The Rickard's Prediction
05 October 2014 | Pago Pago, American Samoa
Kimball Corson
The Rickards Assessment or Prediction
James G. Rickards is a very well educated man. His education is Johns Hopkins University, B.A.in economics; Paul H. Nitze School of Advanced International Studies, M.A. in international economics; Juris Doctor, University of Pennsylvania Law School and an LL.M in taxation from New York University School of Law. He is.also well experienced in domestic and international finance in which he has worked for thirty plus years. He has testified before congressional committees and held high positions in government. He is not a loon.
Rickards argues that within five years we are in for a major economic collapse that will lead to a 25 or 30 year depression. He believes this is true for the following reasons he cites
1) the velocity of money has all but collapsed,
2) to counter that, the Fed has pumped $3.2 trillion dollars into the economy since 2008 to maintain GDP instead of letting it collapse, I argue, as a continuation of the 2008 crash and recession,
3) our public debt levels are very high largely as a result.
4) we are vulnerable to a challenge on our reserve currency status, to rejection of our bonds and other debt, and to coordinated attacks by terrorists or other speculators on our currency, if the dollar falters,
5) the stock market is too high and poised for a collapse as several Nobel Laureates and others contend.
6) Wall Street is again over leveraged, also, with too many derivatives outstanding ($710 trillion vs. world GDP of $72.6 trillion),
7) the misery index is through the roof = real rate of unemployment (23%) + the real rate of inflation (10%),
8) the Fed is in fact insolvent with its unfunded and unstable liabilities hugely exceeding its capital reserves, also meaning the Fed is hugely over leveraged (22:1 in 2008 to 77:1 today),
[Rickards reports this conversation:
"I spoke to a member of the Board of Governors of the Federal Reserve and I said, "I think the Fed is insolvent."
This Governor first resisted and said, "No, we're not."
But, I pressed her a little bit harder and she said, "Well, maybe."
And, then, I just looked at her and she said, "Well, we are, but it doesn't matter."']
9) the whole banking system is over leveraged and is carrying too much debt relative to reserves and capital, which debt is growing 30 times faster than our economy,
10) foreign holdings of U.S. government debt have been plummeting from a high of over $700 billion in 2011 to well under 100 billion today; this is almost like a silent bank run,
11) The rise of the petrodollar caused the dollar to surge, but petrodollar strength is collapsing as Russia and others challenge it and seek another reserve currency,
12)Russia started dumping treasuries before invading Crimea knowing sanctions would follow, starting an accelerated run of sorts causing China to start dumping treasuries somewhat as a defense,
13) but Belgium has been buying up the treasuries dumped holding the market up but Belgium has to be a front for some other buyer because the buys are bigger than Belgium's current account surplus -- the Fed, according to the US intelligence community is the buyer, [Implication is dollars are flooding foreign markets, those used to buy that debt.]
14) the central banks of many countries are largely increasing their gold reserves, including China which the intelligence community says has bought 3000 tons in the last four years, but China lies and say they only have 1054 tons all totaled, If it successfully pressed for an international gold standard, China could devastate the US. Meanwhile China is developing a huge shadow banking industry,
15) but China has its own problems that could precipitate a world financial collapse; the intelligence community says China's shadow banking system is too much fueling a housing bubble that is larger than what we had and much more unstable, and
16) as countries abandon the dollar, fewer of them hold dollars and the dollar has dropped as a percentage of total global currency reserves.
These are Rickards positions and reasons as he presents them, albeit not verbatim.
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I have written myself about the key component of Rickards assessment. It is this. As the velocity of money falls as it has so hugely (largely because of the wealthy hoarding cash, the skewed income distribution and people curbing their spending), the Fed has in fact pumped trillions of dollars into the economy primarily by quantitative easing so as to hold Money x velocity or MV in the following equation more or less constant --> MV = GDP, The economy is indeed too much being held up by increasing the money supply to counter falling velocity. That is a very major concern.
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However, more broadly, what are we to make of the Rickards' assessment and prediction?