 This is Mises weekends with your host Jeff Dice Ladies gentlemen welcome back once again to Mises weekends I'm very very pleased to be joined by a returning guest James Rickards Who's got a great new book out that I'm really going to recommend to you about three quarters the way done with it It is entitled the road to ruin the global elites secret plan for the next financial crisis And if you'll recall we had James on to discuss his book the new case for gold He also wrote a fantastic book called currency wars and he is or one or the main author one of the authors of the strategic Intelligence newsletter that a Gora puts out that we get here at the Mises Institute that really keeps us on our toes About the you know combining global world events and and monetary policy. So James Thanks a million for joining us. I'm gonna go out on a limb and say this is kind of a big picture book that you've written Well, it is Jeff that thank you, but it also has a lot of detail in other words I make some claims about the future of the international monetary system how the elites are see the crisis coming They're set. That's something they're sharing with each other. They're not sharing With everyday citizens, but it's all backed up. I talked about specific statutes specific regulations specific Plans announced in writing by the G20 It's not speculation all the elements to lock down the financial system freeze your money Shutdown ATMs. It's all been done before it's happening in real time now and all the elements are in place So so it does have some pretty bold claims But hopefully the reader will agree that it's all very well documented and you can see it coming Well, what I love about this book is that Austrians people who follow monetary policy generally we always ask is a what's the end game gosh How long can the Fed keep going on with with successive rounds of QE? How long can they keep interest rates this low? How long can the ECB prop up all these governments with the euro? So you've actually laid out a real scenario end game here for when the next crisis hits that that's an achievement I would say Well, thanks Jeff and what one of the points I make is that I don't people say G You're always doing a prediction or forecasting or prophecy, you know There's a little bit of that but I make the point that the future is here today In other words everything that's going to happen in the future is embedded in today's data If you understand how complex dynamic systems work and let me give you a specific example Let's say you have a row of dominoes a long row and you tip over the first domino And then the second one falls and the third one falls and all that You're about halfway through the row and you make a forecast you say I say the last domino is going to fall and then it falls Well, did you have a crystal ball? No, you really you could see the thing playing out You had the current data, which is that dominoes are falling. They're all in a row You know a little bit about physics and all you had to do with that mental model was look down the road a little bit You could see the last domino was going to fall So I make the point that Things that are going to happen in the future are already embedded in today's state of affairs In fact in some fairly obvious ways when I say obvious I should be clear that these are you know extremely technical jargon filled papers published by You know the International Monetary Fund in Washington the Bank for International settlements in Switzerland these various G20 Final communiqués the G20 or these 20 developed and emerging markets leaders who meet Different places around the world, but I actually I guess I'm enough of a geek myself that I read all these and go through them So I can see this coming, but it's not crystal ball stuff It's it's the plan is already there today and all you have to do is look at it and see how Your money is going to be frozen or confiscated in the next liquidity crisis Well, you talk about how it's too late for the Fed or other central banks to cure the depression with monetary policy In other words, you're you're projecting that the next time around if there's a big crash They won't attempt to reliquify the world. Can you elaborate? Sure to do this. I use three crises 1998 2008 and then 2018 that's my my forecast and that's just because 1998 2008 we're 10 years apart So I go out another 10 years and get to 2018 But I make the point that this new crisis could happen tomorrow So don't don't be complacent between now in 2018. I mean, that's an estimate, but it's actually something that could happen tomorrow Now what happened in 1998? That was when Russia defaulted There was a global liquidity crisis the big hedge fund long-term capital management, which owed over 1 Trillion dollars to the Wall Street banks was going to sob and by the way, I Had a front row seat on that when I was the lawyer for a long-term capital I negotiated that bell out I was in the room with the Federal Reserve and the Treasury and the big banks When everything happened, we were just hours away from shutting down every stock and bond exchange in the world That's not an exaggeration Alan Greenspan Head of the Fed at the time Bob Rubin secretary the Treasury both testified to that effect and again I was involved with that. So I know that that was the case now It didn't happen that is the four billion dollar bailout money changed hands the balance sheet was propped up the Fed cut rates Life went on and people grew complacent about it But we were just hours away from shutting down of exchange in the world come forward to 2008 same thing in Mid-September we were days away days away from the sequential collapse of every bank in the world Bear Stearns had