We Study Billionaires - The Investor’s Podcast Network - TIP 082 : Jim Rickards - The New Case for Gold (Investing Podcast)

Starting point is 00:00:00 We started Billioness, and this is episode 82 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host Stig Broterson out in Denmark. On today's show, we're having New York Times best-selling author and world-renowned economist Jim Ricketts-on. This is the second part interview, and the main topic of this episode is Jim's new book, The New Case for Gold. So let's just jump right back into the interview and continue where we left off.

Starting point is 00:00:54 So, Jim, one of the main ideas you talk about in the book is how the U.S. came off the gold standard in 19, And it helped stop the deflationary spiral that we were in with the Great Depression. This time around, you suggest that if the U.S. would create a dollar peg, among other things, but to create a dollar peg to gold at a higher price, say, $10,000, it would potentially create the inflation across all the other asset classes due to the enormous devaluation of the dollar. Although I would agree this would have an impact, I think that the situation we're in today

Starting point is 00:01:26 is slightly different than 1933. So back then, the public debt was significantly lower than it is today. And additionally, this new gold standard wouldn't fix the inherent issues with the main deflationary forces, which is the income and wealth and equality. We can't get people to spend money that they don't have or somehow possess equity that they don't have. So what are your thoughts on this idea? President, that is the most densely packed question.

Starting point is 00:01:49 Anyone has ever asked me. It's a brilliant question, by the way, and you make a number of very, very important points and I'll address them. But there's a lot there. So let me unpack it a little bit. So let's start with how I get to $10,000 gold and your reference to 1933. And I would go back a little bit earlier to 1925. In World War I, the major combat nations either went off the gold standard completely

Starting point is 00:02:09 or at least suspended shipments of gold because they knew they needed gold to fight the war. So the gold standard that was very successful from 1817 to 1914 broke down in World War I. Now we're in the 1920s and the countries want to get back to the gold standard. They have an international monetary conference in 1920s. finally come forward 1925, Winston Churchill is Chancellor of the Exchequer, John Maynarder Keynes is an advisor to the exchequer, Parliament's about to pass an act that would basically reestablish the gold standard. And the question is at what price? What should the price of gold be? And Churchill felt that it should be the pre-World War I price, which was approximately $20 an ounce. Of course,

Starting point is 00:02:48 it was in pound sterling, but for listeners, about $20 an ounce. And he did this really as a point of honor. He said, well, paper money into gold is a contract, which it is. and we have to honor the contract. If that was the old price, that's going to be the new price. Otherwise, we're not honoring the value of the pound sterling. But Keynes said, and Keynes was actually correct on this. He said, well, look, that's fine. But you double the money supply to fight the war.

Starting point is 00:03:09 You print it twice as much money to fight the war. If you want to go back to a gold paper parody, you have to do one of two things. You either have to double the price of gold to reflect the new money supply or you have to cut the money supply in half. But you have to do one or the other. But if you don't, if you go back at the old, price, you're going to have to reduce the money supply, and that's going to be extremely

Starting point is 00:03:30 deflationary. Churchill blunder, Churchill took the old price. He ignored Keynes. He took the $20 price. As Keynes predicted, England had to contract the money supply to maintain the parity. That was highly deflationary, highly depression. It contributed to the Great Depression. It put England, UK, in a depression four years before the rest of the world. By the way, it's given gold a bad rap ever since because everyone says gold caused the Great Depression. Gold did not cause the Great Depression, but a politically motivated, price of gold did. And Churchill later admitted that was the greatest splendor of his career. Because as he threw his country into a depression. Now, so now come to today. So I'm not saying

Starting point is 00:04:07 we will definitely have a gold standard. I'm saying we probably will when things get bad enough. But if you want to have a gold standard or even a gold reference price of some kind, it begs the question, what's the price? And today, if you went back at the so-called market price, leaving aside manipulation. It's about $1,250 in ounce. Given the amount of paper, money in the world, given the amount of gold in the world, if you go at $12.50, that's going to repeat Churchill's mistake. That will be extremely deflationary. You would have to drastically reduce money supplies, which would be a mistake. So let's revive the ghost of Keynes. What is the implied non-deflationary price of gold today, given the money supply? The answer is $10,000 announced. Now, there are different

Starting point is 00:04:50 ways to calculate it. Like every gold standard is some ratio between paper money and gold. It's all it is. But you have to answer some questions. What is my definition of paper money? Is it M0, M1, M2? These are all different definitions. Number two, who's in the club? Is it just the United States or is it nations around the world? Number three, how much gold backing do I want? 20%, 40%, 100%. So those are all inputs. those are variables and they're legitimate policy debates. I use a global M1 with 40% backing. When you do that, you get $10,000 an ounce. By the way, if you took Global M2, a larger number,

