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Ewan Watt:Good evening ladies and gentlemen. My name is Ewan Watt. I'm with the Charles Koch Institute. Thanks ever so much for joining us. Its not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from there to guard to their own interest. The words of Adam Smith have not just inspired many of us in this audience, but also the first for all of us at the Charles Koch Institute, hoped to be a series of successful eventual economic freedom and societal well-being. As the more than 1,000 alumni of our schools educational program can tell you from first hand experience. The Charles Koch Institute welcomes debate, scholarship and analysis of various public policy issues. Monetary policy and integrity of the US dollar is an area that will benefit from the fullest debate and the widest range of viewpoints. And tonights discussion is part of that process. Our guest speaker this evening is widely regarded as one of the most accomplished voices on monetary policy and the perils of loose money. He has appeared in the Wall Street Journal and on CNBC, Fox News, CNN, NPR and C-SPAN and is a contributor to the New York Times Washington Post and Financial Times. And addition to his 35 years experience in capital markets, he's also provided expert testimony before congress. In 2011, he authored the New York Times Best Seller, Currency Wars, the making of the next global crisis, a book examining the history and future threats of competitive devaluations. It was described by Michael and in political as one of the most urgent books of the fall and were reviewing book for the Financial Times. James Macintosh concluded by remarking, Lets hope he's wrong. As we approach both the fifth anniversary of the financial crisis and [PH][0:02:01.3] at the Federal Reserve. It seems appropriate that we have with us this evening, an individual whose views about both have been well publicized in the media and on Capital Hill. As part of the Charles Koch Institutes work to foster productive dialogue among diverse voices on critical topics, were pleased to welcome this evening, Mr. James G. Rickards. James Rickards:Thank for that introduction, Ewan. It is really a pleasure to be here. Washingtons one of my favorite cities in the world. I've never lived here although I did go to graduate school here. But becoming, you know, since I was a child, I think as a taxpayer, its important to get a couple of times a year just to get your moneys worth as well as the wonderful things here. I was very pleased when Koch Institute announced that the event will be in September, I said, at least we won't have to put up with that July and August weather. But somehow we cried a little bit at the tail end of it, but I think Washingtonians are pretty familiar with that. Were going to jump in. I'm going to speak for about 45 minutes, maybe a little less and then well have plenty of time for questions at the end. I do want to get out on time. There's a rumor that someone else is giving a speech in Washington tonight, and I know some folks may want to hear that. So well make sure we get everyone out in time to hear the other speech. Our topic tonight isit has to do with currency wars and specifically, where are we now? We know where [???][0:03:33.9] and we know with the crisis of the 2007, the panic of 2008, the aftermath, the recession that lasted in 2009, although I would take a different view and say that actually what were experiencing is a depression and were still in it. But well talk a little bit more about that. But just kind of summarize where we now and more importantly, where were going both in terms of the dollar, Federal Reserve policy, and the International Monetary System as a whole, and whether some of the forces in play. It is interesting that were here right around the fifth anniversary of the Lehman Brothers, AIG tarp sequence of events, which I'm sure many of youwe all live through and many of you were involved in from a policy respective, and were not going to rehash to all of that because I think thats very familiar territory. But I was struck this morning, those interviews with James Gorman, CEO of Morgan Stanley, you know, on the fifth anniversary in Bloomberg and Chris Morgan Stanley was the next domino to fall. We have seen Lehman fall, AIG fall. Morgan Stanley, at the time, was days away from collapse and if they collapse, Golden Sacks would not have been far behind. And then probably city and then probably [???][0:04:48.3] and whether JP Morgan would've been the last domino standing or would've fallen as well, well never know. But it was at that point that the government decided to drop a steel curtain between two dominoes and prevent that sequence of events. But no doubt that Morgan Stanley was the next in line. So they were literally days away from collapse. And Gorman said today, you know, between the legislation and the regulation, the new capital requirements, etc. the chance of anything like that happening again in our lifetime is extremely close to zero. And I almost fell off my chair, I mean, actually the chance of happening is much closer to 100% for a lot of reasons, and well talk about that. But what they told me is that as usual Wall Street has learned nothing. The risk models they use are worse than defective. They're misleading. Its one thing to kind of point the right direction with a little bit of the variability, but pointing it in the opposite direction is probably not a good thing. So we dont want to beat up on James Gorman. He's never really no different than the other CEOs in Wall Street, but I just shook my head and say, okay. Well, five years later, it seems that Wall Street has learned exactly nothing. But well talk about why. So let mewith that, as a preview, let me jump in. Want to spend a minute. Were going to talk about financing economics and the economic history. We just spend one minute on the national security implications of what were talking about because there's no such thing as a strong national security without a strong dollar. If you have a weak dollar, a currency thats not widely accepted, a currency thats depreciating in value, you do not have the kind of robust national security and defense establishment that you want. And one of my roles is, I mean, I talked to the treasury and the fed notice, but I probably spent a lot more time with what I call, the Virginia government, the Pentagon and Intelligence community and have some on-going relationships with them. So I do get to talk to fairly senior people of the Pentagon about capital markets. They dont ask me about weapons or anything or at least the kind of shoot. But we do talk about this and there's a growing awareness in the national security community and the intelligence community and the defense community that a threat to the dollar is a threat to national security, which is their mission. But its a difficult dialogue, but you know, one senior Pentagon official told me, you know, the treasury doesnt really like it when we talk about the dollar. The treasury doesnt like it when anybody, other than the treasury talks about the dollar. But in 2009, to their credit, the Pentagon sponsored the first financial war game. Of course, the Pentagons been doing war games forever. But this was one where the rules where you can have nothing that would shoot. So no submarines or missiles or cruise missiles or anything like that. The only weapons were currencies, commodities, stocks, bonds and derivatives. The teams were some that you would expect, you know, US, Russia, China, but we also devised a team that was composed of Swiss banks and hedge funds. Because they're players in this landscape, we did have theI was invited first as a consultant to help design the game because as like any game, you have the rules and theyve never done one like this before. They need any help from me in war gaming but they did need help in capital markets. So we came up with the teams and the rules and the scenarios and we played over two days up the applied physics laboratory. Its about halfway between Washington and Baltimore, and it was very interesting. This was all described in the books if you havent read it you have the opportunity to do so. Hope you enjoy that. When we were done, I went home and I said to my wife, I have good news and bad news. I said that the good news is my team won. The bad news is I played China. So Ill leave that to you. But one of the things we said at the time and we got, you know, we got prettywhen I say We, I had a small group of Wall Streeters that I recruited. I said, you know, you couldnt just have what I call, the usual [???][0:08:46.5] of the think tanks and the universities and the consultants. I mean, they're all brilliant people, thats not the point, but I want some real Wall Streeters who knew how to manipulate markets to come in and be the bad guys. And one of the scenarios we laid out at the time was that Russia and China would acquire gold, and over time have enough gold to in effect, discard the dollar and come up with their own gold back currency and then insist