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Transcript
FutureMoneyTrends.com: Greetings and thank you for joining us at FutureMoneyTrends.com. I’m here at the Casey Summit with Jim Rickards. He’s the author of Currency Wars. He has a new book coming out as well. What is it called?
James Rickards: It’s called The Death of Money: The Coming Collapse of the International Monetary System. It’ll be out in April; April 8th is the publication date. I finished writing it about a month ago and we’re in editing.
It’s a funny thing, Dan. We live in a world of what I call instant digital gratification, whether it’s YouTube or Twitter, everybody wants to put everything out there immediately, but a book is still an old-fashioned process.
It takes a year to write it and edit it and bind it, so it’ll be out in April and I’ll be talking more about it between now and then.
FutureMoneyTrends.com: It should be very interesting because I’m sure some of your analysis will have either been proven right or proven wrong in the book, am I right?
James Rickards: Well, that’s right, I mean it is forward-looking, so I say a lot of things in the book that I will be looking over in the years ahead, but sure. It’s something coming out in six months, it’ll be a good test to see how things play out. We’ll see if they play out as expected. That’s exactly right.
FutureMoneyTrends.com: I’ve always wondered in the dollar crisis scenario if right on the cusp of the market just melting down and going crazy that Obama and whatever Fed chairman of that time, say, next to him and they’re instituting a gold standard.
Do you think it’s possible that they, right before a major crisis is about to happen, they come in and switch the currency?
James Rickards: I don’t think so. I think there are several scenarios: one is that we get to a gold standard by design.
In other words, people look at the system and they say that it really is not sustainable, it really is based on confidence, but we’re in the process of eroding confidence. There is no exit from quantitative easing. We should say there’s no good exit. You can back away from it, but then you’ll implode the economy in a deflationary crash.
Or you can keep going and eventually cause a loss of confidence in the dollar and then have a hyper-inflationary crash, so you got a crash either way. One looks like the Great Depression, one looks like the late ’70s but worse. Those are the only two paths, but there’s no other path. There’s no way we can just sort of taper, reduce it, finesse it, try to get growth on a self-sustaining path.
The reason for that is we’re in a depression. And depressions are structural problems; they require structural solutions. You cannot use a liquidity solution for a structural problem. You need a structural solution.
So there’s nothing the Fed can do to solve the depression or to change the structural problems in the U.S. economy. I mean, they’re assuming, they’re saying, “We’re gonna print money until unemployment gets to 6 and a half percent.” Who says there’s any relationship between printing money and unemployment? There’s no necessary relationship there. One’s monetary, one’s structural, so you need to do other things. So therefore they’re gonna keep going, but they think they’re right.
I may be a critic and I may be able to point out why they’re wrong, why their models are wrong and why this says “No Good Exit,” but they think they’re right and they’re gonna keep going and kinda drive the bus over the cliff.
Now, at that point, when the crisis emerges, they may have to go to a gold standard. They don’t want to, but they may have to, to restore confidence. But I’m very doubtful that they’ll do it as a matter of choice and say, “Look, we need to do this, let’s just do it now, let’s be honest, let’s be transparent, let’s be thoughtful.” You could do that but I think that’s very unlikely.
FutureMoneyTrends.com: So in 20 years from now, do you think the world will look back and it will be the 2008 to whatever is going to be depression?
James Rickards: Yes!
FutureMoneyTrends.com: Because nobody would ever say that it’s a depression now, I mean you’re saying it is and your analysis; by the way, anybody who missed your speech, it’s unfortunate because every word out of your mouth is backed by so much data and charts and statistics so, ultimately you think people will look back at this time and everyone will acknowledge that it’s a depression?
James Rickards: Oh, certainly. I mean, first of all I’d say it started in 2007. 2008 was the panic and it was an emergency liquidity response to that, but the roots of this really go back to 2007. That’s when the sub-prime crisis erupted, that’s when the Bear Stearns hedge funds melted down. That’s when the Fed first started in to cut the discount rate and respond a little bit, even though they were way behind the curve and didn’t see it coming.
So the depression started in 2007. It could be over tomorrow if we had the right policies, but we don’t have the right policies. It will continue indefinitely.