Starting point is 00:05:28 with 100% backing, you get $50,000 an ounce. Now, I'm not predicting $50,000 gold. I am predicting $10,000 goal, but my point is that's the price range at the low end $10,000 an ounce that you must have to avoid deflation on a gold standard. basically, and everyone knows this. I've spoken to Paul Volker about it. They won't talk about. Volker does privately because he's sort of retired. But the Bernanke and others they've spoken to,

Starting point is 00:05:53 they won't have the discussion that we're having right now. But they get it. They're economic historians. They're scholars. They can do the math. And they understand that that's the price of gold. That's why they don't want to talk about them. Now, I know you had a conversation with Bernaki over in Japan. What did you guys talk about? Was it a long conversation or was it pretty quick? It was about a half hour. We had some private time. It was kind of interesting because when I wrote The Death of Money in my second book, I used Bernanke's research. He's a scholar, but long before he was a central banker, he was a very noted scholar. It was at Princeton University.

Starting point is 00:06:25 And he was the leading scholar of the Great Depression. Now, of course, you have Milton Friedman, Anna Schwartz, sort of paved the way with their monetary history of the United States. But Bernanke is a younger generation following their footsteps, had written quite a bit on the Great Depression. And one of the things that struck me, and this is Bernanke's own research, because you often here that the gold caused the Great Depression. I just explained why that's not true. It was politically motivated at price of gold, but also that gold constrained action in the Great Depression.

Starting point is 00:06:54 The central banks could have been more aggressive increasing the money supply if they hadn't been on that, you know, dopey gold standards, so to speak. So this is part of the wrap on gold. Well, but what Bernanke showed is that by law at the time, the money supply in the United States was allowed to be 250% of the gold supply. So take the gold, market to market at $20 an ounce, And then two and a half times, that's how big the money supply could be. The actual money supply was never more than 100%, which means that the Federal Reserve had the ability to more than double the money supply while still on a gold standard without violating the law. So the blunder was not gold, had nothing to do with gold. It was a failure of discretionary monetary policy.

Starting point is 00:07:33 If you say to the Fed, hey, you could double the money supply with a gold standard and they don't do it, whose fault is that? Do you blame gold or do you blame the Fed? So that's the way I read it. So when I had the opportunity to talk to Bernanke, I teased him a little bit because I had been one of the people who helped to stand up the Center for Financial Economics at Johns Hopkins University. And we search for a center director, as you always do, and got a very senior, brilliant, distinguished PhD monetary economists from the Fed to come in as our director. And he wasn't even there two years when Bernanke took him back to the Fed. Brinke picks his office. I tease him, I said, Mr. Chairman, you picked off my center.

Starting point is 00:08:12 He said, well, we gave him back to you, which is true, because the scholar in question, he's back at the center. But anyway, I actually had a copy of his book with me, and I know as an author myself, I know that you never turned down a request for an autograph. So when I asked him for his autograph, he very happily signed it, so I have an autograph copy of Bernanke's book. But on a serious note, I said, Mr. Chairman, I said, I read your research to say that gold was not a constraint on money supplying the Great Depression.

Starting point is 00:08:39 Do I have that right? And he looked at me and said, yes, you do. So I have it straight from the horse's mouth that don't blame gold for the Great Depression. But again, it's another one of these myths that you hear over and over. We can't have a gold standard because it caused the Great Depression. And it's just simply not true. Fantastic. I love your quantitative discussion when gold performs well and when it doesn't.

Starting point is 00:08:57 As far as I'm concerned, you're like one of the first people that's ever written a book that actually lays out some math and quantitative value for how to kind of look at gold and when it performs well. Everything else just kind of seems like it's black magic as far as I'm concerned. I really don't like it when people say gold goes up when there's fear in the markets, and the discussion that you have in your new book really kind of dispels that, and you talk about areas where you do see it go up and go down. For me, the dollar price of gold is a function of fiat credit expansion and contraction, and you describe in an even better way in detail that with nominal versus real interest rates. Can you talk to our audience a little bit about this idea on what environment gold prices

Starting point is 00:09:36 do well when compared to domestic currencies, interest rates, and inflation? Fletian. Sure, I'd be glad to, Preston. And you're right, this is kind of a tough one because it starts with a concept, mathematical concept, the French called the numerator. And the numerar is nothing more than how do you count things or how do you measure things. So let's say I have two individuals and there's a football field. And I give one of them a rule or a one foot rule and I give the other one a yardstick and say, hey, guys, go out there and measure that football field. Well, the guy with the rule comes back and says it's 300 feet long. And the guy with the yardstick comes back and says it's 100 yards long. Well, is it 300 or 100? Well, it depends what you're using to count. And the same thing

Starting point is 00:10:16 applies when it comes to gold. If you privilege the dollar, if you say the dollar, the U.S. dollar is the measure of all things. That's how we're going to measure the football field. Then people look at gold and say, well, it's up or it's down, you know, it's 1,015 ounce and it's down to 1,200 ounce or it's 1,000, or it's whatever. That's how they tell you the price of gold. But what if you're using a different measuring stick or what I do actually is I use gold as the measuring stick. I use the weight of gold. And then when I look at the price of gold, I say, well, when people say gold is $1,0,0.0.000 an ounce, I say no. A dollar buys you at one 1,050th of an ounce of physical metal.

