D.C.'s efforts to "save" the United States are destined to destroy
the wealth of millions. But there are some surprisingly simple steps you can
take to protect yourself – and profit – from the
government's misguided economic policies.
Interviewed by Alex Daley, Editor, Casey Extraordinary Technology
Alex Daley: Hello, I'm Alex Daley. Welcome to another edition of Conversations
with Casey. Today joining us is the author of Currency Wars: the Making
of the Next Global Crisis. Thanks for coming to the show, Jim.
James Rickards: Thanks, Alex; nice to be with you.
Alex: So Jim, this
has been a tough crisis for us as a country. We have had trouble growing our
economy, but through all of this, through all the debt problems America has
faced, the dollar has held up very well. Do you see us being in the sort of
footholds, maybe, of the initial recovery after this crisis, or maybe in the
eye of the storm, depending on who you ask? What do you see forward for the
James: I think the
dollar's strength is something that has happened in spite of – not
because of – government policy. It's very clear that the Fed and the
Treasury and the White House want a weaker dollar. But what's interesting is
they're not getting it. They're trying as hard as they can to get a weaker
dollar but it's not actually playing out that way. I think it will in time,
but in the short run, you're right, the dollar has held up pretty well.
The President made this explicit – President
Obama, in January 2010, in his State of the Union address. He said that it is
the policy of the United States to double exports in five years. Well, that's
a worthy goal – it would help the economy, it would help jobs –
but how are you going to do that? How are you going to double exports in five
years? We're not going to get twice as productive, there aren't going to be
twice as many of us. The only way you can do that is to cheapen the currency,
so that was really a very explicit way of saying that it is public policy of
the United States to cheapen the dollar – not by five percent or ten
percent but maybe by twenty percent.
But what's interesting is that it hasn't actually
happened, despite QE and QE2 and massive borrowing and large fiscal deficits and
a lot of the things that would normally cause people to lose confidence in
the dollar. The fact is because of a flight to quality, because of fears in
Europe, because of other concerns, the dollar has held up pretty well. What
this tells me is that they're going to try harder, that you'll see more
quantitative easing down the road and other measures designed to get the
Alex: They want to
devalue the currency to help make our economy more competitive on the world
stage, but what's the effect to the average American? Doesn't a weaker dollar
mean more expensive goods?
James: It actually
does. The theory is very simple, which is if you cheapen the dollar, you make
our exports more competitive. I like to say if you have a small town with
four stores and they all sell the same thing, and one of them has a half-off
sale, everyone's going to go to the place with the half-off sale. So by the
same token, if you have Europe, China, Brazil, and the US selling aircraft,
and we have the cheap currency, they are going to buy our aircraft, because
they're going to be a little less expensive if you're a buyer from Asia or
India or anywhere else.
So that, in theory, creates exports, helps GDP, creates
jobs. What's not to like? Well, there's a lot not to like, and the problem is
one of the things you referred to, Alex. Yeah, it makes our exports cheaper,
but it makes our imports more expensive. And the United States imports more
than it exports, so all the iPhones, iPads, flat
screen TVs, foreign vacations – all those things that Americans like
are going to get more expensive. In effect, a cheap currency imports
inflation from abroad in the form of higher import prices. That then feeds
into supply chains and distribution chains in the United States. And that's
exactly what the Fed wants. The Fed wants inflation. They want to hold
nominal rates here, get inflation up here so you have these negative real
rates to encourage borrowing and lending and spending. They usually try to
get inflation by lowering interest rates, but rates are at zero. They tried
to get it by quantitative easing, but it hasn't worked very well. The third
way is the currency wars: cheapen your currency, import inflation from
abroad. That's what the Fed is trying to do. It hasn't happened as
successfully as they wanted, for the reasons that we mentioned: a lot of
fear, money coming in from Europe. It happens with lags, but I do think 2013
is when a lot of this inflation will start to show up.
Alex: So the
government's effectively been pursuing a policy to favor big business, to
help them grow their exports, and really, to make the middle class, frankly
struggle, and have to borrow and have to spend and not be able to save. Is
that a fair characterization of the policy?
