What Next? Framing the Evolving Macro-Financial Crisis

John Rubino, of DollarCollapse.com joins us to discuss these issues …and much more…


In this Episode, we discussed:

  • Waves and Cycles
  • Debt Jubilees
  • The War On Cash
  • Developments in China
  • Hyperinflation
  • COMEX Default
  • Book Recommendations


Jeff Lewis: Hi, everyone, it's Jeff, here. I am pleased, and it's an honor to be here with John Rubino, and many of you know him. John runs DollarCollapse.com. It's an excellent ongoing commentary, covering the unfolding macro-financial/currency crisis. He's a contributor, a long time contributor, to CFA magazine, the CFA is the Association for Financial Professionals, if you haven't heard of it. He's been on wall street. He has an MBA in finance. He's a Eurodollar trader, equity analyst, and he became a columnist for thestreet.com, among many other publications. Now, you can see his work pop up, frequently, on zerohedge.com. In addition to that, John's written many books, starting way back with “Clean Money: Picking Winners in the Green Tech Boom”, “How to Profit from the Coming Real Estate Bust” was another one, “Main Street, Not Wall Street”, and lately, he's co-authored two books with James Turk, “The Coming Collapse and How to Profit from It”, and “The Money Bubble” is the most recent. You can find all those books on dollarcollapse.com. They're also available on Amazon, I'm sure. John, thank you for being here. Welcome.

John Rubino: Hey, Jeff. Good to be back.

Jeff Lewis:We've been kind of talking about, in your commentary ... I actually took a step back, and went back to “The Money Bubble”. You had characterized, and spoke or discussed, waves and long-term trends. I've always been quite fascinated by, I think, the legitimate prophecies that were presented in books like, The Fourth Turning by William Strauss and Neil Howe. You were very careful to point out that you can't really put a date, or a timeline, on these prophecies, or with these trends, but are you surprised that it's gone on for so long, that we haven't capitulated?

John Rubino: Oh, yeah. Well, there's a chapter in the book you just mentioned, plus a series of articles on dollarcollapse.com, with the title The Long Wave Versus the Printing Press. Basically, the gist of it is, yeah, there are these long waves. They have different names, Kondratieff wave, and Elliot wave, and Fourth Turning, like you mentioned, that all point towards long cycles in human affairs. They're based on psychology. We are, at times, very pessimistic after a hard stretch, and we're really conservation. Then, that conservatism leads us to invest wisely and cautiously, and we start to make money. We get cocky, and then we get exuberant. Then, everything crashes again. We go through these cycles, time after time after time, throughout human history.

We are, according to every single long wave theory out there, way past the point where we should have crashed. Somewhere around the late 90's, or the early 2000's, should have been the end of the long wave, no matter how you define it, now matter what indicators you look at. Yet, here we are. Still, kind of, sort of, expanding, and quote unquote normal, according to most perceptions. The reason that we've been able to keep things going longer than we have in previous long wave cycles is the printing press. There's never been a time, In history, when all the world's major governments had unlimited fiat currency printing presses. In the past, money was mostly sound, which is to say it was based on real stuff. You couldn't just make more of it out of thin air. When people borrowed too much money, they couldn't get the money to pay off their debts. They started to default, and the system started to crash.

Anytime that happens now, the governments of the world just create a lot of new currency, throw it into the banking system, and it buys us some more time. What it also buys us is a chance to borrow even more money. After each one of these reflations, after the tech stock crash in 2000, and after the 2008/2009 crisis, we took on massive amounts of new debt, so we became even more leveraged and more fragile. We set the stage for an even bigger crisis, in the future. At some point, we have a crisis that is so big, and so comprehensive, and so destructive, that even these central banks, with their unlimited printing presses, won't be able to stop it. When that comes, it's going to be immense. It's going to be historically unique, bigger than the great Depression, bigger than anything that's come before, because of the debt that the printing press has allowed us to take on after we should have stopped, reconsidered, paid off a lot of our debt, and started again, from a more sustainable perspective.