Starting point is 00:10:53 And when gold is $1,300 an ounce, I say no. A dollar buys you one 1,300th of an ounce of physical metal. And in that scenario, I wouldn't say the price of gold went up. I would say the dollar went down, the value of the dollar went down, purchasing power, the dollar went down, measured in gold. So right away, you have to go sort of through the looking glass and think about how you're going to measure things. So that's a starting place. But specifically to your question, Preston, people are very confused about interest rates because they'll say, you know, interest rates are at an all-time low or interest rates are near an all-time low. Well, nominal interest rates are close to an all-time low, but real interest rates are not.

Starting point is 00:11:29 And what's the difference? The real interest rate is just the nominal interest rate minus inflation. So let's say you have a 5% interest rate and you have 3% inflation. Well, the real interest rate is 2%. Because if you borrow money at 5%, but there's 3% inflation, you get to pay the money back in cheaper dollars. What you're paying back doesn't have as much real value. So the real cost of the 5% loan in a world of 3% inflation is actually 2%.

Starting point is 00:11:56 That's the real cost. I remember when I got my first mortgage in 1980, it was 13%. My mother cried. because her first mortgage was like 2%. I said, but mom, I've got a 13% mortgage, but inflation is 15%. So my real cost is negative to. And taxes were 50%.

Starting point is 00:12:14 It was tax deductible. So on an after tax basis, I was making 4% or 5%. So the bank was paying me to be a borrow. But that's the thing. In other words, when interest rates were 13%, the real interest rate was lower than it is today because of the impact of inflation.

Starting point is 00:12:28 So right away, you got to put that inflation factor in there if you want to see what's going on. And interest rates today actually are pretty high because inflation is so low. This is why Europe is chasing, why Europe has negative interest rates because they're trying, Europe is trying to get to a negative real rate. A negative real rate is one where the bank pays you to be a borrower. You get to pay them back in cheaper dollars. There's no project that doesn't make sense in a world of negative real rates because it's like,

Starting point is 00:12:54 hey, you're paying me to borrow the money. What's the big deal? If I lose money, I still make money. So, but as inflation gets lower and lower, you have to, to take the nominal rate lower and lower to get to a negative real rate. So you're chasing your tail. It's like nominal rates are chasing inflation down, trying to pass them and get to a lower level so you can have negative real rates. And it's not working because inflation continues to fall. By the way, we can spend an hour on why this is all true. But just to make the point,

Starting point is 00:13:25 if the interest rate is negative 1% sounds low, right? But let's say inflation, inflation is actually deflation of negative 2. What's the real rate? Well, it's negative 1 minus negative 2. When you subtract a negative, you add the absolute value. The real rate is plus 1. It's still a very high real rate. It's expensive money.

Starting point is 00:13:46 Negative 1% is expensive money if inflation is negative 2 because the real rate is plus 1. Now we're through the looking glass rate, subtracting negatives. I mean, the math isn't that hard, but it's a little bit counterintuitive. So that's the world we're living in. But just to cut to the chase, Preston, gold, loves a negative real rate because the world of negative real rates is the world of higher dollar prices for gold because what's the wrap on gold? It has no yield.

Starting point is 00:14:10 Okay. But if real rates are negative, then gold with no yield is the high yield asset. Zero is greater than any negative number. So if interest rates are negative and gold has a zero yield, you have a positive yield on gold. Gold is the high yield asset. Perfect. In your book, Jim, you clearly distinguish between paper gold and physical gold. and you highlight the risk of the former market easily being 100 times bigger.

Starting point is 00:14:36 Could you please explain why investors that might think that they are invested in physical gold might only be exposed to the price of gold and which other risk it entails? Well, I'd be glad to your stick. You know, when you hear the phrase paper gold, just take an eraser and erase the gold part. It's one of the great oxymorons of all time because it's just paper. But I'll make the distinction. So physical gold is easy. It's bullion.

Starting point is 00:14:57 It's, you know, American gold eagles. It's a one kilo bar. That's physical gold in safe non-bank possession. I don't recommend putting it in banks because that'll be the first place that gets locked down to the next financial crisis. You won't be able to get your gold. That's no fun. But there are reputable non-bank vaults readily available.

Starting point is 00:15:18 I'm not in the business of recommending vaults, but there are names like Brinks, Dunbar, Loomis, others. Brinks has been around for over 100 years. They're bonded. They're insured. They're reputable. But there are other less well-known vault operators. Just make sure they have insured.

