Clark: I was struck at our summit by how many speakers have come
to the same basic conclusions we have – that there's really no way out
of the US debt hole. That has a lot of implications, but first, in your view,
how bad is it?
Coxon: It isn't so bad that you should think of it as the end of
the world, but there is a lot of trouble stored up, and I think "no way
out" describes the situation accurately. Most of our economic trouble
has been built up by government actions to solve past problems, and what
they've done is to buy time and provide painkillers, but in doing so they've
made the problems even worse.
Why, specifically, is there no way out?
Let's start with the Federal Reserve and the money supply. In response to the
collapse of the housing bubble and most financial markets in 2008-2009, the
Federal Reserve began printing like crazy. The monetary base more than
doubled, and the M1 money supply at this point has risen a little over 60%.
The reason we haven't seen rapid price inflation is that people are still
squirreling away dollars because they're still very worried about the
prospects for the economy. But that' not the end of the story. The Federal
Reserve will keep printing – as everyone knows by now, Mr. Bernanke has
pledged allegiance to the printing press and assured the markets that the
printing isn't over and won't be over until the economy revives.
or later, the Federal Reserve will have created so much cash that many people
– maybe most people – will be glutted with dollars, and buying
anything will look good compared to holding on to more dollars. At that
point, the urge to buy – whether it's capital goods or consumer goods
or commodities – will revive the economy, and the recession will come
to an end. That will reduce the level of caution people feel to something
near normal. The result will be that all of the excess money that has been
created since 2008 will come pouring out. For a little while it will look
like happy days are here again – the economy will seem to be booming.
But then the excess cash will set off hair-curling price inflation. And
that's just the monetary side of the problem.
look at the budget side of the federal government. They have been operating
on the old Keynesian formula of deficit spending to revive a stagnant
economy. What Lord Keynes perhaps never considered was that even if that
prescription worked – and there is precious little evidence that it
does work – there is a limiting factor over the long run. That limiting
factor is the ability of the government to service debt that gets larger and
larger. The US balance sheet is already at the gateway to the danger zone.
When accumulated debt exceeds annual gross domestic product (think of it as
annual income for the whole country), that's where governments start to get
into trouble in the capital markets.
the budget situation – or the debt-financing situation for the US
Treasury – has been made exceptionally easy by the exceptionally low
interest rates that have been engineered by the exceptionally rapid growth in
the money supply. When the economy starts to revive, interest rates will go
up, and then the cost to the US Treasury of rolling over its now $16 trillion
in debt will become a noticeable element in the overall budget. That pushes
the government closer to a debt spiral, where the rise in interest rates
makes it more expensive to service debt, which means the debt accumulates
even faster. At that point, doubts about the ability of the government to
service the debt over the long run forces another kick up in the government's
borrowing costs. It becomes a nasty and vicious feedback cycle that is
similar to what is going on now in Greece and Spain. This is a predicament
the US government is just whistling about. They've closed their eyes to the
between the built up inflationary pressure that will come roaring out when
the economy revives and the constantly growing US government debt, there is
no solution to the economy's problems that is politically acceptable.
Some economists think we'll eventually grow our way out of
this. We're still the superpower of the world and still generate a lot of
GDP, so can't growth eventually pay back all this debt?
In principle, such a thing is possible, but it would require political
measures that are impossible. They would have to throw out most regulation of
the economy, sell off an empire of unneeded real estate, stop using soldiers,
ships, and planes as pieces in a "big boys' really big chess set,"
and starting saying "no" to the many people – both rich and
poor – who now live off the government.
Why aren't more economists expressing concern or even
outrage over the predicament we're in? It seems so obvious.
If you studied economics when you went to school, the economics department
probably was within a short walk of the science building, where they studied
physics and chemistry. That leaves people with the false impression that
economics is a hard science like physics or chemistry, where there are clear,
proven principles anyone can test and everyone can agree on. In fact,
economics today is about where medicine was in the 17th century,
when people were debating whether the blood circulates through the body or
just sits there. That was the level of knowledge by the best minds of the
day, and it is the level of understanding by economists today. So you
shouldn't be surprised that most economists are sure that most other economists
So what happens – high inflation? There are some
strong deflationary signals in the economy right now.
Even if there are episodes of deflation, they will just
inspire even faster money printing. In the contest between inflation and
deflation, inflation always gets another turn until it wins.
Good point. Is inflation imminent? The CPI is still pretty
Well, it's never going to be imminent in the sense that today it's not
happening and next week it is happening. It's more like a river rising. And
when you see the economy start to revive, the rate of price inflation will
start rising noticeably in a year or year and a half.
This has obvious investment implications.
Yes. You and your family should think about how to protect yourselves, and
the formula sorts out to something very simple. One, you need some gold in
your financial life, and two, you don't need any bonds in your financial
Yes. Anything else?
Well, those are the most obvious – gold yes, bonds no. You should also
keep a good holding of cash in your investment portfolio, because there
probably will be one or more replays of what we saw in 2008 and 2009. And
when that happens, you will be glad you have cash because you can take
advantage of the bargains.
stocks are a bit of a quandary. On the one hand, the equity market welcomed
the restarting of the printing press. On the other hand, the equity markets,
as they go up, are diverging from economic reality. So I suggest thinking of
a portfolio of conventional stocks as a machine that sits in your office and
churns out ten-dollar bills, but eventually is going to blow up. If you want
to take the risk that you'll know when to get out, well, at the end of the day,
if you're right and you get out in time, you will be glad that you invested
in conventional stocks. If you are thinking about a portfolio that you can
just put away and forget about, then conventional stocks should not be part
Bernanke said the $40 billion of bond-buying every month is open ended,
implying it could last awhile. Any sense for how long it goes on before the
Open-ended is an extraordinary thing to announce. The fact isn't surprising,
but I am surprised they would 'fess up to it.
picture I have is someone sitting next to a pile of damp firewood, lighting
matches and just throwing them on. Eventually those matches are going to dry
out the firewood, and then you will get a big blaze; and that's what the
Federal Reserve is doing to the economy right now. The difficulty is that if
you're in charge of printing all the new dollars, you won't know that you've
printed enough until you've printed way too much.
That implies gold and silver prices have a long way to go yet.
Yes, I certainly believe so.
What kind of price levels do you expect?
The only reasonable thing that I can say is, a lot higher. The reason that it
doesn't do much good to put a number on it is that we don't know how long
rapid rates of inflation will run.
What about gold stocks? If you're lukewarm on the stock market, can gold
stocks still do well?
The basic answer is, if you want to own stocks right now, don't own red
stocks, don't own blue stocks, own gold stocks.
Silver is considered a monetary metal, too, but is there a scenario under
which gold does well but silver does poorly?
Yes: runaway inflation and a very sick economy that is not consuming a lot of
silver. That could leave silver behind, but it would have to be a very ugly
But wouldn't the Fed just print more money and make silver as attractive as
Not necessarily. The demand for gold is financial demand, period. Silver is a
different story altogether. It is partly financial demand and partly
What odds do you give for something like that happening?
I don't expect that to happen. If it happens at all, it's years away.
So the bottom line to all this is, make sure you own
That's exactly right.