The Coming Collapse of the International Monetary System – James Rickards Interview

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Buy Rickard’s Books: Death of Money, and Currency Wars

Transcript:

Future Money Trends: Greetings and thank you for joining me at FutureMoneyTrends.com. I’m here with bestselling author, Jim Rickards. He has two must reads. The first one came out in 2011: Currency Wars. His new book is ‘The Death of Money: The Coming Collapse of the International Monetary System.’ Our guest is a very unique man because he’s just so dang smart, and an absolute pleasure to listen to. He has four university degrees including a doctorate and two law degrees. Jim thank you so much for joining us today.

James Rickards: Thank you Dan. It’s nice to be with you.

Future Money Trends: Jim I want to talk about what’s right now in the news before we get into your book. Putin’s close confidant, a man described as one of Russia’s most influential men, recently being targeted by U.S. sanctions. Of course, after reading your books and studying the dollar crisis myself, Jim, what is the US government up to? For an emperor with no clothes, this seems like suicide.

James Rickards: Well that’s a very good point Dan, and the individual you mentioned, the guy in question, is a fellow named Igor Sechin. And so I may not be a Kremlinologist, that’s a pretty arcane art, but Igor Sechin’s probably more powerful than Putin, he’s the ultimate behind the scenes guy. Igor Sechin and Putin both came out of the cage you be, I think that’s well known, but Sechin actually had a higher rank, and is more ruthless, and he’s always chosen to be behind the scenes. So Putin’s the President who’s been the Prime Minister and the kind of Head of State, but Sechin’s a real behind the scenes guy. But here’s what happened, we all know Russia’s basically taken over Crimea, used force to do so. But no one, left, right, or center, thinks that the United States should engage in military action around it, nor does the U.S. Or NATO, so that’s not expected and would probably be pretty foolhardy. But the United States doesn’t want to take this lying down, so they’re engaging in economic sanctions, which is really just a form of potential warfare. And I’ve talked financial warfares in both of my books, in Currency Wars, which came out in 2011; of course the first two chapters were about a financial war game involving China, and Russia, and the United States. I basically helped to plan and participated in a top secret laboratory outside Washington. So that was two chapters that were pretty popular with the readers, and for those who haven’t picked up Currency Wars that might be of interest. But of more immediate interest, my new book, The Death of Money, the entire chapter two is devoted to financial warfare. So exactly what is going on I call the field manual for financial war, which has already broken out. Now here’s the way the listeners can understand it, if you go back to the cold war in the 60′s and the 70′s, the United States always had enough missiles to wipe out Russia, the Soviet Union at the time, but basically Russia. And Russia had enough missiles to wipe out the United States. This was a very unstable situation, because there was always a temptation to shoot first. If you could shoot your missiles and wipe out the other guy, you win. So what both sides did is build more missiles to create what was called the second strike capability. And what this meant was that if the other guy launched his missiles at you, yeah it would do enormous damage, but you would have enough missiles left to shoot back and wipe him out. We actually had a name for this, this was called two Scorpions In A Bottle. So one scorpion stings another, the victim’s going to die, but has just enough strength left to sting back, and they both die. So this actually was more stable because you didn’t want to shoot first, because the other guy could shoot back. Well now flash forward fifty years, we’re in the equivalent posture with regards to financial war. Now in the 60′s we called this second strike capability, we call it mutually-assured destruction, MAD, the mad doctor. And today what we have is mutually-assured financial destruction. So the U.S. can absolutely use financial weapons against Russia, there’s a lot of things we can do. But if we do anything beyond tokens, a token would be some Oligarch doesn’t get to go to the Super bowl, or you freeze the assets of some minor, mid-level guy who doesn’t have any assets, those are token sanctions. But if you deliver these serious sanctions, you can expect Russia to escalate. Now initially, I thought the U.S. would understand this construct, this theoretic construct, of escalation, further escalation, ultimate mutually-assured financial destruction, and not go very far. But this morning, as we speak, the U.S. has announced sanctions against Igor Sechin. That’s serious, he’s the real deal. So now my expectation, using the frame-work I described, is that Russia will strike back in some way. And then yeah, does the U.S do more, does Russia do more, where does this end? Well where it could end, is Russia could unleash their hackers and close the New York Stock Exchange. I’m not saying that’s definitely going to happen, that’s going to happen tomorrow. I’m saying that is where you end up if you keep escalating. So either the U.S has to find a way to de-escalate this, or Russia’s going to strike. And I think investors should understand that there are dangers here that go way beyond normal market volatility, way beyond the way most investors think about things. We’re actually in a financial war with Russia, shots are being fired, it’s going to escalate, and there could be unintended consequences. What if you have hackers ready to shut down the New York Stock Exchange, which they could easily do, and something went off by accident? You weren’t intending to, but you were doing a dress rehearsal, and you accidentally unleash a virus or some program that had the affect of disrupting U.S. capital markets. So it’s a very dangerous state of affairs.