Starting point is 00:15:32 make sure they have better business bureau rating and get some references and do your homework and that sort of thing. But safe non-bank stores. That's physical goals. That's easy. So let's talk about paper gold. It comes in three flavors. There's the Comex Futures Contract. There's the ETFs, the exchange trade of funds. And then there's what's called unallocated gold from the London Bullion Market Association, LBMA. These are the big gold dealers. We know it's Citibank and JP Morgan and Goldman Sachs and HSBC. So, you know, it's a, it's a, it's a, it's a, it's a, it's a, it's a, it's a It's a half a dozen or so, maybe a 10 or so big banks. So let's take them one at a time.

Starting point is 00:16:07 Let's take the Comax Gold Futures. Well, I can call my broker and buy a futures contract on gold. And if gold goes up, I win. I make money on that futures contract. And I don't have to get my hands dirty with physical gold, no storage costs, etc. It's just a commission. What's wrong with that? Well, what's wrong with that is that features contracts allow for physical delivery.

Starting point is 00:16:25 So as the holder of a futures contract, I can sell my contract back to the market and just take my profits. I can roll it over into another month to keep my position open, or I can give delivery notice. I can tell the exchange, hey, I own this futures contract. Please give me the gold. And they will allow you to do that. And they'll ship the gold to a designated place. The problem is the amount of gold in the warehouse is about 1% of all the futures contracts outstanding.

Starting point is 00:16:53 What do you think would happen if all the holder, all the longholders of gold futures contracts all called up and wants to say, give me the gold? Well, clearly they wouldn't do it. They couldn't do it. And guess what? They don't have to. I'm enough of a geek that I've read the rule books of all these exchanges. They actually say in the rule book, we are not a source of supply.

Starting point is 00:17:10 In other words, they allow for physical delivery just to keep the trading honest, just to keep the physical paper arbitrage in line. But they're not, they don't consider themselves gold dealers. They say we're not a source of supply. And they also have a rule in the rule book that says they can change the rules. You know, you go back to the Hunt Brothers when they cornered the silver market in 1980 and the exchange change the rules and everybody whined, oh, you know, you exchanges, it's all rigs, you know, you change the rules. Nah, they have a rule that says they can change the rules. So they also

Starting point is 00:17:36 have another rule that says in the event of disorderly markets, the Board of Governors can issue emergency order. So they have all the tools they need to say, sorry, you know, you 100 people lined up for the one bar of gold. You've got 100 bars of gold, long futures. We got one bar of gold in the vault. You all want it. Sorry, you can't do it. You can trade for liquidation only, which means you can roll over your contracts. Or they could terminate the contracts at the close of business yesterday and send you a check. Now, they won't actually steal your money. They'll send you a check for yesterday's clothes. But what you want is today's price. Because when is this going to happen? This is not going to happen in calm times. There's conditional correlation.

Starting point is 00:18:11 This is going to happen when there's a full-scale buying panic going on. So you're going to be sitting there. Price of goals up $100 an ounce, up $200 announced the next day, up $300 an ounce the day after that. You're going to be watching the price of gold go go up on television, but you're not going to be able to get your gold. You're going to get a letter from the Comex saying, here's you check for, you yesterday's price or two days ago's price. So you're not going to get the protection exactly when you most need it. See, that's the other thing people don't get. The time when these contract clauses and exchange rules are invoked to deny you your profits

Starting point is 00:18:42 will be exactly the same time when your profits are the greatest because there's correlation between panic and emergency action. Same thing with the ETS. People say, well, I own GLD. I don't want to pick on GLD, but that's a ticker symbol. That's the biggest ETF. So I own gold. No, you don't.

Starting point is 00:18:57 GLD is a share of stock trade on the New York Stock Exchange in a trust that has administrators and trustees and authorization. So yes, there is a vault in London that does have gold. And I'm not saying there's no gold anywhere, but you can't get it. All you can do is sell your stock, right? What if the stock exchange is closed? People say, well, that would never happen. Guess what? The New York Stock Exchange was closed for five months from July to December, two, sorry, July to December, 1914.

Starting point is 00:19:24 The New York Stock Exchange was closed for five months. It was closed in Hurricane Sandy. It was closed after 9-11. It's closed every weekend. It's closed on holidays. I mean, the New Yorkie's talking to you, it closes all the time. So the exchange is closed. You can't trade your shares.

Starting point is 00:19:35 And by the way, they can also suspend trading and send you a check for yesterday's price. The last one is, to me, the most insidious of all that's called the LBMA unallocated gold contracts. So there I call up, and I call up JPMorgan London and say, hey, guys, I want to buy a million dollars worth of gold. And they say, okay, send us your million dollars. Here's a contract. Sign here. You own the gold. That contract calls for something called unalleled.

