Friday, August 19, 2016

Jim Rickards: Janet Yellen 21st Century Houdini

Jim Rickards has a new article out on the "handcuffs" he says Janet Yellen and the Fed are working to get free from right now. This article lays out the problems the Fed faces in trying to get more inflation into the economy. Below are some excerpts and then some added comments.


"Harry Houdini was the greatest escape artist of the 20th century. He escaped from specially made handcuffs, underwater trunks and once escaped from being buried alive. Now Janet Yellen will try to become the greatest escape artist of the 21st century.
Yellen is handcuffed by weak growth, persistent deflationary trends, political gridlock and eight years of market manipulation from which there appears to be no escape. Yet there is one way for Yellen and the Fed to break free of their economic handcuffs, at least in the short run. Yellen’s only escape is to trash the dollar. Investors who see this coming stand to make spectacular gains.
Yellen and the Fed face as many constraints as Harry Houdini in trying to escape a potential collapse of confidence in the U.S. dollar and a possible sovereign debt crisis for the United States. Let’s look at some of the constraints on Yellen — and the possible “tricks” she might use to escape."
. . . . . 
"The Fed’s final destination is inflation — the Fed needs inflation to escape its handcuffs. What are the indications and warnings of inflation from a policy perspective?
There are four ways to get inflation when rate cuts are off the table. These four ways are helicopter money, world money, higher gold prices and currency wars."
. . . . 
"The second way to get inflation is for the IMF to issue world money in the form of special drawing rights, SDRs. This may happen in the next global financial crisis, but it won’t happen in the short run. The IMF moves even more slowly than the Fed. SDRs may be issued in sufficient size to cause inflation in 2018. But it’s unlikely to happen before then."
. . . . 
"If we can potentially expect helicopter money in 2017, SDRs in 2018 and a high official gold price in 2019, what can we expect here and now? How can the Fed cause inflation in 2016?"
. . . .
My added comments: What most caught my attention in this article is the timetable Jim lays out for the events he talks about to unfold. I have not seen anything like this before and it is helpful in giving us a reasonable time frame to expect things to happen. Of course, I am sure this not intended to be an exact timetable, but still gives us a useful guide. 
I can add that this timetable he describes fits very well with input I have gotten from a number of the expert sources I talk to. None of those sources tells me they expect consensus to replace the US dollar as global reserve currency in the near term. They also indicate that they think it would take another major crisis to create a sense of urgency in policy makers to move faster towards major monetary system reforms. 
I view this new article by Jim Rickards as additional confirmation that major monetary system changes like we watch for here are currently not expected to unfold in the near term and are more likely to gradually happen over an extended time frame like he talks about in this article. As always, a sudden and unexpected new major crisis could change things and create urgency to move quicker. I always point that out even if the timing for such a crisis is unknown and may not happen soon. It is impossible to know the timing of an event like that.

Added note: Because we have had the SDR in the news quite a bit lately I am running a series of articles that try to cover some basic information about it before the G20 meeting. The first was this article which tries to explain how their are actually two versions of the SDR (O-SDRS & M-SDRs) even while neither version is actually a currency at this time like people normally think of a currency. Soon I will have an article that provides a simple example of a theoretical SDR denominated bond to help explain how that might work for a person in the US if they were ever to own one. Later, ahead of the G20 meeting, I will have an article that was fully reviewed by Dr. Warren Coats. He also offered some of his own commentary as well to include in this article.

To be able to get information directly from someone like Dr. Coats who is a former Head of the SDR Department at the IMF is incredible and I hope readers realize how fortunate  we are in that regard. He knows SDRs and the rules that govern them at the IMF as well as anyone in the world. He has contributed information and quotes to many articles here on this blog.

There are not a lot of sources that cover the SDR. Jim Rickards and Willem Middelkoop are two who do. They actually prompted my initial interest in learning more about them a few years ago. My reasoning was that if they really do someday replace the US dollar, I need to learn all I can on the subject. Both of them do a great job of taking a complex topic and making it easier for someone with no background to get the basic ideas. I consider them both role models to try and emulate in that regard. 

Honestly, it is hard to tell right now if the SDR will play a more prominent role in the global monetary system any time soon. It seems like China and the other emerging nations are more devoted to this than the western nations and the US in particular as best I can tell. Willem Middelkoop's new article on the concept of an SDR substitution account has created great interest and something to watch for in the future.

Perhaps we will get a better idea after the upcoming G20 meeting. If the SDR does someday replace the US dollar as global reserve currency, many more people will want to learn about the SDR because so few know about it now. The goal here is to create an archive of information/articles that people can access free in the future to learn more if the SDR does become more prominent. It is very much an unknown at this time if this will actually happen. Major changes at the IMF require member approval of 85% and the US has a 16% vote which is essentially a veto power of sorts.

People can make up their own minds about the idea of the SDR as a global reserve currency, but before doing so it's always good to know the facts of the situation which is what we try to present here as accurately as possible with the help of experts like Dr. Coats.


  1. Didn't I read that a Chinese bank has begun issuing SDR bonds dominated in RMB? I know I did
    So it seems the SDR program is in the real world
    I really enjoy reading your blog!

    1. G-Man - Yes you did. I covered that in a recent article here on the blog. We know that at the upcoming G20 meeting we will get some kind of statement in support of the SDR, so we are watching to see what it says and also how the US reacts. Are they enthusiastic about a bigger role for the SDR or lukewarm? That is next thing I will be watching for on this topic. But we already know that China wants to see bonds denominated in SDRs become more accepted globally.

  2. Nice article and thanks for sharing your knowledge. I really appropriate your views.

    Money Exchange San Francisco

  3. He you go

    1. Yep. Thanks. I actually ran a blog article on that news a bit earlier as part of the coverage here on the SDR leading into G20.