We look like Japan. Japan has said, people talk about the lost decade, we’re in the third lost decade; it’s been over 20 years of depression, depressionary symptoms or depressionary economy in Japan.
The U.S. is now in the same mode, it’s kind of ironic because for decades Bernanke and other scholars criticized the Japanese, saying, “What’s the matter with you guys, don’t you know how to run monetary policy, don’t you know how to get out of a depression?” Then they said, you know, in 2007, “We are going to avoid the mistakes of Japan.” But we’ve made every single mistake that Japan made.
We should have shut down banks in 2008. We didn’t. We propped them up instead of shutting them down, which is exactly what the Japanese did. They locked the problems into place and financed them instead of writing them off, shutting them down, putting backers in jail, closing the banks, breaking the mob, stripping out the bad assets, putting them under a rock in trust for the American people, sell them over 20 years or however long it takes. Then re-IPO the clean banks.
They didn’t do that. Instead they did what the Japanese did, which is they propped up the system, they kept their buddies in place. There was no real prosecutorial effort, and so we shouldn’t be surprised that we have the same result as Japan, because we went down the same path structurally. Now we printed more money than the Japanese did, but that’s not the solution, so it’s not going to work.
So having said all that, I just think that you will have this hyper-inflationary response at some point. Not right away, because it’s behavioral. The Fed needs to change behavior first. But when they change it, they may find it spins out of control, as it did in the ’70s.
At that point the price of gold will soar or, if we go into a depression (I mean, we’re in a depression, but if we go into a more severe deflationary mode), the Fed may raise the price of gold as a way to create inflation. Either way, gold goes up in the end.
FutureMoneyTrends.com: You talked today about the helicopter money coming and that kind of excited me as someone who owns stocks in gold and silver. Maybe it’s because I feel comfortable where I live and stuff. You know I’m not working in the inner city or something, but is that going to be really good for stocks when that helicopter money comes in?
James Rickards: Well, initially, this kind of inflationary environment is good for stocks, but in the long way it’s terrible for stocks. Inflation destroys capital formation. The stock market is all about capital formation, earning profits, expanding your company, coming up with new companies, capital formation, capital expansion, growth in earnings, growth in multiples.
That’s what the stock market is about. Now initially, you have what’s called money illusions. So, a lot of money floods into the system, it chases assets, it could be housing, it could be a lot of things.
Stocks are part of it. No doubt the stocks have benefited the last four years from the Fed monetary ease. Well, if you have more ease, the stock market should go higher. Initially, but eventually the inflation outruns the gains and it turns out the gains are illusory.
It’s not real and then the capital formation dries up, taxation goes up and the stock market crashes. It’s exactly what happened in the 1970s. We had a very severe, serious stock market crash in 1974 and then the stock market never achieved those highs again until sometime in the mid-1980s. So you had a very long period of no growth in the stocks after a severe crash, and we’ll have something similar.
FutureMoneyTrends.com: As far as rates going up, it would seem that if rates went up, that the government would look really bad with the majority of the income going towards interest and then them borrowing even more.
Is it even possible; I mean are they going to just defend these low rates with everything they’ve got?
James Rickards: Sure. That’s what financial repression is. That’s what quantitative easing is. Every time the rates want to go up, the Fed can just buy more bonds. Of course, they buy bonds with printed money, but it just keeps the lid on rates.
I’ve spoken to people in the primary dealer community. They’re completely relaxed because they’re just middle-men; they’re intermediaries between the Fed and the banks; the institutional investors. They buy bonds from the Treasury, they can finance them or sell them to the Fed or they can sell them to institutions. So the primary dealer is basically the large banks are middle-men.
Now, the risk there is that they’ll get caught out. They’ve got long maturities, so they’ve got five-year notes or ten-year notes and they’re financing them overnight in the repo market. Well, what if the repo rate went up? All of a sudden the trade is profitable, it goes upside down, if the short-term rate gets above the long-term rate. Or if long-term rates go up they have capital losses on the bonds.
So it’s a very risky trade, but the Fed has told them, “We’ve got your back.” That’s what forward guidance is. When the Fed says “We’re not gonna raise rates for two years or three years, etc., then you can do the overnight financing for three years and know that you’re going to be paying zero rates.”
