We Study Billionaires - The Investor’s Podcast Network - TIP138: Jim Rickards (Part II) - Currencies, the Euro, and Central Banking (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everybody doing out there? So this is our second part interview with Jim Rickards. If you missed the first episode, I highly recommend that you go back to the previous episode and listen to it. Quick background on Jim, if you haven't listened to our first episode, Jim is a graduate of Johns Hopkins University. He has a doctorate from Penn.

Starting point is 00:00:21 He also went to New York University School of Law. He's written multiple New York Times bestselling books, and he's one of our most popular guests on the show because of his comments about the Federal Reserve, different ideas about macro and where he sees the general economy going. In this episode, we will have a very detailed discussion about currencies. In a world where everyone seems to be bare on the euro, we'll talk about why Jim is bull and whether or not the euro might end up replacing the dollar. We'll also investigate if the world will be better off with a fixed exchange rate system,

Starting point is 00:00:56 the way it used to be. And finally, we'll revisit the idea of replacing the current monetary system as we know it with gold and SDR and why it seems to be a more and more popular solution. So without further delay, we're going to jump right into this episode. So if you guys are ready to do this, let's go ahead and hop to it. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. So, Jim, I would like to kick off the second part of our conversation with the discussion about currencies, specifically above the Chinese one.

Starting point is 00:01:49 And in international comparison, it's actually a very small currency. That being said, China has gradually asked the trading partners to sell their transactions in Juan as opposed to USD. Do you see this as a long-term strategic move to support a Juan-based bond market? And if you do, is it really just the first step in a much bigger global plan for the currency? I think the answer is yes. I mean, we all know we're students of Chinese history and Chinese culture, and we know that they are the ultimate long-term thinkers. You know, one of my favorite quotes is a conversation between Joe and Lai and Henry Kissinger in the 1970s when Kissinger was over there secretly preparing the way for Nixon. in to go to China. And, you know, so two pretty big brains, intellectuals. And Henry Kissinger asked

Starting point is 00:02:37 Joe and Li what he thought about the French Revolution. And Joe turned and said, too soon to tell. In other words, 200 years was not long enough to see how things really play out. So that's the Chinese mentality. So, yeah, there's no doubt. China's the second largest economy in the world. It's the fastest growing major economy in the world. They do have hegemonic ambitions in the Western Pacific East Asia. We all know what's going on in the South China Sea. They're expanding their periphery. They're making some very audacious place. One thing I think is not that well appreciated. Think of the major rivers in Southeast Asia, the Mekong River, the Irohadi River. There are a number of them throughout Myanmar and Thailand, Malaysia. All those major rivers, they have their headwaters

Starting point is 00:03:20 in Tibet, which is controlled by China. China is building a series of major dams at the headwaters of those rivers, which means that when the not too distant future, when China can look to South Asia and say, you guys want water, you know, tow the line. In other words, they can literally cut off the water supply to all Southeast Asia by just stopping up these dams and building reservoirs. So that's the kind of long-term thinking and really hegemonic type of plays that the Chinese are making. So with that said, there's no doubt that they're applying that to the currency. Now, they're not even close to having the yuan as a reserve currency. And here's why.

Starting point is 00:03:59 Here's what may be their biggest impediment and why they may never get there. What makes a reserve currency? I mean, it's sort of, yeah, the dollar is 80% of global payments, the 60% of global reserves. It's like, why do the letters on the keyboard say what they say? Well, the answer is once upon a time, somebody laid them out that way, and everyone learned, and they never wanted to change it because we all learned a certain kind of keyboard, and nobody wants to relearn it.

Starting point is 00:04:20 So there is this first mover advantage. there is this, you know, this kind of inertia that once you get this critical mass, you tend to keep it. And that certainly applies to the U.S. dollar. But the key is the bond market. In other words, what is the country's reserves? Well, it just means they had trading partners and they ran a surplus. And so, you know, if you make $50,000 a year and you spend $40,000 in, you know,

Starting point is 00:04:43 taxes and rent and car payments and shopping, and you have $10,000 left over when you put it in the bank, those are your savings. Well, it's no different for a country. You sell goods to the rest of the world and you buy them and you sell more than you buy, you're going to have a surplus and you build up the surplus. So the question is, what do you do with the surplus? If you're a country, you can't stick it under your mattress. You have to invest it somewhere.

Starting point is 00:05:05 There aren't too many markets in the world capable absorbing those kind of inflows. But the one that is the U.S. treasury market. And so people invests in U.S. dollars, not because they love dollars, not because they think the U.S. government's doing everything right, but simply because there's nowhere else to put the money. And we do have a lot of things going for us. So before the yuan is ever a reserve currency, they're going to have to build up a bond market

Starting point is 00:05:28 because if you trade with China and you get yuan, you don't want the yuan unless you have something to invest in. And right now, there is no Chinese sovereign bond market to speak of. I mean, it's a small market, but it's not just a question of issuing bonds. You have to issue bonds in all maturity. So you have a yield curve. We have a 30-day bill and we have a 30-year bond and everything in between.

Starting point is 00:05:48 You can buy a two-year note, a five-year-note, a 10-year-note, etc. So you need all those maturities. You need dealers. We have a system of primary dealers who make two-way markets. And if you don't make a two-way market, the Fed kicks you out of the club. And they're very credit-worthy dealers. They're all the biggest banks. You need settlement and clearance.

