Transcript for John Rubino: Get Ready For Accelerating Devaluation of All Fiat Currencies

Below is the transcript for John Rubino:  Get Ready For Accelerating Devaluation of All Fiat Currencies

Chris Martenson:  Welcome to another Chris podcast. I am your host, Chris Martenson. Today I have the pleasure of speaking with John Rubino, publisher of, 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 US dollar. Before starting his website, John was a featured columnist with, 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. He knows what he is talking about. He was an equity analyst and a junk bond analyst in the eighties. There is lots of experience here. With the dollar recently sliding to what I consider dangerous lows, I have asked John to come and share his thoughts on where it goes from here. Welcome John.

John Rubino:  Hey, Chris. Thanks for having me on.

Chris Martenson:  Oh, my pleasure. To set the stage, let’s talk about what led you to write The Coming Collapse of the Dollar and how to Profit from It way back in 2004. I am sure way before that was a popular thing to do. I like to think of myself as having been an early warning siren on this same subject, but you and your co-author James Turk; you were way out in front with this message. It was much earlier than most, including myself. So how did you see that? What dark clouds did you see on the horizon? What were you looking at that made you arrive at that conclusion?

John Rubino:  During the couple years before that, I had written a book on the coming real estate bust. I went into that piece of research with the idea that it was just the real estate market that was the problem. It would blow up and the US economy would go on as before. But as I dug into the research, I realized that we really had systemic problems. Things were much more serious than just home prices getting a little out of hand and mortgage money getting too easy. We were across the board taking on massive amounts of debt, which would inevitably lead us to do something extreme. Either we would collapse under all that debt and have a 1930s style depression, or we would inflate our way out of it, destroy the currency in order to pay back the debt in cheaper dollars, and have some an inflationary episode.

I knew James Turk, the founder of, because we had done a couple of articles together. I had interviewed him and found him to be brilliant and also a nice guy. I approached him and asked if he’d like to write a book on gold and the dollar. He liked the idea and we worked out a deal. So we spent the next year basically putting that book together. A lot of the writing is mine. A lot of the really deep ideas in that book are his, of course.

The timing was a little early. It was only by about a year or so. It came out in 2004, and the dollar went up for the year after that. So had it come out a year later, it would have been perfect. Even so, gold was about $400 an ounce at the time. Silver was $4 or $5 an ounce. So in the ensuing six or seven years, most of the book’s predictions have come true. We have been inflating away the dollar in order to pay off our debts. That has been causing precious metals to go up, which is to say that precious metals have held their value while the dollar has been going down. This process has really just begun. The US has done nothing to manage its finances in the meantime. Things have actually gotten a lot worse, since we have clearly made the decision to try to inflate our way out of all of our debt.

Going forward, I know there are a lot of other things going wrong in the world, but just looking at the US finances would be enough to lead you to say that the world was headed for some a catastrophe. When it’s the biggest economy, the issuer of the world’s reserve currency, doing stupid things on this scale and clearly trying to destroy its own currency, you get a global crisis out there somewhere. That is really what we are looking at now.

Chris Martenson:  You know, John, if you said five years ago, “Chris, we are going to get to a point where US Treasuries are going to be at about the 3.4% range and the US government is going to be running its third consecutive multi-trillion dollar fiscal deficit (actually it is going to be $1.6 trillion) and the world has not sort of burst into economic flames,” I would have said that is insane. It is not possible.

Is any of this surprising to you? I mean, you saw the structural imbalances. You see the debt. Then you see the responses, and then here we are. What is surprising to you in this story? What is not?

John Rubino:  Well, the general shape of the world right now is pretty much what seemed likely at the time. But the numbers are still shocking. You know the trillion dollar deficits? I would have agreed with you back then that it was almost physically impossible. We would be violating laws of physics to have Treasury bond yields where they are now and a deficit where it is now. It did not seem possible.

What has happened of course is that we have got the government intervening in the bond market to keep rates low by buying massive amounts of bonds with newly created money. This is a situation that is really unsustainable. You have got massive amounts of new dollars flowing into the system in order to keep interest rates low. But the supply of new dollars pushes the value of the dollar down, which inevitably will push up interest rates. Who wants to own a thirty-year Treasury bond yielding 4.5 percent when the dollar is being debased by more than 4.5 percent? You get a negative long-term yield in an investment like that. So the people who are buying Treasury bonds right now are not doing it with an investment return in mind. They are doing it with other objectives. China has been accumulating US bonds for years because they want to keep US interest rates low so we will borrow money in order to buy their stuff.

Chris Martenson:  Non-economic participants. Is that what we call them?

