An Interview With Richard Maybury
At the AIA Advocate we have investment analysts, practical economists, and other people with unsavory occupations. But there isn't a political expert among us. Since the landslide election of Barack Obama is likely to have a big impact on Wall Street, we decided to seek an outside opinion about what to expect.
Fortunately, we didn't need to look very far to find the guidance we need. No one has done as much to track the impact of politics on Wall Street as Richard Maybury, the editor of the monthly newsletter Early Warning Report. www.earlywarningreport.com This week we spent about an hour picking Mr. Maybury's brain about how the markets are likely to adjust to the policies of the new administration.
AIA Advocate: Now that the election is over, nearly everyone wants to know how President Barack Obama will affect the economy and our investments.
Richard Maybury: Every person who wins the presidency is a blank slate. Until he enters the Oval Office and begins making decisions, all we know about him is that he said and did what was necessary to become president. His voting record and campaign promises may reflect what he actually believes, or they may all have been nothing but clever campaign slogans designed to attract voters.
AIA Advocate: But we must know something about him that can give us an idea of what's coming.
Richard Maybury: What we do know is that politicians rarely act, they mostly just react, and Obama will be the textbook example. He comes into office with a war that is fast growing worse in the Middle East, and an economic crisis that has the potential to become a very severe recession. Events will steer Obama a lot more than Obama will steer events.
AIA Advocate: You've written a great deal about the psychology of baby boomers as a clue to the behavior of top officials.
Richard Maybury: Good point. Obama is a boomer, and I think an understanding of the boomers is a valuable tool for seeing what is coming. Boomers were raised in government-controlled schools and colleges where they were taught Keynesian and socialist economics. Neither Keynesianism nor socialism contains the concept of malinvestment, meaning the distortions caused by the government injecting massive money into the economy. These two forces, the injection effect and malinvestment, are the foundation of the economic crisis, and I've never heard Mr. Obama or his advisors say anything about them.
AIA Advocate: What problems do they cause?
Richard Maybury: Money responds to the law of supply and demand just as everything else does. When the supply of dollars goes up, the value of each individual dollar falls, and prices rise to compensate. That's inflation. Inflation isn't rising prices. Inflating the money supply causes rising prices.
As prices rise, people become poorer and they demand relief. The politicians stop injecting money, people have less to spend, and business slows down, often causing a recession. The shakeout can be very painful, depending on how long the inflation has lasted and how many new dollars have been injected into the economy.
AIA Advocate: So how much money has the government created, and why?
Richard Maybury: The government has only two ways to finance its spending — taxes, and printing money. Seven years ago the White House and Congress decided to finance the war by printing dollars instead of raising taxes. According to the St. Louis Federal Reserve's MZM measure of money supply, the number of dollars circulating in the US on 9-11 was $5.3 trillion, and now it's $8.7 trillion.
AIA Advocate: So, you are saying, a recession is the correction period following an inflation, and that's where we are now. Obama is faced with a mountain of bad investments that are being shaken out. How bad to do you think the shakeout will be?
Richard Maybury: I think it's barely begun. What is generally overlooked is the fact that the Federal Reserve has been inflating the money supply almost without pause ever since the Fed was created 94 years ago. So, underpinning the most recent seven years of injections and malinvestment, we have the residual from the previous 87 years.
AIA Advocate: And all those bad investments must be corrected?
Richard Maybury: Yes, and the severity of this shakeout is so great that I think the extent of the bad investments is unimaginable.
AIA Advocate: Is there anything that Mr. Obama can do about it?
Richard Maybury: Remember that I said events will control Obama much more than Obama will control events. Ever since the Great Depression, the way the federal government has dealt with shakeouts has been by re-inflating. They halt recessions by expanding the money supply further, which stops the shakeout. But that leaves a lot of bad investments in place, and it also creates a lot more. Of course, the so-called rescue pushes the day of reckoning into the future.