Starting point is 00:19:57 allocate a gold. And this goes back to our billionaire friend Kyle Bass when he went to Hong Kong he said, where's my gold? They go, well, it's all over the place. In other words, you don't own any physical gold. You have a sort of a claim on gold, but they could have one ton of gold and sell one ton each to 100 investors. They could sell 100 tons of paper gold or one ton of physical gold. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through

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Starting point is 00:24:26 All right. Back to the show. It almost sounds like these multiples of a hundred. I just don't know how that could be legal. And I know you're a lawyer. It is well, Jim. So I guess you could talk to the specifics of that. But instead of that, let's go on to the next question.

Starting point is 00:24:41 One of the billionaires that Stig and I study a lot is Ray Dalio. And Dalio has this saying that financial markets find themselves in a risky situation when nominal growth does not exceed nominal interest rates. This is also something that you mentioned in your book. And whenever I read it in your book and your new book, the new case for gold, it just immediately like a light bulb went off. I was like, oh, my God, Jim is saying the exact same thing that Ray Dalio is always preaching as well. So could you talk this idea a little bit more with our audience and kind of share where you kind of see where we're

Starting point is 00:25:11 at in the market in April 2016. Ray's exactly right. And there's no better illustration of this in the United States of America. So what's happened with the budget debt? Why do we not hear about the budget deficit? Remember, you know, the fiscal cliff and, you know, shutting down the government and all this battling between Republicans and Democrats in the White House in 2010, 2011 about shutting down?

Starting point is 00:25:32 Why do we not hear about that anymore? Well, the reason is that the budget deficit dropped from about $1.4 trillion in the in 2011 down to about $400 billion today. That's a dramatic drop. And they actually did, the Congress and the White House actually did bring the budget deficit down by over a trillion dollars in the last four years. Okay, deficit's down to $400 billion.

Starting point is 00:25:57 That's correct. But it's still 3% of GDP and GDP's only growing at 2%. So even with the progress, the deficit is still going up faster than the economy is growing. And that's Dahlio's point. you're still going broke. Now, you're going broke a little more slowly than you were, but you're still on the path to Greece.

Starting point is 00:26:15 So just think of it this way. Let's say you have a job and you have a credit card, and your boss is giving you a 2% raise every year, but your debts are going up 3%. You're going to go bankrupt. It may take a little while. You can kind of pay the minimum or whatever, you know, song and dance with a credit card,

Starting point is 00:26:32 but you're going to go broke. So that's the basic math. If your debts are going up faster than your growth, you're going broke. And that's true in the United States, even with the progress now. But there's another even deeper point that Dahlio's making, which is when he uses the word nominal,

Starting point is 00:26:46 because go back to our discussion on real interest rates, nominal interest rates. Nominal growth is real growth plus inflation. Okay. So what Dahlia is saying is, well, there's another way out of this debt trap, which is we don't have to have real growth, but we do have to have nominal growth. So we can layer a little inflation on top of that.

Starting point is 00:27:05 So let's say that the debt is going up, the nominal debt is going up, 3% a year. Well, if real growth is 2%, which is a problem, but you can have 2% inflation so that nominal growth is 4%. Now what's happening? Now your nominal growth is greater than you're dead and you're coming out ahead. So there are two ways to solve the debt problem. One is real growth, which is good. Everyone likes that. But if you can't get real growth, get some of the phony bologna nominal growth, which is real growth plus inflation. So what Dalia is saying is that we're not even doing that.

Starting point is 00:27:37 Like, not only does real growth stink, nominal growth stinks, because we don't have any inflation to speak up. So you can win the debt game if nominal growth goes up faster than nominal debt. And so, but behind that, hidden behind that is the idea that you don't actually need real growth,

Starting point is 00:27:54 but you do need inflation. And this is what Janet Yellen's trying to get. And she said it goes back to McChagher. You can't always get what you want. The math is simple. Everyone understands the math. Janet Yellen understands the math. The point is she can't get there.

Starting point is 00:28:08 So I guess my point to Dahlia and whoever else is trying to get there. Let's look at Japan. They can't get there. They've been spending, I mean, they're buying equities through ETFs at this point. They're trying to get there so bad and they can't. So I guess from when I'm looking at it, can we get there without a 1922 Germany situation? Well, there are two ways to get there. One is the one you mentioned Preston, which is 1922 Germany, which is, you know what,

Starting point is 00:28:34 if you print enough money, you have to put the pedal to the metal. And this is what Paul Krugman is talking about. Paul Krugman, he's notionally right. I don't think he's right in terms of what's best for America, but his math is correct, which is that Kroogman looked at the $900 billion stimulus bill in 2009. That was Larry Summers, Christine Romer, were the economists, and they were in the White House at the time, and President Obama signed on. The Congress passed it. $900 billion stimulus spending bill, Krugman said that should have been $2 trillion. You know, you want some stimulus to do it right. But the problem, this goes back to something you said earlier,

Starting point is 00:29:09 press when you were talking about velocity. Just to explain velocity. Velocity is the turnover of money, right? So let's say it's evening. I've got two choices in my life. I can go out to dinner and, you know, tip the waitress. And the waitress can take a taxi cab home and tip the taxi driver. And the taxi driver can take some tip, take the tip and put some gas in this car, right?

