TRIGGERnometry - James Rickards： The Next Financial Crash is Coming

00:00:00.000 Hello, and welcome to Trigonometry. I'm Francis Foster.

00:00:08.100 I'm Constantine Kishin.

00:00:09.240 And this is a show for you if you're bored with people arguing on the internet over subjects they know nothing about.

00:00:16.200 At Trigonometry, we don't pretend to be the experts, we ask the experts.

00:00:21.000 Our fantastic guest this week is a writer, economist, and a former CIA advisor, Jim Rickards. Welcome to Trigonometry.

00:00:27.460 Thank you, Constantine. Thank you. It's great to be here.

00:00:29.380 and i'm sure you're thanking francis as well you just left the man out of that thank you

00:00:33.740 i should have mentioned as well you you're a writer and an author of a number of books the

00:00:38.080 latest of which is aftermath which is this get it it's a brilliant read um and jim for anyone

00:00:42.820 who doesn't know who you are tell us briefly who are you how are you where you are what has been

00:00:47.580 your journey through life well it's unclear whether my career path is uh it could be described

00:00:51.720 as eclectic or i just couldn't decide what i wanted to be when i grew up but uh it's been most

00:00:55.940 I'm a lawyer by training, but I spent most of my career on Wall Street.

00:01:00.640 I worked for commercial banks, investment banks, hedge funds, stock exchanges, etc.

00:01:05.960 Along the way, after 9-11, I was tapped by the CIA to help them with financial threats.

00:01:11.460 All of a sudden, financial warfare and what we call market intelligence or market became a big subject inside the CIA.

00:01:20.020 It has not been previously during the Cold War.

00:01:22.360 I mean, Russia, the Soviet Union were not in capital markets, so that wasn't part of the battle space.

00:01:27.420 But it certainly is today.

00:01:29.160 And they do a good job of outreach when they kind of know what they don't know and they bring in people.

00:01:34.260 So I did that for a long time.

00:01:38.060 And then starting in 2011, I had my first book, Currency Wars.

00:01:42.420 And the new book, Aftermath, and thank you for mentioning that, is actually volume four of an international monetary quartet.

00:01:50.040 So it was Currency Wars, The Death of Money, The Road to Ruin, and Aftermath.

00:01:54.880 I have these nice cheery titles.

00:01:57.180 So it works as a quartet.

00:02:00.460 I'll talk to my publisher at some point about a box set so you can get all four in one nice slip case.

00:02:07.880 But Aftermath completes the quartet.

00:02:10.520 It's the new book, and we're kind of on the road explaining it to people and talking about it.

00:02:16.860 See, Constantine's got a background in economics.

00:02:19.020 I don't.

00:02:19.760 And I found it very, very accessible, and I found it very, very informative.

00:02:23.800 And I love the metaphor you used at the start, how essentially the U.S. is trying to navigate.

00:02:29.360 And you used the metaphors of monsters from ancient Greeks, Skilla and Charybdis.

00:02:35.480 Charybdis, right.

00:02:36.020 Charybdis, yeah.

00:02:37.020 So if you could go into a little bit about that and explain what these two threats are that the U.S. is now facing.

00:02:41.780 Sure, and that was actually the most difficult part to write.

00:02:44.600 It's really a challenge when you're writing about economics.

00:02:47.360 Most economists don't write books.

00:02:49.080 They write articles and academic papers and give presentations and all that.

00:02:53.080 It's hard to write a book about economics because either you can do a textbook, which I definitely did not want to do, and it's not a textbook, fortunately.

00:03:00.680 But because economics tends to be very contemporary, market-driven, et cetera, a book becomes stale very quickly after it's published.

00:03:08.720 So the challenge is can you write a book on economics that's interesting, that has a good shelf life, that you can pick it up 10 years later and say, hey, there's still something here for me or something I can learn from.

00:03:18.060 That's what I try to do.

00:03:19.360 And I will say my first book, Currency Wars, in 2011, is still selling extremely well.

00:03:25.180 All the books are in print, so none of them have gone out of print.

00:03:27.780 And it's got a second or third life because we're in a currency war.

00:03:32.100 I said in 2011 when the book came out that we're not always in a currency war, but when we are, it can last 10 or 15 or 20 years.

00:03:42.120 So I'm not surprised.

00:03:43.300 Here we are in 2019 and the currency wars are still going on.

00:03:47.800 So that book did it, and then the other book's the same thing.

00:03:52.220 So, Francis, with particular regard to your point,

00:03:55.580 so what did the Fed do in 2008?

00:03:58.740 And we'll talk a little bit more about that.

00:04:01.680 Cut interest rates to zero,

00:04:03.180 expanded the balance sheet from $800 billion to $4.5 trillion.

00:04:08.000 That's how much money the Federal Reserve printed.

00:04:10.340 And all the other major central banks, Bank of England,

00:04:13.220 People's Bank of China, did the same thing.

00:04:14.980 So this was a global phenomenon.

00:04:16.300 You're talking about quantitative easing for anyone here.

00:04:18.060 Yeah, quantitative easing, so-called QE.

00:04:20.200 It was QE1, QE2, QE3.

00:04:23.260 As I say, printed, took the balance sheet up to $4.5 trillion.

00:04:27.680 But at some point, they had to get back to normal.

00:04:30.080 Now, maybe we've lost sight of what normal is.

00:04:33.120 Maybe that's interest rates of 3% or 4%, which would be a little more normal.

00:04:38.720 And getting the balance sheet down to maybe $2 trillion, it's an inexact science.

00:04:43.380 But if the Fed got interest rates to 4%, got the balance sheet down to $2 trillion, I would be the first one to say, nice job, guys.

00:04:51.500 You saved the world from a worse outcome in 2008.

00:04:54.420 You got everything back to normal, and you're ready for the next recession.

00:04:57.660 That is not what happened.

00:04:59.180 What happened is they're still stuck.

00:05:01.020 Rates are close to zero.

00:05:02.620 They're going down again after going up for the last couple years.

00:05:05.520 They're going down again.

00:05:06.820 The balance sheet has not come down.

00:05:08.600 It's come down very little, maybe around $3.9 trillion, although it's going up again.

00:05:13.340 So what happened was the Fed was trying to, again, get rates up, get the balance sheet down to get ready for the next recession.

00:05:20.640 But the Sillian-Carybdis metaphor was in the course of preparing for a recession, would you cause a recession by avoiding one danger where you're sailing into another danger?

00:05:30.900 And that was the Fed's conundrum.

00:05:32.140 And I said several years ago they would not be able to do it, that in fact they would cause a recession in the course of doing this.

00:05:39.180 And that's exactly what happened.

00:05:41.040 We got very close.

00:05:41.840 So at the end of 2018, Jay Powell, or Fed chairman, got a wake-up call saying, oh, I've tightened too much.

00:05:48.180 I shouldn't have tightened in December of 2018, raising interest rates.

00:05:52.340 We are very close to recession, and the U.S. was at the end of 2018.

00:05:56.760 So he quickly reversed course, said, first, we're not going to raise rates anymore, and we'll tell you if we do.

00:06:02.580 We'll give you advance warning so you won't be caught by surprise.

00:06:05.540 Then by the spring, he said, well, we're actually going to cut rates, which they did in June and September of 2019.

00:06:11.840 And then finally, they had reversed QE, quantitative easing.

00:06:16.580 I still run into people who go, I'm tired of the Fed printing money.

00:06:19.280 We hate quantity.

00:06:20.200 I said, no, they stopped that in 2014.

00:06:22.920 They've been burning money since then, since 2017, 2018.

00:06:26.960 The Fed trying to reduce the balance sheet.

00:06:29.000 You may remember, there was a famous cartoon that showed a manic-looking Ben Bernanke hanging

00:06:34.900 from the strut of a helicopter throwing money.

00:06:37.220 That was the image of helicopter money.

00:06:39.320 will instead picture Jay Powell with a pile of $100 bills and a shovel throwing money into a

00:06:44.620 furnace. That's what they've been doing. They've been reducing the money supply. Well, this was a

00:06:48.420 double dose of tightening. Higher rates, reduced money supply, almost through the economy into a

00:06:53.440 recession. They've reversed course on both. Now rates are coming down again. They're printing

00:06:58.760 money again. And by the way, we're in QE4. They won't call it that, but the Fed is printing a

00:07:05.480 trillion dollars of new money as of the fall of 2019. So call it what you want. It's QE4.

00:07:12.520 So my point was, on the one hand, you have to get ready for the next recession. On the other hand,

00:07:18.380 are you going to cause a recession? That was Scylla and Charybdis. They were trying to sail

00:07:22.800 down the middle and avoid both dangers. I said they would not be able to do it. They're going

00:07:26.720 to have to choose the enemy or choose the danger, if you will. And they did. They said, we're going

00:07:31.240 to avoid recession, but it means they've thrown in the towel on normalizing. So at a higher level,

00:07:37.820 it means they're not ready for the next recession. So essentially, what you're saying is, and again,

00:07:42.840 layman's terms, is we have a debt or the U.S. have a debt that is too big for them to service.

00:07:49.060 Correct. I am saying that. That's a separate issue. Let's separate monetary policy

00:07:54.280 and fiscal policy. So monetary policy is the central bank, you know, raising or lowering rates,

00:07:59.740 printing money or reducing the money supply. So that's the world of monetary policy.

