Incisive Reflections On The World's "Nested Bubbles" By John Rubino And Chris Martenson

Transcript of John Rubino Interview By Chris Martenson at Peak Prosperity

Chris Martenson: Welcome to this Peak Prosperity podcast, I am your host Chris Martenson. We talk a lot about how the markets are defining things for us in some way, shape or form. They do for me, I track the markets very closely and I will know that we are about to get onto the next stage of the story when the markets begin to signal what they did back in 2000, what they did again in 2008. I know we have another one of those moments coming and I think this will be a bigger, larger, more conclusive moment than those other ones, as traumatic as those were.

Here we are though; we are in the midst of the world’s largest set of nested bubbles. This is going to probably carry on longer than anybody cares for it to, but here we are. By nested bubbles I mean the bond markets; the stock markets; derivative markets; sovereign debt markets, everything I care to look at is pretty much overpriced at this point in time, but that is what you get when your leading monetary institutions decide to pervert the price of money itself. Guess what you get perversions all over the place. To help us understand that and talk about it some more, a really great guy who we have had on the show before, cannot wait to have this conversation, John Rubino, author of The Collapse of the Dollar and How to Profit from It and more recently The Money Bubble with James Turk. Very good to have you back John.

John Rubino: Thank you Chris it is great to be back.

Chris Martenson: The Money Bubble it has been out for a while, maybe we start there. How has the reception been?

John Rubino: Real good so far I think we are up to about ten thousand copies sold, which is generally defined as commercially successful by the publishing industry. That is without the markets really going our way. When gold is going is up and we have financial crisis headlines everywhere, then you think the book would be more accessible and more interesting to people, so I am looking forward to a really good 2015 for this book.

Chris Martenson: Excellent, excellent, it is a great book so we will certainly let people know about it here. We have been watching—you and I and everybody that has been listening to this—we have been watching the markets for a while waiting for something approaching sanity to return. Here is how insane it has gotten—and I am sure you have seen the same things. The bankers themselves, not the Federal Reserve of course, but central bankers like the Bank of International Settlements, the BIS, ex-central bankers, retired folks. You had people like Kevin Warsh former FOMC member come out with his big op-ed in the Wall Street Journal. People who are either the banker’s bank or just left the marbled halls of the central banks are all saying the same kind of thing and I am wondering if you are hearing the same kind of thing. What I hear them saying is: "Wow this is getting crazy."

John Rubino: Well, yeah especially the guys who leave office come out with a lot of worried comments. Part of that is that even though they were the architects of today’s problems, they want to make sure that everybody knows that they were the voice of sanity at some point in the process. They see it coming and the guys on the inside see the same numbers you and I do and probably come to the same conclusions that we are doing a lot of unsustainable things. They have such a stake in the status quo that it is very hard for the insiders to make any substantive changes. So they leave and they express concerns, but we should never lose sight of the fact that these are the guys who created the problems in the first place, or at least participated in the creation of the problems. The problems are real and myriad, and we have been talking about them—as we said before we went live—we have been talking about this stuff for ten years now. Things just keep getting worse under the surface, even though to most people now based on government headline numbers things seem to be getting better, but they are actually not. Most of what is going on under the surface in terms of bank derivatives, books and government debt and now consumer debt and just about any other real financial statistic that you would like to look at, they are all getting worse. This means we are heading for some kind of replay of 2008/2009 only with more debt to deal with, bigger derivatives books, more landlines out there. This one could be much worse than the one we just lived through a few years ago.

Chris Martenson: Well it has to be a lot worse because it is a lot bigger and the general arc of this whole story for me is there was a little hiccup in 1994, we had just come off a double dip recession, which scared everybody off, and there were political ramifications, we had Greenspan in office. He says "not on my watch." And it was a little hiccup in the corporate bond market, and it was tiny by the numbers we talk about today routinely. He freaks out and gives us unlimited reserve ratios, in the sense that he did this sweep program thing, which we talked about before, I will not go into it now. That blew up the money supply. There was Y2K so they pumped some more in, yay, we get this whole NASDAQ and other stock bubbles, tech bubbles all of that stuff, that crashes. We get the housing bubble as a response. So the general theme here is that the Fed seems very content with this idea that they are, A.) Want to blow the bubbles and then ride into the rescue. And of course why not? They get feted and lauded. You can create the bubble and then clean up the damage afterwards and retire and get two hundred and fifty thousand dollars a pop to speak, and I am sure your card is full and you have to turn away opportunities.

What is amazing to me John is that we as a nation have allowed these people to create the bubbles, ride in after the fact, clean them up and nobody really seems to be—at least in the main press and mainstream culture—saying, "wait a minute weren’t you the people who caused the accident?" Is it like we have serial arsonists on our volunteer fire department and everybody is happy with that. I just do not understand it and it seems to me like the Fed really does not get it that their behavior is ultimately more destructive than helpful.

John Rubino: That is one of the things historians are going to have a ball with when they look at these times. The same guys who caused the problems are the ones who are then tasked with fixing the problems. There is not any kind of allocation of blame here. In most of the world if you are the coach of a football team or something like that and your team loses because you make bad decisions, you get fired. Same thing with the CEO of a corporation, but the people who are in charge of the economy seem to be able to escape blame. I cannot explain that. It probably goes back to general ignorance on the part of the population. We just do not understand what is happening so we do not know who to blame for it. You see somebody like Greenspan who is still taken seriously in the world, he writes bestselling books, he charges huge amounts of money for speaking engagements, and yet he is the guy who was the architect of the beginning of the biggest financial bubble in human history.

