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 JPMorgan 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 the 1990s Mr. Turk invented and patented an electronic currency, GoldMoney®. You can receive his articles by subscribing at www.fgmr.com and learn about GoldMoney® electronic gold-backed currency at www.GoldMoney.com. 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 we recommend.
Frankly, James Turk is brilliant – and steady. James Turk has written several monographs on money and banking and is the co-author of The Collapse of the Dollar (2004). He kindly made time for this interview on 22 May 2013.
Prospects underlying Bitcoin
MONEYCHANGER Preparing for this interview I remembered that about 20 years ago when you were working on the patent for GoldMoney® I had an epiphany. With the Internet to propagate an alternative currency electronically, fiat currencies could be repudiated almost overnight around the world. The public would simply abandon them for sound electronic currencies, in about a year at most. Do you think that’s still possible, even after all the government attacks and restrictions on alternative money purveyors?
TURK Yes, for two reasons, Franklin. First of all, my outlook for national currencies is quite bleak. Governments around the world are just spending and spending and spending, borrowing and borrowing. You cannot borrow money to meet your operating expenses and expect to be able to do that forever. However, that’s exactly what governments are doing, and that’s why currencies are being debased so badly. Japan is probably the most egregious example at the moment with these new policies from Prime Minister Abe.
That’s a dead end street, which means that as fiat currencies become less and less reliable, people will look for alternatives, which brings up the second point, namely, the technology the Internet makes available. I’m really quite keen on this whole concept of crypto-currencies. Have you been following this at all?
MONEYCHANGER The least little bit. I noticed Bitcoin. However, whenever I see one of these currencies unfolding, the next thing I expect is a government attack on them, and that finally came on Bitcoin on 17 May. [U.S. Homeland Security shut down the Japanese company MtGox, a major Bitcoin to currency exchange, as an “unlicensed money transmitting business.” — FS]
TURK I wouldn’t say it was necessarily an attack. I think it was the government was recognizing that Bitcoin is a fact of life and is here to stay.
Why do I think that? The government provided some guidelines for people that are involved in exchanging from national currency to Bitcoin. Basically, you have to be registered as a money service business, and there have been a couple firms that were closed down by the government recently because they weren’t registered as money service businesses.
But the government basically says if you registered as a money service business, you can go ahead and make a market between a national currency and Bitcoin, but it’s an admission that Bitcoin itself cannot be closed down unless you seize everyone’s personal computer or close down the Internet. There is no Bitcoin central server or central processor. It’s distributed among all of the computers around the world that are using Bitcoin. So in that sense, Franklin, aside from the technological aspects of it, Bitcoin is almost complimentary to gold. Gold can be confiscated, and as we all know, in the 20th century, it was confiscated by Lenin, Mussolini, Hitler, and Roosevelt. Who is to say they may not try to confiscate gold again? But Bitcoin cannot be confiscated because it’s so diffusely distributed. It’s just a mathematical formula distributed on millions and millions of computers around the world, basically everybody who is using it. As it gets bigger and bigger, it’ll become even less likely that anything could be done to stop it.
MONEYCHANGER That’s the one thing that makes me nervous about it. If you’re not a mathematician, the way that Bitcoin is brought into existence is obscure and abstruse, but it is in the end unbacked. Supposedly, the number of Bitcoins that can be created are limited, but it’s still an unbacked currency. Is it possible for that to be sound, or does only the unsoundness of central bank currencies make Bitcoin possible?
TURK That’s really a good question. On one hand you have national currencies backed by nothing except government promises, and on the other Bitcoin or crypto-currencies. In the future there may be other Bitcoin currencies that are even better than the present Bitcoin. These aren’t backed by anything either, but are based on the promise of mathematical formulas. Which would you rather rely on, a government promise of some politicians, or some mathematical formula? I’d rather rely on the mathematical formula if it’s known and if it’s precise.
The math in these crypto-currencies is known and precise, and it’s secure based on current knowledge. That’s not to say in 30 or 40 years’ time some breakthrough or development might not fundamentally alter crypto currencies as they exist today, but there’s also the possibility that some future technological breakthrough might make mining gold from seawater economical, too. Every square mile of the ocean contains a ton of gold, but it’s just not technically feasible at this moment in time to extract it. So although there’s a lot of uncertainty about crypto-currencies, boy! there’s a lot of uncertainty about the dollar as well, and what’s happening there and how it will end.
MONEYCHANGER Pick your poison: which one will poison you quicker?
TURK Exactly right. I wouldn’t call necessarily Bitcoin a poison. I would call it an alternative online currency to gold. The original vision for GoldMoney® and the basis for its original patents was what we called “digital gold currency.” It was a global currency that enabled gold to circulate digitally while it remained safe and secure in the vault, and you could transfer your ownership from the payer to the payee to make payments.
