Jim Rickards - In the Year 2024

As I awoke this morning, Sunday, Oct. 13, 2024, from restless dreams, I found the insect-sized sensor implanted in my arm was already awake. We call it a “bug.” U.S. citizens have been required to have them since 2022 to access government health care.

The bug knew from its biometric monitoring of my brain wave frequencies and rapid eye movement that I would awake momentarily. It was already at work launching systems, including the coffee maker. I could smell the coffee brewing in the kitchen. The information screens on the inside of my panopticon goggles were already flashing before my eyes.

Images of world leaders were on the screen. They were issuing proclamations about the fine health of their economies and the advent of world peace. Citizens, they explained, needed to work in accordance with the New World Order Growth Plan to maximize wealth for all. I knew this was propaganda, but I couldn’t ignore it. Removing your panopticon goggles is viewed with suspicion by the neighborhood watch committees. Your “bug” controls all the channels.

I’m mostly interested in economics and finance, as I have been for decades. I’ve told the central authorities that I’m an economic historian, so they’ve given me access to archives and information denied to most citizens in the name of national economic security.

My work now is only historical, because markets were abolished after the Panic of 2018. That was not the original intent of the authorities. They meant to close markets “temporarily” to stop the panic, but once the markets were shut, there was no way to reopen them without the panic starting again.
My work now is only historical, because markets were abolished after the Panic of 2018.

Today, trust in markets is completely gone. All investors want is their money back. Authorities started printing money after the Panic of 2008, but that solution stopped working by 2018. Probably because so much had been printed in 2017 under QE7. When the panic hit, money was viewed as worthless. So markets were simply closed.

Between 2018–20, the Group of 20 major powers, the G-20, abolished all currencies except for the dollar, the euro and the ruasia. The dollar became the local currency in North and South America. Europe, Africa and Australia used the euro. The ruasia was the only new currency — a combination of the old Russian ruble, Chinese yuan and Japanese yen — and was adopted as the local currency in Asia.

There is also new world money called special drawing rights, or SDRs for short. They’re used only for settlements between countries, however. Everyday citizens use the dollar, euro or ruasia for daily transactions. The SDR is also used to set energy prices and as a benchmark for the value of the three local currencies. The World Central Bank, formerly the IMF, administers the SDR system under the direction of the G-20. As a result of the fixed exchange rates, there’s no currency trading.

All of the gold in the world was confiscated in 2020 and placed in a nuclear bomb-proof vault dug into the Swiss Alps. The mountain vault had been vacated by the Swiss army and made available to the World Central Bank for this purpose. All G-20 nations contributed their national gold to the vault. All private gold was forcibly confiscated and added to the Swiss vault as well. All gold mining had been nationalized and suspended on environmental grounds.

The purpose of the Swiss vault was not to have gold backing for currencies, but rather to remove gold from the financial system entirely so it could never be used as money again. Thus, gold trading ceased because its production, use and possession were banned. By these means, the G-20 and the World Central Bank control the only forms of money.

Some lucky ones had purchased gold in 2014 and sold it when it reached $40,000 per ounce in 2019. By then, inflation was out of control and the power elites knew that all confidence in paper currencies had been lost. The only way to re-establish control of money was to confiscate gold. But those who sold near the top were able to purchase land or art, which the authorities did not confiscate.

Those who never owned gold in the first place saw their savings, retirement incomes, pensions and insurance policies turn to dust once the hyperinflation began. Now it seems so obvious. The only way to preserve wealth through the Panic of 2018 was to have gold, land and fine art. But investors not only needed to have the foresight to buy it… they also had to be nimble enough to sell the gold before the confiscation in 2020, and then buy more land and art and hang onto it. For that reason, many lost everything.

Land and personal property were not confiscated, because much of it was needed for living arrangements and agriculture. Personal property was too difficult to confiscate and of little use to the state. Fine art was lumped in with cheap art and mundane personal property and ignored.

Stock and bond trading were halted when the markets closed. During the panic selling after the crash of 2018, stocks were wiped out. Too, the value of all bonds were wiped out in the hyperinflation of 2019. Governments closed stock and bond markets, nationalized all corporations and declared a moratorium on all debts. World leaders initially explained it as an effort to “buy time” to come up with a plan to unfreeze the markets, but over time, they realized that trust and confidence had been permanently destroyed, and there was no point in trying.

Wiped-out savers broke out in money riots soon after but were quickly suppressed by militarized police who used drones, night vision technology, body armor and electronic surveillance. Highway tollbooth digital scanners were used to spot and interdict those who tried to flee by car. By 2017, the U.S. government required sensors on all cars. It was all too easy for officials to turn off the engines of those who were government targets, spot their locations and arrest them on the side of the road.

In compensation for citizens’ wealth destroyed by inflation and confiscation, governments distributed digital Social Units called Social Shares and Social Donations. These were based on a person’s previous wealth. Americans below a certain level of wealth got Social Shares that entitled them to a guaranteed income.

Those above a certain level of wealth got Social Donation units that required them to give their wealth to the state. Over time, the result was a redistribution of wealth so that everyone had about the same net worth and the same standard of living. The French economist Thomas Piketty was the principal consultant to the G-20 and World Central Bank on this project.

By 2017, the U.S. government required sensors on all cars.

To facilitate the gradual freezing of markets, confiscation of wealth and creation of Social Units, world governments coordinated the elimination of cash in 2016. The “cashless society” was sold to citizens as a convenience. No more dirty, grubby coins and bills to carry around!

Instead, you could pay with smart cards and mobile phones and could transfer funds online. Only when the elimination of cash was complete did citizens realize that digital money meant total control by government. This made it easy to adopt former Treasury Secretary Larry Summers’ idea of negative interest rates. Governments simply deducted amounts from its citizens’ bank accounts every month. Without cash, there was no way to prevent the digital deductions.

The government could also monitor all of your transactions and digitally freeze your account if you disagreed with their tax or monetary policy. In fact, a new category of hate crime for “thoughts against monetary policy” was enacted by executive order. The penalty was digital elimination of the wealth of those guilty of dissent.

The entire process unfolded in small stages so that investors and citizens barely noticed before it was too late. Gold had been the best way to preserve wealth from 2014–18, but in the end, it was confiscated because the power elites knew it could not be allowed. First, they eliminated cash in 2016. Then they eliminated diverse currencies and stocks in 2018. Finally came the hyperinflation of 2019, which wiped out most wealth, followed by gold confiscation and the digital socialism of 2020.

By last year, 2023, free markets, private property and entrepreneurship were things of the past. All that remains of wealth is land, fine art and some (illegal) gold. The only other valuable assets are individual talents, provided you can deploy them outside the system of state-approved jobs.

