 Our guest this weekend is Jim Rickards, the Chief Global Strategist at West Shore Funds and also the author of his Strategic Intelligence Newsletter. Jim is a very fascinating guy and an expert in both geopolitics and global capital. So we'll be talking currency wars. We discuss how much longer and whether the Fed can continue to prop up equity and bond markets, what sort of global debt and currency shocks we might be in store for in the coming 18 months, whether the IMF will be able to capitalize on those shocks and make its case to create some sort of monster global currency based on special drawing rights and who wins and who loses around the world when the game of monetary musical chairs comes to an end. So if you're interested in the fate of the US dollar, the Euro and what's happening in global currency markets, stay tuned for a great interview with Jim Rickards. Jim Rickards, welcome to Mises Weekend. Thanks so much for joining us for the first time. Thank you, Jeff. Great to be with you. Well, first and foremost, Jim, it appears that your long ago prediction that the Fed would continue suppressing rates this fall is correct. And now we even have Christine Lagarde at the IMF in effect almost warning or lecturing yelling that she should not raise rates in such a soft environment. That's exactly right, Jeff. You know, it's obviously a delegate relationship when the managing director of the IMF is trying to communicate publicly with the chairwoman of the Federal Reserve. They can't exactly come out and call each other names, but there's a new IMF report that just came out. This is in preparation for the meeting of the G20 finance ministers and heads of central banks at a very high level meeting. This is in preparation for the G20 summit meeting later this year in Turkey where actually the heads of state, President Xi and President Obama and others will be there. But the G20 is a powerful group, but they don't have a full-time bureaucracy or what's called a secretariat. So they outsource that to the IMF. The IMF kind of does all the research and they just came out with a new report today and they categorically said that monetary conditions need to remain accommodative, meaning don't tighten. But this is not the first warning. There have been a whole series of warnings from the IMF to the Fed. Other prominent folks, people have said this also, Larry Summers, a controversial figure, but I think everyone can see the fact that he's got a big brain. And so these warnings are coming from all over the place and Yellen, she has to be aware of them. We'll see what she does. But I said in late 2014 that the Fed would not raise rates in all of 2015 and of course at the time Wall Street was saying March, then they said June, then they said September. So my expectation is that September will come and go and they'll start talking about December. They just seem to kind of keep moving the goalposts three months. But when I said that, it wasn't a wild guess. I actually take the Fed at the word. The Fed says it was data dependent. The data is weak. It's getting weaker actually. And so it's a pretty easy call to say they can't raise rates. The question is how come I could figure that out and some others could figure that out, but the Fed couldn't? How come they couldn't figure out their own rate path? And the answer is that they base their expectations and all their tough talk about rates was based on the forecast and the forecast, they have the worst forecasting record of any institution I can think of. They've been wrong by orders of magnitude six years in a row. So when I see the Fed has a kind of rosy forecast, I immediately assume the opposite is going to be true. But if you're basing it on hard data and good forecasting, it's easy to see they can't raise rates. If you're basing it on the Fed's forecast, you can see where the rate talk comes from, but they have a very flawed model. But do you ever get the sense that Janet Yellen is flailing? I mean, she's talked about the limits to monetary policy, but as you pointed out, you could always do more QE. You could always venture into negative interest rates, right? I mean, what's her next play? Well, that's a really good question, Jeff. The toolkit is not empty. Everyone says they're at the zero bound. They can't cut. So there's nothing more they can do. That's not true. For better or worse, I think a lot of these things don't work, by the way, but who cares what I think? The Fed thinks they work, and that's the important thing. But they've got five tools in the toolkit. One is more quantitative easing, so called QE-4. Another one is negative interest rates, which has been used in Europe, but has not been used in the US, but that's possible. The third one is they can rejoin the currency wars, which means cheap in the dollar. The dollar is not at all time high, but close to it. And at sort of a 10-year high, they can cheap in the dollar again. Another thing they could do is helicopter money. That's not well understood. But what helicopter money means, you actually have to work with the