3 Min. Gold News – Jim Rickards – Intelligence Squared – February 20, 2015

3 Minute Gold News

A Quick Read for Busy People

A 3 minute synopsis of a debate with Jim Rickards, New York Times bestselling author of The Death of Money and Currency Wars.

The debate was hosted by Intelligence Squared on the topic of whether or not the US is in decline.

This brief synopsis covers points made by Jim Rickards. I enjoyed watching debaters Chrystia Freeland, Josef Joffe and Peter Zeihan, and recommend viewing the whole event.

Topics:

Economics and Geopolitics is a Complex System
US Debt
SDRs
Markets

Rickards - Brisbane

Jim Rickards

Debate Link
Intelligence Squared

February 11, 2015 event

ECONOMICS AND GEOPOLITICS IS A COMPLEX SYSTEM

The most important question in economics and geopolitics today is whether or not our capital markets and our society is a complex system.

If it’s a complex system then we have serious problems ahead of us.

What is a complex system?

Your watch, for example, is complicated but it’s not complex.

A complex system has these characteristics:

1.  Diversity — lots of points of view.
2.  Interconnectedness — different points of view are in touch with each other.
3.  Communication — people with different points interact with each other.
4.  Adaptability — other peoples’ behaviour affects your behaviour.

There is no question that capital markets and finance is not only a complex system, it is a complex system with no parallel.

This is physics but it applies very closely to economic systems.

Using a thought experiment — if there are 500 people in a room and 1/3 of the room screams, gets up and runs out the door, most would agree that the other 2/3 would be close behind them.

The 2/3 wouldn’t know what was happening — a fire, a bomb scare — but they wouldn’t stay around to find out.

Let’s imagine that 1/3 of the room are more nervous than the rest. Let’s say that for 1/3 it would only take 20 people jumping up, screaming and running out the door to get that 1/3 running out behind them.

Let’s say there are 20 people among the 500 who are the most nervous of all. They are on edge, and for them it would only take 5 people screaming and running for those 20 to be running out the door behind them.

How many people would I have to persuade to run out screaming in order to empty the whole place in a panic?

The answer is 5.

If 5 people run, then 20 more will run. If 20 run then 1/3 of the room will run. If 1/3 runs then the whole room runs.

It’s called a Hyper Synchronization model.

It’s a cascade and that’s how complex systems operate.

It takes very small changes in the initial condition to completely and catastrophically change the outcome.

What kind of complex system do we have right now?

The US has more debt now than they had in 2008 when the banks were too big to fail.

The biggest banks in 2008 are bigger today — they have a larger concentration of total assets and their derivatives books are bigger.

When you increase the scale of a complex system — the biggest banks being bigger — the risk goes up exponentially.

If you triple the derivatives books of the major banks then how much does the risk go up?

In a complex system it doesn’t just triple.

In a complex system when you increase the scale 3 times you haven’t just increased the risk 3 times — you’ve increased the risk by a factor of 100 or 1,000.

It is much more dangerous when the scale increases, and we just showed how it takes a very small change in the conditions of a room with 500 people to make the system collapse.

That’s the system we’re living in now.

We’re right on the knife edge and very small financial changes could cause a catastrophic financial collapse.

In 2010, it was disclosed that Russian intelligence had penetrated the NASDAQ market operating system with an attack virus. Not hackers trying to get your credit card, but the military intelligence unit getting into the operating system of the second largest stock market in the US.

In August 2013, NASDAQ was closed for half a day and there was no explanation. If it was a cyber attack then it would be a good reason not to tell the public, as investors would start running out of the stock market, as they would run out of the room in the earlier thought experiment.

When a system becomes more complex you get to the point where you have larger and larger inputs for less and less payoff.

For example, the Research and Development budget to invent fire was zero and the effect on humanity is incalculable. The Research and Development budget for the Boeing 787 was $32 billion and there’s very little difference between a 787 and the airplane models before it.

This is characteristic of a complex system — you get to a point where you have larger and larger inputs for no payoff.

The current financial system is paying for the Research and Development for Boeing by printing money and using derivatives. We’re creating a dynamically unstable system that will take very little to cause it to collapse.

US Debt

President Andrew Jackson is Jim’s favourite president for two reasons: he abolished the Central Bank and he paid off the national debt. Jackson didn’t just run a budget surplus — there was no national debt at the end of his administration.

Today the US national debt is over 100% of GDP.

The last time it was that high was the end of World War II, when the US won World War II and had 60% of global GDP in exchange for that debt.

Today the US is declining on a relative basis.  The Federal Reserve printed money equal to the debt in the last five years and they didn’t get anything for it. They monetized the debt and there’s no way out.

In 2014, the US economy had a 2.4% growth rate. Since the end of the recession the US debt is growing faster than that.

The US is going bankrupt and is on the road to Greece.

SDRs

The currency that is going to replace the US dollar is not the yuan, the yen or any other country’s currency. What will replace the dollar, and sooner than you think, is the SDR.

The Federal Reserve printed $4 trillion to get the US through the last recession. What happened was that they substituted public debt for private debt — the banks were propped up.

Now all that debt is on the balance sheet of the Federal Reserve.

When the next liquidity crisis comes what are they going to do?

Print another $4 trillion?

$8 trillion? $12 trillion?

What is the confidence limit?

