Financial Expert James Rickards says, “The Fed wants inflation . . . . They are not getting it, but they have to have it. What does that mean for policy? That means they are not going to give up . . . . They are going to keep trying until they get inflation, and when that happens, you are going to wish you had your gold.”
How much will gold be in the future? Rickards calculates, “$10,000 per ounce with 40% backing . . . if you had 100% backing (of the dollar), that number would be $50,000 per ounce. The implied non-deflationary price of gold, depending on your assumptions, is between $10,000 and $50,000 per ounce. If you are going to have a gold standard and you want to avoid the blunder of the 1920’s, you are going to have gold at least at $10,000 per ounce and possibly much higher. I explain all this in my book.”
Join Greg Hunter as he goes One-on-One with James Rickards, the best-selling author of the brand new book called “The New Case for Gold.”
Jim Rickards states that the world is in more dangerous position than ever. The crisis of epic proportions is on its way and the only solution is a return to the gold standard, whether the financial elite wants this or not, doesn't matter. The return of honest money is on its way.
TOPICS IN THIS INTERVIEW:
02:00 Why The New Case for Gold, Jim's New Book & Gold Standard 05:00 10% of Your Assets Should be in Gold for Safety 07:30 Will Gold Rally in 2016? 08:40 Dollar to get A Lot Weaker, Make Gold Look Stronger 09:40 Is Gold Money? Would Gold Standard Cause Deflation? 12:00 Gold Standard vs Supply 15:10 Inflation vs Deflation 17:00 Federal Reserve Now Delaying Rate Hikes to Cause Inflation 18:10 Expect Collapse in World Money System in next Few Years
Bestselling author Jim Rickards sits down with Hedgeye CEO Keith McCullough to discuss his new book “The New Case for Gold” and why a cocktail of factors makes it more critical than ever for investors to protect their portfolios with gold.
Get ready to dispose of your preconceived notions regarding the Federal Reserve and its take on gold! Is it possible that the Fed wants a higher gold price after all? That is what Jim Rickards reveals in this riveting interview with Palisade Radio.
Unprecedented policies always bring unintended consequences. Weidentify these hidden fractures. There are many at the moment, and we’ll be writing to you about those in the months ahead.
The ongoing currency war is not new. In fact, the war has been raging since 2010. That’s when President Obama announced the National Export Initiative (NEI) in his Jan. 27, 2010, State of the Union.
The president declared that it was the goal of the United States to double exports in five years. Of course, the U.S. could not become twice as productive or twice as populous in five years. The only way to double exports was to trash the currency, and that’s exactly what happened.
Although it was not widely noticed at the time, the NEI was the start of a new currency war. This was the most momentous development in international economics since Nixon abandoned the gold standard on Aug. 15, 1971. The repercussions are still being felt, and the potential impact on your portfolio has never been greater.
To understand the importance of this raging currency war, some history is needed.
From the Bretton Woods conference in 1944 until Nixon abandoned gold in 1971, the international monetary system operated on a gold standard. All major currencies in the world were pegged to the dollar at fixed exchange rates, and the dollar was pegged to gold at $35 per ounce.
Because of these pegs, non-dollar currencies were indirectly pegged to gold, and to each other. The International Monetary Fund could allow the currency pegs to be adjusted, but it was a laborious and protracted process. (But some countries had already broken their pegs prior to 1971.)
Still, on the whole, it was a fixed-rate system with the dollar and gold as its anchors. This system cracked up in 1971. It was not immediately replaced with a new system. From 1971–79, the world muddled through first with a new gold peg (at $42.22 per ounce), then with floating exchange rates and then with the first efforts at a European monetary system (called “the snake”).
None of this was stable.
The world experienced multiple recessions and borderline hyperinflation, which reached a crescendo in January 1980. At that point, annual dollar inflation reached 15%, interest rates hit 20% and gold spiked to $800 per ounce — a 2,200% increase from the old $35 level.
The international monetary system was collapsing. The world was spinning out of control.
Then, on the brink of total collapse, two individuals stepped in to save the system. One was Paul Volcker, chairman of the Federal Reserve. The other was President Ronald Reagan. Volcker took interest rates as high as needed to kill inflation. Reagan cut taxes and regulation to encourage growth in the U.S. economy.
Inflation came down, growth went up and soon the U.S. became a magnet for savings and investment from around the world. The Age of King Dollar had begun.
From 1980–2010, the world was not on a gold standard, but it was on a de facto dollar standard. Under the leadership of Treasury secretaries James Baker (Republican) and Robert Rubin (Democrat), the U.S. told the world that the dollar was a stable store of value. Trading partners could not anchor to gold, but they could anchor to the dollar.
This new “dollar standard” prevailed through the Plaza Accord (1985), the Louvre Accord (1987), the Mexican Peso Crisis (1994) and the Asian-Russian Crisis (1998). U.S. leadership under Presidents Reagan, Bush 41 and Clinton were resolute. The strong dollar was the new gold standard, and it was here to stay.
