good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for september twentieth two thousand and twelve euro zone manufacturing p.m.i. points to recession according to market economy economics wall st has what's touted as a successful bond auction so is europe on a choose your own disaster track headed towards bad or worse or will it pull through we will hear from both jim and john mauldin and while we deride the bad for launching q e three japan has launched q week eight they've been at it for more

than a decade so we'll talk again plus if the u.s. is on the japan track does it still have a long way to go until the national debt becomes a crisis or is reducing budget deficits top of the priority list heading into the november elections plus. comes out of nowhere what or where is the economic pride or no one has their eyes on we'll hear from our guest let's get to today's capital account.

all right we'll get to q. we central bank easing the eurozone china japan the u.s. debt all of that shortly but first and far more exciting allow me to introduce our guest co-host today he will be with us the whole show you know well jim rickards senior managing director at tangent capital partners and author of the bestselling book currency wars the making of the next global crisis so jim rickards thank you so much for joining us again today as my guest co-host which is such an honor for me thank you lise great to be here thanks for inviting me yeah absolutely and our viewers love it now before we get to q we end currency wars and central banks i want to ask this because yesterday we had alan simpson on the show the former senator one part of the simpson bowles deficit commission and he was on talking about the u.s. debt how it needs to be tackled the simpson bowles proposal to do it and one part of that equation of kind of getting the u.s.

house in order is not in that proposal now has to do with a healthy banking system in the u.s. economy really can't function without one so there's this question of if that can exist a healthy banking system without some kind of glass steagall act coming back and you argue it can't right why is that well i will always have the guts to go can come back and should come back to start going to because of the political opposition but i agree with you on we're not going to have a healthy economy and a healthy bank banking system until we fix three things you've got to break up the big banks and derivatives and put back some congress to go you know where we have this problem the one nine hundred twenty s. where banks originated garber securities and sold them to their customers in the market crash the congress look to say well this is simple from now on you can either take deposits and make loans in your bank or you can underwrite securities in your dealer that's fine but you cannot do both that's what the congress said one hundred thirty three that was good long term one nine hundred ninety nine somehow the congress in one thousand nine hundred nine thought they were smarter than the congress in one thousand nine hundred three they repealed it and guess what seven years later another crash it's really not

a surprise and you know the supporters of the big banks the apologists for the. big banks will tell you think you owe it wasn't close they were the cause of the crisis it was these you know lousy mortgage originations and investors who didn't know what they were doing and radiates that there's enough blame to go around the responsible but the banks were a crucial ingredient they bought the mortgages securitized them and sold them to the investors the banks for the missing link without the banks acting as securities dealers this wouldn't happen so we've got to stop that and there are other criticisms too i've heard jamie dimon for example say hey it wasn't as it was the big guys it was the lehman brothers it was the bear stirred so counter that when real quick who do you think was financing them i mean if you look at the balance to lehman brothers of the get the balance sheet of bear stearns sure they had huge mortgage immaterial they do securities inventories how do you think they finance those stars who is financing them in the repo market with bank of america so if it wasn't for those big banks again financing the whole thing the other thing is with this crisis that lawrence people say well let's say there's about a trillion dollars of subprime and all day you know historic to four rates have never gone above five percent they say let's be crazy and assume twenty percent of

forwards which was unprecedented that's a two hundred billion dollar loss in a trillion dollars of mortgages less than the s. and l. crisis is just a for inflation so they said what's the big deal we can survive this what they missed was that sure there were trillion dollars of bad mortgages but there were six trillion dollars of derivatives and the derivatives are the off balance sheet exposure of the banks again the banks are the culprits because of securitizing garbage loans and the derivatives books they've got to be broken up we've got to stop this it's crazy it's what we have but you don't think there's any chance of it so essentially you're saying there's no chance of us getting back to a healthy banking system and i don't know because the banks own the congress and to be blunt i appreciate your line to the kind of thing we talk about all the time there are good men and women up on capitol hill and they're smart they're working hard they represent their district but the fact is the banks own the congress lock stock and barrel so this is not going to change the template i don't want your look at tempo let's you know today you know he leaves mitt romney's campaign he was out you know talking a hard talk about the bank sure he was thinking about running for president now we go to lobby for them sure in the financial services roundtable which implanted just

