James Rickards： The Next Financial Crash is Coming
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Summary
Jim Rickards is a writer, economist, and former CIA advisor. He has written a number of books, including Currency Wars, The Death of Money, The Road to Ruin, and Aftermath. In this episode, he talks about his early career working for the CIA and how he got into economics.
Transcript
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Hello, and welcome to Trigonometry. I'm Francis Foster.
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And this is a show for you if you're bored with people arguing on the internet over subjects they know nothing about.
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At Trigonometry, we don't pretend to be the experts, we ask the experts.
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Our fantastic guest this week is a writer, economist, and a former CIA advisor, Jim Rickards. Welcome to Trigonometry.
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Thank you, Constantine. Thank you. It's great to be here.
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and i'm sure you're thanking francis as well you just left the man out of that thank you
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i should have mentioned as well you you're a writer and an author of a number of books the
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latest of which is aftermath which is this get it it's a brilliant read um and jim for anyone
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who doesn't know who you are tell us briefly who are you how are you where you are what has been
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your journey through life well it's unclear whether my career path is uh it could be described
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as eclectic or i just couldn't decide what i wanted to be when i grew up but uh it's been most
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I'm a lawyer by training, but I spent most of my career on Wall Street.
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I worked for commercial banks, investment banks, hedge funds, stock exchanges, etc.
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Along the way, after 9-11, I was tapped by the CIA to help them with financial threats.
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All of a sudden, financial warfare and what we call market intelligence or market became a big subject inside the CIA.
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It has not been previously during the Cold War.
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I mean, Russia, the Soviet Union were not in capital markets, so that wasn't part of the battle space.
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And they do a good job of outreach when they kind of know what they don't know and they bring in people.
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And then starting in 2011, I had my first book, Currency Wars.
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And the new book, Aftermath, and thank you for mentioning that, is actually volume four of an international monetary quartet.
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So it was Currency Wars, The Death of Money, The Road to Ruin, and Aftermath.
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I'll talk to my publisher at some point about a box set so you can get all four in one nice slip case.
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It's the new book, and we're kind of on the road explaining it to people and talking about it.
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See, Constantine's got a background in economics.
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And I found it very, very accessible, and I found it very, very informative.
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And I love the metaphor you used at the start, how essentially the U.S. is trying to navigate.
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And you used the metaphors of monsters from ancient Greeks, Skilla and Charybdis.
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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.
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Sure, and that was actually the most difficult part to write.
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It's really a challenge when you're writing about economics.
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They write articles and academic papers and give presentations and all that.
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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.
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But because economics tends to be very contemporary, market-driven, et cetera, a book becomes stale very quickly after it's published.
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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.
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And I will say my first book, Currency Wars, in 2011, is still selling extremely well.
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All the books are in print, so none of them have gone out of print.
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And it's got a second or third life because we're in a currency war.
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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.
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Here we are in 2019 and the currency wars are still going on.
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So that book did it, and then the other book's the same thing.
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So, Francis, with particular regard to your point,
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expanded the balance sheet from $800 billion to $4.5 trillion.
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That's how much money the Federal Reserve printed.
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And all the other major central banks, Bank of England,
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You're talking about quantitative easing for anyone here.
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As I say, printed, took the balance sheet up to $4.5 trillion.
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But at some point, they had to get back to normal.
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Maybe that's interest rates of 3% or 4%, which would be a little more normal.
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And getting the balance sheet down to maybe $2 trillion, it's an inexact science.
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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.
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You saved the world from a worse outcome in 2008.
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You got everything back to normal, and you're ready for the next recession.
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They're going down again after going up for the last couple years.
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It's come down very little, maybe around $3.9 trillion, although it's going up again.
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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.
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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?
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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.
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So at the end of 2018, Jay Powell, or Fed chairman, got a wake-up call saying, oh, I've tightened too much.
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I shouldn't have tightened in December of 2018, raising interest rates.
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We are very close to recession, and the U.S. was at the end of 2018.
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So he quickly reversed course, said, first, we're not going to raise rates anymore, and we'll tell you if we do.
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We'll give you advance warning so you won't be caught by surprise.