Future Money Trends: Jim, could financial warfare ultimately lead to physical warfare?

James Rickards: Well it could, but what’s interesting is that there’s not a country in the world that can stand up to the United States in what’s called kinetic military warfare. So kinetic just means things that shoot or explode. So missiles, bombs, submarines, airplanes, etc., nobody can go toe to toe with the United States. We can sink any navy, ground any force, disrupt any control communications system anywhere in the world. So nobody wants to confront the U.S. in that space. But when you move over to what we call asymmetric warfare, or unrestricted warfare, what is that? That includes things like cyber warfare, financial warfare, weapons of mass destruction, chemical, biological, radiological weapons, those types of things. It’s a much more level playing field. Now the U.S is very good at it, don’t get me wrong, but so are others. And there it’s much more evenly matched. I say the Russians could use their hackers to shut down the New York Stock Exchange, which they could. And one rebuttal I’ve heard as well, is that U.S hackers could shut down the Moscow Stock Exchange. And my answer is of course they could, but who wins? In other words, we have a lot more to lose than they do. They shut down our stock exchange, we shut down their stock exchange, they win because we have a much more important exchange there. Who cares about the Moscow Stock Exchange? So this is how you have to think about escalation and end games, and what technically what we would call the game theoretic context within which this is playing out. I’m not sure the U.S is very good at that. I mean the U.S is very good at these kinds of financial warfare. I’m not sure they’re very good at the kind of geo-strategic and theoretic thinking that I’m describing to your listeners.

Future Money Trends: A lot of people who are buying gold right now have become experts in US monetary and fiscal policy because they’re watching the disaster unfold. After reading chapter four of The Death of Money, I actually got a little fearful because on China you talk about a collapse that could come at a horrible time with the U.S. and Europe slowing down. This would cause a global depression that would be pretty severe. A question on that, is if the China bubble bursts, which it looks like it is because the whole thing is built on fraud, does this give the U.S. dollar a lifeline for another decade or two as the world reserve currency?

