John: Hey Trace! How are you?
Trace: Great, great. You’re the author of The Collapse of the Dollar.
We were talking a little bit before the call about how the stock market’s kind of topped off and the capital seems to be moving out of the stock market into the dollar, which seems to be pressing the price of gold down a little bit. Is there anything else you’d like to add to that initial nugget?
John: Yeah. The stock market, especially in the U.S., has had a really nice run from the 2008 bottom. It’s up about 65% overall. Just that by itself will tell you that a correction is coming, but at the same time we’ve got a lot of big bombs waiting to off out in the world.
Greece is on the verge of defaulting, and several other European countries are having a lot of trouble living within the Euro regime as Germany has defined it. So you’ve got a lot of trouble there, and the potential break-up of the Euro zone, which will send the currency markets into turmoil.
Then you’ve got Japan financially imploding, and a lot of other stuff going on that could send us back into worries about a 1930’s-style deflationary crash.
If that happens, you’ll see the stock market tank and you’ll see a lot of safe haven money as well flowing into the dollar, even though the dollar is obviously not a safe haven anymore. It’s just relative to a lot of these other currencies right now a little bit safer.
The question is what happens to gold in that kind of a scenario. It could be that it gets a lot of the safe haven money that’s flowing into the dollar as well. A lot of people will buy gold at the same time they’re buying dollars in a flight to safety, and that’s good for gold.
Or if we start worrying about a deflationary crash, that’s bad for inflation hedges – which a lot of people see gold as being one of the best – so we could see commodities in general and gold in particular really tank going forward.
As gold investors we need to be aware that the tide might be shifting once again back towards worries about deflation, so we need to be prepared in case there’s a big crack in the price of gold, which would just be the one final buying opportunity before everything takes off, because governments will respond to this.
If we do see Greece implode and the stock market tank, governments will really ramp up the printing presses then. If we’re running a trillion dollar deficit this year in the U.S., they’ll make it five trillion going forward, because they’ll be so worried about a deflationary crash. At some point that just totally destroys the value of the paper currencies out there.
So if gold drops below $1,000 an ounce here in the coming turmoil, then it’s time to load up the wagon. We’ve got a lot of dry powder right now, just in case we see that. I’d love one more chance of getting it in triple instead of quadruple digits.
Trace: Right. Now obviously you’re familiar with My Great Credit Contraction Pyramid. We’ve got gold and silver and then Federal Reserve Notes right above them. They abut each other in the liquidity pyramid.
I’ve often written about what adds so much value to a currency is its velocity, its ability to be used in the ordinary daily transactions. That’s one of the reasons the dollar is treated as a valuable instrument, because we’re able to exchange it in so many daily uses.
So one of the problems that we have – because I definitely see this deflationary issue, it is the issue, it’s the great credit contraction – one of the problems I see for the gold investor is that gold isn’t really used in an ordinary daily transaction. It doesn’t really have that velocity.
You could say not very many money “speak gold” in their economic transactions, which leads us right into that massive article I wrote about Ron Paul’s bill H.R. 4248 Free Competition In Currency Act of 2009.
What effect do you think this bill, which will eliminate Federal legal tender law, which will prohibit states from assessing taxes on bullion, which will remove any of the criminal code for these types of tax-related problems and then also nullify any convictions, like the Kahre case in Nevada –
John: A few things.
First of all, that’s a really good article, a brilliant piece of history and very educational.
Second, Ron Paul is by far the most interesting politician out there. He’s the only guy doing anything worth watching in Washington right now. As you say in the article, his bill to audit the Fed looked like it was a joke to begin with, because the powers that be would never let that happen, and yet it seems like it might happen.
There are still a lot of roadblocks in front of it, but because it’s resonating with the public, it’s generating enough votes to have an outside chance of passing. That means you have to take seriously his new bill that you just explained.
Even though it’s even more of a long shot than auditing the Fed, it’s still a very powerful and very interesting idea that could capture the imagination of people, once they understand it.
If it ever passed – and it’s still a huge long shot, because the powers that be will never voluntarily give up control of the money supply – but if it did happen, it would be really interesting in a lot of ways, because if the dollar faced real competition, it would be shown to be the sham that it is.
