Today, some of the most celebrated individuals and institutions are ensconced within the financial industry; in banks, hedge funds, and private equity firms. Which is odd because none of these firms or individuals actuallymake anything, which society might point to as additive to our living standards. Instead, these financial magicians harvest value from the rest of society that has to work hard to produce real things of real value.

While the work they do is quite sophisticated and takes a lot of skill, very few of these firms direct capital to new efforts, new products, and new innovations. Instead they either trade in the secondary markets for equities, bonds, derivatives, and the like, which perform the ‘service’ of moving paper from one location to another while generating ‘profits.’ Or, in the case of banks, they create money out of thin air and lend it out – at interest of course.

Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.

~ Josiah Stamp – Bank of England Chairman, 1920s

Because these institutions and individuals accumulate vast sums of money for their less-than-back-breaking efforts, they are well respected if not idolized by most. Many of the most successful paper-accumulators are household names. They get invited to the best parties, are lured by major networks to appear on their shows, speak at the biggest conferences, and their views and words find an easy path to the ears of millions.

But this is more than just an idle set of observations for the curious. It’s actually a critically important phenomenon to be aware of. For the current configuration of financially powerful entities has, at the tail end of a decades-long debt-based money experiment, achieved an astonishing concentration of power, money, and influence.

We raise this topic because our work centers on changing the conversation towards the things that really matter while there is still time to engineer a better outcome, and that requires illuminating the status quo and having a conversation about whether it needs to be modified. Unfortunately, those at the center of the status quo are not at all interested in having any such conversation, because all of their accumulated power depends on maintaining things as they are.

Money is power.

And history has shown that power is never ceded spontaneously or willingly.

The Network That Runs the World

A couple of years ago, I came across a study that has stuck with me ever since and I want to share it with you. It’s really important if we want to understand the likelihood of a graceful transition for our current society into a future of prosperity.

Unlike prior studies seeking to quantify the degree of concentration of wealth and influence, this study simply pored through all of the available public data to build an empirical map of the network of power. Its findings are quite startling and deserve a bit of pondering:

Revealed – the capitalist network that runs the world

Oct 2011

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis of the relationships between 43,000 transnational corporations (TNCs) has identified a relatively small group of companies, mainly banks, withdisproportionate power over the global economy.

(…)

Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then theyconstructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20.

What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a“super-entity” of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. ”In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

Just 147 companies control over 40% of the wealth of the entire network of companies. It should be pointed out that such a network does not have any borders and operates on a global basis, meaning that regional analyses –such as how Germany compares with the U.S. – might be less relevant than typically portrayed.

After all, if decisions being made by a tightly knit group of companies are being made to benefit a network that has no borders, then actions by the German or U.S. governments are only a part of the story. And perhaps a minor one, compared to those made the entities that actually control the real wealth of each nation.

It wasn’t that many decades ago that a list of the top companies with the most wealth and influence would have been dominated by companies that produced real, tangible products – that is, those that created wealth by adding value to goods by transforming resources into products. Companies like GE, GM, IBM, Exxon, and other industrial giants would have been the wealthiest, because, well, they create actual wealth.

Today the top fifty companies in the ‘super-entity’ list of 147 from the above study is concerning. Out of the fifty, 17 are banks, 31 are an assortment of investment, insurance, and financial services companies, and only 2 are non-financial companies (Walmart and China Petrochemical)

The top 50 of the 147 superconnected companies

1. Barclays plc2. Capital Group Companies Inc (Investment Management)3. FMR Corporation (Financial Services)4. AXA (Investments & Life Insurance)5. State Street Corporation (Investment Management)6. JP Morgan Chase & Co (Bank)7. Legal & General Group plc (Investments & Life Insurance)8. Vanguard Group Inc (Investment Management)9. UBS AG (Bank)10. Merrill Lynch & Co Inc (Bank)11. Wellington Management Co LLP (Investment Management)12. Deutsche Bank AG (Bank)13. Franklin Resources Inc (Investment Management)14. Credit Suisse Group (Bank)15. Walton Enterprises LLC16. Bank of New York Mellon Corp (Bank)17. Natixis (Investment Management)18. Goldman Sachs Group Inc (Bank)19. T Rowe Price Group Inc (Investment Management)20. Legg Mason Inc (Investment Management)21. Morgan Stanley (Bank)22. Mitsubishi UFJ Financial Group Inc (Bank)23. Northern Trust Corporation (Investment Management)24. Société Générale (Bank)25. Bank of America Corporation (Bank)26. Lloyds TSB Group plc (Bank)27. Invesco plc (Investment mgmt) 28. Allianz SE 29. TIAA (Investments & Insurance)30. Old Mutual Public Limited Company (Investments & Insurance)31. Aviva plc (Insurance)32. Schroders plc (Investment Management)33. Dodge & Cox (Investment Management)34. Lehman Brothers Holdings Inc* (Bank)35. Sun Life Financial Inc (Investments & Insurance)36. Standard Life plc (Investments & Insurance)37. CNCE38. Nomura Holdings Inc (Investments and Financial Services)39. The Depository Trust Company (Securities Depository)40. Massachusetts Mutual Life Insurance41. ING Groep NV (Bank, Investments & Insurance)42. Brandes Investment Partners LP (Financial Services)43. Unicredito Italiano SPA (Bank)44. Deposit Insurance Corporation of Japan (Owns a lot of banks’ shares in Japan)45. Vereniging Aegon (Investments & Insurance)46. BNP Paribas (Bank)47. Affiliated Managers Group Inc (Owns stakes in 27 money management firms)48. Resona Holdings Inc (Banking Group in Japan)49. Capital Group International Inc (Investments and Financial Services)50. China Petrochemical Group Company

(Source)

How is it that companies that produce nothing and only move digital representations of money from point to point now control far more wealth than the companies that actually produce the things that makes money useful at all?

Well, that’s just how the system works. And this is something that nobody in power wants to talk about.

While we may decide that such as system is just, or unjust, or evil, or good, such judgments are merely the emotionally laden descriptors we might assign to a system that – by its very design – accumulates wealth from the many to the few.

This is why compound money systems have been tried and tried again, yet have never proved sustainable. Even ancient religious texts described them as requiring a Jubilee every 7 periods of 7, or 49 years. The Jubilee, of course, was a reset mechanism that wiped out the inevitable concentration of wealth so that things could start all over again with a fresh slate.

An imbalance between rich and poor is the oldest and most fatal ailment of all republics.

~ Plutarch

So it really should not be any surprise that banks, in particular – with their extraordinary power to lend money out of thin air (that’s what ‘fractional reserve’ allows) and their unlimited-duration corporate lives – are able over time to accumulate, accumulate some more, and finally end up owning everything.

While we’re not quite there yet, we are well on the way.

A few are beginning to notice the seeming unfairness of it all, such as the author of this recent article in The New Yorker:

The Problem with Record Bank Profits

July 16, 2013

What do these large dollar numbers have in common: $6.5 billion, $5.5 billion, $4.2 billion, and $1.9 billion? They represent the latest quarterly net profits made by too-big-to-fail banks—in order, JPMorgan Chase, Wells Fargo, Citigroup, and Goldman Sachs, the last of which reported its second-quarter figures before the market opened on Tuesday.

Five years after being bailed out by the federal government, the U.S. banking system hasn’t merely recovered from the financial crisis that brought it to the brink of collapse. It is generating record profits—the sorts of figures usually associated with oil giants like ExxonMobil and Royal Dutch Shell. During the past twelve months, for example, JPMorgan, the country’s biggest bank, has earned $24.4 billion in net income.

Let’s begin with trading. In the aftermath of 2008, there was much talk of banks getting back to basics, which meant concentrating on lending to businesses and households, and jettisoning many of their investment bankers, whose generously remunerated antics had helped to bring on the financial crisis. (…) In the latest quarter, Citigroup’s investment-banking arm generated more than sixty per cent of the bank’s net profits, and JPMorgan’s investment bank generated more than forty per cent of the firm’s net profits.

What exactly did JPM do to ‘earn’ more than $24 billion over the past 12 months? Did they build millions of appliances? Install thousands of critical power systems? Build and install high-definition CT scanners?

In fact they did none of these things, which are just three out of hundreds of accomplishments of GE, which reported a 12-month net profit of just $17 billion  while employing over 300,000 workers.

What JPM did was: trade on the markets, lend to speculators, and use its inside advantage to skim what it could off of the Fed’s monthly $85 billion of free money. Not that there’s anything illegal with that, but perhaps we should really be asking ourselves if this truly serves our society to anoint financial players with the privilege of walking off with the vast majority of our total national and global income.

Unsustainable Systems Ultimately End

The alarming growing wealth gap in developed nations is a predictable indicator of the obvious inequities involved in this system. Those not in the top 1% are finding themselves as modern-day feudal subjects – bound by debt or lack of property – to a global corporatocracy (corporations being the new aristocrats).

But the stability of this parasitical system begins to weaken quickly when the lifeblood it depends on begins to dry up. And that’s when things can begin to go south in a hurry: a crack-up of the financial system, civil unrest, government breakdown – that kind of scary strife.

In Part II: The Indicators of Instability to Watch For, we discuss the 3 most important danger indicators to monitor. These are the areas where the cracks will first appear, and will give those watching closely advance warning to adopt extremely defensive financial, physical, and emotional positions.

The vast concentration of wealth into so few hands is creating systemic instability, and if it continues long enough, it will prove to be a fatal ailment of not just any one particular republic, but all of them.

Click here to read Part II of this report (free executive summary; enrollment required for full access)

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous.

With equity and bond markets at or near all-time record highs, with all financial assets consistently shrugging off bad – or worse – news as the riskiest of assets continue to find consistent upward bids, we find ourselves in familiar and bubbly territory.

I can summarize my thoughts in one sentence:  How could this be happening again so soon?

In times past, it took one or more generations between bubbles for people to financially recover and forget the painful lessons before they would consider doing it all again. Yet here we are, working our way through our third set of bubbles in less than two decades, which must be some sort of world record.

I will confess to my biases right up front: I have always been deeply skeptical of both the practice of running up debts at a faster pace than income (the common practice of the entire developed world over the past several decades) and the idea that the solution to too much debt is more debt, enabled by cheaper money courtesy of thin-air money printing.

In short, instead of seeing central banks as sophisticated stewards of intricate monetary policies, I view them as serial bubble-blowers and reckless debt-enablers whose only response, when confronted with the inevitable consequences of their actions, is to serve up more thin-air money at an even cheaper rate. And when that doesn’t work, then they simply try even more of the same, but in larger quantities.

While I think central banks are populated by earnest people with impressive credentials who have rationalized their actions as being necessary and in service of the greater good, I also think that the biggest ones hold an entrenched set of institutional views that are dogmatic, fail to incorporate the idea of economic and resource limits, and are seemingly immune to healthy introspection.

Somewhere along the way, I would have hoped they might have noted that each new crisis is larger than the one before – necessitating an even larger response that begets an even larger crisis next time, etc., and so on. A corporate bond hiccup in 1994 led to monetary loosening that enabled the development of the Long Term Capital Management (LTCM) fiasco of 1998, which was followed by the tech bubble, and then the housing bubble, and here we are with a now global equity and bond bubble that is larger than all the prior bubbles combined. Much larger.

It was famously said that the market can remain irrational longer than you can remain solvent. And if the trading maxim, don’t fight the Fed, is worth heeding, then surely one should absolutely not take on all of the central banks at once, either. So, the risk I run here in seeing things through my ‘common sense’ filter is that perhaps this time the Fed, et al., have got it right, and a true and lasting recovery is at hand.

With that caveat, in this report I lay out the five most worrisome signs that horrific market losses await the unwary, the careless, the reckless – and those who possess all three characteristics (i.e., your average central bank).

These are not normal times. The degree of separation between reality and today’s financial markets is extreme, which means they have a tremendous degree of potential energy stored up that could erupt in a downward cascade at any time.

While we can’t predict the exact time or trigger of a market avalanche back down to reasonable levels, I can definitely advise that you do not want to be standing in the valley when it happens.

Four Signs That We’re Bubbling

Here are the four things that convince me that we are in truly bubbly territory:

Sign #1: Junk Bond Prices at Record Highs

The Fed, et al., have been buying up all of the ‘safe’ bonds, with the twin intents of driving down interest rates and chasing investors into riskier assets. With lower yields comes (hopefully) more borrowing; and when investors move towards riskier assets, this drives up the equity markets – which, as the thinking goes, will paint a rosier picture of the economy plus boost consumer confidence and spending.

Along with this, however, we find speculators and investors, starved for yield, chasing the junkiest of the junk.

Indeed, the prices of these “assets” have recently been driven to all-time record highs, which means that their yields have hit record lows.

And not just “low” prices, but a brand new record low in all of financial history.

Sign #2: Junk Sovereign Debt Being Chased to New Highs

It was just over a year ago when Greece ten-year debt was yielding a whopping 30%, reflecting the poor economic fundamentals of the country and concern that the European Central Bank (ECB) might stop loaning Greece the principal and interest payments needed to prevent another default.

Oh yes, and let’s not forget that just a year prior, more than $130 billion had been lost by Greek bond investors, which created a ripple effect across Europe, including recently crippling Cyprus’ key banks.

Today? Greek ten-year debt is under 10%.

Greece Bulls Charge Into Corporate Bonds

May 15, 2013

Investors are returning to Greece, lured by receding fears that the troubled country will leave the euro and the high returns offered by many of its battered assets.

It is a remarkable turnaround. Only a year ago, Greece was toxic territory for investors. A debt restructuring had just wiped out more than €100 billion ($130 billion) in government bonds. The stock market stood at one-tenth its 2007 levels. A political earthquake had the country poised for a chaotic election.

But now the markets have turned. Months of relative calm in Europe – and the pressure to go somewhere, anywhere, for yield in a low-interest-rate world—has investors taking another look. The Athens stock market has rallied more than 80% in the past 12 months, with the Athex Composite Index rising 0.8% on Tuesday. Greek government bonds have been on a tear since June.

The real story here, about speculators – not ‘investors’ – returning to Greece, is that the world is so utterly starved for yield that even Greek debt seems reasonable now. In Greece, even as the trend towards buying Greek debt was building, the country’s economy (as measured by unemployment and GDP) deteriorated sharply.

As compared to 2008, Greek GDP in 2012 shrank by 20%, and current trends continue to show 5%-6% shrinkage in 2013:

(Source)

In what sort of a world does serious economic contraction, spiking unemployment, extremely high levels of debt-to-GDP, and falling bond yields go together? A bubbly world, that’s where.

Sign #3: It’s Not Official Until It’s Denied

The poster child for a bubble market has to be Japan, where the main stock index of the island nation, the Nikkei, is up an astonishing 70% in the past six months (!) in a vertical index rise that is well outside of our personal experience:

This isn’t some penny stock, but the entire stock index for the world’s third largest economy. Of course, the ‘reason’ for this rise centers on the actions the Bank of Japan is taking to debase its currency. The people of Japan are realizing that they cannot trust their cash and had better put it to use somewhere besides their bank accounts before its purchasing power is drained away.

After such an obviously unstable spike in the market, what’s left to do but officially deny that it’s in a bubble?

Stock Boom Isn’t a Bubble, Says BOJ’s Kuroda

May 15, 2013

TOKYO—The Bank of Japan’s governor played down worries that the stock-market boom is a bubble and that a weak yen will stir cost-push inflation, signaling his resolve to press ahead with the bold monetary easing that has fueled stock prices and driven down the currency.

Grilled by lawmakers during a session of the upper-house budget committee, Haruhiko Kuroda flatly rejected an opposition-party member’s argument that the recent rapid rise in the Tokyo stock market is out of line with Japan’s real economy.

“At this moment I do not think they are in a bubble,” Mr. Kuroda said.

Driving this bubble is the determined resolve of the BoJ to make the yen worth less, perhaps even someday worthless. For a major world currency, the chart below is quite startling.

If something is not official until it’s denied, then the Japanese stock market is most definitely in a bubble. It should be noted that there are similar examples of stock indexes making new highs on bad news and weak fundamentals the world over, so we’re not just picking on Japan alone here.

Sign #4: Making Up Crazy Excuses

My final sign of that we are in bubble territory is when the folks who consider it their job to make sense of the high and spiking prices offer up thin, sometimes stretched-to-the-breaking-point, rationalizations for why the current price action make sense.

In the late 1990s, when the third most recent Fed bubble was cooking along, stratospherically valued technology shares were justified with strange metrics such as ‘impressions’ and ‘eyeballs’ and other contorted valuations contained in no standard finance methodologies.

In the 2000s, when the second most recent Fed bubble was cooking along, housing prices were justified with trite slogans such as ”they’re not making any more land, you know” and bizarro claims that housing had never gone down in price over time – which it most certainly had.

Today is no different. We’re seeing the same sorts of ‘explanations’ to justify high prices fueled by central bank printing. Perhaps the central cheerleader for the benefits of perpetuating central banking policy errors is Paul Krugman, who recently swept aside arguments for an equity bubble by saying something that Irving Fisher might recognize:

O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits— which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst.

Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.

(Source)

This sounds reasonable until you consider the context of this argument about corporate profits, of which an economist like Krugman ought to be fully aware. Corporate profits are in very, very unusual territory (one could even say record territory), and to say that equities are fairly valued now because of their relationship to corporate profits is to argue that such profitability is a new and permanent feature of life.

The economist Irving Fisher somewhat famously and regrettably opined in 1929 (right before the stock market crashed) that a new corporate model and economic era was in play that had led to a “permanent plateau of prosperity.” The rest is history.

In life and investing, there’s nothing quite so powerful as reversion to the mean, which in the case of corporate profits is nearly 50% lower than where they currently are. By the time that economists are dismissing the notion of an equity bubble by pointing out heightened corporate profits, without providing any of the necessary context, we are in full-blown rationalization mode – which is another bubble indicator.

Also, the fact that Mr. Krugman is citing “low bond yields” as a justification for moving into stocks rather delightfully skips over the reality that it is the central banks themselves that are responsible for those low bond yields. Krugman presents the information as if such intervention were a normal market condition to which investors were rationally reacting, rather than a completely fake circumstance engineered by central banks conducting the biggest monetary experiment in human history.

Next, we have this tidy explanation from Goldman Sachs, groping for reasons to explain why stocks always seem to go up no matter what:

“while equity prices respond more to dovish surprises than hawkish surprises, the results suggest that equity prices typically go up regardless of whether the Fed policy surprise is positive or negative (“good news is good for equities, and bad news is good for equities”). But it is not at all clear why the equity market should systematically buy into this pattern.”

(Source – Zero Hedge)

This is at least as honest an appraisal of the situation as I can find. Goldman Sachs is basically waving its hands in the air and saying that it’s somewhat puzzling why markets should be acting this way. An even more honest statement would continue by noting that such periods of irrational exuberance are quite often found during bubbles, and that bubbles have a bad habit of destroying wealth.

As is common in life, such justifications merely expose the ‘human factor’ of bubbles. Bubbles require a belief system to be installed in the beholder, and two things that beliefs are exceptionally good at are gathering supporting data and rejecting contradictory data (if such data is even seen in the first place).

The human mind does this all the time with respect to our own level of ability, our luck, our good looks, our children’s performance – you name it – this is just part of our innate mental programming.

The really odd part in this story is that once upon a time, bubbles were separated by a generation or more, so that the lessons (and pain) of the prior one could be culturally forgotten before the next one could take hold. Yet here we are, working on our third bubble in a row – larger than the prior two that just happened within the past 15 years. (Of course, with a wide enough lens, we might say that each bubble was just a subset of the largest credit bubble in all of history that began building some 40 years ago).

For some reason, we are forgetting the lessons of the past faster than ever before. Such willful ignorance invites a series of reality-based reversions more punishing than ever before, too.

My advice: Keep a journal. These are interesting times; possibly not to be repeated in many, many generations.

Conclusion to Part I

There are abundant signs that the world’s equity and bond markets are ignoring risk and chasing yield to dangerous extremes. Various denials and justifications are being offered to rationalize these behaviors as sensible or prudent. Taken together, this tells me we are once again in bubble territory, and that, as with all bubbles, this one will end badly. Or rather, these bubbles (plural) will end badly together.

I’m sure that most market participants have it in their minds to dance as long as the music is playing and to be among the first to reach the exits when the music stops. However, everybody is thinking this, and given that only the most well-connected of market players have the opportunity to exit first (literally in the blink of an eye), very few will actually make it through the doorway unscathed.

As is always true in life, the point of a bubble is to separate the most people from the most wealth. The wealth doesn’t actually vanish; it’s just simply transferred from the last purchasers to those who sold before the bursting.

I truly have no idea how much longer all this craziness can continue. I suspect the answer is a lot longer than anybody suspects, myself included.But I also know that reversals tend to happen quite quickly, all on their own, with very little warning. This leads to my personal motto: I’d rather be a year early than a day late.

In Part II: Protect Your Wealth in Advance of the Bubble’s Bursting, we detail our rationale that all this ends in a wrenching market crash (Phase I), which will be followed by even larger, more desperate, and unusual central bank actions (Phase II) that will initially set the stage for what seems like a recovery but ultimately terminates in the largest currency crisis of modern times, if not human history (Phase III).

The difficulty will be avoiding being whipsawed throughout, losing wealth at every step. After all, the primary outcome of every attempt at money printing in the past has been a massive wealth transfer from a very large proportion of the afflicted society to a much smaller one.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

In the meantime, trade safe. My advice here is to use extreme caution whether investing or speculating, whichever you are involved in.

The Best of Chris Martenson

I don't relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I'm "making the call" for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here.

I've only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by Fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views.

Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed's $85 billion thin-air money printing program, have more or less run their course, with the Dow and S&P indexes stalled near their all-time highs. That is, $85 billion a month is what it takes to merely keep the Dow near 14,000 and the S&P 500 near 1,500.

On a fundamental basis, I see numerous signs of consumer weakness, political in-fighting and paralysis in DC, high insider selling, and the return of the retail investor (a.k.a. "greater fool") to the stock market. 

On a technical basis, there are numerous tell-tale signs of a market top, including too much bullish sentiment, waning momentum on multiple timeframes, and too many NYSE stocks being above their 200-day moving average (at least until recently; that's begun to correct).

(Source)

Triple Top?

The S&P 500 and Dow Jones are both once again near all-time highs…for the third time.  The old saying third time’s a charm can work both ways when it comes to the stock market.  Sometimes an index will bust through to new highs, and other times it will fail spectacularly crashing to new lows.

We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high, for reasons outlined below.

If the S&P 500 fails at the triple top and breaks down, from a charting perspective the next thing for it to do is revisit the bottom and then make up its mind as to what it wants to do next.  The implication here is that a major failure of the S&P 500 will open the possibility of it revisiting the 600-800 level, or some 45% to 60% lower from the 1,500 level where it currently churns.

It will take some time to get to that level, typically 3-6 months, unless there’s some sort of financial accident to hasten things along, in which case it could all be over in a month or two.

Assuming a failure at the triple top, we’ll just have to watch and see what the market wishes to do once it plumbs the bottom once again.  For now, the daily and weekly charts of the S&P 500 show waning momentum, and the weekly chart remains in overbought territory (green lines and circles):

These overbought and slumping momentum indicators are headwinds to the Fed’s efforts to keep the stock market elevated. 

From a historical standpoint, stocks are cheap when they sport a collective p/e in the high single digits.  Currently they are anything but cheap on that basis. 

(Source)

With a current p/e of 22, the S&P 500 is on the expensive – rather than cheap – side of things, and is roughly 35% above its long-term average and more than 100% above what we could legitimately call 'cheap.'

The summary here is that if stocks do indeed retreat from here, a triple-top failure will deliver quite a punishing blow to the current efforts to repair the public’s trust in the stock market as a place to send their hard-earned savings to grow.  It would be quite difficult to engineer a run at a fourth top, given the importance of retail participation in providing fuel for the rise of stocks – especially given that the boomers are retiring at the rate of 10,000 per day and drawing upon their investments instead of adding to them.

The younger generation(s) have been the main victims of the high unemployment and general wage stagnation that have been the hallmarks of the Great Recession.  It is not likely that they will be able to save and invest at a rate equal to the boomer's withdrawals, creating one more equity headwind for the Fed to overcome.

Sell in May and Go Away

Of course, another old adage that applies to the stock market is sell in May and go away, which has proven to be a remarkably effective strategy over the years.  The average return between May and September is -0.5%, while it is over 12% for the rest of the year.

(Source)

Why this yearly vacillation of returns occurs is open to speculation, but a betting person would have to think long and hard about buying stocks here – with May approaching and the Dow and S&P at all-time highs – rather than staying on the sidelines and then buying back in September or October if one was so inclined.

However, given the macro forces at play at this time, this May-to-September period could easily offer much more dramatic losses than 0.5%.  I am personally thinking as much as two full orders of magnitude greater, as -50% is right in the middle of my target window for losses.

As always, the best time to begin repositioning one’s portfolio is before any big moves get underway, so I personally would not wait until May to make adjustments, assuming one was of a mind to do so.

Whether or not you forego selling stocks, lighten up your positions, or take on some form of portfolio protection in the form of puts or inverse ETFs, these seem like good things to do before April is over.

Danger Ahead

Technically stocks are overbought. Fundamentally, the picture is even worse: they are facing a litany of economic drags (including weakening GDP growth, higher taxes, the impact of Obamacare, sequester cuts, high gasoline prices, chronic unemployment, etc.) and robust insider selling.  We explore these fundamental risks and their likely impact in great depth in Part II.

For all of these reasons, equity markets face a very high chance of falling over 40% between now and fall of 2013.  (Yes, I'm aware of how extreme a price prediction this is.)

While there’s always a chance that the Fed can keep things magically elevated – and they’ve done a very good job so far –  it is my view that they cannot do this for much longer without a serious correction to justify an even larger program of overt and covert intervention. 

In Part II: How the Market Failure Will Happen, I detail how the pattern I expect to see will play out – and why I expect the fall in equity prices to happen within the May-September window.  This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached.  Along the way there will likely be a flight for "safety" into the dollar and Treasury paper, but only during the first stage of the next crisis.

Once a bottom is reached – again, this might be anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 – the process will begin to be dominated by rising government borrowing, which will cause interest rates to begin to rise. 

When that happens, expect capital to flee the paper market for hard assets.  In particular, that's when the upwards price revolution in the gold and silver markets will kick into high gear.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

The Best of Chris Martenson

Introduction by Adam Taggart

During the height of the 'Goldilocks economy' of the mid-1990s, Mat Stein wrote When Technology Fails: A Manual for Self-Reliance, Sustainability, and Surviving the Long Emergency, a master compendium of do-it-yourself preparation skills.

Fast-forward to today's Great Recession, drought-stricken, $100+ oil, post-Katrina, post-Fukushima world – many are realizing the prudence of taking basic precautionary steps to reduce their vulnerability to whatever the future may bring. Whether you're concerned about the fallout from a breakdown of today's weakened global economy, or simply want to be better able to deal with the aftermath of a natural disaster if you live in an earthquake/hurricane/flood/wildfire/tornado-prone part of the world, the personal resiliency measures Mat recommends make sense for almost everyone to consider.

In this interview, Mat begins with his universal advice for developing basic preparedness – a 72-hour kit covering the basics needs for living, an emergency plan for your family, lining up local and out-of-town contacts, etc. – and discusses specifics on what gear to procure and steps to take in unexpected emergencies. For more protracted periods without access to central services, many more situations are covered in his books and at his website.

It's important to note that Mat isn't a doomer bent on fanning fears of a zombie apocalypse (though those concerned about social collapse will find much utility in his work). Like Chris, he believes that our current fossil fuel-driven, hyper-consumptive, and over-leveraged way of life is not sustainable. So before the unsustainable, by definition, stops – it's best to invest now in developing the skills and habits that will serve us in this new future;  one sure to place a higher premium on self-reliance.

On the Rule of Threes

The Rule of Threes give you an indication of, in a crisis time, where your energies really should lie.

The Rule of Threes basically says:

• If you've got 3 seconds without blood flow, meaning a heart attack or critical injury, then without blood flow to the brain in 3 seconds you pass out.
• If you have 3 minutes without oxygen flow – either you aren't breathing or you don't have access to oxygen – you're out.
• If you have 3 hours without proper shelter or clothing in extreme weather – extreme heat or extreme cold, you get hypothermic or hyperthermic – you start to die or lose your ability to think and function.
• If you have 3 days without water and you have to be physically active and it is fairly hot outside, then people start to die. Water is extremely critical.
• Most people in America could live at least 3 weeks  – and many of us far longer than that – without food. You may not be happy. You may not feel good. You might not have a lot of energy. You could do it. 

On the scale of things, that gives you an immediate priority list of what things you must address and deal with. Obviously the life-threatening things have to be dealt with first. 

On the Approach to Developing Resilience

There are three big buckets of preparedness. There is stuff you have. There is stuff you know. There are the skills and things you can do. This is also including your mindset. 

The most important is the skill set, including the mindset. You take that with you wherever you go.

A lot of people have plenty of money. By all means, gather stuff. Gather supplies. Store food. Have some beans, Band-Aids and bullets – the three B's. Beans means your food and supplies. Band-Aids means medical skills and medical knowledge, medical supplies. Bullets means the ability to protect yourself. Again, that is not really my bag, but it's a necessary evil.

Get the stuff. Even if you are not really great at using some of these things, you can trade. You can barter and you can share. You can team up with people. The lone wolf in a collapse situation will probably not do very well, unless he is super-MacGyver. Someone who is meaner, tougher and better organized will come along and take all his cool stuff away from him. It is really in groups that people will do better. Think medieval times, castles, villages and groups. There was safety in numbers. People have skills and talents. It really takes a village to pull through. 

Think about your strengths. Naturally if you can develop all three areas, great. If not, if you are stronger in one, focus on that. If you do not have money, focus on your skill set. If you are likeable and get along well, if you have great skills and talents, then you will probably manage pretty well. Maybe you are older and you are not very strong you cannot do much. If you have good financial reserves, then you can stock up on things. You will be able to team up with a whole bunch of people. They will be thankful and grateful for you, if and when that day comes when that stuff is needed.

Click the play button below to listen to Chris' interview with Mat Stein (59m:45s):

iTunes | Download

Transcript:

Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson.

Today we have the pleasure of speaking with Mat Stein. Mat is an MIT-trained mechanical engineer who specializes in the design and construction of energy-efficient and environmentally friendly homes. He is also the author of a bestselling book that has a place of honor on my bookshelf, When Technology Fails: A Manual for Self-Reliance, Sustainability, and Surviving the Long Emergency. It is one of the most practical and useful field guides for what to do when our centralized systems suddenly are not available to us, maybe because of a storm-induced power outage or, someday, possibly due to an oil shortage. The list is endless in this day and age.

The knowledge contained within his book and several of Mat's other excellent publications are relevant to anyone looking to live with resilience, whatever the future may bring. That includes his newest book, just out in November 2011, entitled When Disaster Strikes.

Yes, his writings seek to help people navigate difficult times, and Mat is a very hopeful person with a cheerful outlook, as describes many people listening to this podcast, including myself. Mat, I am thrilled to have you here. Welcome.

Mat Stein: Thank you, Chris. It is a real pleasure to be on your show today.

Chris Martenson: Great. Let's start at the very outside. I like to start there. Trained as an engineer, you looked at our highly complex, just-in-time, economic and technical methods and practices. You decided to write a book about the ways in which technology might fail us. At heart, you have trained a cautionary eye toward modern technology when I might say most people's faith in the same is hitting new highs with every release of the next generation Smartphone. What risks do you see in all this technological complexity that a casual consumer might be missing?

Mat Stein: Well, a while back I wrote an article called "The Perfect Storms: Six Trends Converging on Collapse." You and I and most of us grew up in high school. We drew graphs in Algebra class or Geometry, or whatever. If a graph is headed steeply for the bottom, then we know that unless you do something significantly different, it is going to hit the bottom. The problem with our complex world right now is that we have six major trends and many more complex sub-trends that are all headed for the bottom. We have not successfully changed course on any one of these six trends. Logic says, if we keep this up, if we keep doing business as usual, just what we have been doing all along, that these trends will hit the wall and it will collapse the world as we know it. Society will fall apart.

Now on top of that, we live in an extremely complex world. Nowadays there is only an average of three days’ of food in any city in the Western world at a particular moment in time. It used to be that there would be a warehouse with a month’s worth of food, or multiple warehouses, around each city. Now, with computers and the Internet and just-in-time deliveries, basically what you are going to eat next week is on the truck being shipped from somewhere across the country this week. It does not take a real genius to realize that with something complex like that, that is operating on just in time, all it takes is one little glitch and all of a sudden things are backed up for a long time. Nothing is getting there and we are in trouble.

A huge glitch that is certainly a big possibility in terms of major game-changing events is if we had an electromagnetic event, such as an extreme solar storm, which we have had twice in the last 160 years. It is just that the last one was 90 years ago, in 1921. If that one happened today, it would shut down the grid over most of the world. Most the world's nuclear power plants would start burning up. We have multiple individual events that could instantly grind civilization to a halt. We have these long-term trends, which actually are not very long term. They are relatively short-term, like collapsing sometime within the next few decades. If we do not do something major, they are going to shut down the world as we know it.

Chris Martenson: Now these six big trends, what are these?

Mat Stein: Okay – just real briefly, and then we could talk about each individually if you wish – the first one is climate change. I like to call it global weirding; some call it global warming. We are seeing the evidence of a much less stable climate on our planet. We are seeing the evidence that if the trends that scientists predict are correct, the world's main bread baskets will not be producing much food within the next few decades, as they start to fry and cook in a changing world. That is number one.

Number two is a peak in world oil production. As our world goes around today, oil is the number-one energy producing and energy dense material. It is easy to pump and move around to do our cars. We basically go to the easy-to-get and cheap, relatively clean oil. Now we are doing things like drilling for oil five miles underneath the Gulf and in the far north Arctic. We are fracking. We are horizontal drilling. We are doing all kinds of hoops just to keep the world's oil supply running as it is – basically to keep production flat.

Now, for the last 100 years we have been increasing oil production about 10% a year. That has fueled an amazing growth in the industries of the world. Right now, we are struggling just to keep it flat. I do not think we are ever going to do much better than that. As things start to decline really badly, it will cost a huge amount to get the remaining oil out. We will either produce less because it costs so much, or we will spend so much money… We have already seen what that has been doing to the economy.

Chris Martenson: Right.

Mat Stein: Number three is collapse of the world's oceans. It turns out that 11 of 15 of the world's major ocean fisheries are either already collapsed or in danger of short-term collapse. We have acidification. When we burn our fossil fuels and it rains, it makes carbolic acid. It goes in the rivers. That goes in the oceans. We are also collapsing coral reefs, which are like the rainforests of the oceans and part of the lungs of the planet. They keep our atmosphere livable. We are killing the plankton. Since 1950, according to a British scientific study, we have lost 73% of the world's zooplankton. That is the bottom of the food chain. Over half of that, has happened in the last 20 years. We are doing things that are changing the oceans and killing the oceans in a very rapid period of time. They were pretty healthy 30 or 40 years ago. They are not any longer.

The forests of the world, about half of them are gone now. A good chunk of the other half is seriously degraded. The food crisis is a big one. That is a combination of unsustainable use of water, climate change and unsustainable farming practices. We are flushing our topsoil that took millions of years to generate. We are just flushing it down the tube. It is ending up behind dams and in the oceans. It is not in the fields any longer.

Number six is the big kind of driver behind it all. It is the world's population. To give you an idea of how much population has changed, from the time Jesus walked the earth until Abraham Lincoln walked the earth, fewer people were added to our planet from Jesus to Abraham Lincoln than in the last ten years. Think of that. Every ten years, we are adding more people to the world than were added in the 1,800 years between Jesus and Abraham Lincoln. Since we added a billion people between the beginning of 2000 and October of 2011, we added one billion people. That is equal to the entire world population just in the year 1800. In just under 12 years we added more people than were alive in the entire world 110 years ago, 120 years ago. That is something that just cannot be sustained.

We are seeing that. We are collapsing the natural systems of the world. If we do not do things significantly differently, nature is not a little kind and benevolent thing that is going to say, Oh, you human beings. I will take pity on you and I will magically turn the valve on and change things for you. No. When you overshoot nature's natural boundaries, then the result is collapse. We see that over and over again throughout nature, where populations boom and then bust. If human beings do not do something different, we are going to be in the same boat.

Chris Martenson: Well, nature does bat last. My science background is biologically based. I am very familiar with these concepts as they apply to all organisms. I do consider humans a type of organism. I do not know that we are – in fact, I do know this. I will be clearer about this. We are subject to the same rules and regulations that nature sets forth, as any other organism. You went down this list; global weirding, and we have got Peak Oil, obviously. I would add to that potentially other resource extractions which are unsustainable by their very nature. These are non-renewable resources.

Mat Stein: That is correct. There are all kinds of rare earth minerals that are critical to manufacturing the products we use in electronics and solar panels, things like that. Those also have limits to their growth. We have run through a lot of the best deposits of these things. Now we are scrambling to keep things going. Yes, we are running into limits in many directions. Oil is just kind of one of the most obvious ones.

Chris Martenson: Yes. Then you went with ocean collapse and acidification. We have obviously got forest loss. You have a food crisis related to water. There is a big trend in water use there. There is a lot of news coming out about how aquifers are being depleted. Of course population is driving all of this. Around this there is a wrapper of this thing we call the economy. This is how we organize ourselves. It has been fashioned as if none of these trends were real. It has been fashioned as if we can just continue to expand forever. This is where we get to the heart of this story. We can all hope that these things you have just catalogued and other ones that we could raise are not going to bite us at some point. In this story, I think hope alone is a terrible strategy.

Mat Stein: Yes. It is a real strategy for failure. Wishful thinking may be great. You watch the movie "The Secret," and if you just think good thoughts, then you are going to manifest tons of money and everything is going to be okay. The reality is that we live in a bubble around the planet earth. We do live in a bubble. We do not have a way of getting out of our bubble. We have to live within the means that are contained within this bubble.

There was an experiment, a bio-dome down in Arizona, where they spent $200 million. They built a big geodesic dome. They put systems in there that they designed; supposedly the best scientists worked on it, to make it self-sustainable. They had six scientists in there. They were supposed to stay in there for three years. They had to cut the experiment short. With $200 million on the planet earth, this is not out in space, this is not on the moon, this is not on Mars, this is on the planet earth in Arizona. Two hundred million dollars and they could not make a bubble that kept itself going for only six people.  With $200 million. I do not have $200 million in my pocket to make my bubble.

Chris Martenson: It was, of course, the very best of minds. They did think it through. They ran an experiment. Like all good experiments, there were some things that they learned. That is why they are experiments. We do not know all the variables. I believe one of the things that bit them was that the concrete they used to pour much of the footings absorbed CO2 at a much faster rate than they had known about. The point of all this is that technology brings extraordinary advantages. There are these disadvantages that we do not always think about. They just come along for the ride.

Yes, we are getting oil out of shale. It is just amazing. We are taking it from the source rocks. We do this fracking and we get 1,000 barrels per day to flow out of a well. It depletes at extraordinary rates. Within a few years, it is a stripper well, getting less than 20 barrels per day out. All the technology has really done is allowed us to get a little more out of the ground. What it also does is allow us to get it out faster. Yes, we get more out. We also get it out faster so it runs out sooner. Two sides on this coin.

Mat Stein: A good example of that is in the North Sea Oil. Norway and Britain sort of had two different approaches. Norway kind of did the slow, long-run approach for developing it. It is still going to run out. Margaret Thatcher was like, Boom. They just pumped and pumped and pumped. It made for a great boom in the economy in England. They were selling oil at ten dollars a barrel. Now they are importing oil. They have gone from an exporter of oil for 30 years or 25 years off North Shore Oil and North Sea Oil. Now that oil is toast. It is declining rapidly. They have to import. Whereas Norway is now selling their oil at $100 or $140 a barrel. They have still got oil around for another two or three decades, not, like, 200 years. Which was smarter? Was it smarter to go a little slow and steady, or smarter to go boom and bust? Any way you look at it, it is running out. If you are slow and steady, at least you give yourself more time to develop the alternatives, to get off the oil habit while there is still some around to keep things rolling.

Chris Martenson: I have to say that my personal view, and this is a belief of mine, is that watching the current election cycle here in late 2012 for the November elections, I do not see any distinguishable daylight between the two parties. They have different views on how we are going to get ourselves back on the fastest possible path of growth as soon as possible so that it’s business as usual. You just mentioned that there are a lot of things that could disrupt our just-in-time delivery system of food, fuel, medicine and water, virtually everything that we can consider life's essentials. Perhaps it will be a catastrophic banking failure that takes months to patch up. A solar flare you mentioned, like a Carrington Class-X event that ruins a few too many transformers and drags the grid down. It could be a liquid fuels emergency by final failure of Middle East diplomacy.

Listen, whether these risks are utterly remote and not worth talking about or concerning ourselves with, or all but certain to happen eventually, the simple fact remains that society today operates with arguably, I am going to say, the least amount of self-sufficiency and resilience of perhaps any generation ever. This is something you have written extensively about, to say Hey, listen. If this is true, there are things that we individually can and maybe should do in order to increase our own personal resilience. Is that fair?

Mat Stein: Oh, yes. In a nutshell, that is really it. We are extremely vulnerable and extremely fragile. Because we have not had a war on American soil since the Civil War and things have been so nice and stable pretty much since the 1950s, most of the people growing up today have this kind of Ozzie-and-Harriet view of the world. We are America. God has this magic shield around us. Everything is going to be okay. History proves that just is not so.

Chris Martenson: Well, all things change. We are in the middle of one of the greatest periods of change ever. I think that this is an exciting time to be alive. It is also a risky time. I think for many who are listening to this right now, myself included, the risk that some form of major disruption like the ones we just catalogued, the risk that this will occur sooner than later, is just unacceptably high. Being prudent adults, we want to mitigate those risks by reclaiming responsibility for certain mission-critical goods and services. What we can control, maybe we should.

Food, energy, water, medicine, and inner resilience, these all might be at the top of our lists. I want to dive right in. Basic preparation. It probably makes sense to start right at the very beginning and talk about some things that maybe everybody should do. I am agnostic as to whether things on this list should be things you think people should do, regardless of whether they live on the coast, inland, earthquake prone areas or not, urban or rural. Let’s start right at the top. Is it appropriate here to start with the rule of threes?

Mat Stein: Yes. Rule of threes is good. Sure. Rule of threes give you an indication of, in a crisis time, where your energy really should lie.

