Jim Rickards in Debate of Gold, SDRs, or More of the Same?

While meeting up last month in London, Jim Rickards in debate joined forces with Ann Pettifor for a discussion for the ages.  The center of the debate was on the “Future of the International Monetary System – Gold, SDRs, or More of the Same.”  The two economic heavyweights come from highly respective backgrounds and offer a unique perspective in their own right together with our Daily Reckoning UK colleagues.

Ann Pettifor is a UK analyst focused on the global financial system and works as a director at UK based organization, Policy Research in Macroeconomics (PRIME).  Her latest book, Just Money: How Society Can Break the Despotic Power of Finance covered the social impact of the global monetary system.  She was one of the few economist who predicted the financial crisis years prior to the aftermath of 2008 and is widely celebrated as a leading voice for UK analysis.

Jim Rickards is an economist and macroeconomic analyst who just released his latest New York Times bestseller The Road to Ruin.  Jim Rickards worked for decades on Wall Street and has advised various departments within the U.S government regarding international monetary currency systems.

When prompted about what is the future of the monetary system Pettifor responded:

“The future of the global monetary system is in very dire straights.  We have known that for some time now.  The Bank of England is beginning to panic.  It has been panicking behind the scenes for some time, now together with the OECD, the IMF and the Bank of International Settlements.  The world is being allowed to go on as if everything is normal.”

“What is so extraordinary about what has happened since the crisis is that nothing has happened. Nothing has changed. Structurally, the global financial monetary system remains exactly as it was.  What we’ve had is a massive private debt bubble, not a public debt bubble, that hasn’t burst. It is still out there.”

“The problem is, as we have eased up in Britain, it has dipped a little since 2007 but it is where it was in 2005.  The reason why this private debt bubble has not been burst, has not been brought down and not been deleveraged is because there is not enough money to pay it down.  Debts do not rot with old age.  Debt rises exponentially and mathematically.”

“The future of the monetary system is very precarious and fragile.  As we get more authoritarian governments, we are moving toward a new age… Who is going to be in charge of the new international monetary system?  Is it going to be under private authority?  Is it going to be Goldman Sachs that is going to run our monetary system?  Or is it going to be under public, democratic, and accountable authority?  That’s the choice.”

Jim Rickards presented by posing a question “are capital markets a complex system?”

“We have to confront the fact that if capital markets are a complex system, [then] none of the models that the regulators, the bankers and the risk managers are using correspond to reality.  They are at best obsolete and at worst dangerously wrong.”

“This is one reason why regulators and bankers never see the crisis coming.  They are always ill prepared for when they come.  They always underestimate the magnitude.  Their reactionary function is slow and plotting because they don’t actually understand what’s happening.”

“Complex systems are prone to collapse.  They build and build and periodically collapse.  It is the instability of the total system that we need to be concerned about.  The worst thing that can happen in a complex system is… that if you double the size of the system, you do not double the risk.  You increase the risk by a factor of five, or perhaps ten, and increase the risk exponentially.”

“In 2008, all we heard about was “too big to fail.”  Since 2008, the five largest banks in the United States are all larger, they have a larger percentage of the total banking assets, there is greater concentration, they have much larger derivatives books.  Everything that was too big to fail in 2008 is bigger and more dangerous today.  And given the complexity of the system the risk is far greater than what we had in 2008.”

Jim Rickards and Ann Pettifor Debate

Ann Pettifor responded pointedly on the current state of the monetary system stating that, “The financial system exists to serve the real economy.  Before the crisis banks used to lend. We invented the banking system in order to have institutions that would manage the credit system for us.”

“After the crisis we started lending to the banks. We deposited more money into the banking system than the banking system lent out.  This is bizarre and perverse.  Why has it happened?  It is a human, social construct.  It is something that we’ve built over time.”

Jim Rickards pushed forward on money and exchange noting that, “there is an invisible confidence boundary.  You will cross it.  You won’t know that you did until it’s too late.  You’ll find out the hard way.  We are now dealing with a much larger scale of risk.”

“I think a lot of Ann’s remedies could work.  But they won’t be implemented in time before the calamity comes. In the next crisis when everyone wants their money back from the banks, the liquidity will come from the IMF in the form of trillions of SDR’s. If it works, it will only be because nobody understands it because ultimately it is fiat money.  They will then lose greater confidence and begin to ask – where is the gold?”

To hear Jim Rickards in debate with full commentary on the international monetary system with the brilliant Ann Pettifor, click here.

Regards,

Craig Wilson, @craig_wilson7
for the Daily Reckoning

The Daily Reckoning