John Rubino:  Yeah, basically. It is vendor financing. It is like when Cisco lends money to some company so they will buy Cisco’s networking gear. The works until the company you are lending the money to goes bankrupt. Then you are stuck with that debt. China is looking at something like that right now. Basically, the money they are lending us is going to have to be written off at some point. They are starting to figure that out now. The reason this is unsustainable is that all the guys who are buying Treasuries out there, they have more than they want. They are worried about it and are trying to figure out how to get out of their Treasury positions. China especially has been making a lot of noises about shifting out of their dollars and into other currencies and into real assets. They’re buying oil wells, gold mines, and farmland around the world.

Chris Martenson:  They have been making those noises for a while, too.

John Rubino:  Yeah. They have been, and in the meantime their balances of dollar-denominated assets have grown to two trillion dollars.

John Rubino:  There is a limit to that. See, the problem with bubbles is that they blow right through your rationally-arrived-at limits and keep on going before they burst. The dollar bubble is no different. I mean the imbalances that we see now would have seemed, like you said, impossible to a rational analyst five or ten years ago. Yet here they are, and here they go. At some point they blow up, because something that cannot keep going does not keep going. Eventually it stops under its own weight; some external shock forces it to stop, or whatever. The only question now is at what point we hit a wall. When does the dollar die? When does the US collapse under the weight of all its debt and head back into a 1930s-style depression?

Three years ago I would have said we are right there. I still feel that way. I feel like something could happen at any point to send us over the cliff. There is no telling what that is. I recognize intellectually that it might not be for a while yet, but it sure feels like it could happen sometime soon just because these imbalances are unsustainable. Nobody in their rational right mind would buy US stocks, buy US dollars, or hold US Treasury bonds under these circumstances. Yet a lot of the people in the world are doing that.

Chris Martenson:  The only reason I can think I can put stocks into the okay balance is that of S&P 500 forty percent of their profits come from overseas. Assuming those companies have not hedged, a falling dollar actually looks really good to their dollar-based profit lines. It might still not look good if you are a European investor, you put euros in, and there is a decent return on the S&P. The base is because the dollar is going down, then you are back at square one if you are lucky.

From a US perspective I could see that. That is a real stretch. I mean, there we are speculating on the degree to which the dollar is going to fall, and thereby boost the profits of the stocks we are holding. That is not investing. That is something else.

John Rubino:  No. Well, it’s speculating. I think investors do not see it that way because they are looking at corporate earnings. They are saying “Oh well, this company’s earnings went up by thirty percent this year. Therefore we will hop on board because it is clearly growing.” At the same time this is happening with the dollar falling, which clearly does in the short run help corporate earnings, you get a margin squeeze. A falling dollar sends the cost of raw materials up. You’ve got oil over a hundred dollars a barrel again. Virtually every agricultural and most industrial commodities are way up. This affects the cost of doing business for most companies.

Depending on your industry, there are a lot of margin squeezes beginning to happen out there. If you are a restaurant chain, okay? Wheat is up by forty percent, tomatoes are up by seventy percent, and everything else is way up: you have got to raise your prices. Or you have got to raise your prices by half as much as your costs are going up and then eat the extra costs. That hurts your earnings. That is happening in a whole range of industries right now. It is not really apparent yet because it happens with a lag. Commodity prices go up, and then final goods go up at some point in the future. It is going to happen though.

When we see prices start to go up, that has a couple of effects. It causes people to buy fewer things, so consumer spending goes down. It hurts the profitability of a lot of different industries. That is what worries me about US stocks. Yeah, overseas earnings will be going up. At the same time we will be seeing a margin squeeze that affects domestic earnings. You get a lot of cross-currents that raise the level of uncertainty. Stock market investors do not normally like uncertainty. You are already dealing with a risky asset. You want predictability. When uncertainty starts to outweigh predictability, then you have got a big problem.

Chris Martenson:  Right. Let us talk about some of these speculative elements. The Fed’s QE programs over the past few years, they have created just this flood of liquidity. I mean it is everywhere. It is having all sorts of global implications. You say it’s electronic printing, right? They hit a keystroke and this money goes out. I am a believer that the Fed has a ton of power because they can do that, and they can hide a lot of their transactions from us. They are not omnipotent. Once they press that button and they release that liquidity into the wild, it goes out and does stuff. One of the things it is doing is driving up everything – stocks, bonds, commodities, and everything, right? So we have that flood of liquidity. Right now it appears that we are going to have the end of QE2 and we will lapse into something I am going to call “QE sort-of.” This means they are going to take the MBS paper and roll it. What is that? Seventeen or eighteen billion a month where they are currently tossing a hundred to a hundred and eighteen billion a month in? So there is going to be a huge withdrawal of liquidity in essence in June. How does that play out in your mind? What impact might that have if that comes to pass?

