicine and shut up.

Kevin: Do you remember what Adam Ferguson said about that? You asked about the 2%, and he said, “Any inflation is theft.”

David: Yes. Smaller amounts, over a cumulative period, don’t seem like much to you and me.

Kevin: It’s the slow poisoner.

David: And the difference, really, between Argentina and the United States is, they look at the U.S. dollar as the gold standard because we are only inflating at a slow pace, while they are inflating at 35-40%, and on a relative basis, we look like heroes. The question will remain for me: When the dollar, as the quasi gold standard, loses its sheen, what does that world look like for us, when not only in Argentina, but in the United States, we are all operating as currency speculators to survive, and business is not really an excuse to move product, it is an excuse to trade currency, and hopefully, trade up and out as fast as you possibly can?

I sat next to a business executive on the way down, a manufacturer, large multi-national corporation. You wear their shoes when you go running, I can guarantee you. He manages all of the Latin and South American plants for this particular company. He said, “The company I work for gives me a 20% increase in pay every year. That doesn’t quite cut it because we are dealing with 40% inflation.” And for you and me, listen, a 20% bonus every year, from last year’s pay, or the year before, or the year before that? You accumulate enough 20% increases in pay and you would say, “You must be doing quite well.”

And the reality is, in that context, he is not even keeping up. So I asked him, “What do you do with your money?” He said, “I do the only thing that I can do. I buy real estate. As fast as I can, I get rid of my pesos and I buy real estate. And the problem is, I am paid in pesos, and there is a limitation in terms of what I can convert into dollars, so when I travel on business, I convert as many pesos to dollars as possible, and I don’t care if I take a hit on the exchange rate, I am just happy to be out of the currency, and into something that is not the peso. But the reality is, I am very limited in what I can do, because they control the amount of capital that comes into and out of the country.”

Kevin: And the government says what you can and can’t do. We were in an agricultural area up in Cordoba for a while, and we found out that the farmers cannot hold wheat longer than three years. Why would you want to hold wheat longer than three years? Because it actually is a way of staying out of pesos.

David: The point is, they have become their own bankers. A grain producer here in the United States would say, “Hey, you want to move on down the road.” And that is why we use the futures markets to go ahead and sell this year’s wheat before we have even planted this year’s crop, and you can do that in the futures market. You can lock in the current price right now and move on down the road. There, they would rather hold on to the product for as long as possible, because it is like playing your own bank. They have a hard, tangible asset, and they are not about to let it go at the official rate, and they know if they hold onto it long enough, they will have preserved value through yet one more year of 20, 30, 40% inflation.

And so, what is the government’s response? Just as you mentioned, they put a limit as to the number of years’ worth of grain you can keep in inventory, and then you are forced to liquidate that grain into the open market, receiving the official exchange rate of 8-to-1, or whatever it may be next year or the year after. That is a very interesting world to live in. Fascinating to watch how people adapt to inflation, and how inefficient … and how ultimately it destroys productivity, because here you are thinking about how to survive policy decisions, as opposed to thinking creatively about growing a market, growing a business, improving productivity. You are wasting hours and hours and hours every day just trying to make sure that the government, via the inflation tax, isn’t getting into your pocket a little bit more, a little bit faster.

Kevin: Isn’t it interesting, too, you have different educational levels, and then, of course, different wealth levels, how they preserve differently. The man on the street is going to preserve in dollars. That is what he is operating in. It is a transaction-by-transaction basis. The person maybe one scale up is going to go down and buy jewelry. If you recall, we were told where the jewelry stores were. That is another unusual thing to find out. The person who moves up the scale from there, they are probably going to buy land, like what you were talking about.

David: Or an apartment in downtown Buenos Aires.

Kevin: Exactly. But these people can’t move their money out of the country, they have limitations. We have been asked, David, oftentimes, why we recommend a gold holding outside of the borders of the United States.

