John Rubino: We Created The Conditions For Catastrophic Failure
John Rubino published his book in 2004 together with James Turk from GoldMoney. The main theme of the book was that governments in the US lost control over their spending and borrowing, which would ultimately result in some sort of catastrophic crisis. Debt accumulation would continue until some kind of crisis, internally or globally, would force to stop this trend. Most of the predictions have come true, but John Rubino stresses that the 2008 crisis was not the final collapse.He is convinced that the big collapse is still ahead of us.
The same trend was forecasted in the rest of the world and up until now it playing out as expected. Worldwide debt stands at $220 trillion, a figure that should be compared with the global GDP of $62 trillion. That’s a debt to GDP ratio of 350%.
The authors also predicted that money would flow out of paper assets into gold and silver as debt creation gained momentum and went public. It is important to note that gold and silver are the only forms of money that governments cannot debase by creating additional units of it.
An interesting topic is treasury bonds. They are a function of a general flight to safety. The world is still looking at US dollar denominated assets as safe havens even when the US government is taking on an increasing amount of debt. However, it is mandatory to understand that the purchasers in the treasury market are mostly central banks themselves. Their intention is to prop up fiat currencies by buying sovereign debt. What this really means is that governments are taking on too much debt and turning it into currency to cover their debt. Most people don’t see this process; it also remains underexposed in mainstream media. This process, historically, is the final stage of a country destroying its currency. Unfortunately, it is taking place on a global scale, so it will undoubtedly result in an implosion of the whole fiat currency concept.
Where do we stand today? John Rubino points to a number of important statistics since 2009 (US only) to validate his thesis and forecast of a final collapse:
- The number of people with jobs (people actually working) is up with only 2% while the number of people on disability is up with 15%.
- People living on food stamps are up 44%, standing at 46 million currently.
- One in four households lives on less than $25,000 a year.
- 2012 was the 4th consecutive year in which the US ran trillion dollar deficits.
- Total debt has gone from 1.5 times GDP in 1980 to 3.5 times GDP today. This means that the US has $175,000 of debts per citizen or $700,000 per family, calculated with the officially reported debt. When unfunded liabilities are including in the calculation (Medicare, Medicaid, social security …, which all are equally debt), the debt per family stands at $2 million.
These trends are playing out as forecasted. However, in terms of timing things are unfolded at a much slower pace than expected. The path to the final collapse has been slowed down by two factors:
- Human nature. It takes a long time for people to change their minds on something. Our global society still believes that paper currencies still hold their value over time as they keep on accumulating and saving fiat based money.
- The printing press. This is a phenomenal tool for fooling people. Governments are able to create as much currency as they want. There are limitations, however. “Yes they can” set interest rates at levels that signal to the market that economic conditions are fine. Even when underlying conditions are deteriorating, as they are today as shown in the above figures, lending at a very low interest rate gives the impression of a good creditworthiness.
We are in a government debt / bond bubble. Markets and people tend to go with the flow during a bubble. However, history has shown that, as awareness changes, people move to the other side extremely fast. We saw this in the last two bubbles. One year before the tech stock bubble imploded, everyone expected the future to be better than the past, but in an eye blink the world was staring at a global depression. The same happened with the housing boom in 2008: everyone was convinced that housing prices could only go up in 2007, while one year later the whole global financial system was ready to collapse. Today everyone believes that government bonds can only go up and interest rates will remain low. It is unknown when exactly the coming shift will take place, but it will for sure happen as underlying conditions are deteriorating (proven by the above figures). An external shock or the weight of debt will crash our unsound system; the world will wake up from a dream … again!
How the next collapse will play out
The structure of our financial system is a fascinating topic to explore. It gives us insights to describe the anatomy of the coming collapse. The best analytical framework explaining today’s system is described in “Currency wars” (by Jim Rickards, published in 2011). The author explains how complexity in our system has risen to the point where it shows unique characteristics, the most important one being that the propensity for catastrophic failure is an exponential function of complexity. In simple terms, it means that, when the system doubles in size, the instability goes up tenfold. It means as well that it requires an exponential amount of energy to keep the system growing. The framework is revolutionary in that it perfectly describes today’s reality. Today, governments need more and more debt to generate the same amount of GDP. We need to borrow more to only stay in place BUT at the cost of a huge (almost instantaneous) collapse of the system.