on payment in that currency for Chinese manufacturing goods and Russia national resource exports. Nothings going to happen tomorrow but over a 5-year scenario if they were pushing that direction, you couldnt rule that out. That was pretty roundly ridiculed left at, etc. but we played that out anyway. It was kind of interesting to handle the vault. But since then that was in 2009, this is 2014. So this issorry 2013, we did [???][0:09:39.7] four and a half years ago. Since then, Russia has increased its gold reserves by 60%. Theyve gone from.they had about 600 tons at the time we did this, they have a thousand tons today. China has probably tripled its gold reserves. They dont actually tell us. They're not transparent about it, but at the time they had just over a thousand tons and today, estimates are they have somewhere between three and four thousand tons. So you know, watch what they do, not what they say. Their behavior is exactly consistent with what we lay out. I said to someone in the Pentagon, I said, what's going to happen is, someday your destroyer, your cruisers going to pull up to a fuel depot in Singapore and you're going to say fill her up and they're going to say, fine, pay me in SDRs, you know, SDR is the Special Drawing Right, thats the IMF World Money. Well talk about that too. And said, for the first time in history, you're going to have a forward deployed military that you have to pay for in a currency that you dont print. And I was, again, thinking about that was a little bit of an eye-opener. So Ill leave it at that, but again, as we go through the economics and policy and all of the things a lot of you may be more familiar with. We shouldnt lose sight of the important national security aspects of this. Always good to spend a minute on a definition and you know, were talking about currency wars, what's the definition of a currency war. Well, weve had floating exchange rates since the mid-1970s. Some people say, well, what's new about floating exchange rates? Are currencies getting stronger or currencies getting weaker? Thats been around for 40 years. There's nothing new there. What do you mean currency war? Here's the difference. Yes, exchange rates do fluctuate and they fluctuate sometimes for good reasons. They're fundamental economic changes whether its national resource discoveries, changes in comparative advantage, technological breakthroughs, demographic changes. There are reasons for exchange rates to fluctuate. The currency war is different. A currency war is when its done intentionally and maliciously as a matter of policy. So your currency isnt going down or going up because of these fundamental economic factors I described. You're making it go down because you're trying to achieve some trading advantage, some advantage against your trading partners. What it amounts to basically, currency wars break out in purees of inadequate economic growth when there's enough growth to go around when growth is robust. And here in the United States of America and some small trading partner relatively small economy somewhere tries to cheap in their currency together, a few more tours or whatever. The US doesnt worry about that. I mean, its a minor annoyance at most. But when there's not enough growth, when everyones fighting for growth and thats certainly the situation today, its a much bigger deal and the countries are tempted to steal from each other. And when you cheap in your currencies as a matter of policy to still trade or vantage from your trading partner. Thats a currency war. Were not in them all the time but when we are, they tend to persist for very long periods of time. I mean, a real simple example, take aircraft manufacturing, you know, the US has bowing, Europe has airbus, brazil has [???][0:12:43.3] and you say, you know, if you can cheap in your currency. Lets say your country like Indonesia, you need to buy aircraft but you dont manufacture them. So you go shopping and you look at airbus and bowing and [???][0:12:54.7] and see what's on offer. Well, the theory is, if you cheap in your currency a little bit, that will make your aircraft a little less expensive. Its like having a sale at Walmart and maybe you'll get the order and that creates some exports that helps GDP that creates some jobs on the assembly line. We need jobs in this country. So thats the theory. Its very tempting to politicians and you say, well, gee what's wrong with that? You know, cheap in the dollar, sell some more planes, get some more jobs, help GDP, that sounds pretty good. The problem is that, thats not the world we live in. If the US can unilaterally cheap in the dollar and nobody else did anything, there might be some short-term advantage, but thats not the world we live in. What happens is, we try to cheap in the dollar, the next thing you know, Europes cheapening the euro, Brazils cheapening the rial, and thats when the currency wars come in. And for countries that can't or dont have the ability to cheapen their currencies to fight the currency wars, they can do other things. They can put on capital controls, they can put on import terrors, export duties etc. And so then, thats how currency wars morph in to trade wars and then sometimes in the case of the thirties into a shooting war. So thats the fallacy of currency wars is that all advantage is temporary and you dont really get any permanent advantage. What you do get is inflation, and thats actually what the fed wants and its exactly what the bank of Japan wants. Helping exports is, if it happens at all and it really doesnt is that most ancillarywhat you really want to, remember the US is in that importer, right? So we cheapen the currency, maybe it helps exports a little bit but it makes all of our imports more expensive. And thats what the fed wants. They want those higher import prices have that feed through the supply chain and generate a little bit of inflation in the United States and again well talk about why that is. So thats what a currency is. Weve had three in the past hundred years. I'm going to go through this quickly. There's a lot of history here but in the interest of getting to some of the more technical and policy-oriented part of the discussion. Ill just kind of recap this as very high level again. Hope you get a chance to read the book because its all covered in a lot more detail. But currency war 1, 1921-1936, this was the famous period of sequential beg of thy neighbor devaluation. So it started in 1921 with the famous [???][0:15:16.1] Hyperinflation that youve all heard about where, you know, the central bankswell, they actually printed so much money, they ran out of paper and at some pointbut seriously, at some point, they started printing the currency on one side, not the other, to save ink. Thats how much money they were printing. And they were stories, you know, if you went to dinner, you pay for your meal at the beginning of dinner because it would be three times more expensive by the end of dinner, you know. And then a trillion rice marks for a loaf of bread and then the next day two trillion. Well, what happened eventually is that it just actually went to zero. In other words, it wasnt even a currency anymore, it became litter and it was swept down the sewers and the currency had no value whatsoever. It wasnt evenyou know, a question of hyperinflation it just was, as I said, it was litter. What happened next is less well known. It wasnt the end of Germany. Germany actually had a lot of assets. It has human capital, industrial, base, transportation network, etc. Germany over about a 6-month period went to a gold back currency. Theyve got loans from the United States. They use the loans to import where they needed to get their export machine going. They might have trade surplus, use the surplus to buy gold and use gold to back the currency. And from 1923-1928, Germany had the fastest growing major industrial economy in the world. So what that shows you is that, Germanys problem with hyperinflation wasnt the people or the industrial base or the potential of the economy, it was the central bank of the monetary policy once they got back to some money, they grew very robustly. So I think a very good lesson there. 