David: Part of the reason is because capital controls, ultimately, are a sign of desperation on the part of any government. And when you are running massive deficits, you are almost guaranteed, at some point, to have the wheels come off, and in that context, you know that governments protect themselves. This is the notion of the leviathan, and as the leviathan grows, it takes care of itself at whatever expense to everything that surrounds it. Does that mean that government, and this is not only ours, but any government in any timeframe in history, would steal from their citizenry? By all means, they will.

Kevin: Of course they would.

David: Literally, by all means, whether it is inflation, which is a form of taxation, or a direct form of taxation, an increase, or whether it is capital gains or income tax, or nationalization of assets. All of these things are ways that government takes care of itself in the death throes. And what people don’t realize is that in the United States, outside of holding precious metals outside of the United States, we already have quasi capital controls. Yes, you can move $10,000 in and out, much more than that, and guess what you do need to do? You need to fill out a FinCEN report, reporting exactly what it is, where it came from, where it going. No problem making those disclosures.

But very interestingly, where do you take it from there? You can’t open up a bank account virtually anywhere in the world. I say, cannot, open up a bank account anywhere in the world. As a U.S. person, the world financial system has already cut you out, and a part of that is because the U.S. Treasury has erected a threat to their survival. Do you know what that means, exactly? That means that the U.S. Treasury can come after you, legally, if you are a bank or a financial institution, not following their rules, and this is, again, the presumption of a U.S. enforcement agency. Talk about extraterritorial.

Kevin: Hard to believe.

David: Right. That someone else in some other part of the world is subject to U.S. laws and customs. It is really, really interesting. That is the basis for people saying, “Fine. Listen, we just don’t need your business.”

Kevin: Remember, Joseph Tainter was talking about how the collapse of complexity isn’t always a bad thing, but what really is occurring when complexity collapses is that the cost of maintaining that complexity is no longer worth it. So, you have this same situation overseas. Let’s say you are a Swiss banker, and you are just sick of the Treasury calling you every day and asking for more paperwork, and they are asking for more fines, and this and that. There is a point where you just say, “Well, that’s fine. Let’s just get rid of all American accounts.” Now, that is a collapse of complexity, at that point, down to a lower level, but it is manageable.

David: It is manageable. It is beneficial to them. It is the equivalent of saying, “Anything that comes from the Treasury needs to go to my junk email.” It allows them to do that and move on down the road. So, the question of why having assets outside the United States in the form of precious metals is a very good one, because we are watching, in real time, a country where anyone in that country would give their eye teeth for a few more dollars, and if they could have those dollars someplace else in the globe, oh, would they do it – in a New York second. And so, their options are limited, in part, because many of the wealthy families in Argentina didn’t look ahead, didn’t see what was down the road, and assumed that they would always be well-connected, be able to pay their way out, etc.

Kevin: Thinking about the gentleman what we spent a lot of our time with, he came from a family dynasty that assumed they would always have wealth, but at this point, he is working 6-7 days a week to maintain the standard that he has.

David: Right. Admittedly, a wonderful lifestyle, but in his late 70s, he is probably working harder than he anticipated working, given the fact that his family was, as you say, a dynasty – 100,000 acres of arable land, a polo team; he played professional polo for ten years, traveling throughout Europe in the 1950s and 1960s.

Kevin: He had tea with the queen.

David: Tea with the queen. This is very interesting that he is something of a working stiff today, and yet, just a generation ago, literally in one generation the wealth was lost. And he would say, “The game-changers were two-fold. Number one, we made certain financial commitments we couldn’t afford. We wanted to live a lifestyle, the next generation did, that only the first generation could. We hadn’t earned it, we were waiting for it, and guess what happened? By the time it got to us, we had accrued so many debts just betting on the come, hoping that the money would be there, that it diminished very quickly.” And on top of that, then they dealt with something that was exogenous, outside their decision-making, which would have been the inflation.