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Then by the spring, he said, well, we're actually going to cut rates, which they did in June and September of 2019.
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And then finally, they had reversed QE, quantitative easing.
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I still run into people who go, I'm tired of the Fed printing money.
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They've been burning money since then, since 2017, 2018.
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You may remember, there was a famous cartoon that showed a manic-looking Ben Bernanke hanging
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will instead picture Jay Powell with a pile of $100 bills and a shovel throwing money into a
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furnace. That's what they've been doing. They've been reducing the money supply. Well, this was a
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double dose of tightening. Higher rates, reduced money supply, almost through the economy into a
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recession. They've reversed course on both. Now rates are coming down again. They're printing
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money again. And by the way, we're in QE4. They won't call it that, but the Fed is printing a
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trillion dollars of new money as of the fall of 2019. So call it what you want. It's QE4.
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So my point was, on the one hand, you have to get ready for the next recession. On the other hand,
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are you going to cause a recession? That was Scylla and Charybdis. They were trying to sail
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down the middle and avoid both dangers. I said they would not be able to do it. They're going
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to have to choose the enemy or choose the danger, if you will. And they did. They said, we're going
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to avoid recession, but it means they've thrown in the towel on normalizing. So at a higher level,
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it means they're not ready for the next recession. So essentially, what you're saying is, and again,
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layman's terms, is we have a debt or the U.S. have a debt that is too big for them to service.
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Correct. I am saying that. That's a separate issue. Let's separate monetary policy
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and fiscal policy. So monetary policy is the central bank, you know, raising or lowering rates,
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printing money or reducing the money supply. So that's the world of monetary policy.
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Over here, debt deficits and the budget, that's fiscal policy. They are related because where
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it really gets a little tricky and a little dangerous is if you tell the governments they
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can spend as much as they want and run up as much debt as they want, what's the discipline on that?
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Well, the discipline is the market. If the market says, hey, we don't want your paper anymore,
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or we're not buying it, or interest rates go up.
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What if the Federal Reserve is sitting over here saying,
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We'll buy all the debt that you want with printed money.
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So that's where fiscal policy, which is debt and deficits,
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come together if the Federal Reserve monetizes the U.S. debt.
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their failure was they could not get back to normal without causing recession,
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which means they're not ready for the next recession. On the fiscal side, at least in
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the United States, we're back to the wonderful world of trillion dollar deficits last seen in
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2011. Well, we'll get into that because one of the things you outlined very well in the book that
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essentially, historically, the pattern in the United States is that you borrow in times of war
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Right. And then you repay in times of peace. Correct. And we used to do that. We have not
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been doing that. And one of the interesting things that rang true with me is that no one
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is talking about fiscal conservatism anymore. That is a phrase that used to be a centerpiece
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of political discussion. Correct. I have not heard that for 10 years, probably. Right. Close
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to 10 years. And I think that's quite telling because, as you mentioned in the book, the US
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Right, and it's problematic, it's not just big, it is, and you're absolutely right, Constantine.
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So concern about deficits in the United States, you know, last seen in 2010, that was the
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rise of the Tea Party, so-called, and conservative Republicans worried about debt and deficits,
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The Republicans took our House of Representatives and they got the Senate later.
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the on the strength of that a lot of those members are still around but now
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that we have a Republican president they seem to have forgotten all about fiscal
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discipline it was they were opposed to Democrats spending more but they seem
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okay with Republicans spending more but the way I look at it I try to keep
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partisan politics out of it I have my opinions like everyone else but I'm
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looking at Republicans and Democrats in this together and kind of what you say
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Constantine about the history 230 years of the government bond market the
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history is the debt to GDP ratio, how much debt relative to the size of the economy goes up in
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times of war and down and gets repaid in times of peace. So it hasn't been straight up since
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George Washington to Donald Trump. It looks more like a sine wave. It goes up and down like this
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until 2000. That's when things ran off the rail. When Bill Clinton left office,
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the national debt was $5 trillion. After eight years of George Bush, it had doubled to $10 trillion
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dollars. In eight years of Obama, it had doubled again to $20 trillion. And Trump has thrown a
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couple trillion dollars on top of that. So I say we used to have bipartisan responsibility. Today,
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we have bipartisan irresponsibility. It's not specifically a Democrat or Republican issue.
