The Seattle Times:
If President Obama wants to avoid an economic calamity next year, he could always show up at a news conference bearing two shiny platinum coins, each worth … $1 trillion.
That sounds wacky, but some economists and legal scholars have suggested that the “platinum coin option” is one way to defuse a crisis if Congress cannot or will not lift the debt ceiling soon. In theory.
The U.S. government is facing a real problem. The Treasury Department will hit its $16.4 trillion borrowing limit by February at the latest. Unless Congress reaches an agreement to lift the debt ceiling, the government will no longer be able to borrow enough money to pay all its bills.
Last year, Republicans in Congress resisted raising the debt ceiling until the last minute — and then only in exchange for spending cuts. Panic ensued.
What happens if there is another showdown this year?
Enter the platinum coins. Under current law, the Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this scenario, the U.S. Mint would make a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.
Obviously, the only downside to this plan is the inflation, but it’s not like the government is serious about that, seeing as how the dollar has lost over 95% of its value in the last 99 years. I suppose it would be technically better to use the trillion dollar coins to buy back US debt and retire it, thereby monetizing the debt-inflation that has already occurred. However, in the grand scheme of things, it doesn’t really matter. What matters is that we extend and pretend for another year until Krugman and the Neo-Keynesians finally Figure Out How To Solve The Economy For Good This Time (We Really Really Mean It)™.
It makes no difference who gets the extra money from the Fed, because the recipient is no wealthier than before (money is swapped for bonds) and hence they have no incentive to spend any more. Rather the impact occurs in the AGGREGATE. Total holdings of the base now exceed total base demand at the current price level, and hence aggregate nominal spending rises (if the injection is permanent.) [Emphasis added.]
So, Sumner is essentially asserting that the people who sell bonds to the government for cash are essentially kind-hearted souls who are doing the economy a big ol’ favor by spending a ton of time and energy in an unprofitable activity to help plain ol’ average Americans avoid a liquidity trap. And who are these blessed, selfless individuals? Why, these oh-so-helpful people who are engaging in unprofitable activities for the sake of all Americans are none other than bankers!
It is truly amazing how some economists can get so wrapped up in their abstract theories that they cling to the point of absurdity. Seriously, Sumner’s model is essentially predicated on an implicit assumption that those who engage in trading bonds for cash from The Fed only do so out of the goodness of their hearts. It ignores the actual motivations of the economic actors involved, and somehow ignores that most people engage in what they determine to be profitable activities (in whatever way they subjectively value profit). And if Sumner’s theory is predicated on the assumption that bankers do not, when messing around with hundreds of billions of dollars, seek to make a profit, then his theory is probably not all that realistic.
It makes considerably more sense to assume that bankers will swap out their bonds for cash from the central bank because doing so is quite profitable. The central bank will take the hit because, like all good political agencies, it is corrupt and inefficient, and exists to channel wealth from the middle and lower class into the hands of the wealthy. Of course, Sumner can’t admit this because committing heresy against the church of the central bank and its high priest Ben Bernanke would miraculously cause Sumner’s head to explode. And so, he assumes that bankers (again, bankers) engage in economically unprofitable activity because…bankers are nice people, I guess.
And so, you can see that Sumner’s assertion is probably false because there is quite a mismatch between incentives and behaviors. At least it’s a wonderful theory.
Bernanke is apparently not seeking another term as the Fed chairman:
US Federal Reserve Chairman Ben Bernanke will most likely step down from his position in January 2014, even if President Barack Obama stays for a second term, according to friends of the chairman.
This probably sounds like good news, especially since there are a lot of folk that tend to hate Bernanke’s guts (and rightfully so, I must add). However, this could turn out to be somewhat problematic in the long run because, in public discourse, “Federal Reserve Policy” has become conflated with “Ben Bernanke’s Policy.” Allowing Bernanke to resign could have the effect of taking some of the scrutiny and heat off of the Fed since Bernanke’s resignation non-renomination would be viewed as a victory by those who have generally been critical of Fed/Bernanke policy these last few years. By offering Bernanke as a scapegoat, it may be possible for the Fed to lower its public profile and thus get away with even more economic disruption and destruction. So, while it is nice to see that Bernanke has no desire to run the Fed anymore, the more important thing is ensuring that no one wants to run the Fed, to the point where they will “lock the doors and leave the building to the spiders, moths and four-legged rats.”
Join the forum discussion on this post - (1) Posts
They are probably right. It is telling that neither Obama nor his Republican opponent has offered much of a plan to spur the economy, at least in the short term. So far as anyone has any short-term impact on the economy, it is the Federal Reserve, and even it is limited in what it can do. As it has been said, the Fed can print money, but it can’t print jobs. [Emphasis added.]
Well, if all the fed can really do is add to the stock of currency (well, that and not enforce regulations), then pray tell what, exactly, is the point of having it? If it’s not going to do anything save debase the currency and in so doing ensure that banksters get first dibs on the redistribution that inevitably accompanies each round of inflation, then why have a central bank? Oh, wait…
Brien Lundin expects money printing by the Federal Reserve to raise gold above its $1,920/oz high, and as editor and publisher of Gold Newsletter, he considers it his job to show people how to profit. In this exclusive Gold Report interview, Lundin explains why he believes it is time to be aggressive in equity positions and names companies that could benefit the most from the coming leg up.
The Gold Report: We just had a third round of bond buying in quantitative easing (QE). Will QE3 help the economy?
