Economics

John Butler’s interview with Jim Rickards

When it comes to the world of international finance, Jim Rickards has quite nearly seen it all. As a young man, he worked for Citibank in Pakistan, of all places. In the 1990s, he served as General Counsel for Long-Term Capital Management, Jim Merriwether’s large, notorious hedge fund that collapsed spectacularly in 1998. In recent years, he has been a regular participant in Pentagon ‘wargames’, in particular those incorporating financial or currency warfare in some way, and he has served as an advisor to the US intelligence community.

Yet while his experiences are vast in breadth, they have all occurred within the historically narrow confines of a peculiar international monetary regime, one lacking a gold- or silver-backed international reserve currency. Yes, reserve currencies have come and gone through history, but it is the US dollar, and only the US dollar, that has ever served as an unbacked global monetary reserve.

Nevertheless, in CURRENCY WARS and THE DEATH OF MONEY, Jim does an excellent job of exploring pertinent historical parallels to the situation as it exists today, in which the international monetary regime has been critically undermined by a series of crises and flawed policy responses thereto. He also applies not only economic but also complexity theory to provide a framework and deepen understanding.

As for what happens next, he does have a few compelling ideas, as we explore in the following pages. To begin, however, we explore what it was that got him interested in international monetary relations in the first place.

 

BACK TO THE 1970S: THE DECADE OF DISCO AND DOLLAR CRISES

JB: Jim, you might recall the rolling crises of the 1970s, beginning with the ‘Nixon Shock’ in 1971, when the US ‘closed the gold window’, to the related oil shocks and then the de facto global ‘run on the dollar’ at the end of the decade. At the time, as a student, did you have a sense as to what was happening, or any inclination to see this as the dollar’s first real test as an unbacked global monetary reserve? Did these events have any influence on your decision to study international economics and to work in finance?

 

JR: I was a graduate student in international economics in 1972-74, and a law student from 1974-77, so my student years coincided exactly with the most tumultous years of the combined oil, inflation and dollar crises of the 1970s. Most observers know that Nixon closed the gold window in 1971, but that was not considered the end of the gold standard at the time. Nixon said he was ‘temporarily’ suspending convertibility, but the dollar was still officially valued at 1/35th of an ounce of gold. It was not until 1975 that the IMF officially demonitised gold although, at French insistence, gold could still be counted as part of a country’s reserve position. I was in the last class of students who were actually taught about gold as a monetary asset. Since 1975, any student who learns anything about gold as money is self-taught because it is no longer part of any economics curriculum. During the dark days of the dollar crisis in 1977, I spoke to one of my international law professors about whether the Deutschemark would replace the dollar as the global reserve currency. He smiled and said, “No, there aren’t enough of them.” That was an important lesson in the built-in resilience of the dollar and the fact that no currency could replace the dollar unless it had a sufficiently large, liquid bond market – something the euro does not yet have to this day. From law school I joined Citibank as their international tax counsel. There is no question that my academic experiences in a period of borderline hyperinflation and currency turmoil played a powerful role in my decision to pursue a career in international finance.

 

JB: As you argued in CURRENCY WARS and now again in THE DEATH OF MONEY, the US debt situation, public and private, is now critical. It would be exceedingly difficult for another Paul Volcker to arrive at the Federal Reserve and shore up confidence in the system with high real interest rates. But why has it come to this? Why is it that the ‘power of the printing press’ has been so abused, so corrupted? Is this due to poor federal governance, as David Stockman argues in THE GREAT DEFORMATION? Is it due to the incompetence or ignorance of the series of Federal Reserve officials who failed to appreciate the threat of global economic imbalances? Or is it due perhaps to a fundamental flaw in the US economic and monetary policy regime itself?

 

JR: It is still possible to strengthen the dollar and cement its position as the keystone of the international financial system, but not without costs. Reducing money printing and raising interest rates would strengthen the dollar, but they would pop the asset bubbles in stocks and housing that have been re-created since 2009. This would also put the policy problem in the laps of Congress and the White House where it belongs. The problems in the economy today are structural, not liquidity-related. The Fed is trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the dollar in the process. Federal Reserve officials have misperceived the problem and misapprehend the statistical properties of risk. They are using equilbirium models in a complex system. (Ed note: Complexity Theory explores the fundamental properties of dynamic rather than equilibrium systems and how they react and adapt to exogenous or endogenous stimuli.) That is also bound to fail. Fiat money can work but only if money issuance is rule-based and designed to maintain confidence. Today’s Fed has no rule and is destroying confidence. Based on present policy, a complete loss of confidence in the dollar and a global currency crisis is just a matter of time.

 

JB: Thinking more internationally, the dollar is in quite good company. ‘Abenomics’ in Japan appears to have failed to confer any meaningful, lasting benefits and has further undermined what little confidence was left in the yen; China’s bursting credit and investment bubble threatens the yuan; the other BRICS have similar if less dramatic credit excess to work off; and while the European Central Bank and most EU fiscal authorities have been highly restrained for domestic political reasons in the past few years, there are signs that this may be about to change. Clearly this is not a situation in which countries can easily trust one another in monetary matters. But as monetary trust supports trust in trade and commerce generally, isn’t it just a matter of time before the currency wars of today morph into the trade wars of tomorrow? And wouldn’t a modern-day Smoot-Hawley be an unparalleled disaster for today’s globalised, highly-integrated economy?

