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Straight Talk with John Rubino: The Damage Is Already Done

Original Content
By Adam Taggart
Tuesday, March 22nd, 2011

Straight Talk with John Rubino: The Damage Is Already Done

Original Content
By Adam Taggart on
Tuesday, March 22nd, 2011

"Straight Talk" features thinking from notable minds that the audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. The comments and opinions expressed by our guests are their own.

This week's Straight Talk contributor is John Rubino, publisher of, a popular 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, equity analyst and junk bond analyst in the 1980s.

1. Several times, you’ve published prescient forecasts when it mattered. For example, you and James Turk published The Coming Collapse of the Dollar and How to Profit From It in 2004 – about a year and half before the US Dollar Index dropped from 90 to nearly 70. Similarly, How to Profit From the Coming Real Estate Bust was released in 2003. What led you to accurately predict these major market moves so far in advance?

I’ve been involved, one way or another, with financial bubbles for most of my life. Back in the late 1970s I picked up a book by Harry Brown, a Libertarian philosopher who, it turned out, was also a gold bug investment advisor. So I got interested in precious metals and watched with interest as they soared in that decade’s monetary crisis and then crashed in the early 1980s.  

After grad school in the mid-1980s I went to Wall Street as an equity analyst, but when junk bonds got hot — and demand for junk bond analysts exploded — I switched sides. Just in time for the junk bubble to burst. In the 1990s I became a tech stock columnist with and spent the next few years covering the dot-coms as they soared and then crashed.  

So by 2003 bubble dynamics were pretty familiar and it was clear that housing had all the classic traits: prices through the roof, regular people making fortunes doing things like flipping condos that even pros used to find difficult, and tried-and-true business practices being tossed overboard in favor of “innovations” like option-ARMs that were really cons designed to increase deal flow.

So pointing this out in a book (How to Profit From the Coming Real Estate Bust) was easy. But in the course of the research it became clear that what had seemed like a series of unrelated bubbles were really part of a meta-bubble resulting from the Federal Reserve’s ability to create as many new dollars as it wanted. That privilege was being abused big-time, and this “dollar bubble” had inflated asset prices around the world and led governments, businesses, and individuals to take on absolutely insane amounts of debt. Hot money was pouring into one asset class after another, with housing being just the latest and biggest. The process had to end badly, either with the US and other developed economies collapsing under the weight of all their debt, or the Fed and the other central banks printing their currencies into oblivion.

The upside of this admittedly apocalyptic vision was that traditional forms of money like gold and silver would go through the roof once everyone figured out that the dollar was being inflated away. In 2004 gold was about $400 an ounce and silver was under $10, so we were looking at a once-in-a lifetime opportunity for investors able to see past the conventional boom-time wisdom.

I had interviewed GoldMoney’s James Turk for a couple of magazine articles and found that he lived up to his reputation as both a good guy and a deep thinker on money and precious metals. He and I decided to write a book on gold, which gradually expanded into a critique of the whole concept of fiat currency (The Coming Collapse of the Dollar…). We’re both very proud of how it turned out because the analysis proved to be correct, and the investment advice — go long precious metals and short the banks and homebuilders — made anyone who followed it very rich in just a few years.

2. How would you summarize your fundamental thesis for our current economic plight and its likely outcome?

In a sentence: Fiat currencies always fail. If you put a printing press in the hands of politicians and bankers, you guarantee that the power will be abused until the currency is destroyed. The destruction takes the form of rising asset prices and deceptively low interest rates which lead businesses to over-borrow for new factories (malinvestment in economist-speak) and consumers to borrow rather than save. The result is an increasingly overindebted society that can only be kept going with ever-larger amounts of new debt. The central bank finds itself in a “print or die” situation in which the two remaining outcomes are deflationary depression or hyperinflation. That’s where the US, Europe and Japan are now.

3. At this point in the timeline, how much of your predicted collapse of the dollar has come to pass? From your recent writings, it seems you still expect it to weaken further. If so, why, and how much lower do you expect it to fall?

