Saturday, September 20, 2014

The Death of Money - A Summary Review Part II

In Part I of this review we looked at how Part I of The Death of Money lays the groundwork for the forecasts and suggestions that come latter in the book. In Part II of our review we will briefly take a look at Parts II and III of The Death of  Money with emphasis on Part III. Part III is where the forecast scenarios and suggestions to deal with them are found.

Part II of The Death of Money (covering Chapters 3-6) builds on the groundwork laid out in Part I. It is kind of a tour around the globe touching on all the major economic powers in the current monetary system. Readers will find a lot of interesting historical background information on China, the Eurozone, the rise of the BRICS, and even other catchy acronyms like the BELLS and GIIPS. A key takeaway from this is that we live in a complex and interconnected global financial system. A saying we like to use here on this blog is trouble anywhere can lead to trouble everywhere. As an example, Part II explains how trouble in China can lead to trouble around the globe. But the same can be said for Europe.

Part II is interesting, but we won't dwell on it here. Part III is where the rubber meets the road. In Part III, all the evidence compiled in the book leads up to the forecasts about where Jim thinks we are headed. To be clear, the book contains this statement:

"Although the scenarios described in this book are dire, they are not necessarily tomorrow's headlines. Much depends on governments and central banks, and those institutions have enormous staying power even while pursuing utimately ruinous policies."

So, while Jim makes bold forecasts and backs them up with subtantial factual data, he realizes no one can know the future with certainty.

We might add that much also depends on the willingness of the public to continue to trust these institutions. A factor Jim really does not mention much in the book. The book spends much time being critical of these institutions as being the cause of the problem, but then seems to assume that the public will just accept the same institutions as the solution to the problem.

With those disclaimers in place, what are the scenarios mentioned and how do people prepare for them? We won't go into detail, but we can summarize much as Jim does when he does interviews in the media.

Let's quote from page 292 to get the big picture scenarios:

"The dollar's demise will take one of three paths, The first is world money, the SDR; the second is a gold standard; and the third is social disorder. Each of these outcomes can be foreseen, and each presents an asset allocation strategy best able to preserve wealth."

Anyone who has listened to Jim Rickards interviews knows he forecasts that the Fed will not be able to handle the next major financial crisis. He forecasts that the IMF will step in as global lender of last resort (become a global central bank). He forecasts the SDR currency unit now used in the IMF will become a form of global currency. He forecasts that eventually this currency will require gold backing of some kind to restore public confidence. All those forecasts are well known and oft repeated in his media interviews. 

Lesser known is his comment on the possibility of social disorder. By social disorder he means "riots, strikes, sabotage, and other dysfunctions". He notes that social disorder is an unpredictable variable arising out of a complex system. He does not say it is inevitable, but allows for it as a possible consequence from another financial crisis. If it does arise, he believes the government will use brute force to counter it. 

Let's all hope we don't go the social disorder route. That is very difficult to plan for. In that world the average person probably is working overtime just to secure the basic essentials of life and some secure place to live. Not that it should be ignored. People can do some level of preparation. But it is much harder to deal with and will vary from place to place. And the pain and suffering would likely be huge. People might question whether a world like that is worth surviving in.

We will focus on his world money (SDR) and gold standard forecasts. Basically the bottom line of this forecast is that new "rules of the game" will be written to reset the system at some point. And somewhere in that process gold will again come into play to restore stability and confidence. We have covered this many times here on this blog.

If we do see this kind of major monetary system change in the future, how does the average person prepare for it? Jim provides several specific ideas. We won't detail those here, but we will focus on his #1 suggestion. People who can afford to should acquire some actual physical gold held in their possession (not any form of paper gold like options, futures, unallocated gold, etc). If not gold, at least some silver.

A reader may ask, But Jim Rickards says we don't know if we will have a major deflation event, a major inflation event, or both at some point in the process. What happens to my gold if we get a major deflation event? 

Jim answers that question in detail in the book. Basically he explains how historically gold has held up in both times of inflation AND deflation. He provides a detailed explanation of why this is the case and how that works.

Jim does also provide a suggested asset allocation which people can read in the book. But we can say it really is nothing radical. It is basically a variation of the very mainstream concept of diversity and hedging your assets. It just includes a physical gold component which mainstream financial planners ignore. Jim explains why the average person should not ignore the gold part of the overall portfolio.

Concluding Comments: The Death of Money is a book we can easily recommend. It is not expensive and contains a ton of useful information. It covers the very important topics we try to cover here on this blog in great detail. Much moreso than can be done in a blog format. 

If you read the book, you will see why we cite Jim Rickard so often on this blog. There are very few people with experience inside the system who will discuss these issues. Jim does this in a way the average person (like me) can understand. He has the resume and credibility that people new to all this will find appealing. He lays out a detailed array of facts to support his conclusions and forecasts so that readers can verify them on their own.

All of these things make him somewhat rare as a source which is why we cite him here so much. There are certainly many other solid information sources as well and we search for them daily here for readers. But if you only have time to read one book, this is the one we would recommend to get up to speed.

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