i mean actually a good example of that
boomeranging back home
boomers did not boomerang okay
and i remember uh the the great
recession of of uh 8283 you know when
you went into the reagan administration
volcker was tightening rates and so on
it was a really pretty bad recession
boomers would do anything rather than
return they would like sleep under a
bridge or something right but they would
not go back home right
that boomerang stuff started with gen
xers in the 90s
and with millennials they don’t return
home they just never leave
they just keep their bedroom there and
you know they’re always
and you understand what i mean just a
very different kind of relationship
uh where i think there’s a little bit of
inversion is when it came to actually
major structural substantive reforms and
how the system worked and how it
actually you know allocated income and
rewards and how we actually built for
pumas had no problem with the gis were
doing i mean they obviously ran things
really well in fact the whole problem
with the gi generation is they ran
things too well they invested too much
right it’s too much repression you know
we need to enjoy yourself more for today
the millennial problem with boomers is
just the opposite right
boomers can’t run anything
they can’t exercise authority they can’t
invest in anything they can’t do
anything for the long term right they
don’t know how to run the system at all
and this is why i say that the
fundamental problem in an awakening
is that the public senses that
institutions are supplying too much
but the fundamental problem of a crisis
the fourth journey
is that the public be particularly the
younger public begins to sense that
institutions aren’t supplying enough
order and that is always the context for
a crisis right
and by the way i mean just just
mentioning you know you said where might
every fourth turning in american history
has featured a total war
and all total wars in american history
have come in a fourth turn right you
don’t want to think about that you know
this goes all the way back to the
circular you know going back in the
early modern era you know in the british
but this is a pattern now sometimes it’s
it’s so it is
we don’t say that war is necessary
for a fourth turning but that sense of
total public urgency and the need to
band together and create a new sense of
is always required at some point before
the fourth turning is over okay
so this is something that’s just simply
i just observe historically now
sometimes this struggle
is we think of it mostly in terms of you
know america taking on enemies abroad
right and i think that’s the idea that
good war and we we all think of world
war ii you know we took on the axis
powers and we conquered half the world
right uh you know fascism and yeah
exactly yeah you know germany and italy
uh but we forget that that era started
out with the new deal which was
not exactly a civil war but it was a
highly contentious ideological conflict
in america right which deeply divided
americans about the new role of
government and you know it had its court
packing threats and you know everything
else that happened uh in the first new
deal and the second new deal and and fdr
finally getting this incredible victory
in 1936 right finally just becoming
absolutely dominant politically
and pushing through these new
this whole new role for government and
the economy right
um but ultimately we all remember how it
all came together in world war ii which
is more kind of you know america versus
the world but it’s useful to go back in
earlier conflicts and many of these
actually had a very major
a civil dimension of conflict obviously
the civil war was literally
a civil war right no need to explain
there the american revolution however is
interesting for people to know that the
american revolution at the time was
referred to by most more americans as a
civil conflict as a civil war rather
than as a revolution it had a very
strong element of patriot-on-tory
conflict within the united states
particularly within the southern states
the backwoods regulators actually
supported the british because they hated
these big plantation owners near the
coast who were always lording it over
them right in other words it exploited
and the british at one point did what
abraham lincoln did he promised freedom
to the blacks
and one of the things the british
couldn’t understand as well these
planters were you know constantly
talking about liberty
you know and and yet they had all these
things so the british said well we’re
gonna use that as a weapon we’re gonna
we’re gonna promise freedom to anyone
who wants to help that’s exactly what
abraham lincoln did right with his
emancipation proclamation about 80 90
in dittos you go back in earlier crisis
in other words very often there’s a very
strong internal component
to the crisis even while it also has an
ex i mean obviously there’s an external
component the american revolution we had
you know fight the british and uh you
know defeat them finally at yorktown and
and you know they all evacuated by uh
1783 they were gone
but then again we were in chaos after
that right and then we had to actually
forge a new constitution and in some
ways that was the real climax of the era
as being able to actually then agree on
a powerful central government
and to some extent i would say that
there was the miracle of of 1788 which
is even more amazing than the miracle of
you know 1781 which is the the defeating
of uh you know clinton and cornwallis so
so anyway that’s i i think that but it
probably illustrates your point that
there is an important
internal dimension i think it’s no
be no surprise today
looking in america that people are going
to say yeah i get the internal component
right now right red zone versus blue
zone i mean my god the two sides don’t
even talk to each other you know i live
in dc i mean i’ve been sort of a dc guy
uh they don’t even talk to each other
now i mean there’s literally practically
no communication there’s nothing to say
at this point adam
right so when you have mutually
of what the country’s future is
how does democracy work right are you
going to completely forfeit your future
just because the other guy gets i don’t
know half a percent more votes
no it doesn’t work that way does it and
here’s the irony and this has been
pointed out by some you know brilliant
uh carl becker pointed that out in 1940
just as we were going into world war two
he said one of the problems with
this democracy only works
when the problems you’re trying to solve
are pretty trivial
i mean think about it if it’s a
fundamental problem how does democracy
right and and i think
kovid may have even sort of reinforced
that argument where you looked at some
of the more totalitarian governments and
you can say whether it’s right or wrong
uh but they certainly took measures to
clamp down uh
and and really stop the virus spreading
its tracks in a way that a democracy
just couldn’t i agree and there’s a
there’s a great uh a wonderful
compendium of worldwide polls done run
by the cambridge institute for for a
uh by a guy named roberto fowa and he
have written a lot on this issue of
growing inequality but particularly
in the turning away of younger
generations in america
not just in america but around the world
from the whole idea of liberal democracy
