Introduction: James has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. Beginning his career with The Chase Manhattan Bank (now JP Morgan Chase), 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, a position he held until resigning in 1987. James Turk has written several monographs on money and banking and is the co-author of The Coming Collapse of the Dollar and, in 2013, The Money Bubble: What To Do Before It Pops. He is also the founder of GoldMoney, a convenient and economical way to buy and sell gold online.
Anthony Wile: Hi there. Please update our readers on your activities since we last interviewed you, in April 2014.
James Turk: Even though I retired as chairman of GoldMoney back in 2013, I've been keeping busy. I remain a director on the GoldMoney board, and still speak occasionally at conferences. But for most of the past year I've been developing a new company, which will launch this March. It's still in the precious metal area, which is of course my area of expertise, and it is complimentary to the range of services and products that GoldMoney already provides. I would like to keep it under wraps until the launch, but anyone who is interested to hear about my new company when it is ready can follow me on Twitter, @fgmr.
Anthony Wile: You seem more pessimistic these days. Is it because central bank money printing is continuing at a faster pace than ever?
James Turk: The prospect for national currencies continues to deteriorate, and I am indeed more pessimistic about their prospects as well as the economic outlook. But the real underlying reason for my pessimism is the uninterrupted growth in financial repression that politicians and central bankers are forcing upon us. These imperious authoritarians are doing everything they can – including abusing their power – to keep their welfare states afloat, even though the present system they are trying to perpetuate is unsustainable.
What's worse, it is a system that encourages reliance on the State, rather than one's own efforts. As a consequence, taxpayers and tax-eaters are increasingly at odds, which is laying the groundwork for increasing hostility and civil unrest. The isolated outbreaks of violence in recent years are an omen of what we can expect, but demonstrations and other protests will become less peaceful and more violent because frustrations will grow as economic activity continues to deteriorate.
Anthony Wile: Is Europe really deflating? We don't think so given the money being printed.
James Turk: ECB is shrinking its balance sheet, but the measures of the quantity of euros in circulation are expanding because banks are monetizing government debt. So there are two forces at work here. The prices of some products are falling, like gasoline. But these drops are due to slackening demand from a weak economy and overstretched consumers trying to balance debt loads, and are not a deflationary sign that the purchasing power of currency is increasing. At the same time, the underlying inflation rate is eroding the purchasing power of the euro. So even though some prices are declining, the cost of living continues to rise, and many of these costs are not calculated in government Consumer Price Indices, which therefore understate the difficulty in maintaining one's standard of living in today's environment that is dominated by central bank financial repression. In other words, incomes are not rising to keep up with the cost of living. Savers and retirees, of course, are really feeling the pinch because of the zero interest policy being pursued by the ECB.
Anthony Wile: We think the deflation talk is an excuse to justify asset expansion.
James Turk: Yes, I agree. It is also an excuse to increase government power over markets and the economy. And the consequence of that is more control of people, which is the ultimate goal of all authoritarians.
Anthony Wile: Are stock markets headed for a reprise of 1987 or 2009 when averages simply collapsed?
James Turk: It depends on what central banks do. Stock markets around the world are not rising because of good economic activity or bright prospects for the future. They are rising because the money central banks are printing has to go somewhere, and in the low interest rate environment of recent years, this money is going into the stock market. But if the central banks engineer a 1930s type deflation in which the quantity of money actually contracts, stocks will drop from current levels.
Anthony Wile: Are there asset bubbles forming in the West, especially in the US and Britain?
James Turk: Yes, without any doubt. Bubbles imply overvaluation, and overvalued assets are easy to spot these days. They include stock markets, London real estate, classic cars, paintings and many other collectibles. These assets are in a bubble, but their prices may continue to climb. After all, where else do you want to put your money, given the low interest rates paid by banks? So as long as central banks continue with their financial repression by forcing interest rates to artificially low levels, expect the price of these assets to continue to rise, while at the same time, the purchasing power of national currencies continue to erode.
Anthony Wile: Last time, we spoke about a new book you had co-authored with John Rubino, called The Money Bubble: What To Do Before It Pops (DollarCollapse Press). When will the bubble pop, do you think? You've been expecting the collapse for a while now.
James Turk: In our first book, The Coming Collapse of the Dollar, which was published in 2004, John and I said to buy gold and bet against the housing bubble. That may not have been a popular view at the time, but the logic of our argument soon thereafter began to make sense. As it turned out, we now know that those were two of the best investment strategies of the decade. Maybe John and I are early again this time, and if so, the good news is that it does give people time to prepare when the mountain of debt comes tumbling down and lays bare the inherent fragility of fiat currencies, the insolvency of most banks and the hollow promises of politicians and bureaucrats that we all know cannot possibly be fulfilled.