And so, they had an inflation to deal with, and very poorly planned intergenerational wealth transfers. And he said, “You know, when our family moved from the country to the city, we lost control of what generated our income in the first place. We stopped paying attention to it, we assumed that it would always be there, and we lived, not just the first, but then the second and third generation – grandparents, parents, and grandchildren – we lived extravagantly, we built extravagantly, we traveled extravagantly, and ultimately, we paid less attention to our source of income than we should have. We lost that, we lost through the inflation, and we weren’t prepared intergenerationally, for this transfer of wealth.”

Kevin: Which absolutely plays right into the theme that you have been working on with our clients, and on a book.

David: The book I’m working on, Legacy.

Kevin: Legacy, thinking these things through.

David: The key there is, he said over and over again, “I have rediscovered what we lost from my grandfather – work.”

Kevin: Yes. And he was very prudent. It was amazing to watch how he had adapted his patterns of behavior. He is a very hard worker, but he is also shrewd, David. He was very shrewd, and understood what he was doing. But, there was a story, you were talking about the old money relative to the new money, and I think it is important to understand, when you are in a government, like the Kirchner government, or any of these governments right now, the sustainability of these large, huge leviathans, not on productive assets, but they are sustained on just on printed money and deficits.

David: Not that we have to spend too much time on the food that we ate, but we did have some of the best Italian food I’ve ever had. “Italian food in Argentina? What are you talking about?” There is a huge Italian immigrant community there, it has been there for hundreds of years, and, it was absolutely fantastic.

Kevin: Buenos Aires is a very European feeling city – Italians, French.

David: This particular restaurant had two locations, one in Recoleta, and the other in Puerto Madero, and I went to the airport the next day, and the gal who took me to the airport said, “Oh, you were in the area where there is old money, Recoleta.” I said, “So, where is the new money?” She said, “Oh, that’s Puerto Madero.” I said, “What’s the difference between old and new money?” She said, “The old money is all agricultural. It was the fruits of the labors dealing with the land. We are a very rich country when it comes to natural resources. That’s the old money.” I said, “What’s the new money?” She said, “Politics.”

Kevin: Politics.

David: That’s the only thing she said.

Kevin: They produce nothing, they only consume.

David: You are basically talking about a reshuffling of the deck. You look at the stated amount of assets that are in the country, and now it is just a question of who can steal the most from whom, and you will have a beautiful place in downtown Buenos Aires, not on the basis of being born into money, working hard, growing a business from nothing as an entrepreneur, but if you can steal it by graft, theft, negotiation, at the political bargaining table, then you are amongst the nouveau riche in Argentina.

I thought that was absolutely fascinating. We ate at a sushi restaurant, a Peruvian and sushi restaurant, in that neighborhood. Okay, so Peruvian/Japanese fusion, that is sort of a new idea, right? Versus just the old school Italian restaurant. And we had, in contrast, both a cuisine, and the character of the people, the new versus the old. The young, who are experiencing what they think wealth is based on, which is, basically, how do we reshuffle the deck? How do we get as much of what exists as possible?

Kevin: It is the well-connected.

David: We are not talking about creativity, we are not talking about production, we are not talking about business and entrepreneurship. Fortunately, Argentina experiences something of a rebirth, potentially, next October, when Cristina retires. Cristina Kirchner is at the end of her second term, and there is no third term. If there is a third term, there is a problem, a bigger problem, in Argentina.

So, there is some hope, but as you mentioned, Maria, who we spent some time with the first day we were there, talked about the good old days, she talked about them past tense, and she never really did mention even October and the change in politics, with any degree of hope. Because the sense is, that with politicians, it doesn’t matter who they are or from what party they are, they are all in the same business of carving up existing assets for themselves, and then creating a legal or legislative buffer so that those assets can never be taken back.

And I just think to myself, “Gosh, I’ve known people in four different states here in the United States, who have been in politics, and do you know what they do? The very same thing that she was describing in Argentina. They have sons and daughters who negotiate contracts and get a piece of the pie, and then create some buffer by changing rules, or changing this or that, and they solidify the wealth redistribution, and they use the public policy arena as a way toward self-aggrandizement and growth of their own personal balance sheet.

