Transcript of Jim Rickards – The Gold Chronicles October 7th, 2015

October 7thth, 2015 Gold Chronicles topics:

*History of IMF, one of the big 3 Bretton Woods institutions
*The IMF has evolved into its most powerful role ever
*IMF is a functioning world Central Bank
*The Fed has in effect been operating in a 2 year tightening cycle
*China’s reserves are being consumed at a rate of $100B per month stabilizing the currency
*The Fed may easy by mid 2016. Available tools include: Forward guidance, Negative Interest Rates Policy (NIRP), Direct easing (Helicopter money), QE4
*Emerging markets debt crisis, $9.5 Trillion on emerging markets corporate debt denominated in USD
*IMF is warning about declining liquidity in the bond markets and is encouraging governments to take precautionary measures
*IMF: Bond market liquidity could dis-appear instantaneously
*Physical Gold in non-bank storage is one way to protect against what governments might do under conditions of seizing bond markets
*The IMF has a little less than 3000 tons of gold
*IMF gold assets are the third largest holding in the world according to the WGC
*19 Members of the Eurozone combined hold 19,000 tons
*IMF gold was contributed by members joining when it was originally formed
*IMF has not created SDR’s and purchased gold with it
*Gold price required to support world liquidity in this sense would have to be higher than $10,000 per troy oz
*What tools can investors use when it comes to gold in light of potential problems with liquidity

Listen to the original audio of the podcast here

The Gold Chronicles: October 7, 2015 Interview with Jim Rickards


The Gold Chronicles: 10-7-2015


Jon: I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Hello, Jim, and welcome.

Jim: Hi, Jon. It’s great to be with you.

Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.

Alex: Hi, Jon.

Jon: Jim, let’s start in Lima, Peru, where it is IMF Week. The IMF and the World Bank hold several days of meetings twice yearly. Would you begin by giving us a brief refresher on the IMF explaining what it is and why these meetings matter?

Jim: I’d love to. Just as an aside, I went down to Washington last Friday to work with some national security people and conduct financial war game scenarios. They’re not all quite as elaborate as the one I did in 2009, e.g., sometimes it’s just one day. Traveling to this one in Washington, Madame Lagarde, managing director and head of the IMF, happened to be on my flight. I was sitting right behind her on the plane but didn’t have the occasion to speak to her, because she had two bodyguards, a couple of assistants, and a small entourage. She’s as elegant in person as she is on TV or in pictures; quite tall and walks fast.

When we stood up in the plane, per normal airplane etiquette, we all got out in the aisle. Well, I got out between her and her bodyguard, and he was not pleased with me. He got into his protective mode and almost knocked me down, but I did at least have a fun encounter with the head of the IMF!

Now let’s do a little IMF history, and then we’ll bring it up to date in terms of what’s currently going on in Lima, Peru. Going back to the origins, the IMF is one of the big three Bretton Woods institutions. The Bretton Woods Conference was in July 1944 at the Mt. Washington Hotel in Bretton Woods, New Hampshire. I was up there a couple of years ago doing another financial war game with the Boeing Corporation, and they picked the Mt. Washington Hotel as their venue. It’s a beautiful spot that’s still a remote area today, as it certainly was in 1944.

The Bretton Woods conference was toward the end of World War II. At that point, the Allies could see victory although victory was not in hand. This was just literally weeks after D-Day when the Allies were pushing towards Paris. The war was not over, but they were looking through the end of the war, expecting victory at some point, and saying to themselves, “Victory on the battlefield is fine, but we’re going to have a world economy to run after that.” They could see that the inter-war problems between World War I and World War II – German reparations, the Great Depression, the original currency wars (as I call them), the beggar-thy-neighbor devaluations, and other financial developments – made Germany’s burden more difficult. It was never quite satisfactorily resolved and created resentment on the part of the Germans, and in different ways, led to World War II.

So they said, “Let’s not that repeat that mistake. Let’s have a better post-war system.” There were a lot of institutions (the United Nations was one of them), but on the financial side, Bretton Woods was the place that was really led by the United States. They created the architecture of the post-World War II world economy.

There were three big institutions that came out of the Bretton Woods Conference. One was the IMF (the International Monetary Fund), which is what we’re talking about today. Another was the World Bank. The third one was, at the time, the General Agreement on Tariffs and Trade, trying to tear down tariff walls and tariff barriers. That has now morphed into the World Trade Organization (WTO), but it’s still one of the three pillars of the post-war financial order.

Let’s talk specifically about the IMF. It was originally a swing lender, sort of a credit card for countries experiencing balance-of-payment difficulties. Remember, at the time, from 1944 to 1971, the world was on a gold standard. It had some problems, but it was a pretty solid gold standard. This meant that if you were running a trade deficit, your trading partners could take your money they had earned by trading with you and cash it in for gold.

Well, there wasn’t enough gold to go around, at least at $35 an ounce, and countries were running chronic deficits, which meant that they could ultimately lose their gold. As a swing lender, the IMF would then say, “We will lend you the money you need in U.S. dollars to satisfy your creditors for the time being,” because the dollar was as good as gold and was tied to gold, “But we expect you to make structural reforms. Do something to improve the situation. Lower your unit labor costs, improve productivity, impose taxes if you need to balance your budget. Do whatever you need to do.” So the IMF was there as a short-term lender in exchange for structural changes that would in theory solve the problem and get countries back to trade surplus.

The idea worked fairly well in the ‘50s and ‘60s, but then it all broke down in the late ‘60s mainly because the United States did not hold up its end of the deal. It’s one thing to help all these other countries that are trying to tie to the dollar, but the U.S. was not on a sound fiscal basis. We had twin deficits – a trade deficit, first of all, and Vietnam where we were running budget deficits to pay for the war.

I think most of our listeners know that the system broke down in 1971 when President Nixon ended the convertibility of dollars for gold. At the time, he said it was temporary. I’ve actually spoken to former chairman Paul Volcker about this, and he confirmed that. Volker said, “I’m not sure I would have gone along with it if I had known it was going to be permanent. We thought it was going to be a temporary suspension and that we could get back to a gold standard, maybe at a different dollar price.” I think that’s what they expected, but as it was, it turned out to be permanent.

That takes us up to 1971. From ’71 to ’80 it was a confused period where the world didn’t know if we’d be going back on a gold standard, off a gold standard, going to fixed exchange rates, floating exchange rates, and so on. It was a fairly tumultuous period of borderline hyperinflation.

The IMF at that point was a forum or place where major countries could get together to work out new rules of the game, and they eventually did. They said, “Now we’re going to have floating exchange rates. We’re going to go off the gold standard.” That’s when they officially demonetized gold. A lot of people say the gold standard ended in 1971 when President Nixon ended convertibility, but the gold standard didn’t officially end until 1975.

From 1980 to 2000 was a period when the IMF didn’t have a clear mission. The old mission of being a swing lender to deal with balance of payments was over, because you didn’t have to worry about balance of payments anymore in a world where there was no gold standard or fixed exchange rates. There wasn’t a lot for the IMF to do, but they did come up with a new role for themselves as a lender to emerging markets. This was the period of the Asian tigers and high growth in Taiwan, Singapore, Korea, and elsewhere. Those countries would occasionally get into difficulty, and the IMF would come along and help them out sort of like the fire department coming and putting out fires in emerging markets in the developing world.

That role blew up in 1997-1998 with the emerging markets crisis where I think most observers (most prominently Joe Stiglitz) said that the IMF role was badly flawed. They would come into a country that was running balance-of-payment stuff and budget deficits, lend money to deal with a deficit, but then they would say, “You need to raise taxes. You need to cut public payroll.” It was basically an austerity type of prescription, the same kind of thing that’s being complained about in Greece today.

A lot of people took the view that this made matters worse. At the time, the IMF was very opposed to exchange controls. They said, “No, you have to keep an open capital account, and you have to give money to the people who are owed money. But we’ll lend you the money to make these payments in exchange for all this austerity.”


The case could be made that austerity only made things worse and that maybe exchange controls were not a bad idea in certain cases. The prominent voice for that point of view was Prime Minister Mohamad Mahathir of Malaysia. He very famously got into a shouting match with the IMF and George Soros at the 1997 annual meeting in Hong Kong. We’re coming up to the Lima annual meeting right now, but they’ve done this every year for a long time. I was actually there in Hong Kong for that annual meeting in 1997 where this all came to a head.

That brings us up to 2000 at which time the original Bretton Woods mission of being a swing lender under the gold standard was gone, the fixed exchange rates were gone, the gold standard itself was gone, and the emerging markets fireman role, if you will, was discredited. So in the early 2000s, the IMF looked like an agency without a mission and with nothing to do. They did have experts who would write studies and do what they call Article IV Consultations. Article IV Consultations are when they come into your country, meet with your finance minister and various officials, and look at what you’re doing about your exchange rate. Then they would give you a report, but there really wasn’t a lot to do. It was a period of very solid growth in emerging markets. The developed economies weren’t growing quite as fast, but they were growing with no inflation to speak of. The world seemed like a pretty stable place financially. This was the period called the Great Moderation at the time, meaning moderation in deficits and moderation in inflation.

There was talk by 2005-2006 of possibly disbanding the IMF since it looked like they didn’t have anything to do. That all changed in 2007-2008 with the global financial crisis when the IMF took on a completely new role. You have to give the IMF credit for reinventing themselves. They’ve had at least four different personae, if you will, a few of which I’ve mentioned, but this new one was really to be a secretariat for the G20, a group of 20 nations.

Most important financial decisions in the international monetary system had been made prior to that by the G7. The G7 were the seven largest developed economies including the U.S., Canada, France, Germany, the U.K., Italy, and Japan. That had been the main forum, but by 2008 it was clear that because of globalization, the rise of China, and the BRICS, it could no longer be an exclusive rich countries’ club. They had to bring in developing economies including important ones obviously such as China. So that broader platform was the G20.

President Bush and President Sarkozy of France convened a G20 meeting in Washington in November, 2008. This was just weeks after Lehman, AIG, and the collapse of markets around the world. It was a pretty desperate time. The G20 started working on a plan which played out in subsequent meetings: London in April 2009 and Pittsburgh in September of 2009. There was a sequence of meetings where they worked out the currency wars – what became the weak dollar in 2011 and the strong dollar today.

The G20 was fine in terms of heads of state, but they had no permanent staff, no expertise, no research department, and no bureaucracy. It was just a bunch of leaders who got together, so they outsourced the hard work – monitoring and research – to the IMF. The IMF became, in effect, the bureaucracy bolted onto the G20. That’s a very powerful role, because the G20 were heads of state including President Bush, then President Obama, President Xi of China, and other heads of states. It was a very powerful organization and still is.

The IMF has evolved into probably its most powerful role ever considering that ten years ago people were seriously talking about disbanding it. Today it is the de facto central bank of the world. They have 3,000 tons of gold, they’re expanding their balance sheet by issuing liabilities and creating assets in the form of loans, and they have their own currency, the Special Drawing Rights (SDR). They can print as much SDR as they want and hand out, and I expect they will do so in the next crisis. So they are, for all intents and purposes, a functioning central bank of the world, and the bureaucracy, if you will, for the G20, which is the board of directors of the global economy. I don’t think any of that is an exaggeration. It’s really what they’ve become: a very powerful organization.

That brings us up to today with the IMF in Lima, Peru. They have two important meetings: an annual meeting in October and a spring meeting, usually in April. The spring meeting is always in Washington, and the annual meeting floats around. This year it happens to be in Lima, so a lot of your household names in addition to Madame Lagarde – finance ministers and some essential bankers – are all down there now with quite an ambitious agenda. We’ll be hearing a lot about it in the next two weeks.

Jon: Thanks for that recap. It’s really helpful not only to get the definition, but to get the historical context and bring it up to date. There’s been quite a lot of buzz about this year’s meeting, and the IMF has been pretty vocal. They’ve been putting out some strong alarm signals on several topics, and I’d like to take them one by one.

Let’s go first with the state of the world’s economy. Growth is below expectations, there’s particular anxiety about Chinese manufacturing, and U.S. job numbers, even with the rosiest spin, which we see plenty of, are disappointing. How seriously should we take this economic hand-wringing by the IMF?

Jim: We should take it very seriously because they have the expertise. They have a lot of smart people, PhDs, and quite a few graduates of my old school where I got my graduate training in international economics, The School of Advanced International Studies which is part of the Johns Hopkins University. The main campus of Johns Hopkins is in Baltimore, but what’s called SAIS (School of Advanced International Studies) is in Washington, D.C.


Think of it as an intellectual boot camp for the IMF where people from around the world, not just U.S. students, go. It’s a rather small group of about 300 students and tends to have some fairly elite experiences coming out of finance ministries and elsewhere around the world. They feed into the IMF.

I graduated from SAIS in 1974. A few years later, one of our prominent graduates named Tim Geithner came through. He went to work for the IMF and later became President of the Federal Reserve Bank of New York and Secretary of the Treasury. That’s an example of the kind of training you get there. So I do think what the IMF does is important and should be taken seriously. They have the expertise and the added role I described earlier. If anything, being at the beck and call of the G20 enhances their clout.

I’ve always said the IMF is what I call transparently non-transparent. Let me explain what I mean by that. When I say they act transparently, they put everything on their website. You can go to the IMF website and browse around a little bit to find the world economic outlook and global financial stability report. You’ll find a lot of these papers including the famous paper from 2011 that lays out a ten-year plan on how to evolve the Special Drawing Rights into a world currency.

There’s not much they do that you can’t find out about on the website, but good luck understanding it. It is written in very dense jargon, even more dense than the kind of jargon we’re used to seeing from the Fed. They use a lot of buzz words that, if you’re an expert in the international monetary system, will seem familiar to you, but if you’re just a smart, interested person who would like to learn more, it’s tough to get through. The stuff is there, so I give them credit for putting it out there, but as I said, good luck understanding it all.

That’s where the specialized training I and others have received is helpful. Sometimes I’m like a translator. I read these really technical reports and have some ability to put it into plain English for the audience, so I feel like a missionary going out, exploring the territory, and reporting back.

You mentioned some of the reports that came out this week. Let’s take them one at a time. The world economic outlook is the one that gets the most attention. It’s basically a forecast for the entire world. They go country by country, region and region, and for the whole world. In it they have been lowering their forecasts. Now I must add that the IMF has a pretty bad forecasting record. They have talented people, but they have the same problem as the Fed and others; they have consistently overestimated growth for the last seven years.

This is endemic. You see it everywhere from the Fed, from Wall Street, and from the IMF. They say 3%, but it turns out to be 2%. They lower their forecast to 2.5%, and it turns out to be 1.8%. There are reasons for this regular overestimate of growth. I don’t think it’s some deep, dark conspiracy where they’re trying to lie to people. I think they just have obsolete models. They’re using regressions that deal with over 30 business cycles and business expansions since the end of World War II. They take all that data, do the regressions and correlations, and say, “Based on where we are now, we ought to be growing at such-and-such a rate.” There are some other factors that go into the analysis, but the problem with that system of methodology is that it doesn’t apply because we are not in a cyclical recovery. We’re in a growth depression, really the first global depression since the 1930s. You can have a lot of data, but if you’re in a different world, a different situation, that data is not going to tell you very much. And that is the situation we’re in today. I use very different models such as complexity theory, inverse probability, some economic history and behavioral economics, and a lot of other things to get my forecast, but I can see where the IMF and the Fed go off-track.

On the one hand, their forecasting record is pretty poor and they’ve overestimated growth, so I see no reason why they’re not doing that again. On the other hand, they have lowered the growth estimates, almost as if they’re learning by doing. If you get hit in the head with a 2X4 enough times, you’ll learn to duck. I still think they’re overestimating global growth, but they did lower the global forecast to about 3.1% for 2016.

That’s not a lot when you consider economies in the emerging markets like Brazil, Russia, China, India, and other important economies not quite as large like Turkey and Malaysia. When you consider that their potential growth can be 5% to 7% and the world is only growing at 3.1%, that’s a pretty sad story.

The U.S. does not have potential for 7% growth. Maybe that’s possible in the very short run, but it’s unlikely. The central tendency for U.S. long-term growth is higher than we’ve been doing. I think it is 3.5%, but we’ve been doing around 2% since the end of 2008. For global growth to come in at 3.1% is pathetic given the high potential growth in a lot of the important economies around the world. That tells you how weak things are.

Based on what I just said about their forecasting methodology, it could be worse than that. Imagine global growth coming in around 2% or 2.5%. This means that the big emerging economies probably come down to 4%, and the developed economies are getting closer to 0%. That is what that implies, so I think this is a pretty sobering and dour forecast.

To give the IMF credit, they’re not sugarcoating it. They’re warning the world that the slowdown is taking place. This brings us around to the Fed, because when you ask, “Why is this slowdown taking place if there’s all this potential growth out there and you have a lot of under-utilized factors of production, whether it’s labor or capital investment, infrastructure improvement, or structural changes? If there are a lot of things you can do to get growth, why are we not getting it? What’s the problem?” I would trace a lot of the problem back to the Federal Reserve.

You do have a circular flow of cause and effect. On September 17th, when the Fed decided to not raise their target for Fed funds (not to raise interest rates, in other words), it surprised a lot of people. It didn’t surprise us or the listeners of this podcast because we had said all along that they would not raise rates, but it surprised a lot of people on Wall Street. Janet Yellen gave us a reason, and that was the slowdown of global growth, exactly the kind of thing IMF is talking about.

That has now in effect come back to the United States in the form of reduced exports, i.e., the strong dollar slowing U.S. exports and importing deflation from around the world in the form of lower import prices. When the Fed said they wanted inflation, they threatened to raise rates, which strengthened the dollar, which caused deflation. So the Fed’s own policy is pushing in the opposite direction of the Fed’s stated goal. We said months ago that this makes no sense and would have to be resolved, probably to the detriment of the Fed. It turned out that they were unable to raise interest rates.

Janet Yellen blamed it on global growth and mentioned China specifically. That’s fine, but one of the reasons China was slowing down was because they had pegged their currency to the U.S. dollar, and the Fed has been tightening for two-and-a-half years. When I say that, people look at me like I have two heads. “What do you mean the Fed has been tightening? The interest rate has been 0% since 2008. We’ve never seen so much money around. They printed four trillion dollars. How on earth could they be tightening?”

The answer is they have been tightening since May 2013 when Ben Bernanke started the taper talk. He didn’t actually taper in May of 2013 but said they were thinking about it. ‘Tapering’ means reducing money printing. Under QE3, the Fed had been buying about $85 billion a month of Treasury Securities, which meant they were printing $85 billion a month to buy the securities. He said, “We’re tapering that. Instead of $85 billion, we’ll lower it to 70, then 60, then 50,” and so forth until they got to 0. A lot of people say that’s not tightening because you’re still printing money. It’s true you’re printing money, but you’re printing less than you did the month before.

Things don’t happen in black and white in markets; everything happens at the margins. Small moves change expectations and affect various kinds of behaviors, so just talking about tapering caused the “taper tantrum,” or the emerging markets crisis. Capital started to flow out of emerging markets, emerging markets’ currencies collapsed, the stock market collapsed, and money started coming back into the U.S.

They actually started tapering in December 2013 after talking about it for seven months. Then in November 2014, they finished the tapers and weren’t printing any money, but they still had forward guidance in those statements saying, “We in fact promise not to raise rates.” In March 2015, Janet Yellen removed forward guidance by taking the famous word “patient” out of the statement. So the Fed was no longer promising not to raise rates but was in effect saying, “We’re getting ready to raise rates. Anyone in a carry trade, shorting dollars, or borrowing dollars to invest in emerging markets assets better watch out, because we’re going to raise rates and pull the rug out from under you on that trade.”

People heard her. They started covering their short dollar positions, the dollar got stronger, and there were huge capital outflows from emerging markets. Even without changing rates, they were talking and acting their way through a tightening cycle for two-and-a-half years.

Back to China, they pegged to the dollar and the Fed was tightening. To maintain the peg, they also had to tighten. To do this they had to buy their own currency. If the market wants to take the yuan down and lower the exchange value of the Chinese yuan, and they want to keep it up at a higher level, they have to go buy it to maintain the peg. What were they using to buy it? They were using dollars. They were selling Treasuries, taking the dollar, and buying their own currency from their exporters or anyone who had it. That was causing huge capital outflows from China which caused the dollar to get stronger and the yuan to be too strong.

The Chinese government was propping up the yuan. At the same time, they were trying to ease because their economy was slowing down, so they were lowering interest rates to ease. We had this crazy situation where they were easing and tightening at the same time using two different policy tools. They were using interest rates to ease and they were using exchange rates to tighten. What kind of policy eases and tightens at the same time? That makes no sense. China eventually threw in the towel on the peg and famously broke the peg in August this year, letting the yuan devalue. That started the U.S. stock market collapse.

My point is this is all connected. The Fed blundered by tightening, because the U.S. economy was not strong enough to bear a strong dollar caused by the tightening. The time to tighten was 2010, yet they missed the whole cycle. They should have tightened in 2010/2011 when we had the cheap dollar, which gave the economy a tail wind. They blew it, but two wrongs don’t make a right. Just because you should have tightened in 2010 and failed to doesn’t mean you should tighten today when the economy is getting weaker and the U.S. is probably heading into a recession.

The Fed was not tightening only for the U.S. They took the U.S. economy and the Chinese economy down causing the Chinese to break the peg. Now here we are. The Fed is stuck with a strong dollar and deflationary tendencies. They have no way out.


This whole thing is a mess, and it’s working through the interest rates and exchange rate mechanism. That’s what the IMF was warning about. About a week prior to the September 17th meeting in Turkey at the end of the G20 financial summit, Christine Lagarde issued a statement – a warning – that was as blunt as anything I’ve ever heard. There was no polite language around it. She just said to Janet Yellen, “Do not raise rates.” If you recall, the BIS, the G20, the World Bank, Larry Summers, and IMF – everybody was saying the same thing to Yellen: “Do not raise rates.”

She listened and to her credit, she didn’t, but that dialogue is going to keep happening. Now the IMF was out again this morning with a world economic outlook saying, in effect, “Don’t raise rates. The world is too precarious. Growth is too slow.” So that’s one of the big statements they’ve issued. We could talk about some other ones as well.

Jon: Let’s do that. You mentioned the emerging markets a couple times in your answer. In one of their anxiety bulletins, the IMF has also been talking about the threat of a potential debt crisis engulfing the emerging markets. As I read it, the concern seems to be primarily with corporate debt. How real is that threat in your view? And if defaults happen on a large scale, will the impact be limited to the emerging markets themselves?

Jim: Those are great questions, Jon. First of all, the threat is very real. Let’s put some numbers on it. The whole idea that the world was over-leveraged, there was too much debt in 2008, we had a financial crisis that destroyed tens of trillions of dollars of wealth, but we learned our lesson so we’re going to de-leverage – that is not true.

The world is more highly leveraged today than it was in 2008. There’s been over $60 trillion of new debt created since 2008, so the world is actually more leveraged and dangerous than it was then. That’s the starting place and is part of what the IMF is talking about. Specifically, there is $9 trillion of dollar-denominated emerging markets corporate debt.

Let me unpack it a little bit. That huge number of $9 trillion is slightly more than 10% of global GDP. This is emerging markets only, so we’re not talking about developed countries like Australia, Canada or Europe. These are just emerging markets, primarily the BRICS, with a lot of it in China. And it’s corporate debt, not sovereign debt. Sovereign debt can usually be finessed. If sovereigns get into trouble as we’ve seen in Greece, Ukraine, and a few other places, the IMF is equipped to bail them out. The IMF is not around to bail out corporations and cannot do so. What they could do is bail out countries, then the countries take the money and bail out their own corporations.

So we have $9 trillion of dollar-denominated corporate debt in emerging markets, and the dollar’s getting stronger. What does that mean? It means your debt burden is going up. If you’re a hotel operator or an airline or a manufacturer – any business in Brazil, India, Indonesia, Turkey or China, for that matter – why would you borrow dollars? You borrow dollars because the interest rate is cheap. You’re paying 1% – 3% in money and using it to expand local operations. If you make money by getting paid in yuan, Turkish lira, Indonesian rupiah, Brazilian reals or any of these foreign currencies, but you owe dollars to the bond market or J.P. Morgan or whoever and the dollar gets stronger, your debt burden just went up.

You’re caught between a rock and a hard place. You have a slowing economy, so your revenues in local currency are probably going down, but the value of your debt is going up because the dollar is getting stronger. That’s a recipe for default, and we’re beginning to see that.

Where do these emerging markets even get dollars to pay off the dollar debt? They have to go to their central banks. That means they have to cash in some of their reserves. We’re seeing huge reserve drawdowns in Russia, China, Malaysia, and all over the world. Not that long ago, China threw around the $4 trillion in reserves number. Guess what? That $4 trillion is now down to $3.5 trillion, and the money is coming out at a rate of over $100 billion a month. There are huge capital outflows coming out of China.

A lot of these reserves have been built up since 1998. The emerging markets were not hurt that badly in the global financial crisis in 2008. Yes, everyone suffered to some extent, but that was very much of a developed market crisis. It was a U.S./European crisis more so than the rest of the world. China got through it okay. Part of the reason was that a lot of these emerging markets had been the center of gravity in the 1998 crisis. They had learned their lesson, built up their reserves, were managing their economies better, etc., so they got through it in a lot better shape than the U.S. and some others.

Here we are almost ten years later, and they seem to have forgotten those lessons. Now their reserves are draining out very quickly, so there is a potential for crisis in emerging markets debt. It’s not just the IMF but also the BIS (Bank for International Settlements) in Basel, Switzerland, that have warned about it as well.

The second part of your question – if that crisis breaks out – I think is likely because growth is slowing down. We already talked about how growth is probably worse than the IMF forecasted. The Fed shows no signs of easing, at least so far. A lot of this could be alleviated if the Fed eases. I do think they will maybe at the end of the first quarter or beginning of the second quarter of next year.

People ask, “How can the Fed ease with interest rates at 0%?” They ease by words; by going back to forward guidance. They put some words in their statements telling the markets that they’re not going to raise rates anytime soon. Think of the phrases they’ve had: “extended period,” “a considerable time,” “patient.” These are all buzzwords the Fed has used to signal the markets that they’re not going to raise rates.

What’s the significance of these words? I talked to the person who writes these statements for the Fed. He said they just make it up, call Jon Hilsenrath at the Wall Street Journal and tell him what they think they mean, and then Hilsenrath reports it. He’s a good reporter, so I’m not criticizing him. He’s just doing his job, and it’s nice to have these kinds of sources. After he reports it, everybody says, “We get it.” So the process is sort of picking words out of a thesaurus, sticking them in a statement, calling the Wall Street Journal to tell everyone what it means, and everyone nodding and saying, “Okay, we get it.” That’s how we conduct monetary policy today.

Again, the Fed could go back to easing. That would make the dollar weaker, take some pressure off this emerging markets debt, and give the U.S. economy a break. But then, of course, you’re back to the currency wars just like in 2011 with the weaker dollar. All the countries that are complaining because the dollar is too strong and causing capital outflows will then start to complain that the dollar is too weak causing them to lose exports. You can’t have it both ways, but that is the problem with currency wars. It’s a zero-sum game. There are always losers. All you’re doing is picking different sets of losers at different times. You’re not really solving global problems.

This emerging markets debt crisis is serious. In the intermediate, I think by the middle of next year, you may see the U.S. try to weaken the dollar through some Fed easing policy, but right now today that’s not happening. The Fed continues to talk tough and the markets continue to expect a rate increase, maybe in October or December. I personally don’t have that in my forecast, but a lot of people do.

It’s a very messed up world. The bigger picture is that there’s too much debt and not enough growth. It’s that simple. There are only three ways out: 1) You have to have inflation to get rid of the debt; 2) You have to default to get rid of the debt; or 3) You have to have real growth. Real growth requires structural reforms that governments don’t seem to be willing to step up to. Central banks can’t get inflation because the deflationary forces are too challenging, and nobody wants to talk about the D-word, which is “default,” because that has consequences and spillover effects that could cause a global financial panic.

It’s not a great menu of policy choices, but there are no other ways out of this. Emerging markets will start to melt down unless the Fed eases. My guess at the end of the day is that the Fed will ease, but if they don’t and that meltdown starts, there is no way it will be contained to the emerging markets. It will come back to effect the U.S. through a contagion.

I’ll explain how that works. Hedge funds, banks, and other leverage traders who start to lose money in one market, and get margin calls because they are leveraged, will sell something else. They won’t sell the thing they want; they’ll sell the thing they can. Even if they like the U.S. stock market, if they have U.S. stocks that seem liquid, they’ll sell the U.S. stocks to get cash to meet the margin call on their emerging markets bonds that are going into default. They lever them up with a deal, and the dealer is calling them for margins. That’s how the contagion spreads, so there’s no way it’ll be confined to the emerging markets, which brings up the whole subject of liquidity in bond markets.

Jon: That is another one of those warning signs coming out of the IMF. They’re worried about declining liquidity in the bond markets. This is something you’ve addressed in these conversations before, but I’m wondering if you have any new thoughts to share with us on that.

Jim: I do. It’s one of these papers coming out of the IMF meeting regarding their global financial stability report. The paper is called “Chapter 2: Market Liquidity – Resilient or Fleeting?” It is 60 pages of pretty densely-argued stuff, so it’s not exactly light reading.

Here’s the bottom line. They say something that’s very odd. They say that liquidity is okay – not great, but okay. They don’t sound as dismal on it as some other analysts do, probably because they don’t want to panic people, but then they say it can disappear instantaneously. That’s a weird thing to say. Instead of saying, “Market liquidity is getting weaker and weaker and weaker,” they’re saying, “No, it’s okay, but it could go away in the blink of an eye.” That’s pretty scary.

By the way, we’ve seen examples of that. We’re near the first anniversary of the October 15, 2014, flash crash in the U.S. treasuries market. That was a funny kind of crash because prices went up but interest rates went down. That was not the smooth, continuous trading and price-level adjustment that the academics always assume. It was what’s called a gap move where prices in one instant are at one level and then they just drop four standard deviations in the blink of an eye. They reset at a different level, and that’s what happened. We’re going to see more of that when there will be a panic triggered by some catalytic event causing everyone to get on one side of the boat and it tips over. That’s what the IMF is warning about.

What they go on to say is the part I found intriguing. What was the point of giving a warning? The IMF can talk about it all day long, but they don’t run the bond market. They’re not the U.S. Treasury or Exchequer or French finance ministry, so they’re giving a warning but can’t really do anything about it.

What do they recommend governments do? They say governments ought to take preparatory moves or basically have preemptive strategies to deal with the fact that liquidity can disappear. What would that preparation be? If you think about what they’re really saying, it’s this: “You better get ready to lock down the system. If liquidity disappears, it will be like a run on the bank on steroids, and you can’t make it come back. You can’t print any more money, because you’re at the outer limit of confidence.”

What can governments do? They can close markets, freeze bank accounts, do what they did in Greece, and put on capital controls. These are things they could do, but they’re all really ugly if you’re an investor trying to get your money.

This is one of those times when I do think it helps to not even read between the lines. At least understand that the IMF uses words like “spillover” instead of “contagion” and “macroprudential” instead of “lock down the system.” When you hear the word “macroprudential” coming out of the mouths of an elite global financial regulator, you should think to yourself, “They’re saying I can’t get my money.”

I think it’s an ominous warning, but what’s even more ominous is what they’re recommending people do about it. They’re saying, “We don’t have a magic wand to restore liquidity, so we’re suggesting that if you’re not prepared to print the money or hand it out or guarantee deposits ad infinitum, you better be prepared to close your markets.”

That’s one of the reasons I like gold. One great thing about physical gold in non-bank storage is that it’s not in a bank, it’s not in a market, it’s not digital, and it can’t be locked down by executive order. I’ve never recommended that investors go all in on gold, but I’ve recommended 10% allocation. Some people think that it’s more ideal for clients to have 20% or even 50%. I think that’s a little high, but the truth is, the average institutional investor has less than 2%. A lot of people I talk to have 0%. They listen, they’re kind of interested, but at the end of the day, they don’t actually make the move.

The bottom line with all of that is they’re not prepared for what we’re talking about. This is not fantasy or scare-mongering. People accuse me of being a scare-monger to which I reply, “I’m not a scare-monger. I’m an analyst, and I’m not making things up. I’m telling you what the BIS, the IMF, the G20, and the World Bank are saying. They are saying that liquidity can disappear in the blink of an eye, and the solution is to basically lock down markets. If you don’t want to be frozen in that situation, then you should have some gold in non-bank storage so you can have access to it. That’s your liquidity.

Jon: Thanks, Jim. Now Alex Stanczyk is here with questions from our listeners.

Alex: Steve M.’s question is, “Is there a scenario where the Fed would be forced to raise rates regardless of the state of the economy?”

Jim: There is. I think it’s unlikely and it’s not in my forecast, but people talk about it and it could happen. Just because I have a forecast doesn’t guarantee that something’s going to play out.

I find the whole debate about raising rates just a little sterile, because the quality of the analysis is poor. A lot of people say, “It’s been a long time, so you ought to raise rates.” That’s not analysis; that’s a claim, that’s a declaration. What kind of analysis is that? It’s like saying, “I’m tired of playing Russian roulette, so I think I’ll blow my brains out and get it over with.” Just because it’s been a long time is not a reason to raise rates,.

As I said, they should have raised rates in 2010. In an interview I did on CNBC in August 2009, Joe Kernen turned to me and asked, “What should the Fed do now?” I said, “They should raise rates 25 basis points. There’s no global financial panic. There’s plenty of liquidity.” It’s true that unemployment was still 10% and the economy was still recovering, but so what? What does the Fed have to do with it? This idea that they can create jobs is nonsense. The Fed doesn’t create jobs.

But they didn’t raise rates – not that they were listening to me in particular. That was the time to raise rates, but they failed. However, just because they failed to do the right thing then doesn’t mean they should do the wrong thing today. Today they should be easing because the economy is slowing down. The IMF just told us that.

There’s plenty of evidence with the data that’s coming in. I’m used to seeing data that’s mixed, bad data and good, so I try to parse it and look for trends. On balance, I’ve probably been more than a little bit bearish on the economy, but now I don’t see any good data. I don’t see the other side of the argument. All the data – exports, deflation, labor force participation, wage growth, manufacturing surveys, service surveys – Everywhere you look, it’s all trending down.

I don’t see the case for raising rates, but if there is a case, it would be because they’re worried about bubbles. Their argument would be, “We need to let the air out of these bubbles. If we don’t, these bubbles are going to burst and it’s going to be a lot worse. Whatever damage we caused by raising rates at the worst possible time will not be as bad as letting the bubbles persist and having those things blow up.”

There’s one problem with that argument: I cannot think of a single case where the Fed actually correctly identified a bubble and tried to finesse the air out of the balloon. They didn’t do it in ’94 in Mexico, they did not do it in ‘97/’98 in the emerging markets crisis, they didn’t do it in 2000 with the tech bubble, and they did not do it in 2007 with the mortgage crisis. First of all, they have no history of correctly identifying bubbles, and secondly, they have no history of knowing how to let the air out before they explode.

It’s a pretty unappetizing scenario for the Fed if the economy’s getting weak but they are the one to raise rates and make it weaker. We’ll have people driving tractors up the steps of the Fed again like in 1980 when they had a tractor march because farmers were complaining about the back-to-back recession. If not trackers up the steps of the Fed, maybe torches and pitchforks on Constitution Avenue.

Could they raise rates? Yes. What would be the argument? “We know we’re doing damage, but it’ll be less damage than letting the bubbles come and trying to pop them.” I do find it extremely unlikely though, because there’s just no history or policy of it. Are they going to do that in an election year 2016? I don’t think so.

The other scenario where they could raise rates would be if the economy actually got better. I agree with that. If inflation gets up to 1.8%, growth gets up to 2.3%, unemployment comes down for the right reasons as opposed to the wrong reasons, and all those trends are moving Janet Yellen’s way, then they would raise rates. I would be the first one to say they’ll raise rates within 30 days.

But that is not what the data says. The data says we’re far from Yellen’s goals, and we’re moving in the wrong direction. If we get real growth and are moving towards her goals, she’ll raise rates. That will come as no surprise, but that is not how the data is coming out. The only reason to raise rates in a weak economy would be to pop bubbles, and there’s no history of that, so I don’t expect it.

Alex: That makes a great deal of sense. Moving on, I think some people know that the IMF does own gold as an asset. I was recently reading a report by the IMF that shows gold and gold bullion on a chart listed higher than SDRs and currencies of sovereigns. I don’t know if they actually emphasize it that way internally or if that in fact means anything, but according to the IMF it is important as a reserve asset.

The next question is coming from Jim H. who wants to know, “Does the IMF simply print SDRs and then buy their gold? If they’re just printing SDRs, isn’t that inflationary by definition?”

Jim: Great question. The answer is that the IMF has about 3,000 tons of gold. That’s a lot of gold, in fact that’s the third largest stash of gold of any individual country. The United States has a little over 8,000 tons, Germany has a little over 3,000 tons, and the IMF comes in third at 3,000 tons.

This is from the World Gold Council data, not how I analyze it. I take all the members of the Euro Zone – there are 19 countries behind the euro – and combine all their gold to determine the amount of gold available to back up the single currency. That number is over 10,000 tons, so the 19 members of the eurozone have 10,000 tons, which is why I count them as number one. I count the U.S. as number two with 8000 tons. China officially has just under 1,700 tons, but there’s very good evidence that they have 4,000 tons, perhaps more. Using that evidence, I would give the Chinese credit for 4,000 tons, so I’d make them number three, and then the IMF as number four.

Even at number four, it’s a lot more than the next closest. We have Switzerland and Russia with just over 1,000 tons, then we drop off to Japan with around 700 and the Netherlands with 600. It really goes down fast from there. Interestingly, Greece has 100 tons, although it’s in hoc to the European Central Bank.

The IMF has one of the largest gold hordes in the world. They got it from their members. When you join the IMF, it’s like joining a club. If you join a club, you have to pay dues. There’s usually a pretty high initiation fee and then monthly dues. Going back to the 1940s/1950s, when you joined the IMF, you had to buy in. Like in a poker game, you had to put up some chips. At the time, those chips were partly in gold. You could give them currencies as well, but mostly you gave them gold, so that’s where the IMF got their gold.

This goes all the way back 70 years to 1944, but it is not true today. If a new country joins the IMF, they don’t make them give gold. They can actually give their local currency which is pretty inferior.

The IMF used to have more gold but they sold 700 tons between 1975 and 1980 as part of a secret plan. When I say “secret,” these were classified documents at the time that have since been declassified, so scholars have access to them. President Ford, Henry Kissinger, and the IMF did a secret dumping plan between 1975 and 1980 and dumped 1,700 tons of gold on the world markets, 1,000 from the U.S. and 700 from the IMF. They used to have about 5,000 tons but they returned 700 to the members.

The IMF also sold 400 tons of gold in 2010 as part of a gold dumping exercise. Two hundred tons was sold to Mauritius, India, and Sri Lanka, but the buyer of the other 200 tons is a secret. I don’t know who it was, but I’m pretty sure it was China. I can’t prove that, so I’ll label that as speculation.

So even as recently as 2010, the IMF was dumping gold to suppress the gold price. The problem is that when you dump the gold, you eventually run out of it. In answer to your question, they got their gold the old-fashioned way – people paid in to get stock in the IMF.

As far as SDRs are concerned, they do print them and hand them out. There’s nothing more to it than that; it’s just printed money. They have not been using it to buy gold although it would be interesting if they did. That would be a gold-backed SDR in the making, which is one solution to the global liquidity problem. The only problem is, to make that work, you’d have to have the price of gold around $10,000 an ounce. I think we’ll get there as the situation deteriorates, but you can’t print money and buy gold or go back to a global gold standard unless you’re willing to raise the price of gold significantly in order to have enough liquidity for world finance. I’ve done that analysis, and the answer comes out to about $10,000 an ounce, possibly higher. You could get numbers, depending on assumptions you want to make, as high as $44,000 an ounce, but I’ll stick with $10,000 an ounce for now.

To recap, the IMF does have a lot of gold. They’ve stopped dumping it, and I think they’re going to sit tight with what they have. SDRs are printed and handed out, but they’re not using them to buy gold although they could. That would be a radical change in the so-called rules of the game.

Alex: Our next question is something I’ve thought about as well many times, and I think it’s important for people to consider. This question coming from Roberto C. is, “What’s the best product to buy gold and have access to your money if you want to sell when liquidity becomes an issue?”

Jim: There are a number of funds that tailor their product to exactly what Roberto is asking. I’m on the Board of Advisors of Physical Gold Fund, so of course that would be my first choice, but in fairness to the listeners, there are a couple other programs out there.

Here are the key things: Number one – You want physical bullion. You do not want ETFs or COMEX futures or unallocated gold forwards from London Bullion Market Association banks. And you certainly don’t want any cheesy dealer over-the-counter contracts, so you don’t want paper gold. You want physical gold.

Number two – You want it in non-bank storage. You don’t want to put any significant amount of gold in your home because of obvious security issues, so look for storage in vaults. You want vaults that are reputable, insured, bonded, and have been around for a while. Physical Gold Fund qualifies in all those respects. When I visited the Physical Gold Fund vaults as part of my due diligence and to get acquainted with Physical Gold Fund, we visited their vault in Switzerland. Sure enough, there was the gold. It wasn’t just Physical Gold Fund people, either. We went into the vault with auditors and guards and a lot of third parties. They brought it up in a forklift, opened the seals, and opened the lid. It was a bit like Raiders of the Lost Ark. There was the gold, and all the serial numbers checked out. It’s a very first-class operation.

Again, there are others out there, but with the Physical Gold Fund, if you buy one of the units, the money goes straight to the Physical Gold Fund. They’re not hedging with futures or anything like that. If you want gold, you can call them up and say, “I’d like to take delivery.” Shipping could take a day or two to show up on your doorstep, but it is delivered to your house. Considering that you could be living in a world where banks are closed, ATMs have been reprogrammed to dispense only $300 a day for gas and groceries, and the stock exchange and money market funds are closed, you can call Physical Gold Fund and they’ll ship the gold to your house. That is very commendable.

Alex: Jim, thank you very much, as always.

Jon: Thank you, Alex, and thank you Jim Rickards. It’s always a pleasure and an education having you with us.

Jim: Thanks.

Jon: Most of all, thank you to our listeners for spending time with us today. You can follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: October 7, 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles September 15th, 2015

September 15th, 2015 Gold Chronicles topics:
*Jim is correct again on no Fed rate increase
*No rate increase through end of 2015
*What the Fed needs to do is ease
*Fed’s easing options moving forward: QE4, Forward Guidance, Helicopter QE, Negative interest rates, Next salvo in currency wars
*The time to raise rates in 2010 and have missed and entire rate cycle
*The Fed does not lead the economy, it follows it. Raising rates will not make the economy stronger
*Nominal interest rate versus real interest rate
*Real interest rates is what effects gold price
*The dollar price of gold is just the reciprocal of the dollar fluctuating in value
*China’s sale of US Treasuries is being absorbed by the market. Bernanke: The financial system is a closed circuit
*Financial warfare and risks in digital assets from cyber threats
*Conversations with the only man who has ever been the head of both the CIA and the NSA
*Cyber financial warfare attacks are the Precision Guided Munitions of future warfare
*Physical gold cannot be hacked
*World monetary system is described by financial elites as”incoherent”
*Voices joining in cautioning catastrophic collapse of intl. monetary system include BIS, IMF, G20
*If the Fed cheapens the dollar, it will likely raise the price of gold
*The challenge with issuing helicopter money is that you need the cooperation of treasury, Congress, and the executive office working together in order to do it

Listen to the original audio of the podcast here

The Gold Chronicles: September 15, 2015 Interview with Jim Rickards


The Gold Chronicles: 9-15-2015

Jon: I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Hello, Jim. Welcome.

Jim: Hi, Jon. How are you?

Jon: Excellent, thanks. And yourself?

Jim: I’m doing fine, thank you. It’s a beautiful day here.

Jon: Very good, and down here in Arizona, too. Jim, as we are recording this interview, it’s just before the start of the September Federal Open Market Committee meeting. You’ve consistently predicted no rise in interest rates, though I see that you remarked a few days ago that it’s a closer call now than at any time this year. I’m concerned with that ‘close call’ remark. Is this because U.S. and global economic fundamentals have actually improved?

Jim: It’s interesting, Jon. I said that in late 2014 and have continued to say that there will be no rate hike in all of 2015. Some of the listeners may follow me on Twitter, and the great thing about doing television interviews and this podcast is that we have all the video and audio links, so I can show clips from late last year where I said that.

Just to be clear, this is not guesswork or just staking out a position for the sake of attracting a little attention or being controversial. It’s all based on fundamental economic analysis. I don’t even try to be that heterodox or orthogonal to what the Fed is saying. I actually listen to the Fed, I read the speeches, and I read the minutes. I don’t listen so much to television commentators, but I listen to the Fed itself and what the Governors and Reserve Bank Presidents are saying. I then take those indicators, combine them with actual data, and draw my conclusions. I have been saying it all along.

I think I did say this one maybe is a little closer than usual, although I’ve actually backed away from that at this point. It’s unfortunate that it changes day to day. Again, I’ve consistently said that there will be no rate hike. What’s interesting about this time is when I said last year that the Fed would not hike rates in all of 2015, I wasn’t talking about a particular meeting. I said I didn’t see how it could change over the course of the year.

We all remember Wall Street saying they were going to raise rates in March. Instead, the Fed just took away forward guidance, removed the word “patient.” Then everybody said June – we were all spun up about June because there was a press conference – and that didn’t happen. Now everyone is saying September, and I still don’t see it happening. I expect that Thursday will come and go with no rate hike, and then we’ll all be talking about December, although if there is a surprise on Thursday, the Fed might drop a hint about October.

Just to digress on that, there are eight FOMC meetings per year. They don’t meet every month; they meet eight times a year, but only four of them have press conferences. They don’t always have a press conference, so the working assumption is they would only raise rates when there’s a press conference, because they’ll need that opportunity to explain their thinking to reporters.

But actually, that’s not true. Last spring, the Fed rehearsed an impromptu teleconference. They gave everyone one of those dial-in numbers similar to what we’re doing right here where our listeners can log in. They said, “Don’t assume it has to be at a press conference meeting. We might do it at one of the other meetings, and if so, we will do one of these webinars or teleconferences to explain ourselves, so don’t rule that out.”

Be that as it may, I am so used to being out of consensus that now it looks like the majority of the economists and even a large majority of the major Wall Street economists — at least those associated with primary dealers — and the Fed Funds Futures Market, and all the indicators we can find are saying there’s no rate hike this Thursday.

It always makes me a little uncomfortable when I’m in the consensus, because it makes me wonder what I’m doing wrong! In any case, it looks like Wall Street, the markets, and others have caught up to the view that I’ve been presenting all along, which is that the economy is just too weak to bear a rate increase. As I’ve said before, the time to raise rates was actually 2010/2011 when the economy was growing on a sustained basis.

It wasn’t growing strongly, nowhere near potential, for example unemployment was still high, but it was at the early stages of a recovery. That was the time to raise rates, but the Fed didn’t do it. They missed a whole rate cycle, and now it’s too late.

Right now we’re probably getting close to a recession. Undoubtedly the world is slowing down. You look around and see China not technically in a recession but slowing down dramatically, Brazil, Japan, and others in technical recessions, Russia and other major economies in recessions, and the U.S. slowing perceptibly.

What I call the happy-talk crowd likes to look at 2015 second-quarter GDP at 3.7%. That was pretty strong although a lot of it was inventory accumulation. There is a tool put out by the Federal Reserve Bank of Atlanta that’s not perfect, but it’s the best information we have. It’s a real-time GDP tracker, and it’s showing third quarter GDP. Of course, we’re almost at the end of the third quarter coming on September 30, but we won’t have the official number for the third quarter until the end of October. Here we are almost five-sixths of the way through the third quarter, and that’s indicating 1.5%. Combine 0.6% in the first quarter with 3.7% in the second quarter and 1.5% estimated in the third quarter, and it looks like 1.9% growth from January to September, most of the year. In other words, it’s the same kind of crummy 2% or less growth we’ve had all along since 2009. This is certainly not a compelling case for raising rates.

There’s my expectation, but we’ll all find out on Thursday. One of the things I do in my analysis is when I have a view, I’m not necessarily shy about expressing it, but I do ask myself, “What if I’m wrong? What if they do raise rates?”— notwithstanding my expectation that they won’t. That could actually be catastrophic.

It’s a good reason for investors to think now (actually, you should have been thinking all along) about probably increasing your cash position, and if you don’t already have let’s say 10% gold, adding to your gold position. Get into some of those safe-harbor assets, because if the Fed raises rates — again, I don’t expect it, but if they do — this is going to exacerbate what’s already an emerging markets meltdown with massive capital outflows coming out of emerging markets, coming into the U.S., making the dollar stronger, and it could be very, very nasty sailing.

Even if they don’t raise rates, I do expect more of the same. When I say, “More of the same,” the Fed will continue to talk tough. In other words, they’ll talk about raising rates even though they don’t raise them. If they don’t raise rates but continue to talk tough and even hint at October, which again would not surprise me, that’s going to keep the dollar strong and keep the pressure on emerging markets.

We’ll have more of what we’ve been seeing since August, which is pressure on emerging markets’ currencies, capital outflows, volatility in U.S. markets, concern about a global slowdown, and possibly the beginning of a bear market in equity. I think all of these things will continue. If they do raise rates, I would expect all that on steroids. Basically, they would accelerate what could be a market panic comparable to 1997.