Anthony Wile: You've made your reputation with gold and gold stocks. Where is gold headed, and what about silver?
James Turk: As long as central banks continue to debase national currencies, the price of gold and silver will continue to climb higher. It is as certain as night follows day. There will be, of course, price fluctuations both up and down, but gold's 5,000 history as money did not end in 1971 when President Nixon asked then Treasury Secretary John Connelly to "suspend temporarily" the dollar's convertibility into gold. Four decades seems a long time for a temporary suspension, but it is just a fraction of 5,000 years.
So gold is still money, but it just doesn't circulate a lot as currency because of government edicts. These edicts though have not changed the essential nature of gold or its monetary role. This point can be illustrated with an example. An ounce of gold still purchases the same amount of crude oil it did in 1950. So gold clearly fulfills one of the main functions of money – it preserves purchasing power over long periods of time.
Silver is a special case. I see it as a gold-substitute. In other words, silver preserves purchasing power, too. Growing up in Ohio in the 1950s, my parents could pull into a gas station and fill the family car with two silver dollars. Two dollars today don't even buy a gallon of gas, but the silver in two silver dollars will still fill up the family car. However, silver is volatile compared to gold.
Historically it usually took 16 ounces of silver to exchange for one ounce of gold. It now takes 72 ounces of silver, signaling to me that silver is very undervalued. Thus, I expect that as precious metal prices rise as a result of central bank mismanagement of national currencies, silver will rise faster than gold so that at some point in the future, their ratio will again approach the historical norm of 16-to-1.
Anthony Wile: Is the dollar headed down because of all the money printing? It seems surprisingly resilient.
James Turk: As one wag said, the dollar is the best-looking horse in the glue factory. It is only strong because the alternatives look even worse. That is not, of course, a reason to be long the dollar, but institutional investors have to put their money somewhere. So the dollar is benefiting from the need to hold a currency for liquidity as well to be able to transact in commerce and financial markets. But it is a knee-jerk reaction, rather than one that is logical and thought through.
Importantly, don't expect dollar strength to continue. That has been a losing bet for decades, and will continue to be a losing bet until the US returns to constitutional money, which of course is gold and silver. Sadly, I don't see that event to be happening anytime soon. Instead, the US looks ready to re-learn what the framers experienced. After the continental – the country's first currency – collapsed, the framers set out to create a "more perfect Union." A key element to achieve that objective was to enshrine sound money into the Constitution, and so it was more or less until 1971.
Anthony Wile: Janet Yellen says the US is in recovery. Your thoughts?
James Turk: There are some parts of the economy that are doing better than in recent years, but it is spotty and not countrywide. So she is just cheerleading, which is what we used to call propaganda. There are more unemployed people now than in 2007 before the financial crash, and more people in recent months have been joining the food stamp program than getting jobs. All signs indicate that the economy is barely moving along, and that's true for much of the world.
Anthony Wile: She claims she will raise rates but you said she would not. So far you're on the right track. How did you know?
James Turk: The Fed can't raise rates because the US government cannot afford to pay a fair rate of interest on its mountain of debt, which now stands at a mind-boggling $18.1 trillion – and it keeps growing. It is useful to look at the relative size of this towering mountain of debt compared to the federal government's annual revenue, which is about $3 trillion. So consider what would happen if the federal government began paying a reasonable interest rate, say 5%, which is 5% more than holders of T-bills are now earning. It would need to pay 5% more on $18.1 trillion, which is $900 billion per year of additional interest expense, which would increase the federal deficit and cause the federal government to borrow even more money. That borrowing would raise interest rates even further because it would highlight that the federal government is overleveraged and cannot possibly repay its debts.
What I am describing here, of course, is how currencies end up in a hyper-inflationary spiral and are ultimately destroyed as their purchasing power evaporates; namely, central banks keep turning government debt into currency. Since the end of the Second World War dozens of currencies have been destroyed this way, and the dollar is heading in that direction. Sooner or later it will get there and head over the cliff, just like what happened to the continental.
Anthony Wile: The head of Gallup just came out and said the employment numbers were phony. Your reaction?
James Turk: I agree. The unemployment report is just one of the many lies coming out of Washington in recent decades. These lies transcend partisan politics. In The Money Bubble, John and I wrote about the distortions and misleading reporting coming from politicians and bureaucrats, whose vested interest is not in the truth, but perpetuating a system that benefits them.
Anthony Wile: You called Obamacare a boondoggle last time we spoke. Still think so? Further thoughts?
James Turk: Yes, I've yet to see a government program that is cost effective compared to what can be delivered by the private sector. What's worse, to be enforced the program requires yet more government coercion.
Anthony Wile: What about Europe? What's your feeling about a Grexit?
