September 14, 2011; Handing Over the Keynes to the Kingdom: European Discipline Destroyed

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, we’ve been talking a lot about Europe on our show, and the repeating theme is: Are we going to default? Or is austerity going to work? Where is the next bailout going to come from?

Look at China. China seems to step in almost like a super-hero right at the last minute and say, “Oh, well, we’re just going to go ahead and bail out Europe, one more time.” Is this repeating theme going anywhere, or is this just going to continue, ad infinitum?

David: Kevin, it’s kind of the death from a thousand cuts. We are looking at policy-makers experimenting with things that they have experimented with already, and they have failed over and over and over again, but that does not keep them from doing what Einstein thought was utter insanity. If something doesn’t work, you just have to stop it. Don’t continue to punish yourself with insanity.

There is nothing in Europe that we haven’t already discussed up to this point. The emergent crisis 18 months ago was a part of our conversation then. We included a detailed discussion with the European Central Bank co-founder, Otmar Issing, in an attempt to bring an aerial view to the things happening on the ground in Europe, at that point, in a very developmental stage.

I sometimes feel like we are looking at the issues over, and over, and over again, and my hope is that we are not just aimlessly repeating ourselves. Maybe it is that we are searching for nuance and the differences in perspective, in order to aid – whether it is our listeners or clients – in a decision-making process.

The end goal is for people to understand the times. The end goal is for people to take perspicacious, or wise, action, and be in a position where they can both preserve value and preserve assets, and see them grow. So again, we look at Europe because that is what is front and center today.

Kevin: David, we have had Bill King on a number of times as a guest. He outlines a simple, continually repeating theme that we probably need to understand overlays, as a structure, what we are seeing in Europe. His quote is, “Nations first try to inflate over their debt. Then they seek bailouts that are contingent on austerity plans.” Sounds familiar, doesn’t it? “But the austerity causes the economy to sink, impairing the ability to service debt. Citizens then violently protest the austerity measures, so countries then default and restructure the debt.”

That last step, we have not gotten to. We get right to the edge of this Greek default. In fact, 98% chance of a Greek default, according to the credit markets at this point.

David: Exactly, up from a 91% chance on Friday, so it’s a daily deterioration, and I think imminent has to be the word of the week. These are interesting times, as we watch materialize, in real time, something that is restructuring Europe as we know it, and, potentially, U.S./European relationships via the currency relationship in the capital markets.

We have the British, who are talking about completely restructuring their banks, and doing, frankly, what we described in conversation with Larry Kotlikoff not long ago – basically, ring-fencing the vital parts of the bank and allowing the speculative trade desks to be spun off, or run separately, with the risk managed very differently. There is a reconstructive process happening behind the scenes, and it is a very tricky situation for investors to be in, certainly one where you need to keep your eyes and ears very much open.

Kevin: When we talk about these overlying structures, these patterns, we have seen 3 of 4 steps. We know that when the 4th step comes, as in this particular case, countries then default and restructure their debt. That is the 4th step in this process.

My daughter lives in Manhattan, and the forecast a few weeks ago was that Hurricane Irene was going to come in. I had been planning to go visit her anyway, but we actually moved the ticket up because when you know a storm is coming, you prepare, and New York was not ready for a large storm. Thank the Lord, it passed over New York, as it could have been a horrible disaster.

But it was interesting, watching people prepare. Most people in New York really didn’t do a thing about it until hours before they heard the stores were going to close and the subways were going to shut down. Then all of a sudden people started buying bottles of water and tuna, though it wouldn’t have lasted them very long, and I’m wondering if the Europeans right now are prepared for what’s just about to happen.

David: I think the Germans are certainly trying to limit what would be the fallout from major structural changes within the EMU with membership changing potentially, even within days. When you know a storm is coming, Kevin, you are right, you prepare, and Germany has chosen to anticipate the worst. They are putting together a plan, as we speak, to aid their banks, and they are assuming a default in Greece. So they are now moving into – not triage, because the event has not occurred – but anticipation, “Do we have the supplies we need?”