The rule of threes basically says if you have got three seconds without blood flow, meaning a heart attack or critical injury, then without blood flow to the brain in three seconds then you pass out. If you have three minutes without oxygen flow, then either you are not breathing or you do not have access to oxygen. Then you are out. If you have three hours without proper shelter or clothing in extreme, whether it is extreme heat… These are rough numbers. They vary in the situations. Extreme heat or extreme cold, you get hypothermic or hyperthermic. You start to die or lose your ability to think and function. If you have three days without water and you have to be physically active and it is fairly hot outside, then people start to die. Water is extremely critical. Most people in America could live at least three weeks, and many of us far longer than that, without food. You may not be happy. You may not feel good. You might not have a lot of energy. You could do it.

On the scale of things, that kind of gives you an immediate priority list of what things you must address and deal with that are life – obviously, the life threatening things have to be dealt with first, then water. Shelter first, then water; all life threatening things immediately.

It gives you an idea of priorities. So every family really should have a grab-and-go kit. It is the easiest, smallest, cheapest preparation you can do. Give yourself – Call it a go-bag or a 72-hour-kit, a grab-and-go kit. It is something to provide for you and your family for the basics of shelter, food, water, and medicine, emergency medical supplies, for the critical first, say three days, in a potential emergency, before anybody else can come to help. Obviously in a collapse situation, the grab-and-go kit is a good start [but] it is not going to get you through a collapse. It is certainly something that everybody can do.

I will admit, I am really prepared for the short term. I am working toward the long term. If the world collapsed tomorrow, I have a lot of great skills and knowledge and things. I could team up with other people. Could I do it on my own tomorrow? Probably not if the world collapsed. Could I handle a few months? Sure, no problem.

Chris Martenson: All right. So everybody should have a grab-and-go kit. Do you have anything on your list that you maybe think is probably not in what we would call a typical 72-hour kit?

Mat Stein: Oh yes. I have a few items. There is the obvious stuff. Here is something that a lot of people never think about. From our prior conversations, you are a rock climber and I am a rock climber. Inch-and-a-half cloth adhesive first aid tape is one of my key items in my grab-and-go kit.

People say Why is that so important? Think about it. What do you see in a disaster? You see people walking down the roads. If it was not a real disaster, they are driving their cars, unless they are broke and do not have money for cars. They are walking down the roads. Most of us – If all of a sudden you have got to carry a bunch of stuff on your back and you are walking down the road; cars are not working; whether it was an earthquake, tsunami, or oil crisis, what is going to happen? Most people are going to blister up. Then all of a sudden, once those blisters on their feet pop, they are not going to go anywhere fast.

You take that roll of inch-and-a-half cloth tape out. You take a little bit of the sticky tape off. You pull your shoes and socks off. You scrub all your hot spots with this sticky tape to get rid of the oils and scum on your skin. Being a climber, I am sure you have done this 100 times. You take some fresh tape out. You tape up those heels, your toes, or wherever it is. Certainly you can use the tape to bind wounds. You can tape up sprained ankles or broken wrists. You can do all kinds of things. You can repair a rip on your tent. That is a huge item. In a pinch, duct tape will work. I would rather have first aid adhesive tape on my skin than duct tape. In a pinch, duct tape works well on everything. That is one item.

Another item that most people do not have in their grab-and-go kit is a colloidal silver generator. People say What is that? Two thousand years ago, Alexander the Great did not know a thing about germ theory. He knew that if he stored water for his troops in wooden barrels that the troops got sick. A soldier that is vomiting and has diarrhea on the battlefield is not much good for anything. He also knew that if he stored water in silver urns, then his men stayed healthy.

It turns out that tiny charged particles of silver have this almost magical property, where they are toxic to all known pathogenic bacteria. They are non-toxic to human beings. They bind the proteins in the bacteria that prevent them from metabolizing oxygen. Now this sounds too good to be true. It turns out that the bacteria that are probiotic, that live in your gut naturally, the same extra-thick cellular wall that protects them from full strength stomach acids also protects them from the colloidal silvers. It kills the bad bacteria and not the good bacteria.

Again, it sounds too good to be true. It is. A colloidal silver generator is something that uses electricity, typically in the form of nine-volt batteries. It puts it across two pure silver wires. It makes a tiny particle called a colloid of silver. It looks a little like smoke coming off the wires and into the water solution. This is sort of your portable pharmacy, that you can help a hundred [people] heal if you have to, if there is some nasty bug going along.

You can purify water. It does not purify instantly. If you generate silver in water, it might kill every bug in the water over a few hours, not like in five minutes to make it perfect for drinking. Certainly in a disaster situation, you have to assume that your access to medicines and medical personnel is going to be minimal. They are going to be vastly overloaded and understaffed.

Another item that is really good to have on hand is a headlamp. That is where you have like a flashlight on an elastic band. The modern headlamps are just so incredible. They run off of like three AAA batteries. They are super-light. They are waterproof. They are LED-powered. You can drop them on the ground and they are not going to stop. In the old days, you had a massive battery pack. If you happened to drop your headlamp or bang it into something when it was on, then the filament in the bulb would tend to break. They are just wonderful things. They leave your hands free. You can work on your car, put your chains on, split wood, or run through the forest while you are holding something. Whatever you have got to do, the light flashes where your head points and your hands are free. You can even swim across the river with your headlamp on and see where you are going. They are a wonderful item.

Beyond that, basically another no-brainer item but is in most kits, is you really need an excellent water filter. I actually like to have two or three. Water is so critical, so I like to have two or three things for purifying water in my grab-and-go kit. I have multiple back-ups, especially if things stretch out a long time. I have a Backcountry water filter. I have a Katadyn or MSR filter. That is something with a ceramic cartridge that is field-serviceable and a carbon core to suck up nasty bad tastes, odors, and chemicals. It is field-serviceable. If it plugs, you can take it apart and scrub it with a green pot scrubbie. You can put it back together and you are back in business and running. If it is not field-serviceable and you have to buy a new cartridge, you better have a good stock of spare cartridges on hand. Once you pump it out of some scummy ditch water, you might plug it the first time. Then you are SOL if that is your only thing for purifying water.

You say Why purify water? You need at minimum two quarts a day. Figure on a gallon a day per person. Two quarts a day is really not adequate if it is hot and you have got to do a lot of work. About a gallon a person per day is really pretty minimal. If you have a family of four for three days, that is 100 pounds of water you are going to go through in three days. Try carrying that on your back, plus all the rest of your stuff.

Chris Martenson: One hundred pounds or 100 gallons?

Mat Stein: It is 100 pounds. It is eight pounds per gallon.

Chris Martenson: Oh right. Great.

Mat Stein: If you have a family of four, which is four gallons a day times three, that is 12 gallons times eight – it’s basically a little over eight pounds a gallon –  it comes out to 100 pounds. That is a lot to carry when there is other stuff you would rather be carrying, like your gear and clothing, etc.

Let's face it. When things fall apart in a city, you are going to be drinking from the nearest duck pond, river, or ditch. I, for one, would not want to drink out of that scummy duck pond or ditch, especially with a million people going to the bathroom all over the place, without first purifying it. It is so critical.

I like to have multiple things on hand. I have a steriPEN also. Have you seen the movie "Men in Black?"

Chris Martenson: Yes.

Mat Stein: Many people have. The guy pulls his little thing out of this pocket, the flashy thing. He says Everybody take a look over here. He gives a quick flash and your memory is gone. You pull your steriPEN out of your pocket. You give it a click. You turn it upside down. You put it in your water bottle. When the blue light flashes in about 15 seconds or so, you kind of stir the bottle of water while the blue light is flashing. Poof, all the bugs are dead. The good news is you get about 4,000 clicks per battery set in the steriPEN. The bad news is, if it is scummy or dirty water, all bets are off. It has got to be clear water. SteriPEN is like the fastest and simplest, quickest way to purify water when it is clear and relatively clean. You want to kill the bugs. If it is dirty or scummy water, you really got to filter it or treat it with chemicals.

Chris Martenson: Let's imagine that we have got here in our go-kit, this one-and-one-half-inch cloth tape. By the way, people are looking for this. It is wonderful stuff. I have a roll of it with me at all times in my climbing gear. You can find it most easily. It is known also as athletic tape. The cloth is the critical part. By the way, nylon does not count in this story. They have other sort of plastic backings, sometimes, on this. We are talking good, old-fashioned cloth. Think cotton with adhesive on it. That is the stuff.

Mat Stein: That is the best, yes.

Chris Martenson: That is great. It just does not come off unless you want it to. Then you still have to pull. Then you mentioned a colloidal silver generator. That is excellent. A headlamp and H2O filters, plural. That all sounds excellent. In my own world, I think because I live in a rural area that there is a 99.9% chance I am not ever going to bug out. I am going to shelter in place through almost anything I can imagine, short of the nuclear plant just north of me letting go.

Mat Stein: Maybe.

Chris Martenson: Maybe.

Mat Stein: In a real bad situation, the cities become deathtraps. Like, for instance, in medieval times, when the plague went through Europe. If you stayed in the city, you were pretty much guaranteed to die. Similarly, in the United States, in the event of a long-term grid failure, the nuclear power plants will start running out of fuel. They are mandated to have a week's worth of back-up fuel on hand. Some plant operators have told me they personally carry a month. Typically it is not a problem. When is the grid down for longer than a week or a month? If you have got a widespread grid failure from an electromagnetic pulse or solar storm, even some terrorist event – It could be just 200 guys with machine guns going around wiping out transformers.

It is as simple as that. It does not take a real high-tech thing. It just takes coordination. Then all of a sudden you have got a long period of time where these transformers are 300 tons each. They are tens of millions of dollars each. They are custom-designed for each installation. There is a three-year waiting list right now to get a single one. If one or two or three go down, the grid can compensate and they can work around that. They have one or two spares around. If 20 or 30 go down, or 300 to 400 in America, like a solar storm – a 1921 Carrington event would do this – maybe even a couple thousand worldwide – that is ten years’ supply, if the world was working great and going at maximum capacity. It would take ten years to make all those transformers.

You are talking a situation where getting out of the city is your only hope. It is not something where you have to be out today or tomorrow. It is something where you have to get out. The cities, without a grid to support them, the cities are the last place in the world you want to be.

Chris Martenson: So 70%…

Mat Stein: Hopefully we will not see that situation. There is a significant likelihood of it. There is a scientific study that says we have a 12 % chance – that is a one-in-eight chance – that within the next decade we will have a Carrington-event-sized solar storm. That is a game-over kind of situation, unless we get off of our you-know-whats and spend a billion dollars to put the protective gear into the grid.

So far, nobody has ponied up and said Yes, I am going to do it. The government is saying they are going to force the utilities to do it. The utilities are paying their lobbyists and fixing the numbers on reports and saying No, it is really not a big issue. Do not worry about it. Everything is okay. We have got it under control. They do not want to spend a billion bucks. Basically, if no one spends that billion dollars, then it is guaranteed that a solar event is going to happen; it is just a matter of the roll of the dice. If we spend the money ahead of time, it will be bad. It will be manageable. If we do not spend the money, it will be game-over for society.

Chris Martenson: All right. And 70% of the people listening to this, by odds, are in cities. If you lived in a city right now – I take it you do not – if you did, what would be right at the top of your personal list? Let's just imagine for the next two years, for a variety of reasons, you have to live in a city. What would your approach be there?

Mat Stein: The approach in the city is to have a good go-bag. You must have some Backcountry gear so that if you had to put things on your back, you could do it. I am not a real gun nut. Given that America is so heavily armed, it would be a good idea to get some training and pick up some minimal self-protective kinds of supplies. I hope it never comes to that. It is not like I am a Rambo kind of guy and I want to go out and blow someone away or protect someone. That is not my gig.

I would also have a back-up plan. If you have people you can network with in the country, a place to go, a plan of If I had to leave the city… 37% of all Americans live within 50 miles of a nuclear power plant. Think of that: 50 miles from Fukushima. More than one in three Americans. They build these nuclear power plants near major metro areas. It costs a lot of money to pay for transmission losses to move the power a long distance. They build the plants relatively near to the places where they are going to use the power. Far enough away that they do not make people nervous, but close enough so that they do not lose a lot in transmission.

You need to know where your nuclear power plants are. You need to have a game plan for how, if things were down for a long time, how you could manage to get out. Now, obviously, if you are able to figure things out and use gasoline and drive a car to get out of town in the initial period before everyone else has figured it out, that is best. You need a back-up plan in the event that this does not happen, or somebody takes your car away from you, whatever.

There is no way to protect yourself from absolutely everything. Think resilience. Think about short term. Sheltering in place is great if it is a short-term emergency, it is not an earthquake, and everything has not fallen apart. Sheltering in place is fine. If it is a longer-term emergency, where everything has really fallen apart and you are in the city, then you have to know that there is no way that city of millions of people is going to feed itself and take care of itself. You are going to have to leave. You have to have a back-up plan.

Chris Martenson: In that back-up plan, I know that one of the key things that happens, even say during a hurricane or what happened on 9/11, is that communications become extraordinarily difficult. Under that circumstance, I know that even FEMA says you should have a family emergency plan. This means your family should know what to do. Quite often during the day we are separated from each other. If something happened and developed rather suddenly and communications are impossible, all the cell towers are jammed or otherwise unavailable to us in that moment – Talk to us. What is a family emergency plan, and how would somebody go about developing one?

Mat Stein: Well, talk about some key points. It is just like the grab-and-go kit. If you want details and more than I can say on the air, then the emergency plan and the grab-and-go kit, purifying water and protecting yourself from the next superbug, detailed articles on all that information is totally free on my website, at WhenTechFails.com.

When you think about a plan, think about some basic things for your plan. Figure out a local meeting place. If you are separated and the communications are down and you cannot get to your home, then everyone meets at, say, the local high school yard. Maybe it is a Red Cross shelter. It is something. It is some place where, if for some reason –

I live in wildfire and earthquake country. Easily things could get cut off. The question is, where would you meet? Also think of an out-of-town contact. I know during the Loma Prieta quake, I had a friend up here who was saying his wife was visiting down in the Santa Cruz Mountains. He was pretty frantic after the quake. The information was so minimal. He could not reach his wife by cell phone or land line. He had no idea if she was in an area that was affected or if she was hurt or killed. There were people hurt and killed in Santa Cruz and in the Bay area. It turned out she was able to get a phone call out after a while.

Often think about an out-of-town contact, like Mary Sue in Saint Louis or whatever, where if you are separated and you do have a chance to get some communications, you can call and leave a message with Mary Sue. Then everyone can check in there. If everyone in your family knows how to turn off the gas (if you have natural gas), and the electricity and water to your house, that is important, more the electricity and gas than the water. In, say, an earthquake situation or wildfire situation, being able to turn off the gas to your house could make the difference between it turning into a bomb and a torch versus coming out okay. Especially in earthquakes, because gas water heaters and things tend to fall over. They break lines. Then gas lines hit a pilot light or something. They light on fire. Everything goes up in flames. Those things are important. Those are some basic thoughts for a family emergency plan. There are certainly more details available on my website in that article.

Chris Martenson: That is excellent advice. That website again is WhenTechFails.com.

Mat Stein: Also, see both my books, When Disaster Strikes, which is more of a regular-sized book that is a comprehensive survival and prepping guide/handbook in one, and When Technology Fails, which is a big and massive phone-book-sized book that covers prepping and survival. It also covers sustainable living. It covers primitive technologies, like if everything fell apart, could we replicate some 18th century technologies rather than falling back to caveman days. If you are really worried about long-term collapse, then you want to have the big book, When Technology Fails. If you want a perfect book for your go-bag that gives you survival stuff and prepping information, then the newer book, When Disaster Strikes, is perfect for that.

Chris Martenson: Excellent. I think of the three big buckets of preparedness. There is stuff you have. There is stuff you know. There are the skills and things you can do. This is also including your mindset.

Mat Stein: Correct.

Chris Martenson: Across those three, which do you feel is most important, if you could choose? Where would you suggest most people, on average, need to start on this?

Mat Stein: The most important is the skill set, including the mindset. You take that with you wherever you go. I would say in that direction, I am very well prepared. I would still like to know more practical experience, foraging and things like that, being able to forage for food and identify plants. That is so important if things really fall apart and you have to pick up and move. With climate change and world changes, there is a distinct possibility – not a pleasant thing to ponder, but it is a significant possibility – that this is most important.

Then your stuff. A lot of people have plenty of money. By all means, gather stuff. Gather supplies. Store food. Have some beans, Band-Aids, and bullets; the three B's. Beans means your food and supplies. Band-Aids means medical skills and medical knowledge, medical supplies. Bullets means the ability to protect yourself. Again, that is not really my bag. It is a necessary evil.

Get the stuff. Even if you are not really great at using some of these things, you can trade. You can barter and you can share. You can team up with people. The lone wolf in a collapse situation will probably not do very well, unless he is super-MacGyver. Someone who is meaner, tougher and better organized will come along and take all his cool stuff away from him. It is really in groups that people will do better. Think medieval times, castles, villages, and groups. There was safety in numbers. People have skills and talents. It really takes a village to pull through. It is not something that can be done very well with just the lone wolf, at least in the long run. In the short run, the lone wolf may well be fine; in the long run, probably not so much.

Think about your strengths. Naturally, if you can develop all three areas, great. If not, if you are stronger in one – If you do not have money, focus on your skill set. If you are likeable and get along well, if you have great skills and talents, then you will probably manage pretty well. Maybe you are older and you are not very strong you cannot do much. If you have good financial reserves, then you can stock up on things. You will be able to team up with a whole bunch of people. They will be thankful and grateful for you, if and when that day comes when that stuff is needed. The mindset is so important.

My father-in-law was a Dutch Resistance fighter. He had a third-grade education. He was born in World War I. He was one of 14 children. He never knew his parents. They died in the latter parts of the war. He was raised by an older sister. After the third grade he was told Joseph, you eat too much. You have to go out and get a job. We are poor and we do not have enough money to feed ourselves, much less you. Imagine, after the third grade, being forced to go out and work full-time at whatever kind of labor, doing whatever you could to survive. That is kind of unfathomable for most of us here in America.

He was a survivor. He got captured by the Nazis and sentenced to death. He was tortured. He was put in front of a firing squad. He was shot with blanks three times trying to break his spirit. On the day of his execution, underground soldiers came to his jail cell. They walked in dressed as Nazis. They were border-town people who spoke perfect German. They said Joseph. We are going to take him and execute him. They looked up and said Oh yes, he is to be executed today. Take him away. It was his real day of execution. He had been sentenced to death in a public trial. They got to the yard and he thought this was it and he was really going to get shot. They helped him over the fence. He jumped down and broke both ankles. He got pulled into a car and went away.

The point of the matter is, here is a guy with a third-grade education. He has a joyful attitude. He was not sour. He was not dour. He was always making jokes. He was always laughing. He has a positive attitude. He survived the Indonesian Revolution when nine out of ten of his partners and compatriots died. He survived World War II and the Resistance. He was tortured and sentenced to death. He had an incredible attitude. He had a joyful and positive surviving attitude.

He also was not blinded by positiveness. He had a radar out. I do teach some exercises in my book for developing your inner compass to help guide you. I do believe that there is an inner source of wisdom and knowledge that can guide us to make split second life-and-death decisions and do the right thing. It is built into each and every one of us. It is like this most amazing survival mechanism that Mother Nature built into every one of us. Learning to develop that and use that, I think, is going to be important in the uncertain times to come.

Chris Martenson: So this inner compass is something we are all born with?

Mat Stein: Yes. I believe that it is in our DNA. Those beings that did not have it, they got eaten by the saber tooth tigers or they got popped in the pot by the cannibals and died in the battlefields, or whatever. I think Mother Nature built it into each and every one of us. Some call it your gut feeling, your intuition, your spirit guide. It is something which just knows what to do.

There is a wonderful book called The Gift of Fear by Gavin de Becker. He talks about how that feeling, that inner compass, just guides people. So many countless survivors will say Oh, God, we got into this trouble because I ignored it. Then it kicked in and it saved me by getting me to go and do the right actions at the right moments in time, to do the right thing. I teach this pit-of-the-stomach exercise in both my books, to help people get in touch with that.

Let's face it; in a crisis situation, you usually do not have very good information. You do not have CNN. You do not have telephones and cell phones. You do not have somebody telling you what to do. It is like your rational mind is only as good as the information it has to draw upon. That is always imperfect at best.

When you are in a situation where you do not really know what to do, you know you cannot trust your mind when it is changing its mind, whatever it is, every few seconds. I think I should do this. Then a few seconds later, I think I should do that. Maybe we should go this way. Maybe we should go that way. Wait a minute. Slow down. It is like you cannot trust this great rational mind that is changing its mind every few seconds. It is flip-flopping all over the place. At that moment in time, you know you are going to have to get in touch with something else to make a decision. You just simply do not have the information to make good decisions.

Chris Martenson: This is a core tenet of mine. I wrote a piece – it must be in 2006 now – I called it Trust Yourself. I basically wanted to give people permission to tune out what they are hearing, even from our so-called "information sources." Just trust yourself, in terms of knowing what is right and what is coming next. I think a lot of people who are listening to this right now already have a pit in their stomach. We all collectively know that something in our model is broken. Some of us have intellectual understanding of that framework. Others of us have gotten to it intuitively. Either way, I am agnostic. However you have come by the information that things have changed and it is time to take action to protect you, your loved ones, whatever is required to move you past whatever inaction might be holding you in place, that is what I care about most in this story right now.

The thing that has been fascinating to me is – I have discovered in my own life and I have been able to use this with other people as well – is that when I have anxiety, when I have fear around something, and I look into the future and I just do not like what I see, I find that the amount of anxiety I have is a measure of the gap between what I know and what I am doing about it. Anything I can do to close that gap up – You have a lot of very specific things that people can do. I have not read When Disaster Strikes. I know that When Technology Fails is absolutely chock-full of very specific things people can do.

You know, we all at heart want to be like your father-in-law, that hopeful person. That hopefulness combined with a certain amount of rationality will see us through. I have a certain level of hopefulness through all of this. I know that if we get the story right collectively and individually, that we can have a much better future than the one we seem to be heading towards. In your mind, you still obviously are a very hopeful and a very cheerful person. Do you think that a sustainable world, a durable earth – is this a pie-in-the-sky fantasy? Do we have to go through some really hard times? Can we get to a more hopeful place if we choose wisely?

Mat Stein: I think – Yes.

Chris Martenson: Yes, good answer.

Mat Stein: Yes to all. I call myself the "optimistic doomer." I do believe that a sustainable future is doable. I also know that the cards are stacked against us right now. The 1% that got where they are, whether it is a corporation or an individual, they got to the top of the pyramid. They got there through the old way and the old system. It is also soiling the nest and ruining the planet. They have a huge amount at stake at keeping the system going. Keeping the system going is like a 100% guarantee for catastrophic failure. Most people, when I ask the same question, I speak to lots of groups of people at different events. I have asked this question to thousands of people year after year. First I will ask, how many of you think that everything is okay, that we can keep going with what we are doing and it is going to be okay? Up until recently, I did not have a single hand out of those thousands of people raise their hands. One guy raised his hand. I think he was being facetious.

Then I ask, how many people think that no matter what we do, we have passed the tipping point? It used to be that one out of three people would say Yes, I think we are past it. The giant train wreck is going to happen no matter what we do. Then it used to be that two out of three people would be in the optimistic doomer category that I count myself in. They feel that we are going to have to get shaken around and knocked around pretty badly. Then we will restructure the world and make major changes, like just driving a hybrid car is not going to be enough. It has got to be major changes in the way the world works to pull through. I think it is doable. It is going to take major change. Right now, we are not shaken up badly enough to make that major change.

Nowadays, it turns out that I am seeing two out of three people feeling we passed the tipping point. The train wreck is going to happen no matter what. Only one out of three is in the optimistic doomer category. Essentially nobody, except that one guy so far, felt that everything was okay. I think as a race intuitively, that we are getting on a massive scale that it is unsustainable. It is headed for the wall. Whether it is pandemic, or an EMP and nuclear meltdown, or whether it is the cascading fall through various natural disasters and ecological disasters that takes us down, we are heading for that wall one way or the other.

Chris Martenson: So I hold the same view, which is that there is an inertia to the system. The system wants to perpetuate itself. The incentives for maintaining status quo are extraordinarily strong. Given that point of view, I am optimistic. I am hopeful. I am also planning as if there is a major shake-up coming. The path we are on, whether we just look at it economically from an energy standpoint and the environment, they are all unsustainable trends at this point. The definition of unsustainable is that it is going to change or stop someday. I know that the major systems are due for a shake-up. I do not know when. I do not ever try to predict when. You and I had a pre-conversation. You do not either, because we are steeped in this enough to know that these things are inherently unpredictable in terms of their timing. The direction is easy to catalogue. If you know you are on an active set of plates that have not given up an earthquake in a long time, that does not mean that they have given up on earthquakes. It just means that you are going to have a bigger one when it finally comes.

My question is, it seems like a lot of what we have been talking about is that there are certain inevitable changes that are coming. There are certainly things that we can do on an individual level to mitigate some of those risks, be those financial risks or physical, maybe some of these are emotional risks. These changes are really going to hit some people hard, so being emotionally resilient is important. There might even be spiritual dimensions for people. Out of all of these, you look into the future and you consider yourself an optimistic doomer. The question is really, out of all of that, what is it that gets you out of bed in the morning? What are you really excited about in this story? What are the positive changes that you see that can come out of all of this?

Mat Stein: I believe that we are going to have a kinder world when we are done with this. It is going to treat Mother Nature, the earth, and people – individuals – with much more respect. It will not be this. The system where the goal is to get as much stuff, as much wealth, and as consume as much as possible, it is not sustainable. It cannot keep going. I see that when it is all done, we are going to have a much healthier and more balanced planet. The pain is, how do we get from here to there? Do most of us go away? The population of the planet, do we self-regulate and take the population down to a sustainable level in a relatively painless way? Does Mother Nature step in because we do the boom, bust, and collapse situation? Most of us starve or die in various pandemics – how do we end this story?

My optimism is in doing my best to do what I know and feel is the right path, for myself and for the planet. How can I serve? In writing When Technology Fails, that was my goal. People say What is an MIT engineer doing writing about book like When Technology Fails? It does not make sense.Back in 1997, I had at that point a 20-year practice of morning meditation and prayers. This started after a significant event from a 108-year-old yogi back in 1977. Anyway, I made a generic request for guidance and inspiration. I got a bomb dropped in my lap that morning. I received what must be described as a vision, basically a holographic, pictorial, moving-storyboard outline, outlining this massive book project to help people live more sustainably and to also help them cope with the failure of central services in our highly complex society for significant periods of time.

My first thought was No way. I do not know all this stuff. I am an engineer. I am a writer. I do not know it all. I cannot do this. The little voice – Jesus calls it the still, small voice – in my head said Nobody knows it all. It assured me I had the skills and talents that, should I take this project on, that I would actually be able to complete it. I did not just jump right up and say God talked to me today. I am going to save the world and write this really cool book. It took me about a year to decide that it was a good idea and it was doable. I ran it by some well-known people. They thought it was a great idea. It took another year to find a publisher and write sample chapters to get a contract and get the book sold. It took another year to rack up the credit cards and work 70 hours a week, to put my engineering business mostly on hold and make it happen.

It was more like I got dragged into this kicking and screaming. I accepted my cosmic homework assignment. Sometimes it has not been much fun. I racked up huge debt. My first publisher was bankrupt and never paid me. For what I spent on writing my book, I could have bought five acres and built myself a great earthship home. Instead I got this really cool book that has helped a lot of people around the world. I am in a similar financial situation as many others. I am doing the best I can for the long-term preparations, within the financial means I have at my disposal.

Chris Martenson: Great story about how that all came about. At the beginning of this, the part I was drawn to as well is this idea that the preparing itself is not the end. It is something that – We see some difficult time coming. For myself, that is a period I am going to get through.

The important questions I am asking myself are, Where do I want to be when I come out the other side? What core values do I want to have? What am I not willing to do? What am I willing to do in order to get there? All of history says that sometimes you live in very interesting times. Sometimes they are a little bit quieter. We are coming up on an extraordinarily interesting period of history. It is not sufficient to simply ask how am I going to enter that period? That is important. It is also just as important to ask ourselves how am I going to exit that period? What does this look like on the back end? Those are both, I think, critical dimensions of this.

Mat Stein: Yes. It is what gift can I bring to the world? How can I serve? Every morning I ask that question, whether it is in a few minutes of silent prayer or meditation or if I am rushed, I just ask that question during my long-distance run at the end of the day. I say How can I serve? Guide me. What should I be doing at this moment in time? You could say it is just your intuition or your subconscious. You can say that it is the Holy Spirit. It is your spirit guide. It is whatever. I do not care if you are Buddhist or Christian or Muslim or Jewish. It does not matter to me. I believe that the internal compass and inner guidance system is available to each and every human being, totally regardless of what spiritual or belief, what religion, they are a part of or what belief system they operate under.

Chris Martenson: Fantastic. We have been talking to Mat Stein, author of When Technology Fails and also When Disaster Strikes. Clearly we could talk forever. We have just barely scratched the surface. Big topics, so these are big books. There are lots in them. I would invite you to also check out WhenTechFails.com, where you can find more of Mat's writing and potentially some of his more current thoughts and ideas right there, as well as some tools, including the family planning guide, if I have that right?

Mat Stein: Yes.

Chris Martenson: The emergency planning guide. Thank you so much for your time today. I hope we can go deeper at some point in the future.

Mat Stein: You are welcome. I would love to be on any time. I would like to close with my motto. My motto is that I urge everyone to do your best to change the world and do your best to be ready for the changes in the world. Thank you so much for having me on your show today.

Chris Martenson: Great closing words. You are welcome and thank you.

The Best of Chris Martenson

The price of gold is being actively managed by central planners and their proxies. The main culprit here appears to be the US authorities, as the manipulation is most apparent in the US open gold market. For the most part, this ‘management’ has resulted in letting the price of gold rise, but not too much, or too quickly. 

The price of gold has always been an object of interest for governments and central bankers. The reason is simple enough to understand: Gold is an objective measure of the degree to which fiat money is being managed well or managed poorly.

As such, whenever paper money is being governed poorly, the price of gold becomes an important barometer. And this is why the actual price of gold is a strong candidate to be ‘managed.’ Or ‘influenced’. Or ‘manipulated’. Whichever word you prefer, they all convey the same intent.

Some who are reading this are likely having an eye-rolling moment because they hold a belief that there is no conspiracy to manage the price of gold.

This is an interesting belief to hold because it runs heavily against the odds. It’s similar to holding the belief that the house in Vegas does not have a statistical advantage.  

We could spend a lot of time discussing how a belief such as ‘gold is not being manipulated’ gets promoted and inserted into the popular consciousness, but we won’t. Instead, we’ll simply note that the people who hold this belief – and you may be among them – react to the concept at a visceral level, often with strong emotions such as anger or contempt, and even anxiety.

When a strong emotional response surfaces during a conversation of ideas, it usually means that beliefs are in play – neither facts nor logic. Experience has taught me that when someone becomes dismissive or angry or hostile when the idea of price manipulation is discussed, it’s best to simply drop the conversation and move on. No combination of logic or facts is effective against a deeply-held belief. It’s better to wait until some new evidence calls that belief into question, opening the door for revisiting the topic.

But for those with an open mind, there is a very interesting trail of dots to connect.

The Logic of Gold Price Management

Unlike beliefs, opinions can be discussed and even modified without first running through an emotional thicket. They rest on data and ideas that can be consciously accessed and are therefore easier to change. 

It is my opinion that the price of gold is being actively managed and/or overseen by official parties. On a strictly qualitative level, I hold this opinion because if I ever found myself in charge of a system of money rooted in confidences, as is our current fiat regime, I would consider the active management of the price of gold one of my fiduciary responsibilities.

Gold is an important signaling mechanism, and our entire money system is faith-based. Of course anything and everything that could cast doubt on that system would be controlled if it could be controlled.

To emphasize the point: If gold were suddenly to spike up to $5,000 an ounce, all sorts of troubling questions would emerge for people. Such as, is there something wrong with the dollar? Is the world falling apart? A rapid spike in the price of gold would certainly cause people to question the current state of the world of fiat money, and that is an unpardonable sin when your money is, at root, faith-based.

Instead of asking why do you think the price of gold is controlled? I ask, why do you think the price of gold is NOT controlled?

Managed Prices and Signals

Aside from my opinion that our faith-based fiat money system mandates the management of the price of gold as a matter of fiduciary responsibility for those in power, here are some other facts that we have in our possession:

• The quantity of money is managed
• The price of money is managed (via interest rates)
• Because interest rates are being managed (mangled?) to near zero, it means risk tolerances and preferences are being managed towards taking on higher risk
• The price of oil is openly managed, with strategic releases from time to time
• The price of food and energy are managed via subsidies, both direct and hidden
• Official statistics (e.g., GDP. inflation, employment) are heavily biased, massaged, and managed to tell a rosy story vs. a more realistic version, which means that perceptions are managed

Out of all these efforts, certainly the one with the most dramatic impact is the management of the price of money. That sets the stage for nearly every ill that follows, especially including the encouragement of taking on additional risk and the inevitable malinvestments that result.

Bernanke on the Fed's Interest in Stocks

In a Wall Street Journal op-ed, Bernanke openly revealed something that was already obvious to many: The Fed has been very carefully following the equity markets because of the importance of rising stock prices in fostering consumer spending. That is, the stock market is a signaling device, and the Fed is, naturally, quite interested that it signal the correct things.

More bluntly, the Fed is interested in seeing the stock market go up instead of down.

Here's Bernanke in an op-ed placed in the Washington Post back in 2010 discussing the effects of QE2:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.

For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

(Source) 

Yes, Virginia, the Fed does watch stock prices closely. And it targets their efforts to assure that the u2018virtuous circle' is in play. No real surprise there.

Given that big list of managed prices and signals, with literally nothing left untouched because of the price-of-money effect, we are again left to wonder how likely it is that anything has escaped the attention and efforts of our well-meaning (but certainly misguided) central planners.

To my view, gold is simply far too important to be left to its own devices. The evidence strongly suggests that it indeed has not been.

Evidence for Price Manipulation

Critics of the idea of price manipulation might scoff and ask, if gold is manipulated, as you say, then how do you account for the 590% price increase over the past 11 years?

The idea here is that if gold were manipulated or controlled, there’s no way it would have ‘been allowed” to increase by that much.

In the above chart, we can see that gold has been in a remarkably steady run for the past three years. It is almost as if a ruler has been drawn under the price of gold, which has rarely deviated by much from that trajectory.

Certainly some might argue that this is an extremely poor piece of data in support of the idea that the price of gold has been manipulated, unless we want to argue that it has been manipulated upwards to rise nice and steadily (like air being slowly pumped into a balloon).

A fair point, perhaps, yet it is one that not only completely falls apart, but bolsters the case for price suppression when we examine the price action of gold in the daily vs. the overnight markets.

Note in this next chart that if one simply bought gold and held it only during the open and close of the US daily fix, one would have lost 70% of one's money during the same period of time that gold rose in price by more than 500%.

As the chart above shows, the performance is dismal. For example, take a hypothetical gold investment fund starting with $100m in 2001, use it to buy gold only at the US AM fix and sell at the US PM fix until the present, and it would now be left with just $31 million, almost a 70% loss in just under ten years. Over the same time period, gold prices have risen over 590%.

Here we might ask a simple question: How is it possible that an asset that rose across all world markets by more than 500% fell during active trading in the most important market of them all (by volume) by 70%?

Trading is a zero-sum game, and for every winner there is a loser. Who was it that lost so much money in the daily markets fighting a tide that lifted the golden boat by more than 500%? How can there be such an uninterrupted series of losses for gold during this period?

There’s a trading maxim that goes like this: Once a trend is established, other traders will identify that trend and either ride it or step out of the way. That is, sooner or later the trend stops, because too many people have caught onto it and its profitability gets traded down to zero. Yet selling gold into the daily market has been a sure-fire winner for over an entire decade.

For gold to have fallen so much during the daily market, yet be up overall, simply means that gold must be up strongly in the overnight markets. Indeed, this is the case.

We can easily see the startling difference in the chart below. It compares the results of a simple ‘buy and hold’ investment in gold over the past ten years vs. a more active (and clever) strategy that both shorts gold during the daily hours and then buys gold long for the overnight session:

(Source) 

This strategy captures both the daily losses and nightly gains into a single, combined monster gain that has returned over 5,000% over the past decade with very few drawdowns, handily beating the price of gold itself by a factor of ten.

Again, how is it possible for a single strategy to be such a reliable winner without being competed away to zero? A very simple explanation is that an entity that does not care about potential losses simply and reliably sells gold into the daily markets.

After a while, the self-reinforcing aspect of this behavior might entice other market participants to join along and sell into the daily markets. However, even if that were the case, in order to be neutral (as all trading eventually has to be) these positions would eventually have to be bought back. And given the fact that gold has risen by more than 500% over this timeframe, there would be no safe time to do this outside of the daily session. 

So the question persists: Who has been selling into this market, and how large are their positions? Put more bluntly, how much gold is actually left in Fort Knox? Alternatively, just what exactly is contained within the $180 billion u201Cother assetsu201D line on the Fed balance sheet? Deeply underwater gold futures positions, perhaps?

Prior Known Efforts at Manipulation

One other daunting challenge to the idea that gold is not being manipulated is that such a thought requires us to presume that all the past known and proven efforts at gold manipulation are just that: in the past.

One thing I know is that when a tool has proven to be effective – whether it is secretive liquidity injections by the Fed, or MBS purchases – that tool tends to get used again and again, and in increasing amounts if called for. That is, what works is never dropped; it is merely set aside when not needed.

The best we could argue here is that gold truly has no legitimate signaling mechanism at present, and therefore controlling its price has been set aside. For now…

Or, if we believe that gold indeed has an important signaling function, it becomes all the more difficult to argue that its price is simply left to u2018the market' to set.

One example:

On June 3, 1975, Fed Chairman Arthur Burns, sent a “Memorandum For The President” to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon’s actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971.

In a nutshell Burns’ entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would “easily frustrate our efforts to control world liquidity” but also “dangerously prejudge the shape of the future monetary system.”

Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 “could result in the addition of up to $150 billion to the nominal value of countries’ reserves.”

One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: “liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control.”

Aside from the gratuitous observation that even 34 years ago it was painfully obvious how “massive” liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so. 

(Source) 

If the price of gold was not u2018controlled,' monetary policy outcomes would have been somewhat removed from the direct control of monetary bureaucrats. Gold was a threat to an institution dedicated to increasing its effectiveness and power. To give up the battle to control the price of gold, we have to presume something that has never happened in history: the willing abandonment of bureaucratic power to an outside force. 

There is also the London Gold Pool of 1969 and the strong dollar policy of the 1980s, which reveal that in the past, the price of gold has been officially monitored and controlled in order to help direct either a desired interest rate or dollar strength outcome.

From Wikipedia:

The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.

The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years when the system became no longer workable because the pegged price of gold was too low, runs on gold, the British pound, and the US dollar occurred, and France decided to withdraw from the pool. The pool collapsed in March 1968.

The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window collapsed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980.

(Source) 

The point here is that gold price suppression is a clear matter of history at this point and has been well studied. Somehow I think some people have forgotten that history and, quite oddly, consider it less likely that gold suppression is happening today than in the past. I say oddly because the number of overt market interventions has been increasingly enormously over the past few years, and one might think this would soften opposition to the idea that gold, too, is being actively targeted. 

Supply and Demand

So, if the price of gold is subject to manipulation – or influence or control, if you prefer those terms instead – in a way that reliably holds the price in check, then why should we buy it? In a few important ways, it’s because of the very fact that gold remains the subject of so much official concern and secrecy.

The laws of supply and demand tell us that anything with a cheaper-than-market price will experience stronger-than-usual demand. In the case of gold, we might suspect that purchases of gold have been bolstered by a weaker-than-otherwise price. 

Among those benefiting from buying cheaper-than-otherwise gold would be anyone and everyone who has bought gold lately. Private and official purchasers alike have been getting a very good price, indeed. Where you and I can be thankful for less expensive gold as we add to our holdings, so, too, can India and China be pleased at the national level.

If a future gold standard is in the works, then whoever has the gold at that point in time wins. To any given nation, official gold stocks held by the central banks represent just one stock of gold, with that held by private parties representing another. India has always had a robust domestic gold market and is among the strongest of the strong hands. Gold goes into India and just never seems to come back out.

China legalized and then modernized the gold market for its citizens, and gold sales there have been increasingly robust over time. Germany recently faced a ‘call from within’ to repatriate the gold that is currently held in its name in reserve by the New York Fed, perhaps channeling the concern that said gold would be safer within its own borders than in the US.

Given the confidence-shaking rehypothecation fraud perpetrated by MF Global, a bit of caution on the part of foreign concerns regarding the US’s trustworthiness is warranted.

All told, we are seeing a very interesting game play out around gold, and my suspicion is that it is the possibility of eventual re-monetization that motivates some of the moves. If this comes to pass, the gold price suppression will prove to be a most unfortunate mistake, providing short-term political and market cover for excessive money printing while sacrificing long-term advantage to those taking the other side of the suppression trade.

Conclusion

In Part II: How High and When to Sell?, we explore the most likely price targets for gold under the scenarios that we believe are most likely to play out over the coming years. Equally as important as understanding where the price will go is knowing when the time has arrived to exchange your appreciated gold for other assets. We investigate both, as well as which asset classes to start tracking now in expectation of rotating into them with your gold proceeds when appropriate.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

The Best of Chris Martenson

Robert Mish has been a precious metals dealer for nearly 50 years and knows what gold bubble mania looks like. We are nowhere near that stage, in his opinion.

Instead, he sees a US populace largely unappreciative of holding precious metal as a store of wealth, and engaged in a slow process of dis-hording their gold and silver to eager foreign buyers, who are more than happy to take the bullion back to their shores.

In terms of where we are on the gold mania spectrum, he sees us at a "2" out of 10.

But he foresees a very rude awakening ahead, as the populace eventually wakes up to the increasing damage that our over-debted global economy is doing to the purchasing power of world currencies. Because when the general investor finally realizes the protection the precious metals offer against currency debasement, much of the retail supply will already be out of the system, in very tight hands and largely overseas.

Moreover, when supply gets tight, there will be more challenges to obtaining physical bullion during a buying mania than there were during the last mania in 1980. There are many fewer local sources to exchange bullion these days, as much of that business is now transacted by online vendors dependent mail delivery to ship product, and they are more vulnerable to supply chain disruptions.