Yet nothing lasts forever, especially in international economics. The Global Financial Crisis of 2008 put an end to the Age of King Dollar and gave rise to a new currency war.
Wars have an official start date (when someone fires the first shot), but they are usually years in the making. The new currency war is no different.
The war process started with the G-20 leaders’ summit in Pittsburg in September 2009. It was at that meeting that Mike Froman (a key economic adviser to President Obama and now U.S. trade representative) devised a global “rebalancing” plan.
Froman got Obama to convince world leaders of the need for rebalancing inside the major economic zones. He did this to jump-start the global recovery from the worst recession since the Great Depression.
A Fata Morgana is a kind of mirage in which distant objects at sea appear to be floating in midair or upside down, sometimes both. One famous literary description of a Fata Morgana occurs in Chapter 135 of Herman Melville’s masterpiece, Moby Dick.
As Ahab is pulled overboard, and the White Whale rams the Pequod, Melville writes:
“The ship? Great God, where is the ship? Soon they through the dim, bewildering mediums saw her sidelong fading phantom, as in the gaseous Fata Morgana.”
But, of course the ship was sinking, the vision was an illusion.
The Federal Reserve now sees its own mirage. In a real Fata Morgana, the illusion is caused by thermal inversion and light refraction. In the Fed’s mirage the illusion is caused by academic dogma with names like “Phillips Curve,” “NAIRU,” and “FRB/US.” Still, an illusion is an illusion regardless of cause.
Illusions can persist as long as the conditions that give rise to the illusion dominate. In the case of a Fata Morgana, those conditions involve heat and light. In the case of the Fed, the illusions involve bad models. A change in the weather will shatter a Fata Morgana. A change in the economy will shatter Phillips, NAIRU and Ferbus.
Let’s consider the Fed’s failed dogma.
The Phillips Curve is the discredited belief that there is some tradeoff between employment and inflation. Supposedly tight labor markets give rise to demands for higher wages by workers, which lead to higher prices by companies to pay the wages, which lead to higher wage demands, etc. in an inflationary spiral sometimes referred to as “demand-pull inflation.”
This is neo-Keynesian nonsense. It applies in some special cases (1965-1969), but does not apply in the general case. The Phillips Curve was discredited in the late 1970s (high inflation and recession coexisted, called “stagflation”), and yet Fed Chair Janet Yellen clings to it like Linus with his blanket. What the Phillips Curve and Linus’s blanket have in common is they are both in shreds.
Today inflation is nowhere in sight and deflation is the greater risk. Only Yellen and a few like-minded Fed officials see inflation as a risk because they’re looking at models, not the real world.
NAIRU is the acronym for the infelicitously named “non-accelerating inflation rate of unemployment,” or the point at which tight labor markets lead to higher inflation. In the past four years, Fed estimates have moved the NAIRU goalposts from 6.5% to 5.5% to 5%, and now to 4.9% and so on. That’s as strong proof that NAIRU doesn’t actually exist. NAIRU is like a unicorn – you can describe it in detail, but it never appears in the natural world.
For the record, Fed one-year forward forecasts have been incorrect by orders of magnitude for seven consecutive years. That’s because FRB/US is an equilibrium model, and the economy is not an equilibrium system – it’s a complex dynamic system requiring completely different tools to model. If you use the wrong model, you’ll get the wrong forecast every time.
Why does this matter? It matters because the Fed is still on course to raise interest rates later this year. Markets, in their typically moody style, have gone from expecting four rate increases to none in a matter of weeks. Both market estimates are overwrought.
In fact, the Fed is tightening into weakness and will persist in doing so. As a result, investors should expect near recessionary conditions, and continued declines in stock prices for the next 6 to 8 months.
Expect the Fed to raise twice more, in March and June, (because of their model-based mirage), and then ease (because recessionary reality will hit them like a 2×4 to the forehead by late summer).
At that point, Fed ease will take the form of forward guidance; basically an announcement that the Fed is done raising rates for an extended period. Stocks may rally late in the year based on this easing. Forward guidance will be used to ease since the Fed cannot actually cut rates after July due to the election cycle. December 2016 is the earliest possible date for a rate cut.
Talk of more quantitative easing (“QE4”) is premature at best, and probably incorrect. Evidence is emerging that QE doesn’t work as intended. Besides, the Fed has other easing tools they will use first including rate cuts, forward guidance, and a cheaper dollar. QE4 is a mid-2017 event at the earliest, (and the Fed may even experiment with negative interest rates before more QE).
Reality is sinking in for the markets, but the Fed will be the last to know because they are fixated on the mirage. That illusion will be gone by late July when Q1 and Q2 2016 GDP data are in hand. Then the easing cycle will begin.
When the government spends, the economy starts moving again. According to the prescription, it doesn’t even matter what they spend the money on. A lot of elites believe that that’s true.
Of course, the government is excellent at spending money. Democrats will probably spend on community organizers and teacher’s unions. Republicans will probably spend on defense contractors. Everybody’s got their favorite wishlist.
