2247 FBF: Bubble Economies & Fiat Currencies with Robert Wiedemer Co-Author of 'Aftershock' & 'America’s Bubble Economy'

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It's my pleasure to welcome Robert Wiedemer to the show. He's the author of Aftershock and he talks about America's bubble economy. And I think you'll find this to be very interesting as he has made several very accurate predictions and will talk to us today about what the future may hold. Bob, welcome. How are you?

I'm doing great.

Good, good.

So you're coming to us from Bethesda, Maryland from the Washington, D.C. area. And it's good to have you. Boy, this has been a crazy rollercoaster. Few days or really couple of weeks on Wall Street. What are your thoughts on the economy in general from a macro level nowadays?

Well, stepping back from all the chaos that S and P created and so forth and that's been created by the debt ceiling circus, I think you step back from it a which is important because day to day activity can be overly negative and sometimes overly positive. I think what we're really in is a suspended recession. And what I mean by that is we've been in recession since 2008. In 2009, the government worked furiously to borrow massive amounts of money and then to print massive amounts of money to help basically keep the economy from falling further. It wasn't able to boost the economy that much with all the stimulus, but it certainly was able to keep it from collapsing and falling further. So we're in a kind of a suspended recession. As long as they keep stimulating the economy, we'll be okay. But as that stimulus slows down, we're going to have problems, meaning when you stop printing money. Just like last year, we stopped printing money in, excuse me, stopped printing money April 30th and we had a horrible, you know, stock market that basically took a 360 day, a 360 point plunge in four or five weeks. After we stopped printing money this year, we stopped printing money into June and we had a big plunge within four, five, six weeks of that happening.

This begs the question though, why? And of course I don't agree with it philosophically, but why would they ever stop creating money out of thin air? I mean, it helps people win in the short term, it helps make things look better for short term elections and such. And it just sort of kicks the can down the road.

And you're absolutely right. And that's why they print money. And from a short term standpoint is it helps everything short term and it doesn't really cause a lot of problems. And long term, you know, if it never created inflation, we should just keep printing money.

Right, right.

Right. But that's the point. It does create inflation at some point other. Absolutely. And I think what we're going to do is we see so little harm from inflation. We see no connection between printing money and inflation that I think we're going to keep printing until it appears. And once it appears strongly, it's very, very hard to, you know, put that genie back in the bottle.

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Well, that's an interesting point, because when Bernanke gave his first 60 Minutes interview, I remember him just sort of casually saying, when inflation comes, and we know it will as a result of these current Fed policies, we have other tools where we'll. And we'll use those at that time to rein it back in. As if it's some easy thing to do, as you say, to put that genie back in the bottle. It's not. I mean, history has proven that over and over. Why is he so cavalier about that? Is he just basically lying? But what do you think about that? I mean, why is it so hard to put that inflation genie back into the bottle?

Well, let's answer two questions. Why sue cavalier is, I think, in reality, bends up against the wall. I think if he doesn't print money, we're going to have huge problems in our stock market. I think we would have had huge problems. I think we'd have problems selling our bonds. That's clearly why this all started March of 2009, is there were issues with selling bonds, government bonds. There were issues with the stock market, clearly. And so I think he felt up against the wall. I don't think it's something he likes to do, contrary to popular belief. Why does he think he can put that money back in the bottle? Because what's the alternative? In other words, if you say you can't, you're going to have inflation. So I think Ben's got to believe that he can do something about it because he's really forced into doing it in his mind he really didn't have any choice. And so he's hoping, and it's certainly going to make the case that he can solve the problem later. And I might add, there are things the Fed can do, such as paying more interest on excess reserves that can keep the inflation genie from getting out there. But once it's out there, it's very, very hard to put back in.

The only Fed chairman that's really been willing to make America take that hard pill was Paul Volcker. And that was pretty ugly, pretty nasty. Putting inflation back in the bottle, if you will. Since we're using that metaphor, is that what our future holds or is it going to be a hyperflationary type of future?