Brien Lundin: It will not help the economy, but it will help Wall Street. It will help elevate the stock market, including precious metals and resource stock prices. Although that was not the Fed’s stated goal, it will be the ultimate result.
As I have written lately, we now have “QE as far as the eye can see.” There is no end to it. The Federal Reserve will use QE until it works. If it does not work, the Fed will ratchet up the program and print more money until it does work.
The Fed is using the brute force of money creation to eliminate the U.S. unemployment problem, but that is not a foundation upon which a sustainable recovery can be built. At the same time that the Fed is trying to build a towering economy, it is eroding the very foundation of that economy by issuing vast pools of liquidity.
TGR: At a recent Casey Research Summit, some speakers suggested that the stage is being set for inflation. Do you agree?
BL: I see the danger, but I think it is important for investors to recognize the differences between monetary inflation and price inflation.
Price inflation is a symptom of the underlying disease, which is monetary inflation. Every new piece of fiat currency created in the world that is not backed by gold raises the relative value of tangible assets, primarily the monetary metals gold and silver, but also other commodities.
For a number of reasons, I do not think we will see soaring price inflation in the U.S. as we saw in the 1970s anytime soon. There are other very powerful parallels with the 1970s, but I do not think that retail price inflation will be one. We are living through monetary inflation right now. That is why precious metals prices are rising.
TGR: The August edition of Gold Newsletter predicted what happened in the beginning of September: a gold price close to $1,800/ounce (oz). Where do you see things headed?
BL: That prediction of a mid-to late-summer price breakout was based on two things. First, typical seasonality issues came into play. Second was seeing gold trade into a consolidation pattern of an ever-narrowing price trend.
This kind of consolidation pattern has been evident many times before in this long bull market for gold. Eventually, the price of any commodity will break out of such a pattern and typically will return to the trend that was in force beforehand. For gold, the earlier pattern was an upward trend, so the odds were that it would break to the upside, and it did.
Breaking to the upside, the price pretty much predicted some action by the Fed, but QE3 really exceeded anyone’s expectations for such action. I think the near-term goal for gold is to exceed its previous highs of around $1,920/oz. That will create a foundation for further gains.
TGR: Silver has followed gold higher. What is your thesis for silver going forward?
BL: Precisely the same as gold. Silver provides optionality on gold. It is a lever to gold prices. Silver rises more quickly than gold and it falls more quickly than gold.
Despite its volatility, or rather because of it, silver is a way to realize greater profits along the long-term uptrend by playing the interim cycles.
A lot of people talk about the advantages silver’s industrial uses provide. But the industrial uses really play into the price when silver is under, say, $10/oz. When the price goes north of $10/oz to levels that we see today, it is purely due to silver’s monetary role.
TGR: You have gone from a largely passive position in most of the companies you write about to an aggressive position. What happened?
BL: This summer, a few of the companies that I recommended were too good to resist even in a down market. I recommended that readers peck away at these stocks and accumulate them, buying a little bit here and there on weakness. I advised not jumping in headfirst until we saw signs, or even confirmation, that gold was breaking out of its consolidation pattern. Once we saw that happening, I told readers it was time to get more aggressive and start building larger positions in junior mining shares that remained dramatically undervalued.
TGR: Did you see that as a bottom?
BL: Yes. We bottomed in late July or early August. It was the typical seasonal pattern we predicted, just like clockwork.
TGR: What are some of the companies you are being aggressive with?
BL: Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE) has a great project in Fiji progressing toward production in about 12 or 18 months. It has a feasibility study that just needs to be updated and remarkably low capital expenses to get back into production.
TGR: Lion One Metals is around $0.66/share. What are the catalysts between now and production?
BL: The numbers in its updated feasibility study should show the market that this is a viable project. That would be a catalyst.
Remarkably, it should take only $20–$30 million to get the project into production. Raising that kind of capital should be relatively easy, so the company does not have to get the economics buttoned down too tightly before actually going out and building a mine.
SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) has been one of our big winners. Not only is it growing production in a rising silver market, it has plans to double production. This is a production play, but also boasts an exploration upside in another project that it is drilling off. It offers a one-stop shop for investors who like producers, but also like the upside of a development and exploration story.
TGR: SilverCrest is in Mexico. How do you like Mexico as a jurisdiction?
BL: Mexico is a great place to invest. There has been a lot of news about the danger of the drug gangs, but the companies in production or working there are doing fine and handling any issues.
SilverCrest is a well-managed company with two very good projects in production. That is critical: invest in a company that will be there for the long term, is making money and is neither draining shareholder equity nor diluting its share structure to get into production. SilverCrest is ahead of the game, and has a very steep growth curve ahead of it.
BL: I also like Seafield Resources Ltd. (SFF:TSX.V). It just put out a new, very impressive resource estimate on its Colombian project. The next step is to prove the project’s economic viability. I do not think the market appreciates how advanced it is.
TGR: Seafield is at around $0.13/share. Where do you think it should be?
BL: I hate to give specific price targets, but Seafield, with its large established resource, has a lot of upside ahead of it. As the gold market continues to advance and the general market strengthens, companies with established resources will be the big winners.
I followed Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) long before its legal controversy with Coeur d’Alene Mines Corp (CDM:TSX; CDE:NYSE) in Nevada, and I still like it. The staking controversy over Coeur d’Alene’s expired claims gives Rye Patch immediate upside that it previously lacked. I think the two parties will have to reach some accommodation—an accommodation that has a very good chance of being worth more to Rye Patch than its current market cap.
