Macroeconomics expert and author of The New Great Depression, Jim Rickards,
discusses the macro look at the economies of the U.S. and the world, as a
whole.
Why do you say there is no inflation versus disinflation?
“Of course, you can't say there's no inflation, there is inflation. I
always say, you're entitled to your opinions and your analysis, you're not
entitled to your own data, the data is what it is. And inflation has been
running hot since last spring, since April, May of 2021, and some of the
monthly numbers have come in, whether it's the producer price index PPI or
CPI, they're printing numbers that are the highest in 30 years or sometimes
longer. So we're going back to, if not the worst in the '70s, at least the
early 1980s, but some cases longer for these inflation numbers. So
inflation is showing up, so that's undeniable, you can argue about the
forecast, but it's here. When it first turned up in April, May, June, even
July 2021, you could say, and there was good support for it, that a
significant part of it, what we call base effects, and you have to know how
they calculate inflation, how does the government do it. They look at the
monthly data, and they compare it to the same month the year before. So
it's a year over year comparison, but only for one month, then they take
that number and they annualize it, so whatever it is, they times 12 or
there's a little more to the math, but basically they annualize that, and
that's the number you read about in the headlines. Well, if you say, April,
May, June 2021, we're hot, well, what was going on in April, May, June of
2020? Because, that was the comparison. Well,the economy has shut down, literally shut down. The worst collapse since
1946, and one of the worst in American history.
So we didn't just have low inflation in 2020, we had deflation, prices were
going down. So when you get to 2021, the year over year comparison, of
course, it was going to go up, of course, that was going to be more than
usual, that was completely expected. It's hard to disentangle what I just
described as the base effect from, it's called real inflation, real price
increases, but the best estimates were, about half of it was a base effect,
so if you were seeing number of 6% inflation, and that was about what it
was.
You could say, well, it's three real and three base effects, because we're
comparing to a very weak year. However, as you got into August, September,
October, the base effects started to go away, which is, you say, well, what
was going on in August, September, October 2020? Well, that was one of the
strongest periods of growth in U.S. history, that was the other side. It
went down and then it came back up. It didn't make it all the way back up,
but that was the strong rebound in the third quarter of 2020, so therefore
the base effects went away, but the inflationary remain hot, it didn't fade
as much as I thought it would. It was like, well the base effects are gone,
but the inflation is still there. In fact, by some measures it's even
worse.
So here we are early in 2022, and as of the most recent data, we don't have
the December data yet, but we have November data. We have some other
indicators and it's still a little bit hot. So now we're at a point where
you say, is this real inflation? I would define real inflation, not just as
numbers, but is it persistent? Is it pervasive? Is it across the board? Is
it feeding on itself? Is it raising expectations? That's something to worry
about, or are there some specific causes we can point to and say, that's
causing a little inflation, but it's going to go away? So that's the
debate, the biggest debate in economics right now, I'll give you my view,
but I'll be clear that there are definitely two sides of the coin, no pun
intended, but definitely two sides to the debate. And in particular you
say, let's just argue a little bit. The other numbers have been hot, but
what's driving it?
Well, the number one thing, one of the number one things are energy prices.
Well, but what was Biden's energy policy from the day he was sworn in? He
shut down the Keystone XL pipeline. He handicapped fracking in Texas, and
Pennsylvania, and other states. He prohibited new oil and gas leases on
Federal lands. He limited offshore drilling, and he did a number of other
things, all of which were designed to basically handicap the oil and
natural gas industry. Well, that's part of the Green New Deal agenda, and
then they're subsidizing wind turbines and solar panels. I have nothing
against wind turbines and solar panels, I actually own the largest
non-commercial solar field in New England, so I run my house on solar
power, but I don't have any illusions about how scalable that is. I had to
clear three acres of land to put in the solar modules. And everyone's like,
why'd you clear three acres of land? Well, I'm up in New England, we have
trees. You don't want a tree to fall on your solar panels and you got to
create a little room. And it's enough to run a house, so I'm like, three
acres of cleared land, nine towers to run one house, how does that scale?