Well, I wish it were that easy to solve the problem at this point in the same way that Paul Volcker did, but it' the reason is because we have a bubble economy now. That means our stock market and our real estate prices are far higher than they were in 1980. So we really can't take the Volcker treatment of the early 80s simply because if we had 10, 20% interest rates, what would that do to your local real estate market? I'd say be devastating. What would that do to the stock market? Devastating. Our prices are all very, very high. We have bubble prices. They cannot handle high interest rates. So that's the reason we can't do the Volcker treatment now is you're at bubble economy and that's a huge difference from where we were 30 years ago.

So in the book Aftershock, I mean, you've got a very interesting video about that and such. I mean, what does the future look like?

Well, I think you mentioned hyperinflation. The future certainly doesn't look like hyperinflation. Even if you had 20, 30% inflation, that's enough to basically destroy stock markets, real estate, so forth. Even if you take the dollar and turn it into $5, essentially, that's hardly wheelbarrows full of cash, but that's enough to basically destroy your bond market, everything. So it doesn't have to be high for inflation. And I don't think it will be. Could it get as high as 100%? Sure, but not for very long. At some point the government will take the standard inflation fighting practices that all governments have had to take that get into that situation. And it's really very straightforward. Cut spending, raise taxes, get everything in balance and guess what, your inflation will go. Countries have done this frequently and it works great. It's just painful.

That's interesting. Though I don't know that there's actually an academic definition for hyperinflation. The numbers you just quoted sound pretty hyperinflationary to me. Whether it be 20 or 30 or 100% annually. I mean, Bob, think about the implications of that, which I know you have. It's a rhetorical question. But 100% inflation, in any given year, if that just happens one time, people that have massive amounts of debt will just have those debts basically debased and paid off by inflation. I mean, it'll be like a blessing to them. But people who have savings, they'll just be wiped out, won't they?

Exactly. So those people who have lent money at a fixed rate are wiped out. Anybody who's given out a mortgage at 4 or 5% will obviously be completely wiped out. Anybody who's taken a mortgage at 4% or 5% is doing great. So that's exactly what inflation does. The consequences are enormous. Clearly, that's one way the federal government can get rid of its debt is anybody who bought its bonds at a fixed rate will essentially have all that money wiped out. But then the government has it wiped out. So that's part of the restructuring process, if you want to think about it. For the government, that makes it easier to get the budget under control. It's kind of like General Motors. You get to wipe out all that debt, you sort of get to restructure a lot of agreements effectively and you will be forced into real budget cutting. Right now we don't have to cut our budget because we can always borrow more. I mean, there's no issue. We can raise our debts and get the debt.

That's why there's no pressure now. People say there is, but there really isn't. It's once you have that kind of inflation that you have real pressures to cut. And we will.

And give us your thoughts. And I know this is an impossible thing to predict, but the timeline on this, I mean, is it, are we going to start seeing this type of inflation in 2013, 2015? We've got a $60 trillion and some say it's even much higher than that time bomb, as I call it ahead, which all these unfunded entitlements. The most politically expedient way out of this mess that we're in is to inflate away the problem. Because any given president in any four year term has to completely take all of that burden at one time. I mean, you know, and just say, look, we can't pay Social Security, we can't pay Medicaid, we can't pay Medicare, you know, we can't pay for a million other entitlements that we've over committed to. But how does it look in terms of when will it happen?