The thing I least expect is the Fed to do what they actually need to do which is ease a little bit, because, as I say, we are in danger of tipping into recession. People say, “How can the Fed ease rates? We’re at zero.” They actually do have five tools in their toolkit. I’ll leave aside for a separate discussion whether any of these things work, but at least in the Fed’s mind, they all work.

1) They could look at QE4. 2) They could look at negative interest rates. Although that would be a bit of a shock in the US, they could do that. 3) They could resume the currency wars and try to cheapen the U.S. dollar particularly against Europe and Japan. 4) They could go back to forward guidance — that’s just jawboning — re-introduce the word “patient” (“We’re going to be very patient at this time”), which they took away in March. 5) They could use what’s called ‘helicopter money.’ Helicopter money is when they work with Congress to run larger deficits, the Treasury papers over the deficits with borrowing by issuing bonds, and the Fed buys the bonds. It’s simply another form of money printing. The difference between QE and helicopter money is that when you do QE, you give the money to the banks; when you do helicopter money, you give the money directly to the people in the form of whatever programs Congress decides to support.

Again, I’m not here to debate whether those are good or bad ideas, but there are five ways for the Fed to ease or purport to ease. I don’t expect any of them, but if things get worse, which they may, we could see those things early in 2016.

For now I’ll stand by my forecast of no rate increase on Thursday, maybe a hint of an October surprise, and more volatility. To your point, Jon, whatever closeness in the call I might have seen a couple of weeks ago has disappeared, and the economic data since then has confirmed my long-held view that they will not raise rates.

Jon: Let me ask you one twist on this question, Jim. You’re right that many more commentators seem to be lining up with your long-held forecast that they won’t raise rates, but I’m hearing some voices say, “The fundamentals don’t justify them raising rates, but it’s very dangerous if they don’t, because then they’ll be leaving it too late, and when they do eventually raise rates, it’ll go too fast.” Is there any validity in that anxiety? What’s your view on that?

Jim: That doesn’t fit the facts or the data. Here’s what I mean by that. When commentators say, “If they don’t raise them now, they’ll leave it too late,” I would say it’s already too late. The time to raise them, as I said, was 2010.

We’ve had 38 business cycles since the end of World War II that all follow a classic pattern. The economy gets stronger and stronger, things get a little hot, labor markets get tight, capacity utilization gets tight, inflation picks up, the Fed says, “Okay, time to raise rates” and they do, but they’re usually behind the curve so they raise them again and again, and then finally the economy cools off, things slow down, unemployment goes up, inflation goes down, capacity utilization drops, then things look kind of bad, we’re in a recession, the Fed says, “Okay, time to cut rates,” they cut them, and you go up again. It’s like a sine wave up and down, up and down. That’s a normal business and credit cycle.

What’s different this time is that we’re not in a normal cyclical recovery; we’re in a growth depression. When you get 2% growth for seven years, that’s a growth depression. That’s not a normal recovery, but it’s still a recovery. It may be weak, it may be well below potential, it may be depressionary in that sense, but it’s still a recovery and you’re supposed to normalize rates in a recovery. As I say, the time to do that was 2010/2011.

The Fed could have raised rates in baby steps with big gaps in between. Over the course of two years and 16 FOMC meetings, they could have gotten them up to 1.5% – 1.75%, something like that. If they had done that — and they should have done that — they would be in a position to cut rates today just doing 25-basis-point cuts to keep the economy going. That’s a normal cyclical process.

The Fed missed an entire cycle. They just skipped it because of Bernanke’s experimentation. I spoke to Ben Bernanke in Korea recently and we talked about this. He used the word “experiment.” It wasn’t me; that was his word for what he was doing. This looks like a failed experiment.

Analysts have this exactly backwards. There’s a sense out there that I see everywhere and I’m incredulous. It says, “Oh, gee. If you raise rates, that means the economy is strong, and you better raise them fast before the economy gets too strong.” As if somehow raising rates made the economy strong. That’s the exact opposite. What’s supposed to happen and what normally happens is that the economy gets strong and then the Fed raises rates.

The Fed doesn’t lead the economy up and down; the Fed follows the economy up and down. As the economy actually gets stronger, then yes, at some point the Fed does have to raise rates. But there’s this idea out there of, “You’d better raise rates to make the economy strong.” It doesn’t make the economy strong; it actually slows the economy down. That’s the whole idea.

With this notion that “You’d better raise rates before it’s too late,” show me the evidence of inflation. Where is it? Show me the evidence that labor markets are tight. I understand the employment rate is 5.1%, but so what? Labor force participation is at an all-time low, job creation peaked last November and has been going down fairly precipitously ever since, labor force declined last month, and real wages are going nowhere.

When you look behind the headline happy-talk data, the labor market is showing no sign of tightness, no sign of real wage increases, and no signs of inflation. In fact, inflation numbers are coming down, economic growth is coming down — we already talked about that. In looking at every indicator, this is not an economy that’s getting stronger.

In fact, we are 77 months into this recovery. By the way, that’s a very selective period, because we’ve had two of the longest recoveries in history — in the 1980s during the Reagan years and the 1990s during the Clinton years. The average recovery since 1980 is 78 months. We are now at 77 months. In other words, we’re one month away from having an exceptionally long recovery. If you figure the average since World War II, it’s much shorter, down in the low 40s. So this is a very long recovery.

If you knew nothing else — if you didn’t have any data about employment, inflation, growth, past utilization, or anything — and you were just looking at the longevity of it (and I agree that that’s not dispositive), you would say, “We’re pretty close to a recession.”

This notion that somehow raising rates means you have a strong economy is nonsense and completely backwards. It puts the cart before the horse. When you have clear signs of a strong economy, which we don’t, that’s when you raise rates.

There was one honest analysis where an analyst was very candid and said, “I get the weak data part, but you want to raise rates anyway. It’ll take the stock market down 25% and cause a recession, but you ought to do it anyway, because the danger on the other side is you’re creating bubbles and it’s going to end badly.”

I agree with that completely. I think if they do raise rates, it will take the stock market down 25% in a hurry — that’s one reason to have some gold and cash — and it will cause a recession if we’re not in one already. This is an outside analyst saying this, and I think the analyst did a very good job of thinking about it that way. Instead of the happy talk saying raising rates makes the economy strong, it’s saying raising rates is going to put us in a recession, but we ought to do it anyway. It’s like, “Take your medicine, kid.”

Show me a Fed Chairman or Fed Board of Governors who has ever tried to pop a bubble, who has ever tried to get out in front of an economic cycle or even knew a bubble when they saw it. While I agree with that analysis, I don’t think that’s how Fed Governors and Fed Chairs think about the problem. They’re looking much more in real time and therefore don’t see bubbles. They didn’t see the bubble in 2007, they didn’t see the dotcom bubble, they didn’t see the emerging markets bubble in 1997, and they didn’t see the Mexican bubble in 1994. The Fed has demonstrated that they can’t see bubbles when a bubble is ready to come up and bite them in the ankle. Why would this time be any different?

The case for raising rates is either delusional in the sense that people think it’s magically going to make the economy stronger, which it won’t, or it’s candid, which is it would cause a recession. But that’s actually a reason not to raise rates.

Look, anything can happen and I understand that, but we do the best we can as analysts, and that’s how I see it.

Jon: Let’s step back for a moment from this immediately topical question of tomorrow’s FOMC meeting. I’d welcome a little refresher and guidance from you on the underlying structures we’re consistently talking about. What I’m thinking about is the relationship of interest rates to the strength of the dollar, and then the relationship of both of those to the inflation and deflation. Would you give us a little two-minute seminar on how these three forces — interest rates, the dollar, and inflation/deflation — impact each other?

Jim: Jon, as you and I have spoken before, you know that when anyone brings up the subject of interest rates and how they interact with prices, inflation, deflation, and policy, etc., I’m always very quick to make the distinction between nominal interest rates and real interest rates. That’s a very important distinction that I think is too often overlooked in the discussion.

As a quick primer, nominal interest rates are the rates you see. Whatever the coupon or yield to maturity on a bond is, whatever the bank is paying you on your deposit, whatever you’re actually getting whether it’s 0.25% or 2% on a 10-year note, that’s the nominal interest rate. To get to the real rate, take the nominal interest rate and subtract inflation. As a simple example, if the nominal interest rate is 3% and inflation is 1%, it’s 3 minus 1, so the real rate is 2% or positive 2. That’s how you think about real rates. Real rates have much more of an impact on the real economy and commodity prices, including gold, than nominal rates do.

Just to illustrate that, gold went from $35 an ounce in 1971 to $800 an ounce in 1980. That’s a 2000% increase in about nine years. What was happening to interest rates at the time? Interest rates we’re going to the moon. They went to 6%, 7%, 10%, 13%, 15%, and ultimately short-term rates got to 20% and 30-year bond rates got up to 15%. Interest rates were sky high and the price of gold was sky high, but what that leaves out is the fact that while the nominal interest rate was going up, the real interest was going down because inflation was going up even faster than the nominal interest rate.

For example, there was a time in 1980 when the nominal interest rate was 13% for 30-year-bonds but inflation was 15%. What’s 13 minus 15? At least where I went to school, that’s negative 2. In other words, the real rate isn’t even positive anymore; it’s negative.

It sounds crazy, but to me 13% interest rates were lower than 3% interest rates. “Wait a second, Jim. How can 13% interest rates be lower than 3% interest rates?” The answer is that nominally the 3% rate is lower, but when you do it in real space, 13 minus 15 is negative 2, and 3 minus 1 is positive 2. In the first case, real rates are minus 2, and in the second case, real rates are positive 2.

It’s the real rate that kills you. It makes gold go down and investment difficult. When real rates are low or even negative, that tends to be associated with high inflation. It’s bullish for gold, at least in nominal terms, and encourages spending and investment. You have to always make those distinctions.

People like to say interest rates are at an all-time low right now, but actually nominal rates are close to all-time lows and real rates are nowhere near all-time lows. A 10-year note, which I think is a good proxy, is about 2% right now and inflation is running around 1%, give or take, so the real rate is positive 1. That is a fairly high real rate and one of the reasons deflation has the upper hand and gold prices have kind of gone sideways. That’s an important way to think about interest rates when you’re trying to sort it all out.

Having said that, what’s the impact on the dollar? Again, high real rates make for a strong dollar. Look around and you’ll see that interest rates are being cut. Go around the world — Canada, Australia, New Zealand, China — they’re all cutting interest rates. The Bank of England is, Bank of Japan is at zero, and yet if you look at the US, I can go out and buy a 10-year note and get a positive return. Even though nominal rate is 2, with inflation at 1, I get a positive return of positive 1. For capital allocators looking around the world, all of a sudden the U.S. looks like a very attractive destination for capital because the real rates are high. That brings capital into the U.S., which means you have to buy dollars, which makes the dollar stronger.

In some ways, the dollar price of gold is just the reciprocal of the dollar. A strong dollar can mean a lower dollar price for gold, and a weaker dollar can mean a higher dollar price for gold. Of course, you know I like to say that gold doesn’t change – an ounce of gold is just an ounce of gold. That’s my constant. When someone says the dollar price of gold is going up or down, I just say, “Fine, that’s a dollar problem; it’s not a gold problem.” A lower dollar price of gold just means a strong dollar. That is what we’re seeing because of the real interest rates.

The point being, these things are all connected. The nominal rate is not dispositive. You have to look at the real rate, you have to think about things in real space, you have to adjust for inflation, and you have to think about the impact.

Jon: Let’s stay with the dollar part of this story for a moment and look at how China plays into this. I’ve read that China has been selling off a record volume of U.S. Treasuries recently. This plays into a rather popular narrative that China is almost waiting to pounce and at some moment offload huge volumes of its U.S. debt basically in a ploy to wreck the dollar and the U.S. economy. Give us your view of this theory.

Jim: Some of it is theory and some of it is fact, so let’s start with the facts. That’s always a good place to start! China is, in fact, selling Treasuries and reducing several holdings of Treasuries.

There’s been an enormous drain of reserves from China. They’ve lost over $400 billion of reserves in the past three months. Part of it was used to prop up their stock market, part of it was used to defend their currency at least until they broke the peg in early August, part of it is still being used to defend their currency now because they have a new peg at a lower level, and some of it is going because there’s capital flight coming out of China. Chinese oligarchs, Princelings, and the politically connected people are saying, “I want some dollars. I want to get out of here and buy a nice condo in Vancouver, Melbourne, Sydney, Istanbul, London or all these places around the world.”

What’s interesting is that when you have $4 trillion in reserves, which is where China started this process, it looks like an impregnable castle. It’s like, “Wow, $4 trillion, that’s a lot of money.” That’s fine if the dynamic is going your way, but when the dynamic reverses and you start to lose reserves and you begin to drain your reserves because you’re pursuing some policy, it’s amazing how quickly they can disappear. Of course, the emerging markets found this out the hard way in 1997, Mexico found it out in 1994, and places even today such as Malaysia are draining away their reserves.

It’s a scary thing to watch. Think of watching the gas in your gas tank go down. You may still have three-quarters of a tank, but if you keep going and can’t find a gas station, you’re going to hit empty.

China is quickly losing reserves and is selling Treasuries to basically pay for that outflow of dollars. So why aren’t U.S. interest rates skyrocketing? Why hasn’t the U.S. Treasury market collapsed? Why aren’t all these horrendous things happening that so many people predicted when China started selling Treasuries? The answer is that there are plenty of buyers. In other words, if somebody is selling, somebody is buying.

By the way, this is not some kind of coordinated assault on the U.S. dollar. It’s not some nefarious plot by the Chinese to dump Treasuries and sink our markets. Far from it. China is playing defense. They’re not on offense; they’re playing defense by trying to either manipulate their currency or deal with the demands for capital flight or prop up their stock market, as the case may be.

To me, the interesting question is not that China is selling, which they are, but who are the buyers? There are plenty of them. First of all, people are getting out of other markets. It’s almost like the Malaysian company forces the Malaysian Central Bank to sell Treasuries to give them dollars, and then that individual company takes the dollars and buys the Treasuries.

This is something that was explained to me 35 years ago. I was a young senior officer at Citibank, 27 or 28 years old, sitting at lunch across from our Chairman and CEO, Walter Wriston, one of the most famous bankers of the 20th century. I said, “I’ve just seen this movie Rollover,” an oldie but goodie movie from the 1980s with Jane Fonda and Kris Kristofferson. The plot of the movie was that the Arabs were secretly pulling all their money out of U.S. banks and buying gold, and that was going to lead to the collapse of the banking system and the dollar.

Then I said, “Mr. Chairman, what do you think about the possibility of the Arabs pulling all their money out and buying gold? Wouldn’t that be the end of our banking system?” He looked at me benignly and said, “What you have to understand is that the global financial system is a closed circuit. The Arabs certainly could pull their money out and buy gold, but the guy who sold them the gold is going to get the money, and that guy is going to put it back in the bank, and that bank is going to lend it to us.” In other words, as long as the interbank lending system functions, the money doesn’t go anywhere; it’s a closed circuit.

We’re seeing something similar in Treasuries. It is true that the Chinese are selling, but there are plenty of buyers, and some of the buyers may be wealthy Chinese who are getting their money out in the first place. They just take the dollars from the Central Bank, come to Vancouver, buy some Treasury bills, and you’re back where you started.

At the end of the day, there is one buyer of last resort, and that is the big U.S. banks. They will be forced to buy the Treasuries. This goes under the heading of financial repression. I think a lot of people have heard that term, but this is financial repression in real life. It’s an economic analysis that’s been articulated by Carmen Reinhart. Reinhart’s seminal paper credits Alberto Giovannini, a former partner of mine at Long-Term Capital and a very well-known Italian economist who wrote about this in the 1990s.

The idea is that, at the end of the day, governments can make banks do whatever they want. In 2008, all the banks got bailed out. In early 2009, these bankers took their head out of the foxhole. The shooting had stopped, there was smoke, damage, and carnage everywhere, and they’re like, “Hey, I survived. My bank is still here. I got bailed out by the government. I still have my phony-baloney job. I still have my $1 million plus bonuses. This is great. I can get back to business and pay myself lots of money.”

They missed one thing. They were bailed out, they did keep their jobs, they did keep their bonuses, but what they missed is that they’re now wards of the U.S. Government. They’re working for the U.S. Government, and if the Fed makes them buy bonds, they will buy bonds. In effect, the Fed can just say, “If you don’t, we’ll shut you down.”

I’m not too worried about Chinese selling, because there are plenty of buyers out there, and if all else fails, the banks will be forced into becoming buyers. This will equilibrate the market, so I don’t think it’s that cataclysmic.

Jon: Thank you. Now shifting the focus for a moment, you recently had an extensive conversation with a very interesting individual. I’m referring to General Michael Hayden. You dubbed him as America’s top spy, and with good reason. He is the only person to have headed up both the Central Intelligence Agency and the National Security Agency.

The focus of your conversation, as I understand it, was financial warfare, a recurring theme in our conversations. I’m curious to know what you gleaned from this exchange with the General.

Jim: It was a very interesting conversation. Mike Hayden is my favorite spy. He’s a really, really nice guy, brilliant, a four-star Air Force General. He has led multiple intelligence agencies including Air Force Intelligence before he became head of the NSA, the National Security Agency, and finally, Director of the CIA.

He’s kind of bald, wears glasses, and is a little shlumpy. He looks about as much like James Bond as Elmer Fudd, but that’s the real world. Not all spies are running around in tuxedos playing at Casino Royale. Some of the best spies are actually people you wouldn’t even notice in a crowd, and that can be very effective.

General Hayden told me stories about how, when he was in Bulgaria, he used to buy a ticket on a train to the end of the line. He’d ride the train all day, get to the end of the line, buy a ticket, and ride the train back. In places like Bulgaria where the road system is not that well developed, a lot of stuff moves by rail including tanks, military hardware, and troop trains, etc. Just by being a passenger on a train and going from one end of the country to the other in the course of the day, he picked up enormous intelligence that he could then debrief to his associates. That’s old-school spying and very effective.

We talked about was cyber financial threats to national security, i.e., cyber financial warfare. That’s a bit of a specialty of mine, and he was fully conversant with that. The NSA is actually in charge of what we call SIGINT. Any ‘INT’ is just short for ‘intelligence’. SIGINT is short for signals intelligence, which is basically intercepting radio transmissions, telephonic transmissions, Internet, and any kind of telecommunications. Then there’s HUMINT or human intelligence. That’s the old cloak-and-dagger type of spy stuff.

He was very conversant with this concept of cyber financial threats. Categorically, he called cyberwarfare or cyber financial attacks the PGMs of the 21st century. For those who don’t know, ‘PGM’ is ‘precision-guided munitions’ such as a cruise missile, Tomahawk cruise missile, or something from a Predator drone. He didn’t suggest that that would be the main battlespace today, but over the next ridgeline or maybe the one after that, it’s how wars would be fought. I disagreed a little bit and said, “General, I think it’s here now.” Of course, he would know as well as I, but it’s a pretty active field right now.

There is this recognition in the intelligence community and the national security community that cyber financial warfare is as much a threat as chemical, biological, and radiological weapons or certainly conventional kinetic weapons of a kind we’re all familiar with.

That has interesting implications for investors. We all know the traditional arguments in favor of gold, but there’s now a new 21st century argument in favor of gold, which is that it’s not digital. You can’t wipe it out, you can’t hack it. I’m talking about physical gold. If you have paper gold on COMEX or something, or ETFs, then that’s a digital asset that can be hacked or erased.

I know people who have a lot of their wealth in a brokerage account like Charles Schwab or Merrill Lynch or Goldman Sachs. They say, “I’m really wealthy, because I’ve got all these stocks and bonds.” I say, “Really, where are they?” They’ll show you an account statement. Maybe they get the account statement in the mail, but that’s probably online, too. I then say, “Well, that’s interesting. Look at all those nice assets here on the account statement. You realize it can all be wiped out and erased in a heartbeat. What do you really have?”

What they have is a bunch of digital representations of potential wealth in a rule-of-law society, but what if that’s erased? What if it’s hacked? What if the rule of law breaks down? What if governments freeze assets, etc.? Physical gold is the one thing that’s immune from all that. It’s not a reason to have 100% gold, but in my view it is a reason to have 10% gold, because it gives you some protection against that in addition to all the traditional reasons for gold.

It is interesting to meet with and talk to someone as experienced, plugged-in, and prominent as General Hayden who is in complete accord with me and others that financial warfare is the battlespace of the 21st century.

Jon: Before we turn to Alex here, there’s been a consistent vocal minority, of which you’re a part, predicting an imminent financial crisis. You’re not saying when it will happen, but you’ve said again and again that we’re in for a financial crisis even beyond the scale of 2008. I often hear people speaking rather dismissively of “the doomsday crowd.” You pointed out recently that some of the voices in this so-called doomsday crowd include the Bank for International Settlements, the IMF, and the G20. I wonder if you could elaborate on that a little bit?

Jim: Sure. You’re right, Jon. I do see a catastrophic collapse of the international monetary system. I don’t think it’s inevitable; I don’t think it has to happen. I just think it’s very likely that it will happen, because I don’t see any signs that the remedial or preventive steps are being taken.

I can give you four or five things that could be done tomorrow that would prevent it from happening including breaking up the banks, banning derivatives, or banning high-frequency trading. None of these things really serve any particular purpose other than to enrich the individuals who are behind them. They don’t do society any good, so getting rid of them would lead to a more stable system that would still serve everyday investors in terms of market liquidity and being able to trade stocks in secondary markets, etc., which was the original purpose of a stock market.

I think there are things that could be done to prevent it, but then as an analyst, you have to say, “Okay, is anyone doing those things? Is anyone taking those steps?” The answer is no. Therefore, I’m back to the other branch of the tree, and that is if we don’t have systemic reform, we will have systemic collapse. That’s very easy to see. When I say easy, I mean there are recursive functions, analysis, science, and other equations behind it, but it’s a pretty straightforward analysis.

As far as timing, you cannot call it to the day, the month, or the year. I think over a five-year horizon, it’s more likely than not; over a three-year horizon, still more likely than not. But it’s not the same as saying it would be next month or next week, although it could be. That’s the interesting thing about it. When I say it’s more likely than not in three years, I don’t rule out the fact that it could happen tomorrow. I’m not predicting tomorrow; I’m just saying that that’s part of the analysis.

Having said that, I do not consider myself a doom-and-gloomer; I do not consider myself part of the doomsday crowd. When this catastrophic collapse that I’m describing happens, it will not be the end of the world. We will not all be living in caves eating canned goods with our trigger fingers on machine guns. I don’t think that’s true at all. I think we’ll still be in our houses, we’ll still wake up, and life will go on, but it will be a different world financially.

We’ll see extreme responses. We’ll see an emergency summit conference of leaders not unlike the November 2008 G20 conference in Washington that George Bush and Nicolas Sarkozy put together on fairly short notice. We’ll see a reformation of the international monetary system, maybe in a venue something like Bretton Woods. I would like to see that happen today in a rational forward-leaning way before the collapse happens.

As mentioned earlier, I recently spoke to Ben Bernanke, former Chairman of the Federal Reserve. I also had a conversation with John Lipsky. John is a very fascinating individual and a great guy. He is the only American ever to head the IMF.

People who are familiar with the IMF say, “Wait a second, the IMF job is reserved for non-Americans by tradition.” It’s not a law as such, but when Bretton Woods was set up, there was a sort of handshake deal that the head of the World Bank would always be an American and the head of the IMF would always be non-American. That’s been true for all these years, and yet John Lipsky, an American, was briefly head of the IMF for only a few months.

It was after Dominique Strauss-Kahn was arrested on an airplane in JFK and faced some fairly scandalous charges. Normally, the IMF succession is very orderly, but that was a little disorderly. Dominique had to resign. John was the number two guy, Deputy Managing Director, so he became Acting Head for a short period of time until they could decide on Christine Lagard, who came in a few months later.

Having spoken to the former Chairman of the Fed and the former head of the IMF just a few weeks apart – one conversation in Korea, one in Washington – they both used the same word to describe the international monetary system. That word was “incoherent.” I don’t think they rehearsed that for my benefit; I think it’s just the word that comes to mind among the power elite as to what’s going on.

This is indicative of the state of affairs and points to what you were saying, Jon. If you were to ask me who really runs the world of finance or what are the most powerful establishment institutions in the world, you could have the Fed on that list in terms of the elites and look at the Bilderberg Conference (I’ve spoken to Bilderbergers about this), but the three most powerful multilateral institutions would be the Bank for International Settlements (BIS) in Basel, Switzerland, the International Monetary Fund (IMF) based in Washington, and the Group of 20 (G20), which is a floating crap game of developed economies and BRICs and some emerging markets that meet all over the world on a rotating basis.

All three of them have issued very dire warnings. It’s not just, “Oh, gee. We better slow down. We better do this or that.” It’s “No, we are looking at a highly unstable financial situation.” They practically threatened Janet Yellen. Christine Lagard gave her multiple warnings. The G20 finance ministers just met in Turkey and issued a warning. These are very blunt warnings.

When I see the power elite warning about global financial instability and the potential for collapse, not only does it confirm my own analysis, but it says to me that they’re trying to wash their hands of this. They’re saying, “We told you.” When it happens, they’ll be able to say, “Hey, don’t blame us. We told you this was coming.”

I hate to blame the victim, and I do sympathize with people who lose a large percentage of their net worth because they were all in the stock market and didn’t have some gold. However, when it happens, as much as one might sympathize with any investor who’s not prepared, there’s really no one to blame, because you have been warned.

Jon: Thanks, Jim. Here’s Alex Stanczyk with questions from our listeners.

Alex: Thanks, Jon. We have about five minutes left of our traditional time slot, but Jim has graciously agreed to give us a little bit longer. I want to thank all of our listeners and the people who sent in questions.

When we schedule these webinars, we receive questions over Twitter, some by e-mail, and we also get some coming in live while we’re doing the webinar. Let me give some quick guidance about submitting questions. Please refrain from asking questions having to do with legal advice, tax advice, and possibly some trading advice. Also, we’ve already answered a lot of questions that tend to come up over and over again. After doing this with Jim for almost two years now, we have a large archive of webinars available, so may I direct you to the Physical Gold Fund website where you can access a huge archive of various different webinars that answer a lot of the most frequently asked questions.

That said, we’re going to move on and go to the first question. This is a Twitter-based question coming from @awyee707 who asks, “How can the Fed cheapen the dollar without raising the price of gold?”

Jim: They probably can’t. I think if they cheapen the dollar, it will raise the price of gold. As I mentioned earlier, the dollar price of gold is just the reciprocal of the dollar. Strong dollar is lower price of gold; cheap dollar is higher price of gold. Now it’s not as simple as that or a perfect correlation, but it’s a strong correlation. The other driver, which we also talked about earlier, is real interest rates.

If you somehow had a cheap dollar in a world of high real interest rates, that’s a mixed bag. You’d have one force pulling gold down, which would be high real interest rates, and another force pushing gold up, which would be a cheaper dollar. That’s just back to this inflation/deflation tug of war I started talking about in 2011 in my first book, Currency Wars, and hasn’t gone away. That dynamic is still in place.

The bottom line is, “How do you get to a cheap dollar?” You can’t just wave a wand and say ‘cheap dollar.’ You actually have to do something. That would probably mean a stronger euro, a stronger yen, a cheaper dollar. We’d start to import inflation into the United States in the form of higher import prices. That, in theory, would feed through the supply chain and get a little bit of inflation going. Remember the equation of nominal rates minus inflation equal real rates. With higher inflation, real rates are going to come down, and that’s good for gold. If the Fed does try to engineer that, that’s very bullish for gold.

Alex: The next question is coming from [@juhaem]: “Is there some kind of big problem with helicopter money? Why haven’t the Central Banks used it if they really want inflation?” I think what our questioner is referring to is money that’s given directly to people.

Jim: They haven’t, but they may yet. A couple of days ago, the President of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, gave an interesting speech where he talked about this. But here’s the problem. To do helicopter money, you need cooperation between the Congress, the White House, the Treasury, and the Federal Reserve. They all have to be involved.

The notion is you print up a bunch of dollar bills, rent some helicopters, fly around, push the bills out of the helicopters, and everyone scoops them up. It’s an interesting metaphor, but that’s not actually how it works. The way it’s done is by Congress voting larger deficits to spend money. Where would that money come from? The Treasury would borrow it. How would the Treasury finance the borrowing? The Fed would print money and buy the bonds.

The handoff goes from the Congress in terms of voting on spending, then the President has to sign the bill, then the Treasury has to finance the deficit, and then the Fed has to print the money and buy the bonds. They all have to work together.

At the end of the day, the Fed is still printing money. When they print money in QE, they buy existing secondary market bonds from the banks and credit the banks’ accounts with dollars that come out of thin air. But where does the money go? It goes to the banks.

The problem is it’s just been sitting there. Banks take the money and redeposit it with the Fed in the form of excess reserves, and then the money just sits there. Banks don’t lend it, people don’t want to borrow it, nobody is spending it, velocity is down. You can print all the money you want, but if it’s not getting lent and spent and there’s no velocity, that doesn’t do anything for inflation or nominal GDP.

The difference with helicopter money is you bypass the banks, disintermediate the banking system, and give the money directly to people. When I say people, if the Congress votes an infrastructure project, that money is going to go to construction workers and owners of construction companies. If the Congress votes some new benefit, that money is going to go right to the people who participate in that particular welfare or benefit program. Those are the people who get the money. The point is, you’re not relying on the banking system.

It’s theoretically possible, and if they get desperate enough, they’ll try to make it happen. You might not see that until 2017 because you’re probably going to have to have the same party – Democrat or Republican – running the White House and the Congress to make it happen. Republicans and Democrats are barely talking to each other, so it’s hard to see how they could actually pull this off, but 2016 is an election year. There’s nothing Congress doesn’t like about more spending in an election year, so maybe it will happen after all. That’s how it works and that’s what you have to watch for.

Alex: This topic comes back around to the whole idea of the Fed being able to push the economy in the first place. As you said a little while ago, the Fed follows the economy; it doesn’t lead the economy. Looking at what the Fed’s tried to do ever since 2008 and even before, it doesn’t seem like anything they’ve done really has any kind of effect.

What we’re probably looking at here, if I remember correctly from things you’ve said before, is that in order to get real inflation, we’re going to have to have some kind of sentiment or shift in the psychology before something like that happens.

Jim: That’s right, and it’s not easy to do. It took the worst recession and the worst financial panic since the Great Depression to shift people from spending to not spending. What’s it going to take to get them to shift back again into spending? I don’t see that happening anytime soon.

Alex: We have time for one other question coming from Steve M. who asks, “With Europe continuing to slow, do you see Draghi increasing euro QE into the end of the year?

Jim: Draghi is my favorite Central Banker, because he’s the only one who really understands central banking as far as I can tell. He understands that Central Bankers actually have very little power, so you have to talk a good game. If you talk a good game and put on a brave face, people actually believe you.

Go back to June of 2012 during one of the periodic sovereign debt crises. Greece has been in continual crisis from 2010 into 2015, but some periods are worse than others. The summer of 2012 was one of those acute periods, and Draghi said, “I will do whatever it takes to defend the euro, and believe me, it will be enough.” That phrase, “Whatever it takes,” I thought was a little bit of bravado, but he meant it. I think Draghi will do whatever it takes.

The euro seems to have stabilized. As I’ve said, I don’t see any real chance that the euro is going to fall apart. I have been pretty much laughed at for years about that, but it’s working out that way. If you go to Athens tomorrow, you’re going to spend euros. They’re not out of the euro, nor will they be.

Europe is doing okay for the time being, but remember the reason they’re doing okay is because of the currency wars. The euro got cheap. It went from $1.60 to $1.40 to $1.20, and in February of 2015, it was $1.05. At that time, everyone said it’s going to par but I said, “No, this is the bottom.” It’s come back up a little bit. I see it getting stronger next year, but the euro has held together, and that’s what has given Europe a lift.

The Irish economy is doing very well, and the Spanish economy is doing very well. Sure, there are pockets like Greece and Eastern Europe – and even France, for that matter – that are not doing that well. Germany is probably going to decelerate a little bit because of the slowdown in China and the fact that they have such a large trading relationship with China. It’s a mixed bag, but on the whole, Europe is a little bit of a bright spot because the euro got cheap.

The interesting part is that the U.S. engineered a weaker euro and stronger dollar to help Europe in the belief that the U.S. economy was strong enough to bear a strong currency. That was a blunder. It turns out that the U.S. economy was not strong enough to bear a strong currency. We got the strong currency but we’re flirting with a recession.

At what point does the U.S. wake up and say, “You know what, the strong dollar thing is not working for us. We need a weaker dollar like we had in 2011 to keep the game going. Hey Europe, you know what that means: we get a weaker dollar, you get a stronger euro.” If that happens, Draghi may actually do more QE or maybe even deeper negative interest rates just to give Europe a little bit of a lifeline.

The problem with currency wars is not only are they not a positive sum game, they’re not even a zero sum game. Cross rates are a zero sum game, but currency wars are probably a negative sum game because of the uncertainty that gets introduced into the global capital flows and the global trading system.

Again, I think Europe is a bright spot for now. I doubt that’s going to change in the near term. I suspect the Fed will continue to blunder in their forecasting ability by thinking that the U.S. economy is stronger than it actually is, by continuing to talk tough, by talking about the October surprise to keep a strong dollar, and believe somehow that’s all going to work.

By late this year or early next year, I believe even the Fed will see reality. At that point, you may see the beginning of a weak dollar policy and a stronger euro. Draghi is just going to have to go along with that. At the end of the day, the Fed has Europe under its sway because of the importance of the dollar/euro swap alliance between the central banks to prop up the European banking system. It’s all connected in interesting ways that will play out.

Alex: That sounds like possibly the beginning of the next round of salvo in the currency wars, which may continue until we see that psychology shift. Thanks, Jim.

Jim: Thank you, Alex.

Alex: With that, we’re going to hand it back to Jon.

Jon: Thank you, Alex. Let me just briefly remind our listeners that you can follow Alex Stanczyk on Twitter. Go to Twitter and type in @alexstanczyk for great insights and very valuable links to follow there.

Thank you, Jim Rickards. It’s always a pleasure and an education having you with us.

Jim: Thanks Jon.

Jon: Most of all, thank you to our listeners for spending time with us today. You may also follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


Listen to the original audio of the podcast here

The Gold Chronicles: September 15, 2015 Interview with Jim Rickards


You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

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This Podcast is not an offer to sell, nor a solicitation of an offer to purchase, any security. This Podcast is intended for general education and information purposes only, and may include broad discussions of markets, geopolitics, monetary policy, and geoeconomics. Nothing in this Podcast constitutes investment, legal or tax advice, nor an evaluation of or prospectus for any particular investment or market, including gold. This Podcast should not be relied upon to make any investment decision. You are encouraged to seek the advice of qualified financial, legal and tax advisors before making any investment decisions.

This material is provided on an “as is” and “as available” basis, without any representations, warranties or conditions of any kind. In particular, information provided by third parties in this Podcast has not independently evaluated or confirmed. Furthermore, we take no responsibility to update this Podcast to reflect any changes in any of the information presented. Physical Hard Assets Fund SPC and Physical Gold Fund, its officers, directors, employees or associated persons will not under any circumstances be liable to you or any other person for any loss or damage (whether direct, indirect, special, incidental, economic, or consequential, exemplary or punitive) arising from, connected with, or relating to the use of, or inability to use, this Podcast or the information herein, or any action or decision made by you or any other person in reliance on this information, or any unauthorized use or reproduction of this Podcast or the information herein.

Transcript of Physical Gold Fund interview with Director of one of the largest Swiss Refineries

Dear friend of Physical Gold Fund, we are pleased to bring to you what in our view is perhaps one of the most important interviews in the gold market in 2015. The gentleman we are interviewing  is part of senior management of one of the largest Swiss refineries.  His refinery is one of only 5 global LBMA referees, which takes samples from other refineries around the world and certifies them to produce gold meeting the purity and form factor of the LBMA good delivery standard, which makes it part of the very core of the industry globally. He has over 30 years experience in the gold markets and has in our view one of the most authoritative perspectives into global physical gold flows in the world. His unique outlook, formed from internal data on gold flows through the refinery, combined with colleagues throughout the industry including the largest bullion banks (versus news outlets)  is an invaluable source of information and paints an important picture for the gold markets moving forward.

Please enjoy this exclusive interview with our compliments.

Alex Stanczyk
Managing Director
Physical Gold Fund SP

Topics include:
*Why trying to correlate physical flows with the price can be misleading
*On-going tightness in the physical gold markets
*There is less liquidity in the physical market
*The physical tightness of flow is reflected in the price “not at all”
*As long as the spot market is settled with cash settlement, the physical flows are not determining price
*If investors dealing in cash markets begin to take delivery, the physical is just not around
*The current pricing mechanism can continue indefinitely unless investor behavior changes to taking delivery versus cash settlement
*The gold price has “no correlation to the physical market”
*If this behavior changes (to taking physical delivery) it could become dramatically dangerous
*Gold is moving in one direction from west to east with small exceptions over the last year
*90% of the refinery’s business is currently supplying demand from the east (India, China) and 10% to western markets
*China has imposed a new standard on the LBMA good delivery system of 1 kilo, 999.9 fineness
*400oz bars being melted and refined to 1 kilo 999.9 fine bars and shipped into China are coming out of London and particularly the ETF’s such as GLD
*In the next gold upleg, scrap may not be readily available – overall scrap has decreased remarkably
*Declining investment in the mining sector and geo-political issues affecting mining viability will unavoidably reduce gold supply moving forward
*The danger of less supply moving forward is more likely than the comfort of more supply

Listen to the original audio of the podcast here

Physical Gold Fund interviews Director of one of the largest Swiss Refineries



Jon: Hello. This is Jon Ward with Physical Gold Fund. Recently I was privileged to hold a candid conversation with one of the most connected and influential people in the physical gold market. The gentleman you’re about to hear from holds a senior position in one of the five largest precious metals refineries on the planet. Because of his current position and his decades of prior experience, he has a deep inside knowledge of today’s physical gold markets. His insights and unique perspective on these markets goes way beyond what you will ever find in the mainstream press. Due to the sensitivity of the information he reveals in this interview, his identity and that of the refinery he works for have been withheld. Here is the conversation we recorded.

Head of Refinery: Hello, Jon.

Jon: It’s great to have you with us.

Your refinery is one of the largest refiners of precious metals in the world. The company is notable for being one of only five global referees for the London Bullion Market Association. This means that your company certifies all refineries worldwide for their ability to produce gold that meets the LBMA Good Delivery standard.

To begin, please tell us a little bit about your background in the precious metals industry and the position you hold today.

Head of Refinery: With pleasure, Jon. Thank you very much for giving me the opportunity to talk to our customers directly. I started in 1978 as a telex boy in the precious metals department of Credit Suisse. That’s how I earned my living during university. In 1985, I changed to another large Swiss bank, UBS. I stayed in the banking business until 2001 when I had the feeling and impression that physical business in precious metals was becoming more and important.

I found this importance to be neglected by the banks to some extent. That’s why I then moved into precious metals refining. My refinery, as you said, is one of the largest in the world, and I have built up the precious metals trading, funding, and hedging business for this refinery.

Jon: In your day-to-day work in this industry, what are your primary sources of information about the precious metals market?

Head of Refinery: We have, by nature, a lot of direct information. If you look at the trucks driving in and out, look at the bar lists, and look at the capacity utilization, that gives you some information already. It could be misleading, however, if you try to correlate the physical business with the prices. You have to be very careful there.

Information is also dependant on the network you have. At my age, there are a lot of downsides, especially if you get up in the morning and you feel your bones! But age also has advantages in the network we have here. It is huge. We have been an internationally oriented company since the beginning, so our contacts really are all over the world. We are proud of this network, and therefore, I would say our information is coming less from the newspapers and more from the market.

Jon: Yes, it’s from the people you talk to personally day-by-day across the world. In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it. Is that situation still true in 2015? How difficult is it to source the metal you need today?

Head of Refinery: The situation has not changed. It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.

Jon: Wouldn’t you say there’s a paradox here because the price of gold on the spot market is seen as low? What’s your understanding of the current price of gold? How well does the price today reflect the realities of physical supply and demand you just described?

Head of Refinery: The price does not reflect the realities at all. Don’t forget, we have a huge amount of artificial gold or paper gold floating around the market. If you look at the numbers of futures exchanges, there is a lot of metal you can’t even detect because it is within some derivative product, which in the end, you have no clue how much it is and on which side it is.

The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market. This looks dangerous to me. If we were to have a situation where everybody said, “Okay, now I have a long position that expires, so I want the physical,” for sure, the physical would not be around.

Jon: That’s a big ‘if,’ of course. Is it your belief that this paper market can be sustained indefinitely with a huge mismatch between the price in the market and the supply and demand in the physical? Can this go on forever, or do you think will it break at some point?

Head of Refinery: It depends very much on the behavior of market participants. Generally, if you look at the situation we have now, nobody understands the price of gold. We have serious geopolitical, not only risks, but already issues. We have a financial world with debt crises we have not seen for decades. We have a relatively low gold price that is in no correlation with the physical market. So there is question mark after question mark.

Will this continue? I think it depends very much on the behavior of the people. As long as market participants are happy for cash settlements, this can go on forever. The spot market price of gold is nothing more than a number, a benchmark. People are happy with cash settlements or they take the currency. If this behavior should change, then it could become dramatically dangerous.

Jon: Going back to the physical market, you’re in an unusual position to observe the flow of precious metals across the world. I’m curious to know what you’re seeing. Where is the gold coming from? Where is it going? Who are the main sellers? Who are the main buyers? Would you summarize the picture for us as it is today?

Head of Refinery: This is very easy, actually. There is nearly just one direction, from West to East. We have seen a small exception within the last year or so with increased demand in the Western world in Germany, but this bears no relation to what we see in general. The flows of metal end up in Asia. It is mainly China, also India, and to some extent the Middle East.

Jon: If you were to roughly estimate the percentage of buyers of precious metals in the East and the percentage of buyers in the West, how would you map it out?

Head of Refinery: For the whole market, figures are published by GFMS or other researchers. They give a more accurate overall picture. In our case, however, it is 90% going to the East and 10% to the Western market.

Jon: That is a pretty dramatic distinction. Obviously, it begs the question. Why is there so much less demand for gold in the West than there is in the East? Physical gold, that is.

Head of Refinery: I think Western financial markets simply offer more possibilities than you have in Eastern markets. People are happy to move out of their gold positions, to sell their gold from an ETF, and jump into some shares or whatever products are available.

The flows are also more driven by demand, but of course, where there is a buyer, there must be a seller. At the moment, it looks very much like people are very confident in general financial markets, and that’s why we have gold prices at these levels.

Jon: Let’s look a little more closely at the East, particularly China, where demand for gold has been high for several years. It seems rather opaque. It’s not very easy to know how much gold China is accumulating, because there are doubts about the official reports. What’s your picture of that? How much variance do you see between the official reported accumulation of gold in China compared to the reality?

Head of Refinery: I absolutely agree with you when you say it’s opaque. I have the same feeling. I don’t know myself how accurate these figures are, but I have my doubts. Not only is China the largest or second largest importer of gold; they’re also the world’s largest producer. Where this gold all ends up, we don’t know.

I must say that I’m always surprised about the retail demand in China. It is really unbelievable how much gold ends up in decorative items, in jewelry, and also in bar vaulting. But the big question mark we have to put there is what are the figures from the People’s Bank of China? We can estimate or possibly believe their figures, but my personal assumption is that the holding is much larger than what’s published.

Jon: Staying with China for a moment, we see that they tend to prefer 1-kilo bars at 999.9 purity over the traditional LBMA Good Delivery Bars, which are 400 ounces at 999.5 purity. Would you say China has effectively imposed a new international standard on the physical market?

Head of Refinery: It has definitely imposed a new standard. It is also interesting to see that 999.5 gold bars were the bars typically for central bank holdings. Then when demand was on the consumer side, these bars were converted to various weights – from 1-gram wafers up to 1-kilo bars. That was always the case. Now, however, given the scale of demand from China, yes, they have established a new standard.

Jon: Over the last couple of years, has this meant that you actually had to melt down and re-refine a whole lot of 400-ounce bars for China? If you have, I’d like to know where the bars come from.

Head of Refinery: The bars are coming from what you could call “the market.” Looking back, there were all these ETF liquidations, and the ETFs were holding bars in the form of 400-ounce bars. At that time a lot of the physical liquidity maintained in the London gold market was actually in 400-ounce large bars. The final customers were not interested in 400-ounce bars, so it was one of our jobs to take these bars, melt them down, refine them up to the 999.9 standard, and cast them into kilo bars.

Jon: Were a whole lot of these bars coming from London?

Head of Refinery: Regarding the ETF liquidations, this gold had to go somewhere, and that was all converted. This is a thing you see every year. You also see some liquidations of physical gold held with COMEX and NYMEX. More or less, these are the sources of gold other than newly mined.

Jon: What about scrap? That traditionally has been at least one source of gold. What’s the status of the scrap market today?

Head of Refinery: We saw a dramatic decrease when the price came down. To put it another way, when we had $1900 an ounce, there was definitely an incentive to look at melting down some of your old jewelry and whatever was around. We now have price levels around $1150, so this incentive is gone. A lot of scrap coming from old jewelry is just not in the market anymore.

We have seen, however, a certain small increase in the scrap business from the jewelry industry’s processing and production. There is always some waste coming back. Then there is price-sensitive scrap – very opportunistic – coming every now and then out of Asian countries; not China or India, but other countries in the area. This may have something to do with the currency, exchange rates, and sometimes with certain tax issues, but this is not a steady flow.

Overall, I can say scrap has decreased remarkably.

Jon: I’m getting the impression scrap is not a very significant source of gold for your business. Is that correct?

Head of Refinery: No, not for the time being.

Jon: Let’s look at the mining sector then. Infrastructure investment in mining has been dramatically reduced since 2011. How do you see that impacting the future supply of gold?

Head of Refinery: I think it is a very important question. Mining companies are not doing well at the moment. Just have a look at their share prices. If one of the results is that they are not exploring anymore but saving costs, that’s a big issue for them. I think it is unavoidable that within a few years, we will see that there was less exploration done in the past, and that means there will be less gold in the market.

Although I must say, if you look back, the mining companies were still able to increase general production at a pace of 1.5% to 2.5% a year. However, with the present cost situation and drop in exploration, I think the only reasonable conclusion is that in a few years’ time, we will have less newly-mined gold.

Jon: Let’s say the price of gold rises at that time. If I understand this right, it takes the mining industry quite some time to catch up and start increasing production again.

Head of Refinery: Yes, absolutely. Setting up a mine is a big investment. Even for a small venture, it could easily cost about a few dozen million US dollars. That said, even if you explore and know how much is in the ground, you still don’t have a mine that is producing. For several million dollars, the investors must feel comfortable with the price of gold and, also, in general, the political environment. Financial stability must be there. You must believe in the safety of your investment.

We see both of these points now, and I would not say they are very positive. On one side, the gold price is under pressure, and on the other side, there is the geopolitical situation in those places where you still have potential for production. These places are not the most attractive places to invest in. I see a double threat there that will have an impact on future production.

Jon: Are we looking at a future where there could be a rise in the price of gold and greater demand for physical gold in the market, but a squeeze on supply to meet that demand?

Head of Refinery: This is certainly possible. Also, since the last move up, a lot of scrap has already come to the market, so if the price moves up again, I don’t know how much scrap will be around in order to compensate for the lower volumes coming from the mining industry.

For physical gold, I’m very much on the bullish side. Let’s put it this way. The danger of less supply is bigger than the comfort of more supply. That should have an impact on the price, yes – and then do it in physical form.

Jon: Maybe that should also be an alert to those interested in purchasing gold to buy while the gold is available, and as you say, do it in physical form. Thanks for that emphasis.

As an introduction to some of our listeners who are not familiar with your company, what can you tell us about your company today?

Head of Refinery: One point for sure is that we are a precious metals refiner. We do only precious metals, and we don’t diversify into any other metal or material – ceramics, or whatever. We are precious metals, and we will always be precious metals.

What is also special about our refinery is that we are a fully-integrated service provider. That means we refine the metal, we provide hedging facilities, and we give our customers the possibility of maintaining a metals account. With this kind of combination, you could say we provide banking services and refining services. However, what we have on the financial service side always must be related to physical metal.

A further point is that we are a Swiss refinery. In Switzerland, we have the only country in the world that has legislation for trading and processing precious metals. Security and safety for our customers is guaranteed in the end by the Swiss government. Then the other issue about Switzerland is that we are a safe place. We have a stable currency, or maybe even a too-stable currency. We have open financial markets. In a nutshell, that is what is different about my company compared to other refineries.

Jon: I believe you’ve been expanding capacity recently. Tell us about any new initiatives at the company that might be of interest to our listeners.

Head of Refinery: There are a few investments. We are investing and very much want to grow in the high-end jewelry and watch industry in Europe. We are expanding there with innovative product designs and alloys, always in very close cooperation with our customers.

Then looking at mining partnerships, we are expanding in Latin America. We have just opened in Santiago, Chile, and are trying to provide even more competitive services for the Latin American mining industry.

