Exclusive Interview with James Rickards, Pentagon's Financial Warfare Advisor

Abenomics Will Fail

BIS, IMF and G-20 Warned that the System is Going to Collapse

In the Next Financial Panic They might Close Stock Markets, Banks, Funds etc.

James G. Rickards is an American lawyer, economist, and investment banker. He is a regular commentator on finance, and is the author of The New York Times bestsellers Currency Wars (2011) and The Death of Money (2014).

Rickards worked on Wall Street for 35 years. As general counsel for the hedge fund Long-Term Capital Management (LTCM), he was the principal negotiator in the 1998 bailout of LTCM by the Federal Reserve Bank of New York.

In 2001, Rickards began using his financial expertise to aid the US national security community and the US Department of Defense. He served as facilitator of the first ever financial war games conducted by the Pentagon. Currently, James Rickards is a portfolio manager at West Shore Group and he lives in Connecticut.

Rickards attended Forex World Istanbul and delivered a presentation on currency wars at the event on Friday. I found the opportunity to ask a couple of questions to Jim following his book signing event. I am sharing this short interview and Rickards’ exclusive comments here.

James Rickards and Erkan Öz at FX World Istanbul

-Hello Jim.

-Hello, Erkan.

-My first question is, what do you think about ‘Abenomics’ this historical money printing experiment taking place in Japan?

-Japan has been in depression since 1990 so it is a 25 years depression. Depressions cannot be solved with liquidity or monetary solutions. Depressions can be solved with structural solutions. You have structural problems so you need structural solutions. Through all this time Japan tried monetary solutions. They tried money printing, they tried lower interest rates, they tried stimulus but they could not make fundamental structural reforms for their economy. So that’s why they were not able to get out of the depression. Abenomics will fail. It is failing unless they make structural solutions. But since they have not I expect their depression to continue and spread throughout the world.

-Why they cannot make these structural changes?

-It is mostly cultural because structural means you have to allow banks to fail you have to allow businesses to fail you have to allow competition you need a greater role for women you have to lower taxes these are structural things they have nothing to do with liquidity or monetary policy. The problem is about how the diet (Japanese parliament), the prime minister’s office and finance minister’s office will organize the economy.

I recently met with Eisuke Sakakibara in Korea. He is called ‘Mr. Yen’. He is former deputy finance minister. He said one of the things you have to understand about Japan is that the population is actually declining so even if you have zero GDP growth the per capita GDP would increase… Japan is not a poor country it is a very rich country. The stores are up the restaurants are up on sale. They don’t feel the press but actually they do not have growth and I expect this to continue.  

-You said (in your earlier speech) that you don’t expect a rate hike in the US in 2015.

-True.

-What do you expect for Japanese guys for 2015? Will they continue stimulus?

-Yes. They are trying to solve a structural problem with a liquidity solution. It won’t work but they think it will work. My opinion does not matter. What matters is what’s Janet Yellen’s opinion, Kuroda’s opinion and Abe’s opinion. They think this will work and so they gonna keep trying. It wont work and they wont be able to raise rates. Because they won’t gonna normalize rates in a world where growth is not going back to trend.

-What about the role of BIS, in today’s picture and can it have a future role like you described for the IMF?

-I think in terms of a central bank of the world that is really the IMF. The BIS is very important for two reasons. Number one: They are the primary intermedia for manipulating the gold market. That is not a mystery… BIS is manipulating the gold market. They are the intermedia between the central banks and commercial banks and other central banks (of the world). They have been doing that… That’s why they were created in 1930s and they have been doing it ever since. (Number two): … It is also a very important meeting place for the central bankers. One of my partners was David Mullins Jr. He was the vice chairmen of the Federal Reserve in early 90s under Alan Greenspan. He said that Greenspan did not like the (program) and stood off and David would go to the BIS place. You know it is a clubhouse. Only central bankers are allowed ... So it is a great place to change information.