it’s it’s becoming less popular less
interesting and important
amazingly enough there are a lot more
younger people today
who are willing to say yeah let a
dictator you know handle things for a
this liberal democracy that all these
boomers and silent talk about
has done nothing for us
it just feathers the bed of all these
older people and all these in you know
uh dysfunctional institutions which
aren’t doing anything for our future
and that sense of that sense of being
uh and being much more willing and open
to a more autocratic it doesn’t really
matter too much whether it’s on the left
or the right you understand what i mean
or it could be some crossbreed between
well in in you know in some ways um
can you blame the younger generation um
in the sense that it’s seeing all the
spoils go to the older generations as
we’ve talked about
um and you know you get
somebody that’s promising them for
education free health care whatever you
know the the platforms of those more
progressive uh you know political
parties sound pretty appealing right hey
look if i’m if i’m going to struggle i
may as well you know struggle and get
something so you said you know part of
the fourth turning is
is basically seeing the rise of a
recentralization of power
and i think that that’s probably one of
the drivers that will will drive you
know the um
resumption of central state power and
here in the states i mean we’re we’re
seeing this state get involved in ways
that it hasn’t been a long time
right no you’re right well i mean think
about it for for uh most of the year in
uh the state took over everything i mean
we all became words of the state right
businesses households everyone i mean
remotely close to that has happened in
now that example won’t go away quickly
you know what i mean people will
remember that yeah that you can do that
every window is dependent on the state
even major corporations you know to
renew their turnover their loans i mean
everything right the combination of
huge fiscal largesse plus the fed policy
right yeah the stimulus has been i mean
unprecedented yeah and and it and it by
the way it rewrites the rules of the
um and you know i’ve pointed that out i
mean if you look at the six quarters of
and compare them to the quarter before
the pandemic you know the last quarter
we’ve had something like a
seven percent growth in real disposable
at the same time we’ve had a two percent
decline or nearly three percent decline
actually in real gdp
that is unprecedented right a 10
percentage point gap between what we’re
earning to be able to spend
and what our economy is producing i’ve
gone back and look at all the earlier
recessions that gap is never more than
like one and a half percent
so where did all that free money come
it came from
borrowing it came from borrowing and it
first of all borrowing by the federal
which we’ve seen it ramped up we went
into the recession by the way already
under trump at a
federal deficit of nearly five percent
of gdp that was already a record for a
non-recession year before the panda we
were 4.8 percent of gdp
um and you know everyone was fine with
uh jerome powell is fine with that you
know donald trump is obviously fine with
the next two years are at 12.5 percent
of gdp right so that was an extra five
and a half percent of gdp kicker in two
years well that translates into about 10
of dpi right disposable personal income
so that’s how you get there right
this changes the rules of the regime and
the reason why so many people have been
faked out in the market
and i mean if you had told if you had
told people back in the worst days of
back in 2020
that we were going to
you know the s p 500 was gonna double
in three well i think if you told them
first the global economy is you know
gonna shrink in in the next one yeah but
eight months what do you think’s gonna
happen the s p nobody would guess it
well exactly that it was gonna double
and oh by the way and they would have
already disbelieved you but if you told
them that in addition to doubling
employment level in america would still
be would still be lingering about five
percent below where it was at the
beginning and that we’d be having close
to 2 000 deaths per day
after 18 months and yet we’d see this
and picked up they would have thrown you
out of the room right
and and meanwhile we’ve had the the 40th
anniversary of the of the you know bond
uh bull market right we we we saw
september 30 1980 we had bonds 10-year
yield at 15.8 something i think 15.84
what’s going on with that at a time now
when the economy is recovering the
the s p 500 doubled
i mean how do you see bonds so low well
turns out now they’re they’re not quite
maybe they’re shifting in a slightly
different direction now
but here’s the point why do the old
rules don’t work why do the all those
all those valuation rules you know that
we talked about like like you know
you know earnings to sales ratios or or
uh right they just haven’t mattered for
the past half decade yeah
so they’ve all you know they’re they’re
off the charts they’ve all been
sell but if you had sold recently you
would have been killed right
so i this is a really important question
why are all these rules not working and
i would submit that we’re changing
we’re going from an old regime which we
we call you know sort of the neoliberal
regime the fed just you know buys and
sells the short end influence interest
rates over the business cycle and they
and the federal government keeps the
budget reasonably balanced because they
can’t expect the fed to bail it out
right and then you know a little bit
maybe uh in a crisis the fed will
offer credit at penalty rates kind of
the old budget rule
in the new regime which you could call
the mmt regime right
well what what what what is it now the
fed can buy any asset
at any maturity it can flatten the
entire year curve down it can also go
after high risk credit it can do
anything it wants and the federal
government can basically cut taxes or
expand benefits any way it wants to and
the fed will just monetize right
monetize the difference right yeah so
sorry interrupt but this is such an
important um question that so many of
the viewers have been asking themselves
of late which is um
are we going to see in this fourth
turning kind of will reality re-express
itself and it certainly may amongst
things like you know physical resource
limitations and stuff like that because
you can’t necessarily print those up
but well sort of economically here will
will reality re-express itself and all
those old fundamentals of investing and
whatnot begin to matter again
or have we crossed a rubicon where the
fed is just going to be intervening in
any and all cases going forward and it’s
not we’re not going to return to that
because they require very different
investing strategies we hope you’ve been
enjoying this discussion with researcher
the interview continues in part two
where neil details the economic and
market dynamics that he foresees will
play out during this current fourth
turning to watch part two just click on
the link provided in the description of
this video below
or go to youtube.com
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our interview with neil howe
AN INTERVIEW WITH JAMES RICKARDS
Octavian Report: Could you take us through what you see happening to the monetary system?