Beware the Money Illusion Coming to Destroy Your Wealth

A money illusion sounds like something a prestidigitator performs by pulling $100 bills from a hat shown to be empty moments before. In fact, money illusion is a longstanding concept in economics that has enormous significance for you if you’re a saver, investor or entrepreneur.

Money illusion is a trick, but it is not one performed on stage. It is a ruse performed by central banks that can distort the economy and destroy your wealth.

…that people prefer a raise over a pay cut while ignoring inflation is the essence of money illusion.

The money illusion is a tendency of individuals to confuse real and nominal prices. It boils down to the fact that people ignore inflation when deciding if they are better off. Examples are everywhere.

Assume you are a building engineer working for a property management company making $100,000 per year. You get a 2% raise, so now you are making $102,000 per year. Most people would say they are better off after the raise. But if inflation is 3%, the $102,000 salary is worth only $98,940 in purchasing power relative to where you started.

You got a $2,000 raise in nominal terms but you suffered a $1,060 pay cut in real terms. Most people would say you’re better off because of the raise, but you’re actually worse off because you’ve lost purchasing power. The difference between your perception and reality is money illusion.

The impact of money illusion is not limited to wages and prices. It can apply to any cash flow including dividends and interest. It can apply to the asset prices of stocks and bonds. Any nominal increase has to be adjusted for inflation in order to see past the money illusion.

The concept of money illusion as a subject of economic study and policy is not new. Irving Fisher, one of the most famous economists of the 20th century, wrote a book called The Money Illusion in 1928. The idea of money illusion can be traced back to Richard Cantillon’sEssay on Economic Theory of 1730, although Cantillon did not use that exact phrase.

Economists argue that money illusion does not exist. Instead, they say, you make decisions based upon “rational expectations.” That means once you perceive inflation or expect it in future, you will discount the value of your money and invest or spend it according to its expected intrinsic value.

In effect, inflation is a hidden tax used to transfer wealth from savers to debtors…

Like much of modern economics, this view works better in the classroom than in the real world. Experiments by behaviorists show that people think a 2% cut in wages with no change in the price level is “unfair.” Meanwhile, they think a 2% raise with 4% inflation is “fair.”

In fact, the two outcomes are economically identical in terms of purchasing power. The fact, however, that people prefer a raise over a pay cut while ignoring inflation is the essence of money illusion.

The importance of money illusion goes far beyond academics and social science experiments. Central bankers use money illusion to transfer wealth from you — a saver and investor — to debtors. They do this when the economy isn’t growing because there’s too much debt. Central bankers try to use inflation to reduce the real value of the debt to give debtors some relief in the hope that they might spend more and help the economy get moving again.

Of course, this form of relief comes at the expense of savers and investors like you who see the value of your assets decline. Again a simple example makes the point.

Assume a debtor bought a $250,000 home in 2007 with a $50,000 down payment and a $200,000 mortgage with a low teaser rate. Today, the home is worth $190,000, a 24% decline in value, but the mortgage is still $200,000 because the teaser rate did not provide for amortization.

This homeowner is “underwater” — the value of his home is worth less than the mortgage he’s paying — and he’s slashed his spending in response. In this scenario, assume there is another individual, a saver, with no mortgage and $100,000 in the bank who receives no interest under the Fed’s zero interest rate policy.

Suppose a politician came along who proposed that the government confiscate $15,000 from the saver to be handed to the debtor to pay down his mortgage. Now the saver has only $85,000 in the bank, but the debtor has a $190,000 house with a $185,000 mortgage, bringing the debtor’s home above water and a giving him a brighter outlook.

The saver is worse off and the debtor is better off, each because of the $15,000 transfer payment. Americans would consider this kind of confiscation to be grossly unfair, and the politician would be run out of town on a rail.

Now assume the same scenario, except this time, the Federal Reserve engineers 3% inflation for five years, for a total of 15% inflation. The saver still has $100,000 in the bank, but it is worth only $85,000 in purchasing power due to inflation.

- Source, Jim Rickards via Daily Reckoning

Greenspan Has Traditional Been Gold Positive

If you look at Greenspan’s record, before he became Chairman of the Federal Reserve he said many positive things about gold. Since leaving the chairmanship, he’s said positive things about gold on numerous occasions – for instance at the Council on Foreign Relations this week. He has a history of looking on gold favorably but during the entire 20 years that he was Chairman of the Federal Reserve, he never had a good thing to say about gold. I think it says more about the constraints on central bankers; in other words, central bankers can’t tell the truth or what they really think because the market impact would be too great. I think that Greenspan is reverting to saying things today that he was saying 40 years ago but could not say when he was Chairman of the Fed.

- Source, Jim Rickards via Proactive Investor

Jim Rickards - The Fed Will Start QE4 In 2015

The Fed Basically Still Uses LTCM’s Financial Models

The models that LTCM was using the 1990’s were the same models that Wall Street was still using in the early 2000’s and, for that matter, the same models being used today. They are called ‘dynamic stochastic general equilibrium models’ and also risk management models like ‘value at risk’ or VaR models. They were the ones that we used in the 90’s and have continued to use for the last 16 years. They’re still being used now. They do not correspond with how markets actually work or to actual human behavior. They have failed in the past and they will fail again. If you have the wrong model, you will get the wrong policy and you will be negatively surprised by results every single time.

According to Greenspan, the Fed expanded its balance sheet not to boost the economy or to keep inflation moving higher. It was because the Federal government had such large expenditures that it would have ‘crowded out’ private borrowers if the Fed had not increased the size of its balance sheet. Do you think that’s true? Is the Fed directing the economy? Or just reacting to the capital demands of the US government?

I think both things are true. I think Greenspan is right that we are seeing monetization of debt. This is what Frederick Mishkin, the former member of the Federal Reserve board of governors refers to as ‘fiscal dominance.’ Yes, I think Greenspan is right about that but it’s also true that they’re trying to fulfill the dual mandate of price stability and creating jobs. As between the two, the Fed is willing to tolerate higher inflation if they can create more jobs. They don’t talk about ‘fiscal dominance’ and they don’t explicitly say they’re monetizing the debt. In fact they deny that they’re monetizing the debts.

Greenspan’s right. When the credit demands of the Federal government are that great, you either have to accommodate the demands or somebody is going to be crowded out. I think that the result would be deflationary. Governments cannot tolerate deflation. So rather than choose between stimulus from monetary ease and monetization of debt, I think that they are doing both.