took over that's not your normal. being organization that's like a club there are only twenty or thirty members and they're the biggest banks so is it j.p. morgan goldman sachs morgan stanley bank of america citi it's the people you would expect that's the big bank klug streamlined powerful plans it's got a powerful seat and he's going to do his job to make sure that we don't reform our banking system and we don't get rid of the problems from the big banks so this economy is just going to go from crisis to crisis and the other enabler you could argue of banking activity is the federal reserve that should give them plenty of cheap money to spend and you know we just did get q e what some would call to infinity year this is on the tails of the e.c.b. an ounce in an unlimited bond buying program and you think it ends here you think we hear an announcement from china sure in the next thirty days so what do you think and why well you're exactly right one so that started with druggies that they're not talking about you know q.e. in terms of three hundred billion six hundred billion over six months this is whatever it takes or you know they used the phrase open ended but that's another

phrase for whatever it takes which means of pressure so these are the means inflation absolutely exact that's what it takes it takes inflation to get nominated to get down g.d.p. so drugged it goes on september sixth bernanke he goes in september thirteenth last night we had the bank of japan doing the same thing you're right they've been easy for twenty five years from now whatever it takes so the fourth shoe to drop so to speak you can have for sure is the people's bank of china now they're a little different they don't have an open capital account they're not at the zero bound the rates are in at zero so they don't quite know they can't go to quantitative easing because there's nothing to buy there's no robust chinese sovereign bond market to buy anything but they have other tools and they secretly last week in shanghai with a private advisory board the leading economists who are experts in china those advisors told the people's bank of china you've got to cut the reserve requirements and cut their loans of the positive a show that allows the banks to lever up so look for that maybe in the next thirty days or so so that will be china's equivalent of q.e. it's kind of monetary but not quite the same technically but the question is can

any amount of easing delay at the day of reckoning with the debt or the slow downs of the economies that could become. let's bring in our guest to talk more about it before i do i want to say you know who do has who does have an open capital account is that we do yes we are zeroing out a little accounts that are going to show you that. we are the open capital account of things that we talk about all the things that people really want to talk to now let's talk to another guest to who i'm sure wants to weigh in on the debt and money printing because our next guest believes we're approaching the end of a sixty year global debt supercycle and the developed world characterized by a massive household sector do you leveraging process and storage shift of private liabilities on to public balance sheets he said the end game will be characterized by the bankruptcy not just of households but of companies and governments it's the theme of his latest book endgame and to continue this conversation let's bring in john mauldin president of millennium wave advisors so first of all thank you so much for being on the show is. this is i thought you guys in

a very great panel that you were arbitrating mr malden with your records on inflation and deflation before we got to that i do want to bring this conversation to the debt supercycle which mr mollett and you believe are reaching the end game in the developed world at least before we get to outcomes and the future i just want to ask how did we get here and are these super cycles inevitable. they're not in evidence will answer your last question switzerland has awarded one and you don't get there by. not borrowing too much money that's how do you think more who have money and leverage. you get into a down cycle you don't really want to. use it in the spending feels good and then you start believing the good times will never him and over time sixty

seventy years that it builds up and then you can have ways where the market's no longer comfortable that you're going to be able to pay it back in got a currency that. once i've got a value that they're going to be comfortable with and your interest rates go up and then you get into it spiral and it's on but that's where greece it was and it's still myron's or spain is italy. has basically lost its access to the market without the e.c.b. printing of initially it'll be france all of europe's and kimchi give us a friends of them to me isn't walk grow. and and have they don't have an acceptable way to get out and buy acceptable i mean dealing with debt and dealing with debt as if holland in france trying to deal with the deficit in a reasonable manner which is reducing is there and reducing his spending his

coalition would just simply rebel and the british would be in the streets. i mean adding one of the things of going to happen in the not too distant future will be the french are going to confront the fact that they don't have enough money what will happen is that the first things that go will be farm subsidies and how do i know this because there are more old people who there are farmers and the old people are not going to give up their conditions so the farmers will be on the job it was now we know how rich farmers react to almost anything they take their tractors in the street they stop traffic in paris. they burn tires in the middle of the freeway use it want be fun at all if you're in france but they have a choice they've simply run out of money that's what happens to countries in crisis the book that i'm sure jim's familiar with but carmen reinhart this time is

different talks about two hundred sixty six financial crises or will have two hundred years and all are different in how they get there but they all result in the same thing a debt restructuring of some type and i know and i know mr maltin what your spelling out is that bad scenario for europe and i've heard in regular say that in europe this situation is going to be bad or worse it's kind of like a choose your own disaster scenario that we it's really scary that it is after eight years after be disaster aid is keeping the euro zone together disaster because taking it apart either one is an economic nightmare bad policy decisions for the euro zone be good to begin with or without having a fiscal union and the same time we're not possible to create a monetary union and it is the union the politics weren't there the leaders of europe were so committed is that with their monetary unit we have a crisis oh that will be enough to force them to the union and maybe it will be yet

maybe they'll bite the bullet and give up their sovereignty the amount of commitment in europe to keep. being in the euro zone together is really quite amazing yet somehow that they've accorded the euro. with the european union which is basically a longer free trade zone. if you have computers with. no. market now all trading at a so that you could have one credit card you get is why good. will be a simple thing to have when you're there you see the symbol of. a united europe and as long as they're committed to that then they'll go to disaster and yours and you know i will i'm just going to stop you right there because we do have to go to break but when we get back i know that your record is going to want to respond to that because i think it to you may have

a very different idea about how europe is going to end up so still ahead in addition jim records and john mauldin tackle the u.s. debt or try but first your closing numbers from the markets. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realized everything you thought you knew you don't know i'm tom harpur welcome to the big picture.

