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Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. And quantitative easing (QE) is progressing apace, with recent job market weakness leading to speculation that perhaps the so-called ‘tapering’ will not begin now until March of 2014. Of course, the equity bulls love that idea. And on the political front, the government has kicked the can down the road for a bit longer with a continuing resolution that also allows the President to unilaterally lift the debt ceiling. And with that power, we can be pretty certain that no meaningful political dogfights over the debt ceiling will ever happen again. The President will simply lift the ceiling, and off we go.

So how are QE and debt limits related? Both have at their core the idea that we cannot tolerate limits, neither monetarily nor fiscally. Both the Fed and D.C. are now solidly centered on the practices of always promising and delivering more. But can they?

To help us make sense of this today, we have the pleasure of speaking with John Rubino, publisher of www.DollarCollapse.com, a popular online hub for news impacting the economy. John is the author of several well-received books foretelling years in advance the collapse of the housing market and the decline of the U.S. dollar. I hear he has got another book on the way, and I’m looking forward to that. Before starting his website, John was a featured columnist with TheStreet.com, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a eurodollar trader, equity analyst, and junk bond analyst in the late 1980s. So that sets him apart from anybody at the Fed with zero trading experience. John, welcome.

Excellent. So you recently wrote a piece – here is where I want to start – a really interesting piece entitled, Welcome to the Third World, Part 10: Suddenly, Being a Politician is Hard. Let’s start there. What is the central thesis of that piece?

John Rubino: The central thesis, the overarching thesis of that series (because that is the tenth in the series), is that once you borrow more money than you can ever hope to pay back, the system becomes ungovernable. You cannot do the things you used to be able to do, which is to basically buy votes with new money, because you are out of money. And that is what is happening to the U.S. right now. So we have a whole generation of politicians who have never had stiff a major constituency. They have always been able to find the money to keep the people who put them in office happy. But suddenly, with these debt ceiling things and QE maybe being scaled back, etc., etc., the amount of money that is available is no longer sufficient to keep everybody happy.

It used to be that the Democrats and Republicans would basically cut deals in which the Republicans got an expanded global military empire and the Democrats got an expanded entitlement state. And they were both more or less happy. But now there is not enough money for both of those objectives to be satisfied.

Now they are at the point where the money is not sufficient to satisfy both of those objectives. And so somebody has to lose. And these politicians have never had to do this in their careers. They have never had to stand before an audience and tell hard truths. And they do not have those skills. The system has not been selecting for blunt honesty in the political system right now. So you have got John Boehner and Nancy Pelosi who have never had to do this before.

And yet they have to find a way to do it, or they have to convince the Federal Reserve to continue to print new money to the horizon and just get the political system to raise the debt limit or just suspend the debt limit, and then just cut – at that point there is not even any pretense of fiscal sanity in the system. And I think we are heading to that point right now because the alternative is to tell the truth, make constituencies made, and risk the stock market tanking, and all the things that started to happen when Ben Bernanke intimated that QE might at some obscure time in the future be scaled back by five or ten percent and the stock market started to collapse.

So we are reaching the point where we basically just give up in the political system and say look, we cannot stop spending from growing. We cannot stop the deficit from expanding. So we are just going to have to finance it. We are going to have to put the pressure on the dollar in the system as the safety valve. So we are going to depreciate the currency, and we are just going to let it run from there.

And at that point, everything changes.

Because right now, people do not really know what the future of government policy is going to be. You have got all these cross-currents. But once they give it up, once they completely suspend the debt limit and do not even attempt to scale back the entitlement state and the global military empire, and it becomes clear to everybody that that is policy going forward forever, then I think things get really interesting. And we can talk about what specific markets would be most hurt and most benefited by this if we have time. But I think it becomes a really fascinating market, with some analogs in the past that are both interesting and scary, like Weimar, Germany, and Zimbabwe, and places like that.

Chris Martenson: You covered a lot of excellent territory there, and that part I really want to focus on first is this idea that managing for expansion is a very different skill set than managing for, let us call it, stasis. The pie is no longer expanding. It is just sort of hovering in place, which is certainly true no matter how we measure it. Even if we take the GDP, which I think is overstated, it is still showing basically stall speed. And there is not really enough left to go around. And the context for this that is really important to me is to understand if you take – and I have done this, I just did this yesterday, so I have the numbers very fresh – total credit market debt, which is everything, right? That is, state, federal, households, corporate; everything, private and public.