- Source Jim Rickards, via Proactive Investor

Financial War and Currency Wars Are Very Different

I have discussed financial war, which is different from currency war. Currency war is an economic policy countries use to fight deflation and encourage inflation by cheapening the currency and creating inflation in the form of higher import prices. It’s a way of creating monetary easing. It’s an age-old economic policy, used most famously in the late 1920’s and 1930’s in what became known as ‘beggar they neighbor.’ Countries were stealing growth from each other by debasing their currencies, trying to import inflation and improve their trade balances by causing cheaper exports to foreign buyers and more expensive imports for domestic buyers. That combination was seen to bolster growth.

Financial war is different. Financial war involves countries that are traditional rivals or even enemies, for instance the US, Russia, and China, with competing interests everywhere from Eastern Europe to the South China Sea. Countries have fought wars in the past using traditional kinetic methods – armies, navies, air forces, missiles, submarines and so forth. We now live in an age where, thinking about warfare, you have to look at asymmetric forms of warfare – not just traditional forms – like chemical, biological, radiological weapons, guerilla warfare, terrorism, and financial warfare. So the scenario I was discussing that involves China buying gold and selling the dollar was not a currency war; it was a financial war. There you are trying to destroy the economy of your opponent, which is a very different situation.

- Source, Jim Rickards via Proactive Investor

The Goal of Currency Wars is Inflation

I expect a collapse in the value of currencies relative to real goods, real assets and real services. This will happen to all currencies, not just the dollar. I don’t expect a word where people lose confidence in the dollar and the euro does really well. On a relative basis, I’ve been bullish on the euro for some time. In the endgame, however, if people lose confidence in the dollar this will be inflationary in all countries around the word and I don’t think that any currency will be able to withstand it. When I say ‘the death of money’ what I really mean is the loss of confidence in the purchasing power of money. That’s very likely to be a global phenomenon not confined to any particular country.

Currency wars are part of the picture because the way you fight a currency war is by cheapening the currency, cutting rates and quantitative easing. We saw that recently with the announcement of more quantitative easing from Japan, which took the markets by surprise and caused the Japanese Yen to fall by over 2 percent in a single morning. That is a huge move in the currency markets.

Another big factor in currency wars is the question of paying sovereign debts. It’s the sovereign deficits that are really the problem and the question is how to deal with them. One way to deal with them is through inflation, which, of course, is the goal in a currency war. The problem is that not everybody can devalue against everybody else all at once. You have to take turns. So it goes back and forth and back and forth. That’s what happened in the 1920’s and 1930’s and it’s happening again today.

- Source, Jim Rickards via Proactive Investors

Catastrophic Outcomes May Come Faster Than Expected

Jim Rickards China went viral and how steel costs as much as cabbage

Jim Rickards - Oil Shocks And The Global Economy

Jim Rickards on Oil Shocks And The Global Economy.

Why Lower Gas Prices Are NOT “Bullish Indicators”

I don’t think the data is bullish at all.Lower gas prices put more money in consumers’ pockets.

But there’s an alternative to spending… Which is saving or reducing debt – which is the same thing.

I don’t consider these bullish indicators. They tell me an economy is running out of steam.

An economy is nothing more than two things: How many people are working and how productive are they?

Labor force participation is going down – which means fewer people are working. And productivity is also going down. Real wages are stagnant. 50 million people are on food stamps. 7 million people have part-time jobs who wish they had full-time jobs.

These data points are not bullish indicators.

We’re in a global depression.

There’s a slow down in Japan, China, Europe and the U.S. — the whole world is in a global depression.

There’s enough fights to go around, but in a fight between the ECB (European Central Bank) and Germany, Germany wins.

The ECB is only doing $2.5 billion worth of asset buying, while the FED has been doing almost $1 trillion a year. So the ECB is going through the motions but they’re not doing anything like QE. They’re not buying soveirgn debt. They’re buying some asset-backed securities, but there aren’t even enough of those to have much of an impact.

The ECB’s Mario Draghi is the best Central Banker in the world. He understands that Central Banks are essentially impotent.

When you’re impotent you have to talk a good game — so Draghi says little and does less.

The U.S. FED is the opposite. They don’t understand how impotent they.

China is the biggest credit bubble in the world.

The U.S. has created a bubble in housing and stocks with easy money, but there’s no bigger bubble in the world than China. They have a greater capacity to keep it going because their investors have fewer alternatives.

Project Prophecy 2.0 with Jim Rickards

Jim Rickards: Obama’s Abandoning the Saudis for Iran and Dooming the Petrodollar

By Alex Daley, Chief Technology Investment Strategist

I sat down with Jim Rickards, author of many best-selling economics and investing books, including his latest, titled The Death of Money. In this exclusive interview, Jim shares his view on the changes in US foreign policy—the newly announced partnership with Iran to help fight ISIS and recent moves away from the petrodollar deal with Saudi Arabia—and what they mean for the dollar, gold, and investment markets in general.

This interview just scratches the surface of the topics Jim covered in his speech at the most  recent Casey Research Summit in San Antonio. You can grab a complete recording of that speech, and all 25 of the others, in the Summit Audio Collection, which is on sale with a juicy preorder discount for just a few more days.

Alex Daley
Chief Technology Investment Strategist
Casey Research

CIA Expert Warns Of A Disaster That Would Make The Great Depression Seem Harmless

The Misery Index combines the true inflation rate with the true unemployment rate.

Why don’t you hear about this in the mainstream news? It is because the Federal Reserve has repeatedly changed how the Misery Index is calculated.

Rickards believes that the way the Misery Index is being calculated is being used to hide the true state of the economy.

He said:

“Today you rarely hear the government talk about the Misery Index with the public. The reason is they may not want you to know the truth. And the truth is, the Misery Index has reached more dangerous levels than we saw prior to the Great Depression. This is a signal of a complex system that’s about to collapse.”

Rickards specifically pinpointed how he thought the crash will come about:

“I expect the first phase will appear as a nearly instantaneous 70% stock market crash. From the outside, nobody will see it coming. Once it becomes clear that it’s not a flash crash – it’s a systemic meltdown in the economy itself, that’s when the gravity of the situation will sink in. And there will be no digging out from it. $100 trillion is a conservative estimate for the damage. A lot can happen over 25-years as our country struggles to recover from this.”

There you have it. A CIA economic expert reveals how he thinks a 25 year depression is about to hit America. Jim Rickards can’t be dismissed as a crackpot. So what do you think will happen to the country’s economic situation over the next 25 years?

- Source, WJ

The World is in a Depression and There is No Getting Out

We are in a depression. This is a global depression. It started in 2007 and it is going to continue indefinitely. Depressions are structural, monetary solutions are cyclical: you cannot solve a structural problem with a cyclical remedy - monetary policy will not work. What it could do eventually is cause inflation. So far people say: “Where is the inflation?...We printed trillions of dollars, there is no inflation”. That is because we would have had deflation, extreme deflation, but for the money printing. It did produce inflation to the extent that it offset the deflation… The world is in depression, we are not getting out of it.