James Rickards: The dollar, the yen, the euro — all are forms of money. I would say gold is a form of money. Bitcoin is a form of money. In times past, feathers and clam shells have been money. One of the criticisms of many modern forms of money, of central bank money and Bitcoin in particular, is that they are not backed by anything.
I make the point — and I’m not the first one to say this, I actually learned this from Paul Volcker — that it is backed by one thing, which is confidence. Meaning if we have confidence that something is money, then it’s money. If you and I think something’s money, and you’re willing to take it from me in exchange for goods and services, and furthermore you believe that you can give it to someone else in exchange for goods and services and make investments, then it’s money. It functions as money. But the problem with confidence is that it’s fine as long as it lasts, but it’s very fragile and it’s very easily lost. Once it’s lost, it’s impossible to get back, or at least extremely difficult to get back.
When I talk about the collapse of the international monetary system, people think I must be an apocalyptic doom-and-gloomer. End of the world, we’re all going to be living in caves, eating canned goods. I say no, not at all. I don’t think it’s the end of the world, I just think it’s the end of a system that has in fact collapsed three times in the past 100 years. There’s nothing unusual about breakdowns in the international monetary system. When it happens, the major trading financial powers get together, sit around a table, and rewrite what they call the rules of the game. “Rules of the game” is actually a phrase, a term of art in international finance, for the operating system (just to use modern jargon) of the international monetary system.
All I’m doing is looking at the system dynamics. It’s very easy to see the collapse coming based on that, and then ask the question: when the collapse comes, what will the new system look like? That is, what will it look like after the next Bretton Woods, or the next Smithsonian agreement, or for that matter Genoa in 1922? The next time the powers sit around the table, what deal will they come up with? Then I work backwards from that to today, and ask: what can I or should I do with my portfolio now to prepare for this new deal?
That’s the scenario. Now, I have the view that basically all the central-bank models, all the risk-management models used on Wall Street and in capital markets around the world are obsolete. There are much better tools available today. The three that I use most frequently — not the only three — are complexity theory, behavioral psychology, and causal inference. Causal inference also goes by the name inverse probability, and it’s also known as Bayes’ theorem. Three branches of science: one’s physics, one’s applied mathematics, and one’s social-psychological. That’s my tool kit, along with some other things.
Using those tools, it’s very easy to see the collapse coming for two reasons. One, in complex systems — and I would make the case that capital markets are complex systems nonpareil — the worst thing that you can have happen is an exponential function of scale. Meaning that as you scale up the system, you don’t increase the risk in a linear way, you increase it in an exponential way. To take a simple example, let’s say that J.P. Morgan tripled the gross notional value of its derivatives. You go to Jamie Dimon and say, “Okay, Mr. Dimon, you tripled your balance sheet. How much did the risk go up?” He would say: “Yeah, we tripled the balance sheet, but it’s long, short, long, short, long, short. The longs offset the shorts. You net it down, the actual risk is quite small relative to the gross notional value. That’s not the way to think about it. We tripled the balance sheet, but the risk went up a little bit.”
If you ask the everyday citizen, they would probably use intuition and say, “Well, if you tripled the balance sheet, sounds like you tripled the risk.” The correct answer is that Jamie Dimon’s wrong, and the everyday citizen using intuition is wrong. The correct answer is if you triple the scale of the system, you increase the risk by a factor of 10 or 100, some X-factor based on the slope of the curve, which is a power curve. It’s basically the degree, the distribution of severity and frequency of risk.
You go back to 2008: what did we hear about? Too big to fail, too big to fail, too big to fail. Today, the five largest banks in the United States are bigger than they were in 2008. They have a larger percentage of all the banking assets, and their derivative books are much bigger. Everything that was too big to fail in 2008 is much bigger today. Given the exponential function I just described, the risk is exponentially greater than 2008. Whatever you saw in 2008, get ready. A much bigger collapse is coming. Probably sooner than later.
I was general counsel of Long-Term Capital Management. I negotiated their bailout, so I had a front row seat for that. I was on the phone with the heads of the major banks. Jon Corzine at Goldman Sachs, Sandy Warner at J.P. Morgan, David Komansky at Merrill Lynch, Herb Allison and others, and Bill McDonough and Gary Gensler from the Treasury in Washington. I basically negotiated that bailout and saw exactly how close the global system came to complete collapse. We were hours away from shutting every stock and bond exchange in the world. Literally hours away, and the bailout got done. Four billion dollars changed hands. The balance sheet was supported. A press release was issued and the crisis passed. But it was extremely close, and not a foregone conclusion at all that we could get that done.
