Jim Rickards and Alex Stanczyk, The Gold Chronicles September 8th, 2016
*Jackson Hole Meeting Analysis
*Difference between 3.5% growth and 2% growth compounded over 20 years is the difference between a wealthy nation and a poor one
*Now looking like a rate cut by the Fed is more likely than a rate hike
*Removing cash from monetary system is now being discussed at the highest levels as a path forward to allow the US to implement negative interest rates
*Update to “War on Cash” scenario
*G20 Meeting Analysis
*China’s snub against President Obama was the 2016 version of the Kowtow
*This is a very significant G20 summit, the Hangzhou Consensus are the new rules of the road for the international monetary system
*IMF Quota being reviewed in 2017 and expect emerging market voting shares to be adjusted
*BRIC’s expected to have 15% voting power by end of 2017, which shifts the balance of influence within the IMF away from the US
*Long term effect could include rebalancing the SDR currency ratios, removing use of USD for purchase of oil, and other measures which would reduce reliance on USD as world reserve currency
*Introduction to coming war on gold
*Once the “war on cash” is over, it is expected attention will shift to gold, and government will shift attention to gold
*Buying gold may become increasingly more difficult from a regulatory standpoint in years to come
*Several non-US Central Banks are buying billions of USD worth of US stocks
*Expected longer term economic effect of SDR being re-weighted with Chinese Yuan
Listen to the original audio of the podcast here
The Gold Chronicles: 9-8-2016:
Jon: Hello, I’m Jon Ward, on behalf of Physical Gold Fund. We’re delighted to welcome you to the latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.
Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.
Hello, Jim, and welcome. It’s good to have you back after the summer break.
Jim: Hi, Jon. Thank you. It’s great to be with you and our audience.
Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.
Alex: Hello, Jon.
Jon: Alex will be looking out for questions that come from you, our listeners, so let me say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview, and as time allows, we’ll do our best to respond to you.
Jim, I sometimes see you as kind of an anthropologist specializing in a small tribe with its own strange language and behaviors. You refer to this tribe as the global financial elites. Well, the elites are having a busy time of it right now. They’ve recently been huddling at one of their annual rituals, the Economic Symposium in Jackson Hole, and of course, plenty of them were in attendance at the G20 summit of world leaders in Hangzhou, China.
As cracks continue to grow in the global monetary system, I’d like to take a closer look at what this powerful group is thinking and how their mindset today could impact our fortunes tomorrow.
Let’s start with Jackson Hole. In your newsletter, The Gold Speculator, you mentioned a startling paper delivered by economist Marvin Goodfriend. Would you tell us about that paper and why you find it significant?
Jim: I’d be happy to, Jon. By way of introducing the topic, what I have said is based on reading these academic papers, speeches, releases, etc., written by policymakers but often by academics, PhD’s, and so forth. Obviously, they use quite a bit of highly technical jargon. I find a lot of that is by design really meant to exclude the everyday reader. Just as you’ve said, sometimes I feel like I’m an anthropologist going into these elite circles, listening to what they’re saying, coming back, and putting it all in plain English. Sometimes it’s just a matter of translation.
Although it is the case for people who are put off by either the math or the jargon, there’s a lot less there than meets the eye. When you get trained and actually go through it, you can find that so much of it is not that complicated and can be put into plain English. A lot of what I do is simply translating for everyday listeners. We never dumb it down, but I see no harm in putting it into plain English, yet somehow that escapes the people we’re talking about.
When we say ‘elites,’ they are elites because they are in powerful positions. I think they love to hang out with other elites whether in a place like Jackson Hole or the G20 summit recently or some of these other venues.
It’s not some deep, dark conspiracy. You don’t have to put on a tin foil hat or imagine black helicopters hovering over the horizon. We know who they are. It’s Janet Yellen, Lael Brainard, Stan Fischer, Mario Draghi, and certainly the leaders of the G20. We know who the heads of state are: Obama, Angela Merkel, and President Xi of China. There are also a certain number of professors, maybe a little less known to the public, but this group is easily identifiable.
They collectively run the world of money and international finance. Of course, if you run the world of money, you have enormous power in the political and geopolitical sphere, so that’s what we track.
We were saying before going on air that one of the things we love about these calls is that there’s never a shortage of material. I guess the biggest problem sometimes is getting me to shut up, because I tend to talk too long and too much. The point is, we never had a shortage of material to share with the listeners and today is no exception, although I would say today is a slight exception in the sense that we probably have too much material.
We’ve had two major meetings in recent days one of which was in Jackson Hole. For our listeners who might not be familiar, this is an annual event in Jackson Hole, Wyoming, a beautiful spot in the Grand Teton Mountains, and it’s hosted by the Federal Reserve Bank of Kansas City.
There are 12 regional reserve banks in the Federal Reserve Bank system, and they each have their specialties. As I mentioned, this event is put on by the Federal Reserve Bank of Kansas City. All the major central bank heads and other policymakers are there, a certain number of select journalists, academics, and a few others.
It’s conducted like an academic symposium. That means the speakers write a formal paper with footnotes, references, charts, and all that, and then they deliver the paper. They might not read it verbatim but stand up and present it, and the paper is available.
We’ve just gone through that, and the whole world was waiting to hear Janet Yellen speak. She is Chair of the Federal Reserve and has a lot of influence. Her speech, amazingly, was the biggest nothingburger I’ve ever heard – I’ve read it!
By the way, reporters do get these things in advance. They’re embargoed, so you might get it the night before, but you’re not allowed to write about it until exactly 10:00 Eastern Time or whenever the time of delivery is. It gives reporters a chance to write their story in advance.
