James Rickards: Paper, Gold, or Chaos?

Friday, February 17, 2012, 2:29 PM

History is replete with the carcasses of failed currencies destroyed through misguided intentional debasement by governments looking for an easy escape from piling up too much debt. James Rickards, author of the recent bestseller Currency Wars: The Making of the Next Global Crisis, sees history repeating itself today and warns that we are in the escalating stage of a global currency war of the grandest scale.

Whether it ends in hyperinflation, in the return to some form of gold standard, or in chaos, history is telling us we can have confidence that it will end painfully.

On the Cause of Currency Wars

A currency war in the simplest form is basically when there is too much debt and not enough growth. The overhang of debt impedes growth because it clogs up bank balance sheets and clogs up the savings to investment mechanism and has a lot of negative effects. So there is not enough growth to go around. So countries, in effect, try to steal growth from their trading partners by cheapening the currencies.

And indeed, the Fed and the Treasury are trying to do that right now. They are trying to cheapen the dollar, probably for the reason I mentioned. The problem is it does not stop at that. It invites retaliation...
A couple things happen. Number one – we cheapen our currency but other countries try to cheapen their currency also, so you get into these tit-for-tat devaluations where nobody wins. All you do is unleash inflation, restrict world trade without anyone getting an advantage. I like to say that in the currency wars, all advantage is temporary. You give it up pretty quickly.

The other thing is that for countries that cannot necessarily devalue, they can use capital controls, they can use import excise taxes. Currency wars can turn into trade wars. Ultimately, they can even turn into shooting wars. So you get all these bad effects.

So if the U.S. could cheapen the dollar in isolation, if nothing else happened, maybe there would be some quick advantage. But that is not what happens. But it is a temptation that politicians and policymakers can not resist, but it ends very badly

On Current U.S. Monetary Policy

There is no question. It is quite clear that the Treasury and the Fed are trying to inflate their way out of the problem and debase the dollar.

The problem I see is they might not get there, and here is why. The Fed thinks they are playing with a thermostat. You know, you can, if the room is too cold you dial it up. If the room is too hot, you dial it down by adjusting the money supply and working a little bit with expectations on the behavioral side that can gradually tweak economic behavior and lending and spending velocity and money supply that achieve a desired result. The problem is they are actually playing with a nuclear reactor. They are playing with a complex system that is in or near the critical state. Now, you can dial a nuclear reactor up and down but if you don't get it right, the consequences are worse than having to put on a sweater. The consequences are catastrophic. You can melt down a reactor and ultimately, the entire financial world.

So the danger I see is the Fed thinks they are playing with a thermostat. They are playing with a nuclear reactor and they risk collapsing the entire system.

On the Importance of Understanding What's Happening

So that is what the Fed is trying to do. They are trying to get that lending/spending machine going again, get the velocity of money up and kind of inflate their way out of this problem.

A couple problems with that. Number one, two percent inflation is not so benign. Two percent inflation cuts the value of the dollar by seventy five percent in the course of a typical lifetime. So it cuts it in half in thirty-five years and then in the following thirty-five years, cuts it in half again. So now, you are down seventy five percent from where you started. So from the time you are born to the time you die, your dollar is going to lose seventy-five percent of its value. That is at two percent inflation. At four percent inflation, it will cut the value of a dollar in half by the time your children go to college. So these are cancerous rates of inflation. Two percent sounds warm and fuzzy. It is not.

The other thing economists say is, you know, who worries about inflation because your wages are going up and it all comes out in the wash. Well, I mean, this is the kind of thing that only an economist could say. But the fact is some of it does come out in the wash on average. But we do not live on average. We live our individual experiences.

And the fact is in inflation, there are winners and there are losers. The winners are people who can see it coming, who understand what you and I and hopefully the listeners are talking about and hedge their position by getting gold or silver or land or fine art or investing in railroads as Warren Buffett is doing, some kind of hard asset play. The losers, those are savers, people with insurance policies, annuities, pensions, retirement plans – anything denominated in dollars that are not going to go up when the inflation kicks in.

This interview is so insight-packed that I had trouble winnowing down the quotes to highlight. It is a 'must-listen' for those concerned about preserving the purchasing power of their wealth.

Click the play button below to listen to Chris' interview with James Rickards (runtime 29m:25s):

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Or click here to read the full transcript.  

James Rickards is the author of Currency Wars: The Making of the Next Global Crisis, published by Penguin/Portfolio, November 2011.

