On 12 August 2009 I interviewed (mp3) John Rubino of DollarCollapse.comfor the 48th episode of the RunToGold Podcast about economics versus political dogma, the two paths for the FRN$ currency crisis, the Fear Index and potential solutions individuals can take to protect and preserve their wealth during the transition and increase of political risk.
Trace: Your book was originally published back in 2004 and the title was “The Coming Collapse of the Dollar” and can you tell me a little bit about why the title was changed in 2008?
John: Well, that was the publisher’s idea actually. Their sense was that the collapse of the dollar was not coming anymore but it had arrived. And so they dropped the “coming”, and just called the book, The Collapse of the Dollar.
And that turned out to be a bit premature cause the dollar’s holding on still, but not grossly premature. I think the amount of currency being created is going to cause the imminent currency crisis that is going to put the dollar on the front page of a lot of newspapers. We’re going to see headlines that include dollar and collapse in the same sentence. So, the time is coming.
POLITICAL DOGMA V. ECONOMICS
Trace: Many people are squawking especially the politicians and bureaucrats in Washington are squawking about how nobody saw this coming, that “we couldn’t have saw this coming”, And yet, we’ve got a book here where the title of the book is a coming currency collapse, and then in 2008 we actually had to update it. How has this study of economics versus the political dogma that comes out of Washington and the bureaucrats affected the average person and how can people be able to profit from it if they understand the real laws of economics that are at work?
John: One of the really strange things about big turning points in history is that the people in charge are generally clueless at the turning point and this is a prime example of it.
All the basic indicators of a coming crisis were there, you know, we had a massive series of financial bubbles that built up to the housing bubble which is the biggest of all. And the amount of paper currency that was being created around the world was through the roof and debt levels were soaring. And anybody who was able to step back and not be involved in the day to day operations, such as by making of money from derivatives and things like that, should have been able to see that we were heading off a cliff.
Everybody in charge in, maybe, 2006, if you had ask them the consensus would have been that every thing’s fine. You would watch CNBC and you’d never see anything that would raise an alarm or listen to C-Span all the people in government were talking about – “How to expand spending?” and get more tax revenues and they weren’t worried.
It’s a very hard thing to explain. But to James Turk and I when we were writing this book back in 2004, it was pretty obvious that we were in deepening financial trouble and that there wasn’t really a solution since we borrowed more that we can ever hope to repay, so that turned out to be true, and its becoming more true everyday.
And so, the people that who are talking about recovery and we’re back on track and green shoots are again missing the big picture which is that we’re continuing to accumulate more debt at an accelerating rate, and we’re creating the conditions for an even bigger crash further down the road, this time it will be a currency crisis probably in which the dollar tanks, and interest rates spike and the financial sector once again collapses, but all due to basically the same process, which is excessive debt creation.
Trace: It is like they think that the cure for a hangover is more alcohol and throw in a little morphine.
John: Exactly. We are giving the heroin addict more heroin to fix the withdrawal symptoms but the eventual effect is that we need even more heroin down the road and it will kill the patient.
John: We’ve reached a point where a currency crisis is unavoidable. There are basically two horrible scenarios:
One is the 1930’s style, deflationary crash and the other is Weimar Germany style hyperinflation and there is really no middle road because we’ve taken on so much debt that we only had the choice of collapsing under the weight of it or inflating it away (EDITOR’S NOTE:
I attempt to merge, academically, these two potential paths into one in The Great Credit Contraction). There’s no other solution so, we have a very, very difficult ten years ahead of us, or an interesting ten years depending on your point of view. I guess it depends on how much gold you own?
THE FEAR INDEX
Trace: Well, there would definitely be a lot of change in which change comes the opportunity to profit from it. Though, one thing that I have noticed is that a lot of people are scared of change and the dollar collapse you mentioned something called the fear index, can you please give a brief overview about what this fear index is, and how it’s changed from 2004 till the present?
John: Sure. The fear index was an indicator that was created by James Turk, twenty five or so years ago.
It basically measures the relationship between outstanding paper currency in the U.S. and gold reserves at Fort Knox. And when the amount of paper is increasing in relation to gold, that means that we’re basically increasingly afraid of what is going to happen in the future. And it flashed a screaming buy signal earlier in this decade. The markets are becoming more and more worried about what is going to happen in the future and capital is beginning to flow into precious metals, and the indicator has only gotten more positive over time as we’re printing more and more paper dollars out there so, the buy signal was flashing,
I think it was 2000, but it might have been 2002, and it’s still saying buy gold, and short the dollar to this day, and its even more extreme. It has flashed buy signals about five times since James Turk created it.
And each time, gold has spiked after the buy signal, and this time was no exception. Gold was, I think, in a 300 range when it flashed the buy signal in this decade, and since then it’s tripled and the indicators are still saying buy gold because we are headed for a currency crisis because the dollar is still be debased. Because it has been such as reliable indicator its one more reason to load up on precious metals and look for ways to avoid exposure to dollar or actively short the dollar.
THE SIMPLE SOLUTION
Trace: Yeah and I know a lot of people think, “Oh, gold isn’t money, because we don’t really use it anymore in this day and age."
But actually last week, I was engaged in a transaction, a six figure transaction where I settled and extinguished it using physical gold bullion through GoldMoney. And so, now, when we’re moving into this new transitionary age, what role do you see these digital gold currencies playing in competition to the fiat paper franchises?
John.: Well, yeah gold has been societies’ money of choice for maybe three thousand years, and only in the last 30 or 40 years have we gotten away from that, and gone to a completely paper money system.