They race each other to get the headlines out and then release the text of the speech. I’m a slow reader so it might take me 20 minutes, half an hour, or a little longer to read it for meaning, but the way trading works today, they have these robots – artificial intelligence robots – programmed to scan it in a nanosecond and look for keywords. For example, does she say “rate hike,” “data dependent,” or whatever? Then the computers take over the trading and start trading on something Janet Yellen said.
Bear in mind, there are no humans involved in any of this. One robot is reading the speech and another robot is doing the trading. This is where our markets are. I hope listeners understand that you can still call a broker and wait for an order to fill, but you’re at the mercy of all these machines.
It takes a reader like me a little longer to digest. I actually read the footnotes and try to put it in context of other things, so I might be days before I’m really ready to talk about it. The benefit I have is that I’m an analyst, not a reporter, so I don’t have to be in a hurry; I just have to try to do a deep dive and get it right.
The theme of the conference was basically a self-examination: “Do we need new tools? Are the tools we have working?” This is eight years of close to zero rates, seven years at zero, and now we’re going on a year at 25 basis points, three rounds of QE, a $4 trillion expansion of the balance sheet, all kinds of manipulation going in the name of forward guidance, and no growth to speak of.
We’ve had really pathetic growth all along, about 2% for eight years versus trend growth closer to 3% or 3.5%. The difference between 3.5% and 2% doesn’t sound like a lot, but it is a very big difference. Compound it over 25 or 30 years or even part of a normal lifetime, and one society will be twice as rich as the other due to compounded growth.
It’s been getting even weaker lately. For the last four quarters, growth is just barely above 1%. Weak and getting weaker is the way to describe it, and at Jackson Hole they’re saying, “Are the tools good enough?”
Surprisingly, Janet Yellen said yes. She said, “We can cut rates.” They’ve been raised 25 basis points, so I guess they can cut them.
Wall Street is spending all their time navel-gazing about the next rate hike. Not only do I not envision a rate hike as far as the eye can see, but I would put the odds of a rate cut probably slightly higher than a rate hike. No one is talking about that, but it looks like we’re heading into a recession right now. So they can cut rates, go back to a zero interest rate policy, and do more forward guidance. Forward guidance is just jawboning or words.
They may say, “Well, not only did we cut them close to zero, but we’re not going to raise them for a really, really, really long time.” Those words sound ridiculous but no more ridiculous than the words the Fed actually uses. They say things like “Extended period” and “We’ll be very patient.” There’s a whole process for how they come up with these words. I talked privately with the guy that wrote them, and he said the process is ridiculous. That was the word he used. Be that as it may, they have these code words, which are really just a way of saying to the market, “Don’t worry.”
Yellen said that the toolkit of zero interest rates, rate cuts, QE, and forward guidance will be sufficient. She might be the only person there who actually believes that, if she believes it. Let’s give her credit.
Lawrence Summers at Harvard has done a lot of good work on this. He said that when the U.S. economy is in a recession, it takes about 400 basis points of rate cuts to just get out of a recession. Historically, what that has meant is that if rates were 7% and you went into a recession, you could cut them to 3% – 400 basis points from 7% down to 3% – and that would help the economy get out of the recession, so that’s what you need to do.
What exactly do you do when you’re at 25 basis points? If you go into a recession as it looks like we are and you have to cut interest rates 400 basis points to get out of it but you only have 25 basis points to play with, how are you going to cut rates? The answer is you can’t unless you go negative. That’s a whole other discussion; I’ll come to that in a minute. But Yellen seems to favor cutting rates, forward guidance, and saying “We won’t raise them.”
QE is back on the table.
The question of QE is interesting. A lot of critics, including myself, would give the Fed credit and say okay, that was an emergency response to a liquidity crisis, to a financial panic, so I’ll cut the Fed a little slack on QE1. But QE2 and QE3 were completely experimental.
When they went into QE2 in 2010 and QE3 in 2012, there was no liquidity crisis, there was no financial panic. This was just Bernanke’s experimentation to see if he could create a wealth effect and get people to spend more if their stocks went up. What happened was that the stocks went up but people didn’t spend more; we just got another asset bubble. Now Yellen is saying that with more QE, we can get out of a recession.
There is very little evidence for that and no reason to think it’s true. The Fed thinks they can raise rates before the recession so they can cut rates when we have a recession. It’s way too late for that. If that were true, the time to start raising rates was probably 2009. I said this at the time in 2009, but even if you want to say 2010 or 2011, the point is, they missed their chance. Now we’re getting close to a recession with no capacity to cut rates.
That begs the question: what about negative rates? The experience with negative rates is pretty bad. It looks like they don’t work, but just because it’s a bad idea doesn’t mean the Fed won’t try it.
That’s what made the Jackson Hole conference quite interesting. For the listeners who are interested, if you go to the Federal Reserve Bank of Kansas City’s website and look up the Jackson Hole Symposium, you’ll see that there were seven or eight papers delivered, not just Janet Yellen’s.
Yellen was the only one anyone paid attention to. Being the geek that I am, I actually read all of the papers, and the one I found the most interesting was by a professor named Marvin Goodfriend. He is an academic, so just to be fair, he’s not on the Board of Governors or a policymaker; he’s an academic, and academics are supposed to come up with whacky ideas. In my experience, however, you don’t get invited to something like this unless your ideas are being taken seriously as possible policy.
