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A Moneychanger Interview:
JAMES TURK ON THE DOLLAR’S COMING COLLAPSE
James Turk and I
met in 1985, and have been friends ever since. Over a long career
he has worked as an international merchant banker, managed gold
portfolios for Abu Dhabi and large funds, and invented and patented
a gold based electronic money, GoldMoney®, transferred over the
Internet. Frankly, James Turk is brilliant -- and brave. He’s one
of the few analysts worth reading. (Freemarket Gold & Money Report
costs $220 a year for 20 letters, from P.O. Box 5002, North Conway,
New Hampshire 03860,
www.fgmr.com. You can learn all about GoldMoney® electronic
gold-backed currency at
www.goldmoney.com.)
Not long ago James
kindly sent me a review copy of his new book written with John
Rubino, The Coming Collapse of the Dollar & How to Profit From It.
Quick as I could, I sat down to read it, because I didn’t think much
more could be said on this subject. I was wrong. Turk and Rubino
demystify the mystery of money, and make an unarguable case for
fleeing the dollar. Doubleday Division of Random House will publish
the book in December, so get ready.
Mr. Turk generously
made time for this interview on August 27, 2004.
Moneychanger
Since, at least the New Deal and the
succession of Roosevelt and all his monetary/inflationary tricks,
people have been predicting that the dollar would collapse. Aren’t
you ashamed to come along 70 years later and predict again
that the dollar is going to collapse?
Turk
By any logical interpretation the dollar has
already collapsed. Today’s dollar only purchases five cents of what
it purchased in the 1930s, ten cents of what it purchased in the
1960-70s, and maybe 50 cents of what it purchased in the 1980s. So
inflation has already brought the dollar to an ongoing
collapse. The sound money people have been warning about this
through the decades: the dollar is no longer an effective form of
currency.
That raises another
question: will the dollar’s problems become more severe?
That’s where it becomes a bit more troublesome in terms of
projecting and looking at the future. Can this decades-long
situation continue, or must it end in some cataclysm? In our view
it must come to end in a cataclysm, and that’s what we lay out in
the book.
Moneychanger
But isn’t the word “collapse” misleading?
The people who mange the dollar, the Federal Reserve and the
Treasury, have managed the collapse from 1934 until 2004, 70 years,
so that the economy did not collapse along with the dollar. Can you
really call that a collapse? Also, what’s to prevent their managing
it a bit longer, through this decade? Even if it loses (as I
expect) at least 75% of its value in this decade -- and it’s already
lost nearly 30% from February 2002 to March 2004 -- it still won’t
disrupt the economy too terribly.
Turk
Let’s look at the first part of that question,
the claim that the economy hasn’t collapsed. You’re widening the
point that I was making earlier about the dollar collapsing in terms
of purchasing power. When you bring the economy into the discussion
you have to ask yourself another question. Are people better off
now than they were 20-30 years ago? Looking at real wealth and
adjusting for the dollar’s debasement, people are less wealthy today
than they were 20-30 years ago. Incomes are lower today than they
were 20-30 years ago, partly because the dollar’s been debased,
partly because people take home less money after taxes. By any
logical measure, I don’t think
people are as well off as they were in the 1960s or
1950s when the dollar problems weren’t as severe as they’ve become
in recent decades.
But there’s more to that
question: we’ve created a debt mountain, a debt bubble.
Bubbles always pop. We mortgaged our future trying to maintain
standards of living by debasing the currency and borrowing. This
is unsustainable and will ultimately bring about the dollar’s
collapse.
Moneychanger
But the Federal Reserve and the Treasury
have managed the collapse. That’s what they do. They are crisis
managers. They exist to manage the debasement of the dollar
so that this infection does not give the whole economy a fever
resulting in death. Would you agree?
Turk
Yes, and as a clear result of their managing an
unsustainable situation, we have less and less freedom. The Patriot
Act just presents the latest example. Look at US financial history.
They continue to erode and encumber our freedom. Why? Because they
recognise that the present system is not sustainable and they are
trying to keep the bubble in the air.
Moneychanger
You claim the present system is not
sustainable. Allan Greenspan says it is. George Bush says it is.