How do you run a city on that? Well, the answer is, you can't. So solar and
wind have a place, but they're supplements, and they're not reliable, you
can't power a grid on it, it's intermittent power. As the owner of a large
solar field I know one thing, it doesn't work at night. It just doesn't
produce any electricity at night because the sun is down, and it doesn't
work in cloudy weather, it doesn't work when it rains and snows, so that's
why you have batteries. You really run the house on batteries and you have
to charge the batteries.
But it's a whole lifestyle thing where you run the washing machine on a
sunny day, stuff like that, it works, but I'm saying it's just not
scalable, it's intermittent, it's not reliable, you can't power a grid on
it. We're shutting down uranium plants, we're shutting down nuclear plants.
Forget coal, coal is the biggest pariah out there. Well, guess what? If you
handicap oil and natural gas, and you outlaw coal or make it not feasible,
and you shut down your nuclear plants, and you're going to run on hydro,
solar and wind turbines, you're probably, it's going to fail. You're going
to have black outs which we are seeing in California, this whole thing
doesn't work, but it does raise energy prices, and that's the point.
The demand for coal by the way, is close to an all-time high because we
still have a lot of coal fired plants and I can't get anything else, get
some coal, so that's one of the drivers. The other big driver are used car
prices. Well, what's up with used car prices? Why are they going up so
much? Well, the answer is, you can't get a new car. Maybe you must spend
$200,000 on a Bentley or something, maybe you can find one, but everyday
Americans can't get new cars, so why not? Are we out of steel? We out of
rubber? No, we're out of semiconductors. This is where the supply chain
comes into it. So you can think of a car, I remember used to stick a
screwdriver in the carburetor when the engine was flooded, they don't even
have carburetors anymore, but the point being, your car is a computer on
four wheels. It's hardly a car, the kind I grew up with, it's a computer on
four wheels.
And if you can't get semiconductors, you can't make new cars, and if you
can't get new cars, you got to buy used cars, and they're in short supply,
so those prices are going up. So my point is, energy's real, you need it, I
fill my tank just like everybody else, I'm not immune to this, used cars.
But when you have a couple things like that, that are driving the whole
CPI, you have to step back and say, wait a second, is this widespread of
inflation? Are expectations changing? Is this sustainable, or is this just
a short-term spike in a couple of key indicators? And rental equivalent
housing is another one. There's a housing shortage because, zoning
requirements and BlackRock's buying up all the houses, and there are other
reasons for that. And so, as I look at it, what I see is, the inflation
numbers are up, there's no question about it, but this is not the inflation
we had in the 1970s. The '70s it was, you got to raise every two, I was
starting my career and we get three or four raises a year just to keep up
with inflation. It's like, well, thanks from the raise, but prices just
went up 13%, which they were at the time. This is not that inflation. In
the 70's, it was everything, it changed expectations, it was what's called
cost-push inflation, which is workers are like, well, you got to give me
raise and unions were stronger, but even non-union companies said, I do
actually, that's not true today. Workers don't have the bargaining power,
labor force participation is low. And like I said, it looks like a couple
factors that are going to run out of steam, and the economy's slowing, and
then we can get into the whole supply chain base. So just to sum up, I
would look for disinflation. I'm not calling for deflation, deflation is
when prices go down. I can't rule that out, but I don't see that, that's
not my intermediate-term forecast.
But disinflation is, I see these numbers going down from 6%, 7% annualized,
which is what the government's showing, getting down to the 4% level and
eventually down to the 2% level, which is where it was from 2009 to 2019,
during that 10-year expansion, during Obama and Trump. And there wasn't
much difference between Obama and Trump in terms of growth. I know Trump
claimed the greatest economy ever, that's fine, that's a talking point. But
the fact, if you look at numbers, the Obama and Trump economies were the
same, right around 2.2% growth. Inflation was between 1.6 and two, and
rarely if ever touched, the Fed start over 2%, that's where it's heading
again. So not deflation, but disinflation, this inflation bubble is going
to go away.”
Will you define ‘Disinflation’ for us?
