3 Min. Gold News – Jim Rickards – RT Boom Bust – Nov. 11, 2013

3 Minute Gold News

A Quick Read for Busy People

3 minute synopsis of the recent video interview with Jim Rickards, author of Currency Wars, Senior Managing Director at Tangent Capital, by Erin Ade of RT Boom Bust.

Jim’s new book, being released next April, is called The Death of Money – The Coming Collapse of the International Monetary System.

Topics:

Have We Passed The Point of No Return
Importing Inflation
No QE Tapering
Depression
Unemployment
Inflation
Complex System
Collapse
Currency Linked to Gold
National Defense
Returning to a Gold Standard

Jim Rickards

RT Boom Bust
Interview with Jim Rickards
November 11, 2013
HAVE WE PASSED THE POINT OF NO RETURN

We may be passed the point of no return, although it takes a while for all the consequences to play out.

We’re in uncharted waters in some ways, certainly quantitative easing (QE) is a massive experiment. We’re all just consumers, every day Americans, and people who around the world are just guinea pigs in effect, in a Central Bank experiment. There really is no precedent for that.

There is a precedent for money printing and currency wars. Those have happened several times before, and Jim talks about this in his book Currency Wars.

There was a currency war from 1921 – 1936, and another one from 1967 – 1987.

We’re not always in a currency war, but when we are they can last for a very long period of time. Years and sometimes decades.

This present currency war that we’re in started in 2010 and it’s still going on. Actually we have new rounds today where we’ve seen the Czech Republic and the ECB cutting rates to cheapen the currency.

We saw this last year in Japan. We saw it in 2012 with Brazil. So it’s going on around the world.

Jim expects that this will continue for years.

The competitive devaluation scenario is continuing.

Countries believe this will improve exports. Jim says that this is not how you improve exports. You improve exports with technology, innovation, education, good business climate, low taxes, value added… there are a lot of ways to promote exports but cheapening your currency is not one of them.

All cheapening the currency does is get inflation.

IMPORTING INFLATION

And that is the point. The real reason Central Banks are cheapening the currency is to import inflation in the form of higher import prices.

The US is a net importer – it imports more than it exports.

Japan imports massive amounts of energy so for them a cheap currency means higher import prices. That means inflation, and that’s what the Central Banks really want.

NO QE TAPERING

Jim said all summer that the FED would not taper, but if they were going to taper then September was their last chance. He did not expect tapering at all, and he still doesn’t.

In May, when Bernanke started talking about it, Bernanke said they were going to taper, and reduce asset prices before the end of the year, if the economy performs in accordance to their forecast.

The FED has the worst forecasts of any major institution Jim can think of so when they said they thought it would get better, then Jim’s assumption was that it was going to get worse. Which it did.

Jim does not see the conditions under which they could taper, absent of structural changes.

DEPRESSION

We’re in a depression. If the FED were to taper (which Jim does not expect), they would be tapering into weakness and would guarantee a recession in 2014.

They are not going to taper.

They have painted themselves into a corner where there are no good ways out.

If they taper then they taper into weakness and cause a recession.

But if they keep printing then eventually they will destroy confidence in the dollar, and create an international monetary crisis.

The FED always speaks in code.

If you go back to September 2012, when they first announced the unemployment target, it was always a thresh hold not a trigger. They didn’t say they’ll raise interest rates when unemployment gets to 6.5%, they said they won’t raise interest rates until it gets to 6.5%. But it could get a lot lower than that before they do. When they now say they’re lowering unemployment target from 6.5% to 5.5% it just confirms Jim’s point.

UNEMPLOYMENT

Unemployment is going down for the wrong reasons.

It’s not going down because we’re creating a lot of jobs, it’s going down because labour force participation is collapsing.

That’s extremely negative for the economy.

GDP is really just the sum of labour force participation + productivity. So, “How many people are working?” + “How productive are they?” = GDP.

The work force participation is shrinking, going back to levels not seen since 1978. That’s when women were entering the workforce in unprecedented numbers, so we’ve gone back to a time when women did not participate in the work force to the extent they do today.

So our labour pool is dropping. That’s extremely negative for the economy.

INFLATION

They’ve given up on Real Growth and they are targeting Nominal Growth and inflation.

It’s just Nominal GDP Growth by another name. This is just, “Let’s bring on the inflation.” to bring the nominal growth because if the Real Growth isn’t good enough then you make up the difference with inflation.

To do that they’re just going to print money.

So that’s what Yellen‘s doing.

Jim sees that the next step in policy will be the increase in asset purchases. He sees a good chance of a recession in 2014 and sees the response from the FED as an increase in QE.

COMPLEX  SYSTEM

Collapse usually comes from a loss of confidence and confidence is a very intangible thing.

The problem with policy makers, the FED in particular, but also the White House and the Treasury, they use these Equilibrium models and they think that if Nominal GDP  isn’t high enough they can just print money, create some inflation, get Nominal GDP on a sustainable path, and withdraw policy. This is what the model would predict and what they rely on.

But the world is not an equilibrium system it is a complex system. This means it has sudden, sharp changes – what physicists call ‘phase transitions’ and is better known as a ‘tipping point’.

You can print and print and print right up to the point of collapse, and then suddenly confidence disappears.