1925, it was France and Belgiums turn. The issue there was we had a gold standard prior to World War I. It was abandoned in 1914. So countries could print money to fight the far. And now, here were after World War I in the mid 20s. The countries want to go back to the gold standard but it raised the question, at what parody, at what price of your currency to gold would you go back to the gold standard. Now, they had doubled the money supply to fight the war. So if you were, you know, you start out here as a parody between paper money and gold, and you double the paper money supply, and now you want to go back to gold, you basically have two choices, you can double the price of gold, which means cuts the value of the currency in half and massively depreciate your currency or cut the money supply in half to get back to the old parody. Well, France and Belgium said, thats easy, were going to cut our currency in half, were going to double the price of gold. They went back to gold at a new higher price in terms of the French Frank and the Belgium Frank. This was extremely inflationary in France. I don't know if you saw the Woody Allan movie a couple of years back called Midnight in Paris. But it portrays, you know, it was 1925, portrayed US ex-patriots living a very extravagant glamorous lifestyle in Paris in the mid-1920s. Well, that was true, the French currency collapsed and if you had dollars, you could go to France and kind of live like a king even for a very modest amount of dollars. England, interestingly did the opposite, again, they had printed the money supply to get back to the old parody. They chose to go back to the old price and they did cut the money supply in half, which was disastrous, it was highly deflationary, and that put England in a depression three years ahead of the rest of the world. Now it was a nice sentiment. It was like, hey, you know, we issued the money at a certain price and we feel honor bound or duty bound to honor that price. Well, then dont print the money in the first place. But once youve printed it, you kind of have to own up to the fact that youve doubled the money supply and you need to cut the value of the currency in half. And the chancer of the ex-checker at the time was a fellow named Winston Churchill, great war leader, great prime minister, not such a great economist. He later said that this was the greatest blunder of his life that he didnt understand and implicate the deflationary implications of going back to gold at the wrong price. It wasnt about gold, it was about the price. Coming ahead to 1939 at this point, UK is the most overvalued currency in the world. They were losing to trade to France and Belgium. Their economy was in a complete set of depression. Finally there's a banking panic in 1931. They had to go off the gold standard and devalue the pound. So now its 1933, so weve seen Germany, Belgium, France, Italy, UK, all the values. Sequentially, the last guy standing is the United States of America. 1933, we just experienced the worst depression in US history from 29-33. President Roosevelt, literally within weeks of being sworn in to march April 1933, devalued the dollar against gold and raised the price of gold from $20 an ounce proximally to $35 an ounce, so 75% devaluation. But he did something very clever before that. He issued an executive order confiscating all the gold in America at $20 an ounce and made it a crime punishable by imprisonment in very steep fines if you held on to your gold. So everyone had to go to the post office so the treasury hand in their gold. They didn't steal it, they kind of did, but they gave you $20 for your gold knowing that were going to re-price it to $35, but the government want to capture the profit. They didnt want the so-called hoarders or speculators to profit on their gold investment. The government took the profit for itself by buying at the low price and then revaluing it to the higher price. For Knox was actually built in 1937 to put all this gold that the government had confiscated in 33 and 34. This very famous story where Franklin Roosevelt was in his bed in the White House in his pajamas and summon the secretary of the treasury, Henry Morgan at the time, and they were in the process of moving gold from $20-35 in small stages. And said, secretary of treasury comes in the present said, Henry, what do we want the price of gold to be today? He said, I know. Lets raise it 21 cents because thats 3x7 and 7 is my lucky number. And sure enough, the secretary of the treasury went out called New York and bid out the price to go 21 cents an ounce that day and over period of months they need to get it up to $35. So that was the devaluation of the dollar. There was another round in 1936. So what do we get for this sequential currency devaluation? Well, we got the worst impression in global history, massive unemployment, collapse and massive excess industrial capacities, stock market crash, civil unrest and ultimately World War II, one of the worst periods of economic performance and global history, so not much to show for currency war 1. Currency war 2, a little more contemporaneous, this is the 60s and 70s. This came out ofreally started in 1965 of president Johnsons so-called guns and butter policy, in the state of the union address in 1965 and other speeches in early 1965. The president announced two policies, one was a very rapid expansion, escalation of the US presence in Vietnam. The other was a series of social welfare and benefit programs that went under the title of the great society. And this was called guns and butter. Vietnam was the guns and welfare was the butter. And Johnson said, you know, Americas a rich country. We can afford both. Well, he was right. America was a rich country, but we couldnt afford both. This was the beginning of the twin deficits, the budget deficit, the trade deficit that have been with us ever since. It was only a matter of time before the money printing because the fed accommodated this mess of government spending led to inflation. But at this time, we were still under bread and wood system and gold was fixed at $35 an ounce. Now, US citizens could not own gold. That was illegal. But out trading partners, if you trade it with the United States, so Netherlands or France or Belgium and you trade with the United States and you run a trade surplus, you'll get dollars. In those days, you could take the dollars, hand them in to the treasury and get gold, and we would send you the gold. Actually in 1950, the United States had 20,000 tons of gold. By 1970, we were down to 9,000 tons. So say, where did the 11,000 tons go? Well, it went 3,000 to Germany, 2,000 to France, 2,000 to Italy, 600 to the Netherlands and so forth around the world. They actually still have that gold by the way, although we kind of have it because we stored it in New York. So thats a separate issue. But thats what happened to the gold. What happened by the late 60s early 70s? There was a run on Fort Knox. It was very, very apparent that either the dollarthe inflation was going to get out of control and the dollar was going to be worthless and you would want that gold. There was also what was called the gold window, which meant that you couldif your trading partner country and this persistence could do, this potential bank could, you could cash in $35 and get an ounce of gold when there was a private market where the price was 42. So people were cash buying the gold at 35, selling it at 42 as a risk for your arbitrage. Obviously we were going to drain Fort Knox. Fort Knox was going to be empty in a matter or time. And so president Nixon, instead of going for a sound dollar, he said, shut the window. He said, sorry, August 15, 1971, interrupted the most popular TV show in America, Bonanza, and announced what he called the new economic policy. Thats the same title Lennon used in Russia, 1921. The new economic policy, and he had three things, he had 10% surcharge on imports, wage in price controls. Can you imagine a republicanwell, any present republican or democrat? But republican president now saying wage in price controls in the United States of America. You couldnt get a raise or raise a price without government approval. And the third thing, which he mentioned kind of [???][0:25:07.4] was were closing the gold window and he said, are you sure the Americansif they were harmed, their dollar would be worth just as much tomorrow as it was the day before. Just dont travel abroad. But as long as you were home, it was all good. And this was supposed to create jobs and said, well, none of this happened. What happened over the next 7 years was one of the worst periods of economic performance in US history. We had three recessions, back to back to back, 1973. I'm sorry, 1974, 1979, 1980. Between 1977 and 1981m we had 50% inflation. The value of the dollar was cut in half. Gold went from $35 an ounce in August 1971 to $800 an ounce by January of 1980. Unemployment skyrocketed. One of the worst stock market crashes ever in 1974. Once again, none of the promises were met. None of the so-called benefits of a cheaper dollar were realized. All we got was inflation and awful real economic performance. So thats kinds of a synopsis in currency war 2. People dont seem to learn and were now in currency war 3. You know, by the way, going back to currency war 2 in 1980, the dollar almost collapsed in 1978. You know, a lot of people may have not been around then, done the first hand recollection but it came very close. Americans traveling abroad were routinely told, you know, whether hotels or restaurants, they didn't want dollars, you couldnt convert dollars. The United States doing the car demonstration, issued US treasury bonds to nominate it in Swiss Franks. They were the famous carter bonds but we had to borrow, US borrowed money in Swiss Franks because it wasnt clear that people wanted to hold dollar denominated paper. It came very close to collapse. Why didnt it collapse? Why didn't the dollar collapse