He is Senior Managing Director at Tangent Capital Partners LLC, a merchant bank based in New York City, and is Senior Managing Director for Market Intelligence at Omnis, Inc., a technical, professional, and scientific consulting firm located in McLean, VA. Mr. Rickards is a seasoned counselor, investment banker and risk manager with over thirty years' experience in capital markets, including all aspects of portfolio management, risk management, product structure, financing, regulation, and operations. Mr. Rickards' market experience is focused in alternative investing and derivatives in global markets. He has also served as General Counsel at several alternative asset management companies and a stock exchange facility and is expert in fund governance and international fund structures.


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Denny Johnson's picture
Denny Johnson
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I've grown weary of much of the repetition and cheer-leading at King World News, but I never miss a Jim Richards interview when I see one.


Arthur Robey's picture
Arthur Robey
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SDRs and Gold.

A nice intuitive model of chaotic behaviour is the flickering of a dying flourescent tube.

The tube is in a transition between two stable states, healthy and dead.

It is the transition between the two states that is interesting. There are chaotic flashes of hope where we hope that it will not die. But it's fate is sealed.  And so it will be with the economy.

A country that imports more than it exports shoots itself in the foot if it devalues its currency. What are we going to use to import oil? Gold?

SDRs? Here comes the world government. Whoever controls the Enter button on the computer will control the world.

SDRs may actually represent a potential claim on IMF member countries' nongold foreign exchange reserve assets, which are usually held in those currencies

My bold. Err. So why mention Gold wikipaedia? Is there something special about gold?

Denny Johnson's picture
Denny Johnson
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Denny Johnson wrote:

I've grown weary of much of the repetition and cheer-leading at King World News, but I never miss a Jim Richards interview when I see one.



mmmmmmmmm............even if I can't spell his name.

KugsCheese's picture
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Does the CDS King wear no clothes???

RJE's picture
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Always good stuff Chris...

This Podcast, and all the recent Podcast have started to connect the dots for me anyways. Every day I try and mentally visualize what I see, what the individual is doing, and all are trying now to prepare to game the system as best they can if neceessary. Our leadership has shown all of us how, and their leadership is sorly lacking, and one sided. Tilting obviously towards the Elites side, and perspective.. Many of us are waiting to see if things return to some semblance of order, amazed that the Greek people still have money in their countries banks. This Greek crisis will be a very valuable tool for the middle class of the world, and this Greek crisis has definitely got everyone's attention. Chalk one up for the Elites (if the CDS don't trigger) but this is just one battle. Fool me once shame on you, fool me twice, shame on me. I think Portugal, Ireland, Spain, and Italy are going to be in no mood for what Greece has been required to do. Just a hunch. Preparations are the key folks.

So, this inflation is what we want to achieve is it? Who benefits? Is it the few or the many? Tectonic plates!!! You got that right, and the game can be played just as well by the many which will overwhelm the desires of the few when that headwind gets a blowing are my thoughts. Deflation and Inflation will solve one thing, that's for sure. The ruination of the dollar as the reserve currency, and frankly will pit every country against each others. Trade wars, tariffs, resource grabs, and all such things are NOT hard to imagine at all. We'll see. History has also shown during War time that sometimes both sides shoot, and the bullets do not collide and fuse in mid air. Sometimes the shots fired hit both intended targets, and the outcome is as they say, determined. The end result is fatal to both sides.

I remain highly motivated, will live life joyfully, and will do all that I possibly can. My priority is to make sure I am sitting alongside my Lady until my fateful day.


RJE's picture
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..."a dying fluorescent tube.

The tube is in a transition between two stable states, healthy and dead." Yeah Arthur.

Hey, you folks spelling James Rickards as James Richards are libel to get the big man flying over the pay wall incensed at your oversight. Jus' sayin'...


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Jim Ricards Interview

I am a Seond Mate on a USNS vessel at sea. Thank you for publishing the transcript of this interview. Downloading audio or video at sea is difficult, so again thank you for the transcript.


Ed OShea

Trevor007's picture
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On The Cause of Currency Wars

It's all in the Swiss Franc of course! Both the USD and Sterling depreciated over 125% against the Swiss franc after 2007 and these massive moves have never reversed have NEVER recovered. Both the USD and Sterling are being artificially manipulated and kept at an all time low by an invisible hand. Of course, the main news media says nothing. Investors from USA and UK did NOT pour so much of their hard earned money into an already over valued Swiss Franc. Yes, the Chinese Yuan locked into the dollar causng a shift in wealth from West to East but no one has really realised where the main issue lies, it's in the Swiss Franc.

SteveW's picture
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Iran; screws completely tightened

The currency war against Iran is getting really hot. Not content with promoting inflation and consequent problems of food importation the West are now cutting Iran off from the SWIFT international wire transfer system of currency payments.

