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collapse of the current financial system

Jim Rickards explains what is happening in the economy, and how he sees the monetary system going forward






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less scenarios collapse which I actually
think is the most likely through a
combination of Wishful Thinking denial
delay we’ll probably just blunder into a
collapse at which point the response
would take the form of executive orders
and you know after social unrest
probably some kind of neo-fascism it’s a
good reason to believe that we are
looking at a potential collapse of
confidence in the US dollar and indeed
the entire international monetary system
the international monetary system is
based on the dollar so the dollar goes
the system goes that’s not meant to be a
provocative statement the international
monetary system is actually collapsed
three times in the past hundred years in
1914 1939 and 1971. so this would be the
fourth collapse in 100 years and not
that infrequent and when the monetary
system collapses it’s not the end of the
world we don’t all go live in caves who
do canned goods and all that what
happens is the major trading and
financial Powers get together they sit
down and they re-cut the deal what’s
called the rules of the game so what I
want to think about a little bit is
since we can see the collapse coming is
what are the new new rules of the game
what would the international monetary
system of the future look like as a
result of a sort of a new brettonwood
style conference uh in the face of a
collapse I’ve got four scenarios here
mobile Reserve currencies sdrs gold and
collapse followed by something worse
multiple Reserve currencies the ideas
you know in two thousand seventy percent
of international reserves were held in
dollars today that number is 60 it’s
trending down so imagine a world where
the dollar goes below 50 maybe it’s 45
or 40 percent the Euro comes up you know
the Australian dollar in Canadian dollar
were just recently admitted by the IMF
as official Reserve currency so they
have a larger role and we end up in the
situation where you get a whole bunch of
Reserve currencies I call it the Kumbaya
solution we all just get along this
won’t work this is unstable because
there is no anchor there’s no gold
there’s no dollars so instead of one
Central Bank Behaving Badly you’d have
five or six or seven behaving badly I
think this would exacerbate rather than
mitigate the currency Wars the next one
this is the one preferred by the elites
when I say Elites sound of deep dark
conspiracy you know Finance ministers
treasury secretaries academics Central
Bankers other policy makers this is the
SDR the SDR is a special drawing line
it’s understood by very few people but
it’s unbelievably simple the way to
understand it the FED has a printing
press they can print dollars the
European Central Bank has a printing
press they can print euros and the IMF
is a printing press they can print sdrs
and that’s all it is it’s World money
they can print as much as they want they
hand it out they can reflate and
re-liquify the global economy the IMF
actually has a 10-year plan to make the
SDR the global Reserve currency again
not a secret you can find it on their
website I want to give a quick example
because I know this is attuned to a
policy but how the SDR is already sort
of creeping into our system the United
States Treasury got authority to provide
a hundred billion dollars to the IMF
this was legislation passed in 2009. so
what did the IMF do with the money well
what they did is they if you look at the
total IMF loans credit lines Etc 91
percent of all the IMF loans in advances
they want to bail out Europe or to
Mexico only nine percent went to the
rest of the world I leave it to you to
decide whether the president was
entirely candid with the Congress when
he said this is primarily for developing
an emerging market economies you don’t
see Korea Indonesia India Brazil
Thailand Malaysia you don’t see those
countries getting more than nine percent
of the IMF money this money basically
went to bailout Europe that’s another
thing where again I think the American
people were a little more aware they
might raise a few questions
um third outcome is the gold standard
I’m just going to go through this very
quickly all gold standards are relation
between paper money and gold but you
have to ask yourself a couple questions
when you set up a gold standard first
one is what’s your definition of money
because we have m0 M1 M2 these are
technical definitions they’re all
different so you have to pick one of
those to be your money the second one is
what’s the proper Reserve ratio do you
need a hundred cents on the dollar of
gold to back all the paper money well a
lot of gold bugs would say yes but
historically that’s not true England ran
a very successful gold standard in the
19th century with 20 percent back in the
United States through most of the 20th
century was on the gold standard with 40
backing so history says you can have 20
or 40 backing uh and and that works just
fine third thing is which nations are
included the simplest way to understand
that the U.S could do this on its own
but it would be a blunder because if we
had a gold standard a dollar back by
gold and we were the only one doing it
all the other currencies in the world
would essentially be worthless nobody
would want anything other than dollars
which would be extremely deflationary
because the other currencies would not
be desirable and it would repeat the
blunder Winston Churchill made 1925. so
we’ll look at what with those criteria
look at actually where the gold is if
you take the 17 members of the European
monetary system those who backed the
Euro They have ten thousand tons the
United States says 8 000 tons the IMF is
about 3 000 tons you see China
Switzerland it kind of tails off after
that so the good news for the US and
Europe is we still have all the gold and
I think we will have the largest voice
by far if there is a new international
monetary conference with one footnote
which is China is non-transparent so
that China bar that one thousand tons is
probably closer to 4 000 tons we’ll
probably learn that a year from now when
they update their figures so China has
bought themselves a very big seat at the
table so the first one the global money
Global M1 40 backing that’s about seven
thousand dollars an ounce now is that’s
what the price of gold would have to be
to support the money supply without
deflation so it’s the non-deflationary
