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End Game for the Global Economy

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This article is a transcript of the interview conducted on Mises Weekends.

Jeff Deist: James, thanks a million for joining us. I’m going to go out on a limb and say your new book The Road to Ruin: the Global Elite’s Secret Plan for the Next Financial Crisis is a “big-picture” book.

Jim Rickards: Well, it is, Jeff, thank you, but it also has a lot of detail. In other words, I make some claims about the future, the international monetary system, how the elites see the crisis coming. That’s something they’re sharing with each other, they’re not sharing with everyday citizens. But it’s all backed up. I talk about specific statutes, specific regulations, specific plans announced in writing by the G20. It’s not speculation. All the elements to lock down the financial system, freeze your money, shut down ATM’s, it’s all been done before. It’s happening in real time now, and all the elements are in place. So it does have some pretty bold claims, but hopefully the reader will agree that it’s all very well documented and you can see it coming.

JD: What I love about this book is that Austrians, people who follow monetary policies generally, we always ask, what’s the end game? Gosh, how long can the Fed keep going on with successive rounds of QE? How long can they keep interest rates this low? How long can the ECB prop up all these governments with the euro? So you’ve actually laid out a real scenario end game here for when the next crisis hits. That’s an achievement, I would say.

JR: Well, thanks, Jeff. And one of the points I make is that, I don’t, but people say, gee, you’re always doing a prediction or forecasting or prophecy. You know, there’s a little bit of that, but I make the point that the future is here today. In other words, everything that’s going to happen in the future is embedded in today’s data if you understand how complex dynamic systems work. 

And let me give you a specific example. Let’s say you have a row of dominoes, a long row. And you tip over the first domino, and then the second falls and the third one falls and all that, and you’re about halfway through the row and you make a forecast. You say, I say the last domino is going to fall. And then it falls. Well, did you have a crystal ball? No. You really, you could see the thing playing out. You had the current data, which is that dominoes are falling, they’re all in a row. You know a little bit about physics, and all you had to do with that mental model was look down the road a little bit and you could see the last domino was going to fall. So I make a point that things that are going to happen in the future are already embedded in today’s state of affairs, and in fact, in some fairly obvious ways. 

When I say “obvious,” I should be clear that these are extremely technical, jargon-filled papers published by the International Monetary Fund in Washington, the Bank for International Settlements in Switzerland, these various G-20 final communiqués. The G-20 are these 20 developed and emerging markets who meet different places around the world. But I guess I’m enough of a geek myself that I read all these and go through them, so I can see this coming, but it’s not crystal ball stuff. The plan is already here today, and all you have to do is look at it and see how your money is going to be frozen or confiscated in the next liquidity crisis.

JD: Well, you talk about how it’s too late for the Fed or other central banks to cure the depression with monetary policy. In other words, you’re projecting that the next time around, if there’s a big crash, they won’t attempt to re-liquify the world. Can you elaborate?

JR: Sure. To do this, I use three crises: 1998, 2008, and then 2018. That’s my forecast. And that’s just because 1998 and 2008 were 10 years apart. So I go out another 10 years and get to 2018.  But I make the point that this new crisis could happen tomorrow, so don’t be complacent between now and 2018. That’s an estimate, but it’s actually something that could happen tomorrow. 

Now, what happened in 1998? That was when Russia defaulted. There was a global liquidity crisis. The big hedge fund, Long-Term Capital Management which owed over one trillion dollars to the Wall Street banks was going insolvent. By the way, I had a front row seat on that one. I was the lawyer for Long-Term Capital Management. I negotiated that bailout. I was in the room with the Federal Reserve and the Treasury and the big banks when everything happened. We were just hours away from shutting down every stock and bond exchange in the world. That’s not an exaggeration. Allen Greenspan, head of the Fed at the time, Bob Reuben, secretary of the Treasury, both testified to that effect, and again, I was involved with that so I know that was the case. Now, it didn’t happen. That is, the four billion dollar bailout money changed hands, the balance sheet was propped up, the Fed cut rates, life went on, and people grew complacent about it. But we were just hours away from shutting down every exchange in the world. 

Come forward to 2008, same thing  In mid-September, we were days away from the sequential collapse of every bank in the world. Bear Stearns had failed in March 2008. Then Fannie Mae and Freddie Mac, the big mortgage agencies failed in June 2008. Then Lehman Brothers failed in September 2008. Morgan Stanley was a couple days away. Then it would have been Goldman then Citibank, then Bank of America, and then finally, JP Morgan. They all would have fallen, exactly like the dominoes I just described. 