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As I say, both parties are spending freely. So let's look at basically what you're essentially
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saying is the patient had a heart attack. We've emptied the medicine cupboard. We haven't
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restocked it. And before we get onto that, we kind of started with a slightly different order.
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But I want you just for ordinary people who may be watching this, just briefly summarize for us,
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why did the 2007-2008 crash happen? Well, the reason it happened is fairly
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straightforward. And for that, we can go back a little further in time to 1998. That was the
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Russian default. We had a global financial crisis. We had a global liquidity crisis.
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It was over somewhat quickly, and it did not lead to a recession, but it was just as dangerous as
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what happened in 2008. It all started in Thailand, went to Indonesia and Korea and
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Russia, but it ended up in my lab at a hedge fund in Greenwich, Connecticut called Long-Term
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Capital Management. I was their chief lawyer. I was not the head of the Risk Management Committee,
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fortunately, but I say when people mess up badly enough, it gets dumped on the lawyers.
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So here was a situation where this fund had lost $4 billion in about five weeks. And people said,
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well, okay, too bad for you guys or too bad for your investors. But who on earth wants to bail
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out a hedge fund? That's not our job, if you're this Fed. And that's what we thought. We said,
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well, too bad for us, but no one's going to bail us out. But we called the Fed to explain what was
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happening just to be good corporate citizens. We say, well, we see a train wreck. We're in it.
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We want to tell you about it. But we weren't asking for a ballot, nor did we expect one. But
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when the Fed realized that we had $1.3 trillion of derivatives, swaps, and options with the 14
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biggest banks, they said, hey, if you guys go out, you're going to take down these banks. And that is
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what would have happened. Interestingly, in 98, the first victim would have been Lehman Brothers.
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They ended up being the first victim in 2008, but they were always kind of the weak sister
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There was no government money used, but they did what's called the convening power.
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We got it done, and in effect, Wall Street took over our balance sheet with their own
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money unwound it slowly over the course of a year and the whole thing went away my point is people
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forget about that it was 21 years ago uh and people are yeah i kind of remember that or if
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you're younger you've maybe never heard of it but we were i was living in russia at the time
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and as i said i did on the bailout but we were hours away from the sequential closure of every
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stock and bond market in the world that's how dangerous it was and that's how close it was
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Now, when you have that kind of danger and it doesn't happen, the plane doesn't crash,
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As an insider, sitting there with the Fed and the Treasury and the head of Goldman Sachs
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and J.P. Morgan and their lawyers, those are the people we were up against, and we did
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get it done, we all understood the seriousness of it.
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It was a deal that no one wanted to do and everyone had to do.
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Then what was the aftermath of that, if you will?
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The lessons I learned and the lessons I think everyone should have learned is, let's get
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rid of derivatives, not all of them, but most of them.
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Let's keep banking and investment banking separated as they had been under our Glass-Steagall
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The government policy response was the exact opposite.
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They all of a sudden allowed commercial banks and investment banks to be in the same business,
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So it turned Citibank into a hedge fund, for example.
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All the conflicts that had existed in the 1920s were back again.
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All of a sudden, you could do swaps on everything, including oil, which led straight to Enron,
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which was a massive collapse in the early 2000s.
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So as the 2008 crisis was approaching, 2005, 2006, I'm watching this.
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I'd lived through it, lived through the horror show of long-term capital management.
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Now, it was in mortgages, so-called junk mortgages, subprime, and similar types of non-credit-worthy mortgages.
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The previous time, it had been in international bond markets.
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The catalyst can come from a lot of places, but what does matter is that the system is so interconnected,
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and you have what's called contagion, where one sector or one player goes down,
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But, you know, the first symptoms were in the spring of 2007
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and it was actually Hong Kong Shanghai Bank in their U.S. operations said,
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you know, our earnings were a little below expectations
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because our mortgage losses were higher than we thought.
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Everyone's like, okay, you missed your earnings target.