Very interestingly BIS about a month ago issued a warning of systemic risk. They said that the system is getting dangerously close to collapse. A few weeks later the IMF issued a similar one. And then last week G-20 finance ministers meeting at Australia issued a warning. What was the last time you saw the three most powerful multilateral financial bodies BIS, IMF and G-20 issued warnings. I have never seen it before. They are telling you it is going to collapse. They see what I say and they are warning you. People would ignore it but when it happens they would be able to say we have told you. I think I have never seen anything like this. I have been in international finance since 1974 and I have never seen a situation like this…

I think the BIS is very important but I don’t see it is the world’s central bank I really think that role has been left to the IMF.

-Last question Jim, you are telling us in your books that there would be a financial panic... Can you describe us what kind of events could happen during this financial panic? What are your expectations?

I think this financial panic would be different than the last one. The reason is that in all of the financial panics since 1971 the solution was to print money provide liquidity. But prior to 1971 historically the solution was to shut the doors. To close the stock exchange, close the banks, close funds so you can not get your money. That’s what Nixon did in 1971 he closed the gold door so you can’t get your gold. Since then 1987 stock market crash, 1994 Mexico crisis, 1998 Russia LTCM dot com, 2007 mortgage crisis, 2008 panic; in all these crises the solution was to print more money. My expectation is that next time money printing is not gonna work because they can’t print more they have already printed a lot. So they gonna have to go to the old solution. We are already seeing this. For example, the SEC passed a rule last month saying that money market funds can suspend redemptions. This is the law. Now if you talk to the US investors who have money market funds they think it is cash. They think they can call the broker today and money is in the bank tomorrow. They gonna find it is not cash. It has actually closed the door. That’s gonna be a shock. So the financial panic itself will be as always a shock.... But the remedy is not gonna be printing more money. They could print SDRs but that is a little experimental. But, maybe in this case, they have to start closing things down. Which in the distant past that was always what they did.

-Thank you very much Jim.

-Thank you, it was nice talking to you.

The Rich’s Survival Kit: Inflate Bubbles – Smash Others

When something start going wrong with ‘organizing production with money business’ rulers of capitalism take a defensive position for their status in the society.

In every production mode, real rulers are the people controlling the basic production tool that is used to organize production. Basic tool to organize production is money or ‘capital’ in capitalism. So we can say that owners of big capital are real rulers of money based economies and societies.

When big capitalists face systemic problems in money based economy they would start taking various measures to preserve their capital and this phenomenon would severely deteriorate income distribution. This is what happening in the recent years.

Following tables, data and statements are taken from the latest book of Prof. Thomas Piketty: “Capital in the 21st Century”

-Modern Capitalism went back to 19th century levels of income inequality.

-Top managements of economies slip to the hands of big capital dynasties not to talented individuals. Just like it was in the 19th century.

-The basic factor determining income distribution is not wages but capital ownership. (http://bit.ly/1lRoRCQ)

Capital Owners Get Richer while Consumption Power of Masses Melt

-Currently, more than 45 million Americans live on food stamp (state food aid).

-Huffington Post reported that, 60% of jobs lost during 2008 Crisis were high wage occupations. However, again 60% of jobs created after the Crisis are low paying occupations.

-Several US cities like Detroit bankrupted after 2008 Crisis. Many people still residing in these cities live by urban farming. They plant vegetables on the gardens of abandoned houses and harvest them. Megan McArdle from Bloomberg View wrote on 5 August 2014 that New York could be the next Detroit due pension costs! (http://bv.ms/1ojocuz)

Start of Systemic Crises in Money Economy:

(http://bit.ly/1lRoRCQ)

Systemic Crises in Money Economy start by 1913-1914; with rate of return to capital falling below economic growth. The 1st World War, 1929 Great Depression and the 2nd World War, were the initial systemic threats against the money based economy. As soon as the first systemic crisis was seen, big capital owners started ‘corrupting money’ as the strongest measure to protect their capital, wealth and ruling position in the developed world. The US central bank or the Federal Reserve (FED), the creator of modern corrupt money, was founded in 1913!

Creating corrupt money (paper currencies not fully backed by tangible assets like gold) and inflating bigger financial bubbles with this device have been the best way of transferring wealth from people to richest elite in capitalism in the last century. Regulations preventing creation of larger bubbles were also removed when needed. Thus big capital owners maintained their ruling position in the system.