You can imagine that is real debt – not liabilities, just debt. And you look at the time series of that, from 1980 to current, the average across all thirty years, there is 8% compounded annually. And so that is the world that the Fed knows, and that is the world that DC knows, which is the world where you can constantly expand debts faster and underline GDP growth, which was fraction of that; it was about half that. So this idea that you can constantly expand debts faster than income is something that we have lived for so long, in your thesis, that we have raised an entire generation of “leaders” who do not actually have any context for understanding the alternative world, which is, you cannot do that.

So in the alternative parallel world you have to live within your means. And you are saying that we have got basically no muscle memory, no institutional memory, no mentoring. They do not have the skills here.

John Rubino: Yes. To run a government with a fiat currency during credit bubble is one of the nicest jobs in the world, because you can find the money to make everybody happy. And so, basically, your job is to look generous. You create bills, and you work them through the legislative system that gives stuff to people. And so everybody is happy, and you have incredible status in society, and everybody loves you.

And that is the way it has been for the last thirty or forty years for U.S. politicians. They have had no real limits. No need to prioritize. No necessity to sit down with people and say look, we cannot have… They just did not have to do that. And so they had the easiest job in the world, without realizing it. I think they are just now realizing how hard politics actually is in normal times, in times, as you said, of limited resources that have to allocated through the political process. That is not something they have ever had to deal with.

And so I think they are not happy anymore. I think we will probably see a wave or retirements of these old-style, logrolling, back-scratching career politicians, because suddenly their career is not fun anymore. And so who comes along to replace them remains to be seen. And it will probably be Chris Christie types, in general, and Tea Party types, also although in more rare cases, because that is a more specific taste for a congressional district. But I think we will see people come in who at least give lip service to telling hard truths.

But the process as it goes on will have a mix of people who still do not want to tell the hard truth. Like the guys who dominate Congress and Senate today. And then people who come in and want to draw a red line and just not vote for things that raise the debt limit or unbalanced budgets or whatever.

So you will get the kind of gridlock that we saw in the last few weeks, where a small group of people just do not want to raise the debt limit. And they will make up excuses like Obamacare, or whatever, to avoid having to sign off on something that they find abhorrent. And within the Republican Party, I think there will be a kind of civil war. I think it has already started between ideologically driven people who were elected with Tea Party support who are like Ron Paul. They just do not believe in balanced budgets. They do not believe the government should be able to declare war or the President should be able to just invade other countries without Congressional backing.

And they just are not going to vote for these things. And if the government shuts down because of it, that is the government’s fault. That is not irresponsibility on their part. They just do not believe these things are right, and they want to stop them immediately. So you get within the Republican Party the battle between the majority, who are basically career politicians who want to cut deals and keep their nice jobs, and people who do not care about any of that. And so either the Republican Party collapses into a civil war in which you have these really hard-fought primary campaigns that hobble whoever wins the general election, and the Democrats are the majority party for a decade, or you have the Libertarian branch of the Republican Party splitting off and becoming a third party that actually gets ten to fifteen percent of the vote in elections which will also guarantee the Democrats get to be the majority party for the foreseeable future.

And if that happens, then basically the government is cut loose. There are no limits on what we are going to spend going forward. And there is absolutely no limit on the amount of money that will be created to finance it. So that to me looks like the end stage of this process, when the final political barriers to just letting it all hang out financially are taken away, and then we just really go for it. We become the Roman Empire in 300 AD, or Weimar, Germany, or whatever. And that seems to me to be just a couple of elections away. The next Presidential election is when it can start.

Chris Martenson: Well, there is a lot of competing ideas there. I think the central thesis of it all for me is this idea that something has really shifted in this story. If we constrain ourselves to the economic side of the story, it could just be the Japanese story, which is, once you pass a certain level of debt and indebtedness, there is really no amount of monetary policy that can really fix that. Bernanke swooped into office a long time ago claiming that he could avoid Japan. We have not avoided Japan. We are exactly Japan at this point in time: low growth, stubbornly high unemployment, and monetary policy that seems stuck at a zero pound on the interest-rate level, with no traction and exploding government deficits. I think that about encapsulates the Japanese experience. So we are recreating it.

And we wander over to the energy side of the story, and we see oil safely over or around $100 a barrel on the world stage for a couple years now. And that is a new fly in the ointment. And my thesis is that there is nobody in the Fed who really truly understands where we are in the story right now. They are trying some really old story stuff.

And by the way, it fits into the political story that I normally steer very wide of politics and partisanism almost entirely. But politics because it is usually not necessary, to know where we are going. But I think it is helpful here, if you have leaders who do not understand the dimensions of the predicament we are in, and they do not quite have the muscle memory or the institutional experience to know what to do next, and then we combine that with the sense that our monetary masters are also going to try some things that are going to be politically expedient.

