Watch the replay below
Outspoken author and investment advisor James Rickards sat down for a pro-to-pro discussion with Hedgeye CEO Keith McCullough recently.
Here's an interesting quote from Jim:
“I was able to ask Larry Summers about that at dinner a couple of days ago. I knew the answer, but I wanted to hear what his answer was. So the question was, ‘In the last 10 years, Russia has more than tripled its gold reserves and China has more than tripled its gold reserves.’ They have a lot more off the books, but let's take the official number.
Why are they doing it?
And he sort of thought about it for a second and he said, ‘Well, diversification.’ That's actually technically a good answer. But then he said, ‘Maybe they think the price will go up.’ So I’ve got Larry Summers on the record saying, higher gold prices. I'm on board with that.”
That’s just one of many fascinating tidbits from this new, in-depth conversation. We transcribed some other key takeaways from their conversation below.
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Keith McCullough: Hi I’m Keith McCullough and welcome to another edition of “Real Conversations.” This one is with one of my favorite, not only authors, but thought leaders, somebody who comes up with ideas before other people do that are actually timely, topical and over time become quite accurate.
There are very few things, Jim, that were as timely and topical as this book, Currency Wars, when you wrote it in 2011. The most eloquent thing that you wrote is that “None of this happens in a vacuum.”
James Rickards: They don't. Currency wars don't happen all the time, but when they do, they can last for 15 or 20 years. And I had a lot of historical examples of that. So I'm not at all surprised that here we are in 2019 and we are talking about currency wars.
Now the journalists always act like this currency war is new. No, it's the same currency. They just don't end easily because there is no logical ending to it.
Currency wars don't work. When they happen they morph into trade wars. Trade wars don't work either – short-term effects suppress trade. And then they morph into shooting wars. And that's what happened in the 20s, thirties and up to 1939. So there was a currency war in the 20s, early thirties, then a massive trade war in the 30s. And then World War II broke out at the end of the 1930s.
So we're nine years into the currency war. The trade war started in earnest about a year and a half ago when President Trump threw the tariffs on washing machines, aimed at the Chinese, and it's escalated from there to tariffs on $200 billion over the goods. It won't work. We’ll win kind of, and the Chinese will be hurt more than we will, but it doesn't really solve any of the problems.
And then let's hope it doesn't turn into a shooting war. But that is the history and that's what I talked about in the book.
McCullough: Yes. Inequality gaps drive people to the final stage of frustration. We're already there in the U.S. But you have Trump and Powell aiding and abetting – trying devalue the currency to get asset price reflation. Meanwhile, Europe will not recover. So you have Draghi devaluing – who is one of the greatest currency war players of all time.
Rickards: Totally agree.
McCullough: You also have these Latin American currencies that are going down in a ball flames. How can the Fed actually get it done? What happens if the Fed is cutting rates and the dollar won't go down?
Rickards: Well, yeah. And what if they're cutting rates and you can't get inflation, which are two sides of the same coin, no pun intended. I just got back from Bretton Woods. I was up there earlier in the week. It was an event to commemorate the 75th anniversary of the original Bretton Woods at the Mount Washington Hotel. I just love the hotel. It was very cool. It's got Wifi and amenities, but it was built in 1902. You're walking around like, “This is where John Maynard Keynes walked and Harry Dexter White.”
We had Larry Summers, former secretary of Treasury, and others like that. It was a great group, but more to the point, there was one panel, technically off the record so I can't give you the names or exact quotes, with two very senior Fed officials and one very senior ECB official.
But this panel thought rates were coming down in the U.S. and Europe. They didn't think it was like front page news, but they've just got to come down. The Fed people were also talking in a pretty relaxed manner about negative rates. Nobody said there are going to be negative rates or that it's on the horizon. But they didn't treat it like a taboo subject.
