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The Next Big Financial Disaster

An interview with Richard J. Maybury by Pat Gorman of Resource Consultants.
October 2011

Dear Friends,

In this interview, Richard Maybury describes an approaching financial disaster of monumental proportions. 

As far as we know, no one else has uncovered this approaching debacle, and once it becomes widely known, it may shake the financial world far more than the recent federal deficit crisis and downgrade of US bonds.

We have been interviewing Richard Maybury regularly ever since we began Resource Consultant’s Newsletter in 1996.  We know from experience that if you ask Richard’s subscribers what they think of his work, they will say no one’s forecasts have been as shocking, and no one has been as right. 

His newsletter, Early Warning Report, is well named.  His subscribers knew about the roaring gold and silver bull markets, the federal government’s debt problems, the wars in the Islamic world, the Chinese moves into the South China Sea, the real estate crash, the 2000 tech crash and a host of other epic events months and sometimes years ahead.  As you can imagine, those who took his investment advice have earned amazing profits.

We cannot promise you will enjoy this interview — Richard says it is only for those who have nerves of steel— but we can say confidently you won’t read anything as bold anywhere else except in Mr. Maybury’s own newsletter.  We agree when he says, fasten your seatbelts, this will be a wild ride.


Pat:  Hello Richard, welcome back.  It’s great to have you here again.

Richard:  Thanks Pat, as usual, it’s great to be here, you always make me feel welcome despite the frightening news I usually bring in tow.  I truly admire your readers, they must be courageous to be able to read my forecasts without fainting.

Pat:  (Laughing) I have a feeling you are about to test their courage again.

Richard:  I’m afraid so.  This may be the largest financial scandal in world history, and the strangest.

Pat:  Why the strangest?

Richard:  Because everyone has already thought of it.  But we’ve been taught to just skim over it, we assume it’s so obvious that government regulators must already be taking care of it.

Pat:  Everyone has thought of it?  Aren’t you exaggerating a bit?

Richard:  Well, not everyone, but surely anyone who knows much about money — from your stock broker to the US Treasury Secretary.  They already know, and no one does anything about it.

Pat:  How long have you known?

Richard:  I remember writing an article about it in the 1980s.  But the world just wasn’t ready to face it yet, and no one paid any attention.

Pat:  And you think they are ready to pay attention now?

Richard:  I can’t be certain, but we are in a new era of scandals, and like a school of sharks, the mainstream press smells blood.  They’ve found out that such paragons of virtue as the US Treasury and Federal Reserve aren’t so virtuous after all, and journalists are on the hunt.  After the federal debt fiasco, the real estate implosion, the euro crisis, and so on, the journalists are willing to peer into places they’ve never looked before.  Also, the new disaster has such a strong resemblance to these present highly publicized ones that it will be easier to recognize and believe.

Pat:  Believe?

Richard:  Five years ago the public would simply have refused to believe governments would let this debacle happen.  Now, after recent economic events, they know governments are capable of corruption and stupidity of herculean proportions.

Pat:  Okay, I’m on the edge of my seat.  What is this scandal?

Richard:  If I tell you outright, you won’t understand, because no one has a paradigm for it.  I need to give you a paradigm, and I’ll use the bond rating scandal for that.

Pat:  I’m listening.

Richard:  Bonds are IOUs.  When you loan your money to a government or a corporation, you are naturally concerned about your chances of getting it back.  The bond rating agencies are private companies established about a century ago to examine companies and judge the risk in any given bond.

Pat:  What’s wrong with that?

Richard:  Nothing, by itself.  But one of the many things poisoning the well is that these companies are taxed and regulated by the government, and they are human, they’re just as afraid of the government as anyone else is.  

Pat:  So a reasonably bright person should wonder…

Richard:  You’ve got it.  Are these firms really looking at government bonds as objectively as they should?

Pat:  If you were them, would you?

Richard:  Certainly not.  I’m chicken.  The government would be my good buddy and I’d have nothing but wonderful things to say about it, and its bonds.

Pat:  Does this tie into gold and silver?

Richard:  Very astute of you to see that.  Yes, I think so.  A large part of the world financial system is based on government bonds, and investors in every country are waking up to the fact that the ratings of their bonds may be nonsense.  This is causing investors to loose confidence in the whole global financial system, and so they are moving out of the system and into something that does not depend on a politically contaminated rating scheme for its value.