Congress, and the Congress would create a larger deficit. And then the Treasury would issue notes to cover the deficit. And then with the wink and the nod, the Fed would say, well, to the Treasury, we'll buy the notes. So it's a formal quantitative easing in the sense that the Fed is going to print more money to buy the notes. But they do it in conjunction or coordination with a larger deficit. So what that does, it creates money, but instead of giving it to the banks, which is normal QE, they give it right to the people, putting people's pockets in the form of tax cuts. So that's the difference between helicopter money and QE. Helicopter money, you just intermediate the banks and give it right to the people. And the fifth thing they could do is go back to forward guidance, call it job owning or whatever. They ended forward guidance last winter when they removed the word patient from the statement. Patient was the, no, we will be patient about raising rates. I think that was the phrase. But patient was the latest in the long line of words and phrases. I think they probably worn out their thesaurus at the Fed coming up of these. But they say, we're not going to raise rates for an extended period. And they say, we're not going to raise rates for a considerable period. Even earlier, I'm back to 2010, they stuck in some dates. They said, in 2010, they said, we're not going to raise rates until 2013. Well, you know, 2013 came and when then they start talking about 2014, then they gave that up. So they ended forward guides. They could go back to that. They could say, you know, we're going to be very patient this time about raising rates. But here's the thing, if they did any of those things, that would be a form of ease relative to expectations because the market is expecting tightening. The timing is up in the air, but the market still expects tightening. But I don't think that's what's going to happen. I don't think they'll raise rates. We talked about that. But I don't think they'll go to any of these easing techniques either. I think what they'll do is not raise rates, but continue to talk tough, continue to give markets reason to expect that they will raise rates, you know, perhaps at the next meeting, December or early in 2016 at this point. The question is, I think this is kind of what you were getting at, is what about your credibility? How many times, you know, this is like the boy with credit? Well, how many times can you say rate height, rate height before you lose credibility? But the Fed's problem is they're going to have to choose between credibility and catastrophe. If they don't raise rates, they're going to slowly lose credibility. But if they do raise rates in a weak environment, they'll cause an emerging markets meltdown. So it's sort of, this is what happens when you manipulate every market in the world for seven years, you paint yourself into a corner and you can't escape the room. But that's just it, right? The rest of the world is very much affected by this. I mean, when you talk and write about currency wars, do you think people really understand that it is a form of political war? Do investors sort of think it's actually some kind of benevolent form of economic competition? Well, it's definitely a form of economic competition, but it's not benevolent. And of course, I've said that all along, going back to my first book, currency wars, because part of what we're discussing comes out of my second book, The Death of Money, that came out in 2014. But go all the way back to my first book, Currency Wars, which came out in 2011. I made the point that the conventional wisdom is that you cut your currency and this will cheapen your currency. This will make your exports more attractive. You'll get more export orders. That'll create more jobs, give your economy stimulus, et cetera, et cetera. And I made the point then that that's not what happens, that you can cheapen your currency, there are ways of doing that. But you don't get more exports while you get as inflation. And I've made the point all along, and I think this is consistent with Austrian economics, is that the way you generate exports is to value added technology, education, innovation. I mean, I buy German cars. I don't buy German cars because they're a little bit cheaper this week. I buy them because they're great cars. We buy French wine and we take an Italian vacation, whatever it may be. But we do that because of the perceived value in whatever distance being offered rather than the fact that it's 10% cheaper this week. But what does happen is you import inflation because, remember, in a two-way trading system, you're not just an exporter, you're also an importer. So if you cheapen your currency, the price of your imports goes up and that inflation tends to feed into the supply chain and make prices in general go up. And that's actually why they do it. I mean, governments always say they're cheapening the currency to encourage the exports, but they actually know better. What they're doing is trying to get inflation because the world is facing a