Starting point is 00:29:31 In that example, my money has velocity of three. You got the waitress tip, the taxi tip, and the gasoline purchase. So $1 turns over three times. So it produces $3 of GDP. That's velocity of three. But what if I stay home and watch the final four? I do nothing. My money has velocity of zero, right?

Starting point is 00:29:49 Because I didn't spend it. So velocity is just the turnover of money. Nominal GDP, and that's what Dahlia was talking about. Nominal GDP is just the money supply. But trying to get nominal GDP up, trying to get inflation up, is like trying to make a ham and cheese sandwich with ham. You need the cheese, right? So money supply is the ham and velocity is the cheese.

Starting point is 00:30:12 You want a ham and cheese sandwich, which is nominal GDP. You need ham and cheese. The Fed can control the money supply to like a decimal place. They can stick the landing. They can make the money supply whatever they want. But velocity is psychological. It's a psychological concept. The Fed can't make you spend money.

Starting point is 00:30:28 They can't make me spend money. They have to lie to us. They have to sort of, this is now we're into behavioral, economics, psychology, the velocity problem, which is psychological. That, yeah, if you don't have money, you're not spending money. You're absolutely right about that. But you could be pretty wealthy. You could be well established in the middle class.

Starting point is 00:30:45 You could have a rising income. And yet you don't feel like spending money because you're concerned, you're troubled. You know, like I want to save more. I want to pay off my debt. I want to de-leverage my personal balance sheet. And that is a psychological problem that may be with us for a generation. I think what happened in 2008, you know, going back to the sequence we described, You know, 1998, Asian financial crisis, 2000, the dot-com bubble, 2007, the mortgage crisis.

Starting point is 00:31:08 So it's just taking this sequence that we talked about earlier, 1990, 1998 with the long-term capital crisis, 2000 with the dot-com, 2007 with the mortgage crisis, 2008 with AIG Lehman. At some point, people have been on the, they want to get off the roller coaster. They've seen these crashes enough. They just want to get out. And this is why negative interest rates are not working. You know, the theory of negative interest rates, which today we have. have in Europe, Switzerland, Sweden, Japan,

Starting point is 00:31:36 are spreading around the world. The theory is pretty simple. It's like, hey, you got $100,000 in the bank? Go back to our velocity example, right? I want to make you spend it. I'm saying to you, you know what Preston, you know what it's a stake. If you leave your money in the bank,

Starting point is 00:31:48 I'm gonna take it away. That's what a negative interest rate is. You put 100,000 in the bank, and 1% negative, you come back a year later. You got 99. They took it away. So if you want to sit on your money, you have zero velocity, we're gonna take your money away.

Starting point is 00:31:59 So you guys, you better get out there and spend it, right? So that's the gun to the head about kind of going out and spending money. But it seems to be having the opposite effect. People are saying, well, wait a second, if I'm not getting any return on my money, I better save more to make up the difference. Okay, I better put some more money in the account because you're taking it away. So the savings rate actually goes up.

Starting point is 00:32:19 And then as far as spending is concerned, people say, well, what message is the central bank sending with negative interest rates? They're sending a message of deflation. Deflation means lower prices. So I'm going to defer my spending decisions because the price. is going to get lower. I'm going to go out and get a bargain six months or now. Why should I buy it today? So negative interest rates which are intended to encourage spending and increase velocity are actually increasing savings and deferring purchases and diminishing aggregate demand.

Starting point is 00:32:44 It's a typical PhD play. They come up with the theory. The theory is completely wrong. The model is wrong. And the behavior is the opposite of what the banks want. So you've got all these unintended consequences floating around. You're not getting the velocity you want. Income inequality is certainly not helping. That's a serious social problem in and of itself. So, you know, getting back to, you know, the whole theory of nominal growth being lower than nominal rates, we're not getting the nominal growth. We're not getting the velocity. We're not getting into turnover. It's a psychological problem. I think you have a group of savers and investors who have been scarred for generation. It's not going to be easy to do. So the question is, how do you get to Wimer? Well, there are two ways there. One is if you print enough money, just print, forget $4 trillion. Take your balance sheet to $8 trillion. I'm talking about the Fed was there, 12 trillion. At some point, people just say, hey, I'm out of here. I'm dumping these dollars because you can't guys are not going to stop. By the way, do you know in, you may know in, in Weimar, Germany, the constraint on the money supply was paper and ink. They were, I mean, they, I mean, they, I didn't know that. They actually, at one, and I have a, I have a specimen, at one point, they started

Starting point is 00:33:46 printing the money on one side to save ink. So I have like a trillion Reichmark note and it's printed on one side, the other side's blank because they were trying to save ink. And the government was like commandeering printing presses. There was, there were physical constraints on producing money. We don't have that today. We have electrons are free, and they can print all they want. So I suppose you can do it that way. But the other thing you have to do, the other thing you can do, I don't see this in the short run, but it's very possible in the wrong run, is just to fix the price of goals. See, I can get inflation in 15 minutes. Here's what you do. You call aboard a governor's meeting. You go in the room, you lock the door, you take a vote, you come out 15 minutes later. You