TGR: I was just near that property in Nevada. There is a lot going on in the area.
BL: A lot of jockeying here and there, a lot of people trying to get in on each other’s grounds, court injunctions, lawsuits and a lot of staking. The lawsuit also has a lot of implications beyond that immediate area and beyond the specific issue involved. It could throw into the air the whole system of staking claims and mine ownership in the U.S.
TGR: That is something we all will have to watch together. Do you have other names?
BL: I like Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), which is expanding the discovery on its Tuligtic project in Mexico. The share price has come back a bit, and it is a great value right now. A recent step-out on its northeast extension produced a great hit. There are parallel zones for development, giving Almaden a lot of growth potential. Its first resource estimate could be a very big number.
TGR: When is that due out?
BL: Likely by the end of this year. Meanwhile, the company is busily drilling away and expanding the resource. Once it has enough to impress the market, a resource estimate would be the next step.
TGR: In out last interview, you talked about Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). What is happening with that?
BL: Its big mover is the Wellgreen project in the Yukon. It’s a polymetallic project: platinum, palladium, gold, nickel and some of the rare and valuable platinum metals. It does not yet have good assays on the higher-end platinum metals, but they are there.
Prophecy acquired this large project thanks to the vision of its CEO John Lee. He saw that there were two significant deposits as yet unconnected by drilling. He realized that extending them to depth and connecting them would result in a world-class resource. He systematically drilled it off and proved the theory.
Its next stage is a prefeasibility study. That would be the next trigger point in showing the market greater value.
TGR: Do you have another name in the Yukon?
BL: I recently recommended Precipitate Gold Corp. (PRG:TSX.V), which was founded as a Yukon story. Some friends of mine, including the Coffin brothers, helped launch it.
Precipitate Gold’s management team includes Adrian Fleming, who was the president of Underworld Resources. That company helped launch the new Yukon gold rush and was a big winner for my readers a few years ago.
Precipitate assembled a great land package from the Strategic Metals group, for many years one of the top exploration outfits in the Yukon. Precipitate went public through an initial public offering (IPO) with this big Yukon play.
Then came the big GoldQuest Mining Corp. (GQC:TSX.V) discovery in the Dominican Republic. As an example of how a good management team can benefit shareholders, Precipitate went in and quickly seized an enviable land position in the Dominican Republic on trend with the GoldQuest discovery. Now Precipitate has two tremendous land positions in two of the hottest gold exploration trends in the world. It’s a great company. It hasn’t really taken off yet, but I think as it begins its exploration efforts, we’re going to see the market start to pay attention to it.
TGR: Since its IPO in May, Precipitate’s stock seems to be rising.
BL: Yes. I see Precipitate as a longer-term winner that has tons of potential ahead of it and is a very good buy for investors.
TGR: The New Orleans Investment Conference is approaching. What can attendees expect to take away from this year’s event?
BL: The conference always seems to come at a crucial turning point in the markets, but with the advent of QE3 and the November election, I cannot think of a more important time for investors to be prepared than right now.
We will have a blockbuster roster of geopolitical and economic analysts to talk about the election and its impact on the economy and investors. Charles Krauthammer, probably the most influential political commentator in America, will be there, along with Rick Santelli, the godfather of the Tea Party. Peter Schiff, Sarah Palin, Dinesh D’Souza and Marc Faber are coming. Doug Casey and many of today’s top precious metals and resource stock analysts will speak.
We have some fun events planned as well. This year’s political debate will pit the conservative Charles Krauthammer against the liberal James Carville, with Doug Casey defending the libertarian position. That is always a big hit.
TGR: Before we let you go, do you have an election prediction?
BL: Looking at the political landscape right now, I think the odds favor President Barack Obama’s re-election. I would put the odds at 60/40 right now. Obama’s re-election would be an extremely bullish development for investors in gold, silver and resource stocks.
TGR: Why is that?
BL: It would signal a continuation of government spending and money printing. Mitt Romney has spoken out against QE and has said he probably would not reappoint Ben Bernanke as Fed chairman. In contrast, the Obama administration would apparently continue the policies that have led to these high metals prices.
TGR: Brien, thanks for your time and insights.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind, Oct. 24–27.
Here’s something that I would normally call irony if it weren’t so evil:
Wells Fargo Home Mortgage (WFC) has fired a Des Moines worker over a 1963 incident at a Laundromat involving a fake dime in the wake of new employment guidelines.
Richard Eggers, 68, was fired in July from his job as a customer service representative for putting a cardboard cutout of a dime in a washing machine nearly 50 years ago in Carlisle, the Des Moines Register reported Monday.
Warren County court records show Eggers was convicted of operating a coin-changing machine by false means. Eggers called it a “stupid stunt,” but questions his firing.
Big banks have been firing low-level employees like Eggers since new federal banking employment guidelines were enacted in May 2011 and new mortgage employment guidelines took hold in February, the newspaper said. The tougher standards are meant to clear out executives and mid-level bank employees guilty of transactional crimes — such as identity theft and money laundering — but are being applied across the board because of possible fines for noncompliance.