00:08:04.740 Over here, debt deficits and the budget, that's fiscal policy. They are related because where

00:08:12.300 it really gets a little tricky and a little dangerous is if you tell the governments they

00:08:17.740 can spend as much as they want and run up as much debt as they want, what's the discipline on that?

00:08:23.540 Well, the discipline is the market. If the market says, hey, we don't want your paper anymore,

00:08:27.040 or we're not buying it, or interest rates go up.

00:08:29.080 That tends to be self-limiting.

00:08:30.700 What if the Federal Reserve is sitting over here saying,

00:08:32.800 hey, no problem, guys.

00:08:33.980 Shoot it in.

00:08:34.760 We'll buy all the debt that you want with printed money.

00:08:39.120 Now you're monetizing the debt.

00:08:40.880 So that's where fiscal policy, which is debt and deficits,

00:08:44.360 monetary policy, which is money printing,

00:08:46.440 come together if the Federal Reserve monetizes the U.S. debt.

00:08:51.600 So both things are an issue.

00:08:54.300 But specifically to the Fed,

00:08:56.000 their failure was they could not get back to normal without causing recession,

00:09:01.060 which means they're not ready for the next recession. On the fiscal side, at least in

00:09:06.340 the United States, we're back to the wonderful world of trillion dollar deficits last seen in

00:09:10.380 2011. Well, we'll get into that because one of the things you outlined very well in the book that

00:09:15.500 essentially, historically, the pattern in the United States is that you borrow in times of war

00:09:21.300 Right. And then you repay in times of peace. Correct. And we used to do that. We have not

00:09:26.720 been doing that. And one of the interesting things that rang true with me is that no one

00:09:31.020 is talking about fiscal conservatism anymore. That is a phrase that used to be a centerpiece

00:09:38.380 of political discussion. Correct. I have not heard that for 10 years, probably. Right. Close

00:09:43.700 to 10 years. And I think that's quite telling because, as you mentioned in the book, the US

00:09:48.260 now has a debt which is bigger than its GDP.

00:09:51.100 Right, and it's problematic, it's not just big, it is, and you're absolutely right, Constantine.

00:09:58.140 So concern about deficits in the United States, you know, last seen in 2010, that was the

00:10:03.080 rise of the Tea Party, so-called, and conservative Republicans worried about debt and deficits,

00:10:09.760 and they took over the Congress.

00:10:11.060 The Republicans took our House of Representatives and they got the Senate later.

00:10:17.060 the on the strength of that a lot of those members are still around but now

00:10:20.720 that we have a Republican president they seem to have forgotten all about fiscal

00:10:24.380 discipline it was they were opposed to Democrats spending more but they seem

00:10:27.800 okay with Republicans spending more but the way I look at it I try to keep

00:10:31.880 partisan politics out of it I have my opinions like everyone else but I'm

00:10:35.960 looking at Republicans and Democrats in this together and kind of what you say

00:10:41.940 Constantine about the history 230 years of the government bond market the

00:10:46.520 history is the debt to GDP ratio, how much debt relative to the size of the economy goes up in

00:10:52.940 times of war and down and gets repaid in times of peace. So it hasn't been straight up since

00:10:58.200 George Washington to Donald Trump. It looks more like a sine wave. It goes up and down like this

00:11:02.880 until 2000. That's when things ran off the rail. When Bill Clinton left office,

00:11:08.080 the national debt was $5 trillion. After eight years of George Bush, it had doubled to $10 trillion

00:11:14.880 dollars. In eight years of Obama, it had doubled again to $20 trillion. And Trump has thrown a

00:11:20.880 couple trillion dollars on top of that. So I say we used to have bipartisan responsibility. Today,

00:11:27.060 we have bipartisan irresponsibility. It's not specifically a Democrat or Republican issue.

00:11:31.640 As I say, both parties are spending freely. So let's look at basically what you're essentially

00:11:36.140 saying is the patient had a heart attack. We've emptied the medicine cupboard. We haven't

00:11:40.280 restocked it. And before we get onto that, we kind of started with a slightly different order.

00:11:46.840 But I want you just for ordinary people who may be watching this, just briefly summarize for us,

00:11:52.320 why did the 2007-2008 crash happen? Well, the reason it happened is fairly

00:11:58.200 straightforward. And for that, we can go back a little further in time to 1998. That was the

00:12:04.680 Russian default. We had a global financial crisis. We had a global liquidity crisis.

00:12:10.140 It was over somewhat quickly, and it did not lead to a recession, but it was just as dangerous as

00:12:15.800 what happened in 2008. It all started in Thailand, went to Indonesia and Korea and

00:12:22.220 Russia, but it ended up in my lab at a hedge fund in Greenwich, Connecticut called Long-Term

00:12:27.820 Capital Management. I was their chief lawyer. I was not the head of the Risk Management Committee,

00:12:32.640 fortunately, but I say when people mess up badly enough, it gets dumped on the lawyers.

00:12:38.260 So here was a situation where this fund had lost $4 billion in about five weeks. And people said,

00:12:45.760 well, okay, too bad for you guys or too bad for your investors. But who on earth wants to bail

00:12:51.020 out a hedge fund? That's not our job, if you're this Fed. And that's what we thought. We said,

00:12:56.600 well, too bad for us, but no one's going to bail us out. But we called the Fed to explain what was

00:13:01.780 happening just to be good corporate citizens. We say, well, we see a train wreck. We're in it.

00:13:06.560 We want to tell you about it. But we weren't asking for a ballot, nor did we expect one. But

00:13:10.320 when the Fed realized that we had $1.3 trillion of derivatives, swaps, and options with the 14

00:13:18.420 biggest banks, they said, hey, if you guys go out, you're going to take down these banks. And that is

00:13:23.280 what would have happened. Interestingly, in 98, the first victim would have been Lehman Brothers.

00:13:27.000 They ended up being the first victim in 2008, but they were always kind of the weak sister

00:13:33.020 of the group all along.

00:13:34.340 That was always true.

00:13:35.600 So the Fed organized a bailout.

00:13:38.980 They didn't do it themselves.

00:13:40.480 There was no government money used, but they did what's called the convening power.

00:13:45.440 They got the banks together.

00:13:46.900 We put a package together.

00:13:48.040 Five days.

00:13:48.620 No one slept.

00:13:49.300 We worked around the clock.

00:13:50.560 We got it done, and in effect, Wall Street took over our balance sheet with their own

00:13:54.680 money unwound it slowly over the course of a year and the whole thing went away my point is people

00:14:00.700 forget about that it was 21 years ago uh and people are yeah i kind of remember that or if

00:14:05.360 you're younger you've maybe never heard of it but we were i was living in russia at the time

00:14:09.420 and as i said i did on the bailout but we were hours away from the sequential closure of every

00:14:17.860 stock and bond market in the world that's how dangerous it was and that's how close it was

00:14:21.680 Now, when you have that kind of danger and it doesn't happen, the plane doesn't crash,

00:14:27.860 people tend to shrug it off.

00:14:29.180 As an insider, sitting there with the Fed and the Treasury and the head of Goldman Sachs

00:14:33.920 and J.P. Morgan and their lawyers, those are the people we were up against, and we did

00:14:38.380 get it done, we all understood the seriousness of it.

00:14:42.480 It was a deal that no one wanted to do and everyone had to do.

00:14:47.920 Then what was the aftermath of that, if you will?

00:14:50.700 The lessons I learned and the lessons I think everyone should have learned is, let's get

00:14:54.060 rid of derivatives, not all of them, but most of them.

00:14:58.080 Let's have more transparency.

00:14:59.300 Let's have less leverage.

00:15:00.740 Let's keep banking and investment banking separated as they had been under our Glass-Steagall

00:15:06.040 law for 80 years, which worked very well.

00:15:10.180 The government policy response was the exact opposite.

00:15:13.700 They repealed Glass-Steagall.

00:15:16.320 They all of a sudden allowed commercial banks and investment banks to be in the same business,

00:15:19.960 So it turned Citibank into a hedge fund, for example.

00:15:22.900 All the conflicts that had existed in the 1920s were back again.

00:15:28.020 They repealed regulations on swaps.

00:15:30.840 All of a sudden, you could do swaps on everything, including oil, which led straight to Enron,

00:15:36.080 which was a massive collapse in the early 2000s.

00:15:39.660 So as the 2008 crisis was approaching, 2005, 2006, I'm watching this.

00:15:45.380 And it's like I'm watching the same movie.

00:15:46.760 I'd lived through it, lived through the horror show of long-term capital management.

00:15:50.620 I'm seeing the same thing happen over again.

00:15:52.960 Now, it was in mortgages, so-called junk mortgages, subprime, and similar types of non-credit-worthy mortgages.

00:16:01.820 The previous time, it had been in international bond markets.

00:16:05.380 It doesn't matter.

00:16:06.180 The catalyst can come from a lot of places, but what does matter is that the system is so interconnected,

00:16:11.900 and you have what's called contagion, where one sector or one player goes down,

00:16:16.120 but they take other people with them.

00:16:17.980 That's a domino effect and it keeps spreading.

00:16:20.460 That's what we had in 1998.

00:16:21.900 It was truncated by this bailout.

00:16:23.840 That's what we had in 2008.

00:16:25.240 But, you know, the first symptoms were in the spring of 2007

00:16:29.860 and it was actually Hong Kong Shanghai Bank in their U.S. operations said,

00:16:34.180 you know, our earnings were a little below expectations

00:16:36.760 because our mortgage losses were higher than we thought.

