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Financial Sense Newshour

The BIG Picture Transcription

September 29, 2007

Part 1

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Part 2

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Part 1

[Commercial Jingle for Mr. Bubble – “take a bath with Mr. Bubble he’ll get you so clean your own mother won’t know you!”]

Dying of Money: Part II

JOHN: Well, I'm not even so sure my Mother wants to know me with or without. You know what's really bad? You know what I discovered?

JIM: What's that?

JOHN: You can get to be as old as I am and your 92 year old mother still tells you, “don't pick your nose, don't scratch yourself there, don't do this…” It's totally disgusting. It's like, “Go away. Leave me alone. I'm a grown man.”

But here we are, we're all taking a bath with Mr. Bubbles Ben Bernanke. Boy, are we taking a bath!

Last week on the program, we did a segment here on the Big Picture called Dying of Money. That was Part One.

Today we're going to do Part Two. The process of currency depreciation, we're going to continue that discussion today.

Over the last two years, Jim, you've been more optimistic on stock prices than most of your peers. Last year you predicted a new record in the Dow. Of course, that came roaring through this year. This year you predicted three things. This is a reiteration for a lot of our long time listeners, but it frames the issue here for today's discussion: First of all, the real estate financial crisis, slowing economy and a capital market crisis which equals Fed rate cuts.

And so what's happening now as everybody on the talkies is talking about, “should he cut some more?”

“I don't know, go all of the way to the bottom, stay down there. Let's imitate the Japanese.”

That was one this week I heard. Let's do what the Japanese did.

JIM: Well, you know, John, it wasn't that I was optimistic on the stock market from fundamental reasons. It has more to do with a recognition that the stock market is serving as a relief valve for inflation. Remember, we've always talked about on this program when money is created, it has two outlets. It can go into the financial markets creating asset bubbles or into the real economy. And speculation in the financial markets is another common bogie of inflation. All of this buying, selling or constant trading is just a prime unproductive example of activity and the prime source of reward in an era of inflation. So in essence, stock market speculation is the principal relieve valve that conceals latent inflation pressure. It becomes, as Jens O. Parsson talks about, the good part of inflation, because if asset prices are going up, whether it's stocks or real estate, John, we all get that artificial wealth effect. We think, “This is really nice. My assets are going up in value.”

It's only when inflation enters into the real economy that we get all of the political problems, all of the social problems and economic problems that come about in the latter stages of inflation when things are all bad. That's when we experience the bad inflation. So it was recognition that the stock market as a relief valve is another source of all of this money that has been created that we've been talking about.

And by the way, just for simplicity's sake, I coined the term B-52 Ben. I'm shortening that to just Bomber Ben.

JOHN: Okay. Bomber Ben is now the official stamp there. Take a note of that, would you. Okay. We'll do that.

Basically, when we begin to inflate the money supply, sometimes instead of inflating the price of economic goods that the consumer sees, it could actually be diverted to inflating stock prices. At which point the consumer really doesn't see it.

JIM: No, because it's the relief valve. It's that good inflation; everybody feels like “wow, look at the stock market going up, times must be good.”

You know, there are various fundamental reasons or all kinds of backing that people will use it, but basically, a lot of this money that's being created is just simply finding an outlet for it and it's in the stock market, which means higher prices.

So one of the reasons I predicted last year we'd see a new record in the Dow is that I was watching the money supply figures and saying, okay, it's going into the economy because we’re seeing higher prices. But a good majority of that was going into the financial market with money flows into the market which equals higher stock prices. [5:16]

JOHN: Right. So all of this functions as a relief valve for inflationary pressures and keeps it out of the economy and also the political highlight by the way because the consumer isn't too upset.

JIM: You're absolutely right because there is another relief valve which is our payment system or deficit system. That's another relief valve, John, because what it does – our trade deficit reflects or what I call exports part of that inflation as well, the trade deficit minimizes the portion of the domestic effect of money inflation. So the net export of money reduces the price of inflation at home and distributes it abroad.

Let me give you an example. If we were living in just a contained system, where everything that we used or consumed in the United States was made here, the extra demand that comes in from money creation would drive the price of goods up because you would have more demand for goods than we could produce. But when we can siphon off that money into foreign goods, it takes some of the pressure on domestic goods; and in essence, we're deflecting part of those inflationary costs by exporting that inflation overseas. [6:30]

JOHN: Okay. But then there is an obvious question. There is a certain point at which foreigners may not want to absorb that inflation. What happens if they stop accepting dollars?

JIM: If the US payment deficit were successfully blocked and it's inflated money was shut up at home, John, then what we would see is US price inflation would be much, much worse than what we're currently reporting even though today we still under report what real inflation is. [6:59]

JOHN: But currently, Jim, this doesn't seem to be happening. I mean foreign central banks, especially if you look around Asia, keep trying to peg their currencies to the dollar. And so for right now, there doesn't seem to be any motive or stomach to have a strong currency.

JIM: That's true and, in fact, John, I think what we're in effect experiencing is competitive devaluations. And I just call this the 21st century version of a trade war. The fact that foreigners keep their currencies from rising substantially is serving to keep the inherent price inflation in check in the US.

But there are side effects to this: Low rates of price inflation, poor domestic profits. We're seeing sluggish wage growth as you've seen in the press over the last couple of years. It's been one of the complaints that people have talked about of the economic recovery is wages haven't kept up with real prices. And so this sluggish wage growth is closely tied with this foreign-sensitive industries. And you're seeing what industries are most effective by this. The manufacturing sector in the US; you're seeing it play out in auto, steel, chemicals and other forms of manufacturing.

In fact, going back to the last recession in 2001, manufacturing in the US has been contracting. Even though we went through an economic expansion, throughout that expansion, we continued to lose manufacturing jobs. And the sectors of the US that did well in the economic recovery were industries such as home building, as we saw with the real estate bubble, that weren't subject to any competition.

So we've seen price inflation as you've seen the cost of housing go up tremendously in this country that's just another form of inflation. Another sector is medical which is not subject to, let's say, price competition; as well as a lot of the US domestic services in this country. So firms that are doing well are ones with, let's say, a large international presence where they get a good portion of their sales overseas, Coca Cola, Pepsi, a Proctor & Gamble, a General Electric. And where domestic companies that can't export overseas are mainly dependent on US sales and also in a sector that is subject to foreign competition, those industries aren't doing as well throughout this process. [9:21]

JOHN: All right. Let's move this into the political arena because once it comes into a political area, the politicians want to do something about it because it threatens pain. Let's face it. People are going to lose houses. They are going to lose the value of their savings, their investments or whatever it is.

It has been really spooky for me to watch a lot of the political debate. You know what we do here all day long? We watch C-Span and CNBC, whenever the stuff comes up because the only phrase I can think of is the inmates are running the asylum right now. I really mean that.

JIM: No, I've seen some of the stuff that's being proposed here. It is just absolutely insane.

JOHN: It's really spooky but we are hearing talks of protectionism, higher taxes, new social and welfare programs that they are trying to ram through at record paces. These are all mentioned as solutions. But in reality, this is a government inflated creation problem by what G. Edward Griffin would call the cartel between the Treasury Department and the Federal reserve Bank. And then the fix being proposed for this is not going to fix it, it's going to make the inflationary problem worse. That's why it's loony.

JIM: Yeah. The thing that the politicians don't understand is that wages and profits do not exclude one another. Good profits depend on the well-being of labor because the well-being of labor, that produces the wages that allow people to buy the goods that companies produce. And good wages also depend on the well-being of business. If a business doesn't do well, then how do you get better wages. And what we see in this process of inflation is each side is constantly seeking their separate advantage which puts both sides into the inflationary camp of inflationary politicians who always, John, promise to pay off their campaign donors by promising everyone that you can give them more when in reality they leave everyone with less. [11:14]

JOHN: So basically the bottom line is that politicians promise that they’re going to treat this inflation problem, you know, lots of regulation, new laws, et cetera, new programs with really more inflationary remedies. And it's just going to get worse.

JIM: You're right on the mark, John. Price increases are always blamed on either businesses –- as businesses raise prices to cover costs; or it's blamed on, let's say, rising wages on labor. The you heard the Fed concerned at least up until they start cutting that they are worried about rising wages. Workers at the bargaining table, John, do not cause inflation, but workers at the polling booths can – and largely do.

Inflation is always a fraud on workers. And workers are always the perfect dupes of the politician because workers, John, elect the politicians who create the inflation that erodes the purchasing power of their wages by promising workers somehow there is a free lunch. [12:13]

JOHN: I would assume labor union issues tie in with this as well; right? Because the labor unions feel the pressure.

JIM: Yeah. You can see this.

JOHN: If we had to tie down a source to this, not in terms of what exactly causes inflation, but the fact that people allow this to go on is really the same problem we have, say for example, with historical revisionism in the schools where history has been rewritten over the last 50 years to match politically correct outcomes. At the same time, we have economic ignorance because what is generally taught is Keynesian economics; and of course in the Keynesian mindset, the goal is to simply tinker more and more with the system rather than recognizing that the system itself is the problem. And so this ignorance on the part of universities and media – they just replicate this whole outlook or mind set – is really what perpetuates the whole problem. We can never get a handle on it.

JIM: Sure. And there is another problem here and you're seeing it in the political campaigns today is you're always going to have political leaders who can always be found who will sell the people anything that people will buy. You also have economic experts that they drum up that can be found to do the same thing – in other words justify more government involvement. Justify more regulation. Justify taxation. Justify more money printing.

Just turn on the cable channels and you get a mouth full of all of this kind of stuff. So if experts do not lead people, then the people have to lead. But the problem, John, is they are kept from leading through economic deception. [13:44]

JOHN: Yeah. I think they are also kept from leading because the system in Washington and even the state capitals is now becoming a closed system. It's designed to lock the people out except for their input every two or four years as far as the political system goes.

But I've been walking around. I was at the bank yesterday. I always ask, “who owns the Federal Reserve bank?” – “I don't have a clue.” “What causes inflation?” –- “I don't have a clue.” These are people that work in banks and they don't have a clue on the whole thing. So that’s the effect.

JIM: In essence what we have here is with the investment public and with most people that live in this country there isn't a clear link that can be established between monetary inflation as the cause, and price inflation. And a bad thing as a result of all of this is that monetary inflation can be convicted of itself as being a bad thing and the only guy in Congress who understands this is Ron Paul.