As Voltaire said, “Paper money eventually returns to its intrinsic value — zero”. The US seems to have very predictably chosen to try to inflate its way out of all the debt it has taken on. That means massive deficits and low short-term interest rates as far as the eye can see, with the dollar’s value an afterthought. So the process will continue as long as the global financial system is willing to accept dollars and dollar-denominated debt.

But once investors and central banks realize they’re being scammed and demand a much higher rate for US Treasury bonds, we’ll enter the final stage of the process, in which the Fed buys ALL the bonds issued by Treasury directly. Or perhaps we’ll simply print the money the government spends, with no borrowing needed. At that point, no sane person will want to hold dollars and we’ll see a wholesale flight out of the currency and into pretty much any real asset. We’ll define this as inflation but it will really be the total loss of confidence in the currency.

The process might not be linear though. It’s easy to see interest rates spiking in response to rising inflation, which would have a horrendous impact on the interest costs of consumers with adjustable rate mortgages and credit cards, and governments like the US that have to roll over a lot of short-term debt. This could cause the financial markets to freeze up, sending us back into a 2008-style financial crash. So for a while it might appear that deflation is winning out after all.

The world’s central banks would of course respond to another financial crisis with even more printing. And since their ability to create new currency is infinite, they’ll just pick a number deemed to be big enough to do the trick, click “send”, and the banks or consumers or whoever will find themselves with nice liquid accounts once again. And the currency debasement game will go on until its inevitable conclusion.

4. What are your thoughts on Peak Oil, and what contributing role (if any) do you see it playing in the economic collapse you foresee?

The world is definitely running out of cheap oil, so its price will tend to be higher going forward. This is a drag on energy-dependent economies like the US, and a potential geopolitical nightmare, as we send more and more money to some of the world’s most dangerous dictators. And turmoil in the Middle East could cause another oil shock that might be seen as the catalyst for a global financial crisis.

But Peak Oil isn’t necessary to the dollar collapse thesis. Even if oil was $10 a barrel the US would still be borrowing and printing too much currency, which would lead to a financial catastrophe eventually.

5. You spent the 1980s and ‘90s working on Wall Street as a eurodollar trader and equity/bond analyst. What are the safe havens you recommend for investors trying to protect against the collapse you’ve been warning about?

Precious metals of course, because gold and silver are time-tested forms of money that governments can’t create out of thin air. As fictitious paper currencies flood the world, the imbalance between paper and metal will continue to grow, which will send the paper currency prices of gold and silver much higher. The key thing to understand about this process is that gold and silver aren’t becoming more valuable; they’re just holding their value as paper declines.

Other real assets like oil and farmland will do well in this kind of scenario. And the least-badly managed fiat currencies will go up versus the dollar. I’m not crazy about the currency diversification idea though, because the Canadian dollar and Swiss franc are still fiat currencies subject to the whims of whoever gets elected. So eventually they’re doomed too, which means owning them just delays the day of reckoning. You lose more slowly than with the dollar but you still lose. 

Foreign real estate is tricky but potentially a good way to protect against a dollar crisis. Much of Latin America and Asia have avoided the debt bubble of the past decade, so they’ll weather the storm pretty well. The problem is that real estate is illiquid and foreign real estate is a far away, so buyers should approach this asset class with extreme caution, hiring professional help and paying attention to local laws and customs.  

6. You’ve lamented that through quantitative easing, the Fed is flooding markets with liquidity – causing nearly all asset classes to rise in tandem, making historic correlations irrelevant. Elaborate on your recent statement that in such a dysfunctional system, the short side is the place to be.

That’s more of a year-ahead recommendation than a blanket statement about investing in inflationary periods. If all prices are rising because of monetary debasement, equities might go up in nominal terms while declining in real terms. So shorting them is a losing bet. That’s what happened in the past year, as newly printed dollars flooded the world and pushed up pretty much everything, including US stocks.

But this is not a sign of a healthy recovery — it’s actually a sign of growing instability. Austrian economists call this a “crack-up boom” in which excess liquidity flows into assets of all kinds and produces a manic market that ends the way you’d expect, with overinflated assets hitting air pockets and dropping by 50%  – 90% in a matter of months.

