We Study Billionaires - The Investor’s Podcast Network - TIP190: Jim Rickards (Part I) - Central Banking, Taxes, and Crypto - Business Podcast

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back a good friend that always has interesting things to talk about. Jim Rickards is a New York Times bestselling author and major authority in central banking policy. Jim has worked on Wall Street for more than 35 years, and his comments and commentary are frequently aired on CNBC, Bloomberg, and countless other national level news organizations. Many of the books that he's written are on the recommended reading list at places like Bridgewater Associates and Major U.S. Bank. Our interview with Jim is two episodes long, so on today's show, we're going to cover a couple different topics. First, we talk to Jim about his thoughts on the tax bill, what has happened and what he expects

Starting point is 00:00:41 to happen moving forward. Jim also talks to us about portfolio allocation based on where we're at in the current credit cycle, and we even get them to talk a little bit about cryptocurrencies a bit. So get ready to hear some interesting thoughts, all backed up with a lot of statistics and analysis, and without further delay, we bring you the thoughtful, Jim. Jim Rickards. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:12 We keep you informed and prepared for the unexpected. All right. So here we are back with you, the Investors podcast, Stig and I, and we got our very good friend, Jim Rickards here with us. And Jim, such a pleasure that always have you back on the show. I know our audience loves it when you come on. and we're really excited to chat with you about the current market conditions and some of the stuff that you're up to right now. Preston's say great to be with you guys.

Starting point is 00:01:45 Great to be back. Thank you. We hear you're really busy these days, writing like crazy. So I hear this might even be one of your only interviews for the year. So thank you for taking time out to chat with us. Well, glad to do it. That's true. I am working on a new book.

Starting point is 00:01:59 You know, my last two books both came out in the same year. The new case for gold, which was a little bit of a manifesto and The Road to Ruin, which is volume. three of a quartet on the international monetary system. They both came out in 2016. I almost killed myself on book tours and media. I love doing it. Don't can be wrong. I enjoy doing it, but it can be grueling. And I said, I'm never doing two books in one year again, ever. Wow. You're an animal. I'm serious. Like, that takes so much to write a book. Well, Jim, we wanted to start off the conversation about kind of market conditions, because at Christmas time frame and into January, I was kind of like, what in the world is happening in these equity

Starting point is 00:02:42 markets? The thing was going parabolic. I mean, it was just taking off like a rocket. And when you look at all the fundamentals, I mean, we're seeing numbers, P ratios and all that kind of stuff. And we've only seen these multiples this high a few times, like two times in the history of the U.S. stock market. And so it's scary to watch that happen. And so my opening question for you is really just kind of when you take a step back and you look at all these central banks that are just continuing to add more and more money to the global economy. Now, the Fed isn't doing it. The Fed has completely stopped in fact that they're even going through quantitative tightening. But if you take all the money from the ECB, the Bank of Japan, you look at over in China, you look at the Bank of

Starting point is 00:03:30 England and you combine their balance sheets onto just one graph and you take all these central bankers balance sheets into one graph, it's still going up at the same slope that it's been going up for the last seven, eight years. And so my question to you is, are we going to continue to see the equity markets just chug along as long as these central banks continue to print and to basically do the quantitative easing that they've been doing at the scale that they've been doing, even though the Fed is slightly tightening at this point? I don't think so, Preston. I think something has changed.

Starting point is 00:04:05 Very recently, you put your finger on it in terms of the data. Obviously, the stock market major indices peaked on January 26th. And you write, 2017, we'll look back and say, man, what was that? It kind of went straight up. And not just straight up. There were no down months in the year. I don't know if it's ever happened before, but it's certainly been a very long time since that happened. Very few down weeks.

Starting point is 00:04:26 the European Central Bank and the Bank of Japan and the Bank of England, and certainly the People's Bank of China. They're all doing quantitative easing in one form or another, but they are slowing the tempo a lot, ECB in particular. And this goes back to the taper, which was reduction in the purchases of long-term assets by the Federal Reserve, which lasted from December 2013 until November 2014. And everyone said at the time, well, yeah, but they're still printing money. They're still buying securities. And that's true.

Starting point is 00:04:54 They were buying them at a slower tempo. And so that was a form of tightening relative to what they had been doing before. So, yes, still buying. But as they went from $80 billion a month to $40 billion a month to $10 billion in a month to zero, and now they've actually started tightening, Europe is just getting to the taper stage. They're at the very early stages of the tapering. And Japan is talking about tapering.