John, I want to go back to that clip that we played last week. It was sort of the opener where Ron Paul says, “look, you're trying to treat the inflation problem with more inflation.”

RON PAUL: Because we’ve had this malinvestment – all of this credit going into the system – and we have all of this correction that needs to come about and we think we're going to solve the problem of inflation with more inflation.
But really the bottom line is what moral justification do we have to deliberately devalue the currency and the dollars that people save? This pushes the cost of living up for the people who don't even have a chance to buy a house. So there is a moral consequence of the system that we have today. And I can't see how we can avoid this moral obligation we have.
The responsibility of Congress should be to maintain the value of the currency, not deliberately tax the people by creating new money and passing on the high cost of living to the people who can least afford it. Wall Street never suffers from that. And we still – we know of all of these things out in the open that the Federal Reserve does, but we don't know the details of what the Working Group on Financial Markets does to prop up markets because I'm sure they are very busy and have been very busy in these last several months.
But is there any moral justification for deliberately devaluating the currency?
BERNANKE: Thank you, Congressman. The value of the currency can also be expressed in terms of what it can buy in domestic goods, that is, the domestic inflation rate. That is part of the Federal Reserve’s mandate which is to maintain price stability, which to my mind, means the value of the dollar. The inflation rate is something we pay close attention to, we continue to pay close attention to, but over the last year it's been a little over 2 percent. We will continue to pay very close attention to the inflation rate. It’s an important part of our mandate and I agree with you that an economy cannot grow in a healthy, stable way when inflation is out of control, and we will certainly make sure that that doesn't happen. [16:40]

JOHN: So in effect, inflation has and always will be a monetary event. This is something people have to drill into their heads. It's that simple. It can be stopped, but only when the people really wise up to the true cause of inflation. And unfortunately, until they do, we're going to get more of it, which means we’ll go back to the politicians for more of a solution. Like I said, throw one group of rascals out for another group of rascals who gives them more of the same thing. And more money means more inflation, until it reaches some kind of an omega point out there where something falls apart.

JIM: It's not just the money itself that's being created, John. It gets a little bit more complicated than that. This monetary inflation has sort of three variables that are associated with it that are all working at the same time. You have the money supply, which the expansion of that money supply feeds the inflation into the system. You have money velocity in terms of how quickly money has turned over; and you have the supply of real values. And right now, money velocity which has been falling, which is why the Fed has been making huge cash infusions into the system. [17:50]

JOHN: So one factor of the inflationary process is to tone down one aspect of monetary inflation.

JIM: Sure. And there are a couple of factors at work here. Our conventional view of economics classifies causes of inflation as either cost-push or demand-pull. These descriptions really what they are doing are merely stating which of the two parties to an inflation are gaining a foothold – whether it's the sellers or the buyers; which side is pushing or pulling harder to get their mutual prices up to their preordained equilibrium. If labor says, “gosh, with all of this inflation, we want to have higher wages,” or businesses want to increase prices to cover costs, so you might have what we call cost push.

Or on the other side, all of the money that's being fed through the system is creating greater demand; if sellers, for example, are more eager to claim full prices which aggregate money would justify, the inflation will be labeled as cost push. So if unions want higher wages, we just saw the negotiation with GM this last week, if businesses are trying to push through prices to cover their costs, then it's going to be cost-push inflation. However, if buyers are more eager to reduce their cash balances which increases money velocity and bid up the prices of the goods available in the marketplace, the inflation will be labeled as demand pull.

So in terms of distinguishing the basic cause of inflation, which is too much money, whether it's cost push or demand pull, it's utterly useless, it's just a matter of what we call the scapegoats the people that create the inflation use. So you know, when oil prices went up, we were blaming the oil companies. When wages started to rise and keep up or at least approach reported inflation levels you had the Fed talking about wage inflation. So it's just a matter of shifting blame which you're going to see more of that as we go forward in the next couple of years.

You'll be hearing more about, well, the real problem is businesses are getting greedy, they are making more out of profits by raising prices or the unions are getting greedy, they are demanding wages that don't justify productivity, et cetera. All of this is just nonsense. It's just a matter of blame shifting and keeping people focused away from the real cause of inflation.

JOHN: Yeah. But it does benefit what the politicians want to do, Jim, because the proposed answers are always two things; right? More taxes, more regulation. That's where it always goes at some point.

JIM: Sure.

JOHN: And more big government.

JIM: Yeah. And that's what happens. The way it's put forth to individuals, it's like, oh, if it's businesses that are raising prices, then government comes in and puts cost controls in, price controls in, so therefore we'll stop these greedy people from raising prices, which basically leads to shortages. Or I can remember in the 70s when Jimmy Carter asked that all wage increases be limited to 7 percent at a time when inflation was running 14 percent. So once again, it feeds into the political process and government just gets bigger which makes the problem even worse.

In effect, the real cause of inflation, which is an increase in the money supply, has temporarily sort of covered up what we have been seeing lately here by a reduction in money velocity. In fact, there is a lot of people talking about this. And it's not until people wake up that there is real inflation there because I think right now, John, people are confused. They are saying: “I go to the store, I'm paying more for chicken, I'm paying more for groceries. Services that I use –- whether it's a pool service, dry cleaning, going to health care, whether it's a trip to the dentist or the doctor, my tuition for my children, all of that stuff is going up.”

And yet when they turn on the TV they are talking about inflation as moderating. Yeah. That's true if you buy, let's say, a TV set today, you can buy a flat panel TV today cheaper than what you could buy one last year. You might be able to buy a toaster, a washing machine or a blender cheaper this year than you did last year. But the problem is, John, how many people are buying toasters every year, flat panel TVs, digital cameras. You may buy a digital camera and you may not buy another one for five or six years. [22:20]

JOHN: Yeah. And that's not really related to inflation. That's related to changes in the market, which would be there even if there were no inflation.

JIM: Sure. The natural propensity of prices is to go down as factors of production increase. As you get more productivity and efficiency, the prices go down. And that's a natural part of the manufacturing process. But they call that deflation because the prices are coming down. So if a flat panel screen comes down, a digital camera comes down or an IPod price comes down or an IPhone comes down in price, they call that deflation. On the other hand, if gasoline goes up at the pump, if chicken prices go up, that's called inflation.

JOHN: Yeah. But remember, when that stuff goes up, it doesn't count as part of the core inflation rate, so it doesn't get counted anyway. It's only there when people are screaming about it that it becomes a political issue.

Well, we've been calling this segment the Dying of Money, so when you take this process, it's a cyclical one, you take this process and extend it further. It can't go on forever. It has to end somewhere. [23:30]

JIM: Sure. There is an adjustment process and that adjustment process – the difference between the actual price level at any time and what should be the higher equilibrium price – is the unrealized depreciation of the currency. In the living process of working upward from lower prices to higher prices is the process of living through an inflation. It is a process of money which is devaluing itself – it's losing its purchasing value – as the value of money dies. And hence the title of our segment here called Dying of Money. [24:02]

JOHN: I don't know, I think people can understand this. I think it's a little bit heavy at some points. The big issue has been to drum home to people that inflation is a monetary phenomenon. It's not caused by the market pressures or anything, and if you stop inflating the money supply, the inflation stops. Remember Bolivia back in the 80s when they took off, it was like 23 Bolivian pesos to the dollar and by the time they were done it was 50,000 Bolivian pesos to the dollar. And they actually, I remember seeing people having bundles of the money. They were trading big bundles of the money all wadded up on the streets. But doggone, Jim, the moment the central bank in Bolivia stopped inflating the money supply, guess what happened?

JIM: Inflation stopped.

JOHN: Inflation stopped! It works every single time. All right, we're going to take this up in the Dying of Money, Part III. It's important as we said that the inflationary process is now unfolding right before your eyes and you need to be able to take steps to protect your wealth or whatever else is affected by this because inflation is a monetary disease. It destroys the wealth of the paper you are holding or the electronic paper if it's in a bank account. That money is losing money as you hold it. Every time I hand somebody a dollar, $5s at the cash register, I say “losing value as you hold it,” and they all give you the hee, hee. They don't understand I'm telling them the truth.

JIM: Yeah. And people really see the effect of our currency depreciating. Especially when you go overseas. I have quite a few clients that travel internationally. In fact, one of my clients took his family to Europe this summer and he said oh my goodness, he couldn't believe the cost of hotels, the cost of plane travel over there, the cost of food, the cost of entertainment, going to an opera, all of these things as they spent three weeks over there cost them a fortune. But, well, he can afford it. But it's a situation that was really driven home to him in terms of the purchasing value of the dollar because one of the things I try to stress to him – he has a large tax free bond portfolio – is that we have to hedge that bond portfolio with hard assets, investments such as energy and gold that's going to protect the purchasing power of his bonds which are losing purchasing power through the erosion of inflation – and in effect the erosion of the currency that we own and operate this economic system, which is the dollar. [26:32]

JOHN: And don't forget, you're listening to the Financial Sense Newshour at www.financialsense.com.

Petrodollar System: One Nail in the Dollar

JOHN: There is an interesting situation that has been developing. Some people are watching it. A lot of people aren't. I don't think the main line news channels are watching this at all because this is actually a factor in the geopolitical issues that are going around, and what I'm talking about now is what seems to be a gradual hemorrhage away from dollars towards other forms of currency on the international oil markets – settling transactions in things other than dollars. Now, this directly threatens the dollar. And so there is sort of a currency war going on here and a petrodollar war as well which parallels it. So this is what we're going to look at in this segment of the program. This is a continuation of our Dying of Money theme, but it's a look at the problem from a political perspective and Jim, what we really need here is a backgrounder because we have to set this in a framework. [27:50]

JIM: Well, when you take a look at where we are today, we’ve got to go back to 1944 when the dollar was established as the world's reserve currency, the US economy emerged from the war basically intact and unscathed unlike, let's say, Japan and Europe which had been bombed as a result of the war. In the US moreover it had importantly accumulated huge gold reserves, and so the dollar was made the world’s reserve currency. However, due to guns and butter, both in the Vietnam war and the Great Society programs of Lyndon Johnson, foreign central banks began to exchange their dollars for gold.

There was a run on our gold supply, so Nixon suspended gold convertibility in August of 1971. And that was really the beginning of our global fiat system. It was also the beginning of an inexorable climb in our twin deficits. The government budget deficit and the trade deficits and the problem is we began to create an excess amount of US currency that was held in offshore banks. These exchange reserves became known as eurodollars and represent basically US dollars that were held in foreign banks or the foreign branches of US banks. [29:06]

JOHN: Didn't this system sort of create problems with one way flow of eurodollars being held by offshore banks in order to purchase crude oil from the OPEC cartel since OPEC members preferred to invoice oil in dollar. And what this does in effect caused huge currency reserves to accumulate in member bank accounts.