Today the US FED is tracing growth, unemployment and inflation to decide if the economy is back on track. However debated growth of GDP does not necessarily mean that economic conditions of ordinary people are improved. In fact a recent New York Times article shows that GDP growth turns out to be rich getting richer but people are smashed. (http://nyti.ms/1yjCH7P) The article clearly indicates that after removal of Glass-Steagall legislation in 1999, per capita GDP growth jumped however per capita median house income growth almost remained unchanged.

In another research conducted by Morgan Stanley shows how consumer spending has been restrained after the 2008 Crisis, despite a 25 trillion dollars increase in wealth since the so called ‘recovery’. The chart below belongs to this research:

Morgan Stanley states the following: “For US households, the financial crisis was a 30-year debt correction in the making. Left with unmanageable debt levels and constricted access to credit, lower income groups have been forced to spend only what’s in their pocket.

It’s important to note, however, that even high-end households have pared back their consumption.

So, your debated recovery or newly created part time or low paying jobs do not feed people who are supposed to consume more and turn the economy back to its good old days. Your rich elites are getting richer while your poor start living on food aid and urban farming. To make the situation a total nightmare your debt to GDP ratio is also still unsustainable (http://bit.ly/1sXwPws). Dude you are in big trouble! 

Dr FED can not Exorcise the Deflation Ghost

The major central banks of the world have fought a war against the deflation ghost which has been bothering the oldest money-based industrialized economies of the globe since 2008 Financial Crisis.  

Major central banks afraid deflation too much cause paying government debts in an environment where prices, earnings and of course tax revenues are falling is very hard. Deflation increases the real value of public debt.

That’s why especially the American central bank FED and Japanese central bank BOJ are targeting to induce inflation. Inflation causes real value of debt to fall and makes it easier for the government to pay back.

"Saintfrancisborgia exorcism" by User Gerald Farinas - Licensed under Public domain via Wikimedia Commons

Due structural problems in old money-industry economies like inefficient and excessive source utilization, debt burdens amounted to unbelievable levels especially after 2008. And more importantly, already high ‘public debt to GDP ratios’ have continuously increased in all advanced economies since 2008. To make the matters worse, the IMF forecasts that except Germany led Europe debt to GDP ratios will keep rising for developed countries even until 2018.

If we consider that interest rates are expected to rise again in the US soon and push cost of debt up further, the situation is unsustainable for the US to repay debts and maintain the reserve currency position of the US dollar.

Amid these conditions, today bad news came on the inflation side for Dr. FED who is already trying to exorcise the deflation ghost with dropping trillions of dollars from helicopters. The US consumer prices fell for the first time in nearly 1-1/2 years in August. The CPI increased 1.7% in the 12 months through August after rising 2% in July. This is not good for Dr. FED who targets 2% inflation because the main reason for the fall in prices is decreasing oil costs and global oil prices are going down due cooling Chinese economy.

As general structural deflation in the developed countries leaves no room for Chinese exports, red dragon’s economy slows down and this lowers demand for oil and creates another circle of deflation. O ooo!! Major central banks of the world desperately print trillions of dollars paper money to cover the structural deflation in developed economies but since 2008 they are unsuccessful to reverse this trend and create sufficient inflation to get rid of unbearable debt burdens.

It seems, major central banks would need to take new measures in order to avoid this new wave of deflation and prevent collapse of their money supplies. Recently, Eurozone and China announced that they will print money. Under Abe administration, Japan started the largest money creating operation in the history. However, it would not be enough. I guess both the FED and the BOJ could also go for new extra measures.

No Recovery in the Developed World’s Debt Problem

Economists still discuss whether money printing policies are successful in creating real economic recovery at the oldest money-based industrialized societies or the developed world. The US FED is tracing growth, unemployment and inflation to decide if the economy is back on track.

However, the developed world (Europe, the US, Japan and Russia) must initially improve another indicator to ensure the sustainable growth: ‘Debt to GDP Ratio’.

If a country’s government debt compared to its annual national income or GDP is increasing and if the interest rates are expected to increase in the near future public finance of such an economy is not sustainable. And more importantly confidence in the national currency of such an economy would be in jeopardy.