Well, we're looking to see inflation go over 5% within the next year or two. We're already seeing an increase from 1 to about 3. We expect to go over 5 within the next year or two and then fairly quickly thereafter head over 10% fairly quickly. Meaning within another year or so after that we would see it go over 10%. Inflation tends to pick up steam as it gets going. So that's what we would see. And that's going to be the break point is 10% is what people think when they are, when they're going to start worrying about printing money causing inflation. At 10% it's pretty clear it does. And it's pretty clear that you can't keep printing money forever. And if you can't keep printing money, we're going to have problems. So that's really what it looks like in a sense. It takes a long time to get there, but when you get there it's going to start to move very quickly. And again I'm emphasizing it's not hyperinflation, which I think of, and you're right, there's no academic definition, but I think of that as like 1000% inflation, the kind of thing that means you're paying a million whatevers, a million lira for a bottle of Coke, that's hyperinflation. But when it's 100% for a couple of years, honestly that's really not that bad compared to countries. But for the United States it's devastating.

Yeah, it sure is. And what is your opinion on the CPI and the accuracy of 3 and 5% inflation in the first place? I would say that inflation is much more severe even now for the poor and the lower middle income people who base most of their life in food and energy, whereas wealthier people can buy distressed assets and they have all sorts of opportunities in this type of environment that most do not have.

Well, I don't think there's any question about that. I think the real inflation rates are higher. There's a group called shadow stats that said if we calculated inflation the same way we did in 1990, or I should say 1980, it'll be closer to 10% today. But I'm willing to take the CPI. This is going to be big enough inflation that you can finagle with it for a while in the Measurements, but any kind of measurements are going to show the kind of inflation I'm talking about ultimately from a financial standpoint, not from a pain at home standpoint, but from a financial market standpoint. The only inflation I'm worried about is inflation that ultimately pushes up interest rates. So it's got to be strong enough and show enough that it's going to push up interest rates. Until then, you don't have much inflation from a financial market standpoint.

And what about the outlook in terms of the dollar as the reserve currency? I mean, you think that's going to be the future? Or are other nations just going to kind of, kind of get fed up finally with our spendthrifty mentality over here?

Well, I think it will be reserve currency, but people, when they think of reserve currency, they think it's sort of an honor and it's a prestigious thing. A reserve currency really is something that people hold because it's a widely traded currency. So even if the dollar's value dropped enormously, we're still going to be heavily traded currency. Hence it's a good reserve currency. Right now There are only two reserve currencies. Of all the reserves out there, 60% are in the dollar, 30% in the euro. So if we fall, well, the euro naturally become a larger reserve currency. But does that mean the U.S. will fall to 5% of reserves? I don't think so. We might switch places. With the euro, we'll be 30%, the euro will be 60. But the euro's got some issues too, so I'm not sure. I think we'll certainly remain a reserve currency. But is our currency going to be valued highly? No. Is our currency going to be respected? No. But just by the nature of our economy and the size of it, we will certainly still be a highly traded currency. And by default it's either us or the Euro. And I think we'll certainly share the stage and reserve currencies just as we do with the euro.

The subtitle of Aftershock is Protect Yourself and profit from the next Global Financial meltdown. What is the next meltdown?

Basically, it's the popping of the dollar bubble. As we said, in the America's bubble economy, there are four bubbles. Stock market, housing, consumer credit and private credit. Those bubbles all work to boost the economy up when they popped. That's going to put pressure on the government debt bubble and the dollar bubble. And we've already seen that government debt's way up. What is that forcing? That's forcing the dollar bubble to be pumped up through massive money printing. So basically that sort of keeps the debt bubble alive. So the last bubble, I mean, the government debt bubble. So the last bubble to fall in this domino effect really is the dollar bubble. And as long as we can keep that dollar bubble from popping, we can keep the previous five bubbles from popping fully. Once that dollar bubble pops, you have the financial crisis, the real financial crisis. And again, that's not going to be until we hit 10% inflation. At that point, we're going to start to see that final dollar bubble pop, and with it go the other five bubbles as well.

We'll be back in just a minute.

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In terms of any other predictions as to how that looks, Bob, does that look like civil unrest? Does it look like maybe potential for wars between countries, the US And China? I mean, China is holding so much of our debt. What does it look like?

