The Global Financial Intelligence blog is pleased to present the next interview with Keith Weiner.
Weiner is president of the Gold Standard Institute USA in Phoenix, AZ, and CEO of
precious metals fund manager Monetary Metals. He created DiamondWare, a
technology company that he sold to Nortel Networks in 2008. He writes about
money, credit, and gold.
Visit his links.
The Gold Standard Institute www.goldstandardinstitute.org
Monetary Metals www.monetary-metals.com
Keith's personal blog www.keithweinereconomics.com
(Guillermo Barba, GB) Keith, thanks for
accepting this interview.
(Keith Weiner, KW) Thanks for the opportunity! I am glad to do it.
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(GB) In your opinion, what’s the
root of the current financial and economic mess in the world?
(KW) The short answer is: rising debt. It’s not
only rising, but rising exponentially—the debt doubles about every 8 years.
The medium answer is: In 1971, President Nixon
defaulted on the US government’s gold obligations. This plunged us into a
worldwide regime of irredeemable paper currency. Gold was banished from the
monetary system, no longer allowed to fulfill its function as extinguisher of
debt. The dollar was turned into a mere IOU. You cannot pay off your debt by
issuing IOUs, as you cannot get out of a hole by digging deeper. You can only
service the debt. This is why the debt must grow faster and faster.
At the same time, the interest rate was
unhinged. It was free to shoot the moon, as it did until 1981. It was equally
free to fall into the black hole of zero, which it has been doing since 1981.
Falling interest causes massive, but mostly hidden, capital destruction.
The longer answer is: we have central planning.
Before I address the economic failings of it, I need to make a moral point.
Central planning means: commanding people’s lives, forcing them to do what you
want. It is a prominent feature of every kind of totalitarianism, from
communism to fascism. Karl Marx included a central bank as one of his 10
planks, it was that important. None other than Benito Mussolini (fascist
dictator of Italy during WWII) praised one of Keynes’ books as a good
introduction to the economics of fascism.
And the historical record of central planning
is always and everywhere, abysmal failure. Why? Mises wrote about this. Ayn
Rand wrote about this. Hayek wrote about this. And many others. Even if you
concede that the central planners are really smart, wise, and incorruptibly
honest, they have no idea what they are doing!
Without people buying apples, and not buying
pears, without a market bidding up the price of credit and selling off the price
of houses, how is the central planner to know what we need more of, and what is
already in a glut? He cannot. Based on this principle, Mises was able to
predict the collapse of the Soviet Union, which he did in 1922 in his book Socialism: An Economic and Sociological
Analysis.
Most people realize, at least after the USSR
collapses, that central planning of corn does not work. Corn is simple, with an
annual cycle. It amazes me that they still have faith in central planning of
the most complex thing of all: credit. It has cycles of years or decades.
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(GB) Could the gold standard help us
to solve these problems? How could we have a 21st-century gold standard?
(KW) Yes. :)
OK, on a more serious note, gold solves both of
the problems I described above. Debts can be paid off, which is important.
Otherwise they accumulate until they bury us alive. Also, under gold, the
interest rate is set in the free market, and it’s a simple process. If savers
feel the rate is too low, they withdraw their gold coin and take it home. Or if
entrepreneurs find the rate too high, they stop borrowing. The rate of interest
is stable, within these lower and upper bounds, respectively. You cannot have
zero interest (much less negative, as in Switzerland) or 15.7% on the 10-year
Treasury as occurred in 1981. In fact, if you look at the historical interest
rate data it was extraordinarily stable by our modern standards. All this
without central planning!
I am for a free market in money and credit. You
never had to force people to accept gold or silver in payment. Quite the
opposite. Let people be free to choose what to use and accept for payment, and
more importantly what to lend and borrow. They will choose gold. They always
have, for thousands of years.
In the 21st century, people will not
wear sackcloth robes. They will not cinch their waists with rope belts. They
will not have leather purses, jingling with gold and silver coins. The gold
standard does not mean going back to the 17th century.
In day to day practice, I don’t think it would look
much different to the average person. Already, the trend is away from carrying
any coins or even paper bills, towards using plastic. It certainly lets you
have a slim and light wallet. People will spend and earn, mostly not having to
touch actual gold metal.
The key is that they have this right. I think
most people would have a little gold, and some silver, at home. Gold is the
truly risk-free asset (the government bond is not risk-free, just ask citizens
of Cyprus, Greece, or Iceland). Having the right to redeem credit in gold keeps
the debtors honest (and also provides a mechanism for retiring debt at the end
of its useful life). Few will redeem, unless a debtor is getting into trouble.
Then the redemptions will occur in rising amounts. Just knowing that it can
happen will provide important incentives to banks and other financial
intermediaries.
And of course long-term planning becomes
possible again. With a stable currency and interest rate, long-term contracts
are feasible. Think of leases and insurance. Think of pension funds.
Finally, we would get back to real economic
growth and rising prosperity for all, including the unskilled and low-skilled
workers.
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(GB) Let’s talk about the precious
metals markets. Why do gold and silver prices keep falling in a context of
world-wide money printing? Supply and demand issues or market manipulation?
