Transcript for Addison Wiggin: We Can’t Afford the Solutions Needed To Reverse Our Decline

Below is the transcript for Addison Wiggin:  We Can’t Afford the Solutions Needed To Reverse Our Decline

Chris Martenson:  Welcome to another podcast. I am your host, Chris Martenson, and today we have the pleasure of speaking with Addison Wiggin, executive publisher of Agora Financial, LLC, the independent economic forecasting and financial research firm he runs with Bill Bonner. Agora’s wide-ranging operations include the influential econoblog, The Daily Reckoning, bestselling publications such as Financial Reckoning Day Fallout, and The New Empire of Debt both of which Addison coauthored with Bill.

These books were quite influential on me and my thinking which is why you can find both of them in the Essential Books page of my website. Addison was executive producer and co-writer of the highly acclaimed documentary I.O.U.S.A, and if you haven’t seen it, you should. It’s just fantastic. So I owe a personal debt of gratitude here to Addison as well for penning the excellent forward to my new book, The Crash Course: The Unsustainable Future of our Economy, Energy, and the Environment. Addison, you’re a man of many talents. I’m delighted to have you here today.

Addison Wiggin:  Well, thanks for having me, Chris. I’m happy to be here.

Chris Martenson:  Oh, it’s just excellent to have you. So for many years now you’ve been prolific in your efforts to wake up the investing public to the risks that lie ahead. Your books, The Demise of the Dollar, Empire of Debt, Financial Reckoning Day, your movie, I.O.U.S.A. which I just mentioned, all predicted a future that is increasingly now unfolding before our eyes. I’m wondering if you’re experiencing some emotional conflict here like I am. Your predictions have become soundly validated yet that means the dire outcome you feared is arriving. What’s it like for you to be at this time in history?

Addison Wiggin:  Well, it is kind of an interesting time because we had gotten used to, for well over a decade, being mocked by people in the mainstream press and even people in my own family were skeptical of the approach that we were taking to the market which by and large looked at a mounting pile of debt at all levels of society, not just the big fiscal problem in Washington. As we state in I.O.U.S.A, many Americans have been following the bad example set by their federal government, and they had been spending more than they take in and making up the difference on credit.

And it had become a way of life. One way of saying it is that “saving” used to mean that you would put away some money for a rainy day. But in our consumer culture it had become not how much you saved to invest and engage in some kind of productive capacity, but how much less you were going to spend on something that you were going to buy anyway. And that entire mentality permeated our culture, really starting in the ‘80s but getting worse and worse until there’s a whole generation of Americans today that don’t understand the very nature of capitalism: the savings and investment that led to the United States being one of the more prosperous countries the world has ever known.

And a lot of the work that we’ve put into the books and certainly The Daily Reckoning, which is a look at the markets and what’s happening in politics on a daily basis, we trace the influence of that mindset and what the likely outcome is. And when we were looking back even right at the end of the tech wreck, 2001-2002, the federal and fiscal response to a collapsing stock market just looked like it was going to kick the can down the road a little bit and create even more problems. But we foresaw and forecasted many of the things that became big problems in the early 2000s.

Chris Martenson:  So what’s the big surprise for you in this story so far? What’s unfolded maybe a little differently than you thought?

Addison Wiggin:  Actually the thing that has been most surprising to me has been the willingness with which politicians in Washington have jettisoned the values and ideas that led us to be a prosperous society in the first place. I suspected they would do it all along – just to give you an anecdote: in August of 2008 right before the last presidential election, we premiered I.O.U.S.A. This was before stimulus and bailouts, before trillion dollar deficits. We had spent two and a half years making a movie about the disastrous state of the financial balance sheet in Washington, that we were running history deficits of what now seemed like a quaint $450 billion and we had a mounting pile of unfunded liabilities. We made the movie and released in August of 2008 for a reason, we wanted it to be part of the national conversations during the presidential campaign season.

