Here is a recent inter­view with John Embry for the Hera Research Newlet­ter (HRN):

HRN: Thank you for join­ing us today. Let’s talk about gold stocks.

John Embry: Gold stocks rep­re­sent a tremen­dous val­ue in rela­tion to the price of gold and to the fun­da­men­tals of the sec­tor. There has been tremen­dous short­ing activ­i­ty by hedge funds and, as a result, ded­i­cat­ed gold funds have expe­ri­enced redemp­tions. Retail investors, who are nat­ur­al buy­ers of these stocks, have been anni­hi­lat­ed by the price action. This has cre­at­ed one of the finest oppor­tu­ni­ties, if not the finest oppor­tu­ni­ty, that I have ever seen.

HRN: Do you have a short term price tar­get?

John Embry: I don’t look at short term price charts for gold. In a mar­ket as heav­i­ly inter­fered with as this one, charts can be made to look any way you want in the short run. As I see it, if you don’t like gold at these prices, then you must like cur­ren­cies. My part­ner Eric Sprott often says, the U.S. dol­lar is the best look­ing horse in the glue fac­to­ry. If the U.S. dol­lar is the world’s strongest cur­ren­cy, that’s the best endorse­ment for gold that I can think of.

HRN: Do you believe that cur­ren­cies are los­ing val­ue?

John Embry: The fact is that economies are slow­ly melt­ing down. The prob­lem is exces­sive debt in almost every cor­ner of the world. The only way to deal with the debt is through aggres­sive growth, but fab­ri­cat­ing growth through more debt won’t work. The idea that you can get the econ­o­my to move for­ward by cre­at­ing even more debt just does­n’t wash. We can’t ser­vice the exist­ing debt, even at arti­fi­cial­ly low inter­est rates. I don’t see any easy way out. We have to get the exces­sive debt out of the finan­cial sys­tem. Either pol­i­cy mak­ers are going to cre­ate mount­ing infla­tion or there will be a defla­tion­ary debt col­lapse.

HRN: Europe seems to be a case in point. Do you think the Euro will break up?

John Embry: The Euro­crats who con­struct­ed the cur­ren­cy aren’t going to give it up eas­i­ly. The key is how much the Ger­mans are going to go along with. They real­ize that there’s a huge loss for them if the Euro falls apart. I would­n’t want to be in Ger­man Chan­cel­lor Angela Merkel’s shoes. Ger­many is trapped in the Euro because it relies on exports and Ger­man banks hold the debt of oth­er Euro­pean coun­tries. Despite the bailouts and the infla­tion­ary poli­cies of the Euro­pean Cen­tral Bank (ECB), Ger­many does­n’t have much choice.

HRN: How can Euro­pean gov­ern­ments solve their debt prob­lems?

John Embry: The prob­lem is that it would take a hor­rif­ic debt col­lapse to set the stage for future expan­sion. There is no politi­cian on earth that wants that to hap­pen on their watch. Con­se­quent­ly, pol­i­cy mak­ers will resist defla­tion and we’re going down the oppo­site road, which means mount­ing infla­tion or pos­si­bly hyper­in­fla­tion. I don’t think politi­cians will change the sys­tem. I think the sys­tem will change the politi­cians.

HRN: Can the econ­o­my recov­er in a high infla­tion sce­nario?

John Embry: Cre­at­ing even more debt is not going to work. To me, high infla­tion is the most cor­ro­sive thing that can hap­pen to an econ­o­my or to a coun­try. I’m real­ly wor­ried that neo­clas­si­cal, Key­ne­sian econ­o­mists like Paul Krug­man, who are pre­scrib­ing even more debt, will bring about a col­lapse.

HRN: Are these prob­lems the result of Key­ne­sian eco­nom­ics?

John Embry: If you real­ly applied Key­ne­sian­ism as Keynes orig­i­nal­ly envi­sioned it, the gov­ern­ment was sup­posed to run sur­plus­es when the econ­o­my was grow­ing to pay for the deficits that would be cre­at­ed dur­ing down­turns. That’s been con­ve­nient­ly for­got­ten. We’ve had an astound­ing build up of debt. I don’t think peo­ple ful­ly real­ize how seri­ous this is. I’m amazed at how com­pla­cent peo­ple are. We’ve nev­er been in a posi­tion like this in the entire his­to­ry of the world.

