Washington, DC -- (ReleaseWire) -- 04/28/2016 --DAWN BENNETT: Jim Rickards is the senior managing director for market intelligence at Omnis, Inc., a technical and scientific consulting firm located in McLean, Virginia. Jim is also the author of three books. The first one is called Currency Wars: The Making of the Next Global Crisis and we had him on the show for that, as well as the second book, The Death of Money: The Coming Collapse of the International Monetary System, which came out in 2014. His latest book is called The New Case for Gold which is perfect timing since gold just experienced its best quarter since third quarter 1986, as it was up 16.1 percent this first quarter. That's where I want to start today. Jim, welcome to Financial Myth Busting.
JIM RICKARDS: Thank you, Dawn. great to be with you.
BENNETT: This massive central bank intervention, during the global financial crisis, prevented the deleveraging of the global economy and actually encouraged more leverage to stimulate growth. Once again, the planet was borrowing from future growth to propel current growth. And of course, this was a very short-sighted solution to our crisis, which is now faced by the world; we just kicked the can down the road, and 2016 has now come to its logical end, which is gold is rising quickly.
RICKARDS: Well, Dawn, you make a very good point. And I would just sort of expand the timeline a little bit; let's go back to 1998. At that time, of course, there was the Asian financial crisis, the Russia default. It ended up at a hedge fund in Greenwich, Connecticut, Long-Term Capital Management. Well, I happened to be the general counsel of Long-Term Capital Management, and I had a front row seat on that one. And as the firm was failing, a Wall Street bail-out was organized, about $4 billion in cash. We got that deal done, but I was on the phone with the treasury, the Fed, the heads of the 14 biggest Wall Street banks. The world was hours away—just hours away—from every stock and bond market in the world shutting down; that's how close we came to a global financial catastrophe. Now, we got the deal done, we got the money in, Allan Greenspan cut interest rates twice, things stabilized; we got through that. Come forward to 2008, what happened? We were days, if not hours, away from the sequential collapse of every big bank in America, and the Fed bailed that out. But look at the tempo. In '98, Wall Street bailed out a hedge fund; in 2008, the central banks bailed out Wall Street. Come ahead another 10 years, 2018, for the next financial calamity-- I'm not saying it'll exactly be 2018, but the point is, somebody's going to have to bail out the central banks that you described as kicking the can down the road, and chronologically, that's true, but I think of it as kicking the can upstairs. You know, Wall Street did the first bail-out, the Fed did the next bail-out; who's going to bail out the Fed? Well, there's only one clean balance sheet left in the world; that's the International Monetary Fund or IMF. They can print money, too; they print these what they call special drawing rights or SDRs. It's a geeky name, but just think of it as world money. And they're going to flood the zone with trillions of dollars equivalent of SDRs; that's going to be highly inflationary. So you can see this coming; the next collapse is not that far away. It's going to be bigger than the Fed, and they're going to need to IMF to bail out the world. It's going to be highly inflationary, and there'll be a gold buying panic. So what I say to investors is, 'Get your gold today; what are you waiting for?'
BENNETT: Jim, the credit markets, to me, seem like they're signaling that this debt-fueled expansion is turning to bust. I mean, this is the most, I think, precarious moment in financial market history. I think that's why gold's running. The world feels like it's sliding into some type of recessionary global recession that the central banks have no ability to soften anymore. And this is sending a very clear and ominous signal that the world cannot service any more debt, and in fact needs to deleverage and get a more solid footing. But we can't deleverage, can we?
RICKARDS: You're right. I agree with that. And you're right; what we need is a debt deleveraging. You know, we're in a currency war; that happens when there's not enough growth and too much debt. There's this notion out there, Dawn, that, okay, we learned our lesson in 2008, the banks are more sound, they're more solvent, a lot of the risks have been mitigated; that is simply not true. The world has added over $70 trillion of new debt since 2008. In 2008, what did we hear about? You know, too big to fail, too big to fail, too big to fail. Well, guess what? The biggest banks in the world today are bigger than they were in 2008. They have a larger percentage of the global banking assets. They have larger derivatives books. Everything that was too big to fail in 2008 is bigger and more dangerous today. But the central banks don't have the dry powder or the capacity to bail them out, because they did that in 2008 and they haven't normalized, they haven't got their balance sheets back to where they were, so they're at the outer limits of what they can do. So the world is more inter-connected, riskier, the central banks have less capacity to bail it out, but—for the time being, at least—they keep trying to borrow their way out. The latest example is China. China has a debt crisis; what's their solution? More debt.
BENNETT: They're also picking up a lot of gold, too. I mean, the tonnage that they've picked up over the last three years is tremendous.
RICKARDS: Well, that's right.
BENNETT: Why do you think that is? Do you think they're going to be backing their currency?