In August of 2008 we got Warren Buffet together with Pete Peterson, David Walker, the former comptroller general. We premiered the movie and we held a national town hall with the intention of making deficit spending, and unfunded liabilities a part of the conversation that was going on in Washington prior to electing the new president. We broadcasted on CNBC, we thought we made a big splash. Less than six weeks later Lehman Brothers declared bankruptcy. We were already on the wrong course to fiscal mayhem, but after September 17th, 2008 we jumped course and we got on a faster track and I guess my biggest surprise is how quickly people were willing to engage in the amount of stimulus, bailouts and deficit spending. They abandoned any kind of fiscal sense to a much greater degree than I thought was even possible.

Chris Martenson:  I found that surprising as well. A couple things surprised me. First of all, how long all of this has extended out given the pressures involved. But you’re describing how we’ve now found out way after the fact that the Federal Reserve had conducted 21,000 separate transactions with places as diverse as the Bank of Bahrain, and the South Korean Development Bank among others just mentioned in Matt Taibbi’s article in Rolling Stone. And it was just surprising how money was just thrown everywhere at this problem.

And I remember Hank Paulson’s dire warning was all kinds of crazy stuff, and it was just amazing how much went out the window. And there were very so few voices at that time as my recollection saying, “Hold on, wait a minute, we can actually think about this, we don’t have to do this in a panic”, but they didn’t prevail obviously.

Addison Wiggin:  Right, even, even the voices that we followed for a couple of years while filming I.O.U.S.A. – David Walker principally amount them – he fully supported the stimulus spending; even though we were documenting his efforts to wake people up to what was happening with the fiscal condition of the United States. During that period, I remember, we were actually going around the country airing the film and holding Q&As afterwards at different film festivals. And one in particular was in New Hampshire at the Portsmouth Film Festival, or the New Hampshire Film Festival held in Portsmouth.

Senator Judd Gregg who was one of the more conservative voices that we put in the film was on the stage with me during a Q&A. I think it was the day before the senate was supposed to vote on the bailout act. He made the most ardent argument that if they didn’t act soon, and act with largess that it was going to be the end of the world as we know it. And it was just surprising to me that for all these people that we’ve elected to put into office and for the amount of study and intelligence that they presumably have, they rolled over and threw out all common sense and just went for it.

Chris Martenson:  Well, it’s never a good time to tighten your belt but I guess in an emergency you can’t even have the conversation. And we’ve been pretty much in, I guess, continuous emergency even with the GDP growth that’s been recorded, at least the statistical recovery. So here we are, and it’s your public position that debt and our profligate indulgence is really at the root of our current economic woes here. Given what you saw and the anecdotes you just shared with us, how do we reverse this, what do we do from this point forward?

Addison Wiggin:  Well, the prescription for what to do would probably come with a lot of political baggage. It depends on what form you think the government should take. Should the government play the role of providing a safety net for all citizens, or should the government be involved in providing security around the world for national interests, companies to do business in places that are otherwise hostile to us? I happen to believe we shouldn’t be doing either of those things because we can’t afford them – not because politically, I think that they’re bad ideas. It’s just that we’ve never done the hard work of figuring out how to balance our interests with the tax code that we currently run.

Everything is out of whack. We can’t be the policeman to the world and provide a safety net for all citizens if we don’t have the tax rates or the income to the government that supports all that. It seems like common sense, and it should be common sense but something happens when you take it from a discussion that you and I might have to the political level which is often just driven by emotion and public speech. Somehow the desire, the continued promising that the government can solve all problems meets with jubilation and boasts and people want to just keep going and they never want to actually accept that at some point the unsustainable has to end. I mean, that’s the nature of the word.

It gets frustrating to even think that we’re at a point where politicians are really going to have to work together to come up with solutions that are going to be unpopular to anyone – and I struggle to think that we’re even capable of putting together a set of solutions that will work. It might be too late.

Chris Martenson:  I share that view, and this is not just a US issue. World history and also recent current events show that governments will reform, and they will undertake austerity and they will live within their means when the bond market has forced them too.

Addison Wiggin:  Right, absolutely.

