Washington, DC -- (ReleaseWire) -- 02/08/2016 --DAWN BENNETT: John Rubino is publisher of the financial news site dollarcollapse.com and the author of the book The Money Bubble, in which he outlines with his co-author, James Turk, the possibilities of a complete collapse of the world's paper currencies and strategies for surviving and profiting in that scenario. John, welcome to Financial Myth Busting.
JOHN RUBINO: Hi, Dawn, good to talk to you again.
BENNETT: Let me just walk people through a scenario. It's an otherwise ordinary Saturday morning and the government declares a surprise bank holiday, shuts all the banks, imposes capital controls to stop citizens from taking their money out of the country, and at that point, the government is free to help itself to as much of the country's wealth as it wants in a kind of like an all-you-can-steal buffet. This story has already played out in Greece and Cyprus and Argentina and Iceland, and those are only a few of the most recent examples. Do you think it's inevitable in the United States?
RUBINO: Well, I think it's possible in the United States. We're creating the conditions for the mother of all financial crises, and how governments respond and how people respond is kind of unpredictable, because there's so many different ways for people under pressure to act in that kind of a circumstance. But yeah, one way that it could play out is that things just spin so far out of control that the government sees no choice but to declare, like you said, a bank holiday where they just stop us from being able to take our money out of a bank, and then they impose capital controls and stop us from moving our money out of the country, and then they do things that in their mind will help fix things; they'll dramatically devalue the currency or they'll confiscate assets from people. You know, we've done things like this in the past. For instance, in the Great Depression, we made it illegal to own gold and ordered everyone to hand their gold in and then devalued the currency against gold. And so stuff like that can happen.
BENNETT: And gold and silver, in coins or other form, is one of the solutions. What about placing some of your savings outside of your home country in a foreign bank account?
RUBINO: When things get really, really crazy, as they are beginning to, one of the ways you should respond about it is with a stepped up kind of diversification, where instead of just owning three or four different asset classes—stocks, bonds, cash, precious metals—you also diversify geographically, so you move some money overseas to what you hope will be a safer location, or at least a different location. So whoever gets craziest, you've got some money in a place that's not the craziest place in the world. So put some cash in a bank account in Switzerland, for instance, or buy some real estate in what you hope will be a more stable country than the US, if you're worried about the US spinning out of control. And you can't know ahead of time who is going to behave in what way, but if your assets are spread around, you've got a pretty good chance that some place where you've got some assets is still stable and safe and that you get to keep those assets, and that's how diversification works. In a way, it's an admission of defeat. In other words, you can't predict what's going to happen in the future, so you're just going to spread your bets around as widely as possible.
BENNETT: Capital controls are typically a prelude to something even worse, right? It might be currency devaluation or so-called stability levies or bail-ins. Whatever the government or the mainstream media wants to call it, capital controls certainly are a way to trap your money.
RUBINO: Yes. In the U.S., we're imposing de facto capital controls right now, because reporting requirements are so onerous, so extreme, that that makes it really unattractive to move capital overseas. And so in that way, they're trying to force us to keep our money at home. And that's usually a prelude to something unpleasant. So you should consider, if you've got the money to do this, you should respond to this by stepping up your attempts to get some money overseas. And then you should be shifting your assets into things that governments can't actively mess with as easily. They can devalue the currency very easily, so you don't want a ton of dollar denominated stuff sitting around; you know, stocks and bonds and cash. And you do want more of things like precious metals—which are forms of money that governments just can't create more of out of thin air, and in that way devalue them—and really well-chosen real estate. Not bubble market real estate, for instance: sorry about this, but I wouldn't be buying a Fifth Avenue penthouse right now necessarily, because Manhattan real estate has been bid up by a lot of scared foreign capital flowing into the country. But there are other places. You know, a rental house in a small college town or something like that, where there are always going to be kids wanting to rent the house, that's the kind of thing that will preserve your capital for a while, so stuff like that, or farmland. You know, there are things the government can't create more of that will tend to hold up well in an environment where governments are going to make their currency less valuable, because that's the only way out of their mess.
BENNETT: When you read about capital control historically, look at old news releases, it sounds strange to me, but they almost always portray capital controls as being politically popular. Have you read that? It just seems like the government is convincing everybody that they're doing something that they should love.
RUBINO: Well, one of the scary things about financial crises is that people see their world spinning out of control and they want strong leadership at that point, so they're willing to take an authoritarian leader, if he promises to stop the bleeding. And so that's why financial crises frequently lead to some kind of political or geopolitical crisis, because we end up allowing would-be dictators to come to power by promising to do what has to be done. And then once they're in power, they're dictators. They'll do whatever they want and cause trouble, and then the dictators fight with each other, and so that's where you get Hitler or Napoleon or the like. Both of those guys came into power following big financial crises, and so that's one of the things we need to worry about going forward is this tendency of human societies to become authoritarian when they screw up their finances. And we have royally screwed up our finances, so there's no reason why this is going to be some kind of unique period in history, where we have this huge financial crisis and then we immediately shift into a libertarian live and let live kind of political system. That's not how it normally works.
BENNETT: You know, one thing I wrestle with is getting these ideas that we're talking about, understood on a widespread basis. After every session like the one we're entering now or have been in, there's this popular perception that it's the government's job to fix this issue, but their fixes don't ever permanently work or heal anything; it's just re-inflating bubbles that somebody's eventually going to eventually prick. So if we're ever to begin building a prosperous economy on sound economic fundamentals, how do we convince the government to, for a lack of a better term, just let it burn?