Starting point is 00:05:17 They haven't gone very far in that direction. But all these things taken together are a form of monetary tightening. And you do have to overweight the Fed. the U.S. dollar is 60% of global reserves, 80% of global payments, close to 100% of all the oil in the world is priced in dollars. That even exceeds the total use of the dollars in global payments. So you start tightening on the dollar, you're slowing down the whole world. That's a very big deal. Now, I know during the quantitative easing days, there was a popular meme or cartoon.

Starting point is 00:05:48 I'm sure you saw it a picture Ben Bernanke hanging out of a helicopter, one hand on the helicopter strut. The other hand, throwing $100 bills in the air with this manic expression on his face. And that was the image of helicopter money, which is a former quantitative easing. But picture today, J-PAL in a basement into the furnace and a shovel and a pile of $100 bills. And he's shoveling the $100 bills. That's what the Fed is doing. The Fed is destroying money. When they hold a Treasury's security and that Treasury security matures, so you bought a five-year note five years ago,

Starting point is 00:06:20 today it matures. The Treasury just sends you the money. Well, if they sent you, Mayor Stig the money, we'd have it in our bank account. When you send the Fed money, it disappears. It's the opposite of how they create money. They create money. They buy securities and they pay for it by crediting, you know, the bank's account with money from thin air. Well, the opposite is true.

Starting point is 00:06:38 When the security is mature, they get the money, it just disappears. They're not slowing down the tempo purchases. They're reducing M-0. They are destroying money. And it's important to emphasize that this is unprecedented. This has never happened before. We never had quantitative easing and therefore we've never had quantitative tightening. We've never had either one.

Starting point is 00:06:58 This is one big Ben Bernanke science experiment. Now it was left to Yellen and now J-Pel to unwinded, but there is no data on this. No one knows what's going to happen. There are some expert opinions. Now, the Fed would say, hey, it's running on background. They actually used that expression background like you were launching a spreadsheet while you were on Skype or something like that. Pay no attention to it.

Starting point is 00:07:19 It's just a little something going on. They've said we're not using it as an instrument of policy, meaning if the economy slows down a little bit, don't look for us to reduce the tempo of quantitative tightening. It's not an instrument. They've said all these things, but don't believe any of them. They've never done this before. This is in the 105 year history of the Federal Reserve, this has never happened. I've seen estimates, and I think the good ones, particularly Ben Steele, the Council of Foreign Relations. He says that the tempo of quantitative tightening that the federal achieved by the end of this year is, equivalent to four interest rate hikes. Now look at the market chatter. What are people talking about? Oh, are they going to hike three times or four times, three times and four times? How about seven or eight? That's what we're looking at this year. And the Fed, in my view, is underestimating the impact of this. So we're supposed to believe that you print four trillion dollars, you create this massive stock market boom, this massive rebound in the real estate market, you create all these asset bubbles, but somehow we're supposed to believe that if you destroy two trillion, it has no impact on asset prices, that's

Starting point is 00:08:26 ridiculous. So, of course, it will. They're overtightening. They don't know how this works because it's never been done before. Very good reason to believe that this will have a significant impact on markets that it will deflate asset bubbles in conjunction with the rate hikes that they're doing. And this is part of what has the stock market concern. There are a couple other factors.

Starting point is 00:08:44 Look, everyone knows what's doing in a bull market. You use leverage, use your margin account, you spread around your bets, you buy the dips, you hang on, and you make a lot of money. Everyone knows what to do in a bare market. Rotate into consumer staples, reduce leverage, increase your cash allocation. Do not buy the dips, do not catch a falling knife, as they say, wait till it bottoms and then step back in. The one thing people don't know what to do is how do you react to what we have now? This is not a bull market, it's not a bare market, it's a volatile market that is placed

Starting point is 00:09:16 with uncertainty from what we just mentioned, which is the Fed and growth, plus trade wars, geopolitics, and the regulation of the tech sector for the first time. So these are all new factors. All of them are subject to binary outcomes. So I just gave you four factors. At the extreme, each one of them could go either way, right? The Fed could get it right or they could cause a recession. Trade wars could escalate or they could be negotiated to a happy ending. Geopolitics, maybe there's a shooting war in Iran in North Korea, hopefully not. And tech regulation, maybe it just goes away or maybe they bring antitrust actions against Amazon and Facebook. So what's four squared? It's 16. So you've got four factors, two binary outcomes each.