Kevin: So the question is not if, but when, at this point – for Germany anyway.

David: Exactly, and they need to soften the blows for the banks, because the banks serve as a conduit of liquidity. The banks serve the economy as the connecting point. They are prized more critically than any other industry, particularly in this type of crisis.

Kevin: It sounds like the United States. We prized our banks more than anything else back in 2008.

David: We are on the cusp of an official default, and what that means is that we will see a write-down, or a marking down, of assets on bank balance sheets to reflect the already depreciated assets they hold. This is something that most people may not be aware of. But if you hold something to maturity, you can continue, for accounting purposes, to treat it as if it is a full-value asset, as opposed to something that has been impaired, or something that has lost value in the interim. So when the default occurs, there is an immediate marking down of that paper. It is no longer treated as a held-to-maturity asset.

Kevin: Let me make sure I understand what you are saying. When you give your kids saving bonds, it would be as if they were counting the end-maturity value the whole time, at the full amount?

David: Yes, even if it is trading at a discount. And of course, the Greek paper is trading at an extreme discount today. A default prices the asset immediately, and in the case of the Greek paper we are talking about, it implies a 50% loss, or more, by the assets held. This is different from institution to institution. There are certain institutions that hold sovereign paper on their balance sheets, and then you also have institutions that have branch banks in Greece, which is a different kind of Greek exposure. Particularly, when you are looking at the French banks, there are some that actually have branches, as I mentioned, and some, like a BNP, that are just chock full of the Greek debt, itself.

Kevin: And it’s not just the Greek debt. Since you are bringing up Greeks, we may as well go back to an ancient Greek who said, “Give me a lever long enough, and I can move the world.” The issue is leverage, right?

David: The issue is clearly leverage, because banks profit themselves, and they profit their shareholders, by enhancing their returns via leveraging the assets they have. The investments they have exceed the actual bank capital, and that allows them to see growth as long as they have an economic environment that is supportive to those assets appreciating. But that is the problem. If the assets go down instead, your losses can exceed the entirety of bank capital.

Kevin: That’s called bankruptcy, David.

David: That’s correct. So, to avoid bankruptcy for these financial institutions, governments have been – as we saw in 2008 and are seeing at present – committing larger and larger amounts of funds to supplement bank capital. It is all well and good to say to a bank via Basel II, or Basel III, “You need to raise the amount of capital that you have.” Well, raising capital is difficult to do in a stressed environment. You are basically going to the general public and saying, “Will you give me an IOU?” Or, “Will you be an investor in my bank?”

We will look at this in a minute, Kevin, but we are watching banks in the European context that have lost 40%, 50%, 60% of their equity value since the middle of the summer – just in the last few months – so this is a challenged effort. You can’t go to the general public and say, “Please, extend a loan. Will you? We’re good for it.” Because we are now in an environment where, actually, this is exactly like what bankers do to us. When you don’t need money, they are there to give you all that you want, on friendly terms. And when you need money, “Oh, no, no, no. No, you cannot have our precious capital.” So it is just being played in reverse. This is why governments are so involved, because the market says, “No. Bad bet. Not interested. Can’t have my hard-earned money.” So the government steps in for the sake of preserving normalcy and market stability, and it is pledging to support bank capital.

Kevin: But David, there are strange beneficiaries to these types of crises. If you owned the printing presses, or the company that prints currencies (laughter), these guys are printing like there is no tomorrow, are they not? Isn’t there a printer in Europe right now that is doing quite well? They are very busy.

David: It’s a classic business model, Kevin. Think of the Gutenberg printing press, think of all the good things that have come from printing presses, and there are many good things that have come from printing presses. The things that aren’t necessarily advantageous or attractive all seem to come from De La Rue, which is the British printer that has been responsible for printing currencies for over 150 different countries around the world.

Kevin: So the question is, “Oh, you want more currency? Just put your order in.”

David: (laughter). Now, of course, Kevin, when we are talking about support to the banking industry, we are really talking about digital credits and debits, but what is interesting is that it is already being rumored that a European currency has already been printed. ??… Who is that?