“Disinflation is inflation at a lower rate. So now as you still have
inflation, but if it goes from 8% to 6% to 4% to 2%, which is what I'm
saying, you still have inflation, perhaps inflation of 2% and that's not
trivial. Look at the value of the dollar and it happened in 35 years, most
people will be young adults at the time your kids are in college, it's
about 35 years so or less, so that's real. But going from 8% to 2% is a big
deal for a couple reasons. Number one, it means that six to 8% number is
not sustained, if it is, if I'm wrong, I don't think I'm wrong, I wouldn't
be giving this analysis, but if I'm wrong and inflation goes six to 8%,
then it's probably on its way to 15, so that's a completely different
scenario, it's not the scenario I see.
Well, we're getting close to hyper inflation at that point. And again, Kim,
just to be clear, I do the analysis, I have a view, I look hard at the
data, I have models, so I exercise a lot of care on this, but I don't just
ignore the alternatives, sometimes you're wrong, you have to pivot, so we
should all be watching for signs of inflation. I don't see them, I see
disinflation, which means you still have inflation, but it's at a much
lower rate. But there's a world of difference between let's say 1.8%
inflation, and 6.8% inflation. Those are completely different worlds,
because one is much more manageable, but it also changes expectations, and
expectations are the key. The Fed doesn't control inflation, everyone's
like, oh, they print money, you get inflation. That is not true. It's not
true in prices.
It might be true in asset prices, it might be true in stocks, and bonds and
real estate, but that's not the consumer price index, that's not what the
Fed looks at. That's not what most economists, or many economists mean when
they say inflation. They're asset bubbles. Money printing can lead to asset
bubbles, but it does not lead to price inflation, unless velocity picks up.
Velocity is a psychological phenomenon. So if you change the expectations
and change the philosophy, or sorry, they change the psychology, and change
the velocity, you will get inflation, but I don't see any of those things
changing. What I see is, this runs out of steam and we get back down to
below 2%.”
Why did you write The New Great Depression?
“First of all, it has to do with the definition of a depression, and most
people don't have a good definition of depression, and economists don't
even use what I call the D word. They don't like it because, let's compare
it to recession, the R word. So recession is well-defined. It's two or
more, or at least two consecutive quarters of declining GDP. There are a
couple other bells and whistles about employment, and there's a referee,
the National Bureau of Economic Research, a private econ think tank in
Cambridge, Massachusetts, they call the balls and strikes. They tell you
when recession begins, and when it ends, when the expansion ends, et
cetera. But, two or more consecutive quarters of declining GDP, that's the
classic definition of a recession. So people go, huh? Depression sounds
worse than recession.
And if recession is two quarters of declining GDP, a depression must be 10
quarters of declining GDP, it must be way worse. And that's not the
definition of a depression. First of all, 10 quarters of declining GDP has
never happened, if it did we'd all be in trouble, but maybe during a great
depression to some extent, but not otherwise, but that's not the definition
of depression. Depression means depressed growth, meaning you can have
growth in a depression, but the growth is depressed, relative to trend,
relative to potential. So in other words, if your economy at the long-term
trend in a recovery growth in a recovery is 3.5% which it is, and you're
growing at 2% which we were for 10 years, that’s depressed to growth.
You're creating a way, so here's the 3% trend line, and here's the 2%
actual growth, we're in between those two lines, that's depressed growth.
That's lost output. You could have been here, but you're actually here, and
because it's a wedge, guess what? Over time it gets bigger.
I would say we've been in a depression since 2007, that the entire
so-called recovery from 2009 to 2019, that was a 10-year recovery, the
longest recovery in U.S. history, but it was also the weakest recovery in
10-year history. The average annual growth for that 10-year period was
2.2%, but for all post 1980 recoveries, average growth was 3.2%. And if you
go back to post World War II recoveries, it's closer to 4%. So if you have
an economy that can grow three, 4% and you're growing at about two, that 1%
is, 1% what's the big deal? Sorry, 1% of 20 trillion compounded for 10
years is a big number. You're talking about trillions of dollars of lost
wealth, lost output, from the government's perspective, lost taxes, so that
is the definition of a depression.
John Maynard Keynes defined it that way, it was good enough for Keynes,
it's good enough for me, so obviously, we've been in depression in 2007,
but the new great depression is where we are now. By the way, that book has
three chapters on economics, The New Great Depression, but also has three
chapters on the pandemic. So it's a mixture of the impact of the pandemic
and then the effect it had on the economy.”