in 1979, 1980. The answer, two words: Volker and Reagan. Paul Volker came in as chairman of the fed, raised interest rates to 19%, killed inflation, said, were going to make the dollar a good place to invest, you can get positive returns on your money. President Reagan came in, cut taxes, cut regulation, created a positive business climate. The two of them together save the dollar and really, its almost like a plane just about to hit the ground and you grab the throttle and pull it back and you regain altitude. That was the beginning of what was called the King Dollar or the Sound Dollar Policy and that lasted all the way from 1980-2010 and it lasted through republican and democratic administrations. Certainly Reagan but even with president Bush 41, James Baker, Secretary of the Treasury, president Clinton, Bob Rubin, a Secretary of the Treasury. This strong dollar policy lasted through both parties and all these administrations. It wasnt until 2000so we were not on the dollarsorry, we were not on a gold standard, but we were on a dollar standard. We said to the rest of the world, were going to maintain the value of the dollar, maintaining the person in power of the dollar, and you are trading partners, you can do whatever you want. But if you want to anchor to the dollar, consider that a reliable store value in something you can anchor to in just your own monetary policy accordingly. And far from perfect, but that worked very well on of course the 80s and 90s that we very had very, very robust growth, another period of long-sustaining growth with relatively low inflation. In 2010, the United States unilaterally abandoned the strong dollar policy. And the president Obama, state of the union address January 2010 made this explicit when he announced what he called the National Export Initiative. And the president said, it is the policy of the United States to double exports in 5 years. Bear in mind that nothing else was working. Consumption isis in 2010 right after the collapse, consumption was flat on the spec investment. You're not going to get investment if people aren't buying the stuff you're producing. So investment had collapse. Government spending was under stress. We had this, you know, one point, 5 trillion dollar deficits for a couple of years. But there was a limit there and the tea party victory in 2001, really put an end to the government spending. Great retraining. So you look at the components of GDP, consumption, investment, government spending, all three of them were misfiring. The only one left was net exports. So the president said, well, drive the economy forward, were going to double exports in 5 years. He didn't say were out to trash the dollar but how are we going to double exports? You know, there aren't going to be twice as many of us. Were not going to be twice as smart. Were not going to be twice as productive. The only way you can double exports is by trashing your currency and that is what the treasury and the feds set out to do, and we said to the rest of the world, in fact, you're on your own. So now that we have no gold standard, no dollar standard, no teller rule, no standard of any kind. This is just wake up everyday. You know, I see this on Wall Street and with my investing in banking partners and hedge fund partners. You know, some of the smartest people in the world in the world are spending all their time trying to read Ben Bernankes mind. It seems like an enormous waste to me when you think wed have smart people will have better things to do. But that is what's going on because there is no standard other than the Bernanke standard or the PhD standard. Give me a quick take on what Ben Bernanke says about the currency wars. He has a new theory and I go back to currency war 1 in the 1930s. The problem there was sequential devaluation. So Bernanke said, yeah, we understand sequential devaluations are bad, you know, you devalue, then I devalue, then the next guy devalues. Thats really suboptimal and we dont get any worse. Under Bernankes new theory, lets all devalue at once. And when he says All he means the UK, Japan, the United States and Europe. And when he says, Devalue what he really means is ease, print money, and his theory is if these four big economic blocks, US, UK, Japan and Europe, all print money at the same time. He says, its not a currency war because were all printing money at the same time. So in theory, the relative value, the comparative advantage, the terms of trade shouldnt change that much because were all printing together, so you get the ease without the currency war. And Bernanke actually use the phrase, So this not beg thy neighbor, this is enrich thy neighbor. So the more you print, the richer you were. So thats Bernankes theory and by the way, I'm not referring this, he said this in so many words. You can look at his speech this and so forth. Couple of problems with this, actually more than a couple, the first one is that Europe won't play. The US, Japan and UK are all doing this. There's no question about it. But Europe has taken a different view. Europe is sort of making the structural adjustments they need. Theyll print a little bit of money to save the euro but they won't print for the sole purpose of easing and generating inflation. So Europes not quite on board. But the other problem with it isI'm sorry, I'm missing somethingso the other problem with it, of course is the bricks. In other words, its all well and good for the big four to do this but what about China and Brazil and India and Russia and South Africa and beyond that, Indonesia, Malaysia, Korea. These are all affected by these easing policies because if you want the big currencies to get weaker, these other currencies have to get stronger, that hurts their exports or if they want to peg to the dollar. Were printing money so they have to print money to maintain the pegs so they get the inflation. Someone remarked, I think there's a lot of truth in it that Ben Bernanke has destabilized more regimes than the CIA by exporting inflation by printing money. And so actually this is notthis is true, the part of the out spring was driven by inflation and increases in the price of, you know, [???][0:32:54.5] and so forth were actions of riots in Brazil recently where they had an inflation problem and they raised the price of public transportation, a bus ticket and riots broke out in St. Paul. When that inflation was coming from the United States as Brazil tried to fight the currency wars. So this does have ripple effects around the world, the board of governors and the fed presidents say, you know, hey our job is to run US economic policy. Dont make us worry about all these other countries. They have central banks. They can figure this out for themselves. Thats a little disingenuous. When you manipulate for that or you manipulate every market in the world and to sort of wash your hands in the emerging market to say you guys are on your own. Its like a drunk driver who runs over a bunch of pedestrians and blames the pedestrians for being in the way. Thats the part ofthe bricks are just sitting there like, well, what are we supposed to do? You know, we have 20% unemployment. South Africa, were supposed to raise interest rates to keep our currency from crashing. Maybe, but why can't we have a sound dollar instead of a heavily of a heavily manipulated dollar and then make it easy for our trading partners to figure out what were doing. I'm going to jump in to a little bit of the economic theory behind all this. Lets start with one of my favorite authors, F. Scott Fitzgerald. Here's a great quote, he said, The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function. And thats the test that the test that economic analyst and policy makers are going through today and here are the two opposed ideas that you need to bare in mind. A lot of people say, yeah, inflations under control because its kind of 1%. Thats not bad. Its actually below the feds target and some people talk about deflation. The way to understand it, we have inflation and deflation going on at the same time, two opposite ideas happening at the same time. The deflation is natural. Its what happens in a depression because of deleveraging. So what's deleveraging? Well, I have to sell assets to pay off debt. When I sell assets, it tends to depress the price. I pay off the debt but prices are going down. So now I have to stop more assets to pay up more debt, etc. and you get into a debt deflation cycle until youve liquidated everything and prices hit bottom and the kind of people start looking around for bargains again, the cycles starts to turn. It can go a very long way and Erwin Fischer wrote about this in the 1920s and his debt deflation cycle theory of the great depression. But opposing that, we have inflation coming from policy. The fed has printed over 2.6 trillion dollars in the last four years. At the beginning of the crisis, their balance sheet was about 800 billion. Today, its up around 3.4 trillion, and heading north by the way, heading for 4 trillion at a very rapid rate. So if people say, how could