Starting point is 00:06:05 You need a clearinghouse. You need a wire transfer system. And you need a repo market so I can finance my positions. You need futures and options so I can hedge my positions. So you need all this stuff. So where are the futures, the options, the derivatives, the repo, the settlement, the clearance, You know, all the things you need to have a bond market. Well, none of them exist.

Starting point is 00:06:24 None of them exist. They're all there in primitive form, but this will take at least 10 years, perhaps 20 years, to build. And the one thing above all, they just gave you a long list of things you need to have a big enough bond market to be a reserve currency. The one thing above all is the rule of law. China's a communist. I mean, it's a communist society. They may pretend to have a rule of law, but if the leader wakes up one day and wants to change it,

Starting point is 00:06:46 then it gets changed. you know, asked to pose you lie about the rule of law. I mean, he's the guy disappeared. He's like Pauli and the godfather. You know, you won't say him no more. So these firing squads in China, they confiscate property left and right. It's an utterly corrupt society. There's no recourse.

Starting point is 00:07:01 There's no court system. Again, not the way we would recognize it. So the only countries in the world that have really good rule of law, certainly the UK, the U.S. However, there are two other alternatives to the U.S. dollar in play, and we've talked about them on this show before. which are gold and SDRs. SDR being the special drawing, right?

Starting point is 00:07:21 That's the IMF world money. Now, El Auerrean, he's about as elite as you can get in terms of the global monetary leads. He worked at the IMF, and he's, I think, chief strategist for Allian, is one of the biggest insurance companies in the world and was the number two guy of Pimco for all those years, and he's on various committees.

Starting point is 00:07:38 He's a Davos man. He's about as plugged in as you can get. And it was about the SDR. It's kind of like, hey, is the time right for the SDRs? That's interesting. The IMF spring meeting just concluded. it on Sunday. When I look at things like that, I say, oh, so the IMF just had their semi-annual meeting and the next day, O Air Inn comes out with a pro-SDR op-ed. I don't think

Starting point is 00:07:57 that's a coincidence. I think there's something in the air. I'll leave it at that. And there are other things going on behind the scenes with the bricks, getting veto power at the IMF. That's going to take a year to play out, but that's already been agreed in principle when it's in the process of playing out. And the whole thing they did in the summer of 2016, they came up with two kinds of SDRs. There's the SDRO and the SDRM. The SDRO is the official SDR. That's the one that the IMF issues, but the SDRM stands for market SDR. So they're encouraging private organizations to issue SDR bonds, create SDR liquidity and SDR Yield curve. This is what L.A.R. was talking about in the op-ed, but right on Q, the World Bank issued, I believe it was a $2 billion dollar

Starting point is 00:08:41 SDR denominated bond issue. It's not denominated in dollars. It's you buy one. You pay in SDRs and you get paid off in SDRs. You can convert them to dollars. Obviously, that's just a simple math problem. But so this is coming. The gold thing, again, we've talked about that at length. So my favorite central banker, there aren't too many central bankers who understand central banking. But one of them is Elvira Nabilina, who's the head of the central bank of Russia.

Starting point is 00:09:05 She totally gets it. And it's kind of interesting. You know, when the oil price collapsed in June 2014, that was pretty tough on Russia. And their reserve, but they had all this dollar denominated. debt or, you know, gas prom and Rothsnapped and all these guys, but they weren't getting the dollars in the door because of the oil price collapse. And then Obama throws the sanctions on because of Crimea and Eastern Ukraine and that made it worse. So their reserve position drew down from the values round numbers from about $500 billion to $300 billion. And it was dropping precipitously

Starting point is 00:09:36 and you could almost say, huh, here comes Russia again with another foreign exchange reserve crisis. But the point being, throughout that foreign exchange crisis, they never stopped buying gold. 25 tons in March. So, of course, China, we know is buying gold hand over fist and the largest mining I'll put in the world. So my question is simple. Are China and Russia stupid or do they see something coming that most people don't? Well, they're not stupid.

Starting point is 00:10:02 I've been to Moscow. I've been to Beijing, Shanghai, Nanjing. I've studied these people. I know I have friends in Russia and China. They're not stupid. They know exactly what they're doing. Americans don't get gold, but everyone else does. So that's the real, in a crisis.

Starting point is 00:10:16 we're either going to go to SDRs or gold. Those are the real alternatives. Speaking of the next currency system, we talked about SDRs, we talked about gold, as you just said. If we are looking at the current monetary system we have, where the dollar right now is the most important reserve currency, it might seem for a lot of people like it's really going to be hard to change because that is what most people remember that a lot today.

Starting point is 00:10:42 I read this very interesting book, not too long ago. It was written by you, Jim. the death of money. And one of the very interesting thing I found from that, and it really surprised me was that you were talking about the possibility of having Germany or the euro led by Germany to be the most important reserve currency by 2025 because of a number of factors.

