James Rickards: Currency Wars

James Rickards joins Coach Pete to discuss Currency Wars: The Making of the Next Global Crisis. This December 2011 conversation explores inflation, deflation, stagflation, and the role of currencies in the global economy. Call 800-661-7383 or text PLAN to 600-700. Transcript Automatically transcribed from this episode; timestamps are approximate. 00:00 In this FinancialSafari.com interview from December 2011, Coach Pete interviews author James Rickards. And welcome back in, folks, to the Financial Safari, of course, your weekly show looking inside that complex financial world. We've got a most excellent guest this week, pretty relevant to what we've been seeing lately, too. His name is Jim Rickards, and he is the author of a fascinating book, Currency Wars, The Making of the Next Global Crisis. Jim, welcome in. Thank you, Pete. Thanks for having me. Well, let's talk about this. I mean, this is a great book at this time, isn't it? We've gone through currency wars in the past, and it's shaping up to be an interesting future, isn't it? It's a really good question. That's right. You know, books take about a year to write and research, sometimes longer. 00:47 And when I sat with my publisher, really, in the fall of 2010, one of the questions they had for me is, you know, Jim, this book's going to come out a year from now, in the fall of 2011. How do I know this is still going to be a big story? And I said, I guarantee it, because once these currency wars start, they go on for years. So I wasn't being cocky. I felt confident that seeing the currency war begin in 2010, it's just going to go on for years, because they involve a lot of countries, and they're never over very easily. And they cause a lot of damage in the form of inflation and recession and stagflation. We're just at the early stages of that. Like I said, this is a little bit like writing the history of World War II, the day after Pearl Harbor. There's a lot to say, but there's a lot yet to come. Yeah. So, I mean, the average American listening right now, they hear this stuff on TV when they get home at night. You know, they're trying to fix dinner, and they're watching all the news of the financial markets up and down and problems in Greece, Italy, and wherever else. 01:35 What can the average investor do to minimize the effect on their retirement savings? Yeah, it's a good question, and I think a lot of average investors are in some jeopardy here. The most likely outcome, not guaranteed, but the most likely outcome is inflation. And it sounds funny, because we haven't had serious inflation in the United States for almost 30 years. But inflation is what the Fed wants right now. And the reason is, there's too much debt. You look at that, not just the national debt, but all the liabilities. You know what they are. Medicare, Medicaid, Social Security, student loans, FHA, on and on and on. There's no way to pay it off except to inflation, which just makes the debt cheaper. So it's like saying, hey, I owe you a trillion dollars. Here's your trillion dollars, but good luck buying a loaf of bread. So the Fed's trying to get that going. They've got interest rates as low as they can get. So once your interest rates are at zero, the only thing left in your bag of tricks is to 02:22 cheapen the currency. It makes things that we buy from overseas, whether it's flat screen TVs, iPads, or whatever, more expensive. And that inflation starts to work its way into the system. So in inflation, there are winners and losers. The losers, unfortunately, are average Americans with insurance policies, annuities, retirement income, defined benefit pension plans, 401ks, et cetera. They tend to be on the wrong side of this. The winners are people who see it coming and get into hard assets. And that can be gold, land, fine art, silver, maybe stocks and companies that own hard assets, such as railroads and oil companies. So there are ways to do it, but you need to see it coming. Inflation is a very sneaky thing. It kind of sneaks up on you. Yeah. Yeah. So in the words we've heard of deflation, inflation, and stagflation, I think the American investor just gets lost in the mumbo-jumbo sometimes, the terminologies. 03:09 So, I mean... Well, I think that's true. You know, stagflation is the hardest because it used to be, going back decades, that there was a belief that there was a trade-off between inflation and growth. The idea was, we want growth. And if we have a little inflation, that's okay, as long as we have growth. That inflation could be tolerated if it meant that we were getting growth. But what we discovered in the 1970s is that you can have inflation and declining growth, actually negative growth. And people have never seen that before. And the word for that is stagflation. That's where you don't have a good economy, but you do have inflation. And that's kind of the worst of all possible worlds because your savings are worth less and less, but you're losing your job or your home values are going down or other bad things are happening. So investors need to protect themselves against that. And a lot of people say, you know, the Fed has printed $2 trillion in the last three 03:56 years. And at the time they were doing that, a lot of people sounded the alarm on inflation. But we didn't actually see very much inflation in the United States. And so some of the supporters of the Fed have said, you know, this just proves our point. We printed $2 trillion. There's no inflation. So there's nothing to worry about. We can print more. But that's not true. The reason is there was inflation, but it went to China. And this is what the currency wars are all about. Our inflation through U.S. money printing went to China because China was maintaining a peg between their currency and our currency. The more we printed, the more they had to print to soak up the dollars. And so that caused inflation in China. Well, finally, they got worried about that. They threw in the towel. They allowed