Pat:  Gold and silver.

Richard:  Yes.

Pat:  Do you have any evidence that the bond ratings that play such a large part in the world financial system really are contaminated by politics.

Richard:  Yes.  For the whole century or so that the bond rating agencies have existed in the US, they have given the federal government’s bonds their top ratings.  This means they’ve been saying that in their opinion, there is a near certainty that if you loan the government a dollar, you will get your dollar back.   But the government’s own Consumer Price Index reveals that a dollar lent to the government in 1913, when the Federal Reserve was created, now has only the buying power of a nickel.

Pat:  Ninety-five percent of the value of the dollar is gone.

Richard:  Right, and I for one find it hard to believe no one in the bond rating agencies has ever looked at the CPI.  I think they have always known full well that the government’s bonds were losing value, and in order to avoid calling attention to this and incurring the wrath of the government, they hid behind a loophole.

Pat:  What’s the loophole?

Richard:  The agencies said the bonds are nothing more than promises to repay paper dollars.  Since the government can easily print paper dollars in infinite quantities, no lender has any risk of not being paid back.  Hence a triple-A rating is justified.

Pat:  So let me get this straight.  They could look at the CPI and see that 95% of the value of the dollar was already gone, yet they were still giving federal bonds their top rating. 

Richard:  Yes.  And even today they are still giving the federal government extremely high ratings.

Pat:  In a financial system like that, I would think that anyone who does not buy gold and silver must have the courage of a riverboat gambler.

Richard:  Well said.  A great deal of the financial system is just smoke.

Pat:  Summarizing what you’ve said so far, the people who judge the true value and stability of the bonds have been painting pictures of the bonds that are highly misleading. 

Richard:  Correct.  And now the whole world is beginning to face that fact.

Pat:  How can anyone ignore it?  To believe a bond denominated in a currency that has lost 95% of its value deserves a triple-A rating is to have the brains of a turtle.

Richard:  (Laughing)  A turtle?  That’s a bit unkind.  How about a hamster?

Pat:  Okay, a hamster.  But how does this connect to the big new scandal?

Richard:  The big new one is basically the same thing — the unreliability of the data we use to judge value — except that it’s not limited to the bonds, it applies to all of every publicly traded organization of any kind.

Pat:  All?  Every?

Richard:  Yes, all, every.  Not just to a portion of a company, such as the bonds, but the entire thing, from the linoleum in the mail room to the light atop the tail of the CEO’s corporate jet.

Pat:  Are you going where I think you are?

Richard:  Probably.  Let me ask a few questions.  How much is all that stuff worth?  How much of it is there?  Where is it?  How do we know?

Pat:  Oh no.  I do see where you’re going.  We buy and sell stocks, bonds and all sorts of other financial instruments on the assumption we know what we’re getting.  We trust the accounting.

Richard:  Yes.  That’s the scandal, the accounting.

Pat:  And you are saying the accounting is suspect, just like the judgments of the bond rating agencies.

Richard:  Not in the exact same way, but I believe it is, yes.  If I buy, for instance, a share of stock in a blue-chip corporation, I’m expecting to own a share of buildings, office equipment, vehicles, machinery and huge amounts of other things.  But I have no idea what I’m really getting; there’s no way to know.

Pat:  Surely you jest. 

Richard:  Not at all. I’ll give you a small example that will reveal the whole can of worms.  Suppose you are planning to buy a bond or a stock of a sporting goods company.  You look at the company’s balance sheet and find the company says it owns 1,233,010 baseballs, which are packed in little cardboard boxes stored in shipping crates on rail cars parked in Nome, Alaska.

Pat:  Okay.

Richard:  Do you believe it?  Do you really think a platoon of auditors got on a plane, flew up to Nome, unloaded all the rail cars, and unpacked and counted every baseball to make sure none of the boxes contained sand instead of baseballs?  And did they then repack the baseballs, reload the rail cars, and fly home?

Pat:  I’ve always wondered about that sort of thing. 