00:16:40.080 Everyone's like, okay, you missed your earnings target.

00:16:42.800 But that was a red light.

00:16:44.200 That was, hey, something's wrong in the mortgage market, something below the surface.

00:16:48.080 And then in March 2007, Ben Bernanke famously said, oh, this won't be a problem.

00:16:52.740 This will blow over.

00:16:53.620 You know, just one more example of central banks not understanding what they regulate.

00:16:58.560 And then in the spring, or sorry, the summer of 2007, you had the equivalent of a heart

00:17:03.880 attack where Societe Generale in France, their money market funds were closed.

00:17:10.000 And then the Fed had to cut the discount rate.

00:17:12.600 And then the crisis began really a year before the acute stage was September 2008.

00:17:18.040 Lehman Brothers goes bankrupt, AIG gets bailed out, et cetera.

00:17:22.480 But it started in the summer of 2007 with early warning in the spring of 2007.

00:17:28.780 So it was mortgage-related, of course.

00:17:30.800 And I'll give you a very concrete example.

00:17:33.600 There were a trillion dollars of subprime mortgages.

00:17:37.120 These are mortgages that, you know, no documentation, don't have to prove your income,

00:17:41.500 very non-credit worthy, but there was a bubble mentality, a frenzy, and everyone, hey, buy a

00:17:47.400 house and borrow money, fix it up, sell it for twice as much, walk away rich, you know, and everybody

00:17:52.260 was doing it. And it was a trillion dollars worth. Now, mortgage default rates rarely get about 5%.

00:17:59.300 5% is really high in the mortgage market. So people were saying, you know, smart people like

00:18:03.580 Ben Stein, the financial analyst, but the central bank and others were like, well, okay, let's get

00:18:08.280 crazy. Let's assume a 20% default rate, which has never happened, but just assume that's true.

00:18:14.580 On a trillion dollars of subprime mortgages, a 20% default rate would be a $200 billion loss,

00:18:20.340 which was only slightly higher than the S&L crisis of the 1980s. You know, just for inflation,

00:18:26.720 it would have been a comparable loss. And the attitude was, well, we survived the 80s,

00:18:31.480 we'll survive this. Yeah, it's bad. Banks will take losses. Stock prices go down a little bit,

00:18:36.540 but we'll survive. What they missed is, yes, there was $1 trillion of subprime mortgages,

00:18:42.360 but there were $6 trillion of derivatives. That was invisible. So all of a sudden,

00:18:47.180 20% of that was $1.2 trillion. So you had... Sorry.

00:18:53.320 Before anyone who doesn't know, derivative is essentially a way of placing a bet on the

00:18:58.700 future price of something.

00:18:59.680 Correct. That's exactly right. It's a side bet with no underlying. So let's say

00:19:04.020 I borrow a million dollars from Francis.

00:19:06.840 Highly unlikely, believe me, highly unlikely.

00:19:09.220 I've got the money, I just don't know I'm lending it.

00:19:10.940 Well, okay, but say you're in a good mood that day.

00:19:13.340 So we have a real loan, Francis gives me a million dollars,

00:19:16.240 I sign a note, he has a note.

00:19:17.560 That's a real transaction.

00:19:19.000 But then I call you up and say,

00:19:20.180 hey, Constantine, you want to make a little side bet

00:19:21.640 on whether I pay Francis back?

00:19:23.660 And you're like, yeah, I'll take the action,

00:19:25.480 and then we call somebody else.

00:19:26.600 So you create derivatives out of thin air,

00:19:29.980 and there's no limit on how many you can have.

00:19:32.820 They're off balance sheet, meaning give me the balance sheet of the company.

00:19:36.220 I won't see them.

00:19:37.480 You have to read the footnotes and then the information behind the footnotes.

00:19:41.380 So non-transparent, unregulated, no limit on size.

00:19:45.280 And that's what happened.

00:19:46.160 It's gambling, basically.

00:19:46.940 Correct.

00:19:47.240 It used to be illegal because of gambling laws that have been around on the books for a long time.

00:19:52.520 So you had this trillion dollars of subprime mortgages, but about six trillion dollars of

00:20:00.160 bets. So the crisis was actually much worse than anyone realized. And then when it started to

00:20:08.340 collapse, the contagion spread throughout the financial system. And the scary thing is,

00:20:13.260 and what I gleaned a lot from your book, is that we haven't learned the lessons of 2008.

00:20:18.680 Well, that's exactly right.

00:20:19.880 And my point about 2008, it was because we did not learn the lessons of 1998 and we flew

00:20:25.180 right into 2008.

00:20:26.700 But once again, we have not learned the lessons of 2008 and we're going to fly right into

00:20:31.300 the next storm.

00:20:32.740 Sounds a lot like my life, Jim, I'll be honest with you.

00:20:35.320 With one distinction, which is that in 1998, Wall Street got together and bailed out a

00:20:41.320 hedge fund.

00:20:42.400 In 2008, the central banks got together and bailed out Wall Street.

00:20:46.720 Who's going to bail out the central banks?

00:20:48.780 And the point is each crisis is bigger than the one before.

00:20:52.000 The intervention gets elevated, larger dollar amounts.

00:20:55.840 And are we now at the point where there's no one left to bail us out?

00:20:59.220 Except the taxpayer.

00:21:00.360 Yeah.

00:21:00.740 Well, although the taxpayers are a near revolt as it is.

00:21:04.280 So you're right.

00:21:05.780 That's the ultimate source of money or Fed printing.

00:21:10.120 Yeah.

00:21:10.880 And you were saying in your book about how actually

00:21:15.920 this sort of black hole of debt is student loans, which blew my mind.

00:21:22.000 Correct.

00:21:22.460 And one of the questions I'm asked most frequently is,

00:21:24.980 okay, Jim, I kind of follow your analysis on how risk works

00:21:28.340 and how complexity theory is in capital markets, how that works.

00:21:32.980 But where's the crisis coming from?

00:21:34.520 What's going to be the catalyst?

00:21:36.440 And it's actually a long list.

00:21:38.900 Now, student loans, they're $1.6 trillion worth of student loans.

00:21:44.240 This is in the United States.

00:21:45.620 So it's 50% more than the subprime mortgages in 2008.

00:21:48.260 The subprime mortgages, correct, but the default rates actually are 20%.

00:21:51.380 I'm guessing they're not as much subject to derivatives as the subprime mortgages.

00:21:56.600 Well, that's correct, but the loss falls directly on the taxpayer because they're all issued by or guaranteed by the United States Treasury.

00:22:04.760 Now, it ended up being the case that the government had to get involved in guarantee a lot in 2008,

00:22:10.900 but at least initially, those mortgages were not guaranteed by the government.

00:22:14.400 But the student loans are.

00:22:17.040 So this will go, and kind of this gets to your point, Francis,

00:22:20.080 how do capital markets and money markets and Fed policy kind of leach into debt and deficits?

00:22:28.540 So when a lender, credit union, or anybody, or university makes a loan to a student,

00:22:35.460 and the Treasury guarantees that loan, which they do, it's off budget.

00:22:41.480 Again, it's not strictly a derivative.

00:22:44.400 But it is non-transparent.

00:22:46.280 So then the student defaults and the lender simply turns to the Treasury and says, here's your loan file.

00:22:54.700 Pay me.

00:22:55.500 And the Treasury pays the lender because they've guaranteed the loan.

00:22:58.640 Now it's on the Treasury.

00:22:59.660 But until that point, that loss is not on the books of the Nasdaq's government.

00:23:04.780 That loss is not part of the deficit.

00:23:06.480 But when the Treasury writes the check to make good on the guarantee, it does go into the deficit.

00:23:11.980 So we think deficits are high now, but there's this, you know, trillion-dollar tsunami of student loan losses that's going to pile on top of the structural deficits and make it even worse.

00:23:22.620 So all these things are, you know, I spend all my time analyzing these things.

00:23:27.240 I see them all.

00:23:28.000 I can describe them.

00:23:29.300 I can see how they're going to converge into a worse crisis.

00:23:32.000 But in the short run, people either ignore them or they just don't know anything about them.

00:23:36.240 Why should they?

00:23:36.820 I mean, every day people don't.

00:23:38.320 Although I do say when it comes to your own money, everyone has a PhD.

00:23:41.980 But for the most part, this is technical stuff, and people don't get it.

00:23:45.780 This is why I like talking to you, because you can break quite complicated things down in a way that makes them accessible.

00:23:51.060 I was going to ask, just as a very quick aside, a few of the Democratic presidential candidates.

00:23:56.280 Is that what you're going to ask?

00:23:57.200 Yeah, Bernie.

00:23:57.680 Yeah.

00:23:58.480 Bernie, in particular, they're talking about canceling student debt.

00:24:01.260 So that would take the off-balance sheet loss straight into the balance sheet immediately.

00:24:06.940 And what do you think the impact of a policy like that would be?

00:24:09.500 Well, there are two schools of thought.

00:24:10.620 My view is it's disastrous, and I could give a lot of reasons why.

00:24:14.780 But why would Bernie Sanders even suggest that?

00:24:17.080 By the way, he's not alone.

00:24:18.260 I think the other candidates of Elizabeth Warren and Joe Biden and Kamala Harris,

00:24:24.040 one way or another, have suggested that they would do something similar,

00:24:27.760 that we need student loan relief, and that ends up going on to the budget and on to the taxpayers.