This is what Speaker Paul Ryan did in December when he pushed the budget reconciliation bill through the House of Representatives. The Senate passed it and naturally Obama signed it.
Everyone came together in Washington. Politicians love spending money in an election year.
But consider the consequence. Now the deficit will go up even more. How does Congress cover the shortfall? The Treasury will borrow the money.
Who’s going to lend the Treasury the money? Simple. The Fed will print the money and buy the bonds. That brings us back to money printing.
But here’s the difference between helicopter money and quantitative easing: In QE, the Fed prints the money and uses it to buy existing bonds from the banks. Then the money usually sits there in the banks. I’ve explained how that policy has failed.
With helicopter money, though, Congress spends the money. It covers its deficit with more borrowing, and the Fed prints the money to cover the borrowing. It’s essentially monetizing the debt. The difference is that in the case of QE, there’s no extra spending. In the case of helicopter money, there is because Congress spends all the money.
That means, in the final analysis, helicopter money is the recipe for inflation.
I put the odds that we’re already in the early stages of a recession at about 76%. All the signs from the U.S. economyare negative.
The current behavior in the stock market is exactly what I’ve expected to see at the beginning of a recession, too. Stock markets are leading indicators of recession. They typically go down about six months before recessions begin.
Mainstream economists are late to realize this. A year from now they’ll say “January or early February 2016 is when the recession started.” At that point, it won’t be useful information. But you can see around the corner if you’re looking at the right information.
There’s been no real wage growth for example. Other leading indicators such as declining world trade, declining manufacturing, inventory-to-sales ratios and auto sales also suggest that we’re heading into a recession.
Deflationary forces are still strong, making the Fed’s goal of producing inflation even more urgent. Every quarter that goes by brings forward the day of reckoning for the global elites. They need inflation because that’s the only way out the sovereign debt problem.
Yet central banks haven’t be able to generate the inflation they think they need to restore growth to the global economy. Here in the U.S., the Fed has failed to produce inflation for seven years through QE1, QE2 and QE3. The European Central Bank has also failed, and China is currently failing.
The question for the global elites is: Where will inflation come from?
A lot of people assume that all that’s required to produce inflation is just print money. That’s what Milton Friedman said. But it’s not true. Printing money by itself does not cause inflation. People must do something with the money. They need borrow, spend or invest it. Banks need to lend it or put it into projects. The new money can’t just sit idle.
Printing money is only half of what’s necessary to produce inflation. The other half is lending that new money… having people go out and spend it… have banks leverage that money through credit creation and so on. That has not happened.
It’s not happening because corporate and banking decision makers are still licking their wounds from the meltdown of 2008. Everyday people have been saving money and paying down their debt. That’s why we’re still going through a debt leveraging cycle. That’s also why quantitative easing has failed. The money hasn’t gone out into the real economy. It’s been tied up in the banking sector.
Any bank with excess reserves at the Federal Reserve could take them and use it as a base to lend money. But they’re not, so the whole scheme isn’t working. What’s called the “monetary transmission mechanism” is broken.
First, helicopter money amounts to direct government spending to stimulate the economy. The idea is to force spending since the private sector isn’t doing enough right now.
Who does that spending? The government.
This policy will take us back to the Great Depression and John Maynard Keynes. He argued that government spending could lift the economy out of depression. It’s Keynesism 101.
After speaking with former Federal Reserve chairman Ben Bernanke, best-selling author Jim Rickards may have found a way to predict the central bank’s next policy move, especially as stocks continue to struggle.
Rickards, also a senior managing director at Tangent Capital, argued that the Fed only cares about the stock market when it rallies, and not so much when it moves lower, unless of course there are extreme or disorderly declines. This asymmetry may be the main clue for investors.
“What those importuning the Fed overlook is that the Fed doesn’t care about these stock market gyrations,” said Jim Rickards, authors of Currency Wars and The Death of Money, in a blog post for West Shore Funds Tuesday. “While declining stock prices indicate tighter financial conditions, they are neither a determinant nor the object of Fed policy.”
The Fed focuses more on stock prices when they rally, he continued, like they did from 2009 to 2013. During that time, the S&P 500 and Dow Jones both jumped by roughly 105% and 89%, respectively. However, as they struggle now, the central bank doesn’t necessarily care so much, Rickards said.
“Understanding this asymmetry in the Fed’s attention to stock markets – caring on the way up, but not caring on the way down – is crucial to a sound analysis of Fed policy in the coming year,” he argued.
In other words, Rickards noted that when investors understand this notion, they can potentially predict when the Fed will make – or even halt – its next move on rates.
And, how did Rickards come to this theory? The answer lies in Ben Bernanke.
Rickards said that Bernanke told him in a “private conversation” that the central bank doesn’t care if the stock market drops by double-digits. According to Rickards, Bernanke stated that “the Fed doesn’t care if the stock market goes down 15%.”