We also have several ventures together with the United Nations and some government institutions. We are looking at the artisanal mining industry both in Africa and also Latin America. Although only about 10% of the gold produced is coming from artisanal miners, they account for 90% of the workforce in gold mining. They are often working with very outdated technology, maybe sometimes even dangerous technology — I just want to mention mercury and environmental issues. We have been approached, and also looked ourselves, for contacts at the UN and in certain governments. The response is always extremely positive; therefore, we have considered this one of the areas where we will invest more time and money, and grow.

Jon: That’s most interesting. Do you have any final thoughts to share with us about the current state of the physical gold market?

Head of Refinery: If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

I believe that in this situation with all the clever plans, the structured products, and whatever is offered, the market should be checked very, very carefully. If you see in one of these products a paragraph that references the possibility of cash settlement, keep your hands off. I may sound old-fashioned, but if you are interested in precious metals, go the old-fashioned way – do it physically. I think the market is going to be quite interesting in the near future.

Jon: Thank you for sharing your unique experience and insights with us today. It’s been a pleasure talking to you.

Head of Refinery: My pleasure, too, Jon, and thank you for giving me the opportunity.

Jon: On behalf of all of us at Physical Gold Fund, thank you to our listeners. We look forward to joining you again soon.


Listen to the original audio of the podcast here

Physical Gold Fund interviews Director of one of the largest Swiss Refineries


You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

You can listen to the Gold Chronicles on iTunes at:

You can Listen to the Global Perspectives on iTunes at:

You can access transcripts of our interviews at:

You can subscribe to our Youtube channel to access these interviews and more at:


By listening to this podcast or reading its associated transcript (collectively, this “Podcast”), you agree with the following.

This Podcast is not an offer to sell, nor a solicitation of an offer to purchase, any security. This Podcast is intended for general education and information purposes only, and may include broad discussions of markets, geopolitics, monetary policy, and geoeconomics. Nothing in this Podcast constitutes investment, legal or tax advice, nor an evaluation of or prospectus for any particular investment or market, including gold. This Podcast should not be relied upon to make any investment decision. You are encouraged to seek the advice of qualified financial, legal and tax advisors before making any investment decisions.

This material is provided on an “as is” and “as available” basis, without any representations, warranties or conditions of any kind. In particular, information provided by third parties in this Podcast has not independently evaluated or confirmed. Furthermore, we take no responsibility to update this Podcast to reflect any changes in any of the information presented. Physical Hard Assets Fund SPC and Physical Gold Fund, its officers, directors, employees or associated persons will not under any circumstances be liable to you or any other person for any loss or damage (whether direct, indirect, special, incidental, economic, or consequential, exemplary or punitive) arising from, connected with, or relating to the use of, or inability to use, this Podcast or the information herein, or any action or decision made by you or any other person in reliance on this information, or any unauthorized use or reproduction of this Podcast or the information herein.


Transcript of Jim Rickards – The Gold Chronicles July 16th, 2015

July 16th, 2015 Gold Chronicles topics:

*Comments on co-Keynote with Former Fed Chairman Ben Bernanke
*Comments on recent experience and invitation to Pentagon hosted financial wargames
*As predicted, there has been no Grexit
*Bank holidays is a standard way of dealing with financial crisis, people should consider preparing ahead of time
*Greece and Cyprus have been dry runs for how to deal with crisis on a much larger scale
*The China market crash is on-going, this has just begun and will continue for a time
*The extraordinary effort put forth by the Chinese government to halt the crash will not work over the long term
*The greater issue here is whether this turns into a social problem within China
*The most recent Pentagon wargame was specifically focused on China
*Other countries are now building their own systems which circumvent things like SWIFT so that they are able to function without it
*This wargame was more focused than the last, and the Pentagon is taking financial warfare very seriously
*Why a gold market corner is unlikely
*What large futures positions in gold by major institutions probably means
*Movement of unallocated gold in banks to allocated gold in private storage
*People are taking gold out of banks because they are losing confidence in the banking system and putting it into private storage
*Fourth quarter is traditionally a seasonally good time for gold
*The only reason the Fed will raise rates is if inflation remains weak, period, full stop
*The dollar price of gold continues to go down, this is probably a good entry point
*The Fed always follows the market, it doesn’t lead the market. If Yellen raises rates in a weak economy it would be a disaster
*Fed rate increases are always conditional on data, and we are not getting to any of the levels Yellen has specified in the past
*Bernanke describes the international monetary system as “incoherent”, and he is involved with the IMF and Sec. Treasury on China voting rights with the IMF
*Expectation is that China will be included in the SDR in the fall of 2015
*Bernanke says that everything the Fed had done since 2008 during his tenure had been an experiment

Listen to the original audio of the podcast here

The Gold Chronicles: July 16 , 2015 Interview with Jim Rickards


The Gold Chronicles: 7-16-2015

Jon Ward: Hello, I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He is a Consultant to the US Intelligence community and the Department of Defense and is also an Advisory Board Member of Physical Gold Fund.

Hello Jim and welcome.

Jim Rickards: Hi Jon. It’s great to be with you.

JW: Today we have an unusually full agenda. First, my apologies to our listeners as we will not be taking questions. We’ll be sure to make additional time for your questions in upcoming webinars, so please keep sharing your thoughts with us.

Greece has been the hot topic until just a few days ago, but as you predicted, there has been no Grexit. In fact, it transpires that the Greek government, for all its bluster, really had no serious contingency plans for leaving the euro. I’m left wondering, how close did we come to an actual meltdown here?

JR: It’s a great question, Jon, an important one, and you’re right. Remember that this whole Greek sovereign debt crisis started in 2010. There’s nothing new about it. It’s been going through stages of quiet periods and intense periods for the past five years.

Beginning in 2010 and continuing through this past weekend, I was one of the voices saying that Greece would not leave the euro. I think most voices were on the other side. They didn’t see how they could stay in. Even today, I saw that Austan Goolsbee, who was one of the members of the Council of Economic Advisers to President Obama, published a piece saying they’re in for now, but in the long run, they can’t possibly remain in. He listed a bunch of reasons although I thought he left out a couple.

The point is, no matter how many challenges you overcome, people just can’t get their minds around the fact that this is Hotel California. You get in; you can’t get out. There’s no treaty provision, no legal provision, for exiting. Now, that wouldn’t stop a sovereign power from simply unilaterally declaring they were breaching the treaty. That is possible, even though it would be messy. I’ve always understood this not as an economic project but as a political project. Once you see it as a political project with other goals in mind, then you can understand that the political will is there to keep it together, and indeed it has stayed together.

That’s fine as far as it goes, and I will say it’s nice to get these things right. Some people have complimented me on that. The temptation is always to take a victory lap, but the fact is, this was a lot more dangerous and came a lot closer to a Grexit than I would have thought. In other words, I got the result right, but the process was a lot more challenging.

I was up late Sunday night New York time which was early Monday morning in Brussels. The summit conference actually set a record for the longest euro summit conference with almost 24 hours of continuous meetings. There was some pretty good reporting. You could pick things up on Twitter from reporters who were outside the room, so you were getting as close to real-time information as you possible.

I always felt that Germany and Greece would both blink, that they both considered a Grexit – Greece leaving the euro – would cause more harm than whatever it was they had to do to keep Greece in. But in the end, Germany didn’t blink, at least not very much. It was Greece that had to do all the concessions, and it became apparent that Germany was prepared to see Greece leave.

I’ve been in a lot of tough negotiations, and the only way you get a good result in any negotiation is if you’re prepared to walk away. If you make it clear at the table that you’ll pay any price or do anything, whatever it takes, to get a deal done, then the other side will take advantage of you one way or another. To get a good deal, you have to be prepared to let the deal go down.

That was always dangerous as far as the euro was concerned. I took the strong view that there would be no Grexit, but I also said that if I was wrong and there was a Grexit, it wasn’t going to be contained. It wasn’t going to be the non-event a lot of people were expecting, and that it would be catastrophic in its consequences.

That became very apparent Sunday morning when markets seemed to be a little bit complacent. When it became obvious that Germany was prepared to see Greece go, then you start to think through what that meant. The only way I could understand it was that Germany understood the consequences but felt it would be really bad for the rest of the world. In other words, it might be the United States and certainly the Greeks themselves who would have to bear the brunt of it, rather than Germany.

There might be some truth to that, but the good news is that Greece did not leave. There was no Grexit, and the eurozone has held together. I expect that will continue to be the case and that they will add new members.

I went through this in some detail in Chapter 5 of my book The Death of Money. Anyone who read the book last year would have seen this result coming because I outlined it in detail. I expect that will continue to be the case, but it was a far more dangerous situation.

I will say that late Sunday night New York time was the most critical, most dangerous moment in global capital markets since the Lehman Brothers weekend in mid-September 2008. It didn’t result in a collapse; the world didn’t actually fall apart, but it came dangerously close. I guess I would say that I’m glad we got the call right, but it did look a lot more dangerous than I thought, and that’s something that should bear watching in the future because the danger has not really gone away.

JW: There’s one footnote to the Greek story that you picked up in your newsletter, Strategic Intelligence. You report that in response to the crisis, Greece banned the sale of gold to its citizens. This may be a point of interest to our listeners here. Do you have any comment on that?

JR: I did notice that, and it’s very typical of what governments do in a crisis situation. We all know that the banks were closed and the ATMs were reprogrammed to allow 60 euros a day. We all saw the queues of Greek citizens lined up to get 60 euros – roughly $100 or so – out of the banks.

When I saw those pictures a week ago Sunday, I certainly felt a lot of sympathy towards the people in that situation, but I thought to myself, “Gee, what were you waiting for? You could see this coming a mile away. Why weren’t you at the ATM a month ago, two months ago, six months ago or a year ago getting some cash and putting it in a safe place of contingency for exactly this kind of thing?” This has happened in Cyprus, it’s happened in Greece, and it will happen again. I can see this happening even in the United States in the next financial crisis, one that I expect will be worse than 2008.

That brings us to gold. You get your money if you can – that’s easier said than done – but what do you do with it? Authorities did not want people buying gold. You could say, “I’m going to get my euros out of the bank. I’m a Greek citizen; I don’t trust the Greek banks, so I’m going to get my euros out of the bank.” But what would happen if Greece was kicked out of the euro and the euro itself collapsed? Now you’d have two layers of risk: one, your own banking system, and two, maybe your euros aren’t going to do any good because those two things are correlated.

It’s a lot like when you work at a company and they offer you a generous stock purchase plan. You buy the stock thinking that’s a good investment much like the employees at Enron. Then you wake up one day and find that the company has failed. Well, you get a double-wipe out — you lose your job and your net worth at the same time. By buying your own company’s stock, you’ve doubled down on the company, and if it fails, you lose both your job and your investments. There’s a conditional or hidden correlation there.

The same thing could have been true for Greek citizens. They were lucky to get euros out of the bank – the ones who could – but just because they had their euros doesn’t mean they were home free, because if Greece quit, then the euro itself could have failed. They were doubling down in a way.

What’s the way out of that? One way out is in buying gold, to be protected against both – the Greek banking system and the euro failing – because gold is not correlated to either one of those things. In fact, I think gold could be expected to go up in that kind of catastrophic outcome.

The authorities don’t like that. They probably weren’t happy with the 60 euros a day or anyone who was hoarding cash, but they at least felt, “If we stabilize the system and do the deal with Germany, then those people will show up and put the money back in the bank.”

By the way, that’s exactly what happened in the United States in 1933. As this Greek bank holiday was going on – it was day 5, day 6, day 7 – I was reminding people that, so far at least, the Greek bank holiday had not lasted longer than the U.S. bank holiday. In March 1933, the U.S. closed all banks. Of course, there were no ATMs then, so you couldn’t even go the ATM and get $100. President Roosevelt just closed every bank in the United States by executive order. When they closed, they did not say when they would reopen. It so happened that they reopened about nine days later, but they didn’t say that at the time. They just said the banks were closed until further notice and would let people know when they would reopen.

The reason they closed them was because there was a run on the banks. People had completely lost confidence in the banking system and were running down to get all their money out of the banks. They were putting it in coffee cans and shoeboxes, burying it in the back yard, hiding it under their beds and mattresses or whatever.

As they were taking money out of the banks, a funny thing happened. There were “bank holidays,” so you couldn’t get your money out any longer. During the next nine days, the government went through the exercise or the appearance of examining all the banks. I don’t think they examined very many, but they were at least able to go through the motions – à la Tim Geithner’s stress test – and then announced that the banks that were opening at least were sound. At that point people lined up to put their money back. The banks were closed because of a run on the bank and everybody taking their money out, but then, after they reopened because confidence had been restored, people put their money back.

I’m sure the Greek authorities were hoping for the same thing, meaning people would take the money out, but once things stabilized, they’d come back down to the bank and put money back in. But there’s a problem. If you buy gold, that’s it. If you own gold, you’re not going to walk up to the teller and hand them your gold, so the authorities wanted to ban the sale of gold. Gold is a one-way street. You can always sell it, but you’re much more likely to hang onto it as a form of insurance, which in fact is a good reason to own it.

Authorities – central bankers, bank regulators, and mainstream economists – hate gold, because once people buy gold, they tend not to sell it. They tend to hold onto it to keep as protection against various catastrophic outcomes. I believe we’ll see that again.

I look at Greece and Cyprus as dry runs for the same thing on a much larger scale. Whether it’s in the U.K. or United States or Canada – it could be a lot of countries around the world – these things are being tried out on a small scale. Bail-ins, reprogramming of ATMs, and the ban on gold sales will be used on a much larger scale in the next financial panic.

Going back to the people lined up at ATMs, I say, “What were you waiting for? You should get your cash now if you want cash. Get your gold now if you want gold. Don’t wait for the lockdown.”

JW: Let’s turn from Greece to China, where there’s been some measure of recovery from the stock market collapse. We were all following it with great interest, but how serious was this collapse? It looked huge on the charts, but after all, the fall in values was only to levels seen as recently as March of this year. Is the bigger story perhaps the zealous interventions of the Chinese authorities?

JR: I think both stories are big. Let’s take them separately. First of all, I would not refer to this crash in the past tense. It’s actually just starting. I was on television last fall looking at the Shanghai Composite Stock Index and said, “This is a bubble that’s going to crash.” To me, it was very apparent. Bubbles are not that difficult to spot.

When it did crash, I called attention to that and said, “Hey, I was out there a while ago saying this was a bubble that was going to crash.” Somebody immediately came back and pointed out that the level at which I made that forecast was actually below where it was after the so-called crash. In other words, if you had ignored me and bought stocks, you would still have made money.

I’m not in the business of picking tops and bottoms or picking exact turning points. I am in the business of analyzing system dynamics and trying to understand where those dynamics are going so that we can stay ahead of the curve and not be surprised by these things, whether it’s Greece or the Chinese stock market and so forth.

Yes, it is correct that it was off the top and crashed pretty hard – about 30% – but even at the 30% level, it ran up so much that even after going down 30%, it was still above the level where it was at the beginning of the year. But it’s not over. When bubbles break, they don’t go straight down to the bottom. They go down, bounce up, down again, and then they bounce up a little bit. We hear people saying, “Buy the dips.” They buy the dips, it goes up, it goes down again, and some people say, “There’s another dip. Buy the dip,” etc. It’s a process of denial, a process of stages, an irregular process. It doesn’t go straight down.

I suggest that analysts or investors take two stock charts that actually look very alike, the Dow Jones Industrial Index from 1927 to 1933 or the NASDAQ stock market from 1996 to 2001. Either one of them will do fine. Then just normalize it and overlay it on top of the Shanghai Composite. What you’ll see is that the run up looks quite similar. It gets strong, it gets momentum, and then it goes hyperbolic. Then it goes straight up, it gaps up, and then it breaks. You’ll see is that Shanghai is nowhere near a bottom.

Everybody remembers October 21, 1929, when the U.S. stock market went down almost 25% over a two-day period. That was just the beginning. The market didn’t hit bottom until 1933. It took four years to grind its way down and was down 90% by the time it was done, not 20% or 30%.

It was the same thing with NASDAQ when it broke in January 2000. It found its way back not to the old high, but it went up a little bit and ground down a little bit. Then it broke sharply and ended up down 80%. So if you look at those stock charts and look at what’s going on in Shanghai, I would say that this crash has just begun.

Coming to your second point, the Chinese government has used extraordinary measures that are fairly well-known. They did a whole host of things to basically stop the fall. They banned short selling which seems to be the first thing everybody does. Then they told institutions they were not allowed to sell at all. Then they limited margin accounts. They also came up with a $19 billion investment fund. So they got all the brokers to buy stocks, they told the institutions they were not allowed to sell stocks, they eliminated short selling, and they did a number of other things. Who knows what they did that we don’t know about?

It was an extraordinary effort, but it hasn’t really worked. It stopped that crash dynamic and put a floor under it, but it hasn’t caused it to rally very much. I wouldn’t expect it to. This process is just beginning, so yes, it is very serious.

By the way, this doesn’t mean that the Chinese economy is falling apart. Growth has slowed down a lot, and that’s a big deal for the world because they are about 10% of global GDP, but the economy hasn’t ground to a halt. This is a stock market crash and a capital markets problem. A lot of individual investors are getting wiped out, and it could be a social problem for the Communist Party and the authority of the Communist Party.

I expect it to go down a lot more, but I would watch very closely. It’s far from over. It has that dynamic to it where it could to go down another 50% from here, go up and down a little bit, and fluctuate. This is really just beginning, and it’s a serious problem for people who threw money into it.

Meanwhile, the elites – the princelings, senior Communist party members, CEOs, owners of state-owned enterprises, and other mega-wealthy in China – are getting their money out as fast as they can. They have been for years as I covered in Chapter 4 of The Death of Money.

I travel around the world quite a bit. Go to Vancouver, British Columbia or Melbourne, Australia or Istanbul, Turkey or London or Paris – I was just in London and Paris last week – and you hear the exact same story. High-end condos are going through the roof. They’re being bought up by mostly Chinese money among others – maybe some Russian oligarchs and South American drug lords as well.

You have to be connected to get your money out of China. You may be upper middle class – perhaps you own five McDonald’s restaurants in Wuhan or a chain of 7-Elevens in Chongqing or a car dealership in Shanghai — you’re not poor but you’re not mega-wealthy. You may have a few million dollars saved up, but you still cannot get your money out of China very easily. If you are mega-wealthy worth $100 million or $500 million or $1 billion as many of these Chinese princelings are, there are a lot of ways to get money out of the country either through corruption, the ability to have offshore companies, transfer pricing, rigging fake losses in a casino, etc.

What does it tell you if the smartest, richest, most connected people in China are getting their money out? How much confidence do they have in their own economy? The stock market is a problem, but it’s not the only problem. There is a lot of rot in that society. You could be looking at social unrest down the road.

As I said, I think their stock market has a long way go down, so I wouldn’t invest a nickel in China. There are other reasons for that. For example, if you’re a large business, they steal your intellectual property. China is a fascinating story. It’s an old culture, a strong economy, and an important player in the international monetary system. I watch it from the global macro international monetary perspective, but it has so many problems and so much opaqueness that I wouldn’t recommend anyone investing in it.

JW: Is the implication then that this collapse is a very special case? Or is there anything to draw from it in a larger sense about stock market investment and what can happen from an investor’s point of view?

JR: It’s a special case in the sense that China’s stock market is collapsing. This is not happening elsewhere in the world. The European stock industries are doing okay, and Europe’s growth seems to be a little bit better.

The U.S. looks like it peaked last November – not literally peaked, but it’s reached a few new highs since then although not very much higher than it was last fall. The U.S. stock market is going sideways in what I call ‘non-directional volatility.’ There are days when it’s up 200 points, down 150 points, up 90, and down 80. Looking at a chart of the S&P and the Dow Jones, they’re wiggling sideways with a lot of volatility. Job creation seems to have slowed down as have a lot of things, so it looks like the U.S. is not quite in a recession, but we’re close to one. Growth really hit a wall as to the stock market late last year.

I don’t see the bubble crash dynamic in other major stock markets that I do in China. China seems to be unique in that case. I look at the interconnectedness, what I call density function or the potential for either what’s called contagion or what the IMF calls spillover effects. What are the odds that a crisis in one country spills over and causes a crisis in another country? That’s always a potential problem and something I look at very closely.

The Greece thing seems to have been contained to Europe so far and not too much damage was done to capital markets. Obviously, this is extremely painful for the people of Greece as they have to sacrifice: their pensions are being cut, their unit labor costs are going down, wages are going down, and unemployment is going up. There are a lot of problems inside Greece, although that could bottom and turn around pretty quickly once banks reopen, they get access to capital, and maybe some Chinese capital comes in. You might look for a turnaround in Greece, but there was no real contagion, although I think there would have been if Greece had left the euro.

The China thing does seem to be unique to China. Looking back a week ago Wednesday when we had that awful sequence of events, it looked like Greece was collapsing, China was collapsing, and the New York Stock Exchange was closed for some software problems all at the same time. Two of those things are behind us – the Greece thing and New York Stock Exchange closing – and regarding China, I think markets have absorbed that.

These don’t look like the kinds of things that will set the world on fire, if you will, or start global contagion, but they are warnings of how unstable a lot of things are. I always say that the thing that will cause a global panic is the thing we don’t expect. We could see the Chinese event coming. I talked about it on television last year in 2014. I may have been early – that’s fine – but we could see it coming a mile away. And we’ve been talking about Greece for five years, so as dangerous as those things were, neither one of them were unexpected.

One reason to own gold, one reason to be prepared and not wait for a crisis, is that when the crisis comes, it will be something we don’t expect and there won’t be time to get ready. The time to get ready is now.

JW: That’s the black swan concept! Let’s stay with China for a minute. In your first book, Currency Wars, we read about your participation in a financial war game hosted by the Pentagon. I understand you’ve just taken part in a second such war game along with a handful of elite participants from the military, the CIA, the Federal Reserve, and so forth.

I’d like to ask you about it, but I’m struck by one implication. Clearly there are people at the highest reaches of government in the United States who are taking what you have to say very seriously. Is that your impression, too?

JR: This is being taken very seriously, but I wish it were taken a little more seriously at the Fed and Treasury. Senior officials of those agencies are invited to these war games, but sponsorship and hosting comes from the Department of Defense. Actually, I would give the Defense Department, the intelligence community, and the national security community generally slightly higher marks than the Fed and Treasury for thinking about these things as threats to national security.

The Fed thinks about bank risk and financial contagion, and the Treasury thinks about counter-terrorist finance, Iranian sanctions, and all that. Those things are a little more oriented to the banking system, so they are working on that rather than capital markets, which is different than following the money around the banking system.

The Treasury tends to chase money, freeze accounts, and interdict funds of bad guys whether it’s drug dealers or terrorists or whatever. The Fed worries about systemic risk in banks. Neither one of them is thinking as much about financial warfare. Financial wars are different than currency wars. Currency wars are an economic phenomenon where countries try to steal growth from each other by cheapening their currencies, try to import inflation, and try to export deflation to the other guy. There may be some rough elbows in the arena, but it is a kind of economic competition.

Financial warfare is different in that you’re actually using financial weapons to damage your enemy. I would point to U.S. sanctions on Russia in Ukraine, and Russia fighting back by joining hands with China through the BRICS Summit, the Shanghai Cooperation Organization, the Asian Infrastructure Investment Bank, and other institutions that they’re standing up to. They’re basically replicating the Western financial system on their own so they don’t have to depend on it and can’t be victimized by sanctions. That’s more in the nature of financial warfare.

We’ve done a number of war games. The first one ever was done in 2009, and I wrote about that in Chapters 1 and 2 of Currency Wars. Interestingly, that war game was sponsored by the Pentagon, specifically the Pacific Command, and it was conducted by something called the Office of Net Assessment and the Office of the Secretary of Defense.

We conducted it at the John Hopkins Applied Physics Laboratory because they have a war room there. It’s the same place they’ve been doing the Pluto planetary exploration with this New Horizons spacecraft. All the pictures you’ve seen in the last few days of the high fives and cheering from the ground control team for the New Horizons spacecraft that went past Pluto were all from the same place in which we did the war game in 2009, in a different building. They do a lot of weapons, space exploration, and war gaming for the Pentagon.

The most recent war game I did was on May 8th and was also sponsored by the Office of Net Assessment and the Secretary of Defense. We actually performed this at the Pentagon, and it was fun going there. It was an interesting day because May 8th was VE Day (Victory in Europe Day), the 70th anniversary of victory in Europe when the Nazis surrendered. The military arranged to commemorate it, and we were able to watch them fly over vintage aircraft. They had all these B-17s and B-29s, Stratofortresses and Flying Boxcars, Flying Tigers and other World War II vintage aircraft. It was striking and touching all at the same time to see the flyover.

This particular war game was different than the one we did in ’09 which was global, included teams from all over the world, and lasted two days. This was one day and was very specifically focused on China with a very interesting twist. When the U.S. was conducting financial warfare on Iran in 2012 and 2013 – before the President announced his detente with Iran, which has now led to this nuclear agreement, we were in a financial war with Iran and we kicked them out of SWIFT.

SWIFT is the agency in Belgium that handles the message traffic for all bank wire transfers in the world. Of course, it’s all digital and runs through a lot of fiber optic cable these days, but whenever any bank moves money anywhere around the world internationally, it runs through this system.

We kicked Iran out of that system, which meant they couldn’t get paid. They could ship oil in violation of the sanctions, but there was no way to pay them. You literally couldn’t move euros, Swiss francs, Japanese yen, dollars or any currency through the payment channels because the message traffic was interdicted at SWIFT. Leave it to Washington bureaucrats to come up with a good piece of jargon for that. We call that “de-SWIFTing”, so the United States de-SWIFTed Iran.

This recent war game involved China in the South China Sea and the confrontation between the Philippines and China. The U.S. is a treaty ally of the Philippines. If the Philippines gets in a fight, it’s not just an option on the part of the United States to come to their aid, we have a treaty with them that says we will come to their aid. If China tries to de-SWIFT the Philippines, turnabout is fair play, so the message and lesson for the United States is, “Be careful what you wish for.”

The U.S. developed and perfected these financial weapons, but what we are finding is that people don’t just sit still and get pushed around by the United States. They are building their own systems, so I think there will come a time when we want to put some financial sanctions on Russia, China, Iran, Turkey or some other country, and it won’t mean anything because they will have built completely alternate non-dollar systems where they’re quite happy trading with each other, paying each other, moving money, and not relying on the United States. That’s one possibility.

The other possibility is that China will take the same tactics we’ve been using and apply them to our friends. Again, we would have this scenario where China goes to the SWIFT Board in Brussels and tries to de-SWIFT the Philippines on the grounds that the Philippines is an aggressor in some confrontation in the South China Sea. Interesting stuff. I commend the Pentagon for being forward-leaning and thinking about this.

To go back to your original question, they were very serious. I was one of the financial experts invited along with people from the CIA, other branches of the intelligence community, the think tanks, the Council on Foreign Relations, and people you might expect to be there from the Fed and Treasury. Those from the Pentagon who were hosting this were very attentive. They record everything and do a debriefing book and all that. I would say that even compared to 2009, this one had a lot more focus, and it does seem to be more on the radar screen.

I think we can say that the future of warfare is financial warfare. As if investors didn’t have enough to worry about with bank closures, inflation, deflation, contagion, and all the rest, they could be collateral damage in a financial war, which will be fought in cyberspace digitally. This is another reason to have gold. It’s a non-digital, physical asset that cannot be hacked or erased.

JW: Let’s pick up on that and talk about gold for a moment. There’s been quite a buzz in the gold blogosphere about a possible market corner of gold led by Citi and JP Morgan, with those banks taking excessive long positions in the COMEX futures market. Would you give us your view on this?

JR: I did see those articles giving information that JP Morgan and Citibank had massively large, long futures positions in gold on COMEX. Somebody looks at that and says, “A-ha! They’re trying to corner the market.” Then someone will write a blog about it, they’ll throw it out on Zero Hedge, and everyone gets spun up: “Here’s the smoking gun. Here’s the proof that Citibank and JP Morgan are out to corner the market. Look at these massive futures positions.”

I roll my eyes and say, “Have any of you people actually worked in a bank?” I worked at Citibank for ten years as one of their international tax lawyers. I worked on every kind of transaction in addition to working at other banks, investment banks, and hedge funds, etc., along the way.

If you want to corner a market, first of all, you don’t just do it with futures. It’s a three-step process. First you have to buy up as much physical as you can so it’s quite scarce. Then go buy the futures. Yes, a large, long futures position would be an indicator of a market corner. Then step 3, stand for delivery; give the exchange notice that you intend to take delivery. Now the shorts, all the people who sold you the futures, have to go out and get the physical to deliver. Lo and behold, there is no physical because you have that, too. That’s how you corner a market.

Something like this did happen in 2005 in the ten-year notes. There was a big bond investor that got massively long on ten-year notes and massively long on futures. They dominated the open interest in the ten-year note future on the Chicago Board of Trade, and then stood for delivery, and then caused a massive short squeeze. It’s really a three-step process: you have to be physical, futures, and stand for delivery.

Here, we only have one of the three. Yes, they have a large futures position, but no indication that they’re going to stand for delivery. In fact, I would be shocked if they did, and if they did, they would be told by the exchange that they can’t do that. That’s number one.

Number two, I don’t know how you could corner the physical gold market. You could buy a lot of gold, but there’s no evidence that that’s going on. Three, and the thing that I think is most incredible, is I wonder if people read the headlines. These are the same banks that have paid over $30 billion in fines, penalties, restitution, compliance costs, etc., for rigging foreign exchange, rigging energy markets, rigging LIBOR. It’s actually hard to think of something they haven’t rigged.

These guys have had enough fun with the regulators. The idea that they’re now going to launch in to a corner of the gold market when they’re under this much scrutiny and transparency, and they paid, as I said, tens of billions of dollars in fines is absolutely absurd. I think we can confidently dismiss the notion that they’re trying to corner the market, both because a lot of the ingredients are missing and also because they’d get caught in a minute, and probably somebody would go to jail.

They do have the long futures position, so my analytical frame is to say, “Okay, what’s up with that? You’re not cornering the market, but something’s going on.” If you know anything about how banks actually operate, they don’t like large, long speculative positions. Banks like to do arbitrage, spread trades or match long and shorts at two different price levels or two different markets. They want to have some difference so that they can squeeze out some spread, leverage it, and get decent returns on equity. That’s how banks actually operate.

When I see a massively long futures position, it tells me that they must be short somewhere else and are probably trying to hedge the short position by buying futures. If you suddenly find yourself short of gold, one of the things you would do is go out and buy futures. Now you have a hedge position long and short. It might take you a while to fix your short, but you have insurance against price movements. Once you’re long and short, it doesn’t matter if the price goes up or down. You’re locked in the spread and insulated. The classic purpose of futures markets is to hedge prices and other markets.

If that’s true – and that’s far more likely in my view than a corner – then where’s the short coming from? Just to be clear, this is a speculation on my part; I don’t have hard evidence of this, although I do think it’s a likely scenario. The likely suspect for the way the banks could be short would be the fact that they’ve been short all along in the London Bullion Market Association (LBMA) unallocated gold forwards market.

When people call these LBMA banks and buy gold, I’m not talking about a few coins from the mint or the local dealer. I mean a lot of gold such as a ton or $10 million worth — very, very large purchases of gold. There are the usual suspects like Citi, JP Morgan, Goldman Sachs, HSBC, and a few others. When they call the LMBA banks and buy gold from the bank, the bank gives them a standard LBMA contract which I’ve actually read. Generally what you get is called unallocated gold. Unallocated gold means that they say you own the gold, you do have a price exposure, and there’s some gold somewhere, but there’s no gold with your name on it. In other words, there’s no specific segregated bar with a serial number.

When I was in Switzerland for Physical Gold Fund, we actually saw the gold that belongs to the investors in Physical Gold Fund. We had auditors, they had bar numbers and manifests, and we went item by item. Those bars actually belonged to the fund.

That’s not true with these LBMA agreements. You don’t have any allocated gold. That means a bank can have, say, one ton of gold and they can sell 20 tons of gold. They use the one ton to back all 20 of those contracts. In effect, they’re short 19 tons. They own one ton physical and sell 20 tons to a bunch of institutional investors or high-net-worth individuals who want to own gold, so they’re short.

They depend on their customers not asking for the gold. As long as this is all on paper, it works fine. Where it breaks down is if the customer comes in and says, “You know that unallocated gold? I would like to make it allocated and actually have the physical gold. In fact, not only do I want it allocated, but I would like you deliver it from your vault to a private vault run by Brinks or Loomis or one of the big secure logistics providers.”

That is what’s going on. People are taking their gold out of banks and putting it into new vaults because they’re losing confidence in the banking system. These new vaults are private storage vaults owned by private companies, not by banks.

Going back to my original scenario, the bank has one ton of gold and they sell 20. If even five customers show up and say, “I’d like my gold,” one ton each, you’re now short four tons. You have one ton of physical, but you have five tons of requests from five different customers. You’re short four tons, so you have to go out into the market and buy four tons of market. Guess what? That’s a big order. Good luck finding it. You can find it eventually, but you might not be able to find it quickly. So you have price exposure. You’re suddenly short the gold because your customers are demanding it.

What would you do? You’d go out and buy the futures. Now you’re hedged. You’re short to the customer who sent you the notice, you’re long on the futures, but you’re price exposure is hedged. Now you can take 30 or 60 days or however long it takes to source the physical and make delivery to the customer. The customer may think the gold is sitting in the vault and can be delivered tomorrow, but trust me, they can’t. They’ll be lucky to get it in 30 days and could even take a few months.

When I see a massively long futures position, it suggests to me – again, to be clear, I cannot prove this – that banks are turning up short in some other part of the operation, probably on these unallocated gold forwards. Customers are taking their gold out of the bank, the bank has to deliver to those customers, they’re short, they’re getting long futures to hedge, and they’re going to spend the next couple months going out and buying gold.

That’s actually bullish for the price of gold. The banks are smart. They’re not going to go out and buy it all at once. They’re going to work the order in small increments over a couple of months. If they’re in the process of doing that now, which I suspect they may be, they’re also running right into the fourth quarter. We’re not there yet, but the fourth quarter is traditionally a seasonally good time for gold.

We also have our friends, the Fed, and a lot expectation that they’re going to raise interest rates. I don’t think they will; in fact, I’m pretty sure they won’t and I’ve said they won’t. If they do, it will only be because inflation took off. The Fed is not going to raise rates if inflation remains weak. Period. Full stop. Janet Yellen said that. She expects and has forecast that inflation will pick up, but she has the worst forecasting record of anyone I can think of, so I actually don’t expect that, and I don’t expect them to raise rates.

If they do so because inflation took off, that is good for gold. When the market expects them to raise rates but they don’t, that is equivalent of easing, which is also good for gold. The Fed has painted itself into a corner. Either way, raising rates on higher inflation expectations or not raising rates when the world thinks you’re going to are both good for gold. So it’s a combination of seasonal factors: the Fed’s conundrum, the fact that banks are probably out shopping, and the dollar price of gold going down. This looks to me like a very good entry point.

JW: Speaking of the Fed, you were recently invited to a financial conference in Seoul as one of two keynote speakers. The other keynote speaker with you was former Federal Reserve Chairman Ben Bernanke. That’s quite some invitation. I understand you had the opportunity to engage Mr. Bernanke in an extended private conversation. Tell us about that encounter and what you gleaned from it.

JR: We were in Seoul, South Korea. It was a large conference, but we were the only two keynote speakers along with a couple of other panelists. They had a VIP reception for about ten of us including me, the former Chairman, and the VIPs of the Korean banking establishment. There was the head of the Korean Stock Exchange, one officer from the Korean Central Bank, and the head Korean securities regulator. Chairman Bernanke and I were the only Americans.

We had a nice chat and actually had a few laughs. I was one of a group of people who had helped to organize and set up the Center for Financial Economics at Johns Hopkins University. We worked hard to get an absolutely first-rate director, which we did, and no sooner did we get our director than Bernanke called him up and hired him away to come work at the Fed to be head of communications for a couple of years. I tease my friend and call him the Minister of Propaganda, because he’s the guy who was writing all these forward guidance statements that people were pulling their hair out over. I accused the Chairman of picking off our guy. He said, “Well, we didn’t pick him off. We just borrowed him. We gave him back,” which is true because our Director is back at the center, I’m glad to say.

Mr. Bernanke was very kind. I had a copy of his book with me and asked him to inscribe it, which he did very nicely. As an author myself, I know that whenever anyone asks you to sign a book, you always do it in a heartbeat. You never turn it down. He was very kind to sign the book.

He said a number of interesting things one of which was very striking to me. When talking about a rate increase, because that’s all anybody wants to talk about, he used the phrase, “The rate increase, when it comes, will be good news for the U.S. economy because it means growth is getting stronger.”

That’s a perfectly sensible thing to say. This idea that you raise rates and that makes the economy stronger is exactly backwards. The way it works is the economy gets stronger and then you raise rates. In other words, the Fed always follows the market, it doesn’t lead the market. There’s almost this magical or mystical belief that if Janet Yellen raises interest rates, it must mean everything’s all good. It doesn’t mean that all. In fact, if she raises rates in a weak economy, it would be a disaster. We’d have a meltdown.

What Bernanke said did make sense. He said, “The rate increase, when it comes, will be good news because it means the economy in getting stronger.” But then you have to look at the data, which is really weak. By saying “when it comes,” it told me that he wasn’t expecting it anytime soon. In other words, he was conditioning it on economic growth but didn’t suggest at all September, December, this year or any particular time, and he clearly conditioned it on stronger growth, which there is no sign of.

I thought he pulled the rug out from under Janet Yellen. Janet Yellen is trying to have it both ways. She’s trying to get out there, put on a brave face, and talk every day about raising rates later this year. All the headline writers and reporters run right out and write a headline: “Janet Yellen Says We’re Going to Raise Rates This Year.” Forget the headlines. If you actually read the speeches or listen to the testament and look at what she says, it’s always conditioned on stronger growth and economic conditions meeting her forecast. The forecast is three parts: lower unemployment, higher inflation, and stronger growth.

We’re not getting to any three of the levels that she specified in her May 22nd Providence speech. I read an interesting speech she did last Friday in Cleveland, and I found the May 22nd Providence speech to be a lot more specific about the numeric goals she’s looking at. I think she really told us what her playbook is. Based on that, we’re not getting close to any of them, so I don’t see a rate increase. That was consistent with what Bernanke said, and I agree with the former Chairman. People who are expecting Janet Yellen to raise rates are not listening carefully enough to what she’s truly saying.

Another interesting thing he expressed was when he talked about the international monetary system. Now we’re talking about IMF, currency wars, Special Drawing Rights (SDR), and all the things I spend a lot of time researching and writing and talking about. It’s a little unusual for the Fed Chairman to be immersed in that because that’s really the job of the Treasury.

The Treasury Secretary is supposed to be worried about the international standing of the U.S. dollar, and the Fed is supposed to worry about domestic monetary policy. The Fed’s not supposed to have a big footprint in the international monetary system, yet he told me that he was involved working with the IMF to restructure Chinese participation in the voting rights of the IMF.

I was a little surprised at that. He’s clearly competent to do that, but to see the Chairman of the Fed working hand-in-glove with the IMF and the Secretary of the Treasury on Chinese voting rights in the IMF was a little bit unusual. I thought, “Gee, you’re really out of the Fed’s comfort zone.” Then he went on to say that the international monetary system is incoherent. That was his exact word – “incoherent” – which I agree with. It is incoherent. It’s a mess. About ten days later I was in the United States down in Washington and had a conversation with John Lipsky. John is the former Director of the IMF. In a separate conversation, he used the exact same word. He said. “The international monetary system is incoherent.”

I don’t think Bernanke and Lipsky were coordinating their remarks, certainly not to me, but I did find it striking that the former Chairman of the Fed and the former head of the IMF both used the exact same word to describe what’s going on, specifically “incoherent,” which tells me that’s it’s in the air. The elites – the people who really run the global monetary system – are on the same page. We’re going to need new rules to the game, new rules to the playbook for the international monetary system, starting in the fall with the inclusion of the Chinese yuan in the SDR. I think we can all see that coming. They may go beyond not only changing Chinese voting rights, but also maybe issuing some SDRs. We have to watch that.

We’re halfway back to Bretton Woods. We have an informal peg right now going on between the Chinese yuan and the U.S. dollar, around 6.2 to 1. That’s been very stable. The Chinese are not playing the currency war card as they did from 2006 to 2014. They’re on their best behavior hoping to join this exclusive SDR club. I’ll certainly watch that very closely.

It was an interesting conversation, and I’ll briefly mention a third thing Bernanke was very candid about. He used the word “experiment” repeatedly. In other words, he said that what they and the Fed did with monetary policy from 2007 to early 2014 when he left was an experiment, which means they didn’t really know what they were doing. They were just trying stuff. He talked about FDR, Franklin Delano Roosevelt, and what was a very popular term in the ‘30s during the Great Depression. The New Deal was a government-instituted series of experimental projects and programs. “We were just going to experiment to see what worked.”

The thought crossed my mind that most experiments actually fail, and I was hoping that he hadn’t blown up the laboratory in the process. The jury is still out on the success of his time at the head of the Fed, but he was candid about the fact that they don’t really know what they’re doing.

JW: When I look back over the last 50 minutes, we’ve covered an extraordinary amount of ground. It’s always a pleasure and education having you with us. Thank you, Jim

JR: Thanks, Jon.

JW: Thank you to our listeners most of all for spending time with us today. You can also follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: July 16 , 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles June 17th, 2015

June 17th, 2015 Gold Chronicles topics:

*FOMC Meeting Analysis – No rate increase in 2015
*Dangerously low liquidity in bond market
*Back in the 80’s-90’s liquidity in the bond market was a given, virtually any amount could get filled – this is no longer the case
*Today large orders in the bond markets can take days or weeks to fill
*Lack of liquidity combined with High Frequency Trading (HFT) and selling volume is an environment where flash crashes are likely
*Warnings are coming from BIS, IMF, Federal Reserve governors regarding lack of liquidity
*When crashes occur there is always collateral damage – there are no circuit breakers in the bond markets so if there is an extreme panic we may see market closures
*Panics can spill over into other markets – we could see a bond market crash with a rising gold price
*Contagion and spillovers to other markets are typical behavior in a crisis
*Examples of hard assets: Land, Art, Physical Gold Fund
*State Backed hacking of US Government Employee Files
*Compromise of employee files does represent a national security threat
*Any portfolio reliant on all digital related assets is vulnerable to being completely wiped out
*South China Sea – China is claiming the entire South China Sea by creating artificial reefs and islands
*The US is bound by treaty and is obligated to act in the event of China war with the Philippines
*IMF SDR’s versus sovereign fiat currency
*Thoughts on gold confiscation happening in USA, EU, and Switzerland
*Why Switzerland is the best jurisdiction in the world to store precious metals

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The Gold Chronicles: June 17 , 2015 Interview with Jim Rickards


The Gold Chronicles: 6-17-2015

 Jon Ward:   Hello, I’m Jon Ward on behalf of Physical Gold Fund, and I’m delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.


Jim Rickards is a New York Times bestselling author and former General Counsel of Long-Term Capital Management. He is currently the Chief Global Strategist for West Shore Funds, a consultant to the US Intelligence community and the Department of Defense, and is also an Advisory Board Member of Physical Gold Fund.


Hello Jim and welcome.


Jim Rickards:  Hi Jon. Thank you. It’s great to be with you.


JW:    I believe you’re in Baltimore today in preparation for an event you have there tomorrow. Is that correct?


JR:   I am. I actually lived in Baltimore for five years. I went to college and graduate school here at Johns Hopkins, my daughter went to school here, and my publisher is here, so I have a lot of connections with the town. Baltimore is one of my favorite cities, and I’m just glad to be back.


JW:   Excellent. Also with us today is Alex Stanczyk of Physical Gold Fund. Hello Alex.


Alex Stanczyk:   Hi Jon. It’s great to be here as well.


JW:   Alex will be looking for questions that come from you, our listeners, so let me just say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview. You’ll see a box on your screen for typing in your question and, as time allows, we’ll do our best to respond to you.


Well, Jim, I happen to know, because you told me, that you’ve just been listening to Janet Yellen live at a significant press conference. What news? And any first thoughts?


JR:   That’s right. Yesterday and today was the two-day Federal Open Market Committee (FOMC) meeting they have eight times a year. That’s when the Fed makes decisions on interest rates to either increase them, decrease them or keep them the same.


It’s kind of interesting if you go back to the fall or late summer of 2014 and recall what Wall Street was debating. They were certain the Fed was going to raise interest rates this year, 2015, and the debate was March versus June. You had your March people and your June people. I said at the time that they would not be able to raise interest rates in 2015.


Well, March has come and gone and now June has come and gone. This was the June meeting and they did not raise rates. Now Wall Street’s debating between the September people, October people, and a couple December people. I’m sticking with my original forecast, which was that they will not be able to raise rates in 2015, and so far, so good.


It is data-contingent, or “data dependent” as the Fed says. I actually think that my methodology stays a little more true to what the Fed says than what the Fed does. What I mean by that is the Fed says they’re data dependent and I say, “Okay, data dependent. That makes sense. I understand that. So let’s look at the data.”  Well, the data stinks, it’s lousy, and yet the Fed keeps talking about raising rates this year as if somehow the economy was stronger than it was.


You might ask, “What’s up with that? I mean, why do they not get it?” The answer is that they’re basing everything on their forecast. We all look at the same data. They say, “Yes, the data’s lousy,” but they have a forecast that says it’s going to get better. Based on that better forecast, they then lead the market to believe they’re going to raise rates.


You have to remind yourself that the Fed has the worst forecasting record of any major institution; it’s horrible. Anybody can get a few things wrong or be off by a little bit, we understand that. But the Fed is always wrong by orders of magnitude. Go all the way back to 2009, look at their annual forecast for the last six years, and every one of them was off by a significant factor, not by a little bit.


I see weak data today and the Fed engaging in happy talk. Again, reminding listeners that the Fed has a terrible forecasting record, I see no reason to change my own forecast. I still don’t think they’ll be able to raise rates. Let’s see what happens.


So, after this latest meeting, kind of no news other than people should read the tea leaves when they look at the Fed’s statement and question if there is anything in there that might give a little clue even though they haven’t actually voted to raise rates. The Fed did lower a lot of their forecast figures. I keep saying they have a lousy forecasting record, but I guess they’re trying to get better. They lowered their growth forecast for 2015 to 1.9%. That’s really weak.


Janet Yellen gave a speech in Providence, Rhode Island, on May 22nd. Now, these speeches are not just things they slap together. They get reviewed by staff and the Governors themselves or, in Janet Yellen’s case, the Chair. I read it carefully, and she really gave us their playbook. She said what state of the world they would have to see in order to raise rates. In other words, what do they expect? What is their expectation behind the fact that they say they’re going to raise rates?


Ms. Yellen said very explicitly, “We’re looking for 2% inflation, 5% unemployment, and 2.5% growth.” There are the magic numbers:  2% inflation, 5% unemployment, and 2.5% growth. But she also said that the Fed needs to be forward-leaning to stay ahead of the curve a little bit and not let things get out of control.


That makes sense, so all I did was take those three numbers and haircut them a little bit to say, “What would the trigger be?” If you take the 2% inflation and call it 1.8%, that would be sort of a trigger. Make the 5% unemployment 5.2% and that’s a trigger. Then take the 2.5% growth and make it 2.2% for another trigger. So when you see 1.8% inflation, 5.2% unemployment, and 2.2% growth — all three of them or maybe two out of three — trending in the direction that she would like to get to, then the Fed’s going to raise rates. I would say they’d raise it very quickly. Probably within thirty days.


Using Yellen’s own words, I think we have the numbers or playbook we need in order to know exactly when they’re going to raise rates. The problem is we’re not there. The latest unemployment was 5.5%. That’s up from 5.4% and moving in the opposite direction of her 5% target and my 5.2% trigger.


I don’t have a crystal ball or a fly on the wall and I haven’t bugged the boardroom at the Fed. I’m just using their own words and data that are publically available to do some very straightforward analysis. I still don’t see any rate increase for the remainder of this year. Of course it could change, but these are things I watch very, very closely. Meanwhile, they’ve lowered the forecast and are trying to have it both ways. They’re trying to talk rate increase and, at the same time, not actually do anything because the data is weak. I think that act is getting a little old and the market is wising up.


It’s interesting. Right after the Fed announcement, in the past hour-and-a-half, the dollar went down a little bit. That’s a sign that the market thinks they’re not going to be able to raise rates. If they were going to raise rates in September, the dollar would trade up because you’ve got negative rates in Europe. If all of a sudden we’re going to have higher rates in the US, then global capital flows would come to the US, the dollar would catch a bid, and the dollar would get stronger. The fact that the dollar traded off a little bit — stronger Euro, weaker dollar — means the market thinks they’re not going to raise rates, and I think that’s probably the right conclusion.


That’s my analysis. Chairman Yellen is still speaking live as we speak, but unless she says something earth-shattering in the next ten minutes, I think that’s where we’re going to end up.


JW:   Let me turn to a topic you’ve been talking quite a lot about recently, and that is the bond markets. In particular, you’ve been sounding the alarm about liquidity in the bond markets or, rather, lack of it. Given how central these markets are to the global financial system, this sounds, on the face of it, quite serious. Would you explain what’s going on?


