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A 3 minute synopsis of the interview with Jim Rickards, author ofThe Death of Money: The Coming Collapse of the International Monetary System, by Erin Ade from RT Boom Bust.
Okay, this one might be longer than 3 minutes, but you will be so glad you took the time. Erin Ade is a great interviewer.
Three Collapses in the Past Hundred Years
Death of Money
Major Market Threats:
– Financial Warfare
– Inflation and Deflation
– Social Unrest
How Current Threats Differ from Threats of Past Collapses
Breakdown of Post World War II Order
The Next Crisis
Inflation and Deflation Stress
Cyber Financial Warfare
RT – Boom Bust
Interview with Jim Rickards
April 8, 2014
THREE COLLAPSES IN THE LAST HUNDRED YEARS
With the death of money, Jim is really talking about the loss of confidence in the U.S. dollar.
Confidence is what backs the U.S. dollar.
As long as people believe in a sound dollar, and that the monetary authorities are doing the right thing, then they’ll continue to use it. But that confidence is fragile and can go away very quickly, and once lost it’s very hard to get it back.
The international monetary system has collapsed three times in the last hundred years — 1914, 1939 and 1971.
These things do happen every thirty or forty years. It’s not like clockwork, but these things are not unusual.
When it does happen it’s not the end of the world. It just means that the major financial trading powers get together and they come up with a new system.
They did this in Bretton-Woods in 1944, in Genoa, Italy in 1922, and The Smithonian Conference in 1971.
THE DEATH OF MONEY
Jim’s book, The Death of Money, explains to the reader what the vulnerabilities are, and why and how the system will collapse.
It also takes the reader forward to what the new system will look like.
It’s a good guide for investors — you don’t have to wait until the collapse comes. You can get your portfolio ready today.
THE MAJOR MARKET THREATS
Financial warfare is the threat that is most up front and center.
With Crimea, Russia has invaded and now controls Crimea. NATO and the United States don’t think there should be a military response, but the U.S. doesn’t want to be seen doing nothing.
So the U.S. is imposing economic sanctions on Russia, which is a form of financial warfare.
We’ve used these very effectively against Iran, Syria, Libya and North Korea, and elsewhere around the world.
The difference with Russia is that Russia has a much greater capacity to strike back, and have said they would if the U.S. does something more serious.
Right now the sanctions are token — a few oligarchs won’t get to go to the Super Bowl next year. That’s about it.
What if the U.S. were to tighten those sanctions? What if, for example, they kicked the two biggest banks in Russia out of the U.S. dollar payment system? Or, along with their U.S. European allies, they kicked them out of the global payment system called SWIFT?
That would be very serious.
Russia is in a position to strike back. They could dump U.S. Treasury obligations, increase U.S. interest rates, sink our stock market, sink our housing market — or worse yet, they could unleash their hackers to close the New York Stock Exchange.
Nobody wants to go there.
U.S. has those capabilities and Russia has those capabilities.
It’s a lot like the cold war — mutual assured destruction where nobody would fire their missiles because the other guy could fire back and both powers would be destroyed.
Today we have mutual assured financial destruction.
That’s a threat, but things can also happen by accident or unexpected things can happen, and that’s a danger.
INFLATION AND DEFLATION
Christine Lagarde of the IMF has talked about this a lot recently.
We all know what inflation is — prices go up and up.
Deflation is another problem. Money is worth more but people hang onto it because it’s worth more.
People don’t spend and then you can get into a Depression, which is what happened in the 1930s.
Central Banks can’t stand deflation because it makes the Debt-to-GDP Ratio worse and destroys tax collection.
So Central Banks fight deflation by printing money to create inflation.
That’s what the currency wars are all about.
We see rising income inequality.
The IMF wants policy in major countries to continue to be “accomodative”.
Accomodative is just a fancy word for “theft from citizens”.
By keeping zero interest rates you’re depriving savers and investors of their returns, and handing it over to the banks and hedge funds — the big boys who are sucking the system dry.
