Covering a topic like global monetary system change can at times be less than exciting. There are a lot of complicated issues, some confusing terminology, and many long work papers that can make the eyes glaze over sometimes.
So this post attempts to set the stage for what should be an interesting matchup to follow here in coming months and years. Jim Rickards predicts an eventual systemic crisis that will be worse the the 2008 systemic crisis. The US Fed projects that we are coming into a recovery (even if a slow one) and that they see stability and continued improvement ahead. Someone has to be wrong. We will watch it here. Get your popcorn.
In his latest interview and most recent published article, Jim Rickards takes dead aim at the Fed. Below we will link to both and paste in some key quotes. Both the interview are the article are fairly lengthy so we encourage readers to go read them fully to get all the context.
Here are some quotes from the recent interview:
"JW: Jim, we asked our listeners to suggest questions for you this month, and we’re grateful to have received some lively questions. But first, could we just catch up on recent events in the monetary world, and in particular, the June meeting of the Federal Reserve’s Open Market Committee? What caught my attention was a warning from the Fed that investors are showing a lack of caution. Is the Fed beginning to worry about a stock market bubble, and if so, is there a little touch of hypocrisy here? Should they perhaps be asking themselves who created the bubble?
JR: Those are both very good questions. First of all, you’re exactly right about the Federal Open Market Committee meeting in June. There was this discussion, this warning, but it’s even more timely than that. As we are doing this interview, Chairwoman Yellen is completing her testimony to the U.S. Congress (she goes up to testify before them a couple of times a year), and she has repeated exactly that, actually, with more specificity. She points specifically to the social media sector and the pharmaceutical sector as being a little bubblicious. I don’t know where Janet Yellen got her stock-picking credentials, but she’s not only warning about stock bubbles in general but pointing to specific sectors where she thinks there’s an overvaluation.
This is consistent with the notion I’ve talked about that you cannot manipulate just one thing. Clearly, the Fed starts out manipulating interest rates, but they are not supposed to manipulate interest rates. It may be their job to set interest rates to basically conduct monetary policy in a way that optimizes labor conditions and smoothens out economic cycles a little bit. That’s probably bad enough, because I doubt whether they’re even very good at that, but to go beyond that and actively manipulate interest rates (which is what quantitative easing, Operation Twist, currency wars, and other things are about) is too much. But you cannot stop there. Once you manipulate one market, you end up manipulating all markets, because interest rates are the price of money, and money is the medium in which every other asset class is denominated.
Now here we are five years into this experiment, and ‘experiment’ is the right word as the Fed has said themselves. I’ve had private conversations with Fed governors where they candidly admit they are making it up as they go along. This is a gigantic world historical monetary experiment. I guess we as investors are all the guinea pigs. We’ve reached the point where we have the chairwoman of the Federal Reserve testifying before Congress, picking out a particular sector of the stock market, social media stocks in particular, and saying it might be overvalued. What’s the basis for that? It just goes to show how far things have gone and how out of control it is.
Jim is just getting started with those comments. Please take time to read the full article and you will see more things like this:
JW: Let’s turn again to the coming crash. And Michael Young asks, “Is there a danger that the U.S. government will take everyone’s 401(k) and give us annuities instead?”
JR: There is the danger of that. I don’t want to rule anything out. When I say anything, I mean confiscation, bail-ins, asset freezes, special taxes, windfall profits tax, or swaps of stocks for annuities. Just put everything you can think of on the table, and it’s all on the table. The question is, is it possible? The answer is, yes. When things get bad enough, governments will do anything. I find that too many analysts put on their market hats. They take what they learned in business school or in economics or what they hear on TV and put on these economics hats and try to analyze everything in terms of rational markets and efficient market hypothesis and the normal distribution or risk, which is all garbage, by the way. That’s not just my opinion. It’s empirically scientifically garbage, and that’s been very well demonstrated in my books and also by others.
Now here is Jim's latest article titled "Six Major Flaws in the Fed's Economic Model". I think it is pretty obvious this is not a glowing review of how brilliant Fed policy is. Let's take a look at flaw #5 in his list for example:
5) The Fed is now insolvent. By buying highly volatile long-term Treasury notes instead of safe short-term treasury bills, the Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries these notes on its balance sheet “at cost” and does not mark to market, but if they did they would be broke. This fact will be more difficult to hide as interest rates are allowed to rise. The insolvency of the Fed will become a major political issue in the years ahead and may necessitate a financial bail-out of the Fed by taxpayers. Yellen is a leading advocate of the policies that have resulted in the Fed’s insolvency.
Again, readers should read the entirety of both articles to get all the proper context. But these selected quotes should make it pretty clear. Jim Rickards believes the FED policies are failing and will ultimately lead to an end of the present monetary system (hence his new book titled "The Death of Money"). This is not just anyone making these claims. Rickards knows governors at the FED and states in public that they have admitted to him that the FED is technically insolvent. Of course no FED official will acknowledge this in public, but we can assume Jim is not lying about it. He knows the people involved and has too much to lose to lie about it. And keep in mind that FED insiders like Andrew Huszar share Rickards concerns.
So there you have it. Jim Rickards sees FED policy failure leading to systemic collapse leading to a new monetary system (SDR's at the IMF). The FED sees a slow and steady recovery with time left to deal with remaining systemic problems (at least that is their public position). Someone has to be wrong. We will follow it. Get your popcorn. We live in historic times.