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 a call 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 rickards 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 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 was great to be here thanks for inviting me yeah absolutely and our viewers love it now before we get to q we and 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 that 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 right why is that will 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 we've got to break up the big banks and derivatives and put back some congress to go you know 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 the said 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 a good long time one thousand nine hundred ninety 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 they'll 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 but 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 stirring so counter that one 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 bear stearns was 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 when this crisis hit lawrence people said well let's see there's about a trillion dollars of subprime and all day you know historic to four rates and 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 of 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 is 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 you there are lines and i kind of thing we talk about all the time they 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 and he was thinking about running for president now he goes to lobby for them sure in the financial services roundtable which

implanters just took over that's not your normal lobby. 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 clog streamline powerful plans it's got a powerful c 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 banking activity is the federal reserve that should give it plenty of cheap money to spend and you know we just did get q we 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 don't 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 placing so these are the means

inflation absolutely is that that's what it takes it takes inflation to get up to get down to you to be so drugged it goes on september sixth bernanke he goes in september thirteenth the last that 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 as we're going to 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 about the rates foreign at zero so they don't quite 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 were experts in china those advisors told the people's bank of china you've got to cut the reserve requirements and cut their loan to deposit ratio 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 a kind of monetary easing but not quite the same technically but the question is can any amount of easing delay it the day of reckoning with the debt or the slow

downs of the economies that could be coming. let's bring in our guest to talk more about it before i die i want to say you know who do have who does have an open capital account is that we do yes we are zeroing out a little accounts are going to show you how. 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 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 leveraging process and his story of 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 adelaide will answer your last question switzerland has awarded one and you don't get there by. not borrowing too much money that's how you getting more who have money you 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 plays with a more it's no longer comfortable if you're going to be able to pay it back in a currency that. once i've got a bottom 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 is still myron's or spain is italy. has basically lost its access to the market without the e.c.b. printing of eventually will be france all of europe's and kimchi give us a friends of them to me isn't walker off. and then they don't have an acceptable way to get out and by acceptable i mean dealing with debt and dealing with a deficit if holland in france try to deal with the deficit in a reasonable manner which is reducing is going and reducing his spending his

coalition would just simply rebel and the french would be in streets. i mean one of the things that is 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 freeways if you want to 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 the milieu with but coming right or 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 very that disaster eight years after b. disaster a is keeping the eurozone 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 a visible union the politics weren't there the leaders of europe were so committed these avoids the monetary unit we have a crisis oh that will be enough to force him to visit 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 knew that they recorded the euro. with the european union which is basically a long you're 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 one euro see the symbol of. a united europe and as long as they're committed to the. disaster and yours and you know i guess i i will i'm just going to i'm going to stop you right there because we do have to go to break but when we get back i know the chair records are 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 rickards and john mauldin tackle the u.s. debt or try but first your closing numbers from the markets. download the official publication. stream quality and enjoy your favorite. t.v. is not required to watch on t.v. all you need is your mobile device watch on t.v. any time.

the be. cool.

all right welcome back let's get straight back to our guests because jim rickards is co-hosting today he's senior managing director at canter capital partners and we have john moulden scuse me founder of malden economics with us too so before the break john moulden you were laying out scenarios for europe that go from bad

disaster a or b. and jim workers i want to get you in here because i think that you may disagree on . camping 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 just kind of job to footnotes john one you know in seventeen eighty seven says sovereigns 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 but i just want to suggest 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 it wants but over time will come to get there and that's what 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. situation 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 none presidentially bad catastrophes you and i are on the same page about that the question i have for you is about timing i think analysts 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 down for a very long time and in particular if europe runs out of money you've got the i.m.f. which can borrow n.s.t. r.'s convert those two euros and lend them to europe and then finally they can print f.d.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. to get i.m.f. money for europe you're going to have to get the u.s. sure canada england brazil china all agree for their you know basic allotments and there's not