- Source, Jim Rickards via RT

Chinese Growth is Set to Slowdown Further

I have been going for Chinese growth to get to 3 or 4%. I would say that China`s growth is already at 4%. I know they print 7.5%. But about half of the GDP they produce is wasted. So if I build a $5 billion train station in a small town that is $5 billion of GDP- this money is completely wasted because 10 people getting on the train are not going to pay for a $5 billion station. So you go around China with these ghost cities we have talked about before... So it is generating GDP, but it is completely wasted. If you adjusted the published GDP figures for the amount of waste, their actual growth is probably already roughly 4%. That is going to go lower.

- Source, Jim Rickards via RT

The Currency War Goes On

I think this is one long “currency war”. We are now getting into more of a battle, more of a confrontation. The US dollar is the only strong currency that cannot last: the US cannot have a strong currency, because we are desperate for inflation. We have done all thequantitative easing, we have raised the zero, we have issued further guidance, we have done a twist, and we have done three versions of QE. We have done everything possible. The only thing left is to try to cheapen the currency and in fact the dollar is getting stronger. The Fed might not have minded a stronger dollar. Six months ago it did look like the economy was getting stronger. We saw strong second quarter GDP. So it was a little bit of a good day. And Europe was desperate for the help: they were stepping into recession. Japan`s economy collapsed in the second quarter. So you could see the feds saying “ok…we will have a stronger dollar and give Europe and Japan a break”. But that is over. Now the US is becoming a loser and we are the ones who need to take a break. The only way to get it is a cheaper dollar. I would look for that in the months ahead.

- Source, Jim Rickards via Russia Today

Why The U.S. is In a Depression Today

Jim Rickards & Peter Schiff Discuss Global Gold Markets

The FED is Already Insolvent

Jim Rickards on China’s Slowdown & Marshall Auerback on Independence Movements

Our lead story today is China…because we thought we’d at least take one day off from talking about Scotland this week!
China’s central bank is injecting a combined 500 billion yuan into the country’s top banks – a move signaling the deepest concerns yet of an economic slowdown in China. Erin weighs in.

Then, Erin sits down with Jim Rickards, economist and author of “Currency Wars: The Making of the Next Global Crisis,” to discuss Europe and China. After the break, Erin speaks with Marshall Auerback, director of institutional partnerships of the Institute for New Economic Thinking, to continue the discussion on Europe.

And in The Big Deal, Erin and Edward Harrison go over the most recent iPhone 6 reviews and break down some of the new features.

- Source, Russia Today

The Coming Stock Market Crash and The Death of Money

Is the end of the American Empire on the way? What will be the outcome if the dollar meets its death bed. Jim Rickards discusses gold, currency wars and the interest rates. He has some stark warnings.

Max Keiser and Jim Rickards - Currency Wars and the Death of Money

Jim Rickards appears with Max Keiser in New York. They discuss interest rates, the ongoing currency wars and how it is all going to end.

Four Horsemen of the Dollar Apocalypse Jim Rickards

Catastrophic Outcomes May Come Faster Than Expected

James Rickards, author of the new best-selling book called "The Death of Money," says the financial collapse will happen, but he is not sure of when it will come.
Rickards explains, "It is the thing you won't see coming that will take the system down.
Things happen much more quickly than what investors expect."
Rickards adds, "What will happen in gold is that it will chug along and then all of a sudden--boom.
It will be up a $100 an ounce, and then the next day it will be up another $200 an ounce.

Jim Rickards on Currency Wars and Mosler on Saudi Oil Price Cuts

Even as the unemployment rate drops, foreclosures dwindle, and the economy slowly recovers from the Great Recession, financial insecurity is on the rise in American urban areas according to a study conducted by the Corporation for Enterprise Development. Nearly half of all households in major cities don’t have enough money saved to cover essential expenses in an emergency. Erin weighs in.

Then, Erin sits down with Warren Mosler, president of Valance Incorporated, to discuss the many issues surrounding the US economy, the Fed, and employment. Of particular note are Mosler’s views on the recent price cut in Saudi crude prices and the negative impact it could have on production of shale oil in tight oil formations in the US.

After the break, Erin talks to frequent Boom Bust guest Jim Rickards to get a hold on currency wars – specifically regarding the Euro. He argues that the currency wars wax and wane but they are always there. Right now the currency wars are back in the spotlight.

And in The Big Deal, Erin and Edward Harrison discuss Alibaba’s record-breaking IPO. Do big IPOs outperform the market? No, they underperform if you look at the historical record.

- Source, Russia Today

The Tipping Point in Perception of Inflation

‘Inflation often begins imperceptibly, and gains a foothold before it is recognised. This lag in comprehension, important to central banks, is called “money illusion”, a phrase that that refers to a perception that real wealth is being created, so that Keynesian “animal spirts” are aroused. Only later is it discovered that bankers and astute investors captured the wealth, and everyday citizens are left with devalued savings, pensions, and life insurance….

‘Inflation can gain substantial momentum before the general public notices it. It was not until 1974, nine years into an inflationary cycle, that inflation became a potent political issue and a prominent public policy concern. This lag in momentum and perception is the essence of “money illusion”.

‘Once inflation perceptions shift, they are extremely difficult to reset. In the Vietnam era, it took nine years for everyday Americans to focus on inflation, and an additional eleven years to re-anchor expectations. Rolling a rock downhill is much easier than pushing it back up to the top.’

- Jim Rickards, The Death of Money

Six Major Flaws in the Fed’s Economic Model

The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.

The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in the world.

The Fed may have some legitimate role as an emergency lender of last resort and as a force to use liquidity to maintain price stability. But, the lender of last resort function has morphed into an all-purpose bailout facility, and the liquidity function has morphed into massive manipulation of interest rates.

The original sin with regard to Fed powers was the Humphrey-Hawkins Full Employment Act of 1978 signed by President Carter. This created the “dual mandate” which allowed the Fed to consider employment as well as price stability in setting policy. The dual mandate allows the Fed to manage the U.S. jobs market and, by extension, the economy as a whole, instead of confining itself to straightforward liquidity operations.

Janet Yellen, the Fed chairwoman, is a strong advocate of the dual mandate and has emphasized employment targets in the setting of Fed policy. Through the dual mandate and her embrace of it, and using the dollar’s unique role as leverage, she is a de facto central planner for the world.

Like all central planners, she will fail. Yellen’s greatest deficiency is that she does not use practical rules. Instead she uses esoteric economic models that do not correspond to reality. This approach is highlighted in two Yellen speeches. In June 2012 she described her “optimal control” model and in April 2013 she described her model of “communications policy.”