RICKARDS: No, I don't think they're going to back their currency with gold; the Yuan is not ready to be a global reserve currency. What they're doing is actually a little more subtle and more dangerous for the U.S. dollar; they're creating a hedge position. So China's reserve position - by the way, as recently as 15 months ago, it was $4 trillion. They've lost 20% of their reserves in the past 15 months. $80 billion has left China; their reserves are now down to $3.2 trillion. Of that, about $2 trillion is denominated in dollars, and over half of that is US treasury securities. Now, they're worried about the United States. Actually, the dollar has no greater friend than China; they want a strong dollar, because if you own $2 trillion of securities, you'd want a strong dollar too. But they suspect, and rightly so, that the U.S. is going to try and inflate their way out of the debt problem, so it's like holding an ice cube in your hand; it's going to melt. They see the value of the treasury being inflated away by the U.S. Federal Reserve. Now, what can they do? Well, one thing you might think they could do is dump the treasuries, but they can't. I mean, the treasury market is deep and liquid; it's not that deep, it's not that liquid. It's not big enough to absorb that selling without interest rates going sky-high. In fact, the president could stop it with one phone call, if he wanted to. So they're stuck with the treasuries, they're vulnerable to inflation; what they're doing instead is buying gold. And you're right, thousands of tons of gold, and that's a lot of gold. I mean, all the official gold in the world is 35,000 tons; they've bought over 5,000 tons in the last six or seven years. So now they have a hedge position. If the dollar is stable, gold might not do very much, and they're fine. But if we inflate the dollar, which we will, the gold's going to go up, so they're going to lose on the treasuries, but make it up on the gold. So they're creating a hedge position.
BENNETT: The last time the world tried to deleverage was during the Great Depression, right? And so with the gold as their hedge, I'm just wondering if they're actually setting up a perfect position for themselves, because it feels like the world economy's on the precipice of another Great Depression.
RICKARDS: Well, they are. And look, if I told you we were definitely going to have inflation, you would know exactly what to do; you'd get some gold, you'd get properties. If I told you we were definitely going to have deflation, you would know exactly what to do; you'd get 10-year treasury notes and cash, things that perform well in deflation. But what if I said, 'We're right on the knife edge; it could tip either way'? How do you construct a portfolio? You want what I call a barbell; you want some protection at both states of the world. So China's ready. If inflation takes off, the gold protects them. If deflation takes off, their treasury bills will be worth more. So they win either way. But I just say to everyday investors, 'Look, if it's good enough for China, it's good enough for me.' The Chinese aren't stupid. Believe me, I've got friends in China, I've been to China. I've been to Beijing, Shanghai, Xiangshing. I've been all over China. They're not dumb; they get it. So I don't understand why Americans don't get it.
BENNETT: I don't either. In your new book, The New Case for Gold, you make a solid case that gold is a good store of value, a very good, solid investment. But how do we get that across to Americans? I mean, how can we convince them that someone can make money off of gold?
RICKARDS: Well, you can make money, but you can also just preserve money. I mean, making money is fine - I'm all for it - but sometimes avoiding losses is fine too; that's the way you stay ahead in the long run. My book, The New Case for Gold, of course, makes the case, but there's a problem, which is there's seven or eight things that are repeated ad nauseam that are anti-gold that everybody thinks they know that are actually incorrect; factually, historically, empirically, analytically incorrect. So 90 percent of my book makes the case for gold, but 10 percent of my book is to knock down these boogeymen once and for all, because I just got sick and tired of hearing them. I knew they weren't true, and I said, 'I just have to sit down and write this up, and do it in plain English and get it out there, where people can hear it and understand it.' You know, you hear things like, 'The gold supply doesn't grow fast enough to support the growth of world trade and commerce.' That's nonsense. I mean, people say, 'Well, gee, mining puts 1.6 percent a year of the total stock; global growth is 3 percent to 4 percent a year, so the 1.6 percent new gold can't keep up with 3 percent to 4 percent growth, so you have a deflationary bias and you can't have a gold standard.' That is complete nonsense. By the way, the facts I just described are correct, but mining output, as a percentage of stock, has nothing to do with the central banks' ability to expand the gold supply. Because they only have 35,000 tons of official gold, but there's another 145,000 tons of private gold. So all the central banks have to do is go buy some private gold; it's an open market operation. How does the Fed create money today? They buy bonds from banks and they pay for it with printed money. Well, in a gold standard, you could buy gold from the private sector and pay for it with printed money. In other words, money output is not a constraint on gold supply for central banks; that's complete nonsense. All they have to do is go buy some gold. So that's an example of one where you hear it repeated, it doesn't hold water, it doesn't stand up to scrutiny; I explain why in my book. So I just systematically knock down these anti-gold critiques, which are all false, and then proceed from there to make, hopefully, a sound case for having gold.