 

JR: Currency wars can turn into trade wars as happened in the 1920s and 1930s. Such an outcome is certainly possible today. The root cause is lack of growth on a global basis. When growth is robust, large countries don’t care if smaller trading partners grab some temporary advantage by devaluing their currencies. But when global growth in anemic, as it is now, a positive sum game becomes a zero-sum game and trading partners fight for every scrap of growth. Cheapening your currency, which simultaneously promotes exports and imports inflation via the cross rate mechanism, is a tempting strategy when there’s not enough growth to go around. We are already seeing a twenty-first century version of Smoot-Hawley in the form of economic sanctions imposed on major countries like Iran and Russia by the United States. This has more to do with geopolitics than economics, but the result is the same – reduced global growth that makes the existing depression even worse.

 

JB: You may recall that, in my book, THE GOLDEN REVOLUTION, I borrow your scenario of how Russia could, conceivably, undermine the remaining international trust in the dollar with a pre-emptive ‘monetary strike’ by backing the rouble with gold. Do you regard the escalating situation in Ukraine, as well as US policies in much of the Black Sea/Caucasus/Caspian region generally, as a potential trigger for such a move?

 

JR: There is almost no possibility that either the Russian rouble or the Chinese yuan can be a global reserve currency in the next ten years. This is because both Russia and China lack a good rule or law and a well-developed liquid bond market. Both things are required for reserve curreny status. The reason Russia and China are acquiring gold and will continue to do so is not to launch a new gold-backed currency, but rather to hedge their dollar positions and reduce their dependence on dollar reserves. If there is a replacement for the dollar as the leading reserve currency, it will either be the euro, the special drawing right (SDRs), or perhaps a new currency devised by the BRICS.

 

JB: Leaving geo-politics aside for the moment, you mention right at the start of THE DEATH OF MONEY, citing the classic financial thriller ROLLOVER, that even non-state actors could, perhaps for a variety of reasons, spontaneously begin to act in ways that, given the fragility of the current global monetary order, cascade into a run on the dollar and rush to accumulate gold. If you were to do a remake of ROLLOVER today, how would you structure the plot? Who could be the first to begin selling dollars and accumulating gold? Who might join them? What would be the trigger that turned a trickle of dollar selling into a flood? How might the US government respond?

 

JR: If Rollover were re-made today, it would not be a simple Arab v. US monetary plot. The action would be multilateral including Russia, China, Iran, the Arabs and others. Massive dumping of dollars might be the consequence but it would not be the cause of the panic. A more likely scenario is something entirely unexpected such as a failure to deliver physical gold by a major gold exchange or dealer. That would start panic buying of gold and dumping of dollars. Another scenario might begin with a real estate collapse and credit crash in China. That could cause a demand shock for gold among ordinary Chinese investors, which would cause a hyperbolic price spike in gold. A rising gold price is just the flip side of a collapsing dollar.

 

JB: This entire discussion all follows from the fragility of the current international monetary system. Were the system more robust, we could leave the dollar crisis topic to Hollywood for entertainment rather than to treat it with utmost concern for personal, national or even international security. But what is it that makes systems fragile? Authors ranging from George Gilder (KNOWLEDGE AND POWER), to Joseph Tainter (THE COLLAPSE OF COMPLEX SOCIETIES) and even Edward Gibbon (THE RISE AND FALL OF THE ROMAN EMPIRE) have applied such thinking to ancient and modern economies and societies. They all conclude that, beyond a certain point, centralisation of power is destabilising. Does this mean that a robust monetary system would ‘de-centralise’ monetary power? Isn’t this incompatible with any attempt by the G20 and IMF to transform the Special Drawing Right (SDR) from a unit of account into a centrally-managed, global reserve currency?

 

JR: Yes. Complex systems collapse because increases in complexity require exponential increases in energy to maintain the system. Energy can take many forms including money, which can be thought of as a form of stored energy. We are already past the point where there is enough real money to support the complexity of the financial system. Elites are now resorting to psuedo-money such as deriviatives and other forms of leverage to keep the system going but even that will collapse in time. The proper solution is to reduce the complexity of the system and restore the energy/money inputs to a sustainable level. This means reducing leverage, banning most derivatives and breaking up big banks. None of this is very likely because it cuts against the financial interests of the power elites who run the system. Therefore a continued path toward near-term collapse is the most likely outcome.

 

JB: In CURRENCY WARS you make plain that, although you are highly critical of the current economic policy mainstream for a variety of reasons, you are an agnostic when it comes to economic theory. Yet clearly you draw heavily on economists of the Austrian School (eg Hayek) and in THE DEATH OF MONEY you even mention the pre-classicist and proto-Austrian Richard Cantillon. While I doubt you are a closet convert to the Austrian School, could you perhaps describe what it is about it that you do find compelling, vis-à-vis the increasingly obvious flaws of current, mainstream economic thinking?