Starting point is 00:09:57 So four squared, you have 16 possible paths. All of them are plausible. And with that level of uncertainty, no wonder no one knows what to do. 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 the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using. Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology

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Starting point is 00:14:09 That's Shopify.com slash WSB. All right, back to the show. So, Jim, what should we do? I mean, I think that would be the important question to ask, really, because we talk about, you know, history repeats itself, but as you said, like we've never seen this before. So we can't say this is what happened in, say, 2008 or this is what happened on the dot-com,

Starting point is 00:14:34 what we usually do in terms of the narrative of explaining a stock market crash. So what should we do? Well, there are three approaches. As an analyst, I actually try to wrestle these problems to the ground. So I said there are all these possible outcomes. And you have to be humble and say, yeah, these things could go out of the way. My view is that I'll just take them one at a time. On the growth story, I think, as I said, the Fed is overt tightening.

Starting point is 00:14:57 They are going to slow the economy down. The Trump tax bill is not going to have anywhere near the effect that the market believes. You're already seeing that kind of, I think, fairytale come to an end. you have what I call the gang of four, Steve Forbes, Steve Moore, Larry Cudlow, and Art Laffer. They who are very influential in getting the president and congressional leaderships to pass this tax bill. And here's what they said. They said, Mr. President, don't worry about the deficits. We're going to cut tax rates.

Starting point is 00:15:24 I'm a static analysis that's going to blow a big hole in the deficit. But don't worry about it because we're going to get so much growth and so much stimulus, new investment, new jobs, etc. The taxes on that growth will make up the revenue gap and it won't have. nearly the budget impact you expect. And by the way, for proof, we have the Reagan revolution. We did this. Ronald Reagan signed a tax bill in 1981, went into effect in 82. And between 83 and 86, we had 16% real growth, which is true.

Starting point is 00:15:52 It's banging out over 5% a year real. And that expansion continued until 1989, 1990 recession. So what's not to like? Let me tell you that everything I just said, which is what Cudlow is saying to the president, is incorrect. Let me tell you why. First of all, yes, we did have very strong growth between 83 and 86 continuing to 89. That's absolutely true. But in 81, 82, we had the worst recession since the Great Depression. Now, there was a worse one in 2008, but until 2008, that 81-82 recession was the worst since the Great Depression. In a normal business cycle recovery, in a normal V-shaped recovery, you should have

Starting point is 00:16:31 expected strong growth in 1983 because we were coming out of a severe recession. 182 with high unemployment, lots of slack in labor, lots of unused industrial capacity. So you were sort of going to get good growth anyway with or without the tax cuts. But in addition to that, the thing that really drove the economy, and again, we did have that kind of growth and credit to Reagan was Reagan was a big spender, contrary to popular belief. When Reagan was sworn in, the U.S. debt to GDP ratio was 35 percent, about the lowest it had been since the end of World War II when it was well over 100%. When Reagan left office in 1989, the debt to GDP ratio was 55%.

Starting point is 00:17:10 Reagan took it from 35% to 55%. That's a 60% increase in the debt to GDP ratio. Now, to his credit, he won the Cold War. So nice going. We got a 600 ship Navy. We restored our military. We bankrupt the Soviet Union by going ahead with Star Wars. So I would say Reagan was not reckless.

Starting point is 00:17:30 He got something for the money. As I say, he won the Cold War. but he did drastically increase the debt to GDP ratio. So it was the spending and the cyclical recovery that drove growth, not the tax cuts. Now, come all the way forward to 2018. The conditions are not at all what was facing Ronald Reagan. First of all, our debt to GDP ratio today is 105%, not 35, not 55, 105.

Starting point is 00:17:57 The research is clear and convincing, not just Reinhardt-Rogoff, but Bank for International Settlements, ECB, Many scholars have said that any debt to GDP ratio in excess of 90%. It's kind of like if you're a high altitude mountain climber, you go about 26,000 feet. They call it the death zone from 26 to 29,000 feet on Everest. You can't survive. You've got to get up and down.

Starting point is 00:18:18 We are in the death zone. Debt to GDP at north of 90%. Not only slows growth, it stops growth. The Keynesian multiplier goes negative because you get no bank for your buck, plus you owe interest on the debt. People begin to fear that you won't repay them. They fear that you're going to turn to inflation. they believe it's out of control and all those things act as headwinds to growth in addition

Starting point is 00:18:39 to all the other headwinds demographic and otherwise. And also, we're in the ninth year of an expansion. We're not coming out of a two-year severe recession with lots of slack and lots of factor inputs that you can pick up and apply. We're in the ninth year of an expansion. Unemployment is 4.1%. Industrial capacity utilization is sky high. In other words, we don't have any of the conditions.