failed in March 2008 then Fannie Mae and Freddie Mac the big mortgage agencies failed in June 2008 Then Lehman Brothers failed in September 2008 Morgan Stanley was a couple days away Then it would have been Goldman then Citibank then Bank of America and then finally JP Morgan They they all would have fallen exactly like the Domino's I just described But that didn't happen because the Fed intervened the Fed You know took a print of four trillion dollars of new money did ten trillion dollars of swaps with the European Central Bank Actually, that was not known at the time, but the European Central Bank gave the Fed trillions of euros In exchange for dollars which they couldn't print so they could use the dollars to bail out the European banks and the Fed had Trillions of euros on this balance sheet that that came out a few years later As a result of Congressional hearings in Dodd-Frank, but it was not known at the time the Fed Guaranteed every money market fund in America. They guaranteed every bank deposit in America They went to extraordinary lengths to reliquify the system, but here's the problem Jeff in 1998 Wall Street bailed out a hedge fund in 2008 the central banks bailed out Wall Street In 2018 if not sooner who's going to bail out the central banks in other words the central banks have not normalized their operations They you know the Fed I'll use the Federal Reserve as an example, but they're not the only one They print it almost four trillion dollars to bail out the banks in the last crisis now If they had somehow managed to get their balance sheet back down to about 800 billion where they started and maybe raised interest rates Up to say normal rate of two two and a half percent I'd be the first one to congratulate them. I'd say nice job guys You know you save the world and you got back to normal, but that didn't happen Their balance sheet is still at four trillion dollars interest rates are still close to zero They have no dry powder They have no capacity to deal with the next crisis in the way they dealt with the last one The only source of liquidity in the world the only clean balance sheet left in the world is the international monetary fund So the next time there's a crisis which is as I say could be any day It's definitely imminent The only source of liquidity is going to be the IMF world money, which they have a funny name for it They call it the special drawing right or SDR, but just think of it as world money They don't want to call it world money because that would scare people, but that's what it is They will print trillions of SDRs Notice I didn't say trillions of dollars trillions of SDRs That's that's where the money will come from to relic reliquify the system next time But that will mean the end of the dollar as the benchmark global reserve currency Now just to be clear it won't mean the literal end of the dollar will still have dollars But it'll be a local currency like a Mexican pesos or Turkish lira We'll have them for walking around money in the United States, but it won't be the benchmark for the world That will be the SDR and that will be obviously major transformation highly inflationary But one other problem that that process will take a several months several months. This crisis will hit No one will see it coming because they know I see it coming but the the central bankers and the the academics and the policy makers don't see it coming because they're using the wrong models and Misapprehend the statistical properties of risk so they won't see it coming. It'll hit There'll be a panic it will take the IMF at least a few months if not longer to issue these SDRs They can't do it on demand. So during that several month period Since they're not gonna have the money to give you your money back. They're going to lock down the system They're going to the money market funds will suspend redemptions banks will be closed ATMs will be reprogrammed maybe to give you say 300 dollars a day for gas and groceries Stock exchanges will be closed. Of course, all this will be said to be temporary But maybe it will be temporary in the sense of three or four months But three or four months is a long time not to be able to get your money not be able to get more money than you need Just to you know put guests in your car and buy food for your family that day And this is all described in the book and again just to be clear. I don't make it up I don't make claims like this without backing it up all the statutes all the legislation all the executive orders Are all in place very few Americans know that today right now as we speak Jeff The United States is operating under a state of emergency It was declared by President Bush after 9-eleven in September 2001 But it has to be renewed annually by the president Well President Bush and President Obama have renewed that state of emergency every year for the last 16 years We're in a state of emergency today, which means we are one phone call away from martial law again These things are not well understood, but they're all true One thing you talk about is sometimes these big sweeping changes are not made out in public at some grand event Like Bretton Woods. Sometimes they're made in the in the small technical documents that most people don't know exist Well, that's exactly right. I like to say that the the IMF and the G20 are transparently non-transparent and What I mean by that is they actually do publish papers. They all have websites They publish Communicase and technical papers and you know research papers and so forth But boy, you have to be an expert to find them You might have to go 10 layers deep on some of these websites And even if you found the paper it would probably have some technical name that