But that didn’t happen because the Fed intervened. The Fed printed four trillion dollars of new money, did 10 trillion dollars of swaps with the European Central Bank. Actually, that was not known at the time, but the European Central Bank gave the Fed trillions of euros in exchange for dollars which they couldn’t print so they could use the dollars to bail out the European banks. And the Fed had trillions of euros on its balance sheet.  That came out a few years later as the result of Congressional hearings in Dodd-Frank, but it was not known at the time. The Fed guaranteed every money market fund in America. They guaranteed every bank deposit in America. They went to extraordinary lengths to re-liquify the system. But here’s the problem, Jeff. In 1998, Wall Street bailed out a hedge fund. In 2008, the central banks bailed out Wall Street. In 2018, if not sooner, who’s going to bail out the central banks? In other words, the central banks have not normalized their operations. The Feds, I’ll use the Federal Reserve as an example but they’re not the only one — they printed almost four trillion dollars to bail out the banks in the last crisis. 

Now, if they had somehow managed to get their balance sheet back down to about 800 billion where they started and maybe raised interest rates up to say, a normal rate of 2, 2 1/2 percent, I’d be the first one to congratulate them. I’d say, nice job, guys. You know, you saved the world and you got back to normal. But that didn’t happen. Their balance sheet is still at four trillion dollars, interest rates are still close to zero. They have no dry powder, they have no capacity to deal with the next crisis in the way they dealt with the last one. The only source of liquidity in the world, the only clean balance sheet left in the world is the International Monetary Fund. 

So the next time there is a crisis which, as I say, could be any day, it’s definitely imminent, the only source of liquidity is going to be the IMF World Money which they have a funny name for it, they call it the Special Drawing Right or SDR, but just think of it as world money. They don’t want to call it world money because that would scare people, but that’s what it is. They will print trillions of SDRs. Notice I didn’t say trillions of dollars. Trillions of SDRs. That’s where the money will come from to re-liquify the system next time. But that will mean the end of the dollar as the benchmark global reserve currency. Now, just to be clear, it won’t mean the literal end of the dollar. We’ll still have dollars, but it will be a local currency like Mexican pesos. We’ll have them for walking around money in the United States, but it won’t be the benchmark for the world. That will be the SDR. And that will be, obviously, a major transformation, highly inflationary, but one other problem. That process will take us several months. In other words, this crisis will hit, no one will see it coming because they never, I see it coming but the central bankers and the academics and the policymakers don’t see it coming because they’re using the wrong models and misapprehend the statistical properties at risk, so they won’t see it coming, it’ll hit, there’ll be a panic. 

It’ll take the IMF at least a few months, if not longer, to issue these SDRs. They can’t do it on demand. So during that several-month period, since they’re not going to have the money to give you your money back, they’re going to lock down the system. Money market funds will suspend redemptions, banks will be closed, ATMs will be reprogrammed maybe to give you, say, $300 a day for gas and groceries, stock exchanges will be closed. Of course, all of this will be said to be temporary, but, and maybe it will be temporary in the sense of three or four months, but three or four months is a long time not to be able to get your money, not to be able to get more money than you need just to put gas in your car and buy food for your family that day. And this is all described in the book, and again, just to be clear, I don’t make it up. I don’t make claims like this without backing it up. All the statutes, all the legislation, all the executive orders are all in place. 

JD: One thing you talk about is sometimes these big sweeping changes are not made out in public at some grand event like Bretton Woods. Sometimes they’re made in these small technical documents that most people don’t know exist.

JR: That’s exactly right. I like to say that the IMF and the G-20 are transparently non-transparent. And what I mean by that is they actually do publish papers. They all have websites. They publish communiqués and technical papers and research papers and so forth, but boy, you have to be an expert to find them. You might have to go 10 layers deep on some of these websites, and even if you found the paper, it would probably have some technical name that unless you were technically trained, you wouldn’t necessarily understand what they were talking about. I don’t expect everyday Americans to understand the jargon used by international monetary elites. That’s what I do. I actually do have that training. I got a graduate degree in economics from the School of Advanced International Studies, which is the main academic feeder school for the IMF. Tim Geithner went there. That’s where he got his training. So I actually have that background. And I’ll give you a very concrete example. 