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That was, hey, something's wrong in the mortgage market, something below the surface.
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And then in March 2007, Ben Bernanke famously said, oh, this won't be a problem.
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You know, just one more example of central banks not understanding what they regulate.
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And then in the spring, or sorry, the summer of 2007, you had the equivalent of a heart
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attack where Societe Generale in France, their money market funds were closed.
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And then the crisis began really a year before the acute stage was September 2008.
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Lehman Brothers goes bankrupt, AIG gets bailed out, et cetera.
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But it started in the summer of 2007 with early warning in the spring of 2007.
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There were a trillion dollars of subprime mortgages.
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These are mortgages that, you know, no documentation, don't have to prove your income,
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very non-credit worthy, but there was a bubble mentality, a frenzy, and everyone, hey, buy a
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house and borrow money, fix it up, sell it for twice as much, walk away rich, you know, and everybody
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was doing it. And it was a trillion dollars worth. Now, mortgage default rates rarely get about 5%.
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5% is really high in the mortgage market. So people were saying, you know, smart people like
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Ben Stein, the financial analyst, but the central bank and others were like, well, okay, let's get
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crazy. Let's assume a 20% default rate, which has never happened, but just assume that's true.
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On a trillion dollars of subprime mortgages, a 20% default rate would be a $200 billion loss,
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which was only slightly higher than the S&L crisis of the 1980s. You know, just for inflation,
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it would have been a comparable loss. And the attitude was, well, we survived the 80s,
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we'll survive this. Yeah, it's bad. Banks will take losses. Stock prices go down a little bit,
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but we'll survive. What they missed is, yes, there was $1 trillion of subprime mortgages,
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but there were $6 trillion of derivatives. That was invisible. So all of a sudden,
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20% of that was $1.2 trillion. So you had... Sorry.
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Before anyone who doesn't know, derivative is essentially a way of placing a bet on the
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Correct. That's exactly right. It's a side bet with no underlying. So let's say
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I've got the money, I just don't know I'm lending it.
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Well, okay, but say you're in a good mood that day.
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So we have a real loan, Francis gives me a million dollars,
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hey, Constantine, you want to make a little side bet
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They're off balance sheet, meaning give me the balance sheet of the company.
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You have to read the footnotes and then the information behind the footnotes.
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So non-transparent, unregulated, no limit on size.
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It used to be illegal because of gambling laws that have been around on the books for a long time.
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So you had this trillion dollars of subprime mortgages, but about six trillion dollars of
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bets. So the crisis was actually much worse than anyone realized. And then when it started to
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collapse, the contagion spread throughout the financial system. And the scary thing is,
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and what I gleaned a lot from your book, is that we haven't learned the lessons of 2008.
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And my point about 2008, it was because we did not learn the lessons of 1998 and we flew
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But once again, we have not learned the lessons of 2008 and we're going to fly right into
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Sounds a lot like my life, Jim, I'll be honest with you.
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With one distinction, which is that in 1998, Wall Street got together and bailed out a
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In 2008, the central banks got together and bailed out Wall Street.
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And the point is each crisis is bigger than the one before.
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The intervention gets elevated, larger dollar amounts.
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And are we now at the point where there's no one left to bail us out?
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Well, although the taxpayers are a near revolt as it is.
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That's the ultimate source of money or Fed printing.
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And you were saying in your book about how actually
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this sort of black hole of debt is student loans, which blew my mind.
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And one of the questions I'm asked most frequently is,
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okay, Jim, I kind of follow your analysis on how risk works
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and how complexity theory is in capital markets, how that works.
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Now, student loans, they're $1.6 trillion worth of student loans.
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So it's 50% more than the subprime mortgages in 2008.
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The subprime mortgages, correct, but the default rates actually are 20%.
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I'm guessing they're not as much subject to derivatives as the subprime mortgages.
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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.
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Now, it ended up being the case that the government had to get involved in guarantee a lot in 2008,
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but at least initially, those mortgages were not guaranteed by the government.
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So this will go, and kind of this gets to your point, Francis,
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how do capital markets and money markets and Fed policy kind of leach into debt and deficits?