(KW) First, let me address manipulation. It is
natural to develop a theory to explain what one observes. We do observe both
financial distress (to put it mildly) and enormous increases in the quantity of
dollars, euros, etc. At first glance, it is reasonable to expect the price of
gold to go up. But it is not going up, and indeed it’s falling for a few years.
One popular explanation is that the price is
manipulated. However, when you try to study the mechanics of how this
manipulation is supposed to work, it falls apart. The manipulators are supposed
to sell paper gold—i.e. futures
contracts. They can’t be selling metal, at least not in silver. And the silver
price has dropped far more as a percentage. So it must be futures.
OK, well, if this is so, how would it work? It
would drive the price of a futures contract way below the price of real metal.
There would be a total divorce of these two prices. I study the spread between
spot and futures gold, and I can tell you that it just isn’t so.
The data we see in the market does not fit the
theory. I have written many articles about this, and showed my data.
So we need a new theory.
I propose that, to start, one should look at
gold as money and the dollar as failing credit. You cannot measure money in
terms of the dollar. This would be like measuring a steel meter stick using
rubber bands. How long is the meter stick today? 3.8 bands long. And tomorrow
it is 3.9 bands long. Why did it get longer? :)
You have to measure the dollar in gold. Very
few people do this. When I give a talk, usually the audience is very interested
in gold. I ask them to raise their hands if they know the current gold price.
Every hand goes up. I say OK, gold is money right? Yes. Raise your hand if you
know the price of the dollar, measured in gold. This time, no hands go up (it’s
currently 28.6mg gold).
When the Federal Reserve was created, the
dollar was over 1500mg. In 2011, it made a low for the move of around 16mg. Its
long-term price target is 0mg.
This is a paradigm shift, to stop thinking of
gold in dollar terms and start thinking of the dollar in gold terms. As with
all good paradigm shifts, things get sharper and clearer.
Now we can ask, why is the dollar going up?
Isn’t that an easier question? I think the answer is that debtors are squeezed
by the weight of their debts. And of course, speculators are wildly bullish on
the dollar. I have to emphasize here that I do not refer to the price of the
dollar as measured in euros or pounds. I mean in terms of gold. This is simply
the same phenomenon of the mainstream dismissing gold as a “pet rock” (as one
Wall Street Journal reporter did recently). These folks are telling you to go
all-in on the dollar.
That’s self-serving advice, at best. However,
while it holds sway, people buy the dollar (i.e. sell gold) who would not
otherwise.
I have developed a model to calculate the
fundamental price of gold. This model shows this sentiment, and it is saying
that the gold price should be around $1,200.
I think something is going to change, something
in the world of credit. A major default could occur almost anywhere, from shale
oil junk bonds to a larger sovereign debtor, to a major bank. If governments
cannot or will not bail out depositors, and they take real losses, sentiment
will turn. People could begin to realize that, unlike a dollar or euro or yuan,
gold has no counterparty. It’s a lump of metal, and it cannot default.
When that happens, I suspect the price of the
dollar will rapidly move towards its former low of 16mg and there’s no reason
why it couldn’t plunge right through and make new lows.
There is one other benefit to seeing gold as
money, and the dollar as credit priced in gold. You don’t cheer a falling
dollar. You realize that it is a horrible and destructive process that will
hurt (and eventually kill) people. This is nothing to cheer. And you also
realize that there is no profit to be had in owning gold. You simply avoid the
losses of holding dollars. One can make capital gains by holding silver at the
right times (this is the basis of the fund I manage), when silver is rising in
gold terms. But gold itself is unmoving.
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(GB) Could you please explain why
gold and silver are in backwardation and what it means?
(KW) I hinted at backwardation earlier, without
defining it. It is when the price of the metal in the futures market is below
the price in the spot market. In an ordinary commodity, like wheat, it means
scarcity. However, it should never occur in gold or silver (I discuss this often
on my company’s blog at http://monetary-metals.com). It is a sign that the monetary
system is in decay, failing.
Another benefit to thinking of gold as money
comes up here. Whenever there is stress or crisis, it always the bid that is
withdrawn. There is no lack of offers to sell, but suddenly no bid.
Since 2008, we have had intermittent temporary
backwardations. This is my term for the small backwardations that occur as each
contract approaches expiration. By small, I mean around a dollar an ounce in
gold, or a few pennies in silver.
We are witnessing the process of the withdrawal
of the gold bid on the dollar. Here is a link to one of the most important papers
I have written, discussing the consequences when backwardation becomes
permanent.
As I write this, there is backwardation in the
October and December gold contracts, about 0.45% and 0.2% annualized. The
February 2016 contract is close, but not in backwardation.
While this is not (yet) alarming in our
post-2008 new normal, it is a sign of a growing shortage of gold metal. I
believe the shortage will dissipate when the price rises, and that has been the
pattern every time so far.
In silver, there is backwardation in the
September contract. But December is not even close. The silver market is not
loose, but it’s hardly tight either.
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(GB) Do you think that the worst is
still to come in terms of financial and economic crises?
(KW) Yes.
