A lot of people who argue for inflation say that all the money being printed eventually has to go through the banks back into the economy. But it's like being on a treadmill. You running as fast as the treadmill goes, but you don't get anywhere. The Federal Reserve is printing copious amounts of money trying to re-start the economy. Unfortunately, the rate of debt being taken out of the system eventually will overwhelm their ability to do that.
TGR: Your Winter Warnings indicates that as we move through this collapse, China will become a scapegoat in terms of other governments implementing policies that will harm Chinese exports. If the Chinese GDP is growing and they're already becoming less reliant on exports, could they have a milder Winter than Europe and the U.S.?
IG: I think perhaps the Chinese Winter will be the worst of all, and again we have a parallel. China is the U.S. of the '20s. The U.S. came out of World War I as the world's largest creditor nation, with a major significant growth in its industrial prowess—all of which China is today. At that time, the U.S. government was paying down debt, and it wasn't that significant anyway. And now, the Chinese government doesn't have much debt; either. But in the U.S., corporations and consumers of the "Roaring '20s" built up huge amounts of debt. You see parallels in the housing market in the '20s to what we see today in China. A lot of suburbs were developed because people had automobile or railway access to the suburbs. At the same time, we had a major development of skyscrapers in city centers, monstrous buildings carrying monstrous debt.
China is in that kind of process. What happens when you get so wealthy, you're exporting so much, particularly to the United States, the Chinese government takes the U.S. dollars and credits the bank with renminbi. The bank has all this money on hand. So a local businessman goes to the bank and says, "I want to build a factory and build toys for Toys 'R' Us in the United States." The banker says, "Fine." He has all this money; he makes the loan; the borrower goes and builds his factory. Somewhere across town, someone else goes to another bank and does the same, and again and again with different borrowers and lenders. It's the mal-investment that occurs when you have so much money floating in the system.
TGR: And then what?
IG: Eventually, the United States, the biggest importer of Chinese products, cannot continue buying at that level. Despite the pace of growth in China's economy, it still takes probably at least 50 years, maybe more, to develop a middle class. Those are the people who have the wherewithal to spend. So, it's going to take China a long, long time; it's still very much an agrarian economy.
For these reasons, I think China's banking system will go the way the U.S. banking system did in the '30s, and the whole economy will go into a collapse. But out of it, she will rise as did the U.S. as the greatest economic, financial and political power. She will be the world leader.
TGR: So, it's a combination of owning gold and gold stocks. Or should we say precious metals—we'll expand it out to silver. Should our portfolios consider other elements?
IG: As for silver, it didn't really work as a monetary instrument in the early 1930s. Although at that time U.S. coinage from the dollar to the dime was minted in silver, so there was certainly hoarding of silver coinage during the last depression. During this depression silver may well take on a monetary role, since the price of gold might take that metal out of reach of many people. I think only the precious metals work—again because of the stock market debacle that I see occurring. We know that investing in precious metals worked in the '30s. People were pushing their money into gold stocks because they wanted to be in gold in any shape or form.
TGR: Because you're suggesting that all gold companies will increase in value during this timeframe, should the average investor be concerned about which specific gold companies to invest in?
IG: Certainly the producing companies will go up with the rising price of gold. Don't forget in the early '30s the gold price was fixed at $20.67 and it wasn't raised to $35 until 1934. But even so, people were investing in the gold companies, both explorers and big producers.
Today, I tend to put my money into the juniors because that's where I see the leverage to a rising gold price. But you've got to be very, very selective and very cautious. You have to evaluate management of these companies. In Canada, particularly in Vancouver where most of the junior precious metals companies are situated, we're living with these people. It's very tough in the United States, where you have to rely much more on what others tell you. Fortunately, a lot of very reputable newsletter writers and so on are trying to do a good job in their recommendations.