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Titanic Forces of Deflation vs. Inflation Do Battle

Exclusive John Rubino Interview; GOP Contenders Squabble over Rearranging Deck Chairs

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear from John Rubino of DollarCollapse.com and Bearing Asset Management. John speaks about a scenario he sees ahead that could be quite explosive for precious metals, the likelihood of a Fed rate hike, and the implications of an explosion in debt amid a faltering economy. Don’t miss my interview with John Rubino coming up in just a moment after this week’s market update.

Well, so far this month, gold and silver prices have neither broken out nor broken down. They are little changed on the week, with gold coming in at $1,097 an ounce and silver at $15.04 as of this Friday morning recording. Silver is back up over $15 and up 1.5% for the week after a nice little pop earlier today.

But the real story remains the demand surge for physical bullion products. It’s causing supply chain shortages to spread. More on that in a moment.

First, a brief detour into politics. Like it or not, elections do matter to your personal finances. And to the prospects for sound money and a sound economy.

GOP presidential hopefuls took to the stage this week in their first debate ahead of the Republican primaries. The favorites of party establishment and punditry have lately played second fiddle to the surprise front-runner, Donald Trump. The blunt billionaire is striking a chord with grassroots Republicans who are sick and tired of conventional politicians. And our listeners may be encouraged to hear that Trump at least has the sense to own a significant amount of physical gold bullion.

Yet aside from tough talk on illegal immigration, Donald Trump’s policy platform doesn’t appear to be all that unconventional. He has stated flat out that he won’t campaign on cutting government programs. His pitch to voters is that he will do such a great job managing the government that we will be able to grow our way out of our debts.

But with all due respect to Mr. Trump, his multi-billion dollar real estate empire pales in comparison to the empire of debt he would be presiding over as President. We’re not talking billions, but rather trillions. $210 trillion to be specific. That’s the total estimated fiscal gap, inclusive of all unfunded liabilities, that the federal government faces.

Anyone who proposes closing that gap through revenues alone is engaging in wishful thinking. If the deficit spending continues unrestrained, then we’ll continue to move toward national insolvency. The only remaining question is whether the U.S. government eventually defaults on its debt, like Puerto Rico just did, or whether it defaults on the promise of a stable currency. Unlike Puerto Rico, the U.S. can conceivably cover all its nominal debts through aggressive money printing.

Even though the Federal Reserve won’t be on the ballot next year, voters can still demand that candidates for national office take positions on monetary policy. It’s too important an issue to be left to unaccountable elites who operate behind a veil of secrecy, which is why grassroots groups like the Sound Money Defense League have been growing. Audit the Fed and Audit the Gold legislation would at least shed some sunlight on these shadowy players.

Most politicians would rather talk about their pet issues while they pay lip service to fiscal responsibility. But any talk about getting debt under control is empty rhetoric as long as the Fed’s artificially low interest rates and bond buying programs continue to facilitate runaway government spending.

It’s like dangling candy in front of a kid. The candy of easy money is just too tempting for Uncle Sam and his minions in Congress to resist.

And because there are few tangible signs of an inflation problem right now, most politicians perceive no downside to the Fed’s endless interventions. Of course, the downside to perpetually kicking the can down the road is that nothing is ever really solved. The government, the banking system, and the economy are now so dependent on Fed stimulus that we may never return to normal rates of interest and the Fed may never exit the bond market.

When investors wake up to the reality that the Fed’s negative real interest rates are ultimately bad for bonds and bad for cash, they will turn to hard assets such as precious metals for safety. That’s exactly what large numbers of people are doing right now. Even though institutions that trade paper have been relentlessly selling futures contracts to drive down prices, demand for bullion products is as robust as it’s been in years.

Public demand for gold and silver coins, rounds, and bars has skyrocketed since mid-June. In fact, from June 16th through the end of July, Money Metals Exchange experienced a 135% surge in gold and silver sales over the prior 45-day period. The number of first-time customers rose even more dramatically – by 365%.

Overwhelming demand for actual physical metal has led to significant strains on the supply chain, particularly in silver. Many government mints, including the U.S. Mint and the Royal Canadian Mint, have been unable to keep up with demand. They have either temporarily halted silver sales of silver coins or rationed out their insufficient supply.

Private mints have scrambled for raw silver to keep production running at full tilt. Major national depots have run dry. Physical inventories in Comex warehouses are being depleted.

As a result of shortages in refined silver products, premiums over spot prices have risen on all silver bullion products except for some of the largest sized bars. As items become harder and harder to come by, any further spike in demand could cause the whole supply chain to be cleaned out. Physical silver could become completely unavailable at the retail level. Too many people want it at these low prices.