 

JR: There is much to admire in Austrian economics. Austrians are correct that central planning is bound to fail and free markets produce optimal solutions to the problem of scarce resources. Complexity Theory as applied to capital markets is just an extension of that thinking with a more rigorous scientific foundation. Computers have allowed complexity theorists to conduct experiments that were beyond the capabilities of early Austrians. The results verify the intuition of the Austrians, but frame the issue in formal mathematical models that are useful in risk management and portfolio allocation. If Ludwig von Mises were alive today he would be a complexity theorist.

 

JB: You may have heard the old Irish adage of the young man, lost in the countryside, who happens across an older man and asks him for directions to Dublin, to which the old man replies, unhelpfully, “Well I wouldn’t start from here.” If you were tasked with trying, as best you could, to restore monetary stability to the United States and by extension the global economy, how would you go about it? You have suggested devaluing the dollar (or other currencies) versus gold to a point that would make the existing debt burdens, public and private, credibly serviceable. But does this solve the fundamental systemic problem? What is to stop the US and global economy from printing excessive money and leveraging up all over again, and in a decade or two facing the same issues, only on a grander scale? Is there a better system? Could a proper remonetisation of gold a la the classical gold standard do the trick? Might there be a role for new monetary technology such as cryptocurrency?

 

JR: The classic definition of money involves three functions: store of value, medium of exchange and unit of account. Of these, store of value is the most important. If users have confidence in value then they will accept the money as a medium of exchange. The unit of account function is trivial. The store of value is maintained by trust and confidence. Gold is an excellent store of value because it is scarce and no trust in third parties is required since gold is an asset that is not simultaneously the liability of another party. Fiat money can also be a store of value if confidence is maintained in the party issuing the money. The best way to do that is to use a monetary rule. Such rules can take many forms including gold backing or a mathematical formula linked to inflation. The problem today is that there is no monetary rule of any kind. Also, trust is being abused in the effort to create inflation, which is form of theft. As knowledge of this abuse of trust becomes more widespread, confidence will be lost and the currency will collapse. Cryptocurrencies offer some technological advantages but they also rely on confidence to mainatin value and, in that sense, they are not an improvement on traditional fiat currencies. Confidence in cryptocurrencies is also fragile and can easily be lost. It is true that stable systems have failed repeatedly and may do so again. The solution for individual investors is to go on a personal gold standard by acquiring physical gold. That way, they will preserve wealth regardless of the monetary rule or lack thereof pursued by monetary authorities.

 

JB: Thanks Jim for your time. I’m sure it is greatly appreciated by all readers of the Amphora Report many of whom have probably already acquired a copy of THE DEATH OF MONEY.

 

POST-SCRIPT

In a world of rapidly escalating crises in several regions, all of which have a clear economic or financial dimension, Jim’s answers to the various questions above are immensely helpful. The world is changing rapidly, arguably more rapidly that at any time since the implosion of the Soviet Union in the early 1990s. Yet back then, the changes had the near-term effect of strengthening rather than weakening the dominant US position in global geopolitical, economic and monetary affairs. Today, the trend is clearly the opposite.

Jim’s use of Complexity Theory specifically is particularly helpful, as the balance of power now shifts away from the US, destabilising the entire system. Were the US economy more robust and resilient, perhaps a general global rebalancing could be a gradual and entirely peaceful affair. But with the single most powerful actor weakening not only in relative but arguably in absolute terms, for structural reasons Jim explains above, the risks of a disorderly rebalancing are commensurately greater.

The more disorderly the transition, however, the less trust will exist between countries, at least for a time, and as Jim points out it is just not realistic for either the Russian rouble or Chinese yuan to replace the dollar any time soon. As I argue in THE GOLDEN REVOLUTION, this makes it highly likely that as the dollar’s share of global trade declines, not only will other currencies be competing with the dollar; all currencies, including the dollar, will increasingly be competing with gold. There is simply nothing to prevent one or more countries lacking trust in the system to demand gold or gold-backed securities of some kind in exchange for exports, such as oil, gas or other vital commodities.

Jim puts the IMF’s SDR forward as a possible alternative, but here, too, he is sceptical there is sufficient global cooperation at present to turn the SDR into a functioning global reserve currency. The world may indeed be on the path to monetary collapse, as Jim fears, but history demonstrates that collapse leads to reset and renewal, and in this case it seems more likely that not that gold will provide part of the necessary global monetary foundation, at least during the collapse, reset and renewal period. Once trust in the new system is sufficient, perhaps the world will once again drift away from gold, and perhaps toward unbacked cryptocurrencies such as bitcoin, but it seems unlikely that a great leap forward into the monetary unknown would occur prior to a falling-back onto what is known to have provided for the relative monetary and economic stability that prevailed prior to the catastrophic First World War, which as readers may note began 100 years ago this month.