Chris Martenson:  Greece is in the middle of it, Portugal’s in the middle of it, Ireland’s right in the middle of it, Spain’s gonna get there. The UK is trying to get there and they haven’t had a bond market revolt yet – but boy, they have an external indebtedness problem that’s off the charts. Japan’s going to have to wrestle with this soon. They’re trying to roll 50% of GDP and maturing debt this year, plus deal with all their other expenses related to the earthquake and Fukushima disasters and so on.

So this has been my view for a long time is that the United States will reform when the bond market forces it to. And that day will come, we just – nobody knows when or how long we can kick the can down the road. To my great surprise, “pretty far” is the answer to how far you can kick the can down the road. But sooner or later, the bond market will revolt and Bill Gross of PIMCO is out there saying this is coming, and using scary words like “ponzi” to describe our financing and so on. So we can all feel it coming.

My perception is that more people I talk to get it. That it being there’s something really broken in this story. And somehow Bernanke and the politicians are not quite there yet. They’re still talking as if we can get back to the happy, shiny times with no hardness. But would you share this view, that there is a day of reckoning here?

Addison Wiggins: Well, I would definitely share that view, and I think that it does come when the government has to raise interest rates beyond what it can already afford just to get the money that it needs to continue. We witnessed a similar period in 1980 and ’81 when Paul Volker had to chase interest rates up to, I think the top was 18%, just so that the government could attract investors. It’s not unheard of, even in our own history. But when you mention that, when you talk about the fact that we might lose control of our ability to fund these massive deficits in this current environment, people think that you’re a kook, that you don’t understand something that they understand.

But, in fact, there will be a point where investors will look at their return from the US government, and they’ll say, “I want more to put my money at risk.”

Chris Martenson:  Yeah, and I’ll date myself here but my first home mortgage in, I think I got it in 1988 was 12.5%. People today consider that an unthinkable level, but it’s not unthinkable, it happened to me not that long ago. These things comes and go, and –

Addison Wiggin:  Well, and that’s closer to the historical norm too.

Chris Martenson:  Well sure. And think about what would happen to the housing market right now: nothing good in terms of upward price mobility. So one of my views is that we’re all speculators now. This is a strong view I have and it starts with Long Term Capital Management in ’98. They should have gone down and let the big banks take their lumps on that one. Didn’t, so we have the moral hazard. Of course it got multiplied by some whole number like ten or something. And now my perception is that everybody’s speculating about what the Fed’s gonna do next. Will there be any QE or not? Is it going to be “QE sort -of” where the maturing MBS portfolio is rolled into Treasuries or will they wait a little while, watch some unraveling happen and then go forward and give us full QE 3? What are your views on QE and is more QE a good idea here, or is Bernanke trapped either way?

Addison Wiggin:  Well, you mentioned Bill Gross. If you take his point of view, when QE 2 dries up, who’s going to buy treasuries then? That was the position that he took when he started unloading Treasuries from PIMCO’s bond fund. I think that the Fed is between a rock and a hard place because they have to continue to be the buyer of last resort in order to keep Treasuries where they are. But they can’t afford to do it. Politically, they can’t afford to do it any longer, it becomes very untenable and in fact, if they do announce a QE 3, that, to me, will signal the moment when investors from around the world will start getting nervous.

I think they’re at the endgame from what they’ve been trying to do. They’ve been trying to play both sides of the trade, keep treasuries where they are, keep the government funded, etc. But at the same time avoid any kind of a fiscal restraint that would make Treasuries a viable, or even attractive investment.

Chris Martenson:  Yeah, well the 10-year is at what: 3.5%, 3.4, somewhere in that zone depending on which day we’re talking about. That’s a pretty low rate of interest over the next ten years given everything that I see on the radar screen. And without the Fed stepping in there buying and influencing the prices, – manipulating, whatever you want to call it – but they’ve been driving interest rates down. And one of the great conundrums for me is hearing Bernanke and then Yellen come out and talk about how inflation expectations are well-anchored because look at the TIPS to 10-year spread.  It’s good:  but they’re buying both of them.