If using a fake dime is worthy of firing, then what penalty should await those who launder* billions of fake dollars on behalf of the Federal Reserve? It is simply reprehensible that Wells Fargo would fire a man for using a fake dime yet not dismantle their own company for laundering at least $2 billion* of fictitious money. This goes beyond mere irony, and even beyond hypocrisy. This is pure evil, and all those who work at Wells Fargo should lose their jobs, while those who are/were the heads of the company should go to jail for defrauding the American people, and the company should have its corporate status revoked and be disbanded.
Join the forum discussion on this post - (1) Posts
* Wells Fargo received about $25 billion from TARP. The federal budget for 2008 was $2.9 trillion, while the deficit was $240 billion. This means that, proportionally, at least $2 billion of the $25 billion that Wells Fargo received from TARP was from the deficit. The federal deficit is nothing more than monetized debt, since federal services are paid for, but not always by the money from tax receipts. To make up the deficit, the federal treasury sells debt (issues bonds), which are then bought by investors, foreign nations, and the federal reserve. The federal reserve is the largest holder of US bonds, and the sale of US bonds to the federal reserve is referred to as monetizing the debt, because federal debt is converted into money, and the money is created out of thin air. Therefore, a significant portion of the federal debt is actually realized as inflation. And therefore it can be accurately claimed that Wells Fargo launders fictitious money because it receives funds that are nothing more than monetized debt, which is really money created out of thin air.
In terms of forward guidance I think the Fed Chairman’s speech provided little direction, but Friday’s precious metal price action into the close and the various sell side notes that I have seen suggest that this, at least initially, is too bearish a conclusion. The following excerpt from the speech, in particular, was taken as clear evidence of more and aggressive easing in the pipeline.
As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.
Great emphasis has been attached to the chairman’s use of the word “grave” as a clear tell-tell sign of more easing to come. I find this quite interesting since it is one of the first instances of such “new speak” interpretation of the Fed’s statements akin to the good old days of Trichet and the utterance of (strong) vigilance. Needless to say, next week’s jobs market report has suddenly been propelled to a key market event and every single US data point will now be watched with caution. On that note, the next ISM reading as well as consumption figures will be equally important to watch.
I think Tim Duy’s interpretation is the right one then (hat tip Calculated Risk) with my emphasis.
On net, Bernanke’s speech leads me to believe the odds of additional easing at the next FOMC meeting are somewhat higher (and above 50%) than I had previously believed. His defense of nontraditional action to date and focus on unemployment points in that direction. This is the bandwagon the financial press will jump on. Still, the backward looking nature of the speech and the obvious concern that the Fed has limited ability to offset the factors currently holding back more rapid improvement in labor markets, however, leave me wary that Bernanke remains hesitant to take additional action at this juncture. This suggests to me that additional easing is not a no-brainer, but perhaps that is just my internal bias talking.
On balance the main point for me is that the recent change in economic data clearly merits policy change on the basis of the Fed’s reaction function.
The unemployment rate in the US is sticky and the Fed has been persistently concerned about this which is indeed a strong signal to the policy bias especially as inflation expectations are well behaved. Inflation has come down significantly in the US running at 1.4% YoY and the Taylor Rule rate is now declining (though still in level terms way above 0 but that has more to do with the inputs than anything else). We have had two consecutive months of sub-50 ISM readings and consumption growth appears to be rolling over. My interpretation of the forward looking indicators is that they look better than the consensus suggests, but the Fed lives in the here and now and will act accordingly.
Another interesting point here is that despite the visible and strong recovery in the growth rates of US housing market indicators, Bernanke mentions the level of the housing market and not the change which suggest that the despite a good run of data with respect to the change in housing market indicators the level is still seen as depressed.
The bottom line is that some form of easing is coming but what I find highly uncertain is the timing and aggressiveness of such easing. The August minutes had already stipulated potential moves for the Fed in the form of an extension of the low interest rate commitment, lowering interest rates on excess reserves as well as an extension of Operation Twist or outright asset purchases (probably through MBS securities). But which of these measures will be employed and in what order?
One thing for example which I find very interesting is the glaring gap between Bernanke’s discussion of the effectiveness of unconventional monetary policy and its effect on the real economy (i.e. labour market). In that sense, it seems quite clear to me that quantitative easing can have a strong effect in the context of imminent deflation risks and strong downward pressures in asset prices. In such an environment the portfolio effect and, indeed, outright price effect from aggressive central bank action can be very effective.
However, whether quantitative easing can be effective in countering a structural and sticky unemployment rate (and indeed a structurally declining labour force participation rate) seems much more uncertain to me. Obviously, this goes back to the point that the Fed is the wrong tool for the job at hand, but it also raises the issue of what kind of easing the Fed is planning here.
Of the measures mentioned above one of the only things which would have an effect on the labour market (from a theoretical point of view) is an extension of the low interest rate commitment. This would be a signal to companies that their cost of capital would remain low and incentivise investment and thus, in theory, additional labour input. But such a process is slow and arguably a weak remedy in the context of structural labour market issues.
More generally, we must ask ourselves whether an extension of the low interest rate commitment be enough for the market Clearly not and in any case, an extension much beyond Bernanke’s term would be meaningless as the looming presidential election has created uncertainty as to how strong this commitment is, if for example Bernanke is faced with a Republican president.
What about an extension of Operation Twist then? If this is combined with an expansion of the balance sheet through purchases of MBS I think this could be an effective medicine (although in general I find it hard to see how it could meaningfully affect the labour market). However, the theoretical argument here is fair. By influencing long rates the Fed is likely to stand the greatest chance of supporting the ongoing recovery in the housing market and thus, by derivative, the US economy.