 

Economics

Book Review: James Rickards’ “Currency Wars”

In virtually every airport bookstore in America right now you will find a little sleeper of a book in the business section which is as riveting as a thriller and as hard to put down. James Rickards Currency Wars made this reader remember what Secretary of the Navy John Lehman so vividly told Tom Clancy after reading his multi-million-seller Hunt for Red October: “Who the hell cleared this?”

At the end of the Cold, and Middle East, wars, we have entered a perilous new world. Currency Wars is as relevant as tomorrow’s headlines. No sleepy tome on monetary policy, Currency Wars is a white-knuckle exercise. It begins three years ago with a war game carried out by the Pentagon in a secret facility just outside of Washington DC.

The Applied Physics Laboratory, located on four hundred acres of former farmland about halfway between Baltimore and Washington, D.C., is one of the crown jewels of America’s system of top secret, high-tech applied physics and weapons research facilities.

Preeminent among these more abstract functions is the lab’s Warfare Analysis Laboratory, one of the leading venues for war games and strategic planning in the country. … It was for this purpose, the conduct of a war game sponsored by the Pentagon, that about sixty experts from the military, intelligence, and academic communities arrived at APL on a rainy morning in the late winter of 2009. … [T[he only weapons allowed would be financial — currencies, stocks, bonds, and derivatives. The Pentagon was about to launch a global financial war using currencies and capital markets instead of ships and planes?

Rickards describes this with flair.

The rectangular room has four wall-sized screens at the front end and banks of smaller fifty-inch plasma video screens mounted on the walls along both sides to patch in additional participants from remote locations or to display additional graphics. The seating is tiered with a central trapezoid-shaped table for twelve on the lowest level closest to the wall screens; the trapezoid is flanked by four banks of long tables, two on each side, at a slightly higher level laid out in a chevron pattern around the center.

Shades of Dr. Strangelove! But is it just … a videogame on steroids? Rickards:

China controls almost all of the supply of certain so-called rare earths, which are exotic, hard-to-mine metals crucial in the manufacture of electronics…. In July 2010, China announced a 72 percent reduction in rare earth exports, which had the effect of slowing manufacturing in Japan and other countries that depend on Chinese rare earth supplies.

On September 7, 2010, a Chinese trawler collided with a Japanese patrol ship in a remote island group in the East China Sea claimed by both Japan and China. … When the release and apology were not immediately forthcoming, China went beyond the July reduction in exports and halted all rare earth shipments to Japan, crippling Japanese manufacturers. On September 14, 2010, Japan counterattacked by engineering a sudden devaluation of the Japanese yen in international currency markets. The yen fell about 3 percent in three days against the Chinese yuan.

Nothing virtual about that skirmish. Rickards then walks his readers through a simple history of monetary policy. It starts with the prosperous “Golden Age” of the classical gold standard, proceeds through Currency War I (1921 – 1936), Currency War II (1967 – 1987) and Currency War III (2010 – ). Rickards then takes us inside the “G20 Solution.” This proves a fascinating guide to “what do they really do there,” concluding

Now, in addition to China, the United States and Europe all wanting to weaken their currencies, Japan … found itself in the cheap-currency camp too. Not everyone could cheapen at once; the circle still could not be squared.

Then welcome to Rickards’ chessboard for “The Next Global Crisis.” He first gives “a new version of seventeenth-century mercantilism in which corporations are extensions of state power.” Then he takes his readers on a whirlwind world tour through Dubai, where “Espionage, assassination, gold, currency and an international mix of actors at the crossroads of the world give Dubai its standing as the new Casablanca;” Moscow, from which “energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble;” and Beijing, where “China’s hard asset endgame is one more ticking time bomb for the dollar.”

Penultimate chapters deconstructing “The Misuse of Economics,” treat us to subchapters with excellent titles like “Washington and Wall street — the Twin Towers of Deception” (“Washington and Wall street both have a vested interest in the flawed models from the past.”) and on Currencies, Capital, and Complexity (Epigram: “The difficulty lies, not in the new ideas, but in escaping from the old ones.” — Keynes), a primer on prospect and complexity theory — and why Keynesianism and monetarism both tenaciously hang on, discredited and dysfunctional.

Rickards then goes to the Endgame: Paper, Gold or Chaos. In it, he takes up and dismisses the possibility, prophesized as “a plausible and fairly benign conclusion” by Barry Eichengreen, of multiple reserve currencies. Rickards argues, persuasively, that this overlooks a world where “it will be open season with several central banks invited to (abuse their privileges) at once.” He then makes short work of the most preposterous of the common proposed alternatives to the reserve currency dollar, SDRs. “In the end, the IMF’s plan for the SDR as announced in its blue-print document is an expedient, not a solution. It confronts the imminent sequential failure of fiat money regimes by creating a new fiat money. It papers over the problems of paper currencies with a new kind of paper.”

Rickards offers two scenarios he finds plausible. The first is an orderly return to the gold standard. “Gold is not a commodity. Gold is not an investment. Gold is money par excellence,” says Rickards, echoing Charles De Gaulle who said, as quoted in the New York Fed’s The Key to the Gold Vault:

…there can be no other criterion, no other standard than gold. Yes, gold, which never changes, … which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.