Kevin: Are you being conspiratorial? How strong is this rumor, Dave?

David: Not at all. I think if you look at the Greek leadership, and they know that default is inevitable, that is not necessarily how they are going to posture in front of the press. They will keep their game face on until the very last minute.

Kevin: But it is how they will posture in front of the printing press.

David: Well, that’s what is next, to say, “Unfortunately, we have had to make other arrangements, and will no longer be EMU participants.”

Kevin: I have a question, though, because the backbone of the European Union was supposed to be German integrity, German discipline, Bundesbank background. Even when we talked to Otmar Issing, these guys don’t want to see inflation. What we are talking about is inflationary.

David: It is inflationary, specifically, in the Greek context, but if you look at the original exchange rates, as any of these peripheral countries came into the EMU, if you look at the exchange rate that they had, it was hundreds-to-one, implying that they had been irresponsible with their inflation rates for decades. This is par for the course.

Kevin: So David, Athens airport is still operating. There are reporters going in right now to report what could be an imminent event. Are there other planes that are maybe stuffed full of currency?

David: Kevin, this is the rumor, that they have already printed the money. I don’t know if it is drachma, I don’t know what they are going to call it, but if they break from the EMU, it is to eliminate the debt burden, and they can do that via printing. “We’ll pay you back every dollar, it’s just going to be with a depreciating piece of paper.” We are back to the classic version of devaluation. We are back to the classic version of default. Not the kind that they are being forced to the brink of. They may very well default and have to make partial payments.

Kevin: But this is more South American.

David: This is more of a South American kind of default, where you just print and pay, and print and pay, and print and pay, and it may actually also be a North American version, as we are doing the same thing. But what they are regaining is monetary sovereignty, if they, in fact, leave the EMU. That’s what they gave up when they entered the union. Potentially, Kevin, at the Athens airport you may see transports delivering currency over the next few weeks. We are not positive, but we do know that change is imminent.

Kevin: David, going back to the subject of the Bundesbank, we interviewed Otmar Issing last year and we talked about the discipline of the background that the Germans had faced, and how they didn’t want to go through that again. Bundesbank and German mentality has played very much into the European Central Bank at this point. Is that still the case?

David: That’s what seems to be changing, and I think if there is anything of grave significance in Europe in the last ten days, it is not what is happening with Greece. That is attention-getting, because it is in the news and it defines something that is more of a spectacle, but something that we have been predicting and seeing for some time. Seeing Jürgen Stark resign last week, as one of the key principles at the European Central Bank…

Kevin: He was a Bundesbank guy in the past.

David: Exactly, and he represented a voice that brought stability, that was sort of an anchor, if you will. He says he resigned for personal reasons, and that is fine, but three years ahead of his term ending? In the midst of utter chaos within the European context? After last week being in direct conflict with other members of the ECB over the renewed purchase of European bonds? They have been doing this now for a couple of weeks, specifically, with Spanish and Italian paper, and they are driving the yields down, purchasing these bonds as they are issued, and having some success in doing that. But Kevin, this has been the problem. The Bundesbank judgment is, when you monetize, you will create inflation.

Kevin: We’ve seen it before.

David: Their job as central bankers is to look at inflation very carefully. Price stability is a mandate. It is a critical mandate. Unlike the U.S., they don’t have the dual mandate of price stability and full employment, so they’re focusing on price stability and saying, “No, what you are doing is putting into the pipeline a degree of inflation which we will not be able to contain. We disapprove of the monetization of this debt.”

Otmar Issing, from the sidelines, has been more and more critical of what the ECB is doing in support of the rest of Europe, and the European debt markets. This is what we talked about last week, Kevin. It is because what is implied is a quasi-fiscal union if one entity is now supporting the debt structure of all these individual countries. That was not supposed to be. Maybe it was desired, from behind the scenes. We don’t know. But we know that the original agreement was a monetary union only – a monetary union, not a fiscal union. With Jürgen Stark leaving, we really don’t have a counterweight to someone like Trichet. We don’t have a counterweight, frankly, to someone like Mario Draghi.