Turk
Well, are they going to tell you that it’s not
sustainable?
Moneychanger
No, but they have 70 years of success to
argue on their side. What makes it different this time? In the
dollar’s darkest hours of 1980, when gold hit $850 and silver $50
and they pushed interest rates over 20%, well, yes, it’s a crisis,
but we’ll muddle through this one, too. They’ve been muddling
through since 1934. What is to prevent their muddling through this
time? What specific things will make the dollar collapse this
time? By “collapse” I don’t mean “erode” or even “erode
quickly”, but I mean collapse in the sense that currency collapsed
in Germany in 1923 or Argentina in 2002.
Turk
That is exactly what I envision for the dollar.
To answer your question we have to consider both supply and demand.
In recent decades demand for the dollar has been, more or less,
fairly consistent. As the financial bubble has been inflated and
the Debt Mountain was built, people have continued to demand the
dollar. They still use it for their day to day transactions. But
what happened in Argentina and in Germany in the 1920s? Eventually,
in a very short period of time, people realised that the hollow
promises they were using for currency weren't worth what they had
previously valued them to be. Then began the flight from the
currency. The demand for those currencies dropped
dramatically. In a long-term time frame, you could say almost
overnight, but it was really over a period of weeks and months.
People moved out of that currency as quickly as they could into
other alternatives.
Demand for the dollar
will ultimately drop for essentially the same reasons that
demand for the
Argentine peso and the Reichsmark dropped: they were
fiat currencies oversupplied to the market.
Today far too many
dollars are sloshing around the global economy. All it takes is a
little break in confidence, then people
quickly understand that the dollar is not worth the
paper it’s printed on.
There are a lot of hollow promises backing your
dollar. That will lead to the flight from the currency that will
ultimately bring the dollar down. But it’s the same outcome for
every fiat currency. That’s the point that Americans don’t
yet get. There is no logical reason why the dollar should end any
differently than any other fiat currency.
Moneychanger
But help me see the unseen. In 1923
Germany the people had already suffered through the inflation of
World War I. They had seen their currency lose value as prices rose
800%, they had caught on. That “catching on” was necessary
to precipitate the flight from the currency.
In Argentina in the
decades of the 1980s and 90s, they had three different currencies,
if I’m not mistaken. It may have been four, I can’t keep up with
it. All Latin America has a century-long tradition of monetary
instability. In the U.S. the last two generations have grown up
without seeing gold in circulation, the last generation has grown up
without seeing silver in circulation. Since 1971, the whole world
has been on a fiat standard. Every currency has been
inconvertible, backed by nothing. So why would American confidence
break now? They don’t know anything else. They have only
known a regime of inflation and ever-depreciating dollars. What
will put the idea in their mind now that they have to flee
out of dollars?
Turk
What will trigger the flight from the dollar? We
can’t really predict that. It could be some geopolitical event,
some domestic financial event, a bankruptcy of Freddie Mac or Fannie
Mae. We just don’t know what the specific trigger will be.
Look at the overall
picture of what the dollar is today, and ask yourself a question.
Do I want to prepare for this coming event by moving assets
out of dollars into other alternatives – other currencies, precious
metals, tangible assets. Never mind asking what specific event will
starts the flight.
Where we stand today in
this country is not unlike where Russians
stood in the Soviet Union in the late 1980s. If you had possessed
the terrific foresight to say that in two years the Russian Rouble
will collapse and the Soviet Union will be history, the average
Russian would have just laughed at you. And you know what he would
have said? “The government will never let that happen.” Exactly
what Americans say today.
“The government will
never let that happen.”
But the reality is that
the market is bigger than the government. Truth can be hid for only
so long,
and we have been hiding the truth. We’ve been creating illusions of
prosperity, while in reality we’ve been consuming infrastructure and
building a debt mountain. The Debt Mountain is ultimately going to
be the problem that causes the dollar to collapse.
Moneychanger
But, Jim, in the Soviet case the collapse
of the currency brought with it with the collapse of the whole
governmental system. In Germany and in Argentina the same thing
happened. Thinking back to 1720, it is usual for a currency
collapse to be accompanied by the collapse of a government or a
regime. Do you envision that the kind of confusion in the US?