It’s just a self-referential piece of ridiculousness. So there were are. And we’re all speculating now in terms of what the Fed’s going to do next. But what does this future mean to investors and what sorts of recommendations are you making to those that are looking to preserve wealth in this interesting period we’re in?

Addison Wiggin:  Well, even now, even after all of the writing that we’ve done and the trends that we’ve been following and the reasonable amount of success we’ve had having conversations with people – even now, the biggest recommendation we make that seems to gain the most traction is we just recommend that people recognize that this is actually happening. Most people tend to think that the government is made up of a bunch of smart people who really know what’s going on. Even the readers that write back into us, they say things like, “Well they wouldn’t be doing this kind of thing if there wasn’t a very good reason for it. “

There’s a high degree of trust left in Bernanke’s hands, in Timothy Geithner’s hands. So even now part of what our goal is just to get people to recognize that this is the possibility that Treasuries might not get funded the way they have in the past is a possibility. And if you take that piece out of the financial puzzle, then everything else begins to unravel very quickly. And that’s why, I believe we have gold going to the prices it has that we’ve seen in recent weeks – silver, precious metals, many of the commodities – because people are looking for tangible good outside of the financial system, things that seem to make more sense.

Even though they’re priced in dollars, it makes more sense to hold onto something tangible than to speculate on what Treasuries are going to do or what your house is going to do. So we’ve been recommending – most of our editors and analysts have been doing very well in commodities and precious metals, energy markets, things that tend to benefit from errors of more intense volatility.

Chris Martenson:  Sure, and I really agree with that view in part because I don’t see anywhere to hide anymore. People sometimes say, well, Weimar Germany and Zimbabwe, we can use these are reference points to what might happen next. But that’s not true in the sense that you could always duck across a border. There were four good borders around Weimar, Germany that you could go across if you could figure out how to do it and get into a sound currency. They all seem to be roughly managed the same, and so there’s a point of view out there which is that, “Well, we’re about 40 years into this fiat experiment” which is August 15th, 1971, you might date it there, and say, that’s when we became a full floating exchange rate system with no tethering.

Guess what? A lot of excess spending happened. That’s historically in parallel with what we might see in other times of history. So what happens from this point forward? Where does big money go if it can’t really escape across any borders? Or where would China go if they wanted to suddenly diversify out of $3 trillion of foreign reserves of which maybe half is US, what happens there?

Addison Wiggin:  Well, I think that’s the big question of our era and you’ve mentioned that we’re all speculators now. The government itself, the policy makers, people with skin in the game, they’re betting that there’s nowhere else to go. That’s why they’re pushing on a string, as the saying goes. They’re betting that it’s in China’s interest to keep the jig up because they have $3 trillion in reserves that are based on the US’s ability to pay. We’ve spent a lot of time sending our analysts around the world looking at smaller emerging markets for places that are undervalued and can get a quick kick when, like for example, we just got back from Columbia and a lot of the security issues in Columbia have taken place but the market has been beaten down for so long because you mention Columbia and they think drug wars.

So we’re looking at smaller markets for our own investors because there’s a kick that can happen when things return to what is considered to be normalcy. But big money, like what does China do with their reserves? That is the question of our time, and that’s what we spend, or I spent most of my time every day trying to figure out: what’s the end game here? It’s going to be difficult if there’s an alternative to US Treasuries or the US dollar as a reserve currency. And you look at monetary history, or even the history of empires as we did in Empire of Debt. Every 50, 60, 70 years there’s a major shift in the reserve currency of the world, in the dominant financial structure of the world, and we’re coming up on that now.

And in each case, as it shifts like from the British Empire to the US Empire, as it were, there’s a lot of figuring out that needs to happen. And it generally gets expressed in violence, as in wars, and in economic dislocations like depression. So I’ve been suggesting this for a long time, and I still think it’s true, that whatever’s going to happen next, it’s going to happen with an even a higher degree of uncertainty than what we’ve seen over the last couple years. And the little skirmishes that we have going on in the middle east and the two hot wars that we’re involved with in Iraq and Afghanistan, I think they’re just precursors to something bigger which will accompany a shift from the US as the dominant financial player in the world to something else, which will likely be some kind of sharing of financial structures with China and possibly India.