Even if we ignore the debt, which is far, far
past the point where we could ever hope to repay it, the interest rate is both
signaling and causing enormous destruction. What does it mean that the interest
rate in Switzerland and other countries is negative? Well the obvious meaning
is that you pay the government to lend your francs or euros. But what does that
mean?
There are no creditworthy borrowers willing to
pay a decent rate. Why not? It’s like a failing farm, with crop yields falling
every year. Except there’s nothing wrong with the soil. The failure is across
the whole economy. If businesses had opportunities to grow profitably, they
would be bidding up the price of credit at these absurdly low rates. Yet the
fact is, they are not. With few exceptions, they borrow only for financial
engineering such as share buybacks and acquisitions.
Meanwhile, wage earners cannot save for
retirement. They used to depend on compounded interest. And retirees cannot
live on the interest. Ultimately, interest is paid out of corporate
productivity. Now, without interest, retirees are forced to consume their
capital. It’s like selling off bits of the farm to buy groceries, rather than
using the farm to grow food. That cannot last forever.
And what of the 1%? They think they are getting
rich. If pressed, they assume the wealth comes from the poor and middle class.
There’s just one flaw in this theory. The poor don’t have any wealth in the
first place, so whatever it is the rich are getting it is not the poor’s
wealth. It could be the middle class, except the middle class is doing the same
things as the rich—borrowing to buy assets. And getting the same results.
The rich aren’t getting richer. They are
getting rising asset prices, which is not the same thing. This makes them think
they are richer, so they can spend more. They are consuming their capital. This
is a very insidious process, of hollowing out the very capital on which our
civilization depends. And as the price of capital assets keeps rising, they
consume the capital via borrowing against assets.
Suppose you own a house free and clear. But you
notice that the market price keeps rising, and of course all your friends are
living like they are rich. So you start by borrowing $100,000 secured against
your home. And you spend it. That was fun, but it’s quickly gone. So you borrow
another $200,000. And so on. It lasts as long as prices keep rising.
What is borrowing? It is consuming today what
you would otherwise consume tomorrow. What if you consume more than you can
ever hope to repay? What if an entire society does it?
At some point, defaults begin to occur. Creditors
are leveraged, so the default of a debtor can force the creditor to default.
This process could keep cascading.
What most people think of as money is really credit. It is someone
else’s liability. What happens to your money
when that counterparty defaults? Poof!
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(GB) What can people do to protect
themselves against that coming economic collapse?
(KW) It is, of course, better to own gold than
not when living through a collapse. However, that does not provide any
guarantees.
I think everyone should become familiar with the
collapse of Rome. We are not headed to another 1929, but more like 476AD.
If they have land, and can really be motivated
to farm without diesel power, without insecticides, without fertilizers, and
without purchased seeds, they can prepare to be subsistence farmers.
Personally, I would rather put my effort into
working to avert this disaster, than to plan how I could eke out a substance
living after it occurs.
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(GB) What should governments and
central banks do? Stimulate the economy? Do we need more, or less intervention
in the markets?
(KW) First, stop taking more of the poison that
has sickened us to this point! Stop borrowing to consume, borrowing to spend.
Stop trying to centrally plan.
Governments should focus on three problems.
One, how to repay the debts in nominal terms (repayment in real terms is
hopeless). Two, ensure the solvency of the financial system. It’s not just
banks, but pension funds, insurers, annuities, and employers. Three, get gold
and silver to begin to circulate.
I just wrote an open letter to Greek PM Alexis Tsipras,
outlining my proposal for how Greece could do this. They should begin issuing
gold bonds. These are not gold collateral for a regular paper bond, but
denominated in gold, paying coupons on gold, and principal in gold.
To bid on these gold bonds, the buyer does not
say how many dollars he wants to pay. Nor ounces of gold. He says how much
outstanding paper bonds he will redeem. Everyone assumes that governments can
pay off their debts with inflation.
This is the mechanism by which debtor
governments can leverage the falling value of their currencies to actually get
out of debt. By remonetizing gold. Otherwise, they are simply borrowing more to
make payments, but that is not the same thing at all.
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(GB) Is the status of the dollar as
the global reserve currency in danger?
(KW) There is no paper currency that can
replace it. All of the paper currencies are actually dollar derivatives.
There is something that can and will replace
the dollar. It’s not the IOU of Brussels, London, or Beijing.
Gold.
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(GB) Do you think that China and the
yuan will overtake the US?
(KW) No.
Not too long ago, Mike Shedlock posted to his
blog some statistics on trading volumes. The yuan was just ahead of the Mexican
peso.
The yuan has capital controls. Until these are
lifted, I don’t see why anyone would even discuss it.
And, as is beginning to become clear, China has
committed such massive abuse of its credit that it staggers the mind. All of
those empty cities, and unnecessary capacity in everything from smelting to
shipping, was built on credit. These unproductive assets cannot generate the
cash flow to service the debt.
I don’t know the precise timing, but I think
the yuan peg to the dollar will break, perhaps snapping violently. China today
(Aug 11) devalued the yuan by 1.8%. Its value could go a lot lower.
Thanks for this interview, Keith.
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