JR:   Just to give our listeners a little background on my association with the bond market, I talk and write and give presentations on a number of topics in the international monetary system, but I talk quite a bit about gold. Of course, the minute you say what I call the “G- word,” the minute you start talking about gold, you get labeled as a gold bug or whatever  term people want to use. I think because I talk about it frequently, people assume I must have been sitting in my basement the last twenty years counting a stack of gold coins. Sure, I’m a gold investor and I recommend gold to clients, but not too much; about 10% of your investible assets. I don’t really regard myself as a gold bug and, unlike some analysts, I have not spent the last thirty years in the gold market. I spent the last thirty years in the bond market.


I began my career at Citibank, but for a large part of my career I was General Counsel and Chief Credit Officer of one of the largest US government securities dealers. It was a private firm at the time. We sold it to a Japanese bank, and later it was acquired by RBS, so when you hear RBS, Royal Bank of Scotland, that’s my old firm. We were one of the primary dealers in US government securities. For those who don’t know, “primary dealer” is a designation. It’s something you’re selected for by the Federal Reserve Bank of New York as an eligible counterparty for bond transactions.


Let’s do monetary policy 101. When the Fed wants to increase the money supply, which they have been doing for a long time, they buy bonds with money that comes out of thin air. When they want to decrease the money supply, they sell bonds. If you buy a bond from them, you send them the money and the money goes poof, it disappears. When they buy bonds, you send them the bonds, they send you the money, and the money comes out of thin air but somehow ends up in your account. That’s how they create money or destroy money or reduce the money supply if they want to.


That’s a lot of buying and selling of bonds. You need someone to buy or sell with because you can’t trade alone, so they have a list of about twenty approved counterparties. It’s all the big banks, the ones you would expect, that are the so-called primary dealers. I spent ten years of my career as Chief Counsel and Chief Credit Officer for one of the primary dealers, so I’ve spent a lot of time in the bond market, and that’s really my roots — more so than gold or other hard assets.


I was doing this in the ‘80s and then later worked for a hedge fund, Long-Term Capital, a major bond trader. The ‘80s and ‘90s were the heyday, if you will, of the bond market, and liquidity was a given. There was almost no size that you couldn’t buy or sell. If you wanted to buy $100 million of 10-year notes or $250 million of 2-year notes, you just picked up the phone (today, it would be automated), put that order in, and it was sold just like that.


As bond dealers, we made two-way markets; we were buyers and sellers. If you wanted to sell, we would buy from you or if you wanted to buy, we would sell to you. We committed our own capital most of the time. We didn’t get too one-sided or reckless, but we would step up and execute the order. Maybe for a short period of time we would want to hold it in inventory, maybe we would like to trade, maybe we would hedge it in the futures market or the options market or eventually move it out the door to somebody who wanted to take the other side of that trade, but we used our own capital and balance sheet to make a ready market. For customers, starting with the Fed but also all major institutions, insurance companies, PIMCO, bond funds, etc., they had no difficulty buying or selling bonds pretty much whenever they wanted.


That was true of government securities. Going down the credit spectrum into corporates and high-yield munis, liquidity was not quite as good, but it was always pretty good. Today, that model I just described is gone, and there are some very specific reasons for it. One is the Basel III rules that have increased capital requirements on a lot of bonds. High quality government bonds still require relatively little capital, but certainly corporate bonds, municipal bonds, asset-backed bonds, etc., have significantly higher capital requirements.


There’s the Volcker Rule, which has to do with whether you’re a proprietary trader versus just making markets for customers. There are different ways to make markets. You can make a market by taking something on your balance sheet but you can also just be an agent where you charge a small commission to pair up both sides of the trade but you never actually take the bonds onto your books. Then, finally, the regulators are breathing down everyone’s back.


Putting this combination together of Basel III capital rules, the Volcker Rule, and regulatory oversight, the banks and primary dealers have, in effect, been frightened out of committing capital or committing balance sheets. As a result, there is far less liquidity in the bond market than there used to be. I’ve spoken to people recently and they’ve said, “Jim, things that back in the day would take maybe a few minutes or a few hours to get done can now take days or even weeks to fill some of these orders.”


Again, liquidity is drying up, but it’s worse than that. A lot of the trading used to be done on the phone with a customer you knew. I’m sure we’ve all seen pictures of people shouting across trading floors. Today the trading floors are nearly gone and the ones that are left are mostly silent, because so much is automated. Inside that automation are a lot of algorithms. Now you have a lots of computers trying to front run each other, you have dealers who are not willing to commit their own capital to make two-way markets, and you have much less liquidity in general for the regulatory reasons I’ve mentioned. That’s a challenging environment, almost a perfect storm, for the kinds of things we saw last October in the flash crash of the bond market.


I think a lot of people know about the flash crash in the stock market on May 6th, 2010, when the Dow Jones fell a thousand points in a matter of minutes, but something very similar happened in the bond market last October 15th, 2014, when yields crashed.  Prices went up, so the prices didn’t crash — they skyrocketed — but the yields crashed. That was like being on an airplane, hitting an air pocket, and dropping 2,000 feet, just like that. Everyone without a seatbelt banged his head on the ceiling or was thrown into the aisle or got injured one way or another. That’s what that was like.


We’re going to be seeing more of that, because when the dealers are not there to commit their own capital, customers are left to their own devices, everything is automated, and all of a sudden some word gets recognized or some trading algorithm gets touched off, everyone runs to one side of the boat. The market starts moving, other peoples’ programs get hit, people hit stop-losses, and everyone rushes for the exits all at once.


In the old days when everyone was rushing for the exits, the dealers would remain there and stand up to the market because they could see some profit opportunity. The dealers aren’t there now, so we are extremely vulnerable to these kinds of flash crashes. I think we’ll see more of them, some worse than the ones we’ve seen already, in stocks but also in bonds.


Jon, you mentioned at the beginning of the call that I’m one of the ones warning about it. I am, but I’m not the only one and I’m not the first. These warnings are coming from the IMF, from the Bank for International Settlements, from Federal Reserve Governors, and other regulators. These warnings are being sounded all over the place


From an investor’s perspective, this is all the more reason to be diversified. You really can’t trade stocks or bonds on fundamentals alone anymore. You might have a fundamental view, and there’s nothing wrong with that kind of analysis, but you’re vulnerable to these flash crashes. You’re vulnerable to markets suddenly becoming completely illiquid, so you need some hard assets and diversified assets.


Gold is interesting in that regard. Gold can be a thinly traded market. There are lots and lots of bonds that get traded, so the volume of bond activity is huge. It’s ironic that you have huge volumes but reduced liquidity in bonds; however, gold is funded the other way. The volumes are not big but the liquidity is very good. I’ve never seen a situation where you couldn’t go out and certainly sell gold if you want to, because there’s always a buyer. We might have the opposite problem. There might come a time when people want to buy gold and they can’t get it because there’s been a buying panic. At least for those who want to sell gold, I’ve never seen a situation where there wasn’t a willing buyer at a reasonable price although the market is thinly traded. Gold is thinly traded with good liquidity, and bonds are heavily traded with bad liquidity.


As I say, we have enough to be concerned about with inflation, deflation, Fed policy, weak economic growth, and cyber financial warfare, but I would add illiquidity to the list. And that is something new. You hear people say all the time, “Oh, the Treasury market is the deepest, most liquid market in the world.” Well, it might be the deepest but it’s not anywhere near as liquid as it used to be. I would add illiquidity in the bond market to the list of things that investors should be concerned about.


JW:  From an investor point of view, you’re sounding a warning here. Are there systemic implications if there is a major flash crash in the bond market or if there are increasing problems in those markets? Does that have an impact on the larger financial system?


JR: It does, for a couple reasons.


Number one, and this goes way back in terms of my experience on Wall Street to 1987 when the stock market fell 22% in a single day. Down 22% not in a week or a month but a single day is the equivalent of about 3,000 Dow points today. If the Dow Jones went down 300 points, that would be big news. Imagine it went down 3,000 points in one day: that would be the equivalent to what happened on October 19th, 1987.


I saw that, I saw a bond market crash in 1994, and we’re all familiar with the Russia-LTCM crisis in 1998, etc. When these things happen, there are always victims. It might not come out right away but maybe a couple days later or sometimes a week later. Somebody goes bankrupt. There’s an MF Global or a Refco or some firm or an Orange County in the case of the 1994 bond market massacre. Somebody is going broke. When somebody goes broke, that means customer assets could be frozen and counterparty credit could not be honored. Anyone doing business with that firm probably lost some money.


Of course you have investor losses when the market goes down a lot in one direction. Anyone holding those positions has suffered at least a mark-to-market loss. But there’s usually collateral damage. Somebody gets carried off the field feet first on a stretcher and you don’t know who it is. That’s the Lehman Brothers effect. There’s some firm that’s not going to make it, although you don’t know who that firm is and you don’t know what the collateral consequences are.


Number two, sometimes when these flash crashes turn into not just a mini-crash but something that seems to be spiraling out of control, you can’t stand up to the market. I mean, there’s no amount of capital to get in front of a freight train that’s coming down the tracks at a hundred miles an hour. What regulators have to do is actually close the markets. In the case of the stock market, the circuit breakers kick in. We don’t really have circuit breakers in the bond market, but there’s no reason why the Fed or the securities industry couldn’t on very short notice get together and just declare the markets closed. Sorry! It’s like when casinos close similar to that scene in the movie Casablanca when the cops arrive.


From these mini-flash crashes or worse, not only do individual investors have losses, but generally one or more firms go out of business because their capital has been wiped out and, in more extreme cases, regulators will close markets. What does that do? That just feeds the panic that goes from one market to another. Maybe it started in the bond market but it spills over into the stock market or spills over into gold. The panics can go in either direction. There could be massive losses but, as we saw in the bond market last fall, yields crashed but prices went up so there were big gains. You get the flight to quality, and you could have a bond market crash where gold is rallying.
Actually, going back to one of the examples I gave regarding October 1997, my firm made a lot of money because we were not stock dealers but bond dealers. As the stock market was crashing, everybody was trying to buy bonds as fast as they could, so the bond market rallied. Some markets rally while other markets are crashing but, yes, what experts call contagion or spillovers are very likely. What starts in one market will probably not stay there. It’ll spill over into other markets and, in extreme cases, you could see exchanges get closed.


Again, this is another reason to think carefully about some hard assets as we’ve talked about before — whether it’s land, silver, gold or fine art. Obviously, Physical Gold Fund has a solution in terms of having part of your investible assets in actual physical gold. Not paper gold, COMEX futures, options or ETFs, but a fund that actually buys physical gold and puts it in safe, non-bank storage.


These are ways to stay out of the way of some of these tsunamis or digital meltdowns or nervous breakdowns or spillovers. I think you make a very good point, Jon, that this can easily spread from illiquidity and the flash-crash dynamic in a particular market over into things that are much more threatening from a systemic point of view.


JW:  Thank you, Jim.


Let’s turn our attention to China for a moment and not for the first time, of course. There seems to be growing concern that the Chinese appear to be flexing their muscles more and more confidently and insistently. We have news of industrial-scale hacking affecting the personal and security information of every US federal employee. That’s millions of people inside the government systems. Do you share the media consensus view that this is China’s handiwork and, if so, what does it portend?


JR:  Yes, I think the evidence is very good that this is China although they’re not the only bad actor in the space. Russia is just as good and just as active. It seems that one month we hear about Russia putting attack viruses on the NASDAQ operating system, which they did, and then the next month we hear about the Chinese downloading millions of files from the federal Office of Personnel Management, which they did.


I think a couple of things are important. Number one, these are state actors. These are intelligence and military services. Some of them organize as a cyber brigade. We know what an armored column looks like or a flight of F-16s looks like, but these are cyber brigades. They don’t leave their desk, but they can do a lot of damage from where they sit near Moscow and Beijing. These are state-organized attacks, not criminals trying to get your credit card number so they can steal money from your account.


At the more benign end, they are just stealing intellectual property, blueprints, and so forth. At the malign end, think about the personnel records. Yes, you might get credit card information, social security numbers, name, address, etc., but you’re also going to get a lot of personal information that might include medical records or security clearances. There’s a form, I think it’s the SF-86, you have to fill out to get a security clearance. It’s worse than any college application, I can guarantee that. There are tons and tons of information, references, background checks, results of polygraph tests, and so on.


The point is if you get all that information and combine it with information from public sources like social media, Twitter, Facebook, and all that, you can start blackmailing people, you can start threatening people. You can say, “Hey, we’ve got somebody. This person has a security clearance over here and over there we see that they’re in a little financial distress.” They’re very susceptible to basically becoming traitors or giving up secrets for money, which is one of the main inducements for traitors. These are the things that people mainly betray their country over. So these hackers have to find out who they are, who’s got the clearance, who’s got the vulnerability, who’s got four kids in college or whatever, and then they can start to penetrate the intelligence services.


This is very serious stuff. It can lead to blackmailing, various kinds of threats, targeted assassinations, and penetration of the intelligence community. In fact, I think I saw that MI6, the British equivalent of the CIA (that James Bond famously works for), recalled some of their case officers and agents from foreign postings because they were worried about the fact that these hacks had revealed their identities.


A lot of intelligence agents work overseas under what’s called official covers. If you’re a case officer in the National Clandestine Service (NCS) for the CIA, you may have an ID that says you work for the Agriculture Department or the Commerce Department as a trade liaison in the Embassy in Santiago, Chile, or whatever. You’re using some other official position and diplomatic immunity to conduct your spy activities. Well, what if they learned about that?


That’s the kind of damage that can be done. It’s very serious. The question is, what’s the United States going to do about it? Are we doing something similar to them? Well, we’re probably trying. Is there cyber war going on? I think there’s no question about it. I consider the United States to be at war with China and Russia today. It’s just a war that’s being carried out in cyberspace, not on the physical battlefield. And a lot of industrial damage is being done.


Number two, where will this lead?  It certainly doesn’t bode well for economic cooperation. You want to move to less cooperation in the trade realm. Consider the fact that this trade bill got shot down in Congress, and members of Congress were talking about putting up tariffs. I don’t know if anyone heard Donald Trump’s presidential speech yesterday. I don’t get into endorsing political candidates and I’m not going to handicap Donald Trump’s chances, but he was the first candidate I’ve heard speak bluntly about trade wars and putting tariffs on Mexico, China, and Russia. Maybe he’s a fringe candidate, maybe not, but the point is, this is all out there and none of it is good for the globalized society that we’ve all been relying on for inexpensive Chinese imports and so forth.


It is a national security threat. Our audience is obviously most interested in the financial side of things. But just so you know, if they can get into the Office of Personnel Management, they can get into your bank, they can get into your Merrill Lynch account, they can get into your Charles Schwab account. At the risk of repetition, I think any portfolio that doesn’t have a slice of hard assets and any portfolio that’s all digital is vulnerable to being completely wiped out.


JW:  Staying with China for one other point here: there’s the digital front, but on another front,  there’s also a conflict brewing on the high seas. China seems to be giving new meaning to the phrase “nation-building”. They are building actual islands in the South China Sea, and it’s creating an enormous amount of tension. I’m just curious to know, do you think this is primarily about the oil that’s under those oceans or is it about other assets or is it a broader military strategic move?


JR:  It’s probably all of the above. It’s certainly about the oil. The best data says there’s a considerable amount of oil reserves in the South China Sea.


The South China Sea is interesting. It’s sort of egg-shaped, an oval, if you will, elongated from north to south. If you look at a map, that’s where geopolitics gets its name; the politics of geography. The South China Sea is surrounded by the six countries of Taiwan, the Philippines, Brunei, Malaysia, Vietnam, and China. China is the furthest away.  China has some coastline on the South China Sea, but it’s really Vietnam and the Philippines that dominate the landscape. Yet, China has claimed the entire thing. They said, “Okay, you other countries, you can have rights to the twelve-mile strip or whatever adjacent to your borders, but the South China Sea itself, we claim the whole thing.”


I don’t know what their basis for that is other than their size and intimidation factor and brute force. As you point out, they are now backing up that claim. Not legally but militarily by using landfill and artificial reefs and other engineering techniques to create islands out of nothing and then populate them. They put military bases on them, run up the flag, and say, “Here we are. You kick us out, which, of course, would be an act of war.” So, you’re just getting that many steps closer to a war between the United States and China.


The United States is not just a bystander. We have treaty obligations with the Philippines that at least legally and politically are on a par with NATO. That is to say, an attack on the Philippines is considered to be the equivalent of an attack on the United States. We would be obligated to come to the aid of the Philippines if there were any attack on them or any act of war. And, yet, China is getting closer and closer to doing exactly that.


The other problem is when you get all these navies and coast guards in close proximity. I don’t know if any of the listeners have ever piloted a vessel, but I’ve done quite a bit at sea. You get two or three boats in close proximity bobbing around on a dark and rainy night, the odds are pretty high that one of them bumps into the other, rams the other, hits the other. It’s not as cut and dried as you think. You could have an accident where maybe nobody wants a war to break out but two vessels hit each other in some adverse conditions, one sinks, and the next thing you know, the other one is launching missiles. This thing could spin out of control very easily. It’s an extra layer of concern.


It is about the oil but it’s also about China really emerging as a world power, which it had been for a millennium before the early 19th century. China went through a period of about 150 years beginning in the 1830s and 1840s with the Opium War when England forced China to buy opium. England had opium from Afghanistan and India and they wanted China’s goods, but they didn’t have anything the Chinese wanted. The Chinese went, “Get out of here. You don’t have anything we want.” The British said, “Here, start smoking opium. Get addicted, and then you’re going to want the opium.” And that’s what happened. The Chinese government tried to keep it out because they didn’t want their people addicted to opium, but the British went in with gunships, opened up the ports in Canton and elsewhere, and forced the Chinese to take the opium. They made them sign treaties, established a sphere of influence, and then the Germans, the Japanese, and ultimately the Americans weren’t too far behind.


There was also the Taiping Rebellion, which was an internal insurrection. Foreign troops were needed to assist the Qing dynasty in putting that down. Then there was the Boxer Rebellion, the Warlord period, the rise of communism, World War II, the Communist Revolution, and then Mao Zedong. That takes you all the way up to 1979 when Deng Xiaoping started to normalize things. So there were 150 years when China was a mess with internal chaos, disintegration, decadence, political disintegration, etc.


It fell off the world stage. Now they’re back, but, from the Chinese perspective, this is nothing new. You go back to Kublai Khan, the Manchu dynasty, the Tang dynasty, and the Sui dynasty — we’re talking about well over a thousand years — when China was the greatest power in the world. China was highly civilized when the Europeans were running around eating their meat with knives and hunting for protein. For China, this is nothing new.  They don’t feel that they’re coming out of nowhere; they feel they’re just regaining and reemerging from a place they have occupied for a long time and that their eclipse was temporary.


This means their foreign policy has always been based on buffer states, i.e., all the states around China have to be subordinate to China. They don’t have to conquer them all but they do have to subordinate them all to make sure, (a) that they’re not threats, and (b) that they are economic vassals of a greater Chinese empire. That’s been Chinese foreign policy for over a thousand years, and they’re reestablishing that. As far as they’re concerned, Taiwan is not a separate country. They regard Taiwan as a part of China, they got Hong Kong back, and they look at Korea, Japan, and Southeast Asia as the Chinese sphere of influence.


They would say to the United States, “Okay, you guys can have everything up to Hawaii, maybe Guam, but anything west of Guam, that’s us. That’s our sphere of influence. So you guys, get out.” Of course the United States doesn’t see it that way at all. We have allies in the Philippines and in Japan where the Seventh Fleet is very active. In that part of the world, we project force on a forward basis. We’re very forward deployed in the region, and then the President is trying to do this Trans-Pacific Partnership to create a multilateral trading block that does not include China.


Where there are trade wars, threats of military war, and conflicts over resources (some of this is just taking the world back where it was before everything got locked into the Cold War), the potential for conflict is high. I would expect there will be some kind of incident, a shooting incident, sooner rather than later. That seems almost inevitable just based on history and what’s going on in the South China Sea.


What’s different now versus World War I, World War II, the Opium Wars, and the other things I mentioned is cyberspace. Cyberspace did not exist much before the 1980s, at least in the way we know it today. Warfare will spill over into cyberspace and that means attacks. What do you do in war? You try to destroy the other guy’s economy. If they don’t have an economy, the resources, the capability, the taxing authority, the wealth, and the other things they need, they can’t fight the war. How would you destroy an economy doing prior wars? You would bomb or invade or sabotage. How would you do it today? You would do it in cyberspace.


Again, I come back to this fact:  If you have stocks, bonds, bank accounts, and money market funds in your portfolio, I look at that and say you have digital assets. I can wipe out your digital assets in a day if I’m Russia or China. That’s the reason to have some hard assets.


JW:  Thanks, Jim. I’m glad I asked the question because it’s always so helpful to get this larger context. In particular, the historical context really makes for a great deal of clarity about what’s happening today.


We do have some great questions from our listeners, and here’s Alex Stanczyk with those questions.


AS:  Very good. Thanks a lot, Jon.


Really quickly, I just want to take a moment and thank everyone who’s been sending in questions. We receive questions for these webinars on a regular basis through email, some also come in on Twitter, and many questions come in live as the webinar progresses. We appreciate all those that are sent in. As usual, we have far more questions than we have time to answer. We’ve got about twenty minutes left with Jim, but we will do our best to get some of the pertinent ones answered.


The first question came in by email from Ted G. and I’m going to paraphrase it a little bit. Jim, this is referencing your books, both The Death of Money and Currency Wars. You’ve mentioned in the past that in the next big liquidity crisis, if there is a large financial event, it’s going to be beyond the central banks’ ability to bail it out or to create liquidity in that event. You’ve indicated that you believe the IMF will come into play, and SDRs will play a large role in salvaging the global economy at that point. The question is: if SDRs are world money or international money, what do people use as currency?


JR:  That’s a very good question. I’m very much of a global macro analyst, and I do focus on the international monetary system. One of the reasons I talk about the IMF and SDRs is because it’s something I have a lot of acquaintance with. I do view that as world money and a source of liquidity in a future liquidity crisis.


The Fed has printed about three and a half trillion dollars since 2008 in an effort to bail out the economy. I supported QE1 as an appropriate emergency response to a liquidity crisis, but QE1 and the liquidity crisis were over by the middle of 2009. By late 2009 unemployment was still high, growth was low, and we were struggling out of a recession. All those things were true, but there was no liquidity crisis. There was no shortage of money, yet the Fed continued to print money through QE2 and QE3. I think they have been completely counterproductive and no bang for the buck except that they bloated the balance sheet.


Here’s the thing. In 2008, when they started all this, their balance sheet was about eight hundred billion. Today, it’s well over four trillion. If the Fed had somehow managed to take the balance sheet from over four trillion dollars back down to eight hundred billion, I would say, “Okay, nice job. You know, that worked. If we have a liquidity crisis tomorrow, you guys can go print a couple trillion dollars, hand it out, and keep the game going.” But they haven’t. They got to four trillion and they’re still there. They have not normalized the balance sheet. Everyone focuses on interest rates. They haven’t normalized interest rates, but they haven’t normalized the balance sheet, either.


What are they going to do when the next crisis comes? Print another four trillion? Take the balance sheet to eight trillion? Legally they can, but I think that they would push through a confidence limit. There would come a time when people just say, “Okay, this is a joke. Money has lost its meaning. We’re going to get out of the dollar and into alternatives including hard assets.”


This is why I say that when the time comes, this money is going to have to come from the IMF, because the IMF does have a greater capacity to create money. We’ll still have dollars, but the dollar will lose its role as the global reserve currency. It will be a local currency or “walking around money” as we call it in Philadelphia. You and I will still have dollars. I’ll go to the bar or restaurant tonight and pay in dollars, but it’s like when I go to Mexico, I buy pesos. When I go to Turkey, I get some Turkish lira. When I go to the Middle East, I get some dinar. When I go to the UAE, I get dirham.


There are local currencies all over the world, including the Zimbabwe dollar, but none are reserve currencies. Nobody thinks you can buy oil or settle your balance of payments using them. You can’t buy oil with pesos and you can’t settle your balance of payments with dirham. You need dollars or euros to do that .


In the future, I would expect the SDR to be the global reserve currency. Oil would be priced in SDRs, countries would settle their balance of payments between each other in SDRs, and maybe the financial accounts of the hundred or so largest corporations, so a financial report from IBM or Volkswagen or General Electric or someone like that would all be presented in SDRs.


We’ll still have dollars, but the dollar will be a local currency, walking around money, something you need when you come to the United States but which is not particularly valued as an international medium of exchange. We’re not going to have SDRs in our pockets. There was a retirement party for a very prominent central banker in the 1970s where Paul Volcker went to a printer and, as a novelty, had some SDR paper notes printed up as a gag. But in reality there are no SDR paper notes. We’re not going to have them in our pockets and we’re not going to spend them at the ball game. We’ll still have the dollar, but you can think of it as similar to Mexican pesos.


AS:  Thank you for pointing that out, Jim, because I think that’s very important for people to understand. A lot of people, maybe those who don’t deal with money on an institutional level, may not have really understood the difference and were concerned about the whole idea of switching to having to use SDRs.


For the next question, if we can switch over to gold for just a moment. We have a number of different people asking similar questions along the same lines, so I’m going to group them together. This question is coming from Fred H. amongst others who are asking essentially the same question having to do with gold confiscation.


As you’re well aware, in the United States history of gold, there was an executive order issued to confiscate gold within the United States. You have mentioned in the past that you don’t feel this is likely now. If we can break this into a couple of different segments:  First, why don’t you think gold confiscation is likely in the US? Do you think it’s possible? Second, that may or may not be true for the EU, and in either case, why? And then third, as you know, Physical Gold Fund vaults in Switzerland, so what’s your view on Switzerland in terms of gold confiscation in light of what might happen over in Europe?


JR:  Let’s start with the US. I don’t want to be categorical about this. I’m not going to say that confiscation could never happen, but I do think it’s extremely unlikely. The reason is that it’s very, very impractical at this stage.


First of all, believe it or not, not that many Americans own gold. I talk about gold all the time, I advise it and recommend it, but it’s not widely held. I wouldn’t even call this brainwashing, but we’ve had forty years of radio silence.


When I was in graduate school in economics in the ‘70s, it was shortly after Nixon closed the gold window. We did not go off the gold standard immediately, however. In 1971 he ended redemption. It’s like when a mutual fund or a hedge fund suspends redemptions. Nixon said, “Okay, you cannot walk up to the window with dollars and get gold. We’re closing the window temporarily.” He did use the word temporarily. It turned out to be permanent but, at the time, it looked like a temporary expedient. Technically we were still on a gold standard for about three more years.


It wasn’t really until around 1974-75, after a series of IMF meetings, that they officially demonetized gold. That was exactly when I was a graduate student in International economics, so I actually had to study gold as a monetary asset. I think I was the last one or the last class to do so.


Since then, for the last forty years, gold has not been taught. I always say if you know anything about gold, you’re either self-taught or you went to mining college. You must have been around for a while to have been taught gold in an academic context. So it’s not even that people are anti-gold, it’s just that they don’t know anything about it. They think it’s for jewelry, and they don’t think of it as any form of money. Of course, I think gold is money.


Gold is not as widely held as it was in 1933. In 1933 you could still have a $20 gold coin. An ounce of gold was worth $20.67 in the beginning of 1933. It is true that, beginning with World War I, most of the gold was hoovered up, turned into four hundred ounce bars, and put into vaults. Even people who owned gold probably had it in those larger quantities. It pretty much ceased to function as money in your pocket, but it was still legal tender and you could have a one-ounce gold coin worth twenty bucks to pay for dinner or whatever.


That ended in 1933 when it was made illegal for US citizens to have gold. It was at the depths of the Great Depression. The Depression started in 1929 and was the greatest depression in American history. Unemployment was over 20%, industrial production dropped by about 20%, the stock market dropped 85%, there were trade wars all over the world, currency wars, etc. It was a very, very desperate time. Roosevelt was the new President and people supported him. They were looking for a change and, so, when he issued that order, there was not a lot of resistance.


I think it would be completely different today. Most Americans don’t have gold, but those who do probably prize it very much. They have it precisely because they don’t completely trust the purchasing power of the dollar or they don’t completely trust digital assets and dollar assets. They want some diversification, they want some hard assets. So, they’re not just casual holders. They’re probably pretty committed holders.


I think between talk radio, certain members of Congress, certainly prominent Americans like Ron Paul and others — and I would include myself because we’re all advocating for gold —there would certainly be a lot of resistance to this. I’m not talking about civil disobedience, but I think the government would really have to think twice about confiscation. I do feel there are a number of prominent politicians who would stand up and try to prevent that from happening.


I believe it’s unlikely because I think there’d be a lot more resistance and a lot more practical problems. I mean, what are they going to do? Break down every door in America to see if you’ve got a vault or open up every safe deposit box in America? They actually might do that to safe deposit boxes because banks control them, so I recommend private storage or private secure logistics for gold rather than bank logistics. For all those reasons — there’s less trust in government, more willingness to push back, more politicians or public figures that might be on your side, etc. — I just don’t think it’s practical.


Now, will they try something tricky like a 90% excess profits tax on gold? Maybe. I don’t think you can rule that out, but I don’t view that as a reason not to own gold. People say, “Well, gee, what’s the point of owning gold if it goes up a lot? They’re just going to throw an excess profits tax on it. What good does it do me?”


I have two answers to that. Number one, they might not do that. I mean, they might do that but they might not, so let’s not assume that’s a foregone conclusion. Number two, you could see gold going from right now around $1,200 an ounce, a little bit less, to $2,000 an ounce, $3,000 an ounce, $4,000 an ounce, which I do expect. There may come a time when things are spinning out of control and it’s skyrocketing, so it would make sense to sell the gold for $5,000 or $6,000 an ounce and maybe put that money into some other asset class that’s less likely to be confiscated such as land or something else. But we’re a long way from that. I want to be along for the ride. I want to own the gold. I want to participate in that upside.


You can talk about it as gold going up, but I would view it as the dollar imploding and gold retaining its value while the dollar implodes. What’s really going up? It’s the dollar price of gold that’s going up.  Another way to put that is every dollar buys you less and less and less gold. What’s really happening is the dollar is collapsing as the dollar price is going up.


I want to be along for that ride. Could there come a time when it gets so extreme that you want to sell the gold and pivot into another asset class? Maybe. That’s something I would watch carefully. But, as I say, we’re so far away from that right now that I want to own gold today and be along for the ride.


Now for the EU, a lot of the same considerations apply with one big difference. They have much more acquaintance with fascism than we do in the United States. Whether it’s Mussolini in Italy, Hitler in Germany, Stalin in Russia or Franco in Spain, I regard all four of them as fascists. I know they have different labels such as Hitler was a Nazi, Stalin was a Communist, and Franco called himself a Nationalist. I understand all that, but let’s consider it in political science terms. Instead of getting involved in name-calling, try to be objective about what kind of societies they were.


Europe has a lot more acquaintance with fascism than we do in North America although maybe we’re not that far behind. For all the socialism that goes on over there, they are a little bit more respectful of privacy rights. Look at Google. Google’s getting a much tougher time in Europe than they are in the United States about privacy, data mining, and what they do with your information and all that. Europe’s confiscatory tradition has been so abused in the past that it might be less active. You might actually be slightly better off in Europe. That would be the first thing I would say.


With regard to Switzerland specifically, Switzerland is my favorite jurisdiction in the world for  security and liberty and respect for the rule of law. It’s not perfect, though. For an American doing business in Switzerland, forget it. The Swiss have been bludgeoned by the US government — Treasury in particular — into handing over all records on US citizens. As far as I know, you don’t have to declare foreign gold accounts, but you do have to declare foreign bank accounts. If you have a foreign bank account, you must say so on your income tax return. The US has pretty much hoovered up all Swiss bank records of all US accounts anyway, so if you didn’t declare it, good luck to you because you’ll probably get a phone call from the IRS if you haven’t already.


Bear in mind the US has global tax jurisdiction. Most other countries, in fact I think every other country in the world, taxes you on what you make in that country. If you work in Canada, you pay Canadian tax. If you work in France, you pay French tax. Now if you work in Monaco, you don’t pay French tax, and if you work in the Cayman Islands, you don’t pay Canadian tax even if you’re a Canadian citizen. The US is different. As a US citizen, you’re taxed on your worldwide income. It doesn’t matter where you make it or where you have it.


The Swiss do take this seriously. They have not been invaded successfully for over 500 years or maybe longer. The last time somebody tried to invade them, a Swiss force met them on almost a suicide mission. The Swiss were outnumbered and killed, but they just wanted to prove a point and they did. The invading army retreated pretty quickly.


Of course, the country is heavily armed. A lot of those mountains that you like to ski on and they look pretty from the train, well, guess what? They’re hollowed out and have armaments, artillery, communications, and command-and-control stations. It’s interesting to note that some Swiss vaults are buying hollowed out mountains from the Swiss Army and using them as vaults. Some of the expanded capacity, in terms of Swiss vaulting, is actually inside a number of these mountain tunnels and chambers that have been hammered out for defensive purposes.


For all the reasons I mentioned, i.e., rule of law, national security, integrity, tradition, liberty, I think Switzerland is probably the best place in the world to store physical wealth. I know a lot of people talk about Singapore, but I’m just not a big fan of Singapore. It looks kind of libertarian from the outside with pretty good rule of law, and I do business in Singapore, but it’s a little too close to China. It’s a little too under the Chinese thumb for my comfort whereas Switzerland, I would say, isn’t under anybody’s thumb.


The order of the question was interesting, Alex, because you got an ascending order of security. Obviously, the US may be least secure, the EU is slightly better, and Switzerland is best of all.


AS:  Very good. Thank you very much. I think that clarifies a great deal for a lot of people wondering about that topic. With that, it pretty much wraps up our conversation with Jim today. We appreciate it, as always, and I will turn it back over to Jon.


JW:   Thank you, Alex. Let me remind our listeners that they can follow Alex on Twitter — his handle is @AlexStanczyk.  There are great insights and valuable links from Alex to follow on Twitter.


Thank you, Jim Rickards. It’s always a pleasure and an education having you with us. Of course, you can also follow Jim on Twitter. His handle is @JamesGRickards.


Listen to the original audio of the podcast here

The Gold Chronicles: June 17 , 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles May 18 , 2015

May 18th, 2015 Gold Chronicles topics:

*War on Cash
*Cashless society sets world up for negative interest rates
*Herding people into banks and digital wealth
*Daily limits on cash withdrawals
*Impose negative interest rates on deposits
*Potential freeze on bank accounts in the event of emergency
*Trans-pacific Partnership (TPP) and currency manipulation
*Currency Wars – not all currencies can be weak at the same time, they take turns
*If you are at a poker table with four or five people and you don’t know who the sucker is, you are the sucker, this applies to currency devaluation as well
*Spike in German gold purchasing
*Gold in Euro has skyrocketed, it is perfectly sensible
*Europe already has negative interest rates
*Add in geo-political risk, gold makes a lot of sense
*It is almost impossible for the Fed to raise rates without a bloodbath in markets
*As people discover the Fed can’t raise rates, it should be good for gold
*Peak gold
*Jim’s view on best economics schools to attend
*Proper gold allocation in a portfolio
*Can Central Banks perpetually hold up stock markets by continual money printing
*ZIRP is taking money out of the pocket of savers and giving it to big banks
*The Fed is in effect forcing people into the stock market if you want returns
*There will come a time when the magnitude of the crisis will be bigger than Central Banks can create liquidity for

Listen to the original audio of the podcast here

The Gold Chronicles: May 18 , 2015 Interview with Jim Rickards


The Gold Chronicles: 5-18-2015

JW:  Hello, I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles. Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the US Intelligence Community and to the Department of Defense. He’s also an Advisory Board member of Physical Gold Fund.

Hello, Jim, and welcome.

We also have with us Alex Stanczyk of Physical Gold Fund.

JW: I’d like to begin with a very interesting question that Alex himself raised in a recent conversation. He was commenting on what has been called the “war on cash.” What he means by that is there’s been an increasing chatter about the coming disappearance of old-fashioned cash — bills and coins that you carry in your wallet or purse.

One implication of this, of course, is a major expansion of financial surveillance, and as Alex pointed out, a greater ease for governments to seize assets. My question to you, Jim, is: Do you see the cashless society as something happening in the foreseeable future? And if so, what are the implications for gold, which you’ve always insisted is itself a form of money?

JR:  Jon, that’s a great question. It’s got a lot of parts. Let me go through those one at a time. First of all, what’s sometimes called the “war on cash” or the drive to a cashless society, not only do I see it coming, it’s sort of here. Like many things that involve a loss of liberty, I think it’s snuck up on people. It’s already here, and people don’t quite realize it because they have a few bucks in their wallet. You pull out your wallet or your purse, and you look in and you might have $50, $100, or a couple hundred bucks. In Philadelphia, we used to call it “walking around money”, and that’s fine. Maybe you put $100 in a birthday card every now and then. Cash is still out there.

But if you think about it, what you do day in and day out, if you have a paycheck, it’s probably direct deposit from your employer. Most of the money you spend is probably either a credit card or a debit card. Maybe you do some wire transfers, moving money back and forth between money market accounts and brokerage accounts and your bank accounts. That’s all digital.

Probably, 99% of what you do is already digital, and you think that cash is available, but it really isn’t. We’re even at the point where maybe with four bucks at the Starbucks counter, you’re buying a latte or something, you probably just swipe your debit card. You don’t even reach in your pocket and pull out a $5 bill.

The cashless society, the digital society, is already here. People say, “So what? It just seems really convenient.” And I do all these things myself. I have debit cards and I’m no different from anyone else when it comes to that. But it does have some implications.

First of all, it sets up the world for negative interest rates. People ask, “What are those?”

Basically, you put $100,000 in the bank, and at a 1% negative interest rate, you come back a year later and you’ve got $99,000. Instead of giving you $1,000 or $2,000 or $5,000 of interest, which is what used to work, they’ll actually take away part of your money as a negative interest rate. This is designed to get people to spend it, because if you spend it, they’re not going to take it away, but if you leave it in the bank, they will, so it’s a way to force people into spending money to get the economy moving. It’s not really working: the economy has more serious structural defects, but that’s the idea behind it.

The other idea behind it is to get to negative real interest rates. That’s a little more complicated, but a real rate is basically the rate that you get minus inflation. A typical way of thinking about it is let’s say you get a 5% interest rate and inflation is 3%. You do 5 minus 3, and your real gain is 2%, because you have to adjust for inflation.

What do you do when inflation is deflation? In other words, you’re subtracting a negative. This goes back to a sixth or seventh grade math where, when you subtract a negative, you add the absolute value. Now, if you have a 1% interest rate (positive 1%), but inflation is actually deflation, let’s say negative 2, so now what’s the real interest rate? It’s 1 minus negative 2, which is plus 2, which is 3. A 3% real interest rate is very high if you’re trying to get people to borrow money and invest.

If you want to get the economy going, you have to have negative real rates, but how do you get to a negative real rate in a world of deflation? You have to have negative interest rates. A simple example would be if deflation is minus 1, but the interest rate on your bank account is minus 3. Well, minus 3 minus negative one is minus 2, so that’s the negative real rate, and that’s designed to get people to spend money.

It’s a little bit of a through-the-looking-glass world, but that’s the world we’re living in. They’re setting people up for negative interest rates, either to take your money or to induce you to spend it. But to do that, they have to get rid of cash.

Going back to my $100,000 example. The person with the $100,000 in the bank leaves it there and comes back a year later and has $99,000 because of the negative 1% interest rate. But suppose you took the money out and had the $100,000 in cash. You’ve got a stack of one thousand $100 bills, you put them in a safe place. Yyou come back a year later – you still have $100,000, your neighbor has $99,000, but you have $100,000 because you didn’t leave it in the bank. Cash is a very easy way to defeat negative interest rates. To force people into negative interest rates, you have to get rid of cash.

Now, there are other aspects to it. Obviously, there’s a war on drugs. Drug dealers like to use cash. There’s a war on terror. Terrorists have to use cash. The government authorities are always going to say, “We’re not really against everyday citizens. We’re just trying to get these bad drug dealers and these bad terrorists, tax evaders, and others. That’s why we don’t allow people to have cash.”

But there are tons of good, legitimate reasons to hold cash. You might have a cash business. You might want to, as I say, have some cash for emergencies. If you live where I do, we’re very vulnerable to hurricanes here in the East Coast, or just bad storms, and the power goes out. When the power goes out, the ATMs don’t work. It’s good to have a little bit of cash around for occasions like that.

Basically, the war on cash is designed to set us up for negative interest rates, set us up for confiscation, and encourage people to spend their money. But to do that, you need to herd everybody into one of these big banks and some form of digital wealth, and get rid of physical cash.

By the way, this is very reminiscent of what happened to gold in the early part of the 20th Century, from around 1910 to 1914. If you were in anywhere in the United States in, say, the 1890s, and you had to pay for something, you might very well reach in your pocket and pull out a gold dollar or silver dollar. Maybe it was a gold $5 coin or whatever, but people carried around solid silver and solid gold coins. I remember when I was a kid, a quarter or dime was still solid silver. It was only in the 1960s that they debased it by adding copper, zinc, and a couple of other alloys.

How did they get people to give up their gold coins? This was the origin of the 400-ounce bar. People who follow Physical Gold Fund have probably seen a picture of me from a trip to Switzerland where I’m holding a 400-ounce bar. And they’re not light, by the way! They weigh a good 30 pounds. It’s like lifting a heavy free weight.

What they did is they said, “Okay, you can have gold.” This was not 1933, after Franklin D. Roosevelt made gold illegal. This was in 1914-1920, when gold was still legal. But what they did is melted down all the coins, took the coins out of circulation, and put it into 400-ounce bars. Nobody is going to walk around with a 400-ounce bar in their pocket. They said to people, “Okay. You can own gold, but it’s not going to be in the form of coins anymore. It’s going to be in the form of these bars. By the way, these bars are very expensive.” That means you need a whole lot of money to have one and you weren’t going to take it anywhere. You were going to leave it in a bank vault.

It was a process gradually, and people didn’t seem to notice the substituting of paper money for gold coins without making gold illegal all at once. They created these 400-ounce gold bars in very large quantities and got rid of gold coins. Later, they made gold completely legal, but by the time they did that, in 1933, not very many people were using gold coins. They had paper money. They just thought they could go get gold and found out they couldn’t.

So this whole war on cash reminds me of the war on gold coins from earlier in the 20th Century, but it’s the same process. It’s forcing people into the banks, herding people into a small number of institutions, making it less and less convenient to have the old form of money, and more convenient to have the new form of money. But the new form of money implies tighter forms of government control. People don’t really notice until it’s too late.

We’ve kind of come full circle, because I talked about the war on gold in the first half of the 20th Century. Now in the 21st Century, we’re seeing a war on cash, but part of the solution is to go back to gold. Because, of course, gold is now legal. Earlier in the 20th Century, it was illegal and inconvenient but now it is a legal form of ownership. You can buy large bars if you want. And you can buy 1-kilo bars, which are a lot more convenient than 400-ounce bars, but you can also buy gold coins.

The US Mint will sell an American Gold Eagle or American Buffalo. It’s a 1-ounce solid gold coin. Physical Gold Fund, of course, has larger quantities in their structure, but the point now is that gold is legal and convenient, and it actually becomes a way to get out of the way of this digitation of money and the war on cash.

So I do think this trend is significant. I think it’s being done for a purpose. The purpose is to impose negative interest rates and to leave people nowhere to go. With all-digital money, they can also lock down the system, not only impose negative interest rates, but actually do a Cyprus-type situation, where they reprogram the ATMs and say you can only have, perhaps, $300 today for gas and groceries. And the authorities will say, “Why do you need more than $300 a day for gas and groceries? We have a temporary emergency, so we need to lock down the bank accounts and only let you get that much walking around money. You don’t really need more than that.”

The war on cash, all this digitization, is basically setting people up for two things: first, negative interest rates; and eventually, a freeze on bank accounts in the event of some kind of emergency.

It probably is prudent to get cash, but I think that it has become very, very difficult. Go down to the bank and ask them for $5,000. There’s nothing illegal about it, but you might be required to show some ID, sign a bunch of things, have reports filed with the government ­— a Form SAR, Suspicious Activity Report, or a Currency Transaction Report, CTR. There’s a whole reporting network around this. I think it’s almost too late to get your hands on cash, but it’s not too late to get some gold.

JW:  Thanks, Jim. I’d like to turn to a different topic: the subject of your first book, Currency Wars. It’s a topic that’s surfaced recently in a political dogfight here in the United States. The Obama Administration has been trying to push through the Trans-Pacific Partnership, which is a wide-ranging free trade agreement. A major stumbling block for Congress, or some parts of Congress, is the failure of the Trans-Pacific Partnership to address currency manipulation, specifically by China.

It’s not often that we see currency wars at the center of focus in public debate. I’m curious to hear your view on this.

JR:  As you know, Jon, the currency wars, at least the one we’re in now, started in 2010. Here we are in 2015; it’s still going strong. I’ve said many times that the world is not always in a currency war, but when we are in a currency war they can go on for 5 or 10 or 15 years, sometimes longer. I’m not the least bit surprised that here we are five years into this currency war, and it’s still going on, it’s still a topic for conversation, and I think that will continue. I believe we can come back a year from now, maybe two years from now on one of these Physical Gold Fund podcasts and we’d still be talking about the currency wars.

Now, wars have battles, and the tide of war shifts back and forth, so there’s always something new to say about currency wars. In 2011, it was the weak dollar. In 2012, with Abenomics, it was the weak yen. Beginning in 2014, coming into 2015, with negative interest rates in Europe and quantitative easing by Mario Draghi, and now the weak euro — although I think the euro is bouncing back.

This is just the world taking turns because, of course, not every currency can devalue against every other currency all at the same time. If some currency is going to be weak, some other currency has to be strong. It cannot be any other way. It’s like two kids on a seesaw on a playground. I don’t even know if they still have seesaws — they are considered dangerous — but when I was a kid, you had a seesaw. If somebody is down, the other person is up and vice versa.

If the dollar is down, the euro can be up. If the dollar is going to get stronger, then the euro has to get weaker, and vice versa. These things go back and forth. It’s like a real war. If you go back to World War II, the US was pretty badly beaten up at Pearl Harbor and the French surrendered to Germany in the early stages of World War II. In 1942, it looked like Germany and Japan were going to sweep the board. It looked like Germany was going to take over Europe and Japan was going to take over Asia. But the tide of battle turned and those had very different outcomes. It’s the same thing in the currency wars. One currency looks like the strong one for a while, but that can quickly turn around.

Let’s take that background on currency wars and put it into these trade negotiations, and you’re exactly right. It’s not only the Trans-Pacific partnership – that’s a big deal – but there’s another one being negotiated at the same time called the Trans-Atlantic Trade and Investment Partnership.

The Obama Administration is working on major multilateral free trading NAFTA-type deals with our Pacific Rim trading partners and our European trading partners all at the same time. The currency manipulation has been thrust into the middle of this.

Now, the conventional wisdom that I think the White House operates by is this whole theory of free trade comes from the economist, David Ricardo, and his theory of comparative advantage. What he said was this: Let’s say there are two trading partners, and one’s really good at making wine and the other one is really good at making textiles. They ought to trade wine for textiles. It doesn’t necessarily make sense for the wine-producing country to go out and create a textile industry, and it doesn’t make sense for the textile-producing country to plant grapes. Let them trade with each other and they’re both better off.

There is something to that. I’m not saying that’s a nonsensical theory. As a pure theory, it makes some sense, but there are all kinds of qualifications to that. One of the big qualifications is we’re going to have comparative advantage.  Here’s how it works. We’re going to say that certain countries are better at certain things than others, and they ought to focus on those, and then trade with their trading partners to get the things that their trading partners are good at, and everybody’s better off. That’s the theory.

So do you measure comparative advantage? You have to measure it in the price of inputs. What’s the cost of labor? What’s the cost of capital? What are your natural resource endowments? What’s your technology? You have to look at all those things that are your inputs, your factors of production, and weigh them up to find out where you have your comparative advantage.

But how do you figure out prices? You use currencies. You use dollars and yen or yuan, etc. Now here’s the question: What if I’m manipulating my currency? All of a sudden, the whole theory of comparative advantage goes out the window. Because if I’m using prices to determine my comparative advantage and if comparative advantage is supposed to dictate the terms of trade and that’s the basis for coming up with a free trade area, but someone is manipulating the currency and distorting the price mechanism, then you could be kind of a sucker.

If you’re allowing free trade with a trading partner who is manufacturing its comparative advantage out of thin air by manipulating the currency, then you’re just a sucker in that poker game. There’s an old saying, Jon, if you’re at a poker table with four or five people, and you don’t know who the sucker is, you are the sucker. In other words, everyone else has ganged up on you. The US looks more and more like the sucker in free trade because we don’t really suspect or understand what trading partners are doing to kind of rig the game.

The other problem with Ricardo’s theory of comparative advantage is it assumes that the factors of production are immobile. In other words, they stay in one place. If you’re comparing US and China, you would say, “Okay, maybe China has a comparative advantage in labor, but maybe the United States has a comparative advantage in capital, because we have more developed capital markets, better rule of law, etc. And since labor and capital are both factors of production, let them compete in a level playing field and may the best country win.” That’s kind of a fair trade or free trade type of argument.

But what if the capital picks up and moves to China? In other words, what if the factors of production are not immobile, what if they’re highly mobile in a globalized society? All of a sudden, China has the cheap labor and the cheap capital, and that’s encouraged by currency manipulation. That’s really the point of the President’s opponents. I don’t think the President is a good listener. In fact, I know he’s not. He tends to get an idea in his head and assume he’s right and not be a very good listener and not willing to understand what the other side is saying. He just tends to polarize and demonize the issue a little bit.

