Listen to the interview with Andy Hoffman of Miles Franklin, as we discuss the global economic situation explained in layman’s terms, the important difference between currency and money, and several important details pertaining global economic crisis.
Click the play button above to listen to the interview with Andy Hoffman of Miles Franklin, or you can read the transcript below as we discuss:
- The global economic situation explained in layman’s terms
- The important difference between currency and money
- How gold and silver are not investments, but are money
- Why unbacked currency systems are doomed to fail
- Real US debt is much, much greater than what is officially published
- The Federal Reserve is the root cause of the problems we’re facing today
- Why governments and central banks want their currencies to fall
- The Euro must collapse at some point and that’s likely to be quite soon
- China will suffer mass inflation as long as the yuan is pegged to the US dollar.
- Gold and silver are money and have been the best performing asset class since 2012.
- Andy’s $20,000 price target for gold and $1300 for silver
David: Hi this is David Duffield from ultimatemoney.com and it’s great to have a special guest on the line today. ‘Ranting’ Andy Hoffman writes a blog and newsletter for Miles Franklin and he’s very passionate and very opinionated, and most of all very knowledgeable about what’s going on in the precious metals market. Thanks for joining us today Andy.
Andy: Thanks for having me and I hope you mean that all in a positive way.
David: People may soon find out why you’re called ‘Ranting’ Andy, but we’ll get right into it. What I wanted to start with was basically if you have a couple of minutes where you’ve probably met someone for the first time and you’re at a social gathering, and they ask what you do and you explain that you’re involved with gold and silver. How do you get your message across about the global economic situation and the role gold and silver plays in a pretty short space of time and in terms they can understand? How do you explain it?
Andy: It’s difficult because as you say we’ve been brainwashed not as a nation, but as world, for the past forty years that currency is money. There’s a big difference between currency and money and in the United States we’re told that money is the dollar as you are, and the Euro in Europe, but the problem is there’s a definition of money, which all these fiat currencies don’t meet. Primarily that it’s not a good store of value and the US dollar has lost 98% of its value since the Federal Reserve came into being. I’m sure the numbers for the Australian bank and for the all the other central banks in the world are the same. What I need to do when I speak to people is make them start to realise that there’s a difference between money and currency. The oldest and only true real money that’s ever survived in history has been physical gold and silver. Once you get people to start to realise that they are not investments, but money, then you have the basis of further discussions.
David: How do you explain the problems what we’re in at the moment? If you can get the message across that gold and silver are in fact money, how do you explain why that’s important and why they shouldn’t just go on about their normal life?
Andy: Well the problem that we have today is too much debt. In a gold standard that kind of debt wouldn’t be allowed to build up because in a gold standard you can only print as much money as you have gold, and gold hasn’t increased in production in ten years. The problem is central banks around the world are free to print as much money as they want and as a result a) you have inflation, which reduces the standard of living for everybody, and b) you have debt because when they’re printing money they call the dollar a Federal Reserve note for a reason. It is simply backed by debt and when you have unconstrained fiat monetary systems it defines a Ponzi scheme and I don’t mean that lightly because people get the term Ponzi scheme and they think that’s just some generic term for something bad. A Ponzi scheme is something that builds on itself like a pyramid and the only way you can keep a Ponzi scheme going is by making that pyramid bigger and also preventing confidence in the scheme from failing. That’s the problem we have right now with fiat currency systems that can only get bigger or die, and that’s why they say inflate or die, why they say QE to infinity because that’s what we’re going through right now.
David: Okay so can you just explain fiat currency to my listeners?
Andy: Sure. Fiat simply means by decree so the point is the fact that the dollar whether it’s US dollar, Australian dollar or otherwise is ‘money’ simply because the government says it’s money. It’s not backed by anything and if you want one word that defines fiat is it’s unbacked because there are absolutely utterly no assets behind any of the dollars that are minted; they are printed out of thin air. Whereas gold for instance has its own intrinsic value so even if you go off the gold standard as we did in the United States in 1971, gold still trades at an intrinsic value. If we stopped using dollars today they would be worthless and they’re going to be worthless in due time. They’ve already like I said lost 98% of the value they’ve had and they continue to lose inflation every year and because they’re backed by nothing they will do what every single fiat currency in history has done, which is to collapse to zero. That includes, and sorry you may have an Australian-centric audience, but in the United States alone we’ve already lost two currencies to hyperinflation and almost a third currency, which was created by Abe Lincoln of all people. It’s going to happen, it’s happening as we speak, and it’s just a matter of how long the powers can be can keep the ultimate inevitable scenario from occurring.
David: So with fiat currency and the fact that governments can just digitally or run the printing presses, I suppose the problem is that it’s unlimited in supply and anything that’s unlimited like that has to lose its value, and it’s just a matter of how quickly that happens?