Debt to GDP ratio of the US had risen from 50% levels in 1990s to 60% levels before the 2008 Financial Crisis. At the end of 2008 it increased to 64.8%. In 2009 it jumped to 76% and continued climbing rapidly. Despite all recovery talks, it reached 87.1% in 2010, 95.2% in 2011, 99.4% in 2012 and 100.1% in 2013! In 2014, the problem persisted. America’s debt to GDP ratio is expected to hit 101.53%. (Source: US Bureau of Public Debt via tradingeconomics.com; http://bit.ly/1s3jIM9)

"Usa national debt 20 April 2012" by Valugi - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - 

The picture is almost the same for Europe. Here are ‘annual debt to GDP ratios’ for Eurozone countries:

2008: 66.2%; 2009: 70.1%; 2010: 80%; 2011: 85.5%; 2012: 87.4%; 2013: 90.7%; 2014: 92.6% (estimated). (Source: EUROSTAT via tradingeconomics.com http://bit.ly/1s9rwpO)

And this is the situation for Russia:

2008: 8.5%; 2009: 7.9%; 2010: 11%; 2011: 11.04%; 2012: 11.71%; 2013: 12.74%; 2014: 13.41% (estimated). (Source: Federal State Statistics Service via tradingeconomics.com http://bit.ly/1y6qymA)

Japan has the worst case on this issue of the entire world:

2008: 167%; 2009: 174.1%; 2010: 194.1%; 2011: 200%; 2012: 211.7%; 2013: 218.8%; 2014: 227.2% (estimated). (Source: Ministry of Finance via tradingeconomics.com http://bit.ly/1qB9r4G)

When we are talking on government debts of developed countries the figures are unimaginable, tens of trillions of dollars. And as we saw above, rates of government debt to total annual output of the nation have already exceeded normal levels. They are fluctuating around 90%, 100% and 200% . But the worst fact is in all developed societies debt to GDP ratios are rapidly climbing!

And to make the matters worse despite trillion dollars of money printing operations to stimulate economies, the so called recoveries are not expected to reverse this tendency in the future even for the most optimistic predictions. An IMF study indicates that except Germany led Europe debt to GDP ratios of all developed countries (and the UK separately from the Europe) will be higher in 2018 when compared to figures today. (http://bbc.in/1BFXSiF, Table: Debt as a % of GDP).

If you can not ensure a sustainable path to reduce your giant debt mountains; it is not important how much so called ‘recovery’ or economic growth you created or how many people you employed to low-wage or part-time jobs to reduce unemployment rate.

If especially the FED can not lower debt to GDP ratio in an environment where everybody is expecting the end of zero-interest-rate policies; people might lose confidence in the US dollar, the global reserve currency and such an event might trigger the fall of current international monetary system. 

Why Gold Prices Fall Despite European Money Printing?

Last week, the European Central Bank (ECB) surprisingly lowered all its interest rates and announced that it will print money. Following the news the US dollar started to appreciate against euro and all other currencies and commodities including gold.

Gold it is an alternative for paper and fiat currencies. So, if the ECB will provide more euros and expand the paper money supply gold must have gained value. However, it significantly lost value falling from around 1300 dollars to 1250 dollars levels.

"Euro coins and banknotes" by Avij (talk · contribs) - Own work. Licensed under Public domain via Wikimedia Commons

Attributing this fall in gold prices to easing geopolitical concerns is nonsense. I do not think that markets ever really priced a war between the NATO and Russia. If it was the case gold would have skyrocketed to 10 thousand dollars if we consider possible destruction that could be created with such a war. If the war was never priced so a ceasefire in Ukraine has no real impact on gold prices.

The fall of gold prices against expectations for abundance of euros indicates and underlines a special feature of the yellow metal. The gold is not only an alternative for paper and fiat currencies; more importantly it is an alternative for the global reserve currency.

A reserve currency is the kind of money that is held in significant quantities by governments and institutions as part of their foreign exchange reserves for using in international transactions. With the reserve currency you can purchase imports and borrow in international markets more cheaply than people who do not use a reserve currency because you would not need to exchange the reserve currency to do so.