Ultimately, I see two sources of uncertainty here. Firstly, it is not clear to me that the US economy is heading into a hole in the second half of 2012 to an extent that would allow very strong Fed action. Secondly, while the Fed clearly seems committed and perhaps even pre-committed to more easing the nature of such easing and its scope is still very uncertain to me. The upside risk attached to much stronger easing is clearly there (not least because we also have the ECB coming in with policy measures soon), but the spectre of grave disappointment has not been completely extinguished in my view.
It looks like at least one of my predictions might come true:
Eric Rosengren, the head of the Federal Reserve Bank of Boston, is issuing an unusual public plea to his colleagues in Washington, urging the nation’s central bankers to ignore election-year pressures and do more to jump-start the muddling economy.
Less than a week after Federal Reserve policy makers elected not to take new steps to stimulate the economy, Rosengren in an interview added his voice to a handful of dissenters, saying the central bank has to act at its next meeting in September to revitalize the economy. The Fed should not worry, he said, if the move is seen as influencing the presidential election.
I had theorized that there would not be any “official” Quantitative Easing (formal inflation, for those who speak actual English) because of the election-year pressures. If Rosengren’s complaint is any indication, my prediction is spot-on since he is lamenting the absence of any easing in light of political pressures. We shall see, of course, but I’m still feeling good about this.
Henk J. Krasenberg, analyst and founder of the European Gold Centre and author and publisher of the GOLDVIEW newsletter, sees no lack of potential among small-cap equities, especially for investors willing to look beyond the U.S. borders. He offers names in Europe and Africa—what he calls “the poorest and richest continent”—and reminds us that Mexico produces a lot more than silver. In this exclusive Gold Report interview, Krasenberg counsels patience because “you have to wait for the development.”
Join the forum discussion on this post - (1) Posts
The Gold Report: Henk, what did you make of the June 17 Greek election? What does the country’s apparent decision to stay in the Eurozone say about the sustainability of the European Union (EU)?
Henk Krasenberg: I am happy with the result because it shows that common sense prevailed. It seems that Greece will do everything to stay in the EU. Also, it prevented immediate chaos in the European markets.
Of course, it does not mean all the problems are over, but the immediate threat of a chain reaction in Spain, Portugal and Italy is gone for the time being. I don’t think the Eurozone will fall apart. It would be awkward for us all to go back to our own currencies again. I am confident that the EU and the euro will stay.
TGR: Do you think the average European retail investor is as concerned about European debt problems as investors in North America?
HK: I do not think the European retail investor is really a party. In general, European private investors are pretty quiet and not so spontaneous in their investment reactions.
What is more important is the attitude and investment behavior of the institutions. They are concerned about European and American debt. In general, we are confident that the EU, the European central banks and the International Monetary Fund will come up with solutions, although most of those solutions are political.
TGR: The interest rate on Spain’s 10-year Treasuries is now 7% and its economic growth is less than 1%. How does that affect the stability of the EU?
HK: Interest rates are important for governments, institutions and corporations, but not so much for investors. I remember a prominent Dutch investment manager saying 20 years ago, “I only talk about interest rates when I’m drunk.” I have always remembered that.
People cannot influence interest rates. They are beyond our reach. We can look at interest rates, we can comment on them, but someone else is deciding what will happen.
TGR: In the past, you have said the real problem with the global economy is that the U.S. refuses to admit that it is bankrupt. Yet, over the last two years, U.S. markets have outperformed European markets by nearly 40%. How do you argue against that?
HK: If you are big enough, you usually do not go bankrupt. So, the U.S. will not go bankrupt. But if you look at its financial situation, it is in fact bankrupt. If it were to really fail, the impact would be too severe, so it will be saved.
The Federal Reserve is handling the situation quite well, manipulating a lot of things, including gold. And I think the Fed is doing everything to hide the real situation.
I think there is excessive optimism in the American markets, and I think the pessimism in the European markets is an overreaction.
TGR: Fed Chairman Ben Bernanke announced a continuation of the Twist program, basically an exchange of short-term debt for long-term debt. What do you make of that?
HK: Bernanke is in a terrible position. The Fed will not make any statement that would really hurt itself or change things overnight. If you change short-term debt for long-term debt, it is only delaying the execution. Sooner or later, you have to admit that you cannot pay your debts.
TGR: You like gold because you believe it will hold its purchasing power over time, but you like small-cap gold equities because they offer what you call flexibility. What do you mean by that?
HK: I like gold, but it is too static. When you own gold, you sit there and wait. Only very sophisticated investors sell and buy or steer with instruments like options or futures.
With mining shares, you can be much more flexible. You can keep your commitment to the metal, but you can adjust your holdings as things change within the companies, within the industry, with the preference of metal and with the performance of metal prices. Eventually, if you play your cards right, equities should be a better way to benefit from the underlying strengths of the metals.
TGR: Over the last 18 months investors would have been a lot better off holding their money in “static” gold versus gold equities.
HK: People get impatient. The mining and exploration companies are longer-term plays. You have to wait for the development. Some of those companies are grossly undervalued while they are doing great. Sooner or later, the market will have to correct itself.
TGR: When will that happen?
HK: That is difficult to say. Internationally, only 2% of people’s money has been invested in gold and mining shares. I expect that to increase in due time. We are waiting for institutions to make a shift. But before that happens, the industry has to make some changes, too.