JIM: Well, that was because of this very same issue when the framework was put in place for a new petrodollar exchange system. In 1973, the US concluded a series of agreements with Saudi Arabia, which at that time was the largest producer of oil. Under this system, the US would prop up the Saudi ruling family through military protection, so to speak, and also concomitant sale of military hardware to the Saudis to protect themselves. In exchange, the Saudis would commit to pricing their oil only in dollars and as the largest producer, the rest of OPEC really followed suit. So as a result of this, we had the emergence of the petrodollar simply as a means of buying and selling of oil. [30:14]

JOHN: Well, this paints a larger picture. So lay the frame work of how all of this is going to work out. Basically, when transactions are settled, how things are transferred, what goes on.

JIM: Well, it's really there are six parts to the petrodollar exchange system. It begins with the US trade deficit, and by the way, nearly half of our trade deficit last year was involved in some form or another of importing energy whether it was oil, whether it was natural gas, whether it was refined gasoline products, diesel, jet fuel et cetera.

But it begins with the US trade deficit. Foreigners exchange their exports and they receive dollars from us. These US dollars become sort of eurodollars. Foreigners hold these dollars for repayment and purchases. Remember, when they buy oil, they pay for oil with dollars. Then what we have is as the economies of Europe, Japan and other countries around the world import oil, they exchange their eurodollars for crude oil that they purchase from OPEC countries or countries that export oil because oil is denominated in dollars.

Then what happens is these dollars which foreigners use to purchase oil become petrodollars. OPEC, which is the main producer of energy in the world accumulate these petrodollars and through that, these dollars are then invested back in to the US in direct foreign investment in the form of T bills or in our capital markets buying stocks et cetera. So the dollars keep getting recycled. And this is currently the basic framework in terms of which this petrodollar system works. [31:56]

JOHN: Okay. But what this does then as I see it, this makes us very, very vulnerable. We have to ask the question: what happens when some of these oil users decide to go off the dollar plantation and engage in other currencies? Where is the flow? Because if we're looking at the fact the dollar is backed by the oil and the US military, that's basically it right now. If oil becomes invoiced in other currencies, we're in a world of hurt; it would seem like? That would be the ultimate result.

JIM: Yeah. It's one more factor that is going to create another nail in the coffin of the dollar eventually. It's not the only factor. And I want to point that out, because there are a lot of people saying, “as soon as the dollar is stopped being used in invoicing of oil, that's it.” But let's put it this way. That's only one factor and the commodity markets are invoiced in dollars. So what will happen is we'll eventually go to a multi-currency system.

But I'm getting ahead of myself.

Just to put this in perspective, you know, last year, our trade deficit was 763 billion, I think, was the figure; and nearly half of that was for crude oil and finished oil products. Because remember, the US does not produce enough of its own gasoline. I think we consume 21 million barrels of oil a day and we have the refinery capacity of only 17 ½ million. So not only are we dependent on importing oil and natural gas, but we are also heavily and becoming increasingly so more dependent on the importation of refined oil products. So energy is one part of our trade balance and that's nearly half of it. The balance of our trade deficit is mainly with China, Japan and G7 nations. But because the dollar is the reserve currency, approximately, 70 percent of our broad money supply is held offshore because crude oil and other commodities are priced in the US dollars. Foreign nations are literally forced to pursue aggressive trade with the US in order to maintain these large dollar reserves which in turn they use to purchase commodities or energy. And in turn, because they hold these dollars, these foreign nations are obligated to support the US bond market in order to maintain liquid dollar denominated assets. That's why in an age of inflation where we are today where the underlying inflation rate is 8 to 10%, we're looking at bond yields of 4.6%. [34:24]

JOHN: Well, Jim, isn't the petrodollar being challenged as more OPEC members say for example begin invoicing in euros or other currencies? This sort of lurks behind a lot of the geopolitical and military issues that we see developing around the world right now.

JIM: Sure. The petrodollar system is, John, basically causing a structural imbalance for the US economy in the world's financial system. If we weren't able to export our dollars, the government wouldn't be able to spend like a drunken sailor and run the huge deficits that we're running in this country and would probably change our macro economic model immensely. But this macro model can only be maintained or sustained if the dollar remains the world's premier currency and international trade – whether it's for commodities or crude oil – remains denominated in US dollars.

Now, what is going on right now is the dollar is losing some of that support as oil begins being denominated in other currencies and people are saying that's it for the dollar. I don't believe so. We're really moving to a multi currency system because remember the Euro is a fiat currency; the Japanese yen where the government monetizes nearly all of its budget deficit is a fiat currency.

So what we are moving toward is three large currency blocks, the dollar, the euro and the yen; and we'll probably have a fourth currency block that eventually will emerge in the form of, let's say, the Chinese yuan. So we're moving more towards a multi currency system which means there will be less demand for dollars which means it's just going to be one more factor why you're going to see a declining dollar. And that has ominous implications because that means as the dollar declines in value and since the US is so heavily dependent on the importation of finished goods and energy, that means you're going to see higher inflation rates here in the US.

JOHN: Well, obviously, as we see this, moving in that direction, there is going to be more and more pressure on the dollar. And take the Iran situation for example. Here you have rumblings of why we need to go in to take care of Iran and its nuclear issues. But underneath that rumbling is a different type of rumbling. It's this petro-euro issue. [36:38]

JIM: Well, it's not only the petro-euro. It means in essence, John, the dollar has a lot more competition from other fiat currencies today. So this is just one more element along with our trade deficit that is going to drive the dollar lower. The dollar is losing its purchasing power as we speak. And there are a number of issues: our inflated money supply, the fact that we're able to export this inflation through our imports of foreign goods. Those goods are recycled here, so that creates inflation in other countries.

But remember, outside of the amount of money that foreign central banks have to create to sort of neutralize their currency from appreciating against the dollar, they are also creating and expanding their money supply to also finance their own economy. So we are living in a multi fiat system today. And that's why I'm more in favor as you know, a lot of people say put your money in hard currencies. There are no hard currencies. There are currencies that are doing well because of the export of natural resources like Canada, Brazil, Russia or let's say Australia; and countries that have a large export program with raw commodities. But, you know, it's only one element in this whole system and the world is not ready. We're going eventually to a global currency and a global central bank. That's where this is all headed. But right now, we are moving from a dollar backed petro-system to, let's say, a multi currency system represented by the major currency blocks today, the Euro and eventually what will become the amigo here which will be the emergence of Canada, Mexico and US with one currency and that will be the – they call it the amero, we call it the amigo. And also you'll have eventually an Asian block currency probably led by the Chinese. And then you'll also have as one of the most powerful economies in the world the Japanese economy and the Japanese Yen.

So it just means that foreign central banks will be diversifying out of the dollar into other paper currencies.

But there is also going to be an implication of this because all currencies are fiat and the new big gorilla on the block is going to be the sovereign debt funds. And that’s going to be the next catalyst for higher stock prices because, John, you're going to see money from these foreign central banks in addition to moving out of the dollar but the investments that they do make in the dollar are going to go more towards stock market, it's going to be trying to buy assets of real companies whether it's oil companies or international companies.

In other words, they know that this is a fiat system; they know that money is dying or losing its value. So another catalyst for stock prices going forward is going to be the sovereign debt funds that are being created and you're talking about close to one trillion dollars of buying power. I think by the end of this month, a 206 or 208 billion dollar Chinese sovereign fund is going to come into play. So that's going to change a lot of the dynamics of what's going on here in terms of how inflation plays out. [39:52]

JOHN: So the multi-stage at this stage is it we go from where we are today with many currencies to large regional currencies, the amigo, the euro, the ‘asio’ – or whatever we're going to call it in Asia. And then ultimately there will be a union currency for the whole world. That's where I'm anticipating we're headed.

JIM: Yeah. Because eventually, remember, if you are saying, “oh, I'll protect myself, I'll go on the euro,” you're essentially just going to another fiat currency. And it's just a matter of how that depreciates compared to how the dollar depreciates; if you go into the Yen, that's a fiat currency. All currencies are fiat which is why, John, the smart money is accumulating gold, silver, bullion, gold and precious metal equities because that's real wealth. That's real money and the ultimate currency. And that's really what the markets are telling us, as we've seen this week, with the rise of gold hitting $750 that we're going to a system of depreciating paper –- a multi currency system.

But you know what, when the final analysis is brought to bear on this issue, they are all fiat currencies. So if you think that, you know, like

Warren Buffett has got a lot of his money in foreign currencies and really if Berkshire Hathaway wanted to hedge an inflation problem, they should be accumulating real money, which is gold and silver. But I think they are so huge that if they did so, as they did in the past, the government would give them a hard time. So Buffett is probably doing the next best thing saying, well, with all of Berkshire's cash flow, we could really drive the price of gold and silver up with his buying power. But realizing there would be political pressure that would be brought to bear on Berkshire, he's doing the next best thing. What was Buffett buying? He's buying energy, he's buying railroads, he's buying real assets and he's buying foreign currencies. So I think that's what Berkshire is doing because I think Warren knows better than anybody else that we have real inflationary problems out there. [41:48]

JOHN: Yeah. Maybe the analogy would be there are a bunch of life boats out there. They are all sinking and all you're doing is jumping around from the different boats to see which one has less water in it at any given point in time.

JIM: Hey. I love those boat analogies.

JOHN: You like those? I should have tailored them for your outlook.

JIM: For my benefit.

JOHN: Yeah for your benefit. Yeah. That's the way it runs. So anyway, you’re listening to the Financial Sense Newshour at www.financialsense.com and if you'd like to inquire about investing with PFS group – although I can't imagine why anyone would be crazy enough to do that – there we are – how is that for an endorsement? – you should go to Puplava.com.

Of course that was all said tongue in cheek. I have to say that or I won't be here next week.

Well, there is a question that you will hear asked frequently. Do you want to talk to the guy who's in charge or to the one who knows what's going on? And quite frequently in organizations, notably the military, they are two different people. And we are going to look at the same situation coming up in the next hour. Whatever you learned in school about economics from the textbooks, burn the textbooks we're going to tell you what the brave new world is going to look like. We're entering uncharted territories. You're listening to the Financial Sense Newshour at www.financialsense.com with Jim Puplava and John Loeffler. We shall return.