James: That's a
very fair characterization. Who are the big exporters? We know who they are
– it's Boeing, General Electric, Caterpillar
to some extent, Hollywood, Microsoft. These are companies that sell massive
amounts of goods overseas, so the cheap-dollar policy helps those big
corporations, but it is devastating to everyday Americans, because of the
inflation that follows. People with savings, with insurance policies, with
annuities, with retirement, with any kind of fixed income – these are
the losers in the currency wars. These are the people who basically see their
Estimates show that, basically, the Fed's zero-rate
policy, compared to a normalized interest rate policy... If you had rates at
a level that would be normal, historically, for this stage of recovery and
this amount of economic growth, the difference between where they normally
are and where they actually are, at zero, is taking $400 billion a year out
of the pockets of savers and sticking it into the banks who are benefitting
from this low cost of funds. So this is theft. This is Madoff on steroids.
The Treasury and the Fed are basically robbing savers in the United States
and handing the money over to banks and corporations in the form of a cheaper
currency or a cheaper cost of funds. Cumulatively this is over $1 trillion.
The Fed's trying to prop up the banks – that's sort of what they were
designed to do – but it is coming at the expense of everyday Americans.
So it's a form of wealth transfer, or as I call it, theft.
Alex: Obama said
he was going to transfer wealth; I guess he kept that promise.
James: Yeah, but he
transferred it from the middle class to the big corporations, not the other
Alex: He never
said which direction, did he?
Alex: Your book, Currency
Wars – this sounds like a war on the middle class at some level in
America, but I don't think that's what you're referring to. You're referring
to a war between the currencies, between the nations, are you not? So is it
just America pursuing this policy?
James: No; this is
a worldwide phenomenon. America is the largest reserve currency in the world.
You take all the countries in the world and look at their reserves. Reserves
are like savings, so if you make a certain amount of money and you spend a
certain amount, but you don't spend as much as you made, you've got some
savings left over. Well, the same thing is true with countries. If they
export more than they import, they're going to accumulate savings, but they
call it reserves.
If you look at all the reserves of all the countries in
the world, 60% of them are in US dollars. It wasn't that long ago in 2000
that 70% of the reserves were in US dollars, so the role of the dollar is
declining; but when the US decides to cheapen its currency, it affects
everybody in the world.
There's another good example of that, Alex. We focus so
much on the China-US bilateral trade deficit. The US runs a deficit with
China, and we buy a lot of iPads from China and
iPhones. But the problem is the Chinese value added to the iPhone is only 6%.
Ninety-four percent of the value added comes from South Korea, Japan, Germany. Toshiba makes the touchscreens, South Korea makes
processors, Germany makes other components, and so forth. So taking the
dollar down 50% against the yuan only changes the
price of the iPhone by about 3%, because it's only 6% Chinese value added.
You've got to devalue the dollar against everybody. You've got to devalue it
against South Korea, the euro, Japan, Taiwan – all the other members of
the supply chain – because supply chains are so much more complicated
these days. So this is a worldwide phenomenon. I like to say that the Fed has
declared currency war on the world.
Alex: With all
these countries holding dollar reserves, don't they have it in their interest
to hold up the price of the dollar? Is it just a fear-based rally that people
are headed into the dollar and keeping it strong because it's the least bad
of the global markets? Or is there actually some level of support from the
countries holding so many reserves where they're holding up the price of the
James: Well, that's
what the currency wars are all about. These countries would love to see a
strong dollar. Of course they would. China is a good example. China has $3
trillion equivalent of reserves. Over $2 trillion of that is denominated in
US dollars. Some of it's in euros and some of it's in hard assets and stocks
and so forth; but over $2 trillion is in dollars, and the vast majority of
that is in US Treasury obligations and other forms of government obligations.
So imagine we devalue the dollar by just 10% relative to the yuan. Well, on $2 trillion of dollar-denominated assets,
that's a $200-billion wealth transfer from China to the United States, so
we're taking money right out of their pocket.
Of course, they're stealing it back in the form of
intellectual property theft. Some estimates are that they steal $200 billion
a year of intellectual property from us. We're stealing $200 billion of value
from them in the form of the currency wars, so maybe we're just about even
with China. It's nasty business and it is serious business.
So sure, those countries do have an interest in the
strong dollar, or at least a stable dollar, but this is where push comes to
shove. The US is trying to cheapen the dollar to get out from under its debt.
Alex: And all
these other countries are trying to support a high dollar and cheaper
currencies to support their own exports.