Kevin: This is what I’m asking. Granted, he may not act like an Italian, but he has an Italian name, and isn’t Italy the issue right now? (laughter)

David: That actually argues for him taking more of a hawkish view to inflation, and being less accommodative…

Kevin: Because he doesn’t want to look like an Italian.

David: Exactly. “I may be an Italian, I may be a Goldman man, but don’t paint me into that corner. I can do the right thing.” We’ll see how long he can do the right thing. This is the issue, Kevin. Draghi takes the reigns at the ECB from Trichet November 1st, and will his policies be as accommodative? Will he be as interventionist as Trichet has been? Likely, but with caveats. He needs to protect himself, because there is some suspicion relating to his home country, and perhaps loyalties therein.

The question is, the former Goldman man – can he prioritize European stability, or will he ultimately be taking calls from his Goldman cohorts to discuss who thrives and who fails over the next 2-4 years in the Eurozone?

Kevin: Now Dave, are you accusing Goldman-Sachs of possibly front-running, or getting inside information, or possibly even manipulating a situation for a particular outcome, and winning on the bet?

David: They have rolodexes that are impeccably designed, and probably kept under lock and key. This implies nothing, Kevin. They are not ever doing things that are clever.

Kevin: They’re doing God’s work. Isn’t that what we heard last year?

David: Godman-Sachs… (laughter). Kevin, this is the issue. They are so well-placed. We are talking about professional discussions amongst fellow bank CEOs and G20 leaders. These things have to be discussed in order to prevent disorderly chaos in the marketplace. So, “No, we’re not discussing these amongst ourselves, to then go have weekend soirees and figure out how we will personally trade against it, or trade for it. No, we’re not determining who is going to be going long, or who is going to be going short, taking positions in light of what our friend, Draghi, might be telling us.” No, I don’t think we can assume that Goldman will be doing any of that, or that Draghi would be participating. He is a man above reproach, as we have found all Goldman men to be.

Kevin: Let’s get to the crux of the matter, then, on the EMU. Let’s just try to think ahead a little bit. Let’s say we could get into a time machine, go forward a few weeks, a few months, maybe a couple of years. Where are the EMU participants going?

David: The crux is that they have to either move to fiscal union, which is the first option, or they can consolidate around a smaller core. Remember the credit market adjustments that took place as individual countries joined the euro – they saw their credit ratings improve, and they saw their credit costs decline. And what was that in light of?

Kevin: It was basically because Germany was involved.

David: Exactly. They had the benefit, by proxy, of being related to Germany. The recently proposed Eurobond carried the same mark of German credit. That is why people were thinking it was an interesting solution. The problem was that it was an implicit fiscal union, and therefore, on the basis of a referendum vote, was not likely to be approved. This idea of fiscal union is very unpopular. The question is, can the folks who are so for the eurozone get it pulled off without a referendum?

Kevin: David, we have talked before about the price of gold telling the truth on leaders, but so does the interest rate spread between different types of bonds. In the beginning, they were actually giving the rest of Europe the benefit of the doubt, based on Germany being there. But aren’t interest rates starting to tell a different tale?

David: Over the last 12-18 months, we have watched the spread between German bonds – the difference between German bonds and other European paper – widen further and further, which is just acknowledging the actual balance sheet differences that exist between the various European states. And, just to reiterate, there are really only two choices that exist. There is fiscal union, on the one hand, or a shrinking membership role, and a number of countries would be leaving of their own accord, not pressured out, preserving the EMU and allowing it even to become a better currency alternative on the open market.

Kevin: If you had to take a bet, one way or the other, right now, is fiscal union on the horizon? Or are we going to see this consolidation and remaining a monetary union?

David: I think a fiscal union is possible as long as it avoids a public vote, because that would never pass. It would never pass muster, so we are talking now about the cigar-filled, oak-paneled rooms, where men and women are making decisions behind the scenes, and “We have approved, for your benefit, the future of Europe.” The Lisbon Treaty is a part of this, Kevin. It can’t go that way, unless it is done surreptitiously.