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So when a lender, credit union, or anybody, or university makes a loan to a student,
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and the Treasury guarantees that loan, which they do, it's off budget.
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So then the student defaults and the lender simply turns to the Treasury and says, here's your loan file.
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And the Treasury pays the lender because they've guaranteed the loan.
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But until that point, that loss is not on the books of the Nasdaq's government.
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But when the Treasury writes the check to make good on the guarantee, it does go into the deficit.
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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.
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So all these things are, you know, I spend all my time analyzing these things.
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I can see how they're going to converge into a worse crisis.
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But in the short run, people either ignore them or they just don't know anything about them.
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Although I do say when it comes to your own money, everyone has a PhD.
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But for the most part, this is technical stuff, and people don't get it.
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This is why I like talking to you, because you can break quite complicated things down in a way that makes them accessible.
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I was going to ask, just as a very quick aside, a few of the Democratic presidential candidates.
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Bernie, in particular, they're talking about canceling student debt.
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So that would take the off-balance sheet loss straight into the balance sheet immediately.
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And what do you think the impact of a policy like that would be?
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My view is it's disastrous, and I could give a lot of reasons why.
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But why would Bernie Sanders even suggest that?
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I think the other candidates of Elizabeth Warren and Joe Biden and Kamala Harris,
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one way or another, have suggested that they would do something similar,
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that we need student loan relief, and that ends up going on to the budget and on to the taxpayers.
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But there's a school of economics, and I talk about this in Chapter 5 of my book,
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It's called Modern Monetary Theory, MMT for short.
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I wouldn't expect everyday viewers, everyday people to know anything about it.
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But more to the point, economists don't know anything about it.
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This is a new school of economics, if you want to think of it that way.
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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.
00:25:29.960
I disagree on the theory, but she's a nice person, very bright.
00:25:36.140
But she's the financial advisor to Bernie Sanders.
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.
00:25:52.920
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%.
00:26:41.360
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.
00:26:56.920
But my friend Stephanie says, what's the problem?
00:27:28.920
Ben Bernanke would absolutely not agree with this theory.
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.
00:28:01.440
We may have different policy objectives, but the process is the same.
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.
00:28:15.220
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.
00:28:51.380
So all the elements of the thesis are actually correct.
00:29:05.220
and forgive student loans or give a guaranteed job
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,
00:29:22.160
There comes a time when people wake up and they say,
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.
00:29:44.080
I can't believe that you're going to spend this much money without ceiling, without limit, without causing inflation.
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.
00:30:07.620
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.
00:30:22.960
And Jim, there's a question that I want to ask, and it enrages me every time.
00:30:28.720
Why do we make the same mistakes again and again and again?
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.
00:30:47.380
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.
00:31:00.580
But what you can't do is beat the market because you can't think faster than the news is coming in.
00:31:13.460
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.
00:31:37.120
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.
00:31:52.560
Unemployment is really low, but inflation is really low also.
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.
00:32:11.680
and I sell the same $5 billion swap to another person
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?
00:32:31.780
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.
00:32:47.840
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.
00:33:07.040
No matter what you say, nothing's going to change.
00:33:10.760
But in the middle of the presentation to the senior official who was there,
00:33:19.040
And I turned to him and I said, you know, I don't envy your job
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
1.00
00:34:03.960
I worked behind the scenes on exactly the kind of thing we're describing.
00:34:11.760
You're not going to get the right laws, rules, and regulations,
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.
00:34:37.700
Well, my friend Stephanie Kellett would say yes, and I would say no, because you're going to destroy confidence.
1.00
00:34:46.220
Is that why we didn't see top executives prosecuted in the aftermath of the financial crash?
00:34:55.200
They're all back to their $20, $50, $100 million bonuses.
00:35:03.680
If you create a Silicon Valley company or a great app or you run a hedge fund,
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.
00:35:22.600
Hey, guys, if you give us money on Patreon, do you realize we're not billionaires or really nowhere remotely near being billionaires?
00:35:33.940
You're the one that gets all the comments about your appearance.
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.
00:36:14.520
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.