00:24:34.200 But there's a school of economics, and I talk about this in Chapter 5 of my book,

00:24:40.480 It's called Modern Monetary Theory, MMT for short.

00:24:45.460 We just lost half our viewers.

00:24:47.660 Well, fair enough.

00:24:48.820 I'm kidding.

00:24:49.700 I can explain it very simply.

00:24:51.480 I wouldn't expect everyday viewers, everyday people to know anything about it.

00:24:55.800 But more to the point, economists don't know anything about it.

00:24:58.780 This is a new school of economics, if you want to think of it that way.

00:25:03.380 It's 1929.

00:25:04.760 Along comes John Maynard Keynes with new theories on aggregate demand or whatever.

00:25:09.800 Well, there is this modern monetary theory, but the leading light, the leading scholar of modern monetary theory is a lady named Stephanie Kelton, who's a professor at the State University of New York.

00:25:22.840 But she is the financial advisor to Bernie Sanders 2020.

00:25:26.160 I think I might have met her at Kilkenomics, actually.

00:25:27.800 She was at Kilkenomics.

00:25:28.620 Yeah, yeah, we might have met her.

00:25:29.200 Very nice lady.

00:25:29.960 I disagree on the theory, but she's a nice person, very bright.

00:25:33.700 And she was at Kilkenomics.

00:25:36.140 But she's the financial advisor to Bernie Sanders.

00:25:39.140 Right.

00:25:39.420 So this is where this is coming from.

00:25:41.200 So you're right.

00:25:41.900 Bernie Sanders is not going to go to a, you know, a clam bake in New Hampshire or a cookout in Iowa and talk about modern monetary theory.

00:25:49.660 He'd lose the audience.

00:25:51.080 But that's what's behind the thinking.

00:25:52.920 But what modern monetary theory says is that actually there's no limit on the amount you can spend.

00:25:58.480 You can spend as much as you want and the market will either buy the debt or if they balk, the Fed will monetize the debt.

00:26:05.480 And right now, the U.S., so how much debt is there relative to the size of the economy?

00:26:12.720 This is called the debt-to-GDP ratio, but it's a simple fraction you learn in the fifth grade.

00:26:17.860 How much debt divided by the size of the economy?

00:26:20.720 So in a simple example, if you had $5 trillion of debt and a $10 trillion economy, that fraction would be one-half.

00:26:30.560 So you would say the debt-to-GDP ratio is one-half or 50%.

00:26:35.060 Today, the debt is larger than the economy.

00:26:39.260 That ratio is over 100%.

00:26:41.360 We had round numbers, about $23 trillion of debt and about a $22 trillion economy.

00:26:49.380 So the ratio is about 105%, highest since World War II.

00:26:54.460 That troubles me.

00:26:55.460 It troubles other economists.

00:26:56.920 But my friend Stephanie says, what's the problem?

00:26:59.660 You could take it to 150%, 200%, 250%.

00:27:04.660 By the way, that's where Japan is.

00:27:06.160 Japan's at 250%.

00:27:07.620 Greece is 175% or so.

00:27:11.080 Italy's 135%.

00:27:13.120 They're all still standing.

00:27:14.540 Go to Italy.

00:27:15.880 Well, you've got to go to Italy.

00:27:17.280 The lights are on, you know.

00:27:19.060 Bars are open.

00:27:20.040 Go to the Ginza.

00:27:21.220 You know, it looks like Times Square.

00:27:22.560 So you don't see visible signs of stress.

00:27:25.600 And here's the irony.

00:27:28.920 Ben Bernanke would absolutely not agree with this theory.

00:27:31.340 And he said so publicly.

00:27:33.120 But Professor Kelton says to Bernanke, you proved our point.

00:27:38.340 You were the one who took the Fed's balance sheet and quadrupled it from $800 billion to $4.5 trillion or so.

00:27:46.380 You proved that you can print trillions of dollars of money without causing inflation, without causing high interest rates, without causing a run on the bank.

00:27:54.720 So all we're saying is, you know, you did it to prop up Jamie Dimon's bonus.

00:27:58.380 We wanted to do it to forgive student loans.

00:28:01.440 We may have different policy objectives, but the process is the same.

00:28:05.880 What's the problem?

00:28:07.500 Now, of all the things I've debated, for years I was dragged into Bitcoin versus gold debates, which I thought were silly.

00:28:14.120 I mean, I don't like Bitcoin.

00:28:15.220 I do like gold, but it's like fish versus bicycles.

00:28:17.960 I mean, the debate never made sense to me, even though I did a lot of them.

00:28:21.800 But this, of all the things I've had to rebut, this was actually the most difficult because it's superficially appealing.

00:28:27.960 First of all, legally, it is true that the Fed can take their balance sheet as high as they want.

00:28:31.660 There's no legal limit on the Fed's ability to print money.

00:28:35.340 It is true that Japan has a much higher debt-to-GDP ratio, and they're still standing.

00:28:41.340 It is true that the Treasury can borrow as much as they want,

00:28:44.220 subject to periodic increases in the debt ceiling, which have never been denied.

00:28:49.600 And the Fed can monetize the debt.

00:28:51.380 So all the elements of the thesis are actually correct.

00:28:55.180 So how do you refute it?

00:28:57.580 and the answer is that legally it can be done,

00:29:02.900 and if your goal is to print a lot of money

00:29:05.220 and forgive student loans or give a guaranteed job

00:29:09.300 or guaranteed basic income, whatever it is,

00:29:12.060 in theory you could do that,

00:29:13.720 but there is an invisible psychological boundary,

00:29:16.580 and this is what the modern monetary theorists don't understand,

00:29:20.080 and I don't think Ben Bernanke understands it.

00:29:22.160 There comes a time when people wake up and they say,

00:29:25.440 you know, I don't know what's going on here.

00:29:26.860 I don't have a PhD, but get me out of the dollar.

00:29:30.060 So, you know, I'll buy gold, I'll buy silver, land, oil, natural resources, buy a new car, buy a house.

00:29:36.260 Get me out of the dollar into something tangible because I no longer trust the monetary authorities.

00:29:41.880 I no longer trust the Congress.

00:29:44.080 I can't believe that you're going to spend this much money without ceiling, without limit, without causing inflation.

00:29:50.080 My inflationary expectations will go up.

00:29:52.240 And the way to deal with that is to buy hard assets, starting with gold, but not exclusively gold.

00:29:57.660 As I say, land, real estate, natural resources, they're all good substitutes.

00:30:04.440 At that point, interest rates will skyrocket.

00:30:07.620 All of a sudden, the bond market will have difficulty selling it.

00:30:11.280 The president of the Congress could take away some of the Fed's independence.

00:30:15.340 All these assumptions could come crashing down very quickly, very unexpectedly.

00:30:20.080 And that's the problem with the theory.

00:30:22.960 And Jim, there's a question that I want to ask, and it enrages me every time.

00:30:27.060 Why haven't we learned lessons?

00:30:28.720 Why do we make the same mistakes again and again and again?

00:30:32.760 Great question, and there are two reasons.

00:30:35.080 One is the models that the policymakers use are all wrong.

00:30:40.840 If you have the wrong model, you're going to get the wrong policy every single time.

00:30:44.940 So what are the efficient market hypotheses?

00:30:47.380 It says that you can't beat the market because markets get the information faster than you do.

00:30:54.060 They quickly and smoothly incorporate it into the price.

00:30:56.980 Yeah, the price will go up or down.

00:30:58.720 You can win or lose.

00:31:00.580 But what you can't do is beat the market because you can't think faster than the news is coming in.

00:31:06.560 The market as a whole adjust.

00:31:07.900 That's not true.

00:31:09.040 I mean, how do you explain crashes and panics?

00:31:13.460 How do you explain situations where a stock falls 20% in a minute, which happens for an individual stock?

00:31:19.860 Or for that matter, October 19th, 1987, the U.S. stock market fell 22% in one day.

00:31:26.280 Today, by today's measure on the Dow Jones Industrial Average, that wouldn't be 500 points.

00:31:31.740 That would be 5,000 points.

00:31:33.800 That happened on October 19th, 1987.

00:31:36.080 That's not efficient.

00:31:37.120 So my point is that's a pillar of modern financial theory, but it's junk science.

00:31:40.860 The Phillips curve, you know, there's an inverse relationship between unemployment and inflation.

00:31:46.240 So when unemployment gets really low, which it is, inflation has to go up.

00:31:51.260 False.

00:31:51.980 It's not true.

00:31:52.560 Unemployment is really low, but inflation is really low also.

00:31:55.180 So that's junk science.

00:31:56.800 Value at risk.

00:31:57.580 This is used by all the big banks to manage their risks.

00:32:00.780 And it basically says that, you know, I don't have to look at gross positions.

00:32:06.560 so I buy a $5 billion swap from one person

00:32:11.680 and I sell the same $5 billion swap to another person

00:32:14.740 and I can net them down and my risk is tiny

00:32:17.180 because I'm long and short at the same amount.

00:32:19.720 That's what value at risk would say.

00:32:21.560 You don't need much capital for that tiny little risk.

00:32:23.880 Not true because what if this guy goes bankrupt?

00:32:26.820 All of a sudden this short position becomes,

00:32:29.780 this balanced position becomes net short

00:32:31.780 and I got to go out and buy something to cover it.

00:32:34.340 So all these assumptions are wrong, but people cling to them.

00:32:39.860 And with wrong assumptions, wrong models, you get bad policy every time.

00:32:44.220 That's one reason.