And it’s probably going to get a lot uglier before we get to anything that resembles peacetime, and normalcy.

Chris Martenson:  So we have a period of adjustment, somewhere between here and there. We’re going to see some sort of a falloff in living standards, I would guess, if we hold the view that the United States and other advanced economies have essentially been living beyond their means for a period of time assuming they want their currencies to survive. That means that they have to live below their means for a period of time, and that’s – you see disruption, volatility, is that fair?

Addison Wiggin:  Yeah, I think that’s fair, and I do think a reduction in our expectations of our standard of living is inevitable. Even in my own lifetime, we’ve come to expect to more in our lives immediately on credit. And that credit card, I think, is just running out. It’s the natural extension of all the trends that are in place right now. And people have grown to expect things that even a generation ago just wouldn’t even be considered possible. So I think we can expect a downward revision of expectations.

Chris Martenson:  And part of that expectation process we’re seeing get readjusted right now where pension funds are getting to the table and saying, “Hey, maybe we can’t let you retire on full benefits after 20 years of working, you’re only 45. Maybe we have to extend that out to 25.” Eventually, I think we’ll adjust this back to probably where my grandparents were working. It was just a very different set of expectations. And since you’ve read the Crash Course, you know that the core of that philosophy for me is centered around the idea of peak oil, and the role of oil in making our economy grow and move. 95% of everything moves because of oil. We can’t move stuff with solar electrons yet at this point in time. And I think that we’re going to experience an incredibly hard time of trying to grow our economy without the fuel of growth itself.

So that’s even under the best of circumstances, we’ll probably just stabilize. What happens to the world as you us see it? What happens to all these bonds that are outstanding – to focus it down – in a world without growth?

Addison Wiggin:  Well, there are two things. The first thing is that with the health of the federal government and then by extension state, and local government, because the federal government has been supporting them since 2008, the predominant view is that the economy has to grow in order of the deficit spending to go away for any kind of solution to the unfunded liabilities for entitlement programs to go away. The people that we interviewed for I.O.U.S.A. came up with “We’ll just grow our way out of this.” That seems to be the mantra of most of the people that are addressing the issue. In a world without growth, if you take the peak oil scenario, and that would require a huge adjustment in the economy too, moving from oil as the driver of the economy to basket of alternatives, that in itself is going to revise expectations, to use that phrase again. There’s going to be an adjustment period there that will require no growth, or even negative growth.

And we’ve come to believe that 2 or 3% GDP growth is not only desirable, but normal. In order to fix any of the kind of fiscal challenges that we have, we need to see 8 to 10% growth, we need to see growth that is historically an anomaly in places like China and India which are building out their infrastructure. So I think that if you take the peak oil thesis seriously, then our fiscal challenge gets that much more difficult, and a lot of the things we’ve been talking about today become even more pronounced.

Chris Martenson:  Yeah, I’m a big believer in diversifying and spreading our bets. In my portfolio and for people I work with. One of the things I notice though is that our country, in the US here, has not diversified or spread its bets around with energy. We have one bet on the table which is we have continued access to relatively cheap oil, or abundant or both hopefully. That’s it. That’s our plan right now. The $8 billion for a high speed rail that’s going to link two towns in California, that’s just not credible in terms of the scale of the problem here at this stage if you believe this thesis, right?

And so prudent adults should be able to look up this thesis and say, wow, there’s a lot of data here. It’s not opinions, it’s not beliefs; there are real facts. And we can look at these facts and say, oh, there’s something to this. It’s not just a couple of cranks in the internet anymore, the IEA is out saying, whoa, we’re going to have supply problems here really soon, and if the world economy lurches forward at 5% next year we don’t know where this oil’s going to come from. It’s not 20 years down the road, it’s next year. And maybe we’ll drill more and do other things, or the tar sands will really get ramped up, but it hasn’t been done yet.

So it me, it feels like we have a completely undiversified portfolio in this country around this prospect that we’ve just been talking about. And to me, it’s just an incredibly huge risk for a traditionally structured portfolio but it also has enormous opportunities for people who can see some of this coming.