The regulatory issues that we ran into with transfers from holding to holding were extremely onerous, so much so that we only offer that digital payment capability in the Isle of Jersey where we operate in the British Channel Islands. Otherwise, it was just too onerous, too expensive, and in many ways, almost impossible to comply with all the various regulations to enable this currency to circulate. Bitcoin is different. It’s very low cost, very efficient, and I think it’s a very good currency, aside from the fact that it has some complimentary aspects compared to gold.
MONEYCHANGER Such as –
TURK The fact that Bitcoin can’t be confiscated and gold can be.
MONEYCHANGER Was the United States government the leader in creating all of those hurdles and barriers to a directly transferrable electronic gold currency? They have fought against financial privacy around the world, and pushed to make it impossible to use anything that might compete with their own money. I think that’s the point: GoldMoney, Bitcoin, all of these are competitors to the U.S. dollar, to the euro, and to the yen.
TURK That’s exactly right. They are competitors, just like a physical gold coin is a competitor. In fact, it’s really the only natural monetary competitor because gold has been money for thousands of years, and you can’t create gold out of thin air as you can create dollars out of thin air. Gold has some unique advantages that people understand, aside from its 5,000-year track record.
Think about the history of currency: it evolved, and it constantly changes. In ancient times, they used cows for currency, and then eventually, lumps of precious metal. Finally, that became a coin. Sir Isaac Newton invented the milling around the coin’s edge to prevent clipping. Then in 1844 with the U.K. Bank Act, the banks created the concept of deposit currency where the units of accounts remain in the bank on a bookkeeping basis, and you write checks to pay this deposit currency from one bank to another or from a payer to the payee. Then came wire transfers, plastic cards, mobile phone applications.
But these crypto-currencies mark a fundamental change in the development of currency. As I say, there may be a better Bitcoin coming in a year’s time or two year’s time, but the concept that’s behind a crypto-currency is very interesting. I’ve been studying this quite extensively for the past several months and here’s how I compare it… Look at the Internet back in 1992 or 1993. I remember saying, “Yes, it’s very interesting, but it’s very inconvenient to use. What’s the benefit of using it?” A couple of years later, Netscape invented the navigator, the first browser, and the usefulness of the Internet changed dramatically. Bitcoin is only four years old, so in terms of its development it’s about where the Internet was in 1993 or 1994, still a very early stage. It’s hard to say how the technology will move forward and what it might mean for Bitcoin, but the formulas on which Bitcoin are based seem to be quite sound. And there is a logic to it in terms of wanting to use it for two reasons. It cannot be confiscated, and secondly, it can be a very efficient currency for online commerce, aside from the confiscation issue.
MONEYCHANGER Right. But the confiscation issue is the largest one. The U.S. government seized assets from MtGox on 17 May, and that’s typically the way the government works: seize assets and put you out of business before you can sue to recover them.
The precious metals crash in April
Let’s turn to the gold and silver markets. What happened to gold and silver on the 12th and the 15th of April? Did the bull market die then?
TURK No, it’s not the end of the bull market. By the end of this year, I expect gold to be higher than where it began the year. In 2008 when gold got whacked over a period of several months it dropped about 30 percent, and still ended the year higher that year. This year, I expect gold to still end the year higher as well.
In my view this resembles 2008. Why do I expect gold to end the year higher? All the same factors that have been causing gold to move higher already: debasing the currency, too much government debt, bank insolvency, all of these things. None of these problems has been solved. They’re still there. Whether it’s this month, next month, or the month after, who knows, but the market will again turn, recognizing that gold is a good value.
What’s happening actually now, Franklin, is quite unbelievable. For example, I checked recently with the refiners in Switzerland and other parts of Europe. They’re running backlogs of practically two months based on orders in hand. They’re running 24/7. The demand for physical metal is huge.
Here’s another example. In London, instead of the normal delivery time of two days when you’re buying a large amount of metal, let’s say a few tonnes, the delivery time has risen to four or five days. This is unprecedented. [One metric ton = 32,150.8 troy ounces — FS]
Look at the premiums in Asia in places like India or Shanghai. If somebody has physical gold and is prepared to sell it, they’re asking $40 over the so-called spot market. That implies to me that gold is in a very deep backwardation, and this is very, very bullish because gold should normally be in a contango. In other words, the spot month – gold for immediate delivery — should cost less than the futures months.
But here, we have these huge premiums which are reflecting a backwardation. We see only a small backwardation on the Comex settlement prices, but that’s only because interest rates are being manipulated down. You’re not really seeing the true backwardation that exists in the metals market.
