"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, December 7, 2010

Jim Rickards on the Gold Standard: "You will either get there smart or get there ugly."

Of all the analysts that I follow, James Rickards is probably by far the one I tend to most agree with.  He approaches the current economic crisis using a blend of economics, monetary theory, and geopolitics.  Most analysts, especially professional economists only focus on one, or at best, try to combine two.

For those that are not familiar with Rickards, here is a snippet of his bio from King World News:
James G. Rickards is a writer, lawyer and economist with over 30 years experience in global capital markets. He is Senior Managing Director at Omnis, Inc., a consulting firm in McLean, VA and is the leading practitioner at the intersection of global capital markets and national security. His advice to clients from 2002 to 2006 included early warning of impending financial collapse, the rise of sovereign wealth funds, the decline of the dollar and the sharp rise in gold prices years in advance of these events. He has held senior executive positions at Citibank, Long-Term Capital Management and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve Bank of New York. His clients include private investment funds, investment banks and government directorates in national security and defense.

King World News just released an interview with Jim Rickards (link here).  Here is a summary of his most salient points with my own commentary:

1) His central premise, like mine, is that we will ultimately end up with a gold standard.  The question that really remains is: Will the process be a smooth, managed one, or will it be ugly and chaotic?  So far the road we are taking is the chaotic one.  It is obvious in the desperate attempts taken by Fed Chariman Bernanke, the bloated US budget, and continued dollar debasement, among other things.  Keep in mind that there is no real global cooperation, if anything, global economic conflict is the de facto approach to this crisis.

2) If there is an economic collapse or currency crisis, expect US Military operations inside the homeland to maintain domestic order.  Rickards does consulting for the various branches of the US Military and will be delivering a presentation in Arlington Virginia to Senior Military Officers regarding the ongoing economic crisis and how it pertains to them.

But here's the kicker.  Jim Rickards holds no punches when he describes Ben Bernanke's stewardship of the US Dollar and its effect on National Security.  Jim Rickards ends the interview with this, emphasis mine:

"A lot of my clients are in the National Security area so I work a lot with the Department of Defense and you know, the Director of National Intelligence and we obviously spend a lot of time thinking about threats to national security.  And I spend a lot of time in the counter terrorism field and terrorism finance and other aspects of that.  And if I had to rank threats to national security I would rank Ben Bernanke above Osama bin Laden.  Osama bin Laden's capabilities have been greatly degraded... make no mistake about it he is a very serious threat.. but he's on the run.  Whereas Ben Bernanke is not on the run.  He's sitting in a very high office but he's actually a greater threat because of what he is doing to destroy the US Dollar."

Misthos here.  I agree with Richards to a point.  But I also look at it this way:  Fiat debt based paper eventually devalues anyway as the supply must grow to handle the ever growing amount of debt in the system.  Bernanke is actually doing the only thing he can - outside of trying to convince the US government to institute a gold standard.  Bernanke's actions are thus unavoidable.  Has Bernanke also served the interests of Wall Street better than any other segment of the US Economy?  I say yes.  But we must separate the moral issues (banksters raping the country for fat bonuses) with the mathematical issues (debt based fiat creates trade imbalances and unserviceable debt overhangs).

3) Rickards also does some basic math - comparing the current monetary supply, based on different approaches, with official gold reserves to arrive at a gold price that is much higher than it is today.

I have covered this line of thinking in the past in my post: Gold will be a bubble until it isn't.  In that post, I argue that when a gold standard comes about, sovereigns will price gold well above the current market rates because to do otherwise would be highly deflationary.  Thus, the gold "bubble" does not end in a mass exodus out of positions, but it ends on a somewhat fixed price due to official Sovereign  involvement.  Remember past bubbles like tulips, real estate, and dotcom stocks?  Which of those bubbles involved a commodity or security that was held as an official reserve by sovereigns?  None.  Only gold and currencies are held as reserves, so you can't expect gold to end as real estate or dot com stocks did.  There's a reason Central Banks and Treasuries around the world store gold.  For those that understand history, that reason is becoming more apparent every day.

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