The theory of optimal control says that conventional monetary rules, such as the Taylor Rule or a commodity price standard, should be abandoned in current conditions in favor of a policy that will keep rates lower, longer than otherwise. Yellen favors use of communications policy to let individuals and markets know the Fed’s intentions under optimal control.

The idea is that over time, individuals will “get the message” and begin to make borrowing, investment and spending decisions based on the promise of lower rates. This will then lead to increased aggregate demand, higher employment and stronger economic growth. At that point, the Fed can begin to withdraw policy support in order to prevent an outbreak of inflation.

The flaws in Yellen’s models are numerous. Here are a few:


1) Under Yellen’s own model, saying she will keep rates “lower, longer” is designed to improve the economy sooner than alternative policies. But if the economy improves sooner under her policy, she will raise rates sooner. So, the entire approach is a lie. Somehow people are supposed to play along with Yellen’s low rate promise even though they intuitively understand that if things get better the promise will be rescinded. This produces confusion.

2) People are not automatons who mindlessly do what Yellen wants. In the face of the embedded contradictions of Yellen’s model, people prefer to hoard cash, stay on the sidelines and not get suckered by the bait-and-switch promise of optimal control theory. The resulting lack of investment and consumption is what is really hurting the economy. Economists call this “regime uncertainty” and it was a leading cause of the length, if not the origin, of the Great Depression of 1929-1941.

3) In order to make money under the Fed’s zero interest rate policy, banks are engaging in hidden off-balance sheet transactions, including asset swaps, which substantially increase systemic risk. In an asset swap, a bank with weak collateral will “swap” that for good collateral with an institutional investor in a transaction that will be reversed at some point. The bank then takes the good collateral and uses it for margin in another swap with another bank. In effect, a two-party deal has been turned into a three-party deal with greater risk and credit exposure all around.

4) Yellen’s zero interest rate policy constitutes massive theft from savers. Applying a normalized interest rate of about 2% to the entire savings pool in the U.S. banking system compared to the actual rate of zero, reveals a $400 billion per year wealth transfer from savers to the banks from the zero rates. This has continued for five years, so the cumulative subsidy to the banking system at the expense of everyday Americans is now over $2 trillion. This hurts investment, penalizes savers and forces retirees into inappropriate risk investments such as the stock market. Yellen supports this bank subsidy and theft from savers.

5) The Fed is now insolvent. By buying highly volatile long-term Treasury notes instead of safe short-term treasury bills, the Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries these notes on its balance sheet “at cost” and does not mark to market, but if they did they would be broke. This fact will be more difficult to hide as interest rates are allowed to rise. The insolvency of the Fed will become a major political issue in the years ahead and may necessitate a financial bail-out of the Fed by taxpayers. Yellen is a leading advocate of the policies that have resulted in the Fed’s insolvency.

6) Market participants and policymakers rely on market prices to make decisions about economic policy. What happens when the price signals upon which policymakers rely are themselves distorted by prior policy manipulation? First you distort the price signal by market manipulation, then you rely on the “price” to guide your policy going forward. This is the blind leading the blind.

The Fed is trying to tip the psychology of the consumer toward spending through its communication policy and low rates. This is extremely difficult to do in the short run. But once you change the psychology, it is extremely difficult to change it back again.

If the Fed succeeds in raising inflationary expectations, those expectations may quickly get out of control as they did in the 1970’s. This means that instead of inflation leveling off at 3%, inflation may quickly jump to 7% or higher. The Fed believes they can dial-down the thermostat if this happens, but they will discover that the psychology is not easy to reverse and inflation will run out of control.

The solution is for Congress to repeal the dual mandate and return the Fed to its original purpose as lender of last resort and short-term liquidity provider. Central planning failed for Stalin and Mao Zedong and it will fail for Janet Yellen too.

Regards,

Jim Rickards
for The Daily Reckoning

China’s Government Crackdown on Corruption

China’s Communist Party announced a formal investigation last month into one of the party's most senior figures, Zhou Yongkang, and one hedge fund manager says the move will bring broader political and market implications.

Jim Rickards, portfolio manager for the West Shore Real Return Income Fund and the author of “The Death of Money,” has experience doing business in China, and recently told FOX Business’s Deirdre Bolton that the investigation is the Chinese government’s warning shot to corrupt officials.

After 18 months of covert investigation, the Chinese government went public with its official investigation against the ex-security chief on July 29, according to Chinese media. The investigation makes Zhou the highest-ranking official to be placed under formal investigation in over a decade.

“Zhou Yongkang was the head of the secret police, the court administration and the enforcement of party discipline. He is the guy who’s now been arrested and investigated,” Rickards said.

While Zhou is just under investigation, Rickards said his fate might already be sealed.

“You have to understand that there is no rule of law in China. They have a constitution, they have courts and lawyers and trials, but it’s all for show….The Power Bureau, the Central Committee and the Communist Party make all the decisions,” he said.

Rickards described Zhou as part of a group of “financial warlords” in the country that use power and connections to secure multibillion dollar project contracts, such as commercial housing projects.

“If you look at these ghost cities and construction sites… why are they building all these empty things that no one needs? If you are in charge of cement, steel or construction… you scam them and then you take the money buy a place in Vancouver [and] New York.” Rickards said.

Rickards said China’s highly-unregulated legal system makes investing in the country difficult for those without government connections.

“The best way to invest in China, is to find a service business that China needs, where they pay you in hard currencies outside of China, and you don’t have to put a lot of fixed assets inside China,” said Rickards. “That way, if things go badly, you just tear up your contract and walk away.”

- Source, Fox Business

What can the Chinese government do to keep the wealth gap from widening?

China could rebalance its economy away from wasteful investment, which mainly benefits elites in construction and related industries, toward consumption and services, which provides more opportunities for middle-class workers.

China could also invest more in education so that everyday citizens could participate in more high-value-added labor as a way to earn a larger slice of national income. China could also enforce its laws against corruption, bribery and cronyism more rigorously and clamp down on tax avoidance and capital flight.

- Source, DW

What is driving China's growing wealth gap?

Most of the income inequality in China can be explained by corruption and elitism. In the 1980s and 1990s, under the leadership of Deng Xiaoping, China reformed its system of state-owned enterprises (SOES). Some of these SOES were closed, some were privatized, and some remained SOES, but were designated as national champions in their respective industries and allowed to thrive free of normal competition.

In each case, stock in the privatized companies or senior management roles in the new national champions was given to loyal Communist Party cadres and to so-called "princelings" who were the sons and daughters of leading officials or survivors of the Long March days of Mao Zedong in the 1930s. During the export and investment led boom that followed, these enterprises made enormous profits which went principally to the owners and senior managers and not to the workers.