Richard:  Of course.  Everyone has.  Let me call your attention to the word accounting.  Notice that contained within the word is the word count.  I have a 1903 Encyclopedia Americana in which the explanation of the word accountant contains this:  “it is recognized that it is their duty not merely to certify to the correct balancing of the figures submitted to them, but to use reasonable intelligence and honorable purpose on the manner in which those figures were made.”

Pat:  Don’t just check the arithmetic but verify the accuracy of the original counts.

Richard:  Right.  Now look at this sentence from AU Section 331 of today’s Public Company Accounting Oversight Board statement, approved by the SEC:  “In recent years, some companies have developed inventory controls or methods of determining inventories, including statistical sampling, which are highly effective in determining inventory quantities and which are sufficiently reliable to make unnecessary an annual physical count.”

Pat:  So it’s okay for an auditor to not count all the stuff.  He can just take a sample and trust the rest to the company’s own records.

Richard:  Yes.  These days, very little of accounting is about counting.  The auditor takes statistical samples, trusts computers, and checks math. 

Pat:  He doesn’t count every baseball.

Richard:  Right.  But let me hasten to point out that this may not be much of a problem inside the US.  American businesses are generally regarded as some of the most honest in the world.  I think it’s probably very rare for them to jiggle the data on purpose.

Pat:  But America is only about 20% of the world economy.  What about the other 80%?

Richard:  Good thinking, you’re ahead of me.  You’ve put your finger on the exact problem.  It’s a one-world economy now.  Everything is connected to everything else, and the US is deeply intertwined with the other 80%.  I would not be surprised if each member of the Fortune 500 owns assets or has alliances in scores of countries.    

Pat:  And we should be asking, how accurate is the accounting in those countries?

Richard:  Right.  Finding an error that is accidental is a much different thing than finding one that is skillfully crafted and creatively hidden.  The foreigners say they have the assets, but do they?  Fraud might be difficult for someone to get away with inside the US — although the behavior of the Treasury and Federal Reserve would indicate otherwise.  But what about China?  Russia?  India?  Indonesia?  And on and on.

Pat:  We’re linked to them but you don’t trust them.

Richard:  Absolutely not.  Read a book called One Point Safe, by Andrew and Leslie Cockburn.  It was written in 1997.  It describes the accounting, or lack of it, for Russia’s nuclear weapons.  There is no way to know how many nukes the Russians have lost because the accounting was so bad no one knows how many they had. 

Pat:  And if we can’t trust their accounting for their nukes, should we trust their accounting for their baseballs?

Richard:  Right.  And it’s not just Russia. If a US company in which you own stock, buys into a Chinese company that reports it owns a 100,000 square-foot hula-hoop plant on Long March Highway in Xinjiang, how do you know the factory is really there? 

Pat:  How do we even know Long March Highway is there?

Richard:  Have you seen it with your own eyes?  Has anyone ever seen it?  In that 100,000 square foot factory, has anyone measured the building to make sure it’s not really 80,000 square feet? 

Pat: In fact, if the Chinese company reports it owns a factory in Omaha, Nebraska, how do we know the factory really exists? 

Richard:  Good point.  The whole world accounting system is based on the assumption that most people behave honestly and tell the truth, and we’re all friends; there isn’t widespread fraud.  We assume very few people are deliberately trying to rip us off, so we don’t need to count every last nut, bolt, brick and baseball.  We trust.

Pat:  We especially trust computers.

Richard:  Is it logical to assume foreign crooks have not stumbled onto the fact that nobody is minding the store?  Think about the amount of animosity between Washington and Beijing, or between Washington and Moscow, Washington and Pakistan, and so on around the world.  Would anyone in these countries mind if their crooks were ripping off their US enemy?

Pat:  I see what you mean.  The whole world financial structure operates as if accountants are still counting everything, and they aren’t.  Mostly accountants are trusting people who probably should not be trusted.

Richard:  Well said.  Each item an accountant is not counting is an opportunity for fraud.  In that Chinese factory, do the concrete floor and walls contain the correct cement and rebar?  Will the factory blow down in a high wind? 

Pat:  Tough to know.  But if I were the CEO of a big corporation, I’d say, we can’t possibly examine everything in such detail.  It would require thousands of auditors and cost a fortune.

