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moneymetals

Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn…

Well now, without further delay, let’s get right to this week’s exclusive interview.

Jim rickards

Mike Gleason: It is my great privilege now to be joined by James Rickards. Mr. Rickards is Editor of Strategic Intelligence, a monthly newsletter and Director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He's also the author of several bestselling books including The Death of MoneyCurrency WarsThe New Case for Gold and The Road to Ruin. In addition to his achievements as a writer and author, Jim is also a portfolio manager, lawyer and renowned economic commentator, having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN, just to name a few. And we're happy to have him back on the Money Metals Podcast.

Jim, thanks for coming on with us again today. We really appreciate your time as always and how are you?

Jim Rickards: I'm doing great Mike, great to be with you. Thank you.

Mike Gleason: Well Jim, I figure a good place to start here is with one of your most recent books. We want to get your take on the state of the world economy. In your book titled The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis, you make some very interesting comments. Now while the financial media is talking about booming stock markets and accelerating GDP growth, you aren't quite as optimistic. We both know that most of the growth we've seen in recent years has been built with huge amounts of central bank stimulus and the fundamental problems that drove the last financial crisis have hardly been resolved. In fact, you think the next financial catastrophe isn't too far away and many among the elite are getting ready for it. If you can, briefly lay out some of what you've been seeing.

Jim Rickards: Sure Mike, you touched on two different threads. One is, let's call it the short to intermediate term, which is how's the economy doing? What would the forecast be for the year ahead? What do I think about stocks and so forth? That's one part of the analysis, but the other one is a little bigger and a little deeper, which is what about another major financial crisis, a liquidity crisis, global financial panic and what would the response function be to that.

Let me separate. They're related because, I mean the point I always make is that there's a difference between a business cycle recession and a financial panic. They're two different things. They can go together, but they don't have to. For example, October 29, 1987, the Stock Market fell 22% in one day. In today's Dow terms that would be the equivalent of 5,000 Dow points, so we're at 26,000 or whatever, as we speak, a 22% drop would take it down about 5,000 points. You and I both know that if the Dow Jones fell 500 points that would be all anybody would hear about or talk about. Well, imagine 5,000 points. Well, that actually happened in percentage terms in October 1987. So, that's a financial panic, but there was no recession. The economy was fine and we pulled out of that in a couple of days. Actually after the panic, it wasn't such a bad time to buy and stocks rallied back. Then, for example in 1990, you had a normal business cycle recession. Unemployment went up. There were some defaults and all that, but there was no financial panic.

In 2008, you had both. You had a recession that began in 2007 and lasted until 2009 and you had a financial panic that reached a peak in September-October 2008 with Lehman and AIG, so they're separate things. They can run together. Let's separate them and talk about the business cycle. I'm not as optimistic on the economy right now. I know there's a lot of hoopla. We just had the big Trump Tax Bill and the Stock Market's reaching all time highs. I mean, I read the tape. I get all that, but there are a lot headwinds in this economy. There's good evidence that the Fed is over-tightening.

Remember the Fed is doing two things at once that they've never done before. They're raising rates. I mean, they've done that many times, but they're raising rates, but at the same time, they're reducing their balance sheet. This is the opposite of QE. I'm sure a lot of listeners are familiar with QE, Quantatative Easing, which is money printing. That's all it is. And they do it by buying bonds. Then when they pay for the bonds from the dealers, they do it with money that comes out of thin air. That's how they expand the money supply. Well, they did that starting in 2008 all the way through until 2013, and then they tapered it off and the taper was over by the end of 2014, but they were still buying bonds. So, that was six years of bond buying. They expanded their balance sheet from $800 billion to $4.4 trillion.

Well, now they're putting that in reverse. They grabbed the gear and they shifted it into reverse and they're actually not dumping bonds. They're not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It's the opposite of money printing. So, the Fed’s are actually destroying money, actually reducing the money supply, so they're raising rates and destroying money at the same time. It's a double whammy of tightening and I don't believe the U.S. economy's nearly as strong as the Fed believes. They rely on what's called the “Phillips Curve," which says unemployment's low, that's a constraint and wages are going to go up and inflation is right around the corner. And that's part of the reason they're tightening, but there are a lot of flaws in that theory....

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