deflationary meltdown, a deflationary liquidity trap, and everyone's trying to get out of it. The problem with all this, Jeff, is that one country can benefit in the short run. I emphasize short run. It's not a long-run solution at all. It can give you a little boost in the short run, but it comes at the expense of your trading partner. So one country might be a little better off for a short period of time, but the world is worse off, and that's what we're seeing. This is very much a replay of the 1930s. A little bit of a slow-motion replay, not quite as severe, but it could be more prolonged. I mean, look at Japan. They've been in depression for 25 years. I talk about a 25-year U.S. depression. People kind of laugh out loud, but I say, look, it started in 2007. We're already eight years into it. We only have 17 to go, but I don't see any way out in absent structural reforms. Well, you talk about structural reforms. I mean, the world is awash in debt. We're not just talking about the sovereign debt of individual governments, but all the bad debt owned by commercial banks, for instance, all the household debt that may well never be repaid. Do you almost feel like we're right for some sort of global reset or monetary realignment? Well, that's going to be an assessment. The short answer is yes, I do see that. And by the way, that is the condition in which currency wars arise. And again, I said that in my first book, the world is not always in a currency war, but when we are, they can last for a long time. They can go on for 10, 15, 20 years. The currency war and now started in 2010. I'm not at the least bit surprised that here we are in 2015 and it's still going on. And people say, oh gee, how did you know five years ago that we'd still be in a currency war? And the answer is, because that's the way they roll. They do last for a very long period of time. And the reason for that is they don't have a logical conclusion. I cheapen my currency to get the edge on you and then you cheapen your currency. We'll just multiply that by 168 members of the IMF and you can see that that really has no end. The only way currency wars end, there are two ways. One is systemic reform, which I think is maybe what you mean by a global reset where you have a Bretton Woods style conference for at least something like the Plaza agreement in 1985 where the leaders of the major trading and financial powers get together and they just say, look, this is ridiculous. We need to reshuffle the deck and come up with a new deal. So that's one way out. The other way out is systemic collapse where the system just falls apart as it did on the verge of World War I, World War II. And again, in 1971 when Nixon suspended the convertibility of the dollar into gold. So you either get systemic reform or systemic collapse. And actually, if you have systemic collapse that would force systemic reform. So one way or the other, you get to a global reset. Interestingly, I've had private discussions in the last couple of months with Ben Bernanke, of course, former chairman of the Federal Reserve and John Lipsky. John was the former head of the IMF. So, you know, you've got two individuals, both PhD economists who've headed the two most powerful financial institutions in the world. 10,000 miles apart, I spoke to Bernanke in Korea and I spoke to John in Washington. And they both used the same word to describe the international monetary system. They both said this is incoherent. I thought it was really interesting that they chose the same word. I'm not suggesting that they cooked it up for my benefit. It just shows that the people who are most knowledgeable about the system are looking at it and know that it doesn't work. So we're heading for one of these two outcomes. My concern is that because of denial, delay, and sort of pulling rabbits out of a hat, such as quantitative easing, they're going to delay the reform to the point where we actually have the collapse. And then again, we'll see. And that's really what I'm trying to do for readers and subscribers to my newsletter and people on interviews like this is just say, let's put ourselves into that scenario and see how it plays out and then come backwards and say, what would you be doing today with your portfolio to prepare for that kind of monetary reset? That reset might come on the heels of a euro or a dollar end game, right? And you've talked quite a bit about the role that IMS special drawing rights might play in a new global system. And years ago, Pap, you can and talked about how he saw the future of currency as being one of two things. Either some sort of collapse whereby nations retreated to their own nationalist impulses and interests with their own currencies, like a resurrection of European currencies, for instance, or that there would be some sort of monster global currency. And I'd be interested in your thoughts on whether the IMF special drawing rights are going to be that monster global currency in that scenario. Well, first I agree with Buchanan. I would add one element. So Buchanan said, either we'll sort