The same thing with the people running investment banks. By any rational legal definition of what the banks have done in the last ten or fifteen years, they are criminal enterprises and the guys in charge should be put in jail, they should be treated accordingly. As were the guys who ran the S&Ls back during the savings and loan crisis in 1990. Something like eight hundred S&L executives ended up being prosecuted and sent to prison after that relatively small hiccup in the financial markets, and what has gone on lately is so much worse and nobody has gone to jail for it. In fact, hardly anybody even loses their jobs, they continue working and making huge amounts of money and living really prestigious lives after basically blowing up the economy, and now putting us in danger of another 2008/2009 times two or three in the near future. I do not know, it really is shocking that these guys are getting away with what they are getting away with. I think it comes back to financial education. We are not able to separate normal market fluctuations from financial crime and so the crimes are being kind of subsumed within bear markets and bond market fluctuations and things like that and they are not seen as the crimes that they should be seen as.

Chris Martenson: These are not just financial crimes in my mind John. HSBC was laundering drug money, massive quantities of cash, drug money. Got caught and nobody went to jail and of course there were people who specifically oversaw that program it was not like, "oh somehow we just lost track of who was overseeing these cash disbursements and their laundering through the system." Those all had names associated with them, not one of those people as far as I am aware has lost their job, been demoted or fired or let alone gone to prison. We have really horrible cases too coming out of other U.S. banks where they do things like put people into the home owners mortgage modification program, homeowners assistance, the HAMP thing, and shove them into that whole thing. Then maneuver to make sure that those people get lost in the system so that the checks that they are sending in to it do not clear in time. So now, they are technically in default and then seize their property after knowingly putting people into default situations. Whether there is a law against that—which I hope there is—the lack of moral compass in that story is extraordinary. So when you say our banks are too big to jail and are doing some funky things, I am detecting a severe lack of espirit de corps that we are all on the same team in this particular story.

John Rubino: Yeah, I mean you nailed it basically, there are actual people doing these things. Corporations do not do things, they are just a place where people do things. Individuals have done each one of these things and presumably, they knew they were illegal. Because it is pretty clear in retrospect that this stuff was at a minimum unethical, and usually, overtly breaking the law. Where is the media in all of this? You would think you could win a Pulitzer Prize pretty easily by just naming names, going in and spelling out exactly what was being done in these big banks and the government institutions that support them and then coming up with the list of people who did those things. You do not see that anywhere except to an extent in Rolling Stone, of all places, Matt Taibbi is doing some really good investigative work. But you would think this would be something that the New York Times and The Washington Post and pretty much every big newspaper otherwise anywhere else would be all over because this is how you make a name for yourself. You can get famous, win awards, increase your circulation and make more money by breaking, big important stories. This is arguably one of the biggest, most important story of our time, the financial system devolving into basically a branch of the mafia and taking the government with it. Yet you do not see it, I cannot explain that either except to the extent that a lot of big newspapers and magazines are owned by corporations now who might not see it as in their interest because a lot of it will come back to bite them at some point. However, man, you know it seems like there is a wide open door here for some enterprising reported to win a Pulitzer.

Chris Martenson: I feel like that wide open door is where you have your nose and I have my nose. It does create opportunities, which is that for people who want to—are a little bit curious and want to start piecing the story together for themselves—there is plenty of opportunity to do that. And by the way, you have to because for the most part the big mainstream media outfits are not telling the story that needs to be told. Not on any dimension I can possibly tell. The context necessary to understand what is going on in the Ukraine is not that hard. Go back to about 1989 and you can figure out what the story is. Mostly I had to piece together really the United States' involvement in Ukraine from alternative media sources, from foreign news sources, even Putin’s own four and a half hour long press conference where he gave this entire history of Crimea going back to the 1700s with the central context, all of that. So we live in this context free environment where things just sort of happen and you just have to accept that banks are too big to jail and it is all too complicated and all that. Yet at the same time, I know you have a series of articles out right now, articulating that the markets are potentially not what they seem. If this all feels a little bit like we are all unknowing participants in the Truman Show, like we are all Truman, I do not know if you saw that movie with Jim Carey where he is this guy in a movie set and he does not know it. That is how I kind of look at the markets now that they tell me almost nothing useful anymore which is a problem for me because I have always relied on markets as being my personal canaries. I would carry them around with me and if the canary died I would know that something was happening. I do not really trust the markets to tell me much anymore. Most recently the biggest piece for that was looking at the Portugal Bank, Banko Espirito Santo.

John Rubino: Yes.

Chris Martenson: This thing goes belly up; it defaults on some of its bonds just for humor. Goldman had a Buy rating on that stock until this morning, it is destroyed; "Alright we are going to take the Buy rating on that off..." None of the rating agencies were out there picking this thing up. The credit default swap spreads on this were only a hundred and seventy three basis points a month ago, those shot up to three hundred and seventy basis points after they defaulted. I was like, "What are you talking about?" That should be fourteen, fifteen hundred basis points minimum for a defaulted company. Minimum. That is the world we live in.

John Rubino: Yeah, one of the tricky things about Espirito Santo is that it is part of a series of interlocking corporations where one owns twenty percent of the other and a third owns a bunch of both. When one piece of that interlocking chain of different financial companies gets into trouble, it reverberates through the rest of the system so that is what happened here. One of the companies defaulted on some debt, which caused the other company to run into trouble. You have the system that is so opaque that no analyst can really get in there and figure out who owns what and what the impact of something over here is going to be... You just cannot do that when something reaches a certain level of complexity. One piece of this thing blew up and took the rest of it with it.