“If you play your cards right, equities should be a better way to benefit from the underlying strengths of the metals.”
When mining and exploration companies come to Europe to present themselves to the investment community, the most often heard reaction is that they are so small. Professional European investors cannot look at a company with a market cap of $10 million (M) or less. I expect there will be many more mergers in the next 12 months because we need bigger entities in the market. Pension funds are starting to nibble now, but they would like to see more larger companies.
TGR: Is that not related to the amount of risk a fund is allowed to own?
HK: Perhaps, but it is also the practical response of big investment fund managers who are mostly managing very large portfolios, too large to spend time and effort to look at all those small companies.
That is why the exchange-traded funds (ETFs) and mining investment funds are growing. It would be ideal if the European pension funds and other institutions would take part in these funds to get them more comfortable with the industry.
Up until now, there is only a relatively small group of European institutions that buy mining shares, and you really have to look for them. That is what I try to do with my publications: to find the metals- and mining-receptive people in the institutions.
TGR: There are hundreds of companies seeking economic metals and mineral deposits in Europe. What do North American retail investors need to know about investing in Europe?
HK: The general thing I would like to say to American investors is that the world is a lot larger than your own country. Asia, Australia, Africa, Europe and Latin America all offer great opportunities. Canada and Mexico are in your backyard, and there are opportunities there. You do not need to invest in Europe. If you do, great, but it is not a priority.
TGR: What are some of your favorite European mining plays?
HK: Sweden is the most active country here in Europe. Historically, it had a lot of zinc and iron mining, but nowadays its mining and exploration of many more metals are all over the place. Sweden has some nice producing gold mines, Nordic Mines AB (NOMI:ST; NOM:OSLO) and Gold-Ore Resources Ltd. (GOZ:TSX.V), for example.
“Asia, Australia, Africa, Europe and Latin America all offer great opportunities.”
In other metals, Northland Resources Inc. (NAU:TSX; NPK:FSE) is constructing one of the world’s largest iron mines. Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE) has built a great portfolio of rare earth element metals and will do remarkably well. Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) originally built an extensive position in uranium but has recently reorganized the company and its holdings. Its flagship is now in gold/uranium in Finland.
Spain and Portugal have long mining histories, primarily in coal. However, the EU wants to stop coal mining. Several companies are now exploring and some are moving closer to mining in both countries. Spain and Portugal have good potential and an experienced labor force waiting; exploration activities have increased and will be directed to gold, tungsten, copper and zinc.
Astur Gold Corp. (AST:TSX.V) acquired a former gold producer and is now in the permitting stage. Because it is located just a few hundred meters from the coast, the company had to change the infrastructure to dewater the mine to avoid pollution. The Spanish and local governments are very cooperative and laborers are waiting to be employed.
Also in Spain, I like Ormonde Mining Plc (ORM:LSE) and Edgewater Exploration Ltd. (EDW:TSX.V). Edgewater is also active in Ghana in Africa. It just announced that it commissioned a finance firm to raise $120M to put its Spanish project into production.
TGR: Are the Spanish and Portuguese governments more likely to fast-track these operations to spur economic development?
HK: At an EU minerals conference two years ago, the Spanish Minister of the Economy said the government would do everything to accommodate the resource industry; the provincial governments in Spain also have a good attitude toward more mining and exploration.
Portugal recently opened up new tenders for additional licenses and has been awarding them. Avrupa Minerals Ltd. (AVU:TSX.V) just acquired some of these new Portuguese licenses. Avrupa is the Turkish word for Europe. But that is the only Turkish thing about the company, apart from the president’s 15 years as a geologist there. He is looking for gold, tungsten, zinc and copper. Colt Resources Inc. (GTP:TSX.V; COLTF:OTCQX) is also in Portugal with gold and tungsten projects.
TGR: You note in your newsletter that European investors are more likely to invest in African metals plays. Is the reason as simple as proximity?
HK: That depends on your definition of proximity. Not as a matter of geographic proximity, no. But Europeans have a background in Africa. Colonialism is not the proudest part of our history, but it must be recognized. As a result, Europeans have more direct experience with Africa. Americans have no ties there, thus there is very little sentiment toward investing in Africa.
TGR: Which African countries do you like?
HK: Most people look at the historical gold areas in South Africa and Ghana. Both are solid gold producers. Several exploration projects in Ghana are close to resuming production. Other historically important countries are the Democratic Republic of the Congo (DRC) with gold, copper, diamonds and important strategic metals such as coltan, and Zambia with its famous copper belt.
Newer mining countries like Tanzania, Burkina Faso and Mali (now ridden with political troubles) and lesser known Eritrea, Ethiopia and Mauritania are interesting. Also in East Africa the interest in natural resources is moving forward.
I always say Africa is known as the poorest continent but it is also the richest continent on earth. It has resources everywhere, but still remains largely underexplored. There is great potential.
TGR: Which African companies do you like?
HK: In the production sector, I adore SEMAFO Inc. (SMF:TSX; SMF:OMX). It has producing mines in Burkina Faso, Niger and Guinea. It has first-class management and social programs to be proud of.
I used to like Etruscan Resources Inc. (EET:TSX), which was taken over by Endeavour Mining Corp. (EDV:TSX; EVR:ASX). The company solved some problems and now has two producing gold mines in Ghana and Burkina Faso and a great portfolio of properties.