of, the world will retreat and go autarkic and come up with local currencies instead or go to a monster global currency. There's the third path I would put in the mix, which would be a gold standard of some kind. And when I say gold standard, I know Austrian economists have a very definitive view of what that means, no fractional reserve and one-to-one ratio and gold to back dollars, et cetera. And that's one way to do it. It's not the only way to do it. There are other ways to structure the gold standard. Some more rigorous than others. Some not much more than using gold as a reference point. And some spokesmen have talked about that. But then we take the whole spectrum from fully backed by gold, no fractional reserve at the one hand to just using it as a frame of reference on the other. But that's a spectrum of various types of gold standard. And I would put that in the mix as well. There's no doubt that global monetary elites, and by the way, when I used the phrase elites, I'm not talking about some black helicopter conspiracy. I mean, we know who these people are. I mean, it's Christine Lagar and Janet Yellen and Marty Feldstein and corroded the Bank of Japan and the heads of central banks and finance ministers and leading academics and powerful financiers, people like Jamie Diamond and the people who show up at Davos. In other words, we know who they are. It's not a mystery. What they want is the SDR. They want a global currency. I mean, the great Mandel, Robert Mandel, Nobel Prize winner said, oh, I think 50 years ago, the optimal currency zone is the world. He said, as long as you have more than one currency in play, there's going to be some transaction costs or some inefficiency or some arbitrage that you're going to have to deal with. So the world's moving slowly in that direction. Now, and that would be the SDR. That would be the special drawing, right? That's this world money issued by the IMF reacting in its capacity. And in fact, it's de facto central bank of the world. Gold is out there. Maybe a gold backed SDR is not such a bad idea. No, it's take Mandel's idea of an optimal currency zone with the whole world using SDRs, but combine it with an old Austrian idea of a gold standard. The problem, that could work theoretically. The problem with that is the accountability of the IMF. The IMF doesn't answer to anybody. They're self-appointed, self-perpetuating. They have articles of agreement and I know it came out of the Bretton Woods agreements, et cetera. So there is some governance there, but Kana is reporting to the G20 these days and they're unelected, non-democratic. You've got everything from kings and dictators and communists side by side with functioning democracies, et cetera. So I'm a little troubled by the lack of accountability. But the third thing, let's go to Buchanan's other point and I agree and I talked about this in my book, Currency Wars, that the system would actually break up into little blocks. We're seeing that also. Prime Minister of Russia, Vladimir Putin, announced the other day that he's advancing the ruble as a regional reserve currency. Now the ruble is not ready to perform a role as a global reserve currency. That's not even close. But in their periphery, basically the former Soviet Union or most of it are the former CIS Commonwealth of Independent States. Belarus, Kassiristan, Russia itself and some of the other autonomous republics around it, that their trade and interactions would be denominating rubles. It basically is a way of getting rid of the dollar and of course we see the Chinese Yuan expanding as well. So I think all three horses are in the race and I don't wanna predict a winner. What I'm trying to do is keep an eye on the horses, see who's ahead and hopefully help investors structure their portfolios in such a way that no matter what happens, they come out with their wealth preserved. Well, Jim, we only have time for one more short question. It seems to me that in any sort of reset scenario, there are winners and losers, right? The US has been thought of as a winner for out of the Bretton Woods Agreement and certainly the Petrodollar arrangement has benefited the US tremendously. Are winners and losers going to be identifiable if this IMF-led process begins and doesn't that raise the specter of war or tension? Well, I think winners and losers are identifiable and again, that's what I spend most of my time doing. It goes back to your earlier question, Jeff, about the debt. Depression and currency wars, what are the preconditions for that? Well, the preconditions are too much debt, not enough growth. Simple as that, too much debt, not enough growth. When was the last time the world saw this? Well, after World War I in 1919, 1920, Germany owed owner's reparations to England and France. England and France owed enormous war debts to the United States. Nobody was forgiving any of the debt. Everyone was insisting on payment of full. There wasn't enough to go around. That led to an outbreak of currency wars, that led to a great depression and then in turn led to World War