John Rubino:  The system still needs new liquidity. We are grossly over-indebted. The only reason there is any growth at all is, well, two reasons. One is they are lying to us about the numbers. The other is that the government is basically printing money and handing it to people. Take that away and you would expect to see a corresponding decrease in the amount of consumer spending and business investment. I think it is completely possible that that is part of the plan. Because the commodities are through the roof right now and inflation is starting to pick up, they do not feel like they can just come out under these circumstances and say “All right, we are going to keep pumping money into the system at the same level that we were doing during QE2.” That would just send everything through the roof. Then you would have debilitating levels of inflation, which are counter-productive from the point of view of trying to keep the economy growing.

What they might be hoping for is a correction. In other words, they withdraw a little bit. The economy starts to slow down. Some financial market disruption happens, like stocks dropping or whatever. That gives them their excuse to come back in with another liquidity program. Maybe it is QE3. Maybe it is some other new thing that they come up with. They will find a reason and a method of pumping out new money, because that is really their goal. I think they recognize that unless they depreciate the dollar dramatically from here we will never get out from under the amount of debt that we have taken on. They know they have to do that. They have to do it in a way that is not counter-productive. That might be giving them a little too much credit for foresight. But it would not surprise me at all if that is one of their contingency plans and a correction is actually what they are hoping for.

Chris Martenson:  Yeah. I am in agreement that the United States faces a fiscal emergency that can really only be “solved” – and I am putting air quotes up around that word solved – by having a much weaker dollar. Of course they go out and give lip service to the fact that we want to have a strong dollar, but they have to say that. You know? If you made a drinking game out of every time that Hank Paulsen or any of those former Treasury secretaries came out and said I too support a strong dollar, you know you would have a lot of drunken people. They were always saying it, but it was clear that that is not what they were after. In fact, there is no way at a larger structural level that this can be “solved” through anything other than a weaker dollar. Guess what? Everybody wants a weaker currency in this game. When we widen up the field of view a little bit, how does everybody weaken globally? What does that look like?

John Rubino:  We are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like twelve percent right now. China is doing something new every couple of days to scale back bank lending and consumer spending. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Have them have to spend more and more of their money on food and energy so we can keep on borrowing and growing.

Clearly that is unsustainable. At some point these countries are going to say “No, we want our currencies to depreciate, too. We want to be able to continue to export to you.” So what we will end up with is sort of like what happened in the depression. Everybody was trying to cut the value of their currencies at the same time. What that leads to obviously is global inflation instead of just localized inflation where a few countries are debasing their currencies. You have got everybody doing it at once. That is because the US, with the world’s reserve currency, basically controls this process. We have chosen to decrease the value of the dollar dramatically over the next few years. That is going to force the rest of the world to do the same thing or endure an overvalued currency and recession. No elected politician can put up with that.

So what’s out there? Maybe after a mini recession or some correction in the next year or two is another round – an even bigger round of global inflation. Basically all the fiat currencies of the world start decreasing in value at an accelerating rate. At some point, the whole concept of fiat currency, of governments in charge of their own monetary printing presses is going to be discredited. It is going to take a lot of pain in the meantime for that to happen. Very few people understand the process. Very few people are willing to give up the benefits of having the government in charge of the printing press. It is going to take a lot of pain in order to shift that public sentiment all the way around the world, but it will happen. There does not seem to be a solution that is politically palatable to anybody out there right now.

Chris Martenson:  Right. So if I put that together, you are thinking like I am, that if QE2 ends there is a possibility of a downdraft that then allows the fed to ride back in again. During that downdraft – near term and short term, we can see a downdraft in everything including precious metals and everything else out there: all the other commodities, stocks, and bonds.

The question then becomes let us widen that out again. Now let’s talk longer-term. Given the direction things are going, given the pressures, given political realities, and given how history seems to have worked: what is your longer-term view then of precious metals – particularly silver, gold, or anything? When we talked about the extraordinary run they have had at the prices they are at right now, but given the long-term would you advise somebody who does not yet have a core position in precious metals to hold their nose and buy? Should they wait? What would they do in this environment?

John Rubino:  When something like silver is up by a thousand percent in a decade, that just on principal makes me nervous

Chris Martenson:  [Laughter] I am with you on that.

John Rubino:  long-term, because the policies of the governments of the world are clearly biased towards pushing the value of the currencies down. That is baked in the cake because we have overspent and we have no choice but to try to get out from under our debt by depreciating our currencies. Long-term that is great for precious metals. They are really basically the reciprocal of the dollar. If the dollar is going to go down, then precious metals will go up because we measure precious metals in dollars.

