The Money Bubble: What to Do Before It Pops

An interview with James Turk (May 2014)

James Turk and I met in 1985, and have been friends ever since. Since graduating in 1969 from George Washington University with a B.A. degree in International Economics he has specialized in international banking, finance and investments. He began his business career with The Chase Manhattan Bank (now J.P. Morgan Chase), which included assignments in Thailand, the Philippines and Hong Kong. In 1980 he joined the private investment and trading company of a prominent precious metals trader. He moved to the United Arab Emirates in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority.

In 2004 James Turk and John Rubino wrote of The Collapse of the Dollar forecasting the financial crisis that eventually erupted with the collapse of Lehman Brothers in 2008. In December 2013 Messrs. Turk and Mr. Rubino published their new book, The Money Bubble: What to Do Before It Pops.

Mr. Turk’s criticism of the world of money, banking, and central banks has been his lifelong passion. In the 1990s Mr. Turk invented and patented an electronic currency, GoldMoney®, an online method for owning gold. (If you mention that we referred you when you open a GoldMoney holding, it won’t raise your cost but will earn us a small commission.) GoldMoney is the only Internet precious metals storage service that I recommend. I do so because I trust Mr. Turk’s integrity. You can receive his periodic articles by subscribing to his Free Gold Money Report.

If you are wondering why on earth you would want to read yet another book about economic crisis, here’s why: Turk and Rubino have written a book that is both a primer and an in depth manual. That is, they present the problems in the monetary and financial system first in overview, then supply all the details needed to understand more thoroughly. The Money Bubble is a tour de force. Mr. Turk kindly made time for this interview on 16 May 2014.

Moneychanger: We’ve known each other nearly three decades. All that time you’ve been a critic of the central bank monetary system and you’ve advised buying gold. Now you’ve published another book forecasting even greater trouble for the dollar and the financial system and recommending the readers buy gold. How do you answer critics who call you “Johnny One Note” and say, “All he ever does is advise people to buy gold”?

Turk: The key to successful portfolio management is to accumulate undervalued assets and sell overvalued ones. Even though gold is $1300 compared to $35 in the 1960s, gold is undervalued. The reason of course is that the dollar is losing purchasing power because of the destructive monetary policies being pursued by the Federal Reserve and the US government. 

I will continue to recommend the ongoing accumulation of gold until it becomes overvalued, at which point I will recommend to begin using one’s gold to make investments or purchase consumer goods. In other words, now is the time to save gold, just like you might choose to save any money. There will be a time in the future to spend the gold you are saving because it will eventually become overvalued, just like it was overvalued in January 1980. In our new book, John and I explain the way to measure gold’s value properly and accurately. 

Moneychanger: In 2004 you and John Rubino wrote The Coming Collapse of the Dollar and How to Profit from It. That was ten years ago, and the dollar hasn’t collapsed yet. I have read books from the 1930s that predicted, on sound grounds, that FDR’s inflation would destroy the dollar, yet the dollar still stands today. How do you explain that?

Turk: In our first book, John and I said to bet against the housing bubble and to buy gold. Those were literally the two best investment ideas of that decade. And one could argue that the dollar did indeed collapse against gold, the dollar price of which has soared since 2004. But as you say, the dollar is still standing, so here’s my point. Even though we know where the dollar is headed, it is impossible to predict when it will collapse, although I think we are getting close. 

It took around 100 years for the Romans to totally destroy their money, and with it, their empire. The dollar today only has about 1% of the purchasing power it did when the Federal Reserve was created in 1913, so there has already been a century of dollar destruction. If we follow the historical example of Rome, the collapse of the dollar is near, but of course, it is impossible to predict when it will happen.

Moneychanger: Since September 2008 the Federal Reserve has taken its balance sheet from about $0.9 Trillion to $4.2 trillion, more than quadrupling its portion of the total money supply. The world’s central banks have added about $10 trillion to the world money supply since then, yet all rolls along as it always has. If someone had told you even in 2004 that the Fed could quadruple money supply in 5-1/2 years (doubling its assets in four months of 2008) without detonating a hyperinflation, you wouldn’t have believed it was possible, yet there it is. We know the “inflation” is the increase in the money supply and not the increase in consumer prices, but how has the Fed dodged that bullet? Why haven’t consumer prices gone into hyperinflation? How is that possible? What happened to the $3.3 trillion in new money? 

Turk: Like any asset, the value of money is a function of supply and demand. The quantity of money has indeed increased, but so has the demand for it, even though much of the demand for the dollar is largely artificial and the result of government force such as legal tender laws. A currency collapses when the demand for it evaporates and I use the word “evaporates” purposefully. It disappears slowly at first, and people then increasingly flee the currency as they recognize the erosion of its purchasing power is accelerating. The Austrian School of economics calls this phenomenon a “crack-up boom,” and I think one has already begun. 