But I do think that some of the opponents of these trade agreements in the Congress do have a point. They’re not all protectionists. They’re not all tub thumping, high-tariff trade bashers. They’re actually, I think, fairly thoughtful in a lot of cases, and they’re saying, “Hey, United States, you need to wake up and realize that you’re the sucker at the poker game. You need to do something about it.”

It’s interesting to see. And you’re right, having written a book four years ago on the currency wars, the one thing I said at the time is they’re not going away quickly, and that has turned out to be the case.

JW:  Let’s head over to Europe for a moment, Jim. I’m curious to read that German investors are “piling into gold.” Allowing for media hyperbole, our European friends do seem to have discovered a new enthusiasm for the yellow metal, with reported purchases up 20% in the last quarter. What do you make of this?

JR:  It’s not completely surprisingly, Jon. I’ll tell you why. Whenever I’m asked about exchange rates or the price of gold or the value of the dollar – is the dollar going up or down, gold going up or down, or whatever – I always respond with a question. My question is, “Compared to what?” In other words, if you want to know the price of something, you have to say, “What’s your numeraire?”

A numeraire is a fancy French term for your counting system or your numbering system. How do you measure things? Let’s say US-based investors are looking at gold. Today, it’s around $1,220 an ounce, give or take. It’s shown a little bit of strength lately just in dollar terms. I’ll come back to Germany in a second.

We’ve seen a bottom here five or six or seven times. Gold has gone down to the $1,130 to $1,180 range I think six or seven times in the last three or four years. Every time, it’s bounced back. In other words, it’s shown enormous resilience. I think a lot of people are frustrated that gold hasn’t gone higher, but I’m extremely encouraged by the fact that it hasn’t gone lower, considering what’s happened to oil prices, iron ore prices, commodity prices, the price of a lot of other things, and negative interest rates.

If you look around, you see a massively deflationary world. Gold has bounced off the bottom, and it’s actually shown a lot of strength. I think that’s a good sign going forward. Right now, gold is a little bit stronger in dollars, and that’s good for dollar investors. But you have to remember that the euro in the past year has dropped from, around $1.30 to a $1.05 (in round numbers), and then it’s bounced back. The euro right now today is a little closer to $1.13. As recently as about two months ago, it was down at about $1.05.

If you’re looking at gold not in terms of dollars, but in terms of euros, gold has skyrocketed. In other words, Americans are looking at gold saying it hasn’t done much, but for the European investor, the German, the Italian, the Spanish, the French investor, they are looking at gold, saying, “Man, it’s up 20% or 30%.”  Because, well, the euro is down. In other words, the euros that you need to buy an ounce of gold are up 30% or so because the euro has come down so much.

Counting in dollars, gold hasn’t done a lot, although it is up a little bit lately, but counting in euros, gold has skyrocketed. For the European investor, they’re looking around saying, “Greece is a basket case, as usual (no news there), but that could be enormously disruptive to the euro. There could be a financial panic in Europe. If I’m counting in euros, gold is up 25% or so, so I want to get some gold.” It’s perfectly sensible.

Remember, Europe does have negative interest rates. We talked earlier in the call about the possibility of negative interest rates coming to the US, and that’s part of the reason for the war on cash. Europe is already there. They have negative interest rates in Europe. Between no interest on your savings, gold going up a lot in euro terms, which it is, and all the geopolitical risks from Greece and Ukraine and Russian and Putin and elsewhere, gold makes a lot of sense.

I believe it makes sense, anyway. I don’t wait for difficult times to buy gold. I like to buy gold on a consistent basis, get up to the right allocation and stay there, but right now I do think it makes a lot of sense for the Germans. I’m not really surprised to see it.

Now, what’s going on, though, is that the euro is starting to bounce back, and the dollar is getting a little bit weaker. That’s because it’s becoming very apparent that the US economy is falling off a cliff.

Look at the the first half, January 1 to June 30, 2015 — of course, we’re still a month away, five weeks away, we haven’t completed that period. But based on all the best available data, it looks like the US economy is going to finish the first half of 2015 with zero growth. Very, very close to recession. We may even be in a recession now and not know it.

The official National Bureau of Economic Research up in Cambridge, Massachusetts is the official arbiter of when we’re in a recession and when we’re not. They don’t make those decisions until months, sometimes a year or more, after the fact. They’re being cautious and they really care more about the history books and the record books, and that’s fine for a bunch of academics, but we all have to deal in real time with the real world.

We could be in a recession right now. If we’re not, we’re close enough, as the expression goes: we’re pretty close to zero growth for the first half. This means it’s going to be impossible for the Fed to raise rates. I’ve said that all along. I said in 2014 that they would not be able to raise rates in 2015. All that’s happening is the perception of the rest of the world, including the Federal Reserve, is starting to catch up with that forecast.

The Fed can’t raise interest rates, but we’ve had a strong dollar for the past couple of years based on the expectation that the US would raise interest rates, going all the way back to May 2013. That’s when Bernanke, remember, started hinting about taper. They didn’t actually start the taper until December 2013. They didn’t finish the taper until November 2014, and then they’re still talking about raising rates in the minutes of the FOMC meeting. But now, from March, we’re hearing the word “patience”.

Actually, right now, May 2015, is the second anniversary of the beginning of the taper tantrum when Bernanke first started talking about taper. They’ve been setting us up for two years to let us know that they’re going to raise rates. Guess what? They can’t raise rates. They can’t. They’re stuck because the economy is in awful shape. It’s actually in worse shape now. If they were going to raise rates, they should have done it in 2013 when the economy still had legs, but it doesn’t now.

It’s almost impossible for them to raise rates. If they do, you’re going to see a bloodbath in the markets. But because the markets thought they were going to raise rates, and that made the dollar stronger. Now everyone is discussing that the Fed cannot raise rates, and that’s going to make the dollar weaker, which should be very good for the price of gold.

When was the all-time high for gold? In August 2011, gold came in around $1,900 an ounce. Where was the dollar in August 2011? It was at an all-time low. Notice that the all-time low for the dollar corresponded almost exactly with the all-time high for gold. That’s not surprising because they’re just two forms of money, and as I said earlier, it’s like the seesaw. If one’s down, the other one’s up. With a weaker dollar, I would expect to see a stronger price of gold for that reason alone.

Now, there are other reasons to own gold. There are other reasons as to why gold could be going up from here. One of them is this weaker dollar coming from a weak economy, based on the fact that the Fed can’t raise rates. It’s a good example, Jon, of how everything is connected. I realize in the course of answering this question, I’ve digressed from the euro, to Germans buying gold, to the dollar, to currency wars, to gold possibly going higher in the United States, to Fed interest rate policy… But these aren’t really digressions. The fact is they’re all connected, and I think it’s now that you have to see how one thread runs through them all.

JW:  Let me follow the thread one step further before I turn this over to Alex for questions from our listeners. Here’s another possible reason for owning gold. Goldman Sachs just released a report suggesting that 2015 could be the year of so-called peak gold. We’re familiar with the phrase peak oil, and now we’re hearing about peak gold. That’s the point where new discoveries of underground gold begin a permanent decline. Do you take this report seriously? And if so, what are the implications?

JR:  I’m not an expert on mining output or geology, and I don’t want to pretend otherwise. I think about gold as money. I do have decades of experience in bond markets, derivative markets, government finance, the international monetary system — both academically and in my career. I’ve done an enormous amount of research.

When I think about gold, I think of it as money, and that’s how I discuss it. I’m not a geologist and I’m not a miner, so I don’t want to pretend to know more than I do about that subject. But just because I follow it in terms of supply and demand, I do know that gold output has leveled off around 2000 tons around, give or take. It could be a little higher or a little bit lower in some years. With all the new technology and with the higher price of gold a few years ago, we’re not seeing a lot more gold produced.

That’s kind of leveled on the demand side, of course. Russia and China and now India and others are buying all the gold they can lay hands out. Not just mining output, but also gold coming out from other sources. The supply/demand balance or imbalance, as the case may be, does seem to favor stronger prices, but output is not going up.

Whether there is less gold in the ground, I leave that to Goldman Sachs. I’m not a big fan of their monetary research, but I’d say the same of all of Wall Street — no need to pick on Goldman Sachs, this would be true at Morgan Stanley and Merrill Lynch, and the other big banks on Wall Street. Most of the Wall Street economists worked at the Fed, worked at some central bank somewhere, and they come out of the same academic programs at MIT and Harvard and Chicago and Stanford and Wharton and Yale and a few other schools. They follow the same career path. They go to the IMF, they go to the Fed, they work for a number of years in those positions, and then they get hired away by Wall Street. They all drink the same Kool-Aid and think the same way, so I’m not a big fan of their market or monetary research because I think they’re missing a lot.

But if one of their analysts did a deep dive on gold output, geology, and knows something better, I would tend to give that some credit. Without being an expert myself, I guess I would say that this is probably a credible report and probably a bullish for gold.

JW:  Thank you, Jim. Now, we do have questions from our listeners. Here’s Alex Stanczyk with those questions.

Alex:  Very good. The first question that I want to cover here is actually coming in from Twitter. For those of you who want to ask questions on Twitter, use the hashtag #AskJimRickards. Anytime you do that, we have people who are watching that, and we pick up on those questions, and we can either use them for the current webinar or perhaps a future webinar.

The first question from Twitter is coming in from @swapnesh09, and his question is: “Is there a sane-headed business school in the US to learn economics, especially macroeconomics, that does not have Keynesians.”

JR:  That’s a great question. What I advise people when it comes to academic programs is don’t focus so much on the school. Of course, you want to pick a high-quality school and a good program. But focus primarily on the faculty. Even in a very strong Keynesian school, you can find individual faculty members who are a little more market-oriented, are using what are called heterodox or other, maybe even Austrian, economics and so forth.

I would take an a la carte approach and be looking for good professors. And then when you show up at that school, you’ll take your micro and macro courses. They’re all going to be the same. But then get acquainted with that individual professor and try to take advantage of the opportunity to learn.

Now, in terms of a school, I would look at George Mason University in Virginia. It’s a fine school. And George Mason is well-known as having an economics department that is more Austrian-oriented, more free-market oriented. That’s one where I think you can get a breath of fresh air.

I got a graduate degree in international economics. That was a specialty, but as an undergraduate, I studied economics. I had a hard time. My grades were okay, but I really, really struggled with it. I just thought that I wasn’t very good at it. It was only decades later that I discovered that the reason that it made no sense was because it made no sense! I was trying to struggle with something that really didn’t make sense. I can see that now, so I feel a little bit better about my academic performance, but at the time, I was taking it seriously and I didn’t understand the whole neo-Keynesian way that economics was taught.

By the way, Keynesianism does not have a lot to do with Jon Maynard Keynes. I’m kind of a fan of Maynard Keynes; I’m just not a fan of Keynesianism.  Keynesianism was hijacked by Paul Samuelson and the faculty at MIT in 1947, and that was taught in the ‘50s, ‘60s, and ‘70s, and even today as Keynesianism. I don’t think Maynard Keynes, if he were alive, would even recognize it. I can say a kind word for Keynes without being much of a fan of neo-Keynesian economics.

The only two things that I would say are, look for faculty rather than schools. And I do think that George Mason University is a fine school that I happen to be acquainted with a good economics department. I wouldn’t rule out Harvard. I would just go through the academic brochures and try to find a good professor.

Interestingly, Joseph Schumpeter taught at Harvard throughout the 1930s. He’s one of the most famous economists of the 20th century, trained in the Austrian School at the University of Vienna, was classmates with Ludwig von Mises and others, a dyed-in-the-wool Austrian economist, but he was on the faculty at Harvard. I don’t think we can ding Harvard.  Like I said, look for your individual faculty members.

We should widen the aperture a little bit. The London School of Economics, they’ve got their share of Keynesians, but I think you’ll find some good heterodox economists there, as well.

Alex:  I’m really glad you pointed out the difference there as far as the difference between what Keynes taught and how it’s kind of been hijacked today. I know Keynesians get picked on quite a bit in certain circles, and I think that that’s really important to point out those differences there.

Going back to a little bit earlier about something that you had mentioned as far as gold doing really well in the euro and not necessarily measuring it in the US dollar. I just pulled up a chart, and looking across the board, that’s absolutely correct. Looking at prices in 2015, gold was up 9.4%  in the euro and up, over 3% in most other currencies. Across the board, 2013, there was a pretty big pullback. The average for the last 15 years in virtually every major currency is higher than 7%. I agree with you there. It just depends upon how you’re measuring it.

The next question here is coming from Sean F: “With bail-ins a certainty and a stock market meltdown a significant possibility, where should you put your cash? Physical gold?”

JR:  I will answer that question, but before I do, I just want to put in a footnote. I obviously say a lot of favorable things about gold. I invest in gold myself. I manage a fund that has gold,  I’m on the Board of Advisors to the Physical Gold Fund, which offers a solid gold fund. It is a fund that you can invest in where it’s completely backed by physical gold. You can leave it in the vault or you can have it delivered. You can have it converted to cash. It’s a very well thought-out plan.

So I’m an advocate for gold as an analyst, as an investment manager, and as an advisor. But I’ve never said, and I’m not going to say now, sell everything and buy gold. I don’t believe in going 100% into anything. I think the right allocation for most investors is about 10%. If you want to be aggressive and lean in a little bit, go to 15%-20%, if you like. I don’t recommend 50%. I don’t recommend 100%. I think it’s foolish no matter how much I like an asset category — and I do like gold — to go all in.

Here’s where I get beaten up all the time. I will say something good about gold and then somebody will say, “Gold went down. You’re an idiot.” I say, “No — if you have a 10% allocation and it goes down 10%, you’ve only lost 1% on your portfolio. No one likes to lose money, that’s no fun, but 10% of 10% is only 1%. That’s part of the reason for diversifying.”

So yes, I do think gold is a good place to put liquid assets. Gold is also funny in the sense that it’s liquid and thinly traded. That’s a very unusual combination. Usually things that are thinly traded are illiquid. Let me describe the difference. Thinly traded means that the volume of trading relative to the volume of the stock (or whatever asset it is) is fairly small. Maybe the number of dealers is fairly small, etc.

And saying something is liquid means that you can get it in and out of the market with relative ease and minimal market impact. You’re not going to upset the market or have a hard time. If you try selling a private equity fund or shares in a venture capital company or some other assets, you’re going to have a very difficult time. It’s not that it can’t be done, but that’s illiquid.

You’ll never have problems buying or selling gold, and yet it is thinly traded. Gold is a market where you can get in and out with relative ease. I’ve never seen a situation where there wasn’t a bid for gold or where you couldn’t buy the gold if you wanted. But there’s not that much gold that’s actually traded.

So I do recommend for investors 10%. I think it’s the right amount. If you’ve got 2% or 3%, you might think of increasing your allocation. If you got 50%, it’s a little too much for my taste, but to each his own.

There’s a place for cash. There’s a place for gold. I even own some stocks in private companies. I don’t think they’re liquid. If I have to pay the electric bill tomorrow, I’m not counting on my venture capital investments to be able to pay the bills. I’ve got to have cash for that. But it has a place in my portfolio. So I think diversification is key, and bear in mind the possibility of a stock market meltdown — which I think is a real one, by the way. I can see stocks falling a lot, meaning at least 20%, but maybe 30% or 40% in a short period of time. It doesn’t mean one day, although it could happen that way, but even over a couple of weeks.

Here’s the funny thing about stocks falling — let’s say they fall 30% in three weeks, just to pick an example. The market goes down 3% or 4% in one day, that’s a big drop, and people say, “Oh, okay. I’ll buy the dips,” and then they buy more and it goes down 5% the next day. They’re like, “Huh. Maybe I’ll buy more. I’ll sit tight because I know it will bounce back.” And it goes down 4% the next day, and it’s like, “Wow, this is really getting ugly. We’re getting into a bear market.”

The point is you say to yourself, “I never would have sat there and watched it go down 30%.” But that is actually what people do. They do sit there and watch it go down 30%, because they’re in denial about what’s happening. They’re watching these 3%, 4%, 5% drops day after day, and the whole time they’re telling themselves, “Buy the dips. It’ll come back. I just need to sit tight, don’t panic. Everyone on television is saying don’t panic….”

Next thing you know, it is down 30%. They’re like, “Wow, what happened? I just got wiped out.” That’s human nature. It’s very hard to fight human nature. The best traders I ever met worked with people like Bruce Kovner and others. They have ice water in their veins. They are very unemotional. Something goes down — and boom! they get out and get a good night’s sleep. Maybe they come back in the next day, but at least you cut your losses there.

Yes, I do think stocks are very vulnerable. By the way, when I say stocks are vulnerable, they are. They’re very dangerous. Stocks could actually be higher at the end of the year based on the fact that the Fed is going to blink. The Fed is not going to cut interest rates, and the market kind of expects a rate increase, and when they find out they’re not going to get it, that’s the psychological equivalent of a cut, and stocks are very vulnerable in that.

I’m not saying stocks are going to go down 30% tomorrow. I’m just saying they might. I actually think stocks may be higher at the end of the year, but I still don’t like them because I think it is a bubble and I think it’s too dangerous.

Banks, likewise, I think that in a financial panic, you’re very vulnerable to getting locked down, à la Cyprus, à la what will probably happen in Greece, so you don’t want all your money in the banks, either.

Then you say, “Well, okay, if the stock market is too risky and the banks are going to get locked down, other than a little bit for walking around money, what should I do with my portfolio?” It’s a hard question. I understand that, but I do think a 10% allocation in gold is a very good place to put some of your wealth where the wealth will be preserved, it won’t be locked down, it will maintain its value; and if you need to sell it, you can.

Alex:  A quick point of clarification. This is coming from Leo H. He’s asking, “Jim, when you say 10% allocation to gold, is that 10% of your liquid portfolio, meaning stocks, bonds and cash, or 10% of net worth, including, for example, home equity?”

JR:  It’s a really good question, and I’m glad that was asked. That’s 10% of your investable assets, what’s called your liquid portfolio. I always say take your home equity and take your business, if you’re a small businessperson, and set it aside. Maybe you have a restaurant or a dry cleaner or a pizza parlor, or you’re a car dealer, or you’re a doctor or dentist. Whatever that is, however you make your living, if you have some business capital, put that to one side. Put your home equity to one side.

Whatever is left, those are your investable assets. I recommend 10% of that, 10% of your investable assets.

I don’t recommend going out and taking a home equity loan and taking 100% of your home equity and pouring it into gold. I like gold for all the reasons we’ve talked about and some more that we haven’t had time to get to on this call, but gold is volatile. That’s just a fact.  To be precise: It’s volatile in dollars. I actually think of gold is constant, I don’t think of gold as moving around. I think, when people say “gold is up” or “gold is down”, what they mean is that the dollar price of gold is up or the dollar price of gold is down. When I see that happening, I say, “Gold is constant and the dollar is bouncing around.” If the dollar gets strong, the dollar price of gold goes down. If the dollar gets weak, the dollar price of gold goes up.

But to me, it’s not gold is moving around. It’s the dollar that’s moving around. That’s how I understand currencies and the currency wars. I think of gold as a constant store of value and constant store of wealth — but that’s me.

Having said that, if you’re measuring in dollars, if dollars are your numeraire, then gold is volatile, and leverage is volatile. You don’t really want to put volatility on top of volatility. In other words, you don’t want to be a leveraged investor into gold. You want to put money into gold that is your money, your wealth, as an allocation.

Put your home equity and your business equity to one side. Whatever is left, those are your investable assets or your liquid portfolio, and I recommend 10% of that for physical gold.

Alex:  We get a wide range of people who come to these webinars, everything from students to business owners to managers of substantial funds in the institutional money managers. This next question is coming from a business owner. His name is Brad C., and his question is: “As a business owner, I often wonder if I should continue reinvesting in my business versus increasing my hedges against certain financial disaster in the future. My business depends on customers’ ability to spend, and given that the future isn’t looking so good, would Jim recommend that I keep reinvesting free cash flow back into the business or use those funds to build a financial moat, so to speak? Thank you, Brad C. from Washington, D.C.”

JR:  Brad, thanks for the question. I appreciate it. To be completely candid, I’m just not in a position to answer that. I get all kinds of questions all the time, whether it’s a webinar like this, which I thoroughly enjoy doing, or I’m on live TV or live radio or print media or whatever. I’m not shy about answering questions, but I’m also careful to stick to what I know and not try to be the show answer man for every question that comes up. Honestly, on a call like this, it’s impossible to know enough about your business to give advice like that, so I’ll refrain from doing that.

The only thing I would add is I don’t know what business you’re in. Some businesses do well in tough times, but I do see the US economy, as I said earlier in the call, is flat right now. The prognosticators say, “Well, the Fed says we have to have 3.5% growth, so I guess they mean if it’s going to be zero in the first half, somehow it’s going to be 6% in the second half, and that will average out to 3%.” I don’t see that.

Something like that did happen last year. Go back to 2014, first quarter GDP was negative in 2014. Then it found a pulse in the second quarter. The first quarter was negative, the second quarter was positive, the first half was flat. But the second quarter was positive. The third quarter was gangbusters. The economy grew 5% in the third quarter of 2014, and that’s when the Fed got the crazy idea they could somehow afford a strong dollar and let the euro crash, which it did.

I said at the time, that was a bogus number. In that 5% for the third quarter, the Commerce Department failed to make the seasonal adjustment for defense spending. That’s a really big deal because if you know anything about defense spending, and I actually do because I do some consulting for the government in the defense intelligence sector, the government is on a September 30 fiscal year. The government doesn’t use the calendar year. The government is on September 30 fiscal year, which means the year is over September 30.

If you’re a contracting officer in the Department of Defense or some other agency, you don’t get even get your Congressional approval, your authorization to spend money, probably until February, so the whole period from October 1st to the following February is frozen because they haven’t approved the budget.

Then, around February, they get around to approving the budget, so now you’ve only got seven months left in the year. But even then, the contracting officers don’t do anything because they like to keep their options open. If they sign a big $1 billion contract for something, that means if a better idea comes along, then too bad; you already spent the money. They wait until June and July, but then you can’t wait too long because it takes 30 days to sign a contract, so you’ve got to get them all done by August if you’re going to lock it in for the fiscal year.

Believe me, they spend the money. It’s a principle of use it or lose it. Nobody ever gives money back to the Treasury. What that means, as a practical matter, is that the lion’s share of defense contracting gets done in July and August versus the rest of the year, and that’s why the Commerce Department makes the seasonal adjustment to smooth that out. They didn’t do it this year, and that was, I think, to pump the number, because that third quarter GDP number came out right at the end of October, just a couple of days before the election. It has the look of the White House wanting to kind of goose the election in their favor by coming out with a blockbuster GDP.

They did that, but when I saw it at the time, I said, “Well, okay. You can play the game but you’re going to pay for it. If you put too much spending in the third quarter, it’s going to come out of some other quarter, and sure enough, it did. Fourth quarter was dropped significantly.

Now in 2015, first quarter is zero. It looks like it’s going to be revised negative in two weeks, and then second quarter indication is close to zero.

We’ve had to pay the price. I see the US economy is very weak. Again, I don’t want to give individual business advice because I just don’t know enough about it, but if the broader question is, “How is the US economy doing?” the answer is not too well.

Alex:  Here is a really interesting question. It’s kind of appalling to me that we even have to talk about this, because I think everybody already knows the answer, but we do still need to talk about it. This question is coming from Juha M.: “Is it possible that central banks can prevent stock market crashes infinitely by buying up stocks every time there’s a severe correction to the downside?

JR:  The answer is no. They can do it for a while. First of all, the Federal Reserve so far has not bought stocks, at least not publicly traded stocks. They bought some hodgepodge of crummy assets from Bear Stearns when they bailed out Bear Stearns in March of 2008. But other central banks can buy stocks and some of them do. They can buy derivatives, they can buy stock futures. There is some capacity to prop up markets. The Fed has other ways of propping up the stock market without buying stocks. One of them is zero interest rate policy.

I once got a phone call from a retired lady in her early 80s in Florida, and she said, “I have $100,000 in the bank,” that was kind of her life savings, and she had some Social Security and retirement benefits and health care. She wasn’t impoverished, but that money was all she had in the world. She said, “I used to get $2,000 or $3,000 a year interest, even at 2% or 3% on 100 grand, and that paid for my meds. And now I get zero and I’m having to do without my meds. What can I do?” That was her question and it’s a sad state of affairs.

This is what Janet Yellen’s zero interest rate policy gives you. It steals money from savers and hands it to the big banks, hands it to Jamie Dimon and people like that, because if the bank isn’t paying you anything, and you’re not getting any interest in your savings account, who wins? The bank wins because they get to use your money for free, and they get to lend it out to somebody else and make it spread.

The whole zero interest rate policy is taking money out of the pockets of savers and handing it over to the big banks. That’s what has been going on. Now, you say, “Wait a second. That’s really unfair. I got to get some return, what can I do?” Janet Yellen is saying, “Buy stocks.” They actually have a technical name for this. It’s called the channel effect. The channel effect is we, the Fed, want you to channel your money into stocks. Over here, oh, you want to put money in the bank? We’ll pay you zero, and the portfolio channel effect idea is that if you want a return, you’ll go buy stocks.

By having zero interest rate policy and paying savers nothing, the Fed is, in effect, forcing you to go into the stock market to buy stocks if you want a return. Janet Yellen’s answer to this 82-year-old lady in Florida would be, “Buy stocks.” Of course, my answer is, “Don’t even think about it. You’re 82 years old. That money is all you have. If the stock market goes down 30% in a short period of time, you’re going to be wiped out, so you have no business being in the stock market.” Maybe if you’re younger and a portion of your portfolio, you have a long-term view, that’s different if you want to take that risk, but not for someone in that position.

That’s how the Fed props up stocks, basically through this portfolio channel effect and the zero interest rate. But the question was, “Can they do it indefinitely?” The answer is absolutely not. Something will break. I don’t know exactly when, I don’t know exactly where. I could identify a range of possible dates and a range of possible triggering events or catalysts. I’m not saying we have no idea. I’m saying we actually have probably quite a few ideas, but it’s hard to know which one.

My estimate is sooner than later, meaning could it be 2017-2018? Yes. Could it be tomorrow? Yes. Is it something that will erupt in emerging markets or China or the oil patch, fracking junk bonds, geopolitical risk? Yes. It could be all of the above, but it doesn’t matter. What matters is you can see it coming and you can do prudent things in advance to preserve your wealth.

There will come a time when the magnitude of the catastrophe will be greater than the capacity of central banks to bail it out. That will be an interesting time. Just go back over recent times. In 1998, Wall Street got together and bailed out a hedge fund called Long-Term Capital Management. I happen to know a lot about that because I was at Long-Term Capital Management and I actually negotiated that bailout. Global markets were hours away from shutting down. That’s not an exaggeration. That’s actually something that Alan Greenspan and Bob Ruben testified to, and I was there and I can verify that it’s a true statement.

Global markets were hours away from shutting down, and Wall Street bailed out a hedge fund. In 2008, ten years later, central banks bailed out Wall Street, and again, markets were, if not hours, then just days away from shutting down.

In 1998, Wall Street bailed out a hedge fund. In 2008, the central banks bailed out Wall Street. Go ahead ten years to 2018, who’s going to bail out the central banks? What’s bigger than the central banks? There’s only one thing in the world bigger than the central banks. That’s the IMF. That’s where world money and the special drawing rights come in.

There comes a time when it’s not kicking the can down the road: It’s kicking the can upstairs to a higher authority, but there is no higher monetary authority than the IMF. When that bail out comes with SDRs, that will be highly inflationary. But at that point, people might lose confidence in all forms of paper currency, and then that’s when gold will be the only safe haven.

Alex:  That pretty much does it for our time available today. Jim, thank you very much. As always, thank you for your insights. With that, I will be handing it back over to Jon.

JW:  Thank you, Alex. And let me remind our listeners. You can follow Alex Stanczyk on Twitter. Just go to Twitter, type in Alex Stanczyk. Great insights and valuable links to follow there from Alex. And thank you, Jim Rickards. It’s always a pleasure and an education having you with us. Most of all, thank you to our listeners to spending time with us today. Of course, you can also follow Jim on Twitter. His handle is @jamesgrickards. Goodbye for now, and we look forward to joining you again soon.

The Gold Chronicles with Jim Rickards is presented by Physical Gold Fund. Recordings can be found at You can register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.


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The Gold Chronicles: May 18 , 2015 Interview with Jim Rickards


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This Podcast is not an offer to sell, nor a solicitation of an offer to purchase, any security. This Podcast is intended for general education and information purposes only, and may include broad discussions of markets, geopolitics, monetary policy, and geoeconomics. Nothing in this Podcast constitutes investment, legal or tax advice, nor an evaluation of or prospectus for any particular investment or market, including gold. This Podcast should not be relied upon to make any investment decision. You are encouraged to seek the advice of qualified financial, legal and tax advisors before making any investment decisions.

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Transcript of Jim Rickards – The Gold Chronicles April 9th, 2015

April 9th, 2015 Gold Chronicles topics:

*Middle East overview and impact on markets
*Gulf of Aden strategic picture
*US – Iran Nuclear talks framework
*Why Isreal lacks strategic depth
*Price of oil is being determined by Saudi Arabia
*Expecting low oil prices through 2016
*Global above ground oil stocks hitting record levels
*Oil prices are a reflection of Saudi long term strategy to control oil market share
*Structure and influence of the new China led Asia Infrastructure Investment Bank (AIIB) 亚投行
*Argument for AIIB to keep books in SDR’s
*SDR’s have already been in use since 1969
*America’s Summit and shifting US foreign policy in relation to Latin America
*Very little allocation to gold in institutional portfolios
*The world as a whole has insufficient growth, currency wars alive and well
*Optimal portfolio allocations cash or gold during Deflation
*Inflation can happen almost overnight

Listen to the original audio of the podcast here

The Gold Chronicles: April 9 , 2015 Interview with Jim Rickards


The Gold Chronicles: 4-9-2015

Jon Ward: Hello, I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in this series we’re calling The Gold Chronicles. Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s a former general counselor of Long-term Capital Management and is a consultant to the U.S. intelligence community and the Department of Defense. He’s also an advisory board member of the Physical Gold Fund. Hello, Jim, and welcome.


Jim Rickards: Hi, Jon, great to be with you.


JW: We also have with us Alex Stanczyk of the Physical Gold Fund. Hello, Alex.


Alex Stanczyk: Hi, Jon, great to be here.


JW: Alex will be looking out for questions that come from you, our listeners. Let me just say that your questions for Jim Rickards today are more than welcome and you may post them at any point during the interview. As time allows, we’ll do our best to respond to you.


Jim, in the past we focused quite a lot of attention in our conversations on Russia and the Ukraine conflict because it’s an issue with obviously huge economic and financial ramifications. But of course, you could say the same of the Middle East, which today remains in a state of constant turmoil. Since we last spoke we’ve had the approaching nuclear deal with Iran, a near meltdown in U.S.-Israel relations, Saudi military intervention in the Yemen, and ISIS setting up shop within a few miles of Damascus. My question to you at this point is a broad one. How does the crisis in the Middle East impact the global financial and economic picture?


JR: It’s a great question, Jon, and a great way to frame the issue. It would be nice if these various crises were sequential so that we could have a crisis in Ukraine and resolve it, and then have a crisis in Middle East etc. But they’re not sequential; they’re cumulative. We keep piling one on top of the other. To address your question, let’s talk about the Middle East but bear in mind that nothing in Ukraine has really gone away. It’s in a quiet period right now. There is a ceasefire, but there have been multiple ceasefires before that have broken down so it wouldn’t surprise anyone to see Ukraine spin out of control again. In fact, it probably will, but it’s a little quieter now so let’s go over to the current hotspot which is the Middle East.


I want to talk about the geopolitics first and then bring it around to markets, because I know our purpose here is to interpret geopolitical events in terms of the impact they have on markets and investor portfolios. That’s impossible to do without setting the right geopolitical frames, so let’s begin with the geopolitics. Yemen is certainly the crisis du jour. I think listeners know what’s going on there. There was never a lot of stability there to begin with, but the government that had operated out of Yemen was more Western-backed, Western-friendly and had been a base for a lot of counter-terrorist operations for years, certainly putting Al Qaeda on the run and performing joint missile operations and other aspects of the war on terror (even though the White House doesn’t call it the war on terror.)


There is a tribe who has been around for a long time, the Houthis. Backed by Iranians and Shiite co-religionists, they recently led an uprising and effectively deposed the government. They refer to the president of Yemen as “the Western-recognized president.” Whenever you hear the phrase ‘Western-recognized,’ it’s a pretty good sign that the guy is no longer recognized and is probably on the run somewhere. So our favorite has left the building as they used to say about Elvis. Although we have an Iranian-backed government that by the way wants to take control, in the Middle East nothing is ever easy or simple. There’s a third faction which is Al Qaeda. You have an Al Qaeda group in the eastern part of Yemen, the Iranian-backed Shi’a group taking over most of the western and northern part of Yemen, and then you have little pockets of Western resistance now led by an Arab coalition of Saudi Arabia and Egypt trying to hang on to some strategic locations in Aden and the western tip of Yemen. It’s very much of a mess and it remains to be seen how this is going to play out.


Let’s just signal the importance of it. Yemen is probably the poorest country in a poor region. Why do we care and why is this so important? I think listeners are familiar with the Straits of Hormuz. This is the fairly narrow chokepoint where oil leaving the Persian Gulf heading for Western or Asian markets has to pass through this stretch. Iran controls one side of it and the other tip of it is Oman. Iran certainly has the ability to at least try to interdict that traffic. Remember that the oil coming out of the Gulf is not just from Saudi Arabia but form Saudi Arabia, Qatar, Bahrain, UAE, Kuwait, Iraq and Iran. Almost all of that oil, except for some that travels overland through Turkey, comes out through the Straits of Hormuz. So you could really choke off the world’s oxygen supply, if you will, if you interdicted that. The United States Fifth Fleet is based in Bahrain fairly nearby and could probably reopen it if Iran did try to choke that off although it would be quite tumultuous in the meantime.


But there’s another chokepoint. Once you come out of the Straits of Hormuz and get into the Arabian Sea, where do you go from there? Some of the traffic goes east to China. There are other chokepoints over there, but a lot of it heads west through the entrance to the Red Sea, the Suez Canal, to the Mediterranean and to Europe. There’s another chokepoint at the mouth of the Red Sea, and that’s where Yemen is. Now we have the prospect of Iran not only controlling half of one chokepoint, the Straits of Hormuz, but if Yemen falls to pro-Iranian factions, Iran would effectively control the other chokepoint at the entrance to the Red Sea. Now if they want to cut off the Western world’s oil supply and they also controlled Yemen at the entrance to the Red Sea, they could interdict it at two places. That means the Fifth Fleet would have to divide its forces and fight two battles in two different places. Anyone with any military background knows it’s always more difficult to fight two actions than one because of the inability to concentrate forces.


The U.S. Sixth Fleet could just come down from the Med through the Suez Gulf and help out there. That’s a nice thought, but we don’t have a Sixth Fleet. We have a Sixth Fleet in name only which is based in the Mediterranean and consists of one flagship and whoever is in the neighborhood. If any aircraft carriers or traffic happens to be traversing in the Med, they’re temporarily assigned to the Sixth Fleet, but there’s not much besides that. The Sixth Fleet is the fleet of the phantom. The Fifth Fleet is real, but if they had to divide their forces, they’d have their hands full. So that’s the strategic play; Iran is basically trying to prove its ability to choke off the oil supply.


I want to step back from the situation in Yemen and not spend too much time on what I call the crisis du jour but instead help our listeners look at the bigger picture. At the same time this is going on, Iran is building what’s called the Shiite Crescent starting in Iran, traversing now Iraq — Iraq used to be more Sunni and/or secular Ba’athist but today it’s pretty much fallen to Iran and the Shia — on into Syria, which is propped up by Iran, then through Hezbollah, to Lebanon, and to the Mediterranean. Hezbollah is basically an Iranian proxy army, so you have this prospect of Shia influence stretching from the Arabian Sea to the Mediterranean via Iran, Iraq, Syria and Lebanon and, by the way, completely encircling Israel. All that remains to be done is to peel off Jordan. Of course, there are plenty of Shia co-religionists of Iran agents in place in eastern Saudi Arabia and Bahrain.


Israel is feeling encircled, and Saudi Arabia is feeling encircled with what’s going on in Yemen because Yemen is on the southern flank of Saudi Arabia. They’re already confronting Iran across the Persian Gulf and, as I mentioned, there are plenty of Iranian agents in eastern Saudi Arabia where the oil is, and in Bahrain. (I’ve been to Bahrain and will be heading back there soon.)


So Iran is encircling Saudi Arabia and Israel and making huge strategic gains. What’s the United States doing? The United States is making friends with Iran. We are their new BFFs, best friends forever. The President started the process of détente with Iran in December 2013 when he relieved some, not all, of the economic sanctions on Iran. Since then we’ve been in these negotiations over the nuclear dossier, basically Iran’s enrichment capability.


There was some kind of breakthrough announced about a week ago. I wouldn’t even call it an agreement to agree. It’s sort of a memorandum of a framework of an agreement to agree. Whatever that is, that’s what the President announced. The Iranians were already disputing the White House version of it, so take your pick. Not much of this is in writing. It remains to be seen and all hinges on the ability to conduct inspections. We’re letting Iran keep the centrifuges and the enriched uranium, relying on their promise to not enrich or create enough uranium to build very many nuclear weapons. Since they’re not giving up their material or the equipment, it depends on inspections. Inspections are carried out under United Nations supervision which is subject to Security Council sanctions. Russia has a veto on the Security Council, so we’re kind of depending on our good friend Putin to make sure Iran plays straight. I don’t know how comfortable people feel with that.


A good friend of mine, Charlie Duelfer, wrote a column on this in Politico recently and pointed it out. No one knows more about weapons of mass destruction and inspections than Charlie Charlie Duelfer. He was the U.S. representative on UNSCOM in the 1990s the last time we tried this routine with sanctions on Iraq which broke down pretty quickly. Charlie was one of the few people who actually interrogated Saddam Hussain. After they dug him out of a spider hole in Iraq, Saddam Hussain was held in captivity before he was executed. Charlie got to interrogate Saddam face to face across the table and knows more about this than anyone. He’s very, very skeptical of our ability to enforce these sanctions on Iran, so it’s no wonder Israel feels uncomfortable.


The President gave an interview with Tom Friedman of The New York Times recently in which he outlined the Obama doctrine which is pretty fuzzy. You really have to parse words with the President. President Obama said, “I promise that Iran will not get a nuclear weapon on my watch.” That phrase, ‘on my watch,’ set off alarm bells around the world because his watch ends January 21, 2017. While it’s nice to know that Iran won’t get a nuclear weapon before then, there’s the rest of history beyond that.


It has been the strategy all along to basically make sure that Obama’s legacy or administration goes down without Iran getting a nuclear weapon, but he’s selling out the future of the United States and the future of Israel. He’s sort of dumping it in the lap of his successor, whether it’s Hillary Clinton or Jeb Bush or Rand Paul or Elizabeth Warren. I don’t know who the next president is going to be, but whoever it is, they’re going to get this dumped into his or her lap courtesy of Obama’s unwillingness to really wrestle with the future of this. When he said, ‘my watch,’ I didn’t take a lot of comfort from that. He also said, “If anyone messes with Israel, the U.S. will be there for them.” Again, these are his exact words. You can read Tom Friedman’s column in The New York Times. This is not me putting words in the President’s mouth; these are the President’s words. He said, “If anyone messes with Israel, America will be there for them.” Well, what the heck does that mean? The thing is, in ‘messing with Israel,’ if you dropped one nuclear device in Tel Aviv, it’s over. You’ve killed a million Jews just like that. A million Jews could be incinerated. It’s a second Holocaust.


Israel lacks what we call strategic depth. Strategic depth is why no one has ever really conquered Russia. Charles XII, the Swedish conqueror, attacked in the 17th century, Napoleon attacked in the 19th century, and Adolf Hitler attacked in the 20th century. All three of them failed to subdue Russia, because they could drive 1,000 or 1,500 miles into Russian territory but then the winter came and the Russians just retreated and waited them out. Supply lines got stretched, equipment froze, men got illnesses, the army was decimated, and the Russians pushed back. So Russia can absorb tens of millions of casualties and remain standing because they have strategic depth. Israel does not have strategic depth. Going back to the original United Nations borders established in 1947-48, at the narrow stretch it’s only 16 miles from Palestinian territory to the Mediterranean Sea. I’ve driven around Israel from top to bottom. You can do it in a day or day and a half. It’s not much bigger than New Jersey. The point is if Israel ever suffers a major attack, they have no fall back. There’s no plan B, there’s no day two. They’re done. When the President says, if you mess with them, we’re there for you, that’s a meaningless promise, because Israel can’t withstand a first strike. They’ve got to make sure the first strike never happens.


What can we say? Iran is encircling Saudi Arabia who, I guess, used to be our friend. They’re encircling Israel who, I guess, used to be our friend. The President is engaged in happy talk about trusting people you can’t trust, relying on Putin to do the enforcement at a time when he’s calling Putin all kinds of nasty things with regard to Ukraine, and he’s saying nothing bad is going to happen on my watch which is over in about 20 months. So there you are; a pretty unstable situation. Here’s the way the President reframes this:  he says, well, if you don’t like my policy, you’re a warmonger. Do you want to be responsible for boots on the ground and casualties? In analysis, that’s what we call false dichotomy or straw man. He sets up his opponents to be these warmongers who want to drop the 82nd Airborne into Aleppo or drop the 101st Airborne into Aden and incur a lot of casualties. That’s a false choice. There’s a lot of daylight between what I’ll call appeasement on one hand and war on the other.


There’s no better example of that than the Cold War. Through the entire length of the Cold War, about 40 years from roughly 1949 to 1989, or 1947 to 1991, however you want to date it, 45 years let’s say, Russia and the United States never fired a shot at each other. There was no war between Russia and the United States, but there was a Cold War. We used an array of policies, containment, proxies, sanctions, intelligence, and a lot of assets, but we never went to war. There’s something in-between appeasement on the one hand and war on the other. It’s smart policy and strategy. People like George Kennan and the Long Telegram and the X Article in foreign affairs, it’s things like that. That’s what’s missing from this White House. It’s either my way or the highway, so a very, very unstable, uncertain state of affairs.


Now let’s take all that, which is bad enough, and bring it over to markets. There are two big plays going on, the first involving the price of oil. It may surprise some people, but what’s going on with the price of oil actually has relatively little to do with everything we just went through regarding all this geopolitical uncertainty, at least for the time being. That’s a different play having to do with pricing, fracking, market share, and Saudi Arabia’s efforts to put frackers out of business. I’ve said this before – and I think the listeners may be familiar with this analysis – but Saudi Arabia needed to pick a price that was low enough to put the frackers out of business but high enough to sustain their revenues and budget requirements, or at least not any lower than it needed to be to put the frackers out of business. It’s an optimization problem. That number is $60 a barrel; low enough to kill the frackers and high enough to keep Saudi Arabia’s budget in a slight surplus.


That doesn’t mean that the price of oil is exactly $60. Markets overshoot, they trade in a range, there’s day-to-day volatility, and there are a lot of other things going on. I look for oil to trade in the $50 to $60 range with $60 being the cap and $50 being not a hard floor but a place that the price would gravitate to for the rest of this year and most of next year, because it’s going to take that long to put the frackers out of business. Does Iran get hurt by that? Yes, a little. Does Russia get hurt by that? Sure. Saudi Arabia doesn’t mind either one of those two things, but that’s not primarily why they’re doing it. They’re primarily doing it to maintain market share.


It’s important to understand the unique role of Saudi Arabia. People always talk about OPEC, but OPEC is not that important. Saudi Arabia is vitally important because they have a unique combination. They have the largest reserves, the largest potential output, and the lowest cost of production. That’s a unique combination. Other people have a lot of oil at very high prices. Other people have oil at low prices but not that much in reserves so they have to worry about depletion. Other oil producers have one of the three or maybe two of the three factors to worry about. Saudi Arabia doesn’t. They’ve got all the reserves, all the capacity, and a very low production cost all at the same time.


They can set the price of oil wherever they want. If Saudi Arabia wants oil to be $15 a barrel, they can do it. They just have to pump like crazy and fill up storage capacity, completely fill it up with floods of oil coming on the market. If Saudi Arabia wants to add to that, they can drive the price down. On the other hand, if Saudi Arabia wants to shut off the taps, they can take the price to $150 dollars a barrel tomorrow. In a huge range from let’s say $10 or $15 to $150 or $200, Saudi Arabia can set the price, so the price is whatever they want it to be. Right now they want it to be in this $50 to $60 range but not forever. They like $100 oil as much as the next producer, but they have to sink the frackers.


The difficulty is that the frackers don’t fold up their tents overnight. Fracking has a couple of interesting properties. One is the wells have a much higher degree of finding oil. The old wild cat days when you drilled a bunch of wells, most of them came out dry, every now and then you hit a gusher, and that’s how you made all your money — those days are over. At least with fracking technology, you have a very high probability of finding oil, but the depletion rate is much faster. Those wells tend to get depleted or dried up faster. The solution is to keep drilling new wells. That’s kind of how you can understand the dynamic of the fracking industry. In order to drill new wells, you need money to buy pipes, rigs, labor, leases, and do all kinds of things. This causes a unique situation where most fracking is not profitable at $50 to $60 a barrel. It needs prices of $80 and upwards of $130 a barrel. I’m sure somebody can point to some fields somewhere where the price is lower, but most of it is in that $80 to $130 range I just described. Nobody’s going to go out and drill for oil when the cost is $80 a barrel if the price is $50 a barrel. That’s crazy, so they’re not going to do new wells.


If you have existing wells, the math is different because you’ve got some costs. You might not have done it in hindsight, but you did it. You got that well — and all this debt you incurred on the assumption of high oil prices. So you’re going to pump like crazy in the existing wells to generate cash flow to pay your bills, but you’re not going to do new wells until the price goes up, which it won’t because Saudi Arabia is going to hold it down. In that world, you get a short-term flood of oil as you pump the wells like crazy, but you get a long-term drying up of the industry because those wells will deplete quickly and no one’s building new ones. That’s going to take a year-and-a-half to two years to play out, but eventually the fracking will dry up and then Saudi Arabia will start to raise the price again.


People say, oh, how does that work? If they raise the price, don’t the frackers just go back in business? The answer might be ‘no’ for two reasons. One, they’re going to have to borrow the money again and there might be a lot of bad debts in the meantime. There might be trillions of dollars of write-offs the fracking industry jumped at as a result of the new low price of oil, so maybe the lenders aren’t willing to make new loans. Or there are the junk bond buyers, some of whom are unbeknownst to themselves. If you look in your 401(k)s, you might find some of this fracking junk bond in your so-called high-yield funds. In other words, don’t be surprised if you own some yourself. Once those losses come in, people might not be so eager to make new loans. Secondly beyond that, even if you could find credit-worthy projects, do you really want to go there? Saudi Arabia could just wash, rinse, repeat, and lower the price again. This is Saudi Arabia’s long-term play to put the frackers out of business and then ultimately raise the price, regain market share, and regain revenue.


This is all going on independent of the chaos in the Middle East that we just described. One doesn’t help the other. Now, just to connect the dots a little bit, some people have said if the U.S. has détente with Iran, doesn’t that put a lot of Iranian oil back on stream and doesn’t that drive the price lower, maybe down to the $20 range, etc.? The answer to that is some Iranian oil might come back on stream, I think that’s correct, but it doesn’t happen overnight. A lot of these fields really need substantial upgrades. Look for a lot of Chinese capital coming in to do that. Yes, there might be some more Iranian supply and Iran is notorious for cheating as is the rest of OPEC, but Saudi Arabia can just dial it down again. Maybe the frackers are coming off stream as Iran’s coming on stream and Saudi Arabia’s just standing pat waiting for all this to play out.


That’s how that works. Again, I look for oil to trade in that range. Just to tie it back to U.S. monetary policy, this has very important applications for the Fed. The Fed discounts food and energy, inflation or deflation, and they look at core CPI and core PCE for their guidance on price stability, which is part of their dual mandate. A lot of people laugh at that and say it’s ridiculous. What’s more important than food and energy? Why would you factor it out? Well, there’s actually a good academic reason for doing it because the time series and pricing shows that those things are volatile. They do tend to be mean-reverting and come back to where the core is, so in the long run they’re the same or close to the same thereby making some sense to ignore them in the short run because you’re just filtering out the noise. In other words, core CPI is a good prophecy for overall CPI over a longer time period.


It might be different this time, however, because if the price of oil is going down not for normal industrial supply and demand reasons but because of a large market share play by Saudi Arabia, that means it goes down and doesn’t come back up. This means it’s not mean-reverting but is actually being manipulated by the Saudis. That might be sending out false signals to the Fed causing them to think that inflation’s going to tick up to their goal when in fact they’ve got to first absorb the deflation. Secondly, they may not see the bounce-back or mean-reverting behavior, which, as usual with the Fed models, they’re going to get it wrong and possibly overestimate the tendency towards future inflation, by changing inflationary expectations. That’s extremely dangerous, because that might actually prompt them to raise rates at exactly the wrong time. The Fed has a long history of doing the wrong thing at the wrong time, so that makes it dangerous. I know we have a couple more questions, but we’ve got a big picture, long-term geopolitical mess with instability. By the way, if oil does bounce out of that $50 to $60 range I spoke about, it would be because of a geopolitical wildcard or something going very badly wrong. Given the mess I described, we can’t rule it out.