This reader prefers the analysis of Prof. Lawrence White, of George Mason University, in his excellent Making the Transition to a New Gold Standard as published at freebanking.org, to that of Rickards as to the probable equilibrium price for gold under the gold standard. White’s analysis also is fully consistent with that of iconic gold standard advocate Lewis E. Lehrman (whose eponymous institute this writer advises professionally) as set forth in his 2011 The True Gold Standard. Yet give Rickards full credit for systematically laying out his calculus.

Rickards’ final scenario is full-on economic chaos. Perhaps it is one to be “followed swiftly by the ascent of a new gold-backed dollar emerging phoenixlike from the ashes….” Or perhaps, he observes, it will be followed by “the widespread breakdown of civil order and eventually a collapse of the physical infrastructure.”

Powerful people in Washington, D.C. are reading James Rickards’ Currency Wars. The endgame by no means is predestined. Gold standard advocacy has become a staple of the conservative movement, a rising issue with the Tea Party, a part of the 2012 presidential race, and is becoming almost a commonplace topic in the elite media. In laying out the issues of real money compellingly, James Rickards adds intelligently to the policy debate.

To allow “threats envisioned in the Pentagon’s 2009 financial war game” to become “more real by the day” represents a failure of statesmanship. America looks to Washington to get a grip on restoring the prosperity, security, dignity and liberty that comes with real money. History well may view James Rickards as the Paul Revere of the Currency War, our struggle to re-establish real money — currency convertible to gold at a fixed number of grains. History may even come to hold Currency Wars as important for our era as was the famed Midnight Ride for American Independence.

Economics

Swiss Parliament to discuss gold franc

16 Franken, Helvetic republic, 1800, Gold

16 Franken, Helvetic republic, 1800, Gold

Following our Cobden Centre Radio interview last week with Thomas Jacob, and his plans to use a democratic Swiss plebiscite to re-introduce a Swiss gold franc, it is great to see that this story is beginning to grow, with an article in Marketwatch.

Here’s a quote:

Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana.

“I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. ”Today’s monetary system is all backed by debt — all backed by nothing — and I want people to realize this.”

To read the full article, click here.

UPDATE: The Swiss gold franc is also discussed by Eric King and Jim Rickards at 20 minutes into this interview, broadcast on Saturday.

Economics

Jim Rickards: Perpetual Quantitative Easing

You might remember a couple of months ago that Jim Rickards came up with the intriguing theory that the Federal Reserve in the United States would soon go bankrupt even according to its own rules (such as they are).

Remarkably, within a few weeks of that, the Federal Reserve released bizarre new accounting rules for itself, which involved negative liabilities, which to all intents and purposes made it impossible for them to go bankrupt if they can continue to apply their own ‘change-the-goalposts’ accountancy rules to their own books (rather than using any common-sense accountancy paradigm that the rest of the planet might have used for the past several hundred years).

One therefore suspects that the Federal Reserve watch Mr Rickards’ ongoing statements with a hawk-like eye.

In his latest interview with Eric King, Mr Rickards puts forward another fascinating possibility, that the Federal Reserve will be able to announce ‘truthfully’ on July the 1st this year, that it has ceased its QE2 money printing programme.

However, if you follow the implicit logic in the interview below, you may agree with Mr Rickards that on July the 1st they will still remain able to monetize $750 billion of US government debt each year, for the foreseeable future, on the basis of all of the money printing that they have already rolled off the Bureau of Engraving’s printing press.

In the apocryphal words of a certain Austrian lady in the French pre-revolutionary court of Louis the XVIth, they may indeed be planning to have their cake and eat it.

Obviously, with people like Mr Rickards around they will never be able to get away with it completely, and with the US government engaging in $1.5 trillion of deficit spending each year, ad infinitum — and arguing internally about a relatively paltry $60 billion dollars of ‘painful’ cuts — they may still need to rack up another $750 billion dollars a year from thin air, just to keep this party going a bit longer.  This will be especially likely with a presidential election coming up, in which the Great Pharaoh King Obama will come off the golf course and read us all some more folksy speeches off his teleprompter, to make us realise that one day real soon he will finally deliver the change ‘that you can believe in’.

No doubt, he will win again, this time against Mitt Romney, unless something unbelievably improbable happens with Dr Ron Paul.  (Well, I’ll keep with the dream until it becomes impossible to do so.)

However, what I like is the idea that the men and women at the Federal Reserve who gave us ‘negative liabilities’ — plus all of their satellite central banks around the world — still think they’re going to get away with all of these terminological inexactitudes and Byzantine subterfuges, and that they genuinely think the rest of us will still be fooled by their playground machinations, which involve the popular strategy of continually telling porky-pies to the teacher about what happened to the homework.

One day, the Great Big Dog in the sky that eats all such homework will regurgitate these endless excuses and reveal them for what they are; a forty-year blizzard of counterfeited lies. No doubt these same central bankers are already working out ways of how to blame the Libyan crisis and the Japanese crisis for everything that is about to go so very badly wrong with their Keynesian schemes, especially concerning the dollar, over the next few years.