Be sure you’re aware of how the form in which you hold your bullion will affect the price you get during a buying frenzy, when refining capacity is overwhelmed. You may find that your gold or silver sells at a hefty discount because it’s not in a preferred format for trade.

On What a True Gold Mania Looks Like

The phone calls were ringing so much we could not answer them. We had to just put all our lines on hold so we could service the customers, and we wanted to service our own customers first.

We would come in to open at nine in the morning and there would already be a line out the door and down the block. Sometimes the line was mostly buyers; sometimes there were sellers. We would run out of metal. We would run out of anything. And we would have to divide the line into two lines. We would take the sellers in first, get some product, and sort it before the buyers were let in.

And people were not very discriminating then; they were panicking. By the time it peaked in January 1980, there were people out there who did not even understand free market economics or precious metal economics; they were just buying because it was fashionable or because it was going up forever. Those are more the makings of a bubble; today most people are coming in to sell.

On Today’s Typical Seller

The typical seller today is really the opposite of who they were 30, 40, 50 years ago. People used to save, either through a bank account, or keeping some coins around, putting away silver dollars when they came back from Reno or Lake Tahoe. They would be buying some interesting furniture or jewelry and then they had income in excess of their expenses. Today, so many households are stressed having expenses greater than their income or servicing a lot of debt that they are starting to sell the things, the heirlooms, that they so prized before. So we are seeing people sell their Rolex they do not want anymore or cannot afford to keep, their old jewelry, their parent’s jewelry, and belongings that they inherited. The coins they collected when they were a kid. it is sad, in a way, because what we are seeing is the dis-hoarding of a culture.

On Today’s Typical Buyer

Well, in the United States, the typical buyer is perhaps someone who has taken the Crash Course and has studied what is happening to our nation and understands that they have to protect themselves from the coming inflation and social ramifications of that inflation and the debt burdened economy. Big money is buying, but for every one buyer, there has got to be five sellers here, and I am sure that is similar among my colleagues around the country, maybe even more so. Because over here we are in a wealthier area, and I still have more sellers than buyers.

A lot of it is going overseas. A lot of the coins that came to America over the decades, over the generations, either through the fact that we had the money to buy them or through immigration or through the spoils of war, it is all going back now to the home countries. Especially if it is a home country, where their economies are rising and the people are saving rather than spending.

Just last night we had two visitors from China, colleagues of mine in Shanghai, they flew here just to see me, and they flew back the next morning. They cannot get enough coins in China; they are buying everything back that came here when the people in China could not buy their own coins. Next weekend I have more visitors coming. Coin shows, which have been all over America, are now appearing all over the world. There are now major coin shows in gathering marts in Singapore, Tokyo, Beijing, Hong Kong. It used to be once a year; now it is three, four times a year. Big auctions that used to be held in the United States are now organizing in Hong Kong and other countries.

So we are seeing a movement back in the opposite direction, and it is sad [for the US market]

On the Importance of Physical Form

Chris Martenson: So you mentioned refinery problems. What is a refinery problem?

Robert Mish: A refinery problem is where a dealer buys the scrap gold and the scrap silver and his refiner cannot get it processed for several weeks or months. And that squeezes his cash flow so he has to pay less and less to the public.

Chris Martenson: So if I walk in with a bag of junk silver, it is 90% silver, it has always been trading well. But if we are in a real heyday, your refiner says, "I am backed up 11 weeks. I can take that in 11 weeks." Meanwhile, prices are gyrating. You are going to look at me and say what?

Robert Mish: I am going to say, "Mr. Martenson, I wish you had come in here with pure tradable silver or something that is exchange-ready."

The marketplace determines the choice for medium of exchange. If you have silver in any other form, if it is in odd form such as coins, broken spoons, and knives, or whatever, and I have to have it refined in order to get it back in a marketable form, it is going to suffer a discount. And that discount is going to be greater the longer it takes to turn that around.

Chris Martenson: So anything that has to cycle through a refinery has that refinery risk. What was the discount that got applied at its most maximum in the 1980s?

Robert Mish: In the 1980s, when we were about eight weeks backlogged and not everyone even had a refiner relationship and [thus] had to rely on other dealers who did, it got to about a 30% discount for having the wrong form of silver versus the right form.

Click the play button below to listen to Chris’ interview with Robert Mish (runtime 28m:19s):

The Best of Chris Martenson

History is replete with the carcasses of failed currencies destroyed through misguided intentional debasement by governments looking for an easy escape from piling up too much debt. James Rickards, author of the recent bestseller Currency Wars: The Making of the Next Global Crisis, sees history repeating itself today – and warns we are in the escalating stage of a global currency war of the grandest scale.

Whether it ends in hyperinflation, in the return to some form of gold standard, or in chaos – history is telling us we can have confidence it will end painfully.

On the Cause of Currency Wars

A currency war in the simplest form is basically when there is too much debt and not enough growth. The overhang of debt impedes growth because it clogs up bank balance sheets and clogs up the savings to investment mechanism and has a lot of negative effects. So there is not enough growth to go around. So countries, in effect, try to steal growth from their trading partners by cheapening the currencies. And indeed, the Fed and the Treasury are trying to do that right now. They are trying to cheapen the dollar, probably for the reason I mentioned. The problem is it does not stop at that. It invites retaliation… A couple things happen. Number one – we cheapen our currency but other countries try to cheapen their currency also, so you get into these tit-for-tat devaluations where nobody wins. All you do is unleash inflation, restrict world trade without anyone getting an advantage. I like to say that in the currency wars, all advantage is temporary. You give it up pretty quickly.

The other thing is that for countries that cannot necessarily devalue, they can use capital controls, they can use import excise taxes. Currency wars can turn into trade wars. Ultimately, they can even turn into shooting wars. So you get all these bad effects.

So if the US could cheapen the dollar in isolation, if nothing else happened, maybe there would be some quick advantage. But that is not what happens. But it is a temptation that politicians and policymakers can not resist, but it ends very badly.

On Current US Monetary Policy

There is no question. It is quite clear that the Treasury and the Fed are trying to inflate their way out of the problem and debase the dollar.

The problem I see is they might not get there, and here is why. The Fed thinks they are playing with a thermostat. You know, you can, if the room is too cold you dial it up. If the room is too hot, you dial it down by adjusting the money supply and working a little bit with expectations on the behavioral side that can gradually tweak economic behavior and lending and spending velocity and money supply that achieve a desired result. The problem is they are actually playing with a nuclear reactor. They are playing with a complex system that is in or near the critical state. Now, you can dial a nuclear reactor up and down but if you don’t get it right, the consequences are worse than having to put on a sweater. The consequences are catastrophic. You can melt down a reactor and ultimately, the entire financial world.

So the danger I see is the Fed thinks they are playing with a thermostat. They are playing with a nuclear reactor and they risk collapsing the entire system.

On the Importance of Understanding What’s Happening

So that is what the Fed is trying to do. They are trying to get that lending/spending machine going again, get the velocity of money up and kind of inflate their way out of this problem.

A couple problems with that. Number one, two percent inflation is not so benign. Two percent inflation cuts the value of the dollar by seventy five percent in the course of a typical lifetime. So it cuts it in half in thirty-five years and then in the following thirty-five years, cuts it in half again. So now, you are down seventy five percent from where you started. So from the time you are born to the time you die, your dollar is going to lose seventy-five percent of its value. That is at two percent inflation. At four percent inflation, it will cut the value of a dollar in half by the time your children go to college. So these are cancerous rates of inflation. Two percent sounds warm and fuzzy. It is not.

The other thing economists say is, you know, who worries about inflation because your wages are going up and it all comes out in the wash. Well, I mean, this is the kind of thing that only an economist could say. But the fact is some of it does come out in the wash on average. But we do not live on average. We live our individual experiences.

And the fact is in inflation, there are winners and there are losers. The winners are people who can see it coming, who understand what you and I and hopefully the listeners are talking about and hedge their position by getting gold or silver or land or fine art or investing in railroads as Warren Buffett is doing, some kind of hard asset play. The losers, those are savers, people with insurance policies, annuities, pensions, retirement plans – anything denominated in dollars that are not going to go up when the inflation kicks in.

This interview is so insight-packed I had trouble winnowing down the quotes to highlight. It is a ‘must-listen’ for those concerned about preserving the purchasing power of their wealth.

Click the play button below to listen to Chris’ interview with James Rickards (runtime 29m:25s):

iTunes: Play/Download/Subscribe to the Podcast Download/Play the Podcast (mp3) Report a Problem Playing the Podcast

Or click here to read the full transcript.

James Rickards is the author of Currency Wars: The Making of the Next Global Crisis, published by Penguin/Portfolio, November 2011. He is Senior Managing Director at Tangent Capital Partners LLC, a merchant bank based in New York City, and is Senior Managing Director for Market Intelligence at Omnis, Inc., a technical, professional and scientific consulting firm located in McLean, VA. Mr. Rickards is a seasoned counselor, investment banker and risk manager with over thirty years experience in capital markets including all aspects of portfolio management, risk management, product structure, financing, regulation and operations. Mr. Rickards’ market experience is focused in alternative investing and derivatives in global markets. He has also served as General Counsel at several alternative asset management companies and a stock exchange facility and is expert in fund governance and international fund structures.

The Best of Chris Martenson

The idea that the very same economic forces that are currently plaguing Greece, et al., are somehow not relevant to the United States’ circumstances does not hold water.  As goes the rest of the world, so goes the US. 

When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning.

This report lays out the case that the US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people. 

Of course, the age of cheap oil is over. And as Jim Puplava says, the oil price is the new Fed funds rate, meaning that it is now the price of oil that sets the pace of economic movement, not interest rates established by the Fed.  

However, of all the challenges that catch my eye right now, the one most worrisome is the shredding of our national narrative to the point that it no longer makes any sense whatsoever. I’m a big believer that our actions are guided by the stories we tell ourselves. To progress as a society, having a grand vision that aligns and inspires is essential.

But when words emphasize one set of priorities and actions support another, any narrative falls apart. At a personal level, if someone touts their punctuality but chronically shows up hours late, the narrative that says “this person is reliable” begins to fall apart.

Likewise, if a company boasts about being green but its track record belies them as a major polluter, the “green” narrative fizzles.

And at the national level, if we say we are a nation of laws, but the Justice Department selectively prosecutes only the weak and relatively powerless while leaving the well-connected and moneyed entirely alone, then the narrative that says “we are a nation of blind justice and equal laws” falls apart.

I wish this was just some idle rumination, but I see more and more examples validating the importance of alignment of narrative and behavior. Because when there is a disconnect between words and actions, anxiety and fear take root.

Unfortunately, there is quite a lot to fear and be anxious about in the most recent State of the Union address and GOP response.

State of the Union

The recent State of the Union speech by Obama, and its Republican response, are both remarkable for what they say as well as what they don’t say. The summary is this: The status quo will be preserved at all costs.

Here are a few examples of the sorts of disconnects between rhetoric and reality that are absolutely toxic to the morale of all who are paying the slightest bit of attention.

Obama

Let’s never forget: Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same. It’s time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.

We’ve all paid the price for lenders who sold mortgages to people who couldn’t afford them, and buyers who knew they couldn’t afford them. That’s why we need smart regulations to prevent irresponsible behavior.

It’s time to apply the same rules from top to bottom? Is Obama aware of what Erik Holder is up to over there in the Justice Department? The robo-signing scandal alone has thousands and thousands of open and shut cases of felony forgery that can and should be applied to as many individuals as were directly involved, from top to bottom in every organization that was engaged in the practice.

Here’s the reality. Under Obama, criminal prosecution of financial fraud fell to multi-decade lows during what is and remains one of the most target-rich environments in living memory.

(Source)

Obama

And I will not go back to the days when Wall Street was allowed to play by its own set of rules.

So if you are a big bank or financial institution, you’re no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a “living will” that details exactly how you’ll pay the bills if you fail – because the rest of us are not bailing you out ever again.

Has Obama checked with the Federal Reserve to assure they are on board with the new ‘no bail out’ policy? Because last I checked, they were the ones mainly involved in bailing out the big banks and providing swap lines and free credit to anyone and everyone that needed help, US or foreign. 

To be fair, Obama can make no statement or claim about what the Federal Reserve can or can’t or will or won’t do. It is not under executive nor even legislative control. If, or I should say when, the Federal Reserve bails out the next bank or country or whomever, it’s “the rest of us” who will be paying the bill – in the form of eventual inflation. 

Obama

[W]orking with our military leaders, I’ve proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion dollars in our budget.

Let’s review the proposals for military spending then. The language above is nearly impossible to decode. What is really being said is that proposed defense increases have been scaled back, and that this is what is being called savings.

In 2000, Defense spending was $312 billion dollars. In 2012, the proposed budget calls for $703 billion, a 125% increase in 12 years.  

What the plan he mentions really calls for is spending increases in 5 out of the next 6 years. The lone holdout is 2013, when the plan calls for cutting spending by a whopping $6 billion less than the amount already approved for 2012. 

Somehow that all translates into rhetoric that implies cuts of “nearly half a trillion dollars.”

As Lily Tomlin used to say, “As cynical as I am, I find it hard to keep up.”

GOP Response

u201CThe routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place.  The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today.”

This platitude-laden set of ideas is blissfully blind to the role of energy in the story, the amount of debt in the system, and the fact that both parties have contributed equally over the years to the predicament at hand.

How exactly is it that the private economy is supposed to flourish here, with the Federal government borrowing more than a trillion dollars a year and oil at $100 per barrel? The simple truth is that the US government needs to begin borrowing at a rate lower than the previous year’s economic growth. If GDP grows at 2%, then the total debt pile must not grow by anything more than 2%. That is the only way that the official debts can shrink relative to the economy. 

GOP Response

u201CWe will advance our positive suggestions with confidence, because we know that Americans are still a people born to liberty. There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right.”

Last I checked, the original vote tally in the Senate on the National Defense Authorization Act, which empowered the armed forces to engage in civilian law enforcement activities and selectively suspended the habeas corpus and due process rights (as guaranteed by the 5th and 6th amendments to the Constitution), passed by a voice vote of 93 to 7 in the Senate.

It’s kind of hard to swallow the idea that the GOP stands with Americans as “a people born to liberty” when their members are in perfect lock-step with the Democrats, chipping away at the most basic and cherished freedoms. There’s no difference between the parties when both seem intent on limiting individual freedom and increasing the power of the government to reach into and examine our daily lives. 

When Words Hurt

The above examples are not meant to pick on any one person or party or set of ideas, but to illuminate the profound gap that exists between what we are telling ourselves at the national level and the actions we are undertaking. 

Again, it is the gap between what we tell ourselves and what we do that creates a sense of unease, anxiety, and oftentimes fear. When we hear words “X” but see actions “Y” over and over again, it is hard not to come to the conclusion that the words are meaningless; empty rhetoric designed with polls and focus groups in mind, but little else. 

It is the blind obedience to the status quo that worries me the most, as it raises the likelihood that nothing of any substance will be done until forced by circumstances, at which point, like Greece, we will discover that the remaining menu of options ranges from bad to worse.

Left Unsaid – Our Missing Narrative

In neither Obama’s address nor the GOP response do we hear anything about Peak Oil, a stock market that has gone nowhere in ten years, or the fact that with two wars winding down there ought to be massive savings from defense cuts that we can capture. There’s lip service to the idea of using more natural gas to begin weaning us off our imported oil dependence, but no commensurate trillion-dollar program offered to rapidly build out the infrastructure necessary to utilize that gas in a meaningful way.

A more honest set of messages would note that mistakes were made, opportunities squandered, and priorities misplaced. It would note that the US is on an unsustainable course with respect to spending, debts, and liabilities. There would be an explicit admission that having your central bank print trillions in “thin air” money in order to enable runaway deficit spending is a dangerous and foolish thing to entertain.

Most obviously missing is a national narrative that is coherent and comports with the facts. Both parties basically imply that if we elect a few more of their type, do a little of this and then tweak a little of that, then we will get our nation back on track. 

There is no call to a shared sacrifice for something greater. There is nothing to rally around except a laundry list of disconnected programs; a little something for everyone. There is no overarching theme under which everything else can be hung, such as a space race, a civil rights movement, or a massive upgrading of our national infrastructure.

A good narrative is one that inspires people and is based in reality but also asks something larger of us that we can share in. What is our vision for this country? Where do we want to be in ten years? How about twenty?   How will we get there, and what will be required? What should we stop doing, what should we start doing, and what should we continue doing?

None of these things are on display, and all are badly needed if we are going to make the most of the next twenty years.

The Troubling Facts

Of all the facts that got skimmed over or avoided in the State of the Union extravaganza, the fiscal nightmare in DC was probably the most glaring. Yes, both parties have decided to talk about the deficit, but neither is giving the appropriate context. 

For FY 2012, the federal government is projected to run a $1.1 trillion deficit.   Let’s compare that number to the projected revenues:

 (Source) 

The $1.1 trillion deficit is 42% of total revenues and 73% of all income taxes. That is, in order to spend what the US currently spends without going further into debt (i.e., to have no deficit), income taxes must immediately increase by 73%(!).

This is the sort of territory that, were the US any other country, would have already landed its debt markets – and likely its currency, too – in very hot water.

Historically, countries that have run deficits 40% greater than revenue for more than two years have experienced profound financial and political crises. The US is now in its fourth year of inhabiting this rare territory.

How can it keep doing this when every other country that has tried has gotten into trouble? Simple. The Federal Reserve has enabled such egregious deficit spending by buying up mind-boggling amounts of government debt. This has both kept rates low and created a lot of additional buying demand for Treasuries.

Exactly how much US debt is the Fed buying? Under Operation Twist, the Fed has bought anywhere from 51% to 91% of all gross issuance of bonds dated six years or longer in maturity. 

(Source) 

It is quite obvious that the Fed has been a major participant in the bond markets and a major reason why Treasurys are priced so high and offer so low a yield. 

It seems that it is well past time to speak directly to the enormous fiscal deficits in a credible way, not merely bemoaning them being too high. And we’re also overdue for an adult national conversation that it’s unwise and unsustainable for a country to lean on its central bank to print up the difference between receipts and outlays.

Oil and Recoveries

There is a clear relationship between high oil prices and recessions, confirming the idea that the price of oil has the same impact on the economy as higher interest rates (perhaps even more so nowadays). Both are a source of friction. With higher interest rates, less lending and less consuming happens. With a higher price of oil, more money gets spent on energy, much of it sent to foreign producers of oil, and thus less money is available for other consumption.

Both higher oil prices and higher interest rates cause people to think a bit more before pulling the trigger on either ordinary spending or a big capital project.

Note that all of the six prior recessions were preceded by a spike in oil prices. In the case of the double-dip 1980′s twin recessions, oil remained elevated after the first recession was (allegedly) over. Don’t be fooled by the logarithmic nature of the chart below – note that the typical decline in oil prices between the recession-inducing peak (blue lines) and the recovery-enabling trough (green lines) was a substantial 30%-50%:

(Source) 

Also note in the most recent data that oil prices happen to be at roughly the same level that triggered the first recession in 2008 (the purple dotted line). 

If we needed one simple chart to help us understand why trillions of dollars of stimulus and handouts are not causing the economy to soar, this is the chart that explains the most. High oil prices and recessions are highly correlated, and it’s not too much of a stretch to postulate that economic recoveries and high oil prices are inversely correlated.

Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel. 

For those counting on an economic recovery here to lift all boats and assist the bailout efforts, the burden of history is upon them to explain why this time we should ignore the price of oil. 

I say we cannot. Policy planners and citizens alike should be ready for disappointing market and economic activity in response to the usual bag of printing, borrowing and delaying tricks.

Dead Ahead: A Currency Crisis

The State of the Union speech and GOP response neither accurately portray the true fiscal condition of the US, nor present a compelling narrative that speaks either to the realities of today or a future we might like to head towards.

The US is simply on a fiscally ruinous path, and neither party seems up to the task of laying out the story in a way that is mature, clear, and direct. 

No recovery has ever been possible from oil prices this high, nor with debt levels this extreme, and it is quite improbable to think that both conditions could be overcome with anything less than a completely clear-eyed view of the true nature of the predicament faced.

Decades ago, Ludwig Von Mises captured everything discussed here elegantly:

There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Our current dire fiscal condition, our leaders’ dysfunctional unwillingness to address the flawed behavior that caused it, plus many other recent events both in the US and in Europe, point to the idea that a voluntary abandonment of further credit expansion is just not on the menu.

That leaves us with some final and total catastrophe of the involved currency system(s) as the inevitable outcome.

In Part II: Surviving a Currency Crisis, we explain what a currency is, what happens when a currency collapses, and, most importantly, how to position yourself prudently in advance.

At this point, time to prepare is your greatest asset. But as we can see from the precarious global economic situation described above, time is running out. Use what remains wisely.

Click here to access Part II of this report (free executive summary; enrollment required for full access). 

The Best of Chris Martenson

In each of the years 2008, 2009, and 2010, significant worries emerged that Western nations might attack Iran. Here again in 2012, similar concerns are once again at the surface.

Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world’s daily sea-borne oil passes, oil prices will spike, the world’s teetering economy will slump, and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third largest exporter of oil in the world after Saudi Arabia and Russia.

Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran will deliver.

Let me back up. The US has already committed acts of war against Iran, though no formal declaration of war has yet been made. At least if Iran had violated US airspace with stealth drones and then signed into law the equivalent of the recent US bill that will freeze any and all financial institutions that deal with Iran out of US financial markets, we could be quite confident that these would be perceived as acts of war against the US by Iran.

And rightly so.

U.S. imposes sanctions on banks dealing with Iran

Dec 31, 2011

(Reuters) – President Barack Obama signed into law on Saturday a defense funding bill that imposes sanctions on financial institutions dealing with Iran’s central bank, while allowing for exemptions to avoid upsetting energy markets.

The sanctions target both private and government-controlled banks – including central banks – and would take hold after a two- to six-month warning period, depending on the transactions, a senior Obama administration official said.

Sanctioned institutions would be frozen out of U.S. financial markets.

(Source)

The impact of this law was quite pronounced and immediate, with the Iranian rial falling sharply against the dollar in the first few days after the bill was signed into law.

Iran’s rial falls to record low on U.S. sanctions

Jan 3, 2012

Jan 3 (Reuters) – The Iranian rial fell to a record low against the dollar on Tuesday following U.S. President Barack Obama signing a bill on imposing fresh sanctions against the country’s central bank.

The new U.S. sanctions, if fully implemented, could hamper the world’s major oil producer’s ability to sell oil on international markets.

The exchange rate hovered at 17,200 rials to the dollar, marking a record low. The currency was trading at about 10,500 rials to the U.S. dollar last month.

Some exchange offices in Tehran, when contacted by Reuters, said there was no trading taking place until further notice.

“The rate is changing every second … we are not taking in any rials to change to dollar or any other foreign currency” said Hamid Bakhshi in central Tehran.

(Source)

That represents a more than 63% decline in just a month. Assuming that Iran trades its oil in dollars, this will not necessarily cripple its economy, but the specter of hyperinflation looms large whenever a currency falls by that much. With hyperinflation comes economic, social, and political instability, and these are, of course, precisely the aims of the US in imposing the sanctions.  And of course, everything that Iran imports will become hideously expensive – quite rapidly.

The US is deliberately poking and prodding Iran right now. Given the glacial pace of nuclear development, we must ask ourselves, why now?

The Story

As with most things today, there is a story created for public consumption that justifies waging war against Iran. The main narrative goes something like this: Iran is trying to develop nuclear weapons, and this is intolerable, so it must be stopped.

In November 2011, the International Atomic Energy Agency (IAEA) issued a report, long denied under the prior director’s tenure (Mohamed ElBaradei), finally declaring that Iran was unequivocally trying to build a nuclear weapon:

U.N. Agency Says Iran Data Points to A-Bomb Work

November 8, 2011

United Nations weapons inspectors have amassed a trove of new evidence that they say makes a u201Ccredibleu201D case that u201CIran has carried out activities relevant to the development of a nuclear device,u201D and that the project may still be under way.

The long-awaited report, released by the International Atomic Energy Agency on Tuesday, represents the strongest judgment the agency has issued in its decade-long struggle to pierce the secrecy surrounding the Iranian program. The findings, drawn from evidence of far greater scope and depth than the agency has previously made public, have already rekindled a debate among the Western allies and Israel about whether increased diplomatic pressure, sanctions, sabotage or military action could stop Iran's program.

(Source)

I’ve not yet read the report, but I am concerned about the gap between the headlines I’ve seen that say Iran is building a nuclear bomb and carrying out “activities relevant to the development of a nuclear device.”  For example, much has been recently made of the fact that Iran has enriched some uranium to the 20% grade, but there is a huge leap between that and the 90%+ grade needed for a nuclear device.  Iran had told the world it needed the 20% grade for a medical reactor, and then created a fuel rod for that reactor.  To say that enriching to the 20% grade is the same thing as trying to build a bomb is not accurate and possibly deceptive.

As a signatory to the Non-Proliferation of Nuclear Weapons (NPT) treaty, Iran has every legal right to enrich uranium for peaceful purposes, such as making nuclear fuel rods for a research reactor, and Iran is claiming that all their current work is towards this end.

Maybe it is; maybe not. But even if a nuclear bomb is being pursued, there’s nothing in the NPT that provides for military action to pre-emptively prevent any nation-state from carrying out such development work. In fact, if a preemptive strike is carried out, it will be done without the benefit of any international laws or treaties that could justify the action. 

Also left out of the narrative is any explanation of why it was okay for Pakistan to develop nuclear weapons or why North Korea is permitted to hold them.

The simple answer is because they don’t have any oil. A quick view of the US military presence surrounding Iran, coupled with the Iraqi experience of being attacked for supposed weapons of mass destruction that did not exist (nor were used by Iraq to threaten the US), reveals why Iran may be so motivated to develop a nuclear weapon:

If Iraq had a nuclear weapon in 2002, it is quite doubtful the US would have invaded – a lesson that has not gone unnoticed.

While I am not a supporter of the current repressive theocratic regime in Iran, I strongly believe that it is up to the people of any nation to decide for themselves what sort of system they will choose to live under. The Arab Spring, as messy as it was, is vastly preferable to the blunt instrument of an externally driven war. 

The Curiosity

The most curious thing about this story is the apparent lack of awareness among US officials about how the oil markets work. I know they know better, but the context-free repetitions in articles such as this next one almost literally drive me crazy:

Geithner to Seek China's Support on Iran

Jan 9, 2012

U.S. Treasury Secretary Timothy F. Geithner will urge Asia’s two biggest economies to cut Iranian oil imports and seek to narrow differences with China on trade and currency disputes on a visit to Beijing and Tokyo this week.

(Source)

The idea that the world can just stop buying Iranian oil, as though it were the same thing as boycotting McDonald’s and buying Burger King instead, is just ridiculous. The world oil markets are far too tight for that.

How is it that China is supposed to cut its Iranian oil imports, exactly?  Oil is a fungible product. If China cuts its oil imports from Iran, it will simply have to buy the missing amount of oil from someplace else. The 2.6 million barrels a day that Iran exports cannot simply be instantly replaced at this time from other spare capacity elsewhere in the world. It doesn’t exist at the moment. Where will it come from?

Perhaps Geithner is offering something behind the scenes, like providing China with extra petroleum from the US strategic reserve while events unfold (unlikely). But barring that, it is a remarkably nave request as it stands and is curious on its own.

The Powder Keg

With the Persian Gulf being so small, and so many tense parties crammed into that tiny arena, the chance of some sort of mischief arising is quite high. One twitchy trigger finger – such as the one that caused the USS Vincennes, thinking it was under attack by a jet fighter in 1988 during the Iran-Iraq war, to shoot down an Iranian passenger airliner – and the hounds of war may be let loose.

And it’s not just the US. Practically everybody who’s anybody has naval assets positioned for whatever may happen next:

Western forces react to Iran’s Strait of Hormuz threat

Jan 9, 2012

TEHRAN, Jan. 9 (UPI) – A buildup of Western naval forces in the Persian Gulf and Arabian Sea is a reaction to Iran’s threat to close the Strait of Hormuz, military experts say.

U.S., Russian, French and British air and naval forces moved to the Syrian and Iranian coasts during the weekend, Israeli military intelligence Web site DEBKAfile reported Monday.

The Russian carrier Admiral Kuznetsov anchored earlier than planned at Syria’s Tartus port on the Mediterranean Sunday, causing France to respond by consigning an air defense destroyer to the waters off Tartus, DEBKAfile reported. Canada also was sending a warship, the HMCS Charlottetown, to the Mediterranean where it would take over from the HMCS Vancouver.

Meanwhile, Britain has dispatched a missile destroyer to the Sea of Oman, due to arrive at the same time as the French Charles de Gaulle aircraft carrier.

And the U.S aircraft carrier John C. Stennis and its strike group are cruising in the Sea of Oman at the entrance to the Strait of Hormuz after Tehran announced it would not be allowed to cross through.

(Source)

With all those boats chugging around in those little bathtubs, and with various other forces that would definitely like to see a shooting war develop (a false flag attack is an option here), the risk is quite high of some form of incident that would trigger hostilities.

Of course, there are those in the war rooms of the various OECD countries who think they have a plan for the conduct of that war, but no plan ever survives first contact with the enemy. The one thing we can count on is the war being messier, longer, and more expensive by at least a factor of two than whatever is currently occupying the minds of the war planners.

Iran’s Responses

Of course, Iran has been none too happy over the years at being surrounded, poked, prodded, and now finally sanctioned for having done nothing more than cloak its nuclear program in the exact same sort of secrecy that has surrounded literally every other nation’s nuclear programs, including Israel and Pakistan, Iran’s notable nuclear neighbors.

And now, with the aid of enhanced missile technology obtained from China and Russia, Iran has a credible threat to make:

Iran Has Ability to Block Strait of Hormuz, U.S. General Dempsey Tells CBS

Jan 9, 2012

Iran has the ability to block the Strait of Hormuz u201Cfor a period of time,u201D and the U.S. would take action to reopen it, Joint Chiefs of Staff chairman General Martin Dempsey said.

u201CThey've invested in capabilities that could, in fact, for a period of time block the Strait of Hormuz,u201D Dempsey said in an interview aired yesterday on the CBS u201CFace the Nationu201D program. u201CWe've invested in capabilities to ensure that if that happens, we can defeat that.u201D

Should Iran try to close Hormuz, the U.S. u201Cwould take action and reopenu201D the waterway, said Dempsey, President Barack Obama's top military adviser.

(Source)

The admission here by the US military is that Iran has the ability to block the Strait of Hormuz “for a period of time,” which they do, is an extraordinary admission (even if it really is stating the obvious) by the US brass.

Anti-ship missile technology has come a long way, and an offensive missile is much cheaper than either a large ship or defensive measures. The Falklands war in the early 1980s taught me that the navy is an outmoded concept if the opponent is armed with semi-decent anti-ship missiles, and such devices have improved remarkably since then.

During the most recent Iranian war exercises, the Iranian military test-fired (more of a demonstration, really) their Qader anti-ship cruise missile, which has a range of 200 km and can be fired from a small truck. To visualize the difficulty of defending against such a technology, just imagine how many hiding places for a small truck might exist within this 200 km radius green circle :

In order to neutralize the entire missile, full air superiority would have to be established and every mobile launcher found and destroyed. 

Further, Iran has a number of submarines capable of firing a new breed of torpedo that can achieve speeds in excess of 200 knots. As far as I know, these are extraordinarily difficult to defend against, let alone evade. 

Of course, China is paying close attention to the developments:

Iranian authorities reiterate threats to close Hormuz Strait if sanctions imposed on oil exports

Jan 8, 2012

TEHRAN, Jan. 8 (Xinhua) – Iranian authorities reiterated threats to close Strait of Hormuz if Western countries impose sanctions on Iran’s oil exports, local media reported Sunday.

(Source)

Conclusion

Once again, regrettably and mysteriously, we find the developed world in lock-step in its eagerness to attack Iran. “Regrettably,” because Iran has not threatened any other country, and war should never be used simply because the current art of diplomacy is inadequate. “Mysteriously,” because this is a particularly horrible economic moment to go about risking much higher oil prices. 

While we judge the risks of a war, either precipitated by legitimate escalation of frictions or by illegitimate actors seeking to cause the same, to be very high, it is our view that such a war will not go according to plan.  Iran has many more powerful allies, namely Russia and China, than did the extraordinarily isolated Iraq at the beginning of the Iraq war. 

Is it too waggish to suspect that certain Western political powers would love to be able to both divert attention from the crumbling economy and have a scapegoat upon which to blame the next leg of the financial downturn? 

Regardless of such speculation, the risk to each of us and the economy in general from an attack on Iran that closes the Strait of Hormuz is large enough to warrant your attention. Should oil spike in price, you can practically set an egg timer for the beginning of the next leg of the financial downturn.

In Part II: Are You Prepared for $200 Oil?, we explore what likely havoc the high oil prices from a major conflict with Iran will wreak on the financial markets and our petroleum-dependent lifestyle. We also detail specific steps prudent individuals should be taking right now, in advance of such a crisis, to position themselves defensively.

Click here to access Part II of this report (free executive summary, enrollment required for full access). 

The Best of Chris Martenson

There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again?

No, it's worse. Much worse.

In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms.

Anyone who has paid attention knows that those “magic potions” proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time.

As always, we have no idea exactly what is going to happen and when, but we can track the various stresses and strains, noting that more and wider fingers of instability increase the risk of a major event. Heading into 2012, there’s enough data to warrant maintaining an extremely cautious stance regarding holding onto one’s wealth and increasing one’s preparations towards resilience.

Here's the evidence:

• Oil prices higher now than in 2009
• Derivatives up more than $100 trillion since 2009
• Government debts exploding
• Weak GDP growth
• Europe in trouble
• Small investors leaving the market
• China hitting a wall

One of the most important things we need to track is simply untrackable, and that is market perception. When faith in a faith-based money system vanishes, the game is pretty much over.

If you have been reading my work (or anyone else’s) with a decent macro view, you likely lost your faith in the system a while ago and marvel that it can continue along for another moment, let alone all the years it has been creaking towards its eventual date with reality. But along it creaks, day after day, week after week, and month after month, threatening to wear down the observant and vigilant before finally letting go.

2012 promises to be an interesting year, with more than $10 trillion in funding and rollover financing required to keep the developed world floating along. But where will that funding come from? The lesson from defunct economies is u201Cnot internally!u201D And if China's recent slowdowns and projections of an even more lackluster 2012 come true, then we might also scratch a few external sources off the list as well. 

Oil Prices

As Gregor recently penned so eloquently for us, high oil prices are like sand in the gearbox of the economy – they represent the most serious form of friction there is. Rather astutely, Jim Puplava has called oil prices ‘the new Fed Funds rate,’ meaning that the traditional role of the Federal Reserve in regulating the economy via the price of money has been usurped by oil. 

As oil prices go up, the economy slows down, and vice versa. 

The simple fact is that oil prices remain quite elevated by historical standards, and since the correction in 2008, they have been ratcheting steadily higher each year. They are now at their highest average rate in three years. In round dollar terms, oil is $30/bbl higher than in 2009 and $10/bbl than in 2010.

I won’t rehash the data here, but the best explanation for this steady increase is that supplies of cheap oil are dwindling and flow rates of the desired blends are having a hard time keeping up with demand.

The twin deficits to the export market are falling production from existing fields and rising internal demand in the producing countries. The way all that gets balanced is in the usual fashion – through prices.

All of this would be fine, except for the idea that the world is in a far more fragile condition today than back in 2008 when it suffered the first insults levied by high oil prices.

As the Bank of England’s Paul Fisher recently put it:

Financial markets in greater danger than 2008-BoE’s Fisher

Dec 19, 2011

Dec 19 (Reuters) – Financial markets are facing a more dangerous situation now than during the financial crisis of 2008, Bank of England policymaker Paul Fisher was quoted as saying on Monday.

Fisher, who is the central bank’s executive director of markets and sits on the Monetary Policy Committee, also said governments had fewer options to deal with the current crisis because of their stretched public finances.

Fisher was quoted as saying that in 2008, governments had more leeway and cash available to stimulate their economies and bail out banks. Today that “sovereign backstop is less clear”, Fisher said.

“The policy out is going to be more difficult than it was in 2009, given the current position of the sovereigns.”

(Source)

We’ll explore these ideas in greater depth below, but I think the bolded parts illuminate why high oil prices are potentially more corrosive now than in 2008. The bottom line is that economic growth is central to nearly every story of recovery, and there are appallingly few analyses coming out of the OECD countries that address how the various debt rescue plans will fare if said economic growth does not materialize. Most just note that ‘it will not be good’ and leave it at that.

Debt

Let’s begin with debt. This crisis was rooted in too much debt. Even without the headwinds caused by structurally rising energy prices (we’ll get to those in a minute), the credit bubble was destined to someday pop all on its own. After all, there’s no way for debt to continually expand faster than income, which is what was happening across the entire OECD, thanks to the ultra-accommodative policies of the world’s central banks.

(Source) 

Note that GDP is virtually unchanged since 2008, meaning that $5 trillion did not buy us any incremental GDP; it only managed to bring us back to about even:

(Source) 

That means we have about the same-sized economy to support an additional $5 trillion in federal debt, or roughly a third more than when the crisis started.

It is also true that GDP growth in the US is weaker this year than last year, a trend that does not bode well for the US deficit situation:

(Source) 

It should be noted here that this weak growth is happening even though the US federal deficit for FY 2011 was $1.3 trillion, or more than 10% of GDP. If that’s how anemic the economy is with that level of deficit spending, where would it be with less?

Europe in Trouble

The bad news out of Europe continues unabated, including debt and ratings downgrades, sliding economic growth, and exploding red ink.

Much of the hope in Europe rests upon carefully crafted bailouts that rest upon assumed rates of economic recovery and growth in order to pencil out. Without the assumed rates of growth, the plans fall apart, and more rescue funds – or outright defaults – lie in the future.

Ireland is an instructive case because it entered its difficulties earlier, and it has already received a bailout and implemented the austerity measures that were meant to balance the equation.

Ireland

Unfortunately, the plan is now in tatters with the recent revelation that the Irish economy is slumping more than expected under the twin weights of reduced lending and imposed austerity

Ireland’s debt rating under threat as economy contracts

Dec 16, 2011

Rating agency Fitch tonight warned it may downgrade Ireland and five other euro zone countries in the absence of a comprehensive solution to the region’s debt crisis which it concluded may now be “technically and politically beyond reach”.

The agency placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus in credit watch u201Cnegativeu201D, which means a downgrade is possible within three months.

The move comes on back of unexpectedly poor economic data for Ireland which showed economy weakened considerably in the third quarter, shrinking at the fastest rate in more than two years.

(Source)

Here’s the data:

(Source) 

GNP is a better measure than GDP in this case because GNP removes repatriated corporate profits that have left the shores. Many companies use Ireland as a tax haven, so the monies that cycle briefly into and then right back out of the Irish system really should not be counted towards their economic progress. 

With economic contraction, the Irish fiscal deficits will once again breach agreed-upon levels, and repaying debts also becomes that much harder. It is a negative spiral that can be quite destructive and difficult to stop.

The bottom line here, which should surprise exactly nobody, is that austerity shrinks an economy and that economic shrinkage and crushing debt loads are incompatible. Ireland has not been fixed, and it seems that the can is once again right in front of the ECB, ready for another good kick down the road.

Ireland’s debt yields are instructive here. While it is true that Ireland’s debt yields are down quite a lot from their maximum levels (which were over 23% for 2-year paper and 15.5% for their 9-year debt), the current yields of 7.9% and 8.6%, respectively, are utterly unsustainable for an economy that is shrinking. It is only a matter of time before those rates crush the finances of the Irish government.

Do you know why the generally agreed-upon limit for persistent government deficits is 3%? That’s because it’s the basic rate of GDP growth that history has shown to be sustainable. As long as deficits are growing at the same rate as the economy, then the debt-to-GDP ratio stays constant and everybody is happy. If (or when, I should say) the economy grows more slowly than the rate of interest that is demanded from a government, it is a mathematical certainty that either the deficits will swell or austerity and/or tax hikes must be imposed. There is no other way to balance the books.

On this basis, Ireland is still mired in a math problem.

Spain

One theme of the financial crisis is governments loading up on debt in order to get by for a little longer, with the plan seeming to be to face the music later and/or keep one’s fingers crossed that the economy will have somehow sorted itself out by then.

Spain, suffering from a truly crushing housing bust that is still playing out (and will for a long time), very high unemployment, and a stalled economy, has also compounded the issues by piling up an astounding amount of new debt over the past year:

Spain regional debt up 22 percent to $176 billion

Dec 16, 2011

MADRID (AP) – Debt levels for Spain’s cash-strapped 17 semiautonomous regions have soared 22 percent over the past year, the country’s central bank said Friday.

A near two-year recession after a real estate bubble collapse has left Spain with swollen regional and national deficits, a stalled economy and 21.5 percent unemployment.

Many regions are facing severe cash-flow problems and are having to delay payments to suppliers.

An example of the cutbacks came Thursday, when Spain’s Woman’s Institute said nearly 100 centers for the victims of domestic violence face closure next year in the central Castilla-la-Mancha region. Centers for drug addicts in Madrid are facing a similar fate.

(Source)

The good news out of Spain is that its bond yields have fallen considerably since the end of October, when they breached the 6% barrier and seemed ready to launch into truly dangerous, irrecoverable territory. 

Most recently, Spain’s 10-year bond yields were 5.13%, down from 6.7% on October 31 but still about 1.5% higher than pre-crisis levels. It’s important to note that the current yield may not be indicative of the true market perception of Spanish risk because the ECB has been heavily involved in buying Spanish debt. The true yield should undoubtedly be a lot higher given the grim state of finances there. 

Still, Spain’s yield levels are in the best shape out of all the PIIGS. Speaking of which… 

Portugal

Portugal is still in trouble, and the government has, quite worryingly for the precedent it sets, raided private pension funds to help balance the books. 

Portugal deficit falls, helped by one-off measure

Dec 16, 2011

LISBON, Portugal (AP) – Portugal’s finance minister says his debt-stressed country’s budget deficit will likely fall to below 5 percent this year from 9.8 percent in 2010.

But Vitor Gaspar says the sharp drop is largely due to the transfer to the Treasury of euro6 billion ($7.8 billion) in private banks’ pension funds.

(Source)

I am not sure of all the back story and intrigue that must accompany this move, but it seems loaded with implications ranging from the door it opens to other governments seeking relief, to the fact that we know that Portugal is being leaned on heavily by the international banking community and has decided to raid the pensions of…wait for it…four of the largest private banks in Portugal. Maybe there’s a bit of spite built into that move?