Starting point is 00:11:05 Could you please elaborate on that, especially in time where it seems like the entire world is bare on the euro? Well, you're right that the entire world is bearish on the euro, except me and a couple other people. And one of the reasons I said why the Euro, the Yuan's not ready to be a reserve currency, the Russian ruble's not ready to be a reserve currency, SDRs and gold, those are more extreme solutions,

Starting point is 00:11:27 waiting in the wings in a panic. But let's just take the steady state and roll it out. So what's the real competitor to the dollar if there is one? And the answer is the Euro, because the Euro actually has the conditions I described. Now, it has a rule of law. It has banks, it has dealers, it has clearance and settlement,

Starting point is 00:11:45 It has futures and options. It has all those things I mentioned. One thing it doesn't have is a bond market. Because the euro is a single currency with, I believe it's 19 members in the Eurozone. And of course, I think the listeners know that the Eurozone is not quite the same as the EU. There are countries in the EU that are not in the Euro. So right now we're talking about just the countries in the Euro, the Eurozone, who their currency is printed by the European Central Bank.

Starting point is 00:12:11 There's a German bond market. There's an Italian bond market. There's a Spanish bond market. There's a Netherlands bond market, but there is no Euro bond market. And when I say Euro bonds, I'm talking about a Euro-denominated bond guaranteed by the full faith and credit of the Eurozone. All those members and the ECB get together and they back this bond. That bond does not exist. And until it does, it will be difficult for the euro to even give the dollar a good run for its money as a global reserve currency because the reason we mentioned, which is you don't have the liquidity in the bond market.

Starting point is 00:12:44 Yeah, you can buy buns and you can buy Italian government debt. But of course, it's been extremely volatile because they don't have a common fiscal policy. They're just tiptoeing into common bank regulation. But you go back to, let's say, 2012, even earlier, when, you know, Joe Stiglitz and Paul Krugman and Norio Rabini were running around with their hair on fire saying, you know, the euro is coming to an end. Greece is going to be kicked out. And Spain has to quit and go back to the Peseda and devalue the currency and lower the unit labor costs. And it's going to be a northern tier and a southern tier. Remember all that? And I said,

Starting point is 00:13:16 no, none of that's true. None of that is happening. The euro is sticking together. It's Hotel California. Nobody can check out. They will add members, which they have. When I started saying this, they had 16 members today. They have 19 members. We'll see if Scotland becomes the 20th. So they've really got from strength and strength. And I've been very bullish on the euro. Now, I have a theory on why Americans don't understand the euro. Because you can't, the opinion I just expressed, you can't hear it anywhere because all you'll hear is, is the euro is a mess, right? It's because Americans get their information from the economists and the FTA,

Starting point is 00:13:49 but they know nothing about Europe. Those are London publications. They hate the Euro. Everybody in England hates the Europe, right? So if you're getting your information from the FT and the Economist, it's like reading a Hillary campaign brochure trying to figure out if Trump's going to win. So you have to go to Germany, you have to go to Italy, you have to go to Spain. But one of the reasons I was bullish on the Euro, I did an interview last Friday,

Starting point is 00:14:10 I said just go buy the Europe right now. And of course, it's going from $1.6 to almost $1.9 in one trading day. But I said, even if Le Pen wins or does better than expected, I didn't think that. But I said if she does, she can't make the euro go away with a waiver of her hand. All she said was, I'm going to have a referendum. So if she became the president of France, she can have a referendum, but she's going to lose the referendum because the polls show the 60% of the French people support the euro. And you go back to spring of 2015, which was just about the height of the Greek decade. crisis. I mean, it really looked like they were, that's as close as they ever came to kicking somebody

Starting point is 00:14:45 out. And the people in Athens, they were ready to march on Berlin and burn the place down. I mean, they hated austerity. They hated Merkel. They hated Shogel and the whole German financial establishment. But the polls showed the 60% of them favored the euro. So they kind of went it both ways. They want the euro, but they don't want the austerity. But the reason is they remembered the drachma. The Italians remembered the lira. The Spanish remembered the Peseda. Those were highly inflationary currencies. The governments use those currencies for decades to steal from everyday people from savers by inflation. And when they got the euro, they got price stability. So they love the euro. They may not like Merkel. They may not like Berlin and Brussels. They may not like austerity,

Starting point is 00:15:27 but they love the euro and is here to stay. But the big thing is coming to get back to your question to stick about the reserve currency status. What they need is a common fiscal policy. The wrap on the euro has been, hey, you guys have a unified monetary policy, but you don't have a unified fiscal policy. So you got these Greeks running crazy deficits and, you know, et cetera. They're all borrowing at euros, pre-riding on the European Central Bank discipline, but not showing any fiscal discipline. So Merkel's running the show. Merkel will support a Euro bond, provided that the members of the Eurozone get their fiscal house in order, and they establish a common fiscal authority. When you see that, when all of a sudden Greece can't just run any deficit they want, but they've got to run up by a unified, you know, basically think of it as a Euro finance minister. That job does not exist today. But imagine it did. There's Eurofinance minister who can tell the Greeks, sorry, you've got to cut your spending that doesn't wear it for us. Then Merkel will buy into the Euro bond issue. But this is in Macron's platform. If you read Macron's platform, he said, I think we should have a European finance minister. So it's coming. I'm not saying next year.

Starting point is 00:16:34 Europe, but it may be sooner than we think. When you get that and you get the Eurobond, and there are more people in the Eurozone than the EU rather than the United States. I think I think 430 million people and, you know, a very large economy, obviously, and they're very well positioned vis-a-vis the Middle East and Russia's a natural trading partner. They've got so much going for them.