Part 2

Our Brave New World

JOHN: In the day of GPS, global positioning satellite or inertial navigation systems, it's really hard to imagine what it was like sailing across the ocean just using dead reckoning and a compass and an occasional sighting with the sextant. But that was how it was done.

Unfortunately in the area of economics we’re similarly stepping backwards in time. We're looking at a brave new world which means to a large degree we’re out in uncharted territory. So as your guru of uncharted territories, here is Captain James Puplava. Where are we, Jim?

JIM: Beam me up, Scotty. No. That's the wrong scenario.

JOHN: You're supposed to be doing the Columbus thing. Sail on, sail on, and on and on.

JIM: Okay.

JOHN: All right.

JIM: The one thing that you're starting to see here, John, is all of the old paradigms, the economic truisms that the markets function by, the economic cycles function by, have been basically thrown out the window. Nothing is working like it should be. And that's why I think a lot of forecasters – whether you're talking about economists, political forecasters, Wall Street types – have gotten a lot of this wrong. I don't care if it's energy, if it's rising asset markets, if it's inflation rates, if it's economic growth. Nothing is working the way it should be. You're seeing a lot of anomalies in the system and that's why I think a lot of people are being caught by the way side and it seems so perplexing.

JOHN: Well, we need to do a couple of examples to sort of illustrate what you mean by that. A good start would be economy.

JIM: Well, let's go back to the recession that we had in 2001. Normally, John, recessions begin with rate raising cycles, monetary tightening. And as the Fed began to raise interest rates in 1999, normally the sector of the economy that goes down first and is hit first is the real estate market. Real estate leads the economy into a recession, much as it did in 81, much as it did in 1991. This time, as we headed into a recession, instead of leading us into a recession, responding first, real estate did just the opposite. We were already in a slowing economic environment. The technology bubble and stock market bubble were in the process of unwinding in a big bear market that would last for nearly three years. But during the recession, during the bear market in stocks, the real estate market began to get inflated as Greenspan brought interest rates down from 6% down to 1% down to the lowest levels that we saw in nearly half a century. So as the stock market bubble burst, the Fed with its monetary policy began to create another asset bubble in the real estate market, so therefore, as real estate prices rose, the consumers didn't cut back.

You know, I can remember the 1991 recession. During that period of time, you go through a recession, what happens? People tighten their belts, consumers pull in or rein in their spending, they build up saving because there is a lot of economic uncertainty, a lot of job lay offs. John, you remember the, boy, the huge job lay offs we had in 1991 where you'd hear companies like IBM announcing 50,000 job lay offs and huge lay off process that was taking place. Well, if you saw all of this taking place, companies laying off, you probably said maybe we out to curtail on what we're spending and that's exactly what happened. I forget what the statistic is, but not only did consumers pay down debt, but the average consumer increased savings by, I think, 14 hundred dollars. So consumers reacted rationally to an economic slow down.

The 2001 recession was a business-led recession. It was business that was cutting back, repairing balance sheets. Where the consumer on the other hand with rising real estate prices went on a debt and spending boom, and real estate took off instead of going down as it does in normal economic cycles. [4:21]

JOHN: Okay, this time we got a recession then that didn't play out according to the norms and then what you got was another asset bubble, so now, let's talk about the recovery from this.

JIM: You know, that was another interesting thing because when the Fed really began to put the peddle to the metal, as we responded as the stock market bottomed in 2002, what we saw coming out of it was all asset classes began to rise. You saw real estate, a hard asset, begin to rise. You saw the stock market beginning to go up. You saw the bond market begin to go up and then you also saw commodity prices that were going up at the same time. So almost every single asset class was going up at the same time, and that is a reflection of the degree of monetary expansion. I forget what it was, 2001, the money supply figures increased by nearly one trillion dollars. Heck, after the events of 9/11, we saw almost a $200 billion increase in the money supply.

So as a result of all of that money sloshing around the globe, it just wasn't here, it was elsewhere, that money began to find its way into the stock market and all asset classes as people had this money and they had to go somewhere. And as we talked in the previous section, the stock market was a relief valve. But what was even surprising, as the Fed inflated, the bond market did extremely well with long term interest rates and the 10 year Note getting down to the 3% level. [5:35]

JOHN: Yeah. But that was because they were more worried about deflation. I mean the NASDAQ lost, what, something around 75% of its value?

JIM: Well, sure. And there was some playing around with statistics. There was a deflation scare in 2003. And part of that was the CPI went from over 3% down to like 1.6%. But the reason behind that is they were going to owners’ equivalent rent as more people got out of the rental market and went into the housing market because of the housing boom. The price of rents fell. Another factor is through the substitution process, even though people were buying new cars in the CPI index, they were substituting used car prices. And so those two factors alone, owners’ equivalent rent and also the substitution of used car prices for new car prices drove the CPI index down to 1.6% and everybody was saying “oh, my God, deflation, deflation, oh, Mr. Greenspan, do something about it.”

And what the Fed does it just really poured on the money printing and pushed a lot of money into the system because everybody was worrying about deflation. And the Bureau of Labor Statistics took a look at that and said, “well, had we not substituted owners’ equivalent rent, had we not substituted used car prices, the CPI would have been over 3%.” Actually, it would have been much higher if they really used housing prices because housing prices began to go up by double digits as the Fed was creating an asset bubble in the process of lowering interest rates. [7:26]

JOHN: If you look at it, overall the recession was different and the recovery from the recession turned out to be different and then we went through a rate raising cycle and that was different.

JIM: Sure. Because when the Fed began to raise interest rates in the summer of 2004, number one, they did it in baby steps. And one of the reasons they did it in baby steps is, John, unlike in 1994, when they raised the federal funds rate –- they doubled it in a year from 3 to 6% – the economy had become far more leveraged and so they couldn't give the big jolt to really rein in inflation in the supply of money.

And the rate raising cycle, they took two years to do that; 17 rate hikes from the summer of 2004 to the summer of 2006. So they took two years, so the Fed through the entire rate raising cycle was always operating behind the curve. And real interest rates, despite the rate hikes, were negative as they still are today. If you take the real rate of inflation and you subtract the rate of interest, we were operating – and still are today – at negative real interest rates.

And another factor that also happened is normally when you see the Fed go on a rate raising cycle because of rising inflation, you see rising interest rates on the long term; and throughout this process, the long term end of the market virtually went nowhere. I mean we stayed in that narrow range from about 4 ½% to a little over 5%. And that's pretty much where we stayed throughout this whole entire rate raising cycle. And unlike previous cycles, the money supply continued to expand. So even though the Fed was talking tough on inflation, they were injecting plenty of money into the banking system. So that, for example, John, even though the Fed began raising rates in 2004, the real estate cycle really didn't peak until 2005. But last year, was still a fairly good year for real estate. Yes, it began to soften in certain areas. But, you know, the mortgage crisis, as a result of all of the loose lending standards that were basically thrown out the window, didn't really take root. We had warning signs about this; that trouble was ahead. But they were inflating the money supply, which was one of the reasons why last year I said that we were going to see a new record in the Dow even though many people believed that wouldn't happen because the Fed was still raising interest rates. [9:57]

JOHN: That was pretty easy to see, though, because remember when Bernanke came in, he was talking tough, he was raising interest rates.

JIM: Sure. He was raising interest rates, but at the same time with a wink of the eye, he was injecting large reserves into the banking system. [10:12

JOHN: Well, I recall back in December – I think it was December of 2006, you wrote an article about The Next Rogue Wave and you predicted this credit issue that we’re looking at, so you were sort of anticipating where we were going even back then.

JIM: Well, sure, because I mean you can see, number one, the amount of adjustable rate mortgages. And I wrote about this kind of scenario in my Day After Tomorrow. It was sort of a fictional piece, but, you know, when I did the research for that talking to all of the major lenders in our area and also other areas, you could see that the majority of loans that were being taken out on homes were adjustable rate mortgages. So a lot of these mortgages were only fixed for a two year period or a three-year period. So you had to ask yourself, okay, we had these teaser rates that all of these people were able to use to get into the housing market; then you had a lot of people where the lending practices just had deteriorated – no money down, no doc loans, interest only loans, negative amortization loans.

But the important point we were looking at is if you had a lot of these adjustables at two or three year fixed periods only, well, lo and be hold, the Fed was raising short term interest rates, these two and three year mortgages were going to start coming due and they were going to be reset. So we knew a lot of these mortgages, as they were reset for maybe 2 to 3% interest rates were going to be reset at 5 and 6% interest rates – that was going to cause a lot of problems in the system.

And we saw this begin to unfold in February where we had, like, a three week crisis. The market pulled back, we had a lot of these subprime lenders starting to out of business and immediately there was a reaction to that. And everybody said, “okay, we got through that crisis, these lenders were absorbed and we are out of the woods.” And we said no way, we were still raising cash through that process. We haven't really got to a capital market crisis, which was the third element that we were estimating would have to take place before the Fed would be motivated to cut interest rates. [12:16]

JOHN: We've been talking about this three-fold event during the course of the year. The economy was already slowing though if you look at real estate began to slow down. Why would it really take all three events before the Fed would knee jerk into a position where it was going to do something?

JIM: Because, John, and as the Fed was talking about, they really had an inflation problem on their hands and it's going to get worse. It's not going to go away. Just look at food inflation, look at energy inflation. And yes, they tend to dismiss that because they say they don't control that. But take a look at commodity prices. I don't care if it's cement, if it's wheat, if it's corn, if it's oil, if it's natural gas, if it's gold, it's silver, it's copper etc, they had real rising inflation problems. And so the Fed's job is to protect the banking system and the financial system, so that was the third element. The Fed was sort of playing chicken with the markets here and they were trying to raise interest rates and hope to rein in inflation. Remember, the Fed in terms of the way they think economic growth creates inflation and more people who are at work, that creates labor inflation. If more people are buying goods and the economy is growing, that creates inflation rather than the money that it creates.

And so in the Fed's mind, if they raise interest rates and economic growth contracts, that takes away some of the demand in the system, so that will ease some of the inflationary pressures. If more people are thrown on the unemployment lines, that will ease some of the wage pressures. And so that's why we get this sort of boom and bust cycle. They think they need to have some kind of a bust to cleanse out some of the inflationary pressures, so that's why they were doing that.