We still have growth, but it’s depressing growth; not at the potential it
could be, correct?
“Correct. Now, in 2021, we don't have the fourth quarter numbers yet. It
looks like the fourth quarter will be decent, maybe relatively strong. The
third quarter was quite weak, the fourth quarter of 2020 was quite weak. We
did have another strong quarter along the way in 2021, so it's jumpy. We're
getting some strong quarters followed by weak quarters, but now I would
expect that to trend lower. I think we're going to see that very quickly.
And in addition to the pandemic, which we just talked about, there's a new
headwind of growth, a big one, which is the supply chain breakdown. And
that scenario I'm doing a lot of time in research too right now. So between
the new Omicron variant, which fortunately is mild, appears mild, it's
highly contagious and relatively mild.
So it's like the cold or mild flu version of COVID, but it's around and
it's affecting... People can't believe how quickly it's torn through New
York City, and nationally look for a million new cases a day. Now,
fortunately, the mild, but it's still enough to keep people home from work,
it's still enough to, some people unfortunately are in the hospital, but
even if you're at home for 10 days, well, you're not working for those 10
days. So this is a new headwind on top, and then we have the supply chain
crisis, and then they feed into each other, supply chain.”
As of January 5th, 2022, you are forecasting $15,000 for gold?
“Well, the $15,000 gold is actually very straightforward. It's not a number
I pulled out of the air, it's not a number I made up to attract attention,
you don't really need that, but it is the number that gold would have to
be, or higher, it's a base, but it's the lowest number the gold would have
to be if we were going to use gold to support the value of the U.S. dollar.
And why is that? Because, we know how much gold the United States has,
8,133 tons. The people like the [inaudible 00:21:40] Fort Knox, they're not
empty. By the way, most of it is not in Fort Knox, it is at West Point.
There is a lot in Fort Knox, but more of it is at West Point, the Denver
Mint, and a few other locations, they're not empty.
The U.S. government could have leased the gold out and that's fine, but the
gold doesn't go anywhere, and you can terminate the leases and it's still
there. So we know what the money supply is, the Fed publishes that, we know
how much gold we have. And so, if you were going to go on a gold standard,
you would basically have to say, well, what's the value of an ounce of
gold? Where am I going to set it? Because, that's what a gold standard is.
By the way, just to be clear, there's not a central banker in the world
with the possible exception of Elvira Nabiullina, who is head of the
Central Banker of Russia. She's the only central banker who really answer
her job. She's taking gold up to 20%, slightly more than 20% of Russia's
reserves. Russia's reserves is just a new all-time high of 600 billion. And
the gold component is 20% of that, so over $120 billion in gold, about
2,300 tons.
And everyone's like, well, the U.S. has 8,000 tons. They only have, maybe a
little over a quarter of that, but their economy is only one twelfth the
size. So when you look at gold relative to GDP, they have a lot more gold
than we do, and they're in a much better position. And part of it is just
to, so U.S. sanctions don't hurt them, because they're not relying on
treasury bills or dollar payments to support their reserve position because
they have a lot of gold. But getting back to the U.S., so if you said,
because one of the objections to a gold standard, people go, well maybe we
had it once upon a time, and maybe it worked, but we can never go back
there because commerce, and credit, and trade, and bank balance sheets are
so high, we don't have enough gold to support that level of commerce. We
just don't have enough gold. That's nonsense, there's always enough gold,
it's just a question of price.
Now, if you say, we're going to go on a gold standard at $1,800 an ounce
and here's how much gold we have, you'd have to cut the money supply by
about 75%, and that would be the great depression, you collapse the
economy, you can't do that, by the way, it is the mistake that the UK and
Winston Churchill made in 1925, when they went back to a gold standard at
the pre World War I rate, and that was basically overvaluing Sterling, so
they had to cut the money supply and they did go into a depression four
years ahead of the rest of the world, so hopefully lesson learned, although
with the central bankers, you never know. So if you say, if I want a gold
standard, I can't peg it at 1,800, because I'd have to cut the money my
supply by three quarters or more, so what's the alternative? Raise the
price of gold. So now it's the same amount of gold can support any amount
of commerce at a higher price.