Anyone who believed that hammering down spot prices would kill investor demand for bullion got it completely wrong. The raids on spot prices have helped fuel a surge in demand for investment-grade precious metals products. Admittedly, much of the supply problem currently is related to production bottlenecks… but if raw silver becomes widely unavailable, we’ll see some real fireworks.

Well now for more on the metals, Fed policy, and the possibility of negative interest rates and the continued war on cash, let’s get right to this week’s exclusive interview.

John Rubino Interview - Money Metals ExchangeMike Gleason: It is my privilege now to be joined by John Rubino of DollarsCollapse.com and Bearing Asset Management. John is a former Wall Street analyst, and a writer for CFA Magazine and a featured columnist with TheStreet.com. He's also authored several books, including the Collapse Of The Dollar And How To Profit From It. John it's good to have you back with us, how are you?

John Rubino: It's good to be back Mike. It's good to talk to you.

Mike Gleason: Well to start out here I wanted to ask about everybody's favorite topic, naturally, that being the shadowy Federal Reserve, of course. Now when we had you on the podcast back in the spring you predicted the Fed would not raise interest rates, given the economic environment. Now as we approach this must discussed Fed meeting this month, a point in time when many have speculated the Fed would finally raise the short-term interest the first time this decade. What should we expect there John? Do you stick by your prior prediction of no rate hikes this fall?

John Rubino: The Fed needs to raise interest rates, from their point of view. That's their ammunition. Whenever there's a slowdown in the economy or any kind of crisis the main response from the Feds is to cut interest rates, make money more available, and in that way get people borrowing and spending again and mute the effects of whatever downturn or crisis that they're dealing with. They can't do that now. Interest rates are flat out zero at the short-end, and historically low at the long end of the US. They don't feel like they have any ammunition.

If we had an out-of-blue financial crisis right now, and they wanted to respond to it with lower interest rates they'd have to go negative. We'd have to negative interest rates in the US which is historically unprecedented for more than a few days, and what would bring all kinds of distortions, would really mess up the signaling mechanisms of asset prices, and many other things and probably cause a crisis that's bigger than the one their dealing with. So they don't want that to happen. They really want to raise interest rates as soon as they can to give themselves some breathing room to cut later on.

Unfortunately, they're looking at an economy that is so over indebted that it's not growing at the pace that you would normally see the Fed raise interest rates into. In other words manufacturing is weak. Overseas, China has a financial crisis of sorts. They borrowed too much money, and they're stock prices are tanking. In Europe it's just flat lining, it's hardly growing at all, and it's inflation is pretty much at zero. Japan is a mess. Oil prices are plunging. Commodities are down across the board. Now US stocks are starting to rollover. They're down again today, and looking like they're approaching ... at least for Dow Jones Industrial averages, approaching a correction level which is down 10 percent. That could easily rollover into a bear market especially, if the Fed raises interest into this really, over leveraged, overvalued, very dicey financial market.

So the Fed is extremely worried. Right now they're dithering. They had one of their talking heads come out a couple of days ago and say, "Well, you know, it's not guaranteed that we're going to raise rates in September. We've been talking about it, but we're data dependent. We're going to look at the numbers and see what happens." That's their way of starting to back off a bit from this promise/threat of higher interest rates beginning in September. If the numbers continue to deteriorate from here there's a good chance they won't do it even if they loved to do it. They might try raising interest because it's such an important thing for them. If they do raise interest rates I suspect the impact on the financial markets will be exaggerated. It will be a fairly hard hit to an already dicey, weak market, and the Fed will have to back track very quickly.

I'll go out on a limb and say that in 2016 the trend in US interest rates is down and that we end up with negative interest rates by year-end for the first three or four years in the yield curve, so negative Fed funds rate, negative two and three-year treasury yield. That's my prediction. If that happens that's a sign that the global economy is so weak, and that Quantitative Easing of the past few years has failed so miserably that the governments of the world are left with basically nothing.

They don't have any more tools, and they're going back to their old tools and just taking more extreme versions of interest rates and monetary creations, and that because the previous iterations of those policies have failed so miserably, people are going to start to suspect that the next batch are also going to fail, and then you get a financial crisis that has a life of its own. If China, Europe, and Japan and the US are all in some kind of turmoil at the same time then, it's a very different world from what we've seen the last couple of years. There's a very good chance that that's what we end up with sometime in 2016.

Mike Gleason: It seems like we've rate hikes priced into a lot of markets. Certainly, you would think precious metals is one of those where we do have a rate hike already priced in. If we don't get hike in September, what do you suspect will be the results in these markets?

John Rubino: The short-term will be a big pop in something like precious metals. You're right, that's weighing on gold and silver, the idea that the government might start raising interest rates here pretty soon. So you get a pop. When people start thinking about the reasons that the government is not going to raise interest rates ... that we're heading into a period of deflation that might turn into a 1930s style deflation collapse if something new doesn't happen. That in the short-run would be bad for gold and silver, because people would start worrying about deflation. Then, you get responding to that by ramping up a new even bigger quantitative easing program and cutting interest rates to below zero, and that would be good for gold. So we've got a pendulum swing going on here, where the deflationary aspects of too much debt vie with the inflationary aspects of too much money creation and too much interest rates alternately.