Now you can argue that the whole global financial system is in basically the same boat. Even an entity like Goldman Sachs which owns all the different pieces, or JPMorgan Chase—they have derivatives books and they have securitization operations and they have prop trading desks. These are all within the same corporate umbrella but they are all separate operations and any one of which can blow up and take the rest of the system down with it. Then you have cross ownership among all these big banks. And you have loans from one big bank to another big bank, and we cannot as individual human beings manage the complexity of a system like this. We cannot dig in there. The best banking analysts in the world cannot make sense of all of this. We are always going to be surprised by what the system does now because it is at a level of complexity that is beyond the comprehension of an individual human brain. We should expect more stuff like this to happen. I mean, that is what happened in 2009 when the derivatives system blew up. You had insurance companies getting into trouble and threatening to take down the whole global financial system. And we are, if anything, more complex and more financially fragile now then we were, and more opaque. Nobody can figure out what is going on here, not the regulators, not bank analysts, certainly not the government bureaucrats and the politicians that have to make rules governing all this stuff. We had a chance after any of the last few financial crises—whether it was junk bonds or tech stocks or housing—to simplify the system. We could have gone back instead of forward in terms of imposing regulations and separating out different kinds of banking functions, and we did not. We went the other way, we deregulated everything. Now we have a system that is so intertwined that you cannot pull the pieces apart and make any sense of it. We will only, as with so many other things now, understand what is going on in retrospect when historians sort through the rubble of this system and try to figure out exactly who did what to whom and what the effects were. All we can do now is just live through it and know there is going to be a huge amount of complexity leading to a huge amount of volatility, leading to some kind of a crisis out there, whether it is a debt collapse like in the 1930s or hyperinflation like Weimer, Germany or some new hybrid that is based on all of the derivatives that we do not understand but are totaling like a quadrillion dollars now in notional value. We do not know what it is going to be, but we know some kind of a crisis has to come from this kind of complexity and fragility and instability.

Chris Martenson: Now I think the Espirito Santo story tells the tale in microcosm. I am not as familiar with all the holding companies and their formulations, but just the way you described it, it sounds a little bit like Enron. The reason a lot of corporations go into complex corporate structures and shells is so that they can hide stuff and do stuff. Company A makes a loan to Company B, it gets swapped out as an asset on the books of Company A so they take a financial snapshot and say "hey was have this asset" and they do not incur the liability as being a consolidated liability funneling back through. There are games like that. That is what Lehmann was doing, there are all sorts of games being played all the time. As you mentioned regulation has actually softened, not gotten any harder across this. We have the Mark to Fantasy rules now so financial institutions can guess what they think their assets are worth and call that the true number. When you get right down to it with all of these derivative products that are sitting out there, everybody has this sense of safety. Because if my Greek bonds that I bought go bad, that is okay I bought credit default swap insurance. If the stock market really starts to go down it is okay because the Fed will provide the support and come in and not allow that to happen. That type of thinking seems to be about as prevalent as I have ever seen it. And again, there is a lot of opportunities to curl my toes and make my hair stand up straight, but this last week's article was the one about how junk bonds are now at record low yields, record high issuance rates, and the number of them that have covenant light loan agreement attachments to them is now over fifty-one percent. So people are just so hungry for yield they are in junk trading with a four handle. "I will take 4.9% on this junk bond; I do not need any covenance ,that is okay. I am sure that Flighty McSpeedy’s company is going to be good for it." It is insane and here we are.

John Rubino: This is by design Chris. The government is actively trying to force people further and further out on the risk spectrum by lowering interest rates to the point where you flat-out cannot live if you are a retiree; you have a bunch of cash that once yielded six, seven or eight percent and was enough to live on. Now it yields 0.2% in a six month CD and so you basically starve if you have to live off the income from your savings. Two choices: One is you eat your capital, you start spending the money that you saved. Or you find something that yields a little bit more and so you have all this supposedly safe capital pouring into riskier and riskier assets like junk bonds, because the people feel like they have no choice. Pension funds are doing the same thing; that money is supposed to be managed very conservatively but it is going more and more to equities and junk bonds and real estate. The reason for that is that is the only way to make their targets. We are creating fragility at every level. These retirees who thought they had enough to have to live on now have a portfolio of junk bonds and equities with probably some global bond funds thrown in for good measure. Those are very volatile instruments. Eventually, even in normal times, those kinds of things have big corrections.

So you are going to see a lot of people who cannot afford to lose anything of their capital, losing thirty, forty, fifty percent in the next market correction. That is if we just have a normal correction in junk bonds, so you could see sixty, seventy, eighty percent losses on a lot of these things. The pension funds of the world cannot afford that. Retirees cannot afford that. But that is the world we have created.

You really have to wonder about the policymakers who are doing this right now. Because do they not understand this? Or is there some later stage in the plan in which they want this to happen and they are going to do something at that point that is in their best interests, as opposed to the best interests of the people that they are impoverishing? I do not know. I am not sure which one scares me more, whether these guys are clueless or whether they have a plan and the plan is in some way to harvest us. I do not completely understand how they want to do it but if they are attempting to do it then they must see some benefit out there in the future.