So then the question is just an eighth grade math problem, it's like, well,
what would the price have to be to match the money supply? [inaudible
00:24:47] as an example. And I assume 40% gold backing, the Austrians and
the monetarist they bang the table, no, it has to be 100%, your level,
that's the debate for another day. Historically 20% is worth, so I'll be
conservative and say 40%. So if you take 40% of the money supply, and
that's how much gold you need by value, and we know the weight, divide one
by the other and you come out to $15,000 and less. So the reason I explain
that, Robert, is I want to be clear that there's not a central bank in the
world who wants a gold standard. They're not going to go to it voluntarily,
but if they have to, because of collapsing confidence in the dollar, then
it follows that you have to go to $15,000 an ounce. Because, any smaller,
any lower valuation is deflationary and that's the last thing you want.”
There’s talk of the US dollar losing it’s status as the World reserve
currency. What do you think?
“You're right, Kim, I hear that all the time, I get asked that all the
time. It used to go into the name of the great reset. It was like, the
great reset was going to be, we'll have a new Bretton Woods, and we'll
reset the international monetary system, the dollar won't be the leading
reserve currency, begs the question, well, what is? Is it going to be the
SDR? Maybe. Is it going to be a digital SDR? Okay. A digital SDR backed by
gold? Well, that could work, but nobody wants gold except me and a few
other people, but so that's the great reset. What's interesting is that our
friend Klaus Schwab, who is the head of the Global Elites, he's their
chairman, runs the Davos conference, of course, came out with a book
called, The Great Reset.
And, but they hijacked the term. They hijacked it as basically the new
world order. So now when you say the great reset, you've got to define your
terms, because there's a whole lot of, gold supporters, people worry about
the dollar, hey, we're going to have a great reset, but then you got Klaus
Schwab and Jamie Dimon talking about the great reset, meaning get back to
globalization, get back to the new world order, break down borders, and
maybe get away from the dollar, but not in favor of gold, in favor of
something controlled by the IMF, so that's in the air. I don't see it
happening, see, here's the thing, you're never going to have a world where
people lose confidence in the dollar where they say, hey, get me those
Euros, or get me those Yens, all these currencies are going to go down
together. They may stay up together, people may have confidence in them,
but if they collapse, they're all going to collapse.
The idea that, I hate the dollar, but I'll take all the Euros you get, no
that's not going to happen, you think Europe's going to be better off than
the United States in a world where confidence in the dollar is collapsing?
That's going to be a world where confidence in everything is collapsing.
Now, that's the world where everyone goes straight to gold. However, some
people are going to go straight to Bitcoin, or they already have. So I
don't think Gold and Bitcoin are comparable, and I've been in more
Gold-Bitcoin debates, and I hate them all, but I get invited, I'm always
asked to join them and I do. I actually was the cut man for Frank Giustra,
when Frank did a Gold-Bitcoin debate with Michael Saylor. Michael Saylor
has made $5 billion in Bitcoin.
So it's real money. He hasn't sold it, but on a market-to-market basis, he
bought it at 19 and went to 16, and he bought like two billion and he
tripled something, he's up to six billion. And Frank is the greatest gold
mining financier of since probably, George Hearst. So here you had your
gold guy and your Bitcoin guy, so I coached Frank from the sidelines, and
we did a couple prep calls and all that. Frank did a great job in the
debate, but whatever I think of Bitcoin is irrelevant, because you can't
dismiss it. It's out there. So I think what I would expect is something
possibly chaotic and a real roller coaster, and that's the world we would
definitely want gold.”
Why do we have 3 Feds?
“Well, you can say we had three Feds, we actually had three central banks,
one of them was called the Fed, because they didn't want people to know
[crosstalk 00:30:01]... There was a reason for that, Robert, you're making
a good point, because they didn't want people to know it was a central
bank. The Fed is our third try, so the first bank of the United States, I
think it was 1797 to 1816. It had a 20-year charter, so it went from the
late 1790s to around 1814, give or take, and then they shut it down. They
said, well, we don't need this, this is concentrating all of that, it was
actually based in Philadelphia, concentrated too much power in
Philadelphia, the Eastern merchants and all that, so they let the charter
expire. Well, then it was a hangover from the war of 1812, and we needed to
finance, and the trade was disrupted, et cetera, so they... Oh sorry, I
guess, the first bank ended around 1812, but then after the war we needed a
new one, so they chartered a new one in 1816.