There's no way to know when the final crash comes, but we could be seeing the beginning of it right now. This is what it will look like when it starts, the first week of 2016. We had, basically, the worst stock market week, to open a year, ever. It was really wide spread. The US markets were down about sic percent, which is the worst ever start we've ever had. Yet, we were one of the better performing stock markets out there. China, Brazil, big chunks of Europe, large stretched of the developing world, were all worse than us. Japan, Canada ... they did worse than we did. It was a global wake up call. We'll see if that's an indicator for things to come for 2016, or if it's something that they immediately short circuit with lots of easy money. There's no way to know.

What is fairly certain, is that out there somewhere is a crisis we can't handle. We should be preparing for it. That's kind of the point of a lot of the writing I do now, is, okay, take for granted that this is all going to blow up. What do you do, if you're an individual? How do you invest your money? How do you manage your lifestyle, to be ready when things really get crazy?

Jeff Lewis: Yeah. How do you have a conversation with someone at the Thanksgiving dinner table? People generally don't want to talk about it, don't want to face it, would rather believe that what's happening today ... The DOW was up again, was up a little bit. I think it's down now, but people will immediately try to characterize what happened in this first week of the year as, oh, it'll be fine. We're down ten percent, but then, we'll be up two percent a couple days in a row. People will forget, and then, immediately kind of become, I guess, complacent, and rely on ... It's interesting, you point out the complexity that all of this debt overhang has created, and how really, ultimately fragile it is. There's also, I think, on the flip side, a perception that complexity is more robust.

I remember, in graduate school, in medical school, learning about anatomy and physiology, and then, moving on to pathology, and then, kind of going through a stage where I thought, every little sensation was the ... must have been the sign of an impending kidney malfunction, or I had a rare liver disease. Yet, it's always astounding to me how long things that seem so fragile, can go on. When you're ... Over the holidays, if you were confronted by a relative, or an in-law, about what's happening, how do you characterize it for the person, really, that's not necessarily plugged in, or someone who's on the street, so to speak?

John Rubino: I have learned, really, not to proselytize with this. It seems like there are two groups of people out there, at least that I run into. One group is, basically, on this. They might not have the depth of information that somebody like you has, but they know things are going badly. They understand borrowing too much money is a bad thing. They see a lot of societal trends going in the wrong direction, and so, they get it. Their question is, when are my gold coins going to go up? Something like that. Their question is one of timing, not of direction.

Then, there's a lot of other people who say, "You know what, I've been hearing this gloom and doom stuff for 20 years now, and it still hasn't happened, so you know what, it just seems like they've figured out a way to kept it going. The people in charge want it to be this way, and obviously, they can keep it this way. Why do you ever think that it ever has to end?" That's not a fruitful argument, either. My response to something like that is, "Yeah. You're right. It's gone on way longer than it should've been able to go on, and it'll end eventually. Then, we can talk about it more."

I don't try to really convince anybody of anything. That's a really hard thing to do. I think, the older I get, the easier that becomes. I don't feel the need to express opinions to people who have already formed their own opinions.

Jeff Lewis: My strategy has been to maybe ask some questions about where people are coming from, just to find out where they are. Not really try to come at it like where ... Yeah. Proselytize. It's more, engage them on where they are, see where they are, and if they show, or exhibit any sign of being able to go there, then you can ask them what they think about something else, or maybe ... It's not manipulating them, necessarily, but just guiding them along a path that maybe they already know the answers to a question, if they're asking them.

In terms of the crisis that's really unavoidable, and as you characterize, is something that the powers that be, the fed, the policy makers, really can't do anything about ... Whether we call it a ... it's sort of the end of a natural deflationary cycle, that really just has to happen. It's just natural law, really. What do you think they will do in response to this? Will they ... You hear about helicopter drop ... We know that the government has a massive amount of unfunded, coming due now, liabilities. Will printing to keep the government alive create ...? Will that be the tipping point? I guess, the question, I'm sorry, is what will policy makers do the next time around?

John Rubino: Well, they are pretty good example of that old saying, that when all you have is a hammer, everything in the world looks like a nail. They basically have easy money. That's their policy. That's the only thing they've got that seems to have worked for them, in the past, so they'll do it again. When things start to spin out of control, here, as they will, sometime soon, then, the US will walk back that whole wraith cut thing they've got going in a hurry. They'll switch to cutting interest rates, and introducing some new QE program, and probably, they'll pull out some new, experimental ideas. There are a few left in the easy money toolbox.