But it will fail to wash, I’m afraid. Especially while splendid men like Mr Rickards are on their case:

You do, of course, have to wonder at the mentality of these people in the central banks, who are supposed to be the best and the brightest of us.  As Hayek would have said, no man or group of men, no matter how intelligent, can match the entire market of all interacting humans; but when will they get the message? And why, for such ‘intelligent’ people, do they appear so stupid?

QE1 failed, so they tried QE-lite to fix that. Then QE2 was needed to fix that. And now Perpetual QE is going to be needed to fix that. And no doubt QE3 will be needed to fix that, and then QE4, when that goes wrong too.

When are these Über Supermen finally going to realise that money printing fails to solve anything, but only makes things worse for everyone outside the feeding trough of government, and even eventually fails for them too, when nobody will take their paper scrip any more or obey their costumed regulation enforcers? Or, in the words of Richard Bandler:

“If what you are doing is not working, stop and try something else.”

You never know, one day they may even phone Professor Philipp Bagus and ask his opinion about 100% reserve commodity money, and how this could instantly remove all negative externalities and negative liabilities from their Gordian Knot money printing scam, plus get us back to an honest system of enforceable property rights and monetary freedom unencumbered with all the usual government ineptitude, from the same kind of people that built so many nuclear power stations on one of the world’s most active earthquake and Tsunami-causing fault lines.

We can but hope.

Economics

Global paper tsunami planned by IMF

You might remember a post, a month or two back, about the Davos plan to flood the world with $100 trillion dollars of new fiat paper currency, in a global quantitative easing plan. This would keep the 1971 experiment of a pure global fiat currency scheme going for a few more years and replace all of the real Austrian productive capital which has been consumed in the last 40 years (e.g. tangible machines which make things), with even more paper Keynesian ‘capital’ (i.e. bits of fancy paper, or their electronic equivalent) to drown us all in; or, in the words of Del-Boy Trotter, we’re all going to be millionaires.

Jim Rickards thinks he has detected the IMF plan to put this Davos proposal into action. He discusses this discovery in a 22-minute interview with Eric King, as below. With many other interesting topics under debate, the discussion on Davos and its subterranean link to the IMF begins at 5:35 on the clock:

Here is that IMF plan, in PDF form:

[You will also notice that it is dated January 7th, 2011, which is several weeks before the Davos announcement.]

As you might imagine, the IMF web site is hardly user-friendly when it comes to revealing such potentially devastating informational nuggets, only matched in its obfuscation and denseness by the Bank of England’s web site; however, with some karate-style googling technique, I eventually managed to ensnare the needle in the haystack.

Here is the key IMF quote, from that paper:

“An annual allocation of the equivalent of US$200 billion dollars would raise SDRs as a proportion of reserves to a little over 13 percent in the early 2020s.”

If you use fractional reserve banking at a 10% ratio to leverage this by ten, then this becomes $2 trillion pumped into the global economy each year, until 2025, giving us $28 trillion equivalent-dollars of extra fiat ‘liquidity’.

I think we can apply the Duncan’s First Law of Government to that — by which you take any publicly-released government number and multiply it by three or divide it by three, whichever presents a worse public relations figure, to produce the true number, as originally calculated by whichever dissembling civil servant first wrote the report.

When we apply Duncan’s First Law of Government, the real release of SDRs will be the equivalent of $600 billion dollars a year, leveraged up to $6 trillion each year, which gives us $84 trillion equivalent-dollars of extra ‘liquidity’, by 2025, which is a figure remarkably similar to the $100 trillion dollars of extra liquidity, as proposed at Davos.

With the IMF able to switch currencies around inside their SDR currency unit — for instance by dialling down the dollar component and replacing it with Chinese yuan — then welcome to the world’s new global fiat currency, born on a wave of enormous quantitative easing, courtesy of shadowy unelected bureaucrats being paid tax-free salaries and handsome pensions, paid from your pocket, and ensconced in luxurious office palaces all over the world.  They are, after all, only thinking of you and your interests, rather than putting themselves and their friends first.

Once the cuckoo of the SDR has pushed the dollar out of the world-reserve-currency nest, the IMF can then roll out their even grander strategic plan of introducing the Bancor, as first proposed by their hero, Lord Keynes, as discussed in one of their papers from last April:

Here’s a sample quote from that report (my emphasis):

“A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries. A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”.”

We truly are alive in a world of Golgafrincham money cranks, who think there is not a disease on Earth which cannot be cured by the application of ever-more endless sheets of worthless paper, printed up with ever-more inky zeroes.

Have you bought any gold, silver, or oil, this month?  Do you think you should?

Economics

The Beauty of Being Iceland

Under the EU’s Markets in Financial Instruments Directive, the EU allowed the external countries of Iceland, Liechtenstein, and Norway to enter the ‘levelled’ EU financial markets, which Iceland took advantage of, to within an inch of its financial life.

When the Icelandic banks collapsed, the EU tried to make the Icelandic government impose ‘austerity’ upon the Icelandic people to ensure that EU banks were kept whole on their Icelandic investments.