And that was called the Second Bank of the United States, also a central
bank on, I think Chestnut Street, in Philadelphia, the building's still
there, it's a beautiful old building. Now, that was a 20-year charter, also
still ran until 1836. Well, guess who was president in 1836? Andrew
Jackson, and he hated the central banks, and he came from Tennessee, he
campaigned to shut down the central banks. Well, it was one of the biggest
fights in history with the Congress who authorized it, or 90-vetoed it, and
so the second bank in the United States ended in 1836. So two tries, two
failures, we had no central bank from 1836 to 1913, there was no central
bank. And that was for another, as you pointed out Robert, one of the
greatest periods of prosperity in American history. The Telegraph, the
telephone, the electricity, the automobile, I guess, the airplane came
along at the tail end of that, harvesters, machinery, ocean shipping,
steam, you name it, [inaudible 00:32:04], we just grew and grew and grew
from coast to coast, massively productive, inflation was not a problem.
Actually, deflation was a problem, but it was a good deflation, where when
prices go down, if you make the same amount of money, you get a raise, you
can buy more for your money, what's wrong with that when you think about
it? So there were guys, you get guys who just lost their way, like Paul
Krugman said, but look at all the financial panics during the gold
standard, it's like, I could list them, 1893, 1898, there were a lot of
financial panics by the way, look at all the financial panics without the
gold standard. 1990, we had a serious recession, 1987, the stock market
felt 22% one day, 1998 we came within an hour short of shutting down every
market in the world, and the LTCM crisis. 2000, the NASDAQ lost 80% after
the .com bubble blew up. 2008, after Lehman bankruptcy, again, the world
was hanging by a thread. 2020, the economic stock market collapse 30% in
about one month, and there are many other crisis. The Tequila crisis in
1994, et cetera.
The point is, there are financial crisis on a gold standard, there are
financial crisis when you're not on a gold standard. Guess what that tells
me? As a statistician I would say, there's no correlation between gold and
financial crises. Financial crises happen, but they don't happen because of
gold and otherwise gold works fine, so that's something we can dismiss. So
there were those crises, but the turning point, the U.S. economy was doing
just fine without a central bank. National banks could issue dollars, the
dollars were redeemable for gold, about $20 an ounce. If you had a $20
bill, you could walk into the bank and say, give me an ounce of gold, and
they would, and some equivalent silver would be 20 ounces of silver at the
time. That was the definition of a dollar, it was a one ounce of pure
silver, that was a dollar. So why in 1913, why all of a sudden did we want
to bring back the central bank? Well, it goes back actually to the San
Francisco earthquake in 1906, devastating of course.
And so, what happened was, there were insurance claims, everyone's
buildings got wiped out, knocked down or burned out, because it was huge
fires, put in insurance claims. So the insurance companies had to sell
assets in the Eastern Markets, they had to sell stocks and bonds to get the
cash to pay the claims in San Francisco. That created financial pressure in
New York, and then throw in a couple of frauds, there was a panic with the
Knickerbocker Trust, it was financing a corner of a copper market that blew
up corners, usually do. Anyway, there was a financial panic and there was
no central bank, so what happened? Everyone turned to Pierpont Morgan,
original JP Morgan, and he got all the bankers in his townhouse in Murray
Hill, around 35th street in Madison Avenue in Manhattan. And he sent
actually Benjamin Strong, who later became president of the Federal Reserve
Bank in New York. He had to audit all the banks in New York, and they did
triage.
And they broke the banks into three categories, is like if you are strong
enough to weather this storm, you're okay. This category, you're broke,
you're insolvent, you're hopeless, we're going to let you go. And there was
a middle category where they were not insolvent, but they were illiquid. So
what they said is, the strong banks lend money to these banks that'll prop
them up, we'll keep them open and these guys will let them fall off the
cliff. And they locked the bankers, he had the servants bolt the doors, and
then made us stay up all night. [inaudible 00:35:47] you're not getting out
until you come up with an answer, and they stayed up all night. He knocked
on the door and then they said, "We got an answer," and then they came out,
and they did exactly what I just described. Well, it worked, and the panic
was over, and the banks survived, but they didn't mind shutting down banks
in those days.