Chris Martenson: Yeah so it is a choice: Do you want your ship that is being charted through unchartered waters—do you want the clueless idiot for the captain or the evil genus? Who is piloting this ship? I vacillate, John, between those and I am convinced more and more that these are just normal people with egos. I am sure they have plans; most plans do not survive first contact with the enemy. We have never been in a situation this complex, this intertwined. Most of it though—this is the part I do not understand how so many co-called "investors" (I have to put air quotes up when I say that word now, “investors” they are all speculators) have thrown all caution to the wind because one of the things that is really required—there are a lot of things that are required to keep this particular set of inflated asset bubbles fully inflated, right? Oil cannot get any more expensive, probably. That is not going to help anything out. Wnd we need to have continued access to growth; if that growth genie does not return and bestow his magic on our land a lot of these numbers do not work out. There really cannot be any series of defaults, we cannot go down a deflationary path at all or all the junk bond things we are talking about will just come roaring up as one of many heads of the hydra to tear this thing apart. But mostly what is really, really required is that we do not have any geopolitical fracturing. Europe and U.S. and Japan all have to be singing from the same hymn book, we cannot really have any further devolution in the relationship between China and the U.S., Russia and the U.S. Yet this past month has been extraordinary and I would love to get your observations on this because you have been tracking things around the dollar. The number of countries that have been openly calling for an end to the petrodollar, including France—France is in that club now, right? Those stunning announcements by China’s president about how chaotic and bad it would be if there was an actually conflict with the United States. That is a harsh sort of thing to hear from the President of China. Russia obviously not happy with us at this point in time. And now recently Germany, not one, not two, but three spying scandals now and they really started to distance themselves and they are very unhappy with the U.S. I put all that together and I say "hey maybe somebody might want to say there is a risk here somewhere." I cannot detect that risk if it is being perceived by these so-called investors; I cannot detect it in the markets anywhere.

John Rubino: Yeah, the markets are behaving as if we are in the best of all possible worlds. The reason that is happening is that these are not free markets anymore, they are all manipulated. The U.S. stock market is the perfect case study here where we have lowered interest rates to a point where corporations can now borrow very cheaply and buy back their stock and they are doing it on a vast scale. Gordon Long over at Macro-Analytics ran the numbers the other day and found that if you have a two or three percent dividend on your stock, it actually makes you money to borrow at a slightly lower rate than that and then buy back your stock, collect some tax breaks along the way, and it is a cash flow positive strategy. A lot of these companies are now buying back their own stock without any regard to the price of the stock other than the fact that it is low enough to give them this tax break, free cash flow strategy when they borrow money to buy it back.

So you have all this indiscriminant buying going on which is pushing up equity prices. At the same time, you have the world central banks suddenly intervening in the equity markets, which is something that they probably did all along but secretly and on a fairly small targeted scale. Now they are doing it indiscriminately. Three percent of a given country’s stock market, they just go in and buy each stock, three percent. It looks like it is spreading and the scale is growing really dramatically lately so you basically have an unlimited amount of money—because these global printing presses are effectively unlimited—with which to buy equities. So the supply of equities are dropping because corporations are buying them back in.

At the same time the world central banks are creating new currency and buying the remaining equities indiscriminately. It should not be a surprise that equity prices are going up, but you still do not want to see that. It is still not a good thing because it destroys the prices signaling mechanism of the equity markets. It used to be that when a given stock went up it told you something; it told you that whatever that company is selling you should make more of it or you should use less of it. It does not tell us that anymore. Stocks are going up fairly indiscriminately. So that is yet another pricing signal that we used to be able to use. As you said, markets used to tell us things. Well they do not tell us anything anymore, other than the fact that they are being manipulated so we should be really leery of anything they do tell us. Obviously this cannot end well.

The fact that a printing press, a modern printing press—which is basically an electronic system now in which governments can just press Send and increase bank reserves around the world—when that is fully operational as it is today it is basically unlimited. So you really do not know how far this can go because these guys do not have any technical limits to how much money they can pump into the stock market or the bond market or use it to manipulate foreign exchange or depress the gold market or whatever; name your market it is all being manipulated. They have unlimited ammo right now. We do not know—because this is unchartered territory—how far the imbalances can go. How big these bubbles can eventually reach before they eventually blow up. This is completely uncharted territory and all you can say with certainty is that the bigger these imbalances become, the more extreme the correction has to be to bring them back into balance. You cannot say anything about the timing because we do not know how far the process can do.

Chris Martenson: Well, it can go further than anybody expects. I think bubbles get as large as the gap between reality and hope. We have a huge gap right now. I think reality is very clearly saying "hey world, you are facing some real limits." There is only so much blue fin tuna the ocean is going to offer; this is only so much oil that will come out of the ground; there is only so much fresh water, particularly in certain regions; there is only so much earth that can be plowed and planted. We are facing for the first time real limits and I think those are going to obviously have to put a cap on the percentage growth we can expect. In times past, when the limitation was—it is a function; tell me how many people you have, tell me how much money is floating around and how much resources you have and I will tell you how fast your economy is going to grow. By the way, it is sort of constrained by things like productivity and technology and the workforce and all that stuff.

You could just sort of count on that happening. You cannot anymore because obviously to grow three percent per year is easier when you are smaller than when you are larger. We have a very, very large world economy at this point so adding a global three percent gets trickier every year. More importantly, growth requires resources, real stuff. And the Fed is over there in Fantasy World thinking that it is money that creates—you create enough money and real stuff follows. I hold the opposite view; money is an expression of and needs to be in relation to real stuff. I do not think that the main architects of this system have yet caught on to the idea that the system needs to run at a rate that it cannot run at anymore, and how are we going to get around that? There is just a big issue lurking there which I think—the stock market might look forward a quarter or two, maybe four quarters, maybe a little further, but the kinds of things that are really facing us—you have to have a ten year vision, twenty year vision to really hold. Theoretically the body politic is supposed to have that longer view and boy it does not.