Starting point is 00:16:54 And the big variable will be Chinese capital flows. The Chinese capital will start to flow into Europe. The Chinese are very conservative. They're very risk-averse. and they see too much kind of funkiness around Europe. But as Europe gets this act together, which they are doing, the Chinese capital will flow in there. And there's a currency that could displace the dollar. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:21:32 and clearly also the monetary policy, which is somewhat united as is right now, there's this great quote by Maridrahi, the president of the European Central Bank, but he's saying that the ECB is ready to do whatever it takes to preserve the euro. Now, you're also saying that the euro will persist. What do you think he means by that? Well, I said earlier that most central bankers don't understand central banking. I gave Villar Nabia as an example of someone who does my other favorite central bankers, Mario Draghi. And the reason is he also understands central banking.

Starting point is 00:22:07 What Draghi understands is that central banks are actually completely impotent. They can't do anything. This idea that, I mean, they go through the motions, but it's just like the Wizard of Oz. It's just a pretense. Don't dare pull the curtain back, you know, because you'll see. what a shamadal is. Draghi gets that. And so when you're in the position of perceived power,

Starting point is 00:22:27 when you don't have much actual power, the best policy is to say little and do less. And that's Draghi. So you go over the United States, you got these Regional Reserve Bank presidents and members of the Board of Governors, the Ack and I think two weeks ago, there were 14 speeches in one week.

Starting point is 00:22:43 I mean, it's like every single Regional Reserve Bank president, Loretta, Esther, George, Eric Rosengram, Jim Bullard, you know. They were all given speeches and yelling. They're all given speeches. Draghi just keeps his mouth shut, which is really smart. But the one time he came out and said something, he said, whatever it takes. What did he mean by that?

Starting point is 00:23:02 Probably doesn't even know, but it was just sort of a threat. It was like, oh, I don't want to mess with this guy. See, that's what I mean about, you know, he just kind of played close to the vest. So I thought it was very, very clever. It was psychological. The interesting thing about that, he didn't actually do anything. He said it, I believe it was June 2012. We can look it up.

Starting point is 00:23:18 June 2012, at the height of the close to the height of the European sovereign tech crisis, he said, the full quote was, I will do whatever it takes and I assure you it will be enough. That was the rest of the sentence. And the market's like, whoa, don't mess with this guy. But because his words were so effective, he didn't actually do anything. He didn't cut rates. He actually didn't raise rates at the time. It was months later.

Starting point is 00:23:41 It was really into 2013 and later that he started the EuroQE and, some of the other programs that they have today, which they're now trying to get out of, didn't really work very well there either. But he bought a lot of time. That's my second favorite, Drachie quote. My favorite Drachy quote was he was giving a symposium at the Kennedy School up at Harvard. This is about three years ago, three and a half years ago.

Starting point is 00:24:07 And Ticoa to Silver, who's a journalist specializing in gold, somehow got a ticket. And he lined up with the kids to ask a question because Draghi's there. He's like, yeah, it takes questions to the students. students. And there were no false pretences, but I'm sure Draghi thought he was talking to a Harvard student, probably didn't realize he was talking to a gold journalist. And Ticoa asked him about gold. And he said a very interesting thing. This was, there's a video of this. You can find it on YouTube. He said, well, you know, before I was head of the ECB, I was head of the Bank of Italy. And Italy is one of the largest holders of gold in the world. They have over 2,000 tons, which is a lot for the size of Italy. And he says, when I was governor, or the Bank of Italy, I never sold a single ounce of gold. Because I thought it was a good hedge against the dollar. I almost fell off my chair. When I heard that, I was like, whoa, you're a central banker.

Starting point is 00:24:59 You're the guys who want us to believe that gold is not a monetary asset. That is no role in the monetary system. That is a barber's relic or whatever. And yet, as the central bank, head of the Central Bank of Italy, you said you never sold your gold because you wanted to hedge the dollar. By the way, which is smart. I would do the same thing. But I was very surprised to hear him say that.

Starting point is 00:25:17 So, Jim, I want to change gears just a bit, and I want to open up a real broad question for you. If we look at the narratives, everyone's got a narrative in the market. What is a narrative that you're hearing today in the second quarter of 2017 that you think is just dead wrong? Growth. I just think it's the opposite. But let me be more, let me be specific about that. So Trump wins. And, you know, in the wee hours of November 9th, literally.

Starting point is 00:25:47 literally two, three o'clock in the morning as it was becoming clear that Trump was going to be the next president. You know, the stock market sold off. It was in Dow points. It was down 800 points. Gold was soaring. I thought that would happen, but I thought it would reverse. I didn't know it would reverse in two hours. I thought it might reverse in the course of two days. But it did reverse in a matter of hours. And by the morning of November 9th, the stock market was back to even. And by the close of the first day, it was up. And then it never looked back. It went up. Dallas up 3,000 points from round numbers from 18,000 to 21,000 since then. And the reason I thought it would go up after an initial dip was that, you know, during the campaign,

Starting point is 00:26:30 Trump's behavior was so vulgar and so off-putting to so many, and nobody thought it would win. And I think you guys know, I was running around the weeks before saying he would win. The great thing about doing interviews like this is you get to save the audio clips and stuff. If you make a good or bad, but if you make a forecast and you're right, you can always go back and say, yeah, there it is. But I was doing TV interviews saying Trump would win. But that was certainly unexpected. So the point is, market participants, because they couldn't get past Trump's demeanor and his behavior, they never looked at his policies. And then suddenly when he wins, it's like, oh, well, what are his policies?