Alex: Is there
anything that could change this policy? Do you see anything on the horizon
politically that could have the US going in the other direction, trying to
support a strong dollar and support the middle class?
James: I really
don't. Mitt Romney is a bigger currency warrior than Obama. Romney is the one
of all the Republican candidates – and at this point it looks like
Romney will be the nominee – Romney's the one bashing China, calling
China a currency manipulator. Look, China is a currency manipulator, but
there's no bigger currency manipulator than the United States. All countries
manipulate their currencies. It's a policy tool. It's no different than
interest rates, tax rates, budget deficits. Your
exchange rate is just another policy tool. So all countries engage in this,
but the US is the biggest and the best. We are the most aggressive currency
manipulator in the world.
Bashing the Chinese only gets you so far, because, as I
say, we do have very large gross trade deficits with them and trade
relationships, but the Chinese value added is fairly small. Beating up the
Chinese may be good politics, but it's probably lousy economics. But more to
the point, Obama and Romney are on the same page. There's no difference
between them, and so I don't see any return to the policies of Volcker and
Reagan. Remember with Volcker and Reagan, we had "king dollar." It
was a strong-dollar policy. After Nixon took us off the gold standard in
1971, we had about nine years of horrendous economic performance with the
quadrupling of the price of oil, over 50% inflation, the stock market
crashed, high unemployment – it was a disastrous period. How did we get
back on track? How did we reestablish a strong growth path? Well, we did it
with high interest rates and low taxes. Paul Volcker and Ronald Reagan.
Today, unfortunately, we have low interest rates and high taxes –
exactly the wrong medicine – and I don't really see any difference
between Romney and Obama when it comes to that.
Alex: Yet Paul
Volcker is a top aide to President Obama. What's changed with Volcker? Is he
no longer a supporter of the strong dollar?
hasn't really had much to say about the dollar. Volcker's role has really had
to do with the financial crisis and Dodd-Frank legislation and banking
regulations. I'm sure he has opinions on the dollar, but his main role today
has really had to do with the so-called Volcker Rule, which is a very worthy
attempt to get the derivatives genie back in the box, make banks less risky,
avoid the kind of catastrophe we had in 2008. But candidly, Volcker has been
– he's a very important public figure; I think he deserves the respect
of all Americans – but he's been marginalized by the White House. They
don't really listen to him very much. I support the Volcker Rule, but I don't
think the White House does, at least not in a very strong way.
Alex: So, very few
sane voices out there that haven't been marginalized on moving us forward. It
sounds like we're going to be stuck with this. How's this going to play out
over the next five to ten years? What's the world going to look like in a
remember, these currency wars go back and forth, so the US may get the edge
for a while with a cheaper dollar; then the Chinese will push back with a
cheaper yuan, and then maybe it's the Brazilians
cutting interest rates. What I see is that you sort of get two models. One is
the 1930s, what I call in my book "Currency War One," and then the
1970s, what I call in my book "Currency War Two." They have a lot
in common in terms of these competitive devaluations but the dynamics are
quite different. The 1930s were predominately deflationary. The 1970s were
predominately inflationary. It could play out either way.
What I expect right now is inflation. I don't think
that any of these countries are backing off from the money-printing and the
easing – the desire to import inflation. It sounds funny to say the Fed
wants inflation, but they really do. They want to hold interest rates here.
They want to get inflation up and have these negative real rates to encourage
people to borrow, lend, spend, get velocity [of
money] going. That's to turn over money and try to get the economy turning
Remember, the nominal GDP – the number value of
all the goods and services in the economy – is just the money supply times velocity. Well, the Fed can control the money supply
without much difficulty. They can take it as high as they want. But they
can't control velocity. I like to say "$3 trillion times zero is
zero." In other words, you can have $3 trillion in money; but if you
don't have any velocity, you don't have an economy.
So, the Fed's got to change behavior. They have to
create inflationary fears. They have to have inflation that comes in above
expectations. If the Fed sets expectations at 2% and they deliver 2%, there's
no change in behavior – because we got exactly what we expected. We
were already prepared for that. What they have to do is set expectations at
2% and deliver 4%. Then you have a shock effect, and that might begin to
change behavior. So the Fed's trying as hard as they can to get inflation.
They've done it with zero rates. They've done it with quantitative easing and
now they're doing it with the currency wars.