I think we’re heading for something like this, where a catalyst — trouble in the Middle East, an oil shock, soaring food prices, a failed state (US or Europe) debt default, whatever — flips the sentiment switch from optimistic to pessimistic and everyone heads for the exits at the same time. For a year everything that went up goes back down. Gold and silver might still outperform in this scenario because they’re safe havens. But not much else will be spared: developing and developed world equities, real estate, you name it, they should all be great shorts. I’m ‘talking my book” here by the way. I’ve been accumulating short positions for a while now, though I wish I’d waited a few months before starting!

7. Since your days on Wall Street, you’ve founded the website, which serves as a popular “hub” for the better articles published in the econoblogosphere. What are your goals for the site?

DollarCollapse basically contains the articles I read — or would read if I had the time — and my hope is that it will continue to serve the same purpose for like-minded people. Its tag line is “Your ringside seat for the global financial crisis,” and that’s the goal.

8. You now live far away from Manhattan, in a much more remote, agrarian part of the country. Was moving to a more self-sustaining locale a conscious choice given your vision of the coming collapse? What (if any) lifestyle changes do you advise individuals adopt today in preparation?

We moved to Moscow, Idaho from the east coast a few years ago, but it was more about outdoor culture — you can bike all day on country roads and practically live on your boat out here — and about having a great place to raise our two sons. Because it’s a college town, you can’t throw a rock without hitting a PhD, so there’s more intellectual stimulation than you’d expect from a small Idaho town.

But it has also turned out to be a good place to be during crazy times. We’re surrounded by farms, so the local economy benefits from the kind of food inflation that accompanies currency debasement. And there’s the whole western ethos of self sufficiency and self defense. An amazing number of our friends have gardens, raise chickens and own multiple guns.

This isn’t a frivolous point. Great Depression-scale financial crises tend to bring all kinds of political and social turmoil, and Americans can’t necessarily count on “society” taking care of us in the worst-case scenario. So the lifestyle equivalents of buying gold and foreign real estate are probably a good idea. These would include holding some precious metals in a safe, accessible place, having some emergency supplies on hand, and generally becoming more self-sufficient. And scaling back your expenses now, before the economy insists.

9. There is no shortage of criticism for the mess we find ourselves in. Far more scarce but much more important are solutions.  How does the world restore fiscal “soundness” and what needs to be done to set the stage for a rebirth?

The sad truth is that there’s no fix for the mess we’ve created — at least nothing on the menu of politically feasible options. The vast majority of the politicians and voters in the US, Europe and Japan don’t yet understand what’s coming. The US left thinks that raising marginal tax rates will let us keep expanding the welfare state ad infinitum, while the right thinks that whatever we have to spend on our global military empire is worth it. Neither sees the edge of the cliff that’s approaching, so neither is willing to make the kinds of massive, dramatic cuts in government spending that might have an effect.

And even if we did wake up today, the damage is already done. The US total debt (federal, state, local, consumer, business) now comes to nearly $800,000 per family of four. And that’s not counting a similar amount for unfunded Medicare benefits and who knows how much in derivatives liabilities. So a painless fix is no longer possible. Our choices have narrowed to only two: a crash that will dwarf the Great Depression or a hyperinflation that wipes out a whole generation’s savings.

That’s why I don’t publish much political commentary on DollarCollapse. Today’s debate over federal spending and taxes is just so much fantasy. We’re like a family arguing about redoing the kitchen while the house burns down. It’s an irrelevant, annoying discussion. The interesting debate will take place after the collapse, when we have to decide what kind of society to rebuild from the rubble. Then we can argue for limited government and individual rights and sound money and all the rest. Politics will be interesting again!

Until then, we should protect our families and tend our gardens.


If you have not yet seen the other articles in this series, you can find them here:

Readers can submit their preferences for future Straight Talk participants, as well as questions to ask them, via the Straight Talk forum.

– Peak Prosperity –

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