Having witnessed that, and knowing the team at LTCM — we had sixteen Ph.D.s from MIT, Harvard, Chicago, Stanford, and Yale, and two Nobel Prize winners — I said, well, if the smartest people in the world in this field with 160-plus IQ’s can get it that badly wrong, they must be missing something. There must be something wrong with the theory, because they’re not stupid. Nobody likes to lose their own money, so there must be something wrong with the theory.
I spent the next 10 years working on this, about five years figuring out what was wrong, where the flaws were, and another five years figuring out what actually works to remedy them. I refined my models enough that in 2005 and 2006 I was warning people that a collapse was coming again. That it would be worse.
Now, I didn’t say, Bear Stearns’ hedge fund is going to fail at the end of July 2007. I didn’t say that Lehman Brothers was going to collapse in mid-September 2008. It wasn’t necessary. It was sufficient to say that the collapse was coming because none of the lessons of 1998 had been learned. I’m in the same state today: the lessons of 2008 have not been learned. I’m watching the dynamics, I’m watching it play out, and you can see the next collapse coming. Here’s the tempo. In 1998, Wall Street bailed out a hedge fund to save the world. In 2008, central banks bailed out Wall Street to save the world. Move forward 10 years — let’s say 2018, to pick a number — and who’s going to bail out the central banks? Each bailout gets bigger than the one before. Each collapse is bigger than the one before, which is exactly what complexity theory would forecast based on the scaling metrics and the dynamics I described.
So who bails out the central banks? There’s only one clean balance sheet left in the world. There’s only one source of liquidity. After all, the Fed took their balance sheet from $800 billion approximately in 2008 to a little over $4 trillion dollars today. The problem is they haven’t normalized. Now that the crisis is long over, they haven’t gone back to the $800-billion-dollar level, which would be a more normal balance sheet. They stayed at $4 trillion; they’re stuck there. They’re not doing more QE, but they are rolling over what they have and they can’t reduce the size of the balance sheet.
What are they going to do in the next crisis? Go to $8 trillion? To $12 trillion? What is the outer boundary of how much money they can actually print? Legally, there is no boundary. They could actually print $12 trillion if they wanted to. At some point, however, you cross this intangible, invisible confidence boundary that I described earlier — and that goes back to the original problem of confidence in any form of money. And all the other central banks are in the same situation. The People’s Bank of China, the Bank of England, the Bank of Japan, the European Central Bank. It’s not unique to the U.S. If the central banks don’t have the wherewithal to liquefy the world in the next panic, and if the next panic is coming and you can see it a mile away, where will the liquidity come from? There’s only one source of liquidity left in the world, which is the IMF. They can print world money, which are the special drawing rights or SDRs.
When you get to the endgame, they’re going to have to print trillions of SDRs (each SDR is worth about $1.50) to re-liquefy the world in a global financial panic. Will that work? In theory it could work, but I expect if it works, it will only be because nobody understands it, like something’s happening and, as Bob Dylan sang in “Ballad of a Thin Man,” “Something’s happening here and you don’t know what it is.” At best, it will be highly inflationary.
Now, maybe it won’t work. Maybe people will say, “I’ve lost confidence in Federal Reserve money and European Central Bank money and Bank of Japan money. Why should I have any more confidence in IMF money? It’s just another form of currency, and I’ve lost confidence in all of them and I’m going to go get some gold.” If that actually happens, the world may have to go to a gold standard. Now, I guarantee there’s not a central bank in the world that wants a gold standard. They may have to go to one, not because they want to, but because they have no choice, because it’s the only way to restore confidence. That raises an interesting question: if you go to a gold standard, what’s the price of gold? I talk about this in The New Case for Gold, about the blunder of 1925 with Churchill taking the U.K. back to a gold standard at a price that Keynes warned him was deflationary. Keynes didn’t favor a gold standard at the time. He did in 1944 and he did in 1914. He didn’t in 1925, but he did tell Churchill if you’re going to do this, you need a much higher price to avoid deflation. Churchill ignored him and threw the U.K. into a depression.
So question is: what is the implied non-deflationary price of gold today? I’ll use M1 of China, U.S., and the ECB, just as a frame. The answer’s $10,000 now if you have 40 percent backing — and over $50,000 if you have 100 percent backing of M2, which is a broader money supply. I don’t think you have to use M2. I don’t think you need 100 percent. It’s a judgement that’s debatable. But even on the modest assumptions of M1 using 40 percent backing, gold would have to be $10,000 an ounce to support the money supply. You may or may not have a gold standard, but if you do gold will be $10,000 an ounce.
Now, if you don’t, if the SDR thing actually works, gold will get to $10,000 an ounce the other way, which is inflation. Gold is going to shoot much higher. In the SDR scenario it will shoot much higher because of inflation, and in the gold-standard scenario it will shoot much higher because it has to, to avoid deflation. It’s not really the price of gold going up, it’s the devaluation of the paper currency. It’s the same thing. The dollar price of gold is just the inverse of the value of the dollar.
OR: Why do you say gold has to be part of a new system? What do you say to the people who think it’s an anachronism?