Of course, African Barrick Gold Plc (ABG:LSE) is by far the best choice you can have. I also like Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), a company with four producing mines in Mali and Côte d’Ivoire; it is developing a big mine in the DRC, as well as several advanced exploration projects in Mali, Côte d’Ivoire, Burkina Faso and Senegal.
Also, Toronto-based New Dawn Mining Corp. (ND:TSX) is steadily producing gold in Zimbabwe, a most difficult country, and is worth mentioning.
Tanzania is perhaps the most promising country for exploration. Tembo Gold Corp. (TEM:TSX.V) is well organized. Its management is highly experienced in Tanzania and has worked with Barrick. The local office is dealing with the local infrastructure, the project and the exploration site. Everything else is done from Toronto. That is an impressive corporate structure, and I feel comfortable with David Scott as CEO.
“Tanzania is perhaps the most promising country for exploration.”
TGR: Tembo has a property next to African Barrick’s Bulyanhulu mine. If Tembo outlines a significant resource, will it become a takeover target?
HK: There is that possibility, but Tembo’s management may not be eager to do that. First, a lot of development work remains to be done. If anyone has a chance to know what the territory could bring, it is the people at Tembo.
TGR: African Barrick has had issues in Tanzania with local artisanal miners. Has that been a problem for Tembo?
HK: I do not think so, although artisanal mining is a problem all over Africa. There are two ways to deal with it. You can scare them off. That means complicated situations, which turn local forces against you. Or you can work with the artisanal miners. Artisanal mining is not a threat; it only goes 5 or 10 meters deep. Companies should turn the negative into a positive and use the artisanal miners as an extension of their own exploration forces.
In Ghana, African Gold Group Inc. (AGG:TSX.V) reached an agreement with the artisanal miners. While making it clear that the property belongs to the company, the agreement gave the artisanal miners a part of the property where the company would not explore for the time being. It said, go ahead; everything you find is yours with one obligation—tell us what you find. We will not take it, but we want to know. That is how to handle artisanal miners.
TGR: Tembo also has the backing of major financial institutions. How important is that?
HK: A few intelligent young guys are behind Tembo. They have a very good rapport with financiers and they know where to get money. This makes David Scott very happy because he can focus on his skill: advancing the property.
TGR: Any other African names?
HK: In Tanzania, I like Helio Resource Corp. (HRC:TSX.V), a Vancouver company. It also is exploring gold properties in Namibia. These companies complete my list: Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.A) and Sunridge Gold Corp. (SGC:TSX.V) in Eritrea and Stratex International Plc (STI:LSE) in Ethiopia and Djibouti.
TGR: Your supporters include a number of companies operating in Mexico. Tell us about them.
HK: Mexico is a priority country for mining and exploration and is generally mining friendly. But in the past, it was difficult to acquire large pieces of land. Only in the last 10 years has the industry has really materialized. Companies like Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A), Excellon Resources Inc. (EXN:TSX), Minefinders Corp. (MFL:TSX; MFN:NYSE) [recently taken over by Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ)], AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and SilverCrest Mines Inc. (SVL:TSX.V; STVZF:OTCQX) all have moved from exploration to successful production over the last few years and will continue to do well.
I also like Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX), which is increasing capacity at its La Negra mine, Scorpio Mining Corp. (SPM:TSX), which has been kind of quiet, and Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.A; GV6:FSE), a silver producer in the past that is now restarting production.
In the exploration sector, MAG Silver Corp. (MAG:TSX; MVG:NYSE) is a very good one to mention; it will probably be one of the next producers.
I have followed Canasil Resources Inc. (CLZ:TSX.V) for a long time. Its president, Bahman Yamini, is an intelligent mining operator and explorer, but people have not recognized the promise of his project base. Canasil is a great takeover candidate, although Yamini is a shrewd negotiator; an acquirer will have to pay the price.
Newer companies include Riverside Resources Inc. (RRI:TSX), Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX) and El Tigre Silver Corp. (ELS:TSX.V; EGRTF:OTCQX; 5RT:FSE). It is not hard to find good candidates.
But Mexico is not only about silver; it also has other metals such as gold, copper and zinc. As a gold producer, I like Timmins Gold Corp. (TMM:TSX.V; TGD:NYSE.A). It brought its San Francisco mine into production in a relatively short time and has good potential to grow.
TGR: Aurcana is developing a silver mine in Texas, where uranium mines have also come into production. What do you think of Texas as a viable mining jurisdiction?
HK: When I saw Aurcana’s presentation in Geneva just a month ago, I was very surprised to learn about silver mining in Texas. Hearing Lenic Rodriguez talk about the Shafter mine, I did some homework and discovered it is situated in an historical silver mining area.
There is a kind of revival of U.S. mining and exploration. And it is not just Texas. Developments are taking place in Montana, Idaho, the Carolinas and Arizona. I even heard one company talking about exploring in Washington state.
TGR: Is that due to the economy?
HK: In part, but more broadly, people recognize that the resource industry is not just a short-term play. They recognize the world will continue to need metals and that metal prices offer viable opportunities. Aurcana, for example, can produce silver at $7–8/oz and sell it at $28/oz. What other business has profit margins like that? Other industries are looking at eroding end prices, but not the resource industry. I think that is behind this revival of mining in America.
TGR: Henk, thank you for your time and insights.