"Gold Bars" by Agnico-Eagle - Agnico-Eagle Mines Limited. Licensed under Creative Commons Zero, Public Domain Dedication via Wikimedia Commons

Today the world is generally using the US dollar as the global reserve currency. The other alternative reserve monies are euro and gold. Recently, sanctions against Iran showed the world that gold is a very effective reserve currency in emergency situations. When the sanctions blocked Iran’s access to international monetary markets and prevented its exports and imports; Tehran started to use gold for international trade.

So when euro depreciates it pushes the dollar up and as the dollar is the primary reserve currency of the world this upwards move of the greenback presses down gold and also euro further; as the alternative reserve currencies.

In the coming months we can expect the developing countries’ central banks to continue buying gold from cheap prices as they are trying to increase their gold holdings against possible ugly consequences of huge money printing experiments of the developed world. We can also expect that the US will take new measures to depreciate dollar, because strong dollar will hurt American exports and undermine an already fragile and debated economic recovery. Most importantly the US needs a weak national currency in order to create inflation and melt the giant national debt mountain. The problem is all the other developed money-based industrialized nations, especially Europeans and Japanese, need the same thing. 

NATO's Real Enemy: Deflation!

NATO is the intergovernmental military alliance of the US, Europe, Canada and Turkey. The US and Europe are the areas where money based production or capitalism born and raised first. In capitalism production is organized with money and leads to industrialization. Europe and the US - which we can call 'the West' together - are the oldest capitalist industrialized societies on the world. So, NATO is the military alliance of the oldest capitalist-industrialized nations of our planet. Younger industry nations like Turkey or eastern European countries are on supportive roles.

Today, NATO sees Russia and ‘terrorism’ as its initial enemies. ‘Terrorism’ generally refers to extremist, aggressive groups who take ‘Islam’ as basis of their ideologies.  

"Rodriguez at Italian command change in Herat" by MSgt. Matthew Millson - US Air Force, through ISAFmedia. Licensed under Public domain via Wikimedia Commons

However, NATO’S real enemy is not at outside! We can define the real threat as follows: The oldest money-based economies of members of the organization have already reached their natural limits and they are actually dying.

In Europe and the US:

- Populations are aging, taking medical and social spending up

-Centralization and bureaucratization are lowering efficiency and productivity

-Nuclear family breaking up is spreading alienation and depression

-Excessive and inefficient use of resources cause debts to rise to unbelievable levels

-The society fails to offset maintenance costs of infrastructure and other critical elements of the system

As a result of all of these facts top rulers of the West, big international capital owners, try to preserve their leading positions. They corrupt money itself with the Federal Reserve System which is based on paper currencies that could be printed without any limits.

Actually the facts showing us that money-based economy is dying at the West are also bringing a severe deflation to the oldest capitalist-industrialized nations. Demand for real goods, real prices and money supply contract. That’s why the FED or other central banks of the NATO members are printing so much money. They want to prevent the collapse of the corrupt paper money supply.

"Marriner S. Eccles Federal Reserve Board Building" by AgnosticPreachersKid - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Military or intelligence actions of the core NATO members are not separate from economic or financial actions. Trying to pull of Ukraine from Russian influence or fighting against Taliban and Al Qaeda in Afghanistan are parallel desperate movements to ensure some relief to especially dying European money economy. Ukraine has a lot of resources and a large market to exploit which cannot be handed over to Russia, another old but also rival industrialized society. All Muslim countries in North Africa and Middle East have young dynamic populations, abundance of resources, strong demand and most importantly newly and quickly developing money economies and even industries.

Labelling Muslim countries as ‘terrorists’, ‘bringing democracy’ to them, doing nothing against armed uprisings in developing Arab countries or even provoking them, would stop or at least slow down development of money and industry economies of Muslim states which is real threat especially for Europe. Thus core NATO members aim to ensure breath taking time for old capitalist-industrialized nations.

However, the result will not change. The core NATO will not be hit by Russian or Islamist rockets but by a very big new global financial crisis, before the end of this decade.