Starting point is 00:27:04 Oh, he wants to cut taxes, reduce regulation, $1 trillion of infrastructure spending. What's not to like? So all of a sudden, people are like, well, you know, if you're going to cut taxes, and companies with domestic earnings, they're going to have higher earnings for share. So I got to bid up those stocks and you have infrastructure, I'll buy Caterpillar and John Deere. And if you're going to repeal Obamacare, I'll buy pharmaceuticals. And if you're going to repeal Dodd-Frank, I'll buy banks. And there was nothing not to like.

Starting point is 00:27:28 I mean, every sector went up. But initially, gold in the bond market went down because, you know, the Trump, you know, reflation trade and expectation of higher interest rates and all that. And I watched it. And so the Dowell Jones goes up 1,000 points in November, based, on the Trump tax policy. Then it goes up a thousand points in December based on the Trump tax policy. And then it goes up a thousand points in January based on the Trump tax policy.

Starting point is 00:27:56 And I thought to myself, you guys just went up three times on the same policy. I mean, he's not going to cut taxes three times. But to come back to your question, pressing about the narrative. The narrative in November was Trump's going to cut taxes. Okay, I got it. December. Well, they leaked out a few details. And look at this.

Starting point is 00:28:10 Okay, up another thousand points. January. Oh, it's going to be in the state of the United States. union address, boom, another thousand points. And you know, it'll probably go up, you know, as we speak, because they're going to announce some more details again. They still don't have a bill. I spent the first 10 years of my career as International Tax Council at Citibank. I got a graduate law degree in taxation. I know a little bit about the subject. The last time they did a big overhaul, the Internal Revenue Code was 1986. The time before that was 1954, and the time before

Starting point is 00:28:39 that was 1939. In other words, these things happen every 30 or 40 years. They're really hard to do. The idea that they're just going to like bang through something is nonsense. But anyway, the stock market went up based on that and a few other things. But let's look at the reality. So first of all, the infrastructure bill is nowhere to be seen. Most recent is going from a trillion dollars to $400 billion. Most of that is not deficit spending.

Starting point is 00:29:03 It's going to be public-private partnerships. And if you're going to use public bonds to finance it, you're going to have to pay the bonds, which means tolls. So, you know, bridge tolls, tunnel tolls, airport user fees, et cetera. I'm not saying we don't need the infrastructure. I'm all for the infrastructure, but you're not getting it for free. And you've got to put all those tolls on everybody. That's the kind of tax.

Starting point is 00:29:22 That's the tax increase. The Congress has made it very clear that any tax cuts have to be revenue neutral. So if Trump wants to take, they come out today, they leak that. They're going to cut corporate tax from 35% to 15%. They want to cut the individual tax from 39% to 33% roughly. That sounds good, but where are you going to get the money? I mean, you're going to have to raise somewhere else. And whether it's the BAT, which I doubt, whether it's the VAT, the value out of tax, which I do believe is coming,

Starting point is 00:29:52 or getting rid of the deduction on home mortgage interest, getting rid of the deduction for corporate interest expense, you know, set or there are a lot of ways to do it, but they all represent tax increases to somebody. So all you're really doing, you're cutting taxes on one group and you're raising taxes on another group and you're keeping it revenue neutral. hard to see where the stimulus comes from. I'm not saying it's a bad idea. Just to take that a step further, who benefits from a personal tax cut from 39% to 33%.

Starting point is 00:30:18 Well, rich people, I mean, you've got to be making $3,000, $400,000 a year or more to get that tax benefit. If they slap on a value out of tax, who pays? The little guy, it's a sales tax. Value out of tax just a fancy name for a sales tax, right? So the income tax cut

Starting point is 00:30:36 benefits to people with the lowest marginal propensity to consume. If you're that rich, I'm where you already got everything you want. The point being, you're not going to spend more, but the guy with the value out of tax, that's coming out of his pocket.

Starting point is 00:30:48 He's got to spend a little less at, you know, Wendy's or a little less at the gas station because he's paying more for whatever when he shops at Walmart. So your tax plan is, A, revenue neutral, which means no stimulus, and be regressive in the sense that you're rewarding the people who don't spend

Starting point is 00:31:04 and you're hurting the people who do. So I don't see where the stimulus comes on that. So the infrastructure thing looks like the Camira, the unicorn, I mean, that's not happening. The tax bill might have, oh, by the way, two other effects. One is, remember I said the stock market went up in November and December? Well, that's because I thought we'd get a tax bill in 2017. Well, now the earliest they can pass this thing is in November, November, December, which means the earliest effective day is going to be January 1st, 2018.

Starting point is 00:31:31 So you have a whole year of earnings that increases at the stock market price in that just disappeared. Well, has the stock market corrected for that? No, because to me it looks a little bit like a bubble. It goes up and stays up because it's a bubble. My point being, they price the stimulus they're not going to get. They priced in timing they're not going to get. They priced in infrastructure they're not going to get. They haven't repriced.