James Rickards: I don’t know about a decade or two. I mean, there are other forces at work. First of all, you’re absolutely right Dan, in chapter four I do talk about a likely credit banking crisis in China coming sooner than later, just because it’s all been built upon unpayable debt. The Chinese have been driving their economy forward with infrastructure investment, which is fine if it’s productive infrastructure, but the Chinese are creating wasted infrastructure. They’re building multi-billion dollar train stations in places where people don’t need them. I think most listeners have heard about the ghost city’s, these are actually city’s that are empty. I’ve actually been to China and watched these construction sites, I got mud on my shoes observing them, some finished, some still under construction. It’s no exaggeration, I saw city’s being built as far as the eye can see. Seven city’s, not seven buildings, seven city’s. Each city having six or seven skyscrapers, a luxury hotel, high end apartments, shopping, recreation center, golf course, metro stops, highways, actually you name it, and then one after the other. And this was just in one location near Nanjing, and this is going on all over China, in Xingjian, Xhejiang, and all over the place. And so when you put this together, this is… and again, in the short run it is driving GDP. It’s real steel, real jobs, real building, real glass, but when you’re done, you have to write it off because it has no use, it doesn’t produce an income. It’s all being built with borrowed money and the debt can never be repayed because the assets being created are never producing any revenue, and they never will. And some people say, “oh, well they built these cities. Give them time, they’ll sell them out, give them a few years,” you can’t do that. First of all migration from the country-side to the city is largely over, it’s not continuing in anywhere near the size that we saw in the last 30 years. But more in the point, you can’t mothball a city. You’ve got to occupy it, maintain it, use it. If you just keep it on the sidelines, mothball it as I say, for five years, obsolescence, all kinds of natural decay, just the weather, all kinds of things affect it, so you can’t even do that so they can’t pay the debt. Millions upon millions, scores of Chinese were sucked in to these what they call wealth management products. If you put your money in to a bank in China you get the same lousy interest rate you get here, maybe a quarter of half of one percent. So they offer these, what they call wealth management products, where there’s 5, 6, 7% deals. So naturally people are piling in to those. But these are just like the old CBO’s and CBO squared that we saw in the U.S, and the securities that turned out to be worthless in the U.S prior to 2007. All they do is sponsors take the money and they invest in these lousy real estate projects I just talked about. And then if somebody wants to redeem, they sell some new ones and use that money to pay off the old guy and suck the new guy in. Such is the Ponzi, and you don’t have to take it from me. The Chairman of the Bank of China said it was a Ponzi. So that’s again, if you adjust the Chinese growth for the wasted infrastructure it would be a lot less today than it already is. You can see these wealth management projects go in to a collapse because they’re a Ponzi. Ponzi’s always collapse, it’s just a matter of time. We all just wait for a catalyst. Now China probably has the resources to build out their banking system, I’m not saying this will be the end of the world. They’ve got four trillion dollars in reserves, so they can throw a trillion dollars at their banking system to prop up the banks. But what does that mean? It means you have to sell treasuries, it means U.S interest rates go up, it means our markets go down, or it means the Chinese banks get in to stress and they’ve got to meet the positive demands, or wealth management product holder demands, and they sell U.S stocks to get the money to do that. And so these are what the IMF calls spill over, or contagion type effects, so I wouldn’t assume that any market’s going to be immune. Now as far as the dollar’s concerned, yeah in the short run their might be some flight to the dollar. But remember, China’s still on the dollars already, they’re not trying to buy more dollars. They’re actually trying to buy euro’s. One of the things you might see, is maybe the dollar’s up a little bit to the yuan, and you might see the euro go to a $1.50, $1.60, and so a dollar will actually be going down against a euro. And then of course gold is poised to do well in that environment, just because of the uncertainty, so it’s a complicated world. I’m not saying the dollar’s going to disappear overnight, I’m just saying there are many, many, straws in the wind from Russia to China, to Saudi Arabia and elsewhere, but they’re all working to undermine the role of the dollar as the global reserve currency.

Future Money Trends: Who is The Death of Money written for, and what can someone expect when they buy it?

James Rickards: It was really written for everyone, and I’ll tell you who it was not written for. It was not written for an academic economist. Most academic economist’s, they write a book and they only care about of other academic economist’s reading it. They don’t care about a general audience, so that’s why most economists don’t write many books. Some do, Paul Cleveland has some popular books, but they’re mostly writing journal articles for each other. In other words, they’re writing to an academic audience. This book is for everyone. People in their 50′s and 60s, even their 70s, I’ve found a big audience there, because these are the people who’ve worked hard over their lives. They have savings, they have investments, they saw 30-50% of that net worth disappear in 2008. They’ve been gun shy ever since and rightly so. We’re just seeing new bubbles in stocks and housing, that kind of collapse is going to happen again. So people are right to be wary, they say, “I don’t trust Wall St, where do I go?” And that’s part of the audience. But there’s also an audience in my younger people, people in their 20s and early 30s. There they may not have as much wealth, but they can’t get jobs, they’ve got $200,000 of student loans, they can’t get a job, they’re living in the parent’s basement. They’re like, “hey, what happened to the American dream? What happened to the opportunity I’ve always heard about?” And they also don’t trust mainstream economists, they don’t trust a lot of what they’re hearing on television. They’re smart, they’re internet savvy, they’re looking for answers. You know, I’m very active. I hope people buy my books with their money, but I’m very active on Twitter also. And also that’s a very nice combination if you read the book, and then you can keep up to date with my Twitter feed, @JamesGRickards. So we’ve got an audience, and then people in their 40s, their parents need their health care, their kids education, trying to save for their retirement. So it’s really found an audience everywhere. One way to put it Dan, is if you have a health problem, you don’t think you don’t think you have to go to medical school, you just call your doctor. Or if you have a legal problem, you don’t think you have to go to law school, you just call your lawyer. But when people have financial issues you say, “well why can’t they call their financial advisors?” Well the answer is, they don’t trust them, and they shouldn’t in many cases. There’s some good ones, but not as many as you might think. And so people, they don’t think they have to go to medical school or law school, but they do think they have to get an economics education, because they can’t trust what they’re hearing from Wall St, and I think that’s right. And that’s part of the popularity of the book.