Sometimes we'll read about deflation which is what's starting to happen right now. Sometimes we worry about inflation which was the case from 2010 to 2012 more or less. That was a great time for precious metals. The governments of the world were just pumping out huge amounts of currency everywhere you look and people were expecting that, to have an inflationary impact. It's not clear where we end up. The deflationary forces are incredibly powerful. We've never had this much debt in global financial system. We've never been so fragile before, and that includes 1929. We've never been in much of a danger of deflationary collapse as we are now. On the other hand we've never had the whole world with unlimited printing presses that they're running flat out. We've never created this much currency. We've never pushed interest rates down this low before. We've never run government deficits anything like those of the past five to seven years.

We've got these titanic forces out there right now. Inflationary on one hand and deflationary on the other. It's not clear who wins in the end. My guess is that an unlimited printing press eventually trumps a huge but limited debt collapse. So somewhere out there the governments of the world will overreact create too much currency, push interest rates down too low and ignite some kind of what the Austrian economist call a 'crack-up' boom where people just lose faith in currency. It becomes obvious that it's explicit government policy to devalue the currency year, after year, after year for as far as the eye can see, and then nobody wants to hold the currency any more, right? As soon as you get paycheck you can convert it to real stuff.

We saw a little mini version of that in Greece towards the end of its two weeks of ciaos there, where all the banks were closed and everything. People didn't trust their bank accounts anymore. They assumed that Greece might leave the Eurozone, convert bank accounts that were in Euros to Drachmas at 50 percent haircuts. In affect people lost faith in that aspect of their money. Even though the country was in a depression, electronic stores and other places that sold things--where you could take your paycheck and go buy something real--they couldn't keep inventory on the shelves. People were running out to buy stuff, and not because they felt confident about their future, but just the opposite. They didn't trust their banks accounts. They didn't want to deposit their paycheck in the bank, so they just spend it.

The whole world is going to see something like that in the not too distant future. But instead of being worried just about your bank account, you'll be worried about the currency that you're bank account is denominated in and that your paycheck is denominated in. So we will just go out and we will just buy real stuff without currency. We won't want to hold the currency. That's what an overreaction on the part of governments to a debt-driven deflationary collapse would look like, where they just create too much currency. Instead of getting steady growth they get huge instability that turns people off on these fiat currencies and sends us running into hard assets.

Mike Gleason: Truly unprecedented times for sure. It's a very confusing world as to what's going to end up playing out there. Yet, we see it much the same way, you do, in terms of how it plays out. It leads me into my next thing here. In terms of what the governments are capable of doing in a time of crisis, last time we spoke we talked about the war on cash. I want to talk cover that with you a little bit here again today. Obviously, the whole Greece situation which you just spoke about a moment ago, was a good little example of this war where governmental and banking overlords are waging against bank depositors, including blocking them from pulling cash out of their bank accounts. What's the latest on that front? Is this movement to do away with cash continuing to get traction?

John Rubino: Yeah. And the point of the war on cash is that as we talked about, governments pushed interest rates down to zero in negative territories in some cases. And there's a problem with trying to go beyond that. Anybody with money in the bank, who is being charged for their savings account ... In other words, if the rate on your CD, or your checking account or your savings account is negative two percent then, why keep that money in the bank? You just pull the money out, keep it under your mattress or wherever, and you don't have to pay the negative interest rate. Well that short-circuits the government’s ability to push (interest rates) sharply negative. So they're looking for ways to maintain the ability to lower interest rates.

One way is to make cash really, inconvenient to use, and/or completely illegal. They're trying different things right now. For instance, in some countries they're limiting the size of payments that are legal in cash. In other words you just can't go out, in France for instance, and buy a car with cash. You have to use some kind of electronic payment. In other places they're talking about putting, for instance, stickers on currency, that lowers the value of the currency. You have to go out and get a new sticker every couple of weeks if you keep cash, and if you don't do it the cash becomes invalid, and if you do it the cash becomes less valuable overtime. In that way you’re incented to spend rather than save your cash. They're lots of other things they're trying.

The gist of it is that if they feel the need to push interest rates down to below zero, they want to have the ability to do it. And cash is standing in the way. What they're going to try to do is to eventually push us all into electronic accounts, and make cash in some case illegal and some cases just super-inconvenient and hope that we choose not to use it.