If this appeared from some university in some financial journal, then I’d say, “Okay, if you want to think out of the box, that’s fine.” But when you’re standing up at the party in the Jackson Hole, among very few invitees…
The history of Jackson Hole is that very important things happen there. The best example was August 2010 when they leaked the details on QE2. QE2 did not formally begin until November 2010 when the Fed announced it and started doing long-term asset purchases, but they leaked it in August 2010. If you go back and look at the market, the stock market rally was in September and October, so important things do happen at Jackson Hole.
Professor Goodfriend gave his paper and presentation. I think I’m pretty good at coming up with out-of-the box ideas, but this is just about the craziest idea I’ve ever seen. Yet I have to take it seriously.
I want to pivot a little bit and come back to Jackson Hole. I want to pivot to the war on cash as many of our listeners are familiar with. The war on cash amounts to this: you have to get rid of cash if you’re going to have negative interest rates. What’s a negative interest rate? You put your money in the bank, and instead of paying you interest, they take your money away.
Let’s say you put $100,000 in the bank, you go away and come back a year later, and there’s $99,000. If the negative rate is 1%, they would take away 1% of $100,000, so you would have $99,000 left. Instead of paying you interest so that you’d have $101,000 like you did in the good old days or $104,000 in the really good old days, you’ll come back and have only $99,000.
People say, “I can get around that. Heck with the bank, I’ll just take my money out, put it in a safe place, and a year later, I’ll still have $100,000. I won’t make anything, but at least they won’t take any of it away with the negative interest rate.”
People will do that, and they did it during the Great Depression. The primary reason was that they were worried banks were going to fail. People put cash in coffee cans and shoeboxes and buried it in back yards or under their mattresses, because that’s what people do. If you’re going to have negative interest rates, you’re going to have to get rid of cash, so that gives you the war on cash.
The war on cash has three vectors. The first is that banks don’t want to give you the cash. Like I’ve said before, try going down to your bank and getting $10,000 or $20,000 in cash. First of all, you might not be able to get it. They might say “Come back in a few days, because we don’t have that much cash on hand.”
Even if they do, for anything above $10,000, they will file a report with the Treasury called a Currency Transaction Report. I don’t advise this, but people think they’re being cute by saying, “I’ll get $9,000, then I’ll come back tomorrow and get another $1,000.” Forget it. That’s called structuring, and they’ll file a Suspicious Activity Report. They’ll probably put you under investigation, because it looks like you’re structuring around $10,000.
Just to be clear, don’t do it. I don’t advise it, because that’s what will happen to you. You’ll be investigated if you do that.
This is true even for modest amounts such as $3000. One of my Treasury official friends said $3,000 is the new $10,000 for a Suspicious Activity Report. You can be a law-abiding citizen and live in a town for 20 years, and you will be treated like a drug dealer.
The person behind the counter has no interest in helping you. He’s been to compliance seminars teaching how he’ll get fired for not filing money laundering reports. They’ll treat you like a drug dealer, a tax evader or a terrorist and put your name in a file next to Al Qaeda even though you’re just trying to hang on to your wealth by avoiding negative interest rates. That’s the first vector.
The second vector is more recent and more interesting. Merchants don’t want your cash. More and more vendors are saying, “We don’t take cash.” You can go up to the counter, but you’d better get out your debit card, credit card, a gift card, your iPhone with Apple Pay or something because they’re not going to take your cash. Even if you can get the cash, which is hard, you may not be able to spend it.
The third vector – and our friend Ken Rogoff, a professor at Harvard, is the thought leader on this although others have said the same – is just to get rid of the $100 bill. He has a new book out on the subject of elimination of cash. It’s not quite a bestseller but is certainly selling very well. You can Google “Rogoff” on Amazon to see his new book, which is basically a manifesto to get rid of cash.
You might be down to $20 bills, and then you say, “What can I do with a $20 bill?” Maybe you can get a latte with an espresso shot at Starbucks, but then Starbucks doesn’t even want your cash, either. In every respect, they’re attacking cash.
One way to really get out of the system, which I recommend, is to buy physical gold. If you have physical gold, you’re not going to have negative interest rates and you’re not going to be viewed suspiciously. It’s a perfectly legitimate investment and a way to get out of what I call the digital slaughterhouse where they’re trying to round up all the digital savings into a small number of banks and slaughter you with negative interest rates.
Getting back to Professor Goodfriend at Jackson Hole, he came up with another idea which is to create an exchange rate between cash in your pocket and cash in the bank. This gets into the definition of money. A lot of people think bank deposits are money. We say, “You have money in the bank.” The Fed tells you it’s money, and they want you to believe that.
A bank deposit is not money; it’s an unsecured liability of the bank, which could go insolvent. Then you get into insurance, but the insurance might go insolvent. I’m not saying to pull all your money out of the bank, and I’m not saying they’re going to go insolvent tomorrow; I’m just saying that’s not really money, as far as I’m concerned.
We also have the famous money market funds. The FTC just changed the rules so that the money market funds can suspend redemptions and not have to give you back a dollar on a dollar. It’s called breaking the buck. In the new world of money market funds, they can be like a hedge fund and not give you your money back at all, or even if they do, they don’t have to give you a dollar for every dollar you put in.
That’s ‘money in the bank.’ I don’t think it’s money, but the Fed does, so let’s call it money for a minute. Well, if you have $100 in your pocket, go up to the bank, and you deposit it, the bank gives you credit for every dollar. If you look at your statement, there’s $100 more in your bank account. Basically, the cash in your pocket has par value relative to the balance on your bank account. You can put $100 down at the counter and the deposit slip will credit your account for $100.
What this professor said is, “No, we’re going to treat that like a cross rate, like an exchange rate.” If you’re going to Europe and you buy euros, you can buy euros, but you don’t know what the exchange rate is going to be tomorrow or the next day. What we do know is that it fluctuates.