So they’ve taken the risks out of the trade. So the primary dealers are relaxed, the Fed is going to keep the lid on the interest rates.
You know, the only reason the interest rates went up over the summer was because of the taper talk. But they didn’t actually taper and I didn’t expect them to and I honestly don’t see how they’re going to, maybe ever. So the rates went up, not only in the fundamentals but because of the talk of tapering.
People were shocked, they said, “Wait a second, you’re going to taper and do weak economic data? You’re going to taper into a recession?” Which is what they’re doing. But they didn’t taper, so now rates are coming back down again.
If we follow the Japan scenario, and I expect we will, I can see ten-year no-rates coming down to 80 basis points. If they go from 250 to 80, that’s the greatest bond market rally in history.
So everyone’s worried about the bond bubble, but they’re focused on nominal rates. They’re not looking at real rates. Nominal rates could come down a lot more as a way of getting real rates lower, because inflation is low it may even dip into deflation.
So we could be set up. But in the long run rates would go way up and the country would go bankrupt and we’ll all have hyper-inflation. That could be two or three or four years away. Over the course of the next year you can see a very strong bond market rally.
FutureMoneyTrends.com: Do you think whatever’s going to happen as far as a crisis or a restructuring structurally, is this going to happen within this decade?
James Rickards: Yeah, I would say a decade is a likely scenario. You know, when you do the forecast, I drew it analytically, I used complexity theory, I used dynamic models and dynamic methodology. So I look at how things play out and I recognize the fact that they could take several different paths. I don’t put a stake in the ground about one outcome. What I do is I look at several possible outcomes.
And even analysts who do that, they throw weights at them, they say, “Well, there’s a 20 percent chance of this and a 40 percent chance of this and then a 50 percent chance of this” or whatever. What I say is “No, there’s a 100 percent chance of one of them and a zero percent chance of all the others, you just don’t know ex-ante which one it’s gonna be.”
And so the art of analysis is really kind of getting the scenarios right. Then identifying the milestones; identifying indications of warnings along the way. When you see those indications and warnings emerge, then you can know that you’re on this path instead of this path, so that’s kind of how I look at the future.
So there are several possible outcomes but I think they end up with inflation, but you could have some deflation first. So that’s really difficult for investors, because things are kind of pulling two different directions.
FutureMoneyTrends.com: Yeah, it’s been very frustrating for the gold investor. You know, you look at all this, you see the crisis and you buy gold. Yet gold for the last two years has gone down and it might even have further to go.
Do you have any perspective on why gold has been going down? Some say it’s manipulation, some say it’s just the market.
James Rickards: There are a number of reasons. There’s certainly some Central Bank manipulation. There’s some fundamental reasons having to do with what we’ve been talking about, which is deflation.
Gold should go down in a deflation environment initially. But if deflation gets bad enough, the government will make the price of gold go up because they get desperate to create inflation.
If you’ve tried everything, if you want inflation, and you’ve tried everything to create it, so you tried money printing, cutting rates, currency wars, Operation Twist, QE, forward guidance, nominal GDP targeting, you’ve tried everything, you still didn’t get the inflation. There’s one thing that always works, which is devaluing your currency against gold.
So there could come a time when deflation gets so bad that the Fed and the treasury actually raise the price of gold, not to enrich gold investors, but to get close to generalized inflation. Because if gold goes up, silver and oil will go up along with it. It’s exactly what happened in 1933.
So that’s one path. But the other, perhaps more likely path, is that the Fed just keeps printing money and finally succeeds in changing behavior, velocity of the turnover money picks up and inflation goes up on its own. Then gold will race way ahead of that. That’ll just change the psychology.
My advice for gold investors today is to kind of do what the Chinese do: just buy the dips. The Chinese bought a tonne, hundreds of tonnes of gold at the lows in July, July 2013.
Now, again, we had that smash in April and gold went down over 20 percent between April and June. Well, right there at the end of June, the Chinese were buyers, so my advice to investors: don’t use leverage. Buy physical bullion. Don’t buy paper gold. Do what the Chinese do, which is buy the dips, put it away and don’t read the papers.