Rickards: The flaw in that — and I think this is one of the biggest problems today, and certainly an issue with everyone from Milton Friedman to Janet Yellen — is that they take confidence for granted. If you assume that confidence in paper money is infinitely elastic, then there’s no reason why the money supply cannot be infinitely elastic.
There are a lot of gold bashers out there who will be very quick to tell you that gold’s a barbarous relic, blah blah blah. But there are some more thoughtful people out there, among whom I would include Stephanie Kelton, Warren Mosler, Richard Duncan, and others. They’re all different, but they’re smart people. I’ve met a lot of them. Paul McCulley, formerly of PIMCO and a close associate of Bill Gross. They call themselves modern monetary theorists.
I think Adair Turner is coming out this way in his new book, Between Debt and the Devil, and even Larry Summers in some ways. What they’re saying is that there’s nothing you cannot print yourself out of. You get too much deflation? Print more money. Deflation won’t go away? Print more. People won’t spend? The government can spend. Maybe you cannot force people to spend it, but the government loves to spend money, they know how to do that really well. If it increases the deficit, so what? Just issue more debt to cover the deficit, and if people don’t want your debt, the central bank can buy it. Don’t worry about paying it back because the central bank can convert the treasury bonds into perpetual bonds. The whole thing just goes away. You don’t have to worry about the national debt — the Fed can just buy the whole $19 trillion of it, sock it away on their balance sheet, make it a perpetual note, and go play golf. What’s the problem?
This is sometimes called “helicopter money.” It’s called “people’s QE” by Jeremy Corbyn, it’s called “fiscal dominance” by Rick Mishkin. It has different names, but it always says the same thing: there’s no outer boundary on how much money you can print, so what’s the problem?
My thesis — and here I’ll flip over to the behavioral-psychology side a little bit — is that it’s not a problem until it is. In other words, confidence can be sustained until it can’t. You can lose this very quickly, so I don’t believe that confidence is infinitely elastic. There’s nothing in human nature or history that says that. If you’re relying on confidence to say that money can be infinitely elastic, then you’re wrong. The concern is that the elites will go down this road — having been wrong about the wealth effect, about QE1, QE2, and QE3, about Operation Twist — and then they’ll somehow wake up and see they’re wrong again. But they’ll find out the hard way because confidence in the entire system will collapse. At which point, your only two remedies are SDRs and gold.
OR: What’s your take on central banks and gold?
Rickards: With regard to central banks and gold, I always say watch what they do, not what they say. If the U.S. has a budget problem, and we’re sitting on about $380 billion in gold, why don’t you just sell the gold and get some money? That’s what Canada did. That’s what the U.K. did. Why are we hanging onto it?
The question answers itself. Obviously, it has some value. Obviously, it has some role in the monetary system. In my book, I write about a discovery I made — one of those discoveries that’s hiding in plain sight. I had been working on a thesis that the Fed is, at least on occasion, insolvent. My basis for that was to look at the Fed’s balance sheet. They’re leveraged today about 113 to one. That’s unheard of. I’ve been in the hedge-fund business, I’ve been in the investment-banking business, I’ve been in the banking business for decades. Banks leverage maybe 12 to one, broker-dealers and investment banks leverage maybe 15 to one, a hedge fund will lever two or three to one (although that’s getting a little risky). Even Long-Term Capital Management was never leveraged more than 20 to one, and we were very aggressive about leverage. 113 to one is way, way off the charts.
Now, just to be clear, the Fed does not mark its value sheet to market. My thought experiment is: what if they did? There’s a lot of data out there about the composition of the bond holdings of the Fed, particularly those held at the New York Fed. It’s not difficult to get that information, to do some bond math, and mark it to market. Doing that, I discovered that they were in fact insolvent at various times along the way. I had this conversation with several Fed officials. One member of the board of governors, another individual who was not a member of the board, but a very, very close advisor to Bernanke and Yellen, a true insider, a Ph.D. economist, a friend of mine. I was able to have this conversation with him. Interestingly, the member of the board of governors more or less conceded my point, but her rejoinder was, “Well, maybe we’re insolvent, but it doesn’t matter.” In other words, central banks don’t need capital. That’s a point of view.
The other conversation was with the insider: he was adamant that they’ve never been insolvent, ever. Regardless of bond-market moves. He wouldn’t tell me why, so I got to thinking about it. I went back to the balance sheet to see what I was missing. And lo and behold, there was this gold item valued at $42 an ounce. I said, “Well I should mark that to market. If I’m going to mark the bonds to market, I need to mark the gold to market.”
Now, as I was doing this I noticed a couple things. The Fed’s gold holdings are approximately 8,000 tons exactly. Close to exactly the amount held by the U.S. Treasury. In intelligence work, the first rule is there are no coincidences, and this non-coincidence explains why the Treasury stopped selling gold in 1980. Bven as late as the late 70’s, the Treasury was still dumping gold to suppress the price. That’s not speculation; there’s declassified correspondence among President Ford, Henry Kissinger, Arthur Burns, and the Chancellor of Germany that lays this out. The Treasury was actually dumping thousands of tons of gold in the late 1970s, but then in 1980 it just stopped on a dime. The U.S. has sold almost no gold since. Instead, we got everyone else to dump their gold. We got the U.K. to dump six hundred tons in the beginning of 1999. We got Switzerland to dump over a thousand tons in the early 2000s. We got the IMF to dump four hundred tons in 2010. The U.S. has been prevailing upon all these other people to sell their gold, but we won’t sell any ourselves. Why? They can’t. The Treasury has to hold the gold they’ve got in order to honor, on legal and constitutional grounds, the certificate held by the Fed. This was received in exchange for the gold (with an explicit guarantee that the gold was there to backstop the Fed’s balance sheet).