Starting point is 00:19:03 that Reagan had. And so the case that somehow these tax cuts are magically going to pay for themselves is completely false because, A, it wasn't true to begin with. There were other factors involved. And B, none of those factors are present today. And the one factor that's new says you're not going to get any growth at all because you're debt to GP is too high. So those are all the reasons the tax cuts are not going to work. On top of that, I would throw the fact that this is the most poorly designed tax bill I've ever seen. And this completely covered the rich in the corporations.

Starting point is 00:19:34 If you want to give the economy a boost, cut the payroll tax. I mean, 50% of Americans pay no income tax. It's not a disparaging remark. It's just true. They don't make enough income or they've got earned income credit or daycare credit or standard deduction, whatever. 50% of Americans don't pay any income tax.

Starting point is 00:19:51 It doesn't matter what you do. You can cut it to zero. It's not going to change their marginal propensity to consume because they get no benefit. This was heavily skewed to the rich who have a low marginal propensity to consume. You know, a guy making a million dollars a year if he makes a million 100,000 because you cut out of his taxes. As far as this repatriation of offshore money, that's a complete myth. The money was always here.

Starting point is 00:20:15 You actually think Apple had a trillion dollars, a hundred dollar bills stacked on pallets in the basin of the Bank of Dublin and Ireland? No, they had it on the books. That multi-trillion dollar cash share was on the books of a foreign subsidiary. They did not pay U.S. taxes on it. But it was always invested in the U.S. government securities market, which you can do without paying taxes. So the repatriation thing was a sham that was just put over on the American people in the media to get them think that there was this tsunami of money coming in. They were going to invest. If Apple wanted to build a plant three years ago, you don't think they could have borrowed money at like 1% and build the biggest plant in the world and hired all the workers they want.

Starting point is 00:20:50 There was never an impediment to investing in the United States other than a bad business climate. The so-called offshore money was always here. It was just in the treasury market instead of elsewhere. But now that they have degrees of freedom to use it for things other than passive investing, what are they doing with it? They're giving it back to the shareholders. It's in dividends and stock buybacks in M&A activity. They're not building plant and equipment.

Starting point is 00:21:12 So is this good for the stock market? Yes. Is it good for the wealthy? Yes. Does it do anything for the economy? No. And then even if we're better designed, you'd have all these impediments that I described earlier.

Starting point is 00:21:22 So this tax thing is going to add up to nothing. That's already being revealed. if you look at the Atlanta Fed GDP Now Tracker, we're only a couple weeks away from actually getting a print for the first quarter. They're saying 1.9%. That's not a recession. It's not a depression. But it sure isn't 4%.

Starting point is 00:21:40 It sure isn't what Larry Cutlow is talking about. Meanwhile, the debt continues to go up at 5 and soon 6, 7% of GDP per year. So you run up your debt, you run up your nominal debt, is 7% of GDP. And your economy's growing at 2% plus inflation. maybe 3%, what's happening to your debt to GDP ratio. It's catching up with Italy. The U.S. is going broke.

Starting point is 00:22:03 Yeah, and you don't have any trade piece like you ever in Japan. You have a trade surplus versus a trade deficit over here. It's all trade deficit. So, you know, you don't have any other advantages trying to prop any of that up. And I think that that's a major concern. So, you know, back to what Stig was saying, Jim, so like, do you just do the Warren Buffett model? Do you just basically have cash and cash equivalence?

Starting point is 00:22:26 and you just keep building your balance sheet for that rainy day? Or like, what's the strategy? Well, that's one approach. I would definitely reduce an allocation to stocks. I would increase an allocation to cash. I would run a 10% allocation to gold, physical gold, not paper gold, as a form of insurance. I think it'll be a very good asset class anyway. I can make a very strong case for gold and I do frequently.

Starting point is 00:22:49 But even if you thought gold was going to be flattish, it would be a good thing to have as a kind of insurance. So you increase your cash allocation to maybe 30% or more, get 10% in gold. If you want to be in the stock market, my stock investments are more in private equity, fintech, natural resources, a couple other areas. And, you know, that's just a completely different bet. I mean, in those cases, you know, management, they're probably, you know, friends or family or certainly, you know, people that you're very much in touch with, not the same as investing in a public company. But the stock market is going to continue to exhibit this kind of schizophrenic volatility we've seen.

Starting point is 00:23:26 You know, up 500 one day, you know, talking about the Dow Jones, down 300 the next. You get these intraday moves. I looked at it last week. It was kind of up about 1.7% for the week. But it had these 3, 4% intraday moves. So it's like saying a roller coaster ends up in the place it started. Well, yeah, but it's still a roller coaster ride. And that's what the stock market is doing.