AIA Advocate: And you think Obama will do the same?
Richard Maybury: Obama, Congress and the Federal Reserve, yes. In America's schools and colleges, the whole population has been taught that the government has the duty to create prosperity. If the government, led by Obama, doesn't inflate us out of this, he will be in very deep trouble.
AIA Advocate: What do you think the investment ramifications will be?
Richard Maybury: Wonderful, amazing, fantastic.
AIA Advocate: Are you being sarcastic?
Richard Maybury: Not at all. I think a whole new crop of multi-millionaires is about to be grown. The reason is, the dollar is the world's reserve currency, meaning the preferred medium for trade and savings. Trillions of dollars are held in foreign hands, and these foreigners absolutely do not want any further decline in the value of their dollars. If Washington inflates heavily to stop the recession, the foreigners will dump their dollars, possibly triggering a global monetary crisis in which the dollar would be completely rejected, becoming worthless. To prevent this, Washington must give the dollar some kind of backing that will make it trusted and desirable.
AIA Advocate: That backing will be?
Richard Maybury: We cannot be sure, but I think it's safe to say it will be something that cannot be created on a printing press. Most likely it will be a basket of globally traded raw materials, perhaps copper, gold, silver, lumber, wheat, tin, iron, oil, and a lot of other things. Or, perhaps just one thing, gold.
AIA Advocate: Why gold?
Richard Maybury: Until the 1970s, when this insane experiment with the paper US dollar as the reserve currency began, gold had been valuable for six thousand years. It worked so well it was the only reserve currency the world had ever known. There is nothing else so trusted. I don't know exactly what Washington will use, but I think gold will be in the mix.
AIA Advocate: At what price?
Richard Maybury: It's hard to predict the behavior of government officials, but I think $3,000 per ounce at a minimum is a good guess.
AIA Advocate: So at that price, you could take 3,000 paper dollars to the Treasury, or a bank, and get a one-ounce gold coin?
Richard Maybury: Yes. Or, you might receive a mix of valuable stuff, perhaps gold, silver, platinum and copper that would be equivalent to $3,000 gold.
AIA Advocate: Why $3,000?
Richard Maybury: The Treasury won't want a run on its gold supply, so it may choose a higher price, maybe $4,000 or $5,000. They want people to have a reason to trust their dollars, but not to rush to the Treasury and swap them for gold. The higher the gold price, the less likely the run.
AIA Advocate: Why not tie the dollar to gold at its current $712 price?
Richard Maybury: Because then US officials would not be able to inflate the money supply enough to stop the recession, and we'd likely slide into a much worse recession or possibly a depression. If they injected vast amounts of dollars but kept the gold price under, say, $2,000, the whole world would rush to Fort Knox and empty the place out, because they'd know there isn't enough US gold to redeem all those dollars. The more dollars investors need to buy an ounce of gold, the less likely they'll demand the gold.
AIA Advocates: How about other investments?
Richard Maybury: The reason I believe the politicians will tie the dollar to gold or to a basket of raw materials is to instill confidence in the dollar while they are printing new oceans of them. This new inflation will drive up prices of practically everything. With prices of virtually all investments down sharply now, I see this as a historic bargain hunting opportunity.
AIA Advocate: So you think we've seen the bottom?
Richard Maybury: Impossible to say. Maybe, maybe not. But I am reasonably confident that almost any price you pay today, for anything, will look mighty low three years from now, because under Mr. Obama, a mammoth inflation is coming. The baby boomers are running the country now, and nearly all of them were steeped in Keynesian and socialist economics. How could the political pressures on the president lead to anything other than a severe inflation? As I said, a lot of new multi-millionaires will be minted from this.
AIA Advocate: Thank you, Mr. Maybury. Now we know how you got your reputation for being a frightening optimist. In the future we will check back to see how your predictions are turning out.
Richard Maybury: I'll look forward to it, and I hope that by then all your readers have become fabulously wealthy.