Alex: So exactly at
a time when most Americans are as scared as they've ever been to make major
purchases, buy a home, spend a lot money on cars, the Fed is out trying to
scare us, frankly, into spending our money just to keep the economy going.
exactly right. The portrait that you described, Alex, of "we're afraid,
we just want to pay down debt and save money; we're worried about what comes
next" – what economists call "precautionary savings"
– that's the dominant mode. But it is highly deflationary because velocity
drops. So what the Fed needs to do is change the psychology, but whenever
you're trying to change mass psychology, by definition you're engaged in some
kind of manipulation of propaganda and that's what the Fed does.
Alex: Yes, I think
that's what they've been doing since 1913.
– on and off, right.
Alex: A little bit
of the same. Not much changes in Washington, does it? The average person
fighting inflation, higher prices, is starting to see it already. Gas prices
are higher – and you've said if the dollar drops 50%, the iPhone goes
up $3, but that means that gas just went up another dollar or two.
definitely seeing the effects already. How does someone stay ahead? Can I
invest in a particular way that's going to keep me ahead of inflation, where
I'm going to end up better off than the average middle-class American who's
not listening to you?
You know, when this inflation lets loose, when it really picks up,
unfortunately the effects are not evenly distributed. There are winners and
there are losers. The losers, sadly, are those who trusted the government
– basically people with savings accounts, insurance policies,
annuities, fixed income, retirement. They're going
to see their values eroded. The winners are people who take some steps to
One of the best ways is to have some gold or silver. I
recommend for the conservative investor 10% of your investable assets in gold
and silver. For the aggressive investor, 20%. I don't recommend 50%. Some
people have 50% or all in; that's fine but I don't recommend that. I mean,
don't be a pig. If you get the kind of price action for gold and silver that
I expect, 20% of your portfolio is going to do just fine. You're going to
have very large gains there and that will offset some of the losses in the
other part of the portfolio.
I actually recommend some cash. It sounds funny because
I'm the one talking about the currency wars and the possible decline of the
dollar. Why would you want cash? The answer is I might not want it in the
long run, but in the short run it does preserve wealth. It gives you a lot of
optionality. It allows you to pivot into other asset classes once you get a
little more clarity.
Raw land has a place; fine art has a place. This is what
I call "the 30 years' war portfolio." You look in Europe and some
of these multibillionaire families actually have dynastic wealth that has
lasted for not 200 years but 300, or 400, 500 years. When you ask them how
they did it, they say, "A third, a third, and a third." What they
mean is one-third gold, one-third land, and one-third fine art. Yeah, you
need some liquidity, and you might have a little speculative portfolio off to
the side, but gold, land, and fine art will serve you very well in the kind
of uncertain inflationary times that are coming.
Alex: Though of
course, fine art is a difficult business to get into, if you don't already
know it, for the average retail investor. How about, if I've got my 10% gold
or my 20% gold – my insurance policy, if you will, against a total
crash of the monetary system – what other kind of investments you think
might do well in the short run and the kind of things investors can pick up
at a brokerage account or from an insurance vendor?
James: Fine art
actually is not as difficult to invest in as you might think. Certainly, if
you're going to go out and buy a Picasso, you need to be a billionaire to
spend $100 million on a Picasso or a Renoir; I understand that. And you don't
really want to go to galleries because the dealers are going to get huge
markups, and you don't know what you're getting. Most people are not expert.
But there are a small number of fine-art investment funds; they work with
private-equity funds. You can put your money in – $200,000 or $300,000.
Let's say you have, maybe, $2 million of investable assets. You can put
$200,000 into a fine-art fund, so that's 10% of your investable assets; and
then you have professional management and they will – along with others
– build up a portfolio and sell them to museums. I'm actually invested
in a fund like that right now. It has been my best-performing investment for
the last four years. I have gold, and gold has done very well; but this
fine-art fund has done a little bit better. There are assets like that out
Just when you think you know every investment out there, you find another
one. That's very interesting.
How do you expect the stock market to do in this
inflationary environment as the government's pushing for inflation, pushing
for GE to do well? Does that mean I should be in the large-cap stocks?
James: Well, I have
a funny forecast there. I think stocks are going up, but I wouldn't own them,
and here's why. I think it's very risky. The stocks are going up in nominal
space, so with every central bank in the world printing or easing one way or
the other, stocks are going to go up because Wall Street loves free money. So
that's kind of easy.