HRN: Why do you think peo­ple are so com­pla­cent?

John Embry: I think it’s cog­ni­tive dis­so­nance. When con­front­ed with some­thing that’s real­ly unpleas­ant, and to which there’s no easy solu­tion, the aver­age per­son will basi­cal­ly block it out and look for some­body to tell them that every­thing is fine. The main­stream news media and the gov­ern­ment are doing that as we speak. Con­se­quent­ly, the aver­age per­son does­n’t have a chance of under­stand­ing what’s going on. The man in the street does­n’t have a clue what’s com­ing.

HRN: What about invest­ment pro­fes­sion­als?

John Embry: I have a lot of close friends who have been in the invest­ment busi­ness for 40 years and they don’t want to hear it.

HRN: Won’t the Fed­er­al Reserve and oth­er cen­tral banks sim­ply bail out the sys­tem?

John Embry: They think that print­ing mon­ey will buoy the mar­kets and that that’s good, but it won’t solve any of the prob­lems. Although you may get a momen­tary lift in the finan­cial mar­kets, when it plays itself out we’ll be back in the same sit­u­a­tion, but with mon­ey that’s being sys­tem­at­i­cal­ly destroyed.

HRN: Does print­ing mon­ey work in the short term?

John Embry: There are nom­i­nal prices and real prices. Print­ing mon­ey is very decep­tive and peo­ple are con­fused by its effects. I am only inter­est­ed in real returns, not nom­i­nal returns. If you have a nom­i­nal return that’s caused by infla­tion, you’re los­ing mon­ey because gov­ern­ments tax nom­i­nal gains.

HRN: Can gov­ern­ments inflate their way out of debt?

John Embry: The U.S. fed­er­al gov­ern­ment, for exam­ple, has reached a stage where forty cents of every dol­lar spent at the fed­er­al lev­el is bor­rowed and a lot of that mon­ey has been print­ed. There has nev­er been a case in his­to­ry where that has­n’t led to finan­cial dis­as­ter. If you study any empir­i­cal evi­dence, they’re in a hope­less posi­tion. They’ve only been able to get away with it so far because the U.S. dol­lar is the world reserve cur­ren­cy. If the Unit­ed States was­n’t able to print mon­ey and was trapped in the Euro­pean Union, it would just be a mas­sive Spain.

HRN: So, gov­ern­ments can’t inflate away their debt?

John Embry: Infla­tion is the eas­i­er, more expe­di­ent route to take, but I would not rule out an acci­dent. For exam­ple, if pol­i­cy mak­ers push aus­ter­i­ty too far they could trig­ger a defla­tion­ary spi­ral that would be impos­si­ble to reverse. I sub­scribe to the Aus­tri­an the­o­ry of eco­nom­ics. In his book Human Action, Lud­wig von Mis­es wrote that there is no way to avoid the col­lapse of a cred­it boom and that more cred­it expan­sion sim­ply destroys the cur­ren­cy.

HRN: Don’t infla­tion­ary poli­cies help banks and sup­port the finan­cial sys­tem?

John Embry: The ECB could do anoth­er Long-Term Refi­nanc­ing Oper­a­tion (LTRO) or the Fed­er­al Reserve could buy more U.S. Trea­suries in the open mar­ket but that’s not real­ly solv­ing the prob­lem. If you actu­al­ly eval­u­at­ed the bank­ing sys­tem and marked all the assets to mar­ket, the sys­tem would be insol­vent.

HRN: And the basic prob­lem is too much debt and lever­age?

John Embry: The over the counter (OTC) deriv­a­tives sit­u­a­tion is so sur­re­al I can’t begin to express it. Cor­rect­ly cal­cu­lat­ed, the notion­al val­ue of all OTC deriv­a­tives is in excess of one quadrillion dol­lars glob­al­ly. The vast major­i­ty are relat­ed to inter­est rates. Cen­tral banks have to keep cre­at­ing liq­uid­i­ty to pre­vent these instru­ments from col­laps­ing.