One last footnote:  I talked about the Shiite Crescent, the Persian Gulf, the Red Sea, and Yemen, but don’t forget Libya. Libya is in chaos. There’s active ISIS and active Al Qaeda. ISIS is getting pledges from as far away as Nigeria at this point, so they’re actually getting stronger. Even as they suffer tactical defeats in places like Tikrit, they’re making strategic gains around the world, so they’re not going away. You could see that wildcard as a possibility, but oil will stay in a range. I think the Fed is overestimating the mean-reverting behavior of oil prices. They’ll probably get interest rate policy wrong, and that could be very damaging for markets around the world. I’ll stop there and throw it back to you, Jon.


JW: Thank you, Jim. That’s really a huge, complex, and very informative picture. Obviously these are big areas of discussion that we’ll no doubt return to. Let me pick out a single, tiny thread from the Middle East story, one that leads to China. Some rather unlikely bedfellows have rushed to join a new Chinese institution, the Asian Infrastructure Investment Bank. They include Saudi Arabia, United Arab Emirates, and most recently Israel. Of course, the bulk of the founding member countries are Asian, but among some other 40 or 50 nations participating, we’re seeing Britain, France, Germany, and Norway. I guess it would be nice to think all these countries suddenly care about Asia’s need for roads and railways, but perhaps there’s something else going on here.


JR: As usual, this is something that can be thought about or analyzed at multiple levels, so why don’t we jump in and do exactly that? The Asian Infrastructure Investment Bank or AIIB is a real institution that’s new and just in its foundational stages. China formed it and offered subscriptions. As a country, you could sign up, put in your share of the capital, become a founding member of the bank, and get a seat on the board. It’s really not different than starting a company or sending out an offering document in the fund. You sign up, send in your money, and you own a piece of it. This is a stick in the eye for two of the key Bretton Woods institutions, the World Bank created in 1944 and the Asian Development Bank created in 1966.


As a reminder, the Bretton Woods architecture had three institutions:  1) The International Monetary Fund (IMF), which we think of as a world central bank; 2) The World Bank, which is not a world bank but really a development bank for poor countries and infrastructure projects; and 3) The General Agreement on Tariffs and Trade — now the World Trade Organization — designed to encourage free trade. So you had a central bank, a development lender, and a free-trade organization as the basic architecture of Bretton Woods, completely dominated by the United States with participation from Western Europe and Japan. When this was set up, Russia and China were communist and not in the game. Over time, that all changed. Russia and China both joined the IMF, and China recently joined the World Trade Organization.


They were joining the club and playing along with the great game, the big international global monetary system game, but a couple of things happened. China grew so fast that it was probably deservedly entitled to a larger voice at the IMF. ‘Voice’ is their jargon for votes at the IMF. It was clear that some of the old members, Belgium and others, had too many votes relative to the size of their economy and China didn’t have enough. There was some reformat underway to give China more votes, but the U.S. stood in the way of that because the U.S. had its own agenda. We wanted China to restructure their economy away from exports and investment towards consumption. We wanted to sell them some stuff, we wanted them to stop fighting the currency wars, stop cheapening the yuan, and we wanted them to anchor their currency on the dollar. The U.S. had stuff that we wanted from China, and China had stuff they wanted from us, namely more votes in the IMF. It was sort of a stare fest, the two sides staring each other down and mobilizing weapons. It’s like everyone playing a poker game and piling up chips. One of China’s chips is certainly the BRICS Development Bank and their coziness with the BRICS, but also more importantly, I think, this Asian Infrastructure Investment Bank.


China is saying you let us in your club; we’re already in the club, so give us more votes or more power at the club. Put us on the membership committee or however you want to describe it. If not, we’ll set up our own club and go our own way. That’s what’s going on here. As far as the eagerness of Western Europe and a lot of others as well as Asia to join this bank, it was over U.S. objections.  The U.S. did not join but voiced objections and were visibly disappointed when the U.K. signed up, our good old friends in the U.K. Why did they all join anyway? Why did they all sign up despite U.S. objections? The answer is they want the deals. If China is going to start doing multibillion-dollar, multiyear infrastructure projects in Central and South Asia, what are they? They’re railroads, bridges, highways, airports, telecommunications hubs, and oil and natural gas pipelines. These are big-ticket items, and don’t think that the Germans, the French, and the U.K. don’t want to be first in line for all those contracts.


China is behind the scenes saying, if you want those contracts and want us to lend money to your projects so you can get these contracts, then you have to sign up, put some capital in, and improve our credit worthiness. That’s what’s going on. Meanwhile, the wallflower left without anyone to dance with at the seventh-grade dance is Japan, because Japan is the head of the Asian Development Bank, which was designed to do exactly what the AIIB is going to do except that it’s part of the Bretton Woods infrastructure that China is turning its back on at least in the short run. We’ll see how this plays out.


Christine Lagarde was in Beijing a couple weeks ago, and we have the IMF spring meeting next week. There could be a lot of significant announcements there probably relating to the commencement of a process to include the Chinese yuan in the special drawing rights (SDRs). They haven’t announced it yet, but it will be very interesting to see how the AIIB keeps its books. It’s a bank, so they’re going to have books, assets and liabilities, loans, and profit and loss statements just like any bank. They have to pick a currency, but it wouldn’t really make sense to do dollars if they’re trying to break away from U.S. dollar hegemony and U.S. dominance of Bretton Woods. Why would they do it in dollars? It’s probably not going to be in yuan because that makes it China-centric. Even though China’s the dominant voice, they’re trying to make this multilateral. It could be euros, but why would they have euros for an Asian bank?


I don’t know, but it seems likely they’ll keep their books in special drawing rights or SDRs. The IMF already does that, so have a look at IMF financial statements that are available online. They’re all in SDRs. When the IMF makes a loan such as they did to Ukraine recently, those were in SDRs. I talk about SDRs a lot and people laugh at me. They’re like, oh, what are you talking about? It’s just another fiat currency that will never work. My answer is it’s been working since 1969 so there’s nothing new. SDRs work fine; it’s just that no one really understands them. It will be interesting to see if they do keep their books in SDRs which they may very well. A possible scenario is that the AIIB keeps the books in SDRs and the IMF includes the yuan in the SDR, which they may do starting as early as next week (it won’t be official until January 1, 2016, but that process may start next week). It would get formally voted at the IMF annual meeting in Washington in early October (I think the annual meeting might be in Peru). This SDR train has left the station a long time ago.


It’s a very important development. The U.S. is out in the cold, but what remains to be seen is whether the U.S. will nevertheless make peace with China by inviting them to have a bigger voice at the IMF and maybe at some point the AIIB gets merged with the Asian Development Bank to create one happy family with China having a few more votes. I think that really is the bigger play here. China doesn’t want to start their own club because they want to be in the big boys club, so to speak. It’s just a question of having forcing strategies to get there.


Going back to the first topic about Iran, part of this U.S.-Iranian détente is the lifting of sanctions. A lot people are looking at that and saying, wow, that’s a big opportunity. A lot of infrastructure and imports are needed in Iran if you take away sanctions. That’s certainly true, and I don’t doubt that American businesspeople will be on the first plane to Tehran once the president eases up some more of the sanctions. But what the Americans are going to discover is the Germans are already there. They never left. When you relieve sanctions on Iran, the big winner is not going to be the United States; it’s going to be Germany. German large caps like Siemens, Volkswagen, Daimler-Benz, and others are going to be the big winners on Iranian infrastructure projects.  Of course, this all converges if Germany’s in the AIIB, the AIIB decides to finance projects in Iran, and Iran gives the contracts to Germany. Everybody wins except the United States. So watch that space, but it is a very interesting, fast-moving world.


JW: Thank you, Jim. We’ve covered a huge amount of ground with just two questions. We also have questions from our listeners, so I’m going to turn this over to Alex Stanczyk now to give us those questions from the listeners.


AS: Thank you very much, Jon. I also want to quickly say thank you to all of our listeners who have been sending in questions. There are a huge number of questions in the queue, and we’re not going to be able to answer them all, but we will pick out a couple and go over them. First, I want to provide a little bit of background information for this next question. The Summit of the Americas is being hosted here in Panama over the next couple of days with over 30 presidents from the Americas arriving for the summit. What’s different about this is that we’ll have President Castro from Cuba, Maduro from Venezuela, and Obama all in the same room at the same time. As far as we know, this is the first time this has happened in the last 50 years. The streets are pretty much all shut down, there is a U.S. warship in the bay of Panama, there are U.S. military vehicles on the street corners, there are military attack helicopters flying overhead, and Air Force One is expected to fly in sometime today. The question coming from Philip asks: Do you feel that this Americas Summit has any bearing on Russia-Venezuela or the Russia-Cuba relations? And does this, in any way, signal a shift of U.S. foreign policy in regards to the Americas?


JR: I think it does. On my last visit to Panama, I was able to enjoy some fine club activity in Casco Viejo also called Casco Antiguo or the San Felipe district; the old city, the old part, where I enjoyed some nice contraband Cuban cigars. I’m glad I’m not there now because it’s probably difficult to move around even though it is a beautiful city. This is a very big deal. Go back to the U.S. midterm elections in 2014. The Republicans already had the House of Representatives. They increased their seats in the House of Representatives and took control of the Senate. A lot of analysts and Republicans, in particular, looked to this and said, a-ha, this is a turning point. Finally, Obama is painted into a corner, if you will. This is going to trim his sales a little bit in terms of his abilities and degrees of freedom to act.


In fact, what happened is quite the opposite. Obama is unleashed, if you will. He’s now saying he can do whatever he wants. It seems paradoxical but not really, because as long as the Democrats controlled the Senate, he had to work with the Senate Democrats and Harry Reid. He couldn’t just ignore his own party’s majority in the Senate, so it was a three-way conversation among House Republicans, Senate Democrats, and a Democratic White House. Once the Republicans took the Senate, the president doesn’t have to talk to them at all. He doesn’t, so he’s just doing whatever he wants.


The president is feeling very strong, whether it’s détente with Iran, poking a stick in Netanyahu’s eye or relaxing sanctions for Cuba. That actually seems to be moving on a faster track. These things don’t happen overnight, but that’s going very quickly, and now with Maduro in Venezuela, what better opportunity than the Summit of the Americas that you just described. Traditionally and legally the president does have more degrees of freedom in foreign policy, so I think we’re looking at normalization of relations with Cuba and warming of relations with Venezuela. This is a bigger picture thing, and I think you put your finger on it, Alex, with the question in terms of peeling away Russia’s influence in the Western hemisphere. But Russia’s not really the problem in the Western hemisphere. That was true in the ’60s and ’70s from Bolivia to the Bay of Pigs, but Russia’s focus now is on the Russian periphery, reestablishing the Old Russian Empire, Eastern Europe, and Central Asia. Russia doesn’t care that much about the Western hemisphere. Maybe they care but they don’t have the capacity to do very much and it’s not Putin’s interest at all. Peeling Venezuela away from Russia is probably a win for the United States but it doesn’t mean very much to Russia. The real player is China. China is, obviously, actively studying a new alternative.


First of all, China has a lot of influence in Panama and the Canal Zone. China is actively looking at building a new canal possibly in Nicaragua. That’s a multiyear, multi-10-billion-dollar project that’s been talked about for over a hundred years going back to before the Panama Canal was built. Let’s see how it plays out, but that’s something China’s interested in. China is interested in buying Venezuelan oil and swapping it for other oil that arrives in China and sending the Venezuelan oil to the Virgin Islands or the Gulf Coast. Venezuelan oil is very undesirable. It’s heavy and sulfurous so it’s kind of at the bottom of everyone’s list. But it is oil with a margin, and Venezuela certainly needs the money. This is probably just unfinished business from the Cold War. Why shouldn’t the U.S. have closer relations with Cuba and Venezuela? But Russia’s not really the issue any longer. It’s China. I think you can win the battle and lose the war. So we’ve got close relations with Cuba and Venezuela — fine, but we’ve lost Latin America.


Before I went to law school, I was actually an international economics and Latin American studies grad student at the School of International Studies in Washington. My thesis adviser was Riordan Roett. I studied with Riordan 40 years ago, but to this day he’s a legend in Latin American studies circles and very active as the leading scholar of Latin America as well as the number one U.S. expert on Brazil. He considers Latin America a Chinese sphere of influence. Go to Santiago, Lima, Ecuador, Brazil or Argentina and look at the swap lines, look at the trade lines. China has really taken over Latin America without firing a shot, so there’s not much left of the Monroe Doctrine. Chalk up a win of Venezuela but maybe more importantly we should chalk up a loss for the U.S. sphere of influence in Latin America because there’s now a Chinese sphere of influence.


AS: The next question we have is coming from Francis F. by e-mail. He says, “Jim has said the entire world’s got the same problem when it comes to debt, deflation, and inflation. I live in Ireland. Apart from low inflation, the country, according to the national media, is supposedly on an accelerating recovery, which to me sounds like every other country around the planet. In your view, are these false promises and hopeful thinking or real economic expansion?” Francis adds a P.S., “I was recently 33 percent in precious metals but cut back to 26 percent and regret it,” because now he’s in euros.


JR: There’s not much I can say for the latter. As you know, I pretty consistently recommend 10 percent gold for the conservative investor and 20 percent for the aggressive investor. I have consulting clients who have 50 percent in gold and I say, fine, you didn’t get that from me. I think 50 percent is way too much, and 33 percent is way too much. The point is, institutional allocations around the world are at about one and a half percent. Even if you took my conservative recommendation of 10 percent or you cut that in half to 5 percent, that’s still more than three times what institutions actually have in gold. If institutions even tried to move from the one and a half percent to the 5 percent level, when we’re talking about trillions of dollars of wealth around the world, the impact on the gold price would be incalculable. That would get you way past $2,000, probably in the $3,000 to $5,000 per ounce range on its way higher, because at that point, it’ll be a disorderly route in favor of higher dollar gold prices. My recommendation is 10 percent but that’s five or six times what institutions actually have today, so there’s not a lot of headroom if there was a shift of gold. As far as the euro is concerned, if it’s any consolation, it’s probably at a low.


Let me come back to the listener’s question. There’s real growth in Ireland, no doubt about it. There’s real growth in Spain and Europe, but I think the bigger picture is that there’s insufficient growth around the world. The world as a whole does not have enough growth to go around. That’s clearly in the data, and we’re going to see confirmation of that next week at the International Monetary Fund spring meeting. They’re going to update the world economic outlook as they do twice a year.


They marked it down last September, and my guess is they’ll probably mark it down again next week. China is slowing down visibly, and the U.S. has fallen off a cliff. We have 5 percent growth in the third quarter of 2014 which was phony for some accounting reasons having to do with the election, but it dropped to 2.2 percent in the fourth quarter. It looks like it’s coming in way below 1 percent, maybe even zero in the first quarter of 2015. I don’t see that picking up. Again, U.S. growth has fallen off a cliff, Chinese growth is rapidly slowing down, and Europe’s picking up. Why is that? It’s the currency wars, the same old story. Go back to 2010. It’s true that the guy with the cheap currency gets temporary growth. Barry Eichengreen, Paul Krugman, Stiglitz, and others come out and say cut your currency, you’ll get some growth. It’s true in the short run, but all you’re doing is stealing the growth from somebody else. You’re not doing anything for global growth and you’re hurting your trading partners.


My analogy or metaphor is you have four or five thirsty soldiers on the battlefield. They’ve been fighting all day in hand-to-hand combat and 110-degree heat. They caught a break and they’ve got one canteen. What do you do in that situation? You pass the canteen. Everybody takes a drink, hands it to the next guy, and people try not to be too much of a pig and drink too much of the water. That’s the best you can do and it’s one way to understand global economic growth. In August 2011 the dollar was at a long-term low and gold was at its all-time high. (By the way, the dollar and gold are just inverse to each other). That was the U.S. holding the canteen drink, but the U.S. said to the world, hey, we need the growth. If the U.S. doesn’t grow, the rest of you are sunk. We’re all sunk, so give us a chance.


By 2012 – 2013, it looked like the U.S. was growing more strongly, but it wasn’t really. That was just based on a bad Fed forecast, but they thought it was. That’s when Bernanke did the taper talk in March 2013, started the taper in December 2013, and Janet Yellen finished the taper through November 2014. That was the U.S. handing the canteen to Japan and Europe. Japan got the first drink in December 2012 with Abe economics. They trashed the yen which went very quickly from 120 to 90 or so. Then they passed the canteen over to Europe, and they trashed the euro. The euro went from roughly 135 to 105, somewhere in that band, very quickly. These are huge swings. If you look at the history of foreign exchange trading, foreign exchange is a market that’s traded at the fifth decimal place. When you talk about 103 euros to the dollar you hear quotes like 103.12345 ­— this is stuff that trades at five decimal places. If you move it and bang it 30 percent in 6 months, that’s an earthquake. That’s what happened to the euro.


It was pass-the-canteen. Yes, Ireland and Spain are growing, and that’s good for them. Germany’s picking up all the pieces, but it’s coming at the expense of China and the United States. How long is that going to last? How much stronger can the dollar get before we go into a recession? The answer is not much. The question is, is there a bigger play here or are we converging on something that starts to look like what happened in the mid-1980s at the Plaza Accord and Louvre Accord. Let’s watch that space, but I would see the euro at a low here. If it goes down tomorrow, don’t call me up and tell me I’m an idiot. These things are volatile, they overshoot, it could go lower. I see the euro at the low end of the range, the dollar at the high end of the range, and I see the yuan as joined at the hip with the dollar. The Chinese trying to suck it up and deal with the strong currency, but that’s part of getting into the club that we talked about earlier. These are very big plays. The mavens of finance as I call them are working behind the scenes. This isn’t a conspiracy theory. This is how the system has always operated under what I call the rules of the game in my book The Death of Money. So watch the space.


Gold is showing a lot of strength. People ask why gold isn’t at $1,400 or $1,500 an ounce. The better question is why isn’t it at $900 an ounce? Commodities have fallen off a cliff, deflation’s got the upper hand, and growth is slowing down. All of these things say that gold should be lower, but the facts show that it’s hanging in separate from the commodities index – it’s hanging in at $1,200 an ounce. That looks like strength to me. If the dollar’s at a peak and is going to start to come down, and gold has weathered the storm vis-à-vis deflation, that’s a bullish signal for gold. We could still see some unpleasant surprises for gold investors between now and the end of the year. Some interesting things going on, needless to say.


AS: I really love the analogies you gave there. That’s probably one of the reasons why so many people find what you have to say appealing, because you are often able to take very complex issues and boil them down into very simple ways for people to understand. That’s really great. Our next question is coming from Harry B. who says, “Deflationists say that cash is the go-to asset first and that gold comes after a multiyear deflation. Do you see this playing out differently?”


JR: First of all, I wouldn’t say that cash is the go-to asset for deflation. I definitely recommend cash in the portfolio and a significant piece, maybe 30 percent or so. Mohamed El-Erian is by all accounts one of the savviest investors in the world. He ran Harvard Endowment and PIMCO, so he’s an inner circle member of the international monetary elites. Not too many people know more about this stuff than El-Erian. He gave an interview to Bloomberg recently and said he’s mostly in cash. Warren Buffett has $55 billion in cash, the most cash he’s ever had. So cash is definitely a place to be in deflation, and an allocation of 30 percent or so cash to me makes sense. In this environment, the value of cash does go up in deflation. It is a deflation hedge but has other features such as huge optionality. If you get some more visibility, you can pivot and use the cash to scoop up assets which no doubt is what Warren Buffett plans to do.


Also, think of it as the opposite of leverage. Leverage will increase the volatility of whatever else you have while cash will decrease the volatility of whatever else you have. In a volatile world cash will help you sleep at night, but it’s not my go-to inflation play. My go-to inflation play are U.S. Treasury 10-year notes. They’re still yielding with a maturity just under two. German yield to maturity is around zero. Well, something’s wrong there. Either Germany is too low or the U.S. is too high. Based on everything I see, I would say the U.S. is too high. We have to get to negative real rates to get the economy moving, but negative real rates are a world where inflation is higher than nominal rates. Nominal rate is the rate you actually get when you buy it, and the real rate is inflation minus the nominal rate. You have to get inflation above the nominal rate to get to a negative real rate.


What’s been happening is that inflation’s dropping, so the nominal rate has to chase inflation down to even try to get to a negative real rate. The way things are going it might just chase it below zero, but that’s already happened in Europe. It has not quite happened in the United States, but it is happening. This is a little geeky, but there’s something called the DV01 which is the dollar value one basis point change in the yield to maturity in terms of the impact on the price. The DV01 goes up at lower absolute levels of interest rates, so when you move from 2 percent to 1 percent, your capital gain is much greater than if you move from 10 percent to 9 percent. Moving from 10 percent to 9 percent is the same 100 basis point change in yield, but the capital gain at lower rates is much greater. Moving from 2 percent to 1 percent and 1 percent to 1.5 percent produces huge capital gains for the holder of 10-year notes. That’s what I see happening, so I like 10-year notes for a slice as my go-to trade for deflation.


Cash absolutely has a place, but let’s address the question about gold. Gold can do very well in deflation but only at the end game meaning when all else has failed. What do I mean by “all else”? You cut rates to zero, did QE1, QE2, QE3, Operation Twist, currency wars, forward guidance, and helicopter money. You tried everything, still didn’t get the inflation you want, and now you have persistent significant deflation of 3 or 4 percent, something on that order of magnitude. Well, you can always get inflation. I can get inflation in 15 minutes. All the Fed has to do is go into a room, take a vote, walk out 15 minutes later, and announce that the price of gold is $5,000 an ounce. They’ll use the gold in Fort Knox and the market maker banks to stand up to the market. They’re a buyer at 49.95, a seller at 50.50. Come and get it or sell us your gold, but either way, that’s the price.


That’s how you get instant inflation. It’s not hard to do. The United States did it in 1933. But you’re not going to get there until the end game. Now the problem is you can’t just put a stake in the ground around deflation. Inflation is an equal opportunity outcome with $4 trillion of money splashing around. We don’t have much inflation now but that could happen almost overnight. We’ve seen that before obviously in Weimar Germany. Something similar but not quite as extreme started to happen in the United States in the late ’70s until Paul Volcker snuffed it out.


To me, the optimal portfolio is ready for both outcomes. You’re going to have some gold for inflation, you’re going to have some gold for extreme deflation, you’re going to have some cash for lower volatility and deflation, and you’re going to have some 10-year notes for deflation. I might like some other trades, some venture capital or hedge fund selections, fine art, some other things for alpha. Just don’t be monocausal and put all your eggs in one basket. That’s obvious but it’s never been more important than today where the threats to the basket are coming from multiple directions. I do think this mix of gold, cash, 10-year notes, some alternatives, some fine art, and some equities is the right way to go. One of the surprise outcomes could be that the Fed is going to blink later this year, probably September, and not only not raise rates but maybe even drop a hint or two and show a little leg around QE4 early next year.


If that happens, the stock market’s going to scream and go way up really quickly. On the other hand, if the Fed actually raises rates, which they’ve threatened to do ad nauseam, that’s going to sink the stock market. I can give you two really completely plausible scenarios. Under one scenario, they raise rates and sink the stock market. Under the other scenario, they blink and the stock market goes to the moon.


So how do you invest in that environment? Both of those scenarios are plausible. That’s not me throwing up my hands and saying I don’t know what’s going to happen. That’s me telling you that those are equally plausible outcomes. Well, you better be ready for both.


AS: That’s very good. We still have a ton of questions, and some of these are really great. I wish we could respond to them, but we’re out of time. With that said, thank you very much, Jim, and thanks to all our listeners. I’m going to hand this back over to Jon.


JW: Thank you, Alex. Let me remind our listeners that you can follow Alex Stanczyk on Twitter by going to Twitter and typing in Alex Stanczyk. Great insights and valuable links to follow there.  Thank you also, Jim Rickards. It’s always a pleasure and an education having you with us. And thank you most of all to our listeners.


You can also follow Jim on Twitter. His handle is @jamesgrickards. Let me remind you that you can find recordings of all of The Gold Chronicles webinars with Jim Rickards online. Just visit the website Physical Gold Fund Podcasts and register for updates. Goodbye for now everyone, and we look forward to joining you again soon.


Listen to the original audio of the podcast here

The Gold Chronicles: April 9 , 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles March 12, 2015

March 12th Gold Chronicles topics:

*There will be no Grexit
*Greece exiting the Euro would be catastrophic
*Global contagion is a real possibility
*Greek negotiations will continue to be difficult but they will come to a deal versus a Grexit
*Austria Bail-In significance
*Depositors and Bond-holders have always been unsecured creditors of banks
*Depositors have taken it for granted that there is some kind of sacred agreement that deposits would be returned
*Any deposit made with a bank is an unsecured loan to that bank
*G20 Brisbane Summit communicated bail-in intentions
*Physical gold outside the banking system is not subject to bail-ins
*No Fed interest rate rise in 2015
*23 Central Bank rate cuts in the last three months
*This is currency wars on steroids
*Investors are looking at Fed rate hike as potential yield, dump global currencies and buy dollars
*Current deflation is crushing entities dealing with corporate debt denominated in USD
*$9Trillion of USD denominated corporate debt globally held in countries where they cannot print dollars, they have to buy dollars to meet obligations
*If the Fed raises rates it will be the ripple around the world that might cause a $20 trillion (with leverage) bubble to unwind
*At this point Jim likes gold, cash, and 10 yr treasuries
*Jims view on safety of money market funds
*Negative interest rates, how low can they really go
*Financial academics can do the math, but they cannot predict the psychology
*How to know if your physical gold is outside of the banking system
*Ratio of paper short positions versus real physical gold availability
*Why Physical Gold Fund is Jim’s favorite
*How low can the Euro go
*A stronger dollar is the same thing as a rate increase

Listen to the original audio of the podcast here


The Gold Chronicles: 3-12-2015

Jon Ward: Hello I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in this series we’re calling The Gold Chronicles. Jim Rickards is a New York Times best-selling author and the Chief Global Strategist for West Shore Funds. He’s the former general counsel of Long-Term Capital Management and is a consultant to the U.S. intelligence community and the Department of Defense. He’s also an advisory board member of the Physical Gold Fund. Hello, Jim, and welcome.

Jim Rickards: Hi, Jon.

JW: We also have with us Alex Stanczyk of the Physical Gold Fund. Hello, Alex.

Alex Stanczyk: Hi, Jon, great to be here.

JW: Alex will be looking out for questions that come from you, our listeners. Let me just say that your questions for Jim Rickards today are more than welcome. You’ll see a box on your screen for typing in your question, and you may post them at any point during the interview. We’ll do our best to respond to you as time allows. Jim, let’s return to Europe where we spent quite a bit of time in our last webinar. The Greek drama continues to unfold, but just as you predicted, there’s no sign of a so-called Grexit, meaning a breakaway of Greece from the European Union. What we do see are some awkward compromises by Greece’s radical new government, such as raiding the country’s pension funds to pay back the IMF. How do you read this story?

JR: Your introduction is a pretty good capsule summary in itself, Jon. The story is not over by any means. If you went to the Acropolis 2,400 years ago, to a real Greek drama, it would be over in a couple of hours, but this one is going to continue for a few more years. My expectation is that there will be no Grexit. Greece will not leave the euro, they will not be forced out of the euro, and they will continue to use the euro as their currency. That’s the big picture and I think the significant thing that investors need to stay focused on. It’s a very big deal, because if Greece did exit the euro on its own or if they were forced out by Germany or other participants in the EU or IMF etc., that would not be a small event. It would be, in my view, catastrophic.

A lot of people have tried to write it as a small event, and their analysis goes as follows: Greece is a very small economy, which it is. It’s not only small relative to the world when you’ve got giants like China, U.S. and Japan, but it’s small relative to Europe. The Greek debt is significant relative to Greek GDP, but it’s not that substantial relative to European GDP, etc. The Greek economy is not that big a deal, but that’s not where it would end. In other words, markets always discount the future. They look two, three, four, moves ahead. Policymakers may not and a lot of analysts may not, but markets do, and I think that the best analysts are always trying to do the same thing. The market would immediately begin to discount the possibility of Spain leaving, the possibility of Portugal leaving, and then ultimately Italy and France, and then all the dominoes falling.

The problem with dominoes is that it’s not the first one that matters — it’s all the ones that are lined up after it. The idea that you could clinically, surgically remove Greece but nothing else bad would happen is not true. There’s a lot of history, but just go back to the two most recent episodes of contagion. Take the European debt crisis. That actually didn’t start in Europe; it started in Dubai. The day after Christmas, 2009, Dubai unceremoniously announced that they were not going to pay their debts, well over a hundred billion dollars. That caused everyone to say wait a second, if Dubai can’t pay, are there other weak links in the chain? Of course, people immediately took a look at Ireland, Greece, and Portugal. And that was the beginning of the European sovereign debt crisis.

The same thing occurred in 2007 and 2008. We saw those Bear Sterns-sponsored hedge funds collapse in July 2007, spreads started to blow out, and there was a lot of panic. By December, the view was that it looked like it was all under control with sovereign wealth funds coming to the rescue and the recap in U.S. banks. It was all good — but then boom! March 2008, Bear Sterns, boom! June 2008, Fannie and Freddie, and then the biggest explosion of all, September 2008, Lehman and AIG. We all know what happened from there. You can’t knock over one domino, or as I like to say, you can’t disturb one snowflake the wrong way without risking an avalanche. So that’s why Europe wants to keep Greece on board.

Greece for their part wants to stay in the euro. Poll after poll shows that Greek citizens want the euro. This surprises a lot of Western analysts, but they do. They know what happens when they go to the drachma. The government devalues the drachma: they inflate the value of the drachma and steal your savings, pension, retirement, and insurance. Any fixed income obligations go up in smoke. The Greek people have seen that movie many times over the last 30 or 40 years, so they like the euro. Basically, what would happen if Greece left the euro? The currency would hyper-inflate. That would cause more social unrest than they already have and dry up direct foreign investment. No more Chinese investment coming in to Greece, no more ability to borrow money, and no more ability to roll over debts. Greece would be reduced to possibly less than a Third World economy — something more like the Balkans. That might even be an insult to the Balkans.

The dynamic is Greece has a lot of reasons not to quit and Europe has a lot of reasons not to kick them out. Put those two things together and they’re not going to quit, they’re not going to get kicked out. Now beyond that, is this negotiation going to be messy? Yes. Is it going to be volatile? Yes. There will be a lot of accusations; there will be good days and bad days.

Under the Schengen Agreement, if you’re in the European Union, you can go to any other country in the European Union without customs or immigrations. You can just drive from Athens to Paris and cross seven or eight countries without any immigration formalities.

Now I guess they have some detention camps in Greece where illegal immigrants show up and they keep them in detention. I saw the Greek Defense Minister the other day, not the Finance Minister, but the Defense Minister who said we’re going to open up the detention camps and release all these people. By the way, he said, we think some ISIS terrorists are probably included. There’s the threat in effect that they’ll release ISIS terrorists who will be on their way to Paris by tomorrow morning. Thank goodness he’s the Defense Minister, not the Finance Minister. This is really like putting Don Rumsfeld in charge of the TARP; I’m not sure how that would’ve ended up! But the point being, it’s messy, there will be volatility, and I’m not saying this is easy. With a lot of posturing, at the end of the day Greece is going to stay in and the euro is going to stay together. So again, get ready for more fireworks but don’t read too much into it.

JW: Staying in Europe, Jim, something happened in Austria that echoes another story we’ve been tracking, and that is the so called bail-in. There’s a major bank, Hypo Alpe Adria, that was nationalized in Austria when it ran into trouble some years ago. Well, it’s in trouble again, but this time, the response is different. The Austrian regulators are going after the bank’s bondholders rather than providing the classic government bailout. What’s the significance of this?

JR: I think it is significant as a matter of policy. Just to be clear, there’s nothing new here. As a matter of law, a bondholder has always been an unsecured creditor of a bank. A secured bond is different. If you have a mortgage on the bank headquarters, maybe you can foreclose on the headquarters. There are ways to get a secured obligation, but most bonds issued by banks are not secured obligations. Deposits have never been secured obligations. They might be insured by a deposit insurance scheme, but they’re not protected by a security insurance. Again, depositors and bondholders have always been unsecured creditors of the bank except for a deposit insurance or in a small number of secured bonds. So that’s not anything new.

It is true that for about 80 years since the Great Depression, depositors have taken it for granted that if you’re a depositor, you have some kind of sacred obligation from the bank to give you your money back, and you’re not at risk. That’s never been legally true, but it has been taken to be true. It’s the same thing with bondholders because of the famous Greenspan Putt, which turned into the Bernanke Putt, which turned into now the Yellen Putt, and the whole doctrine of too big to fail. People who are lending on security banks said maybe I’m not a secured bank holder but banks are too big to fail; if this bank gets in trouble, the taxpayers are going to bail it out. I’ll get my money back.

That actually was true. As recently as 2008, no bondholder took a nickel of losses. I’m incredulous of that. I know it as a fact, but to this day, I can’t believe that nobody had to take a haircut. To my knowledge, the only bondholders who took haircuts in that whole 2008 fiasco were some hedge funds who owned Chrysler bonds — not the unions, by the way, just the hedge funds. Of course, Chrysler is not a bank, but Fannie, Freddie, Citibank, JPMorgan, Goldman, Morgan Stanley, Bank of America, you name it, no bondholder took a nickel of losses even though taxpayers bailed out the banks to the tune of trillions of dollars in terms of guarantees, etc.

What’s happened since then? I’ll say the regulators, but really it’s people more powerful than the regulators — this is more the G20 finance ministers, people at the IMF and on the Board of Governors, the Fed more so than, say, the New York Fed who are in bed with the banks — they came to the realization that we can’t afford this anymore. Maybe we did in 2008 because we weren’t ready for it and the alternative was worse. (I disagree with that, but I’m just trying to describe how they viewed it.) The alternative was worse, but basically, we can’t keep running this again because one of these days it’s going to be bigger than the central banks. Listeners and others have heard me say before that the next crisis will indeed be bigger than the central banks, but there’s an extent to which the central banks will start to realize that themselves. Certainly politically, the taxpayers have no appetite for this. The taxpayers did bail out the entire system in 2008, but that was politically unpopular.

Remember the TARP which was the big U.S. bailout program. When that was put to the House of Representatives, it failed on the first vote. The stock market fell 800 points that day, from a much lower level, by the way. In equivalent terms, that would be well over a 1,000-point drop today. That spooked the Congress, and then Bernanke said, look, if you guys don’t do this, the whole system is going down, so now how do you feel? So Congress passed the TARP on a second vote, but it was close. It shows how unpopular this is with the taxpayers. It’s a combination of: A) are we feeding a crisis bigger than ourselves, bigger than our own central bank capacity to squash it? Or B) are we politically jeopardizing the ruling parties by doing something so unpopular that the electorate is going to throw us out? If the answer to both of those questions is yes, then they have to try to prevent it.

This is not some deep, dark conspiracy. These are G20 finance ministers, people from the IMF, and people who have names. They’re real people, and they put out public documents. What they said is that from now on, if banks fail, bondholders will suffer losses, and you depositors, if you have more than the insured amount, you’re going to suffer losses. I think the insured amount is $250,000 in the U.S. which is a lot of money for the average saver. Certainly for the average citizen, that’s a huge amount of money, but it’s not for corporations and even for small businesses. You don’t have to be Exxon. You could be a dry cleaner, a successful pizza parlor operator, run a small manufacturing company or own a small distribution company and easily have working capital balances in excess of $250,000.

The regulators are advertising in effect that you are not safe, you are an unsecured creditor. If your bank goes down, your money is at risk. There are two examples of this. The best known one was Cyprus, which is on the euro and a member of the Eurozone. A few years ago we saw bank depositors in Cyprus suffer losses, bondholders suffer much larger losses, and stockholders get wiped out when they had to bail out Cyprus banks. The other example is the case you mentioned, the Hypo Alde Adria Bank in Austria, where the same thing happened. So you’re on notice. They’re telling you, so don’t be shocked or outraged or say oh my goodness, how could this happen? First of all, it’s always been the law. It wasn’t always the policy, but it was always the law. Secondly, they’re telling you loud and clear.

One of the things I say about the monetary elites is that they do tell you what they’re doing. Now, it’s real geeky, and they use a lot of jargon, and you must dig hard to find the stuff. I call it transparently non-transparent, meaning they tell you what they’re doing, but good luck finding it or good luck understanding it if you do find it. I would refer interested parties back to the G20 Summit in Brisbane, Australia, last November. Go to the communiqué, look at the appendices to the communiqué, and go into the working papers where you will find blueprints for the bail-in. They actually used the term ‘bail-in,’ so there’s no mystery about it.

Get ready to lose money when the banks go down, which by the way is a good reason to own gold. Gold in physical form outside the banking system is immune to this, so I would not have all my money in the bank. You need some money in the bank as working capital, but I would have some in physical gold outside the banking system, because you’re not going to get bailed in.

JW: Clearly, by implication, what happened in Cyprus and in Austria could also happen here where you and I are, in the United States.

JR: That’s exactly right. The U.S. is a member of the G20, and we signed on to the Brisbane communiqué. As I say, it’s always been the law. I don’t claim to be an expert in banking laws of 185 members of the IMF, but I am a U.S. lawyer, and I have worked for banks, bank holding companies, and investment banks, and I’ve had a long career as a regulatory counsel to banks. Any deposit in excess of the insured amount is an unsecured loan to a bank; it’s not an entitlement. Any bond not secured by specific assets and with the right legal pledges is at risk. So get ready to lose money if the banks go down again, which is probably just a matter of time.

JW: Let’s come back here then to the United States for a minute for our next thought, and that’s about what’s going on with the Federal Reserve. Once again, even more euphoria about the economy, the latest job reports, a significant rise in new jobs, and a drop in unemployment figures. This is leading naturally to talk about the Federal Reserve raising interest rates. I feel as if I’ve asked you all these questions before, but here we go again. In this context, will the Fed announce a rate rise at the upcoming FOMC meeting? And if not, why not?

JR: We have discussed it before, Jon, but it’s one of my favorite topics because I’ve been able to strike out a little bit of a contrarian view on this. I’m happy to update the listeners. Whenever I’m in a seminar like this or asked to give my views on something, I always give my best, most thoughtful, up-to-date view, but new stuff comes out every day. One of the benefits of this webinar series, The Gold Chronicles, is that we do them once a month and it is a good opportunity to update. One of my analytical techniques is called ‘inverse probability.’ It’s how you analyze things, or I should say how I analyze things. We do this in the intelligence community and elsewhere, but it’s not usually done on Wall Street and certainly not done at the Federal Reserve.

A lot of the problems we confront are what we call ‘underdetermined.’ Underdetermined is just a fancy way of saying we don’t have enough information. So what happens is, the statistics geeks build models, take the data they have, crunch the numbers, and come up with forecasts. If you’re the Fed, you’re almost always wrong. I would actually say always wrong, because I haven’t seen any good Fed forecast since I can remember. The inverse probability technique I use is a little bit different. I’m candid about the fact that I don’t have enough information so I come up with a hypothesis based on whatever scraps of information I do have. I also use other things — intuition, history, and things that statisticians and 160 IQ finance PhDs don’t like to talk about, but they work pretty well. I do the hypothesis first and then test it against the data every day and challenge my own assumptions. If the data comes in confirming what I thought, then I strengthen the hypothesis. If it goes the other way, I throw it away and come up with something else.

I have said since last year — not in prior months this year but going back to 2014 — that in my view the Fed would not, and I’ll say could not, raise interest rates in 2015. So far, so good, but it’s early in the year so we’ll see what happens. I based that on a couple of things. Number one, let’s go all the way back to December 2013 when Ben Bernanke started the taper. Remember, Janet Yellen did not take over until January 2014. Ben Bernanke was still chairman in December 2013 and started the taper. I’m sure Yellen was on board, but it was Bernanke’s idea. Yellen finished it; she saw it through and they kept tapering during 2014. This was based on an assumption that the U.S. economy was getting stronger and growth was pretty good. They said we’re going to do the following sequence: First we’re going to taper, meaning reduce and then stop long-term asset purchases. Then we’re going to pause. Then we’re going to raise rates. Then we’ll raise them some more. Then we’ll start to reduce the balance sheet. And we’ll all live happily ever after. It was a multi-year sequence.

The second basis for my view is that they did the taper but… a funny thing happened on the way to the forum. By the time the taper finished in late 2014, the U.S. economy was already showing signs of weakness, and those signs of weakness have become a lot more visible, a lot more apparent by now. Certainly January, February, and March so far shows a lot of the data is coming in really weak. Plus another thing happened which they didn’t anticipate, which is the fact that the whole world is easing. Europe has QE, China reduced the reserve ratio requirement and cut interest rates twice. There have been 23 central bank rate cuts in the past two and a half months — again, 23 central bank rate cuts in the past two and a half months. This is the currency war on steroids.

We have this massive rate cutting or easing around the world, and here’s the Fed, the lone central bank (except Switzerland — I’ll put Switzerland in a separate category) saying we’re going to raise rates. Guess what that does to global capital flows? It brings them to the United States. If you’ve got capital anywhere in the world, and Europe’s paying you nothing, and China says we’re going to pay you less, and the U.S. says we’re going to pay you more, that capital is going to come to the United States. This means the dollar gets stronger because people are dumping emerging market currencies, dumping the euro, and buying dollars because they want the dollar return they see coming. That’s a strong dollar. What does a strong dollar mean? It’s deflationary. What is the Fed’s stated goal? The Fed says we have an inflation goal.

Let’s think about this for a second. The Fed says we want two percent inflation. That’s not a secret; they say that all the time. Then they say or strongly imply that they’re going to raise rates. They’ve given markets no reason to think that they won’t raise rates, but raising rates makes the dollar stronger, which is deflationary and pushes the Fed away from their inflation goal. How does that work? The answer is it doesn’t work. If you actually go down that path, you will get a stronger dollar and deflation, you will be defeated in your inflation goal, and you may actually have to cut rates later which is a complete loss of face and confidence. I already know the Fed doesn’t know what they’re doing because Fed governors have told me privately they don’t know what they’re doing. But that would just tell the whole world that they don’t know what they’re doing.

They could even go to QE4 in early to mid-2016. They don’t want to do that, so they’re between a rock and a hard place. My expectation is they will not raise rates, but let’s just say I’m wrong and they raise them. If they raise rates, look out below, because that’s going to accelerate and exacerbate the trends I’ve just described. It’s going to be more deflationary.

As a side note, deflation is hurting the overseas earnings of U.S. corporations. If you make money overseas as a U.S. company, you report in dollars. If you have to convert those overseas earnings back into dollars when the dollar is stronger, that’s going to reduce your earnings. What’s that going to do to stock prices? It’s going to take them down. What’s it doing to bond markets? Yields are going down because deflation is getting worse. So bonds are going up, stocks are going up, the dollar is going up, everything is going the wrong way for the Fed at least in terms of their inflation goal. That’s what’s going to happen if they raise rates.

This is all going to come to a head Wednesday of next week because the Fed has a meeting and there’s a press conference. This shows how ridiculous things are. Why are all the smartest people in the world having sleepless nights over the word ‘patient’? The question is will the Fed remove the word ‘patient’ from the statement they release after each FOMC meeting because they’ve said they will not raise rates until two meetings after they take out the word ‘patient.’ Now just follow me on this. There’s a meeting in April and a meeting in June, so if you want to raise rates in June, you have to take out the word ‘patient’ in March so that after two meetings (April and June), you can raise rates in June.

If they take out the word ‘patient,’ they’ll think maybe we’ll raise rates in June, maybe we won’t; that gives us a free option. But we all know what the markets are going to do. The markets are going to anticipate they will raise rates in June. Markets always discount and bring the impact forward. Taking out the word ‘patient’ in March is equivalent to a rate increase, because the markets will assume they’re definitely going to raise them in June and then discount it back to March which is only like 60 days — that’s the same thing. So it’s equivalent to raising rates in a world where the dollar has gone to the moon. The dollar hasn’t been this strong in 12 years. If they don’t take the word out, if they leave the word ‘patient’ in, the markets are going to think now they can’t raise them in June, so let’s look at July.

In this game, the Fed keeps painting themselves into a corner. They seem incapable of thinking two moves ahead. They can barely think one move ahead because they have to make a decision by Wednesday. This is what happens when you manipulate markets — you have to keep manipulating just to keep the whole thing from falling apart. I don’t know if they’re going to take out the word ‘patient’ or not. My gut tells me that they’re going to leave it in because they can see this train wreck. I don’t want to put a stake in the ground on that, because they might take it out, but I do feel strongly that if they do take it out, the dollar is going to spike, the bond market is going to rally on that, and stocks will go down.

This is a fiasco for emerging markets. Look at it from their point of view. I’ve been talking about the impact of the Fed and the dollar and U.S. stocks and bonds, but let’s go overseas. They’re short in dollars by nine trillion. There is approximately $9 trillion of emerging markets dollar-denominated debt. That’s corporate debt, not sovereign debt — put that to one side. It’s not local currency debt; put that to one side. U.S. dollar-denominated corporate debt, emerging markets, $9 trillion. If you’re in Turkey, Indonesia, Mexico, Brazil, Korea, Singapore, Thailand or for that matter China, your central bank can’t print dollars, but you owe dollars. You make local currency, so to pay back the dollars you have to get $9 trillion. That means you’re short $9 trillion. This is what I call the big short.

Michael Lewis had a very successful book a few years ago called The Big Short about the mortgage crisis. It tells the story of a few investors such as John Paulson, Kyle Bes and a few others who in ’06 could see the mortgage train wreck coming and they said my goodness, this is the greatest opportunity of a lifetime. How do I short this thing? They went to Goldman Sachs who cooked up a bunch of derivatives. (Of course, they sold the other side of the trade to somebody else, but that was their problem. That’s good old Goldman.) But Kyle, John Paulson, and others managed to put on the big short. John Paulson personally made $5 billion. That’s not his investors; his investors made more. He personally made $5 billion on that trade. That was a one-trillion-dollar trade levered up 5 to 1. Look around the world today. What’s the big short? We have a nine-trillion-dollar emerging markets short dollar position without leverage. If we put some derivatives around them, I’m sure we could get it up to 20 or 30 trillion without too much difficulty. Just to give you the order of magnitude, that’s 50 percent of global GDP. And don’t think people aren’t doing this.

So you’re Janet Yellen sitting there in your little Fed bubble on the second floor outside the boardroom on the marble hallway of the Federal Reserve with your little incredibly flawed models that you learned at MIT. You’re sitting there saying we have to raise interest rates, but meanwhile you could be popping a 20- or 30-trillion-dollar bubble. To me this looks a lot like 1997, more so than 2008 which might actually be small compared to what happens next. This looks like 1997 that ended famously in August – September 1998 with the default by Russia and the collapse of Long-Term Capital Management. I think we mentioned at the beginning of the webinar that I was general counsel of Long-Term Capital Management at the time. I negotiated that bailout, so I had a front-row seat on that one. I know how these things go down.

That actually started in June 1997 over a year earlier in Thailand where there was a loss of confidence and the hot money started to come out of Thailand. People started selling the Thai baht and taking their dollars out of Thailand. The central bank couldn’t maintain the peg, so they broke the peg. That immediately caused contagion, i.e. loss of confidence in Indonesia, South Korea, and it went around the world before it got to Greenwich, Connecticut, where we were. Something similar is happening today. I hope someone’s explaining this to Janet Yellen. Actually I hope she’s listening. I doubt it, but I hope she’s on the call. If she raises rates, that’s going to be the beginning of a snowflake that’s going to ripple around the world, and it has that kind of catastrophic potential.

Let’s see what happens. I believe they think that they can take out the word ‘patient’ and act like nothing happens to June and may free up an option. That misreads the situation. I think the markets are going to say you don’t have a free option. We’re going to treat it as a done deal. We’re going to discount it to March. We’re going to act like you just increased rates. Then this sort of cascade will bubble all around the world. It’s a good time to own gold and to have cash. I like bonds for the same reason because in strong-dollar panics, flight-to-quality panics, treasuries will rally. I may not like stocks.

Here’s the problem. Let’s say the Fed doesn’t raise rates and they leave in the word ‘patient.’ Let’s say we get to June or July and the data continues to come in weak. They continue to remain ‘patient’. Maybe they call Jon Hilsenrath from the Wall Street Journal who receives calls from the people of the Fed, and they say we’re going to be very patient. Jon is a good reporter, so he puts it out there. People like to beat him up, but the guy’s just doing his job. Then they start to say, well, yeah, patient, we’re actually going to be very, very patient. If the market is pricing in a rate increase and the Fed doesn’t raise rates, that’s the same as a cut, right? They can’t cut because they’re at zero, but if you’ve priced in an increase and they don’t increase, that’s like a cut. So markets could actually rally on that.

That rally won’t be in the next couple of months. It’s something that would probably play out in the second half as the Fed folds their hand. It’s a problem for investors. I can give you a scenario, in fact I just did, where stock markets collapse based on the rate increase path. By the same token, I can give you a scenario where the Fed blinks, doesn’t raise rates, and markets rally because it’s like a rate cut. That’s not being wishy-washy; that’s just being very candid about how the dynamics work. It’s also a very good illustration of how the Fed should just get back to doing their job and stop trying to micromanage the entire world.