Everybody who is currently in power and has their hands on the levers of power loves quantitative easing because they are getting rich like crazy. You look at all the data right now on CEO pay, or who is really taking it home in the 0.1% and who is really not taking it home. There is a very, very large, very profound story here that has sociological implications, political implications, has all kinds of implications. The one dialogue I did not see happen even once even on the budget side, even from the most die-hard, smallest splinter faction of the GOP, I did not see anybody really talk about this idea that we are going to have start fundamentally living within some very real limits or that something has really changed in this story. And the chief critique I have is, really, we have been doing quantitative easing for what, six years now? Can’t we at least hold up a placard and say that unless you count the rich getting richer, it is not really working? And there is something else at play here, and that is the dialogue I do not see happening.

So it feels to me like politics is gridlocked – kind of stuck in its competing ideologies, which sort of guarantee some institutional sclerosis on that front. The Fed is still sort of groping around trying stuff and basically committing to flying by the seat of their pants, as the data suggests. They will tell us how much more they are going to print, or less. But really, there has not been that fundamental backing up and saying whoa, whoa, whoa, what happens if we get all this wrong? What happens if the Fed is not successful in engineering an economic lift-off? What happens next?

And I will tell you, from my standpoint (and I would love to get your views on this, John), when you look at the equities markets worldwide – I mean, the Greek stock market is up even though they are utterly collapsing, economically and politically; their German DAX hit an all-time new high; S&P is at an all-time new high right now – are those good things, or do you smell a bubble again?

John Rubino: Well, we are back in a lot of ways to 2006, where the stock market is hitting record – the last time the stock market was at this level was right before the crash in the housing market that sent stocks down by 50%. And the time before that when it was at this level was 1999, early 2000, when the tech-stock bubble was in full swing and about to pop. So stocks hitting these levels is actually a very scary indicator, because the last two times they have been here, it has preceded a massive, world-shaking crash. And just about every other indicator of financial trouble, specifically debt levels around the world, are also back up there.

So it would not be at all a surprise to see a really serious turn in the tone of all the financial markets in the near future, just because whenever they get here, they seem to do that. So that would not be a big surprise. On the other hand, it is true that in past periods of extreme monetary ease, you see the real economy kind of tanking, but you see the financial markets continuing to look healthy in nominal terms. The stock market in Zimbabwe went through the roof when they were hyperinflating. And like you said, Greece is collapsing, yet their stock market is way up.

So it is possible that if we really let things slide here – monetarily, fiscally – pretty soon that will be reflected in the equity markets continuing to go up beyond levels that we think is reasonable by any kind of rational analysis. But they will do that, because money has to go somewhere. And it is not going to go into the real economy, because the real economy is moribund. But the financial markets are liquid and easy to invest in, and you have got this money, and where can you put it? You put it in Treasurys and you put it in stocks. And they continue to go up for a while. That could happen. But it is not a sign of health.

And by the way you mentioned earlier that monetary policy cannot fix excessive debt, and that is absolutely right. We are finding that out with QE-to-Infinity not really working with the economy slowing down. But it is also true that fiscal policy cannot fix this, either, because the fiscal policy fix of scaling back spending and try to live within your means gives you Greek style austerity. So we are at the point where we do not have a painless option. We only have a choice of what are looking now like catastrophes. We have very serious pain coming.

And then the question is, how are we going to engineer it? What emphasis are we going to place on what part of the financial system to try to get out of it, and then fail, and what will be the outcome? But if we try to force the dollar down in value, then we will have a currency crisis. If we try to scale back our spending and live within our means, we will have a flat-out 1930s-style economic crisis, where people start going bankrupt and unemployment is even beyond where it is now. And we start looking at a deflationary depression.

And that is it. We have borrowed so much money that we really do not have any other choice. And so the history of the last ten years and probably the next few is us coming to grips with this and deciding what kind of poison we are going to take going forward. And I think we are definitely leaning towards monetary ease. And whether that works or not we will see. But it is definitely the policy option that we seem to have chosen.

Chris Martenson: I think you have got it exactly right. I like that framing, which is, listen, you cannot ‘austere’ your way out of a hold this deep. So then what do you do? Well, you can try and print your way out. That does not really work. Really, there is a third option, which you and I might assign a fairly narrow possibility of happening, but that is to grow your way out of it. Of course, I think that is what the Fed in its heart of hearts was really double-fingers-crossed hoping for, and obviously politicians are hoping for it, which is a rapid resumption of economic growth.