00:32:45.100 The other reason is just outright corruption.

00:32:47.840 I was invited by the United States Treasury to come down, meet behind closed doors with senior officials to give them my view of how best to manage risk.

00:32:56.060 And they were very nice to invite me and I had a good audience and they were attentive and it was a good opportunity.

00:33:01.000 Nothing changed, but that's their problem.

00:33:04.920 But in the middle...

00:33:05.840 Sounds like being a comedian.

00:33:07.040 No matter what you say, nothing's going to change.

00:33:09.040 Exactly, let's do it again.

00:33:10.760 But in the middle of the presentation to the senior official who was there,

00:33:13.920 I have a habit of interrupting myself.

00:33:16.960 And I was going through risk and all that.

00:33:19.040 And I turned to him and I said, you know, I don't envy your job

00:33:21.840 because the banks own this town.

00:33:24.540 We were in Washington.

00:33:25.820 He said, the banks own this town.

00:33:27.360 And I thought he would be outraged and that's an insult.

00:33:29.700 what are you saying? Whatever. He looked at me and said, you're right. Meaning they can't regulate

00:33:35.640 in a way to control the banking system because the bank lobbyists and the banks themselves

00:33:39.920 control Washington. What banker is going to encourage a law, rule, or regulation that reduces

00:33:45.920 his pay even by a nickel? So between the Fed and the treasury not understanding risk because the

00:33:52.740 models are flawed and bankers pulling the strings, which they do, and my wife hates me to admit if

00:33:59.680 but I was a registered lobbyist at one point.

00:34:01.420 I ran a Washington office.

00:34:02.500 I spent a lot of time on Capitol Hill.

00:34:03.960 I worked behind the scenes on exactly the kind of thing we're describing.

00:34:08.380 So you don't have the right model.

00:34:10.480 You can't see problems coming.

00:34:11.760 You're not going to get the right laws, rules, and regulations,

00:34:13.980 and it will keep happening again.

00:34:16.480 But my point is, every time it happens, it's worse than the time before.

00:34:20.160 And does there come a time when the crisis is so acute, so big, so out of control,

00:34:25.920 and there is no one to bail it out, going back to what we said earlier,

00:34:29.560 How can the Fed, you know, they've taken their balance sheet to $4 trillion and they're back.

00:34:33.000 They're printing money again.

00:34:34.360 What are they going to do next time?

00:34:35.480 $5 trillion?

00:34:36.580 $6 trillion?

00:34:37.700 Well, my friend Stephanie Kellett would say yes, and I would say no, because you're going to destroy confidence.

00:34:43.020 And you talk about the corruption.

00:34:46.220 Is that why we didn't see top executives prosecuted in the aftermath of the financial crash?

00:34:51.800 No prosecutions, no pay cuts, no penalties.

00:34:55.200 They're all back to their $20, $50, $100 million bonuses.

00:35:00.020 Jamie Dimon is a billionaire.

00:35:01.540 Why should a banker be a billionaire?

00:35:03.680 If you create a Silicon Valley company or a great app or you run a hedge fund,

00:35:09.180 they're like legitimate hard work.

00:35:11.620 Or a podcast.

00:35:12.220 Yeah, exactly.

00:35:14.200 There are legitimate ways to be a billionaire, but being a banker isn't one of them.

00:35:18.580 You should have a nice pay and a nice retirement.

00:35:21.100 So that's a pretty good example.

00:35:22.600 Hey, guys, if you give us money on Patreon, do you realize we're not billionaires or really nowhere remotely near being billionaires?

00:35:28.940 Keep giving us money.

00:35:30.320 Absolutely.

00:35:31.060 Look at the way he's dressed.

00:35:32.020 Right.

00:35:32.260 Sorry, Jim.

00:35:32.760 Carry on.

00:35:33.940 You're the one that gets all the comments about your appearance.

00:35:36.320 I don't know why you try and make it about me.

00:35:38.040 It's not going to work, Francis.

00:35:39.040 It's just the jokes have to have some basis in reality and yours don't.

00:35:43.340 Now, well, Jim, it's interesting to talk about all this stuff.

00:35:47.640 And I guess the question I was going to ask you is some of your detractors might say you have been predicting a crash for a while and it hasn't happened.

00:35:57.920 So is that because it's just around the corner or is that because you're wrong?

00:36:04.440 It's because it could be just around the corner.

00:36:07.180 It could be delayed.

00:36:07.840 But here's the point.

00:36:08.880 Just look at recent history.

00:36:10.540 And I kind of start this from October 1987.

00:36:13.760 You can go back further.

00:36:14.520 But that's 1987, late 80s, that was really the rise of derivatives, the rise of link trading between the stock exchange and the futures exchanges.

00:36:23.980 A lot of, you know, increased automation, faster telecommunication.

00:36:28.100 A lot of the things we're still wrestling with today really emerged in the late 80s and got more intense in the 90s and through the 21st century.

00:36:36.220 October 19th, 1987, stock market falls 22% one day.

00:36:40.680 We mentioned that.

00:36:42.080 1994, the Mexican tequila crisis.

00:36:44.520 The Fed had to use a slush fund to bail out Mexico because our Congress said no.

00:36:49.400 1997, the Asia financial crisis.

00:36:51.780 1998, Russia long-term capital management.

00:36:53.860 We talked about that.

00:36:54.960 2000, dot-com, NASDAQ goes down 80%.

00:36:57.680 2007, the mortgage crisis.

00:36:59.880 2008, the global financial crisis.

00:37:01.920 These things happen every five, seven years with some regularity.

00:37:05.940 It's not, you can't quite set your watch by it, but pretty close.

00:37:09.020 It's been 11 years since the last one.

00:37:11.500 So who wants to bet that it will never happen again?

00:37:14.520 I just turn it around on them and say, okay, do you want to bet your net worth, your retirement,

00:37:19.620 your family's well-being that this will never happen again? How do you feel? And then they get

00:37:23.840 some thinking, well, maybe it will happen again. And I also make the point that each one's bigger

00:37:28.940 than the last one. So the next one is going to be worse than you can imagine. Something we've

00:37:33.580 never seen maybe since the 14th century, who knows? And then I make another point, which is

00:37:39.680 because people sort of say to me, Jim, I've read your books, I've heard your presentations.

00:37:44.040 I actually kind of agree with what you're saying.

00:37:46.260 Would you mind calling me at 3 p.m. the day before, and I'll sell my stocks and buy gold?

00:37:51.260 I said, well, first of all, I'm not going to know the day.

00:37:53.960 I can, with science, with very good kind of rigorous support, you can estimate the magnitude of it and the fact that it will happen.

00:38:05.980 Timing is the most difficult.

00:38:07.260 People say, well, what good is it?

00:38:08.320 Well, it's like an avalanche.

00:38:10.020 How does that work?

00:38:10.840 Well, snow builds up and it builds up and it builds up, and an experienced mountaineer can look at that and say, that's going to collapse because it's windswept, the temperature's too warm today.

00:38:22.380 You can see the avalanches coming, but it doesn't have to be today or tomorrow or the day after.

00:38:28.480 But do you want to ski under it?

00:38:30.160 Do you want to take that chance that today's your lucky day or perhaps your unlucky day?

00:38:34.540 And the other point I make is that when this hits, we'll all know it.

00:38:38.440 I'll know it.

00:38:39.040 You'll know it.

00:38:39.480 The audience will know it.

00:38:40.340 it's going to be too late to protect yourself. You're going to say, oh, maybe I should get some

00:38:45.800 gold, you know, called the gold dealer. Well, if you're not a customer, they're not going to take

00:38:49.300 your call. The dealers are going to be backordered. The mints are going to be backordered.

00:38:53.320 Gold's going to be going up $100 an ounce a day, not a week or a month, but a day. And you're going

00:38:58.760 to say, get me some gold and you won't be able to get it. And I want to sell my stocks. Well,

00:39:02.640 yeah, okay, they're down 40%, you know, you're welcome to it. You've lost half your money.

00:39:07.260 These things happen so quickly that when people realize the panic is on,

00:39:13.320 it will be too late to get out of losing positions, too late to preserve wealth.

00:39:17.640 And so what I say to people is, what are you waiting for?

00:39:20.100 I'm not saying people, when you're in my position, people love to put words in your mouth.

00:39:24.720 They go, oh, Jim Rickards says it's the end of the world.

00:39:26.680 Sell everything, buy gold.

00:39:28.040 I've never said any one of those things.

00:39:29.660 It won't be the end of the world.

00:39:30.740 It could be a very different world on the other side.

00:39:34.120 That sounds so reassuring.

00:39:35.720 It won't be the end of the world, number one.

00:39:38.960 And there are things you can do today.

00:39:41.440 Don't sell everything and buy gold, but have about 10% gold in your portfolio.

00:39:46.380 It's like 10 quid food.

00:39:47.940 Buy 10 quid's worth of gold.

00:39:49.700 No, 40 quid.

00:39:51.280 40 quid.

00:39:52.180 How much gold can you buy for 40 quid?

00:39:55.820 Not much.

00:39:58.040 I didn't think so.

00:39:59.220 It'd be about, what, 1,200 pounds per ounce, so a fraction of an ounce.

00:40:04.740 Wow, okay.

00:40:05.900 What does an ounce look like physically?

00:40:08.320 Well, what's interesting about an ounce of gold,

00:40:11.320 it's a large coin.

00:40:13.260 It's larger than the old sovereign.