The super rich get it and have been fleeing the dollar, causing asset price booms in collectibles, paintings, antique cars and real estate in perceived safe havens like London and Singapore. The super rich understand that it is safer to own physical things than have money on deposit in a bank or to rely on other types of promises. When this understanding of the present monetary conditions is eventually recognized by the preponderance of the middle class and they follow the example of the super rich by also rushing out of fiat currency and into things, the currency will collapse. This principle is true for all fiat currencies, but the two most vulnerable at the moment are the Japanese yen and US dollar.

Moneychanger: Are the central banks really “Masters of the Universe”? Can they really solve every financial crisis by printing more money? Is there any limit?

Turk: There are limits. That is that nature of the world in which we live. We just cannot predict when the limit will be reached.

Moneychanger: You cite numerous examples of earlier societies that over-indebted themselves and exploded. The list stretches back to Sumer and Babylon. But with governments controlling well over half of national economic activity and central banks controlling interest rates and able to create money at will, aren’t we in a new era today? Doesn’t history since 2008 prove they can keep manipulating things forever without a blow up? Hasn’t freedom been tried, and found to fail?

Turk: You are correct about the gargantuan size that government has become, and government at all levels in the US is now a greater percent of GDP than when the country was on a war footing at the height of World War II. So one could argue that we are in a new era, but the present situation is not sustainable because government doesn’t create wealth; it consumes it. 

It is necessary to recognize that there are taxpayers and tax-eaters. The latter are those people who do not create wealth but instead live on money they get from government. Some of this expense is necessary, for example, to pay for the local police and a legal system. But most of it is not, and importantly, there is a limit as to how much tax can be taken from wealth producers to give to the tax-eaters without destroying the economy. So what is needed is to rollback the size of government, particularly the federal government, which needs to be shrunk back to the limits the framers of the Constitution put in place.

Moneychanger: Can you list the factors or forces that threaten a dollar collapse?

Turk: There are probably many reasons, but it always comes down to one factor—mismanagement. The reason of particular concern to me at the moment is runaway government spending. It leads to the destruction of the currency, which in turn causes an economic collapse. This clear pattern of cause and effect has happened countless times throughout history. Essentially out of control government spending is negatively impacting the dollar, yen, euro, pound and nearly all the other national currencies. 

Moneychanger: Why do you believe that collapse is inevitable?

Turk: Nothing is inevitable. It could be prevented if the government turns the ship of state around and goes back to Constitutional money. Sadly, I don’t see any possibility of that happening.

Moneychanger: Since over-indebtedness is the chief part of the world’s financial problem, is a debt jubilee (widespread debt forgiveness or repudiation) inevitable? How could it be avoided?

Turk: A debt jubilee is not inevitable, but it is one possible way in which debts will never be paid. Another is to simply destroy the purchasing power of the dollar so that lenders get back a fraction, if any, of the purchasing power they loaned. The mass repudiation of debt is unavoidable.

Moneychanger: Since mid-2012 the euro has been rallying against the dollar. Does that imply that the European financial system and banks are in better shape than the American? Is the fiat euro really stronger than the fiat dollar?

Turk: No, it is more a sign of weakness than strength. Money is fleeing the dollar looking for a safe home, and people mistakenly believe the euro is safe. It’s not. European banks are in far worse shape than American banks. I’ve seen estimates that the European banks are 3-times more leveraged than their American counterparts. Remember, too, that Europe invented the bail-in where depositors in banks lost money to save the bank where their money was deposited, as was done in Cypress where depositors lost 60% of their money. So even if you believe the euro is safe, its banking system is not safe. Nor do you want to own euro-denominated sovereign debt because of the high levels of debt owed by those countries.

Moneychanger: Do central banks manipulate currency exchange rates?

Turk: Yes, regularly. They do this by controlling interest rates. By taking control of interest rates, central bankers believe they can control economic activity. That is the theory anyway, but we are seeing now that it doesn't work. The Federal Reserve’s zero interest rate policy has not stimulated the US economy, which remains weak. 

Central planning never works. Everybody should have learned that lesson from the Soviet Union, which was an obvious disaster. Yet the US economy is now under the control of the central planners in the Federal Reserve.

Moneychanger: Do central banks and/or governments manipulate silver and gold prices?

Turk: Yes, because central banks cannot control interest rates without controlling gold and silver prices. Interest rates are a reflection of risk, namely, a measure of the likelihood that a currency’s purchasing power will be destroyed by government policy. So for example, the Indian rupee has a higher interest rate than the Swiss franc because it has a higher risk of being debased—of losing purchasing power. 

Gold has the lowest interest rate of all monies because governments cannot print it. Therefore, governments—led by the US government—manipulate the price of gold to keep its spot price lower than its future price, thereby preventing gold from going into what is called “backwardation.” Without getting into a full discussion of the financial and monetary principles here, backwardation would be a clear signal that the price of gold is ready to soar and/or that a currency is about to collapse, and no central planner wants either of those two things to happen.

Moneychanger: Do central banks and/or government manipulate stock markets?