John Rubino: Yeah. Chris, you are doing especially interesting work on energy right now. I think it is fascinating that the U.S. is in the middle of an oil and gas boom right now. We are now producing more oil than we produced at any time in the past fifteen or twenty years I think. Yet the price of oil is still over a hundred dollars a barrel. So we are clearly at the end of the cheap oil era. We can produce as much as we want to now but we cannot do it cheaply anymore. The internal structure of the fracking boom and everything makes it look like even today’s price is probably is not sustainable. Maybe we can produce a lot more in the future, but it is going to be at a hundred and twenty, a hundred and thirty, a hundred and forty, whatever dollars a barrel without any global geopolitical issues going on. Clearly we have hit the limit to cheap energy and we are going to have more and more expensive energy in the future, which is on one hand great for clean tech. That means kind of an open market for solar now, just this huge vacuum that will suck in solar panels for the next twenty or thirty years and make the best solar companies very profitable investments.

On the other hand, that is not going to lower the average cost of energy because we are still so dependent on fossil fuels. That is going to act like this huge tax increase, going forward, on a system that is already struggling. We already have overwhelming amounts of debt and now we are going to have increasing energy costs going forward, irregularly but still in general increasing. So yeah we are reaching limits at a time that we are borrowing more and more and becoming more and more fragile and less and less able to deal with the consequences of those limits. Somewhere out there is the collision between those two trends, and when it happens it will be something that nobody alive today has lived through, certainly.

Chris Martenson: No, it is a whole new thing. What is interesting is when I talk with people who are in their twenties, many of them get that and they really are just like "what are you older people doing? What are you up to? I do not get it." It really looks like just clinging to the status quo for the sake of it all.

So to help us get our minds around when it might end, let us go back to a comment you just made because I think in the micro we can sometimes understand the macro. So you articulated a process. Here is the process: A company has shares out on the market and it has to pay a dividend of, I will make a number up, three percent. It discovers that it can borrow money at one percent in the short term paper market and so it can go out and borrow money. It will have more debt on its balance sheet and take that money and go buy shares in the open market. Then again it does not matter what the price is because if you have a dividend yield of three percent, and you are buying those shares with one percent money, either you have a tax credit or a benefit that happens in the process with that. The whole thing pencils out and guess what, CFO’s should be doing that because it makes good financial sense. Can you unwind that process for me? What happens when that has to go the other direction? Or does it?

John Rubino: Eventually you reach a point where you cannot buy back anymore stock. In the extreme case there is none left; you buy that last share of stock and you are no longer a public company. Big corporations are not going to get to that point so at some point they have to stop. If they need to raise capital—because remember they have taken on a huge amount of debt to buy back the stock they bought back. At some point they need to raise capital to offset that debt. Really the only way to do that—you cannot issue more debt to pay back debt, especially at these low interest rates, because you are not going to see rates drop to make that work. You have to issue stock. So at some point this unwinds via huge increases in stock issuances by major corporations. All this buying pressure that we see now that are pushing up the value of stocks—it will reverse. What we will see is selling pressure on the part of corporations trying to issue stock to raise capital. That will push down the value of the average equity in the U.S. and around the world, and that is just emblematic of all these trends. Eventually they have to reverse out; they cannot go on forever. And then you will see the opposite effect on the markets. Right now it is positive, we are taking on debt, we are buying assets, asset prices are going up. Well at some point we have to pay off that debt and we have to do that by selling the same things that we were buying in the past and that is going to push down prices. Even leaving aside a crisis—even if we do not have anything serious happen as far as a disruption in the derivatives markets or geopolitically or whatever—you still see us building up huge amounts of selling pressure out there on the things that are going up right now. At some point, based on this process, equities become an incredible short because you will see a normal correction followed by companies trying to sell stock in order to build up their capital base, which pushes down prices down even more. There is no real way to say where the end is to something like that. When that really gets going it becomes a full-fledged crisis. A bear market turns into an equities collapse. So we are building up the possibility for that now too. Everywhere you look we are building up imbalances that have to be unwound and will cause a huge crisis when they are unwound. The question is: Do you these things happen sequentially so that we can deal with them or do they happen all at once? That is the worst case scenario, where all these imbalances have to be unwound at the same time and they become feedback loops for each other, each making the other one harder and harder to deal with until it is impossible to deal with anything. That is probably the highest probability scenario right now because when one thing happens it will affect the other things. When derivatives blow up, they will affect equity prices and that will affect pension fund behavior and that will affect government budgets . You will see everything spin out of control at the same time and we will get something that—as you said—we have never seen before. So we cannot predict with any certainty because it is going to be completely uncharted territory.

Chris Martenson: This is the completely mystifying part of this process for me: 2008, that was the shot across the bow. You had Hank Paulson at the time then Treasury Secretary marching into Congress in the closed door session with his magic three page memo which basically said "give me three-quarters of a trillion dollars and you cannot hold anybody accountable for whatever decisions we make. And by the way I am not going to tell you what is spend it on" and they said no and put a little transparency into it but he still got the three-quarters of a trillion. His argument was: We do not know how bad this could get but it all kind of looks interrelated. This is a systemic thing, which is shorthand for: It could get really ugly and we do not understand it. That was the moment I think to begin making it systemically understandable and systemically no longer threatening. Would you say we are more systemically vulnerable today or less?