The idea of negative rates as economic stimulus is just not true. It's a complete failure. It simply doesn't work. And the research is coming in and here's what it reveals. The theory is you get into a liquidity trap so you lower interest rates and people want to spend money but, theory says, if I make them negative, you're really going to want to spend your money because you put $100,000 in the bank and at negative 1%, you come back a year later and there’s $99,000 in the bank.
That's not what happens. People have lifetime goals – your retirement, you and your kid’s healthcare, education, whatever it is. If you're saving for that and I give you a negative rate you actually save more. So it adds to the liquidity trap.
So why would you do [negative interest rates]? Well, there are two reasons. One is currency wars and the other one is just to prop up the banks. Those are the reasons to do it, but economic stimulus is not one of them. Again, we still have a ways to go.
McCullough: This is Jim Rickards’ new book, Aftermath. And essentially you're explaining ‘How do you protect your assets?’
Rickards: Yes, and there’s a whole chapter on Modern Monetary Theory (MMT), which I think people will be interested in. Basically, what MMT says is first of all, they integrate the balance sheets of the Treasury and the Fed. MMT makes these balance sheets one big happy family and they literally spend as much as they want.
And if the bond markets get itchy, the Fed can monetize the debt, put it on the balance sheet, wait 30 years and get paid. Advocates basically say, ‘Japan's debt to GDP is more than twice the size of the U.S. so what's the problem?’
MMT advocates say Bernanke proved that you can print $4 trillion and nothing bad happens. He took the Fed balance sheet from $800 billion to almost four and a half trillion dollars. All printed money. There was no inflation, nothing significant. The world didn't come to an end. There was not another financial crisis. So the fact that he wanted to print $4 trillion to help Jamie Dimon doesn’t matter.
But back to the debt problem we just talked about. There are three ways out.
McCullough: Out of what I guess Ray Dalio would call the ugly deflation.
Rickards: Right. One way out is growth, but Reinhart and Rogoff say you're not getting the growth. The debt is actually a headwind to growth. The debt is hurting your ability to grow your way out of the debt. The second way out is default. We're not going to default. The third way out and the only way out is inflation. That’s where owning gold comes into the equation.
McCullough: It’s the last thing people are long. What is total global institutional asset allocation to gold? Less than a half a percent. Maybe that's the point, if they were actually long it like the Russians or whoever else they’d be buying as much as they can.
Rickards: Well, I was able to ask Larry Summers about that at dinner a couple of days ago. I knew the answer, but I wanted to hear what his answer was. So the question was, “In the last 10 years, Russia has more than tripled its gold reserves and China has more than tripled its gold reserves.” They have a lot more off the books but let's take the official number.
Why are they doing it? And he sort of thought about it for a second and he said, “Well, diversification.” That's actually technically a good answer. But then he said, “Maybe they think the price will go up.” So I’ve got Larry Summers on the record saying, higher gold prices. I'm on board with that.
The real reason is that they're preparing for a non-dollar based system and they're doing this in conjunction with development of a permissioned blockchain and crypto currency, which is like joining a club – you only get in if the membership committee says you're in. By the way, this solves a host of scalability and sustainability problems that open blockchain currencies have.
So who's in the club? Russia, China, Iran, Turkey, North Korea and Venezuela. But maybe they'll extend some invitations to the BRICs. And now Iran sells oil to China. China sells infrastructure to Russia. Russia sells natural gas to Turkey. North Korea sells weapons Iran. All this is going on and what's missing from that trading network? The dollar, there's no dollar in it.
And then here's where the gold comes in. So you cryptocurrency, what's that? Well, you just use this as the way to keep score. I mean you can use baseball cards to keep score, but you use way to keep score and you have deficits and surpluses like any trading network. And then periodically, once a year, twice a year, you settle up, and when you do you settle up in gold. This is completely feasible and heading in that direction.
McCullough: This is the biggest problems that the crypto bears have is that there's nothing behind it. There's no government behind it. But if you backstop a government crypto with gold now we’re talking. That I really like.