Future Money Trends: Jim, I just had a daughter, and I have a four year old son. I know these depressions, cycles, or changes can take a very long time. How long is this going to take to sort through? I’m not asking you when, or if, the dollar will collapse in the next five years. But will my daughter, who was born last week, still be in a mucky situation in the US when she’s a young adult?

James Rickards: I think your daughter will grow up in a very different world. The kinds of things I’m talking about, they’re not 10 or 20 year forecasts, and they’re not far and gradual. I don’t think a 10 year forecast is very meaningful. It’s more like three to five years, and when this collapse happens, it will happen very quickly. And that’s not just a guess, that’s actually a conclusion that you reach when you understand the dynamics. These economies and capital markets in particular, are complex systems. And I talk about complexity theory in my book, The Death of Money, and this is actually part of the problem today. Policy makers and central bankers are not using complexity theory, they’re using stochastic general equilibrium models, and those models do not sync up with reality. The Fed uses model that says the economy’s normally in an economic equilibrium, there’s some perturbation, something happens, they go out of equilibrium, you apply policy, you push it back to equilibrium, it becomes self-sustaining sort of like winding up a clock, and it’s all good. That’s what they think, but that’s not how the real world works. The way the real world works is we have complex dynamic systems which, for a period of time can resemble an equilibrium system, but when they go through what physicists call a phase transition, or what maybe is more popularly is known as a tipping point, they spin off in very unexpected directions and they kind of morph in to very unexpected shapes. These are called emerging properties, and I think the popular phrase for it is black swan, but I tend to use the more technical phrases, which would be an emerging property. But the point is you end up in a very different place than where you started, and you don’t get back to where you used to go. And I talk about the economy collapse, and one the initial monetary system shift, one of the points that I make is that the international monetary system actually has collapsed three times in the past 100 years. It collapsed in 1914, 1939, and 1971. Now each time it collapses, it doesn’t mean we all go live in caves and eat canned goods. What it does mean is that the major financial and economic powers will all get together in a bedroom-style conference, sit around the table, and they re-write what they call the rules of the game, which is basically the rules of the working of the system. So what I’m doing in the book, The Death of Money, is first of all explain to readers what this dynamic is. Why this collapse is coming, how you can see it coming, what are the indications and warnings, and why it will be worse than anything we’ve ever seen before. But then, maybe equally importantly, go forward and say what will the new system look like? What will the world financial system look like once the powers sit down and re-write the rules of the game. And then come all the way back to square one, and say, “OK. What can you do today, in your portfolio, to get ready for this, to prepare for the new world, so you’ll be robust when that comes and preserve wealth.” So that’s really the book in a nutshell.

Future Money Trends: Let’s talk about life success. As far as in this environment right now for people, you have an incredible history where you’ve talked about delivering newspapers or driving a cab as a young person. Now you’re a bestselling author, you’ve advised the defense department, and you’ve managed portfolios with Tangent Capital Partners. What would you do right now, if you were in your 20’s or 30’s, what is the best move for people? Is it just to start a business and move to work through this?

James Rickards: I think if you’ve got the spark, and you’ve got some idea, I think starting your own business is always a good idea. A lot of people in their twenties can’t get a job, and part of the answer is make your own job. Create your own job by starting a business. Now that’s easier said than done, and there are challenges, and I don’t think for one second it’s easy. I understand that. But I’m saying that may be a more important option today than at times in the past, where the jobs are really coming from people who start businesses or get in early on certain businesses. So that’s one thing to think about. Saving is always a good idea at any age. Whether you’re 20, or 40, or 50, or 70, you should always be saving something, putting something aside, particularly in times like today when there’s a risk of a very kind of sudden instantaneous loss of wealth, loss of jobs, or even both if we get the kind of reversal that I’m expecting. But then the question is, “OK, I’ve got some savings. What do I put it in? What does my portfolio look like, of my investable assets?” And there, in the last chapter of the book, it’s called The Conclusion, it’s the concluding chapter. I’ve done about 30 pages of very concrete recommendations, but not just recommendations, also the reason why, the history of how these things have performed in various kinds of markets. But I would definitely include gold. I would recommend 10% of your investable assets in physical gold, not gold ATS or Comex Gold Futures or other kinds of paper gold, but actual physical gold. Not necessarily more than that. Some people say why not half or why not all? I don’t think that’s a good idea to go all in. But I think 10%, maybe a little higher, 15% or so, is the right number. Land has a role, I like fine artisan investment. Certain alternatives, hedge funds, they’re not for everybody, but if you can find the right managers that has a place in the portfolio, and some cash. And people are surprised to hear me say cash, They say “hey Jim, You’re the guy talking about the collapse of the monetary system, why would you care about cash?” The answer is that might not happen for a long period of time, and in the short realm it gives you good liquidity, it gives you good optionality, which is the ability to pivot in to another asset clause on short notice. And it’s also good protection against deflation. We talk a lot about inflation, which is a genuine concern, but deflation is a concern also. So putting that all together, my model portfolio would look something like gold, fine art, land, cash, and some alternatives, some hedge funds, and some other types of alternative assets.