Starting point is 00:31:53 That is to say the market hasn't come down. And then combine that with what we talked about at the beginning of the podcast with the Fed tightening into weakness and the natural deflationary vectors, demographic, debt de-leveraging and technology, you have a recipe for a recession. So the big miss, Preston, I would say, is that there's this growth reflation narrative out there that I'm kind of taking the other side of that. Very, very thoughtful. Jim, in your book, The Death of Money, you discuss fixed exchange rates. And if you read a typical textbook about fixed exchange rates, it would typically highlight the advantage of limiting speculation and providing a stable training system.

Starting point is 00:32:30 Well, I will also say that you need to be cautious about the inflexibility your central bank would have, you can no longer incentivize growth, which we talked about before, for instance, by lowering the interest rate. So could you please provide us with, say, two cases on an economy who will benefit and not benefit respectively from such an exchange rate regime? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Starting point is 00:36:09 slash income. This is a paid advertisement. All right. Back to the show. Well, it's a great question. The world needs to go back to fixed exchange rates of some kind. I mean, there are a lot of ways you can structure it. Why do we have floating exchange rates?

Starting point is 00:36:25 because we didn't. You know, from 1870 to 1914, the world was on what's called the classical gold standard. By the way, at that time, the U.S. had no central bank. People were surprised that, oh, it was the time we didn't have a central bank? Well, from 1835 to 1913, no, we did not have a central bank. And there was no IMF. Believe it or not, the world got a long fine without the IMF. So that was the classical gold standard.

Starting point is 00:36:46 Now, there was no supervising authority. It was a voluntary system. A country would say, hey, I'm going to peg my currency to gold at this rate. and I'm going to defend it at that rate. And if I want a deficit with you and you want to show up with my currency and get the gold, I have to give you the gold. And conversely, if I run a surplus with you and I take your money and I show up at your banks, you've got to give me the gold.

Starting point is 00:37:10 And gold moved back and forth as an equilibrating mechanism when you started to run out of gold. He said, hey, I better, you know, tighten my belt here a little bit and make my industry more efficient and lower my unit labor costs and get back to surplus. And if you were running big surpluses, you were supposed to expand. the money supply and that would be inflationary and that would you know so it was sort of self-equalibrating it wasn't perfect by any means but it's a pretty darn good system with nobody in charge but they were fixed exchange rates because if everyone pegs to gold then by extension just transitive law you're pegged to each other and the breton was in 1944 all they did they took that system and they formalized

Starting point is 00:37:47 it with a couple exceptions one is that the only currency pegged to gold was the dollar and everyone else was peg to the dollar. No surprise, we designed the system, so we, of course, put ourselves in the middle. Now, by extension, it's a fixed exchange rate system, but there was a little wiggle room. You could devalue against the dollar if you got IMF approval and blah, blah, blah. There was a whole, it was a process and it happened every now and then. But the one thing that couldn't happen was the U.S. dollar could not devalue against gold. Of course, that's exactly what happened in 1971.

Starting point is 00:38:18 But what was the intellectual genesis of that? I mean, who was kind of whispering in Richard Nixon's fear in 1971? telling him that floating exchange rates were a good idea and fixed exchange rates were a bad idea. The answer is our friend Milton Friedman. And that opens the door to a very interesting backstory because Friedman was the author, well, not the author, but the leading exponent of what's called the quantity theory of money, which is a very simple identity. So basically, how much money is there?

Starting point is 00:38:46 How fast is it turnover? And that equals nominal GDP, which has two parts, the price index and real output. And Freedman said, well, in a mature economy, real output, you know, central tendency was about three and a half percent a year. And Freedman used to joke that we don't even need central banks because we can just take a computer and tell them to do what I just described. And now, of course, there's more to it than that, and I'm being a little glib, but that was the basic idea.

Starting point is 00:39:13 However, this ran into something else, and this is really the backbone of international economics from the great Robert Mundell and he and his co-art. author's articulated this, believe, in 1961, which is called the Impossible Trinity or the sometimes called the Trilemma. And what this says is the following. In international capital flows and international trade, there are three things you cannot have at the same time. You can have two out of three or one out of three, but you can't have all three. The three things you cannot have are an open capital account, a fixed exchange rate, and an independent monetary policy. Because if you have an open capital account, that means money can go in and out, right? And if you have

Starting point is 00:39:58 a fixed exchange rate, that means you stand ready to exchange your money for other people's money at a set rate. But if you have a monetary policy that's independent of other central banks, then there's always going to be an arbitrage because your rate's going to be too high or too low compared to somebody else. So people are just going to suck your reserves dry where you're going to get massive inflows. There's going to be some imbalance. So what Mandel said is that you can have two out of three, but you can have all three. So you can have an independent monetary policy in a fixed exchange rate if you close the capital account. Or you can have an open capital account and an independent monetary policy if you have a floating exchange rate.