And that was, of course, the whole story behind the Greek rescue packages when I was looking at those in 2008, 2009, 2010, when all that was being developed. By now, Greece was supposed to be back at 6% GDP growth. And, of course, they have kind of inverted that number, put a negative sign in front of it, and that is where they “happen” to be instead. And so growth is really always the bugaboo that is sitting there. As long as we get growth, we can get our way out from under this. And that is what I am cueing in on here, the point that it is not here.

And in order to think that we are going to double GDP growth going forward, you have to – I do not understand the basis of that story. What is the story? Where does it come from? Is there a new technological revolution we do not understand, or is there – where is the organic growth of that? Because in times past, when you have come out of a recessionary period, you have had a couple of things going for you. You have had a massive deleveraging happening. So people had walked all of their debts down, particularly at the household level, so they are ready to releverage.

Bernanke certainly primed the pump. We could releverage in a skinny minute if banks had people they wanted to lend to, right? They have got excess reserves just coming out their ears at this point in time. But the lending is not happening, because the willing borrowers are not there and also the willing lenders are not there, so there is that sort of stalemate happening. The fuel for this growth has just been piled up so insanely high, it is like they built a twenty-story funeral pyre for a gerbil.

And so now, if there are no painless options left, how do you see this playing out? Which pain are we going to choose here? And what does that unfold like?

John Rubino: Well, on your growth idea, Chris, the traditional Keynesian tools for generating growth have been cutting interest rates and running deficits. And that puts money into the hands of people who then spend it. And then the businesses that are getting that new money coming in hire people, etc., etc. And the idea is that that generates growth and tax revenues and you go back to being healthy. But after a certain point, when you owe so much money that people cannot borrow anymore – as you said, banks have these reserves that are just sitting there that they cannot figure out what to do with because households are already heavily indebted. Now we have replaced credit-card debt with student loan debt, basically and have not improved otherwise. So we owe a ton of money. We do not want to borrow more money, as individuals, mostly. And banks do not see any really attractive borrowers coming through the door. So the system does not work with these old tools anymore.

So if you wanted to try to generate growth and have an actual chance of doing it you have to attack the structural problems in the system. We have to lower the barriers to risk taking and capital formation and stuff like that. But that is ideologically unpalatable to the people who are running the show now. Because that means immediately putting money into the hands of the 1% who already have plenty of money. And so that is not going to fly. And so even though we are trying for growth right now – that is the idea – we are not going to generate it.

As you said, the economy is not growing even after five years of absolutely insane money creation and the lowest rates that we have ever seen for loans. And part of that, by the way, is that we are – as we are giving money to borrowers with lower interest rates we are sucking money out of the accounts of savers.

So everybody that lives on a fixed income is being crushed by this policy and that kind of offsets the benefits of slightly cheaper mortgage rates and stuff like that. So I do not think with the tools that we have on hand we can generate growth. And that is being borne out by the last few years of no growth. So at some point we are just going to double down because that is all that is left. These guys only understand what they have seen work in the past. And what they have seen work in the past is aggressive monetary policy; big government deficits; lots of spending on the social side of the economy that puts money directly into the hands of consumers. And so we will do that again.

I mean, if the economy starts to slow down from here and rift into a recession (which it easily could, based on the momentum of a lot of indicators), and especially if we have a stock-market correction right now (which we should just for technical reasons, even leaving everything else aside), then we would see the government respond, as it always has, with even more monetary ease. And even bigger deficits. And we just get more of the same.

So I do not see a way out of this. I think there are going to be lots of theories tossed around, but none of them – none of the ones that have any chance of working – will be politically palatable. So we rely on the stuff that we have done in the past that we thought worked back then, and so we will just do more of the same. And we will get more of the same. And at some point, the system spins out of control. So it becomes a matter of timing. Does it happen this year, next year, five years from now? That is the thing that is hard to call.

Chris Martenson: Well, John, I was listening to Jim Rickards recently at the Casey Summit. And he was saying that he had this whole list of things that he had written a book about a couple years back that the Fed was going to try. And with basically fourteen things on the list, thirteen had checkmarks next to them, and number fourteen on the list is giving everybody an actual tax cut, a big one, like some kind of check back or something like that. So you run a giant fiscal deficit on the basis of that, with the Fed handshake and a wink, saying do not worry about it, we will monetize whatever that pain is right there. And it would have to be fairly meaningful. Some big giant number, hundreds and hundreds of billions of tax credits flowing back into people’s pockets. So that would be a bypass mechanism. Do you think that is a possibility, in your view?

