Jim Rickards: We're Heading Straight Into a Recession
Jim Rickards joined Modern Wall Street and host Olivia Bono-Voznenko outside of the New York Stock Exchange in order to discuss his latest book, “The Road to Ruin” along with a series of topics focused on currency wars, the Federal Reserve and the looming recession facing Trump.
When asked about whether he is suggesting an inevitable economic catastrophe or whether the system is setting up for disaster he responded, “Both items are true. It is the way we’re structured and the risk in the system that will lead to a catastrophe. I would distinguish between a financial panic seen in 1998 and 2008, and a normal business cycle. Right now I think we’re more vulnerable to the business cycle. I think we’re headed into a recession.”
Jim Rickards is a New York Times best-selling author of The Road to Ruin. He is a lawyer who worked on Wall Street for decades. Currently, he advises the U.S intelligence community and military outlets on topics covering currency wars and international economics.
“In my book The Road to Ruin I look at the two recent crisis situations in 1998 and 2008. Both times we came within hours or days from a complete collapse of the financial system. That’s not an exaggeration. In 1998, we had the Long Term Capital Management crisis where I negotiated that bailout. In 2008 Bear Stearns failed, Lehman Brothers failed in September 2008, Fannie and Freddie… the entire rest of the dominoes would’ve fallen as well. That didn’t happen because the Federal Reserve intervened to the tune of tens of trillions of dollars.”
Trump, The Federal Reserve and the Looming Recession
“Here’s the point I make in my book, in 1998 Wall Street got together and bailed out a hedge fund. Then in 2008 the central banks and bailed out Wall Street. In the next crisis, who is going to bail out the big banks. In other words, each crisis gets bigger than the one before. Each bailout gets bigger than the one before. We’re now to the point where we’ve exceeded the capacity of the central banks to “save the day.” When the next crisis hits… where’s the money going to come from next? The Fed balance sheet has expanded from $800 billion to $4 trillion to deal with the last crisis. The problem is they have not normalized and are still at the $4 trillion mark. What are they going to do in the next crisis… Go to $8 trillion? What’s the limit? There is an invisible limit. The Fed knows it. They’re not prepared for the next crisis right now.”
“Where is the money going to come from if you have to reliquify the system? It has to come from the International Monetary Fund (IMF). They have the only clean balance sheet left. We’re focused on trillions of Special Drawing Rights (SDR’s), or world money, that they will print. These outcomes are very predictable based around the models and complexity theory.”
When asked about the Federal Reserve plan to reduce its balance sheet by the Modern Wall Street host, Rickards responded, “I wish they had done it eight years ago. Creating liquidity to deal with the crisis in 2008 was what they were supposed to do. I’ll give them credit QE 1 (quantitative easing), but QE 2 and QE 3 were just experiments by Ben Bernanke. I’ve spoke to Ben Bernanke about this and those are his words, not mine. He indicated that thirty years from now scholars will look back and tell us if we did a good job.”
“Right now, it’s not working. We never got growth [in the economy]. The Fed in 2009 and 2010 when it set out on QE 2 never thought we would be in 2017 with a $4 trillion balance sheet and less than 1% growth – but here we are. I’ll give Janet Yellen for starting the process – but it should’ve been done seven or eight years ago.”
“We’re going to be in the next recession probably by summer, if not a financial panic. You can’t forecast it specifically. Here’s what we can know, it’s definitely coming and will be the biggest in history. Business cycles are different than panics. We’re headed into a cyclical recession right now. We’ve been in a depression since 2007. That’s what 2% growth is – when your potential is 3-3.5%, that indicates depressed growth at an output gap. You can have technical recessions while in a depression as we saw in the 1930’s. However, the entire period from 1929-1930 was just one big depression. The question is, when does the panic come? It could be any day.”
China, Currency Wars and Gold
When asked about President Trump’s commentary on China not being a currency manipulator and whether the U.S and China currency war may be over Rickards’ indicated, “It is not over. I would say we’ve been in one big currency war since 2010… This is just one long currency war. They can last for 10 or 15 years. At times it will get more intense.”
“What Trump is doing is all part of The Art of the Deal. They’ve made it clear that they’re not going to label China a currency manipulator. That was a bargaining chip for Trump to get help [from China] on North Korea. We’re headed to war with North Korea and the Chinese have helped. They’ve mobilized the People’s Liberation Army (the Chinese army) and put them on the border, they have said that they are not going to import coal from North Korea. Trump is situational, mercurial and not terribly hard to predict in the sense that you can predict the unpredictable.”
When asked about Trump’s leverage for the Federal Reserve, Rickards indicated, “Right now Trump does not want the Federal Reserve to raise rates because it would slow the economy. The Fed is going to raise rates because they have bad models… They have bad models and can’t see the recession coming. Trump is trying to understand what leverage he has on Janet Yellen – and that is her job position. He has indicated that he may very well keep Yellen if she does not raise rates. Then, along comes the Godfather – Robert Rubin, who is the most powerful figure in finance that is behind the scenes. He came out yesterday with an Op-Ed that said “don’t play politics with the Fed.” There is a struggle going on with the Fed. Trump will have five open seats at the Fed over the next year. Trump essentially owns the Fed.”
When asked about what actions he might recommend be taken ahead of perceived economic trouble Rickards urged, “The first thing I would recommend is to have 10% of your investable assets in gold. When I say investable assets, what I mean is take your home equity, your business equity, etc. and put that to one side… whatever is left from that investable asset remainder should be put into physical gold. I don’t recommend paper gold. They trade GLD ETF’s here on the NYSE. That’s good for short term but will not save you in a panic. I would also recommend real estate and even cash… I might not have it for long, but I like it in the short run. It gives you optionality. You can pivot. Inflation and deflation are both in play. The person with cash can be nimble.”