00:40:14.420 So that's 1,200 pounds.

00:40:15.860 Yeah, exactly.

00:40:16.820 The classic British sovereign,

00:40:19.980 and I occasionally buy sovereigns as a collectible.

00:40:23.980 It's not good value for money in terms of gold,

00:40:26.160 and I understand that,

00:40:27.020 and I could buy gold bullion or coins or whatever for that purpose,

00:40:30.720 but I do collect some gold coins, and I have some sovereigns.

00:40:33.520 They were seven grams, about a quarter ounce.

00:40:36.980 But, you know, I have a nice picture of King George V on one side,

00:40:40.440 George slaying the dragon on the other side, you know, but 22-carat gold, 92% pure gold.

00:40:47.860 They put in a little alloy.

00:40:50.080 You still got your weight in gold, but they put in a little alloy just to make it durable

00:40:52.900 because this was what we call in Philadelphia walking around money.

00:40:55.860 You know, you had it in your pocket or your purse and you would spend it,

00:40:59.340 and an ounce was almost too much.

00:41:01.420 It was too much value.

00:41:02.480 So the quarter ounce was just right.

00:41:04.600 And that was the classic British sovereign.

00:41:06.640 But the point is, the one ounce coin, a little bit larger in diameter than coins we use today.

00:41:11.920 But what surprises people when you give them an ounce of gold is the weight.

00:41:16.040 It's very dense.

00:41:17.400 It's one of the densest metals in the periodic table, the elements.

00:41:20.760 And people are like, oh, that's kind of heavy.

00:41:22.700 And they're very impressed by it.

00:41:23.580 It's pretty, too.

00:41:24.720 The fact that it's pretty is not a reason to have it.

00:41:27.860 But the fact that it has retained value and it's scarce and it checks all the boxes in

00:41:34.080 terms of a good form of money.

00:41:35.960 But people are surprised at how heavy it is.

00:41:37.700 I've been in some vaults where you see these 400 ounce bars, they're sort of trapezoidally

00:41:43.620 shaped.

00:41:44.620 I want to lift that bar up.

00:41:47.200 It's 35 pounds.

00:41:48.200 It's like if you go to freeways, that's fine, but it's kind of heavy to lift one up.

00:41:53.580 And what about those people who are saying, well, I'm going to be fine.

00:41:55.940 I've got Bitcoin or whatever it is.

00:41:59.000 I like that.

00:42:00.320 That's a good reaction.

00:42:01.580 What is your opinion on Bitcoin?

00:42:03.520 Because it only seemed like six months ago,

00:42:05.640 it was that everybody was talking about it

00:42:07.720 and, you know, crypto and all the rest of it.

00:42:09.980 Yeah, well, Bitcoin, just empirically,

00:42:11.900 before we get into the substance of it,

00:42:13.640 was the greatest bubble in the history of the world.

00:42:17.100 As Bitcoin was going up,

00:42:18.320 so now we're talking about the fall of 2017,

00:42:20.880 it was going up like $1,000 per coin per week.

00:42:24.200 It was $7,000, $8,000, $9,000, $10,000.

00:42:28.600 And I did an interview at the time.

00:42:30.640 This was early December 2017.

00:42:33.480 And I've never been a fan of Bitcoin.

00:42:35.520 Don't recommend it.

00:42:36.280 Don't think anyone should have it.

00:42:38.400 And the host said, well, Jim, what's going to happen?

00:42:40.700 I said, well, it's going to keep going up.

00:42:42.240 This is a bubble and they go up until they don't.

00:42:44.640 So I could see Bitcoin going to $20,000 and then crashing straight down.

00:42:49.840 That's exactly what happened.

00:42:51.280 It went to $20,000 and then it crashed straight down.

00:42:53.360 Now you say, oh, well, gee, if I had bought them for $10 and it wasn't that long ago when you could have bought them for $10 and they went to $20,000 and you had sold them all, you could have made millions.

00:43:03.780 I know people who did that.

00:43:05.060 There are legitimate Bitcoin millionaires, maybe even a few Bitcoin billionaires.

00:43:09.720 I don't doubt that those people are out there and I even know some.

00:43:13.180 But the point I make is that how did they make that money?

00:43:17.020 This is a zero-sum game.

00:43:18.300 That came out of the pockets of people who did pay $15,000, $16,000, $17,000.

00:43:24.160 South Korean garage mechanics who hawked their inventory just to buy a couple coins.

00:43:29.280 You know, Netherlands, you know, middle class individuals who sold their houses and lived in trailers so they could buy coins at these high prices.

00:43:37.240 They've lost all their money.

00:43:38.600 There have been suicides around that.

00:43:39.980 You have blood on your hands.

00:43:41.280 So my point is, if that's how you enjoy making money, I'll leave you to it.

00:43:46.800 But I have no problem with the fact that Bill Gates is worth $100 billion, let's say.

00:43:52.800 He actually earned it.

00:43:53.880 He and his colleagues and his co-workers created something that's worth incalculable.

00:43:58.920 So trillions and trillions of dollars of value for the world.

00:44:01.700 If his share is $100 billion, you're welcome to it.

00:44:04.300 He earned his money.

00:44:05.920 But Bitcoin, you don't earn your money.

00:44:07.580 You just take it from somebody else in a zero-sum game that adds nothing to society, no value, no increase in wealth.

00:44:14.860 It is gambling, except there's no casino.

00:44:17.740 You just take it right from the other player.

00:44:19.460 There you go.

00:44:20.700 So the answer there is buy gold, about 10%,

00:44:23.280 and if that's what you want to do, and send it to us to support the show.

00:44:28.500 Can you imagine instead of Patreon, like $5 a month,

00:44:30.980 we just get a gold sovereign once a month?

00:44:32.760 Yeah, absolutely.

00:44:33.380 That would be nice, man.

00:44:34.020 Yeah, you come in dressed like Mr. T, it would be brilliant.

00:44:36.460 Yeah, just indeed.

00:44:37.260 But anyway, let's move on to one other issue that we wanted to discuss with you,

00:44:41.380 something that you know a hell of a lot about,

00:44:42.960 and we wanted to raise with you.

00:44:46.500 Donald Trump, during his election campaign in 2016,

00:44:49.460 spent a hell of a lot of time talking about China.

00:44:52.360 He was ridiculed for this.

00:44:53.500 He was mocked for this.

00:44:54.400 Most people who are not experts

00:44:55.640 didn't even understand why he was talking about it.

00:44:58.380 Somewhere in the periphery, people might have thought,

00:45:00.540 well, he's talking about it

00:45:01.560 because a lot of manufacturing jobs have gone to China.

00:45:04.860 But if you listen to some of his advisors,

00:45:07.220 if you listen to some of the other people

00:45:08.640 who talk about the threat that China poses to the rest of the world economically more than anything.

00:45:15.820 There are many more layers to it than that.

00:45:18.440 Right.

00:45:18.880 So lay that out for us.

00:45:20.940 Sure.

00:45:21.680 Trump is a difficult to understand genius.

00:45:25.420 And I look at the fact that he won in 2016 and, of course, we're coming into the 2020 elections.

00:45:32.760 And I predicted the Trump victory in 2016.

00:45:35.860 So I'm in that business of predictive analytics.

00:45:38.640 I have Trump as a strong favorite to win again, but one of the factors I look at, I look at his opponents, the media, the Democrats, the progressives, and I say, did they learn anything?

00:45:48.940 Did they learn anything in 2016 so that they can do something different today and perhaps beat him?

00:45:55.640 And so far, the answer is no.

00:45:57.080 They haven't learned a thing.

00:45:58.320 Well, they've doubled down on all the crazy cultural stuff that got them in trouble in 2016.

00:46:02.420 That's exactly right.

00:46:03.180 They've doubled down.

00:46:04.120 That's a good way to put it.

00:46:04.780 But no sign at all that they've learned anything.

00:46:08.640 So I describe Trump's relationships with the media as the media are a herd of puppies, and Trump's the master with a red rubber ball.

00:46:17.980 And he throws the ball, and all the puppies chase the ball.

00:46:20.600 One of them fetches it and brings it back, and he says, very good.

00:46:22.940 And he throws the ball over there, and they do the same thing.

00:46:25.900 Meanwhile, he's doing serious stuff.

00:46:27.800 So what's the ball?

00:46:29.540 Stormy Daniels, impeachment, collusion, Russiagate.

00:46:33.620 These things are distractions, no substance to any of them.

00:46:36.740 The media keeps chasing them.

00:46:38.320 Meanwhile, what is Trump actually doing?

00:46:40.380 The largest tax cut in history.

00:46:42.920 He is remaking the federal judiciary, appointing judges at an unprecedented rate, taking control

00:46:48.760 of the courts.

00:46:49.720 And it's from a list produced by the Federalist Society.

00:46:53.020 They're very staunch, reliable conservatives.

00:46:55.200 And they picked them in the early 40s because it's a lifetime appointment.

00:46:58.480 So you'll be on the bench 40 years from now.

00:47:00.540 The Trump judiciary is going to run the United States long after, well, at least after I'm

00:47:06.100 gone, you guys are younger, but for maybe four decades or so in the future. Trump owns

00:47:11.760 the Fed. Trump came in, there were two vacancies on the board of governors of the Federal Reserve.

