Jim Rickards on the Death of Money, China, and Financial Warfare

Tue, Apr 22, 2014 - 10:15am

Partial transcript

Jim Puplava: The international monetary system has collapsed three times in the past 100 years: in 1914, in 1939, and in 1971. Each collapse was followed by a period of turmoil: wars, civil unrest, or significant damage to the stability of the global economy. The next financial collapse will resemble nothing we've seen in history. Deciding on the best course to follow will require comprehending a mine field of risk while poised at the crossroads pondering the death of the dollar. Joining me on the program is my special guest, Jim Rickards. He's the author of a new book called, "The Death of Money: The Coming Collapse of the International Monetary System," and, Jim, in your book you talk about the demise of the dollar and, by extension, the potential collapse of the international monetary system because if confidence in the dollar is lost—and this is a very key point—no other currency stands ready to take its place as the world reserve currency because the dollar is the lynchpin. If it fails, with it is a failure of the entire system. Let's talk about that.

Jim Rickards: Thank you Jim. As you mentioned in the introduction, the title of the book is "The Death of Money: The Coming Collapse of the International Monetary System," and when I say that it sounds provocative but it's really not meant to be, as you correctly explained: the system has collapsed three times in the past 100 years. The last time was in 1971, a little over 40 years ago, so these things do happen every 30 or 40 years. Now it doesn't mean it's going to happen tomorrow like clockwork, but I would expect this sooner than later for some reasons that I explain in the book. But the important thing is when the system collapses it doesn't mean the end of the world. It doesn't mean we all live in caves and eat canned goods. What it means is that the major financial and trading powers sit down around a table and rewrite what they call the rules of the game. And the rules of the game is not my expression, that phrase has been around for a hundred years and is the way experts describe the workings of the international monetary system. So what I do in the book is first of all to explain things that are visible today, the dynamics that are leading to the collapse but then go further and say, okay, when the collapse comes, what will the new rules of the game be, what will the new system look like and what can investors do today to prepare for that so they can preserve wealth through not only the collapse but into the new system as well. So, it's got some history, it's got some economics, it's got some international security aspects to it. It's got some forward forecasts so I hope the readers enjoy it.

What ever happened to inflation?

“Well, two things happened: a lot of our potential inflation got exported abroad to other countries...it did show up in China, it showed up in Brazil, it showed up in the Arab Spring—that was one of the contributors to the rise we saw in 2011 and so forth. But it's just a matter of time before other central banks throw in the towel, which is what Bernanke told them to do, and then that inflation comes back to the United States. So, that's one thing you can see coming.”

“The other reason is that the increase in nominal GDP has two parts...and this is the failure of Bernanke's helicopter money theory. He's said, well, I never worry about causing inflation. I know I can do it because I can just push money out of helicopters: print it and push it out of a helicopter. But what if people just left it lying on the ground? In other words, picking up the money involves going into debt. People don't want to go into debt. They want to sell assets, get cash, and pay off debt: deleverage their balance sheet. They don’t want to go into debt. So, even the printing of money doesn't work if people don't want to spend it and that's what's been going on. So, the combination of exporting some of the inflation abroad and the declining velocity or turnover of money have meant that they can print all that they want and you still don't get the inflation. But here's where it breaks down: Janet Yellen is determined to get inflation. Central banks have to get inflation—they cannot tolerate deflation. So they print and they print and they're still not getting the inflation. Guess what they're going to do? They're going to keep printing! And they're going to say eventually we're going to wear you down, we're going to get that inflation. And my thesis is that you might get that inflation but you might cause a collapse in confidence in the meantime on the way to printing so much money to get the inflation. You might actually destroy confidence, and that's when you have this kind of catastrophic collapse. So, we're only halfway through this movie, we've got to see the rest of it yet. But it's going to end badly."

Is this the reason China is buying so much gold? Are they hoping to establish a new gold-backed currency to replace the dollar?

"Everyone thinks the U.S. is in trouble because we owe the Chinese so much money—we’re not. We can just print it and hand it to them. We can say, hey, here's your trillion dollars, good luck buying a loaf of bread; and that's what the U.S. has always done. So, the Chinese have a problem. So, they said, OK, we can't dump these Treasury bills—we can't. The market’s big, but it's not that big; and it would be extremely costly to do so. So what we'll do instead is acquire gold by thousands of tons... There are only about 35 thousand tonnes of official gold in the world—I’m not counting private gold—I’m just talking about official gold. So, when a country goes out to buy 3 or 4 thousand tonnes, which the Chinese have done, that's 10% of all the official gold in the world. It's an enormous amount of gold... And China is sitting there saying, fine, we the Chinese want a strong dollar. Believe it or not, they are the dollar's best friend because they have so many dollar-denominated securities—really trillions of dollars’ worth. We want a strong dollar, but if you, the U.S., cheapen the dollar through inflation and money printing, we're going to lose on our paper but we are going to make it up on our gold... So what they've done is built a hedge position. If the dollar is stable, they might not make much on the gold, but their dollars will be valuable. But if we inflate the dollar and diminish the value of their savings, they'll lose on the paper but they'll make it up on the gold. So, a lot of people speculate that China is trying to buy the gold to come out with a gold-backed currency. That's not going to happen anytime soon. China is not even close to having a reserve currency. What they are doing is building a hedged position to preserve their wealth. And what I say to investors is hey if it's good enough for the Chinese, it's good enough for the rest of us. In other words, we should have some gold—not all in—but kind of 10% gold to hedge all of your other assets.”

In the rest of this part 1 of 2 interview, Jim Rickards and Financial Sense Newshour host Jim Puplava discuss the nature of financial warfare, the threat posed by Russia and China to take down the U.S. financial system, and a number of other fascinating topics.

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Chief Global Strategist
West Shore Funds
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