RUBINO: Well, the short answer is that we can't, because that means they would have to give up power. See, if you stop the process of creating huge amounts of new money and encouraging people to borrow more money, we would tip over into a depression right now, because we've borrowed so much already, because of bad government policy in the past. So whoever's in power has to be this generation's Herbert Hoover, the guy who gets blamed for all the trouble. And nobody will accept that if they're a politician, so they're going to take the "easy way out" and print more money and cut interest rates even further, because that might get them through the next election cycle. That might get them to the point where they retire with prestige. You know, Alan Greenspan and Ben Bernanke, who are some of the architects of this mess at the Federal Reserve are prestigious, popular guys now, who go round and make huge amounts of money by making speeches, and everybody wants to talk to them and magazine articles are very favorable. And so they made it; they got all the way to retirement, by doing these incredibly, incredibly unwise things. And the temptation for the guys in power now is to do the same thing, so they will keep it going until it blows up. So there's no way to educate the people in government, because it's not in their interests to behave in a way that somebody would if they actually understood what was going on. They might understand it, but they're not going to do it, because it's not in their immediate interest.
BENNETT: In a recent commentary on Donald Trump, you said that the mere fact that people are basing their political preferences on who will be the least terrible proves the system is broken. And as a rule of thumb, when the government loses legitimacy, replace financial assets with real ones, so stocks and bonds, even financially, what do you think now is riskier?
RUBINO: Well, almost every financial asset is incredibly risky. Stocks are very expensive. In other words, we've had a long stretch of the government creating lots of new money, and some of it flowed into equities and buoyed equity prices, so the broad stock market averages are in a danger zone, based on historical values. Government bonds are as expensive as they've ever been, which is to say interest rates have been as low as they've ever been, so they can blow up on you too. Cash is going to be devalued by all the major governments. If you own Euros under your mattress or dollars in a bank account, they're going to be worth less five years from now than they are now, so they're risky. So there isn't a lot on the spectrum of mainstream assets that haven't been inflated to the point where they're extremely dangerous now. And the victims of this are regular people, savers who are trying to put a little bit away to retire and retirees who need a fixed income generated by their savings in order to live. They're the victims of this policy. And so what we're doing is really, in that sense, despicable. We're funneling money from regular people to the richest handful of people in the world, who can hire financial advisors to play this process and make them even more money. And so I think that historically precious metals, as we've talked about, tend to do well in times like this. So that's one thing the average person can do is go out and buy some silver coins or some gold coins or some gold bars or something like that. But there aren't a whole lot of things that you can do beyond that, because the deck has been stacked against you. If you are a regular lower middle class person who's working hard and trying to save a little bit, the environment isn't favorable for you anymore. And most people like you are going to suffer in the next 5 or 10 years.
BENNETT: This week four major companies—Apple, Boeing, Bank of America, and Caterpillar—warned their shareholders that they expected 2016 to be slow. Now, what's interesting, as you pointed out in one of your pieces, is that all they're all actually operating in different industry sectors, and I'm guessing this might make it hard for the Fed to blame a snowy winter. Do you want to walk through what your thoughts are?
RUBINO: Yeah. We've had seven years of really extremely experimental monetary policy, where the government borrows huge amounts of money and the Federal Reserve prints a huge amount of money, and that has buoyed up asset prices, but it hasn't really helped the actual economy very much, and so you're seeing a lot of big companies report really terrible numbers now. And the dynamic within the stock market, when that starts to happen, is that the money managers see Boeing or something report that bad numbers so they sell Boeing and they buy the stock of Google or Netflix or somebody who's still putting up good numbers. And the number of companies that are going up get smaller and smaller and the amount of money concentrated in them gets bigger and bigger. And so you get this really unbalanced market, where most stocks are down, but a few are up, and so the overall averages are held up by these few. And then when they start rolling over, everything falls apart. And so Apple, in that sense, is kind of a harbinger of what's to come here, because that's been one of the bulletproof stocks of the last few years, and now their business is starting to plateau and their stock is starting to go down. That doesn't leave a whole lot of companies propping up this market. Amazon fell by almost 100 points in the last two weeks, and so when stuff like that starts to spread to a handful of other companies that are still rock solid, you'll see the whole market fall. And that's how it normally goes; that's how it happened in the tech stock bubble and the housing bubble and now in what James Turk and I call the money bubble. You'll see the last remaining powerhouse stocks start to roll over, and then the whole stock market will go down, and then that will pull the economy down further, and that will either tip us into a depression or cause the government to do some crazy stuff, like push interest rates down to negative territory, like Japan just started to do this week. And we'll devalue our currency, we'll make interest rates negative, so you have to pay a bank in order to have a bank account. And that's such a historically unprecedented situation that there's no real way to know how that plays out, except that it will probably be bad, really chaotic and really, really dangerous for almost everybody. And so that's our 2016 and 2017; that's what we're looking at, and there really seems like no way out of it. Because when you borrow too much money, whether you're a family or a country, your life spins out of control. And we are deeply into the life spinning out of control part of the process. So I wish there was some definite stuff to be said about it, but there really isn't. The crazy, chaotic times are inherently hard to predict, and that's what we're heading into.
BENNETT: John, I want to thank you for being on Financial Myth Busting. And everybody, you need to get his book The Money Bubble. It's on Amazon. Thank you, John.
RUBINO: Thanks, Dawn.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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