John Rubino: Oh, more. Which is astounding because you would think that if something like that happened to your family where your finances just spun out of control and you were one day away from bankruptcy, as soon as you got things under control in the short run, you would immediately start trying to simplify your life and make it understandable and less fragile. We went the opposite direction; we allowed the big banks to get even bigger because we basically guaranteed the big banks—that was the Greenspan Put, among other things—it allowed them to use this implicit government guarantee of their finances to expand and take market share away in mortgages and other parts of the economy away from smaller banks so they got even bigger and their derivatives got even bigger. The government budget deficits went through the roof of course so government debt soared. So basically the fragility that almost gave us martial law in 2009 is more extreme now than it was back then. Now you have government budgets that are completely out of control. You have probably done a lot of analysis on Japan and your listeners know that story. The short version is they borrowed more money than any other country as a percent of GDP in history. They let interest rates go up by just a couple of percentage points to globally normal levels and they are bankrupt. The U.S. is not far behind and Europe is just a mess no matter how you look at it. That does not include—when you look at government debt—that is not including the unfunded liabilities of the government pension plans, which in Europe they do not even bother trying to fund them at all. In the U.S. we underfund them grossly and I am not sure how Japan does it but I assume they are making the same mistakes the rest of us are making. You add that in and it is another million dollars per family of four of debt that has been loaded on to the global economy. How all this ends is completely unpredictable in the details but completely predictable in the broad strokes. It is going to be a financial crisis that is even bigger than the one we would have had in 2009 and it is coming and it could be coming soon.

Chris Martenson: Well let us go to Japan for a second because I do think it is a wonderful metaphor. It is a very large economy, so it is not an irrelevant sort of side show that we are tracking here. They are ahead of the United States in a demographic respect, so they are about ten years ahead of us in terms of aging. On their current trajectory, Japan goes from a nation of about a hundred ten million to somewhere between sixty-five and thirty-five million people by the year 2100. So they are depopulating and they have a culture and laws to support it that basically do not allow a whole lot of immigration and population additions that way. So assuming that Japan is losing population as it goes forward and has more and more people entering retirement, which means that they are drawing upon their savings rather than adding to the productive side of the economy, which is totally fine. You have to step back and go "okay those two trends mean that on a debt per person—but most importantly on a debt per productive member of society, that is an economically contributing member of society—those numbers are just skyrocketing." For all the people that are saying "yeah Abe has managed to give us some slight inflation and the appearance of economic health," any competent thinking person would say "yeah but what is the plan? Where are you going to be in twenty years? Is debt per person going to be twice as high as it is today? If so how does it get paid back? And if it does not get paid back, who is left holding the bag?" That is ultimately the only question I am interested in these days is who is holding the bag. Because somebody has to pay for this, right? Somebody has to take the losses.

John Rubino: Yeah, Chris, and the final solution in every case across the board is going to be a massive currency devaluation because the only way you deal with this debt is to cut it in half by making your currency half as valuable. That means the debt that you have to pay back does not change in nominal terms but you are paying it back with cheaper currency and so in that way you hope to get out from under it. The people who suffer from this are savers. Anybody who trusts the currency and holds dollars or euros or yen as the basis of their financial life is going to be screwed by this. Because they are the ones who are going to take the gigantic haircut. If you are Exxon, you are basically as valuable as you were in the past no matter what the currency is doing because you own real assets. Somebody who owns stock in Exxon is going to be okay, but if you have a bank CD, say you have a five year CD yielding one percent, and your currency is devalued by thirty or forty or fifty percent, that is all loss for you. Your net worth just went down in real terms by that much. It is yet again an example of how savers are the people who are being hurt by almost every major government’s policies.

You are doing a great job with Peak Prosperity of helping people figure out how to deal with this. We are really past the point where we even need to talk about whether a crisis is coming; we know it is and we know the general outline of the solution, which is massive devaluation. What we do about that as individuals? That is the real question now. So becoming more self-sufficient and lessening your dependence on the local fiat currency—all that stuff is what people should be focusing on now rather than even bothering to watch the news, I think. I think some kind of a crisis is baked in the cake and it is going to be resolved through massive devaluation. You as an individual and your listeners should be thinking about how you are going to come through it and possibly even make money from it. That is what James Turk and my new book is about, it is about how you position yourself so that you not only sail through this, but you end up possibly making a lot of money on the process. Because huge changes—huge crises—bring huge opportunities. Things are going to go way down, but some other things are going to go way up. So you want to be shifting out of the stuff that is going to go down and into the stuff that is going to go up in the event of a massive currency devaluation. That at least is something that is simple enough that we can understand. We cannot figure out what is going on in JPMorgan Chase’s balance sheet, but we can figure out how to move our CDs into precious metals and how to make ourselves more valuable at work and how to lower our expenses. That is all stuff we can handle. So that is really what I think we should be focusing on.

Chris Martenson: Absolutely. So let me ask you this then: How do we experience currency devaluation if every country has that same plan?