all right welcome back let's get straight back to our guest because jim rickards is co-hosting today he's senior managing director at tangent capital partners and we have john moulden. me founder of malden economics with us today so before the break john molding you were laying out scenarios for europe that go from bad disaster a or b. jim records i want to get to end here because i think that you may disagree you want to jump in with your your take john certainly right that you had debt is unsustainable that pretty more money by itself doesn't solve anything doesn't solve the debt problem i was just kind of job to for those john one you know in seventeen eighty seven. hours as diverse as south carolina and new york gave up some of their sovereignty to form the united states of america so you're exactly right that a monetary union is not sustainable without a fiscal union because one suggests that as you said yourself maybe the fiscal

union is coming maybe this is just a two step process in the elites are saying that we have to do this in stages we can't cram it down people's throats all once but over time will kind of get there and this with naomi klein calls the shock doctrine which is use a shock to drive through unpopular policy use the euro sovereign debt crisis to drive through brussels and berlin sovereignty in effect over the rest of europe so it might go that way but i have one question on what you said earlier john about actually the u.s. is. i agree completely that we have an unsustainable pyramid of debt i agree the money does not stop printing money does not solve the problem this will end badly and it will be actually non-presidential a bad catastrophe so you and i are on the same page about that the question i have for you is about timing i think alice have consistently underestimated how long you can kick the can down the road maybe they are kicking the can down the road but maybe they can kick it out for a very long time and in particular if europe runs out of money you've got the i.m.f. which can borrow and ice-t. r.'s convert those to euro's and lend them to europe and then finally they can

print s.t.r. so there's a there's a bazooka in the form of the i.m.f. balance sheet that hasn't been in the interest of your comment on that then i don't . get i mean money for europe you're going to have to get the u.s. sure canada england brazil china all agree are there you know basically. and there's not a snowball's chance in you're going to get united states to say we should leave bunny europe when they can't get their own act together when we have our own crisis you're just not going to. you're going to solve its own problems and so the i am no thanks to the next to barney frank the u.s. actually has signed a one hundred billion dollar loan commitment so the commitments that i draw in the money is different i agree with that i mean for them to use that commitment for europe. that would be

a real political nightmare. i don't think i don't think they'd want to you think might argue actually. it would create i mean it would be able to get under but in the us for years john i think and you think it might depend on the election on the outcome of the election if obama wins with that make it easier for them have to put in the bar when the us is actually signed the agreement we've agreed to do it we just haven't found it yet. well i don't think you have funded you've got to get through congress and congress at least in the iterations that we now have and are likely to have is not going to fund an italian or spanish bailout those are real countries these are not the countries that the i am it was put together in is intended for him to be able to help and bail out now. let me do it. i mean they they've just been the path they are

they and they know it and we are driving citizens says the problem is really not a monetary problem it is a physical problem and we are giving you know monetary solutions in order to buy you time to get your because go acts together if they don't get their fiscal act together kind of that wind up being disaster mean. and mean that at that point. you have to see whether they really want to go through the austere you grow grams that are required to do that and we all know that when you start in that austerity road it becomes a soap of the eating cycle specially when you know. what they're growing that none of them are going to address which is the trade imbalance in the list you address the structural problems that are in europe. trade imbalances being the first part. comes to mind then you can play with monetary policy and don't want nothing's going

to change the only way you deal with those structural imbalances is either having an series. of these you can change your terms of labor costs or you have a currency that allows you to go in terms of buying a car which is the war traditional ok in europe to the euro there are more we're right they there is a problem mr monk and i want to jumping all think i want to give jim rickards opportunity to respond and i and then i want to move on to the u.s. because i would argue that europe to an extent distracts from the u.s. has problems at least here in washington it seems like at the line and to kick the can for this i generally respond to john i think we agree completely on the definition of the problem in the state of play say where we may disagree has come on how things are going i agree that they've got a lower the unit labor costs they can't do that right through devaluation the u.s. is out to cheapen the dollars that means a stronger euro which were saying so they're not going to be able to devalue the euro but you know the average fifty year old greek would probably rather you know throw a smoke bomb than take a pay cut i agree with that but