Andy: Right and that again comes back to the definition of money, which I put front and centre in my presentation. There are really four things: it has to be fungible, which means every dollar has to be the same like if you go into a store with a dollar it’s going to be the same dollar as someone else who goes in. It has to be a unit of exchange that you can actually go buy things with it. It has to be a store of value and actually whatever the fourth thing you just said was – I’ve lost my train of thought.
David: I mentioned it was unlimited in supply.
Andy: Right! You have to know how much is out there. Not only is it unlimited in supply and the government can print as much as it wants, but at the same time you don’t even know how much is out there because they lie to you about what’s out there. Just last year we found out that the Fed had lent out 16 trillion dollars during the global crisis in 2008 without telling anyone. Not only can they print as much as they want they don’t even tell you so you can’t even gauge how much money is out there versus the goods they’re chasing.
David: So just to get back to basics, we’ve already run through a few words or a few terms and you can just tell us briefly what you associate with that word or how you’d explain it in straightforward layman terms. Firstly, just Wall Street itself.
Andy: Wall Street historically its job is to raise capital for companies that need it. It’s always kind of been a mediator between the investing public and the companies. I was an analyst on Wall Street for ten years, buy side and sell side, but that business died when the economy rolled over in 2000 when we had the tech wreck. As a result, Wall Street has had to find different means to make profit and unfortunately those means for the most part are illegal or unsavoury. Right now most of their profits have been generated from – they get this zero interest rate money from the Federal Reserve and they have been able to buy treasury bonds with it and make a spread and that’s what they call a carry trade. They’re not doing anything and they’re basically being given free profits and that of course high frequency trading’s taking over Wall Street where they have these computers, which front run orders on the New York Stock Exchange for instance, and they are now three quarters of all the trade in New York Stock Exchange if you could believe it. If you take them out we’re actually at volumes that are back to 15 or 20 years ago so between the carry trade and the high frequency trading, which is unsavoury at the least and illegal at the worst, and of course the insider trading because some of these banks such as Goldman Sachs and JP Morgan have half of their board seats within government posts and government organisations. That’s what they’re doing and Wall Street is not what it used to be.
David: United States debt?
Andy: Right well the United States debt as you know back in August of last year, the S&P, Standard & Poor’s , downgraded their credit rating from AAA to AA+, and they did so because the national debt is exploding. By the way right after that happened the President of S&P was fired and even though they said in their statements that if the US doesn’t get their stuff together immediately they’re going to downgrade it again. They’ve been extremely quiet in the last six months considering the US has added another two trillion dollars of debt since that time to the debt ceiling. The nominal debt that’s outstanding that you see all the time in the media is 15.5 trillion dollars, but that doesn’t include what they call ‘off balance sheet’ debt. Fanny Mae and Freddie Mac did some other things which I have no idea why they’re off balance sheet, but that’s another five trillion so they’re really at 20 trillion, which is a debt to GDP ratio of about the same as Greece. Of course then there’s what they call unfunded liabilities, which also doesn’t show up on the official calculations such as the money that’s ultimately going to be owed to Medicare, Medicaid, and social security, and some people calculate that number as another 100 trillion. Again, we’re at the rate that the US is now accumulating debt at the rate of 100 billion dollars per month. Right now we’re increasing debt at the parabolic stage and it’s very close to becoming hyperbolic and that will happen sometime in the next year or two.
David: Some of those numbers are so large that I’m sure people don’t even quite grasp them and they are pretty scary. Another one I’d like you to run through is The Federal Reserve if you could just explain their role.
Andy: The Federal Reserve is the central bank of America and it’s the same basically as the Australian Reserve Bank. They are theoretically owned private, meaning theoretically they are not a government agency and they are actually by charter owned by banks such as Goldman Sachs and JP Morgan and that is a fact. It’s such a murky situation that no one truly understands how it works, but the fact is Wall Street and Washington have become one and the same because Wall Street has been for the last decade by far the largest contributor to congressional and presidential campaigns. Obama’s been fully paid by Wall Street and so has Bush, and right now it looks like Mitt Romney has most of that money. It’s really as far as I’m concerned the government agency and they came about the Federal Reserve in 1913. Even though it’s illegal, the US Constitution says only gold and silver should be legal tender, but they somehow finagled their way into creating the Federal Reserve in a Christmas Eve vote where most of the people didn’t even show up. Since that time in 1913 when they created it, it’s devalued the dollar by 98%. They are the root cause of all the problems of the world because again when the US went off the gold standard, the whole world went off the gold standard. The US dollar is the reserve currency meaning it’s the currency that most countries have their reserves in and do their transactions in. They basically created inflation for the whole world and any time the dollar gets printed or the countries have been printing their currencies as well in this competitive currency war to keep the values down so that their manufacturing businesses will not suffer.