unless you were technically trained You wouldn't necessarily understand what they were talking about I don't expect every day Americans to you know, understand the jargon used by international monetary elites. That's what I do I actually do have that training I got a graduate's green economics from the School of Advanced International Studies, which is the main Academic feeder school for the IMF. Tim Geithner went there. That's where he got his training. So so I actually have that background And for I'll give you a very concrete example Brisbane, Australia November 2014 G20 leaders summit G20 G is for group 20 countries So that the group of 20 countries, that's what the G20 is includes all the big ones, you know, US Germany, Italy, UK, France, Canada and so forth, but also the big emerging markets economies You know the bricks China Russia Brazil India and others So that's where the G20 is they had a final communique. It's about 15 18 pages but attached to it were Dozens of technical pavers each of which would be 30 or 40 pages long sometimes longer on their own I went into those and read them and I found the bail in plan It was all agreed by the leaders. So President Obama and Chancellor Merkel of Germany and at the time David Cameron Prime Minister of the UK and and all the others agreed on this bail in plan Now, what's the difference between a bail out which we've all heard about and a bail in In a bail out, that's when the banks in distress and it's too big to fail So they use taxpayer money to prop up the bank and it's a ripoff for taxpayers because you know bondholders don't take a loss Stockholders don't take a loss. Maybe the price goes down, but it can bounce back again. Nobody gets fired Nobody goes to jail They all keep their funny baloney jobs and their multi-million dollar bonuses and the taxpayers, you know I bet you get your money back, but you know, you don't get the profits and all the recovery you take equity risk for measly, you know, zero income return If you're that lucky, so it's a ripoff of the taxpayers plus zero interest rates steal from savers That's another way to enrich the bankers. So that's what a bail out is But that those were so politically unpopular that the G20 leaders agree that they weren't going to use bailouts anymore They're going to use bail ins. What that means is that The losses fall on the stockholders themselves You you might find that your stock is wiped out if you're a depositor with money in excess of the insured amount You might find that that money gets turned into involuntarily gets turned into equity in a bad bank That's got some claim on the recovery assets bondholders will take a haircut But this still comes back to affect everyday citizens because if you're in a pension fund that owns those bonds Or 401k that owns that stock or you're a small and medium-sized enterprise and your deposit exceeds the insured amount And all of a sudden you find you hold stock and you know an insolvent bad bank So to speak not to mention the financial panic that goes along with it. This is the the bail-in plan But it would involve another concrete example would be money market funds You know, you talk to people they say oh, I've got my money in a money market fund And I can call my broker today sell my units the money will be in my bank bank account tomorrow morning. What's the problem? Well, that's not money That's a share in a mutual fund money market funds are set up like mutual funds. They're called money market funds But it's not money. It's a unit. Well for the first time those funds are allowed to suspend redemptions Which means they don't have to give you your money back. This is very recent by the way There's final rule that's been kicking around the SEC for a couple years But the final rule was just enacted and it is the law today But this was not true in 2008 2008 they had to give you your money and that was the problem everyone was calling up saying giving my money back and These funds are melting down and the people that they invested in were melting down because they couldn't roll over their loans Etc. So people are going to call their money market funds in the next panic and find that they can't get their money They're going to call their banks and find that their bank accounts have been frozen This is all part of the bail-in plan it but the point I make Jeff It's all there meaning the papers are there the studies are there that the decisions have been made the laws are in place They're just waiting for the panic and all the stuff's going to get locked down So my advice to savers is get some of your money out of the digital system you know before you can slaughter cattle you have to herd them into a pen and savers are being herded into a digital bank pen so they can be slaughtered by Negative interest rates confiscation freezes hacking and a lot of other ways to steal your money So it's good to have something like physical gold for some portion of your portfolio because it's it's non-digital in the south side of the system Well this business about redemptions and the rule change is so important to our listeners You know don't think just because you've got a vanguard account that that's accessible to you James one of the points that are threads that runs throughout this book is complexity and interconnectedness I just wonder if you think this this more catastrophic type default or collapse is really baked into a global economy But almost by definition that globalism Makes us all more vulnerable to a catastrophic collapse And what definitely doesn't I could put that on a scientific basis again It's not speculation the first question you have to ask yourself What is a complex system? We're put slightly differently our