In Brisbane, Australia, in November 2014, the G-20 Leaders’ Summit met. The G-20 includes all the big countries — the U.S., Germany, Italy, UK, France, Canada, so forth, but also the big emerging market economies, you know, the BRICs, China, Russia, Brazil, India, and others. So that’s who the G-20 is. They had a final communiqué. It’s about 15, 18 pages. But attached to it were dozens of technical papers, each of which would be 30 or 40 pages long, sometimes longer on their own. I went into those and read them, and I found the bail-in plan. It was all agreed by the leaders, so President Obama and Chancellor Merkel of Germany and at the time, David Cameron, the prime minister of the UK, and all the others agreed on this bail-in plan. 

Now, what’s the difference between a bailout, which we’ve all heard of, and a bail in? In a bailout, that’s when a bank’s in distress and it’s too big to fail, so they use taxpayer money to prop up the bank. And it’s a ripoff for taxpayers because you know, bondholders don’t take a loss, stockholders don’t take a loss. Maybe the price goes down but it can bounce back again. Nobody gets fired, nobody goes to jail, they all keep their phoney-baloney jobs and their multi-million dollar bonuses, but the taxpayers, you know, at best you get your money back, but you don’t get the profits and all the recovery. You take equity risk for a measley zero income return, if you’re that lucky. So it’s a rip off for the taxpayers, plus zero interest rates steal from savers. It’s another way to enrich the bankers. So that’s what a bailout is. But those were so politically unpopular that the G-20 leaders agreed that they weren’t going to use bailouts anymore, they’re going to use bail-ins. 

What that means is the losses fall on the stockholders themselves. You might find that your stock is wiped out. If you’re a depositor with money in excess of the insured amount, you might find that, that money involuntarily gets turned into equity in a bad bank that’s got some claim on the recovery assets. Bondholders will take a haircut. But this still comes back to effect everyday citizens, because if you’re in a pension fund that owns those bonds or a 401k that owns that stock or you’re a small or medium-sized enterprise and your deposit exceeds the insured amount, and all of a sudden you find you hold stock in an insolvent bad bank, so to speak, not to mention the financial panic that goes along with it.  

This is the bail in plan. But it would involve, another concrete example would be money market funds. You know, you talk to people, they say, oh, I’ve got my money in a money market fund and I can call my broker today, sell my units, the money will be in my bank account tomorrow morning, what’s the problem?  Well, that’s not money. That’s a share in a mutual fund. Money market funds are set up like mutual funds. They’re called money market funds but it’s not money. It’s a unit. Well, for the first time, those funds are allowed to suspend redemptions, which means they don’t have to give you your money back. This is very recent, by the way. The final rule, it’s been kicking around the SEC for a couple years, but the final rule was just enacted and it is the law today. But this was not true in 2008. In 2008, they had to give you your money. And that was the problem.  Everyone was calling up, saying, give me my money back. And these funds were melting down and the people that they invested in were melting down because they couldn’t roll over their loans, etc. So people are going to call their money market funds in the next panic and find that they can’t get their money. They’re going to call their banks and find that their bank accounts have been frozen. This is all part of the bail in plan. 

But the point I make, Jeff, it’s all there, meaning the papers are there, the studies are there, the decisions have been made, the laws are in place. They’re just waiting for the panic, and all the stuff is going to get locked down. So my advice to savers is get some of your money out of the digital system. You know, before you can slaughter cattle, you have to herd them into a pen. And savers are being herded into a digital bank pen so they can be slaughtered by negative interest rates, confiscation, freezes, hacking and a lot of other ways to steal your money. So it’s good to have something like physical gold for some portion of your portfolio because it’s non-digital and it’s outside the system.

JD: This business about redemptions and the rule change is so important to our listeners. Don’t think just because you’re got a vanguard account that that’s accessible to you. James, one of the points or threads that runs throughout this book is complexity and interconnectedness, I just wonder if you think a catastrophic-type collapse is really baked into a global economy, almost by definition, that globalism makes us all more vulnerable to a catastrophic collapse?

JR: Well, it definitely does, and I could put that on a scientific basis. Again, it’s not speculation. The first question you have to ask yourself, what is a complex system? Or, put slightly differently, are global capital markets a complex system? If they’re not, then you can put your mind at ease. If they are, boy, do we have a lot of vulnerability and instability. So what’s the test of complexity? 