Portuguese bond yields are down from their crisis highs of 20.4% (2-year) and 14.1% (10-year), but again not enough to count, as they are sitting at 15.6% (2-year) and 13.1% (10-year), levels well above the current rate of GDP growth.

Greece

Our poster child for the entire Eurozone mess is, of course, Greece. And quite understandably, a trickle of bank withdrawals has turned into a flood:

Greeks fearing collapse of eurozone bailout pulled record sums from bank

Dec 16, 2011

An unprecedented exodus of capital from Greece – peaking in a record number of withdrawals from banks in recent months — has exacerbated the liquidity crisis now wracking the recession-hit country.

The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled u20AC12.3bn (10.3bn) from domestic banks, spurred by fears of political uncertainty and economic collapse.

Overall, outflows have reached a record 25% since September 2009 — when household and corporate deposits stood at a peak of u20AC237.5bn, the data showed.

Theodore Pelagidis, an economics professor at the University of Piraeus, said: “This is part of the death spiral of the recession as a result of austerity measures. People realize that contagion has come to banks and they are very afraid of losing their deposits. On average around u20AC4bn-u20AC5bn in capital flees the banking system every month.”

The extraordinary figures back up anecdotal evidence that it is not just the super-rich behind the flight of funds.

(Source)

This data, released by the Bank of Greece, is over a month old, and we’d be especially interested to see what November and December add to the story. At any rate, it is now “game over” for Greece. The market is still pricing in a nearly 100% chance of default even as the bankers and Eurocrats squabble over the prospect of raising the haircut on Greek debt from 20% to 50%. 

Where the Greek crisis highs for debt yields were 151.9% (2-year) and 35.1% (10-year), they are now sitting at 146.6% (2-year) and 34.6% (10-year), which are essentially unchanged.

The Pattern

I keep mentioning that the ECB is interfering heavily in the bond markets of various countries in their attempts to keep things going. Apparently they’ve tossed in the towel on Greece, as evidenced by the Greek yields above.

However, when we note the ways in which the Spanish, Irish, and Italian debts have come down off their highs, can we make sense of why the ECB focused their efforts there? Sure, that’s easy, and the BBC has put together an extraordinarily helpful interactive chart to make it all crystal clear.

The interactive chart can be found here, but I’ve taken a number of screen shots so that you can more easily follow the story.

To begin with, what the chart is showing by the width of the arrows is how much money is owed to banks of other countries – the wider the arrow, the greater the amount.

Here’s the country that was let go:

Now let’s compare that to Ireland, which was rescued (for now):

And here’s Portugal, which is apparently in the process of being tossed under the bus, at least judging by how its interest rates are still punishingly (and ruinously) high:

See the pattern? Now let’s look at Spain and Italy, both of which have recently enjoyed a nice decline in their yields

Now are the actions and focus of the ECB coming clear? It’s not a surprising insight, but these charts help bring things into focus for me, and inform us that falling bond yields are probably more indicative of ECB actions than an improving debt crisis. 

Just for kicks, and to complete the story, here are the charts for the UK and the US, which hopefully make clear why these two countries could never be allowed to fail, for surely the whole world would fail to spin on its axis

The other takeaway from these charts is that everybody owes everybody, a point I’ve made before, but not as nicely as these charts manage to do. Kudos to whomever thought these up. 

Where Things Are Headed

In Part II: Get Ready for Worldwide Currency Devaluation, we detail the remaining risks posed by the massive amount of outstanding derivatives, small investors fleeing the markets, and China’s increasingly visible slowdown. At this point, it’s quite clear that there simply won’t be enough economic growth to rescue the global economy from the hole it’s in. So, how does this end?

It will most likely end in a concerted devaluation of the world’s currencies, in an attempt to inflate away the worst of our debt burden. And if that happens, there’s one asset in particular that you will want to be holding.

Click here to access Part II of this report (free executive summary, enrollment required for full access).

The Best of Chris Martenson

I do not toss around the idea of a market crash lightly.  If you’ve been following me long enough, you know that only in very rare instances do I issue a cautionary Alert (I’ve only issued four since my website launched in 2008), and I am generally not given to hyperbole.

Let’s be clear: I’m not issuing an Alert at this time. But I am concerned that a materially adverse disruption to the financial markets is increasingly likely in the near future.

Perhaps a definition will be helpful as we begin. A ‘market crash’ is an event where there are no bids to meet a wall of selling. The actual amount of the percentage decline is less important to note than the amount of chaos, or loss of control, that a given market experiences. Some like to say that a market downdraft requires a decline of 10%, or maybe even 15% or 20% (or more), in order to qualify as a ‘crash.’ For me, the key factor is not so much the amount of the decline, but the pace of the decline.

With perhaps a quadrillion US dollars of hyper-interconnected derivatives outstanding – that’s the notional value, but who really knows what the real number is? – an orderly market is essential for knowing whether or not the counterparty to one’s trade is solvent. During periods of intense price swings in the market, such things are simply not knowable, and spawn the fear and paralysis that really define a market crash.

The Next Market Crash

Like everybody, I have no idea when the next market crash will occur, but I do happen to hold the view that a market crash is on the way. In fact, my view is that the entire future from here onward will be marked by sharp plunges (both crashes and regular market declines), followed by periods of stability, if not apparent recovery.

What I track instead are imbalances and risks. Sort of like being a fire marshal who takes note of an outlet with fifteen things plugged into it, some with frayed cords, located near a pile of old cleaning rags. I can’t tell you for sure that a fire will result, only that the odds are elevated. A prudent person will take steps to remedy the situation or at least prepare for the possibility of a fire.

Here’s one view of the possible trigger for the next meltdown from Dr. Robert Shapiro, advisor to Presidents Clinton and Obama, and now the IMF, as offered on BBC Newsnight on October 5, 2011:

“If they cannot address this [the sovereign debt crisis in Europe] in a credible way, I believe within perhaps two to three weeks, we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. 

We’re not just talking about a relatively small Belgian bank, we’re talking about the largest banks in the world. The largest banks in Germany, the largest banks in France that will spread to the UK in part through the sovereign debt problems in Ireland. 

It will spread everywhere because the global financial system is so interconnected, all those banks are counterparties to every significant bank in the US and in Britain, and in Japan and around the world. This would be a crisis, in my view, more serious than the crisis in 2008.”

(Source) 

What he’s warning about here are two main things. The first is the risk of contagion, where problems in one area spread to another because everything is so intertwined. The second is that you can count on the rot spreading from the weaker periphery to the stronger core. Crisis always progresses from the outside in.

That dynamic has been playing out for months, and it should be obvious to the most casual of observers that the Greece situation has not been improved one iota by any of the steps yet taken. 

The stakes could not be higher. Normally staid politicians are letting their guard down and saying previously unthinkable things. For example, this shocker recently came from the Polish finance minister:

Poland warns of war ‘in 10 years’ as EU leaders scramble to contain panic

Oct 14, 2011

Speaking to MEPs in Strasbourg on Wednesday morning (14 Sept) [the Polish finance minister] warned of the need to act rapidly to prevent grave danger for the EU. Making reference to a recent report entitled ‘Euro Break Up – The Consequences’ by Swiss financial giant UBS, he declared: “There is no doubt we are in danger. Europe is in danger”.

The paper by UBS, normally known for its highly sober analysis, warned that historically, monetary unions do not break up without civil war or some other form of authoritarian reaction. “The risk of civil disorder questions the rule of law, and as such basic issues such as property rights. Even those countries that avoid internal strife and divisions will likely have to use administrative controls to avoid extreme positions in their markets”, it said.

The Polish minister went on to warn of a doubling of unemployment within two years “even in the rich countries”.

He concluded his comments by recollecting a recent conversation he had with an old friend who is now head of a major bank: “We were talking about the crisis in eurozone. He told me ‘You know, after all these political shocks, economic shocks, it is very rare indeed that in the next 10 years we could avoid a war’. A war ladies and gentlemen. I am really thinking about obtaining a green card for my kids in the United States”.

(Source)

I’m not sure whether the US will be a much better place to ride out the storm if the European banking system collapses, as it will be only a matter of time before the US is exposed as being just as financially and fiscally ruined as the EU. 

Supporting this view is a rather famous Harvard economist (and the probable successor for Bernanke’s current position, according to some rumors):

Martin Feldstein says there’s a “nontrivial” chance the U.S. economy will turn down again and calls the recovery “about as bad an expansion as I’ve ever seen.”

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Chris Martenson: Welcome to another ChrisMartenson.com podcast. I am your host, of course, Chris Martenson. And today, we are speaking with a particularly interesting guest, Mr. David Stockman — economic policy maker, politician, financier. Mr. Stockman represented Southern Michigan in the US House of Representatives from 1976 to 1981, later served as the Director of the Office of Management and Budget, the OMB in the Reagan administration, and was the youngest cabinet member of the twentieth century. Since then, he’s held executive positions in many of the most influential banking, buyout, and private equity firms, including the Blackstone Group and Solomon Brothers. He has many other accomplishments too numerous to list here. Welcome, David. It’s an honor to have you as our guest today.

David Stockman: Very happy to be with you.

Chris Martenson: Well, great. Let’s start with where we currently are as a nation. Although the US is arguably in the same fiscal and economic pickle as much of Europe, Japan, other developed countries. So, perhaps, let’s just leave open in our minds the possibility that the US is a component of a larger structural problem. With that said, for the past several years, you’ve been publicly making the case there are no easy fixes here, no monetary adjustments or fiscal tweaks that can save the day. So what are the structural conditions you see that lead to these conclusions? How did we get here?

David Stockman: Well, I think we had a thirty-year debt spree that is unparalleled in modern history or recorded history. In 1980, our total debt- (public and private) -to-GDP-ratio was about 1.6 times. That had been sustained, more or less, for the last hundred years. It was kind of the golden constant, if you want to use that term. Today, our debt to GDP ratio is 3.6 times. There’s two turns more of debt on the national economy.

We effectively had, over the last thirty years, a national LBO — a leverage buyout of the whole economy. And this is important if you look at the difference between our historic leverage ratio, which seemed to be compatible with a stable and usually growing economy, notwithstanding periods, obviously, of boom and bust. But at 1.6 times, we would have about twenty-two trillion of debt (public and private) on the US economy today. We actually have fifty-two [trillion] at 3.6 times. So the extra two turns have put on the economy — households, business, government, we can go through the different sectors — roughly thirty trillion in debt that’s being lugged around by the US economy as it struggles to stay even, to say nothing of recovery today. And until that massive over-leveraging is worked down and reduced and liquidated, which will take years and years in a painful process, we’re not going to get back on track as an economy.

Chris Martenson: So if we could summarize, it was simply too much debt, here we are after — I started tracking this from the fifties — it really sort of started. But it took off, as I noted in the charts, around 1970. And so if we look at the decades from ’70 to ’80 to ’90 to 2000, 2010, we look across those decades, we can see that debt was growing far faster than GDP — the total credit market debt you’re referring too — far faster than GDP, and that, just, you can build a very simple spreadsheet that proves that model is not sustainable, yet we’re trying to sustain it, I think, in official actions and monetary actions, stimulus, all of this.

David Stockman: I would like to comment on that, because I think that is dead on, and it’s exactly the point I’ve tried to make many times. If you go back to the 1970s before this leverage ratio took off, before the real national LBO got going, if you had dollar GDP expansion, it tends to be accompanied by about a dollar-fifty of debt, so the ratio stayed about the same. By the time we got to the late ‘90s, we were adding two and a half to three dollars of debt for every dollar of GDP. And we reached the peak of all this in 2007, during which we increased credit market debt by four trillion and GDP by about seven hundred million. So we were pushing six dollars of debt into the economy, nearly, for every dollar of GDP that was coming out the other end. That was the end point. That’s when the system buckled; that’s when the music stopped.

Obviously, we had the huge crisis the next year, and the meltdown, and so forth. Now, since then, we’ve been treading water. Basically, private debt has been liquidated to some degree; the shadow banking debt has been massively liquidated. But it’s been replaced by public debt. And so we have gained no ground whatsoever in terms of the total debt burden on the economy. We’ve just shifted it. And so now the crisis is moving from too much leverage on the household sector and in the shadow banking system in 2007, 2008 to the sovereign debt crisis that we have in 2011 and for many years to come. Because that’s really the end game. I would say one way to describe all this is that we’re nearing, if not at, the Keynesian end game.

Chris Martenson: The Keynesian end game. So where we came through a period where we put on four trillion of debt [and] got seven hundred billion of economic activity for our troubles. Here we are, we’re pumping money in like crazy, we’re stimulating like crazy. I think a position I happen to share with you is that I’m not a fan of either monetary or fiscal stimulus, the tools we seem to be enamored with to try and get out of this mess. What’s wrong with a little stimulus in a time of need, and what is the Keynesian end game?

David Stockman: Well, stimulus, it’s very well demonstrated right now that there’s no multiplier effect, there is no pump priming going on. Stimulus is simply borrowing from next year or next decade or next generation through the credit of the United States; some money to hand out, like this ridiculous holiday on the payroll tax. So people spend for twelve months and then you’re back to where you started. And this makes no sense whatsoever. And the idea that now is being pushed by the White House is just symptomatic of how far our thinking has gone off into the ditch here. They’re proposing, even though Social Security is bleeding and last year we had seventy billion more — and by that I mean the fiscal year that just ended in September — seventy billion more went out the door for Social Security checks than came in in the payroll tax.

Notwithstanding that, Obama wants to have a one-year holiday to reduce three out of the six points that the people pay in the payroll tax so that they what…? Can go out and buy some more Happy Meals that they don’t need or some Coach bags that they can’t afford. Because one year later, they’re going to be right back paying the higher rate. This makes no sense. It is really primitive Keynesian thinking that says all we have to do is drop money from a helicopter and that’ll pump up spending and then that’ll get the machinery of the economy going. The problem with that view is it ignores the fact there’s a balance sheet, as well as an income statement, in the economy. And if you get to the edge of your balance sheet, if you use up the credit, so to speak, or the credit card, then additional stimulus only buries you deeper and it does move the economy forward.

Chris Martenson: Well, the federal government, of course, is expanding its balance sheet like mad. And I think the Federal Reserve is enabling that. It certainly did with QE2 and indirectly, with QE1 — buying all that MBS paper — where was all that money going to go?

David Stockman: Right.

Chris Martenson: It’s going into Treasuries, obviously, in part. And so here with Operation Twist, they’re just enabling the federal government to take advantage of some long borrowing at that, what I consider to be, abnormal, grotesquely distorted rates that do not really seem to take the risk into account in the pricing. So we’ve got the federal government really blowing its balance sheet out at this point in time. How does that story end, in your mind?

David Stockman: Well, it ends badly. But I think we have to go right to the source. You’ve hit on it. It is the Federal Reserve and it’s the current leadership of the Federal Reserve. As far as I’m concerned, Bernanke is the monetary Darth Vader. He has destroyed the bond market. Because fundamentally, in a healthy capitalist system, the interest rate in the money market and in the longer-term capital market is the price of money and the price of capital. And if the pricing system isn’t working, if it’s been totally crushed, disabled, manipulated, rigged, medicated, everything that the Fed has done with QE1, QE2, zero interest rates, Operation Twist, all the rest of this insanity, then we’ve destroyed the ability of the capital market to function and we’re giving false signals in every direction. One, we’re saying you can count on the fact that overnight money is going to be free or close to zero through 2013. That is an open invitation to speculators to put on a carry trade, because the Fed isn’t going to surprise you with your ninety-eight cents on the dollar that you’re carrying the trade with, borrowing overnight, so that you can carry a two- or three- or four-percent return asset, or speculate in currencies or all of the other so called risk assets, and pocket the ARB. Now, this is really crazy.

It is totally undermining the healthy function of a capitalist economy. Now, beyond that — and here’s where I get to the fiscal issue — it’s hard enough for politicians to face the music, to dispense bad news, to make hard choices, allocate pain to constituencies whether it’s spending cut or tax increase. But when the Fed destroys the bond market, which is the benchmark for the whole capital market, and tells the Congress that you can borrow money for two years at eighteen basis points, which is — as far as Washington’s concerned — that’s a rounding error. It’s the same as free. Or you can borrow five-year money, which you can right now — I’m looking at the screen — at .78, at less than one point. When you’re giving that kind of signal, then there is no incentive, there’s no motivation for people to walk the plank and face down this monster of a fiscal deficit and imbalance that we have.

So the Fed has been the great enabler. The many, many costs to this policy that we’ve had — and we could talk about those — but one of them that is not remarked upon enough is that it has destroyed the government bond market and therefore, undermined the fiscal governance process in this country, because Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are.

Chris Martenson: Absolutely. I see it that way, as well. There’s two things that I think Bernanke was really doing in his policies. One was, as you mentioned, enabling, I believe, a false sense of security on the spending side because after all, if money is free it’s really not a big problem here. Look, our interest costs are dropping. On the other side, I think what he was really doing was helping to recapitalize banks. You give them free money and let them park it back with you and give them a quarter point on it, and I know it’s not a lot, but that was part of it, buying their assets off of them at par or something close to par, not market rates, I’m going to suggest here. That’s helping to recapitalize the banks. So guess what? He helped recapitalize bank balance sheets for the bad decisions they’d made so we got the whole moral hazard story looming there.

On the other side, what he’s done is he’s taken everybody who was prudent, everybody who was a saver, everybody who is on a fixed income or is relying on some sort of an income stream, and forced them to live at negative real rates of return for a number of years, and it looks like he’s set to continue that program. I think there’s social costs here for his actions that go well beyond just the financial world. I think, from where I look, I see real damage happening to what I’m going to call the prudent portions of our society. How do you see it?

David Stockman: I agree with that a hundred percent. You know, the banking system has been saved on the back of the savers of the United States. We have totally destroyed any incentive for thrift, for deferred gratification. The Fed has become more Keynesian than Keynes. And to think that a Republican White House appointed this Bernanke guy who had, you know, he was recorded everywhere at that point as talking about dropping money out of helicopters. There was no doubt he was an out-and-out Keynesian. They appoint him, and here is what we get. Now, the fact is, if you were going to bail out the banking system with this kind of transfer — I calculate it at three or four hundred billion a year — the suppression of interest rates on depositors, on the seven trillion or so of deposit base that we have, is at least three or four hundred billion a year. And that’s the same thing as taxing the public by three or four hundred billion and redistributing it to banks based on the distribution of their deposit base.

That wouldn’t get one vote. Okay, in other words, what I’m saying is, if it were done in a proper way as a fiscal transfer, put before the democracy to review and vote up or down, it would be voted down, overwhelmingly. It would be shouted down. It would not even see the light of day out of committee, to say nothing of the floor of the House or Senate. And yet, we have twelve people who can sit on the open market committee and affect a half-trillion-dollar transfer arbitrarily. They haven’t been elected, they haven’t been authorized to do this, they’re totally twisting and exaggerating their mandate, their so called "dual mandate." This ought to be grounds for a serious constitutional crisis, if nothing else. The Fed is operating as the central planning agency of the US economy. It is exercising plenary power from stem to stern in the US economy, and that is not the kind of system, 1) that’ll work, or 2) that’s compatible with all of our traditional notions of a private sector of a free market economy, of a distinction and separation between the realm of the State and the realm of private activity.

You cannot say enough about the danger of the deluded people who were running the Federal Reserve, and that’s why I’m so happy to see, finally, the Republicans waking up and the letter that came out a couple days ago warning them no more of this, you’ve done too much already. At least there’s a dawning recognition that we have a profound constitutional crisis emerging as a result of the Gang of Four. Yes, there’s twelve people on the open market committee. It’s the Gang of Four — Dudley, Bernanke, Yellen, and Evans — who have seized power in this country and really need to be called out.

Chris Martenson: You know, I think that this most recent Fed announcement, which just came out on September 22nd, I guess, or 21st, and it was around Operation Twist. That was a real disappointment to Wall Street. I think we’re seeing that on some of our screens today and yesterday, obviously, and maybe across the world. So maybe they did get a little bit of the message that, you know, you talked about some of the political and social risks that exist in this. I’d like to talk a bit about the economic and financial or monetary risks that occur. And I don’t really ascribe to any particular school of economics, but there is one quote from Ludwig Von Mises of the Austrian school that does stick with me because it rings true. And that quote is that, “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” I can’t find a lot of fault in that. I’ve analyzed that statement a lot, and it feels like we’re fully down that path at this point in time. What are the financial and — particularly the ones I’m most concerned with here — the monetary risks that you see in our current trajectory?

David Stockman: Well, there are big risks. But I think that quote is spot on. It was never more applicable than to our recent past. And it’s important to dwell on it, to focus on it, because the reason we have this crazy thrashing about by the Fed today, and by Washington with the front door stimulus, the back door stimulus, the absurdity of one-year tax holidays on payroll taxes that we desperately need, and so forth, is there is not a proper understanding of what caused the crisis in the fall of 2008, what caused the meltdown. And the answer is, it grew out of the preceding unsustainable reckless boom, exactly as Mises said. And as a result of failing to understand that, we have an implicit theory, which I think is remarkable in the mainstream of Keynesian policy makers or just politicians who would like to help, and that is that they don’t know where this crisis came from.

It was like a one-in-a-hundred-year flood; maybe it was a contagion that came in on a comet from deep space. But they have no explanation for it; it was bad luck. It hurt us so now let’s dig our way out and use the balance sheet of the Fed, the balance sheet of the federal government to compensate until we get back to normal. Well, that’s absolutely wrong, that we’re in a depressed economy right now because in 2003, -4, -5, and -6 and -7, we had an overheated bubble economy that wasn’t real, wasn’t sustainable, that created millions of jobs based on the margin credit extensions that couldn’t be sustained. And all of that was taken back by Mr. Market in 2007 and 2008 when the first debt liquidation started. And therefore, we’re totally on the wrong track, if we’re trying to restore demand that was never honest demand, or legitimate demand based on earned income and production in the first place.

And that fundamental issue is why policy has gone off the deep end and become so dangerous. Because now, they’re just pouring gasoline on the fire, as I think we all believe. Why would they think at the Fed that with the economy as sick as it is, the housing market as damaged as it is, that if you could get thirty basis points more on the long-term mortgage rate that somehow this is going to make everything better? And Operation Twist is, I would say, further evidence of ritual incantation. The Fed is so locked into this erroneous Keynesian world view that it’s indulging in a ritual incantation just doing the same thing over and over and over, when almost anyone who thinks about it can see why twenty or thirty basis points — if they can get that from Operation Twist — [would] solve anything that the last four or five hundred basis points of interest rate reduction haven’t solved, and what are the negative consequences of going in and manipulating and distorting the fundamental capital market of the world for thirty basis points? It’s not even a close question. It’s an evidence that they’re locked into almost insane policy making.

Chris Martenson: Well, so we’ve got the Federal Reserve headed by Bernanke. They’ve maybe [been] prescribing some excellent cures. Unfortunately, they have the wrong diagnosis, with ritual incantations. So Bernanke, is he Darth Vader, or is he a witch doctor? We’ve got some good metaphors to work with here.

David Stockman: Maybe we could apply both of them. But you know, I think, if you look at Operation Twist, there’s also an irony to it, which I think people who are trying to understand what’s happened, not just in the last year or two but the last decades or few, would be interested in. And that is the original Operation Twist, ironically, which I think was implemented in February or March 1961, was done as a valiant effort — although misguided — to protect the gold dollar, okay? It was still under the old exchange rate, and the threat at that point was there was a lot of hot money flowing out of the US because they worried about the expansionary fiscal policy and new economics of the new administration coming in — and properly so — Kennedy and all of those Keynesian advisors he had from Harvard. And so the Treasury, which was still run by orthodox people — including Douglas Dillon, who became Secretary of the Treasury — came up with an expedient whereby they could sharply raise short-term interest rates.

They pressured the Fed to do that in order to stem the outflow of hot money and support the dollar and support the waning days of the gold exchange standard. And, on the other hand, [they] wanted to push down the long-term interest rate to encourage investment and growth. But the point is, today, the aim is the opposite. Bernanke’s trying to destroy the dollar with Operation Twist and all the other monetary medicine that he’s dispensed. And yet, it didn’t work in 1961, for a good purpose. And today, to reincarnate Operation Twist as part of this capital market and currency market destruction that’s underway, I think is quite ironic.

Chris Martenson: It’s interesting. You know, I think it was a little over a year ago in the New York Times, you had an op-ed piece titled “The Four Deformations of the Apocalypse.” And if I paraphrase, you essentially said that Democrats lean towards, maybe, ‘tax and spend’ and the Republicans lean towards ‘borrow and spend,’ but that there’s really no effective daylight between their spending habits. Certainly there is, if we look at marginal priorities for where the money goes, but not in terms of either the amounts of the long term — even short term — fiscal prudence. What’s the reality of the situation? And how, when, or even why will economic or fiscal reality finally gain purchase with our decision makers?

David Stockman: Well, you know, that’s the heart of the crisis. It’s deep and stubborn. And it begins with the fact that after the early 1980s, we developed two free lunch parties in this country. The Democrats were always the free-lunch party of the welfare state and the Great Society programs and so forth. And the job of the Republican party, which was accomplished pretty reasonably under Eisenhower and, actually, initially under Nixon, who then finally threw in the towel and went totally Keynesian, but at least in 1969, he was attempting to maintain some fiscal discipline. So the job of the Republican party was to be the party that said no, the party that was the watchdog of the Treasury, the party that raised for the public the issue of fiscal discipline and the consequences of not maintaining it.

Well, after 1980, I was a supply sider, but not a free-lunch supply sider. And when the free-lunch version of supply sides set in and then became party doctrine, we ended up by 2010 with both parties wanting to give away the credit of the United States. The Democrats with more spending or defending the spending was their entitlements that were growing insupportably like Medicare or Social Security. And the Republicans cutting taxes randomly, continuously, and under every imaginable economic circumstance without offsetting spending cuts or a total framework of fiscal discipline. So we get to the point today where you now have Republicans saying no taxes, any way, any shape, any form, when the revenue is at fifteen percent of GDP, the lowest in history. And you have the Democrats defending what I call the twenty-four-percent line; that’s where spending is. And you have the President a few days ago threatening to veto a bill if it reforms entitlements and is put on his desk and it doesn’t tax the rich at the same time.

Now, that is a prescription for Banana Republic fiscal policy at best, and even more irresponsibility if you look at the real facts. Now, why did we get into a situation where our democracy became deformed and both parties became free-lunch parties and we no longer have a fiscally conservative party left? I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved — or morphed — a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the ‘T-bill standard’ or the ‘federal debt standard.’ And the other central banks of the emerging mercantilist Asian economies — Japan, Korea, and now, especially, the People’s Printing Press of China — have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. But as long as the debt… In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But we got away for twenty or twenty-five years with, you know, to use the phrase, “deficits without tears.” And because all the bonds on the margin were being absorbed by the central banks.

Where we are today is that the central banks of the world own five trillion of Treasury paper, from bills to thirty-year bonds. That’s half of the ten trillion outstanding. So I refer to this system, the Fed and all its subsidiary central banks, as a chain of monetary roach motels. The bonds go in; they never come out. That has totally distorted the capital markets of the world in fiscal policy making. In the last few years, especially. More than half of the debt, even though on average, half of it is owned by central banks and other official institutions, well more than half has been absorbed by the central banks in the last few years.

And so, as a result of that, the reckless irresponsibility of the two free-lunch parties has had no check. And as a result, the positions have become politically institutionalized. I mean, the Republicans can’t help themselves on the tax issue because nothing bad has happened so far, and, as Chaney said inappropriately, they have the view that deficits don’t matter. And so far, they haven’t, because the central banks have absorbed it all. But I think we’re at the end of the road for this monetary roach motel chain, as well. China is red hot with inflation. The People’s Printing Press is going to have to let the currency rise. When they stop pegging, they will therefore be buying less Treasury paper and one bid is removed from the market. I hope the Fed is done with any additional balance-sheet expansion. And if they don’t expand the balance sheet, then on the margin they won’t be able to absorb incremental debt issuance by the Treasury.

Other central banks are in the same position. So that’s why we’re coming now into a very dangerous phase, because we had a twenty-five year, let’s say, interregnum, here, where the consequence of massive debt issuance was not felt in the real economy in the short term, so that there would be a feedback that would cause at least some politicians to want to change course. Now, we have the central banks out of business and massive debt flow in both Europe and here that’s turning into the sovereign debt crisis, and that’s just another name for the fact that there isn’t enough private, legitimate private savings in the world to absorb debt at this issuance rate.

Chris Martenson: You know, I’m right with you on all this, because for years — and it’s gone on longer than I ever thought it could — but I’ve been watching with alarm the custody account at the Fed, which is really just a measure of the reserve balances growing in central banks across the world…

David Stockman: Sure, right. That’s three trillion right now.

Chris Martenson: Yeah, and it’s not just a little bit. This is like twenty, twenty-three, twenty-five percent year-over-year growth for years.

David Stockman: Right, right.

Chris Martenson: It’s an astonishing compounding that’s happening there.

David Stockman: Yeah, and add, if I could, just then add the 1.7 trillion of Treasury paper on the Fed’s balance sheet, and therefore, you have close to five trillion of the real outstandings. But actually, it’s worse than that, because if you take all the mortgages back, the GSE paper, that’s just a back-door form of Federal debt anyway, now that we’ve guaranteed the security holders with the bailout in September 2008. So if you look at the real sovereign and quasi-sovereign issuance of the United States, a massive share of it — both Treasury paper, per se, and the MBS paper, is in the Fed in the other central banks of the world. And if it were that simple, well, let’s just get it over with and have the governments issue trillions of new debt, drop it out of the air from the helicopter, and put it in the central banks. Now, we know, historically, that you can’t print your way to prosperity. And that’s essentially what policy amounts to today.

Chris Martenson: Right. And so assuming we can’t do that — and I’m in agreement with you that that can’t persist forever and that we might be very close to the end of the road on that — my question here is, essentially what we’re talking about then is a massive debt deflation if we’re going to write down — let’s throw a number out there — if the US has maybe twenty or thirty trillion of excessive total credit market debt, has to walk that off, what kind of economic impacts are we talking about? What happens to unemployment? How much does GDP actually contract, let alone not grow all that, right? So what do you think happens there if we really walk down that path of austerity?

David Stockman: Well, I think that’s where the gloomy outlook materializes in living color. I think the unemployment rate is actually higher than nine percent right now. It’s only nine percent on a mathematically calculated basis because we’re driving people out of the labor force, because they lose hope that it’s worthwhile to look for a job, or we lure them into not looking with unemployment insurance; one of the two. So I think we’re over double digits right now. Even if you take the labor force participation rate of two years ago and divide that into the number of jobs that exist right now, you’ll find that you get a double digit result. I think we’re going to stay at double digits from now till as far as the eye can see. I think we’re going to have a crisis of incomes in our private economy, because sooner or later, the ninety-nine weeks of unemployment’s going to run out. The safety net is under tremendous pressure, and that’s one side of the equation.

The other side of the equation is, I don’t see why we have any growth at all. The only growth that we’ve had is statistical growth over the last two years as a result on the margin of the federal government borrowing money and then redistributing it back through transfer payments or through direct purchases in these stimulus programs we’ve had. The number that I look at, that I think demonstrates that in spades — and this is kind of in round terms, but it demonstrates the point and it’s accurate within a few ten billion — but we’ve had a one trillion growth since the fall of 2007, when, allegedly, the cycle peaked in DPI — Disposable Personal Income. And that is the fundamental metric that measures the capacity for spending — PCE, Personal Consumption Expenditure — to grow. Or savings to grow. But the point I’m making is of the one trillion growth of DPI in the last four years, about eighty percent of it is due to either lower personal taxes or higher government transfer payments. And on the margin, the lower taxes — which may sound nice to some conservatives — but every dollar was borrowed because we were already deeply in debt before they started cutting taxes to stimulate the economy. And obviously, every dollar of the huge increase in transfer payments during that period was borrowed, as well.

So almost all of the DPI growth has been borrowed money using, taxing, the last bit of balance sheet that we had left, both as a political matter and as a financial matter. Now, I think finally, the politics had reached the point where physical expansion — I don’t know that we’re going to cure the problem, but hopefully it’s not going to get worse. The Republicans at least put a line in the sand on that. And as a result, I don’t see where we get much growth in the income statement of the economy. And without that, obviously, you’re not going to get GDP either.

David Stockman: That we need to have a giant alarm going off in the entire economy. And maybe that’s beginning what’s been happening for several weeks now, but in the last couple of days, finally, I think people are beginning to realize that this was an entirely artificial rebound in the financial markets, not in the real economy. And that the props that were under this monetary expansion and fiscal stimulus are no longer operative.

Chris Martenson: Well, so here we are looking at a period of austerity that’s going to be imposed, I guess. I’m thinking Greece is our metaphor here; that eventually the markets catch up with you. The Federal Reserve has a lot of power, but it’s not omnipotent. So I think in the past you said there are actually two primordial forces — the welfare state and the warfare state — that are really driving the federal spending machine. First, neither of those states, I think, are going to be particularly happy with the type of austerity you’re describing. So, first, I want to know how you might expect them to react to that austerity. And second, where do we really go for spending cuts here at this juncture, given how much mandatory spending we seem to have that’s essentially untouchable?

David Stockman: Yeah, well, those are really good questions because I think that’s why we’re seeing the utter paralysis in Washington that manifests itself daily. You hear all the talking heads on financial TV saying isn’t that disgusting? What’s wrong with these people? Can’t they realize they shouldn’t be fiddling while Rome burns and all that. But I think that is a superficial misperception. What is actually happening is that we’ve allowed the welfare state to grow so large, the warfare state to remain so unnecessarily huge, and the tax rolls to be cut so dramatically that we now have a gap that is so imposing that the politicians can’t cope with it. They’re paralyzed.

Anything they might want to do seems too insignificant relative to the size of the problem that they simply repair to inaction. So therefore, the military-industrial complex is hanging on for dear life and has actually driven through the House Armed Services Committee a budget for 2012 that’s up by three percent or so from 2011. Now why in the world, with the crisis as dramatic and as clear and as present as we see it now after having gone through the August debt ceiling crisis and the downgrade, would a Republican Armed Services Committee think you need to raise the defense budget in a world where we have no industrial enemies, where Al Qaeda is down to forty people, where the great holy warrior of Al Qaeda is dead, what are we thinking when they raise the defense budget? But I think it’s the military industrial complex that’s so dug in. And unfortunately, they see defense as a jobs program as opposed to what it really is — and utter and complete economic waste — that no progress is made. And of course, the same thing is true on this welfare state side.

I heard the White House press office the other day say that unemployment was a great jobs program. Unemployment insurance is a great jobs program. Now, how in the world could someone make that kind of preposterous statement? But it was only in the primitive Keynesian derivative sense that, well, if you send out the checks, people will use it to buy some food at the grocery store and someone will then work at the checkout counter. You know, that is the problem. Every feature of this is now being seen as a jobs program because the economy is stalled out. And the gaps are so great that it seems as there’s no political will or capacity to take on the warfare state when it should be dramatically shrunk and demobilized, and we can talk about that. Or the welfare state starting with Social Security.

How can someone not believe that at least the top five or ten million beneficiaries out of fifty ought to be means tested and if we can’t afford to give these people their full checks, since nobody earned it anyway, then the check needs to be cut back or eliminated. But there’s no capacity, really, to take on any of those issues. And so the system is falling into paralysis; not because the politicians are totally cowardly or stupid. It’s that the system has drifted into such massive gaps that the capacity for Democratic consensus and for positive action to slow down the doomsday machine is being lost. And that’s what the Keynesians never thought about, you know? They never thought you would reach the end of the balance sheet, that you would reach a crisis point like they’re having in Greece or Portugal or Europe, generally, or now in the United States. And they never thought about the weaknesses and the imperfections of democracy in terms of its ability to cope and make policy.

The whole Keynesian myth, I believe, is based on the erroneous idea that the private sector has its imperfections and its cycle instability, and government needs to step in with compensatory policy and make up for it without any examination of the State and the capacity of politicians to actually manage fiscal policy according to the Keynesian formula. The answer that we’re learning is they can’t, that the State has more imperfections built into the process of democratic action, and that this whole policy we’ve had for fifty years of managing the business cycle of macro-economic policy, the whole project of macro-economic policy, has been a giant error. It’s being discredited; it’s led us into this public sector sovereign debt trap that the political system can not work out of. That’s the real danger. That’s the real crisis at the moment.

Chris Martenson: Yeah, I agree. Where I think we had an opportunity to fall off of a small stepladder back in the mid ‘80s, early ‘90s, we’ve now gotten ourselves forty feet up an extension ladder. And so I think politicians are rightly scared of how we manage the fall from here. At the same time, I see defending the status quo and business-as-usual not being terribly, let me say, leader-like positions to take at this juncture of history. So we’re talking about political blind spots. I’d like to just talk about one of the larger blind spots that I see, quickly get your take on it. And one of my key tenets is our monetary system; you know, through its essential design of loaning money into existence and our entire economic and institutional scaffolding, which we then built around that monetary condition. Well, it all kind of requires endless exponential growth. Not a lot. Two percent, three percent a year mind you. But endless growth nonetheless. And without such growth, the entire system becomes shaky, groans ominously, threatens to collapse, maybe systemically.

So when we look at this, a second key tenet of mine is that, look, nonrenewable natural resources, they are the headwaters of all economic activity. With resources, you build an economy. Without them, you can’t. So at the top of this list has to be petroleum, given its unique role in fostering economic activity. It’s the original spring, then, that feeds all the tributaries. Where does Peak Oil fit into your world view here, if at all? To us at my site, it’s that and competition for other critically depleting natural resources including maybe land or fish or whatever that seems to be one of the fundamental issues at hand. And the US current leadership seems either ignorant or intentionally avoidant of this entire topic. Is it on the political radar at all? And if not, why not?

David Stockman: Well, it’s on the political radar but in a very superficial way. And I happen to have the screen on right now and I’m seeing someone sitting before a Congressional committee taking the Fifth Amendment on the guaranteed loans that Solyndra got from the federal government. Now that is symptomatic of everything that’s wrong. We can not have a State run solution to a very complex, subtle market problem. I agree that there is something in the nature of Peak Oil happening, but I think that’s a metaphor for the fact that a delivered BTU, whether it comes out of a conventional oil well or whether it comes out of the tar sands or whether it comes out of some new or more efficient form of consumption or combustion, the price, the real price of the BTU delivered or consumed is rising. And as the real price rises, I believe the market could keep things balanced, but it would slow down the rate of total output growth as the BTU factor weighs on the mix that goes into economic activity.

I think that is being totally ignored. It is another one of the headwinds or constraints that we’re facing, along with the demographic time bomb of this huge generation retiring. And if you look at all of these, there’s no reason to expect much economic growth for the next ten or twenty years, even if you had a healthy monetary and fiscal situation. But given the situation that we’ve described and given the massive excess private leverage that was built up in the thirty-year debt spree, we have sort of added insult to injury. We have maybe an inevitable question of the rising real cost of the BTU, being added to the demographic question, being added to the totally distorted world labor market that the central banks have produced, which is another whole topic. But when you put all those together, the headwinds are truly frightening.

Chris Martenson: I agree. So I see there’s a multiple convergence of forces here. And okay, so if I take the summary of this and I say, listen, you know, if a betting person now decides that the odds favor crisis over willing structural reform; that is, they come to the conclusion that maybe our future is more likely to be shaped by disaster than design, what would your advice be to the concerned American who wants these problems addressed responsibly, and what should they, as individuals, be doing to mitigate or protect themselves from what you see coming?

David Stockman: Well, the first thing is to protect yourselves, you must get out of the risk asset markets. This whole thing, in my view, is a scam that has been promoted by the day and hour by the talking heads of Wall Street and the so-called economists that they trot out on the financial media constantly with all kinds of spurious explanations as to why there’s a light at the end of the tunnel, that we’ve solved the problem, that the crisis is over, and that the normal machinery of economic recovery is back in shape. All of that, I think, is a dangerous delusion. And therefore, all of the risk assets are dramatically overpriced, from copper futures to the SNP index and especially, the higher baited names in the stock market. So my point would be it’s a dangerous place. Both the bond market, we’re in the greatest bubble of all times, it’s been driven by the Feds’ bond buying, which is now coming to the end. So the bond market, the fixed income market, is an extremely dangerous place that should be avoided at all hazards.

The stock market and the various derivative markets that relate to it are exceedingly dangerous. And so the best thing to do at the present time is conserve capital. And ultimately, the monetary systems of the world are coming apart. They’re falling apart. They’re losing their credibility, and therefore, gold is becoming the de facto money. We’re going to be back to a gold standard one way or another, through the back door, in only a matter of time, simply because the central banks are dominated by the ritual incantation of dying Keynesian theory. And therefore, I would say that’s what someone needs to do to protect themselves. What do you need to do politically? I see not a lot of hope at the present time, because both parties, as I’ve indicated, are in denial. They have their heads in the sand. They’re more or less embracing free-lunch economics. And I think until we have a thundering crisis in the bond market that truly puts the fear of God into Washington, we’re not going to get any break from the path of drift towards disaster that we’re on right now.

Chris Martenson: That’s an excellent summary. And I think we’re going to leave it there today. I really enjoyed this interview, and your views mirror a lot of my own. Maybe that’s why I enjoyed it so much.

David Stockman: Well, your questions were great, and these matters go right to the heart of what’s behind the moment-to-moment headlines and impulses that seem to drive the markets but are really not the underlying reality that people need to focus on.

Chris Martenson: Absolutely. And it’s reality which is the piece that I like to focus on. And there’s certain pieces of data and evidence that just can’t be spun and we talked about a bunch of them today. There’s more to be found on my website and I’m sure, as people follow you in the news out there, you’ll continue to make these points. And let’s just hope somehow we can shape that future by design rather than disaster, but plan as if maybe the opposite will happen.

David Stockman: Very good.

Chris Martenson: All right, thank you much.

David Stockman: I agree with that.

Chris Martenson: All right.

David Stockman: Bye.

The Best of Chris Martenson

“I have little doubt that most of the silver that is on the SLV’s web site with a bar number is there somewhere. But what I am really concerned about is if it is hypothecated or not, meaning is there more than one owner on that same bar. And I can almost guarantee that there are multiple owners for almost every bar that they report. It does not mean that that bar does not exist.