So I was wrong the first time. The Fed has never been insolvent; my insider friend was correct. The reason I was wrong was not because of the bond portfolio, which would have made them insolvent, but because of the gold, which adds about $350 billion to the balance sheet. When you add that to capital on a mark-to-market basis, the leverage ratio drops from 113 to one to about 13 to one, which is pretty healthy for a normal bank. On top of everything else we’re discussing, you find that the Federal Reserve has a hidden asset, which is the value of gold, and that it’s well capitalized — if you count the gold. What does it mean when central bankers and public officials disparage gold, tell you it’s an anachronism, tell you it’s a tradition, tell you it’s a barbarous relic, tell you that you’re a fool to own it — and yet they themselves are propped up and made solvent by gold?
OR: More and more physical gold is leaving the tradable system as China and Russia stockpile it, yet huge derivatives are still being written on it. Can you talk about that disconnect?
Rickards: Well, there is a world of paper gold and there’s a world of physical gold. Now, paper gold to me is not paper gold. It’s paper, but it references the price of gold. There’s not going to be any actual large difference between the paper price and the physical price quoted whether it’s in London or Beijing, because of the arbitrages.
I just recently returned from Switzerland where I met with the head of the country’s biggest gold refinery, who told me that he’s seeing severe shortages in supply. This guy, he knows who all the big sellers are, he knows who all the big buyers are because he’s the biggest gold refiner and he takes it in and ships it out. He knows who all the players are and this is, again, in the physical world. He said that with regard to his selling side, he has more demand than he can handle. He’s sending the Chinese 10 tons a week; they want 20 tons. He won’t provide it because he doesn’t have that much gold and he has other customers to take care of.
The physical shortages are already showing up and they’re getting worse. I’ve heard similar things from wholesale dealers — people who deal directly with London Bullion Market Association members and Comex-approved warehouses. These are the large holders of gold in the world, and they are saying that it is taking longer and longer to fill deliveries. The supply situation is stretched and probably about to break.
Meanwhile, the paper gold market continues to expand with 100-to-one leverage. Warehouses continue to get drawn down, contracts continue to be written. You have a very, very large inverted pyramid, with a broad base of paper gold on top and a tiny sliver of physical gold supporting the whole thing. It’s becoming wobbly, and it’s about to tip over.
Any break in that market — coming back to the issue of confidence — would lead directly to what I would call the mother of all short squeezes and a buying panic. What would I mean by a break? Well, most likely a failure to deliver. Suppose some dealer, some large bank, some exchange, some intermediary somewhere has sold a lot of paper gold and has been called upon by the buyers to deliver. They say, “I don’t want to roll over my contract, I don’t want cash settlement, I want the gold, please. Give me the gold.”
They’re not going to be able to get it. That failure will become public, because it always does, and will create a crisis of confidence. Everyone will run down to their dealers, their exchanges, and their brokers all at once and say, “Give me my gold!” They’ll then discover that there’s only about one percent of what’s needed to fulfill that demand, and there’s nowhere near enough gold in the world at anything close to today’s prices (even if you could find it, which you probably will not be able to) to satisfy those contracts.
What would happen next? The answer is that, since you cannot deliver the gold, you’re going to have to terminate the contract, and it will come as a surprise to a lot of paper gold buyers that such terminations are totally legal. If you actually read the contracts gold buyers sign you’ll find what are called force majeure clauses or material adverse change clauses, meaning gold exchanges have the power to suspend delivery. There’s also what’s called trading for liquidation only, which means you can roll over your contract or close it out, but you cannot take delivery. They have emergency powers to do, really, whatever they want to maintain orderly markets. So what they’ll do is they’ll terminate all these contracts using these contractual and governance provisions. They won’t steal your money, they’ll send you a cash settlement for yesterday’s price. But meanwhile the price of gold today will be going up $200, $300, $400, $500 an ounce. Day after day you’ll be sitting there, watching the exact hyperbolic price movements that were the reason you bought the gold in the first place — and you will not be participating in them.
You will be closed out at exactly the time when you most want the contract. That always happens. That’s the conditional correlation effect. The time you most want it is the time you won’t have it, because it doesn’t work for the other guy. They close you out, send you a check for yesterday’s price, and you’ll miss the move. And by the way, even if you want to jump back in, you won’t be able to buy any. Dealers will be sold out, mints will be backlogged, refiners will be backlogged. They won’t even take your calls. That’s what my friend in Switzerland told me. He said if I didn’t know you and you weren’t already a customer, I wouldn’t take your call. I’m not taking any new business because I cannot supply it.
OR: Can you talk about the so-called war on cash and the potential confiscation of gold?