you print, you know, 3 trillion dollars and not get inflation? Well come back to that. But what's actually going on is we have sort of a notional 5% deflation and a notional 5% inflation. The deflation from deleveraging the inflation from policy and they're pushing against each other and they're canceling each other out. So the net of the two is just kind of 1% that you see in the data, but its not stable. Youve got these two forces and one of them is going to prevail. Its going to snap and it could snap by the way could go into much more rapid inflation or much more serious deflation. And so its verythey're important to bear in mind. So again, using Fitzgerald as a guide, dont think we have well-behaved price indices. I understand it as a seismograph underon top of the San Andreas fault when its quiet knowing full well that you could have a massive earthquake at any time. Kind of the monetary policy roots of this, here's the basic statement of the quantity theory of money. Now you all learned this in your first week of macroeconomics, but its the equation M.V=P.Q. M is your money supply. V is the velocity. Velocity is just the turnover of money. So you know, I go to the bar tonight and I leave a tip and the bartender takes the tip and takes a taxi home and the taxi driver takes the fare and puts gasoline in his car. That dollar has a velocity of 3 because $1 supported $3 of goods and services, the tip, the taxi and the gasoline. But if I stay home and dont spend any money, my money has velocity of zero. So I, you know, remind people 3 trillion dollars times zero is zero. In other words, if you dont have velocity, you dont have an economy. So basically, money supply, how much money is there, times velocity, how quickly is the turning over, equals the nominal GDP, the gross dollar value of all the goods and services in the economy. And nominal GDP has two parts. Q is the real part, and P is the price index. So inflation or deflation. And Milton Freeman looked at this equation, says, well this is kind of easy. Its a solve in the set from a policy perspective in the sense that the mature economy like the United States can really only grow about 3 ?% a year. Its just the sum of increases in labor force participation plus increases in technology or productivity. How many people working? How productive are they? Thats how fast economy can grow. Well, our population increases about 1 ?% a year and productivity increases about 2 ?% a year. So you add them together, you get 3 1/2% or 4%. Thats the most the economy can grow. And we want P to be 1. 1any number times one is itself. So 1 means no inflation, no deflation. So P of 1 is ideal. And frequently, the velocity was constant. So he said, monetary policy is a very simple thing to figure out. If the P can only grow about 4% a yearsorry, if the real economy can only grow about 4% a year and you want no inflation, deflation, the velocity is constant. All you have to do is increase the money supply about 4% a year and you'll get 4% Real Growth with no inflation or deflation. And Freeman used to joke that we dont need a board of governors and federal market committee just get a computer to increase the money supply about 4% a year. Now, there's more to it than that. There's leads and lags and sometimes labor force participation increases faster if you're coming out for recession but that was the basic idea. So lets look at what's been happening in the real world. So here's your money supply. Now, notice from the 1980-2008, it grows at a very slow, steady pace, exactly what Freeman was prescribing. All of the sudden in 2008, it goes vertical. It takes off like a roman candle. Thats QE1. Then it goes sideways a little bit. There was a gap and then the next vertical leg up is QE2. QE2 is over in June 2011. But by September 2012, the fed was back in the printing press and they announced QE3. You see the beginnings of QE3 there. I have to update this chart constantly because QE3 is going. Its actually off the charts now. I think were over 3.2 trillion but if I came back next year Id had tokind of show you where the money supply is. So this is what's happening in the money supply. Its gone up almost 400% in four years. So remember, Freeman said, well, money should suppose to go about 4% a year if we dont want inflation. Here the money supply has grown 400%. So why dont we have 396% inflation to go with our 4% Real Growth? Well, here's the answer, Freeman was wrong about velocity. Velocity is not constant. Velocity is imploding. We havent seen anything like this since the early 1930s. So you can understand monetary policy is a desperate race between increasing money supply and decreasing velocity. You go back to the equation. Your M is going up but your V is collapsing. And If the V is collapsing and the M is not going up, then the real economy is going down. So this is really what's going on and why the feds printing so much money and why we havent had the inflation one would expect because the turnover money is not there. People are just not borrowing it, and they're not spending it. So here'sI like to keep my equations simple so I can understand them but here's one way to think about monetary policy. I show you 1+3=4 and 3+1=4. Take the first term to be a nominalsorry, take the first term to be inflation. Take the second term to be Real Growth and the combination of the two is Nominal Growth. So 1% inflation + 3% Real Growth gives you 4% Nominal Growth. The fed has to get to 4%. If we dont get to 4% nominal growth, were going to fall on the debt because the deficits are increasing faster than that. I remember deficits are nominal. If I borrow a dollar, I owe you a dollar. It doesnt matter if its worth a dollar 10 or 90. I mean, it kind of matters. Thats an important fact. But contractually I owe you a dollar. So the United States government owes nominal debt. If we dont have nominal GDP, we can't pay the nominal debt. Now the fed would like 1+3, theyd like 1% inflation and 3% Real Growth. But theyll take 3+1. Theyll take 3% inflation and 1% Real Growth and thats really their goal right now. They're following the town on real growth, they're just going for inflation because they have to get to 4, because if you dont get to 4, we can't pay the debt. So what the fed is really trying to do is bend this curve. They're trying to bend the velocity curve. Now they can make money supply whatever they want. They can dial this up or down. Trust me, they can hit this target. But this is psychological they have to basically lie to you. They have to engage in propaganda to bend the velocity curve, to make you want to spend more money than youre actually doing right now so that they can get the nominal growth they need to pay off the debt. So how do you bend the velocity curve? What is the policy here? I know, as I mentioned, this exercise and propaganda, two ways to do it, two tools that goesthe first is negative real rates. Negative real rates is when inflation is higher than the nominal rate. Thats good because if you're a borrower in that world, you actually pay the bank back in cheaper dollars. Thats better than 0%. Thats the bank paying you to be a borrower. So ideally the fed would say, well have 2% on the tenure note and 3% inflation, negative real raise of 1%. Thats a very powerful inducement to go out and borrow. The other thing they want to do is deliver and inflationary shock. Now here, the fed has said at [???][0:43:29.7] that their inflation target is 2%. And you know, 2%, 2%, 2% I mean, talk about 2 ? as one of their threshold goals for ending quantitative easing or raising rates. But just take 2% as their stated target. Well, if I promise you 2% and I delivered 2%. There's no change in behavior. I've exactly met your expectations so there's no reason for you change your behavior. What I have to do is lie to you. I have to tell you 2% and deliver a 3%. Thats a shock, now you're like, oh gee, inflations out of control, better go buy a house, buy a car, buy a refrigerator, do whatever. So that changes behavior. So 3% inflation with 2% or 2?