A financial catastrophe worse than that of 2008 will hit us within five years, says James Rickards, best-selling author and senior managing director at Tangent Capital Partners.
"The meltdown in 2008 was not a meltdown. It was sort of a half-meltdown," he told Dennis Kneale of Newsmax TV in an exclusive interview.
While Lehman Brothers was the only major financial institution to completely collapse, others were close to it, said Rickards, author of "The Death of Money: The Coming Collapse of the International Monetary System."
But the Federal Reserve stepped in to prevent financial firms from going under. As a result, "the Fed truncated" the avalanche, he explained.
"Think of it as a bunch of dominoes falling. All the dominoes are going to fall, but if I drop a steel curtain between two dominoes, that's going to stop. That's what the Fed did."
Rickards believes "things should have been allowed to crash" in 2008. "All the banks should have been nationalized by the government, the stocks should have been wiped out, the bondholders should have taken a haircut and the clean banks should have been re-IPOed," he argued.
"That's hope and faith in the American people and entrepreneurship. That's what I advocate. The government doesn't believe in itself. So when you start to go down, but instead of hitting bottom, you truncate it and guess what, you're flat-lining forever," he asserted.
But the Fed's tactics didn't change the dynamics, Rickards maintained, as bad debt and leverage haven't gone away. "That's all still there. Except now, it's worse, because in 2008, what did we hear about? 'Too big to fail,' right? Well guess what, the five biggest banks in America today are bigger than they were in 2008," he insisted.
"So everything about '08 that was too big to fail is bigger today. Those dominoes are still waiting."
Meanwhile, the Fed has printed $4 trillion during the last six years. "So, they've got no more drive power," Rickards contended. Liquidity crises arise every five years, he said. "So what's going to happen when the next liquidity crisis comes?"
It won't be pretty. "The next time it happens, it's going to be bigger than the Fed, that's why they're not going to be able to stop it," he predicted. The fact that the financial system is bigger than in 2008 will make this crisis worse, Rickards added.
"The depression of 1920 was as sharp and as hard as what happened in 1929 and 2008. But the government let it go and guess what? It was over in 18 months and we had 10 years of prosperity and Roaring Twenties," he said.
"But that actually is a very healthy process. But because we haven't allowed the system to heal in all these other crises, the next one is going to be so big that the outcome is likely to be money riots and social discord and then you'll see a neo-fascist response."
Rickards compared today's economy to the San Andreas Fault, because "underneath these forces are building up."
"We're in a depression — not a recession — a depression."
He warned that the deflationary forces from the depression and the inflationary forces from policy are pressing against each other.
"They're fighting each other to a standstill, but that's going to snap, that's exactly like two tectonic plates crashing into each other," Rickards declared. "It's going to be ugly for investors, it's just a matter of time."
As for the timing of the crash, "it could come tomorrow," he said. "I'm not predicting tomorrow, but three years seems like a long time for this, five years definitely a long time."
So what will cause the collapse?
"The correct answer, the scientific answer is it doesn't matter, and what I mean by that is, it's like the snowflake in the avalanche," Rickards explained.
"The snow's building up and it's building up, and you're looking at it. An expert can say, hey, it's unstable, it's going to fall down. So here comes a snowflake, it disturbs a few other snowflakes, it starts to slide, it starts to shoot, gains momentum and the whole thing comes tumbling down."
And what might be the first snowflake to move?
"It could be a failure to deliver physical gold," Rickards suggested. "Physical gold is disappearing, there's a mountain of paper gold. . . . So a failure to deliver could cause panic buying of gold."
Other possibilities include "an IMF-global type of failure, a prominent suicide, a natural disaster such as Fukushima," he said, referring to the March 2011 Japanese nuclear accident. "It could be a lot of things. . . . What's important is the rock that's already in the system."
For investors seeking to cope with the crisis, Rickards recommended a 10 to 20 percent exposure to gold — "10 percent for the conservative investor, 20 percent for the aggressive investor."
Meanwhile, corporations have record amounts of cash on their balance sheets. "That wealth is highly concentrated in a relatively small number of companies," he stated. "Apple, Google, IBM … they've all got records amounts of cash."
But why do they have that cash? "This is what the IMF calls precautionary savings," he explained. The companies "build up the cash so when the next panic comes — and it will be coming — they know that they'll have to fund themselves internally for six months because the commercial paper market will go. So it's not a source of strength," he noted.
"They're not going to spend that cash or use that cash, they're holding it. . . . They're holding it because they're scared to death of liquidity evaporating. But it's not going to stop this global meltdown because that's much bigger than these corporations."
Rickards also warned that the United States isn't doing enough to thwart the "financial warfare going on behind the scenes, some of it obvious, some of it behind the scenes."
He believes the "greatest single threat" to the nation is "cyber financial warfare, the combination of a financial attack done in cyberspace."
"Everything the United States is doing is making the situation worse. China's on the attack, Russia's on the attack, Saudi Arabia will soon be on the attack," he stressed.
When it comes to the banking system, "we should break up the big banks. JPMorgan should be five separate banks. That way one of them goes down, too bad, but it didn't take down the system," Rickards claimed.
"We're actually enabling the banks to get bigger, we don't understand the fiscal properties at risk. Everything about what the U.S. is doing from a policy perspective is moving in the wrong direction."
- Source, Money News