I get questions all the time from people who are going on vacation like, “Jim, should I buy my euros now, or should I wait until I get there?” depending on whether I think the euro is going up or coming down.
What the professor said is that cash in your pocket and cash in the bank can have an exchange rate, and they’re not exchangeable at par. The Fed can set the exchange rate, and the Fed is under no obligation to maintain parity.
What that means is in this future world the professor is envisioning, you could take $100, give it to the teller with a deposit slip, and the bank would credit your account $98. Your $100 in cash would be converted to $98 of deposit credits, or vice versa. Let’s say you have $100 in the bank and you said to the teller, “I’d like to withdraw my $100,” or if you went to an ATM and said, “I’d like to withdraw $100,” you would receive $98.
There would be an exchange rate between cash money and bank money. Even though people think of them both as money, it could fluctuate. That is a way of imposing negative interest rates on cash.
We already said that if your money is in the digital system, they can impose negative interest rates just by taking it away. You may respond, “Well, I can go to cash and avoid the negative interest rate.” I just explained at length why that’s really difficult, but let’s say you did. Imagine that you said, “Whatever. I don’t care if they report me to the Treasury. I’m an honest citizen. I want $50,000 in cash please, and I’m going to put it in a safe place.” You might only get $47,250 for your $50,000. It’s not worth 100 cents on the dollar.
The system is so corrupt and so extensive that they’ve even figured out a way to impose negative interest rates on cash in your pocket. With Goodfriend’s policy, you can’t take it in and out of the bank without suffering an exchange rate, which obviously would be adverse to cash.
I read his paper and thought that from a professor’s point of view, it’s pretty creative. I’ve never heard of that before. But from a saver’s point of view, this is appalling. It’s amazing the lengths to which policymakers, politicians, and now academics will go to steal your money.
It’s easy to dismiss this as the musings of some academic, but when you’re on the podium at Jackson Hole and Janet Yellen, Stan Fischer, and William Dudley are in the front row… This is how things work; this is how they do it. They feed it out as an academic paper, then next thing you know it’s on some policy agenda. First, some economist is writing a paper, and next thing you know, it’s real.
I saw this over the last five years with SDRs. SDRs are all over the news now. Some people say “Hey, Jim, you had a whole section on this in your book Currency Wars in 2011. How did you know in 2011 that the world is moving to SDRs?” The answer is because they told me.
I went to the IMF website and found the papers. Do normal people do that? No. If you found the paper, could you necessarily understand it without technical training? Probably not. It doesn’t mean people aren’t smart; I think everyday Americans are. I always say when it comes to your money, everybody has a PhD, but you do need some technical training to understand this.
The whole SDR blueprint was laid out in 2010/2011; all you had to do was read it. What I’m saying is, don’t dismiss this as something that will never happen. The blueprint was laid out at Jackson Hole for how they’re going to steal your money one way or the other. I’m telling you now that this is coming, and when it actually happens two or three years from now, no one should be surprised, because you could see this coming.
So there actually was big news coming out of Jackson Hole. It wasn’t Janet Yellen, other than the news that she doesn’t know what she’s doing, which has been clear for a long time and made apparent from her speech. It also wasn’t the news that the Fed is completely unprepared for a recession; we can see that as well. But there was this other paper from a professor about how they can actually impose negative interest rates on physical cash just by having an adverse exchange rate to your money in the bank.
Watch that space. I think that wraps up on Jackson Hole, Jon. I know you want to talk about G20 a little bit since there’s some news there. I’ll hand it back to you.
Jon: Thank you, Jim. That is a startling story. I had a question for you about an event coming up on September 30th, but I don’t want to break your flow if there was something you wanted to share with us about the G20 summit.
Jim: They’re actually connected. The September 30th event has to do with the IMF and the Chinese yuan, but that is very much related to what happened at G20. I’ll take a few minutes on G20, segue into that September 30th event, and then we’ll go from there.
The G20 conference just wrapped up. I think a lot of listeners know the G stands for group, so it’s a group of 20 countries. There are actually 24 that get invited, but it’s called the group of 20 countries of the G20. They do this once a year.
They operate at different levels: heads of state, financial ministers, central banks, technical staff, so-called Sherpas, and a lot of other things contribute, but this was the leaders’ summit. It included President Xi of China, Theresa May, Prime Minister of the U.K., Justin Trudeau, President Obama, and the rest all there for about three days.
It’s a rotating presidency, so a different country takes a turn every year. Last year was Turkey, next year is going to be Germany, and this year was China which made President Xi of China the president of the G20.
The G20, I’ve said for a long time, is basically the board of directors of the world. Even more powerful than the United Nations, more powerful than the IMF, the World Bank, and these other multilateral institutions of various kinds, this is the group that runs the world. The G20 is the most powerful group get-together that exists.
The Chinese are very caught up in appearance and ceremony and protocols, so nothing escapes their attention in this regard. When the President arrives on Air Force One, they wheel up a big two-story staircase. There’s a top door on Air Force One that opens, and the President comes down the staircase to meet whatever dignitaries are waiting for him at the bottom of the steps. The Chinese did not let him do that.
There’s a back door on Air Force One. It’s like a hatch that comes down the back with stairs that are much shorter and closer to the ground. It’s very unimpressive-looking. They made the President do that, so right away they’re kind of insulting the President.
This is the 21st century equivalent of the kowtow. The kowtow is a ceremony when you approached the Chinese Emperor back in the days of the empire. You had to lie flat on your face then rise and bow and crawl on your hands and knees like 20 feet, lie flat again and rise and bow again. You’d keep doing that for a long distance as you approached the emperor. They didn’t make the President kowtow, but making him come off the back of the plane was a 21st century kowtow, so to speak. It was Xi saying to Obama, “I’m the boss.”