applied price to Gold Global money
supply Global M2 with 100 backing is
forty four thousand dollars an ounce the
last scenario is collapse which I
actually think is the most likely
through a combination of Wishful
Thinking denial delay misapprehension of
those statistical properties of risk and
bad policy will probably just blunder
into a collapse at which point the
response would take the form of
executive orders and you know after
social unrest probably some kind of
neo-fascism the way to understand it we
have inflation and deflation going on at
the same time two opposite ideas
happening at the same time the deflation
is natural it’s what happens in a
depression because of deleveraging so
what’s deleveraging well I have to sell
assets to pay off debt when I sell
assets it tends to depress the price I
pay off the debt but prices are going
down so now you have to sell more assets
to pay off more debt Etc and you get
into a debt deflation cycle until you’ve
liquidated everything and prices hit
bottom and the kind of people started
looking around for bargains again the
cycle starts to term but it can go a
very long way and Irene Fisher wrote
about this in the 1920s in the debt
deflation cycle a theory of the Great
Depression but opposing that we have
inflation coming from policy what’s
actually going on is we have sort of a
notional five percent deflation and a
notional five percent inflation the
deflation from deleveraging the
inflation from policy and they’re
pushing against each other and they’re
canceling each other out but it’s not
stable you’ve got these two forces and
one of them is going to Prevail it’s
going to snap and it could snap out of
the way it could go into much more rapid
at inflation or much more serious
deflation got the monetary policy roots
of this here’s uh the basic statement of
the quantity Theory money now you all
learned this in your first week of
macroeconomics but it’s the equation is
MV equals PQ m is your money supply V is
the velocity velocity is just the
turnover of money so you know I go to
the bar tonight and I leave a tip and
the bartender takes the tip and takes
the taxi home and the taxi driver takes
the fair and puts gasoline in his car
that dollar has velocity of three
because one dollar supported three
dollars of goods and services the tip
the taxi and the gasoline but if I stay
home and don’t spend any money my money
has velocity of zero so and I remind
people three trillion dollars times zero
is zero in other words if you don’t have
velocity you don’t have an economy so
basically money supply how much money is
there times velocity how quickly is it
turning over equals the nominal GDP the
gross dollar value of all the goods and
services in the economy and nominal GDP
he has two parts a q is the real part
and P is the price index so inflation or
deflation but this is psychological they
have to basically lie to you they have
to engage in propaganda to bend the
velocity curve to make you want to spend
more money than you’re actually doing
right now so that they can get
phenomenal growth they need to pay off
the debt so how do you bend the velocity
curve what is the policy here and as I
mentioned is exercise and propaganda two
ways to do it two tools like this the
first is negative real rates negative
real rates is when inflation is higher
than the nominal rate that’s good
because if you’re a borrower in that
world you actually pay the bank back in
cheaper dollars that’s better than zero
interest that’s the bank paying you to
be a borrower so ideally the FED would
say we’ll have two percent on the
10-year note and three percent inflation
negative real rates of one percent
that’s a very powerful investment to go
out and borrow the other thing they want
to do is deliver an inflationary shot if
I promise you two percent and I deliver
two percent there’s no change in
Behavior I’ve exactly met your
expectations Nation so there’s no reason
for you to change your behavior what I
have to do is lie to you I have to tell
you two percent and deliver three
percent that’s a shock now you’re like
oh gee inflation’s out of control better
go buy a house buy a car buy a
refrigerator do whatever so that changes
Behavior so three percent inflation with
two percent or two and a half percent on
the 10-year note is a negative interest
rate which is a powerful inducement to
borrow and it’s also inflation shock
which is a powerful inducement to spend
and the idea of three percent inflation
is to get the borrowing and the lending
and spending machine going again try to
get nominal GDP back to Trend make it
self-sustaining withdrawal policy
substitute real GDP for nominal GDP get
real GDP back to trade and we all live
happily ever after this is what the FED
is trying to do they’re going to fail
but it’s important understand what
they’re trying to do why they’re trying
to do it then when you see them failing
it’s very easy to forecast monetary
policy because they’re just going to do
more of it until they get what they want
why do they have to get this well why do
they have to have inflation uh what’s
wrong with a little deflation well
here’s what’s control that this is
actually the fed’s worst nightmare the
government in economic theory inflation
and deflation you know prices are going
up prices are going down so what you
know you get a raise or you don’t get a
raise or you get a little benefit or
they’re winners and losers it would seem
like a normal economic process but the
government’s view of inflation deflation
is asymmetric they have to have
inflation they cannot have deflation
they can’t tax it so imagine you make a
hundred thousand dollars a year and your
boss gives you ten thousand dollar raise
and prices are constant okay so you just
had a ten thousand dollar increase in
your real standard of living you got ten
thousand more prices are the same except
what happened so the government comes
along and takes half they take five
thousand and you get the other five
thousand but imagine an opposite case
you’re making a hundred thousand a year
you don’t get a raise but prices drop
ten percent well you have the same ten
thousand dollar increase in your
standard of living your salary didn’t go
up at all but the price of everything
you buy went down so you’re better off
except that now you get to keep the
whole ten thousand dollars because as
the government doesn’t know how to tax
deflation so deflation can increase the
real standard of living of the American
people but the government won’t allow it
because they can’t tax it it destroys
tax revenues