Richard:  Maybe that’s why they don’t do it.  I’ve written often about what I call the Trust Crisis, especially in regard to China.  A rather good summary appeared in my September 2007 Early Warning Report.  The underlying assumption around the world is that errors are almost always by accident, and there is no large number of people deliberately scheming to deceive us. 

Pat:  So you knew about this Trust Crisis four years ago.

Richard:  I knew about it forty years ago.  It was revealed to me by one of my accounting professors who was worrying about it when I was in college in the 1960s.  With the advent of the computer, many accountants could see this coming but no one would listen to them.

Pat:  And now it’s finally here.

Richard:  I think so.  My main point about the Trust Crisis is that trusting anything financial is becoming unwise.  You may have noticed that in the last year there have been articles in the Wall Street Journal warning about Chinese accounting. 

Pat:  So look out.

Richard:  Yes, look out.  For a bit of insight into why a lot of Chinese feel the way they do about us, and why their accounting, and their policy toward the dollar, may not be what they seem, watch the 1966 movie "The Sand Pebbles". 

Pat:  You are saying a lot of people have grudges against us that Americans today know nothing about.

Richard:  Yes.  I think a big reason we’ve seen such a huge run-up in precious metals during recent years is, people see one economic scandal after another and they are running away from the financial system itself.  Imagine what will happen when they begin to face the fact that much of the auditing that underlies the entire world economy is based on trusting people who hate us.

Pat:  For past meddling we’ve completely forgotten. 

Richard:  Yes.  The stampede away from the financial system and into precious metals will be unlike anything ever seen before.  Gold’s run from $271 to $1,900 will look tame by comparison.

Pat:  This is truly scary.

Richard:  Mind you, I’m not saying all foreigners are crooked.  It’s been my experience that in most cases, people in any given country are very honest, toward each other.  But most countries have been invaded and overrun so often by foreign armies that many feel no love for outsiders.  Anyone considered to be an outsider is fair game, whether he is from the far side of the world or the far side of town.  Auditors should take precautions accordingly, and some don’t. 

Pat:  A population’s history affects their behavior.

Richard:  Certainly.  My wife and I were born after World War II and had nothing to do with the war.  But we remember in 1989 visiting a town in Germany that had been heavily bombed.  When the townspeople heard us speaking English, they treated us very rudely.  I would not be surprised if the rate of crime on Brits and Americans in that town was higher than in other parts of Germany.

Pat:  No kidding.

Richard:  Yes.  My point is that many auditors totally ignore the effect of history on the psychology of the people they are auditing.  The winners in a war rarely remember much, but the losers never forget.

Pat: An old saying among gamblers is, trust everyone but always cut the cards.

Richard:  Excellent, Pat, very apropos. A wise man once said to me, always try to see things from the other person’s point of view.  Most of the world has been attacked and invaded repeatedly.  An auditor should study the history of the country in which he is working.  He should go in with an attitude of, these people have a hundred good reasons to hate outsiders and swindle them, so I’d better be meticulous.

Pat:  You think up to 80% of the world’s accounting is seriously in error?

Richard:  Not 80%.  That’s much too high, or at least I hope it is.  But if it’s 10% or 20%, this would not surprise me.  I remember in the Air Force in 1968, an anthropologist told me that Americans just don’t understand that in many countries, what we regard as dishonesty is simply the customary way things are done.  He said Americans just can’t cope with the fact that those people don’t think like we do.

Pat:  From this interview, I’m sure our readers can see the importance of understanding the issues your Early Warning Report covers. 

Richard:  Thanks, Pat, that’s kind of you to say.

Pat:  Let’s get back to the financial ramifications of not cutting the cards.

Richard:  Okay.  I suppose a summary of what we have covered so far is, every item an accountant does not count is an opportunity for fraud.

Pat:  When you said this affects all parts of every company, you weren’t joking.

Richard:  As I said, I think it will shake confidence in the whole financial structure, and people will be even more afraid to have their wealth in the system.  They will be desperate to put it somewhere else, and for thousands of years, the number one choice for investments outside the system has been gold and silver coins.  These days, I’d add platinum coins, too.  The main thing is to hold at least some of your wealth in a tangible form that isn’t dependant on the ethics of people who feel no obligation to be honest with us.

Pat:  Why open this can of worms now?