That causes rising income inequality and it is also socially destablizing.
This all goes back to market manipulation, which the FED has been doing since 2008.
It’s all related.
Any one of these threats — financial warfare, inflation, deflation or social unrest — could happen.
They’re all bad and this is what you get when you manipulate markets.
HOW CURRENT THREATS DIFFER FROM THREATS OF PAST COLLAPSES
The main difference is that this one will be bigger and worse than all the ones before.
Capital markets and financial markets in general are what is called “complex systems”.
When you grow the size or scale of a system you don’t increase the size of the risk in a linear way, you increase it in an exponential way.
So if you triple the system you haven’t tripled the risk — you’ve increased the risk by maybe a hundred times.
So how big is the system?
The derivatives are larger than global GDP — we’re closing in on $100 trillion.
So if you look at the size of the system, any complexity theorist would say, “You’ve made the system that much bigger. Your catastrophe, your collapse isn’t going to be equally bigger or a little bigger, it’s going to be exponentially bigger.”
The FED has built a 5 foot seawall but they’re going to get a 100 foot tsunami.
This is bigger than the FED.
The only liquidity source when the next crisis comes is going to be the IMF.
They have the only clean balance sheet.
What the BRICS (Brazil, Russia, India, China and South Africa) want is what’s called “more voice” — more votes at the IMF.
Since the IMF was set up at Bretton-Woods in 1944 they have been overweighted towards Europe.
China doesn’t have as many votes as it should have based on the size of its economy. It’s 10% of global GDP but has nowhere near 10% of the votes at the IMF. Same as the other countries in the BRICS.
They want more voice and the U.S. has denied that and told everyone they have to support the U.S. dollar.
The U.S. actually wants a stronger Chinese currency so they can cheapen the dollar — which is part of the currency wars.
There’s a stand off right now between what the U.S. wants and what the BRICS want.
The BRICS have said that if they don’t get a larger voice in the IMF then they’re going to create their own institutions. They’ll create their own lending fund just among the BRICS. They’re building their own internet backbone, their own lending institutions, their own reserve funds.
Jim guarantees that those institutions will not have the U.S. dollar as the reserve currency.
This is a trend away from the dollar and there are many others.
BREAKDOWN OF POST WORLD WAR II ORDER
We’re definitely seeing a breakdown and there is cause for concern from the U.S. perspective.
There is no such thing as strong national security with a weak currency.
A strong country has a strong currency.
Jim has advised the Pentagon that the day would come when their naval vessel, their cruiser, will pull up at a fuel depot in Singapore and be told, “Pay me in SDRs”, because they’ll no longer accept U.S. dollars.
For the first time, the U.S. will have a very expensive forward deployed military that it has to pay for in a currency they don’t print.
If the U.S. wants SDRs it will have to earn them just like any other country, with a surplus in its balance of payments.
This is a whole new world. We’re moving in this direction.
Another threat comes from Saudi Arabia.
For forty five years Saudi Arabia has put a prop under the U.S. dollar — the Petrodollar.
What they and the rest of OPEC said was that oil must be priced in dollars.
Everyone needs oil so everyone needs dollars to pay for the oil.
Saudi Arabia said they would price oil in dollars but the United States needed to guarantee their national security.
Last December the United States stabbed Saudi Arabia in the back by having detente with Iran and making Iran the regional power.
Now that we’re no longer defending Saudi Arabia they have no further reason to support the U.S. dollar.
The threats are everywhere and they’re building up. They don’t happen overnight but it’s just a matter of time.
When the FED (which is the Central Bank of the United States), was created it was called the Federal Reserve because they wanted to fool the citizens about what it actually was.
America had central banks twice before that and they were closed by the people, so they called it the Federal Reserve, the FED.
Same thing with SDRs.
It’s world money — that’s the easiest way to understand it. But “world money” sounds kind of scary. So they call it Special Drawing Rights.
SDRs are not backed by anything.
The easiest way to understand it is that the FED has a printing press and they can print dollars. The IMF has a printing press and they can print SDRs. They will print the SDRs the next time there’s a liquidity crisis.