Starting point is 00:23:48 But it's because of these four factors I mentioned, a growth in the Fed, trade wars, geopolitics, and tech regulation. So everyone's concerned Congress is going to break up Facebook and Zuckerberg goes up to the hill. By the way, everyone said he did a great job and the stock about it. I thought he was an awful witness personally. I've testified before Congress. I've testified under oath to investigative committees.

Starting point is 00:24:12 I kind of know a little bit about that drill. I thought he was evasive. I mean, he kept saying, well, my team will get back. to you. Your classic CEO says my staff will get back to you. He's the team. My team will get back to on that senator. My team will get back to you on that Mr. Chairman. He had a bunch of I don't knows, really? You're a late 20 something CEO of a major corporation. You don't know what's going on when you've had weeks to prepare for your testimony. I thought he was at times condescending and arrogant, even though he was warned not to do that. I thought it was evasive in more ways than

Starting point is 00:24:42 one. So I personally thought it was an awful witness, but I guess the market felt good that he didn't, you know, do worse or fall off his chair or anything. And so the stock rallied. But I don't think we've heard the last of that. That's another one where Wall Street seems to have said, yeah, okay, headline news for a couple days, but it's over and they can go their own way. It's business as usual. No, I think they're going to get a very serious look. And not just Facebook, but Amazon also look from the Justice Department under the antitrust law, certainly the privacy considerations, what's going on in Europe. A lot of times they take their cues from us. This may be one where we take RQs from Europe in terms of the privacy regulation.

Starting point is 00:25:19 It will at some level, her profits and increase costs and disrupt their business model. I'm not saying it's the end of Facebook, but it will be a headwin for them. So I don't think we've heard the last of that. But you could take the other side. My point is that I have a view on these factors. I think growth will disappoint.

Starting point is 00:25:36 I think the trade wars will escalate and get worse. I think the geopolitical situation, a little bit quiet at the moment, but the president's getting ready to walk away from the joint comprehensive plan of action on Iran, that'll exacerbate that situation. I think either the courts or the Congress are going to move on these big tech firms.

Starting point is 00:25:54 So that's me. But for people who take a different view, you might want to be in the stock market. So it is confusing. That's really the point. All of these outcomes are plausible. These factors are not going away soon. None of these things are going to get resolved very soon.

Starting point is 00:26:07 This will linger for at least a year, maybe well into 2019. So what do you do with volatility and uncertainty? go to cash. People disparage cash. You go, well, it has no return. You know, it's a drag on your portfolio. You're missing out on stock market rallies, et cetera. A couple points on that. Number one, a cash allocation reduces the volatility of the rest of your portfolio. So if you got things moving 5, 6, 7 percent over here, you know, gold has been volatile, stocks have been volatile. If you have a slug of cash, it reduces the overall volatility. That's just what it does.

Starting point is 00:26:43 it's the opposite of leverage. It's the anti-leverage. You know, the same way the leverage doubles or triples your gains and losses, cash in a portfolio dampens the impact of the gains and losses you do have. So you sleep better at night. But the hidden value of cash is that it gives you enormous optionality. What if I said, hey, Preston SIG, what would you pay me for an out-the-money call option on every asset class in the world? You go, well, that sounds pretty valuable. Well, that's what cash is. You know, cash is an after-money call on every asset class because you could wait a up any day and take your cash and go buy something at the market. And so that right, which is equivalent to a call option, is extremely valuable. Because if you're in something else, you're in real estate, you're in private equity, et cetera, or you're in volatile stocks on a down day. It's not so easy to get out and pivot to another asset class, but when you have cash, it's very easy. So that's valuable in and up itself. 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

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Starting point is 00:30:45 material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I want to talk a little bit about the Facebook comment. I was talking to a friend about this. And my friend said to me, she said, you know, the real problem isn't all this stuff that you're really kind of seeing in the media. I think the real problem is that people can't go into their data and delete anything. Like they cannot clear their history. So for me, like if I wanted to log into my Facebook account and literally delete every single like, every single thing that I've done in the last five years on

Starting point is 00:31:30 Facebook, there's no mechanism for me to do that. And I think that's the problem that everybody's starting to have with these large fang stock companies. And I really think that this is where the politics are really going to get involved is it's going to be mandated that people are able to go in and literally clear their search history, if you will, of everything that they've done. And I think Facebook is the absolute worst at not allowing people to adjust the data that's collected on them. And I think if that becomes a mandate through law that these companies have to allow people to start deleting their history or that they have the optionality to delete their history and it's very clear as to what data is being collected on them. The value of those businesses drastically changes in my book. I think that they drastically change.

