Editor's note: In Digest Premium yesterday, Porter introduced famed lecturer and analyst Richard Maybury. He and co-host Aaron Brabham recently spoke with Richard on their weekly radio program, Stansberry Radio.
As Porter says, Richard is a legend in the newsletter business. He's one of the top free-market writers in America. And he's a world-renowned author of numerous books, including his highly acclaimed Uncle Eric series.
In today's edition of our weekend Masters Series, we give you the first half of an edited transcript of Richard's interview on Stansberry Radio. In it, he discusses the biggest risk he sees with the ongoing credit and monetary bubble in America… the "greatest miracle that humans ever stumbled onto"… and how to survive in a corrupt financial system, like we're seeing today.
You may not agree with everything Richard says, but we guarantee it will give you a lot to think about…
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The Biggest Risk Affecting Our Monetary Future, Part I
By Stansberry Radio, co-hosts Porter Stansberry and Aaron Brabham
Aaron Brabham: Richard, welcome to Stansberry Radio.
Richard Maybury: Well, thank you, thank you. Before we get started on the subject matter, I would like to say congratulations to Porter. There are very few people other than him and a few others who have so consistently sounded the alarm about the deep trouble that governments have gotten the world into. I just wanted to mention that in case people aren't aware. Porter, you deserve congratulations for that. And thank you very much.
Porter Stansberry: Well, that's high praise. You're pretty much the dean of that industry.
Can you – and as concisely as possible, because we do have a time limit here, and I know you and I could talk about this all day – tell people what the biggest risk is with the ongoing credit and monetary bubble that has been sponsored by the major Western democracies? What's the big problem with their policies?
Maybury: Well, I would say the way to look at it is that about 100 years ago, the whole world, every government in the world, started doing socialist experiments on their populations. And today, every government is socialist to some extent. The root cause of what's wrong in the world is that all of these socialist experiments globally now are collapsing. And so, whatever financial or monetary problem you want to point to – or foreign policy problems, geopolitics, all of it, in my opinion – goes back to that period about 100 years ago when all of these governments started doing their experiments on us. Socialism doesn't work.
It has a built-in tendency to go backward, and so that's where we are today. The world is going backward because these experiments are collapsing.
Stansberry: Yeah, I see exactly your point. The reason, of course, why socialism collapses is because it requires coercion, and it has negative incentives. We all know that human beings don't react well to either of those two things.
What about this, Richard… The other big problem I see with what's gone on is that by corrupting the money, you are ruining one of the very best ways that information is shared across the entire global economy. Prices, of course, communicate information to producers and consumers. And when you start messing with those signals, the economy is not going to be going in the right direction.
Maybury: Right. I think one of the greatest miracles that humans ever stumbled onto was the invention of money. Money enables us to attach prices to goods and services. And an entrepreneur only needs to know basically about the price when he's deciding whether to go into a given field or not. Can I sell such and such at a price that leaves me a little bit of profit afterward?
The supply and demand forces in the markets create those prices. So the price is a very small, shorthand piece of data that directs companies in the way that will help them earn a profit… But also, more importantly, provide the goods and services that humans need. And when governments start debasing their currencies, they make the value of the currencies unstable, and they destroy this pricing system.
So this little piece of data that is so important in deciding what a business should do to help its customers is corrupted. And it sends false signals. And it causes businesses to go into fields where they shouldn't go and into locations where they shouldn't be.
Stansberry: Exactly. Let me give you a great, real-life example. Richard, do you know what the largest privately financed real-estate development in the history of the United States is?
Maybury: No, I don't.
Stansberry: It's the CityCenter development, which is on the main strip in Las Vegas. And it was developed by MGM, which had to get bailed out by Dubai in the middle of the process because it was so expensive. They ended up spending $11 billion on a single set of buildings in one development. If you think about this, they built the largest privately financed real-estate development in the history of the United States in the middle of a desert that has a chronic water shortage. And if you know anything about the history of building in deserts throughout human history, it's always a disaster.
Maybury: Yeah.
Stansberry: The other thing is, of course, the industry that drives that complex is gambling, which contributes absolutely nothing to the productivity of the United States.
Maybury: I've got another example for you. This is a lot bigger than that, although it's not private, but it's the same sort of thing. It's malinvestment, meaning investment that is corrupted in some way or another, and that is the water system that feeds the Los Angeles area. Now, you've got I don't know how many millions of people living down there, more than 10 million, I'm sure. And that whole area used to be desert, but now there's this gigantic city there because the state and federal governments managed to set up these water projects all over the state of California that send the water down there to make that city possible.