THE NEXT CRISIS
The next crisis is going to be bigger than the FED, and the FED is already insolvent on a Mark to Market basis.
They’re leveraged 80 to 1.
The only clean balance sheet in the world is the IMF. They’re only leveraged 3 to 1.
It won’t be issued on a calm day. It will be issued in a crisis to provided liquidity. It remains to be seen who will accept it, but they might not have any choice.
The IMF is not elected. They’ve got kings, dictators, communists and others on their executive commitees. People won’t understand it. It’s opaque.
We won’t have SDRs in our pockets — it’s not walking about money.
We’ll still have dollars, but they’ll be a local currency and not the world reserve currency.
The reserve currency will be the SDR.
The IMF could be better than the system we have now under one condition –if it was backed by gold or something else.
People think Jim favours a gold standard. He thinks we may have a gold standard, but his first preference would be a strong dollar. He’d like to see a strong America with a strong dollar.
But we’re not getting that because the FED, the Treasury and the White House are united in trying to cheapen the dollar.
Jim recommends gold for investors as a way to preserve wealth.
If you have to go to SDRs you could have a gold backed SDR with some accountability and transparency.
In 2009 and 2010 the IMF sold 400 tonnes of gold. We know that 200 tonnes went to Sri Lanka, India and Mauritius. http://www.nationsonline.org/oneworld/mauritius.htm
They have never disclosed where the other 200 tonnes went.
That was obviously price suppression. If you dump 400 tonnes of gold on the market it’s going to keep the price down.
So here’s the IMF, largely supported by the United States, but they won’t tell the U.S. taxpayers where the gold went. This is the kind of non-transparency and non-accountability that Jim is opposed to.
INFLATION AND DEFLATION STRESS
We’ve been in a global depression now since 2007.
Deflation is natural in depressions because people are in distress, they sell assets, that drives prices down, that puts other people in distress, they sell assets, and it feeds on itself. People hang on to cash.
On the other hand we have inflation induced by policy — the FED money printing.
Normally if you print $4 trillion you’d see some inflation, but what’s actually happening is the deflation and the inflation are fighting each other to a standstill.
It’s like two tectonic plates under a fault line. There might not be an earthquake today, but the forces are building up, it’s very unstable, and it’s going to snap.
The FED is contributing to this by not allowing markets to clear and by artifically stimulating the economy. They are increasing the scale of the system, which means when the catastrophe comes it will be worse than ever.
When you manipulate markets you get no good choices.
CYBER FINANCIAL WARFARE
There are those who are waging it and there are those capable of it.
We don’t know everything. China has a dedicated team that does nothing but this. The capability of Russian hackers is no secret. The U.S. has its own hacking teams. We’ve also heard from the Iranians, Israelis, and the Syrian Electronic Army.
Some of the hacking teams are state sponsored and some of them are criminal gangs.
One of the problems in cyberspace is you can’t tell if something is a malicious attack designed to steal money and information, or if it’s a military attack designed to disable a system.
You can have cyber warfare that isn’t financial. That would be aimed at infrastructure — the power grid, or the internet backbone.
Cyber financial warfare is when you use cyber capabilities to penetrate the financial system.
Imagine if they got inside order entry systems at the major exchanges.
They could close the exchanges. Or worse than that would be if they could penetrate the exchange and put out spoof sell orders that you couldn’t tell from the real thing.
The market would sell and then the panic would feed on itself.
Those are the things that are out there. They are real threats and they are there today.
Right now we have a balance of financial terror — no one wants to escalate to that level because the other guy could strike back.
But things could also happen by accident, and if people don’t understand the threat clearly enough then they could start the escalation and not understand how bad it could get.
This financial warfare catastrophe is independent of the market related catastrophe that Jim is anticipating.
The thing about gold is it’s not digital. You can’t wipe out gold digitally.
You can turn off the power and shut down the internet… and your gold is still gold.
Another Week on Wall Street
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