00:47:16.960 Why were there two vacancies? Well, Obama was so sure that Hillary was going to win

00:47:21.780 that he didn't bother with the appointments. He said, well, I'll give him to Hillary,

00:47:25.100 she'll appoint some strong hands. So Trump got two seats right off the bat. Then there

00:47:29.320 were a couple of resignations. So that kind of went up to four seats. And then one more

00:47:33.840 since then, plus promoting Jay Powell from a governor where he already was a governor before

00:47:39.240 Trump to chairman. So Lael Brainard is going to end up as the only non-Trump appointee on the

00:47:45.980 board of governors of the Federal Reserve. She must feel like a hostage when she goes into the

00:47:49.800 room. But the point is, so Trump owns the Federal Reserve. He's taking control of the judiciary.

00:47:55.860 He's burning the code of federal regulations and literally burning it down so you can actually

00:48:00.500 have some freedom, and the largest tax cut in history, and confronting China, and that

00:48:05.620 was your point, Constantine.

00:48:07.000 So the press is chasing the rubber ball.

00:48:09.840 He's doing big stuff.

00:48:11.580 That's really going to be world historic, as it relates to China.

00:48:15.600 So for 20 years, I would say the 1990s and the early 2000s, a little beyond that, really

00:48:22.520 up until Trump, the globalist view, when I say global, I use these phrases, but I name

00:48:27.220 names, you know, because we know who these people are.

00:48:29.000 People like Jeffrey Sachs at Columbia University, Richard Haas at the Council on Foreign Relations, John Kerry, who was our Secretary of State, and, of course, President Obama, and President Bush.

00:48:40.000 I don't see much difference between Bush and Obama on this point.

00:48:42.860 But the globalist view was, okay, we know the Chinese are kind of bad guys.

00:48:47.020 We know they're communists.

00:48:49.000 But if we trade with them and open our doors and let them break the rules and let them steal our intellectual property with their low-cost Lego-style manufacturing assembly, they'll grow rich.

00:49:00.480 And in the fullness of time, they'll be just like us.

00:49:03.220 Once they taste the fruits and the benefits of capitalism, they'll gradually – they might not be like a liberal democracy the next day, but they will move away from communism.

00:49:12.760 And I said 20 years ago, I said, no, you've got this exactly wrong.

00:49:16.280 You don't understand the communists.

00:49:17.460 And people go, oh, Jim, you know, the communists, there's just a couple 80-year-olds on the Apollo

00:49:21.440 Bureau, they'll die soon, you know, the communism is anachronistic in China today. I said, no,

00:49:26.760 they're hardcore communists. Well, so all this accommodation, so, you know, China in 1994 does

00:49:32.880 a maxi devaluation of the yuan. 2001, they joined the WTO, proceeded to break every rule and every

00:49:40.040 promise. It's kind of like getting into a club and you go, you know, an exclusive club, you go

00:49:44.180 before the membership committee and they say, well, we're going to admit you to the club,

00:49:47.480 but you know, we have a very strict dress code. And you say, yes, I understand. I'll adhere to

00:49:50.640 the dress code. And you show up the next day in like flip-flops and a t-shirt. That's China.

00:49:55.060 They show up in the t-shirt and say, you know, give me a drink. 2016, the IMF admitted them to

00:50:02.140 these small group of five currencies that are used to calculate the value of world money,

00:50:06.980 world money, SDR, you know, the special drawing rights, world money printed by the IMF.

00:50:13.300 But you had to make certain promises to do that, including one that you would have an open capital account.

00:50:18.460 They immediately proceeded to close the capital account.

00:50:21.140 In other words, China's willing to lie, cheat, steal.

00:50:23.980 We know that.

00:50:25.240 But what was interesting is that the U.S. was willing to tolerate it for the sake of a chimera or a mirage of a more liberal China.

00:50:32.900 And that hasn't happened.

00:50:33.840 The opposite has happened.

00:50:35.300 President Xi was made president for life.

00:50:37.420 They had a two-term, two five-year term rotation.

00:50:40.120 and in your second five-year term, you had to appoint your successor

00:50:43.900 who would smoothly come in and take over at the end of your five-year term,

00:50:48.180 second five-year term.

00:50:49.140 That's gone.

00:50:50.160 Xi is president for life.

00:50:51.540 They've now created a new branch of ideology called Xi Thought.

00:50:56.460 Well, there's only one other dictator in China who had thought,

00:51:00.200 and that was Mao Thought.

00:51:01.520 So Xi is the first head of the Communist Party since Mao Zedong

00:51:05.620 to have a school of thought named after him.

00:51:08.260 These are, this is a little obtruth perhaps to the West, but these are really important things inside of China.

00:51:15.040 So he's head of the Communist Party for life, has his own school of thought, has suppressed all of his enemies.

00:51:21.300 I was in Hong Kong not long ago, a very elite audience at the Asia Society, the biggest property owners, scholars, et cetera, in Hong Kong.

00:51:29.460 And they were all, see, these people are globalists.

00:51:31.620 I don't know why I get invited to these things, but they do invite me.

00:51:34.220 And they're all globalists and they're all saying nice things about China.

00:51:37.500 And when it came my turn, I just looked at this one guy, I said, what happened to Bo Zhilai?

00:51:42.740 Bo Zhilai was a rival to Xi Jinping.

00:51:45.380 He was the mayor of the head of the Communist Party of Xinjiang.

00:51:48.660 And he was the up-and-comer.

00:51:50.040 He was making his own play, disappeared.

00:51:52.220 We haven't heard from Bo Zhilai in about four years.

00:51:55.520 So he's been tortured and sent to a re-education camp.

00:51:59.000 Let's say you're a Muslim Uyghur in Western China, or you're a Catholic almost anywhere in China.

00:52:04.920 And in addition to having religion, because they're officially atheist, you express a little bit of dissent while they arrest you.

00:52:14.260 They put you in a concentration camp, a real one, not the made-up ones from our squad in the U.S.

00:52:21.000 It's thought re-education, so they basically try to brainwash you into getting with the program.

00:52:25.960 Some people do that or pretend to, but let's say you still don't do that.

00:52:29.800 You're not with the program.

00:52:30.620 They strap you to an operating table without anesthetic and they surgically remove your organs to supply a multi-billion dollar organ transplant industry in China.

00:52:40.200 And you die having your organs removed without anesthetic and then they cremate the body.

00:52:45.500 Where have we seen that before?

00:52:47.160 So this is China.

00:52:48.280 These are your friends.

00:52:49.020 Atheists, murderers, deny human rights, drown 20 million girls in buckets because they had the one child policy, but everybody wanted boys.

00:52:59.140 So if a girl, they kept a bucket of water by the delivery bed,

00:53:02.180 and if a girl was born, they drowned her on the spot.

00:53:04.440 So why are we doing any business with China?

00:53:06.740 That's what I don't understand.

00:53:07.720 And my friend Kyle Bass agrees.

00:53:10.220 He's been a very successful hedge fund manager.

00:53:13.480 He agrees.

00:53:14.400 So what Trump has done, he's taking—

00:53:16.720 Presumably, Jim, sorry to interrupt.

00:53:18.220 Presumably, although all those things, of course, terrible,

00:53:20.900 I don't imagine that American voters were concerned about China on those issues.

00:53:28.600 No, they were actually very concerned about China because they were the ones losing jobs.

00:53:32.200 They were the ones who saw their income stagnant.

00:53:33.760 But is it just jobs or is it China's trade policy, what people call mercantilism?

00:53:38.380 Is there other thing?

00:53:40.380 You mentioned stealing intellectual property.

00:53:42.200 Tell us more about some of those things.

00:53:43.740 Well, there's been this myth, and it goes back to the 1890s when the U.S. announced the open door policy,

00:53:51.480 which meant that we don't want to conquer you, but we're forcing you to trade with us.

00:53:55.500 That was the advantage for Americans.

00:53:57.180 And the myth was, boy, so many people in China, if you could just sell everybody one T-shirt and one bottle of Coke, you'd make a fortune.

00:54:05.140 That has never panned out.

00:54:06.440 It has never panned out.

00:54:07.640 So today, the modern version of that is, boy, if I could just sell everybody in China, you know, one cell phone with my patented technology or whatever.

00:54:14.820 But China says, sure, come on in and set up your plan.

00:54:16.740 By the way, you can only own 49 percent.

00:54:19.280 We own 51 percent.

00:54:20.620 And you have to hand over all your patents and all your intellectual property as the price of admission.

00:54:24.900 And companies say, okay, because they want to sell those phones.

00:54:28.240 They then hand that to Huawei, which reverse engineers.

00:54:31.300 It puts it in their own phones and puts you out of business.

00:54:33.500 That's the price of doing business with China.

00:54:36.100 So a couple of things.

00:54:37.420 One, companies are waking up to this.

00:54:39.380 American workers knew it a long time ago because they were the ones losing their jobs.

00:54:43.100 And you're right, Constantine.

00:54:44.480 I don't suggest that every unemployed blue-collar American worker who lost a job,

00:54:49.220 the Chinese, was as concerned as I may be about human rights violations.

00:54:53.140 but they're learning about them and they're not surprised.

00:54:56.960 And so Trump is the first one to stand up to them and say,

00:55:00.840 no, theft of intellectual property is over.

00:55:03.820 Investment in China is over.

00:55:05.280 We've weaponized certain statutes that the United States uses to protect our national security

00:55:10.360 and that have been on the books for a long time,

00:55:12.900 but they weren't kind of strictly enforced.

00:55:15.100 They've all been weaponized.

