Sean Goldsmith: At this point, most people expect the government to raise taxes because we know they're not going to cut spending. But recently, we see they're actually going to extend Bush's tax cuts for two more years, and they're actually making the estate-tax more lax. So we have less money coming in the door. Meanwhile, we're still printing tons and tons of cash. It just seems like a downward spiral.
Porter Stansberry: Well, it is a democracy, and there is no interest group that's going to organize to have less government benefits and higher taxes. So this is the way democracies always go, and this is why creditors shouldn't lend money to democracies. You're guaranteed to get your face ripped off because no one's going to ever pay back these debts. It's just a fact.
So if we're not going to pay them back anyway, why are we going through the charade of this massive inflation? Why don't we just have a real default, reorganize the debts based on our ability to actually pay, and get our economy moving in the right direction again?
SG: It's political suicide.
PS: I don't think it necessarily is, but I'm certainly no political expert. I think the political suicide is the track we're on right now because we're heading into a complete collapse of the U.S. dollar and the U.S. economy. Think about the consequences.
SG: But that's political suicide for the next guys.
PS: Yes, it's a political suicide that we just kick the can down the road a little bit. But think about this: 40 million people in the United States are on food stamps, and if agricultural prices double or triple – and it's already underway – how are you going to feed all those people? So we're going to borrow more money to feed those people. If you borrow more money and print more money, inflation's going to get worse. So we will borrow and print more money.
The whole thing will completely fall apart, and everyone knows this. This is not like some super-secret thing that no one can figure out. This has happened time and time and time again in history. It mostly happened in democracies, and it's always happened for a simple reason: The politicians couldn't be straight with the people.
Look... our fiscal deficit this year is something on the order of 30% of GDP, OK? That's absolutely, positively unsustainable, and everybody knows it. So what are you going to do? You either have to default on the debt, or you have to raise taxes tremendously, which will end up defaulting on the debt because you'll kill your economy. Or you have to print money and have a hyperinflation. Those are your choices. The only option other than that is simply to default on the debt, to wipe it clean, to move on.
SG: In an interview with 60 Minutes, Fed Chair Ben Bernanke said if inflation starts running rampant, he can raise interest rates in "15 minutes," as if that's going to solve all of the world's problems. So will simply raising rates stop the problem? And what's the consequence to raising rates quickly during rampant inflation?
PS: If you saw Bernanke in that interview, you know he was lying. There's lots of ways, but even his body...
SG: Mainly the twitch.
PS: I mean, he was shaking so badly, I actually kind of felt sorry for the guy even though I think he's probably the biggest criminal in the world today. But the Federal Reserve cannot control the market value of the dollar. That's a fact. The global foreign exchange volume is something around $5 trillion or $6 trillion a day. Nothing the Fed can do about how the market prices our currency, and you see that in the soaring price of gold, the soaring price of silver, the soaring price of oil, the soaring price of uranium, the falling value of the dollar versus its trade weighted other currencies. That's all out there. That's all absolutely, positively the truth.
Bernanke wants to argue the value of the dollar is not correlated to inflation, and that is simply an absurd lie. He knows very well the root cause of inflation is the falling value of the dollar, and he knows very well that his money-printing and quantitative easing is destroying the value of the dollar. He also knows very well that raising interest rates will not reverse those trends unless the U.S. can do something to assure its creditors that it will not continue to print ever increasing amounts of money.
SG: So the printing of money, huge inflation – it's happened many times before in history, probably most famously in Germany during the Weimar Republic. Can you discuss briefly what happened in Germany during the '20s?
PS: That's a complicated situation because a huge amount of war debt and war repayments were in place. And so what the Germans decided was, "Hey, you know what? We don't want to repay the $12 billion that our economy owes for the war reparations, so we're going to print money and attempt to pay it all back"... and obviously, it didn't work. But the analogy isn't quite appropriate because the issue was war reparations the German people really didn't want to repay.
But it is analogous in one way. In both cases, an enormous amount of debt was placed onto a free economy. And the government made a deliberate choice not to repay it and instead to paper over the problem. The exact same thing has happened in the United States. It's not war debt... It's not war reparations. It's simply money the government has borrowed for the last 30 years.
SG: It's still a lot of debt on a government balance sheet.
PS: It's a lot of debt on a government balance sheet. And there is no political will to actually repay it. None. No U.S. politician in the last 15 years has presented a budget whereby the debt would be repaid. When people talk about balancing the budget, all they're talking about is ending new additions to the debt, ending the fiscal deficits. Nobody talks about "in 15 years we can pay off all our government's debts." No one even mentions that anymore and because there will never be an actual attempt to repay, ever. It will never happen.
SG: So you say Germany is not the best analogy... but there are several throughout history. There's Zimbabwe... there's Argentina... there's Asian financial crises. So how is the U.S. any different? Is it any different?
PS: It's different in one important way. It's different because the U.S. dollar forms the basis of the world's economy. More than 60% of all the currency reserves in the world are U.S. dollars, so banks all around the world hold U.S. dollars in reserve, and other central banks hold U.S. dollars in reserve. The open question – and no one knows the answer to this – is what happens when the world reserve currency goes into hyperinflation, goes into de facto debt default? What are the consequences on the world?
And the truth of the matter is we just don't know. But it certainly doesn't seem like it's going to be good for the U.S. because all those dollars out there in foreign hands represent claims on U.S. assets. If all those people want to dump those claims, they want to cash in those tickets, there's going to be a very, very big problem in the world's currency market, where you could see the value of the dollar fall 50%, 70%, 80% very, very quickly as people panic to get out of the dollar.
Goldsmith comment: Tomorrow's installment of our "End of America" interview is the most important of the series. Porter tells you how to protect yourself. Don't miss it.
December 21, 2010