That is putting the politician’s in charge of money creation and is an inherently flawed idea for a lot of obvious reasons and we’re paying the price for that now. So, when paper money fails, which it is on the verge of doing, then the market is going to start looking around again for something to replace paper. Society needs something to function as money as a crucial tool to modern society.
We are starting to look again at gold and silver which are older forms of money which can’t be created in infinite quantities by government on a printing press.
Their rarity and slow increasing supply of over time means that they hold their value. We will come back to gold in some form and start treating it once again as money in terms of exchange as well as storage of value which we always used before. The attractiveness of a GoldMoney account will rise in relation to a standard checking account and more and more people will choose to keep their spare cash in that form, instead of FRN$ cash as the dollar continues collapsing.
And its possible that we just see a gradual migration to digital gold currencies which turns into deluge, as everybody figures out that this is the better way to go and society, via the free market, returns to gold because it is more efficient.
That would be a nice peaceful way for this process to progress. And a more disruptive way might be that we have a massive currency crisis that leads to a financial collapse.
Then there would be discussion about what money is and how best to structure the monetary system of the world. The digital gold currencies which have survived and prospered throughout the process may become the focus of the discussion and could be adopted by government decree. We will see. One way or another we’re gonna have to go back to some form of sound money and gold is the most logical choice.
And now with these digital gold currencies as you say, they can be adopted first as alternative and eventually become a substitute to the current monetary system. While the situation is serious the prescient can take preemptive action to order their affairs in a way to minimize disruption. For example, there is a bank holiday but you could still exchange your values through the GoldMoney system because GoldMoney is built from the ground up to be solid, in the sense that there is no fractional reserve and it is not based on a fiat currency.
John: Yeah. I mean that system has been thought through like you said from the ground-up to be the opposite of a fractional reserve fiat currency system. Probably GoldMoney and the other electronic gold payment systems will keep o0perating even if there’s a disruption in the fractional reserve banking system. If that happens the publicity will be really favorable for digital gold because you will see a lot of media articles about how Bob Smith in De Moines is not having any trouble even though all the banks in his town are closed because he still has his GoldMoney. He is still be able to transact and buy food.
Trace: Right, and engage in ordinary daily transactions.
John: Yeah. And once that happens, the system could, via the market, switch over almost overnight where everybody just flows into these currencies that clearly work better than the systems that the governments and fractional reserve banking industry are running.
Trace: Right. And with the speed that it can happen. For example, people start “Twitting” about it, they go through Facebook, and the next thing you know we could be seeing quite a revolution.
People can fight a revolution either with the power of the purse or with the power of the gun. I am not that favorable of the option of trying to fight a revolution with a gun. But as far as using sound money to protect against these despotic inroads by government the use of sound plays a critical role and I see gold playing a key role. These digital gold currencies are rising because of the negative economic environment and help us protect ourselves. After all, this currency collapse is the largest in history.
THE GOLD CLAUSE
Trace: So while a currency collapse is happening there are solutions.
Another option is for people to build gold clauses into various contracts. For example instead of a CPI adjustments for rent they can add gold clauses into their rent or debt issuances. If they rent they could have a gold clause in there to protect against this currency debasement. [NOTE: If a gold clause is written into the contract then you may want to include a residual effect clause for illegality.
For example, if gold contracts are made illegal then the amounts will revert to silver and if silver is also made illegal then platinum, etc. Of course this is only general advice and not meant to be neither investment advice nor legal counsel. Consult your attorney for individual application.] There are many alternatives for people to take to protect and preserve their capital.
They could also buy silver.
John: There is a wild card though. Just because we are painting a picture of a peaceful market driven transition the governments are not going to like this transition because it threatens their control over the money supply which is the main source of power that has been accumulated over the years.
John: All kinds of crazy things could become possible when governments really start to panic. They could make much of these solutions illegal. They could go after GoldMoney even though it is domiciled in a very safe place. They could make gold clauses in contracts illegal like they have done in the past.
Trace: Yeah. You know, they both made the gold clause contracts illegal and attempted to confiscate the gold. Fortunately under current federal law gold clauses in contracts are enforceable and we can legally possess gold. It will definitely be interesting to see what exactly the governments attempt to do because their tendencies are to do the exact worse thing possible for their creators the constituents.
John. Yes. We are at the beginning of one of the all time greatest government panics [NOTE: You may be interested in Survivalism In The Suburbs]. When they find out that this monetary system is not working anymore then we are going to see some stuff that will shock even you and I who are looking for this kind of stuff.
Trace: Right. If we think these criminal gangs costumed in government regalia that are owned by the banking industry are a rogue elephant on the world stage now we need only wait until they truly panic.
OTHER SOLUTIONS AND POLITICAL RISK
John: And the solution becomes diversification because there is no one way of attempting to get your money away from the government to where it is going to be completely safe.
Like we were talking about before this call started foreign real estate is an option [NOTE: We were also discussing my other website How To Vanish]. Buy some property offshore and that may put some of your capital beyond the reach of your home government.
Store gold or silver bullion in another country, open a digital gold account and foreign stock accounts. There are many things someone can do to insulate their capital. Then the likelihood that your capital survives the government tactics increase.
Trace: I agree. Having diversification among political jurisdictions and an alternative to the current monetary system, such as GoldMoney, is a wise move.
I remember last time at the Cambridge House Conference event where we had a special get together with about 50 of us and the main topic for 45 of the 50 minutes was political risk. I agree that minimizing that political risk is extremely important in this day and age. I also recommend the listeners read your book The Collapse of The Dollar.
John. Thanks, Trace.
DISCLOSURES: Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.