Being outside the EU and being one of the most freedom-loving peoples in the world, with a proud history of North Atlantic island independence and a record of cocking a snook at the powers of the world — including defeating the Royal Navy in 1976 — the Icelandic people refused to bow their collective knees to their feeble quisling government and their government’s would-be overlords at the EU; they defaulted instead on their banking system’s enormous debts, much to the anger of the technocrats in Belgium.

Since then, Iceland has recovered from a low recessionary point, with this growth accelerating.

Meanwhile, back within the hallowed holy borders of the EU, the overlords of the Holy Roman Empire of Brussels have insisted that the Irish people suck up austerity and stop complaining, because this will:

  • Help prevent a terminal crisis for the glorious Euro project
  • Help prevent German and French banks collapsing
  • Help their satrap quislings in Dublin and their divine overlords in Brussels keep living the high life

You’ll notice that there’s little in the above package for the actual Irish people themselves.

However, because they allowed themselves to get ruled over by some of the stupidest politicians and most Machiavellian bankers in global history (and let’s not even talk about corruption and greed), this means in the explicit EU view, that the Irish people deserve to take their imposed punishment of austerity.

But is this divinely-directed EU edict written in French on tablets of Lapis Lazuli and then copied out in triplicate in Danish, German, and Greek?  Or is it in any way modifiable?

Unfortunately for the EU, the Irish people also have a proud history of North Atlantic island independence, not unlike that of Iceland, which is also a lot closer to Ireland than it is to Belgium. This relative success of the Icelandic default, compared to the upcoming agony of austerity for the tax serfs of Ireland, is something that is also quite clearly visible from the north-western shores of County Donegal.

So in this latest King World News interview, Jim Rickards asks the question: What if the Irish people refuse to suck it up? What if they do what Iceland did and tell the EU and its tottering banks to take a hike? What happens next?

Personally, as Daniel Hannan reported, I think this is an unlikely outcome, because most people in Ireland still perhaps accept their political system — for its legion faults — and all of the politicians in Ireland still want to suck up to the EU, for whatever reason. But what if the Irish do default and overcome the selfish personal interests of their politicians?

We certainly do live in interesting times and that is perhaps an interesting question.

If you would like to listen to the interview, which also discusses the honest financial assessments of Mervyn King, plus the situation in the metals markets, then click through either of the links below.

The interview proper starts @ 30 seconds:

Economics

One for the weekend: Jim Rickards discusses $100 trillion dollars worth of new debt designed to solve fiat currency problem

The upcoming world power elite meeting at Davos will decide that the debt slaves of the world who fund their riches need to be nailed down further with another $100 trillion dollars worth of debt. Or so says Jim Rickards, in an intriguing new interview with King World News, which amongst other things also discusses Alan Greenspan’s post-Fed views on fiat currencies:

Rickards believes that the mechanism for generating another $100 trillion of debt will be based upon the SDR (Special Drawing Rights) paper ‘currency’ of the IMF, the primary financial excrescence of this unaccountable Davos power elite.

You can read the summary World Economic Forum (WEF) report below:

You can read the full WEF report below, in PDF format:

Or via Scribd:

More Credit with Fewer Crises 2011

Economics

Jim Rickards: The complete corruption of the Fed is driving the Chinese to buy much more gold

Eric King spoke recently to Jim Rickards, the principal negotiator in the Long Term Capital Management rescue, about China’s 480% increase of gold imports and Ben Bernanke’s willingness to keep going on money printing until he has created inflation — whatever it takes — plus the recently-released news on the liquefaction of the world’s fiat currencies by the Federal Reserve.

The interview ‘proper’ starts at 1:51 on the clock, if you want to fast-track through the announcements:

Economics

Jim Rickards: Zoellick has legitimised the gold debate

In Part II of an earlier interview, Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, speaks to Eric King about the last few incredible days in the world of international finance:

They warm up by discussing planned US Army exercises, which apparently are going to be based on the collapse of the dollar and how the Army will deal with the riots and the associated public disorder, which they would expect to take place on the streets of continental America.

They then moved on to the beef and debated Robert Zoellick, the eleventh president of the World Bank, and Zoellick’s recent thoughts on reintroducing a gold standard.

Rickards thinks that this momentous intervention lends an air of legitimate respectability to the debate on the use of gold to help recreate honest money from out of the dishonest paper fiat standard that the world’s governments have spent hundreds of years trying to steer us towards.

“You cannot just snap your fingers and go back to a gold standard,” says Rickards. He estimates it took thirty years for the EU just to build up to the Euro and then ten years to technically implement it, even with the many flaws which are now plainly evident within its roll out, especially to the Club O’Med countries.

[I think that we could move much more quickly to a gold standard than that if we simply legitimised private gold and silver monies, allowed currency competition with state fiat monies, removed government monopolies on the production and distribution of money, removed all taxes and legal restrictions from the use of private gold, silver, and copper monies to satisfy contracts, and simply got government out of the way of money, but that is a debate for another day.]