Turk: Yes, that is the task of the President’s Working Group on Financial Markets, which is the so-called “Plunge Protection Team” whose purpose is to keep the stock market from collapsing. It was formed after the 1987 stock market crash. 

The Federal Reserve also plays a key role here, which used to be called the “Greenspan put” when Alan Greenspan was the Fed chairman. It meant that the Fed would change monetary conditions to make sure the stock market did not collapse, which is a policy now called the “Bernanke put.” Consequently, the stock market is setting new highs simply because of Federal Reserve money printing, not because the economic outlook is improving because it isn’t.

Moneychanger: If central banks and/or governments manipulate all these markets, why bother investing in gold or silver? Central banks will just keep on suppressing the price, won’t they?

Turk: Yes, they are likely to do so until they run out of bullets, as they did when the central bank cartel called the “London Gold Pool” could no longer control the price of gold. It collapsed in March 1968. The point is that governments and their central planners can influence prices, even for an extended period of time if the government keeps absorbing more power and takes away the freedom of individuals to do what they want with their money. But in the end, governments cannot control prices forever. The reason of course is that the free market is bigger and more powerful than any government or group of governments working in concert. 

Moneychanger: When the Internet was first emerging in 1991 or 1992 and you were working on the GoldMoney patent, it became obvious that an Internet-transferrable precious metals currency could replace national currencies within a two year span or less. Employing that extra-national marketplace beyond any one government’s ability to crush it, the public could make an end run around national fiat currencies by using that gold-backed currency, and it would quickly & easily prove itself superior to national fiat currencies. Once that recognition went viral, national currencies would be abandoned in a very short time. Since GoldMoney was founded governments around the world, with the US leading the charge, have been weaving a financial police state, and have choked down Internet payment providers. They aim to suppress all monies that compete with their own. At first, GoldMoney offered an account to account transfer option, but (it seems to me under that government pressure) finally withdrew that option. Is that dream of an Internet-catalyzed return to honest money still possible? Or must the world suffer the long bloody decline and utter destruction of fiat money and economies before it returns to sound money?

Turk: The optimistic side of me would like to think that it is still possible, and in this regard, cryptocurrencies like Bitcoin might help bring that about. But seeing that governments pretty much everywhere are putting pressures on these new currencies, even to the extent that they are being completely outlawed in some places, the pragmatic side of me thinks that reason and common sense will prevail only after fiat currencies collapse. But even here I must be cautious in suggesting any alternative because there are two possible outcomes—the good one and the bad one. 

An example of the good one is how the framers created the American Constitution with its sound money rules after the hyperinflationary collapse of the continental, the country’s first currency. The most obvious bad example is the rise of Nazism in Germany after the hyperinflationary collapse of the Reichsmark.

Moneychanger: You and John Rubino offer several outcome scenarios. What straws might break the camel’s back in the financial system?

Turk: There is too much debt in the system. There is not enough cashflow—or more generally speaking, wealth—being created to service that debt. It is that simple.

Moneychanger: What do you think is the most likely outcome over the next ten years? 

Turk: It is clear that a lot of promises are going to be broken, particularly by government. Nevertheless, governments will fight to retain the abnormal power they amassed in the 20th century. Thus, governments will make the economic and political situation worse, meaning that standards of living will continue to deteriorate. But they will get better eventually, because I also believe that the world will eventually return to sound money. Unfortunately, there is no way of predicting when that will happen.

Moneychanger: The present monetary system is the beating heart of power in today’s world: whoever controls money creation controls markets and governments. Josef Stalin said that ruling classes never voluntarily leave the stage of history. As deeply entrenched as that system is, do economic and political freedom have any chance at restoration? What role do gold and silver play in that restoration?

Turk: Two dominant features of the 20th century were the rise of fascism and the breaking up of empires. The former reduced individual freedom, while the latter tended to increase it. This battle has spilled over into the 21st century, and it will continue. In fact, the fight for economic and political freedom is a dominant feature of history. It never goes away because people yearn for freedom while demagogues and sociopaths strive for power, but we also know from history that where the power of the government was limited, human freedom flourished. 

The key here is that gold and silver are the most peaceful way of controlling and limiting the power of government for the simple reason that governments cannot create physical gold out of thin air, as they create paper money. Money is power, and governments have taken control of national currencies to increase their power. So I see the last forty years—which is the period when governments no longer tied national currencies to gold or silver—as an aberration, which stands in marked contrast to 5000 years of history of the precious metals as money. John and I call this aberration the Money Bubble, and we believe it will pop.

Moneychanger: Congratulations on The Money Bubble. It is a tour de force and and indispensable primer for anyone trying to understand money and finance and how to protect himself, sound and gentle with outlines and then generous with details. Y’all have done a masterful job of drawing it all together.

Turk: Thank you Franklin.

Readers can find Mr. Turk’s book at either in paperback or Kindle version. I strongly recommend you read it soon, before the Money Bubble pops.

Originally published May 2014