Iran is being forced into barter and the use of gold as a last resort before the possible chaos that Rickards talks about. If you want to understand chaos, watch Iran, it isn't pretty.

Thomas Hedin's picture
Thomas Hedin
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why not interview byron dale

Why won't you guys interview Byron Dale?

Travlin's picture
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That was a very impressive interview. I already had a high regard for Rickards. To have Chris asking the questions was ideal. I’d love to hear those two in a free form discussion of their various ideas. (Hint) Maybe Chris could wake him up on peak oil. Given Jim’s government connections, I think we should pay attention to what he said about the Fed using Nominal GDP Targeting.

The rise of the caliber of guests on this site is very impressive.


Jim H's picture
Jim H
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Nominal GDP targeting..

I agree that this was an informative interview... Rickards has been sounding the alarm on nominal GDP targeting for months now.. and I think Bernanke did make it pretty clear with his latest statements that it is happening.  Going back to Chris' piece on Surviving a currency crisis, and our tendency to constantly reset the bar as to what we think is extreme and absurd... this idea really fits the bill... to replace real growth with inflation... AS POLICY. This outlook is winning more adherents;

"Things will get serious once the Fed adopts a policy called N-GDP targeting. Instead of inflation, the Fed will try to “target” nominal GDP. If real GDP growth is zero, the nominal GDP growth will be made up entirely of inflation. Debt is a nominal unit, and it is supported by nominal GDP. In order to keep the ratio between GDP and debt halfway bearable, GDP must be inflated. It is a tax on everybody holding dollars, since the value of those will decline."

source:  http://www.zerohedge.com/news/guest-post-mental-contortions-printing-mac...

I am sure the Automatic Earth will still tell you that this is impossible.. to create inflation in the face of all the deflationary forces in the system now.  I think we know better....


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RJE's picture
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...thank you for your posting of Lira's opinion. I too believe that an opportunity will exist where Deflationary forces will be pronounced enough to take advantage of during an Iranian attack. I am also speculating that Greece will provide a similar opportunity, and I will allocate to hopefully take advantage of this risk/reward opportunity that I see.

I happen to believe that a negative response by the hangers on, and other intel in Greece is not factored for completely in the market. I also believe that Portugal and Spain have as a risk the possibility of a run on their banks too. Perhaps even in Ireland, and Italy. I actually base part my opinion on how Chris reacts to uncertainty with us, and asks us to prepare by pulling cash from our accounts. A pre-cautionary warning that makes sence. The European community of people have at the very least an under current of Psychological stress that if the herd starts a moving could feed on itself. I'll play that hunch. Hell, I know I'm stressed, and I don't use the Euro. I have friends that live in Germany (my sisters friends), and they are even taking precautions by having a little more cash around. This is not advice just a muse. Regards, and thank you.


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Currency Wars


I know it is rude to just jump into other people's blog and start criticising. I have read 'Currency Wars' and listened to the interviews, and I have concluded that Rickards has indeed caught the ball, but he is now running off in the wrong direction.

Why did the US terminate gold convertibility of the US$ in 1971? They could have just raised the official gold price from $35 to $50 and later even higher. So why did they stop convertibility rather than just raising the price? Answer: Middle Eastern oil was too cheap. At that price, the US had no domestic production and would have become totally dependent on the Middle East. They knew that if they stopped convertibility, the Arabs would start purchasing gold in the private market and as soon as the gold price rose, OPEC would raise the US$ price of oil as well. This plan worked out, but towards the end of the 1970s the oil price became too high and got out of control.

Another problem was the Europeans did not like this at all. They had to export to the US in order to acquire dollars while the US could just print them and buy oil with them. So they started working on the Euro. As long as the Euro was not yet established, however, they had to keep the US$ in business. Towards the end of the 1970s this became difficult. Many thought the US$ would fail already at that time. Why did the US$ survive? Because everyone, including the Europeans, supported the US$ by making gold artificially cheap. This was done by expanding the London gold market.

Then, in 1999, when the Euro was up and running, the Europeans stopped supporting the London gold market, and this is precisely when gold turned around and started its decade long ascent. But back to Rickards. The introduction of the Euro has made it impossible for the US to return to a gold standard as Rickards proposes. Europe can always break that gold standard by inducing trade imbalances. The US will never again be able to keep the price of gold low in US$ for a long period. Europe can always force the gold price in US$ up, at least up to its free market price. For the last ten years, we have been watching the beginning of this development.

If you want to read more, the primary source is Another, FOA, and FOFOAs blog. Here is a summary of why I don't think Rickards proposal can work:


Hope you find this interesting,


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