It takes ten contracts to be a market maker. So I have got ten contracts, I have got fifty thousand ounces, and I ship it to my buddy who is a hedge fund manager over in Idaho. That is my silver. I have just sent it over to him on a lease. I have leased it to him. Now he has taken that silver and he has swapped it with somebody at the SLV, so they have got bars there. And he swapped for those and now those are on the exchange showing as part of the deal. So you can have a lease and a swap, so you could have two or three claims on those same bars. And that happens over and over again.

So the reason I used “purportedly” is that is the correct word. There are very few bars that are actually one-to-one correspondence that are sitting on the SLV and that is their only purpose. That is not the way banks operate. That is not the way the whole system operates. So I am not against the SLV, but I also state very clearly that if you follow what I teach, you would not want that to be considered a primary silver investment. That is a paper investment. That is not silver. That is paper. It only settles in paper. People ask whether I think there is going to be a default on the SLV. I say, how could there be? I mean, read the prospectus, they settle in cash. Think they have any trouble printing that stuff up? I haven’t seen any problem with that lately.”

So cautions David Morgan, publisher of The Morgan Report on precious metals and proprietor of Silver-Investor.com. More so than perhaps any other, the silver market has been loudly and visibly accused of rampant price manipulation. And more recently, suspicion is growing that the exchanges and ETFs dedicated to trading the metal do not hold sufficient volume of it to meet their obligations. Is the silver market free and fair? Chris delves deeply into these important questions with one of the best-known silver experts.

In this interview, David explains why:

• The silver market is definitely manipulated, though likely not as rampantly as some believe. And desipte this manipulation, he believes the overall upward trend in silver (and gold) cannot be suppressed in the long run.
• Holding phyiscal bullion as a core part of one’s precious metal portfolio is absolutely critical. Many of the bars pledged to tradable securites (ETFs, futures, etc) are assigned to multiple owners – meaning there is much less actual bullion underlying these securities than the market thinks.
• Why his long-term outlook for silver is so bullish. Annual industrial demand for silver continues to outstrip supply from new mining, while increasing investment demand for silver as a monetary vehicle only takes more tonnage out of the market. At some point, the market will wake up to the fact that silver is in much shorter supply than current appreciated. At that point, the price will go much, much higher.

Click the play button below to listen to Chris’ interview with David Morgan (runtime 35m:58s):

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Or start reading the transcript below:

Chris Martenson: Welcome to another ChrisMartenson.com podcast. I am, of course, Chris Martenson, and today we are speaking with David Morgan, publisher of The Morgan Report on precious metals and proprietor of Silver-Investor.com. David is a long-time expert on the precious metals markets and how they operate and actively consults for investors, hedge funds, mining companies, depositories, and bullion dealers. Today we are going to talk with him about manipulation in the precious metals markets. Does it truly exist, and if so, where and to what extent? And what are the implications for buyers and holders of gold and silver today? David, we are privileged to have you here with us today.

David Morgan: Well, thank you. Pleased to be with you.

Chris Martenson: I am really pleased to have you here today and very interested in your views on silver, of course, naturally for you. The first thing I would like to start with: there is a lot of talk out on the internet, on my blog and at other blogs where people are wondering what is going on with the silver market. Is it a fair and free market? I guess this could be asked about the larger precious metals markets as well; and maybe the commodities markets, too, which people are concerned about. But with your experience and what you have seen: you have been looking at the silver market for a long time, tell me how you think the market currently is constructed and whether you think it is free and fair.

David Morgan: Okay, well, it is definitely not a free market in the true since of the word, and it is manipulated but probably not at the level that a lot of people consider it to be manipulated. This question comes up fairly often. One of the more recent times it came up was in a very large public forum at the Silver Summit in 2009. The Silver Summit was actually a creation of mine and one of the mining guys in the Silver Valley that is fairly close to where I live in Spokane. The Silver Valley is in the Coeur d’Alene mining district in Idaho, and I am about an hour and a half from there. Anyway, we started Silver Summit several years ago, and it grows every year. And 2009 had a pretty good turnout. I am going to guess probably 800 to 1,000 people. And during one of the intermissions, Al Korelin, who has his own radio show, gathered us as the MC. Us meaning myself, Bill Murphy from GATA, Roger Wiegand, Trader Rog, and Jeff Christian from CPM Group, and I believe that was it, those four. It might have been one more, and if I am leaving someone out, forgive me, but…and I wanted to get the debate going between manipulation and non-manipulation. 

So Murphy went first and gave the GATA position and then Jeff Christian gave the CPM position and then it was my turn. And I said, well I am in the middle, and I didn't really plan to be in the middle, but you cannot manipulate the overall trend of a market. The free market forces that remain are large enough to take a market higher or lower depending upon what the real market forces are. The forces underlying the silver market are tremendously huge from two aspects, both industrial and monetary, and those forces have been showing from basically 2003 to present day. Where you can really make the case that the manipulation that exist certainly takes place – and I will explain that in a moment – but you can really say that what is left of the free market really has an effect is from the advent of the ETFs in the silver market. If you look at what the silver price has done since April 2006 when the SLV was implemented – actually, before that because there was some anticipation in the market – till present day, you will see a huge increase not only in the amount of physical metal purportedly bought by these ETFs, but the overall trend of the market price-wise, of course.

I think it bears repeating that the overall trend in both gold and silver cannot be manipulated. All right, so what does that mean? Well, that means that what remains of the free market forces have influence, but within that main trend, the market is manipulated quite a bit. How often? I do not know. Daily? I doubt it. But I think there are some extreme cases. And I think it is good to look at the extreme cases because if they can do it in an extreme way, they could probably do it the subtle way as well. So one of the extreme cases was brought out and I think, again, GATA probably did one of the best jobs of this because I think they filmed a lot of this, of one of the traders – I forget his name – but he talked about 25% of the world's silver markets being sold at one mouse click. Now anyone that knows anything about the market a moves understands what he just said. All markets move based on buying or selling pressure. If there is more buying pressure, the price of whatever the commodity or the stock or the automobile or the Rembrandt painting, it does not matter – whatever is being purchased will force the price higher because there is a lot of buyers that want to buy it. Conversely, if there is a lot of sellers selling something, the price will move down, be it a stock, be it a commodity, be it an abundance of Taurus automobiles. No one wants a Taurus anymore. There are lots of sales signs on them.

So that is how markets move. So if you have a huge supply on paper of silver and you say to the market, u201CI am selling 25% of the world's supply nowu201D, there is no way that that cannot do anything but manipulate the price downward in a huge, huge way. Because if you understand commodities and most people that listen to these types of programs do, it is a zero-sum game. For every winner there is loser, and all orders have to match. And so that took the market down substantially, and that was brought out in the CFC hearing. Chris, if you might…well, you might have a question or two, but I also want to give another good example of how the market is manipulated.

Chris Martenson: Yeah. Oh, absolutely.

David Morgan: Let us take the floor trading. Now just to be very clear with everyone, the amount of floor trading that takes place in commodities these days is rather small relative to the amount of what they call u201Coff-floor trading,u201D which really means electronic trading. I mean, the amount of computer trading that goes on in these markets is huge relative to what is still done on the floor. But nonetheless, this serves as a very good example of how the price of silver actually operates, pretty much from an objective perspective. And I want to emphasize the word u201Cobjectiveu201D because I have given this rendition, which is factual, many times, and it is always amusing to me the reactions I get. I did this, actually, for a bunch of Casey's researchers at a mining trip I was in in Mexico. There were about six of them, myself counting as number seven. And – I am going to give this out – but three of them were convinced that proves without a doubt the market is manipulated, and the other three said, no, that is just how the market works.

So here it goes. And this really, really applied earlier on in the silver market. It still applies to some extent now, but the market has many more participants, as I said: the ETFs, more offshore participation, and India has always been there, but China. There is just a lot more interest in the market, so the market is more diverse, which is good for any market. But regardless, here is how it works. So, especially in the earlier days, you have, let us just say, two main parties. And this really is a good breakdown of it. I will give Ted Butler plenty of credit here — he has explained this many, many times. I do not know if he is explaining it the way I am going to. But he talks about the commercials or the banks, they are the synonymous, and the trading funds. So I am a trading fund and I am long silver, meaning I am buying. I am bullish, I think the price is going up. So I am in the silver market, I am buying, buying, buying. Well, there is buying pressure and for every buy there has to be a sell, so the banks are selling, selling, selling, selling. So now, hypothetically, and you can look at a chart, but you can see the price when we broke out a $5.55. The price went up to $8.40. So there is all this buying pressure and the market moves up, up, up, and the price is up roughly $3 from the break out of $5.55. And now what happens is the trading funds have shot all their bullets. In other words, they have no more money available to them at all to put in the silver market. They bet $5.50 and $5.75 and $6 and $6.25 and $6.50, and they are buying all the way up. And the banks are selling to them all the way up. But now there is only – really, there are several ways, but I am just going to focus and keep it really simple. There is only one way for these trading funds – I hope I did not say banks – the trading funds buying all the way up, the banks selling all the way up. The trading funds have a huge profit on paper. The only way for the trading funds to get out of their position with a profit is to do what?

Chris Martenson: Sell the position.

David Morgan: To sell.

Chris Martenson: Yeah.

David Morgan: Absolutely. They have to sell. But since the banks were selling all the way up, do you think the banks are going to buy at the top when they've been selling it all the way up? They are going to sell on top of the trading funds. What is that called? Huge selling pressure. Huge. Hey, but wait a minute: all trades must match. So on the way up, some hedge fund decided that $7.20 looked like a really great price for silver, but they missed it and it opened at $7.40 the next day and then it went to $7.60 and a few trading days later it was over $8. And then a few trading days after that it was in the $8.30s and $8.40s, but they have an open order for $7.20. And so now they get their wish because there are no orders that are open to buy silver except that order, and now you get what is called a u201Cgap down.u201D They have to match. There are all these sells. The trading funds are selling. The banks are selling. Who's going to buy? And the answer is that lucky hedge fund is buying. So that is a gap in the chart and that means that those 20 contracts that the hedge fund wanted to buy is $7.20. It gets its wish. So it shows in the chart as a gap.

And the reason I am doing this and emphasizing it so strongly is I think that the extreme example is the best way to illustrate the point so perfectly clear that there is no ambiguity for anybody listening, Chris, to your show. Because I want it to be well-understood. I want people to understand how these markets work. And I want it to be unambiguous or unquestionable what really takes place. So then you can take that same scenario a little further, and it might be some people that are on the floor themselves that say, u201CGee, we just had a $1.20 gap down. I think it is going to bounceu201D. So the locals, that's what they call them, come in and buy or maybe somebody saw it and says that cannot be – whatever. So the market starts to get more participants and there is more fresh orders that come in and that kind of thing, and then maybe some of the banks say, u201CWell gee, we just shot it down a buck twenty, maybe we could get rid of some of our shorts in the $8su201D, at the $8 level and that type of thing. Now there was a gap in the chart at that time, it was not as dramatic as I just illustrated, but it does exist. If anyone goes back and checks, you will see there is actually two gaps in the chart, and this is what takes place and took place again and again and again. I would just call it the game restarting.

And again, I will give Ted Butler some credit here that he very much deserves, because Ted was really instrumental in waking a lot of people up to the Commitment of Traders reports. And what you could do with those in the early days is you could almost trade silver to the penny. Now those days are long, long, long, gone. And not that I advocate trading for anybody, in fact, just the opposite. I think most people should never being in the futures market. I happen to be there myself on a very small basis. In other words, I do what I teach which is, if you have the wherewithal, the funds, and the ability, then you can use a very small, small portion of your overall funds to either use it to speculate hedge or that type of thing. But regardless, that is how the market works. I think I have beat it to death, Chris, but you give me some feedback.

Chris Martenson: Well, this very much fits with my own views. I actually was a futures trader for a while for myself, for my own private fund. I mostly focused on SPX and silver and gold. So I am very aware of the shenanigans that you talk about because I watched them happen again and again. And so what I focused on here, though, is: you said if the main trend is up though, these bounces that we are talking about where a trading fund and a commercial bank are involved in some blood sport with each other. As far as I am concerned – they do not even care about fundamentals, fundamentals like what is the industrial use of silver? How much is there? All they care about is where the books are stacked, right? How many people are short? How many people are long? It is a game. So the price of silver is volatile not because of fundamentals, for the most part, but because of these games that are going on, particularly in the paper markets.

David Morgan: Absolutely agree 100%. I mean, those guys on the floor do not have a clue if we would ever run out of silver or what is used for – any of that stuff. They do exactly as you stated. So they could care less. But, of course, the public sees this stuff and they get worried that the commercials know something no one else knows about, the true fundamental picture of silver and that kind of thing. The commercials may have some insight into that, but traders basically do not care. And most of the banks really do not either. They are there for one purpose and that is to make money.

Chris Martenson: Yeah, well anybody who still has a lot of faith in the banks at this point maybe they should start reading some newspapers from starting about two years ago. I have lost a lot of faith in these people to do anything other than to have a very, very finely focused since of what is available today, maybe tomorrow – but next year, not so much. And so they do that game really well. I want to talk now about where silver is going. And before I get there, you mentioned one word that was very interesting to me, I want to make sure we circle back on it. You mentioned in regards to the silver ETF, SLV, you use the word u201Cpurportedlyu201D to describe their actual physical silver holdings. Can you flush that out for me, please?

David Morgan: Absolutely. This is one that is in a controversial area, and I have done a few interviews privately for my Mastermind group. But I have little doubt that most of the silver that is on the SLV's web site and gives you the bar number is there somewhere. But what I am really concerned about is if it is hypothecated or not, meaning are there more than one owners on that same bar. And I can almost guarantee that there are multiple owners for almost every bar that they report. It does not mean that that bar does not exist.

It takes ten contracts to be a market maker. So I have got ten contracts, I have got fifty thousand ounces, and I ship it to my buddy who is a hedge fund manager over in Idaho. That is my silver. I have just sent it over to him on a lease. I have leased it to him. Now he has taken that silver and he has swapped it with somebody at the SLV, so they have got bars there. And he swapped for those and now those are on the exchange showing as part of the deal. So you can have a lease and a swap, so you could have two or three claims on those same bars. And that happens over and over again.

So the reason I used u201Cpurportedlyu201D is that is the correct word. There are very few bars that are actually one-to-one correspondence that are sitting on the SLV and that is their only purpose. That is not the way banks operate. That is not the way the whole system operates. So I am not against the SLV, but I also state very clearly that if you follow what I teach, you would not want that to be considered a primary silver investment. That is a paper investment. That is not silver. That is paper. It only settles in paper. People ask whether I think there is going to be a default on the SLV. I say, how could there be? I mean, read the prospectus, they settle in cash. Think they have any trouble printing that stuff up? I have not seen any problem with that lately. 

Chris Martenson: Yeah. All right, so they have, apparently, a lot sitting over there. When we look at this primary trend, you mentioned that SLV was really a critical component of starting to enforce, I guess, the fundamental trend to the upside. Any concern about them being a catalyst for reversing it, or do you just see investment demand continuing from here? And how does SLV factor into that for you?

David Morgan: Yeah, very good question. I have been asked that before. I am so bullish and I am biased. I think anyone that knows me very well knows that. I was asked that early on and it kind of dawned on me. Yeah, of course, you know?

First of all, some numbers. The SLV has claim to roughly 300 million ounces of silver. The amount of silver that is held by the dealers on the COMEX is less than 30 million. So in round numbers, the SLV is ten times bigger than the COMEX, yet the COMEX is what gets all the attention. You add in the physical realm whether the amount of the SLV is held independently without multiple claims like I am almost certain that there is. Regardless of that fact, they are a huge supplier of silver. So when you get a selloff, as we had recently, I think it was 35 million ounces came off the SLV, at least by their books. And that, of course, is a large hunk of silver to move around. And it is just like the example I gave earlier, it will weight on the market significantly and it has. Now whether that physical silver really moved off of the SLV vaults to somewhere else, I am not sure. It probably was a paper transaction, but that neither here nor there as far as would it actually caused the market to do.

Chris Martenson: Okay. So here we are and silver just recently…if we are going to talk about manipulation, we have to talk about the most recent take-down, I guess. So by my eyes, anything that starts at 1:30 in the morning on Sunday and knocks that much off of silver's price is a suspect move in my mind, particularly since most of that knock down stuck at the first open of the major markets the next morning. What are your views on that particular piece of work there?

David Morgan: Well, my personal view on that is that it was so blatantly obvious a blind man could see it. I mean, look, when you get a market that is moving that down in such a small volume arena. Remember all prices move up and down – as you know, I am not lecturing you, Chris, this is for your audience – you know, up and down. So there is a massive amount of selling in a very, very, very small market. It takes the price down significantly because it is such a teeny market. You can move it very easily. So the smaller the market it, the easier you can manipulate it.

So now what happens on the open is that the clerks are required by law to start sending out margin calls on everybody that is on the open that is in the margin territory, so this thing starts feeding on itself. And this has got to be orchestrated. I mean, you have to be a moron not to know what is going to take place when you do it. So it really upsets me, as you can tell from my voice. I do not like it. I do not know if it is any way to correct it. I mean, if there was a floor trader that is bullish silver out of position for tech, which is it could have been true, maybe. They might have seen it and see the order flow being so ridiculously small they said, u201CAre you kidding me?u201D, and started to buy on the open. And it might not have happened, you know, there was enough time right at the open and they would have to be pretty quickly to take place where you might have prevented some of the damage – but that is not what happened. You almost have to wonder, you have to actually ask the question: u201Cis this a total set up or not?u201D I mean, it is like, okay, it is going to happen now. And then, of course, when it opens in the markets, get ready boys. Get your speed dialers set up because here we go. u201CStart sending out the margin calls. We are coming for them again.u201D   

Chris Martenson: All right, so yeah, the whole thing looked very suspicious to me. The analogy I use is it is kind of like the price of beef plummeted in Hawaii one evening, and then next morning, all of Oklahoma opened up 10% down.

David Morgan: Good analogy. Well-said. I will use that one the next time I am asked about this.

Chris Martenson: And it's silly, right?

David Morgan: It is.

Chris Martenson: It should not have had any impact at all, really. I mean, it should have been undone and whoever dumped all that should have lost their shirt.

David Morgan: Anyway, you are getting me excited. You are exactly right, and it is only because these paper markets exist how they exist that this can take place.

Chris Martenson: Yeah. All right, let us switch things up a bit though. You mentioned that you do not recommend anybody should be trading silver, so I think you are an investor in silver. Why is it that you think silver is a good investment, and could somebody Rip Van Winkle silver in your mind? I mean, they buy some, go to sleep, 10 or 20 years later wake up and feel good about what they have done?

David Morgan: Yeah. Personally, I do both, trading and investing. I have three levels of service. The main service is for the buy-and-hold investor, and I think that is the safest for those people. Some people like to trade and that is fine, and I do a little bit of that myself. As far as a Rip Van Winkle question, it is an excellent question. I was obviously very bullish on silver starting, actually, a couple times in my life. This is the second bull market for me, but I really got on the band wagon in, actually, the late 90s and then after moving up here and starting a Web site, I had another one earlier. But regardless, I was very bullish on silver from 2000 to 2010 on basically the monetary aspect. Yeah, I looked at the industrial and it was growing and it was important, but after ten years, I decided to take another look at the silver market from the aspect of assuming I didn't know anything about the silver markets. So I took out a blank sheet of paper and I asked a question: u201CThis is January 2010, would I want to buy silver for the next ten years or not?u201D When I got done with that study, I published it in the March issue of The Morgan Report. It is still available for all my members, paid members can get it, but I have lectured on this for free. So if you really want this information, if you just Google my name, there are several lectures out there that I have gone through pretty much the entire report.

Regardless, Chris, what I found was astonishing. What I found was that within three to four years, we are going to be back in a deficit situation and most of the silver bucks know what that means and some of the new listeners might not. But silver basically was in a deficit from 1990 to 2006. For 16 straight years the amount of mining available and recycling available did not meet total demand. But supply and demand have to meet every year. And so the way it meets is by the above-ground stockpile, I will call it, of silver. It was 2 billion ounces in 1990. It dwindled down to roughly 500 million by 2006, so round numbers, we were taking a 100 million ounces of fine silver out of the stockpile every year to meet the demand for 16 straight years. And then around that same time frame, the mining supply had increased and increased from the commodities boom and we had a crossover, meaning that the mining supply plus recycling does meet total demand currently. That is just on the industrial side, but if you throw in the monetary aspect as well, you have monetary demand that is going to be there. And you are going to have a supply chain that cannot meet just the industrial demand. So I am more bullish now, Chris, on silver going out ten years than I was, as I said, back in the year 2000.

I was surprised by this – now I want to be very careful here because one, whenever you project something ten years, and I do not do a linear projection by the way, you are probably going to make some errors. So I was very concerned if I took into account that there are errors to be made, there are things that I am going to overlook, so I only looked at the three main areas where the most rapid growth in silver exists and that is in food, water, and solar. So the three things people need the most, they need food, they need to eat, and they need energy. There is a huge push, as everyone knows, for solar energy around the planet. Governments around the globe are looking to push the solar industry. I am an engineer. Solar is really not that efficient a methodology to make electricity but it does. But it is being pushed. And when you have it being pushed, it is going to get a lot of money and a lot of silver is going to be used in the process. Water purification, very important obviously, silver is used there more and more. And lastly, on the food processing. Packaging is part of it. With the nanotechnology, you can impregnate these plastic sheets with silver now, and you can do a wrapping of a meat or any other product. You could do it with potato chips, as an example (they don't). Any packaging you can think of, silver impregnated will keep the product from spoiling a lot longer, so it is used mostly in like the meat packing industry. But that is a huge growth industry as well.

So those three are the only ones that I account for in the study. I did not look at the RFID tags, I did not look at consumer electronics, I did not look at everybody in China buying a flat screen television. I just discounted all that stuff. They still are going to have a problem three or four years out. And the reason I keep saying three or four is because there is going to be a very significant increase in the amount of silver that comes out of the ground from some significant mines over the next three years or so. And I have to be truthful, I mean that is fact and let us stick to the facts. So there may be a lot of the mainstream press or the mainstream financial press telling everybody how much new silver is coming to the market. And they will probably be accurate on their numbers.

What they are not telling you is that that is going to last for just a few more years. And if everything goes as I expect it to, meaning in a very strong recessionary environment, there is still going to be huge industrial demand for silver. And there is algo going to be monetary or investment demand. I think silver is one of the most easy investments you could actually sleep on. Now, it moves quite rapidly up and down as we all know, but if you are taking a Rip Van Winkle approach that I'm putting X amount of dollars or Aussie dollars or Candos into silver, ten years out and I am giving it my grandkids or for myself or whatever the case may be. And that long term approach, I cannot think of a better investment.

Chris Martenson: Yeah. All right, so I just noted I think India's year-over-year demand growth for silver was up a couple hundred percent this past year, and we are seeing all sorts of demand increasing from industrial sources. One of the things I track very closely is the idea that, yes there are some fairly significant new mines coming on board, but a lot of silver also comes as a byproduct of other things: zinc, copper mining, other things. And as I look into that space, I see peak oil as being very real. I see energy as being a critical component of mining and mining cost, and I see the possibility that some marginal mines may not really be economic at these or higher fuel prices. So there are all sorts of factors sort of weighing in on this. Yes, there are more people. Yes, there is more industrial demand. Yes, we are going to be wanting more silver for a variety of purposes. Yes, there are new mines coming on to help meet that. And on the other side of that, we have got this idea that known mines are depleting. Eventually all mines run out; that is the nature of mining. And they run out faster at higher fuel cost because the marginal production just does not cut it. So on a Rip Van Winkle standpoint, when I look at these things, 10 or 20 years I think we are facing a very different landscape, and so it defaults all the way back to I have got a very simple investment philosophy here – a bird in the hand is worth two in a the bush. I prefer physical silver in this regard. What are your thoughts there?

David Morgan: I have always talked from the beginning that as long as this bull market continues, number one: you have to buy physical to start your metals portfolio. Basically, if I could, I would not let anyone subscribe to my service that did not initiate a position of physical silver and or gold before they ever talk to me, so to speak. I cannot control that, of course. But, no, the only monetary asset outside of what I call the matrix, I mean everything else…you can have the best mining company in the world, but you still have to buy it through a broker and you still have to sell it through a clearing house. Gold and silver, you do not have to clear anywhere. I mean, I come from an aircraft background. I do not talk about this very often, but the survival kit in fighter jets is a gold coin. They do not care where you parachute over. It could be Vietnam. It could be China. It could be anywhere. Anywhere in the world, that gold coin is recognized as money. And there is not any clearing problem, is there? You just hand it to somebody and they know what it is.

So that is what gold and silver represent anywhere on the planet, and a lot of people just do not get it. They do not get what value is, what real value money's basis is, what honest money is all about. A lot of people do. There is a very small percentage. But people take for granted that everyone knows what gold is and yet ask them…a lot of people in some places have never seen it, like a certain currency or whatever. But that kind of money, gold money, silver money is recognized everywhere. So I definitely emphasize buying the physical metal first and have it in hand if you are okay with that. If not, have it in a secure location that you will have access to and you know it is there. After that is established, then I am a little looser. I am pretty free market. So the way I teach is to go in a top-tier cash rich un-hedged mining companies. I like big money and big companies. I am much more inclined to grow my wealth at 20, 25, 30% a year compounded than to buy every junior mining company out there that has got a story to tell.

I am not really that big on the story stock thing. We have done very well on some of them. I have lost on others. But I teach bet a little to win a lot. This is speculative money. Make sure it is a speculation. Sometimes people do not do what I teach. I cannot, again, control that, but I am very consistent with what I tell people. Right now the real sweet spot on the mining side is in the mid-tier sector, and that did so well for the first ten years I have kind of refocused the report now to emphasize that sector because that is where the real best risk-to-reward profile lies. But any of us that write in this sector, you have got to diversify even within the sector. Nothing is more frustrating than buying a mining company and only buying one and your goes down while many more are going up. You have to have a basket. No one is smart enough to give you a stock that is going to do well. You have to diversify throughout that sector. I hate a long list. Diversifying does not mean you have to have a hundred. I think ten or so is probably enough diversification. Who can track a hundred companies? I know I cannot.

Chris Martenson: Right. So we have our physical core portfolio. Even Merrill Lynch says 10% gold exposure is not a bad idea. I am personally much higher than that. Everybody has to make their own sort of decision around that. And then after that, you recommend and track and offer service around looking at how you can leverage your investments in the markets. So, David, if people want to find out more about you and your service, where would they go?

David Morgan: Well, there is a couple ways to get there. The easiest is the domain name, TheMorganReport.com. It is all one word, TheMorganReport.com. You can also go to Silver-Investor.com. Both take you to the same place.

Chris Martenson: Great. And you have your offerings, your subscription service – people can find out more.

David Morgan: Right. It is a two purpose Web site, tons of information for free. Do not feel obligated to subscribe. You can get on the free email list if you want. I give good information on that for free every week. And then if you are a serious investor and you want to get my best thinking, you can try a subscription.

Chris Martenson: Excellent. So how is the Silver Summit 2011 shaping up?

David Morgan: Quite well, thank you, and we are not afraid to cover both sides. I mean, Jeff Christian and I, call us u201Cfriendsu201D in quotation marks, we certainly do not agree on everything, but Jeff is invited every year. And I think it is good for people to hear both sides. I am not a know-it-all. I try to be a learn-it-all. I read a lot of stuff that I am opposed to, but I think it keeps my mind sharp. And I like to see the other side. I try to keep an open mind. I am skeptical but with an open mind.

My main core proposition is my mission statement and that revolves around the fact that fiat money has always failed. And if you do not think it is going to fail this time, then do not listen to this program and have a nice day. If you are concerned, then I think you should get better educated. And, Chris, I think you are one of the leaders in the field as far as educating people. You are a broader base than I am. I mean, I am pretty strong economically, especially on the Austrian School, but I am pretty focused on the metals themselves and mining. And that keeps me quite busy every day, but you have got a broader base looking at the oil situation. And I, coming back to what you said earlier, totally agree. I mean, I think you are not going to see the increase compounding two to three percent in the silver market that we have seen over the last eight years continue because of the energy situation, but I projected my analysis as if it would. In other words, to be concerned, I pretended as if we could keep mining at a three percent growth rate compounded for the next decade. I really, really doubt that is the case.

Chris Martenson: Right. So, well thank you for the kind words, and it has been a pleasure talking with you today. I hope we get to do it again.

David Morgan: My pleasure. Anytime.

Chris Martenson: All right. Thank you very much, David.

David Morgan: You're welcome.

The Best of Chris Martenson

“The rule of law has basically been thrown out the window. Money printing is the order of the day. And when politicians take control of central banks, which they have done in the United States and they are also doing in Europe, that basically destroys the currency. It puts the currency on the road to what I call the Fiat Currency Graveyard, so I expect there are going to be massive currency problems as we go forward. The financial crisis that we have been dealing with for the last several years has not been solved.”

So cautions James Turk, widely-respected precious metals expert and founder/chairman of GoldMoney. In this detailed interview (recorded in June), Chris and James explore the probable outcome of the current US debt-ceiling operatics, the likelihood of future Fed money printing, and strategies for preserving wealth. In short, James believes we are witnessing the decline of the world’s major fiat currencies, and expects gold to be remonetized in the aftermath.

James explains why he expects:

• The US Government to raise the debt ceiling in August, which will require the Federal Reserve to print more money in order to soak up the new debt, sending gold and silver prices much higher this summer. Holders of fiat currencies to experience increasing losses in the purchasing power of their wealth; contrary to those who hold precious metals, who will see the reverse.
• This pattern of currency devaluation to be similar to the many other examples seen throughout monetary history. In short, the “unthinkable” event of a dollar collapse is a much more probable event than most consider.
• Precious metals to be an excellent vehicle for preserving purchasing power through this next transition, and whatever future currency emerges, their historic role as money to be restored.
• The end of the bull market in precious metals is years away. We’ll know its ending when holders of PMs begin trading them for other assets (e.g. property, securities) that have become overly undervalued.

Click the play button below to listen to Chris’ interview with James Turk (runtime 49m:11s):

Download/Play the Podcast Report a Problem Playing the Podcast

Or start reading the transcript below:

Chris Martenson: Welcome to another Chris Martenson.com podcast. I am your host of course, Chris Martenson. And today we have the distinct privilege of speaking with James Turk, founder and chairman of GoldMoney which offers investors an easy and inexpensive online solution for buying precious metals with international storage options. James is one of the foremost authorities on precious metals and has long offered market forecast commentary including co-authoring The Coming Collapse Of the Dollar and How to Profit From It, with our good friend, John Rubino, of DollarCollapse.com. He has built his career on decades of experience in international banking and finance spending many of those years living outside of the US, which gives him a critical advantage to look at our economy with an outsiders eyes. I am really delighted to have you here, James, and I have a tall stack of questions prepared for you. Are you ready to dive in?

James Turk: I sure am, Chris. It is a pleasure to speak with you.

Chris Martenson: The pleasure is mine. So, short-term, what I’m really interested in here is to start diving into where gold is going to go short-term, where do we buy gold? Do we buy it now? Over the short-term people are very concerned about the price of gold and where it’s at and where it might be headed. So with QE2 ending here at the end of this month — we are in June right now – how do you expect the precious metals to be impacted?

James Turk: Well I think the precious metals are going to do quite well this summer. And I don’t agree that QE2 is going to end in June. It may “end” in June but it is not going to end on August 2nd because on August 2nd the US government is going to increase its spending limit probably by $2 trillion and the Federal Reserve is going to have to step in and start buying some of that government debt and run the printing presses again with all this new money creation. And I think that is what is going to light a fire under both gold and silver this summer.

Chris Martenson: So you are of the view that QE whatever, 3, is a done deal because they are in something of a box. The federal government has enormous borrowing needs and you are of the opinion that really without the federal reserve being there, there is insufficient buying power for all the borrowing needs they have?

James Turk: Yes that’s exactly right. Look at what has happened since August of 2010 when the Federal Reserve announced QE2. During that period of time, up to the present, the US Government debt has increased about $900 billion, about $500 billion of that has been purchased by the Federal Reserve. What is happening is that the US Government is spending so much money it is forcing it to borrow more money than the market is willing to lend to it. When that happens, only two things can happen: spending has to be cut back or the Federal Reserve steps in and buys that government debt and turns it into currency. And that is what QE is all about. This policy of buying government debt is going to continue once the debt limit is increased on August 2nd. Maybe the Federal Reserve will claim victory and say that they will stop QE on June 30th but the reality is it is only going to happen until the debt limit increase is approved. And I do believe at the end of the day, despite all the posturing we are seeing now Congress and the President are going to approve a $2 trillion debt increase by August 2nd.

Chris Martenson: So really we are talking about July as a possible pause. And I have my concerns about that because we are looking at the data here for the first week in June roughly and what I’m seeing is a lot of weakness out there. The Feds’ so-called mandate around employment, around economic growth, there is a lot of weakness in that data right now. So you are of the opinion that QE if it does pause will only maybe for a month.

James Turk: Yes, maybe for a month unless Congress finally chooses to act sooner than August 2nd, although I don’t expect that to happen. It is really just a question of numbers and mathematics, Chris. The US Government has to stop spending so much money or the Federal Reserve has to come in and turn that government debt into currency, those are the two alternatives. And I don’t see any discipline or intent by Congress to stop spending.

Chris Martenson: Yes, everything they have done so far is a bit of a dog-and-pony show without much substance; $30 billion, $90 billion. Please, that is meaningless at this point. And when we go over to the other side of the pond we see that Europe also has just extraordinary funding needs right now. They are using all sorts of fancy terms for a Greek default which will probably be the first of several shoes. But when you add it all up it looks like there is, again, enormous funding gaps there and the need for a massive amount of liquidity. What is your view of Europe then? Is Europe going to print? The ECB – are they too in a box or will they actually go for austerity and allow the chips to fall where they lay?

James Turk: No, they have been printing all along and, in fact, I think they are going to continue to print as well. You know, the turning point here in Europe was last May, May 2010, when the politicians got together when the Greek crisis sort of erupted and became quite serious. And on Monday morning after the politicians met, Mr. Trichet, the President of the European Central Bank, said that he is going to start buying Greek bonds, despite his pledge not to buy sovereign debt of any country. And despite the fact that it is against the EU Constitutional Principals for the ECB to be buying and sovereign debt. You know, the law is basically just being ignored. It is being ignored by 13 of the 16 Euro-zone countries who have debts exceeds 3% of – deficits, excuse me – 3% of GDP. So the rule of law has basically been thrown out the window. Money printing is the order of the day. And when politicians take control of central banks, which they have done in the United States and they are also doing in Europe, that basically destroys the currency. It puts the currency on the road to what I call the Fiat Currency Graveyard, so I expect there is going to be some massive currency problems as we go forward. The financial crisis that we have been dealing with for the last several years has not been solved.

Chris Martenson: I agree completely and so similar dynamics in both the US and Europe, also Japan, let’s not wade into that too much. What we see is the advanced, developed nations all pursuing the same rough policy which is to try to print their way out the great credit bubble that they all got enmeshed in. So let’s switch then to the end game. So you agree I think if I can put it this way, that the political will doesn’t really exist or the structural or institutional processes aren’t really there to enforce any sort of law in the area that printing is the path of least resistance, always been true historically, probably today is not different in that regard. Given that, what do you see as the endgame here? Many call for a deflationary collapse and crunch and other people call for an inflationary and some call for hyperinflationary. You mentioned that it ends in the Currency Graveyard, how do we get to a currency graveyard if all the currencies are pursuing the reckless policies? Who falls against whom?

James Turk: Yes, that is all of the currency for the exception of one, which is gold. So to answer the inflation/deflation question you have to actually first decide which currency are you going to use to measure prices. In other words, if you measure prices in terms of dollars you are going to see a hyperinflationary blowoff and the dollar will end up in the Fiat Currency Graveyard that way. The hyperinflation will come because of continued quantitative easing by central banks around the world. But if you look at the price of goods and services in terms of gold you are going to see a massive deflation. In other words, the purchasing power of gold will continue to increase in the years ahead which is basically what happens during the deflation, the purchasing power of the currency increases. So we are going to have deflation when prices are measured in terms of gold or inflation when prices are measured in terms of dollars or Euros or British Pounds or Japanese Yen. So clearly, everybody should be focusing on owning as much as gold as possible within the liquidity part of the portfolio.

Chris Martenson: You know, I started accumulating gold in 2002 and I did it principally as a way to preserve my wealth. And it turns out, it has also been a way to enhance my wealth for this dynamic you have described. We are closing in on 10 years in my personal experience with gold and in each one of those years it has been a great way to not only protect my wealth but also increase my wealth on a purchasing power basis and you are predicting that that dynamic is going to continue.

James Turk: Yes. And let’s put it into a bigger term perspective because what you have been witnessing over the past 10 years is just a recurring pattern that has occurred throughout monetary history. You know we have these – what economists called booms and busts. During the boom banks lend and lend and lend borrowers borrow and borrow and borrow until both banks and borrowers become over-leveraged and then you have the collapse. You have the boom in the 20s, the collapse in the 30s, the boom in the 50s and the 60s, the collapse in the 70s. The boom in the 80s and 90s and we are in another collapse. Now when you are in a collapse, be it the 30s, the 70s or the present period that we are in you want to own gold because gold preserves your purchasing power during this financial reckoning.

And when we get out of this particular financial collapse or bust that we are in, which is going to take a few more years, you will then have your wealth and purchasing power preserved by owning physical gold. And you will then use that gold to make investments, acquire consumer goods because by that moment in time gold’s purchasing power will be at a maximum. Gold will be over-valued compared to where it’s been these past couple of years which is under-valued and gold is still very under-valued. So that is the biggest strategy to what everyone should be aiming toward and looking for.

Chris Martenson: Well, so let’s talk about that. I’m interested in your timeline here. I was going to ask you when you think the wheels are going to come off but it sounds like you are saying the lug nuts are off and the wheels are already wobbling on the axles here. So the question becomes when do you need to have your core position in place before it’s too late? Is it too late? A lot of people think that gold is in a bubble, it is really hard to buy at all time highs and I completely sympathize with that, but given where we are in the story you said there is still a few more years in it. How many years and is now an okay time to begin establishing a core position if you don’t have one?

James Turk: Yes, you know, your question is a good one. And I get this one all of the time. In fact, I have been getting it since I started GoldMoney back in 2001. Is it too late? And my answer is: don’t look at the price of gold, look at the value of gold because that is what is really important. What has been happening over these past 10 years the price of gold has risen but the dollar is being debaced every year by policies that are destroying the purchasing power of the dollar. You know the purchasing power of the dollar has been constantly eroded by quantitative easing and all types of other things that the Federal Reserve and the government is doing. So the question is: is gold still good value? And to answer that you have to say well what does gold do for you? And what it does is it preserves purchasing power over long periods of time and it does this when you have physical gold, it does this without any counter-party risks. In other words the value in your gold is not dependent upon someone’s promise. Now what happens during a bust like the one we’ve been going through is promises get broken. People who had money at Lehman brothers saw that promises were broken at Lehman Brothers. People who own Greek debt are seeing those promises being broken. This is going to continue recurring until balance sheets are brought back down to leverage, and we are nowhere near that.

I did an interview back in 2003 and they asked me to forecast the price of gold and I said it was probably going to be $8,000 an ounce at some point between 2013 and 2015. I’m sort of sticking to that price target and I am also sticking to that time frame because normally a bust lasts about anywhere from 10, 12, 15 years so 2015 would be 15 years from the peak of the last bubble in 2000. Now, it could be longer than that. If government continues to intervene and prevents the free market from cleansing all of the bad debts and all of the bad decisions that have been made all along, we probably would be much closer to the end of that had the bailouts not taken place back in 2008 and let the system cleanse itself then.The people who had made right decisions would be doing okay, the people who made bad decisions would be bankrupt and as a consequence of that, we wouldn’t be dealing with these ongoing problems with the banking system that we have today.

So as government continues to fiddle around and intervene maybe it is going to be six years before we finally get to the end of this but on the other hand if we get a hyperinflationary loss on the dollar and I think that could happen here as well, maybe the end is finally going to come sooner when people start to realize that what we are addressing here is the point that you are raising. This is not a cyclical issue it is a structural issue. It is a structural issue that there is too much debt. And the system of allowing governments to just borrow, borrow, borrow and put the debt on the backs of the taxpayers that is just about to come to an end. I think that is what we are facing presently in Europe and will soon be facing in the States when that August 2nd decision is made.

Chris Martenson: One of the things that truly surprised me so far, James in all of this was how long we have been able to kick the can down the road. And you mentioned that one of the things that will happen is gravity eventually takes over so that maybe the timeline extends or contracts a little bit depending on the decisions that are made. I have one other thing I want to get your view on, which is I see that the longer we continue to kick the can down the road and pile up the public debts that the greater the risk we have of something even worse happening that might have happened otherwise. That is I see a risk of the loss of the dollar’s reserve currency, maybe in a fairly dramatic way, maybe transpiring over a couple of months. Something really dramatic. Low probability still in my mind, but it is now possible. And that I am growing more and more concerned that the more reality is attempting to be denied I guess with all of these policies is that the risk to these currencies is now growing larger and larger. And I don’t have a really great way to quantify that yet but it is certainly something that is very strong in my gut and it is something that I think I’ve got a reasonable handle on looking at historical examples and looking at how these things have played out. What is your view on the risks here?

James Turk: Yes, I agree with what you are saying completely except I think the risk is much bigger than just the dollar’s loss of status as the world’s reserve currency. The real risk when you have a currency collapse is ultimately political. If you look at the issue of currency collapses more often than not you move toward dictatorship and totalitarianism. And just to give you a couple of examples: after the Weimar Republic collapsed at the Reichsmark in the 1920s it ultimately led to increasing fascism and we all know how that worked out. But I mean if you look at the collapse of the French during the period of the French Revolution, you know, ultimately led to chaos and Napoleon. Now if the US Dollar collapses it is not the first time that a currency has collapsed in America. During the War of Independence, the currency was the Continental and it collapsed because it was over issued. Politicians were spending too much money, nobody wanted to lend to the government and they put that currency, they printed the currency and put it into circulation. What they call bills of credit at the time but it was basically what we call paper currency. But because the Continental collapsed one of the reasons why the framers got together to create a more perfect union was to create a common market with a common currency. Much like Europe tried to do with this common market. And the common currency of course was the silver dollar, which was confirmed – first of all, it was put into the Constitution but it was reconfirmed in the Coinage Act of 1792 which was one of the new acts of the Congress which had just been created under the Constitution.