The summit was two days, and again, there was a communiqué. It was pretty long at about 15 pages or so with lots of points. When you explore these things as I do, there’s the communiqué, but there are 40 separate working papers that come out of this.
There’s the tax group, the structural reform group, the SDR group, the climate change group, etc., and every one of those groups produces its own report. These reports are anywhere from 20 to 100 pages long, so you’re literally talking about 1,000 pages of very dense, technical material coming out of these G20 summits.
I haven’t read 1,000 pages, but I’ve read quite a few pages in the particular areas that are of interest to me, which are SDRs, financial risk, and taxation. It’s amazing what’s there. I would say this is the most significant G20 summit since the Pittsburg G20 summit in September 2009. There were three in a row: Washington in November 2008, London in April 2009, and Pittsburg in September 2009. Those three in a row were the response to the global financial crisis.
There have been some significant developments since then, but this is by far the most important G20 summit since September 2009. I’ll mention a couple of things just to be specific. The leaders announced what’s called the Hangzhou Consensus. Hangzhou is the name of the city where this took place. As I said earlier, nothing happens by accident. The word “consensus,” which is the English translation, was very much by design.
Going back to 1989, there was an article by a think-tank scholar in Washington called the Washington Consensus. The Washington Consensus was also called Bretton Woods II and was basically the blueprint for running the world after the collapse of the original Bretton Woods.
We all know Bretton Woods broke down in August 1971 when Nixon suspended redemptions of dollars for gold. The 1970s were a period of chaos, and the 1980s were a period of the dollar reasserting itself under Volcker and Reagan – the new “king dollar” period. The dollar was quite strong at an all-time high in certain industries in 1985.
By 1989 with the fall of the Berlin Wall, the end of the Cold War, and king dollar, the U.S. looked like a global hegemon. At a time when U.S. power relative to the rest of the world was probably at an all-time high, this scholar came up with what he called the Washington Consensus.
It was basically ten rules of the road. You have fiscal reform, floating exchange rates, open capital accounts, etc. There was a list of policies, and it more or less said, “This is how Washington wants to run the world. My way or the highway. If you don’t play by these rules, don’t expect an IMF bailout, don’t expect foreign investment, don’t expect to participate in free trade deals, etc.” The Washington Consensus was basically Washington dictating to the world.
Clearly, that has broken down a little bit in this century when we saw weakening in the global financial crisis, etc. I’ve been talking quite a bit about the diminution in the role of the U.S. dollar and the rise of the SDR. A lot of the stuff about U.S. power eroding has been in the air not just financially, but militarily, and we all know what’s going on in the Middle East with Libya and Syria. We don’t need to belabor all that.
When I saw the words “Hangzhou Consensus,” they literally jumped off the page at me and hit me in the eyes. I said, “Okay, this is the coming out party. There is no more Washington Consensus by the fact that it was named after a Chinese city.”
I understand that it’s the G20, the U.S. is a signatory, the U.S. isn’t going away, and the dollar is not disappearing overnight. I’m not saying any of that. What I’m saying is that there has been a changing of the guard. We have global rules of the road named after Washington, the capital city of the United States, and then suddenly a new set of rules come out named after a city in China. Hangzhou is not the most important city – it’s not Shanghai or Beijing, maybe that’s what made it palatable to the U.S. – but the Hangzhou Consensus is the new rules of the road of the for the international monetary system. I haven’t seen anyone report this or pick up on this, but the symbolism is unmistakable.
I’m trying to share with our listeners the stuff you won’t hear on CNBC or read in the New York Times or the Financial Times. This is the stuff that goes right over the reporters’ heads, and the people who do get it don’t talk about it. Christine Lagarde understands this, but she’s not going to tell you this, so I’m trying to share this analysis with the listeners.
What’s in this Hangzhou Consensus? We have these new rules of the road. One of them explicitly says that the G20 runs the world. I’ve been saying this for five years, and sometimes I get laughed at with, “The G20 is just a conference, who cares.” No, they outsource to the IMF and intersect with these other multilateral institutions. They don’t have a permanent secretariat – that’s what the IMF is for – but they do have all these working groups, and they’re coordinating with other agencies such as the OECD on taxation and the IMF on the SDRs.
They have a finger in every pie, but they explicitly say, from a governance point of view, “We, the members of the G20, agree that we run the world.” It didn’t say that in so many words, but it kind of did say that. Of course, this is self-appointed, self-perpetuating, unaccountable, and non-democratic. There are kings and dictators, communists; this is not necessarily a nice, warm, fuzzy group, but that was explicit.
What was implicit for years has now become explicit. Think of this as two things: 1) a charter for the board of directors of the world, and 2) a new set of rules of the road named after a city in China announced under the auspices of President Xi who happened to be the president of the G20. This is like saying he’s king of the world. Again, the symbolism here is unmistakable.
There is a third thing just to put a finer point on this. Our old friend, the BRICS were back. BRICS is an acronym going back to 2000. Jim O’Neil of Goldman Sachs came up with it as a marketing device. It’s the only marketing device I’ve ever seen that became a political reality, but it speaks to the power of branding.
BRICS stands for five emerging markets – Brazil, Russia, India, China, and South Africa. South Africa is kind of a rounding error on this, but the five of them together led by China add up to 22% of global GDP. At almost a quarter of global GDP, it’s not insignificant.
