Its a type of calling. A kind of priesthood. Except the fire and brimstone has been replaced metaphorically by the Biblical intonations of the high priests of economics. They have either found them and dusted them off from a new discovery in the pyramids, or simply found them aimlessly wandering in a back lot of Hollywood. You can call it fear mongering catering to some of the deepest anxieties of middle-class America. Like a return of D.W. Griffith’s Birth of a Nation, where white women are constantly at risk from black men. The Fed is of course, Black men and if Rick Perry is elected he going to saunter cowboy style into the Fed and dispatch a few bankers where they can do a greater good. Maybe he’ll bring along Hop a’ Long Ron Paul; better to bring along Barney Fife to keep things in hand. Most of them are like Walter Benjamin’s analysis of Baudelaire’s urban Paris in the Arcades: ( most economists ) like prostitutes are merchandise and sales person in one.
Jim Rickards: I think there is a definite and highly significant danger of inflation coming from QE and QE2 specifically. A lot of people have said, in fact, the Fed has said, that, if you look at the key price indices, the Producer Price Index (PPI), Consumer Price Index (CPI), and the Personal Consumption (PC) price deflator, they are very, they use the phrase, “well behaved”. For the past year and a half, the critics, and I would include myself, have been saying that this situation is dangerous and unstable. The Fed has been pointing to the price indices and saying that you can’t find inflation under a rock, you can’t find inflation with a microscope, so what are you worried about?
HRN: Why do you think the situation is unstable?
Jim Rickards: There is a lot of inflation, but it is being offset by deflation. I compare it to an arm wrestling match. If you’ve ever seen an arm wrestling match with two really powerful participants, nothing really happens for a long time. The two arms just kind of sit there, then all of a sudden it starts to tip, then one guy just breaks and his arm is slammed down on the table. Just because nothing is happening at the surface doesn’t mean that a lot of things aren’t happening below the surface. In a depression, such as the one that began in 2007, you have very, very strong deflationary forces. I call it a natural deflation that’s being offset by policy inflation. So the fact that the price indices are around zero doesn’t mean that they’re well behaved, it just means that they’re masking the two tectonic forces that are pushing against each other.
There is always, when listening to these business broadcasts such as over Bloomberg or at Business News Network, the kind of libidinal subtext that underlies programming exclusively devoted to money 24/7. The material, quantified and commodified almost ad nauseaum, especially when considering the limited range of vocabulary, context and frame of reference used. Yet, much of it remains compelling, probably due to the mix of basically honest people with a sprinkling of con artists and a few outright psychopaths.
…HRN: Do you think deflation will win, or will it be inflation?
Jim Rickards: For the past year and a half, I’ve wondered which way it’s going to tip. If I’m right about those two forces, one of them is going to prevail at the end of the day and, on which one it’s going to be, I really reserve judgment because I could argue it both ways. I am now coming down on the side of inflation because the inflation is becoming very, very apparent. So, the first thing is that the well behaved indices are masking more than they’re telling us because, below the surface, there are powerful deflationary and inflationary forces fighting each other.Read More:http://www.financialsense.com/contributors/ron-hera/interview-jim-rickards-on-inflation-and-currency-wars
ards: There are some new forces in play since Friedman did his seminal work and, of course, it’s the result of globalization. What has been happening is that what would otherwise have been U.S. inflation is showing up in China and Taiwan and Korea and places like that because of the exchange rate mechanism. I put this under the heading of currency wars. In effect, China has been importing all of our inflation through the peg between the dollar and the yuan.
Again, there is always that auto-erotic relationship to money. A perplexing acknowledgment to Freudian psychology where the obsession rubs against the ambiguities of the libidinal which prevails in character over what could be considered rational in nature. Whether it relates back to excremental pleasure is plausible as Freud stated. At least something to be considered when gold bugs begin their doomsday speeches and a bit of prodding finds they keep gold in the house, in the bank, own gold ETF’s, shares in gold mining companies and so on; as if the collection of feces manifests itself in accumulation of precious metals, as part of some bizarre ideology of alchemy.
HRN: How does the yuan-dollar currency peg cause inflation in China?