BENNETT: Now, one of the most frightening things about your book is what may happen in the event there's a panicked gold buying spree, as you kind of work very quickly through that in your book. Only central banks and hedge funds and big banks could actually afford it. Has something like that ever happened before? If the dollar collapses and gold becomes inaccessible to most of the population, then what?
RICKARDS: Well, that's exactly right. You know, I talk to people all the time and give lectures and presentations and interviews, and one of the things I hear a lot is, 'Well, okay, Jim, I hear you, I kind of agree with you - maybe I very much agree with you - but not yet; I'm going to wait until things start to fall apart, I'm going to wait till gold starts to take off, and then I'll jump on the bandwagon and get some gold.' Or another variation of that, they say, 'Hey, Jim. Call me up at three o'clock the day before the panic, and I'll sell my stocks and buy gold.' I've got news for you; I'm not going to know the day before. I can see it coming a mile away, I can explain it in scientific terms, but I'm not going to know the day it happens. And by the way, if you think you can get gold in the panic, you're wrong; you're not going to be able to get physical gold. There's going to be a buying panic. Maybe some big hedge funds and central banks will be able to get it. And this is not a speculation, Dawn. I just got back from Switzerland; I was there about 10 days ago. I met with the head of the world's largest gold refinery. What does a refinery do? I mean, they take a certain kind of gold in the front door, they refine it, and they send another kind of gold out the back door. But this is physical gold; this is not paper gold. So my friend knows all the big sellers and all the big buyers in the world; these are his customers and the people he buys from. He's already seeing shortages, he's seeing shortages now. He said, 'Hey, I'm back-ordered. I'm selling to China 10 times a week. They would like to buy twice as much; I can't sell it to them, because I can't get the gold.' So as he buys gold and brings it in the door, he's already seeing shortages like he's never seen in 35 years. So the shortages are already popping up. How much worse do you think it's going to be when the price starts to sky-rocket? You'll be sitting there, watching television; the price will be going up $100, $200, $500 per ounce per day, and you're going to say, 'Oh, I'd better get some.' Sorry, out of luck; you're not going to be able to get it. The time to get it is now.
BENNETT: You're predicting the next crash to be exponentially bigger than 2007 and 2008, and exponentially is a lot, especially considering the last crash was pretty severe. How will this crash look different than the last, and will we witness it this year, 2016, in your opinion?
RICKARDS: First of all, you're right; that is my forecast, and there's science behind the exponential claim, so let me explain that briefly. The Fed and the other central banks use what they call stochastic general equilibrium models, and these models are obsolete; they don't describe the real economy. But think of is it as a thermostat. You know, your house is too warm, you dial it down; your house is too cool, you dial it up. It's linear, it's reversible. That's an equilibrium model; that is not how capital markets work. Capital markets work in accordance with complex system dynamics, and now you're into complexity science, complexity theory, which I have studied, which I have applied to capital markets. One of the things we learn about complex systems is that the worst thing that can happen, the biggest catastrophe in a system, is an exponential function of scale. What that means in plain English is that if you double the system, you don't double the risk; you increase it by a factor of 10 or 100. So again, what's happened since 2008? All the banks are bigger, bigger derivatives books. They've greatly increased their scale, which means the risk has not gone up in a linear way; it's gone up in an exponential way. Therefore the worst thing that can happen is much greater than what happened in 2008. Now, all we're waiting for is a catalyst. This is what I call the snowflake and the avalanche; you know, a single snowflake can start an avalanche, just by landing the wrong way and disturbing a few other snowflakes and starting a chute, starting a slide, creating momentum; the whole mountain comes loose and an avalanche comes down and buries the village. When that happens, don't blame the snowflake; blame the instability of the system, blame the whole mountainside, the snow pack. So I look at the financial system; I see it as inherently unstable, for the reasons that I've mentioned. So we're just waiting for the snowflake. Now, do I think it will happen this year? You know, it could. It could happen tomorrow. Probably not, but by 2018, maybe. My point is just look at the tempo. 1987, the stock market crashed 22% in one day. Not in a week or a month, but one day. That would be the equivalent of 4,000 Dow points in one day today. 1994, the Mexican peso crisis. 1997, the Asian crisis. 1998, the Russia LTCM crisis. 2000, the dot-com collapse. 2007, the mortgage collapse. 2008, Lehmann-AIG. These things happen every, you know, five, six, seven years on average, like clockwork. It's been eight years since the last one; how much longer do you think we have to go before it happens again? And my point is when it happens, it will be worse, because the system is bigger and exponentially more unstable than it was before.
BENNETT: Jim, are you thinking 2018? You've actually said that a couple of times during our interview.