Starting point is 00:32:19 I'm curious to hear your thoughts. I agree completely. And by the way, Facebook has a lot more on you and me and Stig than we've ever given them. I rarely use Facebook. I'm very active on Twitter, as you know, I don't use Facebook. But I do have an account because, you know, I'm an author and fans want to, you know, find out where to get your book and all that stuff. So I put on, you know, name address, birthday, where I went on the usual kinds of four

Starting point is 00:32:42 or five things in a couple pictures. That's it. Well, they have far more than that because if you have an active timeline, yeah, they got a bunch. But even if you don't, they have huge files on you that they've collected from third parties. So a vendor comes to Facebook and says, I want to launch an advertising campaign, and I want to target the following. And let's say, you know, your name's on the list or my name's on the list. And Facebook says, well, we know a little bit about this guy.

Starting point is 00:33:07 What do you know? What do you have? Did you make a purchase or did she make a purchase or whatever? And then they add that, and then they launched the advertising campaign. But Facebook is collecting data on you from all sources, not just what you put in, and then aggregating it. And you can't delete that either. So I agree.

Starting point is 00:33:26 That's an easy change. The company will never do it. It can't be legislated. It's not the equivalent of an antitrust suit to break them into pieces. I can see how you could break up Amazon and some others, but I don't even know how you would break up Facebook. It's kind of, well, it's a one product monopoly. But yeah, they'll do something like that.

Starting point is 00:33:42 And at that point, the value of these algorithms and their reach goes way down. Interesting. So, Jim, let's have gears here. One of the things I thoroughly enjoy is to read your thoughts about Bitcoin. You have a very adamant opinion about Bitcoin. And we have a lot of listeners on here on the show, too, who are very skeptical about it. We also have a lot of listeners who are very positive about it. So I'm curious to hear not only your strongest argument against Bitcoin,

Starting point is 00:34:12 but because you're definitely not a follower or a fan, if you're like, why could you be wrong about Bitcoin? I think that's really what I'm asking for here. We want to hear you argue with yourself, Jim. Yeah. Okay, well, I say I have two law degrees, so I'm very well trained in doing that. I mean, this is how they brainwash you. This is what law school is all about.

Starting point is 00:34:32 They teach you to argue both sides of everything. So sit tight. I'll take both sides of the argument. I love it. Although I have a view. So the first thing you have to do when you discuss this is to separate Bitcoin, the coin from distributed ledger technology. Used to be called blockchain.

Starting point is 00:34:48 Now, I think the better word is DLT or distributed ledger technology. So a ledger is just a record. distributed means it's in a whole bunch of places, not in one central source. Technology speaks for itself and it's encrypted. Okay, so it's an encrypted distributed record of transactions. That's all the blockchain is. And that's a platform on which you can create coins, and Bitcoin is one of those coins. Bitcoin is like, imagine if you're paleoanthropologists and you're studying hominids,

Starting point is 00:35:17 and we all know that here we are, we're homo sapiens, we're the survivors of this branch of the family tree, so to speak. But there are many other hominids along the way, psoriphythicines and Neanderthals, pro-magnans, and others. So Neanderthals had a good run. They had culture. They had burial rights.

Starting point is 00:35:34 They had art. They had some kind of language. And they died out. They were robust to the ice age, but then the glaciers melted and it got warmer, and they didn't have the right body type, and they didn't survive. That's what Bitcoin is.

Starting point is 00:35:46 Bitcoin is, you know, someday we'll look back and there'll be some very valuable cryptocurrencies, cryptocurrencies and there'll be massive applications of permissioned and permissionless distribute ledger technologies. But there won't be any bitcoins. There'll be like beanie babies or, you know, pet rocks. By the way, you can still buy a pet rock. You guys are a little young. You might not remember the pet rock. It was a 70s fad. It was a rock that came in a box, a gift wrap box. It was called Pet Rock and you would buy it for, you know, kids or family members. It was a present and it was just a fad, right? But they got like really crazy. And then, uh,

Starting point is 00:36:20 But you can still buy them. You go to eBay and find a pet rock. They've actually outperform coal. I know an economist who did this time series, but Pet Rock is slightly upperformed coal. But it's a novelty and that's a joke and it has no use and I don't know why you would buy it. I'm sorry to interrupt you. But for a person who would look at HTTP, they would say that that was like the first protocol and they would look at that and say, you know, how could that thing stand the test of time?