And that system worked more or less pretty well. There were some problems along the way but it worked more or less pretty well up until 1971 when the last remnants of precious metals were kicked out of the monetary system. And what those metals did is they put an external discipline on the spending by Congress. And without that external discipline you run into problems. Getting back to the political issues I’m making; when you have a currency collapse you can go the right way or you can go the wrong way. Germany went the wrong way. America after the collapse of the Continental went the right way. And I hope after the dollar collapse this time we will go back in history and look and see where it errs and by abandoning the precious metals and get back on the right track.

Chris Martenson: Well this is a subject near and dear to my heart now because I own gold for two main reasons. One is wealth preservation and the second is, I think there is an option value on it and like all good options this one is pretty far out of the money but boy it has got a really attractive strike price if it hits and that is that gold and maybe silver might be remonetized at some point. That I truly believe we are at risk of a major currency failure, particularly in international settlements, and in a time of crisis often what happens is that you refer to the last thing that you know that worked The last thing that I am aware of in the international financial scheme that really worked was gold as backing. Do you see that as a possibility? What are your views on re-monetization and what might that look like and how would that happen?

James Turk: You know it’s a really good question and it is basically what we intended, what we are arguing really with GoldMoney. You know when you have money you can do two things with it: you can save it or you can spend it. Right now when it comes to gold and silver most people are saving it rather than spending it. But within GoldMoney based on the patents that we have we enable gold and silver to circulate as a form of digital currency instantaneously 24/7 anywhere in the world, completely outside the banking system. So will gold and silver become currency once again in the future. As an aside, you used the term monetization. You know, gold is money because it is still useful for economic calculation and the same thing with silver. They just didn’t they were stopped by governments as circulating as currency but they can still be used to calculate the price of goods and services. They still are money and that is basically where gold’s value arises – for monetary use not from any other application.

In terms of having them circulate once again as currency, this is the interesting part. Are they going to circulate again as coins? I don’t think so. I think they are going to circulate again digitally. In Gold Money for example, you can use your iPhone to click gold from your holding to someone else’s holding and I think ultimately a new form of gold currency that we are making available in GoldMoney will be how the precious metals will once again circulate in commerce globally.

Chris Martenson: So you don’t have to flip bits of actual metal from one person to the other but there would be in your system 100% gold backing for whatever amounts are being transacted.

James Turk: It’s even better than backing. You know, when you talk about backing you are talking about banks where there is al inability circulating as currency that is backed by an asset on the bank’s balance sheet. But in Gold Money you are using what is in effect a digital gold coin. If I put a gold coin across the counter top to pay for some good and service, the exchange is extinguished at the moment that I get the good and the shop keeper gets the gold coin. There is no lingering obligations like you have in the banking system when you use checks or plastic cards. There is a lot of payment risk in the banking system. But with digital gold currency, the gold and silver remain in the vault and you just click the ownership of whatever weight you are transferring from your holding to another person’s holding. So it is extinguished at the moment that you receive the good and click a payment to the other person’s holding. It is like a gold coin but you are not bound by any physical location.The gold and silver remain in the vault and that ownership of gold and silver is being transferred instantaneously.

Chris Martenson: I really like, I mean I love the whole concept and it appeals to me greatly. I want to shift here to talking about investing in precious metals. So you mentioned before a portion of a person’s assets definitely should be in gold and silver; absolutely a song I have been singing. Let me get this for you, what would your percent portfolio recommendation be, maybe there is a range you have given where people are in life. What is that percentage for you?

James Turk: It is hard to make a sweeping generalization, Chris, because everybody’s circumstances are different. What might work for one person may not work for another person. Age is a big factor, the older you are the more conservative you should be so the higher percentage of gold you should actually have in your portfolio. A younger person may want to be focused more or less on savings, having less liquidity having less gold and silver, and more in investments maybe mining companies or tangible assets like timber land and other types of tangible assets that produce cash flow. But the older you are the more gold you basically want to have in your portfolio. And so that by the time you are in your 70s or 80s and near the end of your life, I kind of think you are getting closer and closer to 100% gold to make an easy transition of any assets you want to distribute to your heirs as well as have liquidity available for any needs you might to make your retirement years as comfortable for you as possible.

Chris Martenson: So for me I think everybody ought to have at least 10% exposure to start. I am much higher personally but I totally recognize and understand and support the idea that individual circumstances vary a lot. But assuming somebody wants to build some exposure, starting even now at gold at $1,500+ How would they go about doing that given that where gold is today? How would you personally coach somebody to build a portfolio?

James Turk: The best way to do it is through a dollar cost averaging program. In other words determine what portion of your portfolio you want to put into gold. And then divide it by six or 10 or 12, some number representing months at which you will accrue or accumulate. You know, maybe you want to do it just over three months. So you decide that – let’s say for example, you have $100,000 dollars that you want to put into gold and you want to do it over four months. So you divide that by four, you have $24,000 and you choose to make the purchase, for sake of argument, the 20th of each month. So regardless what the price is on the 20th of the month on the first month you buy $25,000 on the 20th of the month, the second month another $25,000 on the 20th of the month, the third month and fourth month you do the same thing, regardless of what the price is and you will have averaged in. Because what we are talking about here Chris, is a major bull market. And one thing that a bull market does is regardless of when you buy that you are going to come out whole or you are going to have your position improved as the bull market continues to move forward.

That is why I come back to this point about the difference between price and value. The price of gold may seem high but the value of gold is still – by all of my historical measures – very, very low. In other words, gold is very under-valued. So as this bull market moves further the price will go up and it will become less and less valued but we are still years away from gold becoming over-valued.

Chris Martenson: So, somebody has done this they are putting away $25,000 on the 20th of every month. They are fortunate enough to be able to do that for 12 straight months. How do you recommend allocating – there are all these various ways of owning precious metals. We have got gold in hand, maybe you got gold and bars and in gets or junk coins in the case of silver, numismatics, where you buy it from, where you would store that kind of stuff? Compared to say allocated storage or paper gold or miners you mentioned maybe there is other derivatives. How would you advise somebody to sort of structure that? Let’s say they are just starting.

James Turk: Okay. Let’s first look at a from a big picture point of view; when you have your portfolio you have two different asset groups in your portfolio. You have investments and you have liquidity. Your investments are you wealth producing assets. You put your money at risk in order to generate some kind of return. And then you have your money, your liquidity – where you have either sold an investment and you are waiting to buy a new investment or you sold an investment and you are waiting to make the purchase of some kind of consumer good. Gold mining stocks are an investment. They have to be treated like all stocks. You have to look at management, the quality of the balance sheet, the quality of the company and all those types of things. But buillon is not an investment, it is really money. So you compare bouillon to other monetary alternatives like the dollar or the Euro or wherever you happen to live. Now in an environment where you are not earning any interest income on your dollars, as is the present case, you may want to have a much larger holding of gold because there is no cost in holding gold. And in fact, because gold has been going up in dollar terms, 18% per annum on average for the past 10 years. You are much, much better off owning buillon than owning dollars in this environment. The broader sense is investments are your mining stocks, buillon is your liquidity position.

Now, looking at gold, people say they “own” gold, but when you actually analyze it they don’t own gold they own paper gold. Paper gold is different from physical gold. Paper gold are the various representations out there where you are exposed to the gold price but you don’t actually own metal. And that exposure to the gold price comes with counterparty risk, options and futures and even the ETFs – they are basically paper gold products. Because you don’t own physical gold, you have a stock in funds that supposedly owns gold on your behalf. What I recommend when it comes to your buillon part of your portfolio, the liquidity of your portfolio, you own physical gold. And there are only two ways to buy physical gold, you buy it and you store it yourself or you buy it and you have someone store it for you, which is what we do in Gold Money. Now each approach has advantages and disadvantages just like anything in life. You got to weigh the pros and the cons and make some decision that best suits your needs. When you buy it to have it at hand, store it at home, you have it right there at hand which is an advantage but that comes with disadvantages too. What is the risk of theft? Can you get insurance, is the insurance expensive? If you have to sell because you need the money you have to take the coins or whatever you have back to the shop. If you own bars that might force the dollars to be refined and you incur that cost. So there are disadvantages to storing it yourself. Also, if you store it in a bank safe deposit box there is a risk of confiscation. Gold was confiscated in 1933 who is to say it couldn’t happen again in the future.?

If you store the gold with others there is also advantages and disadvantages. The disadvantage is that you don’t have it in hand. But there are advantages like GoldMoney: you have the gold stored for you outside of the United States, which is useful because when the gold was confiscated in1933, gold held by Americans outside of the United States was not confiscated. Whether it happens again in the future, who knows? It is worth noting historical precedent for it. The other thing is it is in a secured bullion vault, it is insured. But most importantly you have liquidity. If you need your money for any reason you can sell your gold and silver and have the money wired to your bank account, the proceeds wired to your bank account the same day.

So what you have to do is look at these different alternatives between buying and storing yourself and buying and having someone store it for you and see what or probably both methods make sense. If you are going to store $5,000 in gold at home that is one thing you might be prepared to take the risk. But you are obviously not prepared to store $100,000 in gold in your basement – it just doesn’t make any kind of sense. What you have to do is make your decision between two alternatives but there is one thing to keep in mind because if you are using other people to store your gold and silver for you there are certain things you have to be careful about. You have to make absolutely certain that your gold and silver are there in the vault and the only way you can do that is to have independent third party audits, and you have access to these audited reports, showing that the weight of gold and silver is exactly equal to the quantity of gold and silver that you own. This is one of the backbones of GoldMoney. What I basically recommend to people is if you are looking to store others make sure that you have the same industry-leading governance principals that we follow in GoldMoney so that you know that your gold and silver stored with others is not at risk.

Chris Martenson: Excellent. And if people want to find out more about that they can go to GoldMoney.com and you got a great website there and it explains a lot. What I have heard so far is that gold is in a major bull market here and there are probably several years left to it. And in the near term what we are looking at is the QE, that is the printing of money in Europe, whatever they call it and in the US is really set to continue and by the way it will continue in Japan as well. We have more and more defacement of money in a vain attempt in my opinion to sustain the unsustainable which is a credit market that went too far. So here we are and it looks for a variety of reasons there is time left in that particular story. You have set a target that we can slide the date a little bit depending on what policy decisions get made but that $8,000 gold is not an unthinkable number to you; that re-monetization works as a international policy option at some point across major nations. And that gold already exists as money through GoldMoney.com for individuals to use and to trade use as money.

So that is where we are in the story right now. What I’m interested in hearing from you is so let’s assume somebody has a big PM position, a big precious metal position; how would they protect that or do you advise protection? Limits, stock options, futures, offsetting positions, do you at all get involved in any of that?

James Turk: I don’t recommend trading the precious metals. Making money by trying to pick the fluctuations correctly in the price of gold or the price of silver is a very, very difficult full-time job best left to professionals and speculators. The way you want to preserve wealth is to accumulate an asset that is undervalued, continue accumulating it throughout the bull market. And when the bull market is finally over and the asset becomes over-valued then use that asset to invest in other things that become under-valued at that future date. That is really my approach. And gold is the insurance, I don’t think you need insurance when it comes to gold and silver for that matter because they are so undervalued. The insurance that you need is the insurance on being reliant upon the dollar because it is the dollar that is over valued and over owned and existing because of its legacy not because of its underlying fundamentals. The precious metal fundamentals suggest that the dollar should be much, much lower and gold should be much, much higher and I think it is just a question of time for the market to perceive that and that is what has been happening over the last several years and I think it is going to continue into the foreseeable future.

Chris Martenson: This brings me to something very near and dear to my heart, I personally have an exit strategy for precious metals and I will know when that date comes. It is a ratio for me and I will share that in a minute. I am wondering tell me about your exist strategy. You mentioned at some point gold will be over valued. Will you know that by price, how will you detect that? What are your sign posts there and what would that look like? When will you know it’s time to begin reversing that trade?

James Turk: I have some mathematical models. There is a lot on the internet about my fear index, once my fear index gets into a high territory that will be a clear warning sign which is really a simple approach anybody can follow. It is a response I give to the question I get frequently. People say “if I buy gold how will I know when to sell it?” They are immediately thinking about January 1980 which is the peak of the last bull market, 20/20 hindsight, how can I pick the top? I think this time around it is going to be pretty easy to pick the top because you are not going to sell your gold, you are going to spend it. Think about what I am saying there. It’s that gold again is going to become currency. Once gold becomes currency again it is going to become overvalued you are going to use your gold to buy consumer goods, houses, you are going to use your gold to buy farm land, office buildings, stocks, all kinds of investments you can think of that are undervalued at some point and time in the future relative to gold itself.

So gold is going to reemerge as currency. I think the 20th century, let’s say the last half of the 20th century or maybe even just the last few decades of the 20th century, are going to be an aberration in monetary history where people largely thought that gold had no role to play. When you stop to consider that gold has been money for 5,000 years and it has only been dealing with the world reserve currency without backing by gold for only 40 years, and given the problems we are seeing today with the dollar, one has to assume that gold’s rightful role as the center of commerce is going to reemerge once the silliness with fiat currency and government printing presses ends, which I think is going to happen within the next two years.

Chris Martenson: Well you mentioned August 2nd as a date to watch because that is when the debt ceiling gets bumped up by a couple of trillion. I am watching August 15 because that means this is the 40th anniversary – I love round numbers when it comes to these things – the 40th anniversary of the slamming of the gold window and when we look back historically there are a lot of currencies that failed including even metallic currencies through the process of actual debacement or clipping. And 40 years is not an unthinkable amount of time for a currency experiment to run historically and so here we are. And the idea that the dollar can continue its current role for another 40 years is actually a really, really tiny probability to me. I am seeing larger stresses, increasing structural imbalances, an absolute failure of floating exchange rate fiat currencies to manage international trades and goods and services in any reasonable fashion. So all of these things are building, and here we are. And one of the concerns that comes up for many people, many of my listeners I am wondering if you could touch on this now: is they accumulate this position in gold because they read all of these tea leaves right, they got their position and then all of a sudden the rules get changed. And the gold either gets confiscated, kind of a funny word, as it did in ‘33. Actually they gave you dollars in return for it so it wasn’t like a full-complete confiscation with no return. What do you see as the risk of such an event? Maybe its too broad, maybe it will vary by location. Certainly probably will by country. But what are your views on that confiscation fear or worry or idea that gold will be appropriated or be declared an international reserve asset therefore it is too important for people to own individually, it belongs to the nation or the globe, what are your views there?

James Turk: Yes, it is really sort of sad that the big risk today to owning gold is government. Government is supposed to be there to maintain the rule of law so that we operate in a level playing field so that no one person is at an advantage to another person. The key to that is protecting property rights. This is the basis of traditional Anglo-Saxon common law. The last decade or two we have moved so far away from that, a lot of what is called law today is hardly recognizable in terms of in a historical precedent and the traditions up to traditional Anglo-Saxon common law. But yeah, government has become the big risk today for anyone who owns not just gold but silver in many respects, any asset. It is sort of unfortunate but it is a sign of the times and what we have to deal with. I think the only answer that one can pursue to deal with this increasing unlawfulness that governments are pursuing or unlawfulness in historical standards is global diversification of your assets. Just try to fight as much as you possibly can because when you do that you are mitigating risk.

There is no really one right answer because the future is unknowable. There is no one right answer as to how to plan for the future other than to diversify. Diversification mitigates your risk and I think that is the thing that everybody should be keeping foremost in their mind.

Chris Martenson: I absolutely agree with you. It is awkward at this moment in time to see some of the changes that have happened and are continuing to happen and it is all accelerating and this is a point of view I have which is that things are going to speed up. What a really unusual moment in history. We have been sticking to just the economic side there is a really interesting story when we put energy into this mix and the notion that we have a world economy, a money system that really needs to expand to be happy and there are real adult-sized challenges to expansion as we have known it in the past. And it is unclear to me how those are going to play out but I am convinced that how things used to work is not how they are going to work in the future. So we are now describing that there will potentially be a change in government, in policies, maybe a change in leadership that can accompany a hyperinflationary collapse of some kind ala Weimar Germany leading into World War II in essence. Many of these risks. I see a well-diversified portfolio in gold and silver as a reasonable way at this point in time to protect as best we can knowing that we don’t know what is going to happen or how this is going to unfold but we do the best we can. The rules have changed though. The old rule of having a reliable yardstick that we can count on and measure things by which we used to call the dollar or the euro depending on where we live. And that’s really shifted and we are in the period of that shifting. And that makes it really challenging and its difficult and its uncomfortable and its awkward and I find in many cases, people become paralyzed through all of that change and my advice has always been as soon as you get the first gold coin in your hands, first of all you are going to connect with 6,000 years of human history, which is magic. And the second thing is you are going to start feeling that first a bit of relief by saying I know own the only monetary asset known which is not simultaneously someone else’s counterparty risk which you have already mentioned. One of the great, great reasons I believe in owning this particularly monetary asset of gold.

James Turk: I agree with you completely, Chris. And I think what you said is very well stated. You have hit the nail on the head and captures exactly the reason why people should be looking at the precious metals.

Chris Martenson: Exactly, so as we close up here tell me, are there any best keep secrets out there? What do you see as the least understood aspect – maybe pro or con – of owning precious metals? Let me put it this way: what advice would you give to kids if they were going to buy into this market?

James Turk: There are a couple of keys, we already discussed some of them like buy physical metal and not paper gold or paper silver you want physical gold and physical silver. But there is another important key: you want to get the most gold for your money. In other words you want to look at the cost of buying that gold relative to other alternatives. You want to get the smallest markup over the spot price of gold. To do this typically the larger the bar you buy the lower the cost to you. And this is because smaller coins or smaller bars have fabrication, shipping and handling costs and they can be quite considerable. So for example, if you are buying a one of coins or several one of coins you may be paying 7 or 8% over spot. If you are buying a one-quarter ounce coin you might be paying something like 15 or 20% over spot. Because the cost of fabrication is a much higher percentage of the smaller gold content in a one quarter ounce coin than it would be in a one ounce coin. And this logic continues to follow all the way down to 400 ounce bars which is the international standard which is what we sell in GoldMoney as well as parts of a 400 ounce bar. So you can buy gold and silver in GoldMoney for nothing greater than 2.5% you can buy $100 worth of gold for $102.50 and you can’t buy physical gold any other way for such a low mark up over spot.

So what you basically want to do is get the most gold for your money. The way you have to do that is to get the largest bar as possible when you are making your purchase.

Chris Martenson: Excellent. And it is always the bid and the ask in that whole transaction so there are transaction costs to gold and silver as you mentioned but when people trade it between themselves now, they are on the GoldMoney.com system and they trade it where are they trading it at the ask or are they trading it at gold spot? How does that work?

James Turk: First of all, if you are a GoldMoney customer and you want to sell some gold and convert it into US Dollars or Euros or some other national currency and have the money wired to your bank account, you get the spot price of gold. So we don’t take any fees when you are actually selling. And the reason why we have created GoldMoney that way is we don’t want the fee to be an impediment to liquidity. If you need the gold or you need the silver go ahead and sell it and don’t pay a fee for it. If people are actually using it between themselves they can do it one of two ways: they can either agree to do it in a contract between themselves in terms of ounces or grams of gold or silver or platinum and palladium for that matter too because we offer those metals as well. So let’s say you and I have a business deal and I agree to pay you three ounces of gold, I just click three ounces of gold to you. On the other hand you and I have a business deal and I agree to pay you $4500 and you are willing to accept gold in GoldMoney as payment. On the day I agree to pay you I have to go into my GoldMoney holding, put in $4500 as the amount to be paid, what is the gold equivalent. The system based on the spot price at the time you are actually making the payment and that weight of gold is then clicked from my account to your account and transferred instantaneously so you can actually do it that way. We are actually using 16 different currencies in GoldMoney for tracing back to the spot price when you are doing an exchange using it for purchases or sales or something else in the GoldMoney system.

Chris Martenson: And is this useful for small dollar amounts? I mean how many decimal places to the right do you go when transferring gold?

James Turk: We go down to what we call a mil a mil is approximately equal to four US pennies. We can always go down much further because once you digitalize it you can take it to as many decimal points as you want. But we find that three decimal places works very, very well and it is something that people are very familiar with. We also operate in terms of ounces, we show you the weight of gold two ways, either in metric or in Troy. So regardless of whether you are European or British American, you will be familiar with what you have in terms of how much metal you own. And you can also report for you on internal purposes a reference currency. So if you have a specific weight of gold you can see when you log in to your holding what the value of gold would be in regard to your reference currency that you choose.

Chris Martenson: Excellent. Well, I really want to thank you for today and I know that you have a lot of writing out there and other – you got your fear index and all of the wonderful work you are doing to help educate people. How do people follow you and how do they find out more about maybe your fear index and other things that you are sharing with the world?

James Turk: Look at GoldMoney.com, we have got a big research section there. I contribute there as well as other people contributing there from time to time. I also have a number of videos where it is interviewed money managers and things like that that people find useful. And if you have specific topics like the fear index, just Google ‘Fear Index James Turk’ or just Google ‘James Turk’ and I am sure you are going to see some articles on the Fear Index and then they will just continue to other articles as well on the Fear Index so that is probably the best way to do it.

Chris Martenson: Well, excellent. Thank you so much for your time today. This has been very helpful and I’m sure people will get a lot out of it like I have. So thank you again and it has been my pleasure.

James Turk: Thanks, Chris. It was a pleasure speaking with you.

This report lays out an investment thesis for gold and one for silver.  Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. My timing and logic for both entering and finally exiting gold (and silver) as investments are laid out in the full report.

The punch line is this: Gold and silver are not (yet) in bubble territory, and large gains remain, especially if monetary, fiscal, and fundamental supply-and-demand trends remain in play.

Introduction

In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30 year mortgage, these holdings represented 100% of my investing portfolio. So I dug into the economic data to see what I could discover. What I found shocked me. It’s all in the Crash Course in both video and book form, so I won’t go into that data here.

By 2002, I had investigated enough about our monetary, economic, and political systems that I decided that holding gold and silver would be a very good idea, poured 50% of my liquid net worth into precious metals, and sat back and watched.

Since then, my appreciation for and understanding of the role of gold as a monetary asset and silver as an indispensable industrial metal have deepened considerably.

Investing in gold and silver is still a good idea. Here’s why.

Why own gold and silver?

The reasons to hold gold and silver, and I mean physical gold and silver, are pretty straightforward. So let's begin with the primary reasons to own gold.

1. To protect against monetary recklessness
2. As insulation against fiscal foolishness
3. As insurance against the possibility of a major calamity in the banking/financial system
4. For the embedded ‘option value’ that will pay out if and when gold is remonetized

By u2018monetary recklessness,' I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the great financial crisis. In gold terms, the supply of above-ground gold is growing at roughly 3% per year, while money supply has been growing at nearly three times that yearly rate since 1980.

Now this is admittedly an unfair view, because the economy has been growing, too, but money and credit growth have handily outpaced even the upwardly distorted GDP measurements by a wide margin.  As the economy stagnates under this too-large debt load while the credit system continues to operate as if perpetual expansion were possible, look for all the resulting extra dollars to show up in prices of goods and services.    

Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That is as close to an absolute requirement as I have in this business.

Monetary policies across the developed world remain as accommodating as they've ever been. Even Greenspan’s 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke has recently engineered. But it is the highly aggressive and u2018alternative' use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape.  In Europe, the equivalent would be the sovereign debt now found on the European Central Bank (ECB) balance sheet.  

Federal deficits are seemingly out of control and are now stuck in the -$1.5 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.

Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold. I'm not referring to u201Cpaper goldu201D either, which includes the various tradable vehicles (like the “GLD” ETF) that you can buy like stocks through your broker. I'm talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.

Literally everything else financial, including your paper US money, is simultaneously somebody else's liability, but gold and silver are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.

Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-4 over the next 5 years, I expect banks to close for some period of time. Whether it’s two weeks or six months is unimportant; no matter the length of time, I’d prefer to be holding gold than bank deposits.

During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some u2018money' out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.

The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high.

Here are some numbers:  The total amount of ‘official gold,’ or that held by central banks around the world, is 30,684 tonnes, or 987 million troy ounces (MOz). In 2008 the total amount of money stock in the world was roughly $60 trillion.

If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($60T/987MOz) = $60,790 per troy ounce.

Clearly that’s a silly number (or is it?), but even a 10% partial backing of money yields $6,000 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world’s money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a fraction of the world’s money supply by gold will result in a far higher number than today’s ~$1,500/Oz.

The Difference Between Silver and Gold

Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons. Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.

There is a chance, growing by the week, that gold will be remonetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the u2018new' system selected during the next bout of difficulties.

Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive metal known, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in such vanishingly small quantities that it is hardly worth recovering at the end of the product life cycle — and often isn't.

Because of this dispersion effect, above-ground silver is actually at something of a historical low point. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today there are perhaps 1 billion ounces above ground, when in 1980 there were roughly 4 billion ounces.  

Because of this consumption dynamic,  it’s entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.

I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.

Scarcity

If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 8x more than today, we have to ask how many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation, and how many will close because their energy costs will have exceeded their marginal economic benefits.

After just 100 years of modern, machine-powered mining, nearly all of the good ores are gone. By the time you are reading stories like this next one, you should be thinking, ‘Why are they going to all that trouble unless that’s the best option left?’

South African Miners Dig Deeper to Extend Gold Veins’ Life Spans

Feb 17, 2011

JOHANNESBURGu2014With few new gold strikes around the world that can be turned into profitable mines, South Africa’s gold miners are planning to dig deeper than ever before to get access to rich veins.

The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.

Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company’s Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn’t in time operate an additional 3,000-plus feet deeper.

“The most critical challenges for all of us in South Africa are depths and depletion of reserves,” Mr. Cutifani said in an interview.

The above article is just a different version of the story that led to the Deepwater Horizon incident.  By the time exceptional engineering challenges are being pondered to scrape a little deeper, it tells the alert observer everything they need to know about where we are in the depletion cycle.  We are closer to the end than the beginning.

We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore purities, and gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines fits into the priority list. Not very high, would be my guess.

Supply and Demand – Gold

Not surprisingly, the high prices for gold and silver have stimulated quite a bit of exploration and new mine production. With over a decade of steadily rising prices, there has been ample time to bring on new production. Which leads to a real surprise: In the case of gold, relatively little incremental mine production has occurred.

The analytical firm Standard Chartered has calculated  a rather subdued 3.6% gold production growth over the next five years:

Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues — we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.

(Source – Standard Chartered)

Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it’s probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs, while greenfield, or brand-new, projects require a gold price of $2,000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: Energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it’s not as simple as the fuel that goes into the Caterpillar D-9s; it’s the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, ore body from being developed. Given declining net energy, that’s forever, as far as I am concerned.

The punch line of the Standard Chartered gold report is that they think $5,000 gold is a realistic target and go on to note the most important shift in gold accumulation of the past 30 years:

The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand.

With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.

(Source)

The emergence of central banks being net acquirers of gold is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the ‘barbarous relic.’ Famously, Canada and Switzerland vastly reduced their official gold holdings during this period, a decision that many citizens of those countries have openly and actively questioned.

The World Gold Council out of the UK is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here’s the most recent data on official (i.e., central bank) gold holdings:

(Source)

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2011 is for the first four months only, so we might expect 2011 to be a record-setter if the current pace continues.

Overall, world supply and demand are a bit out of alignment right now, with supply increasing by 2% last year and non-official demand increasing by 10%:

The summary of the fundamental analysis is that with mine production seriously lagging, the price increases for gold, and increased central bank and investment demand, we have set the stage for some hefty price increases irrespective of any fiscal or monetary shenanigans.

However, once we put those back into the mix, I forecast a quite volatile but upwardly sloping price for gold over the coming years. Possibly a very steep upward slope at points.

Supply and Demand – Silver

Silver demand is growing by double-digit percentages, being led primarily by industrial uses and investment demand. The Silver Institute does a fine job of tracking and reporting on these matters.

First, demand:

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver's use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011.

Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world's improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.

(Source)

Now, supply:

Silver Production 2010

Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year.

Mexico eclipsed Peru as the world's largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

(Source)

Again, we are comparing double-digit demand increases against low single-digit supply increases.  After a decade of rather dramatic price increases for silver, the alert observer should be asking exactly why this is the case.

In table form, we can clearly see that the silver balance for the world requires both dishoarding from government stockpiles and the recycling of scrap silver. That is, shortfalls from mining have to be made up from above-ground stocks:

(Source)

There’s only so long that such an imbalance can continue before the shortfalls require much higher prices to cool off demand.

One of the precise reasons that I originally invested quite heavily in silver is that I came to the conclusion that the price was far too low, artificially so, and that it would therefore be a great investment. So far, so good.

Given the above fundamentals, I project that prices for the precious metals will be many multiples higher – in today’s dollar terms – by the end of the decade.

Part II of this report: How to Play The Greatest Gold & Silver Bull Market Of Our Lifetime delves into the specifics of how much of your net worth to invest and in what forms, what price targets gold and silver are likely to reach, and what indicators to look for that will indicate that it’s time to sell out of your precious metal investments.

Click here to access Part II (free executive summary, enrollment required for full access).

Chris Martenson: Welcome to another ChrisMartenson.com podcast. I am Chris Martenson your host today as usual. Today we’re speaking with Fernando “FerFAL” Aguirre author of Surviving the Economic Collapse. FerFAL experienced the hyperinflationary destruction of Argentina’s economy in 2001 and has since dedicated his professional career, like I have, to educating the public about his experiences and observations of its lingering aftermath. Given the rising concerns that we all have today about the future of fiat currencies, our listeners are increasingly asking to hear from voices that have firsthand experience with extreme currency devaluation, what it means, how it actually feels, how it plays out. So we’re very fortunate FerFAL is able to join us today from his home in Argentina. We’re going to be discussing the signs that preceded the collapse in his country and what has defined the society since, including smart moves to take if worried about a similar fate happened in one’s own country and how would you know where you are in the story as it unfolds. So FerFAL, we’re so glad to have you with us today.

FerFAL: Hi Chris. Thanks for having me here.

Chris Martenson: So take us back to that period leading up to the currency collapse that you witnessed living in Argentina in 2001. You know: what were the signs, what were people’s perceptions at the time about how dire the situation could get, and what was the government saying and doing?

FerFAL: Well, the government as always says that nothing is going on and that everything is fine. As you can come to expect by now, just a few hours later you see the entire country go down and you will be seeing high amounts of an unemployment and there’s going to be a good amount of social unrest. Unfortunately, many of these things are already happening in the United States. So you are seeing many of these signs right now.

Chris Martenson: What sort of signs?

FerFAL: Having the people living on the streets where it didn’t happen before. Inflation slowly going up. There’s small details. I was talking with a friend yesterday of mine from the U.S.A. He was telling me that something I had mentioned a few years ago about sizes of items and products shrinking and changing the design. It’s all very well-campaigned with good marketing and such. It’s like we’re offering this new improved product but that new improved product happens to be just a bit smaller than it used to be at a slightly higher price. So all those little things, the way in which they hide the inflation, they slowly creep it into your life.

Chris Martenson: So did the Argentinean government – how were they hiding inflation? – through the official statistics claiming it was lower than what people were experiencing or how did that play out?

FerFAL: Yes, at first hiding inflation as products get smaller but soon enough that’s just not enough either. So it starts going up as well, noticeably so, and people see that their shopping cart just isn’t filling as much as it used to. You’re just buying half of what you used to with the same amount of money; but in the official statistics they’re saying that everything is fine because they changed the way they measure inflation so as to fit what they want to show you. So, if for example, take meat – it has gone up 20 percent, they will just take into account specific type of meat that is only found in one particular location so it’s not very real, that statistic, but that’s what they stick to.

Chris Martenson: Right, so a beef tongue in the outer reaches seems to be cheaper today so we’ll go with that – something like that. So it sounds like a pretty common story here which is the government’s obviously don’t want to admit that inflation is high because that’s either a fiscal or a monetary failing or most likely both. So they don’t like to admit that plus there’s a lot of reasons why you want to keep inflation low in terms of being able to say your economic growth is higher and keeping your pension payments lower. There are a lot of reasons for that. So you’re saying that in the United States if we look around, we can already see early signs that parallel what you saw in Argentina? We have rising prices, shrinking packaging for certain things, maybe more people on food stamps, historical records, maybe more people homeless…

FerFAL: More people on social welfare – all those things we saw as well and it’s happening in U.S.A. as well unfortunately. It’s an already written story. We know what ends up happening. It may have different variations and it may end up in an economic collapse or not. That’s something that I personally prefer not to be the one spreading that kind of – you know what happens? Its fear. It’s not productive for people in general when preparing, so I’m not going to be saying that the economy in the U.S. is going to be collapsed. All I’m going to be saying is that it’s going to be much worse than it already is right now and people need to adjust to that different lifestyle.

Chris Martenson: Absolutely and I want to get to that really important point about how fear can be demotivating. Let’s get to that later. Let’s track this now. So how quickly did the collapse happen? You know, what is a boiling frog situation and people woke up one day and said “whoa, how did we get here?” or did it feel somehow like the world changed overnight?

FerFAL: It’s a bit of both. These things don’t happen overnight. You see them coming for years. As you see it in U.S.A. as well, we saw it here as well and that’s the reason why some of the richest, most powerful elite manage to leave the country with more than enough time. Some happen to do it more in a rush but most of these guys that have the inside information manage to avoid having their bank accounts frozen as we saw. So there are signs and it is a bit of a boiling frog situation. The thing is eventually when it cracks down its does so all of a sudden. All of a sudden, you know, when the banks close that’s when people go absolutely ballistic because that’s when they realize that their money has been stolen from them – or when inflation turns to hyperinflation one day to the next. That’s when people see that even though you didn’t steal their money directly as it happened here with the banks, you’re stealing it through inflation as well. So they just bought half of what they used to with the same amount of money. It’s in a way of stealing their labor, their savings.

Chris Martenson: Absolutely it is but it seems that few people can really diagnose what it is and so somehow it feels like the easiest course of action. So that’s why we see it again and again historically speaking. In my mind, I have no idea what’s going to happen next or what the future is going to hold but I do know how to spot risks when they pile up and know that the more risks you pile up the greater the chance of something happening. So from my perspective as I look at the U.S., I see a lot of parallels with Argentina, some significant differences too but some of the parallels for me are: we’ve got basically a fiscal situation at the federal level that’s pretty much out of control. There’s a lot of spending. Nobody wants to dial spending back. It’s never a good time. It’s always an election year or about to be one or just was one. For some reason it’s very difficult to do. So we have that going on. We’ve got monetary policy which by every measure is just in insane territory at this point in time. And, a lot of structural sort of deficits like we have a trade imbalance, a really big one. Its 30, 40, 50 billion dollars a month that’s constantly eroding – these are all things that I sort of see in parallel to Argentina. How do you see them and are people who are ignoring those really potentially ignoring a really big risk?

FerFAL: I think – like you mentioned – there are many of them. I’d say there are even more than some feel comfortable accepting. Because some people like to think they are different especially in the U.S.A.. Americans want to feel that they are different as well, that they are slightly better than some of the rest of the people. Why is this going to be happening in my country when this only happened in South America or in this poor country? Those are Europeans – it happens to them but that’s not going to be allowed in U.S.A.–we’re not going to be allowing that. Many people told me that before they got hit with this $300 billion tax on the hard working American people they said it would never happen but it did end up happening. My point here is that we’re all more similar than we want to admit. These things that you mentioned happened here exactly the same way – out of control spending especially through corruption, everything that was getting built or spent or done in Argentina was costing ten times as much than if you had gone and done it yourself on the private sector. So the out-of-control spending is a typical thing that happens during these times.

Chris Martenson: Yeah and let’s draw the parallel there because you know some people maybe in America will be listening saying, “oh well that doesn’t apply”, because we don’t have that kind of corruption going on up here in America but what’s the difference. So if a defense contractor comes and puts a few bucks in a lobbyists hands then gets a billed passed that results in some really, really overpriced military hardware being bought how is that different from what we might otherwise call corruption? I can’t – it’s a rhetorical difference at best. In practice it looks the same to me.

FerFAL: The textbook of what they’re doing is very similar, maybe you could say exactly the same result within its variations but, as you said, what’s the difference between spending too much money on a military contract that makes no sense than paying ten dollars a brick for a school you’re making in the south of Argentina?

Chris Martenson: Very little difference – I can’t find it. So it’s a rhetorical difference. So the same thing though there’s an entrenched system which ends up driving a lot of unproductive spending possibly by over spending in the case of buying ten dollar bricks or an unneeded military contract of some kind or by spending way too much on things that are actually malinvestments. You know the country doesn’t really need these things. They were decided behind closed doors between a small number of people and so we get them. Sometimes they’re good investments but often not really the case. So here we are. We’ve got a growing number of people who fear that the U.S. and other developed countries – so let’s expand this a little bit to other developed countries – are at risk of a currency collapse given the unsustainable debt levels or this profligate money printing that we talked about before. What are the similarities you see to pre-collapse Argentina that might lend credence to those arguments?

FerFAL: Well, since you brought in other countries as well just look at Spain right now. It’s just about to go down. The situation there it’s very bad. I have my parents and my brothers they live there and there are so many of similarities especially where the differences are cultural you know and just different such as the language you speak. That’s enough to place some people in a comfort level and think “Yeah we’re not like that. We’re going to be doing better I think.” Some people are more pessimistic and they think it’s going to be worse but it’s so much alike. You know I was watching on the news the other day what was going on in Spain and they were advertising on national television a job. There was a place where they were offering job paying a thousand Euros a month and it was such a big news that it was on TV. So that reminded me of the times when we had 25 percent unemployment here and something as weird and as strange as a job was newsworthy as well. So we have people that escaped from Argentina during and after the 2001 collapse about 200,000 left to Spain and they’re seeing that the exact same thing they saw in their own country. They’re seeing it happening there as well. In the U.S.A. I know it changes from state to state. Some do better than others but the unemployment situation is also just as bad as it was here in Buenos Aires as well than some places.

Chris Martenson: Okay, so let’s talk about then what it looks like when hyperinflation sets in. How did that manifest itself in the life of the average Argentinean, maybe with a timeline? Like how did this really play out and what were the impacts?

FerFAL: Well, the first thing you see when this happens is that no one wants to spend a single buck. No one wants to spend nothing at all because they don’t know what’s going to be happening tomorrow so everything just happens to freeze. With places such as supermarkets and such you see the workers, employees, running around keeping the price of products updated within the hour. I mentioned one time I was buying myself one of these Home Depot equivalents in Argentina and I was buying a few tools, and by the time I reached the cash register it had gone up in price and I had to have a small argument with the cash register lady and she ended up talking with the manager and the manager said, “well, he pays the price that he picked it up at”. So, you could actually go buy the product again and see that they had just placed the sticker on top of the older price. So there was this little pile of prices from that day and if you peeled them away you could see how it had gone up in price through the day.

Chris Martenson: Well, what about the availability of products as this is happening? Were products still available? Did they just happen to be moving in price very quickly or did certain things become unavailable?

FerFAL: It’s an extremely complex situation but some of the things that you might be interested in it happens to go up in price depending on other currencies. For us it was the dollar, so it would go up in dollars so that’s why they had to change the stickers with the different prices. Some companies decide not to send their products to the outlets, to the stores, to supermarkets. They stay waiting to see what happens with those prices because they don’t want to be selling at a price that’s going to be half as much as its going to be the next day. So they just prefer saying we don’t have any more left and we don’t have any more sugar left; we ran out of it. So they keep their stockpile and see if they can sell it for a few more bucks the following day. Also, you have to consider that while this happens the social situation is pretty bad. You have lots of protesting, lots of rioting, and looting all across the country. That lasted in Argentina for a couple of weeks. It extended itself for more time in different locations depending on what was going on in that particular region but the problem of the social unrest and looting is also a factor to be considered as well.

Chris Martenson: So in these events – let me guess – the poorest people are probably impacted the most and then this reached into the middle class and maybe even up a little further. The rich were probably reasonably well-insulated. Is that right?

FerFAL: Yeah. The breaking point – something that you might to keep in mind – the breaking point is when the middle class which is in general all over the world, the middle class is the one that makes things work because the more middle class you have the better in general terms the country is, right? The more middle class you have the better life standard for everyone, the more chances of growth, the more fair it is. When you have lots of poor people, little middle class and the very powerful and very rich elite, that’s the typical schematic of third world nations, right? In a prosperous first world country you have a strong middle class. When that middle class is being threatened or is being actually destroyed as we saw here through the economy situation, through lots of purchasing value, of their savings, of what they make every month – when that happens is when everything cracks down and that’s when the situation goes from ‘slow boiling frog’ to sudden instant collapse of society and everyone taking to the streets and protesting and trashing the banks and such.

Chris Martenson: So what’s the greatest risk here if you would say another country you’re looking at it and giving it an analysis and this country’s going to face a currency collapse like what Argentina faced? What’s the biggest risk for people living there? Is it just loss of investment wealth? Are you actually concerned about violent crime and how that might reemerge? Is it unemployment? What really drags people down there?

FerFAL: When you ask any Argentinean person what concerns them the most, the first thing they’re going to be telling you is the crime problem. And the second one is the financial problem. Those are by far the top concerns the average Argentinean person has and I think that eventually it will happen in the U.S.A., as well. I think that five years from now or so you’re going to be talking to people and the thing that’s going to be concerning them is that, you know, Joe down the street he suffered a home invasion and he got beaten up, maybe even got killed, all that kind of crime that wasn’t used to happen in the U.S.A in the good parts of town. It’s going to be one of the greatest concerns people will have eventually.

And, of course, the financial situation as well. If you look into what people are worried about right now they’re worried about losing their jobs not being able to put food on the table the next month. They see that if they lose their jobs it’s not as easy as it used to be to find another one as well. That’s terrible because it’s very cold when you look at it in numbers but it’s – I’m telling you – it’s so much different when it happens on a social level and you see that on the street . When you see the people picking up garbage on the streets to eat. This guy – he sent me an e-mail about visiting Argentina – and he saw how it was here after visiting during the 70s. He said he was surprised to see normal-looking people, relatively well-dressed people eating off the junk bags in the street. That’s something I saw myself and that’s one of the things that impacted me the most: seeing people that looked just like myself with their kids, an entire family, a couple and two or three kids, eating around a trash bag as if it were at my dinner table.

Chris Martenson: So this has reached up into the middle classes at this point in time. It’s been enormously destructive. So the process here was what? So hyperinflation begins to set in, banks get closed, the currency really gets devalued, and then unemployment follows. Why does the unemployment follow in this story?