HRN: What can the Fed­er­al Reserve and oth­er cen­tral banks do?

John Embry: They’re lost either way. They’re run­ning a mas­sive lab exper­i­ment with mon­e­tary pol­i­cy and don’t have a clue what the out­come is going to be.

HRN: Do you think the U.S. econ­o­my can grow its way out of debt?

John Embry: When I was a kid back in the 1950’s, most women did­n’t work. Amer­i­cans main­tained their stan­dard of liv­ing by putting a sec­ond per­son to work. When that was expend­ed they made up the dif­fer­ence by going into debt and, even­tu­al­ly, they used their homes as cash machines. Now stu­dent loans total more than $1 tril­lion. I just don’t see where the con­sumer demand is going to come from going for­ward. You can’t get blood out of a stone.

HRN: What do you think the out­come is going be?

John Embry: I believe that before this is over we’ll have a new cur­ren­cy sys­tem, prob­a­bly backed by gold.

HRN: Do you sup­port the gold stan­dard?

John Embry: One of the great­est peri­ods of wealth cre­ation was when we had a gold stan­dard in the sec­ond half of the 19th cen­tu­ry. It’s hard to believe that it’s going to be 41 years since there has been gold back­ing for any of the major cur­ren­cies in the world. That is what has allowed the mas­sive build up of debt that we have today. If there had been a gold stan­dard, we would­n’t be in the posi­tion we are in. West­ern gov­ern­ments don’t want the gold stan­dard because it restricts their abil­i­ty to dole out favors.

HRN: But the gold stan­dard does­n’t pre­vent finan­cial pan­ics.

John Embry: There are always going to be finan­cial pan­ics, but, under the gold stan­dard they tend to be short term. If we had had a gold stan­dard, there would have been a num­ber of cleans­ing peri­ods where excess debt was elim­i­nat­ed. The Fed­er­al Reserve allowed the build up of debt that led to the stock mar­ket bub­ble and crash of 1929 and to the Great Depres­sion, which was fol­lowed by World War II. It took about a decade to build up the debt and more than a decade to deal with the fall­out. It’s tak­en more than 40 years to build up the debt we have today and I don’t know how long it’s going to take to cor­rect it.

HRN: What does this mean for the aver­age per­son?

John Embry: I think liv­ing stan­dards of most peo­ple in the world, par­tic­u­lar­ly in the West are going to decline pre­cip­i­tous­ly. The Fed­er­al Reserve recent­ly report­ed that the net worth of the medi­an Amer­i­can fam­i­ly has fall­en near­ly 40% since 2007 after adjust­ing for infla­tion. Before this all plays out, I think the per­cent­ages are going to be far larg­er.

HRN: Do you fore­see any wider impact on soci­ety?

John Embry: When I was grow­ing up in the Unit­ed States after World War II, I did­n’t real­ize how remark­ably for­tu­nate we were as a soci­ety to have such a strong mid­dle class. Sel­dom in his­to­ry has there been a mid­dle class to equal what tran­spired in the U.S. and Cana­da from the 1950s to the 1980s. We basi­cal­ly took it for grant­ed because that’s all we ever knew. The mid­dle class in the Unit­ed States is dis­ap­pear­ing. What hap­pens is that you have mas­sive pover­ty and a small wealthy class. It’s one of the worst things that can hap­pen to a soci­ety and it can lead to civ­il unrest. If there’s no rea­son to buy into the sys­tem, peo­ple will act up.

HRN: Do you view gold and sil­ver as com­modi­ties?

John Embry: I view gold and sil­ver as mon­e­tary met­als. The main­stream news media con­flates gold and sil­ver with indus­tri­al com­modi­ties, but they’re real­ly a com­peti­tor to the cur­ren­cy sys­tem. Gold is the antithe­sis of paper mon­ey.

HRN: I’ve read that cen­tral banks are buy­ing gold.