Well, there’s a four-part test and I make the point that if you went to, you were involved in the Physics Program, Ph.D.-level Physics Program at the University of Michigan from a professor or any good school, from a professor who knew nothing about finance, he was just a physicist and a complexity theorist, this is what they would teach you. They would say that complex systems are characterized by, first of all, diversity of what they call the agents or the actors in the system. In the capital markets, it would happen to be individuals. In a sandpile, it could be individual grains of sand. In an avalanche, it could be individual flakes of snow. But whatever it is, you have these individual actors. So the question is, are they diverse? Because if they are all the same, it’s a pretty boring system, but if they’re diverse, they have greater capacity to interact in unexpected ways. Well, of course they’re diverse. Look at capital markets on any day. You have bulls and bears, fear and greed, long and short, leveraged and unleveraged. Some people are, you know, the market goes down, some people are saying, buy the dips, some people are saying, sell more, get me out of here. So you pass the diversity test. 

The second test is interconnectedness. What good does it do to have diverse points of view if they’re not connected through some channel? So it’s the connection part of it. Well, sure, between Bloomberg and Reuters and Dow Jones and iChat and email and electronic exchanges and Globex, we’re probably, you know, CNBC and Bloomberg, we’re probably over-connected. So we certainly pass the connectedness test. 

The third one is interaction. So okay, you have diverse actors, they’re connected, are they interacting? Well, of course they are. We do trillions of dollars equivalent of stocks, bonds, currencies, commodities, derivatives every single day, so there’s massive, massive interaction. 

And the fourth element is adaptive behavior. In other words, does my behavior affect your behavior and vice versa? You know, a simple way to explain that is, let’s say you’re in your apartment and you don’t know what the weather is like outside and you look outside and everyone is walking down the street with a big down jacket and pullover hat and big mittens. Well, you know it’s cold, you’re probably not going to go outside in a t-shirt.  That’s an example of adaptive behavior based on your interaction with other people. Well, again, you know, if you’re losing money in a trade, you better get out of the trade or you’re going to get wiped out. Of course there’s herding and people follow other people. You know, people wait to see what Warren Buffet’s quarterly position report is because they want to buy the same stocks he bought, etc., so there’s lots of adaptive behavior. 

So we’re four for four. We have diverse participants, we are connected, we interact massively and we adapt our behavior. If you have those four things, you have a complex system. Now, what does that mean when you have a complex system? Well, one of the things it means is that one of the characteristics of complexity is what’s called emergence or an “emerging property.” This means that something comes out of nowhere. I mean, it might be popularly known as the black swan. I don’t really like the phrase the black swan. It was a good book, by the way, by Nassim Taleb, but I don’t really like the phrase because it’s a metaphor that’s not really scientific and is sort of content-free. But when you say emergent property, just to understand it as something that comes out of a complex system that cannot be inferred from perfect knowledge of all the parts of the system. 

And this is why F.A. Hayek was against central planning. If you have perfect information, you still couldn’t get central planning right because there’s too much, human nature is such that we’re always going to be surprised, and oh, by the way, we don’t have perfect information, not even close. So he said central planning would always fail because you could never have enough information or enough expertise to do it right. Well, that’s an earlier version, complexity science is more recent, but that’s an earlier version of the critique that complexity theory offers. 

But the final thing, and just to wrap up on this point, Jeff, and cause for concern for investors, is that catastrophic risk in complex systems, they do collapse, periodically, they do implode, they fall in on themselves. And the worst thing that can happen is an exponential function of scale. And what that means is that when you double the size of the system, you don’t double the risk. You probably increase the risk by a factor of 10. And if you quadruple the size of the system, you probably increase the risk by a factor of 100. In other words, it’s an exponential relationship. Now, look at the biggest banks in 2008, the banks that were too big to fail in 2008, how many times do we hear the expression, too big to fail? Those five biggest banks in the U.S. today are bigger than they were in 2008. They have a larger percentage of all the banking assets in the U.S. Their derivatives books are much bigger, they’re more inter-connected, and this is all inter-connected globally. So everything that was too big to fail in 2008 is much, much bigger today. And if you take my point that the catastrophic risk increases exponentially, that means if we’ve doubled or tripled the system, the risk is way up beyond anything that we can imagine, beyond anything we’ve seen before, and I already made the point that the central banks are tapped out, they’re impotent in terms of their ability to stop it, so we’re going to have a crisis worse than any other, and they’re going to be powerless to stop it, and that’s why they’re going to lock down the system and freeze your money.