Everyone was talking about BRICS four years ago. The BRICS have a reserve fund, they have a development bank, and they were building their own Internet. It looked like the BRICS were going to tell the U.S. to shove off, and then suddenly, in 2014/2015, you didn’t hear as much about the BRICS. What you really did hear about was China going their own way with the Asian Infrastructure Investment Bank and some other initiatives. It looked like China was going to run away from the rest of the BRICS.
The BRICS are suddenly back, and here’s why. The IMF has to reform their quota every five years. Like I said, they can’t speak in plain English; they have to make up words. Quota is a vote in the IMF. As stated in the Articles of Agreement, they have to review it every five years and make adjustments. Right now the BRICS are 22% of global GDP, but they’re only 14.9% of the IMF quota, so clearly, they are under-represented.
The Hangzhou Consensus, this final communiqué of the G20, says, “We acknowledge that the IMF is going to review the quota in 2017, and we acknowledge and expect and are in accord that the percentage quota of emerging markets will increase.”
Well, if you’re at 14.9% and the Hangzhou Consensus says you’re going to increase in 2017, all that’s laid out; obviously you have to be at least 15%. My guess is it’ll be a lot more than that, but you can’t increase from 14.9% without hitting 15%.
Fifteen percent is a very significant number. That’s the percentage vote you need to veto an important action by the IMF. In other words, the big deal things need 85% or more to pass. It’s a supermajority. You need 85% to issue SDRs or amend the Articles of Agreement. If one country has more than 15%, they can therefore block it, because you can’t get 85% if the guy with more than 15% is holding out.
There’s only one country in the world that has 15% or more right now, and that’s the United States, so the U.S. has always had this veto power. No single country has that. The BRICS suddenly acting together, holding hands – and they actually do hold hands in the group pictures – are going to have at least 15% by this time next year. That’s in the G20 final communiqué and means they can block. It doesn’t mean they can make stuff happen, but they can prevent stuff from happening.
Let’s just play out this scenario. Next year, the IMF does the quota review, which they have to do. You get a bump in emerging markets representation, which they agreed to. The BRICS have 14.9%, which means you’re going to blow past 15%. That gives you veto power.
The world is in a financial panic, there is a liquidity crisis worse than 2008, and you can see that coming a mile away. Central banks are stretched, because they never normalized the balance sheet after the last crisis. The only clean balance sheet in the world is the IMF, so the only way you’re going to reliquify the system is by issuing SDRs, and you have to have a vote.
Now the BRICS can sit there and say, “We’re not voting for the SDRs. We’re going to use our veto power unless we get what we want.” What they want is the diminution of the role of the dollar – no more pricing oil in dollars, no more dollar being the dominant reserve currency, etc., whatever their wish list is.
So the BRICS can turn to the IMF and say, “If you want our votes on the SDR to save the world” – because at this point, the world will be burning down metaphorically, if not literally – “you’re going to have to give us what we want.” They will have the leverage to run the dollar off the road by this time next year.
It’s happening anyway in slow motion, but this would be a very specific tool, a very specific percentage, and a very definite event that you can see coming where all these things could fall into place.
I look at Jackson Hole, Yellen is clueless, this professor has just said that my cash isn’t worth par value anymore, and I look at G20 where they’re saying they have new rules for the game called the Hangzhou Consensus. No more Washington Consensus; they’re going to upgrade to the BRICS having veto power, and by the way, they run the show. There was also language in there about SDRs.
These are hugely significant events back to back, just to share with the listeners the stuff that you won’t read. I like all these outlets and reporters; I’m not dinging anybody, but you won’t read this stuff on Bloomberg, the Wall Street Journal, or the FT, because it’s way down in the weeds. This was the significance to me, Jon, so you’re right; a very eventful past several weeks.
Jon: Thanks, Jim. That’s another rich transfer of information for us. I’d like to turn the conversation over to you, Alex. I know you have some great questions from our listeners, but first, there is another topic Jim has been writing about recently in what he’s calling the beginnings of a war on gold. We’ve heard about the war on cash; Jim has been starting to warn us about a potential war on gold.
This is such an important question, Alex, so I really think we should give it priority today. From your perspective, would give us a brief update on the gold market and tell us how this concept of a war on gold resonates with your own experience there on the front lines, and then let’s hear from Jim on this.
Alex: From my perspective dealing in the gold industry, we’ve seen this happening over a period of years. When I say over a period of years, it’s been slowly happening for almost a decade now.
Our team differs from other gold funds in that we come from the physical side of the industry, which means dealing with refineries, dealing with secure logistics, moving gold around the world, vaulting, etc. Over the last few decades, we’ve had access across multiple jurisdictions and on three continents, so it’s given us a view into the changes in regards to regulations impacting investors on a global scale.
We’ve observed changes in banking and regulatory requirements that are pointing to the direction of full transparency and full regulation of individual wealth. Without diving too deeply into all of these details, here’s a brief list:
In 2010, the Foreign Account Tax Compliance Act was passed in the United States and signed into law. This is also known as FATCA; some of you might recognize that acronym. FATCA requires foreign financial intermediaries and foreign financial organizations such as banks, funds, and anything having to do with finance and investing to comply with this law globally. In 2010, the U.S., France, Germany, Italy, Spain, and the U.K. all made a joint announcement that they were going to be implementing FATCA.
In 2013, VIA MAT – which is now Loomis, one of the largest private vaulting custodians in the world – announced that it would no longer allow U.S. persons to have individual accounts or store valuables with them. They were specifically citing U.S. tax liability issues.
In 2014, a staff report issued to Congress by the Committee on Oversight and Government Reform for the U.S. House of Representatives identified a federal executive administrative program that was forcing banks to close accounts of businesses across a wide range of industries. They came out and created this list of what they considered high-risk merchants.