It’s not based on anything. The government can and does print basically as many new dollars as they need to finance their re-election every year, and because of over-supply its value is plunging.If you put that up against other currencies that are circulating that don’t have those problems, the differences become really stark.
However, it also might activate Gresham’s Law, in which bad money chases good money off the field, so we still might end up just hoarding gold and silver, because as a store of value they’re so superior to dollars that we’ll want to spend dollars.
If there are gold coins around, we’ll take them and put them in a safe deposit box and spend our dollars. So we’ll still get massive dollar velocity at the same time that it’s losing its value.
Trace: I think a lot of people don’t realize the costs that are imposed on business by the current monetary and banking system. We’ve not only got the inflation tax but as I discussed H.R. 627 The Credit Card Act we have also got the transaction tax that Visa is just making an absolute killing with, and the credit card industries, which of course are all backed by the bank.
All of these things add so many additional costs to using that particular medium of transaction that if we were to remove even the 28% rate gain tax on gold, all the sudden you’ve got a currency that’s now 30% more efficient than the other one. It’s 45% more efficient just in 2009. That was the gold price rise.
But then you take into account say a 3% credit card fee. How much is it, 8 cents for every gallon of gas goes to Visa? So if we could eliminate some of these transaction costs using much more efficient tools, like gold money for example, which has a maximum fee of $2, and yet I just sent $100 with Paypal, and Paypal charged $3.80. If I’d sent $1,000, it would have been $30. There’s a lot of opportunity for competing currencies to really make a lot of change in the system.
However, I think I agree with you that the powers that be, the ones that currently have the legal right to counterfeit while everybody else is prohibited in that type of currency production activity – they don’t really want to give that up, especially not voluntarily.
So where we place the issue of revolution, you can do it with money, as Dr. Edwin Vieira Jr. says, or you can do it with guns.
I thought this was really interesting in my article. I don’t know if you remember, I had the quote from Bernanke about the U.S. government has a printing press so it can create as many dollars as it wants at virtually no cost, so I had that quote.
Then I had Section 19 of the 1792 Coinage Act, which provides that anybody who debases or makes worse the currency shall be guilty of a penalty and shall suffer death.
Wouldn’t it be interesting if – in addition to H.R. 4248 – we were also to start floating the idea politically to start implementing the death penalty for these types of counterfeiting activities that the Federal Reserve and the banks are currently engaged in.
We could perhaps start revoking bank charters for these types of violations, which would be the equivalent of executing a corporate entity, removing their bank charter status or things like that.
Goldman-Sachs (NYSE:GS) – boom – you guys lose your bank charter. Your corporation is dissolved and you don’t get to do business anymore because you’re engaged in the type of behavior that China just executed one of their rogue derivative traders over.
This could be very interesting to see how we evolve politically in this sphere.
John: I agree, it’s a really attractive idea, but it’s sort of in the realm of gold bug porn. It would be so great, but they have such a long hard road to travel before they become even conceivable in the mainstream, because the bankers are basically in charge.
The idea that this kind of thing would become law over their objection means, like you said, a revolution. If we tried to do it with money it means that it would evolve into having to do it with guns probably to get to that point, but it’s a nice idea.
Trace: You know what we’re starting to see, especially with these Tea Party activities that are going on, with the banks and their massive PR nightmare, we’re really starting to see the zeitgeist, the culture that we swim in, we’re starting to see it really change.
A lot of popular sentiment is being directed in anger towards the Wall Street banks. How much longer is it going to take, how many more people’s retirements and pensions are just going to evaporate before they really get fed up with this stuff?
John: I think we have to have the crash, basically, because we’re still immensely self-centered and selfish – especially baby boomers.
We’ve always voted for free stuff, we expect to get free stuff, and we expect someone else to pay for it, and that hasn’t changed. In fact, it’s gotten more extreme. As the economy tanks, more and more people start demanding more and more stuff from the government to help them.
Trace: More and more free stuff.