00:36:44.520
The Fed had to use a slush fund to bail out Mexico because our Congress said no.
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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.
00:37:11.500
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.
00:38:10.840
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.
00:38:30.160
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.
00:38:40.340
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.
00:39:30.740
It could be a very different world on the other side.
00:39:41.440
Don't sell everything and buy gold, but have about 10% gold in your portfolio.
00:39:59.220
It'd be about, what, 1,200 pounds per ounce, so a fraction of an ounce.
00:40:08.320
Well, what's interesting about an ounce of gold,
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,
00:40:27.020
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.
00:40:36.980
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.
00:40:50.080
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,
00:41:06.640
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.
00:41:17.400
It's one of the densest metals in the periodic table, the elements.
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
00:41:37.700
I've been in some vaults where you see these 400 ounce bars, they're sort of trapezoidally
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.
00:42:13.640
was the greatest bubble in the history of the world.
00:42:38.400
And the host said, well, Jim, what's going to happen?
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.
00:42:51.280
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.
00:43:05.060
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?
00:43:18.300
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.
0.77
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.
00:43:53.880
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.
00:44:07.580
You just take it from somebody else in a zero-sum game that adds nothing to society, no value, no increase in wealth.
00:44:23.280
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,
00:44:34.020
Yeah, you come in dressed like Mr. T, it would be brilliant.
00:44:37.260
But anyway, let's move on to one other issue that we wanted to discuss 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.
00:44:55.640
didn't even understand why he was talking about it.
00:44:58.380
Somewhere in the periphery, people might have thought,
00:45:01.560
because a lot of manufacturing jobs have gone to China.
00:45:08.640
who talk about the threat that China poses to the rest of the world economically more than anything.
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.
00:45:35.860
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?
00:45:58.320
Well, they've doubled down on all the crazy cultural stuff that got them in trouble in 2016.
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.
00:46:29.540
Stormy Daniels, impeachment, collusion, Russiagate.
00:46:33.620
These things are distractions, no substance to any of them.
00:46:42.920
He is remaking the federal judiciary, appointing judges at an unprecedented rate, taking control
00:46:49.720
And it's from a list produced by the Federalist Society.
00:46:55.200
And they picked them in the early 40s because it's a lifetime appointment.
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
1.00
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
0.87
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.
1.00
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.
00:49:17.460
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.
1.00
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.
1.00
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.
00:50:37.420
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,
00:50:51.540
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,
00:51:01.520
So Xi is the first head of the Communist Party since Mao Zedong
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?
00:51:45.380
He was the mayor of the head of the Communist Party of Xinjiang.
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.
00:52:30.620
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.
00:52:49.020
Atheists, murderers, deny human rights, drown 20 million girls in buckets because they had the one child policy, but everybody wanted boys.
0.99
00:52:59.140
So if a girl, they kept a bucket of water by the delivery bed,
1.00
00:53:02.180
and if a girl was born, they drowned her on the spot.
00:53:10.220
He's been a very successful hedge fund manager.
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?
00:53:43.740
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.
00:53:57.180
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.
00:54:07.640
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.
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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.
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00:54:39.380
American workers knew it a long time ago because they were the ones losing their jobs.
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,
00:55:05.280
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,
00:55:16.520
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.
00:55:26.120
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.
00:55:43.420
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.
00:55:58.460
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?
00:56:11.400
Yeah, well, Pence might have his eye on the Oval Office in 2024.
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.
00:56:55.000
And this, in my view, will be on a par with the Marshall Plan,
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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,
00:57:14.040
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,
00:57:26.260
Just boxed them in, starved them out, and they fell.
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.
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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.
00:58:12.160
The U.S. is the established power, and China's the rising power,
1.00
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.
00:58:27.600
So that would suggest that the U.S. will destroy China.
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,
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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.
00:59:16.420
You move your plant and you keep it there for 10, 15 years.
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.
01:00:15.660
Timing, hard to say, and you're right about that.
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.
01:00:39.180
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.
01:00:53.240
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.
01:01:14.480
I love the way they make up names that no one understands
01:01:19.740
they actually tell you what they're doing but no one understands it
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
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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