So gold’s volatile. You just have to get used to it. And if gold is down a lot, it’s because deflation has the upper hand.
But nothing moves in isolation. If gold traders down to, let’s say, $800 an ounce, that is a highly deflationary world. That probably means the stock market’s crashing, other commodities are going down, so you might actually like your gold better in that environment, because even though it went down a nominal space, it can outperform these other asset classes and still preserve wealth.
Of course, in the opposite case, if inflation takes off, we all know what’s going to happen: gold is going to go way up.
FutureMoneyTrends.com: Yeah. What is your next book gonna be about? Or what is it about?
James Rickards: Well, it’s both a prequel and a sequel to Currency Wars in the sense that one of the parts of Currency Wars that people liked was the part about the war game.
The Pentagon, what they did in 2009, while there was some stuff, activity before that. I talked about that really for the first time, so to kind of give the lead-up to that and how I would’ve gotten involved in that war game with the Pentagon, etcetera, so I hope that’s interesting to readers.
But then the sequel is to kind of go into the future. With Currency Wars it was a lot of the economic history. And I thought that was very important. First of all, readers like it, they enjoy economic history, but it’s also educational.
And if you want to talk about gold, if you jump right into gold, a lot of people go, “Oh, you’re a gold bug, you’re a gold nut,” or whatever, they don’t take it seriously. But if you can explain it over an 150-year period and how gold was always in the monetary system and the role it played, then the reader comes along with you and they’re much more interested in it, more attentive to it when your actually get to it in the present-day context.
So the new book won’t have as much history, because that’s in Currency Wars and you don’t need to do it twice. It’s more forward-leaning, talking about the future of the international monetary system.
FutureMoneyTrends.com: I’ll never forget that part, because your book was like reading a novel. And then that part where you were, your proposal was that the Russians back it with gold with China, I believe, and then it was on Drudge the next; well, first people blew you off, and then it was on Drudge the next day.
James Rickards: Well, that’s right. An even better validation: We did this in 2009. We were; the Harvard eggheads all laughed at us and they said, “Yeah, gold has no role in the monetary system, you guys don’t know what you’re talking about.” And of course, it was on Drudge the next day.
That was right around the time that Putin and later the Chinese and the BRICS started being more vociferous, really standing up to the United States. But since we did that, we came up with this scenario in 2009 that the Russians and Chinese would buy gold and move away from the dollars to gold reserve currency through some means. Well, since then the Russians have increased their gold reserves by over 60 percent. They’ve gone from 600 tonnes to over 1000 tonnes, almost 70 percent.
The Chinese have increased their gold reserves by a multiple; we don’t know how much because they’re not transparent about it, but they clearly have some number: 3,000, 4,000 tonnes, the exact number’s not known, but it’s kind of that order of magnitude up from 1000 tonnes. So the Chinese have increased their gold 300 or 400 percent, the Russians have increased their gold almost 70 percent.
They’re acting exactly the way we told the Pentagon in 2009, so I think that was pretty good vindication for our scenario.
FutureMoneyTrends.com: On the treasury front, are the Chinese still big buyers of treasuries?
James Rickards: No, they’re actually reducing their purchases. Now, they’re not dumping them. This idea that suddenly they’re going to dump two trillion dollars of treasury. That’s not gonna happen. Because it would be too disruptive; they would shoot themselves in the foot. They would crash the market, the U.S. could actually freeze their treasury accounts.
People don’t realize that, but the president has the legal authority to freeze the Chinese accounts. We wouldn’t have to steal their money, just say, “Hey, we’re freezing it. We’ll get back to you later about when you can collect.”
You gotta get back to them and make good behaviors, so to speak. And the Chinese know that, so they’re not gonna go there because the U.S. has very powerful tools to preserve its interests and preserve its markets.
But at the margin, as they get more reserves, as they run a continuing current accounts surplus, they get direct foreign investments. They get their hands on more dollars. They don’t have to invest new dollars in treasuries. What they’re doing is swapping it for Euros, they’re investing very heavily in Europe, they’re buying direct assets, they’re buying mines, they’re buying companies, buying stocks, etc.