One that gets talked about a lot, now, is the debt jubilee, where instead of creating a lot of money and giving it to the big banks, which really didn't work, because first of all, basically, criminal organizations. It's like handing it to the mafia. Second of all, the big banks haven't felt like lending that money out. They just turned around and deposited it at the fed. We didn't get this huge bang for trillion and trillions of dollars of bucks put into the system.

This time around, the debt jubilee idea is that you give the money directly to people. That's also helicopter money, really, as you mentioned, where the government just creates five trillion dollars, and then deposits that money in our bank accounts, or sends us checks, or gets it to us in some other way. It might be with the proviso that we have to use that money to pay off debt, or it might be some kind of guaranteed income, where everybody gets ten thousand dollars a year, from the government. It might be something else. There are lots of ways to do this. There's a good chance we'll see that, because, first of all, it's really popular. Could you imagine running for president, and having that be the thing you just did, before the election? I gave everybody ten thousand dollars. In a traditional, recent, American environment, that would be a winner, I think, politically.

Jeff Lewis: Yeah. It sort of dove tails with this movement to eliminate cash, this ... It's an extra layer of control to have in place. If you were going to fund electronic accounts with ten thousand, or more, dollars a year, and you wanted to make sure that money went to wherever you wanted it to go, it's a way to make that happen. I suppose, thinking out loud, it could even benefit the banks. It could be that money is directed in a way that doesn't hurt ... I think, the traditional debt jubilee would destroy the banking system, right? This is another way of kind of keeping the system, I guess, the banks and the government ... It's really kind of ... It's sort of a seamless relationship, anyway. Interesting.

John Rubino: Yeah. The whole negative interest rate thing, and the war on cash, is also part of what will probably come. If they're going to cut interest rates from here, they got to make them negative, right? Why would you leave your money in a bank? The bank is going to charge you, rather than pay you interest. Negative interest rates bump up against that whole money being sucked out of banks thing. The government, if it wants negative interest rates, has to do something about the attractiveness of cash.

The war on cash, which is a term you see a lot, to describe all kinds of policies that are being put in place, around the world, to make cash less attractive, will involve something like fees that attach to holding cash. In other words, making cash lees and lees valuable, over time. For instance, if you have a twenty dollar bill, it's worth twenty bucks today, but the government might only give you nineteen dollars for it, if you hold it for a year, then, eighteen dollars six more months after that, or whatever, to get you to spend, rather than save, cash. Lots of other things are being tried, including the limitation on what you can buy with cash. In some parts of Europe, you can only spend three or four thousand euros in order to buy something with cash. If you try to buy anything more expensive than that, you have to use plastic. We'll see stuff like that.

The question becomes, will it work? Will the market finally see stuff like this as an admission of failure and a sign of weakness, on the part of the governments, and then react in the opposite way to what the government wants them to do? Some day that's going to happen. Some day, the creation of money will be seen as a negative. Inflationary policies will lead to people dumping that currency, rather than wanting to use it to buy stocks and bonds. People will start to buy real stuff with their currency, as quickly as possible.

You'll get what the Austrian Economics School calls a crack-up boom, where people just, when they get paid, convert that currency into real stuff. The prices of real things go through the roof, relative to the currency. It looks like inflation, in the sense that an increasing supply of currency usually leads to higher prices. What it really is, is a collapse of confidence in the currency. When that happens, it'll manifest as hyper-inflation. Prices will really spike, but it will actually be a vote of no confidence in the government. That's out there, too, somewhere, you just can't know where. It could be this year. Could easily be this year, or it could be 2025. There are just no way to know. The more money we borrow, the closer we bring ourselves to that point.