Kevin: So whatever happens, they are going to have to find a way of increasing efficiency to continue to move. They are completely immobile at this point.

David: Well, if they scrape the barnacles off the bottom of the boat, they will find that efficiency, and that is essentially taking the peripheral countries out, or voluntarily letting them leave. This is an interesting thing, Kevin, because a lot of the power-hungry folks in Europe, the true socialist elite, don’t want to concede defeat in any part, and they are using very strong language – the term, “irrevocable,” regarding the commitment to the EMU. It was voluntary up front.

Kevin: Yes, when did it become irrevocable?

David: Well, that’s what is interesting. They are saying the treaty signed cannot be undone. I don’t think we have the complexity there in Europe that we had with the federalist north and the states’ rights south, here in the United States, several hundred years ago, but we do have this strange, “No, we’re in control, and you may not leave. We’re not approving that.”

Kevin: David, it’s Hotel California. You can check in, but you can never leave.

David: Well, I don’t know what is going to happen, Kevin. Nobody does know what is going to happen. But we do know that there are advantages to being able to inflate away your debt. We do know that, politically, austerity measures are death to the existing parties in power. You can’t tell the Greeks that they are going to be the ones that suffer. You can’t tell them that and expect to be re-elected. That is what we are seeing fall apart. It is political chaos, because the only thing that the Greek government can do is put in place austerity measures – fiscal measures. They lost their monetary tools. The contrast between us and them is so significant, because we can bandy about different fiscal measures, we can talk about the jobs creation program last week…

Kevin: And we can just print reserve currency.

David: And then we can just print, and print, and print, and we can pretend to try to solve the problem. Kevin, what is the cost of Obama’s new jobs program?

Kevin: 477 billion, amongst friends – especially if it’s already paid for.

David: I know, well, that’s what he said, originally. But it actually looks more like a 421-billion dollar tax hike.

Kevin: Oh, so it wasn’t already paid for.

David: No, no, no. If you look at it, this is what drives me crazy with politicians. They can’t just speak the simple truth. They have to pack it with so much ethos, they have to pack it with so much pathos, you feel guilty. “I’m abusing the elderly, and young children, if I don’t approve this jobs program!” Kevin – 477 billion dollars? And he thinks he is going to create half a million to two million jobs? That’s a million dollars per job created. A million dollars per job created, or if he does actually create two million jobs – 250 million.

Kevin: Maybe we just send people millions of dollars and just say, “Retire.”

David: Why don’t you find 10 million people that need an extra 50 grand? Because it’s going to end up making its way into the economy far more effectively than the government bureaucracy trying to “create jobs.” Kevin, this is the insanity.

Kevin: You’re just a Negative Nancy, Dave. You’re a Debbie Downer. I’m sorry, this is the wrong way to look at it, you should be supporting your president right now.

David: I would like to support the president. I would like to support a statesman. I would like to support leadership. I would like to support ideas that don’t have negative consequences. And Kevin, I fear what we are facing is the ultimate demise of our American dream, up and until we have adequate leadership to draw us out and through the other side.

Kevin: David, you are talking about how much it costs to bring about just a single new job under the president’s jobs plan, but the problem is, we are also paying for jobs over in Europe. We are talking about European bailouts, and Germans, and we are talking about austerity, and then we are talking about the ECB having a new lease on life, but what about us? We have spent an awful lot of money, more than the Chinese, more than the Russians, in the bailout of Europe.

David: And this was an interesting disclosure this summer. We found that, actually, we were very, very active in supporting foreign institutions in the 2008 period, via the Fed swap lines, and this is, I think, what we will see open here in the next few months, liquefying the world, the U.S. being the lender of last resort, and very ironically, the world’s largest debtor, in those moments of crisis, also being the world’s largest creditor at the same time. It is the ubiquity of our currency, and the limitlessness of it, that allows us to lend very short-term, overnight, via digital credits and debits.

