James Rickards sees threats in many places. In his latest book, “The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis,” he paints a picture of how that crisis will unfold. He argues that rather than pumping the financial system with liquidity, as happened in 2008, “elites” will freeze the financial plumbing until the crisis has passed.
That means banks will close, as will exchanges. Money-market funds will be inaccessible. Forget trying to get your hands on money.
Rickards, who was the principal negotiator of the 1998 bailout of Long-Term Capital Management as the hedge fund’s general counsel, calls this new world “ice-nine,” after a fictitious substance in Kurt Vonnegut’s “Cat’s Cradle.” Freezing customer funds in bank accounts is what happened in Cyprus is 2012 and Greece in 2015, he says. In the U.S., the Securities and Exchange Commission adopted a rule in 2014 that lets money-market funds suspend redemptions.
Prefer stockpiling cash? Governments are eliminating high-denomination bills, and Kenneth Rogoff, a former IMF chief economist, has written a book that Rickards describes as “an elite step-by-step plan to eliminate cash entirely.”
Then, Rickards says, there are rules on banks and other institutions. Capital controls could be imposed to keep money from fleeing across borders. And the U.S. is still under the state of emergency declared by President George W. Bush days after the Sept. 11, 2001, terrorist attacks and renewed annually since then. Rickards argues that such measures can be applied in any emergency, “including money riots in the event of a financial system breakdown and ice-nine asset freeze.”
Rickards, who now advises the Defense Department and U.S. intelligence community on international economics and financial threats, discussed his latest book with MarketWatch.
MarketWatch: Why do you believe a financial crisis is coming in 2018, and what do you see as the likely triggers?
James Rickards: A financial crisis is certainly coming. In “The Road to Ruin,” I use 2018 as a target date and device because the two prior systemic crises, 1998 and 2008, were 10 years apart. I extended the timeline 10 years into the future from the 2008 crisis to maintain the 10-year tempo, and this is how I arrived at 2018. Yet I make the point in the book that the exact date is unimportant. What is most important is that the crisis is coming and the time to prepare is now. It could happen in 2018, 2019, or it could happen tomorrow. The conditions for collapse are all in place.
It’s simply a matter of the right catalyst and array of factors in the critical state. Likely triggers could include a major bank failure, a failure to deliver physical gold, a war, a natural disaster, a cyber–financial attack and many other events. The trigger does not matter. The exact timing does not matter. What matters is that the crisis is inevitable and coming soon. Investors need to prepare.
MW: Is this likely to be on the scale of the 2008 financial crisis? Or what is a better comparison?
J.R.: The new crisis will be of unprecedented scale. This is because the system itself is of unprecedented scale and interconnectedness. In complex dynamic systems that reach the critical state, the most catastrophic event that can occur is an exponential function of scale. This means that if you double the system, you do not double the risk; you increase it by a factor of five or 10.
Since we have vastly increased the scale of the financial system since 2008, with larger banks, greater concentration of banking assets in fewer institutions, larger derivatives positions, and $ 70 trillion of new debt, we should expect the next crisis to be much worse than the last. There is no comparison short of wartime exigencies such as 1914. The next crisis will be of unprecedented scale and damage.
MW: On the flip side, what could prevent this crisis? And how do you respond to those who say this is just fear-mongering and a conspiracy theory? What are they missing?
J.R.: Policies that could prevent the crisis are spelled out clearly in the book. These include reinstatement of the Glass-Steagall separation of investment and commercial banking, breaking up big banks, banning most derivatives, and tougher law enforcement of bank wrongdoing.
The book also explains clearly why the dysfunctions in the system are not a “conspiracy” but the workings of like-minded individuals operating in a closed loop lacking cognitive diversity. I am not a fear-monger; people are already afraid, [and] I’m just trying to shed some light on the situation, which is why readers have responded so positively to the book. The critics do not have a firm grasp of the statistical properties of risk. They are clinging to obsolete equilibrium models instead of embracing more accurate models based on complexity theory and behavioral psychology.
MW: How does the election of Donald Trump play into your scenario of a 2018 crisis? What policies would you recommend that he adopt or push Congress for? How much of a difference can that make?
J.R.: The election of Donald Trump does little to change my analysis. The Trump administration is focusing on macroeconomic policy relating to taxes, spending and regulation. That’s fine, but it does not address the issue of systemic risk, which exists separately from normal business-cycle and credit-cycle considerations (although credit cycles and systemic-risk event may coincide at times).
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The policies to avoid a systemic catastrophe in the financial system that I would recommend to the Trump administration are the same ones outlined in the book. These include reinstatement of Glass-Steagall, breaking up big banks and banning derivatives. The odds of any of these policies becoming law are close to zero because of the power of bank lobbyists. These policies would mitigate systemic risk in the same way that setting off controlled dynamite explosions on steep ski slopes mitigates avalanche risk. These policies could make a huge difference but are unlikely to happen; therefore my systemic-risk forecast is still intact.
MW: Should investors be worried about that resounding “no” in Italy’s referendum? So far they seem to be saying we saw it coming.
J.R.: The problem with the “no” vote in Italy is not the vote itself, but what comes next. We’re already seeing fallout including the resignation of the Renzi government, the failure of the Italian bank private recapitalizations, the emergence of a public recapitalization, and possible spillovers into Germany’s Deutsche Bank DBK, -0.95% DB, -0.80% and Spain’s Banco Popular BPESF, -9.91% POP, -1.26% . It’s important to recall that the 1998 crisis started in 1997, and the 2008 crisis started in 2007. Large systemic crises can take a year to incubate and spread. In 2017, we may be witnessing the early stages of a crisis that will come to a head in 2018 as described in my book.
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MW: Who will be the big losers in the next crisis? And how do you recommend that investors position themselves?
J.R.: Losers will fall into two groups. The first are those who hold wealth in digital form, such as stocks, bonds, money-market funds and bank accounts. This type of wealth is the easiest to freeze in a panic. You will not be able to access this wealth, except perhaps in very small amounts for gas and groceries, in the next panic. The solution is to have hard assets outside the digital system such as gold, silver, fine art, land and private equity where you rely on written contracts and not digital records.
The second group are those who rely on fixed-income returns such as life insurance, annuities, retirement accounts, social security and bank interest. These income streams are likely to lose value, since governments will have to resort to inflation to deal with the overwhelming mountain of debt collapsing upon them. The solution to this is to allocate 10% of your investible assets to physical gold or silver. That will be your inflation insurance when the time comes.