Starting point is 00:40:37 Or you can have an open capital account and a fixed exchange rate, but you've got to tie your monetary policy to somebody else. Kind of what China is doing right now, raising raises, the Fed raises. Okay, so there's the setup. There's Mundell's Impossible Trinity or Trilemma, and here's Freeman's quantity theory of money. Now, what is Friedman saying to Nixon in 1971? Of course, this is Freeman thinking behind the curtain. So Friedman's thinking, well, we need an independent monetary policy. We need to be able to dial money supply up or down to grow the economy. We need what's called elastic money. That was the key word of elastic money. If we don't have that, then we don't have the ability to get out of recessions or pull down expansions,

Starting point is 00:41:20 et cetera, et cetera. Well, that means you need an independent monetary policy. Now, obviously, everybody wanted an open capital account. The United States could not close the capital account. We weren't Russia. So Friedman, as an advocate for elastic money under the quantity theory of money, said, well, if I want an open capital account and I want an independent monetary policy, I have to have floating exchange rates.

Starting point is 00:41:43 I can't have fixed exchange rates because Mundell says I can. Mandel was right. So Friedman had a bias to blow up the fixed exchange rate system to blow up Bretton Woods basically and go to floating exchange rates so he could solve the trilemma and have the independent monetary policy. He wanted to pursue his theories under the quantity theory of money. What's wrong with that? Well, everything Friedman thought was wrong. Everything I just described as spent 10 minutes described.

Starting point is 00:42:13 an intellectual, theoretical edipus, the whole thing comes tumbling down around one point. Velocity is not constant. But a velocity is not constant, and it is not constant because it's behavioral, it's because it depends that you and I feel. Like if you and I want to, we feel great and we want to go out Friday night

Starting point is 00:42:29 and go to a restaurant and see our friends at the bar and drinks on us and spend money, that's one state of the world. But if we feel depressed or frugal or squeezed and we stay home and watch TV and we don't spend money, that's a different state of the world. Well, those are different. different kinds of velocities, me going out and spending a lot of money, me staying home watching

Starting point is 00:42:46 TV. I stay home and watch TV, my money has velocity of zero. $4 trillion times zero is zero. In other words, you can have all the money in the world, but if you have no velocity, you have no economy. And so, Friedman didn't get the fact, he thought people were kind of robots under, like, you know, variations, efficient market theory and rational expectations. Freeman didn't quite get the fact that velocity was highly volatile based on psychological conditions. In fairness to Friedman, velocity empirically was

Starting point is 00:43:16 constant from 1950 to 1980, which is a long time, and that was the main part of his working career. But if you'd look at data from the 1930s, we'd actually look at data in the last 20 years. Velocity fell off a cliff in 1998, and it's been falling ever since. So the point being,

Starting point is 00:43:33 once you say velocity is not constant, then the whole quantity theory of money goes out the window as a policy tool. Now, it's still interesting for thought experiments, I use it to help solve problems, but it's not going to guide you to policy. And therefore, if you don't need flexible money, then you can revisit the subject of fixed exchange rates. So to answer your question, SIG, you ask for example, as I would say, there's no country that's better off with a floating exchange rate. The whole world will be better off with fixed exchange

Starting point is 00:44:01 rates. We just have to bear the burdens and meet the responsibilities that come along with that. There's one thing Friedman did get right. He said there's no. a free lunch. In a way, Jim, isn't this what the whole cryptocurrency movement is trying to establish as far as fixing the monetary baseline so that it can't be manipulated in order to create this fixed medium of exchange? Is that what they're really trying to do with the movement? That's my opinion. It's part of, I have a lot of reservation about Bitcoin. And look, I've read all the original papers and I've studied it closely and I understand blockchain. I've been down to Tampa with U.S. Special Operations Command, working on methods for interdicting Bitcoin flows used by the

Starting point is 00:44:42 Islamic States. So I'm not a technophobe. I'm not a Neanderthal when it comes to this. But I have some serious reservations about Bitcoin, one of which is that, you know, it's never been through a business cycle. Bitcoin has been in 2009. We have not had a recession or a panic since then. So how will it behave in panic conditions? Maybe just fine, but maybe not. So that's one thing. But the other point I would make is that the idea that there's a maximum number of bitcoins that can be ever be produced and they get progressively harder and more expensive so that momentum slows down and you need more processing power and all that says it. I mean, that's the protocol.

Starting point is 00:45:20 But the Bitcoin community of developers and miners can get together and change those rules the same way Richard Nixon changed the rules on August 15, 1771. So I'm not saying they will. I'm saying they could. So is it really any different than any other medium where you're relying on a fixed rule when it turns out your reliance is misplaced? So that's the second reservation I have. And then I have others. But the thing is Bitcoin floats.

Starting point is 00:45:46 I mean, you know, the dollar Bitcoin, if you think of the Bitcoin as a currency, this is a dollar Bitcoin cross rate, the same way there is with a dollar euro cross rate or a U.S. dollar Canadian dollar cross rate. So it has no more of an anchor. see if somebody took the Bitcoin and said, we're going to fix it in terms of units of gold. You know, to one Bitcoin equals a half ounce of gold or whatever it is. That would be interesting. How you enforce that, by the way, as a matter of law, a separate question. But my view is the first currency goes to gold will be the only currency in the world that anyone wants. So, Jim, when you say that and we think through the dynamics of that,

Starting point is 00:46:24 Isn't a country that would adopt gold and make that their pegged currency to gold, isn't that creating a deflationary environment for them so they're decentivized in order to do that? Not necessarily. That could be the result. But this whole question of getting the price rate, you know, the old expression you hear it all the time. You can't have a gold standard because there's not enough gold in the world to support the money supply. Well, that's nonsense. I mean, there's always enough gold.