And the unfortunate thing for the Fed it wasn't quite working. We had the economy slowing down, but we still had wage pressures, the unemployment rate was stronger than what they anticipated; and at the same time, commodity prices were still going up as they are today. I mean look at it this Friday. We're looking at oil prices over $80 a barrel. We're looking at gold prices at 750. I mean all commodities are still going up. So that’s why I think they were reluctant to lower interest rates at the first signs of economic weakness; because number one, according to the way they think, economic weakness relieves some of the inflationary pressures and also some of the pressures on the wage system.

JOHN: That's one factor in the whole area, but, if you recall, you've been more bullish on the market than most people have because they are looking strictly at the market. But you actually look at it from a monetary point of view and that the stock market constitutes a relief valve to this whole thing. That's where the money rushes.

JIM: Sure. And I do believe, John, as we get more rate cuts, it's going to produce a lower dollar and as the dollar declines but also you're going to see a nominal increase in the value of stocks. And one thing that I'm starting to see as I monitor capital flows into the US, they are moving away from credit instruments and they are moving more towards equities. And I think you're going to see more of that, especially with the catalyst that the next catalyst for the stock market, I see, is the sovereign debt funds.

And these funds that are being created by central banks with over a trillion dollars, I think is the figure, they are going to be going in and wanting to buy real assets. They are going to want to buy oil. They are going to want to buy energy of all kinds. They are going to want to buy raw materials. They are going to want to buy companies that have real products, industrial companies, capital goods companies, infrastructure companies, raw material companies. And I think that is going to become the source of speculation for this next boom that I see coming in nominal terms, and into the stock market. That’s because paper money, as we talked about in the first hour, is dying. It is being devalued globally. [16:15]

JOHN: You know, this brings us back to something we were talking about in the first part of the Big Picture if you recall, money everywhere is losing its value. They are all fiat currencies, so they are all going down. My analogy was they are all life boats that are sinking and some people want to invest in other currencies but it’s sort of like jumping from one life boat into another one where maybe the water isn't quite as deep – yet.

JIM: Exactly. You just take a look at the money supply growth figures. And I know some of my peers would say that's just because the central banks are creating and printing money so they can buy dollars to keep their currency from appreciating. Yes, that's part of it. But the other part is they are also inflating their own economic system. China needs to see growth to keep all of its people fed and in employment, otherwise they would have social unrest. Europe needs to inflate to pay for its huge welfare state. The same thing with Canada and Australia. The US needs to inflate for our guns and better policies that we have.

And John, my goodness, just take a look at this political campaign, they are promising us more butter. I mean everywhere you look, a new social problem. They are talking about socialized medicine. They are talking about increasing everything from tax credits – it's just another welfare system but that's what they are doing. They are talking about even more government spending. Where are we going to get the money to pay for all of that? And it's been proven, you raise taxes you actually get less tax revenue because you choke off economic activity where as it's been proven, tax cuts stimulate economic activity and tax revenue have actually gone up instead of going down. [17:54]

JOHN: That's a hard sell in a lot of political sectors, though, people will still debate that and argue that with you.

JIM: Yeah. They'll argue about it and ignore the evidence. And they'll say well, if we would have done the tax rates at 40%, we would even have had, even though tax revenue went up, which they did, they'll dismiss that and say they would have went up even more had we not lowered the tax rates. They miss the whole argument there because they will argue that well, if the economy produces $1 million of economic activity and we, through our tax system, take 35% of, then we only get $350,000 in taxes. Had we left tax rates at 40%, we would have got 400,000, so we would have got 50,000 more in tax revenue. They forget about the fact that the economy grew and that brought in higher tax revenue. They look at it from a static accounting point of view, which is one of the problems that Keynesians have in really assessing the impact of this. [18:51]

JOHN: I've got an idea. Why don't we just take 100% and then we can be infinitely wealthy? It will work for everybody.

JIM: Yeah. If you follow that argument, why stop at 40%. And why don't you just go higher which is what a lot of candidates are proposing. They are proposing getting rid of the Bush tax cuts, and even surcharges, and taking tax rates to 50%. And what they don't realize, that would be the death knell of the economy. And what would happen, it would kill the economy, government revenue would actually contract, new entitlement spending programs would produce greater deficits, which in turn, would lead to greater monetization of debt and higher inflation rate. It's a endless, vicious cycle. And the only reason they are able to do that is economic ignorance because people really don't understand the true cause and root of inflation, which is an expanding supply of money and credit against the productive goods and services produced in an economy. [19:49]

JOHN: So Ladies and Gentlemen, don't forget to sign your congressman up for Jim Puplava's No Congressman Left Behind economics education program.

JIM: Yeah. We're actually thinking of doing something like that as we change the website. I'm actually thinking of a series of articles that we're going to post and we're going to keep them there permanently. And that's going to be the name of the section: No Congressman Left Behind. Hopefully somebody other than Ron Paul. Ron Paul should be writing some of these articles for his fellow congressmen, John, because it's plain when you see these guys out there in these committees that they absolutely don't have the slightest clue of what makes the economy work or what causes inflation. [20:30]

JOHN: So that means they are making bad decisions and they are going to continue to do that and the more panicky the decisions, the worse off they are.

JIM: Absolutely. And as they become more panicked, it's like: “do something, give us more money, give us lower interest rates, let's orchestrate a bail out, let's spend more money. We needed to add this program.” That's why I think you're going to see this economic weakness combated with all three government tools. It will be led with monetary inflation which will lead secondly to currency debasement which, third, will be followed by fiscal stimulus. And they are going to do it on infrastructure, John, and already we're already seeing it. The President is talking about relieving some of the congestion and some of the problems of the airport system in this country. I've been flying the last couple of weeks.

I was due to go to Vancouver a couple of weeks ago, John, and I got to the airport, got ready and the plane was held on the ground with mechanical problems. They are not servicing the planes like they used to. It's just one endless delay after another. And I don't have to tell anybody that travels in the US here, but it's just absolutely amazing. I think it was BusinessWeek three or four weeks ago that had the front cover of The Summer From Hell talking about our airport system. So we are going to be spending a lot more money to repair the infrastructure system. That's why I believe infrastructure is doing to be one of the great areas to invest in. It has been and it will get even more so going forward. [21:56]

JOHN: We're going to continue this series next week on the program Dying Of Money. But again, what's critical is number one, that the listeners understand what causes inflation; but two, because you understand the inflationary process then you understand where things will automatically go assuming no other kind of intervention or changes. And as a result of that, you know what to do in terms of investing because you understand what's happening. That's the core to doing anything intelligently in life.

JIM: Absolutely. So next week we will once again begin our Big Picture with what I call Dying of Money, Part III. There will be four parts to this but hopefully it will give you some insight into this inflationary process as it unfolds. And more importantly it will allow you to protect yourself against what I believe is eventually going to become the great inflation. And hopefully you'll be protecting yourself. That's one of the reasons why I'm not a big believer in alternative currencies because alternative currencies are all fiat systems, they are all inflating. And that's why I am such a strong advocate of precious metals because that, in its truest sense, represents real money. It's the only currency that can't be debased or defaulted on.

Q-Calls

JOHN: Time for us to go to the Q-line, the Q-line means the question line. It is available to you 24 hours a day to record a question for the program, toll free from the US and Canada, 800-794-6480. It does work internationally, but it is not toll free from anywhere except the United States and Canada, we should remind you as with everything here on the Financial Sense Newshour that the content which you hear on the program is for your information and educational preferences only and we shouldn't have you consider it as a solicitation or offer to purchase or sell securities.

Our responses to your inquiries here on the Q-line are based on the personal opinions of Jim Puplava. They don't take into account your suitability, your objectives or risk tolerance because we can't know that much about you and what you need to have done. So these are sort of general responses to your questions and as such we are not liable to any person for financial losses that result from investing in companies profiled here on the program or stocks or securities or anything of that nature.

David is in California:

Good afternoon, Jim. I really like your show. This is David from California. I just want to know what your take on silver is right now. I know silver gained about 7% this whole week and is it due for a pull back or it's going to continue to go up because I know gold has kind of topped out a little bit. I remember last week you saying they might knock it down one more time. It looks like it had a good run on it. What's your take on it? Do you think it's going to continue to go up like this week or next week or is going kind of rest for a while? Enjoy your show. Thanks very much.

JIM: David, I think it's going to continue to go up, but don't be surprised if we get a momentary pull back once again; there is a lot of trading that goes on in this market. But I do believe silver is going higher as is gold. So as gold moves towards $800 an ounce and then beyond that, and then it's going over a thousand.

You know, there are three targets we're going to take out. The previous high which we've done already except last year; and then the next target we're going to take out is the previous high set back in 1980; and then after that, we're going to go and we're going to have quadruple digits. We're going to see gold go up over 1000. And with that you'll be seeing silver go up, you know, in the 20s and eventually 25, $30 an ounce. [26:04]

This is Bob, and I'm from Reno, Nevada. And I was just wondering, I – one thing that has not been addressed in this wonderful program that Jim has got on and I enjoy very much is the President has passed all of these executive orders and this Directive 51 that virtually gives him dictatorial powers. All we stand is about one false flag from martial law. What happens to investments in the event that we have another false flag attack and they declare martial law in the United States. I’d appreciate some input on that, if you don't mind. Have a nice day.

Bob, under those kind of circumstances, there would be a scramble for real assets. Gold and silver would absolutely soar under those circumstances and what would come in afterwards would be even greater monetary inflation. So I would say real assets would go up, especially gold and silver. [27:04]

JOHN: I don't think we're as close to martial law as he might want to put on, but in the other area, the government is not going to do anything to jeopardize its economic system, is it?

JIM: No. They need markets because they have to tap the markets for the sale of bonds to keep the system functioning. And also the economy has to function because corporations have to tap the capital markets. So, you know, you shut the capital markets down, government and the economy cease to function. [27:28]

JOHN: So we're not talking about confiscation of goods or accounts or things like that. That's the point I'm trying to make.

JIM: The government is not going to do anything that would result in its having an inability to raise capital to function because the government whatever they don't raise in taxes they raise through the sale of bonds and then the – either if you didn't have the functioning capital market, then the only way that the government would be able to pay its bills is have 100% of its deficit monetized by the Fed and then you're talking hyperinflation. [27:58]

It's Greg calling from Canada. Your own Frank Barbera has recommended liquidating gold stocks and I know I sold most of my gold stocks and that is really contradictory to what Jim is saying in terms of riding out the correction. Frank seems to think that in a down market the gold stocks are going to get clobbered and that seems to be quite different from what Robert McHugh said this weekend. So it's a – it's getting a little confusing for the investor. Thanks.