Chris Martenson:  Right.

John Rubino:  Over the long run, I think you could easily see $10,000 gold and several hundred dollars silver. That is not saying they got any more valuable in the meantime. It just means that the dollar was debased by that amount in that time. Clearly that is what we are headed for. Unless we elect Ron Paul and make him a dictator or something like that, and all of a sudden we decide to take the pain and endure a massive depression for ten years to get out from under this debt; then we are probably going to keep on running the printing presses. That is good for gold and silver. Now in the year ahead, it has been such a long unbroken run. The stock market has more than doubled. Gold and silver are way up. Oil has had its run from thirty to a hundred and some. It feels like these trends are ready for a hiccup.

It is not just because of the chart, but because a lot of them are self-contradictory. When oil gets to a certain point, it chokes off consumer spending because we are spending all of our money just to get to work. That does not leave anything else for restaurant meals and stuff like that. The economy starts to slow down. Then that impacts the stock market and you head into a recession. That is the normal course of an economy. We are heading to that point. When commodity prices get too high they choke off other economic activity. I would not be at all surprised to see a slowdown in the year ahead in reaction to higher commodity prices. This sends a lot of risk assets down. That would not mean that the game is over. That would just energize government policy that is already in place. We would see another round of quantitative easing or something like it. This would send us back into an inflationary spiral. We would have a year or two years or whatever when it seems like the deflationist argument is starting to win again. I do not think we can rule that out. I do not know how much higher oil can go at this point without it becoming really debilitating for an energy-intensive economy like the US.

Chris Martenson:  Yeah, I agree. As I look at it, here we are. We are talking on Friday, April 29, 2011. The dollar is pretty much right at seventy-three the last I checked on the USD Index. A lot of traders, including myself, look at the seventy-two to seventy-four level. It is a critical band of support there. It goes way back. In your view, is this a critical moment? I mean are we going to crack below seventy-two here? Do we put in the legendary W or V bottom on this thing and bounce, and that is that? If we do crack seventy-two, assuming you can speculate around what would happen there; how fast and how far could the dollar go? Personally I see a lot of air under that chart. I do not have a target for it. I am wondering if you do.

John Rubino:  That is another one of those questions as with oil. How much further can the dollar drop before it becomes front-page news and a huge problem for the economy? I do not think it is clear right now where that point is. Historically it has got to be somewhere around here. This is as low as it has gotten. In the past when it got to this point, it caused trouble for so many different parties around the world that something happened to reverse the trend. Because the numbers are so much bigger now, our debt is so much higher; the amount of money the government is printing is so much bigger than it used to be; that the corresponding effect on the dollar could be bigger. We could see the blow-off top in commodities and the blow-off drop in the dollar index at some point here. This is where the dollar just falls through the floor and drops five or six more points from here. Or we could see it bounce off its long-term resistance level. I do not really have an opinion about that, except to say that a lot of these trends are reaching the point where they are starting to cause more trouble than the system can bear. They have got to be reversed out. The dollar is one of the big ones.

Chris Martenson:  Yeah. Once upon a time, way back when – I do not want to date myself – but people used to look at the MZM and follow monetary policy. It was important. That has all been but dropped at this point in time. I guess we are interested in speculating now more. I am actually hearing more and more people come out with what I consider to be crazy talk. Very big people running very big funds who say things like fiat currency as a concept are getting dicey to me. The United States system is a Ponzi scheme. I mean, big words. Right? They are big charges.

I think that the inherent flaw that exists at the heart of every debt-based money system of which fiat money is a prime example; it is that eventually you just cannot continue to compound your debts forever. Sooner or later you cannot do that. You have to hit the reset button. I feel like we are close to that. I do not know if it is ten years or ten minutes from now, but we are in there. I honestly do not have insights to when, but you can feel that there is just something structurally wrong with the whole system.

To me, widen the lens way up, it is too much debt. We cannot possibly continue to compound the debt at the same rates. The inverse of debt in our system is money with gold holding this very nice anti-matter role way off to the side. I look at from the 1970s to 1980s, to 1990s, to 2000s, and then to 2010; in each one of those five decades we at least doubled credit in every one of those decades. In fact we had six doublings in five decades. In order to follow that pattern, in order for the next ten years to look like any one of those decades, we would have to double our credit market debt. Okay. That is from fifty-two to a hundred and four trillion dollars. Where does that fifty-two trillion in borrowing come from for the US? I cannot see it anywhere no matter how big the budget deficit. We are into new territory in this story. Something is fundamentally going to change in this next ten years, which is going to be a decade where we cannot double our credit unless we severely debase the dollar. That is the trap I see in this story. If that comes to pass, what does that world look like with the dollar spiking down? What does that feel like to investors? What would individual investors do in that circumstance?