John Rubino: Well, Jim Rickards, who I think is one of the absolute best analysts of this process, says that we all do it against gold. We cannot devalue against each other because that is a zero sum game with a limited life span. You push down the exchange rate of the dollar versus the euro, well that helps us in the short run but it hurts Europe and they are going to retaliate by pushing down the value of the euro. Eventually everybody figures out that the one thing they can devalue against is gold, so gold becomes ten thousand dollars an ounce (which is another way of saying the dollar is worth one-ten thousandth of an ounce of gold) and we peg it there and in that way create a sound currency going forward. We do that at the expense of everybody who saved dollars because all of a sudden their dollars are now worth one-fifth as much or one-seventh as much or whatever of what they were before. That, when you see it that way, is a fairly simple process that you can prepare for. The investment aspects of that play are pretty straight forward. What becomes complicated is how you deal with the political aspects of it. Are they going to confiscate gold before they do this like they did in the 1930s? Are they going to empty out your bank accounts along the way? Are we going to have capital controls that stop us from moving money from one country to another and trap us here before they raise wealth taxes or whatever? That is all within the realm of possibility and it is something that we have to plan for at least to the extent that we can. That is complicated, but also really interesting. I think it is a fascinating puzzle to try to look through the different scenarios and come up with solutions for each one that allow you to keep at least most of your capital.

Chris Martenson: And real assets of course fit into that scenario for you as well—land.

John Rubino: Yeah the government cannot make more land so it is going to go up in terms of dollars if the dollar goes down in value. It does not mean that piece of farmland got any more valuable, it just means the thing we are measuring it with changed and so in dollar terms your farmland goes up, your oil well goes up, your gold and silver coins go up. Real assets that the government cannot create in unlimited quantities, the way it can created currency, will be the winners in this process. You are already seeing it at the high end of the spectrum. The one percent—people who have a lot of free cash to play with—are converting that cash into fine art, London townhouses and farmland and of course equities now. But they are already doing it; they already see what is coming. So we are seeing booms in those asset classes that are usually interesting to rich people. The question is: How do we get on board? You cannot go out and buy a Rembrandt—most people cannot—but we can buy gold and silver coins, store them in a safe place. We can have some bullion stored overseas for us. We can buy equities in companies that own real assets—those would be the mining stocks and the oil companies and to an extent farm related companies, although there are not that many of them out there but there should be pretty soon. We can play this along with the one percent and benefit along with them but then the second part of that process is: How do we keep it once we make it? That is where it gets really challenging.

Chris Martenson: Well it does get challenging, obviously, it is more and more challenging. We are starting to see stories come out that the one percent are starting to say "hey this might not actually end all that well for us if it turns out all of the wealth is sort of ended up in just in a very pockets." You become Brazil. Nothing wrong with Brazil but I mean people who live down there who have wealth have to live with 24-7 armed guards in gated communities under the constant threat of kidnapping, extortion or home invasion armed robbery. It is a lifestyle, but it is not one that I would aspire to necessarily and you can see that we are getting in that direction with this gap. The political solution is to just be more and more redistributive and give more and more out through a variety of hand outs in a variety of ways. That keeps the lid on the pot for a while, but at some point it is not possible for the government to continue doing that because they are just simply—the resources do not exist for everybody to get a cut like they did in the old days; somebody has to cough something up. Who do you think that is? Which side of the spectrum pays first?

John Rubino: Well the way it works in reality is that the middle class gets soaked for all this stuff because high end capital is very mobile; it is really hard to keep track of and it is hard to tax. Look at Apple’s finances. They have billions of dollars overseas that for them is very tax advantageous. Google does the same thing, they lower their taxes by spreading their money out around the world and governments are not able to keep track of it. To go after the one percent and say "okay we are going to impose a wealth tax on everybody that has more than ten million dollars" or whatever, you would see a huge decrease in the number of people with ten million dollars in your jurisdiction. They would just move and they would send their capital to some place that you cannot track. That has always been going on, but in times of aggressive redistribution it happens on a bigger scale. The ideal world is where you do not have these huge income and wealth disparities and where there is a lot of upward mobility. The question is: How do you get back to that from—because we were once that way in the 1950s, 1960s and 1970s in the U.S. Wealth inequality was nothing like it is today. But once we went to a pure fiat currency, and the government can create as much of it as it wanted to and gave it to the big banks and the big banks gave it to their preferred customers you saw inequality start to grow. One thing you do is go back to sound money, which makes it harder for governments to redistribute from the middle class to the rich. Then beyond that, it gets tough because you cannot do overt redistributive policies that affect the one percent because you cannot catch them. Even if you could, you end up with a system that makes the government even more powerful, which leads to more inequality. It is not easy to see how this works.

And that is why Latin American countries have been such a mess for such a long time. They began with, basically, oligopolies with a few families ruling everything. And ever since, they have been trying to become egalitarian societies and they cannot do it. And that is why you have these recurring crises in Latin America. Now we have created a situation where we are in kind of that boat, where our income and wealth inequality is comparable to Argentina's. It is not clear that we can do a better job than Argentina or Brazil have done in the past because it is not easy to get huge amounts of money away from people who have acquired it and who can move it around the world. I do not know what the solution is; I know sound money is part of it and may be the biggest piece of it. Once you go back to a sound money that does not allow you to play all the games that the big banks and the world's governments have been playing, you reimpose morality to an extent on a society.

Because sound money is really a moral issue as much as it is a financial issue. It means you have to keep your promises. Governments have to maintain the value of their promises. A piece of currency is basically a promise that if you hold on to it today you will be able to exchange it for something of equal real value sometime in the future. Governments have been breaking that promise consistently since 1971 and that moral corruption has bled over into every other aspect of life. If we go back to imposing financial morality on governments, that is a start. Beyond that, I would not even pretend to have a solution.

