An introduction to lawyer, portfolio manager, government adviser, lecturer, and author James Rickards could easily be five pages long. Sifting through his CV, it’s easier to pick the things he doesn’t do rather than listing all the different jobs and responsibilities he holds and has held over the past decades. This is what is keeping him busy at this moment:
He is the chief global strategist at West Shore Funds, is a registered investment advisor, and he edits the financial newsletter Strategic intelligence. He advises the department of defense and also lectures at Johns Hopkins University among others. What he is best known for, however, are his two best-selling books about the global financial system, “Currency Wars” (2011, Portfolio Penguin) and “The Death of Money“ (2014, Portfolio Penguin).
Both books have defined and predicted important trends in financial markets that the mainstream media and other commentators frequently overlook or pick up on years later.
Epoch Times spoke to Mr. Rickards about his new book “The New Case for Gold“ (Portfolio Penguin, 2016), the coming reform of the financial system and China’s role as a source of global market volatility.
Read about why the Fed didn’t hike rates at its last meeting and why gold is the real money in part I of this exclusive interview with James Rickards. Skip to 14:16 in the video to directly delve into financial system reform and China.
Epoch Times: In your new book you quote the book of Revelations in the Bible, a quote about the new Jerusalem where the streets are paved with gold. But before we get to the new Jerusalem, there is some volatility according to the Book of Revelations. Where do you draw the parallels with our financial system at this moment?
James Rickards: I'll leave the biblical interpretation to the scholars, I’m more of a financial analyst and a gold analyst. Clearly central banks have pulled out all the stops, they printed trillions of dollars, they’ve swapped trillions of dollars. They guaranteed the money market funds in 2008 and the guaranteed all the bank deposits. They did everything possible.
We might have avoided something worse that might have happened, like the Great Depression, but none of that policy has been reversed. The Fed’s balance sheet is still bloated. A lot of the swap-lines are still in place. They haven’t been able to normalize policy since 2008.
So what’s going to happen in the next crisis? And these crises come every seven to eight years. We go back to 1987, the stock market fell 22 percent in one day. Not a year, not a month but one day, 22 percent. By today’s Dow Jones Index that would be the equivalent of 4000 Dow points.
Now if the stock market fell 400 points I guarantee it would be on every evening business show, front page news, every website. Imagine if it fell 4000 points. That’s the equivalent of what happened in October of 1987. In 1994 we had the Mexican Peso crisis. Then we had a surprise interest rate hike, Orange county went bankrupt. In 1997/1998 we had the Asian financial crisis, the Long Term Capital Management (LTCM) crisis.
I was the general counsel for LTCM, and I negotiated that bail-out. I had a front row seat on that one. I know exactly how close global markets came to a complete collapse. We were within hours from shutting every exchange in the world. People forget about that but that’s exactly what happened.
In 2000 we had the dot.com crash, 2007 the mortgage crash, 2008 the Lehman and AIG panic. These things happen like clockwork. Every six, seven, eight, nine years. It’s been seven years almost eight years since the last one. How long do you think before another one comes? And yet they haven’t normalized policy, so what’s the Fed going to do the next time.
Are they going to print another $4 trillion? Legally they could, but they are at the outer limit of what they can do without destroying confidence. And confidence is the key to the whole thing.
Epoch Times: You talk about the concept of world money in your book, sponsored by the International Monetary Fund (IMF).
Mr. Rickards: So what you are going to see is world money. You are going to see the IMF print Special Drawing Rights (SDR). It’s a geeky name but it’s a kind of world money printed by the IMF. They'll flood the world with trillions of SDRs. It might work because people don’t really understand what SDRs are. It might just blow by everybody.
At best it will be highly inflationary. At worst it won’t work because people will say, we’ve lost confidence in these other kinds of paper money and fiat money, why should we have any more confidence in that.
And then you'll see a gold buying panic and the dollar price of gold would skyrocket. It would be better if the leading financial and trading powers in the world sat down today in relatively calm times and did something like Bretton Woods and reform the international monetary system.
I think if they did, gold would play a role. I am not saying it would be a strict gold standard but I am saying gold would have some role. I don’t think that is going to happen. I think we are going to see a crisis first. Going back to your version of the Book of Revelations you have to have some rough times before you get to the good times.
The powers will come together. They will reform the international monetary system, but they'll do it in a state of collapse and panic rather than in a calm, orderly state.
In that world, people are going to go on their own gold standard. They’re not going to wait for the financial powers to create a gold standard, they’re going to have a gold standard of their own. They’re going to dump paper money, get into gold to preserve wealth. It won’t even be a question of “Gee will it go up? Will I make gains?” like buying stocks and bonds. It‘ll just be to preserve wealth so they’ll actually have something left. So we talk about all this in the book “The New Case for Gold.”
Epoch Times: Speak about a crisis, let’s talk a bit about China. They have laid out this path to reform the financial system and yet are in a bit of a hotspot themselves right now.
Mr. Rickards: China has actually been doing a good job of getting ready for playing both sides of the fence. The Chinese yuan, their currency, also called the RMB or renminbi has been included in this Special Drawing Rights (SDR) that I talked about.
A lot of people think that these are hard currencies backing the SDR. That’s not true. They are a basket of currencies but that basket is for the sole purpose of computing the value of an SDR. So you ask what an SDR is worth in euros or dollars, that’s just a simple math formula and there are five currencies that go into it.
Technically, today there are four currencies. The International Monetary Fund (IMF) has announced that they’re going to include SDRs but that will not be effective until October 2016. So as of today, the Chinese Yuan is not in the SDR but they have announced that they’re going to include it as of Sept. 30, 2016.