a twenty five year old greek or italian a spaniard who's never had a job living at home is offered a chance to work in say a b.m.w. assembly plant with training benefits investment financed by chinese capital there is some virtuous combination of german technology chinese capital and youth labor that could make europe an export powerhouse i'm a lot more concerned about the u.s. and china than i am about europe so then let's switch gears to the us gentleman because a lot of the similar. situations are going on you have monetary policy that's trying to make up for what many would argue is a fiscal issue at this point and this is been going on for a long time the conversation surrounding the national debt is not a new one in fact alarm bells were ringing loud and clear for the american people during the ninety ninety two election when the national debt was roughly sixty five percent of g.d.p. i want to play you gentlemen both our viewers a clip of ross perot. here to my we were going to do an additional. million dollars an hour and

a half day now it's not republicans of course it's not the democrats and what i'm looking for is who did it. they did not the democrats or the republicans that if you did it well there's enough culpability to go around i'm sure but mr mullins and i want to get your thoughts if we were able to get through the past two decades without a sovereign debt crisis in the u.s. who's to say we can't get through another two or is it the lack of urgency this time that's a signal like the calm before the storm of some sorts. we very clearly again solve the problem if after this election come january congress instead and says ok we're going to put the deficit on a glide path to getting solved you know we get sort of all at once but over the next four or five years we're going to reduce the deficit one hundred two hundred billion dollars a year every year and this is our going to do it and this is the taxes they're

going to raise and here's that the spending is going to get cut however that works out simpson bowles in even dozen ways to do it. then we can go on for essentially ever bigger than visually you could have a balanced budget and you could begin to have between growth and pain of the doesn't now which is where we were in the late ninety's but get away from that sixty five percent problem that ross perot's so long about and which is a little bit over that they had in the seventy's but resent range not counting the social security debt which i. think we used to go in that knowledge doesn't really exist and there is no trust was the. last march of the trust fund and we can get there but we have to have political will and it's going to take compromise and what i was writing about last week that i think the most important problem that this country faces is how he'll with a deficit everything else falls out of it if you are interested in jobs jobs are

going to be affected by how we deal with this. if your concern is health care that's going to be how you would have on on this election is about the direction of the compromise. dear example one group is going to be a larger government in both the country is going to be a higher taxes one wants to see a lower government. and that's the direction of the compromise but there has to be a compromise otherwise it won't happen and. i become rather than willing to be optimistic that we're going to solve our problems to try to figure out where they have the excess because it will get ugly and i mean get ugly within a few years fourteen thousand and fifteen the markets start realizing we're not serious they're going to what you're going towards japan and load you know my line but i use my book was that japan is about in search of a windshield yeah the great line i think the line i hear you to record what you

think. i mean that's what i think and i will respond i think the markets will look at europe and japan and they'll do the look at the united states not be serious about that if we aren't in the ago gentlemen. if you don't mind we've seen this movie before. we know how it ends and we're just going to go ahead and slip out at intermission and normally you think we could go on five six seven years we are the world's superpower we are the reserve here currency we control our own yeah. the markets will see it that way if they don't see it as being serious after they've seen the disasters of europe and that's an interesting point that we have about a minute left jim i want to give you the opportunity to respond thanks john i get a good deal on the house is this is actually the stairs the easiest problem in the world to solve and we're seeing the solution of front of our eyes which is inflation five percent pleasure in fourteen years because the value of a dollar and a half and real terms that would basically be

a one point five trillion dollar real wealth transfer from china to the united states they've got three trillion of our debt we cut the value of the dollar in half with five percent inflation for fourteen years that's like taking one point five trillion from the chinese and. sticking in our pocket so inflation is the easiest way out there for the most likely way out and that's what we're sitting on so you think there was central banks are doing now this is the course and there's going to be no real fiscal solution i agree with john the it is a very all new this is still made between congress and republicans democrats in the white house will do a little bit of tweaking around the edges but the real solution the one the central banks are going for is inflation so obvious obvious and we will have to see i would imagine after the elections if politicians move towards any kind of a compromise on the debt i'm not hopeful but i appreciate you jim rickards and john wall mold on both for being here and weighing in on the euro zone's that you we big u.s. it was great to have you guys both on. and that is there for our show today thank you so much for watching make sure to come back tomorrow and in the meantime you

can follow me on twitter at lauren lyster give us feedback on the show a you tube dot com slash capital account watches in h.d. on hulu at hulu dot com capital dash account from everyone here and our guest co-host jim records one of our capital accounts favorites thank you thank you so much and have a great night. all

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