Chris Martenson: Well even that start is going to be quite the trick. Because last time I ran the numbers in order for the U.S. Federal government alone to close its budget deficit they could tax one hundred percent of the income of everybody earning over two hundred and fifty thousand dollars—a hundred percent tax—and it would just about close the gap. There is obviously a big gap between income and expenditures. Japan has a huge one, and Europe has a huge one. I do not see any way around it personally except for people to square up to reality and say "we kind of promised ourselves a little bit too much, it looks like we cannot have those promises, how are we going to close that gap and do that in some sort of a fair way?" Everything since 2008 has taught me that we are not going to do this the fair way; we are going to do this the other way.

John Rubino: Yeah because how do you tell people who are dependent on government-run healthcare that they are going to get much less, they are not going to get that operation they need because the money is not there, while you have a group of people who are just insanely rich and a bunch of big banks that are just running rampant, committing crimes and paying out huge bonuses based on the revenue from those crimes. You will not be able to do that politically because the people you are trying to take money from are going to say "no take it from those guys." Then you end up with a system that looks an awful lot like Eastern European central planning, which will not work either. You are going to lose the wealth creation vitality of a society if you try to take too much from the capitalist class, so you cannot do that. Then you have something out of Atlas Shrugged where they just disappear, capital just goes on strike. Again, I am not sure what the solution is.

We all have to take less, obviously. We have all made promises or been promised things that we are never going to get. How we get from today to a general acceptance of that, it is hard to see how we do that without it being incredibly messy and full of strife. That is why governments around the world are preparing for civil unrest and they recognize that their financial policies for the last thirty years have led us to this point and that any fix is going to involve a lot of trouble. They are preparing for riots in the streets, domestic terrorism, and electoral turmoil in which every election is a "throw the bums out" event. You always have the new people in charge and they are always failing to live up to their promises. That is what we are looking at on some scale and it does not seem like we can avoid it and I think governments recognize that. They are planning for—we were told in 2008 or 2009 that we were a day away from martial law. Well if that is the way it was then, with all the increases in financial leverage and fragility, there is no reason why we cannot see that again. We could see something politically out of 1984 if we do not watch ourselves. We are creating the conditions for it.

I think that on the political side—obviously financially we have to do the stuff that we just talked about, but on the political side we should be educating ourselves so we can make the case when the time comes for sound money, limited government, individual freedom, a return to basically constitutional principles. So there are enough people speaking out for those things that maybe we can offset the people who are saying "well this was a failure of capitalism, therefore we need a dictatorship." That is going to be a hard argument to win when this all blows up because it is going to look like it was capitalism's fault. You inherit your times just as you inherit your family; you cannot really do anything about it, you have to be part of your time. That argument I think at some point is going to be the defining trait of our time and we need to participate in it.

Chris Martenson: To be clear: We have not really been practicing capitalism for quite a long time.

John Rubino: No.

Chris Martenson: It has been something that needs a different name. I laughed before when you said we are going to 1984, I was just thinking about how it was just recently revealed that some researchers were using Facebook with DARPA money to find out the impact of using social media. If you just feed people happy stories or let them see a little bit more of the reality of the world, could you steer how people’s emotional responses tended to be? And the answer was yes of course. They would specifically titer or limit certain people’s news feeds to just sort of happy stuff. Here is how you know that the revolution has arrived: You are going to go to Facebook and you will only see posts about cats and kittens on your Facebook feed and you will say "wow it must be bad out there, I guess today" or something [laughter]. Because they are preparing.

But to me it is obvious that the government is clearly concerned and they have militarized our police forces and they are investigating ways to shape our perceptions both overtly through the media, which most people have caught on to, but also more subtly by doctoring our news feeds and our social media streams. Guess what: It is all fair game. I think that that is what that day away from martial law taught me was that when the people in power get that scared, anything is possible. Literally anything can be rationalized after that. Buy the stock market? Come on. That is the easiest thing on the list. I am sure there are much more interesting things on that list when you get right down to it. So that is the world we live in.

And so I guess, in closing, the only thing I can take away from this is: The more manipulated the markets get—the higher the stock market goes against all reason and the equity and the bond markets and all of these markets—the higher they go against all reason, the more I am convinced that it is my personal duty to be as prepared as I possibly can be mentally, physically, financially, emotionally, all of that. Because my faith in a small non-elected group of people controlling the ubermarkets with precision is zero. I have zero faith in that outcome.

John Rubino: Yes it is going to end badly. They are going to mess this up one way or another. But it is completely beyond our control, so it is time to tend our gardens, as it is time to take care of our own lives and be as embeded it in our communities as possible and know that that is going to be the unit when the time comes. Those we meet with and trust and deal with face to face, that is going to be the group that saves us when the time comes and who we participate in saving. It is time to get going on that.

Chris Martenson: Absolutely, I could not agree more. John thank you so much for your time. We have been talking with John Rubino, he runs and that website—go to it, it's got a lot of great information on there. A few great articles up, a three-parter actually. The most recent book, The Money Bubble, and that is at Amazon and you can find links to it on his site, it is all there. John anything else to how people can follow you?

John Rubino: No that covers it Chris.

Chris Martenson: Alright, he has great stuff obviously. It is just always a pleasure talking with you John so thank you so much for your time today.

John Rubino: Thanks Chris I enjoyed it.

Chris Martenson: Thanks and I am going to return to this playground we call Maine and the Maine Coast.

John Rubino: You go have fun.

Chris Martenson: If anybody has heard some strange noises in the background that is because this is on the road. With that John thank you so much for your time and I hope to talk to you again soon.

John Rubino: Thanks Chris.


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