RICKARDS: Could it happen? The answer is absolutely. Yes, it could happen tomorrow. And that's a reason to get your gold today; don't wait. But, you know, it could happen next year, it could happen in 2018. The only reason I sort of focused on 2018 is because it was exactly 10 years between the '98 panic and the 2008, so if that's the tempo, I just come forward from 2008 and I get 2018. I would actually be surprised if we make it to the end of 2018 without the kind of panic I'm describing. But the point is, Dawn, it doesn't matter if it's tomorrow, next year, or the year after. It doesn't matter. It's coming; you can see it a mile away. When it happens, it'll be too late, so take your precautions now. Don't wait till your house is on fire to buy house insurance.
BENNETT: (Laughs) You know, if things go to hell this year, any predictions on how this is going to affect the presidential race? I mean, could this boost the chances of someone like Trump, who's running as a strong man who's trying to get our house into order?
RICKARDS: Well, I mean, the way things are going right now, you have to remember, Janet Yellen is, in effect, controlling asset values, controlling the price of money, controlling the world economy indirectly, through the Fed. The dollar is the leading global reserve currency; if you control the dollar, through interest rates, you kind of control the world. Janet Yellen is a well-known liberal democrat labor economist; that's her background. She comes out of University of California, Berkeley. You go back to her March 29th speech to the Economic Club of New York, where she just threw in the towel on interest rate increases. She's now back to being queen of the doves. Well, that has given the stock market a little bit of a boost, and so they're going to kind of structure the game to favor the democrats. So look, it'll be an interesting race. It's been an interesting race so far. Trump is trying to capitalize on some dissatisfaction with the economy, but Janet Yellen seems to be doing everything she can to prop up asset prices, and that will certainly favor democrats. We'll see what happens, but it's not the Republicans versus the Democrats; it's the Republicans versus the Democrats and the Fed.
BENNETT: That's a good point. Do you believe that the next president needs to strip the Fed and their dual mandate of price stability and full employment? I believe the Fed should no longer be tasked with ensuring full employment and debt creation, and this should be disincentivized through the changes through tax code; that's just my belief. I'm wondering what you're thinking, Jim.
RICKARDS: Well, I agree completely. Whether it's a Republican or a Democrat, I think they should amend the Federal Reserve Act to take away the dual mandate and give the Fed one mandate, which is price stability. Print the dollar, fine, but make it a stable store of value, use gold as a benchmark. You don't have to have a strict gold standard. We may get to a strict gold standard, but you don't have to have that; you could just use gold as a reference point to determine whether you've got policy right, in addition to inflation, deflation indices and so forth. But this dual mandate is fairly recent; it only came about in the 1970s. It was pushed by Hubert Humphrey, a famous liberal Democratic senator from Minnesota and vice president in the '60s. But it was the Humphrey-Hawkins Act, and they created the dual mandate. But from 1913 until the 1970s, the Fed did not have a dual mandate; they had a single mandate, which was price stability. By the way, they don't just have a dual mandate, Dawn; they have about a quadruple mandate. So it's price stability, unemployment, or employment, they're a regulator, they're intervening in the currency wars. I mean, they're doing all kinds of stuff; this is a juggling act. But look at it from Janet Yellen's point of view, or any central banker; why would you give up power? Nobody in Washington gives up power. So the Congress is going to have to take it away from her. So you are right, I do agree with you. Let's get rid of the dual mandate and let's get back to price stability. By the way, the 2 percent inflation target?
RICKARDS: That's not price stability. In an average lifetime, from birth to death, of 70 years, let's say - an average lifetime - at 2 percent per year, the value of the dollar goes down 75 percent. You lost 75 percent of your purchasing power in an average lifetime with 2 percent. There's nothing warm and fuzzy about 2 percent. You're getting robbed 75 percent in an average lifetime.
BENNETT: Two last questions. Where can we get your book? And can you tell me what you think gold's going to do this year? It's up 16 percent so far in first quarter; what are you thinking for the rest of the year?
RICKARDS: Thank you very much, Dawn. You can get the book on Amazon, just search The New Case for Gold on Amazon, and you'll find it right away. And it's available for order there, and it'll be in bookstores if you prefer your local, independent bookseller, so I hope people get it and enjoy it. Look, when people say, 'What's gold going to do?' what they really mean is, 'What's the dollar price of gold?' Well, what you're doing is you're privileging the dollar as what mathematicians called a numeraire; why is the dollar the measure of all things? The way I think about it, Dawn, if I have an ounce of gold today, I come back a year from now, I still have an ounce of gold. It might be worth more or less in dollars. In other words, the dollar price of gold is going to be affected by the Federal Reserve interest rate policy, but they won't be able to manipulate it forever. They'll either throw in the towel, or the system will collapse, and at that point, you're definitely going to want gold.
BENNETT: Thanks, Jim.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Dawn Bennett provides individual investors, corporations and foundations with holistic investment strategies. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.