John Rubino: Well, that is a variation of the debt jubilee idea, where we just print a lot of money and give it to people to pay off their debts with the idea that that restarts the system. People do not owe as much, so they can borrow more. And the normal life can return. And I think that would give us a burst of consumer spending, but I do not think it would translate into anything, because the government will have had to borrow that money. So that is functionally the same as the government borrowing more money and creating more currency out of thin air and then spending it on stuff. And we have been doing that.

So in effect, we run an extra $500 billion dollar a year deficit. And something has to give somewhere, if that is what we do. Maybe the dollar gets weaker because of that, or maybe the bond market starts to behave badly, or whatever. Or we create asset bubbles where energy prices spike and houses go up to the point that they are not affordable for regular people anymore. We cannot do this expecting a free lunch. For every action in the world of money and fiscal policy, there is some kind of a reaction. And so the question with a policy like that is, what other part of the economy will it distort? And will that distortion be enough to offset the benefits of people having extra money in their pocket?

And my guess is that it will be, because it has tended to be in the past, and that we are reaching the point where we cannot control these distortions anymore because the numbers are just too big. So we will definitely try something like that. That is one of the things that the government will go for, especially in an election year when a recession is looming. But my sense is that it will not work any better than the other stuff that they have tried, just because the big looming problem, too much debt, at government and individual and business levels throughout the society is not going to be fixed by this. It is just going to be shuffling debt from one account – the individual’s account – to the government’s account. And that does not solve any of our problems.

Chris Martenson: Here we are, all the way out, deep in 2013. I have been very, very cautious and preaching caution for a long time in the markets, because this does smell to me exactly like 2007, 2007, also 1999. And it is very, very easy to be early in calling a bubble. It is very hard to persist through it. And I am sure that of the few financial managers out there who are being very prudent and understanding the risks, I am sure they are experiencing all kinds of career risk and pain at this point in time, because they are trying to do right by their clients. And I am sure people just want in on this. That is one of the natures of a bubble. And you always know you are getting to the end stage of a bubble when you suck in the last few people, because, of course, it takes more and more fuel to keep the rocket perched at that height.

I mean, think about somebody who suddenly wants to get into Google. Well, that is going to cost you at least a thousand dollars a share today, so that is big money. And so the higher things go, the more money it takes to lure in those new entrants. But really, I think that is one of the defining features of a bubble, when they have got the last person on board, pretty much, who is going to get on board.

How have you been managing talking about markets to people who are looking for your perspective on these things? And are you telling people to stay in/stay out, or what would you advise at this point in time?

John Rubino: When someone asks me what I think is going to happen in the next year, I just say I was wrong for the last two years. I thought this thing was going to end in 2010, give or take, and that we just could not keep going and doing what we are doing. And so my credibility for short term predictions is basically zero right now. But having said that, all the imbalances that we are building up over the last thirty years are bigger now. And so if debt was the problem in 2008, and stock valuations were the problem in 2000, we have got both of those back. We have got all the technical and structural and fundamental reasons for hard times in the near future. And so we should probably be preparing for that.

However, since this has gone for at least two years longer than I thought it would, there is no reason why it cannot go on for a few more years. So we just cannot know about the timing. This thing does not have to revert to reality in 2014, necessarily, because a printing press is just a phenomenal tool for fooling people. And we have the biggest best printing press that has ever existed. But the turn is coming, and when it comes, it is going to be really dramatic. When people finally figure out that this is really a charade, none of it is based on reality, and the actual reality under the surface is really horrendously bad, then we will see a mass change in crowd psychology in the markets. And everything that seems fine right now will disappear. And the general consensus will be that we have lost control and things are spinning out of control and we had better protect ourselves. So that day is coming. It is just a question of when.

Chris Martenson: Yes, well, so I have been wrong for a while as well. Here was my organizing framework: First of all, I noted that bubbles usually are separated by about a generation, because the pain of the prior bubble takes a little while to wear off. And typically, everybody who lost money in the first bubble has to die so people can completely forget what happened and go through it again. It is astonishing to me that we have been through not one, not two, but we are in our third bubble now within a fifteen-year span. And that is just astonishing, historically. So it really speaks to a couple of things. One is the power of the printing press. I think there are other tools at their disposal, not the least of which is a very, very compliant press, and can I call it a propaganda machine?

Because it is really – the shaping of opinions is really quite elegant. Actually, golf claps. I mean, I am really impressed with how well opinions are managed. I believe the stock market is largely a signaling mechanism. It is one of the reasons I think it remains so elevated. It is too important to let it go down. And so really, as you mentioned, though, it is the word illusion that is