Starting point is 00:46:49 It's just a question of price. So if you pick a deflationary price, yes. It could be extremely damaging, could put your country or by extension of the world into a depression. That's absolutely right. So just pick a non-deflationary price. And, of course, this was the blunder that Churchill made in 1925. He took the UK back to the gold standard at the wrong price. He went to the pre-World War I parody after the Bank of England had doubled the money supply to fight the war.

Starting point is 00:47:15 So that wasn't going to work. You either had to double the price of gold or cut the money supply in half to reestablish the equilibrium. him. Well, by choosing the old price, they cut the money supply in half and through England into a depression three years before the rest of the world. And Churchill later admitted that was the greatest blunder of his life. And so you can get it wrong. But the good news is that you don't need calculus. It's eighth grade math. You sit there. How much gold do I have? What's my money supply? What percentage backing do I think I need to stand up to the world? You know, 20%, 40%, 100%. And then do that math. And that will give you an applied non-deflationary price. And bingo, there you go. So you provide an example where it was priced wrong and then would you say in 1933, they priced it correctly in order to reflate the U.S. economy. Would that be a... Correct. Yeah, the U.S. did that in 1933. The U.K. did it in 1931. The U.K. reversed the blunder of 1925. And the U.S. in 1933 took the price of gold from $20 an ounce to $35 in ounce. And that worked. That broke the back of deflation, simulated inflation. And Roosevelt did not do it to reward goldholders. In fact, he was pretty clever. He confiscated all the gold before he did it.

Starting point is 00:48:27 So the profits went to the Treasury, not to the American people. But be that as it may, he wasn't trying to make gold more valuable. He was trying to create inflation. He wanted inflation in oil and cotton and wool and all the other commodities and corn. And it worked. Got the U.S. economy out of a deflationary spiral. The U.S. economy grew fairly well, 33, 34. Stock market went up.

Starting point is 00:48:49 So it can work. And in today's world, you might take a one-time hyperinflationary hit, meaning that when you do this math I described, you might discover that your currency is worth 5% of what you think it is when you express it in terms of gold at today's price. But once you do it, you know, it makes some adjustments for retirees or people who savers or people who might suffer the most. Bondholders might lose, you know, too bad. But what you would be doing is putting your economy on a sound footing going forward. All right, Jim. So this is the last question, and we want to give you an opportunity to talk about the relaunch of the death of money. So give our audience what's going on.

Starting point is 00:49:26 Why are they relaunching in the book? Sure. The death of money came out in 2014. It's a New York Times bestseller. And typically a publisher will bring the paper back maybe a year after the hardcover, maybe not at all, depending on how they sell. But the death of money stayed in hardcover for three years because I'm happy to say it's sold very well and found a very good audience. Now we've come out with the paperback edition, but we have a new preface that I wrote. So there's some new material in it.

Starting point is 00:49:53 So if you don't have the book at all, get the paperback. Even if you do have the hardcover, you might want to pick up the paperback for the new material. The new material specifically relates to insider trading in advance of 9-11, a subject I covered in chapter one of the death money. I talked about Project Prophecy at the CIA where I was a co-project manager, and we worked on market price signals, to detect terrorist attacks with a lot of success. This is all post-9-11 when we were kind of, you know, you pick up the pieces of that failure and then say, well, what can we learn? And one of the things we learned was that we could use market price signals to detect

Starting point is 00:50:30 terrorist attacks. But after that came out, I put, you know, whatever I could say that wasn't classified, you know, we put in the book. But people read it. And then people started calling me. They came forward. They had their own stories, top Wall Street traders, people at primary dealers, There was people who saw things that they knew were insider trading.

Starting point is 00:50:48 They weren't terrorists. They weren't books. They didn't do anything wrong. They didn't realize until after the attack, looking back on trades the day before the attack, there was no other explanation than the fact that somebody knew. And candidly, people wanted to unburden themselves. One guy, one of the top guys on Wall Street, just told me his story in tears. I mean, he really just wanted to get it off his chest.

Starting point is 00:51:10 So I put those stories in the book, not ones that I knew about. the time, but as I say, people came forward afterwards, and I've been able to include some of the stories in the new paperback edition. That sounds fascinating. So, you know, Stig and I have both read the original print that came out and just love this book. Every book that you've come out with, Jim, has just been phenomenal and Stig and I have read all of them. So we can't encourage our audience enough. Get out there, read Jim's material. If you haven't noticed yet, Jim's brilliant. If you haven't noticed that by now after two episodes, and his writing is equally brilliant.

Starting point is 00:51:44 and I guarantee you you will really learn a lot going through his material. So, Jim, thank you for your time. Always a pleasure. We really hope to have you on it on the show again in the future. So thanks for taking time out of your busy night here. Thank you. All right, guys. That was all that Preston and I had for this week's episode of the Investors Podcast.

Starting point is 00:52:02 We see each other again next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to the Investorspodcast.com. To get your questions played on the show, Go to AskTheInvesters.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network.

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