00:55:16.520 Today, you know, to say that China couldn't buy Verizon,

00:55:19.720 which is one of our biggest telecommunications companies, that's true.

00:55:22.900 China can't buy an ice cream stand.

00:55:24.760 China can't buy anything.

00:55:26.120 Huawei might as well pack up their bags and leave.

00:55:27.940 They're not going to do any business in the United States.

00:55:30.100 And we're going to see through Europe and Japan and our allies that they don't do any business with anybody else either.

00:55:37.960 And if they do, they can't do business in the United States.

00:55:40.780 That's a secondary bracket.

00:55:42.120 So we're playing hardball.

00:55:43.420 But if you want to boil this all down, in October 2018, our vice president, Mike Pence, gave a speech before a think tank.

00:55:51.620 It's readily available on the Internet and the White House website, easy to find.

00:55:56.500 And people are calling it the Pence Doctrine.

00:55:58.460 It's the first time I've ever seen Trump not name something after himself.

00:56:02.580 He allowed Pence to go ahead, and so it's the Pence Doctrine.

00:56:05.320 Do you reckon there's a tiny room in the White House?

00:56:07.560 The Pence room is like a little cupboard, isn't it?

00:56:09.960 Yeah, where they keep the brooms.

00:56:11.400 Yeah, well, Pence might have his eye on the Oval Office in 2024.

00:56:14.380 We can talk about that later.

00:56:16.440 But what the vice president said, and this is the serious part,

00:56:20.120 says, yeah, this is a currency war, this is a trade war, those are important things, but this

00:56:24.140 is a much bigger issue. We've got human rights violations, geopolitical confrontation in the

00:56:29.580 South China Sea, theft of intellectual property, you know, trade war, currency war, and the other

00:56:33.860 things we mentioned, that this is more like Cold War II. It doesn't mean you have a shooting war,

00:56:40.880 but it means that the confrontation is much bigger, broader, and will be more long-lasting,

00:56:45.980 And actually, Pence is preparing to deliver part two of the Pence Doctrine.

00:56:51.540 There'll be another speech very soon.

00:56:55.000 And this, in my view, will be on a par with the Marshall Plan,

00:57:01.320 or what's called the Long Telegram by George Kennan,

00:57:04.100 which was turned into an article called Sources of Soviet Conduct.

00:57:08.240 But that article, which I think came out in 1947,

00:57:11.800 they could be off by a year, thereabouts,

00:57:14.040 was the blueprint for the conduct of U.S. foreign policy

00:57:17.620 during the entire Cold War, right up until 1989.

00:57:20.680 Everybody looked at that Kennan article and said,

00:57:22.920 yeah, this is the way to do it.

00:57:24.160 And it wasn't a war, it was containment.

00:57:26.260 Just boxed them in, starved them out, and they fell.

00:57:29.640 And that's exactly what happened.

00:57:30.760 It took 45 years, but it happened.

00:57:33.460 This Pence Doctrine is going to be the new long telegram.

00:57:36.940 It's going to define our confrontation with China.

00:57:39.560 And then the thing I love is all these scholars, you know, TB Pundits, whatever, like, there was a book called The Thucydides Trap.

00:57:48.720 And, of course, Thucydides, the Greek historian, a chronicle of the Peloponnesian War, and he said, well, you have, you know, the established power, Sparta, and the rising power, Athens.

00:57:58.940 Whenever you have a rising power meeting and established power, it comes to a war.

00:58:04.380 There was a war between them, and that was the history of the Peloponnesian War.

00:58:08.420 So everyone's glommed onto this and said, yeah, here we go again.

00:58:10.820 You know, this is these trap.

00:58:12.160 The U.S. is the established power, and China's the rising power,

00:58:15.620 and it's going to come to a confrontation.

00:58:17.520 There's no way around it.

00:58:20.060 There may be some truth in that, but what they ignore is that Sparta won.

00:58:23.960 In other words, Athens did not win the Peloponnesian War.

00:58:26.140 Sparta destroyed Athens.

00:58:27.600 So that would suggest that the U.S. will destroy China.

00:58:30.660 We're not going to physically destroy it,

00:58:32.240 but either China will transform into a more liberal society,

00:58:36.040 or the U.S. will box them in and defeat them at every turn, not let them steal the intellectual property.

00:58:42.720 And just to make it very concrete, U.S. companies are already moving the supply chain.

00:58:48.400 They're coming out of China, they're going into Vietnam, Indonesia, Philippines, Thailand, Malaysia,

00:58:53.940 other countries that have enough infrastructure, enough trained workers with low wages

00:58:59.080 that you can replicate what China offers without the baggage, without the theft of intellectual property

00:59:04.640 and without supporting the human rights violations.

00:59:06.960 Now, here's the thing.

00:59:08.540 These are 10-year decisions.

00:59:10.240 You don't close a plant and build a new one

00:59:11.920 and then go back next year

00:59:13.500 because everyone's kissing and making up.

00:59:16.420 You move your plant and you keep it there for 10, 15 years.

00:59:19.280 So these jobs are coming out of China,

00:59:21.040 but they're not coming back.

00:59:22.720 And the Chinese economy is in much worse shape

00:59:25.500 than people realize, much more indebted,

00:59:28.160 much more vulnerable.

00:59:29.680 And to top it off,

00:59:31.280 the history of China for 5,000 years

00:59:33.780 is centralization of power

00:59:36.740 followed by dissolution and decentralization.

00:59:40.800 Then the warring kingdoms,

00:59:42.540 then it centralizes again

00:59:43.960 and it falls apart again

00:59:45.860 over and over through centuries

00:59:48.560 and through dynasties.

00:59:50.700 Right now, China is at peak centralization,

00:59:53.540 going back to what I said about Xi,

00:59:55.420 which means it's very easy to forecast

00:59:56.940 what's going to happen next.

00:59:57.940 It's going to fall apart.

00:59:59.140 Well, on that happy note,

01:00:00.440 we've got one more question for you, Jim.

01:00:02.100 What is the thing that we are not talking about, but we really should be talking about?

01:00:07.160 The question is, when the next crisis comes, and it will come, so that's the easy part.

01:00:14.300 It will be worse.

01:00:14.980 That's the easy part.

01:00:15.660 Timing, hard to say, and you're right about that.

01:00:19.400 My answer is, what are you waiting for?

01:00:20.900 Get ready now.

01:00:22.300 When it comes, what will the world look like afterwards?

01:00:26.620 And I talk about this in my book, in Chapter 8, and the conclusion of the book.

01:00:30.800 And I suggest that there's only one clean balance sheet left in the world.

01:00:35.100 The central banks have not normalized their balance sheets.

01:00:38.020 We talked about that.

01:00:39.180 There is one clean balance sheet left, which is the IMF, the International Monetary Fund.

01:00:43.580 So just as central banks bail out Wall Street, perhaps the IMF will have to bail out the central banks.

01:00:50.500 In other words, reliquify the world.

01:00:52.080 Where's the source of liquidity?

01:00:53.240 Where's the money coming from when there isn't enough money?

01:00:56.120 When everyone wants their money back and selling everything, prices are crashing.

01:00:59.260 money is disappearing in front of your eyes

01:01:01.560 where does the money come from

01:01:03.360 to get the system back to normal

01:01:04.780 it might only come from

01:01:07.560 the IMF

01:01:08.460 if they can get their act together

01:01:10.480 but they issue this world money

01:01:12.620 this SDR as they call it

01:01:14.480 I love the way they make up names that no one understands

01:01:16.400 I call the IMF transparently

01:01:18.740 non-transparent

01:01:19.740 they actually tell you what they're doing but no one understands it

01:01:22.700 it's very hard to read

01:01:23.420 but if that happens

01:01:26.980 you're going to need

01:01:28.300 China to agree and Russia to agree and other countries that are very averse adversaries to

01:01:34.440 the United States and also don't like the dollar. So the price of poker, if you will, is yeah,

01:01:38.860 we'll flood the zone with SDRs. We'll reliquify the world with world money. But it means starting

01:01:44.080 now the dollar is no longer the dominant reserve currency. You know, the price of oil will be

01:01:48.820 denominated in SDRs. The balance sheets of the hundred largest corporations will be recorded in

01:01:53.920 SDRs. The SDR will be how we maintain our reserves. It doesn't mean the dollar goes

01:01:58.520 away, but it becomes a local currency. Like I go to Mexico, I buy some pesos. You know,

01:02:03.740 if you visit the United States, you'll buy some dollars, but it won't play the role it

01:02:07.460 plays today. And U.S. power will fall with it. Throughout history, Rome, British Empire,

01:02:14.440 Spanish Empire, Dutch Empire, et cetera. When their currency has lost value, their empires

01:02:19.540 fell so there are much larger forces in play and and what i say to people is you know it will be

01:02:27.120 the end of the world no but it might be almost a semi-agrarian world life might look a little bit

01:02:34.580 more like it did in 1910 well thank you very much for coming on the show jim uh yep as always

01:02:40.560 subscribe follow jim on twitter uh your twitter handle is jim at james g ricards you're very

01:02:45.700 active on there i follow you with great interest it's the only social media i use but i am fairly

01:02:49.860 active right yeah so follow jim there follow us at triggerpod on our social media we'll put the

01:02:54.460 postal address to send all your gold in the bottom of the video and we will see you in a week see you

01:02:59.880 later guys bye

01:03:15.700 Thank you.

TRIGGERnometry - October 27, 2019

James Rickards： The Next Financial Crash is Coming

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