JIM: Greg, I like to think that Frank has gone over to the dark side. But I think Frank is in the process of changing that opinion. He's still bearish on the stock market but he's getting more bullish especially gold bullion in the gold market. And remember, Frank runs a hedge fund, so he's going to be more short term oriented in how he approaches the market. I've described many times on this program, where I've been more long term theme oriented, where you really need to make very few investment discussion in your life time. If you can pick up on a theme in its early stages, get on board add to your positions and ride that theme until it fully plays out. I think that's how real wealth is created. So I'm more oriented towards keeping things, holding on to things and going through the corrections because just as gold has broken out in this last move that we've seen here, that's what always happens with gold. It will take you by surprise. It will happen so quick and the run up will be so severe that you know, you don't have a chance to catch your breath. And that's why I believe in riding out the dips.

In fact, using dips for adding to your positions, which is exactly what I did. And I think that is a much better approach, probably less complicated. But one of the things that we do on this program – we have different technicians, some that are bullish, some that are bearish, and what we try to do is let them make their case to you. And then for you, the investor, to form your own opinion, because what we want to do is educate you as an investor. [30:12]

Hi, Jim and John. Great show. In my opinion probably the best show on the internet. This is Greg from Houston, Texas. I have a question regarding your reinflation theory. I’ve agreed with you 101% up until this point where you're calling for another reinflation. I just don't think what they are going to do is reinflate. If they reinflate commodities that's going to cut into corporate profits and strip the consumer of more purchasing power. They’ve already inflated stocks and real estate. What other area that will allow consumers more purchasing power are they going to reinflate in order to get things going again? Especially if the bond market is not cooperating with the Fed and long rates are moving up as they did last week when Helicopter Ben cut 50 basis points; how are they going to reinflate things if the bond market is not cooperating? Thanks.

JIM: You know, Greg, they are going to reinflate the stock market. That's why you've never seen a serious pull back in stocks. They intervened to prop up the market because they know they have to keep assets inflated. That's the collateral behind a lot of this debt. And in terms of the bond market cooperating, I mean, just take a look at a chart of the 70s. You can take a look at the stock market, you can take a look at gold and commodities and during that whole period of time that gold and commodities were rising, you also had rising interest rates – we went from 4% interest rates all of the way to almost 15 ½% on the long term Treasury bond – during that whole entire period. So the idea that if interest rates rise, commodities can't rise. That's not really the case and you can see that clearly if you go back and take a look at charts of the 1970s whether you're looking at commodity index, looking at specific commodities, gold, silver, energy and also rising interest rates. [32:09]

This is Norman in Florida. With the huge amount of money printing, the 50% decline in the dollar against the euro and other currencies, the true inflation rate has got to be a lot higher than what the government says. What is your opinion on what the true inflation rate is and are we entering the Weimar republic? This reminds me of the day of Jimmy Carter when we were getting free cheese, interest rates were like 20%. It was great, I was starting all the time on that stuff.

JIM: You know, Norman, there is someone like John Williams at Shadow Statistics who believes that the real inflation rate today is somewhere between 8 and 10%. And I really believe that too because you can see it. Take a look at stuff you spend money on to live on a day-to-day basis. I mean it's obvious to people that inflation is much higher than what's reported. And in terms of the Weimar republic, that's ultimately where we are going to end up and that's why we've been talking on this show of Dying Of Money because that's exactly what's occurring right now. Money is dying. It's losing its value as it depreciates and the ultimate end game will be hyperinflation. [33:16]

Good evening. This is Ira from Nebraska. I wanted to request your thoughts on the available options through the fixed savings plan, which is the pension plan our government is using. I am in my late 30s and partly employed with the government. The options are basically five different funds: the G fund which is invested in short term US treasury securities; the F fund matches the performance of the LBA Index; the C fund which matches the performance of the S&P 500 index; the S fund which matches the performance of the Dow Jones Wiltshire 4500 Completion Index; and the I fund which matches the performance of the Morgan Stanley capital international Europe, Australasia far east index.
Interestingly, there are no options for a brokerage account or anything like that through this plan. And I would be very interested in your thoughts on what is a wise approach to investing through this. I always listen with great interest to your program and I'm grateful for your very thoughtful presentations and advice. Thank you very much and God bless.

JIM: You know, Ira, when inflation takes hold, stock markets go up in nominal terms, so it's going to be the big blue chips. So I would be in an S&P 500 fund and I would definitely be in the Morgan Stanley, the International Fund Index. The best way to do this is because we can get into the short term corrections as we saw in February, and once again this summer, I would dollar cost average. In other words, let's say that you have $12,000 in your fund. Rather than putting all 12,000 at once and assuming that you got in at the right time, maybe what you might be more comfortable is dollar cost average at $1000 a month into these funds, maybe $500 in the International 500 and the S&P.

I'm a little more leery of the smaller cap funds because we're in a weakening economic environment and also a situation where the dollar is losing its value and that's where the large cap international companies that are getting a bulk of their revenue from overseas are going to do much better than small cap companies that are subject only to the domestic economy. So those are the two I'd pick out of the group. [35:57]

Hey Jim and John, this is Art from Calgary calling again and still listening to your show as I have now for many years and have enjoyed it and have prospered from your advice. Thank you very much for the good public service you're giving.
I'm responding –- I can’t remember the fella’s name – to a call on the Q-line talking about the report in Alberta that’s just recently come out suggesting higher taxes on the tar sands and indeed they are talking about reviewing all royalties. And the reaction in the United States has been I think, an over reaction. This is just a report from a bunch of bureaucrats and it has not yet taken the force of full government action. Maybe that will come. I don't know, but I do not believe the new government, they have been – he's the new guy in here and he's new enough to allow such reports to come out. But to suggest that he's already acting on it is I think over reacting.
In all probability what's actually happening here is this is a great opportunity to buy Canadian assets because they’re driving down the price – even Gartman was saying sell everything Canadian because of this report. But it's not been put into legislation; it's not been enacted. And Alberta is not the Venezuela of the North. There is no reason at this point to believe that these suggestions will be adopted, or that Alberta is going to try to do something to destroy the golden goose here. These reports come along, but they are just reports. So I would suggest as advice to your listeners what they need to watch more closely what’s actually being enacted and not everything that's being suggested because the government people suggest all kinds of crazy things. You live in California. You know that crazy suggestions are a dime a dozen and this is probably all it is. [38:13]

JIM: Art, some good sound sage advice.

JOHN: I guess I would slightly disagree with that, Jim, and the reason I say this is the way a lot of agendas have been implemented is what they will do when these come out of either bureaucrats that have been put up to it by think tanks…

JIM: Trial balloons.

JOHN: Trial balloons. And they want to see what reaction of the public is. If the public doesn't jerk too much, then they go ahead with it. But they are already thinking about it. That's the important thing to understand.

And then, if the public reacts negatively, don't think that it goes away either because what they do is they back up and they break it up, package it differently, break it up into pieces, put it into several bits of legislation so nobody is looking. And within 24 months there it is. This is a fairly common procedure.

The real key thing here is at least to observe they’re thinking about it. If they weren't thinking about it, you wouldn't have anything to worry about. I've seen this happen over and over and over again to various long term tax agendas, education agendas, social engineering agendas, that's the way they do it: float the trial balloon, if it's positive go forward; if not back up, break it up, rename it, repackage it, push it again. [39:26]

JIM: And that's what they are doing with socialized medicine. They are trying to repackage and reinstitute it.

The one thing I've said here is as the price of energy goes up, as the price of precious metals go up, you're going to see governments become more rapacious. And we're certainly seeing that globally, so the fact that they are floating a trial...

Good points in each direction. Art, you bring up some good points. Maybe if there is strong reaction, like John said, if they have a lot of strong reaction against this, maybe they'll back off. But never under estimate the government's ability to try to raise taxes. If they had their way, they'd probably have 100% taxation. [40:04]

Good afternoon or evening, Mr. Puplava. This is Willie from Reston, Virginia. I have a question: you have explained in programs that you have a preference of silver over gold.; Could you please explain that to all of us out here? Thank you very much.

JIM: Willie, one of the things about silver as compared to gold is silver has been consumed where all of the above ground gold still exists. So there is less of it around, it's harder to mine, the recoveries of silver are harder to get versus gold. And if you take a look at the ratio which is out of line today, in other words, the ratio of let's say 15 or 16 to one – 16 ounces of silver to one ounce of gold – we’re over 50. So I think that ratio is going to contract. And as it does contract, I think you're going to see silver outperform gold as it will do many fold. And in addition to outperforming, it's also more affordable. How many people can go out and buy one ounce of gold at $750s as compared to let's say one ounce of silver.

It's been said that silver is the poor man's gold and over the centuries it was silver that was used in common every day transactions for most people where gold was sort of deposited wealth for, you know, the wealthy. So I just think silver is going to outperform as that ratio corrects to more normal ratio of somewhere 15 or 16 to one silver to gold.

Hi, Mark in Salt Lake City. You played a clip of Ron Paul questioning Helicopter Ben Bernanke at the congressional hearing. He dodged the questions almost artfully as Mr. Bubble's Greenspan. My question is: How can those congressmen and reporters sit in those hearings and claim they don't know where inflation comes from after Congressman Paul just explained it to them. Can they been that misinformed or is this just a shell game to keep the public fooled. Your comments will be appreciated. Thanks.

JIM: Mark, it gets back to our education system. All of these congressmen were educated in public schools where they were taught Keynesian economics, where the definition of inflation is rising prices, the definition of deflation is falling prices. And most of the people that are in the press room have been educated in the same way. So when you are raised on the belief system, you know, they never stop to check their belief system and say that, “you know, wait a minute, this just doesn't hold up.”

Some day they are going to wake up as they did in the latter part of the 70s and realize, hey, this is inflation and the government is the cause of it. But they will use all kinds of misinformation. But it stems from the education system. A lot of everybody have been brainwashed through this whole system of Keynesian economics which is why people believe what they do. [42:55]

Hi, Jim and John, this is Sean from Wisconsin. Last week’s show you briefly touched on some of the ways that the federal government reduces their official number for the federal deficit. And you mentioned how they, like, tap into the Social Security trust fund. I was wondering: what are some of the other ways that they can reduce the official number? Is it possible for the government to have the Fed monetize ongoing expenses and do it in such a way that it won't even show up on the official books? I was just wondering. Long time listener. Love your show. Keep up the good work.