These types of industries included things like ammunition sales, coin dealers, credit repair services, firearms sales, money transfer networks, payday loans, pharmaceutical sales, surveillance equipment, telemarketing, and tobacco sales. These are all legitimate and lawful businesses in these industries, but many of these businesses were notified really without any advance warning that their banks were closing their accounts. Few, if any, banks will open new accounts for businesses in this area. It’s become very difficult.
This is not just happening domestically; this is happening globally. We’ve seen it in a number of jurisdictions. While this doesn’t bear directly on investors, it does show the extent to which governments are going to control the flow of finance regarding anything including industries it doesn’t approve of.
With that in mind, Jim, I know that you have recently talked about a coming war on gold. Would you like to elaborate on that a little bit more?
Jim: That’s a great summary, Alex. The only thing I would add is that it just strikes me as funny or curious at least that the war on cash is going full steam ahead. We talked a lot about that, but gold is actually something citizens around the world can transact fairly freely.
You’re right, it’s clear that Swiss banks don’t want U.S. accounts, but U.S. citizens can go buy gold. You need a reputable dealer. You have to be careful because some of the markups are too high. A proper markup is maybe 1% up to 4%. That’s a little steep, but that’s a normal markup.
Some of the markups, unfortunately, are 20%. I feel that people who are interested in gold get ripped off or taken advantage of by some of those dealers. Avoid the 20% guys; look for the guys who are less than 5%. A dealer deserves a commission, so I don’t mind paying a markup if I buy gold.
U.S. citizens and foreign citizens can buy it freely. Foreign citizens can use Swiss vaults, but U.S. citizens are going to have to find U.S. vaults although the government hasn’t really done anything. I think the government has spent so many decades telling you that gold is not money that they started to believe it themselves.
I think gold is the best form of money, and I think every investor should have about 10% of their assets allocated to physical gold. My point being the government is going to win the war on cash. It won’t be pretty; they’ve almost won it already. Sooner than later, you’re not going to have cash or be able to get cash, but for now, you can get gold. That’s the way to get around negative interest rates and avoid the government stealing your money.
I think once the war on cash is over, maybe a year or two or less from now when you actually don’t have cash and you’ll have to use debit cards or prepaid cards or whatever, the government is going to wake up and say, “Wait a second, we won the war on cash, but how come all of these people are buying gold? Obviously, we need to do to gold what we just did to cash. We need to make that hard to get, we need to clamp down on dealers, and we need to increase reporting, just do a whole bunch of stuff that has been around forever in the cash world.”
Right now the government has their hands full attacking cash and they are ignoring gold, so in my view, it’s a good opportunity to get gold relatively hassle-free. If you wait a year or two from now, you might find that you’ll be treated like a drug dealer for buying gold.
It’s ridiculous. I don’t know why honest citizens can’t have any kind of money they want whether it’s a bank deposit, physical notes, physical gold, derivatives – take your pick. I don’t know why people can’t express a preference for various forms of money, but the government is going to stamp them out one by one.
There are a lot of reasons to get gold today including the fact that when you really want it, there will be actual, physical shortages. We’ve spoken about that before; independent of government action, you just might not be able to get it, period. That’s just one reason. Another thing is that the price might run away from you. A third reason is that the government might decide that they don’t want to let you do it, so I would always make preparations when the sun is shining; don’t wait for a rainy day.
Alex: I very much agree with that sentiment. In fact, we’ve been recommending that type of thing to people for many years now.
We have about a dozen really good questions here in the queue, but I think we only have time to get through a few of them.
The first one is coming from Duha M. In fact, several people are asking this exact same question or something similar. He’s saying “I’m sorry this is a bit long; I haven’t found the answer anywhere else. There has been a lot of talk about central banks buying a lot of stocks –the Bank of Japan, Swiss National Bank, and others. My question is, is it possible that central banks can prevent market crashes by just printing fiat money and buying equities as much as needed? And why does the Swiss National Bank have something like $1 billion in gold stocks?”
Jim: The answer is yes. If you want to bid up the prices of stocks, you can prop them up. What is the stock market index? It’s just a formula applied to a bunch of closing prices. If you want to print money and buy stocks, go ahead and do it now.
That is unbelievably unsound and will cause a loss of confidence in money. I’d want no part of the stock market unless you’re a really expert trader. If you’re an expert trader and you’re looking for rifle shot opportunities on over- or under-valuation and that sort of thing, that’s one way to tiptoe in, but as an allocation in my portfolio, I have no publicly traded equities.
I obviously have gold, silver, cash, and land. I do own stocks, but they’re private companies I invest in – tech startups and venture capital type situations where I know the people involved – it’s contracting, investing in hedge funds, rental properties, farmland, and fine art. There are lots of things to invest in, but the stock market is a huge bubble mainly because of central bank intervention.
I did an analysis a couple of weeks ago where I could see that the yen was going to get a lot stronger. Everyone was expecting B of J intervention and QE whatever in Japan, and that the yen was going to be weaker. I said, no, the yen is going to get a lot stronger and trade through 100, which it did briefly with the dollar.
I saw that and then took it a step further. I said if the yen is strong and the large Japanese corporations get a lot of their earnings from overseas outside of Japan, when they take these local currency earnings and translate them back to yen, they’re going to have fewer yen because of the strong yen. That’s going to reduce their earnings, so that’s going to be bad for Japanese stocks.