% on the tenure note is a negative interest rate, which is a powerful inducement to borrow. And there's also an inflation shock, which is a powerful inducement to spend. And the idea of 3% inflation is to get the borrowing and lending and spending machine going again, try to get nominal GDP back to trend, make it self sustaining. We draw policy, substitute real GDP for nominal GDP, get real GDP back to train and we all live happily ever after. This is what the fed is trying to do. They're going to fail but its important toand if you dont understand policy, its important to understand what they're trying to do and why they're trying to do it, than when you see them failing, its very easy to forecast monetary policy because there's just going to do more of it until they get what they want. Why do they have to get this? Why do they have to have inflation? What's wrong with a little deflation? Well, here's what's wrong with it. This is actually the feds worst nightmare. The governmentin economic theory, inflation and deflation, you know, prices are going up, prices are going down. So what? You know, you get a raise or you dont get a raise or you get a little benefit or are there winners or losers? It would seem like a normal economic process but the governments view of inflation and deflation is asymmetric. They have to have inflation. They cannot have deflation. Here's a world, here's an interesting world at close through the looking glass. Here what were showing is nominal growth minus inflation equals real growth. Now, the way you normally see this equation, youll see something like 4% nominal growth minus 1% inflation equals 3% real growth. Thats a happy world. Thats a world of high nominal growth, low inflation and pretty good real growth. But look what happens when you use negatives. Imagine a world of -1% nominal growth. So the gross dollar value of GDP is going down 1% a year, but 3% deflation. Well, when you subtract inflation, deflation is the negative. When you subtract the negative, what do you do? You add the absolute value. So (-1) (-3) = 2 which is real growth. So here is what we have, 2% real growth, 2% real growth sounds pretty good. Thats not so bad. But look at nominal GDP. Its going down. Now you're nominal debts going up because the budget deficits an interest payments. So if your nominal GDP is going down and your nominal debts going up, what's happening to your debt to GDP ratio? Its going up. So everyones saying, Washingtons patting themselves in the back saying, a bunch of deficit is coming down. Its really under control. Well, your debt to GDP ratio isnt. Your debt to GDP ratios still going up because your budget deficit isnt coming down faster, then the nominal growth is not there in the denominator to support the fact that your budget deficit is coming down. So your deficit isyour debt is still going up. Your nominal GDP is not going up enough. Your ratio is going up. You're still on the path to grease even with the declining budget deficit. So what I focus on is the debt to GDP ratio. There are other reasons the government cant have deflation. One of them is, they can't tax it. So imagine you make a $100,000 a year and your boss gives you a $10,000 raise and prices are constant, okay? So you just had a $10,000 increase in your real standard of living. Youve got 10,000 more and prices are the same except what happens. So the government comes along, they take half, they 5,000 and you get the other 5,000. But imagine an opposite case. You're making 100,000 a year. You dont get a raise, but prices drop 10%. Well, you have the same $10,000 increase in your standard of living. Your salary didnt go up at all but the price of everything you buy went down so you're better off. Except that, now you get to keep the whole $10,000 because the government doesnt know how to tax deflation. So deflation can increase the real standard of living of the American people but the government won't allow it because they cant tax it. It destroys tax revenues. So that, the fact that that GDP goes up when nominal GDP is negative, the fact that the government can't tax it, there are other consequences. But suffice to say that the government has zero tolerance for deflation. Therefore, they must have inflation, and when you see deflation on the horizon, you can bet that the fed will keep printing because they have no other way around this. So does thetalk about this 3% inflation goal. How does the fed actually accomplish this. Well, here's the toolkit. You know, they cut interest rates starting 2007. Quantitative easing started in 2008. Communications policy, I call propaganda policy in 2008. Currency wars began at 2010. Operation twist, changing the maturity structure of the fed balance sheet in 2011. They now nominal GDP targets in 2012. And on 2013, of course we have the famous taper debate. Well find out on September 18th what's going to happen there. My own view and its a very close call. My own view is the fed won't taper and I based that on the feds own and now its criteria. If you look at the criteria the fed laid out for whether they were tapered and whether the economic performance of the economy is actually been. Your conclusion would be that they won't taper. But they might. I have to admit its a very close call or two schools led by Jeremy Stein and [PH][Jenny Yelen] if they do taper, if I'm wrong, and they do taper, they will be tapering in to weakness. So you might even expect a recession in 2014. By the way, once this expansion going to pick up steam, guess what? Its 4 years old. Were probably ready for a recession. Average life of an expansion is about 58 months. So the fed will be tapering into weakness. We may get a recession in 2014. I dont think they will taper but I'm wrong and they do, they're going to expand asset purchases by probably April or May in 2014. In other words, it will be QE4. The problem with manipulation is there's no way up. There's no good way out of this. So this iskind of economic overview what the feds doing, why they're doing it and how you can understand policy going forward. What could possibly go wrong with this economy over at the fed? Well, they're making a lot of mistakes. The first one is, the fed doesnt really distinguish between the dynamic and the static. The fed would look at this automobile, you see here, and say, you know, that automobile is in great shape. There's not a scratch on it. Engine runs fine, nice tank of gas, brand new tires, etc. but of course we all know what's going to happen next. That cars going to crash and burn and kill a lot of people and burst into flames. But the fed really doesnt really use the right models. They use [???][0:50:52.1] models that dont take into account, you know, exponential effects, recursive functions and the kind of what we call the Black Swans. So they're using the sort of wrong methodology. I liked another metaphor but they're not really metaphors because the sciences are the same. The fed thinks were playing with the thermostat. They can dial the, you know, the house is a little too cold, you dial it up, the house is a little too warm. You dial it back down again, its linear, its reversible. But what the fed is actually doing, is they're playing with a nuclear reactor. A nuclear reactor is a dynamic, critical state system prone to catastrophic failure. Now, you can dial a nuclear reactor up or down, but you better know what you're doing because if you get it wrong, you're going to melt it down, you're going to have a catastrophe and that's irreversible. There's no such thing as a melt-up of a nuclear reactor. One of my great concerns is the fed has all the wrong models, misapprehension of the statistical properties a risk. They think they're playing with a thermostat and they're actually playing with a nuclear reaction and they risk collapsing our confidence in the dollar. In the interest time, I'm going to skip the science class and kind of get to the end game. So we have thislet me just summarize by saying there's good reason to believe that were looking at a potential collapse of confidence in the US dollar and indeed the entire International Monetary System. The International Monetary System is based on the dollar. So the dollar goes, the system goes. Thats not meant to be a provocative statement. The International Monetary System is actually collapsed three times in the past hundred years, in 1914, 1939 and 1971. So this would be the fourth collapse in a hundred years, so not that infrequent. And when the monetary system collapses, its not the end of the world. We dont all go living caves with canned goods and all that. What happens is the major trading of financial powers get together. They sit down and they recut the deal. Thats what's called, the rules of the game. So what I want to think about a little bit is since we can see the collapse coming is what are the new rules of the game? What will the International Monetary System of the future look like as a resolve of sort of new [???][0:53:03.2] style conference in the face of a collapse. I've got four scenarios here, multiple reserve currencies, SDRs, gold and Collapse, followed by something worse. Multiple reserve currencies, the ideas, you know, in 2000, 70% of international reserves were held in dollars. Today, that number 60% is trending down. So imagine a world where the dollar goes below 50%, maybe its 45 or 40%, the euro comes up, you know, the Australian dollar and Canadian dollar were just recently admitted by the IMF as official reserve currencies so they have a larger role and we end up in a situation where, you know, you get a whole bunch of reserve currencies I called kumbayah solution we all just get along. This isthis won't work, this is unstable because there is no anchor. Theres no gold, there's no dollar. So instead of one central bank behaving badly, you have 5, 6 or 7 behaving badly. I think this would exacerbate rather than mitigate the currency wars. So its something thats favored by academics but it doesnt really solve any of the problems weve been discussing. The next one, this is the one preferred by the elites. When I say elites, its