Kevin, I think this is the stability component which the Fed has scripted for itself. It is going to spend an infinite number of dollars to maintain stability in the international markets. And we have, right now, in front of us, something that is begging for those swap lines to open. French banks are under pressure. German banks are under pressure. Why? Because of the assets that they hold via Greece. It is a strange web of interconnectedness, Kevin, but French banks have been under pressure since June 15th. We had Societe Generale sell off by 55% — 55%! Their stock is down 55% in a matter of months. BNP Paribas down 42%. Credit Agricole down 45%.

Kevin: David, recall 2008 here in America. We are seeing these same types of things happening right now in France.

David: Right, and this is what we were talking about last week, Kevin – the idea that a number of these institutions will have to merge to survive. The question is, what gets them through a moment of crisis where there is panic in the marketplace, and good reason to jump ship as an equity owner? Looking at insolvency, looking at your liabilities exceeding your total capital by 2, 3, 5, 10 times, because your equity has been sold off so precipitously. That is why the Fed is there. The Fed is there to make sure that the world does not come unglued financially. Does this have echoes of 2008? Yes, only we are not talking about single institution stability, Kevin, we are talking about entire countries, not just singular institutions.

Kevin: This is, in fact, a worldwide default, if it is allowed to go on. We have been joking about planes coming into Greece and replacing the currency, we have been talking about the ECB having a new lease, we have been talking about all these things, but they are highly, highly inflationary. Let me use a different word: Currency devaluationary. In other words, the European currency has been falling in its buying power. The U.S. dollar has been falling in its buying power. The only currency that really wasn’t falling in its buying power was the Swiss franc until they pegged the currency last week.

David: To the euro. Yes, so Kevin, I think the peg, at one point, also, is an interesting scenario. I don’t know that there is the resolve with the Swiss National Bank, or the depth of pocket, to continue to write the check and maintain that stated peg.

Kevin: What you are saying is, they may print money for a while to try to keep their currency down and stay pegged to the euro, but if the euro falls too far, do you think the Swiss might still break away?

David: The question is, how much money are they willing to spend in that effort? They could ultimately destabilize their own price stability, if you will, or purchasing power, in their own country.

Kevin: But you are not going to count this as a stable hedge, right now? In other words, you are not going to tell a client, “Hey, go buy the Swiss franc because it may still be a better hedge than another currency?”

David: Here’s the irony. It now stinks, like all the other fiat currencies. It just happens to be a better bet than the U.S. dollar, and other things that stink even worse. It is question of lesser evils. It is not a question of greater goods. That is where, I think, we come back to the gold bull market and see a duration for this market, as years – years. Why? This is really the point. It will endure as long as the Keynesian bias, long dominating the halls of the Fed, long dominating the halls of the Treasury, long dominating universities – as long as the Keynesian bias remains.

Kevin: And the Keynesian bias is, print money, or change fiscal policy, but basically, stay away from gold, stay away from discipline. We can spend hours talking about what currency is the best currency, and what is going to happen next to this paper market, or that paper market. Why is it that people avoid gold, which seems to be a natural answer. We are seeing the Europeans, at this point, start to compete with us, as far as buying gold. We have been buying gold from Europeans for years – your dad’s company, and now you run the company. That’s where we have gotten a lot of our gold. The Europeans are starting to finally wake up and say, well, maybe it’s not in Europe. Maybe it’s not in U.S. dollars. And maybe, after last week, it’s not in Swiss franc.

David: It was interesting, when I was down in Argentina, I ran into a German family that was on vacation. He worked for BMW, had been working for BMW for about 30 years in their HR department, and loves the company, loves the euro, loves the ease with which he can go from one country to the next. I asked him, flat out, what he thought about the stability of the euro, and he said, “It will always be stable. It has to be. Nobody wants to go back to changing currencies at borders.” I was thinking to myself, “Is that your only perspective? It’s just an issue of convenience?” There are deeper issues here. When we are talking about issues of convenience, that is one of the things that has had gold on the outside and U.S. dollars on the inside.

Kevin: Sure, because you don’t go to the grocery store with an ounce of gold.