The longer this process goes on, the faster the collapse will play out when it hist. Suppose the final collapse strikes in 2016. By then, the system will have grown so complex, and the amounts of debt will be so huge that there will be no way to control it; the crash will take a life on its own.
The exponential growth of derivatives play a crucial role in our financial system. In fact, they ARE the complexity story. What most people do not realize is that banks report their net derivatives position (their long versus short positions). That position is shown as their risk. However, the gross position is the relevant number. To put things into perspective, the earlier mentioned $62 trillion global GDP should be compared with the gross derivatives figure which stands close to a quadrillion dollar of notional value.
John Rubino believes that a derivatives meltdown will play out almost instantaneously. When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.
It is really impossible to forecast the exact trigger that will cause the bubble to burst. Jim Rickards uses the analogy of the avalanche which also has no way to determine in advance which snow flake exactly will become the final trigger. There simply will be ” a ” snow flake that will take all the rest with it. What we clearly see today is that the fixed income (bond) market is the epicenter of the coming shock. A lot of derivatives are hedges against bond portfolios. So the crack could start with trouble in treasury bond markets for example as US interest rates start rising. As a reaction, he Fed could start buying all bonds that the US government is issuing which would spook the markets instead of calm them down. This could set off a chain reaction.
Complex systems do not allow to determine things ahead of time. One of the few things we know, however, is that the mother of all bubbles will burst and that we created the conditions for this catastrophic failure.
Trends for 2013 & potential triggers for a trust crisis
John Rubino does not expect the final collapse to take place in 2013, although the following trends could spark a future trigger.
(1) The erosion of the Petrodollar position. Oil producing countries start dealing their oil in other currencies with huge purchasers (think Russia, China, Brazil), resulting in a lower demand for dollars. If central banks decrease their demand for US dollars, it would lower the value of the dollar and make inflation and interest rates explode. We saw the first signs of this in 2012, where oil began trading for gold.
(2) Expansion of the police state. The response to terrorism and instability is an increased control by the US government (think internet monitoring, surveillance systems, etc). It creates conditions for domestic turbulence via civil unrest, resulting in an outflow of money towards other countries. The acceleration of this trend should be visible in 2013.
(3) State and local pensions are imploding. States and localities cannot pay off their obligations anymore and could go bankrupt in 2013, resulting in a tanking municipal bond market.
(4) Threat of cyber war and cyber terrorism. The internet being an insecure system, the next future trade war could result in a breakdown of the electronic system, which could spook the markets tremendously.
Gold & Silver – Store of safety and protection of wealth
“Precious metals are where we hide when we do not trust the rest of the world,” says John Rubino. When things start really spinning sin out of control, everything could potentially be destroyed, BUT the only things that cannot be destroyed are gold, silver, and probably the mining stocks, among other tangible assets. With a limited supply and availability, a massive demand for precious metals will translate into exponentially rising prices.
The ongoing destruction of fiat currencies (see first paragraphs) will become increasingly apparent in 2013. An increasing number of investors will understand that precious metals are holding value while other assets are not. Central banks are already moving out of currency, into gold. China as the best example imported 800 tons of gold in 2012. To put that figure into perspective: their official reserves were 1,000 tons. The same trend is taking place in other countries (although on a smaller scale) like, for example, Russia, Brazil and several Asian countries. This demand only will be a main driver for higher prices in 2013.
Downwards suppression of gold and silver prices (“manipulation”) can be the only explanation for some strange price action in 2012 (and before). In December, for instance, huge amounts of short selling took place during the most thinly traded moments during overnight trading sessions. That is not how a market participant closes out a large futures position because all the subsequent trades are happening at a lower price. Commercial banks, together with Western central banks, actively try to depress gold and silver prices to validate the existence of their paper based, fiat based currencies. It has resulted in a controlled price rise, not an exponential one.
People and investors need to look at it as an opportunity. A slow and steady bull market makes it possible to accumulate the metals in a steady way. At the start of 2013, the fundamentals justify much higher gold and silver prices.