their currency to get stronger. The dollar got weaker as a result. Well, guess what? Now that inflation is going to come back to the United States. So look for it in the year ahead. Now, I mean, when we look at currency wars, some people listening say, hey, it doesn't affect 04:45 me or I don't really care as much as I should. But that also, the currency situation could affect national security as well, can't it? Well, that's right. This is a different vector. And I talk about this in the book. The book is a lot about economics and the international monetary system, but it's also a lot about national security. And what troubles me is that the Fed and the Treasury are pursuing a cheap dollar policy, but they're not really talking to the Pentagon, the State Department, and the intelligence community about what that means for U.S. national security. How are we going to have a strong defense? We've got troops and vessels and ships and bases all over the world. How are we going to forward deploy that force and basically maintain a strong military in a world with a cheap dollar? I don't think you can have strong national security and a weak currency. We need a strong currency. And that's something the Fed just doesn't get. 05:31 What's your view of the future if we keep pursuing the path we're on right now? Well, I actually talked about that in the book, Pete, in my book, Currency Wars, in Chapter 11. I actually give four different scenarios. And rather than predict one or the other, I describe them and let the reader kind of get a mental toolkit of what to look for. One of them is kind of multiple reserve currencies where the dollar declines as a percentage of global reserves. It's already declined from 70% to 60% in the last 10 years. Imagine that keeps going. And the dollar is 40% and the euro is 40%. And China comes in. Well, it sounds benign, but the problem is instead of one central bank abusing their privileges, they would all abuse their privileges. So that's really not a solution. The thing I would look for is this world money. The Fed has a printing press. They can print dollars. But the IMF has a printing press also. 06:17 They can print something called special drawing rights. It's a real technical geeky name. But just to call them SDRs for special drawing rights, that's world money printed by the IMF. It's unaccountable. So that's what the global elites, when I say elites, I mean central bankers, finance ministers, people at the IMF, et cetera. That's the ultimate fire hose that they're going to use to put out the fire. They'll just print these SDRs. The third is a gold standard, which I would prefer to see a king dollar. I prefer to see a strong dollar. But if we don't get a strong dollar, we may end up having to go back to gold. And I talk about that in the book. The problem there is you'd see much higher prices. There's a wide range depending on the variables. But anywhere between $3,000 and $40,000 an ounce. I expect something around $7,000 an ounce. My fourth scenario, the one that's the most disturbing, is chaos, which is just through denial and wishful thinking and kicking the can down the road. 07:03 This is not something anybody wants. It's not something anybody plans for. But it could happen. You could have a collapse of confidence in the dollar. And then the president would have to use emergency powers to somehow restore confidence. Yeah. And now what would you tell the retiree right now who's looking for cash flow or income planning? What should they be worried? I know we're worried about inflation. But some people also want to have an income, too, off where they put their money. And it's hard to get that off of certain things and easier on other things, correct? Yeah. You might look at... I would look at stocks that own hard assets. And my example there is Warren Buffett. Pretty smart guy, right? Warren Buffett, a couple years ago, bought the Burlington Northern Railroad. And people said, oh, Warren Buffett likes railroad stocks. Well, Warren Buffett doesn't like railroad stocks. Warren Buffett likes railroads. He bought the whole thing. And a railroad is the ultimate hard asset play. 07:50 You've got rail. You've got equipment, rolling stocks, switching yards, signals. And you've also got mining rights adjacent to the right of way. So the land around the track, you own that, too. And that's available for mining. And then railroads make their money by moving other hard assets, such as corn, wheat, grain, cattle, oil, et cetera. So what Warren Buffett did, he got out of dollars and into railroads, owns a complete railroad, and that's the ultimate hard asset play. So we're not all able to buy a whole railroad. But you could buy stock in a well-run railroad with a good dividend. That's a good hard asset play. The other ones would be oil companies. But I do recommend 10% to 20% gold. I think investors who have, I don't recommend going all in or half. But if you don't have 10% or 20% gold in your portfolio, you really are extremely vulnerable. I once owned four railroads when I played Monopoly, so I know the value of railroads. 08:37 Well, unfortunately, the Fed's playing Monopoly with our money. And that the money's turned into Monopoly money almost, isn't it? Just about. Yeah. So, folks, his name is Jim Rickards, and his book is Currency Wars. And you can visit the website, currencywarsbook.com. Correct, Jim? That's correct. And again, I hope the listeners are interested in the book. And if you pick it up, have a read, and I'd love to know what people think about it. Well, thanks for coming on. I hope to have you again on in the future. Thank you, Coach Pete. Thank you so much for listening to this interview on the Financial Safari. Remember, folks, if you have any questions about this interview or your financial situation, you can email the team from the Financial Safari at comments at financialsafari.com. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. See omnystudio.com/listener for privacy information.