John: More and more free stuff at someone else’s expense. Unless things get so extreme and the powers that be are so completely discredited that we actually have a national conversation in which these ideas come up and are debated and win out, this stuff, at least in its more extreme form, is not going to be enacted.
I think the system has to fall apart before enough people start paying attention and asking why it fell apart before we get to that point. The really interesting discussion happens two or three years out, when things have just totally tanked and when the whole concept of paper money is actively being debated, and then we have a chance to win.
Then we can put the original constitutional idea of sound money out there, forming a consensus around limited government, free enterprise, private property, sound money, and going back to constitutional principles.
But until that time, it looks to me like we’re still a childish selfish society that is going to run itself off a cliff before it really comes to grip with the mistakes.
Trace: You raise a great point there. You’ve got this baby boom generation that has just kind of moved through the garden hose like a basketball.
Now in 2016 you’re going to have 78 million baby boomers going up against 112 million millennials, and the baby boomers buying into this idea of government, which is just the fiction that everybody can live off everyone else.
They’re going to want to live off all the millennials, who are going to start entering their prime earning years and they’re going to say, “Why in the world am I paying 15% for Social Security when I know I’m never going to see any of it?”
And that’s the millennials that are actually able to find jobs or get employed, because the economy will just be that much further in depression because of all the preventing of the credit liquidation and trying to keep wage prices up and things like that that the Obama administration has implemented.
It’s going to really, I think, contribute dialogue with the ideas – assuming the internet stays relatively free and open, which I don’t really see any idea why it wouldn’t, because we enshrine free speech so much in our Western democracies on all sides of the aisles –
We’re going to have videos like Peter Schiff was right, and all the people who voted for Obama will have just lived through four or maybe eight years of this grind economically, and they’re going to want new ideas.
What are the ideas going to be? They’re going to be Peter Schiff or Ron Paul, who will look like seers that foresaw and forecasted all this happening, so we might see a big shift of the zeitgeist towards that.
In the 2004 election we didn’t really have YouTube as a functional usage, and now everybody watches YouTube. The same thing with Facebook. It’s gone from being absolutely nothing to having hundreds of millions of users in just a few short years. I think we could see quite a bit of change happen so quickly because of these technological advances that we have.
John: Oh, absolutely. We will have a national and a global discussion about this stuff. I just hope Ron Paul stays healthy so he’s around to lead the good guys.
But we won’t have the discussion, I don’t think, until enough people have been shaken out of their complacency and realize that they just can’t have free stuff. [laughing] We aren’t there yet.
Right now you and I get this, and we see Peter Schiff and Ron Paul and a few other guys out there making these really good points, but 99% of the people in the U.S. are still not paying attention.
They’re worried about their 401Ks, a little less worried now than they were a year ago, and they’re worried about their job and they’re worried about the value of their house, but they’re mostly looking to the government for help.
They expect that help to come from somewhere. They expect the government to get the money and to give it to them. That’s as far as they go in terms of thinking about how the world works.
Over time, when things really fall apart, that 1% will grow to 15-20% of people who actually understand what’s going on. Then we’re going to have an interesting debate, because 15-20% of a group, if they’re committed enough and knowledgeable enough, can change the nature of the group itself.
That’s our challenge three or five years from now, to be part of a well-educated, seriously committed group of people who want free markets, free minds, limited government, sound money – the constitutional principles – and it will be a huge battle, but it’ll be interesting.
Trace: Seth Godin talks about being this lynchpin that leads the tribe. We’ve got our little gold bug tribe, and we were talking about this before the call, how the traffic to our websites is so small compared to the other large websites out there, like the Huffington Post or some of these other really large blogs.
Our little gold niche is a relatively small niche despite the silver price and platinum price rises, and yet we could see this huge influx of people who are going to need to be educated and need to have this discussion.
I’d really encourage people to try and get involved at the local level with your local businesses. I guess if you can hold your nose and put on a Teflon suit, maybe go down to some political meeting and try to really make a difference and educate one’s neighbors on these issues.
Is there anything else that you’d like to add?
John: No, I think we’ve covered the high points. We’ll have to get together and do this again.
John: Thanks for having me on, Trace.
Disclosure: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., Euros or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.