not a deep dark conspiracy, you know, finance ministers, treasurers, secretaries, academics, central bankers or the policy makers. This is the SDR. The SDR is a special drawing right. Its reallyits not understoodit was understood by a very few people but its unbelievably simple. The way to understand it, the fed is a printing press. They can print dollars. The European Central Bank has a printing press. They can print euros. And the IMF has a printing press. They can print SDRs and thats all it is. Its world money. They can print as much as they want. They hand it out. They can reflate and re-liquefy the global economy. The IMF actually has a tenure plan to make the SDR the global reserve currency. Again, not a secret, you can find it on their website. I want to give a quick example because I know this group is attuned to a policy, but how the SDR is already sort of creeping in to our system. And the United States Treasury got authority to provide a hundred billion dollars to the IMF. This was legislation passed in 2009. As part of this global bailout, you know, Christine Laggard went around with her Louis Vuitton purse and said, fill her up. But I want to just illustrate how if the United States meets its commitment. We made the commitment, its in law, we havent funded it yet. Kind of how the math works if the US were to meet this commitment. Now the SDR is a basket. Its not backed by anything. There's nothing behind it but the value of an SDR expressed in dollars is a basket. Its got a number of components. Each component has a way and all you do is you take the component like Sterling or Yen or Swiss Frank. You convert it to dollars to the current exchange rate. You multiply it by the weight and that gives you a dollar result. And you add up the dollar results and thats the value of an SDR. So what will happen when the United States Treasury gives the hundred billion dollars to the IMF? Well, what a lot of people dont realize is the IMF doesnt give us a note for a hundred billion dollars. They give us a note for SDRs. We then end up with an SDR promissory note. That would be converted at the SDR value on the date we make the loan. So imagine the baskets, just sort of saying, I say the euros is a dollar 35. Its a hundred yen to the dollar. Pound sterling is a dollar 55. With that basket, the SDR would be worth a dollar 52.4. If we give the treasury and hundredwe give the IMF 100 billion dollars, they're going to give us a note for 65.6 billion SDRs. Now, imagine a few years go by, the note matures and the treasury goes down the IMF says, I got my 65 billion SDR note here, please cash it in. But imagine in the meantime all those exchange rates have changed and the dollar has weakened. Remember thats US policy. So lets say that the new basket, the euro is now worth a dollar 40. Japanese yen is 95 to the dollar. Pound sterling are a dollar 60. With those exchange rates, lower dollar, cheaper foreignhigher foreign exchange, the SDR will now be worth a dollar 55.7. So when we cash in the 65.6 billion SDR note, what we get back is a 102 billion. So we loan them 100 billion but we get 102 billion back plus interest, I'm leaving the interest out of this. The treasury would actually make a 2-billion dollar profit on the cheaper dollar. But think about that, the treasury is the sponsor of the United States dollar and here they're going to enter into a transaction with the IMF where they're in effect, shorting the dollar. Were shorting all on currency. Well make a 2-billion dollar profit in my example if the dollar goes down. The slight finding out that Mark Zuckerberg is shorting Facebook. I dont know how the treasury would explain it, maybe well bump in to Jack Lou and ask him how he feels about shorting the dollar. But thats the effect of doing an SDR along with the IMF. The next slide isthe United States, I talked about this 100-billion facility. President Obama sent a letter to congress, April 16th 2009. He requested these US funds and he said this is primarilythis is a quote from the president, Primarily to developing an emerging market countries facing economic and financial difficulties. So thats what he's told the congress he wanted the money for. Bonnie Frank and Richard Lugar were the key sponsors. I was inserted in a war spending bill, of course, why not, IMF funding and a war spending bill passed by congress June 16th 2009. By the way, subsequently, Lugar, of course, was confronted with a tea party challenge, lost the primary, Bonnie Frank retired, Madam Laggard, managing director of the IMF was asked how she felt about losing Bonnie Frank and Richard Lugar, and she said in a very famous quote, she said, We will miss them. So now, so what did the IMF do with the money? Well, what they did is theyif you look at the total IMF loans, credit loans, etc. 90%, sorry, 91% of all the IMF loans and advances either want to bail out of Europe or to Mexico. Only 9% went to the rest of the world. So I leave it to you to decide whether the president was entirely candid with the congress when he said, this is primarily for developing an emerging market economies, you know, you dont see it create Indonesia, India, Brazil, Thailand, Malaysia, you dont see those countries getting more than 9% of the IMF money. This money basically went to bail out Europe. So thats another thing where, again, I think the American people were a little more aware, they might raise a few questions. Third outcome is the gold standardI'm just going to go through this very quickly. All goal standards are relation between paper money and gold. But you have to ask yourself a couple of questions when you said up the gold standard. First one is, what's your definition of money? Because we have M0, M1, M2, these are technical definitions. They're all different. So you have to pick one of those to be your money. The second one is what's the proper reserve ratio? Do you need a hundred cents on the dollar of gold to back all the paper money? Well, a lot of gold votes would say yes. But historically, thats not true. England ran a very successful gold standard in the 19th century, with 20% back in the United States for the most of the 20th century was on the gold standard with 40% backing. So history says, you can have 20 or 40% backing and that works just fine. And the third thing is which nations are included. The simplest way to understand is that the US could do this on its own, but it will be a blunder because if we had a gold standard dollar backed by gold and were the only one doing it, all of the other currencies in the world would be essentially be worthless. Nobody would want anything other than dollars, which would be extremely deflationary because the other currencies would not be desirable and it would repeat the blunder Winston Churchill made 1925. So we want to look at what those criteria look at actually where the gold is, if you take the 17 members of the European monetary system, those who backed the euro, they have 10,000 tons, the United States has 8,000. The IMF has about 3,000 tons. You see China and Switzerland and kind of tails off after that. So the good news for the US and Europe is we still have all the gold and I think we will have the largest voice by far if there is a new international monetary conference with one foot now, which is, China is not transparent. So that China bar, the 1,000 tons I'm showing there. Its probably close to the 4,000 tons. Well probably learn that a year from now when they update their figures. So China has bought themselves a very big seat at the table. Here are the implied prices of gold using the criteria I mentioned. Along the bottom, G is for global, M is for money supply, so I'm showing M1 and the percentage and the brackets is the backing. So the first one, global money, global M1, 40% backing, thats about $7,000 an ounce. You know, thats where the price of gold has to be to support the money supply without deflation. So its a non-deflationary price of gold. And you see all the way over on the right, global money supply, global M2 with 100% backing is $44,000 an ounce. I'm not predicting $44,000 an ounce gold, and I dont think thats necessary but I'm just showing you the math that you get to, the kind of implied prices you get to if you go back to a gold standard. And the last scenario is collapse, which I actually think is the most likely through a combination of wishful thinking, denial, delay, misapprehension of the statistical properties of risk and obey a policy will probably just blunder into a collapse, at which point the response would take the form of executive orders and, you know, if there's social unrest probably some kind of new fascism. There's a pluck from my book and I thank you very much. [Applause] James Rickards:Thank you. I know we ran a little bit over. Some of you may have to go but I'm very happy to stay and so if any of you have any questions, we certainly have time. I think we have a couple of microphones around. So if you just raise your hand, Id be happy to answer any questions anyone has. Yes sir. Interviewer:We just learned this past week that