Henk J. Krasenberg is the founder of the European Gold Centre, which analyzes and comments on gold, other metals and minerals and international mining and exploration companies in perspective to the rapidly changing world of economics, finance and investments. The Centre publishes GOLDVIEW, Mining in Africa, Mining in Europe and Mining in Mexico, all available at no cost to investors. Krasenberg’s career has included security analysis, investment advisory, portfolio management and investment banking.
A “paralyzed” Federal Reserve Bank, in its “final days,” held hostage by Wall Street “robots” trading in markets that are “artificially medicated” are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.
The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?
David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.
Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.
TGR: What should the role of the Federal Reserve be?
DS: To get out of the way and not act like it is the central monetary planner of a $15 trillion economy. It cannot and should not be done.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of “Operation Twist” is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed’s monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
TGR: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?
DS: I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world’s financial market.
Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.
As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.
On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.
If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked.
TGR: Is that what happened in 2008?
DS: In 2008 it was the repo market for mortgage-back securities, credit default obligations and such. In 2008 we had a dry run of what happens when a class of assets owned on overnight money goes into a tailspin. There is a thunderous collapse.
Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.
TGR: Walk us through a hypothetical. What happens when the fast-money traders lose confidence in the Fed’s ability to keep the spread?
DS: They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people’s printing press of China and all the rest of them.
The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets? The Fed balance sheet was $900 billion (B) when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it’s the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations.
TGR: Following that path, what happens if there are no buyers? Do the governments go into default?
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.
TGR: Will the mayhem stretch into the private sector?
DS: It will be everywhere. Once the bond market starts unraveling, all the other risk assets will start selling off like mad, too.
TGR: Does every sector collapse?
DS: If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.
I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it’s a drastic downward re-pricing of inflated financial assets.
TGR: Is there any way to unravel this without this massive dislocation?
DS: I do not think so. When you are so far out on the end of a limb, how do you walk it back?
The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed’s next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed’s next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons.
TGR: Was there some type of tipping that allowed certain banks to front run the Fed?
DS: There are two kinds of front-running. First is market-based front-running. You try to figure out what the Fed is doing by reading its smoke signals and looking at how it slices and dices its meeting statements. People invest or speculate against the Fed’s next incremental move.
Second, there is illicit front-running, where you have a friend who works for the Federal Reserve Board who tells you what happened in its meetings. This is obviously illegal.
But frankly, there is also just plain crony capitalism that is not that different in character and it’s what Wall Street does every day. Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman’s traders, and possibly its clients. So then it links in the ECB, Bank of Canada, etc. Is there any monetary post in the world not run by Goldman Sachs?
The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.
TGR: Does this unwinding of the Fed and the bond markets put the banking system back in peril, like in 2008?
DS: Not necessarily. That is one of the great myths that I address in my book. The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.
The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don’t need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic.
Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out.
TGR: Let’s get back to our ballgame. What is to keep the U.S. population from saying, please Fed save us again?
DS: This time, I think the people will blame the Fed for lying. When the next crisis comes, I can see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices.
TGR: Let’s talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.
TGR: What will Congress do?
DS: Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn’t demanded a recount yet, an opportunity to come up with a plan.
To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.
TGR: It is like chasing your tail. How does it stop?
DS: I do not know how a functioning democracy in the ordinary course can deal with this. Maybe someone from Goldman Sachs can come and put in a fix, just like in Greece and Italy. The situation is really that pathetic.
TGR: Greece has come up with some creative ways to bring down its sovereign debt without actually defaulting.
DS: The Greek debt restructuring was a farce. More than $100B was held by the European bailout fund, the ECB or the International Monetary Fund. They got 100 cents on the dollar simply by issuing more debt to Greece. For private debt, I believe the net write-down was $30B after all the gimmicks, including the front-end payment. The rest was simply refinanced. The Greeks are still debt slaves, and will be until they tell Brussels to take a hike.
TGR: Going back to the triple-witching hour at year-end, if the debt ceiling is raised again, when do we start to see government layoffs and limitations on services?
DS: Defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.
TGR: I would think to unemployment numbers as well.
DS: They will go up.
Just take one example. According to the Bureau of Labor Statistics monthly report, there are 650,000 or so jobs in the U.S. Postal Service alone. That is 650,000 people who pretend to work at jobs that have more or less been made obsolete and redundant by the Internet and who are paid through borrowings from Uncle Sam because the post office is broke. Yet, the courageous ladies and gentlemen on Capitol Hill cannot even bring themselves to vote to discontinue Saturday mail delivery; they voted to study it! That is a measure of the loss of capacity to rationally cognate about our fiscal circumstance.
TGR: In the midst of this volatility, how can normal people preserve, much less expand their wealth?
DS: The only thing you can do is to stay out of harm’s way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour.
TGR: But if the government keeps printing money, cash will not be worth as much, either, right?
DS: No, I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People’s financial circumstances are so bad that they think they will be working two years after they are dead!
TGR: Finally, what is your investment model?
DS: My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains.
TGR: Thank you very much.
David Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan 1977–1981 and as the director of the Office of Management and Budget under President Ronald Reagan 1981–1985. He is the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Stockman was the keynote speaker at last weekend’s Casey Research Recovery Reality Check Summit. This event featured legendary contrarian investor Doug Casey, high-end natural resource broker Rick Rule, New York Times bestselling author John Mauldin and 28 other financial luminaries. Over the three-day summit, they provided investors with asset-protection action plans and actionable investment advice. And even if you were unable to attend, you can still hear every recorded presentation in the Summit Audio Collection. Learn more here.