Rickards: The war on cash is over. The government won. We hear about the cashless society and I think Sweden may be the first to get there. Others are considering it. Larry Summers writes an op-ed on abolishing the 100-dollar bill, and there’s a movement in Europe to get rid of the 500-euro note, so there are a lot of significant legal and political trends against cash. It’s really irrelevant, because we don’t use cash anywhere. You might have a few bucks in your wallet, but people get their paychecks from direct deposit, they get their retirement checks from direct deposit, they pay their bills online, they use their credit cards, they use their debit cards, and there hasn’t been a paper Treasury security issue, I think, since the late 1970’s. The dollar is already a digital currency, and so are all the other major currencies.
To the extent we have any paper money at all, it’s a token. To the point where you buy a two-dollar candy bar, you don’t even reach in your pocket and get out a five, you just swipe your debit card. We already live in a world of digital currencies, with respect to the dollar, the major currencies.
People say, “Yeah, but it’s still legal. I can go down to the bank and get $10,000 or $20,000 and stick it in a safe to avoid negative interest rates or have it for an emergency.” They’re wrong. It’s not that easy. If you go actually do it, actually go down to the bank and ask them for $15,000 or $20,000, you will be treated like a drug dealer or a tax evader. Some banks will tell you to come back in a couple days, that they have to order the cash. There’ll be reams of paperwork to fill out. They’ll file a report with the Treasury.
People are kidding themselves about the ease with which they can get cash. They are locked into a digital system. The war on cash is over and the government won. That’s just the prelude to negative interest rates. It’s like slaughtering pigs: you don’t chase the pigs around a field. You get them into a pen and then you slaughter them. What’s happening with savers is that everyone’s being rounded up into one of four or five digital pens, i.e. Citi and J.P. Morgan and Wells Fargo, and they’re going to be led to the slaughterhouse of negative interest rates.
OR: Do you think we are seeing a currency war going on internationally at the moment?
Rickards: About currency wars, let me say I’m always amused when I see a journalist or someone write a story saying “Oh gee, there’s a currency war. Look at this. China’s weakening against the yen.” I make the point that the most recent currency war started in 2010. I talk about it in my book on the subject which came out in 2011. It’s the same currency war. Wars consist of many battles, wars are not continuous fighting all the time. There are big battles and little battles; there are quiet periods and then a new battle erupts. You have an occasional D-Day or Battle of the Bulge, but some episodes are more intense than others.
Currency wars are the same. There are quiet periods, but it’s the same war. What I call Currency War One lasted from 1921 to 1936. What I call Currency War Two lasted from 1967 to 1987. I make the point that the world is not always in a currency war, but when we are they can go on for a very long time because they have no logical conclusion. It’s just back and forth, with a race to the bottom via competitive devaluations. The only conclusion to a currency war is either systemic reform or systemic collapse. Either the system breaks down completely or people get together, as they did at the Plaza Hotel in 1985, to give the system some coherence.
I don’t see the leadership, I don’t see the giants today. I don’t see people like James Baker, Bob Rubin, George Schultz, or John Maynard Keynes. I don’t see people like that on the landscape. I see a lot of people not of that stature in positions of power. I don’t see any awareness that this collapse is coming. So given the two possible outcomes — systemic reform or systemic collapse — I think systemic collapse is the more likely. But we are in a currency war and have been since 2010. We will be perhaps until 2025. Unless the system collapses earlier, which is what I expect.
James Rickards is an investor and the bestselling author of The New Case for Gold, Currency Wars, and The Death of Money.
If We Had a Real Leader
Imagining Covid under a normal president.
This week I had a conversation that left a mark. It was with Mary Louise Kelly and E.J. Dionne on NPR’s “All Things Considered,” and it was about how past presidents had handled moments of national mourning — Lincoln after Gettysburg, Reagan after the Challenger explosion and Obama after the Sandy Hook school shootings.
The conversation left me wondering what America’s experience of the pandemic would be like if we had a real leader in the White House.
If we had a real leader, he would have realized that tragedies like 100,000 Covid-19 deaths touch something deeper than politics: They touch our shared vulnerability and our profound and natural sympathy for one another.
In such moments, a real leader steps outside of his political role and reveals himself uncloaked and humbled, as someone who can draw on his own pains and simply be present with others as one sufferer among a common sea of sufferers.
If we had a real leader, she would speak of the dead not as a faceless mass but as individual persons, each seen in unique dignity. Such a leader would draw on the common sources of our civilization, the stores of wisdom that bring collective strength in hard times.
Lincoln went back to the old biblical cadences to comfort a nation. After the church shooting in Charleston, Barack Obama went to “Amazing Grace,” the old abolitionist anthem that has wafted down through the long history of African-American suffering and redemption.
In his impromptu remarks right after the assassination of Martin Luther King, Robert Kennedy recalled the slaying of his own brother and quoted Aeschylus: “In our sleep, pain which cannot forget falls drop by drop upon the heart until, in our own despair, against our will, comes wisdom through the awful grace of God.”
If we had a real leader, he would be bracingly honest about how bad things are, like Churchill after the fall of Europe. He would have stored in his upbringing the understanding that hard times are the making of character, a revelation of character and a test of character. He would offer up the reality that to be an American is both a gift and a task. Every generation faces its own apocalypse, and, of course, we will live up to our moment just as our ancestors did theirs.
If we had a real leader, she would remind us of our common covenants and our common purposes. America is a diverse country joined more by a common future than by common pasts. In times of hardships real leaders re-articulate the purpose of America, why we endure these hardships and what good we will make out of them.