Stansberry: Yeah, the great book on that is called Cadillac Desert. It's a great read.
Maybury: Yes. So the day is going to come when an earthquake is going to destroy those aqueducts, and you're going to have more than 10 million people in the desert without water.
Stansberry: Yeah, the most important price corruption that's going on, of course, is being orchestrated now by the Fed – the reduction of the risk-free rate. A lot of people don't understand that all of modern finance and all of banking and credit around the world operate on the basis of the 10-year Treasury yield. That's known as the risk-free rate, and that rate is what sets the price of risk in every market, in every asset around the world. And so, the Fed's buying up of all that paper to manipulate that rate lower, to the tune of $85 billion a month. That has caused a huge reduction in the risk premium. And you say, "Well, City Center was built in 2008. That was before the quantitative easing."
Yeah, I got that. I know, but that's making the problem going forward worse, much worse than it would have been. Prior to that... there was the implicit guarantee that the Fed stood behind all of these projects and all the banks that financed them, so there was lots of problems. But mostly what it leads people to do, of course, is to make bad economic bets. And it also leads to enormous amounts of corruption because the people are not going to be held responsible for the bad bets they make.
My favorite story in that league – Richard, you might not know these details – there was a bank in Chicago called Corus Bankshares. Corus Bankshares were the guys who specialized in building all the condos in Vegas and Miami. In particular, they really specialized in converting older apartment buildings into new condos, which is where you put a coat of paint on a building and sell it for four or five times more than it's worth.
Maybury: Yeah.
Stansberry: Anyway, the guys at Corus saw the handwriting on the wall in 2007, so they paid a special one-time dividend that totaled more than $40 million, and they got the hell out of dodge. Anyway, lots of examples of people running away from their banks and their loans and all this stuff, because, of course, it's all backed by the Fed, so Corus was taken over by the government. The government paid all the bad debts that Corus had made, made sure their depositors were safe, and then it sold the bank for pennies on the dollar to Wilbur Ross' group, and so this is the whole cycle. It's lots of malinvestment, lots of bad risk, lots of government bailouts, and then who ends up with the following profits? Of course, the rich and the well-connected from New York City.
So people wonder about the income disparities in America. This is the whole cause of it, this ongoing debasement of the monetary system where the risks are socialized and the profits are privatized. That's what's happening to our country.
Maybury: Yeah. I was thinking the other day, because I'm in the process of adjusting my own investment portfolio pretty dramatically right now. And I was thinking about what the old families in Europe tend to invest in as far as we know. Nobody knows exactly what they're doing, but there is lots of information around, because the people like the Rothschilds have been in business for centuries, and the key point is they're still in business.
They have found ways to survive in these corrupt systems, these corrupt monetary systems. And one of the ways, I understand, is that they actually don't own very many stocks or bonds or other sorts of financial assets that are based on these corrupt currencies. They tend to go into real estate and other actual real things that you can put your hands on.
Stansberry: Yeah, farmland, chateaus, timberland, commercial real estate especially, class-A properties. Yeah, absolutely, that's what they do. They also own a lot more art and collectibles than the average person.
Maybury: Mm-hmm. Yeah, to them, the financial system, which is built on this corrupt foundation of debased currencies, is just a tool that they use to accumulate real stuff.
Stansberry: That's exactly right. They take the debased dollars that they can collect through banking and trading, and they invest them in real assets. And if you look around at a lot of U.S. moguls, take a guy like Malone from Liberty Media. This is a guy that made a bunch of money by selling off worthless cable assets to AT&T.
He took all this cheap and easy money that he used to buy up these cable systems and to sell them. He became like the largest landowner east of the Mississippi. He bought tons and tons and tons of timberland in Maine. So he's taking cheap credit and phony profits and turning them into hard assets, and that's what the most successful wealthy guys I know do as well.
[Look for the second half of Richard's interview in tomorrow's edition of the Masters Series.]
Editor's note: Each week on Stansberry Radio, Porter and co-host Aaron Brabham interview the top names in finance and investment, like Rick Rule, Jim Rogers, and Marc Faber… American talk radio host Alex Jones… and several of S&A's own top analysts. To hear our archived episodes and receive e-mail notices when we air each new show, click here.
Also... we believe Richard's Uncle Eric books are among the best ever written on history, finance, and economics. If we had our way, every child in America would read and understand the critical ideas found in the Uncle Eric books. Richard's monthly newsletter, the Early Warning Report, is also a must-read around our offices. You can learn more about Richard's work by clicking here.