Let’s watch it very carefully. My view now is that we’re going to have the worst of both worlds. What I mean by that is the Fed is not going to be able to raise rates for the reasons I’ve mentioned but they’re going to keep acting like they can. The markets are not going to know which way to turn, so we’re going to get volatility. Again, I like gold here, I like cash, and I like 10-year notes. And stocks? I don’t want to short them because if they don’t raise rates, they could rally, but you don’t want to back up the truck either because if they do raise rates, there could be no bottom. I’ll stop there, but that’s where we are.

JW: It’s an extraordinary story. I was trying to figure in my mind if it’s Alice in Wonderland or Gulliver’s Travels. When the global economy stands or falls on the presence or absence of the word ‘patient,’ that’s totally bizarre. Thank you, Jim. We do have some questions from our listeners, and here’s Alex Stanczyk with those questions.

AS: Thank you very much. I have to just make a quick comment. I was doing my best not to split my sides with laughter with the whole “I hope Janet Yellen is listening” comment. As usual, we have way more questions than we probably have time to answer. The first one comes from Jim L., and his question is: “A large part of our funds are currently in money markets. I’m a Canadian. Is this a satisfactory place to be at this time?”

JR: The answer is no, and let me explain why. We talked earlier about how bank deposits are not safe beyond the insured amount. I think they are safe up to the insured amount, so I just want to be clear on that, but beyond the insured amount, you’re just an unsecured creditor. Now you can go to a too-big-to-fail bank. Bank of America or Citibank are in some ways the most reckless, worst managed banks in the world, but our system is so messed up that the most reckless banks might be the place you want to have your money because they are too big to fail, and they’re the ones that are least likely to actually collapse. This is another example of how messed up things are.

People think money market funds are like cash. That’s why they were invented. They were invented in the 1970s when a lot of usury laws were still on the books. Most of those laws have been repealed since then, but at the time, interest rates were on their way to 20 percent. Around January of 1980-81, Paul Volcker took short-term interest rates to 20 percent, but there were a lot of usury laws that said the banks could only pay maybe 10 or 11 or 12. Merrill Lynch invented the money market fund so they could pay whatever they wanted because they weren’t a bank. That’s a little bit of history.

Money market funds were invented as, first, a cash substitute and then they later became a cash equivalent. If you call any investor in America or Canada – I don’t think it’s different – and say, is your money market fund cash, they’ll say, yes, absolutely. You can call your broker today and the money will be in your bank tomorrow. It’s not same-day cash; it’s next-day cash. If you have a big bill to pay tomorrow, you call up your broker today and say, I want you to move money from my money market fund to my bank account, and the money will be there tomorrow good to go. Other than the one-day lag, it’s cash.

Well, last summer the SEC finalized a rule stating that money market funds can suspend redemptions, which means they’re not giving you your money back. This has always been true in hedge funds. As a hedge fund lawyer for many years, I’ve probably read 300 or 400 hedge fund offering documents, and they all have suspension clauses. You may read a hedge fund document that says you can get your money back on 30 days’ notice or three months’ notice, but oh, just in case things get hairy, we don’t have to give you your money back. It’s called the suspension clause and is just the way hedge funds work.

That’s now the law for money market funds as well. That’s new. I’m sure that last August or September, hundreds of millions of Americans opened their money market fund account statements and there was a little high-gloss flyer stuck in the pages that told you this. I would think that 98 percent of people threw it in the trash, because who wants to read the fine print? What it said is that just in case we feel like it, we don’t have to give your money back. This is what we call ‘conditional correlation.’ Conditional correlation is when there’s no correlation except when there is. With regard to money market funds, that means when you really, really don’t need your money, you will be able to get it. When you really, really, really want your money like when the world’s collapsing around you, you won’t be able to get it.

I’m sure you could call your money market fund right now and have your money tomorrow because there’s nothing really bad going on. If this emerging markets collapse that we talked about happens or a replay of 2008 or banks are failing or they’re using the bail-in clause, things are falling apart left and right – and don’t tell me that can’t happen because it’s going to happen – when you want your money the most, you could say I really have to get my money because I want to go buy some gold or whatever, that’s when you won’t be able to get it. That’s when these suspension clauses will be put in place because every trade has two sides. You say I own a money market fund. That’s fine. What did the money market fund do with your money? They went out and bought commercial paper from banks. The point is, do you think the banks can pay in that world where under Dodd-Frank they’re being shut down?

The money market fund needs the ability to suspend because people are going to suspend from them and they don’t want the money market fund managers dumping paper on an oversaturated market. The whole thing is going to break down. The short answer is yes: for working capital or some small slice, you might need some money in money market funds, but you are at risk to an asset freeze. So what can you do? You can’t walk around with hundred-dollar bills in your pocket. If you have too many, the police will think you’re a drug dealer. What you can do is have short-term treasuries. I’m not a fan of how the government runs its finances, but I do think that 30-day treasury bills (although they pay almost nothing) are liquid. Very short-term treasury notes owned directly will be liquid, so you should be able to get those. Think of the extra little yield you get by being in a money market fund. Nothing’s free. Think of the delta between the yield on the money market and yield on the treasury as the premium that you get for selling a put option, because when things get bad, you’re going to be stopped out. You’re not going to be able to get your money back, so in effect you’re selling an option not to pay your money and you probably don’t even realize it.

AS: That was an excellent answer. The next question we have comes from Juha who asks, “How far can NIRP or negative interest rate policy go? Are we going to have two percent central bank interest rates in a few years? And is something going to break if it continues like this?”

JR: When I was in high school, there was a dance craze called the limbo rock. Two people would hold what they called the limbo stick and you’d form something like a line dance. When it was your turn, you had to bend backwards to get under the limbo stick. Really acrobatic people could put their fingers on the ground although sometimes that was against the rules and you’d fall down. The song they played was “Limbo Rock.” At one point in the chorus it said, “How low can you go?” That was the point of the dance, and it’s the same thing with negative interest rates. It’s a big psychological, operational, and policy threshold. Going from 0 to -1 basis point is a very big deal. Once you do, what’s the limit? How low can you go? Why not -1,-2, -3?

I think crossing the threshold is a very big deal. We’ve crossed the threshold; we’re through it. It wasn’t like Y2K that turned out to be a non-event. Remember Y2K on January 1, 2000, when everybody was concerned that computers wouldn’t work because they’d all been programmed to have 1-9-9-9. A lot of programs didn’t account for the two zeroes. It turned out to be a non-event and this was similar. Could you actually program computers to deduct money from peoples’ accounts instead of adding money to peoples’ accounts? The answer is yes, no problem. Now that we’ve crossed the threshold, I think they can go as low as they need to go.

What’s the significance of it? Let’s talk about what it actually means. The central banks are trying to get to negative real rates. Negative real rate just means that the interest rate they pay you is lower than inflation. A negative real rate steals money from savers and gives it to borrowers. For example, if inflation is three percent but interest rates are two percent, an investor is losing money in real terms. I’m losing one percent a year because I’m getting two percent interest but my money is worth three percent less. I’m actually losing one percentage point a year. That’s what a negative real rate does. The central banks want that because it’s a great incentive to borrow. We want people to borrow, because we want people to spend money they don’t have to increase aggregate demand and follow all these Keynesian cookbook recipes to get the economy moving.

How do central banks get to a negative real rate if there is not only no inflation but you’ve actually had deflation? Deflation of one percent with an interest rate of two percent is a real rate of +3. You have to take the two percent nominal interest. Normally you take nominal interest and subtract inflation to get the real rate, but I think we all learned in the sixth grade when you subtract a negative, you have to add the absolute value. That equation looks like 2 minus -1 which is 2 plus 1 equals 3, so the real rate is actually quite high. When people say interest rates are really low, I say no they’re not. Interest rates are close to an all-time high. Nominal rates are really, really low, but real rates are really high because of deflation.

As a way to understanding the bond market, the nominal rate is chasing deflation down a rabbit hole. Think of zero as not being a boundary. Just going from +1 to -1, think of that as down 2. The more deflation declines, the lower the interest rate has to go until you get to a negative real rate because the nominal rate has to be lower than the deflation. In theory, to get to a negative real rate, you’d have to have something like 2 percent deflation and -3 percent interest rates. Now just think about that for a second. Two percent deflation with a -3 percent interest rate would be -1 percent real rate which in theory is supposed to encourage borrowing. I think if we ever got to that position, most people would be running for the hills. This is where the eggheads get it wrong because they can do the math but they can’t do the psychology.

A short answer to the question is, I think there’s almost no limit to how low rates can go although there is some limit. The second part of the question was brilliant and that was, is something going to break? The answer is yes, something’s going to break. On the way to trying to get nominal rates below deflation through financial repression, they’re going to print too much money, they’re going to destroy confidence, there’s going to be something coming up in exchange rates. Remember, interest rates are just reciprocal exchange rates, so if you mess with interest rates this much, you’re going to break the exchange rate. That’s what the currency wars are all about. I think that for now, nominal rates are going lower, and there’s no theoretical limit on how low or how negative they can go. Nominal rates are chasing deflation down. That’s why I look for U.S. 10-year notes to get down to 70 basis points, why not, right? But in the process of doing that, we’re in totally uncharted territory. The central banks don’t know what they’re doing and something’s going to break. Again, another reason to have some cash, have some treasury bills, have some gold outside the banking system. That’s your insurance against all these bad outcomes.

AS: Our next question is from Lorna S., and it’s a really good one, because I think there’s a lot of confusion in the marketplace about what actually constitutes owning physical gold inside and outside of the banking system. Lorna’s question is, “Is having your gold in a bullion bank the same thing as having it outside of the banking system?”

JR: Absolutely not. That’s probably the worst place to put it for two reasons. Number one, anything in a bank, in a bank vault, etc. is at risk to regulatory shutdown. I think we’re talking about the LBMA (London Bullion Market Association). There are seven or eight lead bank members of the LBMA. It’s all public and easy to look up. They are what I call the usual suspects, Goldman Sachs, HSBC, ScotiaMocatta, and a few others. They have standard contracts, so read the contract, painful as it may be. When you buy gold from them, they sell it on what’s called an unallocated basis. That means they sell you gold but you don’t actually have physical gold, and they say that in the contract. They say you do not have bars — serial-numbered, inventoried bars — that belong to you. What you have is an unsecured claim on some gold.

If you say I actually would like my gold, please, you have to do a bunch of stuff. First of all, you have to give them notice, then you have to pay more, and worst of all you have to wait. Alex and I and others have heard horror stories about people who did this and a month or two went by, they said come back next week. They couldn’t get the gold. What that means is that the bank is out there in the market talking the whole spiel to dealers trying to cover a short position, trying to get some physical gold. It’s impossible to know the exact number, because this market is all over the place and no one has all the information, but there is easily a hundred times more in paper short positions if you count the Comex and these unallocated gold forwards than there is physical gold. If all the people who had a paper claim on gold said give me the physical, it’s not even close. The price of gold would skyrocket overnight, they’d shut down all the contracts, and send you a check for yesterday’s closing price. You would not get today’s closing price. It’d be a nightmare.

There are two reasons why that’s not a good idea. One, even if you had allocated, you’re in a vault that could be seized by regulators, and two, you don’t have gold. You have a paper claim. Physical Gold Fund is our host on the call today. There are others, but Physical Gold Fund is my favorite and the one I’m most acquainted with. I’ve actually had the pleasure of going to Switzerland and visiting their vault, not just with the sponsors but with outside auditors and lawyers and tons of security. We went into the vaults and the gold actually came out in a crate where they opened it up and there’s your gold. You have a list with serial numbers on it before the crate is opened. After the crate is opened, not us but the auditor checks every number on a bar against every number on the list. Everything is checked out a hundred percent. That’s when you know you’ve actually got the gold.

That particular vault operator is one of the largest secure logistics firms in the world and is not a bank. Interestingly, we had a very pleasant meeting after we saw the gold and said okay, all the gold’s there, that’s good. We went in and met with the head of logistics, had a little Swiss coffee, and asked how’s business. He replied that business is great. He said we cannot build vaults fast enough. They’re actually in negotiations with the Swiss Army to take over some fortifications that have been abandoned by the Swiss Army inside of mountains that they can use for vault space in the future. If you know anything about the Swiss Army, those vaults are nuclear bombproof. If you drop a nuclear bomb on it, it wouldn’t affect what’s inside.

We asked him, where’s the gold coming from? He said a lot of it is coming from the Swiss banks. In other words, it was coming out of UBS and Credit Suisse going into whether it’s VIA MAT or Brinks or G4S or some of the other big secure logistics providers. The smart money is well aware of this. They’re getting out while the getting’s good. I’ll just wrap up there, but the short answer is I’m a big fan of physical gold. Don’t go all in. I think 10 percent is a fine allocation. Most people don’t have 1 percent, so there’s a lot of headroom between 1 percent and 10 percent, but even if you’re a 5 percent person, whatever it is, do it in physical for security. It’s hard to beat the Physical Gold Fund. As I say, I’ve been to their vaults and that gold isn’t going anywhere, it’s quite safe. That would be my recommendation.

AS: Very good. Thank you also for the kind words there, Jim. The next question came in by e-mail from a gentleman by the name of Jordan T. who is asking, “Is dollar strength basically the same thing as interest rate hikes? Also, could the euro fall even more than it has, and can it really get out of hand?” In other words, something like the Russian ruble, etc.

JR: I love the second part of the question about how low can the euro go. One of my favorite vacations was in the Swiss Alps when the euro was 81 cents. All these people see the euro drop recently from 1.30 to where is it right now at 1.06 today and think it’s the end of the world. Well, I was in Europe when the euro was 81 cents, 0.81. It was terrific because we’d go out to dinner and have a four-course meal at an excellent French restaurant, order wine, dessert, and after-dinner drinks. For a party of seven, we couldn’t spend $100. That’s how low the euro was, so for Americans, it was great.

I don’t get too bent when I see this because remember the IPO price for the euro was 1.16. That’s where it came out. It has traded as high as $1.60 and as low as 80 cents, so there’s a wide range of where the euro can go. If you wonder could it go lower, of course it could go lower. Like I say, I was in the French Alps when it was 81 cents. Will it go lower? That’s the question, and it’s a good question. I guess the right answer is it could, but think about what that means, because the euro doesn’t go lower by itself. If the euro’s going lower, that means the dollar’s going higher. That’s the great thing about analyzing cross rates; it’s a zero-sum game. If something’s down, something else is up.

Could the euro go lower? Yes, but that means the dollar is getting stronger. What does that mean? That means more deflation, a slower U.S. economy, the Fed getting further away from their inflation goal, and a lower likelihood of the Fed raising rates. In other words, it causes all kinds of headaches in the United States. There’s no free lunch here. My view is that the euro is at the low end of where it’s going to go, but again, I don’t want to put a stake in the ground on that. If it goes to 99 cents, don’t tell me I’m an idiot. Maybe it will, but I do think it’s kind of at the low end.

Even if it does go lower, remember that’s not good news for the U.S. economy, corporate earnings, the U.S. stock market, or for Janet Yellen. Don’t just focus on the rate and get into a binary up, down, right, wrong kind of mindset. Think about the dynamics and what it really means.

The first part of the question was: Is a stronger dollar the same as a rate increase? Absolutely. That’s why I said that the way to understand exchange rates and interest rates is that they are reciprocal. They’re two sides of the same coin generally. There are all kinds of exceptions and leads and lags, but generally speaking, higher interest rates mean a stronger currency. The opposite is also true. A stronger currency is the same as a rate increase even if the Fed says zero. That’s what we’re experiencing right now.

Maybe the way to think about it is easing / tightening. This is what my first book The Currency Wars is about where I talk more about these kinds of dynamics. My second book is The Death of Money where I talk a lot more about instability in the international monetary system and the role of gold. Again, this is not just pop economics. It’s very rigorous economic research that had a big influence on Ben Bernanke when he was still at Princeton before he went to the Fed. That is, when you are at the zero bound, you can still ease by cheapening the currency. That’s what started the currency wars. And the opposite is true. When you want to raise rates, you can tighten by raising your currency even if you don’t raise rates. In effect, the Fed’s getting the rate increase without raising rates just by a strong dollar. But it begs the question, do you want to raise rates, too, or is that doubling down? It might be doubling down.

AS: That about does it as we’re out of time. We still easily have another dozen questions in the queue. I just want to really quickly thank everybody who has sent questions in by e-mail, by Twitter, and also live on this webinar. With that, I’ll hand it over to Jon.

JW: Thank you, Alex, and thank you, Jim Rickards. I’d like to pick up on that very characteristic remark, “They can do the math but they can’t do the psychology.” For me, what makes these discussions so illuminating is this multi-dimensional perspective you bring to the issues. So thank you for that.

And thank you to our listeners. You can follow Jim Rickards on Twitter. His handle is @jamesgrickards. Let me remind you that you can find recordings of all The Gold Chronicles webinars with Jim Rickards online. Visit the website Physical Gold Fund Podcasts and register for updates. Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: March 12 , 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles Feb 2015

February 9th Gold Chronicles topics:

*Current Events Europe, US Leadership Vacuum
*Ramifications of Swiss Franc De-Peg
*Difference between ECB and Federal Reserve Quantitative Easing (money printing) programs
*How the ECB QE program will affect the economy
*Why Greece will not exit the Euro, they will reach an agreement
*Why the Ukraine crisis is a fait accompli for Putin
*Meeting with CIA operatives, US ambassadors, and US Intel community – they are making a classic mistake of mirror imaging
*The west assumes Putin thinks like the west, nothing is further from the truth
*There is more power concentrated in the Executive Branch than ever before
*When it comes to US leadership, there is no strategy for Ukraine
*Russia is not a peripheral player that you can just push around
*We are already in a war, it is not kinetic, its being fought in cyberspace and financial space
*Sanctions are not a form of diplomacy, it is a form of warfare
*Being kicked out of SWIFT is equivalent to using a nuclear bomb
*Russia has indicated that response to such actions has no limits
*Kinetic war still not likely, but one a scale of one to ten we have dialed it up past 5 and maybe as high as 8, and then back down to 5
*Current actions (as of Feb 9) are moving towards a kinetic proxy war between the US and Russia
*Huge volatility in markets and FX
*Gold is now trading like money
*World has woken up to threat of US confiscation of sovereign gold and are repatriating
*The scramble for gold by central banks proves gold is now moving back towards the core of the monetary system
*View of allocated gold funds versus paper gold
*Due-diligence on Physical Gold Fund
*View of silver versus gold in portfolio allocation
*What happens for the average person after the current monetary system trends unfold

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The Gold Chronicles: February 9, 2015 Interview with Jim Rickards


The Gold Chronicles: 2-9-2015



Jon Ward: Hello I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in this series we’re calling The Gold Chronicles. Jim, as you know, is an investment banker and investment adviser based in New York, and he also serves on the Investment Advisory Committee for the Physical Gold Fund. Jim Rickards is the author of the New York Times bestseller Currency Wars: The Making of the Next Global Crisis. And most recently, he’s the author of The Death of Money: The Coming Collapse of the International Monetary System, also a New York Times bestseller. Hello, Jim, and welcome.

Jim Rickards: Hi, Jon. Thank you. It’s great to be with you and on the call.

JW: We also have with us Alex Stanczyk of the Physical Gold Fund. Hello, Alex.

Alex Stanczyk: Hi, Jon. It’s good to be here, thank you.

JW: Alex will be looking out for questions that come from you, our listeners. As time allows, we’ll do our best to respond to you. I should emphasize ‘as times allows,’ because on this occasion there is an awful lot of ground to cover in one conversation.

Jim, we last spoke on January 12th. Let’s take a look at what’s happened in four short weeks since then. First, the Swiss Central Bank decoupled the Swiss franc from the euro; the Greek electorate drew up battle lines with the European powers that be; the European Central Bank announced a massive money printing bonanza; and sadly, Ukraine edged closer to a major conflagration. In a moment, let’s take these one by one, but first, at the macro level, what’s up with Europe?

JR: I’ve enjoyed all of these webinars in the series, but of all the ones we’ve done, I think this is the one with the biggest agenda or longest list. It’s not just headline-making events. I think a lot of the listeners are aware of those. But what is the meaning of them, and more importantly, to your question, how do they connect?

Looking at what’s going on in Europe whether it’s Switzerland, Greece, ECB, Ukraine, Russia, all the issues you mentioned and more, to me the common denominator is the lack of U.S. leadership. A quick glance at Europe’s history for the past 2,000 years shows that it’s divided, it’s warring, it has numerous ethnicities, numerous cultures. It’s even multiple civilizations if you want to look at the eastern orthodox and western Catholics. There are a lot of ways to divide Europe, but the history of Europe is warfare, bloodshed, and division up until the end of World War II.

Then the end of World War II coming so soon after World War I was such a disaster. Europe was so exhausted that it was really the U.S. creating a new world order using a combination of NATO, United Nations, the Bretton Woods Agreements, International Monetary Fund, the original gold standard coming out of Bretton Woods, and the Martial Plan. There were a whole host of things with one thing in common which was U.S. leadership, and U.S. has provided that leadership ever since.

Now, Europe has come a long way. Obviously, the European Union, there’s a very significant development going back to a series of treaties from the 1950s, and then the launch of the euro in 1999, and the actual use of euro currency in 2000. So Europe has done quite bit on its own, but the minute the U.S. is absent, the minute U.S. leadership is lacking, guess what? Europe goes back to its old mode of internal squabbling. We saw a little bit of this in the ’90s with the Bosnian genocide when the Clinton administration was very slow to get involved. It was only when the Clinton administration did get involved, led by Richard Holbrooke and others, that that crisis was resolved.

We’re going to take these one by one and talk about them in an economic context, but if you ask me to give a single, global, macro overview of what’s going on in Europe, I would say that U.S. leadership is missing. Whenever U.S. leadership is missing, Europe reverts to what Europe always does, which is a lot of squabbling and potential for war. That’s what we’re seeing now.

JW: That gives a very interesting and helpful context, thanks. Let’s focus on Switzerland first for a moment. On January 15, that country’s central bank ambushed us all with the decision to decouple the Swiss franc from the euro. There was brief chaos in the currency markets, but it seems now that everyone has returned to business as usual. Would you help us understand the decision, and are there any lasting implications we should watch out for?

JR: The timing of the decision was certainly a surprise and caught everybody off-guard including Christine Lagarde who is the head of the IMF. She gave a very interesting interview on CNBC around the time. I think she was in Davos, and normally she would have been someone they interviewed in Davos, but it happened to be the day the Swiss broke the peg to the euro. She was very visibly perturbed, visibly angry, upset, and clearly had not been consulted. So, yes, it’s a shock when you break the currency peg between two major reserve currencies and no one has the presence of mind to call the IMF and give a heads up.

The timing was a surprise, but the breaking of the peg was not a surprise. The reason I say that is whenever you have a non-sustainable policy, the one thing you can be certain of is that it won’t be sustained. In other words, you may not know when it breaks or the exact consequences of the break, but you can be sure of a break because if you have to have a peg, it means you’re fighting market forces to begin with. If the market was going the way you want it, why would you need a peg? You wouldn’t. If you have a peg, it means you’re fighting the market. Well, markets are always bigger than you are, even for a major central bank.

Remember how this worked mechanically — everybody wanted Swiss francs because it seemed like a good store of value. People were dumping euros because they were worried that the euro was going to fall apart, the European economy is collapsing. Some of those worries have only been exacerbated by what’s going on in Greece. At a very simple level, people wanted to dump euros and buy Swiss francs.

If you left market forces to work, the result would be that the Swiss franc would trade up and the euro would trade down. That’s pretty simple, but Switzerland didn’t want that because they have a highly export-dependent economy. We’re all familiar with chocolates, dairy goods, and cheeses, but they also make watches, precision machinery, and pharmaceuticals. They have a lot of hi-tech, high value-added exports. You can also think of tourism as a kind of export. They don’t ship the mountains to California, but Californians get on a plane and go there to ski, so that’s a kind of export, all very sensitive to exchange rates. For example, if the Swiss franc gets too strong and I want a European ski vacation, I can go to France or Austria instead of going to Switzerland. That’s why they wanted to keep the Swiss franc from appreciating or going up too much, but the market wanted it to go up because they wanted Swiss francs. In order to maintain the peg, they had to print Swiss francs, use them to buy euros at the pegged rate (that’s how they maintain the peg), then use the euros to buy euro securities, euro sovereign bonds and other euro anonymous securities.

Guess what was happening – they were inflating their balance sheet. They were piling up massive amounts of euro securities on the balance sheet of the Swiss National Bank and flooding the market with Swiss francs. If they didn’t break the peg, they were going to end up owning every euro in the world because the pressure never let up. No matter what they said or did, the market still wanted Swiss francs, so they were just going to blow up the balance sheet and own every euro in the world. This was clearly non-sustainable, so they picked a particular moment to break the peg. Maybe no one called Christine Lagarde at the IMF, but it sure sounds like Draghi and the head of the Swiss National Bank were talking, because this happened literally days before the ECB announced their quantitative easing. It was almost as if Switzerland were to say, “Okay, we’ve done our part to prop up the euro. Now over to you, European Central Bank, it’s your job.”

The reason they broke the peg was because they had to sooner or later since it was non-sustainable. The lesson for markets is to look around the world and find anything that looks like a peg. One that comes to mind is Hong Kong dollars to U.S. dollars. I’m not saying that Hong Kong is going to break the peg tomorrow, but whenever you have any currency that’s fighting the market, it’s probably just a matter of time before the market wins. Whenever you see any relationship like that or any effort to rig a market whether it’s the Fed and interest rates or any pair of exchange rates, it’s probably going to break down sooner or later. Usually when it does, there’s a shock factor because people aren’t ready for it.

That’s why they did it, and it was bound to happen. The timing was a surprise, but the event itself was not a surprise. There is another artificial peg in play which is Denmark. Denmark has cut interest rates four times in the past couple of weeks in order to try to cheapen their currency because people are flooding in to Danish capital markets right now trying to get the Danish krone. It’s very easy to predict that will break at some point. They’re going to let the krone go up, but for now they’re still fighting it, so that’s another one to watch.

JW: The excitement about the Swiss move was pushed aside by the next announcement you mentioned – the European Central Bank launching a huge asset-buying program. In the past you’ve emphasized in discussing this possibility the difference between the ECB and the Federal Reserve. I’m curious to know if you were surprised by this decision, and beyond that, will it work?

JR: Two different questions. This was about the most well-advertised easing program you can think of. Go all the way back to when Draghi said ‘whatever it takes.’ The euro was under attack and he needed to calm down markets so he said, “We will do whatever it takes to defend the euro, and believe me it will be enough.” Those were his exact words. He said that in the summer of 2012, so the fact that it took almost two and a half years to actually do something, like I say, it was pretty well advertised. At the end of the day, they probably did have to do something.

One of the important ways to understand this is that so many Western analysts – when I say Western, I really mean United States and U.K. – look at Europe and think this is a stimulus program similar to what the U.S. has done. I have news for them. Number one, quantitative easing doesn’t stimulate anything. It does have effects; it has channel effects in terms of creating asset bubbles and potential channel effects in terms of exchange rates, but it doesn’t create jobs or stimulate anything. That’s nonsense, and Draghi knows it’s nonsense, so they’re not doing this for the so-called stimulus reasons the U.S. supposedly did. They’re doing this to fight deflation. The European Central Bank does not have a mandate to create jobs and stimulate the economy the way the Fed does with the Fed’s dual mandate. They do have the mandate to maintain price stability, and the prompt for this was deflation. Neither inflation nor deflation is price stability. Whether the purchasing power of your currency is increasing or decreasing, by definition, you don’t have price stability.

That was really what prompted it, not any kind of stimulus program. That’s important, because it means they won’t go beyond doing what they need to maintain price stability. If you see the deflation start to level off in Europe — and I think we’re already seeing some signs of that — and you see them getting into a little bit of inflation rather than deflation, that signals that Draghi will not be doing much more. In the U.S. we think you should have QE1, QE2, QE3, multiple rounds, and keep doing it until you wipe out unemployment and create nominal growth. Draghi doesn’t believe in any of that, but he does believe in price stability, so they’ll do enough to avoid deflation but not more than that. Even though it’s now happened, in terms of the future, I wouldn’t expect a lot more. So that’s number one.

Number two, there’s less here than meets the eye. First of all, I love Draghi because he’s the master of saying little and doing less. They had this announcement in January and haven’t actually started the program yet. It’s supposed to start in March, so it’s still a few weeks away in terms of the launch. So this is still vaporware. But beyond that, a lot of these purchases are going to be from what they call the NCBs (national central banks) rather than the European Central Bank itself.

In the U.S. we have one Federal Reserve System. There are 12 regional Federal Reserve banks, but they’re all under the thumb of the Board of Governors and the FOMC in Washington and don’t really act very independently, at least not in terms of monetary policy. In Europe, they do have the European Central Bank, but none of the national central banks went away. There’s still a Central Bank of Greece, a Bank of Italy, the Deutsch Bundesbank, which is the central bank of Germany, and Banque de France, the central bank of France. All these central banks still exist. Draghi said the central banks have to go buy these bonds, so you’re going to see the Deutsch Bundesbank buying German bonds, and the Greek central bank buying Greek bonds. A lot of this has been pushed down to the national central banks, and that’s important for credit risk reasons, meaning that if those bonds go bad or are devalued or restructured, those losses are going to fall not on the ECB but on the balance sheets of the national central banks. So again, even in terms of the ECB, there’s less here than meets the eye.

And finally, one of the big trends of the past two years was that the European Central Bank was reducing its balance sheet. Some of the ease they put into the marketplace in 2012 and 2013, some of those asset purchases, were actually being unwound during the course of 2014. This is unlike the Fed, which blew up its balance sheet and never looked back; the Fed has tapered additional long-term asset purchases, but they haven’t done much, actually very little in terms of reducing their balance sheet. Their balance sheet is still at a very high level or a very inflated level. The ECB actually did, so to some extent this quantitative easing is just putting back some of the easing they took away in 2014. On net, the balance sheet isn’t any bigger than it was in 2013.

Putting all this together, the fact that they’re only doing enough to avoid deflation, it’s not really a stimulus program, the heavy lifting has been pushed down to the national central banks, and all they’re doing is putting back some of the money they took away last year. To me, this is a big nothing burger and I wouldn’t get too excited about it. It does have one very important effect, however, in that it has helped to keep the euro low. The euro traded down from about a high of 160. In recent years it’s been around 140 traded down through 120 where it was in the crisis all the way down to about 113. I think it is close to a bottom at that level. I’m not saying it couldn’t go down a little more as it probably would tick down a little bit as we see some bad days and bad headlines coming out of the Greece crisis, but we’ll talk about Greece in a minute. So I’m not saying it can’t go lower, but it does feel like it’s near the bottom. I think the ECB program was putting the icing on the cake.

One other thing, by the way, is that a lot of the easing already took place courtesy of our friends, the Swiss. Go back to what I said earlier. They broke the peg in January, but before that, they were printing francs to buy euros, and then taking the euros and buying euro securities. That was a form of easing — it’s just a different central bank. It wasn’t coming from the ECB; it was coming from the Swiss National Bank, so a lot of the easing was already in the marketplace. The ECB is just sort of not really doing a lot more than keeping a lid on it and keeping the euro where it is, so we’ll see the euro at these levels at least until later this year. If there’s a reversal, it won’t be because wonderful things are happening in Europe but because the Fed wakes up and realizes they’re not going to be able to raise rates, although that’s a separate discussion. The big takeaway is that this is keeping the euro at a weak level. I don’t expect a lot of stimulus, but it is another example of the currency wars.

JW: You mentioned the next shock to the European system, which arrived on January 25th. With the election in Greece of the left-wing Syriza Party, this put Greece on a collision course with the so-called Troika — the European Commission, the European Central Bank and the IMF — on the issue of sovereign debt. How will this one play out?

JR: I think it’s going to play out the way it has played out before. I have a long history with this subject going back to my first book Currency Wars in 2011 and a series of interviews I’ve done since. We’re really talking about three and half years at this point, even a little bit longer, going back to 2010. At the time I was the only voice and even now one of the few voices who have been of the view that Greece is not leaving the euro or being kicked out of the euro. The euro, as a system, will add members as it has in recent years and isn’t going anywhere. I call it the “Hotel California,” i.e., you can check in but you can’t check out. I continue to be of that view, and I’ve been pouring cold water on the “grexit.”

In 2012 we heard the grexit voices including Roubini, Krugman, Stiglitz, Zero Hedge, and all these guys saying Greece was going to get kicked out, Spain was going to quit, and Italy was going to quit. They were all going to go back to their local currencies, devalue and lower their unit of labor cost, and that was going to be the antidote to austerity and all that. At the time I said that was nonsense, and I said it again in my second book, The Death of Money. I’ve been consistently of that view, and I remain of that view. In other words, there’s not going to be a grexit.

Now having said that, let’s not underestimate the seriousness of the situation. We do have a political party that has staked out some very tough ground, which is new. The political parties that were in charge up until now favored working with the Troika. Now there is a political party leading a government that wants to confront the Troika. This is new, riskier, and a more dangerous situation that’s going to grab some headlines and make a lot of people nervous. I recognize that we have a new political reality on the ground, but I still hold the view that Greece is not leaving the euro, and here’s the basis for that. This is not different than any other negotiation I’ve ever been in. I’ve done a lot of negotiations over 40 years having served the capital markets and banking markets all this time and also having been a lawyer. I’ve done quite a few deals. Prior to going into a room, closing the doors, sitting down, and banging through the negotiation itself, there’s a lot of posturing and positioning. Even when the doors are closed, you start out that way and then begin to reach for common grounds.

Right now these negotiations have not begun in earnest. They will shortly, but in the meantime, the two sides have been huddling on their own. We have speeches from the Prime Minister of Greece and interviews from the Finance Minister. The European major countries, major participants, European Central Bank, have been meeting on their own in Brussels working out their position. Everyone has their press releases out and everyone is posturing. Now we know what the two sides are. The lines are more starkly drawn and they are confrontational, but here’s how to understand the negotiation dynamic. You have to say to yourself, what do I have to gain or lose by reaching some kind of agreement or some kind of compromise? And what do I have to gain or lose by walking away from the table?

This is a classic negative-sum game. These are not crazy people. I recognize that they may be political and adversarial, but they are rational, so you put it in the game-theoretic context. This is a classic negative-sum game, which means that if they don’t reach an agreement, both sides are worse off. Clearly, the European Union and the euro zone will be worse off if Greece does leave the euro. I don’t expect that, just to be clear but if they did, that would be catastrophic. It’s hard to know what the ripple effects would be, but certainly you would see Podemos sweep to power in Spain. You might see the National Front, Le Pen, gain significantly and maybe even become President of France if you can imagine that. Similar parties would arise in Italy. They’re already there, but they would gain power. There will be a domino effect. People would expect Portugal, then Spain, then Italy, and possibly Ireland to quit the euro. The euro would literally fall apart very quickly with unforeseeable consequences in terms of the target two balances, declining asset values, and global financial catastrophe. So there’s your downside, pretty bad. This isn’t just a shoving match between Germany and Greece.

On the one hand this is catastrophic, but on the other hand, let’s imagine you’re Greece. It’s not a lot of fun. You actually want to quit the euro? Okay, that’s fine, but now you’re back to the drachma, which is barely worth the paper it’s printed on. You’ve already admitted your government is bankrupt as a negotiating posture, so now you’re going to come out with your own currency not backed by anything? By the way, there are a hundred tons of gold pledged to the ECB to secure the prior bailout they got. So now, they have no gold, a bankrupt country, a paper currency nobody wants, and everyone is running for the exits. Good luck with that. My point being if they fail to reach a settlement, there are disastrous consequences for Greece and disastrous consequences for Europe. That’s the ultimate negative-sum game, which means that in behavioral game-theoretic space, they’re going to reach an agreement.

One of the questions I get asked most frequently is who’s going to blink first? The answer is they’re both going to blink. Both sides will give more than they want and both sides will not be totally happy with the outcome, but an outcome is an outcome. If there’s some agreement, both sides will walk away saying they got part of what they want. You can count on the Germans to emphasize what little sliver they managed to get. You can count on the Greeks to emphasize whatever sliver they got. Maybe Greece will get a little more than Germany this time around, but they will find a way. The short-term deadline is the end of this month, and there’s significance to the end of February. That’s when the existing bailout has its next tranche. The way they have been doing this is that the Troika have been dispensing money to Greece in exchange for which Greece agrees to adhere to an austerity program, which so far they have in terms of raising taxes, cutting expenses, reducing public payroll, cutting deficits, privatization, etc. It’s a whole long list of things they’ve agreed to do. They have been living up to their end, not very happily, and that’s why the Syriza was able to sweep to power.

Now Syriza says they are not going to adhere to the program any longer. The Troika says, if you don’t, we’re not going to dispense any more aid. This train wreck is set up for the end of the month, but there is a way out, which is this idea of a bridge loan. The bridge loan would be new money with no strings or very few strings attached for 30 days or maybe 60 days. The idea would be to buy time to rework the fundamental agreement. It would not be a continuation of the existing bailout; that would very possibly be over at the end of February. The two sides would then get to work on negotiating a new long-term solution with some concessions in favor of Greece. To get 30 or 60 days to do that, they need some kind of bridge loan. Who would the lender be? It remains to be seen. It’s very unlikely to be the ECB and could actually be the IMF or Brussels. The EU has been very creative in coming up with emergency facility.

I look for a game of chicken between now and the end of the month. There will be increasing tensions, increasing volatility, lots of bad headlines, lots for the grexit groupies to cheer about, some kind of last-minute bridge loan probably coming from Brussels, 60 days of hardball negotiations, finally a new settlement, and Greece remains in the euro. That’s my expectation and what I would advise investors. Expect volatility, bad headlines, and bad days in the meantime. I think I’m right for the reasons I mentioned, but if I’m wrong, I’ll go way, way the other way and say that the catastrophic consequences to that are actually worse than the worst skeptics have imagined. That’s why I think they’ll find a way. It’s precisely because I can envision a worse catastrophe than the critics, my expectation is we won’t go there because both sides understand how bad it can be.

JW: Finally, the Ukraine crisis. What’s striking here is that there may be a growing rift between Europe and the United States. We see Angela Merkel and her European colleagues apparently negotiating an effective surrender of the Eastern Ukraine provinces to Russia. Meanwhile the U.S. is talking up lethal aid to Kiev. Where will this one end?

JR: Surrender is an interesting word. You’re kind of right in pointing in that direction. The technical term for it is ‘fait accompli’ which is a phrase meaning something that has already been done. In other words, Putin just took what he wanted, and no one’s going to do anything about it. It’s a fait accompli and he wins. The question is how do you accommodate that? How do you fit that within your own understanding of the world order? How do you learn to live with it, like it or not? I think your first point is a very powerful one, which is there is a wedge driven between Europe and the United States. That goes back to my first point about the lack of U.S. leadership.

I was in Washington last Wednesday morning meeting behind closed doors with a group of national security professionals. There were about 15 of us. We have what we call “Chatham House rules” which means you’re not allowed to mention names of individuals or give quotes attributed to individuals. You’re allowed to talk about it on general terms; you just can’t say, Mr. Jones said this or Mr. Smith said that. I’ll honor and respect those rules, but just to give the listeners a flavor, we had U.S. ambassadors, CIA covert operatives, people from Treasury, from the National Security Council, and from think tanks. It was a pretty high-level group. The tenor of the conversation was sort of: “What does Putin want? We need to figure out what Putin wants. Does Putin want this or Putin want that? We need to know what Putin wants so we can figure out how to affect his behavior,” etc.

I was listening and trying to be polite, but sometimes I can’t help myself. At some point I just interjected and said this is ridiculous. This is a prime example of what an intelligence analysis would call mirror imaging. Mirror imaging is a flaw in intelligence analysis that arises when the analyst assumes the other guy thinks the way you do. In other words, the West looks at Putin, assumes Putin thinks the way we do and says, what does the guy want? Once we figure that out, we’ll know how to change his behavior in certain ways, etc. First of all, I said, Putin doesn’t think the way we do so get that out of your heads. That’s where mirror imaging comes in. Get away from mirror imaging and understand he’s a different breed of cat. He thinks about things very differently.

Number two, asking what Putin wants is the easiest question in the world. I know what Putin wants. He wants Georgia, he wants Ukraine, and then when he gets those two things, he’ll figure out what’s next, probably Moldova and a few other places. He’s on a tear in terms of territorial expansion. It’s easy to figure out what Putin wants. The hard question is, what does the United States want? This is where our leadership and our foreign policy have fallen down. We have no strategy. We have no well-articulated set of goals. As Henry Kissinger says, it’s important to know what you want and it’s also important to know what you don’t want. In other words, you should have a list of things you will not allow. Is Russian occupation of Eastern Ukraine and Crimea something we will not allow? Yes or no?

If the answer is yes, then you have a war on your hands, and you have to go for the throat. If the answer is no, then live with it. The point is we’re not asking those kinds of thoughtful questions, the kind that Kissinger is very good at framing. Forget the State Department and to some extent forget the Defense Department. I’ve never seen an administration where more policy is concentrated in the White House than we have today. Very powerful departments like Defense and State and for that matter the intelligence community end up being peripheral players because there’s so much power concentrated in the White House in the West Wing.

These people are amateurs. I don’t know what to say. There’s nothing wrong with being younger. I’m all for getting younger people around, but the problem of being younger is you’re young. You don’t have the seasoning that you get from a George Shultz or a Henry Kissinger or a Madeleine Albright. Too bad Richard Holbrooke died at a young age. He would have been one of the people you could turn to in a situation like this on the Democratic side, and there are certainly a few people on the Republican side. It’s not a partisan comment; it’s just that it’s amateur hour at the White House. They centralize power, they micromanage, and they don’t know what they’re doing. They just go from day to day, headline to headline, spin to spin, and say what feels good today, what looks good today, but none of it thought through. No one’s asking questions about what U.S. interests really are, what we will permit, what we will not permit, how we will align our goals with our resources and capabilities.

This is a massive, massive problem with the result that Putin is getting what he wants and the Western response is a muddle. Just to bring the conversation back to economic space, Europe does not want these sanctions on Russia. They are the eighth largest economy in the world and a major trading partner to Europe. Depending on the country, they provide anywhere from 90 to 30 percent of energy imports of all the major countries in Europe. This is not a peripheral player you can push around. It’s not even like Iran. Iran’s a pretty big country but it’s not that heavily integrated into the global economy in ways that you have to worry about. Russia is.

Europe doesn’t want sanctions; Obama does. You have a lot of hawks. By the way, it’s not just the Democrats. You have Republican hawks McCain, Lindsey Graham, and others who are banging the drum over this. None of them, as far as I can tell, have really thought it through. What I see is a lack of U.S. leadership, a lack of U.S. strategy. Putin is focused like a laser beam. He knows what he wants. People ask is there a potential for war here? My answer is we’re in a war. Unfortunately, it’s just that a lot of our leadership don’t realize it.

This is what I said to the group of experts on Wednesday, because they were talking about economic sanctions as a form of diplomacy and an alternative to warfare. I said no, economic sanctions are warfare. You’re not shooting and dropping bombs necessarily. It’s non-kinetic, but it’s not diplomacy; it’s warfare. The alternative to economic sanctions is diplomacy. This is what Merkel is saying, and I think that message got through to Obama based on what I’ve seen about their meeting today. Merkel has said clearly there is no military solution in Ukraine, and she’s right. That means you have to have a diplomatic solution. The White House still thinks that sanctions are a form of diplomacy, but what I’m saying and the way Putin looks at it, sanctions are a form of warfare. And it’s a warfare that risks escalation.

What’s the equivalent of a thermonuclear bomb in economic sanctions? The answer is kicking you out of the SWIFT system. SWIFT is the Society for Worldwide Funds Transfers based in Brussels. That’s the messaging system or central nervous system for the entire global financial system. They process $6 trillion a day of bank transfers, message traffic between the banks. Kicking Russia out of SWIFT would paralyze their economy. That’s the equivalent of dropping the H-bomb on Moscow. Dmitry Medvedev, the president of Russia, said the other day, “If that happens, the Russian response will know no limits.” Those are his exact words, “no limits.” No limits means the Russians can escalate up to and including a nuclear response. That’s how we’re kind of playing with fire here.

As far as I can tell, Merkel did a pretty good job of getting through to Obama that economic sanctions were counterproductive. We’re either in a war or close to a war. We need diplomacy. Diplomacy at this point means Putin gets a lot of what he wants. Maybe we’ll circle back and punch him in the nose somewhere else in the world. Again, I can’t attribute specific quotes to specific people, but I’ll just say the view is expressed that Putin is wondering why we’re not doing sabotage somewhere. He’s used to that, but he’s not used to these sanctions. People in the White House think it’s a good way to put pressure, but it doesn’t put pressure.

Again, the mirror imaging comes in in the following way: These people in the White House who are pretty naive say let’s put pressure on the oligarchs, and the oligarchs will put pressure on Putin and will change his behavior. That’s the analysis. Well, it works in reverse. If you had a way to put the screws to Bill Gates, Warren Buffett, and a couple of hedge fund kings, I dare say they would find a way to get through to the White House and get the White House to change their behavior. That’s the way it works in our system, but it’s not the way it works in Russia. It’s easy to put pressure on the oligarchs, but if the oligarchs put pressure on Putin, he’ll put a bullet in their heads. Obama’s not going to assassinate Warren Buffett. He’d probably do what Warren Buffett wants. But Putin will see to it that an oligarch gets assassinated. There’s an asymmetry where the mirror imaging falls down. This whole naive idea that you can put pressure on Putin via the oligarchs is nonsense. It seems we’re waking up to that. It does look like Putin’s getting most of what he wants, but hopefully that war will die down. I think it’s going to take a while. Let’s just say we’ll have more bad days in Greece and more bad days in Ukraine before this is all over.

JW: Let me follow this with a question that came up between colleagues. In everything you’ve described, do you feel that the hazard of a kinetic war between NATO and Russia is any more likely or less likely? Is that possibility a concern for you?

JR: It’s a concern. I don’t think it’s going to happen, but if you said we’re kind of dialing it up from 0 to 10, we got way past 5 last week, maybe even up to 7 or 8. This all happened while I was in Washington for this meeting, and over the course of Monday and Tuesday, the White House leaked to the New York Times that they were considering arming Kiev, Kiev being the Western Ukrainian forces. They were considering providing lethal aid. Right now they’re giving them body armor and defensive stuff, but they would actually give them some more heavy weapons.

Then Wednesday morning, it was reported that Poland had agreed to sell weapons to Ukraine. Interestingly, ‘sell them’ not ‘give them,’ but I guess the Pols need the money, so that’s understandable! All of a sudden, you’ve got Russia arming rebels in the east and the U.S. arming Kiev forces in the west. Now you have a proxy war between U.S. and Russia. That would be a proxy kinetic war. As I said, the financial war and the cyber war are already here. This would be kinetic. Everything short of U.S. troops or NATO troops confronting Russian troops. You would come very close to that with, in effect, NATO arms confronting Russian arms and I dare say Russian troops. I think there are Russian troops in Eastern Ukraine.

You could have the specter of Russian Spetsnaz (their Special Forces) being killed with NATO weapons. How does that feel? Not so good. We were really barreling in that direction as of last Wednesday. Now here it is Monday. There were talks over the weekend, and the U.S. seems to have backed off on that a little bit. Merkel is the only adult supervision in the story. This is like a playground. Putin’s out there, difficult for some people to understand, but it’s easy for me to understand. He’s kind of a thug and a killer and he feels that he’s been dissed. Just to put it in the language of the basketball court, we dissed Putin.

Think about what Obama has said about Putin publicly. He said Putin is like the kid who sits in the back of the class and wiggles and doesn’t pay attention. He’s like the dumb kid or the kid with ADD in class. Here’s the president of the United States calling the prime minister of Russia a kid in the back of the class who’s not too bright, and on and on. How is that a way to run a bilateral relationship? How is that a way to create dialogue? How is that a way to engage in diplomacy when you’re publicly insulting the head of state of the eighth largest economy, one of the major thermonuclear powers in the world? Again, this shows you the amateurish nature of Obama’s foreign policy. To answer your question, Jon, probably as late as Wednesday or Thursday we dialed it up to maybe 8 on a scale of 10. As of today it’s dialed back down to maybe a 5 or a 6. That’s good news, but this was a game of chicken played by people who didn’t really understand how chicken ends.

JW: I’m very mindful of people with us wanting to ask you questions, but we call this series The Gold Chronicles, and I really have to ask you briefly about gold. In a way, through all this drama, it has behaved quite un-dramatically. It’s bounced up and down a little bit in the dollar price, but there have been no spectacular swings. It’s as if gold is, as a sort of market intelligence, not reacting very intensely to all these huge upheavals we’ve been discussing. What’s your take on that?

JR: You’re absolutely right in terms of the price action. It took a beating last fall and then picked itself up, got off the bottom, and traded up around the $1300 range. It’s backed off from that, but it does seem to be holding most of those gains, most of that retracement from the lows. That’s a very positive sign given what’s going on around the world, particularly given the strong dollar.

Now for a couple of comments on gold. I talk about this in chapter nine of my book, The Death of Money, and I also talk about this a lot in my monthly newsletter Strategic Intelligence. I say gold is money, but I recognize the fact that it trades like a commodity on commodity exchanges and people treat it like a commodity. It has some inflation-insurance aspects to it. I get that, but I try hard to think about gold as money. It helps me understand what’s going on. If you look at a chart of gold and a chart of commodity indices that include gold, along with a lot of other things such as iron ore, copper, aluminum, other agricultural commodities, what you see is a very high degree of correlation with a downward trend through most of 2014.