global capital markets a complex system If they're not then you can you know put your mind to these if they are Boy, do we have a lot of vulnerability and instability? So what's the test of complexity? Well, there's a four-part test and and I make the point that if you went to You know you're enrolled in the physics program PhD level physics program at the University of Michigan From a professor or any good school from a professor who knew nothing about finance was just a physicist and complexity Theorist this is what they would teach you they would say that complex systems are characterized by first of all diversity of What they call the agents or the actors in the system and in a capital markets It would happen to be individuals, you know in a sandpile it could be individual grains of sand and an avalanche It could be in the individual flakes of snow, but whatever it is. Yeah, these individual actors So the questions are they diverse because if they're all the same it's a pretty boring system But if they're diverse they have greater capacity to Interact in unexpected ways. Well, of course, they're diverse look at capital markets on any day You have bulls and bears fear and greed long and short leverage and unleverage Some people are you know something the market goes down some people are saying buy the dips Some people are saying sell more get me out of here. So you pass the diversity test The second one the second test is interconnectedness, you know What could just do to have diverse points of view if they're not connected through Through some some channel, so it's the it's the connection part of it. Well, you sure between you know Bloomberg and Reuters and Dow Jones and iChat and email and electronic exchanges and glowbacks. We're probably, you know CNBC and Bloomberg were probably over connected. So we certainly passed the connectedness test. We're highly highly connected The third one is interaction. So okay, you have diverse actors. They're connected Are they interacting? Well, of course they are we do trillions of dollars equivalent of stocks bonds currencies commodities derivatives Every single day. So there's massive massive interaction And the fourth element is adaptive behavior. In other words, does does my behavior affect your behavior and vice versa? you know simple way to explain that is let's say you're in your apartment and You don't know what the weather's like outside and you look outside and everyone's walking down the street With a big down jacket and a pull-over hat and big mittens. Well, you know, it's cold You're probably not going to go outside in a t-shirt. That's an example of adaptive behavior based on your interaction with other people Well, again, um, you know, if you're losing money in a trade, you better get out of the trader You're going to get wiped out of course There's hurting and people follow other people, you know, people wait to see what Warren Buffett's Quarterly position report is because they want to buy the same stocks he bought etc So there's lots of adaptive behavior. So we're four for four. We have diverse Participants, we are connected. We interact massively and we adapt our behavior If you have those four things, you have a complex system. Now, what does that mean when you have a complex system? Well, one of the things it means is that one of the characteristics of complexity is what's called Emergence or an emerging property. This means that something comes out of nowhere I mean, so it might be popularly known as the black swan. I don't really like the phrase the black swan It was a good book, by the way Biden seemed to let but I don't really like the phrase because it's kind of It's a metaphor that doesn't that's not really scientific and it's sort of content-free But when you say emergent property, you know, just to understand it as something that Comes out of a complex system that cannot be inferred from perfect knowledge of all the uh, the parts of the system This is what uh, high equities said Peter Van Hayek would have said the same thing in fact did say the same thing This is why he was against central planning because he said if you had perfect information You know, you still couldn't get it right because there's too much Uh, you know human nature is such that we're always going to be surprised and oh by the way We don't have perfect information not even close So he said central planning would always fail because you could never have enough information or enough expertise to do it Right. Well, that's a an earlier version that complexity science is more recent But that's an earlier version of the critique that complexity theory offers But the final thing just to to wrap up on this point Jeff and cause for concern for investors is that Catastrophic risk in complex systems, they do collapse periodically They do implode they fall in on themselves And the worst thing that can happen is an exponential function of scale What that means is that when you double the size of the system You don't double the risk you probably increase the risk by a factor of 10 And if you quadruple the size of the system, you probably increase the risk by a factor of 100 in other words It's an exponential relationship now look at the biggest banks in 2008 the banks that were too big to fail and 2008 how many times do we hear the expression too big to fail? Those five biggest banks in the united states today are bigger than they were in 2008 They have a larger percentage of all the banking assets in the u.s Their derivatives books are much bigger They're more interconnected and this is all interconnected globally So everything that was too big to fail in 2008 is much much bigger today And if you take my point that The catastrophic