They don't anymore, but there were a large number of banks, and large
number of depositors lost money, but they said let's be more careful about
your bank next time. But what happened was, Pierpont Morgan died not long
after that, and the bankers, basically the Rockefeller interests,
Stillmans, the Morgan interests said, well, this is going to happen again,
because bankers are dopes and they do it every 10 years like clockwork, and
we're not going to have Pierpont Morgan around the next time, there's
nobody like him, so we need a central bank. We need a print press
basically. And they cooked up the idea for what became the Federal Reserve,
but they knew that Americans hated central banks, and they do, they still
do. So they said, well, don't call it a central bank, call it the Federal
Reserve. It sounds like a brand of whiskey, it's like aged Federal Reserve,
but they call it the Federal Reserve and have a Board of Governors, and
break it into 12 regions, so it doesn't look too ominous. They did all
these gimmicks to basically make it not look like a central bank, even
though it was. And the original purpose of the central bank, it really only
had one purpose, lender of last resort. So next time there's a panic, like
the panic of 1907, your job is to lend to illiquid institutions, not
insolvent institutions, the illiquid institutions. And Walter Badger, a
19th century writer had written the playbook for central banking in the mid
19th century. And he said, a central bank in a financial crisis should do
three things, lend freely to solvent institutions at a punitive rate.
Turn the money, stick it on, crank up the printing press line freely, but
only to the people who are solvent. Do not lend to the insolvent, let them
fall by the wayside, and a punitive rate to teach them a lesson. Now, what
did, Ben Bernanke, do in 2007? Well, he lent freely. We know he had to
increase the balance sheet by four trillion dollars, but to solvent and
insolvent alike, they lent to everybody. AIG was insolvent, half the banks
on Wall Street weren't solvent, but they lent to them anyways. So they
didn't follow Badger's number two rule, they lent to insolvent
institutions, and it was not a punitive rate, it was close to zero. So,
Bernanke, broke two of the three rules. He lent freely, but he lent to
everybody, wasn't selective and he lent at a zero rate.
Well, that just means that, you got through it, but you just propped up a
bunch of insolvent institutions and set them up for the next time. And,
2020 was different, 2020 was an economic crash. It was not a financial
crisis. We did not have a financial crisis in 2020. We probably will the
next time, so the point is, we have a central bank for all the wrong
reasons, but the real problem is that in 1934, during the Roosevelt
administration, they reneged on the original Fed deal. They pulled all the
power from the regions and put it back in Washington where it is today. And
then in the 1970s, I think 1979 or thereabouts, the Humphrey–Hawkins bill,
they expanded the mandate of the central bank. It was no longer just price
stability, which it always had.
Well, the state of mission was price stability. The real mission is bail
out the banks, that's what you're there for. The state of mission was price
stability, we don't want too much inflation, but they added a third
mission, which was full employment. Well, mission two and three are
inconsistent. A lot of times what you need to do to get price stability, it
doesn't necessarily give you full employment and vice versa, full
employment might mean inflation, which is inconsistent with goal number
two. So we've given, and now by the way, now the central bank, in fact has
a fourth mission, which is climate change, and that's another, we'd spend a
couple of hours on that, Robert, we don't have to, but they're going to.”
So this national debt just hit 30 trillion, COVID's going to be around, the
Euro, Dollar market is bigger. Europe is in trouble. What's the possibility
of $15,000 gold?
“Well, it gets better every day. So, two things with the 30 trillion of
debt. First of all, it's a big number. I look at it, but what I look at,
and others do also, is you look at the debt to GDP ratio. The number could
be, if you have a bigger economy, 30 trillion might be just fine, but you
say, well, what's the ratio of the national debt to the size of the
economy? Well, when the debt is 30 trillion, which it is, you're right,
just got there, and the economy's about 22, 23, maybe trillion. That's a
dept to GDP ratio of 130% or more. So why is that significant? Well,
there's a huge body of economic research. We don't have time to go through
it all, but [inaudible 00:42:12] have been the leading scholars, but there
are many other studies you don't have to rely on Reinhardt and [inaudible
00:42:20], you can, but there are many other studies that say the same
thing. When the debt to GDP ratio goes over 90%, it's no longer any
monetary stimulus, it's a headwind to growth.