Starting point is 00:34:22 stand in front of a microphone. You say, ladies and gentlemen, the price of gold as I said now is $5,000 and ounce. And we're going to use the gold in Fort Knox and West Point to back up that price. So if you think that price is too low, come and get it. If you think the price is too high, sell us your gold. We're a buyer at 49-95. We're a seller at 50-50. We're going to make a market. We're going to peg the price of $5,000 gold. If you do that, you've got the inflation. Because nothing happens in isolation. If you have $5,000 gold, oil's going to 400, silver is going to $100. Gas in the pump is going to be $10 a gallon. It's not the gold goes up. Everything goes up, because That's the de facto devaluation of the dollar.

Starting point is 00:34:58 And if you use the gold in Fort Knox, by the way, quick aside, people ask me all the time, who controls the gold? Is it the Fed or the Treasury? And I say it's the U.S. Army. The gold is in two army bases. Fort Knox and West Point are Army bases. So the Army's got the gold under lock and key,

Starting point is 00:35:11 but I assume they play ball with the Treasury. But the point is, you could declare, by Fiat, you could declare the gold is $5,000 an ounce. You could make it stick by open market operations, buying it when it's low, selling it when it's high, give the people freedom to buy and sell the gold of the government. And then gold would be $5,000 an ounce. And then you would have 80% inflation overnight.

Starting point is 00:35:32 So you can either just do the wire more thing, just print until you run out of bank or electrons, or peg the price of gold of $5,000 ounce. By the way, those are the only two things at work. Because how do you change the psychology? Everything they're doing is failing is having the opposite effect. This is a very tough problem. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:39:21 that has drastically increased your understanding of the market? Well, after my experience at long-term capital, I set out on a kind of a 10-year personal honesty, because I was the lawyer there. I was just not to wash my hands of it, because I was very involved in writing all these contracts, but I was a lawyer. I was not the head of risk management.

Starting point is 00:39:37 And I lost a lot of money personally in that, And I don't fault anyone but myself for that because I made those decisions. But I was sitting there. I said, wait a second. And they're all good guys. They're friends of mine. I was like, wait, we had 16 PhDs. You folks went to MIT, Harvard, Yale, Chicago, Stanford.

Starting point is 00:39:53 You're the fathers of modern financial theory. Two Nobel Prize winners, season traders. And obviously you got this disastrously wrong. Everything you thought you knew must be wrong because otherwise this wouldn't have happened. So I set out on a kind of personal odyssey to figure. out two things. Number one, what went wrong? It took me about five years and I did figure that out. But then I kept going. I said, well, if those models, the models that were using don't work, are there models that do work? Are there better ways of thinking about this? And this is kind of what

Starting point is 00:40:24 set me apart from the Seams Lev, author of The Black Swan, a great bestseller, great book. So Lev took a baseball bat and demolished the bell curve. He just pounded it into sand. He said, the bell curve doesn't work. Risk is not normally distributed. Your value at risk models. don't work. It's all junk science. And he was exactly right. But then he kind of stopped there, throw up his hands and said, you can't model this, see you later. I'm going to be a philosopher. I wasn't satisfied with that answer. I agree completely with Taleb about demolishing normally distributed risk and the bell curve. But I wanted to sort of build new models that would work. One is complexity theory. One is behavioral economics or behavioral psychology.

Starting point is 00:41:02 And the third one is something called inverse probability or base theorem. And interestingly, I found kindred spirits in the national security and the physics community. And it teaches you about risk in complex systems, how systems break down, how risk is an exponential function of scale. And that's a big deal because when you triple a system, let's say I triple the size of J.P. Morgan's balance sheet. And I went to Jamie Diamond and said, you know, Mr. Diamond, you tripled your balance sheet. How much did the risk go up?

Starting point is 00:41:31 He would say, well, almost zero because, you know, we tripled it. It's long short, long short, long short. everything pairs off, everything hedges, everything else, boiled all down to zero, and it's a very small thing. If you ask my mother, she's a brilliant woman, but non-economist, she's 85 years old, said, mom, I tripled the balance sheet, J.P. Morgan, how much did the risk go up? She would probably use intuition and say it went up three times. Well, Jamie and Diamond's wrong, and my mother's wrong. When you triple as the scale of a system, the risk goes up exponentially. It goes up maybe 10 times or 100 times, depending on all the factors. And that's what's happening in the banking system. And that's why the next crisis will be, much worse than 2008. But that's good science. That's physics and that's what I brought from physics.