Turk
No, I disagree with your premise. In Argentina
and also in Germany, they still had the basically same forms of
government, they just brought in new people to run the government.
The Soviet Union was different because it itself was the most
unsustainable command economy. What will hopefully happen here is
that we will return to the constitutional basics that requires the
money of this country to be gold and silver coin.
Moneychanger
I saw that in your book, but having fought
that issue through the courts, I think that the elite that presently
rules this country founds all its power on creating money out of
thin air. Why would they give that up and return to the
Constitutional standard?
Turk
I think the American people will demand it.
Moneychanger
Really?
Turk
Yes. I think the American people are wise enough
to demand it. The economic problems
that will result from a dollar collapse will cause people to
recognise what our heritage is, where our roots are and why this
country became great in the first place. Sound money is the key
element of that
and sound money is enshrined in the Constitution.
Moneychanger
You could almost say the sound money was
the reason that the Constitutional Convention was called.
Turk
Yes, because of the memory of what happened
during the Revolutionary War with fiat currency. The
founding fathers learned their lessons in dealing with fiat
currencies and didn’t want their posterity to suffer the same
miseries, so they enshrined sound money in Article I, Sections 8 &
10
and it worked for nearly 145 years (counting 1934
as the final end of sound money).
Moneychanger
But not everyone at the Constitutional
Convention favoured sound money.
Turk
No, they were in favour of sound money, but there
was a disagreement. First let’s define sound money. Is it gold and
silver coin only, or is it gold and silver coin with a
parallel fractional reserve banking system.
? At the constitutional convention there were two
schools of thought. The Jeffersonian school maintained that gold
and silver coin should be the only money of the country. That was
ultimately put into place by Andrew Jackson over forty years later
when he defeated the banking interests.
On the other side at the
constitutional convention was Alexander Hamilton who felt there was
a need for fractional reserve banking. And after Jackson’s victory
many years later, the fractional reserve banking school eventually
won out. Its victory was so complete, in fact, that now we have
only fractional reserve banking, no gold and silver coin, and
fiat money. To make that fractional reserve banking possible,
we have created this fiat currency as well.
Moneychanger
Which is necessary to make the fractional
reserve system survive.
Turk
Yes.
Moneychanger
Yes, but even during the constitutional
convention there were people who were not just friends of fiat
money or fractional reserve banking, like Hamilton. Some went
further and wanted the state to just print as much money as it
wanted.
Turk Crazy
monetary thinking appears in every generation
- people who believe the state can
create wealth by printing up pieces of paper and forcing people to
accept it as money. That thinking was definitely in the minority,
particularly since the Revolutionary War experience had discredited
it so thoroughly.
Moneychanger
So you think this crisis in dollar
confidence dollar will bring about that same understanding in the
public?
Turk
Yes, that’s my expectation but also my hope. I’d
rather not think about the other alternatives.
Moneychanger
You cover those other alternatives at the
back of your book. I really appreciated that you did not leave up
in the air how the final collapse will be dealt with and the
alternatives for reform. So many people say, yes, we ought
to have gold and silver currency, but then after all there is no way
we can re-institute it because there is not enough gold and silver,
or some such silly thing. At the end of your book you and John
Rubino show three different scenarios for the collapse’s outcome and
a return to sound money.
Turk
Thanks for saying that. We tried to make a
realistic assessment, and hope those scenarios will provide food for
thought and help guide the public discussion.
Moneychanger Make
a connection for me. Why does the mounting business, government and
consumer debt in the U.S. make any difference? As long as
the Federal Reserve continues to pump out new money, cheapening the
overall value of the debt and providing new money to pay the
interest, why can’t the debt burden be borne? It has already
reached ridiculous, hardly conceivable levels. Consumer debt in the
U.S., not counting mortgage debt, is about $18,200 per
person. Who would have ever imagined debt like that? I have talked
to bankruptcy lawyers who tell me it’s at all unusual for their
clients to owe $45,000-$60,000 in credit card debt.
The debt bubble has
already blown higher and lasted longer than any sane person
expected, but it hasn’t collapsed yet. Why do you maintain that the
debt unsustainable?