Right around the end of 2014 in the November/December timeframe, they completely diverge. The commodity index plunges mainly because the oil price collapsed, which we all know about. Gold starts to go up from trading off those $1,100 lows closer to $1,300. When I see very sharp diversions like that — the high correlation between gold and broader commodity indices suddenly breaking down, the commodity indices continuing to collapse but gold goes up, which it did — that tells me that gold is now trading like money. In other words, it stopped trading like a commodity and started trading like money. People just wanted it independent of what was happening to deflation and commodity prices and other things.

That happened, by the way, right around the same time there were large outflows from the Federal Reserve Bank in New York. Again, this is a very sophisticated audience we have on this call. I think listeners are aware of the repatriation movement, that movement to get your gold back. It’s also something I talk about in my newsletter Strategic Intelligence and in the opening pages Currency Wars, my first book in 2011. I was the first one to say, hey, Europeans, Japanese, all you people, you have your gold in the Federal Reserve Bank in New York. Don’t be surprised if the U.S. seizes your gold in some kind of future financial crisis. We have a good track record of seizing assets when we feel like it.

I remember sending that book to a good friend of mine who is a PhD economist. In the foreword or introduction I said it was a possibility that we could seize all the European gold. My friend said to me, “Jim, I read that. If I didn’t know the book was written by you, I would have thrown it in the trash right there. That was such a ridiculous comment. I almost stopped in my tracks, but I knew it was by you and I kept going and read the whole book.” So we had a laugh about that. Well, guess what, since then the world has woken up to the threat. The Germans are getting their gold back, the Dutch are getting their gold back, and there was a referendum in Switzerland, which, unfortunately, failed because the Swiss National Bank lied to people about the peg. If they lie to you once, shame on them; if they lie to you twice, shame on you. So maybe people will wake up the next time. There’s also talk about it in France and Belgium and elsewhere.

This movement is alive and well. Those shipments out of the Federal Reserve reached a peak for the year right around November and December 2014, and they’re continuing. We have these two data points – major shipments of physical gold coming out of the Federal Reserve in November/December 2014, and a sharp divergence between the dollar price of gold and the gold index right around the same time. I look at those two things and it tells me that the scramble for gold is now thinking of gold not as a commodity, not as an investment, but as money, which I think is the right way to think about it.

I’ve gone a step further in my thinking, which is the whole thesis that China and Russia are acquiring gold. At a minimum, this will be your pile of poker chips in the game of Texas Hold’em the next time they reset the international monetary system. Could you possibly have a gold-backed currency? I don’t necessarily predict that, but it gives you an option. There’s price suppression going on to keep the price low while these two countries back up the truck and get all they can. There’s a diminution in the floating supply, which is different than the total supply.

We’ve talked about all those things before and will again, but I’ve gone a step further. This is starting to look like a corner. I don’t want to put a stake in the ground on that; I need to do more work and think about it a little more, but it’s starting to look like a corner to me. There’s never been a successful corner in the gold market. There was the famous one attempted September 26, 1869, by Big Jim Fisk on the old New York Gold Exchange. There was certainly an attempt to corner and a panic, but then the corner was broken by President Grant and the Treasury agreeing to release some gold.

A lot of listeners are familiar with the Hunt brothers’ effort to corner the silver market in 1980. That was busted by two things. They got pretty far long, and the price of silver spiked up, but there were two phenomena. One, you had every grandmother in America climbing up to her attic, getting out the family silver, and selling it to salesmen who were going around door to door. In the precious metal industry that’s called “scrap” although it may be a nice silver set, flatware, bracelets, necklaces or whatever. That kind of scrap silver literally came out of the woodwork and flooded the market, so there was suddenly a lot more floating supply. Secondly, of course the government changed the rules, although a lot of people whined about that. My view is to get over it. There’s a rule that says they can change the rules, so you should see that coming in. They changed the margin requirements and busted the corner.

The Hunt brothers got caught between granny and the government and that failed. These corners usually fail, but Russia and China are different. Recognize that the scrap has been coming out of the woodwork already, independently, without a price spike. In our conversations with refiners in Switzerland, they’ve said they’ve had trouble sourcing scrap. There’s a little “We Buy Gold” sign on every corner of America. People like at CNBC enjoy making fun of that as if it somehow diminishes the role of gold, but I remind them that those signs don’t say, “We Sell Gold;” they say “We Buy Gold.” So a lot of the scrap has been hoovered up and refiners are having trouble sourcing it.

I think the grannies have already done their thing and the government can’t do their thing, because Russia and China are sovereign governments who don’t care what the CFTC [Commodity Futures Trading Commission] thinks. They’re kind of immune to what happened to the Hunt brothers, and they probably have a little more in resources than Big Jim Fisk from the 1860s, so it could be a corner. Again, I don’t want to predict that, but it is something I’m watching very closely and another reason to own gold.

JW: That’s interesting. Thanks, Jim. I’m going to turn quickly to Alex, hoping we have time for at least one or two questions from our listeners. My apologies to everyone. We really needed, as I think you are hearing, to cover a lot of ground in this conversation. Alex, over to you.

AS: Thanks, Jon and Jim. We have about eight minutes left and are going to do our best to answer a couple of questions here. As per usual on these webinars, we have way more questions than we have time available to answer. They’re very good, smart questions from a wide range of people. I have one here from a 25-year-old university-educated geologist who is underemployed all the way up to managers of substantial funds that we have on the call as well. The first one comes from a gentleman by the name of Arthur. His question is, “How do you view holdings in a fully allocated physical gold trust like Sprott?”

JR: Obviously, I advocate and recommend to investors that they have something in gold, and I’ve been pretty consistent that 10 percent is the right amount. Some individuals have more — that’s a choice for the portfolio manager or the individual — but if you look at institutional allocations on the whole, they’re actually closer to 1 percent. So there’s a lot of headroom between where people or institutions are and where they need to get to. If you don’t like 10 percent, then do 5 percent, but have some significant allocation to gold.

That said, I do recommend physical bullion, not paper gold. Paper gold would be COMEX futures, ETFs, unallocated forward contracts, etc. I think all of those are very flawed ways to hold gold. What you really want at the end of the day is wealth preservation and price exposure. The paper instruments are going to give it to you up until the day gold spikes out of control, then they’re going to terminate your contracts as of the close of business on the prior day, and after that they’re going to send you a check. They’re not going to steal your money, but you’re going to get a check for yesterday’s close. You’re not going to get today’s price action, because that’s the thing that will break the banks. So you need physical gold.

Now, the question is, how do you hold it? It all depends on if you’re talking about five coins or $100 million allocation out of a billion-dollar portfolio. When you get into those large amounts, you do need structures. I’ve seen a lot of these. Believe me, I often am shown documents or charts and things like that on many of them. One of the things I’ve always liked about Physical Gold Fund is that it’s very well thought out from the Swiss vaults to really technical things like keeping the gold inside the LBMA network. By this, I mean there’s a whole approved list of refineries and secure logistics providers right down to who’s driving the armored car and where the vault is. I don’t want to get too in the weeds on that, but there’s a lot to know there. Physical Gold Fund has thought through all that, so I like it.

There are others out there. Sprott is a good name. I can’t say I’ve done the diligence on Sprott the way I’ve done on Physical Gold Fund, but as far as I’m concerned, any reputable firm that’s offering physical gold fully allocated with the ability to get the gold if you want it, meaning you call them up and say, I’d like to redeem my units and I’d like the gold to ship to the following destination. It could be a private vault or any designated custodian, then that’s a good structure. So again, I caution investors to do your own due diligence. Talk to your lawyers and accountants, read the documents carefully, and understand what it is you’re getting. All gold investments are not created equal. Again, I’m comfortable with Physical Gold Fund because I’ve done the diligence there and spent time with that, but there could be other good ones out there as well.

AS: Very good. This next question comes from a gentleman by the name of Joseph. He is a managing partner in what looks like a fund management company. He says, “I hear you loud and clear about the reasons to hold gold in a portfolio. I own some in physical form, but I own far more physical silver than I do gold. Given the historical role that silver as money has played, why do you emphasize the role of gold so resoundingly and rarely mention the investment merits of silver? Are there attributes to silver that make it less valuable money?”

JR: I’m not a silver basher or a silver hater. I think silver has a role to play, and I have some silver in my portfolio. Here’s what I would say. Silver is always going to tag along with gold. There’s no way gold is going to $5,000, $6,000 $7,000 an ounce (which I do expect) and silver doesn’t go to $100, $150 or some rough equivalent. If gold takes off, silver’s going to take off with it. It’s not going to be left in the dust, and therefore it’s a good holding. The only reason I don’t talk about silver a lot is because gold actually isn’t good for anything except money.

Money is a pretty good thing to have when the world’s falling apart, so I like gold for that reason. Gold has very limited industrial uses. Yes, it’s used for jewelry, but I consider jewelry wearable wealth. People talk about getting a new watch from Apple, and they call it wearable technology. Well, to me, gold is wearable wealth. You can put on a nice necklace or bracelet or pair of earrings or whatever. That is what they do in India. You see these women adorned in gold. That’s their bank account. I don’t really separate jewelry from wealth. Gold jewelry is stored wealth, even though I think the world gold council probably does treat it separately. If you treat jewelry as just a form of wealth, really no different than bullion bars and coins, then gold has no industrial use.

Silver does. Silver is good for a lot of things, a lot of industrial inputs, which means it’s always going to move on two vectors. One is the monetary vector, but the other one is the industrial vector. They can be pointing in different directions. The monetary vector could be pointing up if there’s a flight to quality or outbreak of inflation or just on a fear trade, but the industrial vector could be pointing down because of a slowing global economy and less demand for silver and some industrial inputs. To me, it’s a mixed bag, and I don’t hold myself out as an expert on all the industrial applications of silver. I know they’re there, and to me it just muddles the picture a little bit. I’m not anti-silver; it does have a place in the portfolio. I just don’t spend as much time on it, because I’m a global macro analyst, not an industrial engineer. I’ll leave it at that.

AS: Perfect. Normally we’d be turning this back over to Jon so that we could wrap this up, but there is one last question I want to try and squeeze in here. We may run just a couple of minutes overtime, but it’s a really good question. This question is coming from Sasha, and I’m going to read what she wrote in an e-mail. She says, “I’m a 25-year-old university-educated geologist and underemployed. I have no mass wealth to protect by the purchase of gold, although I do own a few bars. However, I have not seen any benefit from this supposed growth.” I think what she’s talking about when she mentions “growth” is what’s parroted in the mainstream media and by the current administration. “For my family and friends, it’s just a creep up in asset prices and the cost of living. Will there come a time in the near future when the honest work of individuals will be enough to purchase a home, raise a family, and enjoy the quality of life where one needs not worry about how to merely survive from day to day?” I guess the summary of it is will a real and equitable economic expansion take place after the fall of the dollar and the restructuring that you’ve written and talked about, Jim?

JR: Here’s hoping we can get to the kind of growth Sasha is asking about without a collapse in the international monetary system. My views on that are based on the trends I see, the instability I see, a lot of dysfunctional public policy, and a lot of misapprehension of the statistical properties of risk by the Fed and other policymakers. That’s why I warn about that. I hope I’m wrong and it doesn’t happen, but right now we are on track for that to happen. Unfortunately, if it does happen, there are two possible outcomes. One is a massive wakeup call maybe like Noah after the flood. The waters go down, we land the ark, we get out, and we start over again. Maybe that restart is a much healthier kind of economic dynamic, the kind of opportunity Sasha is talking about. That’s one possibility but not the only one.

The other one is a much darker vision of a neo-fascist response as financial institutions collapse, as money riots break out, as things go from bad to worse. Governments as they always do don’t go down without a fight, and they respond by using militarized police and surveillance. People like the convenience of E-ZPass, but you have to remind people that every E-ZPass tollbooth in America is a surveillance interdiction point where they’re using facial recognition software and license plate scanning. Operating on government orders, you can be seized and detained. If you think the government isn’t politicized, just look at what the IRS did to the Tea Party. That’s the dark side of what’s going on. I hope we don’t get there. What I hope is that myself and others, acting as a wakeup call working through the electoral process and educational process, over time can lead us to some better policies.

By the way, for Sasha and actually all the listeners, and at the risk of throwing in another promotional link here, I’m going to do a debate. It’s actually live on Broadway, Wednesday night at 6:30. The sponsor is a group called Intelligence Squared. That’s really all you need to know. Just Google ‘Intelligence Squared’ and you’ll find the link quickly or I’ll put it out on my Twitter feed. The event’s sold out but they’re going to live stream it. This is an Oxford Union-style debate, so nobody’s going to interrupt anybody and no one’s going to scream at each other. Hopefully, we’ll have four thoughtful people who stand up and make their points.

The proposition is “Declinists Be Damned, Bet on America”, so it’s a pro-American proposition. The people who are going to be ‘For’ are Josef Joffe, a very prominent intellectual, and Peter Zeihan who had a long career at Stratford. Arguing ‘Against’ are myself and Chrystia Freeland who’s a rising star in the Liberal Party in Canada, a member of the Parliament, a very prominent journalist, and a public intellectual. We have some good firepower on the stage if you want to find that link and live stream it [or see the recording]. We’re going to be talking about exactly the kind of thing that Sasha and maybe some of the other listeners are interested in, which is what it is the future of America.

AS: Thank you very much, Jim. With that, I’m going to turn it back over to Jon to wrap it up.

JW: Thank you, Alex, and thank you, Jim Rickards, for a really illuminating conversation. It’s been great being with you today. Thank you most of all to our listeners and for some really phenomenal questions. As Alex said, I know there are a whole lot of other great questions in the pipeline. I think we need to find a way to really address those, so we’ll discuss that and figure something out.

You can follow Jim Rickards as you know on Twitter. His handle is @jamesgrickards. Look out for that debate; it sounds extraordinary. “Intelligence Squared” was the phrase to Google.

Jim mentioned his newsletter Strategic Intelligence. It’s very affordable and a great way to follow Jim’s in-depth thinking month by month. One final note, you can find recordings of all The Gold Chronicles webinars with Jim Rickards online. The way to do that is to visit the website Physical Gold Fund Podcasts and register for updates. Thank you for staying with us overtime today. I hope you found it fruitful. Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: February 9, 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles Jan 2015

January 12th Gold Chronicles topics:

*What happens if the Fed does or does not raise rates in 2015
*QE4 Early 2016
*China coming debt crisis – Trillion dollar ponzi scheme
*Gold second best performing currency of 2014
*Gold and dollar acting as safe havens
*Gold becoming harder to mine, mining companies cant simply mine as much more as they would like
*Chinese show no evidence of letting up on gold purchases
*How gold will behave in a Japanese style inflation
*In a massive deflation, the government can always raise the price of gold


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The Gold Chronicles: January 12, 2015 Interview with Jim Rickards


The Gold Chronicles: 1-15-2015


Jon Ward: Hello, I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our first webinar of the New Year with Jim Rickards in this series we’re calling The Gold Chronicles. Jim is an investment banker and an investment advisor based in New York, and he also serves on the Investment Advisory Committee for Physical Gold Fund. He is the author of the New York Times bestseller Currency Wars: The Making of the Next Global Crisis and most recently The Death of Money: The Coming Collapse of the International Monetary System, also a New York Times bestseller. Hello, Jim, and welcome.

Jim Rickards: Hi, Jon. How are you?

JW: I’m great, thanks. I’m looking forward to today’s webinar where we also have with us Alex Stanczyk of Physical Gold Fund. Hello, Alex.

Alex Stanczyk: Hi, Jon. It’s great to be here, thanks.

JW: Alex will be looking out for questions that come from you, our listeners, so let me just say that your questions today for Jim Rickards are more than welcome.

Jim, in this first webinar of 2015, let’s take a look forward. Why don’t we start with the Federal Reserve? They made it clear they’d like to raise interest rates. But they’re holding back for now, in what looks like a push-pull going on here. Let me ask you two related questions. What happens if the Fed does raise rates? And what happens if it doesn’t?

JR: It’s unfortunate that we have to be spending so much time on the Federal Reserve. You’re right; it is the place to start and is the key to understanding a lot of what’s going on in markets. Nothing is more important, but I wish that weren’t true. I wish the central banks could go back to just being boring, opaque, marginal institutions that took care of money supply and acted as a lender of last resort instead of these monstrosities that seem to manipulate and invade every corner of every market in the world. But unfortunately, that is what we have. When you manipulate the dollar and dollar interest rates, you are directly or indirectly affecting every market in the world – equities, gold, real estate, other commodities, junk bonds, corporate debt, etc.   So it is the biggest question, but I wish it were otherwise.

Let’s take your two scenarios:  What if they raise rates? What if they don’t? I’ll address both of those directly but would like to spend a minute on the background to help our listeners hopefully understand what’s behind the debate. The Fed has certainly signaled that they intend to raise rates, there’s no question about that. That is what the Fed has signaled and what the markets expect. Securities around the world — equities, bonds, etc. — are priced as if the Fed were going to raise rates. I’ve never seen anything more trumpeted and more advertised in my career, and there’s good reason for that. The last time the Fed raised rates was 2006. In terms of cutting rates, they hit bottom in late 2008 when they got to zero, and they’ve been at zero ever since. It’s been six and a half years at zero, but you have to go back two years before that to find the last time they raised rates, so it’s going on nine years at this point. That’s a long time without a rate increase, and maybe people forget how nasty they can be.

I was in the markets in 1994 when the Fed raised rates, and it was a wipe out. That’s when we had the bankruptcy of Orange County, California, and other dealers went out of business. There was a bond market massacre. The same thing happened in 1987. A lot of people recall the crash of October 1987 when the stock market dropped 22 percent in a single day. In today’s market, that would be the equivalent of over 3,000 DOW points. Imagine the market dropping not 300 points, which would get everyone’s attention, but 3,000 points. That’s what happened in October 1987. But before that, in March of 1987, there was a bond market crash. The bond market crash preceded the stock market crash by about six months.

These things can get nasty and I could say it’s been a long time since the last one. That’s why the Fed is talking so much about it. You have to go all the way back to May 2013 when the Fed was still printing money and buying bonds (long-term asset purchases as they call it) when Bernanke, chairman at the time, first started talking about maybe beginning the taper. They didn’t do anything. They didn’t cut purchases and they didn’t raise rates — they just talked about it — and still the market threw a taper tantrum fit. We had the actual taper through the course of 2014. Now the taper is over, QE3 is officially over, so this thing has been really advertised for two years.

There’s a reason for that. The reason rates were at zero in the first place is because the Fed was trying to pump up assets. They wanted banks and other borrowers to go out, borrow cheap money, buy houses and stocks, bid up the price of assets, and create the wealth effect. Hopefully, that would make people feel richer, they would spend more money, and the economy would get on a self-sustaining path. That didn’t happen. The asset prices did go up, but the wealth effect did not kick in and the economy is still very weak. The Fed did not get the kind of 3.5 to 4 percent growth they were really hoping for when they started all this. I think if the Fed had it to do it over, they never would have gone down this path or at least not stayed on it this long.

They had encouraged everyone to borrow money and lever up and do maturity mismatches (borrow overnight in the repo market and go out and buy some risky asset like stocks or other assets). Because of that, they wanted to give people lots of warning — hey, we’re going to raise rates. If I’m a dealer, I can borrow money overnight in the repo market and go out and buy a 10-year note, which until recently was about 2 percent. I have zero cost to funds and I make 2 percent of my 10-year note, but I can leverage that trade 10-to-1 because I can get more than 90 percent margin in the repo market. A 2 percent profit levered 10-to-1 is a 20 percent return on equity, so with a government security as my asset, it’s not like I have to go buy some junk bond.

As long as rates were at zero, it was pretty easy to make 10, 20, or even 30 percent returns on equity with a highly leveraged trade. You say that sounds a little too easy; what’s the risk in the trade? Well, there’s no credit risk in the trade because you’ve got a treasury bill as your asset. The risk is that they may raise short-term rates while you’re sitting there with overnight money holding a 10-year note. All of a sudden the overnight money gets to be more expensive, the trade is upside-down, and you’re losing money. The Fed was saying we encourage everyone to do these crazy carry trades, do these maturity mismatches, make a lot of money, and rebuild the bank balance sheet. The time will come when we’re going to raise rates, but we’re going to give you years, literally, to get out of the trade or wind it down or hedge it. Anybody who’s caught out, shame on them, as you can’t say you weren’t warned.

The Fed wants to raise rates to normalize things. They’ve been talking about it for almost two years because they want to give people plenty of warning, but the markets don’t listen so well, at least there’s always somebody who doesn’t get the message. As I look around, there’s still a lot of leverage in the system, enormous leverage in the stock market, enormous leverage in various carry trades around the world. Chuck Prince, then CEO of Citicorp, said prior to the last world financial calamity that you have to keep dancing as long as the music’s playing. There are some people who literally either won’t listen to the Fed or don’t believe them, etc. and are still going to be in these trades.

The short answer is I expect a lot of market disruption. I think this might throw the U.S. economy into a recession because the economy is fundamentally weak. Some people have been smart enough to get out of these carry trades, at least based on the Fed’s warnings, but some people have not and will get a rude awakening. They may have to unwind those trades quickly, and we may see a lot of liquidity pressure. We’re seeing it anyway, by the way, based just on the talk. Imagine the reality of the Fed actually raising rates for the first time in eight years.

I think we’ll have a very bumpy ride and it won’t be soft landing. Beyond that, the whole idea that the Fed would raise rates was based on a forecast that the economy was getting stronger and we sort of achieved self-sustaining growth. But nobody in economics, nobody on Wall Street, nobody on the buy side, nobody in academia, nobody I’ve seen anywhere has a worse forecasting record than the Fed. I don’t say that out of spite or to try to embarrass anyone; it’s just a fact. Year after year after year they produce these very high growth forecasts, and every year they’re wrong. They’re not just wrong by a little bit; they’re wrong by orders of magnitude. So when the Fed says, well, we think the economy is healthy enough for a rate increase, that’s the first sign that it’s not. Now besides that, there’s a lot of data. We’re seeing auto loan defaults go up, real wages are stagnant to down, labor force participation continues to be very low, our trade deficit is getting worse partly because of the strong dollar, emerging markets are slowing down, and China and Europe are slowing down. I think it’s nonsense to believe that somehow we would be closely coupled on the way up but somehow the rest of the world is going to go down and the U.S. won’t be affected by that.

Growth is weak, so not only would I expect some disruption from the rate increase simply because people don’t listen or they’re greedy or they stay in the trade too long, but I would say the Fed’s got the economy wrong and they’re going to increase rates into a very weak economy. I would expect probably for the U.S. economy to come close to a recession, more deflation, and probably some disruption in equity markets. The one market that might rally actually is the bond market. Ten-year notes are still pretty attractive based on everything we see.

Now, that’s if they raise rates. Let’s flip that around and talk about what happens if they don’t raise rates, because that was the other part of your question. Very, very few people expect this, but I actually don’t think they will raise rates. I’ve been saying that for about six months, and more people are jumping on board that bandwagon recently. I did a bunch of interviews in the fall where I said I did not think the Fed would raise rates in 2015. We can debate 2016 — that’s still pretty far away — but let’s just talk about 2015.

My view is the Fed will not raise rates, and more people are coming over to that view. If you go back six months just to last summer, the debate was the Fed’s definitely going to raise rates in 2015: the only question was would it be March or June? I was one of those saying they won’t do it. Well, here we are in January and nobody is talking about March. Even Janet Yellen said they weren’t going to raise them in March, so now you have your April people and your June, July people, but you’re hearing more and more people say maybe it won’t be until September. Bill Gross recently said he expects it in December. Tell me the difference between December 2015 and January 2016 — not much of a difference.

We’re starting to hear a lot of doubt about whether they will, in fact, raise rates. My view that they won’t is based on what I expect the data to show. I don’t have a crystal ball and I’m not sitting inside the Fed boardroom overhearing the chitchat. I’m basing this on what the Fed itself says. They say that the decision is data-dependent. If you look at the data, it’s coming in weak. I know we had this gangbuster third-quarter GDP, but there’s a lot of noise around that and it doesn’t appear to be sustained. It looks like the fourth quarter will certainly come in a lot weaker and first quarter 2015 may be weaker yet. We’re still not seeing any pulse in the thing that Janet Yellen pays so much attention to, which is real wages. Real wages are stagnant.

Remember that the Fed has a dual mandate that consists of trying to reduce unemployment (or create employment, depending on how you want to put it) and price stability. Sometimes those things are in conflict and they have to roll the dice on inflation a little bit in order to create jobs or other times they have to stifle job growth in order to damp down inflation. You can’t always do both of them at once, but sometimes you can. What’s the one piece of data where both parts of the dual mandate come together? One thing you can look at that tells you something about both is real wages. If real wages are going up, that’s a leading indicator of inflation, but it also tells you that the labor market’s pretty healthy because employees cannot get a raise or demand a raise from their bosses or their companies unless the labor market’s tight.

Real wages is the number one thing Janet Yellen is looking at. Guess what? They went down; they’re still going down. There doesn’t seem to be anything indicating, at least as far as the data is concerned, that they should raise rates. I think this is just the result of bad forecasting. They always forecast stronger growth than we actually get, and by the time they catch up to the reality of their forecast, they find out that we’re nowhere near what they expected. This is interesting because the market is set up for a rate increase. What if they don’t? I think we’ll get to the summer, the data will be lousy, the Fed will make it clear that they’re not going to raise rates anytime soon, and “patience” will just turn into more “patience”, using their new favorite buzzword. (They seem to come up with new buzzwords every six months or so!)

Once it becomes clear that they’re not going to raise rates, I think the markets might say that maybe they can never raise rates. We did QE1, QE2, QE3 part 1, QE3 part 2, then they promised to raise rates, and then they can’t do it. It wouldn’t surprise me to see QE4 in early 2016. What may happen then will be very interesting, because the stock market could actually rally on that. It won’t be rallying on fundamentals; it will be rallying on cheap money. The market’s expecting tightening. If they get ease, at least no rate increase and the possibility of more reason to form a QE4, markets might even rally. I’m not a big stock market bull, but if the Fed doesn’t raise rates — and my expectation is they won’t — you might actually see stocks higher at the end of the year than they are now based on more free money. I think by then the inflationary expectations will start to ratchet up, and that’s probably good for gold as well. It could be one of those periods in the second half of this year when gold and stocks go up together for the same reason, which is it’s apparent that the Fed has no way out of this dilemma.

JW: I’d like to pick up on one element you mentioned right at the end there, and that’s the dimension of inflation. Would you spell out how you see the impact of this trajectory you are forecasting on inflation?

JR: This goes back to literally the first couple pages of my first book Currency Wars which came out in 2011, and nothing has really changed my view since. The way to understand a global economy is we have inflationary and deflationary forces going on at the same time. They’re pulling against each other exactly like two really strong teams pretty evenly matched in a tug of war. I’ve used that metaphor before but I think it’s a good one. At the beginning of the tug of war, not much happens. You have one strong team pulling one way, another strong team pulling the other way, and nothing is moving. There’s enormous tension being exerted on the rope, a lot of force involved, but nothing happens right away. Eventually one team wears out the other, the losing team collapses, they get pulled over the line, and the outcome becomes clear, but it’s not clear at the start.

The natural state of the world is deflation, and we’re seeing a lot of visible signs that this has been true for years. There are three main reasons why the world wants to deflate. The first one is demographics. Work forces are aging, people are retiring, they’re spending less and saving more or there are just fewer people around in places like Russia and Japan. It’s not a question of birth rates slowing down; the population is actually declining. China’s population with the one-child policy has leveled off. The only reason the U.S. has some population growth is because of demographics, but more and more of our baby boomers are turning 60 every day. So demographics is one thing.

The second thing is technology. I don’t need to belabor this, but I think we all understand that we’re all more productive with computers and technology and the Web. But this means that people who used to hire an assistant or a couple of staffers don’t need them anymore, so that’s a driver for fewer job gains and is deflationary.

The final addition to those two reasons is de-leveraging because of the excessive debt which we’re still working our way out of. I know it seems like a long time since the financial panic of 2008, but in fact there was so much debt in the system and there still is. There’s been a lot of de-leveraging in the private sector, private balance sheets, but that’s been accompanied by increased leverage in the public sector. All we really did was substitute government debt for private debt to some extent because of the bailouts. What that means is that the system is still pretty highly leveraged and has a tendency to de-leverage.

With demographics, technology, and de-leveraging, we have three deflationary forces. On the inflationary side, we have money printing by all the central banks. We’ve talked about the Fed quite a bit, but the ECB, the Bank of England, the Bank of Japan, and People’s Bank of China are all leveraged just as much as the Fed, some more than others. The People’s Bank of China has printed more money than the Federal Reserve in the last five years. So you’ve got the inflationary force of money printing by central banks offsetting the deflationary force that we just mentioned — demographics, technology and de-leveraging — and these two powerful forces are fighting against each other. Right this minute deflation is winning as we see in oil prices, commodity prices, gasoline at the pump, and in a lot of indicators everywhere. But the central banks have not stopped trying, because central banks have to have inflation. There are reasons having to do with managing sovereign debt, tax collections, and bank balance sheets. We could spend the whole hour just on why central banks have to have inflation, but they do.

What does it mean when central banks and governments have to have inflation but they’re not getting it because the natural state of the world is deflation? It means they have to try harder. If they printed all this money and it hasn’t worked yet, then they probably have to print more, which is one of the reasons I don’t expect them to raise rates in 2015 and may even come back with QE4. This is very, very difficult for investors needless to say. If I told you that we’re going to have inflation, you would know what to do; you wouldn’t need much investment advice. You’d buy some gold or art or hard assets or get out of cash, etc. If I told you there was definitely going to be deflation, likewise you would know what to do: cash, bonds, and certain other things that do very well in deflation.

The problem is that we have both. One can prevail for a short period of time, but the other one never really goes away. I think the best way for investors to deal with that is to have a balanced portfolio, a diversified portfolio that has a combination of all the things I’ve just mentioned. You’re not going to win on all those trades, but you’ll win on a lot of them and at least you won’t get wiped out on the wrong side of a tidal wave when it comes. A barbell approach is some mix of inflation protection in the form of gold, fine art, land, energy assets, and some mix of deflation protection in the form cash and high quality government bonds. By the way, Warren Buffett has exactly that kind of portfolio. He’s buying railroads, oil, and natural gas to hedge inflation, but he’s got $55 billion of cash to hedge deflation. I think that’s the right approach. It’s not as sexy as putting all your chips on one side of the table, but it’s a lot more prudent, because we don’t know how this is going to turn out and you need to be prepared for both.

JW: Looking beyond the U.S. for a moment, Jim, there are murmurings of a coming credit crunch in China. Do you think that’s likely? And if so, what are the global implications?

JR: I think not only is it likely, I would say it’s already here and is being finessed by the central bank. Real estate prices are in full-scale decline. We know they’ve conducted a trillion-dollar Ponzi scheme under the name of wealth management products or WMP. We’re not talking about the multi-billionaire oligarchs and we’re not talking about peasants. We’re talking about the rising middle-class Chinese person, which numbers in the hundreds of millions. When they go down to the bank to make a deposit from their savings, they basically get zero or a very low interest rate, the same as in the U.S. But then the bank will say, “We’ve got these wealth management products that are paying 5, 6, or 7 percent.” Of course a lot of people think 6 percent sounds a lot better than zero, so they take the wealth management product.

What they don’t realize is that these wealth management products are structured products not that different from our mortgage-backed securities or CDOs, collateralized debt obligations, etc. They are not guaranteed by the bank. A lot of people think they’re guaranteed by the bank because they buy them in a bank office, but they’re not guaranteed by the bank. The money goes to these real-estate projects which are being used to build empty apartments and office buildings in empty cities, stadiums, train stations, and everything else. I’ve been to China and seen this first hand. I know a lot of the listeners have heard about it or have seen pictures, but you actually have to go there and get some mud on your feet out in some of these construction sites. It’s amazing what’s going on.

When people do want to redeem them, they just sell a new one to the next sucker in line. Maybe they get their money back if they were smart enough to cash out, but then the bank just sells it to the next person and uses that money to replace the original investment. There are over a trillion dollars of those, and that’s starting to implode. Real estate prices are going down. China has $4 trillion in reserves so they’re in a good position to bail it out, but it’s still very costly in terms of how that’s going to play out. On that point, I think a credit crunch in China is happening in slow motion and we need to watch it.

It’s important for listeners to understand there’s a credit crunch going on all over the world, partly because of the strong dollar. We now have two sets of borrowers out there who are starting to go into pretty deep distress. One is in the energy sector. A lot of people know about this obviously with the price of oil going from $100 to about $45 today; we’ll see where it levels out. A lot of money — we’re talking trillions of dollars — was borrowed on the assumption that oil would be over $80 a barrel. Some of these projects were priced out with oil well over $100 a barrel. With oil at $45, $50, and even as high as $60, those projects are not profitable and a lot of those bonds are going to default.

In addition to that, we have trillions of dollars of emerging markets’ corporate debt. I’m not talking about sovereign debt; I’m talking about companies in places like Mexico, Brazil, Indonesia, Turkey, South Africa, certainly Russia, and elsewhere that borrowed dollars. Remember, they’re not central banks, so they can’t print dollars, and a lot of their business is conducted in their local currency. It could be Turkish lira or Russian rubles or Mexican pesos, so they don’t even necessarily earn dollars. Some of them do if they’re exporters, but a lot of them don’t. Yet they’ve got these dollar liabilities, and the dollar is getting stronger. This means they need more of their local currency to convert to dollars to pay off the debt, so that debt just got a lot more onerous. That’s if they can even get the local currency. Some of these central banks may run out of hard currency.

Russia is a prime example of that. Russian hard currency reserves are probably enough to pay off their sovereign debt, but they’re not nearly enough to pay off the corporate debt beyond the end of 2015. I’m not saying this is a crisis that’s going to hit us in the face tomorrow as it could actually take a year to play out. Even a guy who’s in the process of going bankrupt might have a little cash in the bank to pay interest for six months or whatever. Eventually, if the price of oil doesn’t correct, and these natural resource exporters don’t start to make more dollars, and the economy continues to stall out, which it looks like it is, they’re not going to be able to pay this debt. We could be looking at trillions of dollars of defaults from energy-related debt and emerging-markets debt. That’s bigger than subprime was in 2007. The entire subprime market, including what’s called Alt-A or alternative A, which is a kind of subprime, was about $1 trillion total in 2007.

I’m talking about a market that’s closer to $10 trillion, so it’s 10 times bigger. It’s not all going to default, but even a default rate of 10 or 15 percent means losses bigger than subprime. We’re starting to see it already show up in swap spreads, credit spreads. It reminds me a lot of what happened in 1997 and 1998 where that didn’t happen overnight but took over a year to play out. It started in Thailand in June of 1997. Who knew that it would end up in a hedge fund in Greenwich, Connecticut, by September of ’98, 14 months later, but that’s what happened. I was at Long-Term Capital Management at the time, the hedge fund in question. I had a front-row seat on that fiasco, so I know what it looks like and how it feels. It has that feel right now. We’re not at the acute stage, but it does look like we’re at the beginning stage. I think the credit crunch in China is a big deal, but I’m seeing a credit crunch all over the world with early signs of distress and spreads widening. We could be at the beginning of something that, as I say, may take a year to play out, but it does have that kind of dangerous look and feel to it.

JW: Let’s take a moment to look at gold. It turns out that December 31st saw the price down slightly from the start of the year. Does that make 2014 a bad year for gold in your view?

JR: I think of gold as money. I know a lot of people think of it as a commodity and some people think of it as almost an industrial import or collectible. There are a lot of ways to think about it, but I think of it as money. Whenever I’m asked a currency question – and I get quite a few, as you can imagine – people ask: What’s the value of the dollar? What’s the value of the euro? What’s your forecast for Japanese yen? Or whatever… And I always ask them the question: Compared to what? Because none of these things exist quite in a vacuum. They’re all priced in terms of something else. When we talk about the value of a euro, we’re really talking about the dollar value of the euro or the dollar-euro cross rate. One thing I know from sixth-grade math is the dollar and the euro can’t both go up against each other at the same time. It’s a zero-sum game. If one’s up, the other one’s down.

Most investors think of the dollar price of gold. When they say gold is up, it would be a day like today — gold’s up about $18 an ounce today, a pretty strong day. Gold is volatile and has its up days and down days, so when people say gold’s up, what they really mean is the dollar price of gold is up. If they say gold is down, what they really mean is the dollar price of gold is down. Looking at 2014, was it a bad year for gold? Not at all. It was down slightly — a little over one percent in terms of dollars — but it was up against every other major currency in the world. Based in euros, gold was up; based in Japanese yen, gold was up; based in Chinese yuan, gold was up; based in pound sterling, gold was up. In other words, gold was up measured in every major currency in the world — Canadian dollars, Australian dollars, New Zealand dollars, Singapore dollars — name one. Gold was up in every single currency except U.S. dollars.

I realize that most of our listeners are U.S. dollar-based investors so that’s how they think about it, but it’s important not to get too gloomy and to understand that gold was down a little bit in U.S. dollars. Another way to think about it, gold was the second-best performing currency in the world ahead of all the others except it was down slightly in U.S. dollars. It certainly beat the heck out of bitcoin. Bitcoin was the worst performing currency in 2014, the Russian ruble was second, and everyone else was somewhere in between. Gold was second best and dollar was the best.

To me this is not really a gold story; it’s a dollar story and a very, very strong dollar. One way to think about it is that considering the dollar’s strength against the euro, the yen, and other major currencies, it’s amazing that gold held up as well as it did. Gold barely went down against the dollar, so that really means gold and the dollar are harnessed together at least for the time being, pulling away from all the other world currencies. This tells me it’s a safe-haven trade. The dollar has a bid because of capital flight from around the world, people unwinding carry trades and emerging markets, getting out of China before it collapses, getting out of Russia before getting arrested or worse, getting out of emerging markets because all those economies are slowing down, and trying to get into dollars. When you do that, you can buy the U.S. dollar in the form of our stocks and bonds or you can buy gold, which a lot of people think of as a dollar-denominated asset.

Gold stayed very close to the U.S. dollar throughout all of 2014, down a little bit but not much, just about one percent, but gold and the dollar together pulled away from all the other currencies. To me, this is a strong dollar story, and gold actually did pretty well. I would say it had a very good year in 2014. Even though it was down slightly against the U.S. dollar, it was up against everything else. That trend seems to be continuing although if anything, gold is actually starting to leave the pack a little bit right now.

JW: Thank you, Jim. And now we do have some questions from our listeners. Here’s Alex Stanczyk with those questions.

AS: Thanks a lot, Jon. Just a brief housekeeping item. This webinar is being recorded, and we will post the recording at Physical Gold Fund on the podcast page.

Our first question is by e-mail from Ted G. He’s asking, “If the price of gold goes up, don’t they just mine more?”

JR: In the long run, yes, but in the short run, no. The reason is that you can’t just turn the mine on. It’s not like throwing a light switch. Gold mining is a very capital-intensive, long-horizon business. They have to identify a likely vein, do feasibility studies, geology studies, get environmental permits, and raise money, a lot which is borrowed. You have to get out there with your equipment, and a lot of these gold mines are in difficult locations. I realize some mines have already been dug out and they just closed them so they can reopen them with a little bit less effort than I was just describing, but it’s not a simple thing to do. With gold’s volatility, if gold goes up, it doesn’t mean reopen the mine the next day. You want to see it stay there for a year or two years. Of course, in a world where maybe interest rates are going up, these capital costs could be going up as well.

The basic answer is in the long run, yes, a much higher price of gold at a sustained level will cause more mining and more output, but that can take years. It’s not something that’s going to change the price of gold in the short run, not at all. I know a little bit about gold mining, but I’m not a geologist, but beyond that, all the reports I’ve seen and read say that I don’t want to get into “peak gold”, so to speak. I have seen a lot studies that say it’s just getting harder and harder to find. I was in South Africa recently and spoke to people there who said, yes, we’re still mining gold, but the quality of the ore is going down. We have to keep going deeper and deeper. Some of these mines are over a mile or more deep, not a couple of hundred yards. It seems to be getting scarcer and harder. It’s not something that can happen very quickly.

If you see a run-up in the price of gold, the mining output is not going to change it in the short run. Over a five-year horizon, some gold might come on stream, but bear in mind that demand for physical gold is voracious. The Chinese show no evidence of letting up, not just the Chinese government but also the Chinese civilian population and people throughout Asia, India, and elsewhere. Yes, maybe over a very long period of time gold mining output could go up a little bit but the demand seems to be right there. Although gold is volatile, I’m not saying it’s going to go up a lot. I certainly expect that it will go up exponentially, meaning 300, 400 or 500 percent in the face of a new financial crisis, which I do expect. But leaving that to one side and simply talking about the steady state, I would expect gold to trend higher based on some of the factors we talked about earlier in the call, and mining output is not going to change that in the short run.

AS: The next question comes from Judson R. which I’m going to paraphrase a little bit. Judson says, “Jim, you have made good points about the merit of gold under most scenarios. However, there is one scenario that I have never heard you address, and that is what to do about Japanese-style deflation. So how would gold perform in a multi-decade Japanese-style deflation?”

JR: I take that to mean what if Japanese-style deflation came to the United States, and I think that’s not farfetched. I actually think the U.S. is Japan. We’re seven years into a depression. Japan’s been in a depression for approaching 30 years at this point, about 27 years, but I think the U.S. is in that rut. As I said earlier, central banks cannot tolerate deflation, and it’s not just a preference; it’s existential because there’s too much debt. The United States gets out from under its debt by buying inflation. We basically steal the money from creditors by making the money worthless. We say, China, we owe you $2 trillion. Fine, we’ll print it up. Here’s your $2 trillion. Good luck buying a loaf of bread. That’s a little bit of an overstatement, but I think listeners take the point that historically we get out from under these debt burdens by inflating the dollar and making the dollar worthless, which hurts the creditors — but too bad. At least that’s the way the United States government thinks about it.

But there’s more to it than that. Tax collections are a big deal. Gas used to be $4 a gallon but now it’s $2 a gallon. Let’s just say you use 100 gallons a week in your pickup truck or whatever. At $2 a gallon and 100 gallons a week, all of a sudden you’ve got $200 more in your pocket than you did before the price of gas went down, but the government can’t tax it, right? There’s nothing about a lower price of gasoline that changes your tax bill, you still owe what you owe, so you’re getting the equivalent of a $200-a-week raise in the form of a lower gas price and the government can’t tax it. The government hates it when you get a raise they can’t tax. That’s the asymmetry.

If I gave you $200 more in your pocket in the form of a pay increase or if I gave you $200 more in your pocket in the form of lower gasoline prices, an economist would say it sounds like it’s the same thing. It’s not the same thing to the government. If I give you a raise in your paycheck, I’m going to tax it, but if it’s a lower gasoline price, I can’t tax it. This asymmetry is another reason governments favor inflation. They want inflation to prop up the banks because it’s easier to tax those gains and it’s the only way to pay off the debt.

The listener’s question was what happens if you get persistent deflation. It happened once before from 1929 to 1933. Actually, it started in 1928 before the crash in 1929. The U.S. had about 30 percent deflation over that five-year period, and guess what happened. The price of gold went up 75 percent. In other words, because of all the reasons I mentioned why governments need inflation, if governments need inflation and they’re not getting it through money printing or QE or Operation Twist or currency wars or forward guidance or all the bag of tricks the Fed has, governments can always get inflation just by raising the price of gold.

We won’t see the government arbitrarily raise the price of gold in the short run because they want to pretend this problem doesn’t exist, but if they get desperate enough and actually do get into a Japanese-style deflation, don’t be surprised if the government takes steps to raise the price of gold. Nothing happens in a vacuum. If gold goes up, guess what, everything else goes up – silver, oil, copper, bread, wheat, beef, everything goes up. That’s why they do it. The government doesn’t increase the price of gold because they’re nice guys and want to enrich gold investors. They do it to cause inflation. If we get real long-term, persistent, deep Japanese-style deflation that just won’t go away, don’t be surprised to see the government raise the price of gold. They did it before, and actually it’s been done many times but most famously in 1933 when the price of gold increased 75 percent. If you go back and look at the New York stock exchange prices during the Great Depression when it dropped 90 percent, the one stock that went up was Homestake Mining, a gold miner.

AS: This next question is coming from Juha M. I’ve actually heard this said before about you, Jim, in that sometimes people refer to you as an “insider”. In other words, you come from the pedigree and the league, so to speak, of people who have very high positions either in government or among hedge funds, etc. Here’s Juha’s question: “Considering that you’re an insider, why did you write your books Currency Wars and Death of Money, and how have other insiders reacted to your books, for example, people from the Fed, Pentagon, etc.?”

JR: Wow, that’s a good question. I’m usually up in Connecticut but today I’m actually doing this webinar from Washington, D.C. because I have some meetings on counterterrorism finance issues tonight that I’ll be getting ready for after the webinar. I’m not going to call myself an insider, but I do meet with officials of the Federal Reserve, including Reserve Bank presidents and members of the board of governors, and with people in the national security community and at the Pentagon. I’ve been a guest over at the Treasury when they’ve invited me in for seminars and to give presentations behind closed doors to risk management groups, etc.

Suffice to say I’ve had a lot of contacts with the U.S. government which I’m very happy to do. Some of it is consulting and a lot of it is volunteer work. Earlier in my career I happened to spend a fair amount of time in Pakistan involved with Islamic banking, which I wrote about in my second book The Death Money, so I was one of the people called on after 9/11 to help, and I was able to contribute. I did quite a bit of that work as a volunteer and was also very involved in recruiting other volunteers to help out on the national security side. I have to say it was very gratifying that I was never turned down. If I picked up the phone and called a friend on Wall Street or in the hedge fund community and said, could you come down to Washington or northern Virginia and meet with some national security officials, no one ever said no. It’s great to see that kind of patriotic spirit we all applaud.

I spent a lot of time in that milieu with IMF officials and others and became very aware that the insiders, at least the people in the know, always win. They always win because they can see it coming; they’re involved in the decision-making process and know how to get out of the way. It bothered me that everyday Americans are as smart as anybody you meet anywhere and work hard for their money, but you can’t expect a dentist or doctor or lawyer or teacher or fireman or policeman or construction worker or truck driver to have a PhD in economics in their back pocket. That’s unrealistic. I hated the idea that their money could be stolen from them through policy. I understand the policies, but I also felt that there had to be a place for a book that was written in plain English.

If I may say so, what I focused on in my books is PhD-level content but it’s written in plain English. In other words, there’s nothing about my books that’s dumbed down, but it is simplified. When I say simplified I mean you can use plain English and metaphors. You can take fairly sophisticated comments and explain them to people in ways that are pretty easily understood. Some of it’s not even that difficult. When I hear someone talk about something like “sticky wages” or “downward nominal wage rigidity”, I say, oh, you mean people don’t like to take a pay cut. Everybody understands that. Nobody likes to take a pay cut, so why do I have to say “downward nominal wage rigidity” which means exactly the same thing? One is the way you would speak in the faculty lounge at Harvard and the other one is the way we would talk at the bar. I wanted to write a book for all Americans or really people around the world. My first book was in ten languages and my new book is I think up to 6 languages, and we’re still working on foreign sales.

I write these books not for the academic crowd or policymakers but for everyday Americans just to level the playing field. You can be interested in what I have to say or not, but at least I know that I tried to level the playing field and give people some insight into how the elites are thinking. How do my policymaking friends react to the books? There’s a lot of interest. It’s funny, even people who don’t like to think that their conversations are going to be scrutinized like to read about themselves in some way. People are very interested and do read the books. You actually end up maybe getting more invitations because people want to talk to you to see what you’ve been doing or where you’ve been traveling. I do get a lot of speaking invitations around the world, so it’s not just fun but an opportunity to talk to people.

I recently met with the head of the Istanbul stock exchange and a member of the central bank of Turkey, and I was in Korea not long ago and met the head of the Korean equivalent of the SEC, their lead market regulators, so I do have a lot of experiences like that that are opportunities presented because my book is popular. Those are experiences I can use to learn and hopefully offer more. It’s a good process and I’m glad I did it. So that’s a little bit about my motivation and background for doing this.

AS: Thanks for sharing, Jim. It was really great to understand that from you. At this point, I hand it back over to Jon.

JW: Yes, thank you Alex and indeed thanks to you, Jim Rickards. I know you have to get to a meeting but it’s been great having you with us here today. It is much appreciated. And thank you to our listeners. It’s wonderful to have you with us and we appreciate your questions. I’m sorry we couldn’t get to all of them, but they are very valuable and useful questions, and we always welcome those from you.

Just to remind you, you may follow Jim Rickards on Twitter. His handle is @jamesgrickards. Let me also remind you that you can find Jim’s latest book, The Death of Money, at Amazon or any good bookstore, so get yourself a copy if you haven’t already. It was wonderful to hear Jim talk a little bit about the background of the writing of his books.

Goodbye for now to all of you, and we look forward to joining you again soon.

If you would like to ask Jim Rickards a question on Twitter which may be used in a future interview, please use hashtag #AskJimRickards

You can follow Jim Rickards on Twitter @JamesGRickards and Alex Stanczyk @alexstanczyk


Listen to the original audio of the podcast here

The Gold Chronicles: January 12, 2015 Interview with Jim Rickards


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