There are technical problems with this, but the bigger problem is that you lose the last vestige of financial privacy, if you have to have to transact completely electronically. Then, the NSA , or the IRS or whoever else has access to you accounts can watch what you do 24/7. They've got your location on your cell phone, and they're also listening into your conversations through your cell phone. They've got your transactions via your credit cards or your cell phone, if you use iPay or whatever. So they see you 24/7. You have no privacy whatsoever anymore. Cash is sort of the last little bit of privacy that we have left. You take that away and it gives immense power to the people in charge, even more immense than they currently have. It's really a civil liberties issue more than an economic issue.

I would say though that if they take this to its logical conclusion and make cash illegal then, what it'll do is create a black market in transactions that bypass traditional fiat currency cash. So you might see bit coin or some other crypto currency become the transaction method of choice for a big part of the world. Or we go back to silver coins, or gold coins or something like that. Things that we can transact in privately. The governments of the world will have bitten off more than they can chew if they actually, try to make cash illegal or just incredibly inconvenient. We'll choose other ways to transact. We won't just pushed completely into an electronic transaction systems. So the war on cash is actually very good for gold.

Mike Gleason: One of the other things that they don't like, because it gives liberty to those who have it, is of course, gold. I know you follow the precious metal markets quite closely. There's been a lot happening there. In terms of physical demand, it's literally through the roof here at Money Metals Exchange and other national dealers. Product is becoming harder and harder to come by, given the record sales we're seeing. There's just a massive disconnects developing between all of the physical market demand, leading to shortages at the retail and wholesale level. Primarily for silver, but for gold too. All of the papers selling in the futures markets that's driving down the price. I wanted to get your thoughts on those developments, including the flash crash we saw about two weeks ago, when gold was taken down dramatically during a period of low liquidity in the wee hours of the night. What's your take on all this? Both the manipulation and then, also just the disconnect, the bifurcation between the physical and the paper markets?

John Rubino: It's fascinating, and it's reminiscent of 2008, 2009; 2010. Remember how hard it was to get silver coins back then? And gold coins? There was a shortage of physical metal back then, at least at the one ounce coin level. I remember ordering some Krugerrands for my father-in-law, and paying for them and not getting them for three months. He was pretty mad at me. I tied up his money for such a long time. We're starting to see something like that again. Now that's at the stage for a really, rip roaring boom market in precious metals from the point they ... In the case of silver, nearly tripled and gold nearly doubled, from the time that I'm remembering coins being so hard to get. It's possible that we're recreating 2008/2009 in a lot of different ways.

The stock market is at bubble levels, and is starting to rollover. Commodities are getting crushed. Gold and silver are way down, beyond anything we thought was possible. Gold and silver stocks are down even further. That was all pretty much the way it was in 2008. This feels like that to me. The surging demand for one ounce coins is a part of that. So it's possible we're setting the stage for another nice long run, when the people who are buying right now of course, take so much off the market, and they have no intention of selling at these levels again. You're moving precious metals at the physical level into very strong hands right now, to the extent that there's huge demand. That metal is off the market for a really, long time. It's got to double before those people are going to want to turn around and sell again.

We're creating the conditions in which we could see a nice run from here. But that doesn't mean it starts today. Commodities are still collapsing out there. Gold and silver are at least partially commodities. Gold is money, and silver can be considered a monetary metal. They'll tend to hold their values while pure commodities fluctuate. But they're still subject to the same forces. If we're going to have a deflationary scare in the second-half of this year and early in 2016, which we easily could, these things take a while to play out. They really, don't seem to run their course yet. We could see another down leg in precious metals. At some point in the not too distant future we find a bottom. If physical demand is as strong as it is right now, we'll see shortages everywhere, and that'll become front page news. That'll set the stage for a really nice run. It's coming. It's been brutally painful for anybody who owns a lot of gold and silver the last couple of years.

Once we hit the bottom, we're back in 2010/2011 which was a really nice time to be owning these things. It's a timing issue. For us to feel smart, it really depends on when we bought, what we own, going into this nice up leg in the future. I can't say whether now is the time to load up. Somewhere out there in the next couple of years that time is coming. The people who back up the truck at that time are going to be the ones that have an awful lot of capital to do interesting things with five years hence.

Mike Gleason: It's certainly starting to act like a bit of a safe haven here, at least among the precious metals buying public. I think that's probably driving a lot of the demand here recently, and it will continue to get very interesting as we see maybe, shortages develop as you mentioned. Well, John it's great talking to you again. It's always outstanding stuff. We know you're a busy guy. We really, appreciate your time and your great insights. Thanks very much for joining us.

John Rubino: Thanks Mike. Good talking to you.

Mike Gleason: Well that will do it for this week. Thanks again to John Rubino. The website is DollarCollapse.com. Be sure to check it out. John and his staff put out some first rate stuff there. You will not be disappointed. Be sure to check it out.

And don't forget to check back here next Friday for our next weekly market podcast. Until then this is Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.

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