MONEYCHANGER So there’s a backwardation in the big gold market, too, not just the retail market that I’m in, where the supply pipeline very thin and can be emptied out pretty quickly. Even in the larger market where gold is traded in 400-ounce bars deliveries are delayed?
TURK Yes, that’s correct. And on the physical side of the market, there are two elements to that. First is the fabrication issue, which would exist for kilo bars and anything smaller. There’s only so much fabrication capacity existing in the world, and that fabrication capacity is suffering a huge backlog. But aside from the fabrication issue, it is difficult to buy 400-ounce bars and actually have them delivered in a normal timeframe.
That suggests to me that the market is extremely stressed. This kind of price/supply anomaly says the market is either very, very close to or at a bottom, or maybe the bottom has already been made and prices are about ready to turn up. You can never predict when it will happen, but prices are down at a level that suggests to me that the bull market in gold is not over.
That abnormal price has occurred for a variety of different reasons. Now whether you believe that those reasons are government intervention, markets being slammed by hedge funds who are piling on the short side for a profit, the momentum players, or other reasons, it’s essentially irrelevant. What’s relevant is the tightness in the market that we’re seeing, or the stress in the physical market that suggests that prices have to go higher to bring supply and demand back into balance.
Franklin, gold has got a 5,000 year history as money. Wouldn’t it be a bit arrogant for us to pronounce that gold is no longer money? After 5,000 years, will it stop right here in our lifetime? People in Asia don’t see it that way and don’t necessarily listen to what politicians might say about gold. They just know intuitively what gold has to offer: it’s money with no counterparty risk. That is, I think, an important factor for not only people in Asia, but everybody today who wants to mitigate the risk of the financial problems that we’re seeing worldwide, over leveraged governments and insolvent banks. [“Counterparty risk” is the risk that the party on the other side of any security, bond, or debt instrument will default. Gold has no risk of default.]
MONEYCHANGER Right. You talk a lot about counterparty risk. I just saw a Chinese movie called “Empire of Silver which you might want to watch. The movie depicts a family bank trying to maintain their ability to pay their depositors’ silver accounts. This occurred during the period around the Boxer rebellion (1899 – 1901) and afterwards, from the late 1800s to the early 1900s.
After a long and dreadful experience with paper money, the Chinese had repudiated paper money about 1650 and been on silver ever since – no paper money, no central bank. After the Boxer rebellion, the government set up a central bank and started printing paper money again and inflated that into worthlessness. This same sad tale has been played out so regularly, so often in history, that I will never be able to swallow all the media and central bank propaganda that somehow or other it’s different this time.
Has Europe come any closer to solving its banking crisis? Underneath everything, the economic crises in Europe and the U.S. and Japan are not really economic but banking crises. It’s not that everybody has just stopped producing things. It’s that the debt load got too high to carry.
TURK That’s exactly right. When you undergo a financial bust like this one, the banks are a key element because they made all these loans during the good times. When the market finally turns, they recognize that a lot of those loans they made were bad. Because they’re so highly leveraged relative to the size of their capital base, the failure of those loans can wipe out their capital, as we found in the case of Cyprus, and Cyprus is not unique. Most of the European banks, including the big ones, are way too leveraged. They’ve taken on too much debt and too much leverage reaching for profit, and didn’t really consider the longer-term consequences or the amount of risk. That’s now coming home to roost.
U.S. banking system resembles Cyprus’
So to answer your question, no, the problems in Europe have not been solved. They’re as bad as they’ve been at any time in the past, and the reason is that the European economy is continuing to do poorly. And as the European economy does poorly, that means more and more bank loans will go bad. So they’re not even close to addressing the bank solvency question. Here is the amazing thing, Franklin. The way they handled the Cyprus situation — asking depositors to take the losses -— has really spooked a lot of people in a lot of European countries. That will have a very negative consequence for the European banks, and not only in the long run but maybe even in the short run. I think more banks will fail in the not too distant future.
MONEYCHANGER The United States remains in a banking crisis. Am I correct to say that Bernanke’s quantitative easing program, especially as it purchases mortgage backed securities, is aimed at reliquefying the banks?
TURK Yes, it actually has three purposes: (1) Reliquefying the banks, (2) Keeping interest rates low on the premise that maybe low interest rates can jumpstart the economy, although it’s quite clear that QE has failed if that was its objective, and (3) To keep interest rates low to make the U.S. government look solvent. Given the level of its debt, only low interest rates are keeping up the illusion that it’s really solvent.