Turk
If you cheapen the debt you cheapen the
currency. Keep in mind that for every obligation there is an
asset. Many of those obligations have been turned into
currency by the banking system. So cheapening the assets, which are
debt on the balance sheets of the bank, also cheapens the
liabilities on the balance sheet of the banks, which are the fiat
currency that is circulating today.
Moneychanger
But we have doing that for the past 70
years and it hasn’t collapsed yet. What is it about the debt burden
now that makes it unsustainable?
Turk
It’s a combination of two things: the magnitude
and where that debt is now owed. When I was growing up in the 50s
and 60s and Federal debt was growing, people used to say that it
didn’t matter because we owed it to ourselves -- implying that it
was all owed within the country. Now we owe debts all over the
world. We owe four trillion dollars to the rest of the world and
are living on the good graces of the rest of the world. That’s what
creates the vulnerability.
That, too, is what
Warren Buffett offers to justify diversifying out of the U.S. dollar
and taking a cash position in other currencies. (About 50% of his
$35 billion in cash is now invested in foreign currencies, according
to his last quarterly report.) He’s saying that we have squandered
much of our financial capacity and as a consequence we are
vulnerable to what the rest of the world thinks about the dollar and
our debt position.
Moneychanger
I keep thinking about the surprise. You
are telling me that there is an
upper limit. A point comes when you can’t make the payment any
more.
Turk
More importantly, at some point the demand for
the dollar will change. Even though they
will still need dollars for day to day transactions,
people will put their liquidity into other resources. We are seeing
this even a little bit presently because the supply of dollars has
not been growing very rapidly. Still, the dollar has been dropping
on foreign exchange markets. Why? It suggests that demand
for dollars is not growing as rapidly as the supply. So we
are already starting to see the early stages of the dollar collapse?
Moneychanger
When do you think this will happen? By
2010? By 2015? By 2005?
Turk
My own assessment is that it will happen within
three years, maybe five years at the most. But the important point
is not when it will happen, but what you do about it now.
You have to prepare your strategies and act and plan for it today.
Let’s assume the dollar system survives another ten or 15 years. If
you are prepared, you really don’t care when it happens because you
have peace of mind knowing that you are ready if and when it does
happen. That is the key.
Moneychanger
How do you prepare?
Turk
We outline of a lot of strategies in the book. I
don’t want to get into those in detail, because some are quite
complex. There is a basic rule of thumb: minimise your dollar
assets and minimise dollars that are owed to you. Instead go
for precious metals, strong currencies (some European currencies
are stronger than the dollar, but not prefect), and tangible assets
of all sorts.
Moneychanger
An investor can’t protect himself by going
from dollars into Yen or dollars into Euros. Is that correct?
Turk
Yes, holding Euros or Yen is better than holding
dollars, but that doesn’t answer the problem. Ultimately, if the
dollar lands in trouble the other currencies will as well. Neither
the Euro nor the Yen is a viable long term currency because they,
too, are fiat currencies. They confront all the same
weaknesses as the dollar, but for the moment their problems aren’t
as severe as the dollar’s.
Moneychanger
In their essence they differ from the
dollar only in the symbol that represents them.
Turk
Yes. The economic conditions are a bit different
in those countries, but at the end of the day they are still fiat
currencies. My complaint is against fiat currencies of all
sorts.
Moneychanger
Since you’ve dealt in the gold market for
nearly 30 years, you are well aware how narrow the door is into the
world of gold investments. When a dollar crisis precipitates, how
will precious metals markets behave?
Turk Gold
and silver prices will rise dramatically..
Moneychanger
Very quickly?
Turk
Yes, very quickly. When the rush our of dollars
finally comes, it will be like emptying Hoover Dam through a garden
hose. The garden hose presents a very limited opportunity to get
gold and silver because they will just continue to be bid up.
When you look at gold
and silver now from any historical perspective, they are extremely
cheap. Month after month I have been recommending that people
accumulate them in an unleveraged way, a safe way. Diversify your
gold and silver assets and make sure that you control them either
through allocated storage or physical possession.
Moneychanger
There are four ways to hold gold:
physical metal, electronic currency, stocks, and futures and
options. Is it practical for a person to put all his assets into
gold and silver using those four means?