Well, not at all. Not at all. What it looks like is more like a wealthy family that has been very irresponsible and it has gone ahead and it's blown its credit card debt sky high. It's had its house value go way, way up. And it's been a good life. And what's happened is it all blows up. The credit card debt blows. The house isn't worth much. You still get to keep the house, but it's not worth much. Gee, the wife lost her job, the husband's income's cut maybe 20%. But you know, right now they can afford the house because it's, you know, it's not worth much. They're not doing much to keep it up, but they can certainly, you know, afford to pay the electric bill and stay there. They can certainly keep their cars. They can't really afford new ones, but you know, life goes on. They're not worth much anymore in terms of assets, but they certainly can make enough money to live a reasonable life. But it's not much fun. That's what it really looks like. It's more like a wealthy family, which we are, that's behaved very irresponsibly. It's not going to go under. China's a different matter. China's not going to go to war with us, but what's going to happen is its people are going to go to war with its government. There will be an overthrow. A Tiananmen Square is successful and the Chinese dictatorship, communist dictatorship, will be overthrown and they will go to a more democratic government. And I say more democratic government. I'm not going to say it's going to be democratic by our definition, but it will be more democratic than a communist dictatorship.

From the point of view of commerce and capitalism, though, I would almost submit to you that China is more free and democratic than we are nowadays. Just from that point of view of.

That that might be true, but I think if you were. There's an awful lot of state influence in their businesses. There's an awful lot of control of what people say and they don't really have a two party system, but certainly they're not maybe a Stalinist in any way, a Stalinist communist dictatorship. They're much more free and open than that. And that's one reason they've been successful. Right. And we'll find there's going to be a lot of pressure just to move along that path, if you want to say. And I think there will be a full, you know, multi party system and there'll be a lot less repression of freedom of speech and freedom of gathering and so forth, which we certainly really didn't in Tiananmen Square. They weren't real open to that.

Yeah, that would be nice if that happened in China. And ultimately I think it's going that direction. I have a friend who's there and he just loves it. He's been there for a couple of months, opened a new business there. It took a long time to open a company there. And he's constantly saying how great it is and this and that. And I'm like, well, you're forgetting about this little thing called civil rights, which one of the things I really like.

About the U.S. well, you know, when the economy is Good people don't worry about that. But when the economy turns bad, all of a sudden people get real grump about corruption. They get real grumpy about civil rights. And you take that economy and you blow it apart, which is what's going to happen. And you put that economy to the point where they have trouble feeding their people and you can bet they're going to get real upset at stuff that they didn't care about at all. Right now when the economy is great.

Yeah, yeah. No money. Money hides a lot of problems. And that rising tide does float a lot of ships, that's for sure. You know, when you look around the world, Bob, what countries do you think are just the abject disasters? I think probably most people listening actually know who those are. But what countries do you think are a good future? Like was kind of particularly wanted to get your take on Brazil. But just looking around the world, what's.

Going on in your eyes and what are disasters? Well, I mean the dominoes will fall pretty much as follows. The US will do the best. Europe will sort of be number two, Japan worse, China very badly. And countries like Africa and so forth. And to some degree South America will do even worse because they're far more dependent upon the rest of the world economy for their growth. And so they get hit the hardest. And they also have the weakest fundamental economies. Although they, they've all improved a lot, especially South America, they're still going to be the most vulnerable to this kind of fallback, just like China is going to be extremely vulnerable as well.

Now why is China so vulnerable in your eyes? Because they haven't created their own consumer class yet and they're dependent on exports.

Or they're very dependent on exports. It is an export driven economy. The only reason it looks a little better now is because they printed all that money to build infrastructure and real estate which they're not going to need or use. It's all going to be vacant buildings and vacant infrastructure and it's going to be sort of a shame when people look around having trouble to find money for food and they've got these beautiful high speed trains that nobody's using and maybe don't even have the money to run. So that's what's going to happen with China. That export market falls and that's basically the end of China. Now they will come back, they will make changes, they'll make change in the government and I think China long term will come back and do very well. But it's got a lot of changes to make before it gets there. And we were just talking about a few of them.