James Turk: Greece is following the path taken by Cyprus, which remains an economic basket case. The ECB stopped making loans to Greek banks that were using Greek government debt as collateral, just like the ECB did to Cypriot banks. The next step in Cyprus was cutting its access to Emergency Liquidity Assistance, by which banks in the eurozone can borrow from the ECB to keep liquid and therefore keep their doors open. The ELA was the only lifeline keeping the banks in Cyprus afloat. When the ECB gets around to pulling that plug on Greece, the Greek banks will fail, just like they did in Cyprus.
That banking collapse, of course, led to the infamous "bail-in," whereby depositors in Cypriot banks lost their money. The ECB took their money to repay the loans the banks had borrowed from the ECB. Greece is headed in the same direction and is resting on a knife-edge. The Greek government is trying to extend its current bailout program for another four months. A number of observers have claimed that Greek officials are doing this to string along the ECB so that Greeks can withdraw more money as their deposits mature. The Greek banks – like many banks around the globe – are insolvent and are only being kept afloat by the ELA. As an aside, it is important to note that an Austrian bank failed this past weekend, and initial announcements by the government there are suggesting that there will be a bail-in, like occurred in Cyprus.
Anthony Wile: Last time we spoke you claimed China was unstable economically. What are your thoughts on that now?
James Turk: The problems in China are becoming increasingly apparent, particularly the huge sword hanging over it, which of course is the real estate sector. In this respect, China looks like Ireland or Spain back in 2007 before the real estate sector in those countries collapsed. Actually, real estate in China is already collapsing. Housing prices have been falling for months, and in January recorded the largest monthly decline so far. There is so much overbuilt real estate and speculative loans based on real estate, it is reasonable to expect that China will repeat what happened in Spain and Ireland.
Anthony Wile: China has been buying gold. So has Russia. How has this affected the gold market?
James Turk: China and Russia have been buying physical gold, and it is indeed impacting the gold market. That gold is in backwardation is evidence that the prices of paper-gold and physical gold are separating. They are, of course, fundamentally different, with the former being a financial asset with counterparty risk and the latter a tangible asset without counterparty risk, which has made physical gold a reliable safe-haven for millennia.
Anthony Wile: Tell us about gold backwardation. Is it still in effect?
James Turk: Yes, but I can't prove it. Just like the London Bullion Market Association stopped reporting forward rates in silver two years ago, it has now stopped reporting them for gold, too. Thus, the only way to see the backwardation is to get a sampling of quotes from banks that deal in both the spot and forward market, and then compare the prices. Right now spot gold is above April, and spot silver is above May. So both metals are backwardated, which is bullish.
Anthony Wile: You recommended certain investments last time. "Tangible assets like farmland, timberland, oil wells, buildings used productively and, of course, precious metals instead of financial assets like bank accounts and bonds. Avoid those assets denominated in national currencies." Any changes?
James Turk: I still recommend the same strategy. The key to successful portfolio management is accumulating undervalued assets and selling overvalued ones. And tangible assets remain undervalued while financial assets remain overvalued. Stocks are a special case because some of them are a near-tangible.
For example, if you own a company involved in agriculture, mining, oil or other commodities, you essentially own an equity interest in an enterprise engaged in and creating wealth from tangible assets. I expect these stocks to continue to do well as central banks further debase national currencies. But stocks of banks and companies involved in finance will not do well, but these classifications can be tricky. For example, Apple has $180 billion of cash, which is more liquidity than many of the biggest banks in the world. So it is a financial stock? Probably not, but it does highlight the point I am making. Stocks require a lot of analysis before you buy them, and they also require a lot of analysis on an ongoing basis as circumstances change.
Anthony Wile: How about cannabis businesses? Are you familiar with that sector? Any interest?
James Turk: I'm not familiar with the sector or the business opportunities, but from what I read in the papers, it is a product in demand. And one that is likely to grow.
Anthony Wile: A lot of the changes in the world are the result of what we call the Internet Reformation that has allowed people to understand a lot more about their world than they used to. Where do you stand on Internet regulation and net neutrality?
James Turk: There are a couple of points to make here. First, I take the view of the framers of the Constitution, which was – if you use it, you pay for it. So for example, toll roads were perhaps the most obvious example of this principle in early American history. Second, I am in favor of letting the market regulate itself. Government regulation doesn't work; it just distorts. Banks are among the most regulated institutions today, yet they continue to fail, and look at all the banking scandals that have occurred. Imagine where we would be today if telephones were still a regulated monopoly controlled by government bureaucrats.
Anthony Wile: Give us a short strategic summation of global issues. How will Ukraine tensions end? Will Putin be forced from office?
