How Does The Collapse Of The Monetary System Look Like?

In a video interview on RT, Jim Rickards explains his view on the coming collapse of the international monetary system. He also argues why he does not expect any tapering. Parts of his views are based on his new book: “The death of money.”

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Rickards on what would trigger a collapse of the international monetary system and how such a collapse would look like:

A collapse usually comes from a loss of confidence, and confidence is a very intangible thing.

One of the problems with policymakers, in particular the Fed but alos the White House and the Treasury, is that they use these equilibrium models and they think that if nominal GDP is not high enough they can print money which creates inflation, get nominal GDP on a sustainable path, withdrawal policy, replace GDP with real GDP. As they say, this is where the equilibrium models would protect; this is what policymakers rely on. In fact, the world is NOT an equilibrium system, it is a complex system, and complex systems are characterized by sudden sharp changes what physicists call phase transitions (I think a more proper terminology would be a tipping point). You can print and print up to the point of a collapse and then suddenly confidence disappears. So I think the policymakers take confidence for granted. They are in the process of destroying confidence, slowly at first and then very suddenly.

By the way, when I talk about the collapse in the international monetary system that is not meant to be a provocative statement. The international monetary system actually has collapsed three times in the past 100 years; it collapsed in 1914, in 1939, and again in 1971. So these things do happen, and it does not mean the end of the world. It does mean we all go live in caves. What it means is that the major trading financial powers have to sit down, create a new system to replace the one that failed. In my new book, I look forward and define what the new system could look like, who the players could be, what the alternatives would be to the current dollar system. For example, China was not a player in the 70ies; the last time this happened at the Smithsonian agreement in 1971, China was around of course but was not a big factor in the international monetary system. This time they will be a player, so what does that mean?

Rickards on which options the Fed has left:

We are in a depression. If the Fed were to taper, which I do not expect, but if they did it they would be tapering into weakness and they would guarantee a recession 2014. I think the data will bear that out. They are not going to taper; they painted themselves into a corner where there are no good ways out: if they taper, then they taper into weakness and cause a recession, but if they keep printing eventually they will destroy the confidence in the dollar and create an international monetary crisis. There are bad outcomes either way which is what happens when you manipulate markets.

Rickards on why there will be no tapering but rather an increase of asset purchases:

There are papers presented last week by Federal Open Market Committee economists, and they suggested that the unemployment threshold which currently is at 6.5% to be moved down to 5.5%. This could suggest keeping rates low through 2017. Is this just the Fed testing waters here?

Well, the Fed always speaks in code. If you go back to December 2012, when the Fed first announced that target, it was never a trigger; it was always a threshold. In other words, they did not say we will raise interest rates when unemployment gets to 6.5%, they said we will not raise interest rates until it gets 6.5% but it could get a lot lower than that before we raise it. This paper just confirms that.

Unemployment is going down for the wrong reasons. Unemployment is not going down because you are creating a lot of jobs; it is going down because labor force participation is collapsing. That is extremely negative for the economy; GDP is really just the sum of labor force participation plus productivity. So how many people are working and how productive are they. With the number of people
shrinking at an unprecedented rate going back to levels last seen in 1978 (when women did not participate in the workforce).

What the paper really says is that they have given up on real growth and they are targeting nominal growth. This is just nominal GDP targeting by another name. If real growth is not good enough and you have to get nominal growth to a certain level you make up the difference with inflation. To do that, they are going to print money. That paper is completely in accord with Yellen her views as expressed in prior speeches and papers and other interviews she has given. Actually, I expect the next change in policy will not be tapering, it will be an increase in asset purchases. I think there is a good chance of a recession in 2014, and if we will not see any fiscal relief the Fed should respond to that by an increase in asset purchases.

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