a snowball's chance in pain you're going to get the united states to say we shouldn't listen buddy to europe when they can't get their own act together when we have our own crisis here just not going to happen. you're going to solve its own problems absent the i am out thanks to the next divide and frankly us actually has signed a one hundred billion dollars loan commitment so the commitments that i draw in the money is different i agree with that i mean for for them to use that commitment for europe. that would be a real political nightmare for the i.m.f. i don't think i don't think they want to test that they think might be election proof that it would create perfect imo it would be able to get funded but in the u.s. for years john hollinger would you think might depend on the election on the outcome of the election if obama wins that make it easier for the i have to put in the bar when the u.s. is actually signed the agreement we've agreed to do 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 and italian or spanish but those are real countries these are not the countries that i am it was put together in its intended form to be able to help and bail out now don't. let me do it. i mean they they just they have in the past they are they and they know it and we are dropping citizen 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 just go actually gather if they don't get there because they'll actually get other kind that wind up being disaster mean. and mean that at that point. you have to see whether they really want to go through the us theory

programs that are required to do that and we all know that when you start down that austerity road it becomes a simple beating sagal oh specially when you have no. problem 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 serious depression so that 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 you would need to do the euro there are more were 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 a place where we may disagree has come on how things are going i agree that they've got a lower unit in a labor costs they can't do that if you're devaluation the u.s. is out to cheap in 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 avastin 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 nineteen ninety two more alexion when the national debt was roughly sixty five percent of g.d.p. i want to play you gentlemen both in our viewers a clip of ross perot. we should hear divide we will go into depth an additional fifty. million dollars now in our hands now it's not the republicans fault of course it's not the democrats fault and what i'm looking for is a bit. ed lavandera got the other republicans out here and did it well there is an f. up ability to go around i'm sure about mr mollett 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 a calm before the storm of some sort. we've heard flute again song problem if after this election come january congress and stand on it as ok we're going to put the deficit on a glide path to getting solved you know we can't solve 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 how we're going to do it and this is the taxes are going to raise and here's the spending is going to get power that works out simpson bowles it even doesn't want us to do it. then we can go on for essentially every bit of the visual you could have a balanced budget and you could begin to between growth. came to the deficit 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 to grow well and which is

a little bit over the in the seventy one percent range not counting the social security which i. think we used to go in that knowledge doesn't really exist and there is no trust was the no what works for 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 you deal with the deficit everything else falls out of it if you're interested in jobs jobs are going to be affected by how we deal with those. if your concern is health care that's going to be how you would have so on and on this election is about the direction of a compromise. pure and simple one group is going to be a larger government involvement in the country is going to be a higher taxes one wants to see a lower government footprint 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 religiously 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 think get ugly within a few years doesn't fourteen two thousand and fifteen the markets start realizing we're not serious are going to what you're what we're going towards japan and load you know my line that i use and my book was that japan is about in search of a wins he'll yeah that's a great line i think i like i hate to record what you think it is because the problem i mean that's why 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 our bet is that if we are in the ago joe and if you don't mind we've seen this movie before. we know we're just going to have. intermission

and normally you could go and buy a six seven years we or the world or we were here we control our own. markets we'll see if they don't see it as being serious and. that's an interesting point so we have about a minute left jim i want to give you the opportunity to respond thanks john i get to agree with you on the analysis this is actually this there's the easiest problem in the world to solve and we're seeing the solution in front of our eyes which is inflation five percent placement for 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 it on a pocket so inflation is the easiest way out there for us the most likely way out and that's what we're saying ah so you think that was central banks are doing now this is the course and there's going to be no real fiscal solution i going to challenge this ever this is tell me between congress and you probably going to

democrats in the white house they'll 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 records and john moulden 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 it 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 watch us an h d on hulu at hulu dot com capital dash account from everyone here and our guest co-host jim rickards one of our capital accounts favorites thank you thank you so much and have a great night. wealthy

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