Kevin: And it is not just from the top down, not just the largest of governments. When we got out to the country, when we got of Buenos Aires and went into Cordoba…

David: We were in a town of 100 people…

Kevin: 110 people. The mayor had full control, and we were told the story that the mayor had thrown a party with money that was supposed to dig a well for the community. And he threw that party, of course, to buy votes. Then when it came time that they needed the well…

David: He called somebody in Buenos Aires and said, “I need to borrow some money so I can drill the well and I don’t lose my job. I solidified some votes, but everyone knew that I was supposed to use the money for the well, so at the 11th hour, 59th minute, he drills the well, and guess what he had? A little bit more debt for the city, but guess what he also had? He delivered what he promised. There was the well, and everyone was happy with him because he threw the biggest party in town.

Kevin: So from bottom to top, top to bottom, they play the same game they understand, but it is all redistribution. And unfortunately, Dave, as we were there, Argentina really does look like an America. It is about half the size of America. They are resource-rich. They should be much wealthier than they are, but unfortunately, every time they start to get on an upswing, the government takes the money, redistributes it, and does exactly what you are talking about.

David: Next month we are having a conversation with Peter Bernholz, who teaches Economics at the University of Basel, in Switzerland. Very fascinating guy. We learned a tremendous amount from him. The two things that he points out, which I think are very interesting, and bring the focus back to the United States, he wrote a fascinating book called Monetary Regimes and Inflation: History, Economics, and Political Relationships. He basically says there never has been a hyperinflation, except from 1914 forward.

Kevin: With one exception.

David: You’re right, you’re right. The French creation of the assignats. You have had high levels of inflation in other periods of history, but never hyperinflation.

Kevin: Which he characterizes as 50% per month, or more, devaluation of the currency.

David: 50% per month is how he defines hyperinflation – 29 instances in human history, 29 instances from 1914 forward, in a period where paper money has no gold backing it. And I think it is ironic that the dollar today is treated like gold, though there is nothing backing it. It is just simply one more paper promise to pay. The other thing that he highlights, and we will go into depth with him on this, is the importance of budget deficits, because he says when you begin to finance a budget deficit with the printing press, it’s game over.

Kevin: It either leads to high inflation, or hyperinflation. So, with all of those inflations you never had a currency that was backed by gold go into a hyperinflation, or even a high inflation. And you never had a country that didn’t pay for deficits with printed money – they never went into a hyperinflation, or even a high inflation.

David: But we have the ingredients, today, for a hyperinflation. So, it is fascinating that the conversation amongst most investors is an either/or conversation where absolutes are sought. It is either deflation or inflation, and we must prepare, exclusively, for one or for the other. And I think anyone who tries to prepare exclusively for one or the other will be terribly mistaken – terribly, terribly mistaken. Because, as we discussed with Russell Napier last week, and we will continue to bring out insights from that conversation as we move forward, there is this notion of too much debt in the system, and a collapse in the debt system, and there is this notion, that Napier pointed to, of a concerted, a concerted, money-printing effort on the part of the world’s central banks, that never, in the history of mankind, have we had central banks all operating with the same machinery, and playing from the same playbook. So, the notion that you have either/or, instead of both/and, is really a mistake.

Kevin: And most inflations start really going hyper when the economy slows down, and it actually looks like a deflation is going to hit.

David: Right, and this is something that, again, we will explore with Bernholz, but this critical element of the budget deficit being financed directly by the central bank, in the 29 instances in which we have had hyperinflation, it has played a critical role. And I just look at QE-1, QE-2, QE-3, and it is going to become painfully obvious as we move into 2015, that another QE is important, too, so that we don’t circle the deflationary drain, so that the Fed is not written off in the annals of history as the group that watched us be destroyed by deflationary implosion. No, they will do their best, and QE-4, 5, 6, whatever they call it, and the number that follows it – this, I think, is where we home in on the both/and understanding of the world we have, and the world of tomorrow.