Jim believes the policymakers take confidence for granted. They’re in the process of destroying confidence, slowly at first, and then very suddenly.

COLLAPSE

Jim doesn’t mean his statement regarding the “collapse of the monetary system” as a provocative statement. The international monetary system has collapsed three times in the last one hundred years.

It collapsed in 1914, 1939 and again in 1971.

It doesn’t mean the end of the world.

It doesn’t mean we all go live in caves and eat canned goods.

What it means is that the major financial trading powers have to sit down and reform the system. Create a new system to replace the one that failed.

In Jim’s new book he looks at what that new system could look like, who would the players be.

For example, China was not a player in the 1970s, the last time this happened. This time they will be.

CURRENCY LINKED TO GOLD

Jim has said that the best way to ensure financial stability would be the adoption of a flexible gold standard in which major currencies are linked to the price of gold.

It takes away the inflation option.

We had a very successful international gold standard from 1870 – 1914. That was a period characterized by enormous growth, technological innovation, price stability, some mild good deflation when prices go down and your standard of living goes up. It was a very successful period.

It was abandoned at the beginning of World War I because they needed money to fight the war. It was replaced by a modified gold standard in the 20s and 30s. Then another collapse followed by another modified gold standard, and finally another collapse in 1971.

The reason Central Bankers don’t like it, and the reason every day citizens around the world should like it, is because it gives you price stability. So you create wealth with ideas, technology, entrepreneurship, through hard work, and by taking risks. That’s the way you create wealth.

You don’t pretend to create wealth by printing money.

The problem with inflation is that what the FED and economists say is that the dollar has lost 95% of its value since the creation of the FED in 1913. That’s true.

The purchasing power of $1 today is what a nickel would have gotten you a hundred years ago.

Economists say that yes, but that wages have gone up, income has gone up and the stock market has gone up so it comes out equal or slightly ahead – called ‘money neutrality’.

But it’s not true individual by individual. Inflation creates winners and losers.

The winners are the people who can see it coming and prepare for it. So the bankers, speculators, hedge funds, and elites. The losers are every day citizens, people who rely on pensions, annuities, insurance policies, retirement income and savings – any kind of fixed income.

Inflation can lead to outbreaks of social disorder, riots, and the collapse of cultures, ethics and morality, that we saw in the Weimar Republic.

Gold takes away the inflation option. This helps savers and prudent citizens. It hurts the speculators, but too bad.

Linking the currencies to diamonds wouldn’t work because diamonds aren’t that scarce. It’s a myth. You can have a commodity standard and link it to wheat, or corn, or oil, but they degrade, or ferrous metals rust, and oil is not uniform.

The beauty of gold is that it is an element. Atomic number 79. It doesn’t rust or corrode. It’s hard to destroy.

It’s not that it’s shiny or magic – it’s just extremely practical as a commodity standard.

Countries and civilizations have chosen gold for thousands of years.

It you fix the price of gold, and a country prints too much of its money so people want their gold, you have to give them their gold at the fixed price.

It doesn’t mean you can’t have discretionary monetary policy. It doesn’t mean you can’t print money. It just means that whenever you do you test it by the market, and if people want the gold they’ll come and get it.

You can go on your own personal gold standard. You don’t have to wait for Central Banks. Warren Buffet bought a railroad, so he got out of paper money and bought a hard asset. Maybe we can’t buy a railroad but we can buy some gold.

NATIONAL DEFENSE

You cannot have a strong national security without a strong currency.

When you cheapen the currency, the way the FED is trying to do, and the White House and Treasury have been supporting that, you weaken national security. We’ve seen that all over the world.

Right now Saudi Arabia, Egypt and Russia, with others, are discussing an axis to break away from the United States,  because it appears the United States is unwilling to stand up to its security guarantees to Saudi Arabia.

The United States is seen as facilitating the rise of Iran as a regional hegemon. That would be to the detriment of Saudi Arabia. And what the US will find out is that the Saudis will no longer accept dollars for oil, they’ll insist on some other currency. They are working on a regional reserve currency. The GCC members are trying to organize a Central Bank. Other currencies could be used, including the Euro. Germany is looking to create a European wide bond market, and a European wide banking regulation and banking insurance.

The FED seems to be oblivious to this. Maybe they don’t care.

We’re jeopardizing national security by weakening the dollar.

RETURNING TO THE GOLD STANDARD

When countries went back to the gold standard after World War I they committed a major blunder. Particularly England, because they went to the Pre-World War I price.

There’s a parity between gold and the money supply. They doubled the money supply and needed to either double the price of gold, or cut the money supply in half. They cut the money supply.

That contributed to the Great Depression.

The key to a gold standard is you’ve got to get the price right.

People say there’s not enough gold in the world to have a gold standard. Well there’s always enough gold, you just need to get the price right. Jim sees this as north of $7,000 per ounce.

……………………………………

Wag the Dog (Currency Crash and Drums of War)
words and music Elaine Diane Taylor
©2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
available soon on iTunes

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Coins and Crowns
words and music Elaine Diane Taylor
©2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns

As featured in Episode 1 of bestselling author Mike Maloney’s documentary series – Hidden Secrets of Money

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Another Week on Wall Street
words and music Elaine Diane Taylor
©2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns

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