JIM: You know, Sean, it's not just tapping the Social Security fund. They are tapping all kinds – The highway trust fund, all kinds of funds that are supposed to be set aside for specific purposes. And another way that they do it is they keep a separate set of books. They do it by, for example, taking something off budget. Well, you know, it doesn't matter that it's taken off budget, for example the Iraq war is off budget. It doesn't matter that it's off budget. We still have to spend that money. So another method that they do it is they keep a couple of sets of books where a lot of expenditures which the government spends money on are not recorded in the deficit that's reported publicly. [44:10]

JOHN: I've been trying to figure out how to adapt that to my income tax reporting every year. I don't know if the government would buy – just say I'm taking this income off budget. We're going off budget with this one, don't worry about it. You do it. I'm going to do it too.

JIM: I'd like to have the same privileges. Can you imagine that? You report zero income. You've been hedonically adjusting your income to account for the true rate of inflation. [44:38]

Hi, my name is Mike from Pennsylvania, long term listener of the show and a client of your firm for about a year.
My question relates to the value of the dollar, increasing inflation and the prospect of hyperinflation in the coming years and the anticipated degrees of severity across different asset classes.
My specific area of interest is in the housing market. Back in 2002, due to personal reasons and also as well as seeing my house greatly appreciate in value, I sold my house and invested the proceeds and within five years I was able to more than double my money, thanks in part to your show, and with other publications and subscriptions of people like Doug Casey, Steven Leeb and James Dines.
I'm now considering a house purchase within the next few years due to the market softening. But I'm concerned about something that Robert McHugh said on your September 22nd broadcast. My interpretation of what he said was that the US dollar index will decline from its current level of about 78 to the low 70s and it may be followed by a quick plunge to the 40s, which may be indicative of hyperinflation. I don't know if you agree with this or what time you think it would occur in, but I'd like to hear your thoughts on that.
I don't ever want to try to time the market and pretend to know when the housing market bottom will be, but I am concerned if I wait beyond 2009 to buy a house that hyperinflation and reduced purchasing power of the dollar should that occur, that it will cause housing prices to spike up way up even higher to higher levels than we saw in the last few years in the real estate bubble. I was hoping to get your thoughts on this. Thank you and keep up the good work.

JIM: You know, Mike, we are probably not quite halfway through this housing cycle. I mean if you saw some of the housing numbers that came out, we are up to, what is it, ten months worth of inventories some of the highest inventory levels. But you know something, what you are going to see as prices weaken, there is already funds that are gathering large amounts, and I'm talking billions of dollars that are going to be, like, vulture funds; and they are going to go into the builders. We're seeing auctions of housing prices here go for 50% of what they were, let's say even months ago. And eventually this housing market is going to stabilize and it's going to start going up as we reinflate.

In terms of timing, you know, I would probably say somewhere within the next 12 months you're going to see this housing market bottom – probably towards the middle of next year or later in the fall of next year.

In terms of purchasing a house, what I would tell you is this: Buy what you can afford and make it more sort of a personal decision right now. And don’t be worried about it: “I bought it now, you know, I could have got it cheaper six months from now.” So it's going to be a personal decision on this because what you're looking is not just the next six months you're looking what happens beyond that. And I do think we're going to end up hyperinflating which means real estate or real assets will become more important.

And here is another factor I think that will prop up real estate eventually besides these vulture funds – as the dollar depreciates, remember, foreigners who are going to try to get out of their paper dollars can then come into the United States and buy real assets such as real estate that is going to be a lot cheaper to them. It's what we've seen over and over again in these hyperinflations and economies around the world. For example, Argentina where the value of property to outside investors if you owned dollars or other currencies were screaming bargains.

So look at this more for a personal decision, buy what you can afford and don't worry. The one thing I would tell you is look for some of these auctions. A lot of, like for example, this weekend one of the big builders here, national builders is holding an auction. They are going to auction 75 homes. A lot of it is basically condos, but I saw a condo that was selling for over 300,000. The starting bids are going to be somewhere close to 50% of that; they are going to start at about 150. So you know, if you can find something like that in your neighborhood where maybe some of the large builders if they’ve got tracts. But look for some of these builders to start liquidating inventory in terms of auctions. That seems to be the new way one builder – I'm trying to think who it was, I can't remember offhand – saw their sales jump up. They sold 2100 homes as a result of these auctions which is 10 times what they were selling. Look for those kind of opportunities to take advantage of. [49:19]

Hi, Jim and John. This is Bernie from cook Tennessee. I had the pleasure of watching Donald Trump on CNBC. He was parlaying with Erin Burnett and she was trying to console him. He wants “leadership from Washington.” Leadership he says, leadership. I mean the President needs to go over to the Mideast and tell the oil producers to bring the price down. He said without leadership and the jawboning of the government, oil prices will remain high. Wow. Isn't he lost? I know you'll have a laugh at that. Maybe you could pull that off of your Tivo. Have a wonderful day. Keep up the good work.

JIM: Bernie, I saw that interview. He has – that's not the first time he said that either. He said that in previous interviews. If you were in charge of President Bush what would you do. “Well, I would go over there and say we're the big customer, we buy most of the oil, you take that price down because we're Americans.” I mean the guy is clueless. [50:21]

Hello, this is Chuck from Aurora. This question is for Jim. I know you're in Denver and I hope you're enjoying our weather. Of course I appreciate the show.
I am 75% in energy and 25% in mining of which one quarter of that 25% is gold and silver. I'm listening to the webcast of the show as it goes and at night on the rebroadcast of each of the presenters. It sounds like there is a ton of gold and silver coming along in the next number of years. What are the chances are that with all of this gold and silver we hear about in the show you’re attending, what are the chances of that coming along and flooding the market? What is the demand for gold? I know silver is used up. Gold isn't necessarily used up. Give me some idea what's coming on when and what demand is? Thank you very much.

JIM: You know, Chuck, there are new mines that are coming into production as a result of all of the exploration that's been done over the last decade. But you know, one of the things that they are not telling about is also on the supply side you're seeing a drop in the production of one of the world's large producers of gold, which is South Africa. I think South African mine production will be down another 7 or 8%, and that's something that they don't talk about.

And it's just like we make the same mistake when it comes to oil. You know, they talk about the optimists, “oh, all of these new oil fields are coming online,” but what about the depleting oil fields. So the one thing I would say is in terms of supply, the miners have had trouble of not only meeting current demand but also replacing what it is that they produced. So when push come to shove, I just think that the supply-demand dynamics for gold and silver have never been better. And the variable that is probably the most difficult to predict, but we've seen it occur over the last six years, is gold buying is at an unprecedented level. It's global. It's not just the US. It's not just Europe, it's not just OPEC. It is global. And it's mainly because of the things that we've been talking about here in dying of money. So when it come to gold, the supply-demand dynamics are still favoring much, much higher prices. [52:44]

Hello, Jim an John. This is David formerly from Cleveland, Ohio, now living in Chicago Illinois.
Two quick questions for you. Jim, I've heard you say several times at least that we are moving from an era from paper to an era of things. And I'm just wondering what you specifically mean by that. More because you talk about investing in paper energy stocks and paper mining stocks, but you don't really talk about owning the actual commodity other than bullion, gold silver and platinum. So I'm wondering if you also agree with owning the ETFs that represent oil, natural gas, agriculture because I know that these ETFs out there exist. I wanted to know if you do, how come you don't talk more about it more on your show and maybe you can even tell the listeners what percentage of the actual ETF that owns the actual commodity like USO and UNG and BBA, which is the ETFs for oil, natural gas and agriculture ;and what percentage should go on paper assets such as Conoco-Phillips, Transocean, Goldcorp, silver Wheaton etc.
The second part of my question is, Jim, if you could throw the listeners a bone here and tell us specifically maybe how to invest in infrastructure. I'm not knowledgeable enough to know what individual infrastructure stocks to pick. I was wondering if you know of any kind of ETF or better yet a mutual fund that's specifically invests in the sector of infrastructure. Thanks very much.

JIM: Okay. Dave, in terms of talking about ETFs that own the physical commodity. I'm in favor of them. We own one in particular. I'm not going to mention that, but it is part of that investment process where you own the physical commodity and certainly with ETFs –you know, maybe we'll do a show on ETFs! I'm a stock investor, I buy individual securities rather than funds. I use ETFs only when I want something like a physical commodity, but I also like the leverage that I get from the equities themselves. In other words, if gold goes up 10 percent, the gold equities are going to go up 30, 40%. If oil goes up, you're going to get more leverage from the oil shares or the oil service shares. So maybe we'll do a show more on ETFs. In fact, I think we do have an author coming up here in the interview process that talks that.

Now, in terms of infrastructure, there are some ETFs out there. There are ETFs on alternative energy. When I talk about infrastructure, I'm talking about civil engineering projects –anything from airports to roads, to bridges to the rail system, to the canal system. And there are companies that make products in that area. Another area that we like is infrastructure for the mining system. I mean, it's very difficult today to find drills, so companies that make products that miners use.

There are plenty of companies out there. One is named after an animal, a pet that most people have. That's about as close as I'm going to get. There are also companies that are building energy infrastructure from oil service to companies that build wind turbines to companies that build wind blades to companies that make nuclear reactors, to companies that facilitate building of power plants. So those are the kind of things I'm referring to when I talk about infrastructure. [56:12]

Hello, Jim and John. This is Jeremy from North Carolina, and I love listening to your show. I've been listening for two years. And I notice that the show gets longer as the price of gold goes up, so I can't wait until next year when the show is a full eight-hours long. You don't pay your producers nearly enough, I imagine.
But my question is this: I know you've talked about alternative energy, solar power and wind power. Have you done any research on what is sometimes called free energy alternative energy, or maybe known as cold fusion or magnetic energy or non-mainstream energy? Thanks.

JIM: Jerry, I've always said on this program, we have no silver bullet when it come to replacing fossil fuels. Oil and natural gas. So the things that I believe that we're invested in is when this power crunch and energy crunch comes in, the markets are going to wake up to anything that we have that we know that works. What do we know that works right now? Geothermal works right now. We know that wind works. We know that coal can work. We know that solar works. We know that nuclear works and that's where we're heading. If you look at permits for nuclear power plants. If you look at the raw material uranium that goes into it, that's where we are focusing on right now. I just haven't seen some of these other things that you're talking about become feasible yet, although BMW, I think, is talking about a hydrogen powered car. So we are looking at some of those kind of things.