II. And then trade wars thrown on top of that. So there was a very deleterious and destructive path that came out of that. We saw the same thing in the late 1960s, early 1970s. England had still had too much debt, had not paid off its World War II debt and the US was going into debt to finance the combination of the Great Society and the Vietnam War, the so-called guns and butter policy of President Johnson. So there, the reset wasn't World War III, it wasn't deflation and depression. There, the reset was inflation, enormous inflation. From 1977 to 1981, the United States had 50% inflation, 5-0 in a five-year period. I know Ron Paul and Austrians like to point to the tenure of the Federal Reserve and let's say, since the creation of the Federal Reserve in 1913, the dollars lost 95% of its purchasing power, which is true, but no matter what you have left, you can always lose 95% of what you have left. And that's what happened from 77 to 81. There was a 50% evaluation in a very short period of time. And that solved the problem. But it caused enormous disruption and enormous losers. So who were the winners and losers in these various scenarios? Well, in inflation, and there's no question that central banks, the IMF, the global leads, the use of SDRs, all of that is designed to cause inflation. And by the way, it's all failing so far. They haven't really played the SDR cards very aggressively, but they could, and I do expect that in the future. But I call this Mick Jagger economics. The Rolling Stones had a song called, You Can't Always Get What You Want. The Fed wants inflation, but they can't get it. They've been failing to get it for eight years in a row. But if the inflation comes, the losers are savers. Anyone with a fixed income, if you have an insurance policy, an annuity, a retirement, a savings account. Anything where you depend on the amount of dollars at nominal dollars, you'll be one of the losers in that. Deflation up to a point, the debtors lose because the real value of debt goes up. But you have to play that through. So you say, okay, well, we have deflation. The value of debt goes up. My debt becomes more and more onerous. And that gets back to your point about dollar-denominated debt issued by companies in emerging markets. And the BIS estimates there's $9 trillion of dollars-denominated debt issued by private sector emerging markets borrowers. These are not sovereigns where you can go to the IMF and get a loan. These are corporations, state loan enterprises. This is from, you name it, Brazil, Turkey, Indonesia, Malaysia, Russia, China. China is a big player in this. But the problem is with more and more deflation is the debt gets more and more onerous. What do they do? They default. So it kind of comes back to the creditors. The creditors are feeling that the value of the debt's going up for a while, which feels good, until the guy actually doesn't pay you. And then you destroy the banking system. And then you get to hyper deflation. But since central banks can't tolerate that, you come back to inflation. So I think all roads lead to inflation. But what's not clear is, are we going to go straight to inflation? Or are we going to have a more severe deflationary episode, which will then be resolved by going to inflation by increasing the price of gold, which of course is exactly what happened in 1933. So my advice for investors is be prepared for both and use what I call the barbell strategy. So have your inflation hedges, which would include gold, land, perhaps some fine art, and have your deflation hedges, which would include, say, 10-year treasury notes, cash, and other very liquid assets. And then have a big slug of cash in the middle. People are surprised to hear me say that. They say, hey, Jim, you're the guy talking about the death of money. Why would you have cash? Well, the answer is I might not have it forever. But you might have it in the short run for three reasons. One, it's a good deflation hedge. Value of cash goes up in deflation. Number two, it reduces the volatility of the rest of your portfolio, which can help you sleep better at night. Number three, it has huge embedded optionality. If the world's falling apart in unexpected ways, the person with cash is the person who can pivot and take advantage of that. So some deflation hedges, some deflation hedges, cash to give you optionality. And just watch what's going on. And again, this is what I try to do in my newsletter. Because I get comments from people. They say, well, you told me to do this, and this isn't working out. And I said, well, yeah, I said that two years ago. You have to keep listening. You have to stay tuned. You can't just, as the expression goes, set it and forget it in an environment like this, which is dynamically unstable. You have to be very nimble. You have to be paying attention all the time. And again, that's exactly the service we try to provide in my newsletter. Tim Rickards, thanks so much for your time. And I hope you'll join us again sometime. I hope so. Thank you, Jeff. Ladies and gentlemen, have a great weekend.