David: Exactly. We have these biases on the basis of patterned behavior and ease of use, or convenience, which do dictate how we feel about certain asset classes. Gold, Kevin, is going to continue to remain front and center as a priority in peoples’ portfolios as long as we have negative real rates of return. We have talked, how many times, about Gibson’s Paradox and the Summers-Barsky Thesis.

Kevin: Right, which is simply if interest rates are too low, and inflation is too high, it’s not going to work.

David: If what you are earning on your investments, what you would qualify as your productive capital, what is supposed to be growing in terms of capital gains or providing income, if your real rate of return after you pay your taxes, and after you account for inflation, is negative, strip out all the reward – why did you take the risk? It did not make sense. So market participants come to the conclusion, in a negative real-rate environment – “I’m gonna opt out. At some point I will re-engage, when I can put my capital to work productively, but until that point, don’t force me to take risk without reward. Strip away the reward, and I’m just not gonna play.”

That is the growing awareness globally, Kevin, as we see interest rate suppression, not just in the United States, but in Europe, as well. We have seen the Europeans – Trichet just recently has qualified with the most recent inflation numbers. That is largely a balanced issue. They are no longer concerned about inflation. What he is doing is trying to set Draghi up to, in the first few months of being in office, be able to lower rates below the 1.5%, and again create that same, almost zero interest rate environment we have here in the United States. It ends up driving investor interest into gold, because there is a frustration. Where do you go when real world inflation, not the stated rate of inflation, but real world inflation, is nearing double digits, and taxes are on the increase because governments are desperate for revenue? You go to a place where you don’t have to take risk, or at least, in that environment, it is deemed as less risky than your other alternatives.

Kevin: David, what we have seen is about 80 years of a flawed system, the Keynesian system, that started out looking like it was working because of other factors. But really, Keynes talks about printing worthless money, spending it, and lowering interest rates when they shouldn’t be lowered. We have seen where Keynes has gone wrong. We are coming to a turning point. I think back to a great interview we had last year with a man named Hunter Lewis who wrote the book, Where Keynes Went Wrong. I think maybe it would be time to revisit that.

David: Kevin, just the discussion, because so many of Keynes’s ideas are assumed to be true. It is the basis upon which our policy-makers behave and act and think. And again, we never want to be construed as being disrespectful to the folks at the Fed and the Treasury. We are talking about people who earned their degrees, worked hard, stayed up late nights, drank lots of coffee, I am sure, in putting together what they thought was sort of their personal magnum opus. The problem is that good logic, with bad assumptions, ends you back with mistakes – mistakes. So we are not faulting their logic, we are faulting their assumptions, so many of which are based on the ideas of John Maynard Keynes.

Kevin: That is what makes it so hard to learn economics, to be honest with you, because Keynesian economics doesn’t make sense. You can get something for nothing? Money does grow on trees? And that’s okay? Because my parents didn’t tell me that.

David: I think you are right Kevin. Bringing Hunter Lewis back into the equation, and having him explore with us, again, where Keynes went wrong, why the Europeans, as well as those in the U.S., continue to bow to the throne of a dead academic? And are there better sets of ideas out there? Kevin, I don’t know what the revolution of ideas will look like, from a business standpoint, they view the gold bull market as something that is limited in scope, that the next 2-3 years, perhaps, will see its ultimate peak price.

But, when I consider how hard it is to see ideas change, and the fact that we are really talking about the death of an ideology, and until that ideology or world view changes, gold will have its place front and center, because that is, in fact, what is driving the price higher – the abuse of the Keynesian system. Now we are talking about an extension of 5-10 years. I don’t know.

We need a revolution of ideas, and the part of me that likes capital gains doesn’t mind seeing Keynes win the day. But the other part of me that says, “I love my children, my children’s children, and my children’s children’s children, and I want them to inherit plenty, not want,” wants to see change now, and wants to see the end of the gold bull market now, because it’s a better place to live. It’s a better place to exist. It’s a place that is based on right ideas, versus ideas that just seemed intelligent when they were adopted.