So I have to say. And we'll wrap up here, but I have to say that I'm a little surprised at your take on that, that you were pretty bullish on the US and Europe.

I mean, most people would say Europe.

Is just an abject mess right now. No, not so much.

Well, parts of it really are. There's two Europes. I mean, you know, Europe, I mean France and Germany are still doing reasonably okay. The pigs and the Spain pigs are not clearly. So you've got a bit of a two Europe situation. And I think we'll find, you know, there's Norway, Sweden, so forth could potentially do okay. So look at more maybe as 2 europes would I think be a better way of looking at it. But yeah, don't get me wrong, lots of problems. I mean, what if the US GDP fell by 40 or 50%, which could happen. That's a big hit. But we're still in much better shape. Our economy is by far the most flexible in terms of running businesses, starting businesses. We have the most flexible labor markets. The reason Europe does worse is they're pretty flexible economy too compared to South America or Africa or even Japan or China, which have a lot more government intervention in their economies. We don't think about that, but they do. Europe is a relatively free market economy some, so they've got a lot going for them. But they've got a lot of what would you call, difficulties or there's a lot of things in Europe that make it harder to do business. There are labor laws and so forth. Obviously high taxes, all those can be reformed and once they reform those, they'll get back on the track towards growth as well. But fundamentally there's a lot more rigidities in Europe than there are here. But there's a lot less rigidities in Europe than there are in China or Japan. That's one reason that Europe has vastly higher incomes than China or Japan.

Right, right.

Yeah. I shouldn't say vastly higher than Japan, but vastly higher than China, so.

Well, Bob, what would you like to just say in conclusion and tell listeners where they can get the book and find out more?

Sure. The book is available on Amazon. It is now the number one selling personal finance book on Amazon. Number one selling economics book on Amazon. So it's easy to get. You can get information about our money management services. We manage to protect your wealth and so forth. A little bit of commercial there, but we do manage money with the outcoming aftershock in mind, but trying to make money now even before it happens. And you can get information that@absolute-im.com that's absolute-im IM for investmentmanagement.com and you can read a little bit about what we said on that. Some of our newsletters and so forth would be good. You can also look at the book website, which is aftershockeconomy.com aftershockeconomy.Com and get the book on Amazon. And that second edition is, I think, a real improvement over the first edition. Authors shouldn't criticize their first. I'm not. I think the first edition was a good book, but the second edition is really a whole lot better. I'd certainly recommend getting it.

And just final thoughts on any advice for listeners. What action should they be taking now to protect themselves from the next meltdown?

Be careful about your exposure to stocks at this point and bonds at 2 longer term, not that you have to sell out. And certainly the time to sell out stocks or anything like that is not when they've stopped printing money, but ultimately when they start printing money again and stocks are rolling upwards. But be careful about your exposure on stocks and bonds. They could keep a run going for another year or so, but I think we're going to find that the next round of money printing in the fourth round, I think there will be a third round coming. I'll try a fourth. I think it's going to be tough to get stocks moving up next year, so be thinking about lowering your stock positions and eventually even your bond positions. Bonds have done well and certainly at my money management firm we've done very well in our bonds, but we'll be getting out of those positions over the next year. Have a part of have gold in your portfolio. I certainly don't think it's reached its height by any means. So I'd certainly have some gold that will give you some nice growth in your portfolio and maybe look at some foreign currencies, although that's a trickier market. But if you do that, you protect yourself by trying to limit your stock and bond exposure over time, over the next year. No panic. And then I'd also try to get up your gold exposure. I've even seen, well, let's say I'd increase your gold exposure. How much you have as a percentage depends a bit on exactly where your financial situation is and your risk tolerance. But I would certainly have it as a significant part of your portfolio.

Good. Well, thank you so much, Bob Wiedemer. The book is Aftershock and Thanks for joining us today.

Absolutely. Thanks so much, Jason.

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