Turk
It’s hard to make a sweeping generalisation
because everyone’s situation and temperament is unique. My years of
experience in investment management, banking, and everything else
has taught me that if there is one right answer, it is
diversification. Put your eggs in a lot of different baskets.
But I would like to make
a distinction. Physical metal and digital currencies, like
GoldMoney®, are different from stocks, which again are different
from futures and options. First off, futures and options are paper,
they’re derivatives. You don’t really own gold, you just own
someone’s promise to pay you gold. That’s just like unallocated
storage, or what I also
unallocated call pool accounts and certificates. They
are just promises to pay, not real physical metal. I would avoid
those because gold and silver are the bedrock of your portfolio and
you don’t want to take any chances with that.
Stocks are different
from both the other two because stocks interpose all the risks of
being in business. They aren’t really gold and silver, they are
companies with management and are subject to acts of God. Stocks
are an investment, not money. Whether in physical or digital form,
gold and silver are money. That makes them different from the other
assets. When you look at a portfolio you normally think “stock,
bonds, cash.” Gold and silver are your cash.
Moneychanger
I have to explain that over and over
because people don’t understand that gold and silver are currencies
that compete will all others. When they think of currencies they
think dollar, Yen, or Euro. They don’t think dollar, Yen, Euro,
gold, silver. Without thinking in those terms you can never
understand what is really happening.
Explain to us about
digital gold because this is a new player on the scene. Digital
gold didn’t exist in 1980 or perhaps the outcome of the currency
crisis then might have been very, very different.
Turk
Yes. We haven’t used gold as currency for a
long, long time. Back in the 19th century gold coins used to
circulate. In the early 20th century some gold coins circulated
alongside paper gold certificates. But for the past 70 years there
has been no gold currency.
Digital gold is a new
21st century form of gold currency. It enables gold to circulate as
currency without any of the impediments. You own gold,
sitting in the vault. (In GoldMoney®’s
case, the vault is in London.) You transact on
line by clicking ownership of the gold from your
account to someone else’s account. The gold never leaves the vault,
but stays in allocated storage,
and in the case of GoldMoney is insured by Lloyd’s of
London. The ownership changes from you to the other person the
moment you click it out of your account. It’s like passing a gold
coin from hand to hand but you do it online, anywhere in the world,
any time day or night.
Moneychanger
It sounds like a good idea, but what sort
of volume is there? If I had a GoldMoney® account where could I
spend it?
Turk There
is a chicken and an egg
issue here. Merchants want a lot of users and users
want a lot of merchants, so we are building up the GoldMoney®
base. We now have about $27 million worth of gold in GoldMoney®,
about 12,000 accounts with people in over 100 countries. As
merchants see that more and more people using GoldMoney®
to buy gold because its inexpensive and convenient, more and more
merchants are starting to accept GoldMoney®
in payment. A lot of people are using it for international
transactions. A small businessman buying supplies worth $3,000 a
month from Hong Kong can go to his bank and pay $50 to send a wire
transfer, and if he’s lucky the wire will get into Hong Kong three
days later. With GoldMoney®,
he makes the payment of $3000.00 in gold instantaneously and
it costs
about a dollar. So we’re finding a lot of peer-to-peer
payments
being made with GoldMoney®.
Moneychanger
There are several purveyors of GoldMoney®.
At one time there were 20 to 30?
Turk
There
several purveyors of digital gold currency, but there
is only one purveyor of GoldMoney®.
There are many imitators, and a couple of them have failed. All of
them basically infringe the patents we have on
this process, but more importantly,
they haven’t gone about the whole business correctly. They haven’t
established the
governance
procedures, they haven’t created the control mechanisms
to provide the
assurances of integrity that customers must have to
know that their gold is safe. Before you look at any of these
programs ask yourself is your gold safe? With GoldMoney®
I am sure you’re going to answer yes to that question. When
you look at the alternatives, you’ll have a lot of question marks.
Moneychanger
What about silver? As a bimetallist I
know I am in the company of maybe two or three other people on the
face of the earth. Still, I was a little bit miffed by your
emphasis on gold. How you think silver will perform over the course
of this dollar collapse?