John Embry: Con­fi­dence in cur­ren­cies is mis­placed. There is a strong flow of gold from West to East. The Chi­nese, Indi­ans, Rus­sians and Viet­namese know per­fect­ly well what’s going on with the U.S. dol­lar and the Euro. They are buy­ing phys­i­cal gold and the West has been stu­pid enough to sell it to them.

HRN: What’s your view on Chi­na?

John Embry: I’m not opti­mistic on Chi­na in the short run. The Peo­ple’s Bank of Chi­na (PBoC) recent­ly cut bank reserve require­ments by 150 basis points to stim­u­late 1.2 tril­lion yuan ($190 bil­lion) of new lend­ing because they don’t want growth to fall from around 8% to 7%. As I see it, they’ve dined out on West­ern profli­ga­cy for 20 years and have become the most unbal­anced econ­o­my in the world. An inor­di­nate amount of Chi­na’s eco­nom­ic activ­i­ty is gen­er­at­ed by exports and by all man­ner of cap­i­tal spend­ing on man­u­fac­tur­ing, real estate, infra­struc­ture and more. The slow­down in the world econ­o­my has revealed mas­sive over­ca­pac­i­ty in many sec­tors.

HRN: Can Chi­na devel­op a con­sumer-dri­ven econ­o­my?

John Embry: The idea that Chi­na’s econ­o­my can morph into a con­sumer-dri­ven econ­o­my is pre­pos­ter­ous. The very same con­sumers are employed in sec­tors like man­u­fac­tur­ing where there is mas­sive over­ca­pac­i­ty. If the world slides into anoth­er glob­al reces­sion, which is not beyond the realm of pos­si­bil­i­ty, I don’t see how Chi­na stays out of it and if they don’t then there’s no engine of growth left in the world.

HRN: So, even with a ris­ing mid­dle class, Chi­na remains depen­dent on exports?

John Embry: The fact is that Chi­na has become the world’s man­u­fac­tur­er but the abil­i­ty of their two largest cus­tomers, Europe and the Unit­ed States, to con­sume is being con­strained. Chi­na is not going to be able to keep sell­ing more year over year. The HSBC man­u­fac­tur­ing index has fall­en to reces­sion­ary lev­els.

HRN: It has been pre­dict­ed that Chi­na will become the world’s largest econ­o­my. Do you think that’s true?

John Embry: I think Chi­na will prob­a­bly dom­i­nate the 21st cen­tu­ry. The U.S. dom­i­nat­ed the 20th cen­tu­ry but it went through some very tough times in the first half of the cen­tu­ry.

HRN: With a slow­down in Chi­na, what’s your view on com­modi­ties like cop­per or crude oil?

John Embry: In the short term, I’m wor­ried about com­modi­ties. In a deep glob­al reces­sion, I expect there will be extreme mon­e­tary debase­ment, which will hold up the nom­i­nal prices of com­modi­ties more than sup­ply and demand fac­tors would sug­gest.

HRN: Do you fore­see a bear mar­ket in com­modi­ties?

John Embry: We are in a short-term bear mar­ket that will be arrest­ed by mon­e­tary debase­ment.

HRN: But there are val­ue buy­ing oppor­tu­ni­ties?

John Embry: Giv­en my views on cur­ren­cies, com­modi­ties that are already depressed could be decent repos­i­to­ries for wealth. I like agri­cul­tur­al prod­ucts. As the glob­al econ­o­my con­tin­ues to devel­op, I think the sup­ply of food is going to be a major issue.

HRN: How can investors pro­tect their assets in a glob­al reces­sion?

John Embry: The only things I’m com­fort­able hold­ing are pre­cious met­als and, because they are so cheap now, pre­cious met­als min­ing shares.

HRN: Where do you think the price of gold will end up?

John Embry: I’m more con­cerned with how many ounces I own than with how many U.S. dol­lars I can get for them at any giv­en point in time. Gold and paper mon­ey are going in oppo­site direc­tions.

HRN: Thank you for your valu­able time.

John Embry: It was my plea­sure.

© Copy­right MMXII RagingGoldenBull.com