The Keynesian idea, you borrow a $1, spend a $1 and get a $1.20 of growth.
Borrow a $1, spend a $1 and get a $1.10 of growth, but the number keeps
getting smaller. What happens when you borrow a $1, spend a $1 and you get
80 cents of growth? You didn't even make your $1 back. And so, now the debt
GDP ratio is getting worse. That effect is getting worse. You're off the
right hand to the diminishing marginal returns curve, you're actually into
negative marginal returns. So not only is it not stimulative, calling the
Biden thing stimulus is nonsense.
Not only is it not stimulative, it's a head winded growth, number one.
Number two, the people say, well, we'll never be able to pay off the
national debt, the $30 trillion, you don't have to pay off the national
debt, but you do have to roll it over, that's the key. So as an old, a 10
year note that you issued out 10 years ago matures this year, you got to
pay off that note. Well, maybe you issue a new 10 year note, or maybe you
issue a new 30 day bill, or a five year note, or whatever it is, so
treasury securities are maturing all the time every day. New securities are
being issued, at least weekly, sometimes daily, depending on the maturity.
And that's the system Alexander Hamilton invented in 1789, and it's been
going strong for 230 years. But, it's always been based on confidence and
good management.
In U.S. history, and I cover this in chapter two of my book, Aftermath, the
U.S. history shows that, the debt goes up, but it always goes up, the debt
to GDP ratio goes up in times of war. And then in times of peace, we pay it
back down again, and it goes up in a war, then it comes back down again, so
you can think of it as dry power. It's almost like, ammunition, and gun
powder, and artillery, or today jets, or cruise missiles or whatever.
You keep your debt to GDP ratio modest, so that you can ramp it up when you
have to. That's gone, thanks to Stephanie Kelton, and Johnny [inaudible
00:44:37], and modern monetary theory, and Bernie Sanders, and a lot of
other influences that's gone. Now, the debt to GDP ratio is at a very high,
historically high war time level, even higher, but there's no war. What are
you going to do if there is a war? Where's your borrowing power then? Or
something like the great depression, not the technical definition I gave,
but a collapsing economy, where's your borrowing power then? And that's the
problem. It's not that you have to pay up the debt. You do have to roll it
over, and when you lose confidence, you can't roll it over, then you lose
confidence in the dollar itself.”
How do you see 2022 panning out?
The vaccine mandates are going to start to collapse. The courts take their
time, but justice moves slowly, but it keeps grinding. And so, I think most
of the vaccine mandates will be thrown out. I think, the 80% of the U.S.
population woke up a couple weeks ago and said, oh, vaccines don't stop
infection. They have been sold like, vaccines stop infection, they don't.
They have other effects. I'm not “, I am anti-mandate, but they reduce
symptoms, they reduce hospitalization, that's a good thing, but they don't
stop infection, they don't stop the spread. A lot of people thought they
did, so I know 20 people or more who personally, who have got Omicron in
the past three weeks, and every one of them has double vaxed, every one of
them.
So it's like, well, what's the point of vaccination if it doesn't stop the
infection? Good question. And more to the point, what's the point of the
vaccine mandate, if it doesn't stop infection? Because, the people you're
firing are marines, airmen, soldiers, truck drivers.AMTs, the doctors, the
people we actually need. So I think that's all going to fall by the
wayside. You don't have to be a political genius to say the Republicans are
going to clean up in the November midterms, but the problem with that is,
it's a long way from now to November. And in fact, if I know it, the
Democrats know it. And so, if you're a Democrat, you're going to get
swamped in November, you're going to try to do all the damage you can
between now and then. So I would watch out for that, and Ukraine is another
hotspot, but I always say, can the, all those things that are on the list,
I watch all of them. One or more of them will explode literally or
otherwise. But the thing that probably deserves the most attention is the
thing that none of us are thinking about, the true unexpected. But even the
unexpected, the thing that's not on the list has warning signs, and that's
what I look for.”
Find more from Jim Rickards in his new book, The New Great Depression.