were now the lowest labor force participation since 1978. Kind of a check in to that question, to what extent that participation a symptom of, you know, a depressive economy and zero velocity of money. To what extent is it a cause? What's the relationship between them? James Rickards:Yeah, its a good way to frame the question because a lot of these things are feedback loops and its hard to sort out cause and effect. But it doesnt matter. Each thing feeds into the other. So there's no doubt that low labor force participation is a symptom of a depressed economy and the reason for the depression having to do with what's called regime uncertainty. You know, if you're a business person and you're responsible for, you know, a tenure 5-billion dollar infrastructure projects, youve got to sign off on spending 5 billion dollars, investing 5 billion dollars now with a tenure payoff. And I said, okay, what are your taxes going to be? What do your health care cost going to be? What is your environmental regulation going to be? You know, on and on and on. You can't answer any of those questions. I'm not here to debate policy. You can debate the policy all day long. I'm just saying a businessperson can't answer those questions. And so they would prefer to sit on the sidelines, hold on to the cash until they see some clarity and resolution. So this was the problem in the great depression. You know, we had a very bad depression in 1920. Industrial production collapsed, stock market collapsed, inflation took off, and unemployment skyrocketed. It was a disaster, and the government response was to balance the budget and do nothing. That depression was over in 18 months and led to the roaring 20s, which is one of the most robust periods of growth in US history. Because everyone say its the great depression, I like to look at the depression in 1920. It was over in 18 months. It was bad but it was over. That was the real V. We go all the way down and you come back up again. In the 1930s it was really Hoover and Roosevelt. There was an amazing continuity between the Hoover Administration and the Roosevelt Administration. But you know, and they had cotton price supports and they took them away and they devalued the dollar against and then they tried to pack the spring cord and they had ways for price controls and they put them on, took them off. Businesspeople didn't know what to do and were in a very similar period today. So we are in the depression. Labor force participation is a big deal. Were really placing the policy is, you know, the fed stated the goal, 6 1/2% unemployment as not a trigger but a threshold. They said, were not going to raise rates until unemployment gets the 6?%. Well, its been coming down. It went from, I think 7.1 or I may up by a point there, but it is been trending down. We might actually get to 6 1/2% but with the lowest labor force participation, flat real wages, you know, 15% unemployed. I mean, imagine a world where there's only one person in the economy working, just one person in the economy working and the person was looking for a job and they got a job and everyone else is staying home. In that world, unemployment is 0, unemployment is 0%, a pretty low rate of unemployment. But obviously, you know, extreme example that thats not a desirable state of the world. So I think the fed has got to wrestle with, you know, they put a stake in the ground on these nominal targets with 6.5 percent but what does that mean where labor force participation is going to approach 60. The number of people working in the United States today is about where it was in the 1999. For all the growth and all the increase in population and immigration set, we still have 131 million people who had jobs. So this is a disaster. You have 50 million on food stamps, 11 million on disability, which is the new, you know, unemployment. 26 million unemployed or underemployed, you know, looking for more hours, etc. I mean, these are depression level statistics. Yes sir, in the back. Interviewer:Hi, how is it that the way the China manipulates our currency, how is that different than QE1, QE2, and QE3? James Rickards:Well, everyits not in some ways. I mean, every country manipulates their currency to some extent. Its a policy tool. So you, you know, you have tax policy, interest rate policy, a monetary policy and a new currency policy. So everyone does it to some extent. Now the biggest currency manipulator in the world is the United States of America. It is true that China tried to keep a lid on the Yuan. But Chinait was kind of funny. They said, yeah, you know, China and the United States are the two largest economies in the world, one of the largest bilateral trading relationships in the world. So wouldnt it be cool if we have some stability in the currency between the two? So you can make trading investment decisions and remove the currency uncertainty. But the fed didn't want that. The fed wanted China to appreciate their currency because we wanted to cheapen the dollar because we want to import inflation to meet those now GDP targets that I described. So what the fed did, the fed started printing money now. For so long as China wanted to maintain the pay. You want to maintain the pay. Well if the feds printing money and that moneys going to China in the form of the current account surplus or portfolio investment hot money inflows, China has to print money to soak up the dollars. You're a Chinese exporter and you earned dollars, the peoples bank of China says, give us the dollars and well give you local currency. Well, the more dollars coming in, the more local currency they had to print. So what was happening is, as the fed was printing money, the inflation that you would expected to see in the United States was actually being exported to China. China was creating their own inflation by printing their money to soak up the dollars. Inflations very politically destabilizing I China throughout 5,000 years. Regimes have fallen, dynasties have collapsed around the subject of inflation. It was also a contributor to the [???][1:09:32.5] demonstrations of massacre in 1989. So finally, China blanked, China said, you know, by maintaining the peg and the fed printing, were going to get inflation. Thats dangerous politically. So were going to get the Yuan go up. So the fed won that round of the currency wars but watch out because the stronger the Yuan gets, the more inflation were going to get back, so the blow back is going to be inflation in the United States. Its not here yet, but I acknowledge that, but its coming. So did China, you know, print money to maintain the peg? Is that a form of currency manipulation? Sure. But there's no bigger manipulator than the US, which is trying to, as I said, the more youyou want to print, our printing press is bigger than your printing press. And finally we got China to blink. Interviewer:This will have to be the last question. James Rickards:Oh, sorry. Do we haveyes sir, right here near the pillar? Interviewer:Yes, well, this has been a great lesson on economics as well as history. But I want to go back briefly to even before the 20s. You have something in your book where you talk about where Andrew Jackson abolished the second bank of the United States in the 1836. And we had for 80 years no central bank and sort of competing private currencies, sort of the classy system of free banking. And you say, from 1836-1913, an almost 80-year period of unprecedented prosperity innovation and strong economic growth for that period of the United States had no central bank. So is that the only solution today? James Rickards:Its one solution. I dont think weI have long advocated a lot of reforms at the fed. But you know, lately I'm thinking maybe its just beyond hope and we should abolish central bank. I dont think it will be a bad thing. You know, what is a dollar? Look at a dollar. My first week of law school, they taught us in contrast always read the contract. The paper dollar is your contract and if you read what it says, right on top it says Federal Reserve note. At least where I went to law school, note is a liability and not an asset and if you look at the feds balance sheet, sure enough dollar is a circulation or a liability. So on the feds balance sheet, they're on the right hand side of the balance sheet. So you could think of a dollar bill as we all probably have one in our pockets as a perpetual non-interest bearing note of an insolvent central bank. The fed is insolvent by the way. They have a 3.2-trillion dollar balance sheet. They have 60 billion at capital. So they're leverage 50-1 with long duration assets. They look like a bad hedge fund. But they dont have to mark to market. But if you took the feds balance sheet and call out the primary dealers and say, give me prices on those assets and mark the balance sheets to market, the feds capital would be negative. So they're insolvent today. So our so-called money is a perpetual non-interest bearing liability of an insolvent central bank. I dont know why thats so important, why we couldnt do without them. Okay, thank you. [Applause]