JD: Well, when you talk about this in the epilogue of your book, a lot of people who would accept the idea of America in decline don’t necessarily understand that, that decline could be sudden, it could be catastrophic, a sudden reverse. We imagine that it’s going to be a gradual thing over a century or something like that, but as you point out, it might not be.

JR: Right. And the metaphor there, and it’s a metaphor, but it’s also the science and the mathematics and the system’s dynamics are the same, would be an avalanche. So you have a mountain, you have a little bit of an overhang. It’s snowing, it’s snowing, it’s snowing. The snow is building up on this overhang. Any expert can take one look at it and say it’s unstable, it’s going to pull loose and cause an avalanche and maybe kill some skiers and bury the village below. But you don’t know exactly when. And so it’s snowing, it’s snowing, and then one snowflake disturbs a few other snowflakes, and that starts a little shoot and that gathers momentum and starts a bigger slide, and then it creates instability and the whole thing rips loose and you have this avalanche. Who do you blame? Do you blame the snowflake or do you blame the instability of the system as a whole? And I make the point that you shouldn’t really blame the snowflake, because if it wasn’t one snowflake, it would have been another. It could have been the day before, it could have been a day later. You never know exactly when it’s going to happen.  But what you do know with certainty is that it will happen, and it will be, again, you can estimate the scale of it. So this is the point I make about financial instability. I can look right at the system, I can see the scale of it, I can understand the complex dynamics, I can understand the instability of it. I don’t necessarily know which snowflake will cause the avalanche to occur, but I can see it coming, and I do know that when it happens, it will happen very, very quickly. There won’t be time to prepare then; the time to prepare is now.

JD: Well, James, we just have time for one last quick question. I’m wondering if you have any thoughts about what, if anything, Trump’s win might mean and whether people who voted for him maybe have some uneasy, vague sense of some of the things you talk about in your book that they couldn’t necessarily put into words?

JR: Well, I think I’ll take the second point first. I think part of Trump’s success is maybe an intuition that something’s not right. There’s something wrong about the way the Federal Reserve has handled this, the way other central banks have papered over the crisis, the lack of accountability, the fact that no banks failed, no one was held accountable, so I think they sense that something is wrong even if they can’t exactly put it into words. And that’s part of Trump’s success, it’s not the whole story, but it’s part of it. But the problem is, nothing is really being done about it. I can only imagine how busy President-elect Trump is right now, but I’m sure what we’re talking about is probably 30th on his list. He’s got to make Cabinet appointments and sort out his tax policy and his fiscal policy and what are we going to do about Obamacare? They’ve got a pretty full agenda. I doubt anyone is talking about this kind of abstract, theoretical instability, even though it’s maybe theoretical, but it’s very, very real. And the other point I make is that an avalanche, if an avalanche buries a skier, it doesn’t care if the skier is a Republican or a Democrat. In other words, it’s not about ideology or partisanship. These are complex dynamic systems. They do what they do. Earthquakes kill indiscriminately. Tsunamis kill indiscriminately. And financial catastrophes will wipe out your savings and your wealth indiscriminately. It doesn’t care who’s president or what party’s in power. So I’m not saying there’s nothing you can do about it. There are some policies you could implement tomorrow that would reduce the risk significantly, including a repeal of Glass-Steagall, banning most derivatives, breaking up the big banks. So there are some things you could do to make the system safer, but I just don’t see them on the agenda, and even if they’re discussed, I doubt any of that will happen in time. So what I would expect is that this crisis will occur exactly the way I’m describing, and if you can’t prevent it, if you can’t save the world, at least you can save some of your net worth with some hard assets. I recommend gold, silver, fine art, have some cash handy, and just be prepared.

James Rickards is chief global strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and director of The James Rickards Project, an inquiry into the complex dynamics of geopolitics + global capital. He is the author of New York Times best seller The Death of Money (Penguin, 2014), national best seller Currency Wars (Penguin, 2011), and The New Case for Gold (Penguin, 2015). He has held senior positions at Citibank, Long-Term Capital Management, and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve.


James G. Rickards

James Rickards is chief global strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and director of The James Rickards Project, an inquiry into the complex dynamics of geopolitics + global capital. He is the author of New York Times best seller The Death of Money (Penguin, 2014), national best seller Currency Wars (Penguin, 2011), and The New Case for Gold (Penguin, 2015). He has held senior positions at Citibank, Long-Term Capital Management, and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve.

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