Jeff Lewis: Right. Right. Where it doesn't really require that much of a confidence drop to turn things over. It could be some policy response that seems mundane on the surface, but then, has this reaction that is unexpected. Kind of like, in general, what a lot of policy ends up becoming, anyway. It ends up doing the opposite of what it was intended. Switching gears just a little bit, I was curious to know what you ... Obviously, China has been in the news. Their markets have been crashing. There's been a lot of debate. They seem desperate, from a policy standpoint, to maintain confidence. Most people are now shorting the yuan, and people have been ... Investor have been expecting a significant devaluation, and they haven't had one. It strikes me as reminiscent of what's happening in any large economic system or government, the control economic system where fiat money is available, that they will try and do ... This, again, I should say, is in the backdrop of ... Does China really need all the gold that they're buying, if they're implementing policy that's really a continuation of this Keynesian experiment?

John Rubino: China's behaving as if they understand what's happening. They see the amount of debt that's being taken on all around the world, and get that we really have no choice, in the developed world, but to devalue our currencies really aggressively, in order to get out from under all this debt. They're buying gold, which is the traditional form of money, that can't be created in infinite quantities by governments, and that, therefore, usually goes up in value , versus the currencies that governments are currently destroying.

Maybe China is just investing. Maybe they're just buying something that they think will go up in value, or maybe they're trying to back their currency as solidly as possible, with something that will be taken seriously in the future, which is traditionally what gold has been for, as well. It's a reserve asset. You back your currency with it, and people, then, believe that your currency is nice and solid, because it's got all this gold behind it. Maybe they're doing that, or they, maybe somewhere out there, in the future, are thinking about going on a full blown gold standard, where they literally back their currency, and make it convertible, with gold. Then, have the world's reserve currency replace the dollar with the yuan.

There's no way to know exactly what their motivation is, because they really don't tell you much about what they're thinking, in China. They're a really opaque society, still. It could be any of those things, and they're all inter-related, and they're all good for China. If any of the scenarios that we're talking about here actually play out, China's gold hoard helps them greatly, to get through it. To the extent that we're sending them our gold, we're going to be disadvantaged by what comes.

Jeff Lewis: Interesting. That leads into another, a final question to run by you. In terms of gold, and really precious metals, and actually, you could say the same for most commodity prices ... The price discovery mechanism is centrally, is pretty much, for the most part ... Worldwide commodity prices are discovered using the future's market mechanism. It's really become an interplay, like a lot of markets, between pure speculators, in essence. This has led to a distortion, I think, in real value, kind of to say the least, especially in the metals.

China, perhaps, is benefiting from that. The price that they pay for gold,, if it's determined ... if it's lower than it ought to be, then they aren't going to be complaining. As we reach these tipping points, we finally ... all of this debt ... We crossed the Rubicon, and now, new policies will be implemented, emergency measures, whether it's helicopter money, or some sort of jubilee, and we begin to see a fall in confidence, and a rise in prices, how do you envision that sort of mismatch between where ...? Does the COMEX become, at some point, irrelevant? How do you see that mismatch being resolved?

John Rubino: Well, the paper, gold, and silver markets are fractional reserve banking systems, basically. They've got claims that dwarf the reality of the gold and silver on hand. At some point, there's a pretty good chance that the people who have futures contracts, who today aren't asking for actually delivery, they are just closing out in cash, settling in cash, will start asking for the metal, itself, to be delivered to them. It only takes a ten or fifteen percent increase, over the people asking today, to bankrupt the COMEX, and a lot of the other fractional reserve metal systems. We could easily see a default on one of these exchanges. That would just blow this thing up. If, all of a sudden, the paper market didn't at least give you the option to choose physical, then the point of the paper market would kind of be called into question, and wouldn't really trust futures contracts, and wouldn't use them the way they use them now.

Your fall back with the futures contract is that if things really go your way, you actually can get the real stuff, where as you might not be able to get it otherwise. You may not be able to buy it in the stock market, but if you've got a futures contract that allows you to take delivery, you feel like you're covered, but if that's not the case anymore, then it all blows up, and the price goes through the roof. People will be scrambling to get it, wherever they can. There really isn't that much out there.

These just aren't liquid markets. They're not very big, and they're not very liquid, especially in the case of silver, where there really just isn't much silver. If a couple of hundred billion dollars flowed into the silver market this week, it would just send it to the moon, because it's a small market. That's chump change from the point of view of a major government or something, but from the point of view of the silver market it's big bucks. Capital flows shift just minutely from traditional investments, like stocks and bonds, into precious metals. It would have a profound impact on precious metals, because they are so much smaller than the government bond market, or the Blue Chip Equity market.