This boom has continued beyond the bounds of normal expansion through China's over-investment in infrastructure, much of which is wasted. In effect, China is misallocating national wealth in favor of the SOES and private companies favored by government, which enriches a few at the expense of the nation as a whole.

How unequal has the current Chinese economic system become in comparison to capitalist systems in countries such as the United States?

Income inequality is a global problem. It has always existed in traditional oligarchical systems such as those in South America. It was less prevalent in North America and Europe and former Commonwealth nations that had a strong rule of law and offered good economic opportunities to those people who did not necessarily start out from a privileged position.

It was also not much of a problem in Communist nations such as Russia and China because there was relatively little wealth to begin with. Elites may have lived better but they were constrained by the relative poverty of their countries. Since the new age of globalization began in 1989, China and Russia have become much richer, which increases the opportunities for cronyism and theft by elites.

The situation in the US is exacerbated by bank and auto bailouts, other forms of government favoritism, and an opaque and complex tax system. The causes of income inequality in China, Russia and the US are different but the result is the same. China has greater income inequality than the US, but both countries are approaching the point where income inequality is so extreme that it threatens to cause social disorder.

The ruling Communist Party aims to preserve social stability to avoid any challenge to its grasp on power. How big of a concern is this widening wealth gap to China's Communist Party?

Income inequality should be deeply disturbing to the Communist Party leadership because it has historically been a source of social instability in China. The demonstrations and massacre in Tiananmen Square in 1989 were in part attributable to increasing inflation, which is a form of income inequality because it is most damaging to those with fewer investment options to hedge against inflation.

However, the Chinese elites are themselves the main beneficiaries of income inequality in the short run. Capital flight from China is accelerating, which is a sign that at least some elites have adopted a "take the money and run" attitude and no longer care about continued Communist Party dominance provided they can extract enormous wealth from the country before the social disorder become more pronounced. The widening wealth gap is troubling, but it is not clear whether there is much political will to stop it.

- Source, DW

Rickards: Stock market reality check

by James Rickards

Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indices, at or near all-time highs, will go higher still.

The litany of market happy talk is impressive. The unemployment rate has dropped to 6.1%, down about 4 percentage points from its peak, and is expected to go lower in the months ahead. The economy created about 230,000 jobs per month in the first half of 2014, which brings the increase in jobs to nine million since the economic recovery began in mid-2009. Interest rates remain low, which supports high asset valuations in stocks and housing. Inflation is tame and expectations about future inflation are well anchored. To hear the stock market bulls tell the story, all is right with the world.

But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse. Almost everything about the happy talk story is superficial, and falls apart under scrutiny. There is an alternative narrative of bad news that is seldom discussed on mainstream business channels but is well known to analysts. When these adverse trends are taken into account one conclusion in inescapable. The stock market and economic fundamentals are on a collision course. One or the other will have to swerve. Either the economy will have to improve rapidly and unexpectedly and reverse its fundamental weakness, or inflated stock values are heading for a precipitous fall. The evidence suggests that the latter is more likely.

The first weak link in the happy talk chain is the nature of job creation. For example, it was reported than 288,000 jobs were created in June. But full-time jobs declined by 523,000 while part time jobs increased by about 800,000. The widely reported increase in net jobs masked a disastrous loss of full-time jobs offset by a huge increase in part-time jobs. The part-time jobs offer fewer hours, lower pay and few benefits. They may be better than no job at all, but they are not the kind of jobs that will support discretionary consumer spending on which the economy relies for growth.

This trend in part-time jobs is not new. There are 7.5 million people working part-time on an involuntary basis compared to about 4.4 million doing so in 2007. This rise in part-time jobs is expected to continue because it is driven in part by Obamacare, which does not require coverage for part-time workers. Employers are aware of this and simply cut full-time jobs and replace them with part-timers to reduce insurance costs.

Nor is there any comfort in the declining unemployment rate. Much of the decline is attributable not to job creation but rather to the decline in the number of people looking for work. Once people stop looking for a job, they are no longer technically “unemployed” and the unemployment rate drops even though no job has been found. As columnist Mort Zuckerman said, “You might as well say that the unemployment rate would be zero if everyone stopped looking for work.” Only 62.8% of Americans participate in the work force today — the lowest level since 1978.

The news gets worse. Not only is labor force participation low, and full-time employment collapsing, but the productivity of those working is now in decline. This decline in productivity is another drag on growth. The reason for it is even more disturbing. Productivity is declining because capital expenditure has slowed. Businesses are keeping up with demand by employing part-time workers instead of investing in the plant and equipment needed to make full-time workers more productive.

Not surprisingly, this triple-whammy of declining full-time jobs, declining productivity and slowing capital investment means that real wages are stagnant. If workers can’t make more, they can’t spend more without borrowing. Borrowing is more difficult because home equity has not recovered from the 2007 housing crash and lending standards are the most stringent in years. Companies won’t invest in equipment if consumers can’t spend.

The result is a death spiral of lower consumption, lower investment, declining productivity, stagnant wages, and underemployment all feeding on each other and making the overall economy weaker. This is the real reason for the shocking 2.9 percent decline in first quarter GDP. It was not the result of “cold weather,” which by the way happens every winter.

There are other signs of ill health in labor markets. In a dynamic labor market, net job gains reflect large numbers of new jobs and lost jobs as employees confidently quit their jobs in the expectation of finding new ones. But evidence reported by Goldman Sachs and James Pethokoukis of the American Enterprise Institute shows that job turnover has declined sharply as employees are extremely reluctant to quit their jobs in an uncertain environment. This tends to lock-out the unemployed who lose job entry opportunities and to weaken wage growth as employees lose leverage to demand raises.

Labor force participation is unlikely to rise significantly partly because of generous benefits that provide an adequate lifestyle for those out of the labor force. The U.S. has over 50 million on food stamps, 11 million on disability, and millions more on extended unemployment benefits. Prospective loss of these benefits creates a high hurdle to motivate a return to the workforce.

The news from abroad is no better. China is slowing precipitously and may be on the brink of a credit collapse. European growth is near zero and even the mighty German economy, the locomotive of Europe, is slowing partly because of weaker demand from Ukraine, Russia and China.

Against this backdrop, mainstream voices are beginning to call U.S. financial markets a bubble. The New York Times recently featured a front page story with the title, Welcome to the Everything Boom, or Maybe the Everything Bubble. The conservative Bank for International Settlements in Switzerland recently warned that stock markets had become “euphoric.” Even Janet Yellen of the Federal Reserve, the institution with the worst record for spotting asset bubbles, said that valuations of some securities “appear stretched.”

