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James Turk and the Money Bubble

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James Turk and the Money Bubble

In today's programme I meet James Turk to talk about his latest book, the Money Bubble, written with John Rubino.


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James is convinced the money bubble is about to burst. I'm not so sure. We discuss.
James Turk is a sound money advocate. He is the founder and former chairman of Goldmoney, through which you can buy and store gold. His book, also written with John Rubino, the Coming Collapse of the Dollar, is, in my view, essential reading.



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It is always good to hear Jim Turk's well articulated opinions.


I am looking forward to hearing it

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Unfortunately, the book is not available from Fishpond (and Amazon's shipping charges are prohibitive).


All that being said, I remain to be convinced that gold is the answer to monetary debasement (I prefer equities and real estate) - when the valuations make sense.

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(I would take a slightly different approach...)



Stretching a promise is like stretching the Truth.
How far can you stretch the Truth, before the holes show through, and it becomes a lie?

How much can you stretch a Promise, before people stop believing in it?



This is the situation with the US dollar.

If you "do the math", it is already clear that the US cannot honor its debts. Not with dollars having the same value as they have today. Or to put it another way, the government has loaded too many promises on future generations. They will be unable to repay the debts unless the real value is much reduced, in relation to their incomes. Thus, we MUST see either:


+ Default (ie broken promises),

+ Hyperinflation (promises kept, but with a vastly devalued currency),

+ A combination of both


As the promises get stretch across more and more currency-in-circulation, the holes start showing through. And now we are seeing some important stesses:


+ China has announced they will not increase their holdings of US dollars

+ BRICS countries are starting to pay for oil in their own currencies, bypassing the dollar altogether,


So these countries have stopped honoring the promises of the USA as easily as before. To cope with these strains:


+ The US has said it will take 7 years to return to Germany its gold

+ The US has said that the next banking crisis will not be solved by a "bailout" from US taxpayers (since the last one was so unpopular). Instead, it will be bail-ins supported by depositors, as in Cyprus,

+ Capital controls are beginning to show up, in measures which make it harder to move money out of the US

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"China has announced they will not increase their holdings of US dollars"


China says this a lot .... but continues to amass more holdings of US debt securities. They just hit a new record high:




China still has a vested interest in the US as a destination for its exports and preventing the USD from depreciating against the RMB.


All of which is a minor quibble - the bottom line is that the US will continue to attempt to inflate away its financial obligations to the detriment of its people for the simple reason that the obligations are so big that no amount of higher taxes could come close to closing the gap (even if taxes could be dramatically increased without killing already anaemic growth).

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"China has announced they will not increase their holdings of US dollars"


... - the bottom line is that the US will continue to attempt to inflate away its financial obligations to the detriment of its people for the simple reason that the obligations are so big that no amount of higher taxes could come close to closing the gap (even if taxes could be dramatically increased without killing already anaemic growth).


I hear that often, but I don't think it is wholly accurate.


You cannot "inflate away" debt, unless you raise incomes in relation to that debt.


This is why QE is failing - incomes are not increasing with the money supply.

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I agree with that (I should have emphasised "attempt").


That doesn't mean that individuals cannot protect themselves (or even prosper) while all the currency debasement is going on. As Marc Faber keeps saying, they can print the money but they can't control where it ends up.

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I agree with that (I should have emphasised "attempt").


That doesn't mean that individuals cannot protect themselves (or even prosper) while all the currency debasement is going on. As Marc Faber keeps saying, they can print the money but they can't control where it ends up.



I have been tracking that - I call in "Bernanke's Racetrack". Or now; "The Fed's Race track"


This chart starts when the SPY and GLD were at exactly the same level - you can see what happened since then:


The Fed's Racetrack ... update




Note how; after Gold has its "blow-off", GLD went too high for the level of underlying inflation - as shown here by :


GLD / Gold versus CRB ,,, update




GLD (and Gold shares too) corrected - and quite massively so - as money flowed into stocks, and out of Gold.


So you could say that, "The Fed got its way... once it was clear that inflation was not taking off."


(I think that Jim Turk, and other Gold Bugs, would do well to track the CRB and other inflation indices.


Perhaps we have learned that Gold may run into troubles, if it gets too far ahead of inflation.

Having said that - the Transactional and Seniorage value of a "currency marker" can push it to high levels.

We have seen that with Bitcoins, which have no tangible backing. The lesson for those who favor Gold is,

that they need to make it more transactionally-friendly, as Gold Money has done to some degree,


A better idea might be to tie it more closely to a Crypto-currency. And I have some ideas about how to do that.*)


*Perhaps I should discuss my ideas with Jim Turk, and/or the GoldMoney team.

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Living in London and being short property, long gold must be an awful experience. The belly of the beast….



The really clever thing, would have been to Swap out of GLD/Gold into BDEV, when Gold was near its high


You could have made 4X your money in BDEV


BDEV.L versus GLD ... update



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"Hindsight is a wonderful thing!

I'd say the smart money should now go long gold and short London property (although I would expect it to rise further this year)"

- Jim Turk


Like this? Swap every Two years (between Gold and BDEV)




It looks like the right sort of timing from Gold's perspective, but BDEV may have further to go

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  • 3 weeks later...

The Money Bubble...& Gold & Bitcoin - John Rubino Interview




Compared with when we wrote the first book, "everything's bigger... the mistakes are bigger"

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  • 2 weeks later...

Q&A with James Turk - from the Casey Report




Question 1: One central tenet of your book is that the dollar's international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?

In a word, momentous. Although the dollar's role in world trade has been declining in recent years while the euro, and more recently the Chinese yuan, have been gaining share, the dollar remains the world's dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.

Supply and demand determines the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of "money printing." So as the dollar's reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve's quantitative easing program that began after the 2008 financial collapse.


Question 2: Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will "win" this currency war (to the extent there is a winner). What is China doing right that other countries aren't? How would the investment world change if China does "win?"

As you say, nobody really wins a currency war. All currencies are debased when the war ends. What's important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.

For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world's third-largest gold reserve. The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.

Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.


Question 3: You draw a distinction between "financial" and "tangible" assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?

Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money "out of thin air," as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don't get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.

So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.


Question 4: You cite the "shrinking trust horizon" as one of the long-term factors that will drive gold higher. Can you explain?

Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, like happened in Cyprus last year, trust begins to erode. An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.


Question 5: Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let's say in 2014—could wake it from its slumber?

We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year's price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world's best-performing asset classes since the current financial bust began with the popping of the dot-com bubble.

Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can't even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.

So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—"quantitative easing." But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency's purchasing power.

Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly central bankers are doing their job.


Question 6: Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?

Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so-called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.

Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing as a dollar has today, which interestingly is not too different from the rate at which Rome's denarius was debased.\


Question 7: After discussing how the government of Cyprus raided its citizens' bank accounts in 2013, you suggest that it's a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?

It is impossible to predict of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used. For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.

Protecting one's assets in today's environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.


Question 8: You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?

I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, gold is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s. In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, silver is still far from that price. So silver has a lot of catching up to do.

Silver is a good substitute for gold in that silver too can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1. So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.


Question 9: Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?

Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.


Question 10: What asset class are you most bearish on?

Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.

So everyone needs to plan and prepare for that day of reckoning. We can't predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.

What today is considered to be money is only a money-substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: "Money is gold, nothing else." Because we have lost sight of his wisdom, a "money bubble" has been created. And it will pop. Bubbles always do.

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