Starting point is 00:42:11 Behavioral psychology, I think that ground is pretty well known. Even some PhD economists are starting to use it. Connman Thversky and Erle and others and lots of experiments to show that we are not rational as economists to find it. We have all kinds of risk aversion and other behavioral things that you have to take into account. The third thing, I really learned in working with the United States Intelligence Community because you used it as CIA and elsewhere all the time, which is based theorem. Base theorem is a tool that lets you solve problems when you don't have enough information. A statistician like Janet Yellen would say, give me lots and lots and lots and lots of data and I'll do the regressions, look with correlations, and that'll guide policy and all that.

Starting point is 00:42:46 Well, that's fine if you have the data. What if you don't have the data? 9-11 was one data point. What if your job is to look out for the next spectacular terrorist attack, which is the job of the intelligence community? That's your job. What are you going to do? Wait for a thousand attacks, you know, three million dead, and then say, well, I have a, have enough data now, I think I can solve the problem. You don't have enough data. How do you

Starting point is 00:43:07 solve problems when you don't have enough data? The disappeared Malaysian airliner, you had one of those. You know, how do you, how do you solve it? That's where base theorem comes in, and I use that quite a bit. So Neil Johnson wrote a book called Simply Complexity, Great Title, but again, good, but rigorous, but accessible layman's introduction to complexity theory. Thinking Fast and Slow by Daniel Connaman. Not an easy read, a bestseller, I'm not sure how many people actually read it, but It's a summary of all that he's done in 30 years of behavioral research. You can go dig out all those papers if you want, but the most important ones are printed as an appendix to the book, and then he kind of goes through all the literature.

Starting point is 00:43:43 So if you want one book, it'll take you through all behavioral economics in about 500 pages. That's the one. And for Bayes' theorem, there's a book called The Theory That Wouldn't Die. These are books that I recommend. I get a lot from history, a lot from Schumpeter, as I mentioned. So these are the sources that have influenced me. And I think that 30 years from now, talking about complexity theory and base theorem and behavioral economics and behavioral psychology and economics will be kind of the conventional wisdom. But right now it's not the conventional wisdom.

Starting point is 00:44:12 The Fed and other central banks are still using value at risk and stochastic generally equilibrium models and things that are just simply obsolete. So, Jim, I know I'm talking for our audience when I say, wow. This interview was just phenomenal. We are just so thrilled to be able to just have this discussion in front of our audience for them to listen to this and just have access to your just brilliant mind and all the research and hard work that you've done through all the years. For anybody else out there that's kind of listening to the show and you want to know more about Jim Rickards, first of all, he has a book called Currency Wars. He has another book called The Death of Money. And now he has a new book and it's called The New Case for Gold. Jim, if people want to learn more about you or want to go to your website, could you kind of get to,

Starting point is 00:44:58 give them a handoff and tell them where they could learn more about you. And I also follow your Twitter, which is fantastic. You have a lot of great posts on Twitter for people that are looking for more current events. But where else could they find you, Jim? Thank you, Preston. Sure. My Twitter feed is at James G. Rickards. I use my middle initial G. for George. So at James G. Rickards. It's about 90% international monetary economics and 10% Phillies baseball. So you've got to take the good with the band. My website is at www.james Rickardsproject.com. I'm records, by the way, R-I-C-K-A-R-D-S. So, www.

Starting point is 00:45:31 James Rickersproject.com. A lot of resources there. The Twitter fee we mentioned. And then, of course, my new book, The New Case for Gold, covers a lot of what we talked about in this interview. And the first two books,

Starting point is 00:45:43 currency wars and the death of money, we're macro, top-down, critiquing the system, making recommendations for the system. The gold, the new case for gold, a little bit more of a manifesto, a little bit shorter than the other book, saying, look,

Starting point is 00:45:55 I'm still trying to fix the system. I'm still trying to help. policymakers, but just in case they're not listening, here's what's going to happen, get yourself some gold. But I want to get people reasons why. I never make a claim or never make a recommendation without giving the backup, the research, the history, the analysis. It's all there. But I had written about gold in my other books, kind of one chapter here, a couple chapters there. And I said, you know what, I need to sit down, put it all in one place. Everything I've learned, everything I know, everything I've experienced, put it all in one place, make it easy

Starting point is 00:46:24 for the reader. So that's the new case for gold. So Preston Stig, thank you for the opportunity. Thank you for inviting me on the show. It's been a great conversation, really enjoyed it. And I hope the listeners enjoyed it as well. I'm sure they will. As Jim is dropping off this call, I just want to thank everyone for listening. Before I'm letting you go, I just want to give you a quick shout out for the free executive summaries that Preston and I type up and send to you twice a month. You can sign up on a website where I can find the 35 summaries that we already did. Also on our side, you can find the link to a free audible book, which is basically a free book from Preston and me, you, you can also claim your free book on AudibleTryon.com forward slash the Investors

Starting point is 00:47:03 podcast. That was what we had for this week and see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 082 : Jim Rickards - The New Case for Gold (Investing Podcast)

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