James Turk: It's likely to get messy. Look at it this way. Assume Venezuela formed a South Atlantic Treaty Organization (SATO) that was aimed at defending it and other treaty signatories from Yankee aggression. Then assume SATO started adding new members by working its way north toward the Yankee aggressors, but was not satisfied by stopping at the Rio Grande. So SATO sends agents into Texas to disrupt the status quo and overthrow government there, causing the elected governor to flee for his life. SATO then arranges for a new government favorable to it to take control, and then begin clamoring for Texas to join SATO. So how would D.C. respond? They would no doubt show less restraint than Putin is showing at this provocation.
I like to recall President Eisenhower's farewell address to the nation in which he warned about the "military-industrial complex." That industry makes a lot of money by the US fighting wars all around the globe, so there are probably many gleeful senior people in that industry getting their pockets lined from stock options and other schemes as they see the conflict in Ukraine building.
Anthony Wile: How about Syria … Will the current regime fall?
James Turk: And bring peace to the area, meaning the US arms industry will lose a lot of clients? That's not likely to happen.
Anthony Wile: What's going on with Mexican immigration and the US – is the continent being primed for a North American Union?
James Turk: Yes, sovereignty is under threat in many parts of the world as unelected supranational bodies increase control. That is a worrisome trend. Notice how the people running these bodies paint a nation's sovereignty as a threat to peace and freedom. Yet the truth is that it is these bodies that are telling people how to live their lives that is the real threat to peace and individual freedom. Look at what the IMF is doing to Greece, or what it did to Indonesia a few years back or any other of the dozens of countries on which it imposed its will, regardless of whether or not it was in the best interest of people living in those countries.
Anthony Wile: We get the feeling the West is behind a number of these provocations and wars to distract the public from the endless recession at home. Your take?
James Turk: I don't know for a fact whether that is the case today, but history shows that is a plausible observation.
Anthony Wile: Is it possible the world is being primed for even more internationalization including global governance and a global currency?
James Turk: Yes, authoritarians and other sociopaths seek one thing above all else – control. Some are satisfied with just dominating the local PTA, but others want to dominate the world. It is just a matter of degree, but these people exist. And they will do whatever they can to smother the rights of others, which recurs time and again throughout history. In this regard, the medieval kings of England, for example, had the same goal as the neocons running D.C. today – power. Once they have that sought after power, they can exercise control over people, which is their ultimate aim. The key to their power always rests on the same base, namely, control of money, which is why a global currency is so important to them.
Fortunately, there is a wonderful global currency called gold. Its use as currency limited the expansion of the State and thereby allowed human freedom to advance. That in turn spurred production and savings, which are the backbone of our capitalist society that has enabled humankind to continue raising our standard of living. The problem now is that capitalism is under threat, and the obvious evidence is the downward pressure on living standards. Wealth is not being created today at anywhere near the rate prior to 1971.
Anthony Wile: Concluding thoughts?
James Turk: I will soon be 68 years old, so I have seen a lot in my lifetime. I have also been an avid reader, so in addition to learning a lot through experience, I have also learned a lot from history, which explains why I am an optimist. Despite the problems, disasters and setbacks, humans flourish. We don't move forward in a straight line, but rising standards of living are clear evidence that we do move forward, despite the setbacks – the recessions and depressions – that recur throughout history. We just have to be prepared to avoid getting caught in these events. It requires careful planning for the future so that each of us and our families are protected come what may. And if history is any guide, one of the best ways to be prepared for an uncertain future is to own physical gold.
Anthony Wile: Thanks for your time, once again.
What's nice about talking to James Turk is how reasonable he seems. His analysis – not exactly mainstream – is arrived at via a kind of logic that he is glad to explain. He's not ideological; he's practical. He comes across as someone who sees a certain kind of reality and is happy to explain it.
Perhaps the nub of the interview can be found in this Q and A …
Q: You recommended certain investments last time. "Tangible assets like farmland, timberland, oil wells, buildings used productively and, of course, precious metals instead of financial assets like bank accounts and bonds. Avoid those assets denominated in national currencies." Any changes?
A: I still recommend the same strategy. The key to successful portfolio management is accumulating undervalued assets and selling overvalued ones. And tangible assets remain undervalued while financial assets remain overvalued. Stocks are a special case because some of them are a near-tangible.
A lot of logic there. Accumulate undervalued assets and sell overvalued ones. Of course, overvalued may be in the eye of the beholder. But generally speaking, we can't argue with the idea that paper assets after six years of central bank reflation are probably over-expanded. As for gold, given that it peaked at nearly US$2000, we figure at some point it could head back up.
Stocks could keep going up for a while longer as well, depending on how much additional liquidity central banks dump into the world's economy. We note they don't seem inclined to stop printing.
Whatever asset decisions you make, Turk's approach is probably worth emulating. Try to remove emotion and approach the decision reasonably and realistically. That probably goes for life decisions as well as investment ones.