The U.S. government’s almost $17 trillion in debt now, not including contingent liabilities. If interest rates were to go up 1 percent, the government would have to spend about $170 billion a year on top of what it is already spending, meaning the deficit will be that much worse, meaning the government would then be forced to borrow more money to cover this bigger deficit. This creates a spiral that ultimately leads to the hyperinflationary collapse. Interest rates now are well below the normal levels that would compensate people who own dollars for the risks of lending. Probably 7 or 8 percent would be a normal interest rate. Well, take 7 or 8 percent times $170 billion a year. That’s about another trillion dollars of deficit merely to meet interest rates at a normal level. This is another reason why the fed is keeping interest rates low.
The sad thing is this, Franklin: they’re destroying the capitalist economy because these low interest rates kill any incentive to save dollars. If you’re not saving money, if you’re consuming more than you’re producing, you’re ultimately crippling the backbone of the capitalist economy, the middle class. That’s where the savings come from. That’s where the production comes from.
The middle class is getting hurt very, very badly by these misguided policies that Mr. Bernanke and his colleagues in Washington, D.C., and New York are pursuing.
MONEYCHANGER Not to mention what low interest rates will do to pension funds when they try to meet their obligations.
TURK Absolutely. A lot of people have been working hard their whole life, saving up money, and thinking that they had enough to live off the yield of the interest income and do it without a lot of risk. Those plans have been blown away by this crazy zero interest rate policy central banks around the world are pursuing. They’re all doing this, Franklin, not just the U.S. They’re forcing people to search for yields, and maybe that’s one reason why the stock market is experiencing such crazy price increases.
MONEYCHANGER If anyone had told me that from September 2008 until May 2013 the Fed could add two-and-a-half trillion dollars to its balance sheet — multiply that balance sheet by 3.57 times — without hyperinflation, I probably would have called him crazy. Still, no hyperinflation has appeared and not even much price inflation. Why has no greater inflation appeared? Where has the new money gone?
TURK Two things: The inflation rate is much higher than the government says. You can look at John Williams’ www.shadowstats.com and he shows that the inflation rate is closer to 9 percent. If you look at gasoline prices, property taxes, insurance premiums, those things that really you feel it in your pocketbook, you can accept the fact that inflation is a lot higher than the government reports.
Obviously, it’s not yet hyperinflation, but I’ve been in the hyperinflationary camp, and I continue to be in the hyperinflationary camp. There are signs out there that signal hyperinflation is getting much closer. Under hyperinflation, the stock market just goes up and up and up because there is so much money that people have to do something with it. It doesn’t make sense to hold that money in a bank account or in any kind of deposit account because you can’t get enough yield to offset the inflation loss. So you look for other alternatives.
One of the first alternatives is a rising stock market. The stock market is not climbing because of good economic conditions. The economy won’t improve until the number of people employed actually increases, and that’s not happening, even though the unemployment rate is falling. There are fewer people working now than there were ten years ago for the simple reason that government is manipulating the statistics to make the picture look much brighter than it really is. They just drop people out of the workforce saying that they’ve given up and they’re permanently unemployed, and therefore, they aren’t counted in the unemployment numbers. That doesn’t really reflect the true situation.
Therefore stock markets are not soaring because of the good economy but because of the new money — Quantitative Easing. It’s an early sign that maybe hyperinflation is not that far away.
The key is that hyperinflation is not just the quantity of money increasing. It is that, but also a change in the demand for money. If people start taking the dollars that have been accumulated and spending them and the velocity of money increases [demand for dollars decreases], hyperinflation could occur very, very quickly.
Crises in confidence may strike in moments
MONEYCHANGER Right. It’s a question of confidence. The whole monetary system is a confidence game. And today that break in confidence can be propagated electronically — oh, my goodness! How fast might it go? No need to print paper bills as in Germany in 1923. The new money is slammed into circulation electronically.
The bottom line is that you don’t believe that the present central bank attempts around the world to launch a huge inflation can overcome the economic depression and banking crisis, any more than it did in Zimbabwe?
TURK That’s exactly right. Look at monetary history: printing money has never solved economic problems. Never. That’s what they’re trying to do. They’re trying to disprove history.
MONEYCHANGER But the media agrees with them. They fawn over that idea, and it’s –
TURK The media in Weimar Germany also agreed with Dr. Havenstein, the president of the Reichsbank. That’s the interesting thing. Havenstein thought he was doing the right thing, because he was following mainstream economic thought. Economists back then thought Havenstein needed to put more money into circulation to keep the economy from collapsing and to keep unemployment from rising, but it had the exact reverse effect from what the theories predicted.
Now they’re trying these same theories again, and we can see that it’s not working. QE or quantitative easing, has failed to jumpstart the economy.
Please read Part II of this interview here.
Used by permission from the May 2013 Moneychanger. Subscribe to the Moneychanger’s daily commentary by dropping your email address at Franklin’s website, the-moneychanger.com. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focuses on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$149 a year. Franklin is a trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.