Rickards thinks the price of gold per ounce is a difficult hurdle to cross for the world’s financial authorities and could easily be $5,000 dollars an ounce, with the actual percentage of currency backed by gold being the second major hurdle. However, he does think that now Zoellick has spoken from the nascent world government’s Mount Olympus, that other lesser state monetary gods will now feel capable of expounding upon the subject, without the rest of the banking establishment deriding them.

What does surprise Rickards is the speed at which things are falling apart with the global fiat monies, with Gordon Brown wasting billions of pounds by selling off gold a few years ago, through to the World Bank now recommending that gold be used as the new basis of the world’s monetary system.

[Plan B, it seems, is to return to the gold standard, as it may have been all along, despite all of that talk of the irrelevance of gold, in 1971, which Nouriel Roubini was still going with when I last looked.  What is interesting, of course, is that if gold was so irrelevant, why did so many central banks hold on to so much of it for all of these years, assuming of course that it hasn't all been 'lent' out under encumbered titles to keep the gold price down.  Why lend it out to keep the gold price down, if it was so irrelevant? And thereby hangs a tale.]

In this fairly long King World News interview, which runs to 20 minutes, Rickards and King discuss much else of relevance, and the whole interview is well worth a listen.

Economics

Jim Rickards: The Fed has no exit strategy

If you take a look at this page, you will see that the Federal Reserve has a total capital figure of $46 billion dollars, with $2.198 trillion in assets and $2.152 trillion in liabilities.

The Federal Reserve holds out the promise to the world’s markets that if price inflation takes off in the United States because of all the money printing it is doing, then it will sell its US Treasury bond assets to rein in the money supply, to then destroy the money used to purchase these bonds, and all the fractional reserves pyramided up on top of this money.

[For those interested in the mechanism of that, and much else besides, the best book on the subject is The Mystery of Banking, by Murray Rothbard.]

In a King World News interview, Jim Rickards contends that if the Federal Reserve should need to do that, it will go bankrupt even according to its own rules, because it will lose more than $46 billion on the transaction. This is because if it should need to sell bonds this will be due to rampant price inflation. In those circumstances, three forces come together to send the Federal Reserve bankrupt on a sale of its bonds:

  • In times of rampant inflation, interest rates will be spiking massively to control the inflation. Higher interest rates send the values of fixed-interest bonds down.
  • The Fed is now holding onto much longer-term US Treasury bonds than it used to. These bonds are more volatile than short-term bonds, because changes in interest rates have more effect on long-term bonds than they do on short-term ones, due to a horrible subject called duration. (If you don’t know, then you don’t want to know.) This means that the Fed’s bond assets will be rocketing downwards in value just at the time that they need to sell them.
  • Finally, because interest rates are at record lows, just tiny uplifts in interest rates have a disproportionately large downward effect on the values of bonds. This is due to an even more horrible subject called convexity. (And no, unless you really need to know, then you really don’t want to know.)

Essentially, if the Fed’s bond assets go down 3% in value for the reasons laid out above, in a time of rising price inflation, and if the Fed sells its bonds, then it will crystallise these losses and go bankrupt. The only way to avoid bankruptcy will be for it to hang onto its bonds till maturity, to collect the full principal of $100 dollars a bond, though this will be at the price of letting price inflation run rampant.

The Fed is thus nailed into a corner, claims Rickards. The one time it cannot sell its bonds is the one time that it needs to sell its bonds. Hoist on their own petard, they therefore have no viable exit strategy, says Rickards. In times of rampant price inflation they will hang onto their bonds, he says, to survive, and the devil of inflation can have its wicked way.

The full interview, which also begins with a discussion on the gold and silver markets, is well worth listening to:

There is also a related blog article.

[Personally, I think the Federal Reserve will just invent a new set of accounting rules for itself, to meet any eventuality, but it is all still very interesting nevertheless and not really something that they want anyone to know or think about. The other way out might be for them to revalue their gold assets. They currently hold these at the original value of $11 billion dollars, at $42 dollars an ounce, but could revise this upwards to the market value of this gold, which is currently $250 billion. Although it will still be fairly easy for the Fed to blow this extra money, I think it is ironic that if they do use this get-out-of-jail method, then they will have been saved by the very barbarous relic they usually deny has any place in any kind of monetary system. It will of course be interesting to see if $250 billion dollars worth of gold actually exists in Fort Knox and the Federal Reserve Bank of New York, which they will have to demonstrate if they raise this asset figure up from $11 billion dollars. I think Rickard's idea also highlights the Golgafrincham madness of this entire fiat currency fractional reserve situation. If we were to send Gulliver to Lilliput and he were to find Lilliputian government men standing in tiny fields and printing zeroes on fancy bits of coloured paper to solve all of their economic problems, rather than working harder and consuming less, then we would rightly conclude that the reports that Gulliver brought us back of this strange behaviour were either fictional or that the Lilliputians were deranged mad men. Yet somehow, these same Keynesian myths live on in the minds of highly educated full-sized human economists. I sometimes wonder what future historians will make of us all when they find out that we tried a forty-year experiment in global fiat currencies and then wondered why it all went so horribly wrong? They must have all been mad, they surely will conclude. They will be right.]

The Mystery of Banking, by Murray Rothbard