Jeff Lewis: Yeah. Very interesting. I like that ... I appreciate that characterization. I really appreciate you taking the time to speak with us. In wrapping up, where can listeners find you? Let me ask you, just before we wrap up ... I'm always interested in this question. I get this a lot, and I'm constantly looking for resources. Can you give us a couple of books that you are reading, that are having some influence on you, currently?

John Rubino: I'm on kind of a history kick, right now.

John Rubino: I think anybody who hasn't read “The Big Short”, yet, should read that, or at least see the movie. That gives you a kind of sense of what's going to happen again, here soon. There are people figuring out what to bet against, right now, who haven't been right, lately, but are beginning to be right. They're going to make a fortune. They're going to be the modern versions of the guys who are profiled in The Big Short. That's one that I would recommend to people.

Then, another one, that I just listen to ... I listen to a lot of recorded books while I do yard work, or house work, or whatever. It's called "The Brothers", about the Dulles brothers, who ran American foreign policy back in the 1950's. Anybody who think that we're the good guys in international affairs should listen to this book. We did some amazingly horrible things around the world in the 1950' and 60's, that a lot of people don't know about. I've been paying attention to this stuff for awhile, and I didn't know 90% of what was in that book. It gives you a real sense of the reason that the world is the way it is today, and that brings us back into geopolitics, like in the Middle East right now. We're at fault for most of what's going on there, and the commodities markets. Part of the reason oil is crashing Is because we screwed up in the 1950's. You can go all the way back. That leads back into modern economics, and why the markets are the way they are. There's a lot of interesting history out there that I recommend people take a look at, but that one in particular, is very useful.

Jeff Lewis: Great. The Brothers, and the other one was The Big Short, which has become very popular, I think. Did the movie come out already? Yes. It probably did.

John Rubino: Yes. The movies out, and it's getting good reviews. Somehow, they made an interesting, funny movie out of a finance story. I'm really curious about how they did that.

Jeff Lewis: Yeah. I would definitely want to check that out. Well, again, thank you. John, what's happening next for you? What can we expect, in terms of ... You've been on quite the treadmill, in terms of producing and publishing these books, and I know you're really busy at dollarcollapse.com, but what's happening?

John Rubino: I'll be starting a new book pretty soon called ... at least the working title is “After the Crash”. The premise is that, yeah, we got this financial crash coming. We know about that and everything, but what happens at the bottom, when the debt we've taken on has been flushed out of the system, and most of the main asset classes have just cratered? What should you be buying? It turns out that there's a ton of fascinating new technology coming along that will power the growth stocks of the next generation. That's what we should be educating ourselves about right now. Advanced solar power, for instance, and regenerative medicine, and new digital testing, medical tests, things like that. It goes on and on. The book will break these things up in to chapters, that, hopefully, will be kind of easy to understand, and give readers a starting point for researching this stuff, and for creating a sample portfolio of the best companies in these fields, that then, they can use to create a real portfolio at the bottom.

Jeff Lewis: Now, that's interesting. It just struck me as you were describing that, as evidence that as you open yourself to the truth about what's happening, it enables you to see, and at least have a little more optimism, than one would think. Many people think, well, if you're so focused on discussing or documenting a train wreck that's kind of unfolding as we speak, that's a pretty lonely existence. Really, what you're demonstrating as you work on this book, is that the ability ... the willingness to actually look at what's right in front of you gives you, I think, a keen, or at least some insight, into what's the next step, where as everyone else, if they're oblivious, or if they refuse to look at what's going on right in front of them, how could they possibly see beyond ... see clearly beyond any other point. If they just think that things are just going to move in a continuous, or a linear way, then they're sort of missing out on a potential opportunity. That's great.

Well, we all look forward to hearing about it when the book is announced, and when it comes out. Good luck getting through it. Once again, thank you so much for taking the time to speak with us today.

John Rubino: Yeah. Thanks, Jeff. Enjoyed it.