But the problem is when inflation kicks in, how much
did you really make in real terms? If the Dow Jones
goes to 20,000, let's say, but inflation takes off and runs at 10% for three
or four years, it's going to cut the real value in half. I think stocks could
go up in nominal space. I think they'll do fine in 2012, but over the longer
term – meaning two or three years – it's a lousy investment on a
risk-adjusted basis because you're very vulnerable to seeing your wealth
erode in real terms. Or if it's a bubble you could get a crash. I don't like
stocks for that reason, but I do think they'll go up in 2012.
Alex: I remember
many stories, many cautionary tales in the investment community about how
many millionaires were created in Mexico in the 1980s and '90s. The only
problem was they were millionaires in pesos.
James: Exactly. We
saw the same thing in Weimar Germany in the hyperinflation in 1921 and 1922.
One of the reasons the German people were not more alarmed when the inflation
started was because the stock market was doing very well – but of
course, all the money ended up worthless. If you owned a whole company,
that's one thing because you might have hard assets, bricks and mortar or
railroad or... If you have tangible assets underlying the stock, that might
be fine. But if you're counting on dollar appreciation and the dollar is
going down, that can be very risky.
Alex: Okay, so it
makes sense to not just look at your investments in terms of how they've done
in nominal dollars, but how much money can that piece of stock buy –
how much gold is that piece of stock worth?
your portfolio in real value and asset.
James: You always
have to think about real value. It's very difficult to do because you have to
subtract the negative, and you have to adjust for inflation; but yes, you basically
have to take whatever nominal increase you're getting and subtract out the
inflation, and then that's your real gain. You need to think about it that
Alex: And then
when you say "subtract out inflation," these days the government
claims CPI is at 1.8%. Who do you listen to when it comes to inflation?
James: Well, I
think you have to look behind the 1.8%. It's a little bit of a barbell
distribution. Yes, the average is 1.8%, but you've got some stuff going up
six, seven, eight, nine percent and other stuff going down four, five, six
percent. Now the average may be one or two, that's correct – but it
depends where you are in that distribution.
If you're paying childrens'
college tuition, you've got healthcare costs for your parents, you're putting
gas in your car and driving to work, you're over where the stuff is going up
maybe eight, nine percent. Maybe some things are going down. Maybe the iPad is going down but, as someone said to Bill Dudley
(the president of the New York Fed), "You can't eat an iPad." And how many do you need at the end of the
day? You buy one maybe, and that's about it. But you've got to put gas in
your car every day or every other day. So I think that statistic masks a lot,
but I also follow John Williams and his Shadow Statistics very closely. I
think he does a very good job at picking that apart and showing that
inflation is a lot higher than the government would have you think.
especially considering the CPI doesn't include the two things we all need
– food and energy.
James: The core CPI
does not include that. That's right.
Alex: So if stocks
are going to be a weak investment, does that mean that bonds are going to be
a good place to be?
James: Not necessarily.
I think bonds will probably not move very much at all because there's not
much of a bond market left. It's completely manipulated by the Fed. The Fed
decides what the interest rate is going to be. The Fed decides what the price
of bonds is going to be. A lot of people worry that if inflation takes off,
interest rates will go up and then bond prices go down – that could be
a very disastrous investment. That is possible, but I think the Fed has a
very good ability to suppress that. I've spoken to people at some of the
primary dealers and people on the Fed borrowing committee, and what they say
is that they're very relaxed about it because the Fed has their back. They
know the Fed has a bid if interest rates start to go up too much.
Now, on the other side, I do think there is room for
interest rates to come down, and so bonds might be – contrary to what I
said in the beginning – bonds might be a good investment if interest
rates come down a little bit more. On balance, interest rates will probably be
flat, but if they move at all I think they'll come down and bonds will go up.
Alex: That's a
pretty good picture for the income investor that might be worried about their
Alex: Even if
their rates are low today, at least there's some stability to look forward to
in that market, thanks to government backing.
Alex: I have to
tell you, Currency Wars is a great book. It really paints an
interesting picture of why these seemingly irrational actions of the
government make sense on the global stage, why all governments are pursuing
this devaluation policy with their currencies.
Alex: Thank you
very much for speaking with us today.
James: Thank you,
Alex. It's great talking with you.