David: Can you just expand on that for a moment because Currency Wars is obviously James Rickard’s book, but here in Australia we tend to cheer the Aussie dollar on like we’re proud we’re above parity against the US and for some reason it’s a little parochial, but when you look at the currency wars a lot of these countries want the opposite effect and they want their currencies to go down. Can you just explain that briefly for us?
Andy: Actually the Australian and the Canadian dollar have the exact same issue where they always right up around parity and recently the Australian dollar was above parity and right now Canadian dollars are at parity, which from a nationalistic perspective is encouraging because people always feel like the US feel they’re so much superior so look at our currency. It’s completely different what goes on in newspapers as behind the corporate doors as I assure you especially in a commodity country like Australia and Canada is the same way that it’s devastating for industry when their currencies rise because their cost bases goes up and of course they report lower profits. Now the silly thing about all of this is if you have a lower Australian dollar and your companies report ‘more profits’ they’re worth less because of the inflation caused by the lower dollar, but that’s not how companies look at it. They don’t understand the true nature of economics. This currency war is more a political thing than anything else and since the businesses that are paying our bonuses in these countries want to report higher profits they don’t really care about the inflation impact. They’ll continue to competitively devalue their currencies.
David: So just to get an idea of the global picture we’ll run through say Greece in the Eurozone. What’s your take on what’s happening there?
Andy: Well my take is that the Euro must collapse at some point and probably soon, and the collapse doesn’t necessarily mean falling to a million fragments – I mean there are countries that are either going to be kicked out or are going to voluntarily leave. I have been very vocal about how this Greek bailout would never happen and basically I’ve been right because it’s failed and Greece is at default and yes they will put some money into Greece, but basically the net of this bailout is Greece’s debt is going to go up because they’ve forgiven some debt but they’ve just given them more. They are really suffering from all fronts and they also have been the poster child of how quantitative easing or money printing does not work because they’ve at zero interest rates for close to 15 years and things at the worse that they’ve ever been.
David: What about China? Are they the miracle some people believe or do you see a hard landing coming from them?
Andy: Well China is as they say the growth engine of the world and they’ve taken the largest percentage of manufacturing in the world, but that said they have by far the largest population up there with India. Even with all the manufacturing they still have problems feeding its people and they also have a government, which is centrally run and they’ve had a central bank that has been pegging the Chinese currency to the dollar so the same reasons we talked about before to remain competitive. As a result they bought in all the inflation from the printed dollar. What I’m saying is by pegging the Yuan to the dollar, every time the Federal Reserve prints a Dollar they’re required to print the Yuan. They’ve had worse inflation in China than anywhere else plus the government has taken a lot of that money and misallocated it into construction so that they’ve had a massive construction and housing boom, which is bursting as we speak. When I say bursting I don’t necessarily mean it’s going to be as bad as the United States is right now, but the fact is they have lots and lots of social problems and economic problems as a result of misallocation. I think that the Chinese are going to continue to be the largest economy in the world and grow in that aspect, but they’re also going to have massive inflation that will only stop when they stop pegging the Yuan to the Dollar.
David: Alright so it’s a pretty compelling case that it’s a global issue on our hands so if you can just explain the role you expect gold and silver to play in obviously the deterioration in just the overall situation and longer term as well.
Andy: Well for the past 12 years gold and silver have been the best performing assets on earth hands down and nothing’s even close. That’s because that’s what gold and silver do; they respond to loose monetary policy and they are money. People don’t realise that living in this day and age that this is a very very brief look history where you’ve had this global fiat currency system. So basically from 1970 to 2000 there was a period where countries went off of the gold standard and thus they had very low debt and we were able to build debt without it hurting their economies. For some time it almost looked like that was a good thing, but then about ten years ago we hit the point of saturation where increasing debt first it just reduced the amount of positive impact, but now it’s actually at the point where it’s gone negative where the more debt they add the more economy goes down. I think you’re going to see an accelerating movement into physical assets as people realise that the debt is growing exponentially, and as I said earlier, fiat currencies are a Ponzi scheme, which will only make things worse and it’s going to be a global scenario. It’s been going on and it’s going to accelerate, and just think of it as going from parabolic to hyperbolic. My target for gold just based on the money printed by the Federal Reserve, just what they’ve told you, is close to $20,000 an ounce and for silver I think the gold to silver ratio had at some point returned to at least the 15 to 1 ratio, its historic average over time.
David: So it’s a scary scenario in some ways, but obviously if you’re prepared for this it’s actually an opportunity. How do people find out more about what’s going on and possibly get in touch with you?
Andy: Well if you want to subscribe to my daily blog, actually milesfranklin.com is my company and we’re one of the biggest bullion dealers in America, just go to milesfranklin.com and you could sign up for free to get my piece, and we actually have two pieces every day. You can call me on 800-822-8080 at any time.
David: Excellent. Alright thanks very much for your time today, I really appreciate it and all the best.
Andy: Great thanks Dave.