Addison Wiggin:  Yeah, I would agree, and we have a newsletter called Outstanding Investments, and the editor, Byron King is one of the more outspoken voices on peak oil. Predominantly the investment advice we give in that newsletter is dislocations in the oil market itself because there’s still money to be made when the price of oil continues to rise. But also, looking for alternatives in geothermal, wind, tide, things of that nature. And Byron has been very successful in a back end product we call Energy & Scarcity investor in which he is looking at the very scenario that you’re talking about, helping people position people to take advantage of the marketplace that is growing up around the peak oil thesis and the alternatives that are being rapidly developed in the meantime.

Chris Martenson:  Yeah, this is a big story of mine is that this is a period of change. Many people chose to look at the message and say, “oh, that’s unpleasant”, or something. But it just happens to be reality to me, and with change, there’s always crisis, but there’s always opportunity, lots of opportunities out there. We’ll be doing things substantially differently in some area of the future. When I look at the future I say, oh, here’s what we’re going to stop doing, here’s what we’re going to have to start doing, here’s what we’ll continue doing – and just sort of getting the big sweeps of that correct I think is the best thing to do.

Gold and silver in 2002 is when I first started legging in. To me, it was just obvious that there was probably a decade in front of that, some big log sweep. Don’t handle that, it’s not a portfolio to touch, just set it aside. That was my Rip Van Winkle move. I’m not quite clear on what that move is today, but certainly we need people out analyzing and surfing this. My view is it’s a very turbulent period. Probably it’s going to increase and staying ahead of that is a full-time job.

Addison Wiggin:  Right, and one of the central tenants of the Agora Financial strategy is that while we identify a lot of the problems that are arising, in many ways mass approach to government, mass approach to the auto industry, for example, those are all artifacts of the 20th Century. And as we move into the 21st Century the opportunities become smaller, and smaller in my opinion, and therefore if you’re an investor and more nimble you can take advantage of them. And in a way it’s a positive thing that some of these massive archaic government structures are crumbling and meeting their demise, because that allows for people to become more nimble, and take advantage of opportunities that would otherwise be swallowed up.

Chris Martenson:  Oh, I completely agree. I’m wondering if – I’ve heard you’re working on another documentary set for release later this year. Does any of this tie in, and can you tell us a little about it?

Addison Wiggin:  It does, it absolutely ties in. Because as we were making I.O.U.S.A. and I kept hearing this mantra, “We’re going to grow our way out of this”, as if there was one size fits all solution to the fiscal – I was mostly just looking at the fiscal problem of the federal government. But I kept hearing this, and it just made me think, “Well, who are going to be the people that help us grow our way out of this?” and predominantly, that’s entrepreneurs. Most job creation, most new ideas, most innovation comes from entrepreneurs who are willing to take a risk of with their own time, with their own money, a lot of times without government help, sometimes with grants.

But I wanted to look and see what those people, what entrepreneurs were thinking and doing in the post crisis time, 2008-2009. And for a case study, I’m using this company called Odyssey Marine that looks for gold at the bottom of the ocean. I like the metaphor of Greg Stam and his crew going out into the ocean, and using very sophisticated technology that they had to develop themselves looking for gold at the bottom of the ocean in these shipwrecks. They have to have historians and oceanographers, and people that understand how tides work and it’s a very sophisticated enterprise.

And they found – in 2007 they found $500 million worth of silver and gold coins at the bottom of the ocean off the coast of Gibraltar and they were immediately arrested by the Spanish government, hauled into Gibraltar, and now even to this day they’re in court trying to figure out – in fact, they haven’t even made it to court yet because the US District Court down in Tampa where Odyssey Marine is based has refused the hear the case. But they’ve been tied up in all this time and in all this kind of political shenanigans, so it – to me the story of Odyssey Marine is a good metaphor for the types of challenges that entrepreneurs across the economy has faced since – really since the housing bubble collapsed and everybody realized that housing and house prices and stocks don’t go up forever. There has to be something else mov