John Rubino:  Chris, you are exactly right. Everything comes back to the dollar here. If we intend to try to double the debt in the system again after having doubled it already for six straight decades, then we are going to have to do it by basically just flooding the system with dollars. We will not be able to get anybody else in the world to buy all of our debt, so we are going to have to buy it ourselves. The Fed will just have to expand its balance sheet by buying Treasury bonds with newly printed money. It comes down to the value of the dollar. They can keep on doing this as long as the rest of the world is willing to accept dollars in return for real stuff. As soon as the rest of the world figures out that the dollar is being destroyed and decides that they do not to accept dollars for real stuff anymore, the price of everything goes through the roof. People totally lose faith in the dollar. The system falls apart and the game is over.

The question is, where is that? If the dollar right now, which is already at multi-year lows, hits an air pocket and really plunges; then it become front-page news. The debate becomes is the dollar over. By implication, is the concept of fiat currencies valid, or should we have never tried this experiment? That is going to be a fascinating discussion. It is going to be absolutely devastating for the US economy. If nobody will take dollars, then we have to live within our means. That means we have to cut twenty percent of GDP out of the economy immediately. As interesting as that would be to watch, it is going to be painful for a lot of people.

The numbers do not lie. As you said you cannot increase something exponentially forever. We have reached the point of the last doubling. We are looking at that some time in the next decade, and maybe some time in the year ahead.

Chris Martenson:  So it leads to the question then, “Is collapse inevitable?” Is this just how fiat currencies end? Maybe not. Can you see if there is something that we can start doing today? You mentioned maybe if Ron Paul became dictator for life or something and was allowed to just get out his magic red pen and go to town on the budgets; you mentioned that that might be something that could be done. What, if anything, could put us on more sound footing to build for a prosperous future?

John Rubino:  We are at the point right now where we have borrowed so much money that we really only have two choices. One is to liquidate this debt via default. Have a 1930s style depression, which would be bigger than the 1930s and more painful because we have taken on correspondingly a lot more debt. Just spend ten years in which companies go bankrupt. People get thrown out of work. Governments have to lay off two-thirds of their firemen, policemen, and teachers. Come out at a point where the productive side of the economy is able to carry the remaining debt. Ten years of extreme pain in which the people in charge get voted out of office five different times. Because of that, it is not something that any politician is going to willingly accept.

The only thing left for these guys, if they want to keep their job, is to try to keep the game going. No. To answer your question, I do not think there is a pain-free solution. We have taken on all this debt and we have to get rid of it somehow. Either we have to find a way to carry it, which is going to involve immense pain; or we have to repudiate it, which will be even more painful in the short-run. That is it. That is our decade.

I think it is really instructive, too, that you and I can kid around about making Ron Paul a dictator. That is the thing that you see in big financial crises. You see people just throwing up their hands and going “Listen, I do not care about my civil rights. Just save me from this catastrophe.” So instead of Ron Paul you get Hitler, Napoleon, or any number of other dictators who have come into power during financial crises. I hate the idea that the US and the Baby Boomer generation in the US in particular has brought us to this point, but that might be what we see in the future. We are going to demand strong leadership from people. To Hell with civil rights, because we are so terrified by what we are seeing. Everybody around us is losing their jobs, losing their livelihoods, and kids are starving and stuff. This is the inevitable result of taking on this debt.

I think the decade ahead could be an economic mess for sure, but it could be a political mess too. That is terrifying. I have two young sons, and the idea that they are going to grow up in a world like that where you have political turmoil which usually leads to some crazy war that we never would have thought of doing otherwise. They are going to be at draft age at that time. I am terrified for that part of our future. I do not see any real clean alternatives to it.

Chris Martenson:  Well, it is a personal fear. I will consider it a personal failing of mine if I we go to a resource war with China and my kids get drafted. I have got three kids who are all getting to that age. We might do that simply because it is easier for a politician rather than look in the mirror, to look across the border and say there is our problem right there. It is those guys. We have had precious little introspection about the fact that we have been living beyond our means. In my world, you live beyond your means for a while and you live below your means for a little while. It all balances out. As long as we are unwilling to do that, we risk just driving and living beyond our means until we hit a wall of some kind.

Quickly I would like to talk to you about that. My response to that was that I ended up moving to a more rural community where I figured the people, the resources, the skill sets that existe