And also when we talk about energy, we're also looking at the conservation side for companies that are going to be making products that get better gas mileage. One thing that I like that seems very promising that I predict is going to be a status symbol is the Smart Car that's coming to the US shores beginning next year from Mercedes. [58:07]

Hi. This is Bob from Utah. Great program. I really appreciate the service you provide. I wonder if you might talk about the relative safety of gold holdings such as Street Track’s Gold (symbol: GLD) versus holding the actual metal. I'm concerned about how that might play out. Thanks. I look forward to hearing your answer.

JIM: Bob, I see Street Track’s GLD more as a trading vehicle. It's just paper gold. I think you need to own the physical gold and metal and I would take that as savings over, let's say, trading in and out of GLD. [58:50]

Jim and John, this is Jim in Atlanta. I'm a big fan. Enjoy your show. I've been downloading it so I can listen in my IPod as I drive around.
I have a question about investing in companies that have Russian assets. I've noticed how the Russians have run roughshod over the oil companies. I see in some newsletter how certain advisors have touted Kinross gold. I know you don't comment on specific companies, but I know they have a substantial Russian holding and they are a fairly lower priced major. But I just wanted your thoughts about the companies that have Russian assets because to be blunt about this, I don't think they really care about our concepts of property. And I think that my concern would be that some investors are going to be in for a rude shock. So let me know your thoughts. As always, enjoy your show.

JIM: Jim, I agree with you 100%. I don't trust the Russians. They've proven over and over when it comes to mining or it come to energy, they will entice Western countries to come in, find it, explore it, build the system and then they confiscate it – whether through environmental laws or anything else. Don't trust them. And I don't like companies that have assets there. [60:03]

Hi, my name is Steve from Charlotte and Jim and John, I just want to again thank you for your show. I want to say I've learned more from listening to your show. I've listened since about 2001 whenever you started. But I've learned more from your show than ever learned from school. I just want again to thank you for your show.
Jim, I was wondering if you read the article by F. William Engdahl, Confessions Of An Ex Peak Oil Believer and what your comments are on it. Thanks.

JIM: You know, he has certain geopolitical aspects that I think are valid. But in terms of his comments on that article, I disagree with him 100%. I'm a big believer in peak oil and believe me, I would love to come on this program and say one day, “you know what, I was wrong on peak oil. You know, we've got new discoveries, we’ve found ways to go down to the middle of the earth or maybe oil replenishes itself as some people believe.” I would love nothing more to do this, but I've been studying this to the mid 90s is when I read Colin J. Campbell's book when I first came across the peak oil concept. And back in the 90s I just ignored it, I thought great idea and maybe eventually we'll run out of oil. But I’ve just studied, I’ve read, I’ve watched oil statistics evaluating the industry and I think he's wrong. [61:29]

This is Kit from Corpus Christi, Texas, and I was wondering how long you think the financials are going to continue to hold up with the value of the dollar falling and gold and silver prices rising? Thank you for your answer.

JIM: You know, I think there is more weakness coming ahead because as once again the system hasn't played itself out fully. It's going to work it's way up the food chain. You know, I can't help but believe that some of the bigger banks and some of the large financial institutions have more trouble coming their way and that's going to impact their earnings. And especially they have to increase their loan loss reserves which many of them have increased their profits because they've been sort of stingy on increasing their loan loss reserves. So maybe what happens is they weaken further, but they don't completely collapse as they did in 1991. The real estate problems in 1991 were much worse than I think we have going right now. And I think what will eventually stabilize these companies is reinflation. [62:26]

This is Peter from New York, and a big fan of your show. And I just have a question about your view on international securities over the next couple of years. I've been following with great interest your view of commodities and gold and how you expect them to perform over the next couple of years and in agreement with that, wondering what your thoughts are on the various international markets: European market, Scandinavian market and various Asian markets. And how do you expect them relatively to perform to these other asset classes? Thanks very much. Looking forward to Saturday.

JIM: You know, I think, Peter you're going to see the Asian markets, which are the fastest growing markets, and developing economies of the world, perform very well. Certainly you've seen the Chinese market just go utterly ballistic. I expect that trend to continue.

In terms of international, I think one has to consider when you're investing today that you own a portfolio of international companies, whether they are domiciled here in the US, whether they are domiciled in Europe, Asia, Latin America, Canada, Australia, wherever it is. And that's something that we've been doing for probably the last five or six years. I mean a lot of our energy companies are international. A lot of our gold companies are international. Our base metal companies are international. And then also even our domestic companies have a very, very strong international presence. In other words, a good portion of their assets are in sales coming from overseas. And I can expect that trend to continue.

And I expect that these international large blue chip companies are – at least in domestic markets here – are going to out perform the smaller domestic companies. So certainly expanding international markets, especially emerging markets in Asia, but all companies with an international presence are going to do well no matter where they are domiciled. [64:23]

Hi, Jim and John. This is Bob from San Diego. Great show. And John I love the musical things you do.
But my question is on gold bug websites you hear the words liquefy or inject when it comes to the Fed. For example Countrywide financial, I read the Fed injected $15 billion. Is this actually a loan by the Fed with terms, rates and a pay back schedule. Liquefy implies that it's free money and it's shooting out into the system. So my question is are all of these liquefications around the world by various central banks, are they actually loans to be paid back? And once the money gets back to the Fed, I guess what happens then? Anyway, great show, thanks.

JIM: Bob, when you talk about liquefication, it's through the repo market, the Fed buys securities from the banking system as they were doing during the credit crunch. They were talking, in the repo system, about assets such as these mortgage securities that were non-sellable and they are also doing that in Europe as well. So basically what they are doing is they are taking assets from the banking system and giving them cash by buying those assets. And that's what they are talking about liquefying the system. [65:44]

Hi. This is Angela. I'm calling from California. This is regarding the petrowar on gold article because there was a question last week about it, and there was something I don't know if it was addressed in your answer, but I was wondering if that happened, if like governments bought gold, if they could make gold a set price and lower it from where it is right now; or if there could be a possible return to the gold standard. Or thirdly, because you said something at the end of your answer like that's why it's important to buy gold while it’s available. And I was wondering: how would holders of gold be affected if gold was taken completely off the market or out of the market? What would happen then? I think this article just got me thinking about some things like that. Thanks a lot for your answer.

Angela, eventually as currencies depreciate and as we move from regional currency blocks like the Euro, dollar, Yen and possibly an Asian currency led by China, eventually all of these fiat currencies are nothing more than fiat currencies. And eventually they want to move towards a global currency and with that to get confidence back before people accept it, they are going to back it with something tangible. When that happens it will be most likely gold and silver because that represents real money.

We go through these periods of fiat systems as we did in the 17th century and as we've been going here in the world since 1971, really 19 – going back to the 30s when we got rid of the gold standard, the real gold standard when there was actual gold backing it rather than the dollar gold standard. At some point when they have to go to that global currency and they go to gold, they will probably freeze the value of gold at whatever price it might be. Who knows? It might be 3, 4000, 5000 an ounce. Who knows how crazy things will get?

But anyway they are going to have to do that. In terms of buying the physical gold, the reason I'm saying do it now because once that demand comes into the market it's going to be harder and harder to get. If they confiscate gold, they may do something like the ETFs, which is the large supply of gold. But what they might do to effect gold as they do now is they might effect its investment returns by taxation. So they might say for example, if you own paper assets, you know, the capital gains rate is 15%, but if you own gold assets maybe there is a surcharge or a surtax and you pay 40, 50% tax. So they will probably if they try to discourage, it will be done through the taxation system. [68:23]

This is Sam calling from Birmingham, Alabama. I couldn't help but chuckle after listening to last weekend's show when I picked up last Sunday's New York Times and read an article by Ben Stein entitled the Great Inflation Mystery Still Unsolved. It was clear to me after reading the article that number one he doesn't acknowledge the notion of asset inflation; and number two, he relies on government economic statistics which he uses to draw a conclusions. Are articles like this written out of economic ignorance or illiteracy or are they deliberately written to deceive the general public to the benefit of the Wall Street asset shufflers, as Marc Faber refers to them?
And secondly, if the inflation rate is defined as an increase in the supply of money and credit, then why isn't the rate directly equal to the increase in the money supply? I know it's only measured in terms of good and services, but the remainder has to go elsewhere and perhaps can even be higher because inflation is created through other sources today. Look forward to your comments and enjoy the show.

JIM: You know, Sam, in answer to your first question regarding Ben Stein and not acknowledging asset inflation or believing government statistics, I think it's one of ignorance as we mentioned earlier; people have been educated through the public school system whether it's in high school, in civics class or in college to the Keynesian system, so when you're educated that way, you tend to see the world in that way.

In terms of the inflation of the money supply and credit why it isn't equal to the – I think what you're meaning is the inflation rate – remember, inflation has many outlets. If the money supply increases by 10%, it doesn't necessarily translate to a 10% inflation rate. Money has many ways in which it can go. It can go into asset inflation and certainly we saw that in real estate going up at a rate equal to or above the increase in the money supply. And then also another mitigating factor might be also reducing some of the effect is the velocity of money. So listening to the first hour where we talked about Dying Of Money, also the part we did last week on that and we'll get more into this in the weeks ahead when we discuss Dying of Money, Part III and IV. [70:43]

JOHN: Obviously, we are going to track all of the trends that's we've been discussing here on the program as the weeks go by. I don't expect a long time before things start to move again. I don't think we're going to be predicting X number of months way out, I think things we’ll see a little more rapid activity here. If not on the geoeconomic side then on the geopolitical side, I think. So what are we looking forward to in programs to come in the future?

JIM: Well, we've got a great set of interviews coming up next week, my guests will be Emanuel Balarie. He's written a book called Commodities For Every Portfolio. On October 13th, Stan Richelson has written a book on bonds. October 20th, Nathan Lewis has written a book called Gold: The Once & Future Money. Looking forward to that. October 27th will be a surprise and November 3rd, boy, this will be full of lots of nastygrams, John, Bjorn Lomborg will be my guest and he's written a new book called Cool It.

JOHN: I have told you I'm going to be on vacation that week?

JIM: He's written a book called Cool It about all of this controversy over global warming which is becoming hysterical. So he'll be my guest on November 3rd.

In the meantime on the behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend.

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