I was completely wrong. The Japanese stock market went up. I was like, “What did I miss?” What I missed was that the Central Bank of Japan was buying stocks. In other words, my fundamental analysis didn’t matter because the Bank of Japan was just waking up and buying Japanese stocks.
They don’t care about earnings, translation losses, earnings per share from foreign exchange translation, and all of the things fundamental analysts look at. They were just bidding them up.
So the answer is, yes, central banks can print money and buy stocks and prop up markets, but I wouldn’t touch it with a ten-foot pole. That is very non-sustainable, very fragile, and subject to collapse based on confidence, based on psychology, and so it will fail in the end, but it can succeed in the short run.
Alex: Another question we have is from Adeeb: “What economic effect, if any, can we expect when the Chinese yuan joins the IMF reserve currency status in October?” I think what he’s saying is as the SDR gets reweighted with the Chinese yuan as a component, are we looking at any specific economic effect from that?
Jim: We are in time. These things play out very slowly, and the elites behind it want it to play out slowly, because they don’t want you to notice. We already talked earlier in the call about how so much of this is technical, but it’s hiding in plain sight. You can find all these source papers on their websites, but good luck reading them or understanding them.
Just to be clear on what’s going to happen, the value of an SDR right now is calculated with reference to poor currencies. A lot of people think there’s this big basket or pot of hard currencies backing up the SDR. There isn’t; there’s nothing backing up the SDR. It’s just another form of fiat currency. The IMF prints them and hands them out, there’s nothing behind it, but you can take an SDR and exchange it for your euros or dollars.
I can take dollars and buy euros, and I can take SDRs and buy euros or dollars, but it begs the question, what is the exchange rate? This basket we talked about is used to calculate the exchange rate. Right now, there are four currencies in the basket: dollars, sterling, yen, and euros. Effective the close of business September 30th or waking up October 1st – take your pick – the Chinese yuan will be included in the basket.
Now, it doesn’t mean your dollar is worthless on October 1st. It does not mean you’re going to wake up on October 1st and the dollar will have disappeared; that’s not how these things work. What it does mean is that China is on the bus. In the 1960s, there was an expression, “You’re on the bus or off the bus.” Well, so far, China has been off the bus, but on October 1st, they’re going to be on the bus meaning they’re going to be part of probably the most exclusive club in the world, because you have five members.
This means that in the next financial crisis when you need to reliquify the world, as I said earlier, central banks can’t do it because they never normalized the balance sheet and they’re at an invisible confidence boundary, and “Oh, another $4 trillion from the Fed, nothing to it?” I don’t think so; at some point, you’re just going to get out of the dollar and out of all these other currencies.
Where is the money going to come from? When you have to print money because everybody wants their money back, where is that money going to come from? It’s going to come from SDRs, except China would not approve that unless they were on the bus.
The significance of what happens on October 1st is once China is in the club, they would then have a vested interest and community of interest in improving and expanding the use of SDRs, which we’re already seeing.
For the first time in 40 years, the World Bank issued an SDR bond issue underwritten by Chinese banks, by the way, in the Chinese market.
That’s not the IMF printing SDRs; that’s a separate multilateral institution borrowing in SDRs by issuing bonds denominated in SDRs. If you want to buy the bonds, you have to pay for them in SDRs.
So the SDR is now being expanded in private use, so called market use. It’s going to be expanded in terms of the composite currencies including the yuan. It was specifically referred to in the Hangzhou Consensus and the G20 final communiqué that we talked about earlier. This is not in the lab anymore; this virus has been released and is going to sink the dollar.
It won’t happen overnight, but it could happen quickly if we have a financial crisis soon, which is possible. But even if that doesn’t happen, it will happen over the next several years.
People seem to think, “It’s happening in slow motion, so call me when it happens.” No, it’s happening. What are you waiting for? My point to listeners is if you want to ride the stock market thing or whatever, if you’re waiting for the day when everything I’m describing happens, it’s going to be too late.
It’s going to happen faster than you think. It’s going to happen overnight. You’re not going to be able to get gold. The dollar is going to plummet. Now is the time to diversify your portfolio to include physical gold.
Alex: Chris T. is asking when this recording will be posted stating, “There’s so much material to re-listen to here, so much content.”
We will be posting the recording on http://physicalgoldfund.com/podcasts/. We will also send out an e-mail to everyone letting them know when that’s available.
We are about out of time, but there are a lot of questions in regards to portfolio allocations to gold, how to buy gold, and lots of questions about precious metals.
Jim, would you like to just very briefly talk about your last book, The New Case for Gold? I know a lot of these kinds of questions are answered in this book.
Jim: At the risk of sounding like a book salesman – but I guess I am – I have a book that came out in April and is still available in book stores and on Amazon. It’s called The New Case for Gold. It has history, economics, analysis, and also has a very practical side: How do you buy gold? How would you store it? What’s the best way to own gold? What’s the recommended allocation? All the types of questions some of the listeners are asking are covered in the book.
We don’t have time to go through it all on the call, but for those who are interested, just go to Amazon: The New Case for Gold by James Rickards. It’s easy to find. I thank everyone in advance who purchases a copy. You’ll find quite a bit of information there and also other resources to follow up on.
Alex: Thank you, Jim, for your time. It’s been an excellent discussion. I appreciate your points about the war on cash, the war on gold, and SDRs.
With that, I’m going to turn it back over to Jon.
Jon: Thanks, Alex, and I’m glad we got to at least a couple of those great questions from our listeners. Of course, we’d love to have tackled more of them, but I think it’s clear we’ve been discussing some momentous developments today.
Thank you, Jim Rickards, once again. It’s always a pleasure and an education having you with us.
And most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now, and we look forward to joining you again soon.
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