The other four currencies are dollars, sterling, yen, and euros, which is what you'd expect. Now they’re going to include the Chinese yuan. So in that sense, China is joining the club. Joining the paper money club, acting as a responsible member of the international financial system and would not look from the outside any different from the United States and Europe.
But they’re also acquiring thousands of tons of gold. Now they’re doing this secretly, doing it through stealth, intelligence, military assets, agents, using banks that will buy gold but not disclose who the buyer is; of course it’s China. China is stripping their mines, they’re producing 450 tons internally, they’re importing about 1200-1400 tons from Hong Kong, and we know Hong Kong has pretty good reporting.
So we know China is getting about 1600-1700 tons of gold a year. They’ve been doing this for about seven years so they have well in excess of 10,000 tons, maybe as much as 13,000 tons of gold that they’ve acquired in the last seven years. We don’t know how much of that is going to the government, how much of that is going to private consumption.
The Chinese citizens love buying gold. They can’t invest overseas, at least not very easily. The real estate bubble has popped. The stock market bubble has popped. They can’t invest overseas so they tend to buy gold. You can make different assumptions about this, I’ve heard different estimates but it does appear that officially, China has around to maybe 4,000-5,000 tons of gold. They report far less. The reporting is deceptive. They don’t want the world to know how much they actually have.
They report about 1,700 tons but they have maybe closer to 4,000 tons. They’re still trying to get to 8,000 tons of gold which would match the United States. That’s how much the United States has.
Epoch Times: Will China launch its own reserve currency backed by gold?
Mr. Rickards: Here’s why some people speculate: The Chinese are going to launch the yuan as a global reserve currency backed by gold and run the dollar off the road. That’s possible but I don’t really see that as what they’re doing. What they are doing is hedging their position because they have about $2 trillion in U.S. dollar denominated assets. By the way, their hard currency reserves are going down very rapidly as well; separate problem. They’ve got about $2 trillion and this pile of gold.
What they want is a strong dollar, actually. Because if you had $2 trillion you'd want a strong dollar too. They fear that the US will resort to inflation to get out from under the U.S. debt burden and I think that’s highly likely. The United States is trying to get some inflation. What’s going to happen is that the real value of those dollar reserves will start to go down.
Now the nominal value, the $2 trillion figure I mentioned will stay the same but it won’t be worth as much. The United States will do this all the time and also to China. They'll give them the $2 trillion they owe them, but good luck buying a loaf of bread with it because they’re going to inflate the value of it.
If that happens, some people say the Chinese could dump their treasuries. They can’t. The markets aren’t that big and the president of the United States could stop them if they tried to do it in a malicious or disruptive way. So they’re kind of locked in. They hope for a stable dollar but if the value of the dollar starts to go down, the value of their gold will start to go up because that’s what happens in inflation. What they’ve done with the paper and the gold is create a hedge position.
The way it will probably play out is that the US will get some inflation so paper assets will go down but the gold will go up and China will preserve wealth. My view is that if it’s good enough for China, it’s good enough for ordinary citizens. They obviously see something coming otherwise they wouldn’t be buying so much gold.
Epoch Times: It’s not just a dollar devaluation they need to be afraid of. The market thinks the yuan will devalue first.
Mr. Rickards: China is highly unstable. But China’s not going to disappear. It’s the world’s second-largest economy. Over 1 billion people, world’s second largest economy, China’s not going to disappear. But they have a lot of problems. No economy goes from low income to middle income to high income without booms and busts.
This was true in the United States. We went from an agrarian economy in 1776 to a prosperous not only industrial, but high technology economy in the 21st century with astounding growth. But we had busts along the way. We had bankruptcies. We had panics. We had bank runs. A lot of the states defaulted on their obligations in the late 1820’s and early 1830’s.
China’s at that stage where they clearly have a credit bubble, a real estate bubble, a stock bubble, and enormous debts. I’ve been to China. I’ve been out to these ghost cities. I was with Communist Party officials in some of these ghost cities and they were magnificent. As far as the eye can see; buildings, skyscrapers, shopping centers, apartment complexes, hotels, highway exits, train stations, airports: all empty.
All completely empty. It was an enormous amount of waste. I mean they did create jobs temporarily. They were real buildings. Somebody had to roll the steel and fabricate the glass and build the buildings. They created hundreds of thousands of millions of jobs, at least temporarily but now all these cities are empty and are all going to head toward ruin.
So I said to the Communist Party official, “This is all debt financed, how are you going to pay the debt?” They said, “Oh we can’t pay it. Beijing is going to have to bail us out.” I thought that was interesting. So I guess Beijing is going to do that. The point is that people are betting against China right now financially, they’re betting that they’re going to have to devalue the currency, which I do expect. I don’t expect that right away.
They have a few other tricks. They can cut interest rates, cut reserve ratio requirements, use fiscal policy, basically deficit spending, so they can do a couple things to keep the game going. But ultimately either the capital account is going to be depleted, which I don’t think they'll allow to happen. Or they’re going to cut the currency, which I do expect to happen.
They don’t have enough money to do both. They can either defend the currency or bail out the banking system, but they don’t have enough money to do both. They will have to bail out the banking system to some extent and the only way to defend the currency is to not defend it; to cheapen it and let it devalue to reduce the hard currency outflow.
China’s in a very tough position. I do expect a financial crisis. We’ve already seen signs of it. I expect it to get worse. The economy will slow down again. They’re not sinking in the Pacific Ocean, but they’re in for some very rough times, and I’m more in the hard-landing school than the soft-landing school.