Richard:  Well, I’m not opening it.  The Wall Street Journal articles about Chinese accounting show that it is beginning to open by itself.  The press is digging where they’ve never dug before.  The truth about the real condition of the world economy is beginning to surface, and this accounting scandal is integral to that condition.  I think it’s only a matter of time until people will be screaming, this was ridiculously obvious, why didn’t the government do something about it?!

Pat:  You really do see the whole world financial structure as very rickety.

Richard:  I would use the word fragile.

Pat:  Yes, fragile, that’s good.  It’s already fragile even before people have begun noticing the implications of the fact that accountants are no longer counting every brick and baseball.

Richard:  Yes.  You might want to check out a report on the Forbes website, June 14, 2011, titled “Accounting Scandals Galore…” about China.  I think that whole country is a shell game.

Pat:  You have a reputation for telling it like it is, but this must set some kind of record.

Richard:  Right back at you, Pat.  There aren’t many publishers who would put something this shocking into print.  On the other hand, as I said, anyone who has any knowledge of finance already knows it’s true.  We’ve all thought of it before.  Does that platoon of accountants really fly up to Nome and count every baseball?  Of course not.  Somewhere along the line they’re taking someone’s word for it.  That’s what my accounting prof was so worried about in the 1960s.  Computers were new then, and he could see that by doing the counting for us, computers were making things dangerously easy. 

Pat:  A computer can be wonderful, if the person at the keyboard is honest; it can do thousands of useful computations per second.  But if he is a highly clever crook, the computer can commit thousands of thefts per second.

Richard:  Again, well said.  If America’s economy was the only one that affects Americans, we might be okay.  But Washington has a lot of enemies who have great incentive to hate us and rob us.  If you think the real estate crisis and the federal debt crisis have been big trouble, those have been just the tip of the iceberg.  Wait till you see the accounting crisis.   

Pat:  Why haven’t the bond rating system and accounting system been cleaned up by governments?

Richard:  I’m not a mind reader, but I think one reason governments don’t want the monitoring systems fixed is because they don’t want those systems looking clear-eyed at them.

Pat: They certainly are the ones who have the most to hide.  Is there another reason?

Richard:  Government officials control everything under the sun, because they like to acquire power.  But the typical individual assumes the controls are to protect him.  The more controls, the more he trusts.  He lets his guard down, and gets conned.

Pat:  And you think this is going on in regard to accounting?

Richard:  Big time.

Pat:  Around the world.

Richard:  Around the world.  Let me emphasize, I don’t think investors at this time are losing faith in manufacturers or banks, retailers or oil companies.  They’re losing faith in the financial system itself.  And if I’m right about the coming accounting scandal, this will be the final nail in the system’s coffin.  Gold, silver and platinum coins will be on their way to the moon.

Pat:  I remember you predicted this loss of confidence in the system itself in the June 2009, Early Warning Report.  

Richard:  Yes.  The Trust Crisis might be the biggest crisis of them all — how can anything function if everyone is afraid to trust — and the accounting scandal is what may cause the whole world to sit up and realize the crisis is here.

Pat:  Does the Trust Crisis tie into your book Whatever Happened to Justice?

Richard:  By golly you’re right, Pat.  I hadn’t thought of that.  We’ve been friends for over 20 years and I’ve been recommending your firm for gold, silver and platinum bullion coins for that long, because you follow the ethics explained in Justice.  But I missed the fact that the Trust Crisis, including the accounting breakdown, is global because, at bottom, we’re now in a global breakdown of honesty.

Pat:  It seems that everyone is beginning to say, if governments can rob Peter to subsidize Paul, why can’t I rob Peter to subsidize myself?

Richard:  Painfully true.

Pat:  Now we know what you meant when you said you were going to test our courage.  This will keep a lot of us awake tonight.  We’re out of time, Richard.  I really do hope our readers subscribe to Early Warning Report.  This interview has been an excellent sample of your work.  It is true that no one else does what you do.

Richard:  Thanks, Pat.  It was great meeting with you again, you certainly are doing an outstanding job at Resource Consultants.  Say hello to the family for me.

End


Pat Gorman and RESOURCE CONSULTANTS are on the
EWR recommended vendors list for gold, silver, and platinum bullion coins.
They can be reached at 800-494-4149.


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