Jim Rickards: Just think about the mechanics of it. There’s a lot of deleveraging going on, which is where the deflation comes from, so the Fed goes out and prints a whole bunch of dollars and spreads them around. Americans take a lot of those newly printed dollars and buy foreign goods so the dollars go to China, but China doesn’t want the yuan to appreciate because they want to maintain the peg, or at least they have until very recently. So, what do they do? They have to buy up the dollars. Well, in order to buy up the dollars they have to print yuan and basically give the yuan to the exporters in exchange for the dollars. Well, that’s basically flooding China with yuan and so the Fed’s printing press was being sterilized in America by the Chinese who were flooding their own country with their own local currency. So, through the exchange rate mechanism, and through the peg between the dollar and the yuan, our inflation was showing up in China and now it’s showing up in Vietnam, South Korea, Taiwan and other places… Read More:http://www.financialsense.com/contributors/ron-hera/interview-jim-rickards-on-inflation-and-currency-warsa
But, the basic thesis of Rickards, that we are engaged in currency wars is a valid one, though its not new either, though he explains it very well. The implications of course, going to Rickard’s logical conclusion are quite harrowing: $5,000 gold and $300 oil. And the U.S. ultimately winning this war since it contains the most gold in the world and with a little arm twisting on Canada and Australia with their significant stash, the win is slam-dunk. It may explain China’s belated foray into Africa in a fresh round of colonialism. But whether Rickard’s interpretation is correct, is a wait and see proposition…
…Jim Rickards: I don’t see any feasible combination of growth and taxes that will generate enough income to pay off the debt. People warn about the debt trap, to me it’s already too late. We’ve already fallen into a hole where, mathematically, it’s impossible to earn enough to pay off the debt. The debt is compounding faster than growth is being generated and raising taxes is not a solution because that will kill growth, so you just can’t get there….
…Jim Rickards: I think these processes are dynamically unstable and once you let the inflation genie out of the bottle, you don’t get 2% or 3%, you go straight to 10% and that’s what happened in the 1970’s. If you look at the late 60’s and early 70’s, inflation was 1% or 2% and then one year it pumped up to 3% and they said, oh my goodness, it’s 3%. After that, it went to 5%, then to 8%, then to 10% and then to 13%. In other words, between 1977 and 1981, in that five year period, cumulative inflation was 50%. The value of the dollar was cut in half over that very short 5-year period of time. So, that’s how it accelerates and gets out of control. I think that’s what’s going to happen again.
HRN: How much will prices go up in the U.S.?
Jim Rickards: Bernanke says 2%, but he actually wants something closer to 4%. I think what he’s going to find is that it goes very quickly to 8% or 9% or 10%, which is borderline hyperinflationary and that’s going to be a huge problem. It’s going to be a shock that the American people are not ready for….Read More:http://www.financialsense.com/contributors/ron-hera/interview-jim-rickards-on-inflation-and-currency-wars
…Jim Rickards: The Fed is on its way to a $3 trillion balance sheet. Their capital, in round numbers, is about $60 billion. With $3 trillion on the balance sheet and $60 billion of capital, they’re leveraged 50 to 1. That’s worse than Long-Term Capital Management when they got in trouble in 1998. If you’re leveraged 50 to 1 and you have a 2% decline in assets, just 2%, and the stock market sometimes moves 2% in a single day, you just wiped out your capital. A 2% hair cut on $3 trillion is $60 billion and that takes your capital to zero and the Fed is broke….
…HRN: Won’t rising prices make most Americans poorer?
Jim Rickards: The Fed doesn’t care about that. The Fed doesn’t care about people. They don’t care about workers. They don’t care about wages. They say they do, but the Fed only cares about banks.
HRN: Bernanke has been in the media, saying that inflation will stimulate the U.S. economy and help create jobs without causing prices to go up.
Jim Rickards: It’s propaganda. I had a discussion with former Fed governor, no reason to mention the name, who is a very well known economist, and what he said was that behind closed doors the Federal Open Market Committee spends about 10% of their time on policy and 90% of their time on communication. They very quickly arrive at what they’re going to do and then spend the vast majority of their time thinking about messaging and wordsmithing. Well, there’s a name for that. It’s called propaganda….
The entire global system is at a critical juncture with sovereign bonds, currencies, stock markets and the fate of politicians all in play. The hidden purpose of QE and QE2 was always to cheapen the dollar by causing inflation in China and forcing its hand. Critics have said that QE did nothing to help with unemployment and consumption. But that was never the main purpose – the purpose was to weaken the dollar to help exports and get jobs that way, but it takes time. I removed QE3 from my set of expectations late in 2010 when it became clear that Fed rollovers were enough to keep the yield curve tame and, more importantly, China was finally starting to move on the currency. For now, QE3 is still off the table. But if the euro weakens and China re-pegs to the dollar as a result, that is the signal for more QE. It’s hard to know how this will play out, but at least we know what to look for. If you want to see QE3 ahead of the market, watch the euro.
Finally, it is not quite true there are no winners in a currency war. There is always one winner – gold. Read More:http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/18_Jim_Rickards_-_Gold_is_the_Only_Winner_in_this_Global_War.html