So, the conundrum is complete. Stock indices march to all-time highs while economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing. Structural reform is the job of the White House and Congress, not the Federal Reserve. Since the White House and Congress are barely speaking, no help should be expected from that direction. Therefore a stock market collapse is almost inevitable and is probably coming soon.

James Rickards is portfolio manager for the West Shore Real Return Income Fund and the author of “The Death of Money,” a New York Times best seller from Penguin Random House. Follow on twitter @JamesGRickards

Forget Cyprus, Noboby Is Stealing from Depositors More than Bernanke

James Rickards on Alex Jones Infowars

Jim Rickards appears on the very popular, Alex Jones, Infowars radio show. He tells Alex to watch what they do. Not what they say.

Tracking the impact of Argentina's debt default

Jim Rickards, Senior Managing Director at Tangent Capital, discusses whether Argentina's second default on its sovereign debt will have a contagion effect on global financial markets.

Fireplace of financial instability is stacked with wood

Jim Rickards talks with Paul Buitink about the crisis and his presentation for 20 September in Rotterdam.

Jim Rickards on Russian Sanctions

China’s Government Crackdown

The World's Most Important Financial Battle Is Coming to a Head

Dr. Steve Sjuggerud

"The world is witnessing a climactic battle between deflation and inflation," Jim Rickards writes in his excellent new book The Death of Money.

"It is just a matter of time" before this battle comes to a head.

At some point, the U.S. economy will experience "an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpected overwhelms the other."

Which one will win? And what are the potential outcomes? Rickards goes over each of those in his book...

Inflation is the easy one to understand...

For the most part, the government creates this one... by "printing" trillions of dollars.

Deflation is less easy to understand...

For starters, we "have no living memory of it." The last episode of persistent deflation was in the Great Depression. Rickards calls deflation "the Federal Reserve's worst nightmare." For one, deflation "increases the value of government debt, making it harder to repay."

Because of fear of deflation, the Fed can't stop its money printing. If it did stop, "deflation would quickly dominate the economy, with disastrous consequences for the national debt, government revenue, and the banking system."

Which will win – inflation or deflation?

Rickards explains that "the most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation." The Fed assumes it can later deal with inflation that it might create.

I agree with him. Governments have proven for centuries that – while they might be pretty bad at most things – one thing they're pretty good at is creating inflation through printing money.

The easy conclusion is that inflation will win... but many times, the easy conclusion isn't necessarily the right one.

In his book, Rickards builds a strong case for how deflation could win as well.

Whether inflation or deflation wins this battle, Rickards makes a strong case for a higher gold price.

If inflation wins, then it will take more paper dollars to buy an ounce of gold. And if deflation wins, then the price of gold will move higher to break that deflation...

- Source, The Daily Wealth

Stock Market Reality Check

James Rickards

Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indices, at or near all-time highs, will go higher still.

The litany of market happy talk is impressive. The unemployment rate has dropped to 6.1%, down about 4 percentage points from its peak, and is expected to go lower in the months ahead. The economy created about 230,000 jobs per month in the first half of 2014, which brings the increase in jobs to nine million since the economic recovery began in mid-2009. Interest rates remain low, which supports high asset valuations in stocks and housing. Inflation is tame and expectations about future inflation are well anchored. To hear the stock market bulls tell the story, all is right with the world.

But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse. Almost everything about the happy talk story is superficial, and falls apart under scrutiny. There is an alternative narrative of bad news that is seldom discussed on mainstream business channels but is well known to analysts. When these adverse trends are taken into account one conclusion in inescapable. The stock market and economic fundamentals are on a collision course. One or the other will have to swerve. Either the economy will have to improve rapidly and unexpectedly and reverse its fundamental weakness, or inflated stock values are heading for a precipitous fall. The evidence suggests that the latter is more likely.

The first weak link in the happy talk chain is the nature of job creation. For example, it was reported than 288,000 jobs were created in June. But full-time jobs declined by 523,000 while part time jobs increased by about 800,000. The widely reported increase in net jobs masked a disastrous loss of full-time jobs offset by a huge increase in part-time jobs. The part-time jobs offer fewer hours, lower pay and few benefits. They may be better than no job at all, but they are not the kind of jobs that will support discretionary consumer spending on which the economy relies for growth.

This trend in part-time jobs is not new. There are 7.5 million people working part-time on an involuntary basis compared to about 4.4 million doing so in 2007. This rise in part-time jobs is expected to continue because it is driven in part by Obamacare, which does not require coverage for part-time workers. Employers are aware of this and simply cut full-time jobs and replace them with part-timers to reduce insurance costs.

Nor is there any comfort in the declining unemployment rate. Much of the decline is attributable not to job creation but rather to the decline in the number of people looking for work. Once people stop looking for a job, they are no longer technically “unemployed” and the unemployment rate drops even though no job has been found. As columnist Mort Zuckerman said, “You might as well say that the unemployment rate would be zero if everyone stopped looking for work.” Only 62.8% of Americans participate in the work force today — the lowest level since 1978.

The news gets worse. Not only is labor force participation low, and full-time employment collapsing, but the productivity of those working is now in decline. This decline in productivity is another drag on growth. The reason for it is even more disturbing. Productivity is declining because capital expenditure has slowed. Businesses are keeping up with demand by employing part-time workers instead of investing in the plant and equipment needed to make full-time workers more productive.

Not surprisingly, this triple-whammy of declining full-time jobs, declining productivity and slowing capital investment means that real wages are stagnant. If workers can’t make more, they can’t spend more without borrowing. Borrowing is more difficult because home equity has not recovered from the 2007 housing crash and lending standards are the most stringent in years. Companies won’t invest in equipment if consumers can’t spend.

The result is a death spiral of lower consumption, lower investment, declining productivity, stagnant wages, and underemployment all feeding on each other and making the overall economy weaker. This is the real reason for the shocking 2.9 percent decline in first quarter GDP. It was not the result of “cold weather,” which by the way happens every winter.

There are other signs of ill health in labor markets. In a dynamic labor market, net job gains reflect large numbers of new jobs and lost jobs as employees confidently quit their jobs in the expectation of finding new ones. But evidence reported by Goldman Sachs and James Pethokoukis of the American Enterprise Institute shows that job turnover has declined sharply as employees are extremely reluctant to quit their jobs in an uncertain environment. This tends to lock-out the unemployed who lose job entry opportunities and to weaken wage growth as employees lose leverage to demand raises.

Labor force participation is unlikely to rise significantly partly because of generous benefits that provide an adequate lifestyle for those out of the labor force. The U.S. has over 50 million on food stamps, 11 million on disability, and millions more on extended unemployment benefits. Prospective loss of these benefits creates a high hurdle to motivate a return to the workforce.