FerFAL: Unemployment follows because it’s very hard for people to keep a business open as well. As you said before there’s the government is not helping. The government is insulating a different kind of society, right. They’re looking for a society where social welfare is going to be the solution. That brings up taxes and government expense. That means that the small business entrepreneur is getting punished for his boldness in getting involved in a new business. It’s getting more expensive for him to stay in business. At the same time with inflation going up supplies and materials and wages as well, because wages also go up. If you don’t do it yourself the government starts forcing you to do so. So we see that here as well. Here one of the greatest problems businessmen have is keeping up with inflation but also with the unions that force them to raise the wages so as to keep up with inflation. It’s basically a race to keep up with inflation that makes it very hard for the honest entrepreneur, the business owner to stay afloat. That causes more unemployment as well and its part of the problem.

Chris Martenson: And the more unemployment you get the probably the less money there is to spend and circulate, even as prices are rising. Just it squeezes everything.

FerFAL: The entire society ends up changing where people that used to be middle class now become poor. Just think for a second what you would be doing yourself if things went up 30 percent as of tomorrow. Maybe you’d be okay, right? Maybe you’d say okay I’m going to be cutting some expenses so as to get by. Now after a month it goes up 50 percent. What would you be doing then? What if after a year it went up 100 percent? So you have to cut your expenses to half. Eventually you reach a point where you cannot cut anything else where your income just isn’t enough to keep you in the middle class. You’re now poor and you’re now fighting to put food on the table, right? Where people that don’t manage to succeed at that they become poor or they fall below the poverty line where they don’t have anything at all and they have to basically scrounge around junk and eat out of the trash.

Chris Martenson: So the great reset here is that too many promises are made on a number of dimensions and levels at some point and then those promises have to be taken away and they get taken away through a process of either outright default or inflation or sometimes both but in some way or another the key warning sign here is to note: has my country made promises it can’t possibly keep? (in current dollar terms if that’s your currency, in current whatever currency terms). So the key thing would be to ask, hey, do we have promises here that we can’t possibly meet under current arrangements as we understand them? Yes, if that’s true – okay – no, we’re not going to meet those things. That means we just have to figure out how those promises are not going to be kept.

FerFAL: Unfortunately, it looks very political, it looks like – why are we talking about politics? People have to understand that the greatest key is understanding what the country’s going for. Is my country going for a welfare state where everyone is kind of poor and the government is the good daddy that gives you a few bucks so as to stay afloat and survive? Is that going to be happening in my country or is it looking to another direction? Is it looking for a different direction where the middle class would be stronger, would be more capable of fulfilling whatever they strive for? Is that my country or is my country a socialist welfare state? Understanding that will give you a great lead as to where you’re going to be in ten years from now.

Chris Martenson: And your assessment of the United States?

FerFAL: Unfortunately, it’s copying the exact same role model we follow. That it’s a big country, big government that handouts to an increasingly poor society – unfortunately, you know what happens when that occurs is that you need the poor people because if your entire politician stance is that you’ll be the one fighting for the poor, you need poor people. Because if not, no one elects you into office, right? Who’s going to be electing you if you are the savior of the poor people if there’s no poor people anymore. So it sounds very drastic but it is exactly what happens. They feed on its own. They need poor people to keep in power.

Chris Martenson: Right, so let’s be clear. This is understanding the politics of the situation. This is not partisanship, this is not casting a dispersion in any one direction left to right, however you want to look at that.

FerFAL: No, not at all because it all comes back to the same point no matter where it is you’re going left or right, unfortunately, so.

Chris Martenson: Yeah, so here we are. Your assessment is that the United States is clearly in a direction of big government. I’m a small business owner up here and I can tell you that the burdens on small businesses become only larger with every passing year. They never take any laws off the books. The taxes never go down. These are the sorts of things that, you know, ultimately the productive class has to support a larger and larger weight and at some point that starts to break in a hyper inflation or even a just highly inflationary environment, is a great place to break more than a few backs in the productive class. Is that how you see it?

FerFAL: Yep. That’s it.

Chris Martenson: Okay, so for the people who were there then are they really worried about crime. And they really worried about their investment wealth. And then unemployment was a big factor for the people who lost their jobs. And, at 25 percent unemployment, you know, that’s the levels we experienced at the Great Depression. The U.S., allegedly we may be close to that now if we count things differently in the U.S. or how we used to. It’s kind of murky but we’re – one of the key messages I work with here is we’re really actually pretty far along in the narrative of this story if we bother to step back and start to add up all the pieces that we see ranging from the debt levels, the fiscal situation, the political gridlock, the rising numbers of the dispossessed which are just staggering at this point you know from the poor and its reaching up into the middle classes now. So you would say of all these signposts, you’ve seen them before.

FerFAL: Yes. Most of what’s going on in the U.S.A. right now happened in Argentina and unfortunately it makes an extremely clear road map of what’s going to be happening soon. It’s going to be happening different because I honestly doubt that they’re going to be closing bank doors as they did here and bluntly stealing your money. “We close the doors, we keep your money, and we’re not giving it back to you.” That’s a bit too third worldly for the U.S.A. I doubt that’s the way they’re going to be stealing it from you but through inflation. By all means with inflation rising slowly, little by little, and one day you’ll look back and you see how different it was. You know, you find an old supermarket bag and you find an old ticket, an old receipt and see the prices and wonder what the heck happened here. This used to be the prices I was paying a year from now. Why are we like we are today? That’s the kind of thing people will be experiencing.

Chris Martenson: So we’re in the boiling the frog stage you would say and you would predict that at some point there’s some sort of a trigger, there’s an event, there’s a something that kind of kicks this into a different orbit. Is that how you see it?

FerFAL: Yes, eventually there’s an event where there’s going to considerable unrest, there’s going to be looting, rioting, and such. It may happen in one city or in a few. These things are viral in terms of they show it on the news that its happening in L.A. and then it starts happening in Washington D.C. and the guy in Texas says, “Okay, I’m fed as well so I’m going to be taking this as well and making my opinion heard because obviously no one cares about it. So I’m going to make it extremely clear what it is that’s upsetting me.” That appears to be extremely bad and it is to a point, but it’s more impressive to the eye than it actually is in social and economic terms. What has happened in social and economic terms has been happening already for years. It’s not just because there was suddenly looting over in L.A. or in Washington. It happens because it had been going on for a good amount of time now. But the scenes of the people protesting and looting and rioting are a bit staggering for most people. And Americans, in general, will feel like that’s the breaking point in spite of this having been provoked through a number of years. These things may last maybe a couple of weeks, something like that, but in the end when you look at the cold numbers that’s not the worst part. The worst part is not the looting and the rioting and whatever. The worst part is the loss of quality of life and the suddenly becoming poor for a lot of middle class people. That’s the real tragedy.

Chris Martenson: Okay, so at this point as you’re looking at things and you’ve been following it for awhile and you’re watching these events unfold is that avoidable for the United States?

FerFAL: I don’t think so.

Chris Martenson: Okay.

FerFAL: I don’t think so because the political stance as of today is unfortunately so similar to what we’ve been doing. There are people that offer solutions but they’re not getting elected, they’re not getting – the elected people are still seeing this as a republican and democratic thing. Its people that end up working for the same people, okay? It’s politicians working for the same elite that really manages things and models a country depending on what they want for themselves. So I don’t think it’s going to be changing. I hope I’m wrong. I really hope I’m extremely wrong.

And even if it keeps going this way there’s much worse places to be in, right? It’s going to be bad but America will eventually recover from this. It’s going to be taking decades for sure but it’s not going to be the end of America by any means. It’s just going to be a very hard time to live in but it will get by this.

Chris Martenson: Yeah, big change is coming and for those who can see it coming and they have an opportunity to prepare, mitigate some of the risks and maybe even come up with a better quality of life once they sort through what’s available in the pieces there.

FerFAL: There are always opportunities.

Chris Martenson: Right, there are always opportunities – something I harp on all the time. This is change. So what used to be is no longer and now something new is unfolding. Getting to that story early is important and I know you help people with your book, Surviving the Economic Collapse – how else can people follow you if they want to hear more and learn more, and I think they should, about the parallels in the Argentinean experience? How do they follow you?

FerFAL: Well, my book is in Amazon. It’s easy to find. It’s Surviving the Economic Collapse. It’s rather easy to find on Amazon. Also, my website is the modernsurvivalist.com. I blog almost daily and there’s a forum where they can find me if they want to ask questions or see what we’re up to. It’s all there for people to use.

Chris Martenson: All right. Excellent. And the name of that website again – one more time…?

FerFAL: It’s the modernsurvivalist.com.

Chris Martenson: Excellent. Well, thank you so much for talking to us today. This brings us to the end of the public portion of this podcast. It’s just been a real pleasure talking to you and I hope people get your book and visit your website because what you’re talking about could easily happen not just in the U.S. but for anybody listening in many other countries. This is a reality that can hit anybody, any country at any time. So thank you for the work you do.

FerFAL: Thank you Chris for having me on your show.

Chris Martenson: My pleasure.

Click here to access Part 2 of this interview (paid enrollment required).

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can’t be fixed. By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past. At least they are for the debt-encrusted developed nations over the short haul – and, over the long haul, across the entire soon-to-be energy-starved globe.

he sooner we can accept that idea and make other plans the better. To paraphrase a famous saying, Anything that can’t be fixed, won’t.

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

All economic depressions share the same root cause. Too much credit that does not lead to enhanced future cash flows is extended. In other words, this means lending without regard for the ability of the loan to repay both the principal and interest from enhanced production; money is loaned for consumption, and poor investment decisions are made. Eventually gravity takes over, debts are defaulted upon, no more borrowers can be found, and the system is rather painfully scrubbed clean. It’s a very normal and usual process.

When we bring in natural limits, however, (such as is the case for petroleum right now), what emerges is a forcing function that pushes a debt-based, exponential money system over the brink all that much faster and harder.

But for the moment, let’s ignore the imminent energy crisis. On a pure debt, deficit, and liability basis, the US, much of Europe, and Japan are all well past the point of no return. No matter what policy tweaks, tax and benefit adjustments, or spending cuts are made – individually or in combination – nothing really pencils out to anything that remotely resembles a solution that would allow us to return to business as usual.

At the heart of it all, the developed nations blew themselves a gigantic credit bubble, which fed all kinds of grotesque distortions, of which housing is perhaps the most visible poster child. However, outsized government budgets and promises, overconsumption of nearly everything imaginable, bloated college tuition costs, and rising prices in healthcare utterly disconnected from economics are other symptoms, too. This report will examine the deficits, debts, and liabilities in such a way as to make the case that there’s no possibility of a return of generally rising living standards for most of the developed world. A new era is upon us. There’s always a slight chance , should some transformative technology come along, like another Internet, or perhaps the equivalent of another Industrial Revolution, but no such catalysts are on the horizon, let alone at the ready.

At the end, we will tie this understanding of the debt predicament to the energy situation raised in my prior report to fully develop the conclusion that we can – and really should – seriously entertain the premise that there’s just no way for all the debts to be paid back. There are many implications to this line of thinking, not the least of which is the risk that the debt-based, fiat money system itself is in danger of failing.

Too Little Debt! (or, Your One Chart That Explains Everything)

Note: this next section is an excerpt from a recent Martenson Blog entry, so if this seems familiar to any site members, it’s because you’ve seen it before.

If I were to be given just one chart, by which I had to explain everything about why Bernanke’s printed efforts have so far failed to actually cure anything and why I am pessimistic that further efforts will fall short, it is this one:

There’s a lot going on in this deceptively simple chart so let’s take it one step at a time. First, "Total Credit Market Debt" is everything – financial sector debt, government debt (federal, state, and local), household debt, and corporate debt – and that is the bold red line (data from the Federal Reserve).

Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).

Then if we perform an exponential curve fit (blue line) and round up, we find a nearly perfect fit with a R2 of 0.99. This means that debt has been growing in a nearly perfect exponential fashion through the 1970′s, the 1980′s, the 1990′s and the 2000′s. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again, from $52 trillion to $104 trillion.

Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008, and it has not yet even remotely begun to return to its former trajectory.

This explains everything.

It explains why Bernanke’s $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits), which were positioned to directly benefit from the money. It explains why things don’t feel right, or the same, and why most people are still feeling quite queasy about the state of the economy. It explains why the massive disconnects between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed during and are utterly dependent on exponential credit growth. Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin. This is why Bernanke can print a few trillion and not really accomplish all that much, because the main engine of growth expects, requires, and is otherwise dependent on credit doubling over the next decade.

To put this into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation each year of that decade. Nearly three years has passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

What will happen when credit cannot grow exponentially? We already have our answers; it’s been the reality for the past three years. Debts cannot be serviced, the weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas housing, etc.), and the dominoes topple from the outside in towards the center. Money is dumped in, but traction is weak. What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.

Debt and Europe

The debt situation in Europe is fairly typical of the developed world and mirrors the debt chart of the US seen above. There’s entirely too much debt, and most of the unserviceable amounts are concentrated in certain spots (i.e., PIIGS), while the amounts owed are concentrated in the German, French, and British banks.

This New York Times graphic did an excellent job of summing everything up.

Here is a slightly less-complicated image that expresses the same dynamic:

If everybody owes everybody else, then kicking the can down the road only works if there’s more wealth, more growth, and sufficient economic activity down that road to service the past debts. If any one participant drops the baton in the debt relay race, the absurdity of the situation becomes unavoidable and the cause is lost.

When we hold this view, it is abundantly clear that adding more debt along the way only increases the burdens and is therefore ultimately counterproductive, although it does grant the gift of additional time to avoid facing the truth.

When all of the most indebted countries are stacked up, we see that all but Russia carry a total indebtedness greater than 100% of GDP and that nine are carrying debt levels higher than any that have ever been repaid historically.

(Source) Note: 260% debt-to-GDP is the all time record for repayment, accomplished by England between 1815 and 1900, but required both massive cuts in spending and an industrial revolution.

Without mincing words, the world does not face a crisis of liquidity, nor a crisis of insufficient debt, but one of entirely too much debt. That’s the entire predicament in three words: too much debt.

More debt is only going to compound the predicament, yet that is what the world’s central banks and political structures are busy manufacturing. More debt.

Of course, debt is only one component of the story; there are also liabilities to consider. The above chart merely graphs the legally defined debts involved. If we bother to add back in the liability components, which are pensions, social security and government medical plans, the predicament is seen to be three to six times larger:

Whereas the prior chart showed all debts incurred by all sectors of each nation, the above chart only displays government debt and liabilities. For reference, the red bars, above, are the amounts that you read about in the paper when commentators note that the US, for example, still has a debt-to-GDP ratio that is under 100%. It’s a comforting tale, but not an accurate description of the situation.

Again, there are no historical examples of any country ever digging itself out from so deep a hole, and yet we find that the entire developed world has bravely pushed itself deep into unknown territory, seemingly without any serious discussions about whether or not this made sense.

Where We Are Now

So here we are, just a few weeks away from the end of the second round of quantitative easing (QE II) , with massive public debts and liabilities having only grown larger instead of shrinking during the Great Recession, everybody in nearly the same boat, and no clear plan for how all the sovereign debts will be funded from current productive cash flows (i.e., existing GDP).

This is why so many commentators, myself included, are convinced that more thin-air money printing is on the way. My thesis, laid out back in early March is that the Fed will stop QE II on schedule and that the financial markets will react exceptionally poorly to this loss of support. Commodities will tank first, then stocks, then bonds; from riskiest and most-leveraged to least.

It is time to face the music; the levels of indebtedness now require permanent support from thin-air money in order to avoid a deflationary collapse. Given this reality, we explore key questions in detail in Part II of this report: Understanding the Endgame:

• How will the global debt crisis play out?
• What does a world economy without growth look like?
• What steps should we, as individuals, need to take in preparation?
• How can investors safeguard their purchasing power during the coming rout in the finanical markets?

Click here to access Part II of this report (free executive summary; paid enrollment required).

Well, it now turns out that many of my worst fears about Fukushima have been confirmed with the news that TEPCO has finally admitted that Reactor #1 has experienced a meltdown event that may have breached the primary containment vessel. Further, truly alarming levels of radiation are now being reported in and around Tokyo.

The prospects for containing the situation at Reactor #1 are now much dimmer than previously admitted. A melted core is far more difficult to cool because the geometry of the slag heap at the bottom is not nearly as favorable as long thin tubes around which water can be relatively easily circulated.

Worse, if the slag has either melted through the primary containment vessel or somehow leaked out through a fitting that has failed, then the ability to circulate water is even more compromised.

Partial meltdown hits Fukushima nuclear plant

Friday, 13 May 2011

Uranium fuel in at least one of the six reactors at Fukushima has melted, the operator of the crippled nuclear plant has said. The admission effectively torpedoes a plan to flood the overheating fuel with water and bring a quick end to the worst nuclear crisis since Chernobyl.

Tokyo Electric Power Co (Tepco) said water levels have fallen at least one metre below fuel rods inside Reactor 1 and that melted fuel has dropped to the bottom of the reactor’s containment vessel. Engineers are working inside the reactor building for the first time since the crisis began when a hydrogen explosion blew off its roof following the huge quake and tsunami on 11 March.

Tepco general manager Junichi Matsumoto told reporters in Tokyo that the discovery means its timetable to entomb the containment reactor vessel in water may have to be scrapped. “We can’t deny the possibility that a hole in the pressure vessel caused water to leak,” Mr Matsumoto said.

Observers fear that Reactor 3, which contains MOX plutonium fuel, may have also suffered a meltdown, and the situation inside Reactor 2 is still shrouded in mystery.

The idea that fuel rods have melted (a process that begins at around 2,600 degrees F but requires 3,400 degrees F in order to melt the zircaloy cladding) coupled with the admission that the roughly 5-inch-thick steel containment vessel have been breached (presumably by being melted through) is completely, utterly, and inexcusably at odds with the temperature data TEPCO has released to date for the core.

At no time has TEPCO ever reported a temperature higher than ~750 degrees F (400C), and it has more typically reported primary containment temperatures barely one third that high.

With steel being an excellent conductor of heat, it is just simply not possible for melting to occur and for the reported temperatures to have been that low. Either something as basic as temperature monitoring is out of the realm of the possible for TEPCO’s engineers (with troubling implications for where we really are in this unfolding disaster), or TEPCO has been falsifying the temperature data that it has been releasing.

This, too, has troubling implications, for it means that the rest of the data – including the radiation readings and isotopes discovered – are all suspect, too. Neither bodes well, so pick your poison.

I am now very suspicious of the water level data, as well, because TEPCO is now admitting (sort of) that that they can’t deny the possibility that there’s a hole in the primary containment vessel. Unless that hole is magically at the same level as the water readings, there’s something wrong with their water level data. The process I am imagining is that the core melted down and somehow punctured or penetrated the bottom of the vessel. If true, then the water level in there is essentially zero, not “one meter below the fuel rods,” as claimed.

Sadly, the news that the reactor melted down simply confirms a piece of analysis I performed in a special report for enrolled members back on March 21, 2011.

Worrying Images From Helicopter ‘Over Flight’ Video

Last week we analyzed a few stills from the helicopter fly-over. This morning I came across this next video, which at first I thought was the same, but I quickly realized it had additional footage taken from the beginning of the fly-over that I had not yet seen. It also seems to have slightly different views than the prior one, so it may be a different video shot with a different camera taken during the same flight (the final images of Reactor #4′s smoke line up). It has an enormously interesting but troubling feature in it that I only discovered by crawling through the video frame by frame (that’s how desperate I am for any hard information about the reactors).

Here’s what I found. Between seconds 30 and 31 in the video, as it scans across the rubble of Reactor #1 (presumably; orientation is not easy at this part of the video), we see a fissure that appears to be emanating a bright white-orange light. The link is here (better hurry, I bet this one gets pulled too), and I’ve arranged some stills from the video below. They are presented in series, meaning the top one is from second 30 of the video progressing to the bottom one from second 31.

In all, we have numerous frames taken from quite different angles, some in and some out of focus, indicating that what we are looking at is not a video anomaly caused by light reflecting off of some bent metal or other such artifact.

(Watch the video here while you still can.  Again, these come from the 30 and 31 second mark.)

Okay folks, that looks very much like a hot spot. A very hot spot. If we knew what it was made out of, we could probably identify it to within a few degrees of its actual heat value, but we don’t know what it is (besides a fissure that is glowing at an orange-white temperature).

But I am disinclined to believe it is a normal fire burning up normal materials, because there have been no reports or videos or photos showing smoke emanating from this reactor. Still, it remains one possibility.

Another less-desirable but not dismissible possibility is that it is coming from some sort of nuclear reaction, be it residual decay heat or even a meltdown-driven process. We just don’t have enough information to tell, and the authorities have been less than forthcoming with this bit of information.

A seat-of-the-pants analysis, which borders on the irresponsible because we don’t know anything about the camera, its settings, or what is emitting the light, allows us to speculate that the temperature of the hot spot is well over 1,000 degrees Celsius. If it were metal, say iron, glowing that color, our guess would be in the vicinity of 5,000 degrees Celsius.

Here are several views of the glowing spot against a black-body temperature chart (note that a Kelvin is the same thing as a Celsius but they start at different place…zero for Celsius is freezing water and for Kelvin it is absolute zero. To convert, just subtract -273 from the Kelvin scale and you’ve got Celsius).

Of course, we have no idea about what is glowing down there, so it is impossible to say anything for sure, besides, “That’s a very hot spot.”

It is not yet time to turn our attention off of this situation. Yes, it is good news that nothing else seems to have exploded or gone much worse in a few days, and for that I am grateful and hopeful. But the utter lack of information leaves me concerned that something is being hidden from our view.

No Chance of Hooking Up All The Pumps

One stated goal of the authorities is to hook up the pumps in Reactors #1, 3, and 4. A power line has been brought in, and this is supposed to provide hope.

Also in that helicopter fly-over was a nice stable view of Reactor #3 from the air. Please look at this and decide for yourself how likely it is that the pumps and wiring and plumbing are all in place to allow for the pumps to be turned on any time soon.

It was only yesterday that functions were fully checked out and restored in the control room - a building that didn’t get turned to rubble. Therefore, we might question just how quickly the systems might be restored at the decimated reactor structures, especially if the repair crews are operating out of a Type 74 main battle tank.

My conclusion from this line of thinking is that while we should still hope for speedy restoration of systems, we should plan as if weeks and months might be involved.

As it turns out, we now have a reasonable understanding of what the ‘crack of doom’ probably was: the heat signature from a melting core.  The title of the piece quoted above is “Japanese Reactor Situation Far Worse Than Admitted,” and I guess we can now say that the admissions are finally catching up with what we already knew.

As always, trusting our own abilities to know what we are looking at and make reasonable guesses turns out to be the right course of action, especially during times when official sources have conflicts of interest in being truly open and honest.

I use the term “official sources” loosely because it is also true that it was not just TEPCO that had access to the heat signature data detected above. It must also be true that the US, which conducted numerous fly-overs with sophisticated detection packages, had this information as well.

We had clues about this when the NRC official made an at-the-time shocking statement that a partial meltdown had ‘probably’ occurred.

Japanese officials detect radioactive incinerator ashes in Tokyo, other prefectures

TOKYO, May 13 (Xinhua) — A radioactive substance of up to 170,000 becquerels per kilogram was detected in incinerator ashes at a sewage plant in Koto Ward, east Tokyo, in late March, the Kyodo News Agency quoted government sources as saying Friday.

The highly-contaminated ashes were discovered following the nuclear crisis at the Fukushima No. 1 nuclear plant which escalated through March as a hydrogen explosion exacerbated the disaster and highly radioactive water was both discharged and found to be freely flowing into the Pacific Ocean.

The ashes have since been recycled into materials used for construction, such as cement, sources with knowledge of the matter said.

In addition, the sources revealed that also in late March a radioactive substance, which may or may not have been cesium, measuring 100,000-140,000 becquerels per kg, was found in two other separate sewage facilities in the Itabashi and Ota areas of Tokyo.

Separately on Friday, the local government of Maebashi, the capital city of Gunma Prefecture, said radioactive cesium of 41,000 becquerels per kg was detected in incinerator ashes collected Monday at a water sanitation facility.

This is outrageous and shocking news.  First, because of the levels, and second, because these things were detected in “late March” and then hidden from the public to such an extent that the screaming hot ashes were allowed to be recycled into and used for construction materials.  Now that’s a cover-up.

A becquerel is one decay per second. So if you had a Geiger counter up against a radiation source that was emitting just two becquerels, you’d hear a reasonably steady tick-tick-tick-tick sound. By one hundred becquerels, you would be hard-pressed to hear the ticks as separate events – the sound would be a blurred staccato. By one thousand becquerels, it’s just a squeal, and there’s no point in listening anymore, as your ears are not helpful in trying to gauge the level of radiation.

Now look back at those radiation readings in the hundreds of thousands per kg. They are incredibly hot. An average brick is in the vicinity of a kilogram, so think of holding one in your hands while it emits 170,000 radioactive decays per second.

Okay, so this is a very, very hot reading.

And here’s where those readings were detected:

These readings are all within a ten-mile radius of Tokyo.

Further south of Tokyo, in the Kanagawa prefecture seen to the lower left of the above image, tea was recalled:

Radiation Detected in Tea Leaves in Japan

TOKYOu2014A prefecture just south of Tokyo said it had detected higher-than-permissible amounts of radioactive material in tea leaves, in a reminder that Japan’s radioactive-contamination problems are far from over.

The contaminationu2014the first case in nearly a month that an agricultural product has been found tainted outside Fukushima Daiichi’s home prefectureu2014is also the first time that any agricultural item from Kanagawa Prefecture, which includes Yokohama, was found to contain an excessive level of radioactivity.

According to Kanagawa officials, a sample of tea leaves collected May 9 from the city of Minamiashigara, in the western part of the prefecture, was found to contain 550 becquerels of cesium per kilogram in the first test; the second test of the same sample detected 570 becquerels. The difference between the two readings is within the margin of error in such tests, the officials said.

While it is a bit disturbing to have that much radiation be found that far from the Fukushima site, here we note that a Becquerel count in the 550 range is at least a number we can get out minds around. It is still far too high a reading – and I wish we knew the isotopes involved, as they are crucial to determining whether there isn’t possibly a greater concern from the type of contamination vs. the radioactivity itself. By this I mean that if the contaminants involved are iodine or strontium, the greater concern is one of bioaccumulation and deposition, which can enormously magnify the health risks for a given level of radioactivity.

What the Japanese people, as well as the rest of the world, need very badly right now is one of the most comprehensive radiation and contamination mapping projects ever conducted.

If I lived over there, I would get myself a sensitive radiation/dosimeter and I would be personally scanning all of the food and water my family consumed, and my immediate surroundings as I lived, worked and played. If levels beyond what I considered safe were detected, I would then leave.

The 170,000 becquerel reading is just so far off the charts, and is so far beyond my personal safety limit, that there’s a nearly 100% chance that if I were living in the Tokyo area my family and I would have left as soon as I heard the readings.

Similarly, frighteningly high levels of radiactive cesium were found in the soils around Tokyo, in amounts that are higher than  those TEPCO or the Japanese government have released for most of the Fukushima prefecture itself:

Highly Radioactive Substances Detected in Tokyo

Moving on to the latest developments in Japan’s ongoing nuclear crisis highly radioactive substances were detected in parts of Tokyo.

Japan’s Asahi Shimbun reports about 3,200 and nearly 2-thousand becquerels of radioactive cesium per kilogram were found in the soil of Tokyo districts of Koto and Chiyoda, respectively, from testing conducted between April 10th and the 20th.

This amount is higher than what was found in the prefectures near the Fukushima plant and experts warn that other areas may be subject to radiation contamination as clusters of clouds containing radioactive material remain in the atmosphere.

One could reasonably ask how such a finding is possible this many miles away from Fukushima, given the prevailing wind patterns and the (allegedly) lower findings far closer to the plant itself. At least these tests are only a month old…perhaps someday real-time results will become available to the people of Japan.

My faith in TEPCO and the Japanese government (which blocked Greenpeace from conducting its own radiaiton sampling in Japanese territorial waters) is very close to zero.

Fairewinds Associates Has The Best Coverage

The very best ongoing coverage of the Fukushima disaster is coming from Arnie Gundersen of Fairewinds Associates. He is experienced and very, very clear about when he knows, what he suspects, and what he doesn’t know. I really appreciate that approach, as you almost certainly already know.

He recently postulated that the explosion seen in the Reactor #3 complex was initiated in the spent fuel pool and was much more than a simple hydrogen explosion (which is quite obvious, really, from the video of the explosion), and was an example of what he calls a ‘prompt moderated criticality’. 

Without going into all the details, it is a form of what we might call a nuclear, rather than a chemical, explosion.

Significant differences exist between this type of event and what we might call a true nuclear explosion.  But all the same, it was a very exothermic, high-energy release that most likely drew its power from a briefly-sustained fast neutron reaction.

As Mr. Gundersen reported, pieces of the spent fuel pool rods were found up to 2 kilometers away, implying an initial ejection speed in the vicinity of 1,000 miles per hour. But we already knew that the Reactor #3 explosion was something far more energetic than a simple hydrogen explosion, and it’s good to know that there’s a reasonable explanation even if it is rather frightening to know that such a thing can happen in a spent fuel pool.

By the way, this would be another example of something that many of the nuclear apologists said could ‘never happen’ – and yet which happened. Other examples would be breach of the primary containment, breach of the secondary containment, and large-scale release of radiation into the environment.

Also it should be noted here that a private food firm in Japan tested its own rice fields 50 km from Fukushima and detected in plutonium on far higher concentrations than any TEPCO or government tests had yet revealed (link: need to translate to English.)

The Remaining Fears

The good news is that nothing has blown up lately at the Fukushima complex, indicating some sort of stability as well as the likelihood that the reactors, while a complete mess, are not going to do anything more dramatic than they’ve already done.

The bad news is that Reactors #1, #2, and #3 are all really badly damaged and leaking contamination to the outside world. Pouring water on them only creates more radioactive water that will find its way into the groundwater and/or the ocean.

The fear is that the molten cores are still cooking along, slowly working their way out of first the primary containment vessels and that they might slowly eat their way out of the secondary containment vessels, too. If this happens, there will be a very real chance of extremely large-scale release of radioactive contamination -possibly in a rather vigorous manner – should some sort of re-criticality be established or just a good-old-fashioned steam explosion occur if/when the molted cores encounter water.

Can we rule out another, possibly larger, ‘prompt criticality’ event? No, not at this stage.

Another fear centers on the fact that we’ve not yet been treated to full disclosure on the amount and types of radiation released. Is there still significant iodine-131 being released more than 60 days after the beginning of this event? If so, that will mean that criticality is still going on or has recently happened? Because by this stage, more than 99% of the initial 1-131 has decayed away.

The difference between fighting the leftover decay heat and trying to deal with re-critical fuel is like night and day. The former is slowly cooling off naturally; the latter is generating heat.

So, yes, we need and deserve to know exactly what the isotopes are that are being found, in what proportions, and whether there are pockets of criticality in any of the damaged reactors.

As Predicted…

Just based on the evidence we had and the amount of damage we could see, it was obvious early on that this event would drag on for months. Now it looks like ‘years’ is a better guess.  Certainly it is already well past the point of relevance to most news organizations, and it is hard to get good information from major news organizations outside of Japan these days.

The primary worry right now is that the situation at Fukushima Daiichi is not yet stabilized. Every time I think they have turned the corner, more news is released that indicates that there are still surprises emerging from the site.

Water escapes, unexpected isotopes are detected (I-131 in the Reactor #4 fuel pool), and meltdowns and reactor breaches are finally admitted.

Given that this is still something of a two-steps-forwards/one-step-backwards situation, we should now consider what will happen if/when a typhoon comes and blows all the contamination inland in far greater quantities than have yet occurred.

Even without renewed criticality generating fresh isotopes, the amount of material that is highly dangerous is immense.

We can hope and pray that they manage to get things under far better control before too much longer, but so far the scale of the disaster has proven a formidable foe.

Conclusion

The Fukushima situation is still not what we might call stabilized, and it may not be for some months yet, especially if re-criticality has occurred.

The amounts of radiation detected all the way south of and in and around Tokyo is alarming, especially the sludge findings in the hundreds of thousands of becquerels.

Anybody living there should invest in radiation detection equipment and begin practicing basic decontamination procedures as a matter of routine if unsafe levels are detected.  Obtaining food from sources as far south and west as possible is prudent practice.

The problem is not the levels of radiation; the danger lurks in the ingestion of contamination, especially of isotopes that tend to concentrate in the body. Strontium, iodine, and cesium all have that tendency.

I wish there were better news to report, but this is the situation as it stands: Fukushima is not over, not by a long shot.

Greetings from paradise. We have a lot to cover today, so I want to get right down to it.

First, long-time readers know that I don’t really do public speaking gigs or interviews. We get a lot of requests for these but usually turn them down with few exceptions. Chris Martenson is one of those exceptions.

If you don’t know about Chris, you should – he’s one of the sharpest financial minds out there, and we look at the markets with a similar perspective. Chris speaks routinely with folks like Jim Rogers and Marc Faber, and as we share a similar worldview, I happily sat down with him recently for an interview.

We discussed how the best opportunities now are outside the western world – greater reward, greater freedom, greater adventure. If you have 30-minutes, you can listen to the interview on Chris’s website.

Next, Monte writes, “Simon, I worked for Bolivian president Evo Morales and had first-hand experience with the issues you discussed. Bolivia is taking a dangerous rode to both socialism and hate; our leaders want to improve things by telling us that we have to chase bad guys, i.e. anyone with a dissenting opinion.”

It’s the old ‘us vs. them’ approach: define a clear enemy (them) and people will gravitate towards the side of ‘right’ (us). This is a core principle of psychological warfare; human nature wants to divide the world into two sides and then be on the ‘right’ one, often without fully understanding the issues.

Politicians know that this is an effective tool to rally support for a cause, and history provides many examples. Hitler painted first the Communists, and then the Jews, as enemies of the state in order to build support for his dictatorial control.

The US government applied the same tactic 10-years ago, defining ‘evil terrorists’ as the enemy in order to build support for the erosion of civil liberties in the United States.

Anger and hate may be effective tools to rally popular support, but such polarization rarely leads to solutions… just witness how governments are now defining ‘evil oil speculators’ as the enemy. It’s easy to side with the politicians on this one – after all, everyone hates paying more for fuel.

But will breeding such negativity bring down gas prices? No chance. In the same way, democrats and republicans painting each other as the enemy does nothing to bring down the US debt.

Read the rest of the article

Note: This post deals with personal security, one of the most asked-for topics by this community. However, we realize it is a sensitive if not scary topic for some. The intent here is have an open and mature exploration of an important subject. Please respect the author’s efforts to do just that.

My wife and I live in Philadelphia on the u201Cgreen lineu201D between mostly-prosperous Center City and mostly-wasteland North Philadelphia. People are very aware of crime around here, as you might imagine, and many people have taken numerous steps to avoid becoming victims. That being said, I am still surprised on a nearly daily basis how unprepared and unaware some people are. (I'm a Police Sergeant, so I see many people who have been caught off guard by criminals. And that's a very important first tip: If the criminal cannot catch you off guard and unprepared, he's most likely going to pick a different victim. But that doesn't account for intoxicated/drugged criminals, very inexperienced criminals, and professional criminals.)

A middle-aged woman who is our neighbor lived alone in a three-story rowhouse one block away from us. At about 10:00 pm one night, she was reading in bed in her second-floor front bedroom. Suddenly, there was a strange man she had never seen before standing in the doorway of her bedroom demanding money. Scared half to death, she pointed out her purse on her dresser. He went through it, took all her money and fled out the second floor rear bedroom window through which he had entered. Responding police were unable to find the perpetrator. Crime is an ever-present threat around here, yet this long-time resident was totally caught off guard. Even more amazing to me was how easy it would've been for her to have prevented this whole unnerving incident. She had a burglar alarm system, but she hadn't armed it, even though she was going to sleep in a few minutes. She also left her rear second floor window unlocked, which enabled the burglar to climb in without making any noise after using her neighbor's rear second floor deck to access it.

I don't know the lady, but I'm thinking that before this event she had had a theoretical or abstract awareness of crime from hearing so much about it in the neighborhood and the media. You, too, may have such an abstract awareness that has not affected you on a gut level. She had an alarm system as a way of fending off attack (at home), but she obviously didn't have the motivation to practice simple discipline to protect herself. In my experience, a person's first time being victimized by a criminal is a real wake-up call. Depending on the person and the crime they are the victim of, the effect on the person may be life-changing and sometimes devastating. My neighbor was freaked out, as you would have been having gone through something like this. She was glad not to have been physically injured and glad the burglar took such a small amount of her valuables.

Sadly, I can't conclude the story here, and this is the part that really shocks me. This neighbor had a very powerful emotional reaction to a very dangerous and shocking crime, but she didn't take the simplest of steps to protect herself from being victimized again. Amazing! A few months after this first incident, my neighbor was asleep in her bed. She had not armed her burglary alarm system (again) and her rear window was unlocked (again). She was awakened from her sleep by a different man in her bedroom who brutally raped her, took her money, and drove off in her BMW. This man had entered through the same unlocked window! I don't think it was much consolation to her, but police caught the predator several days later, still driving her BMW. She sold her house quickly below market and moved away. I wonder if she is more prepared to deal with crime now. I wonder how many of the readers here haven't taken significant steps to protect themselves.

I'm writing this post on preparing for crime and violence primarily to stimulate or inspire members of the ChrisMartenson.com community who have not already done so to plan for and begin taking steps to prepare themselves for crime and violence. The next 20 years are going to be completely unlike the last 20 years, and one way they're going to be different is in the area of crime. Obviously, more poverty and desperation and fewer law enforcement resources will be the main ingredients in generating more crime and violence. It's going to be more frequent, more clever, and more brutal. From my perspective, these preparations are a normal part of life, because crime is a normal part of the human experience (in varying degrees and types). It only makes sense to think about crime and violence, take some reasonable steps to prevent it, and respond to it if prevention fails. This is true in national parks, rural areas, small towns, and large cities. These are my thoughts, but I believe most people have not thought about these things very much. And more importantly, they have taken very few effective steps to prevent themselves from being victimized and to deal with a crime against themselves once an attack starts.

This post may not scratch where you itch, because I see people falling into one of four categories in regard to preparation for crime and violence. Look at my four categories and decide where you are:

The first category consists of those who are already aware of crime and violence and have begun taking steps to prepare themselves and their loved ones. Readers in this first category may find they have already progressed beyond most of the material in this post. If so, a second future post I have in mind may be more helpful.

The second category of people are hopefully the largest group, and they are the ones I want to move with this post. These are people who haven't yet done much thinking and preparing to face crime, but they will if effectively prompted to do so. I say u201Ceffectively promptedu201D because many things could trigger a person's journey into self-protection. Being the victim of a crime for the first time in your life often qualifies as being u201Ceffectively promptedu201D (though not always, as per my neighbor's experience). Vicariously experiencing someone else's crime has u201Ceffectively promptedu201D many people to take their own self-protection more seriously.

My brother- and sister-in-law live in a quiet, prosperous, low-crime area in Connecticut which is very close to a brutal 7-24-07 home invasion in Cheshire, CT. That nearby crime, which resulted in the murders of the wife and two daughters of Dr. William Petit, Jr., u201Ceffectively promptedu201D my brother- and sister-in-law, and many others in low-crime Connecticut, to begin taking their self-protection very seriously. They bought guns, took training and went through the arduous process to get concealed carry permits. (If you need to be effectively prompted by someone else's experience of crime and violence, go to YouTube and watch all the u201Carmed robberyu201D and u201Cshootingu201D videos you can find. Your blood should run cold and your motivation hot.)

The third way someone might be u201Ceffectively promptedu201D is by a traditional learning experience such as in a classroom or by reading this post. This is the least effective way of the three, and is most effective when combined with one of the other two. Nevertheless, I have hopes that this post might move some ChrisMartenson.com people u201Coff the dimeu201D to start taking their personal protection seriously. After all, if you're on this site, you've taken an u201Ceyes wide openu201D look at the world as it really is, you've made some educated guesses about what the future holds, you've begun to prepare, and in many cases you've started spreading the word. You didn't wait for a six month u201Cbank holidayu201D or a 50% devaluation of the dollar to get started. That's exactly what I'm trying to get readers to do: conduct a brutally honest look at the world as it pertains to your safety, make some realistic projections about what the future holds, and take appropriate action now.

The third category is also a large group of people. These are the people who won't prepare significantly in advance to prevent crime and violence toward themselves, but they WILL fight back if attacked sufficiently. Ginger Littleton is the poster girl for this group. Ms. Littleton was in attendance at a school board meeting in Florida on 12-21-10 when Clay Duke pulled out a handgun and began ranting and threatening. I don't know Ginger, but I saw her interviewed on TV and I know her u201Ctype.u201D She apparently has never taken her personal protection very seriously, but when confronted with an attack on herself and innocents near her, she decided to fight back (sort of).

It's best if you watch her u201Ccounterattacku201D on YouTube, but allow me to describe it here. Middle-aged Ms. Littleton fled the room when allowed to do so by the would-be murderer. However, feeling an admirable rush of civic responsibility, she decided she couldn't just run away. She snuck back quietly to the meeting room. Seeing Duke's back to her with his gun in his right hand, she formed an impromptu plan. She snuck up behind Duke and swung her purse at his gun hand, hoping to disarm him! The attempt failed, and Duke just shooed her away again (lucky for her he was intent on u201Csuicide-by-cop,u201D not homicide).

Like many others in this category, Ginger Littleton is a peaceable, law-abiding person who wouldn't normally hurt a fly. And like many others in similar situations, she was completely surprised by her own actions. “Off-the-cuff without preparation” is not a recommended way of dealing with problems, but it is especially dubious when it comes to dealing with crime because so much is at stake. Many unprepared people die or are seriously injured in ill-advised counterattacks. If you think you are in this category, I hope I can reach you. If you're going to fight back when attacked ANYWAY, why not prepare in advance so you have a better chance of winning and surviving?

Finally, there's a small fourth category of people who will never prepare or fight back against violence, even if that means they passively die at the hands of an aggressor. Some of these people are pacifists by religion or philosophy, but most simply cannot overcome their natural human inhibitions against violence. If you're in this category, I may never convince you to prepare to inflict violence on someone who is intent on hurting you, but maybe I can encourage you to take some of the many non-violent forms of self-protection (using burglar alarms, for instance).

Are you still with me? Do you want to further explore this subject of taking personal responsibility for your own protection and that of your loved ones?