After the Challenger explosion, Reagan reminded us that we are a nation of explorers and that the explorations at the frontiers of science would go on, thanks in part to those who “slipped the surly bonds of earth to touch the face of God.”
At Gettysburg, Lincoln crisply described why the fallen had sacrificed their lives — to show that a nation “dedicated to the proposition that all men are created equal” can long endure and also to bring about “a new birth of freedom” for all the world.
Of course, right now we don’t have a real leader. We have Donald Trump, a man who can’t fathom empathy or express empathy, who can’t laugh or cry, love or be loved — a damaged narcissist who is unable to see the true existence of other human beings except insofar as they are good or bad for himself.
But it’s too easy to offload all blame on Trump. Trump’s problem is not only that he’s emotionally damaged; it is that he is unlettered. He has no literary, spiritual or historical resources to draw upon in a crisis.
All the leaders I have quoted above were educated under a curriculum that put character formation at the absolute center of education. They were trained by people who assumed that life would throw up hard and unexpected tests, and it was the job of a school, as one headmaster put it, to produce young people who would be “acceptable at a dance, invaluable in a shipwreck.”
Think of the generations of religious and civic missionaries, like Frances Perkins, who flowed out of Mount Holyoke. Think of all the Morehouse Men and Spelman Women. Think of all the young students, in schools everywhere, assigned Plutarch and Thucydides, Isaiah and Frederick Douglass — the great lessons from the past on how to lead, endure, triumph or fail. Only the great books stay in the mind for decades and serve as storehouses of wisdom when hard times come.
Right now, science and the humanities should be in lock step: science producing vaccines, with the humanities stocking leaders and citizens with the capacities of resilience, care and collaboration until they come. But, instead, the humanities are in crisis at the exact moment history is revealing how vital moral formation really is.
One of the lessons of this crisis is that help isn’t coming from some centralized place at the top of society. If you want real leadership, look around you.
W.T.O. Chief Quits Suddenly, Adding to Global Turmoil
Roberto Azevêdo, director-general of the World Trade Organization, has been a proponent of international cooperation, putting him at odds with the Trump administration.
The head of the organization charged with bringing a semblance of order to international trade relations resigned unexpectedly Thursday, adding another element of uncertainty to commerce in the midst of the coronavirus pandemic and escalating trade conflicts.
Roberto Azevêdo, a career Brazilian diplomat, resigned as the director-general of the World Trade Organization effective Aug. 31, the Geneva-based organization said. His second four-year term was not scheduled to end until September 2021.
The W.T.O.’s operations have been crippled since late last year as a result of actions by the Trump administration, which has refused to approve nominees to fill vacancies on a crucial appeals panel that rules on trade disputes.
With Mr. Azevêdo’s departure, which caught officials in Geneva and Brussels by surprise, the organization will lose an advocate of open trade and international cooperation whose views clashed with President Trump’s preference for bilateral power politics.
His resignation also leaves a leadership vacuum at a perilous moment for the world economy.
The pandemic “is the worst shock to global trade that has happened in our lifetimes,” said Josh Lipsky, director of the global business and economics program at the Atlantic Council, a research organization in Washington. “To lose the leader of the W.T.O. is a serious blow. There is a broken global trading system, and it needs leadership to fix it.”
Mr. Azevêdo, 62, did not link his departure to tensions with the Trump administration. Rather, he said he wanted to give W.T.O. members a head start on choosing a successor, which is often a difficult process.
The coronavirus pandemic has brought complex negotiations on issues such as fishing subsidies to a standstill and made it unlikely that agreements would be reached until next year. A debate at the same time about the next W.T.O. director would interfere with attempts to overcome trade disputes, Mr. Azevêdo said.
“The selection process would be a distraction from — or worse, a disruption to — our desired outcomes,” he said during an online meeting with W.T.O. members. “We would be spending valuable time on a politically charged process that has proved divisive in the past.”
World trade was already declining because of Mr. Trump’s trade wars with Europe and China, and has plunged further since the pandemic brought economic activity in many countries to a standstill. The W.T.O. has predicted that global trade could fall by one-third, a decline not seen since the Great Depression in the 1930s.
Recently Mr. Azevêdo has expressed frustration that the United States, Europe, China and other large countries were not coordinating their response to the coronavirus emergency. Mr. Trump has recently stepped up his criticism of China.
“Either we shape up and begin to talk to each other and find common solutions or we are going to pay a heavy price,” Mr. Azevêdo told CNN in April.
Robert Lighthizer, the United States’ top trade official, was conciliatory Thursday. “Despite the many shortcomings of the W.T.O., Roberto has led the institution with grace and a steady hand,” Mr. Lighthizer said in a statement. “He will be difficult to replace.”
Mr. Azevêdo, who was previously a top trade negotiator for Brazil and has worked in Geneva since 1997, also cited personal reasons for his departure. The W.T.O. makes decisions by consensus, which means even one of the organization’s 164 members can stymie progress. The director-general must find a way to thread conflicting national interests and reach accord, a laborious and exhausting task.
Mr. Azevêdo said Thursday that, while he had no serious health problem, he recently had knee surgery. Between that and the lockdown, he said, “I have had more time than usual for reflection.”