risk increases exponentially that means if we've doubled or tripled the system The risk is way up beyond anything that we can imagine beyond anything we've seen before And I already made the point that the central banks are tapped out their impotent in terms of their ability to stop it So we're going to have a crisis worse than any other and they're going to be powerless to stop it And that's why they're going to lock down the system and freeze your money Well when you talk about this The epilogue of your book a lot of people who would accept the the idea of american in decline Don't necessarily understand that that decline could be sudden it could be catastrophic a sudden reverse We imagine that it's going to be a gradual thing over a century or something like that But as you point out it might not be Right and the the metaphor there and it's a metaphor, but uh, it's also the science And the mathematics and the uh, the systems dynamics are the same Would be uh an avalanche So you have a mountain, uh, you have a little bit of an overhang It's snowing it's snowing it's snowing the snow is building up in this overhang Any expert can take one look at it and say it's unstable. It's going to pull loose and Cause an avalanche and maybe kill some skiers or bury the village below But you don't know exactly when and you know, so it's snowing it's snowing and then one snowflake Disturbs a few other snowflakes and that starts a little shoot and that gathers momentum and starts a bigger slide And then it creates instability and the whole thing rips loose and you have this avalanche Who do you blame? Do you blame the snowflake or do you blame the instability of the system as a whole? And I make the point that you shouldn't really blame the snowflake because if it wasn't one snowflake It would have been another could have been the day before could have been a day later You never know exactly when it's when it's going to happen But what you do know with certainty is that it will happen and it will be again, you can estimate the scale of it So this is the point I make about financial instability I can look right at the system. I can see the scale of it. I can understand the complex dynamics I can understand the instability of it. I don't necessarily know Which snowflake will cause the avalanche to occur But I can see it coming and I do know that when it happens it will happen very very quickly There won't be time to prepare then the time to prepare is now Well james, we just have time for one last quick question I'm wondering if if you have any thoughts about what if anything Trump's win might mean and and whether people who voted for him Maybe have some uneasy vague sense of some of the things you talk about in their book that they couldn't necessarily put into words Well, I think I think I'll take the second point first. I think that's right. I think part of trump's success is Maybe an intuition. Maybe everyday citizens. Look, I mean candidly I spent a lot of time Studying physics and applied mathematics and complexity theory and all the things we've discussed in this In this interview and I I don't expect in everyday citizens to be expert on all that Why should they be they all have lies? But I think they have an intuition that something's not right There's something wrong about the way the Federal Reserve has handled this the way other central banks have papered over the crisis They they the fact the lack of accountability the fact that no banks failed No one was held accountable. So I think they they sense that something's wrong, even if they can't Exactly put it into words And and that's part of trump's success not the whole story, but it's part of it. But the problem is Nothing is really being done about it. I you know, I can only imagine how Busy president elect trump is right now, but I'm sure this is what we're talking about It's probably 30th on this list, you know, he's got to make cabinet appointments and sort out his tax policy and his Fiscal policy and what are they going to do about obama care? They get a pretty full agenda Uh, I doubt anyone's talking about this this kind of, you know, abstract theoretical instability Even though it's maybe theoretical, but it's very very real and the other point I make is that An avalanche if an avalanche buries a skier It doesn't care if the skier is a republican or a democrat In other words, it's not about ideology or partisanship. These are complex dynamic systems. They do what they do earthquakes kill indiscriminately tsunamis kill indiscriminately And financial catastrophes will wipe out your savings and your wealth indiscriminately It doesn't care who's president or what parties in power So, uh, I'm not saying there's nothing you can do about it. There are some policies You could implement tomorrow that would reduce the risk significantly including a repeal of glass stigl banning most derivatives Breaking out the big banks So there are some things you could do to make the system safer, but I just don't see them on the agenda and Even if they're discussed, I doubt any of that will happen in time So what I would expect is that this crisis will occur exactly the way I'm describing and uh If you if you can't prevent it, uh, if you can't save the world At least you can save some of your net worth with some hard assets I recommend gold silver fine art has some cash handy and uh and just be prepared Well james rickards, thanks so much for your time His new book is entitled the road to ruin the global elite secret plan for the next financial crisis Check it out if you're interested and ladies and gentlemen. Have a great weekend Subscribe to mises weekends via itunes you stitcher and soundcloud or listen on mises.org and youtube