Turk
I think silver will do extremely well. The
fundamentals for silver are very, very bullish and it looks like we
will continue to see what we have seen for the past few years,
silver outperforming gold. I am very, very bullish on it. Silver
as an asset will show considerable appreciation and I am quite
bullish.
But is silver going to
have a role as currency? In the physical world it may,
although only time will tell. In the digital world I don’t think it
necessarily will. From a currency point of view silver in the last
100 years was the subsidiary coinage used to make the small change.
It wasn’t practical to make gold coins that small. In the digital
world that is no long an issue. With GoldMoney®,
for example, you can send as little as a penny’s worth of gold so
there’s no need for a subsidiary coinage in a digital world. Once
you digitise gold you can divide it up into amounts as small as you
want. I don’t see silver necessarily having a digital currency
role, but that doesn’t necessarily mean silver won’t
do well. In fact, I think silver will outperform
gold.
Why am I more a
monometallist than a bimetallist? Because it has a huge consumer &
industrial demand, silver is more volatile than gold. That’s why in
my mind silver is not as good a money as gold is. Gold’s demand is
almost all monetary demand.
Moneychanger
I understand that but a fundamental
question of valuation underlies the question of bimetallism or
monometallism. That fundamental question is echoed in the Latin
proverb, Quis custodiet custodes ipsos? Who will guard the
guards themselves?
What regulates the value
of gold? The fact that an ounce of gold buys 16 ounces of silver.
What makes an ounce of silver valuable? Sixteen ounces of silver
will buy one ounce of gold. The correspondence of value between the
two defines the value of each.
The alternative is a
monometallic system where the value of gold is defined in terms of
paper money: one ounce of gold buys thirty-five paper dollars.
Without silver in the system to validate valuation, then gold will
be valued in terms of a paper currency. As we’ve seen in the last
100 tragic years, that is the camel’s nose of fiat
money. It’s a crucial epistemological question, and if it’s not
answered correctly it will destroy the monetary system.
Turk
I don’t object to bimetallism per se. In
the past bimetallism has been implemented by government fixing the
ratio between the two metals. Government price fixing in any form
never works, and that’s been the problem with governments fixing
bimetallism ratios. If we have two different metals circulating
freely without the government fixing their exchange rate, I can live
with that.
Moneychanger
I completely concur. But it’s interesting
that the Founding Fathers did not create a monometallic monetary
system. Looking at the constitution and later enactments like the
Coinage Acts of 1792, 1834, 1837, and 1849 you see that they made
the silver dollar the standard coin, with gold “eagles” valued
in dollars. They never intended that gold/silver ratio to remain
fixed at that rate forever, but to be adjusted to changes in the
market. They only fixed it in accord with the technology available
at that time, and intended for the ratio to be adjusted
periodically. They made silver the standard, with gold coins
adjustable in weight according to how the ratio rose or fell.
Turk
But governments are never in a position to
understand what the market already understands. So even with an
adjustable ratio, the market will always move ahead of government.
Moneychanger
You are quite right. But today, of
course, with the communications capability to transmit value changes
around the world instantaneously, there’s no reason why you couldn’t
use both gold and silver because the market will be constantly
iterating toward a current ratio. That fits in rather well to your
definition of money as a “means of communication.”
Turk
There will always be a ratio because in the
market people will always be exchanging between gold and silver. My
only complaint is with government fixing that ratio.
Moneychanger
My only complaint is having governments in
the money business at all. Suppose they weren’t. Suppose that the
US government announced tomorrow, “In 18 months we will close the
Federal Reserve and we will no longer accept its notes for taxes and
other payments. Also, the US Treasury is getting out of the money
business, and we’re going to encourage every other government in the
world to do the same.” Why, in six months we would see the biggest
economic boom the world has ever known.
Turk
I
wholeheartedly agree
Moneychanger
I deeply appreciate your giving me time
for this interview, and I applaud your book. It’s hard for me to
approach a book about money, gold, and the dollar collapse and find
anything I haven’t heard before. But in your book I found a
considerable number of things I had not heard before. The way
you put things together will be extremely helpful for every
investor.
Turk: Thank you,
Franklin.
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