If you're on the ChrisMartenson.com website, to some degree you're expecting the Economic, Energy and Environmental challenges that our world is facing to dramatically affect us for at least the next 20 years. There are going to be BIG problems all around, and one of those is going to be BIG increases in crime and violence. Since we expect poverty, desperation, and anger to increase, so we must expect crime and violence to increase proportionally. We have to expect drug and alcohol abuse to rise under these stressful conditions, and this will have a proportional effect on crime rates. At the same time, we have to expect law enforcement resources to decline with the economy that pays for them. (Just as crime reaches the worst levels in a century, we'll be on our own more than ever). We have to expect the number of crimes to increase. We have to expect the locations where crimes are committed to spread to traditionally low-crime areas. And, perhaps most chilling, we have to expect the crimes to be more brutal, more clever, and better resourced than ever before.

The good news is that human predators will always have certain traits, and we can use that to prepare ourselves to defeat them. And by defeat them, I mean convince them not to choose you as a victim and fight back far more effectively than they would've imagined.

Step 1

Accept the reality of the criminal threat and mentally choose not to be a victim. The denial, distraction, and passivity that many people exhibit concerning crime is the predator's dream come true. Human predators, just like animal predators, want to take what they want without getting hurt or killed. They survey the population looking for a juicy target who is not paying attention and doesn't look like it will put up much of a fight. Then they arrange a circumstance to maximize their advantages and minimize the target's chances of escape or counterattack. Defeating predators absolutely must start with a knowledge that there are predators and a firm resolve to not be a predator's next easy target. The National Rifle Association has a community education program entitled u201CRefuse To Be A Victim,u201D which would be a good place to start if this is where you are. BY FAR the most important factor in your ability to prevent and effectively respond to crime and violence is an authentic, deeply-felt decision to face it head on.

Step 2

Formulate a plan for self-protection from crime and violence that fits you and your situation, both present and future. Your plan should include protecting:

• Your home, both when it's unoccupied as well as when you and your loved ones are in it
• You and your loved ones while away from home (school, work, traveling, etc.)
• Your assets that are not kept at your home or on your person (which are more vulnerable to fraud and theft than to street-level violence).

My main concern in this post are the first two areas of protection: home and street.

Your plan must be specific and measurable. u201CImprove the security of our homeu201D is a great idea or objective, but it needs to be made into a series of measurable goals. Without specific, measurable goals, you're likely to spin your wheels without accomplishing much. Here are a few specific, measurable goals that someone might include under this objective, just as an example.

1. Install a monitored burglary/fire alarm by April 1.
2. Repair the lock on the dining room window by March 15.
3. Replace the burned out flood light bulb in the motion-activated light at the back door by Feb. 5.

Of course, your plan will evolve over time as you learn and grow into it, but at every point you have to be working YOUR plan. Wasted time, money, and effort are to be avoided at every turn.

Step 3

Based on the plan you develop, begin accumulating the skills and hardware you will need to make it a reality. Again, you will need specific, measurable items on your list. For instance, u201CBy June 1, achieve a rate of at least 95% for arming the burglary alarm system whenever the house is empty or everyone is sleeping.u201D Keep a chart and watch your discipline grow.

Self-protection from crime and violence is really that simple to understand:

1. Mindset
2. Plan
3. Skills
4. Hardware

Of course, your journey into self-protection will influence the rest of your life, so it may look long and convoluted from that perspective. Remember, you're aiming for steady, sustainable progress in your efforts, not an instant transformation into civilian commando. Your plan may include a long list of skills and hardware and cost $1,000s, but it doesn't have to. Inducing predators to avoid you and look for someone else can be amazingly simple and inexpensive with the right attitudes and habits. Most of the effort and expense comes from trying to deter determined and well-prepared predators (they are a very small percentage of all predators) and defeating predators who have blundered through all your efforts at prevention and deterrence. It's all about resilience and flexibility. How much of the threat of crime and violence do you want to be prepared for?

Remember this is one of those low-probability, high-cost issues. The mathematical probability that you will have your home invaded by three men with guns is pretty low, but if it happens anyway, you could lose everything. (But don't forget: The mathematical probability that you will be the target of criminal action is going to keep going up significantly for a long time.) Do you feel lucky? Are you willing to depend on chance? Most people are, but if you are reading this on the ChrisMartenson.com site, I doubt you are the kind of person who normally buries his/her head in the sand and hopes for the best. Yet in my experience, it is entirely possible that you've made big strides in preparing for the Economic, Energy, and Environmental storms brewing on our horizon, but HAVE NOT done anything to prepare to confront the potential crime and violence embedded in those storms.

I suppose the denial and passivity that this is caused by is natural. It's one thing to prepare for the impersonal difficulties ahead of us, and it's another altogether to prepare for a VERY personal attempt by another human directed at killing, maiming, or robbing you. A hurricane or a six month u201Cbank holidayu201D that hits you is going to be a major problem, but there are steps you can take to prepare. That kind of u201Cattacku201D is not directed at you personally, and that makes it easier for many to u201Cfight back.u201D Finally, in your response to these two scenarios, there's no reason in the world for you to have to harm someone else to survive. However, two seventeen year olds with guns who rob you at the ATM is very personal, and to defeat them you will very likely have to harm or kill two fellow human beings. Maybe you wouldn't hurt a robber to prevent a $300 robbery. How would you feel about those two armed men bursting into your home, tying you and your family up, and using torture and sexual abuse to get you to give them your stash of precious metals? Ask Dr. Petit if he had to do it over again – and he was armed with a gun and skilled in its use – would he kill those two ex-cons who raped his wife and killed her and his two daughters.

At this point, if you are determined and ready to begin your journey into self-protection, I want to point you in the direction of some of the many fine resources in the self-defense u201Cindustry.u201D I'm not a part of that industry, but I've seen some great resources that you might also find helpful. Here are a few:

• Surviving The Economic Collapse by Fernando Aguirre
• Urban Survival Guide by David Morris

Both of these books are a great place to start. They both emphasize the importance of mental preparation and attitude in self-defense, and both deal with self-protection comprehensively at home and on the street. Aguirre's book is based on his personal experience surviving the 2001 economic collapse in Argentina, which will strike a cord with Chris Martenson readers. Aguirre also debunks the idea that you can escape the coming crime and violence by relocating to a rural area or small town. He points out the self-defense disadvantages of such places and describes how some of the worst crimes in post-crash Argentina occurred in them. In addition to their books, both authors have additional resources. Aguirre has his blog at ferfal.blogspot.com and Morris has his SurviveInPlace.com, which gets you the book and many more resources. I found his bonus chapter on acquiring water in a crisis to be worth the cost by itself. My urban family can be water self-sufficient indefinitely, thanks to it.

As you prepare your self-protection plan and begin implementing it, you will have to face the issue of firearms used in self-defense. I suggest Thank God I Had A Gun by Chris Bird because in it you encounter normal people who were saved by their use of a firearm. I hope their stories effectively prompt you! Second, I would suggest an old classic, In The Gravest Extreme: The Role of the Firearm in Personal Protection by Massad Ayoob. Ayoob is head and shoulders above the rest of the self-defense industry in understanding and teaching the legal and psychological aspects of armed self-defense. I agree that many people should not carry or have access to a firearm, or even a sharp stick or pair of scissors! Ayoob's book will help you get your head in the right place so you can decide if a firearm is right for you and, if it is, begin your mental preparation to use it legally and effectively.

There are many, many firearms training schools, if you choose to become armed and properly trained. Some have great, well-deserved reputations, but some are all bluster and actually dangerous. The most convenient and least expensive can be accessed through some of your local gun shops. Others serve a regional or national clientele. I would highly recommend the two I have attended: The Massad Ayoob Group Lethal Force Institute (formerly the Lethal Force Institute, it holds training mostly on the east coast) and Front Sight which trains at an excellent facility in Nevada and a satellite facility in Alaska I've never seen. Lethal Force Institute builds good shooting skills, but again the best part is the understanding of the legal and psychological aspects it teaches (which are widely used and adapted by other schools). Front Sight promises to make you a better shooter than most military and police are, and it succeeds. (I'm an excellent handgun shooter and one of the best in my big city department, but I'm quite humbled by many of the civilians I shoot with in advanced Front Sight courses.) Front Sight's mandatory first course is the Four Day Defensive Handgun course, which accomplishes more with first time and experienced shooters in four days than my policenacademy did in two weeks! If you're considering Front Sight, you really should take that first course and add the fifth day, which will get you a Nevada concealed carry permit which is accepted there and in 29 other states. Both schools offer courses on unarmed self-defense and self-defense with weapons other than firearms.

In January, the media reported that the city of Camden, New Jersey (across the Delaware River from Philadelphia) laid off 46% of its police force. Camden and New Jersey are in severe financial straits and leaders are unable to kick the can down the road any further. Severe cuts are being made. Camden is already u201Cthe second most dangerous cityu201D in America. What effect do you suppose losing 1/2 their Police Department is going to have on public safety and quality of life? The criminals are already emboldened. Officers have reported seeing thugs standing on high drug corners wearing T-shirts that read, u201C1-18-11: We Take Back The Streets.u201D (Philadelphia Inquirer, 1-19-11, p. A7) And to make matters worse, simply buying a firearm in New Jersey is very difficult. Getting a concealed carry permit is, for all practical purposes, impossible.

That doesn't strike a chord of concern in your heart for your future safety because you don't live in Camden, and maybe not in any big city? You don't see that news as a thread being pulled from the reality we all share and have to deal with personally wherever and whoever we are? Really? But you ARE concerned about sovereign debt in Greece and Ireland? You ARE concerned about the policies of the Federal Reserve in Washington? You ARE concerned about Peak Oil, even though you don't work in the oil industry?

The coming storm of Economics, Energy and Environment has within it a the potential for a surge of crime and violence. Face the reality honestly. Form a plan to cope. And gather the skills and equipment you'll need to survive.

In my first post on crime, I urged you to accept the reality of the criminal threat and to mentally choose not to allow yourself to be easily victimized. Hopefully, you’re reading this second post because you’ve sworn off the denial, distraction and passivity that characterizes most people and decided to do whatever you reasonably can to protect yourself, your family and your home. If this mindset of yours is authentic and deeply felt, you’re more than halfway to your goal.

Your next step is to form a self-protection plan. Helping you do that is the purpose of this second post. “Self-protection” is too large of a subject so I’ve narrowed it down to something you can reasonably take on in the near future: fortifying your home and yourself against crime. I’m going to focus on three types of crimes because your plans to defend against all three are closely related.

1. Burglary when your house is unoccupied. 2. Burglary when you are home. 3. Home invasion robbery.

Legal definitions vary from state to state, but in Pennsylvania burglary is defined as unauthorized entry into your home or other building (with or without the use of force) with the intent to commit a theft or a felony. Burglary is considered a property crime because the usual intent is to steal valuables that are not in the physical possession of another person. By contrast, robbery is stealing valuables from a person using or threatening to use force. Robbery is a violent crime against a person for the purpose of theft.

Most burglaries are intentionally committed when the criminal believes the house to be empty. Burglars want to avoid being confronted by a home’s occupants because they’re afraid of getting hurt by the homeowner or captured by the police. Most burglars are unarmed when they break in (except for a tool they might have used to force entry) because they have no intention of having to hurt someone to complete their crime and safely escape. This crime presents the least amount of physical danger to you, but it is by far the most common of the three. Whatever plan you come up with has to address this issue comprehensively. Fortunately, most of your plans to prevent burglary will be useful in your plans to deal with the next two crimes which are far less frequent, but far more dangerous to your physical safety. Check out this typical burglary story caught on video. The teenage burglars crawled in through a “pet door” on an exterior door, ignored the friendly pets (2 dogs, a cat, and a noisy bird), and ransacked the house (“so easy a caveman could do it!”). Atypically, the owner, who had been previously burglarized had set up a security camera in her house which she monitored live via the internet while she was at work. She saw the intruders, called police, and the two boys were arrested. It would have been a good idea to get rid of the pet door. Anyone want to bet these were the same two who burglarized her place the first time?

Important note: 

It is with a heavy heart that I am now issuing the highest-level alert to my readers than I have to date. The threshold for an alert is one or more world events that personally cause me to take action.

I’m making this alert publicly available less than 36 hours after releasing it to my enrolled subscribers given its importance and the speed at which events are accelerating.

The substance of this alert centers on the unknown aftershocks that may result from the world’s third-largest economy, Japan, rapidly shifting from an exporter of funding to a consumer of it. In situations like these, we are by definition operating with incomplete and often confusing information, and events are developing more rapidly than they can be fully analyzed and internalized. We regret in advance any mistakes that we might make due to making calls and decisions in this highly fluid environment.

This alert warns you that major world-changing events are now underway and that your personal preparations for an uncertain future should either be completed or take on a new sense of urgency. On the basis of the information contained here and in the past two days of posts, I am personally ratcheting up my preparations, making purchases, and topping off what needs to be topped off.

Important caveat:  At this point in time, I cannot fully support 100% of my concerns with hard data and evidence. Some of what has tipped me into this state of urgency is data, evidence, and stories that I can point to. Some is due to the absence of data or information, the remainder results from watching market gyrations and correlations shift into new patterns, which tell me something is afoot.

I have not been this concerned since October of 2008.

Some Background

Within hours of learning of the event at Reactor 1 in Japan, I had looked at the evidence available, drawn a few conclusions, and then checked to see what the experts were saying. Never quite sure of what sort of personal and/or professional limitations are in play, I rarely start with anyone’s assessment but my own. It’s part of trusting myself and it has worked remarkably well for me and my subscribers over the years.

Here’s what I wrote in the blog on the morning of Saturday, March 12, 2011 on Japan’s nuclear incident:

There have been reports from Japan’s nuclear agency that radioactive cesium and iodine were detected outside of the facility, which can only happen if the core has been exposed somehow. Perhaps that’s all under control now, but the evidence for very high temperatures, the explosion of the containment building, a 12-mile evacuation zone, and the presence of cesium and iodine all indicate that perhaps the complete situation is not being shared with the public.

If you live in Japan, you should be heading well upwind of this facility and have potassium iodide pills on hand. I would personally be reading the wind forecasts and assuring that I was upwind.

My expertise involves making sense of the world in relatively short order. It also helps me smell B.S. remarkably quickly, especially from official sources. The nuclear situation in Japan struck me from the outset as being rather more serious than described, and this has proven true. I take no pride in this particular ‘victory,’ and instead feel the burden of having to be the bearer of bad news.

The nature of this alert is to let you know that I consider the chance of a renewed round of economic and fiscal crises to result from the chaos that is currently engulfing Japan and the MENA region to be extremely high.

A Global Meltdown

For decades, the world has been running its own nuclear-style reaction, only in the currency and debt markets, where exponentially-accelerating piles of debt and money have spun about faster and faster in a gigantic, complex, coordinated reaction, the core of which is, and always has been, the United States.

At the very center of this ungainly money reactor is the main fuel pile itself, the US Treasury market. With any interruption to smooth flow of money through this pile, it will immediately become unstable.

The threat I see goes like this:

Stage 1:  The world watches, riveted, as Japan suffers a tragic and horrible earthquake and tsunami, but as horrifying as these are, they are localized phenomenon affecting a relatively small percentage of the country. The real trouble lurks within damaged nuclear plants, which are now ruined and will never again produce electricity for Japan, creating instant shortages that will take years to remedy. Worse, a dangerous plume of radioactivity is carried south by winds. Tokyo partially empties and shuts down for all practical purposes.

Stage 2:  The abrupt slowdown of the world’s third-largest economy alters the smooth flow of cash around the globe, and even causes reversals of some other long-standing flows. Chaotic eddies emerge in a decades-old pattern of ever-increasing flows of money into and out of the money centers, and various carry-trade and other interest-rate-sensitive strategies blow up. Manufacturing in Japan screeches to a halt, disrupting just-in-time manufacturing strategies both internally and across the globe.

Stage 3:  In order to fund the rebuilding effort, Japan has to buy a lot of items from foreign suppliers at the same time that its exports plunge precipitously. At first Japan simply does not participate in US Treasury auctions, leading to a shortage of buyers. But eventually Japan has to sell some of its vast hoard of US bonds in order to pay for external items needed for its reconstruction. Further, insurance companies, huge holders of US bonds, face stiff liability claims in the wake of the worst natural disaster to hit a heavily industrialized center and are forced to redeem enormous amounts of Treasury paper. US Treasury yields begin to climb.

Stage 4:  Continuing unrest in the MENA region serves to keep oil elevated and local funding needs high, while Europe’s weaker players (the PIIGS) continue to slip under the waves. Money continues to ebb away from the US Treasury market. Forced by circumstance, the Federal Reserve reverses its linguistic course and opens the monetary floodgates once again. There’s nothing like a crisis to justify more money printing, especially to a one-trick pony (the Fed) that only knows how to stamp its hoof on the ‘print’ button.

Stage 5:  An increasingly chaotic monetary and fiscal situation spills over into the derivatives arena, creating a number of financial accidents. Stressed governments find themselves in more of an arguing mood than a pull-together-and-sing-Kumbaya mood, and agreements are hard to come by. Banks begin to fail again, global trade falls off, unrest continues to build, and then it happens – a currency crisis.

Stage 6:  Everything changes. Faster than you think.

I wish I could completely quantify and justify the reason for this assessment, but I cannot at this time. Yes, we’ve got some very serious market turbulence to point to:

From ZeroHedge:

Japan’s nuclear crisis has deepened and we deeply regret to say that there is now the real possibility of a nuclear catastrophe. Investor panic has set in with the Nikkei down over 16.5% in two days and the Topic index down by 17% – its worst two-day loss since the 1987 Wall Street stock market crash.

The cost to insure Japanese debt has surged to a record with credit-default swaps protecting Japanese government debt for five years soaring 27 basis points to a record of 125 basis points.

One UBS trader said that the deteriorating nuclear crisis had led to “near panic across local credit-default swap markets.” While most equity indices and commodities have fallen, some sharply, gold has remained resilient and is down 1% in US dollar terms and is higher in Australian dollars which like other so called ‘commodity’ currencies has come under pressure in recent days.

(Source) 

The nuclear meltdown has led to a market meltdown. Market breaks can quickly lead to supply shortages and other unpleasant realities.

Shifting Baselines

The problem with these fast-moving situations is that everything shifts from beneath your feet and events fundamentally change so quickly that you do not have time to adjust properly before the next insult arrives.

For example, I pride myself on ingesting massive amounts of information and processing it logically and relatively completely. But right now I am overwhelmed by too many situations. I should know who the opposition leaders are in Bahrain, how many troops have crossed from Saudi Arabia, what sorts of equipment they brought (as an indication of whether they plan to stay for a little while or a long while), and so forth. But I only know that troops have crossed the border; I consider this to be a bad sign for global oil price stability, but know very little else.

And I am not entirely clear on the inner machinations of the European debt crisis any more. I am completely consumed by following the developing nuclear crisis in Japan and trying to determine how that could, will, should impact our readers in Japan, and the world economic landscape.

The problem is captured perfectly in this post by Debu: 

Another slightly surreal day in Tokyo which I largely spent buying food in case we have to stay indoors for an extended period due to fallout and/or if food supplies are disrupted by distribution problems. (I have been remiss in my prepping, I admit. I will spare you my lame excuses as to why.) Near pandemonium in some supermarkets which surprised me given the generally anodyne tone of the reactor situation coverage on the TV. Possibly it is simply worries about empty shelves feeding on itself.

Still, despite the devastation a few hundred kilometres away in the areas affected by the earthquake/tsunami (words fail), in Tokyo we are only inconvenienced in trivial ways. And so, the sense of unreality. There were emails today from my Japanese mates saying they were resigned to there being no hockey for awhile because the rinks will be closed because of the power cuts (and serious damage to the roof of our home rink). Or, whether it is milk is hard to come by (but still lots of wine and whiskey available), or some shops are closed to save power, or limited train service, etc. it is all inconsequential trifles. Given what is happening up north it is enough cause a bit of survivors’ guilt.

Many thanks to all on this forum for the info and the insights. It has, and will continue to be I suspect, my best source of information and advice.

One name for this process of only very slowly coming to grips with an enormous change when it happens at a slow enough pace is “shifting baselines.” It means that if you had put these same people to sleep a week ago and woke them up today, the shock of the reality of today’s situation would immediately jar them into action. But somehow, as things change seemingly gradually from hour to hour and day to day, the change itself can prove oddly paralyzing, and this is because our baselines shift. What would have been abnormal yesterday is normal today.

Last week the residents of Tokyo were sympathizing with the plight of their neighbors to the north, and then they were hearing about some controllable problems with some nuclear plants, and then they were hearing about maybe some more serious difficulties, and today they find themselves scrambling to empty store shelves and get out of Dodge, so to speak.

(Reuters) – Radiation wafted from an earthquake-stricken nuclear power plant toward Tokyo on Tuesday, sparking panic in one of the world’s biggest and most densely populated cities.

Women and children packed into the departure lounge at an airport, supermarkets ran low on rice and other supplies and frightened residents, tourists and expatriates either stayed indoors or simply left the city.

“I’m not too worried about another earthquake. It’s radiation that scares me,” said Masashi Yoshida, cradling his 5-month-old daughter Hana.

The nail-biting eased in the afternoon after Chief Cabinet Secretary Yukio Edano appeared on national television saying radiation levels at the troubled Fukushima Daiichi nuclear-power complex had fallen dramatically since morning.

But confidence in the government is shaken and many decided not to take chances, especially after radiation levels in Saitama, near Tokyo, were 40 times normal – not enough to cause human damage but enough to stoke fears in the ultra-modern and hyper-efficient metropolis of 12 million people.

Many hoarded food and other supplies and stayed indoors. Don Quixote, a multistory, 24-hour general store in Tokyo’s Roppongi district, was sold out of radios, flashlights, candles, fuel cans and sleeping bags on Tuesday.

At another market near Tokyo’s Yotsuya station, an entire aisle was nearly empty on both sides, its instant noodles, bread and pastry gone since Friday’s earthquake and tsunami killed at least 10,000 people nationwide and plunged Japan into a twin nuclear and humanitarian crisis.

(Source)

Time to Prepare

Okay, folks, this is not a drill.

Events have now sped up to the point that we cannot predict what will happen next. At this point a systemic banking crisis, complete political upheaval in one or more countries, a currency crisis, or a debt crisis are all within the realm of the possible.

This is the most difficult Alert I’ve ever had to write, because I know I have not yet processed all the necessary information to truly assess the risks. I am operating on gut instinct here, and several of you have already reminded me to trust myself. Thank you. That’s what I am doing now.

The risks I am most concerned about striking outside of Japan are:

• A derivative-fueled banking crisis. Another banking crisis could shut down international monetary flows for a period of time, which would severely impact your ability to access your money, conduct trades, or otherwise take care of business.
• Critical shortages. Already we know that much of Japan’s manufacturing output will be crippled for a while due to quake damaged plants being destroyed, workers failing to show up as they attend to their families in a moment of deep crisis, and electricity shortages due to destroyed power plants being taken permanently off-line. How much and which products will be affected will take weeks of effort to discover, as our highly integrated global supply network has an unknowable number of nodes that originate in or pass through Japan.
• A global GDP insult. Building on the idea of critical supply chain disruptions and shortages, it is a safe bet that the world economy will take a hit now that various products cannot be manufactured and sold. Rather than a gentle slow-down that can be easily managed, the risk I see here is akin to a large wrench being tossed into a delicate transmission. The risk springs less from how much you slow down, but rather how fast you do it. This global GDP hit will further expose the weakness at the periphery, probably taking down the weaker players once and for all.

The main story line here is that Japan is a critical and embedded player in both the financial and productive economies, and it has suddenly, almost instantly, been taken off-line. We don’t know what might happen next, but we should be prepared for anything.

My Advice

Recently I had advised readers to be ready for a big downturn linked to the idea of a QE cessation. I am going to retract that somewhat (almost entirely), because this Japan crisis will provide all the political cover necessary for more printing.

Nonetheless, a market rout is on, but for entirely different reasons than I first projected.

At any rate, the time to move to cash from stocks is slipping quickly past, if not already gone, but if you haven’t made that move yet, you should consider waiting for the next “Bernanke bounce” in which a few hundred billion are tossed into the kitty to stabilize the markets.

This alert is going to be a living document in the sense that I will be constantly updating it as time goes on and events unfold. The first stage of my advice centers on the basics. You need to have all of your basic preparations completed at this time. Food, water, medical kits, shelter, cash out of the bank, and all the rest should absolutely be in place at this time.

Get the basics done. Now.

• If you live on the west coast of the US, you must prepare for a fallout event even though this is extremely unlikely due to the distances involved. The concern here is that nearly 40 years of spent fuel is stored onsite and apparently boiling away its water and possibly burning. This means buying KI tablets for at least a week for every member of your family and being prepared to spend up to a week ‘taped up’ inside your house if it comes to that. Plastic, duct tape, and board games are what you need. I hate having to even suggest this sort of preparation. But while remote, there’s always the chance that a quirk in the air flow patterns could lead to less dilution than expected across the ocean and that a relatively small area of the west coast could receive a surprisingly strong concentration of contamination.  Again, this is very remote, but so was the idea of four plants all melting down at the same time.
• Get what cash you can out of the bank. You can always put it back later on. Keep it somewhere safe.
• Move any money you can from less liquid to more liquid vehicles. You want to be able to access your money in a hurry should that become necessary. Re-read Taking Control of Your Personal Finances if necessary. I outline all the reasons and a few methods for ‘becoming more liquid.’
• Top off your fuel tanks.
• Buy extra food at the grocery store.
• Have long-term storage food put aside.
• Take medicines? Be sure to get extras.

I am still holding onto all of my gold and silver holdings as I cannot imagine any possible policy responses that will bolster anyone’s faith in fiat currencies. That said, I am expecting short-term declines, possibly significant, in the US paper price for these metals on the basis of a liquidity crisis skimming the speculative component of their price off the top. I really don’t know how much this will be, but it’s certainly not insignificant.

When you stock up on things at the store(s), think also about friends family, neighbors, and all the other assorted people you care about who have almost certainly done little or nothing to prepare. What would they like? Don’t overlook comfort and luxury items that command a mental premium in a time of crisis. Chocolate comes to mind.

Timing

As always, I have no idea if anything is going to transpire or not, or when. How’s that for indecisive? But I can tell you that the pressures are larger than they've ever been throughout this long emergency and that conditions are ripe for an avalanche. My sincerest hope is that this will all blow over. But hope alone is a terrible strategy, and so we prepare.

My best guess is that the situation in Japan will unfold over the next two weeks, with a full-blown funding and fiscal crisis (of confidence) blossoming there over that time. Already we are seeing credit spreads on Japan’s sovereign debt begin to skyrocket, meaning that an increasing chance of a sovereign default is being priced into the debt markets. This is the same dynamic we saw with Greece, then Ireland, Iceland, too, and so on. Only this time it is happening to the world’s third largest economy.

Two weeks after that, I expect that the first real product shortages and associated work stoppages will begin to hit the US and European economies. I expect the difficulties to surface first in Europe followed by the US. Somewhere in this zone we will get the next solid commitment to print, print, print, probably as a joint exercise of both continents.

Taken together, I think we’ve got at least a month until things have shifted enough that preparations will become either difficult or irresponsible.

Use this next month very wisely.

Remember, it’s better to be a year early than a day late. So get out there and prepare responsibly.

Above all, it is our duty to remain calm, focused, and helpful to those around us. We are all experiencing anxiety and fear to greater and lesser degrees. It is my hope that we can use the privacy of the comment thread below to work through whatever issues arise for each other, whatever those may be, and to help each other make the best decisions we can in an increasingly chaotic and uncertain environment.

Welcome to the nexus of multiple exponential curves. We always knew things would speed up along the way, and so they have. Let’s do the best we can.

Events are unfolding in a manner entirely consistent with the framework I laid out in my recent  Guide to Navigating the Coming Crisis.  As the report predicts: things are speeding up, events are progressing from the outside in, and soon enough everything will be substantially different than you remember and it won’t be completely obvious how that happened due to the phenomenon of shifting baselines. Reading it should be a particular priority for those with family or substantial investments to protect. Click here to read the free executive summary.

Below you will find the original post I started on Saturday, hours after the explosion in the first reactor. It has since become a primary source on the unfolding tragedy for tens of thousands of people around the world – largely due to the extremely knowledgeable contributions of experts in the CM.com community. More to come as circumstances develop. 

Your faithful information scout, Chris Martenson

A Note on Prepping Responsibly

To prepare responsibly, you should do it before a crisis hits, when there are plenty of goods, food, and other necessities available for purchase and your purchases actually increase the local resilience of your community.  After a calamity has struck, say after the earthquake in Northern Japan, then any buying or accumulating you might do can be perceived as an act of hoarding, something we’d like to see everyone avoid. 

If you have not done so, you need to be sure that you have covered all of the basic steps recommended in our What Should I Do? guide. 

At the very least, you’ll get peace of mind and have the chance to be among the people who are in a position to help others when the time comes. At the most, it could be the difference between a rather miserable piece of time spent wishing you'd done more to prepare and a relatively comfortable stretch of time.

Japan’s Evolving Nuclear Accident

Saturday, March 12, 2011, 10:38 am, by cmartenson

An important caveat: This is a developing situation. We are operating on limited information and we run the very strong risk of getting something wrong here. For those of you living in Japan, this is a very serious incident deserving your close attention. For those living in the Americas, this is not yet a source of serious worry, because even in a worst-case scenario, a lot of distance separates the two countries. Dilution, distance, and time all serve to mitigate the effects of accidental radiation release. The latest information from officials is that radiation levels are declining and that a meltdown is not imminent.

There has been a horrible turn of events in Japan with the violent explosion of the building in which reactor 1 of the Fukushima Daiichi nuclear power plant was housed. The design of these particular plants includes an inner, very solid steel containment dome. We do not yet have any reliable information about the status of that vessel, but the evidence suggests that the event is not yet contained.

These three still images from the video show that the reactor housing disappeared in an instant, speaking to an enormously violent explosion.

By appearances, that’s pulverized concrete dust, indicating that a violent explosion occurred. We can be certain that the outer containment structure is completely missing.

This is a horrible event.

Right now I am deeply concerned by the lack of information and official stories that simply do not add up. Here’s the latest on CNN.com:

(CNN) – An explosion at an earthquake-struck nuclear plant was not caused by damage to the nuclear reactor but by a pumping system that failed as crews tried to bring the reactor’s temperature down, Chief Cabinet Secretary Yukio Edano said Saturday.

Workers at the Fukushima Daiichi plant have begun flooding the reactor containment structure with sea water to bring the reactor’s temperature down to safe levels, he said. The effort is expected to take two days.

Radiation levels have fallen since the explosion and there is no immediate danger, Edano said. But authorities were nevertheless expanding the evacuation to include a radius of 20 kilometers (about 12.5 miles) around the plant. The evacuation previously reached out to 10 kilometers.

(Source) 

“A pumping system that failed?”  Sorry, that one does not pass the logic test.

Point number one, the building utterly vaporized with a visible shock wave. That’s no “pumping accident;” that’s a massive, high-energy explosion. Point number two, there are only two viable candidates to create that kind of explosive force in this situation: (1) a hydrogen/oxygen explosion and (2) a sudden water-into-steam ‘flash boiling’ event.

Both point to extremely high temperatures being present. In the first case, the thermal decomposition of water into hydrogen (and oxygen) requires extremely high temperatures, preferably well over 1000 degrees Celsius:

Thermal decomposition, also called thermolysis, is defined as a chemical reaction whereby a chemical substance breaks up into at least two chemical substances when heated. At elevated temperatures water molecules split into their atomic components hydrogen and oxygen.

For example at 2200 C about three percent of all H2O molecules are dissociated into various combinations of hydrogen and oxygen atoms, mostly H, H2, O, O2, and OH. Other reaction products like H2O2 or HO2 remain minor.

At the very high temperature of 3000 C more than half of the water molecules are decomposed, but at ambient temperatures only one molecule in 100 trillion dissociates by the effect of heat. However, catalysts can accelerate the dissociation of the water molecules at lower temperatures.

(Source) 

This is my favored explanation because of the very brief flash of light seen at the beginning of the explosions sequence (see images below). Hydrogen only very weakly emits light when it burns/explodes, and this is consistent with what was seen. We cannot yet rule anything out, but hydrogen is the most likely culprit in my mind.

On the second possibility, we also see strong evidence for extremely high temperatures:

A steam explosion is a violent boiling or flashing of water into steam, occurring when water is either superheated, rapidly heated by fine hot debris produced within it, or the interaction of molten metals (e.g., Fuel-Coolant Interaction of molten nuclear-reactor fuel rods with water in a nuclear reactor core following a core-meltdown).

Pressure vessels (e.g., Pressurized-Water (nuclear) Reactors) that operate at above atmospheric pressure can also provide the conditions for a rapid boiling event which can be characterized as a steam explosion. The water changes from a liquid to a gas with extreme speed, increasing dramatically in volume. A steam explosion sprays steam and boiling-hot water and the hot medium that heated it in all directions (if not otherwise confined, e.g. by the walls of a container), creating a danger of scalding and burning.

(Source) 

Neither of these possibilities square up with the official story that the temperatures are being brought down and that engineers will have things under control in a couple of days. Let us hope and pray that they will, but the shredding of the outer containment building speaks of a situation that is anything but under control.

Again, I rather seriously doubt that flooding the inner steel containment vessel with water will be an easy task, due to physical damage of the pipes, pumps, valves, and other assemblies, which will probably have to be repaired before flooding can commence. Our evidence is the fact that the outer containment building was rather violently destroyed.

Here’s a few stills of the shockwave, but I invite you to watch the video, as it is difficult to capture the essence in these stills:

There have been reports from Japan’s nuclear agency that radioactive cesium and iodine were detected outside of the facility, which can only happen if the core has been exposed somehow. Perhaps that’s all under control now, but the evidence for very high temperatures, the explosion of the containment building, a 12-mile evacuation zone, and the presence of cesium and iodine all indicate that perhaps the complete situation is not being shared with the public.

If you live in Japan, you should be heading well upwind of this facility and have potassium iodide pills on hand. I would personally be reading the wind forecasts and assuring that I was upwind.

If you live on the west coast of the US, you should know exactly where your potassium iodide pills are and have a multi-week supply of them on hand, but this is always true.

There’s no word yet on the other three reactors, but let us hope they can be fully and safely shut down and contained.

What we do around here is to prepare ourselves prudently and responsibly for an uncertain future. Nobody could have foreseen the timing and severity of the Japan earthquake, because that’s the nature of complex systems, but we can choose to either become minimally prepared or not.

Most choose ‘not.’

The Limits of Safeguards and Human Foresight

March 11, 2011

All technology can do in the face of such force is to minimize damage to communities and infrastructure, he said, and u201Con both of those fronts, we're never going to be perfect.u201D

Given the limits of steel and concrete to resist the forces of nature, much depends on people's own preparedness to face up to disaster u2014 but that mental infrastructure is in even poorer shape than the nation's roads and bridges. People in the Midwest might have storm cellars to shield them from tornadoes, and those in coastal cities like New Orleans might keep a hatchet in the attic in case they have to chop their way onto their roof after a hurricane. But in most of the country, simple plans that include having a quick-grab case of supplies, medications and important family papers, as well as a plan for reuniting family members who have been separated in a disaster, are distressingly rare, Dr. Redlener said.

Dr. Redlener, the author of u201CAmericans at Risk,u201D about why the United States is not prepared for megadisasters and what we be done about it, said the biggest problem is a failure to go so far as even Japan has to protect its citizens from natural disasters.

u201CWe seem to not have the ability or the willingness to do that right now,u201D he said. u201CAt a time when states are facing $175 billion in deficits and the federal government is trying to deal with very compelling issues of long-term debt and deficits, the likelihood of our being able to mobilize the resources to significantly improve disaster readiness is limited.u201D

And yet there are few issues as important. In a telephone press conference on Friday, W. Craig Fugate, the administrator of the Federal Emergency Management Service, said, u201CThe lesson that you learn from this is that earthquakes don't come with a warning. And that's why being prepared is so critical.u201D

The bottom line here is that it’s always good to be prepared in advance, but that it’s just not something that people tend to do, no matter which culture they come from. Our prior interview with Dan Ariely went a long way towards explaining why that is.

You can be certain at this stage that there are tens of thousands of families in Japan who are wondering right now why they did not lay in a few minimal supplies like some food, batteries, and stored water that could really ease their current circumstances.

This will also be true for American families when the next big earthquake strikes the US. As we explore in the Crash Course seminar, people change their ways via either insight or pain. Insight would be looking at Japan’s current woes and using that information to spur your own preparations. Pain involves waking up in the midst of a crisis wondering why you didn’t do anything to prepare.

Update: This just in from the NYTimes:

TOKYO u2014 An explosion at a nuclear power plant in northern Japan on Saturday blew the roof off one building and destroyed the exterior walls of a crippled reactor, but officials said radiation leaks from the plant were receding and that a major meltdown was not imminent.

Government officials and executives of Tokyo Electric Power, which runs the plant, gave confusing accounts of the causes of the explosion and the damage it caused. Late Saturday night, officials said that the explosion occurred in a structure housing turbines near the No. 1 reactor at the plant rather than inside the reactor itself.

The blast, apparently caused by a sharp build-up of pressure after the reactor's cooling system failed, destroyed the concrete structure surrounding the reactor but did not collapse the critical steel container inside, they said. They said that raised the chances they could prevent the release of large amounts of radioactive material and could avoid a core meltdown at the plant.

u201CWe've confirmed that the reactor container was not damaged. The explosion didn't occur inside the reactor container. As such there was no large amount of radiation leakage outside,u201D Japan's Chief Cabinet Secretary Yukio Edano said in a news conference Saturday evening. u201CAt this point, there has been no major change to the level of radiation leakage outside, so we'd like everyone to respond calmly.u201D

(Source) 

Despite the apparent official confusion, I’m still going to go with the explanation of a hydrogen explosion, which still speaks of very high temperatures and the likelihood that the temperatures in the steel core are not as well-controlled as is being revealed. This is, of course, raw speculation on my part and should be treated as such.

We’ll be posting more as we learn more.

There’s a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%. The trigger will be the cessation of QE II and a multi-month pause before QE III.

This is a reversal in my thinking from the outright inflationary ‘buy with both hands’ bent that I have held for the past two years. Even though it’s quite a speculative analysis at this early stage, it is a possibility that we must consider.

Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.

But over the next 3-6 months, I have a few specific concerns.

It’s time to build on the idea I planted in the Insider article entitled Blame the Victim (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.

Here’s what I said:

How I read [the Fed's recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can – with words – to soothe the situation. Perhaps China is making noises, or perhaps Brazil’s finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.

The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.

At the time, I speculated that all of the Fed’s pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating. And I worried about what would happen if the Fed were to end the QE program in June.

Let’s just say it won’t be pretty.

Everything would tank. Stocks, bonds, and commodities. All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains. Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices. So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.

The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation. I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.

The basic idea is this: The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010. The markets, all of them, are higher than they would be without this money. $4 billion per trading day is an enormous amount of money. It’s gigantic by historical standards. As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.

Hello, downdraft.

The markets are quite substantially elevated due to the efforts of the Fed. T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.

It’s really that simple.

To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.

First, on March 2, 2011 Bernanke said this:

Bernanke Signals No Rush to Tighten When Asset-Buying Ends

March 2, 2011

Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.

A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.

The "no rush to tighten credit" statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.

Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it’s a safe bet that market interest rates will rise. Bernanke is at least on record as saying that if this happens, it won’t be because the Fed has taken the lead.

Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system. It’s a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.

Then on March 5th, a much stronger and clearer signal was given, confirming my worries:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

March 4, 2011

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Whoa. This is important news. Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed. This will change everything.

The old saying ‘sell in May and go away’ might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.

For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects. But so far they’ve either spoken in code to reveal their displeasure or quietly resigned. So we’re pretty sure there’s an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.

Of course, there’s some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between ‘stocks and flows’ (from the same article as above):

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of "stocks over flows" is somewhat troubling to me. MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience. Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like ‘stocks and flows.’

I’ll go even further. I’ll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government – which, it should be noted, will still be with us each and every month long after June 2011. Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.

Who will buy all the Treasury bonds after the Fed steps aside? That is unclear. If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found. Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program. When that’s over, pressure will be reduced and yields will rise.

So what to do? For those concerned enough about this possible scenario to consider taking action, please see Part II of this article (free executive summary; paid enrollment required to access). In it, I predict the extent to which stocks, commodities, Treasury bonds and precious metals prices may be impacted in the near term. I also detail the key indicators to look out for in order to determine if and when this scenario is unfolding – as well as recommended strategies to preserve capital during this corrective phase.

Click here to access Part II.

In Fuzzy Numbers,
we will examine the ways that our measures of inflation and Gross
Domestic Product, or GDP, are flawed, using charts of inflation
and GDP as well as other easy-to-understand graphics. This chapter
will help you understand inflation and GDP and how our national
obsession with misrepresenting them to ourselves has led us to the
edge of a recession and possibly depression.

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The Gold Price Is Manipulated But that’s okay, says Chris Martenson.

Gold Bubble? Don’t make Robert Mish laugh. And he has frontline evidence.

Will You Be a Loser or a Winner? Chris Martensen and Jim Rickards on gold, paper, and hyperinflationary chaos.

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Surrounded, Poked, Prodded, and Sanctioned Chris Martenson on the death forces arrayed against Iran.

Worse Than 2008, Much Worse Hold onto your money and increase your preparations, says Chris Martenson.

Big Trouble Brewing Chris Martenson on time bombs in the government-promoted derivatives system.

The Road to Destruction Chris Martenson interviews David Stockman.

Is There a Free Market in Silver? David Morgan on manipulation, delivery default, and shortage risks. Interview with Chris Martenson.

Our Defense Against the Fiat Money Graveyard Chris Martenson and James Turk on gold and debt-ceiling operatics.

The Screaming Fundamentals for Owning Gold and Silver Chris Martenson’s manifesto.

Living Through an Economic Collapse Chris Martenson and Fernando “FerFAL” Aguirre on surviving hyperinflation.

Death by Debt Chris Martenson’s one chart explains it all.

The Fukushima Disaster Is Not Over Not by a long shot, says Chris Martenson. The news is very bad.

Us vs. Them It’s the old tactic of tyranny, says Simon Black, who also does an interview with Chris Martenson.

Prepare for Violent Crime A step by step plan to protect yourself in the coming storm.

Fortifying Yourself and Your Home Against Crime

Nuclear and Economic Meltdown in Progress Get your cash out of the bank and get prepared, says Chris Martenson.

The Coming Rout Chris Martenson on what’s ahead this summer.

Fuzzy Numbers