Starting point is 00:36:43 Because the code for that is just terrible. But then you talk about network effects and that's why it's still around today and they've kind of built on top of it. What do you say about that for a person who would say, well, Bitcoin's a protocol, so maybe it is going to be around and there's just going to be layers that are built on top of it? Do you agree with that? No, it's too slow and too expensive. I mean, it's, first of all, the energy consumption and mining, I'm sure you guys are familiar with the fact that it grows exponentially. The way Nakamoto set these math problems up, they keep getting harder. They require more and more processing power.

Starting point is 00:37:14 You know, they're putting the coin mines in Iceland because they can open the windows. It's cold. They spend less on air conditioning. They're putting them in China because China's burning coal and killing the population, but the electricity is cheap. They're putting them out near Moses Lake and central Washington because you have the Bonneville Power Authority, the Columbia River hydroelectric, Grand Coulee Dam,

Starting point is 00:37:33 and that electricity is cheap. They are currently using more electricity per year than the country of Nigeria. They're on course to use more electricity than Japan, the third largest country in the world. Now, who thinks that the G20, the G7, the United Nations, and the people who control the world are going to allow a novelty coin to use more electricity than Japan. Who thinks that's ever going to happen? It's not going to happen.

Starting point is 00:37:57 So that's the first impediment. Number one, it costs me $50 to buy a $3 a cup of coffee using Bitcoin. My coffee is $53. I don't think that's very appealing. That's going to stand in the way of utilization of it as a currency. And then every, you know, the Bitcoin fans go, well, here comes lightning. Lightning is going to solve all the problems. Preston says it's a layer.

Starting point is 00:38:17 Well, it is a layer, but all it is, it says to a group of users, hey, hey, gang, in all the coffee shops in Seattle, we'll do all these transactions among ourselves on the lightning network. We'll net them out, buys and sells, pays and receives, and then we'll take the net of the net and we'll put that on the blockchain, and then that will use up less processing time, et cetera, than all the individual transactions. Well, that's fine. That can work technologically, but it's not Bitcoin anymore. What happened to the trustless system? What happened to the fact that you don't need permission to join? What happened to the fact that there's no centralization? All those things are gone.

Starting point is 00:38:54 When you're enlightening, you're not on the blockchain. It's like in the 1950s, when the telephones were still getting installed around the country, we had party lines. Five people would share one phone number, and you'd pick up the phone, and there'd be somebody on it. If you had an emergency, you'd have to ask them to hang up. I mean, this is kind of just like a party line for Bitcoin. So it's got issues of scalability, sustainability,

Starting point is 00:39:14 cost. Okay, HTTP has proved a lot more robust. You're absolutely right about that. But think of all the technologies that viewing movies from Betamax to VHS to CDs to DVDs to Blu-Rae to Netflix. And the only place you can find a Betamax machine today is in the Smithsonian. So this is why I make the point. Distribute leisure technology is here to stay. Some cryptocurrencies or tokens have. a bright future. I'm not a technophobe. I read the technical papers. I get it. I have a cryptocurrency newsletter. Anybody wants to subscribe. I have some recommendations for my readers. But I just look at Bitcoin and it doesn't pass the test. So you actually like some of the ICOs. It sounds like you would

Starting point is 00:40:01 not hesitate to invest in an ICO, but you're anti-Bitcoin. I am definitely anti-Bitcoin. I'm also, well, let's qualify ICOs. There are, I'll say, very few. Look, 90% of the ICOs are frauds. Just stick that as simple declaratory as we can. 99% of it. Okay, 99% of the fraud. So I don't want to go sign up or encourage any listeners to sign up for any ICOs, and I certainly don't. But there are some cryptocurrencies that have sponsorship, they put together by development teams. They have serious partners, meaning major banks. There's sawtooth from Intel. There's a hyperledger fabric. This is the Linux Foundation. It's now a repository for, you know, developments in distribute leisure technology where they have a developer community,

Starting point is 00:40:47 who is all open source, they're contributing all the software for free. There's a cryptocurrency called Stellar. Lumen is the name of the coin. Stellar is the sponsoring organization, tickers, XLM. This is actually being used in a pilot project with IBM to create a payment system in the southwestern Pacific and all those little tiny island nations, you know, Micronesia, Samoa and the Marianas. Well, think about what they have to do.