Future Money Trends: Jim, I want to ask one quick question before we close out. The first chapter, you open up with the 9/11 insider training. Of course, a lot of people will jump on the conspiracy stuff. You’ve said repeatedly in interviews that it’s not about that, this is just factual insider training. You have done so much research, I imagine your book takes 500 books of reading material just to put together. I want to know if you have looked into the 9/11 activities as far as what happened at the World Trade Center 7. Did you ever look into any of that stuff?

James Rickards: There’s no question there was insider trading heading in to 9/11, to me that was no dispute. There was academic research, anecdotal research. I’ve heard first hand from market participants, so there was definitely insider trading heading in to 9/11. Now the question is who was doing it, and how much of it was genuinely informed, meaning it was done by terrorist associates who knew the attack was coming. Versus how much of it was piggy-backing, or what I call signal amplification, and that’s not something that’s very well understood. For example, let’s say on a given day, market’s are kind of quiet. Let’s say the market’s up, the transportation sector is up, airlines are up, but there’s one particular airline that’s going down. Maybe people are buying different options, or they’re shoring stock versus going down. But again, the other airline sector as whole, and the whole market is going up and there’s no news. I mean, if there’s news on a particular airline or a particular stock that’s negative, of course the stocks are going to go down, everyone understands that. But I’m imagining a scenario where one stock is going down, but the peers in the sector of the market are going up, and there’s no news on that stock. Well that is almost a sure sign of insider trading, somebody knows something you don’t. And you might see that if you’re a smart hedge fund, you’re monitoring price action, or you’re a specialist on the floor, or you’re market maker in options, and you see that. You’re going to say, “I’m going to buy some good options for my own account, I don’t know why really, I just know something’s up, someone knows something I don’t.” And then of course my trade adds to the momentum, more people see it, they do the same thing. And by the end of the day, maybe you’ve traded a million shares, but only 5,000 of them are real criminal or terrorist insider trading, and the other 995,000 are just people piggy-backing on the initial signal without understanding what was behind it. So you do get this kind of… it’s not actually very typical of markets. And one of the reasons you have the 9/11 commission… see the 9/11 Commission never said that there wasn’t insider trading. What they said is that they did not find evidence of insider trading. That’s a little different, because if you don’t go looking you’re not going to find it. The point is I don’t think they did a very good job forensically, and the people they talked to were the big traders. And it comes as no surprise to me that the big traders were innocent, because they were the ones piggy-backing. If you want to do it right you’ve got to get all the way down to those first initial traders. They might have come from Spain earlier that day. So as I say, I go through the evidence, I do it objectively, it’s multiple sources, it’s overwhelmingly convincing that there was insider trading ahead of 9/11, but you can’t leap from that to the conclusion that everybody who traded knew a terrorist attack was coming, because the vast majority of them were just piggy-backing on the original trade. But the 9/11 Commission did not do a good job of getting down to that original small trade.

Future Money Trends: Jim, thank you so much for being generous with your time. We’ll have the Amazon link for your book, but you also have a website now, correct?

James Rickards: I do, my website is JamesRickardsProject.com . My twitter handle is @JamesGRickards , and it’s very active. I was just putting out stuff this morning on Igor Sechin and treasury sanctions and escalating warfare with Russia. And I try to keep it very current. And do a lot of, whenever I do an interview such as this one, Dan, I’ll always put the link on Twitter so it’s a very good way to keep up.

Future Money Trends: You’re very accessible and I love your humor on twitter. James Rickards, his new book ‘The Death of Money: The Coming Collapse of the International Monetary System.’ Thank you so much for being on the show.

James Rickards: Thank you Dan.

 

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