The news from abroad is no better. China is slowing precipitously and may be on the brink of a credit collapse. European growth is near zero and even the mighty German economy, the locomotive of Europe, is slowing partly because of weaker demand from Ukraine, Russia and China.

Against this backdrop, mainstream voices are beginning to call U.S. financial markets a bubble. The New York Times recently featured a front page story with the title, Welcome to the Everything Boom, or Maybe the Everything Bubble. The conservative Bank for International Settlements in Switzerland recently warned that stock markets had become “euphoric.” Even Janet Yellen of the Federal Reserve, the institution with the worst record for spotting asset bubbles, said that valuations of some securities “appear stretched.”

So, the conundrum is complete. Stock indices march to all-time highs while economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing. Structural reform is the job of the White House and Congress, not the Federal Reserve. Since the White House and Congress are barely speaking, no help should be expected from that direction. Therefore a stock market collapse is almost inevitable and is probably coming soon.

- Source, James Rickards via Darien Times

Monetary Solutions Can't Solve Structural Problems

The global debt markets have mushroomed to an estimated $100 trillion dollars! According to the latest statistics.

Jim Rickards Talks Financial Warfare

Economist and author Jim Rickards, discuss reserve currencies, BRIC nations, and the IMF in the context of financial warfare.

- Source, Russia Today

The Death of Money, Playing the Currency Wars

BRICS Development Bank A Significant Step Away From The Dollar

Jim Rickards appears on CNBC where he discusses the gradual move away from the use of the US dollar by countries such as China and Russia.

Fireplace of Financial Instability is Stacked With Wood, Spark is Matter of Time

Jim Rickards talks with Paul Buitink about the crisis and his presentation for 20 September in Rotterdam at the event.

The Significance of a BRICS Development Bank

Jim Rickards, Senior Managing Director at Tangent Capital, explains how the new bank differs from the World Bank and the International Monetary Fund.

- Source, CNBC

Jim Rickards talks Financial Warfare & Eric Schneiderman targets Barclays

New York Attorney General Eric Schneiderman accused Barclays of allegedly telling its customers that it would protect them from high frequency traders, while actually doing the exact opposite and accommodating them. Erin takes a look.

Then Erin brings you part two of her interview with economist and author Jim Rickards. They discuss reserve currencies, BRIC nations, and the IMF in the context of financial warfare. After the break, Erin brings you the best of week. Catherine Austin Fitts, Divya Narendra, Cullen Roche, Marshall Auerback, and Marc Chandler all weigh in.

- Source, Russia Today

Jim Rickards: No Exit For The Fed

The Federal Reserve, the central bank of the U.S., is nearing the end of its ability to manipulate the U.S. economy without producing consequences worse that those it set out to avoid in 2008. The Fed has no good exits from seven years of market manipulation. If it continues its current policy of reducing purchases of assets, the so-called “tapering,” it risks throwing the U.S. into a recession. If it reverses course and pauses the taper and later increases asset purchases, it risks destroying confidence in the dollar among foreign creditors of the U.S. Both outcomes are potentially disastrous, but there are no good outcomes on the horizon. This is the result of manipulating markets to the point where they no longer function as markets providing useful price signals and guiding the efficient allocation of capital. Today markets are a mirage, created by the Federal Reserve, which is caught in a prison of its own device.

Fed Is Wrong about Recovery

Since 2007, the Fed has tried to revive the U.S. economy through monetary ease. It began with a series of interest rates cuts, but by late 2008 interest rates had effectively reached zero and the Fed resorted to money printing, called quantitative easing or “QE” as a way to continue to stimulate nominal growth and aggregate demand. The money printing is done by purchasing bonds from banks and paying for the purchases with money that comes from thin air. This money printing has continued in three programs over six years called QE1, QE2 and QE3. The most recent program, QE3, began in September 2012 and was open-ended as to duration and the amount of bonds being purchased.

By late 2013, the Fed’s balance sheet has swollen to over $4 trillion due to the money printing. Because U.S. growth appeared to be stronger in late 2013 and the unemployment rate had fallen sharply, the Fed began to reduce the rate at which it printed money. This was the “taper” of asset purchases. However, the data on which the Fed relied was highly misleading. U.S. growth had been propped up by inventory accumulation. The declining unemployment rate had been caused not by job creation but by people dropping out of the labor force.

In fact, the Fed had not tapered into economic strength, it had tapered into weakness. This quickly became apparent when U.S. growth in the first quarter of 2014 showed a decline and as the U.S. labor force continued to shrink. Many other negative signs appeared including weak retail sales, declining real wages, lackluster consumer confidence, and a cooling-off in the housing market. In short, the U.S. economy was showing signs of sharply declining growth if not outright recession.



Why Tapering Is Nothing New & Why the Fed Needs To ‘Untaper’

This should not have come as a surprise. Those who focused on the tapering in December 2013 did not recognize that the Fed had tapered twice before. The end of QE1 in June 2010 was, in effect, a 100% taper. The end of QE2 in June 2011 was also a 100% taper. So, the famous taper of December 2013 was actually the third time the Fed had tried to withdraw from money printing. The first two times were failures as evidenced by the fact that the Fed had to launch new money printing programs after each withdrawal. By early 2014, it appeared that the taper of QE3 would also be a failure.

Depending on economic data in coming months, the Fed may have to pause the taper before it is completed late in 2014. Even if the Fed does not pause the taper but completes the process of reducing new asset purchases to zero, it appears likely that the Fed will have to increase money printing in 2015 in what will no doubt be called QE4. The U.S. economy has not shown an ability to achieve self-sustaining growth, so continued Fed money printing is needed to keep the economy growing at all.

Monetary Expansion Comes at a Price

But money printing carries its own risks. Foreign creditors of the U.S. are watching the Fed’s money printing closely and are visibly uncomfortable. Major creditors such as Russia and China are taking steps to insulate themselves from the potential for inflation in the near future if the Fed’s QE money printing programs continue.

Treasury data shows that net foreign purchases of U.S. Treasury debt have dropped sharply over the past year. Russia has been dumping U.S. Treasury debt since late 2013, partly as a result of fear of U.S. economic sanctions and partly out of concern about the fate of the U.S. dollar. Both Russia and China have been buying enormous quantities of gold to hedge against possible U.S. dollar inflation.

If you would like to continue reading follow this link.

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Gold Demand Shock Coming From China Credit Crisis

Spoke to head of global commodities trading at LBMA bank. He expects a #gold "demand shock" from #China credit crisis. May be game on there.

- Jim Rickards via Twitter

China's Giant Ponzi Scheme Won't End Well

(Video cannot be embedded, please click image to view)

The Daily Ticker's Aaron Task and Lauren Lyster discuss the drop in Chinese stocks and economic growth coupled with rise in rates.

- Source, Yahoo Finance

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