Starting point is 00:41:15 So you go to a Starbucks in, you know, New Caledonia or someplace. And that poor bank is, you know, you got a merchant acquirer or accepts your master card. Then they got to hand it over to the local bank. That bank has to send it to a correspondent bank in Sydney, Australia. The bank in Sydney, Australia has got to run it through the Visa Network. Then they got to get paid. Then they got to send it back to this little bank. You know, so think of all the steps, all the costs, et cetera.

Starting point is 00:41:40 What if you could replace that with a blockchain? They are doing this, by the way. This is a real pilot using the Lumen token. Well, IBM has built this. Lumen is the token of choice. It's working extremely well. And those value is moving around without going through this clunky central bank network and correspondent bank network that I just described. It's cheaper. That means, you know, people can either lower prices or offer more services. And it's also big on remittances. You know, a lot of countries around the world, the job opportunities are limited. So the population, they migrate. They go. to Europe or the United States or elsewhere, get jobs, but the mom and dad and the little sister

Starting point is 00:42:18 are still home, and so they send money back home. Remittances are very clunky. A lot of people have been using Western Union or other payment systems. So there are real applications for real cryptocurrencies out there, and they are being used, and those are the ones I would look for. But unless you can compete with Visa MasterCard, see, the one that pilot I just described with Lumen is cheaper than Visa MasterCard. But Bitcoin isn't even close. So to me, it's not a bias. I'm not a technophobe.

Starting point is 00:42:47 I'm just trying to apply real analytic metrics. Let's just say for a moment that the scaling issue is solved and that the energy issue is solved. And let's say we have a decentralized crypto coin. We could come up with whatever name we want. Do you see central banks and governments, the IMF, you name it government entity, allowing that to become a global dominant force? No, but what they will do is have their own.

Starting point is 00:43:17 This is happening by central banks and governments. They're not allowing independent teams to preempt their national currencies at all. In fact, you're seeing clampdowns all over the world. Every day, another country or another regulator, you know, yesterday it was Eric Schneiderman, the Attorney General of New York. You know, the day before that, it was one of the Latin American countries. So they're clamping down all over the world. are going to do is hijacked technology and create what they call permissioned systems.

Starting point is 00:43:46 China and Russia are already working on this. And they'll have, you know, called a Putin coin or or whatever you want to call it. But they will have Russia and China and their allies in Central Asia and elsewhere will have an encrypted distributed ledger using their own token so they can settle balance of payments between themselves and completely bypass Swift and the dollar payment system. So you won't be able to impose sanctions. You won't be able to, freeze accounts. You know, Iran will be able to pay North Korea for weapons technology without fear that the U.S. Treasury is going to get Deutsche Bank to intercept the payment, which is exactly what happens today. Now, they're also using gold. It's kind of interesting. They're using the oldest

Starting point is 00:44:27 form of money, which is gold and the newest form of money, which is cryptocurrencies, but they're using both. And it's all with a view. And by the way, the IMF is not far behind. They're working on a crypto So SDR, so you know what the SDR is, the special drawing, right? That's world money. So the Fed can print dollars, ECB can print yours, and IMF can print SDRs, and they have, and they will, particularly in the next global financial crisis. But between now and then, there's this distinction between the permissionless system and the permissioned system in terms of DLT, and the permissions system is one of the solutions

Starting point is 00:45:05 to the scalability, sustainability problems that you were talking about state, because what it says is that only certain people can join. In the case of the IMF, it would be the 189 member countries. You and I would not be able to have an SDR account down at the good old IMF, but, you know, Russia and Brazil and India and the bricks in the U.S. would have these accounts. So it's like a club. If you know who the members are, you don't have to worry about people showing up in jeans and flip flops. You know, everyone's got to wear a suit. Same thing. If you have a permission system and you can trust the people in it. You don't need the proof of work.

Starting point is 00:45:39 You don't need the proof of stake. You don't need all the clunky governance models to validate the blockchain because you have relatively few people and you know who they are, so they're not going to cheat on that system. But you have the benefits of distributed leisure technology, bypassing the dollar system, and very fast and expensive payments. So that's where they're heading.

Starting point is 00:45:59 And the next time they issue STRs, it'll be on this blockchain technology, but all with a view to make, making Swift and FedWR absolute. All right. So that's where we're going to wrap up our conversation for this first part interview with Jim Rickards. We really hope you guys tune in next week for our second part interview.

Starting point is 00:46:16 Thanks for joining us. Thanks for listening to TIP. To access the show notes, courses, or forums, go to theinvestorspodcast.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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We Study Billionaires - The Investor’s Podcast Network - TIP190: Jim Rickards (Part I) - Central Banking, Taxes, and Crypto - Business Podcast

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