There is only one clean balance sheet left in the world, and when the next crisis comes the world is going to be re-liquified by the International Monetary Fund (IMF) using Special Drawing Rights (SDRs), which has been around since 1969.

The SDR is world money.

China will have a big vote and the US will lose its current veto, and that’s how they are going to re-liquify the world.

The US dollar will be the money in Americans’ pockets, like the Mexicans use pesos and the Turkish use the lira, but the big stuff like the price of oil and balance of payments will be in SDRs.

MARKETS

There are no markets left. What you have is theater.

You have the appearance of markets, meaning that prices and things move around so it appears to be a market. But the Fed is manipulating the price of money, and money is the common denominator for every market.

When you suppress the dollar and keep interest rates at zero then the money everyday people have in savings gets zero.

The other side of that trade is that if you’re JP Morgan you can go out and buy some 10 Year Treasury Notes, leverage them up 10 – 1 and make 20% returns on equity.

That is a $400 billion per year wealth transfer from everyday Americans to the richest bankers.

That is America today. There are no markets left.

Jim Rickards can be found on Twitter: @JamesGRickards and at his website James Rickards Project.

 

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Today’s News:

Gold is $1,208 US per ounce via Kitco.

Screen Shot 2015-02-20 at 12.51.06 AM

 

 

 

 

Greek Central Banks Says Gold Reserve Worth 4.7 Billion Euros via Bloomberg

There was talk in the Greek press that Greece’s gold was moved to England during World War II and not returned, but the Greek central bank says they have half their gold at home and the rest in New York, England and Switzerland. When things are uneasy in the world that’s when there’s talk of repatriating the gold.

 

Gold Coins, At the Bottom of the Sea for Millennium, Go on Display via New York Times

A beautiful treasure of 2,000 year old gold coins.

 

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Another Week on Wall Street (Currency Wars and Naked Short Selling)
words and music Elaine Diane Taylor
SOCAN/ASCAP
from the album Coins and Crowns available on iTunes

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Nothing on this site is individual investment advice.

 

One thought on “3 Min. Gold News – Jim Rickards – Intelligence Squared – February 20, 2015

  1. Complex and cascade effect, the immediacy of being on a knife edge of an economic system may just a harbinger of change, for the U.S. and most of the world. The International Monetary Fund (IMF) using Special Drawing Rights (SDRs)… I surmise that’s for countries and corporations. While barter still exists for individuals it can grow into more of the ‘economic’ picture. Bitcoin is being thrown into the mix as a ‘new mint’, i.e. virtual printing of money. The individual and family are of consideration as a driving force in the economic systems, a powerful undercurrent whose requirements will inevitably be better met. Another crisis in our world economic system may just bring on a better system, an evolution of our present one.

    It is theorized that humanity evolved (and is evolving) along lines of empathy and compassion as the strength of cultures that propagate successfully, our own survival of the fittest. In the past century the understanding of our health being dependent on a healthy biosphere, our role as environmental stewards, and the importance of mutual well-being has grown exponentially. Is our strong survival instinct evolving to include each of each other and all life on the planet as a whole?

    The physics of economic systems encompasses the evolution of economics since the dawning of societies. ‘Economics’ Its’ Ancient Greek roots implies its’ meaning as the care of a household: οἰκονομία (oikonomia, “management of a household, administration”) from οἶκος (oikos, “house”) + νόμος (nomos, “custom” or “law”), hence “rules of the house(hold)”. Money was created as a ‘condensation’ of goods and services, replacing barter. Money as an abstract thought can be viewed as a resource of energy, available at point of use, used to provide for a household or community i.e. love and caring, or used for the destruction of a household or community, i.e. war and hate.

    Technology is another factor to consider. Goods continue to be made with less and less labor. Technological advancements will continue to decrease the number of jobs, the natural progression is to work less to have all our needs met. On demand 3-D printing of goods and automated delivery systems will eliminate many of the jobs that are left. Economic systems will have to evolve to adjust to the changes in our world

    “Those instrumental goods which should serve to maintain the life and health of all human beings should be produced by the least possible labor of all.” Albert Einstein

    “The fact of evolution is the backbone of biology, and biology is thus in the peculiar position of being a science founded on an improved theory, is it then a science or faith?” Charles Darwin

    “We have to do the best we can. This is our sacred human responsibility.” Albert Einstein

    “In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.” Charles Darwin

    “Only a life lived for others is a life worthwhile.” Albert Einstein

    “Ignorance more frequently begets confidence than does knowledge: it is those who know little, and not those who know much, who so positively assert that this or that problem will never be solved by science” Charles Darwin

    “Where there is love there is no question.” – Albert Einstein

    “The very essence of instinct is that it’s followed independently of reason.” Charles Darwin

    Evolution (muse)

    In wonder, a child whistles a refrain while sitting on a hill under the shade of a tree. From above, a bird on a branch tilts its head and once again joyfully warbles its response.

    On a distant mountain a youth walks alone towards the high peaks. Arrives reflective of humanity, life, and wondering a part to play. A vision unfolds of all that has been and of what can be. Returns determined to walk a path working towards the best for all thru-out time.

    Elsewhere, an elder experiences the fruition of a hearts dream that has taken a lifetime to bring to success.

    Others watch and inspiration blossoms deep within.

    It’s no wonder my mind wanders in awe of it all…

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