So they’re not dumping what they have, but they’ve slowed down the purchases. They’re selling a little, and most importantly, at the margin they’re diversifying into other assets.
That’s going to put a lot of pressure on U.S. interest rates, because in the past the Chinese have been buyers, so the question is: Who’s going to step in and fill the void, so to speak, as what’s called “the buyer of last resort” of treasury? Well, the answer, of course, is the Fed.
FutureMoneyTrends.com: Yeah. In closing, I know in a previous discussion we had, you said Obamacare was a revenue-raiser.
What about on the economic front? Because there’s two major things I’m seeing: the companies are reducing people to 28 hours, 28-29 hours. And then some employers with over 50 employees are reducing it to 49. This seems like a very common-sense thing for any employer. You’re obviously, you’re not gonna put yourself in a situation where you’re gonna crush all your profits.
What does this mean for the economy? I mean, is this just gonna make things rapidly deteriorate?
James Rickards: Yes. I mean, when I said Obamacare is a revenue-raiser, I didn’t mean it as a good thing. What I meant is that it’s a hidden tax. Basically we’re gonna tax the economy directly and indirectly and that was a very bad thing.
But all of the other aspects you mentioned, Dan, which are maybe I’m gonna call them unintended consequences, maybe some of them were actually intended, but yeah. We’re going from full-time jobs to part-time jobs, we’re going from expanding work forces to, if you have 49 employees you have no interest in hiring one more employee.
So we’re taking the most entrepreneurial, small-to-medium-sized enterprises in the country, we’re capping out the number of people they’re going to hire, to the extent they’re going to hire more people who are part-time.
It is a huge tax on the economy. It’s creating all kinds of inefficiencies, so sure. The economy has enough problems as it is. I mentioned before that a depression is a structural problem, so you need structural solutions.
This is, Obamacare is actually adding to the structural problem. Not only is it not a solution, it makes the structural problem worse.
FutureMoneyTrends.com: Yeah. It’s very scary and it’s very sad.
James Rickards: Yeah, it is.
FutureMoneyTrends.com: Mr. Rickards, thank you so much. I hope everyone checks out Currency Wars and your next book in April. If someone wants to follow you, how can they; do you have a website?
James Rickards: I don’t have a website, but the best way is on Twitter.
My Twitter handle is at JamesTRickard. R-I-C-K-A-R-D-S, so, @jamestrickards, and I put out a steady stream of commentary on the economy, the Fed, and the international monetary system. Sometimes I talk about baseball. I hope people can follow along and enjoy it.
FutureMoneyTrends.com: Real quickly, I almost forgot to ask, because he’s gonna be really mad if I don’t ask you about Bitcoin.
James Rickards: OK.
FutureMoneyTrends.com: I’ll just throw it out there: Bitcoin, what are your thoughts?
James Rickards: It’s one of my least favorite topics because I’m very skeptical of Bitcoin, but Bitcoin supporters are fanatical, they love it. So every time I say something mildly negative about it I get a lot of; I hear from the Bitcoin people, so to speak.
But I will say, I was down in California about four months ago. I was in a debate on Bitcoin. Look, I’ve got nothing against the technology. I’ve actually read the technical papers. I’ve spoken to a lot of people about it. It is cool technology, it’s good encryption. The block chain method of validating, the fact that it’s decentralized and dispersed. You can fire a drone missile at a Bitcoin server and it doesn’t matter because there’s another one over here that’s got the block chain and they can validate.
So, I understand all that and it’s cool stuff and it does attract libertarians and it does attract technophiles. So I get all that, but what I said at the time was, “Don’t deceive yourself, don’t kid yourself, don’t think the government’s not watching.” This idea that somehow you’re escaping government scrutiny, or you’re outside the government matrix or whatever is just not true.
And that has been validated since I made those remarks. There’s been a number of, Mt. Gox, you know, was attacked by the government. And of course there’s Silk Road, and now arrests have been made.
So, the government’s watching everything you do, so if you’re in Bitcoin enjoy it but don’t kid yourself, don’t think the government’s not watching.
FutureMoneyTrends.com: Thank you so much for your time.
James Rickards: You’re welcome.
