Jim Rickards calls a spade a spade

Just reading through the great finance blog Zero Hedge we came across this summary of a recent interview on King World News (a great source for podcasts with high profile clear thinking investors and economists, if you haven’t been over there yet) with Jim Rickards.  Mr Rickards is a highly respected investor, economist and lawyer, with an extremely solid grasp of economic history, not to mention his understanding of financial markets as they trade today. 

The ZH piece is worth a read if you want to know what US authorities are attempting to achieve with their grand money printing plan, with the ultimate destination of these policies clearly laid out by Rickards. 

Jim Rickards Explains Why Jim “Son Of Helicopter” Bullard’s Reverse Psychology QE2 Plan Is Fatally Flawed

by Tyler Durden, find the original article here

Still confused by Jim Bullard’s critical paper from last week Seven Face of The Peril in which the St. Louis Fed president, and voting Fed member, stated that he has no qualms about buying up Treasuries, further debasing the currency, and raise interest rates at the same time should deflation persist? Is Bullard’s entire well-orchestrated PR campaign merely a reverse psychology attempt at managing deflationary expectations, and represent that even though the Fed is now expected to keep rates at zero for years (an “expectation” that will certainly not spur lending as consumers have no fear of rising rates tomorrow… or a year down the line), that the Fed in fact sees material inflation behind the corner and will consider every option to keep it down (thus giving debtors a presumably far shorter horizon in which to borrow money from the bank at acceptable rates)? Jim Rickards provides some, as usual, very astute observations, in calling Bullard “Son of Helicopter” (for obvious reasons) and particularly notes the velocity of money dynamic seen during the Weimar Republic, when years of excess monetization had no impact on inflation, then overnight hyperinflation set in without warning: “Who says that you can print all of this money and you’re just going to get mild inflation?  Who says you are not going to get hyperinflation?…Well, this is a dynamically unstable process and the example I would give would be Weimar Germany in the early 20’s.”

Rickards observes that Bullard’s paper is nothing more than a spin campaign whose secondary goal is to prevent panic if and when the time for monetization arrives. Rickards’ conclusion is that the primary intent behind Bullard’s oeuvre, is nothing less than a last-ditch behavioral experiment to shock the people out of saving and to instill the fear of currency debasement, thus forcing the consumer class to not only stop saving but take rush to take out credit and spend it all on hard assets (but not gold, the Fed doesn’t like when you buy gold). Will it work? With trillions of deleveraging still left, (not to mention the cataclysm in the shadow banking system) the Bullard gambit is worth a shot, as the logical next step is the real deal.  Yet Rickard’s conclusion is spot on: “it’s like treating the citizens of the US like lab rats in a great monetary experiment conducted by the geniuses of the fed – the same people who missed the tech boom, missed the housing boom, missed the severity of the crisis, cut the dollar by 95% in 80 years… what they are trying to do is scare people into spending money, but I don’t think it is going to work… what will happen instead is they will print so much money in this effort and they won’t get the traction, and then it will just tip, it will be like throwing a light switch and it will go from no inflation to hyperinflation instantaneously. At that point it won’t be about spending money any more, it will be about the fact that money instantaneously becomes worthless.”

In other words, the Fed has resorted to its last pre-destructive option: a free call option on animal spirits, to be rekindled by the combination of the fear of monetary stability in the future, and a surging stock market completely unjustified by anything in reality, yet one which keeps on going higher, thus tempting every Tom, Dick and Harry to buy up every stock imaginable on margin. And in this grand scheme, Bullard’s reverse psychology campaign is the last chance to extend the call option by a few weeks or months. If that doesn’t work, then it’s time for Plan QE B.

Full Jim Rickards interview on King World news can be found here.

These concepts are nothing new, this is what happened in Zimbabwe, the Weimar Republic, and anywhere else where the same conditions have existed.  Just as gravity works in Zimbabwe, it works in the US too.  The laws of economics are no different and will win out in the end.

The central bank for central banks, the Bank of International Settlements earlier in the year also laid out the fundamentals that are in place to see a hyperinflation take place all across the industrialised world.  Although not put as bluntly as Rickards, their warning is of hyperinflation if deficits and unfunded liabilities are not restructured and if money printing is not stopped.

We leave you with this extract from the founder of the Austrian school of economics Ludwig von Mises’ book, and inspiration for the name of this blog, Human Action:

“But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

Ludwig von Mises, Human Action (chapter XVII)