Jim Rickards: Our Monetary System Is Instable and It Will Collapse

In one of his latest interviews, Jim Rickards, author of the new book “The Death Of Money“, explains on the Dutch TV channel RTL why he believes the monetary system will collapse. This is of course nothing new for readers of our site. We have written about Rickards his observations and projections in numerous articles in the last years (for instance, Most Likely Outcome Is Still A Monetary Collapse, Jim Rickards Describes Four Future Monetary ScenariosWorld Currency System Moving Towards Catastrophe). However, he makes a couple of interesting points and brings up some new insights which we haven’t covered before.

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Why the gold of countries is not safe in New York:

I think it’s not safe. It is physically safe, but the US government might steal it. If you have a financial panic and there is a collapse of the dollar, and the US government sees a need to back the dollar with gold to restore trust, there is a risk that the US will confiscate that gold. The US government would add that to the US gold supply, create a new gold backed dollar, turn to the countries (whether the Netherlands, Italy or France) with a certificate and say they could get their gold back in the new system. That’s what I mean with re-writing the rules of the game.

Why the trigger for the monetary system to collapse is irrelevant:

You never know. Think of an avalanche. You have a mountain with a snow pack. Here comes a snow flake, it disturbs a few more flakes, then you have a slide, a collapse, the avalanche comes down and kills a lot of people. What do you blame? Do you blame the snow flake or the instability of the system? The snow flake is irrelevant, it could have been the next one or the one before. What matters is the instability of the system. What you need to study is the instability of the system. If you get that right, you will be able to see the collapse coming. The trigger is really irrelevant. A trigger could be the failure of a firm (think MF Global), the failure of an exchange, some kind of panic, a natural disaster, suicide of a prominent person. It really doesn’t matter what it is; what matters is your system is instable and it is going to collapse.

Why Europe is the strongest currency in the world:

Bernanke gave a speech in 2012 in Tokyo where he was talking about currency wars. He explained the problem of the currency wars of the 1930ies. Back then, first France devalued, then England devalued, then the US devalued, then England and France again. So it was sequential. Bernanke said that was the problem, it was sequential. What you need to do is devalue all at the same time. All the economic blocks need to print money at the same time. You get monetary ease (the stimulus) but not the currency war because the relative value shouldn’t change that much. Well, that’s a complete mistake. First of all, he is ignoring the rest of the world, like the BRICS who are the losers of the currency war. More importantly, Europe is refusing to play. Bank of Japan is printing, Bank of England is printing, Bank of China is printing, Europe is not printing that much. That’s because they try to maintain a sound currency. Europe is becoming a magnet for a lot of investment capital around the world. A lot of Chinese capital is coming over to Europe. The Euro is the strongest currency of the world and it is getting stronger.

Why the common interest of the world to maintain the dollar is not strong enough:

What the US policy makers are doing (US Fed) is highly flawed. It is based on flawed models and a misunderstanding of the dynamics of the economy. Europe, under Draghi, the ECB and German leadership, have a much better understanding of how the economy works. I like to say that Angela Merkel is the only head of state of the world who understands how the economy works because she is not an economist (she is a scientist).

The dollar will go through a very rapid loss of confidence, just like the avalanche I described. You don’t know exactly when it is coming, but you see it coming because of the build up of the instability of the system. There will be a need to restore confidence. For instance, in the last 5 years, the US Fed has printed over 3 trillion dollars. They have taken their balance sheet from 800 billion to over 4 trillion. That has happened without a liquidity crisis. We had one in 2008, but not in the past 5 years. Now, what would happen if a liquidity crisis would happen tomorrow, next week or next year? What is the Fed going to do? Take their balance sheet to 8 trillion or 12 trillion? The point is, they are at the outer limit of what they can do.

The next time there is a liquidity crisis, it will be bigger than the Federal Reserve, and the only clean balance sheet in the world that can liquify the world, is the IMF. The ECB prints euros, the US Fed prints dollars, the IMF can print money as well. They have their SDR’s which they can print. The next time there is a liquidity crisis, the IMF will need to print SDR’s to reliquify the world because all the balance sheets of the other central banks will now be trashed. The Chinese and others will not allow the IMF to do that unless they get a larger voice. What that means is that the SDR will replace the dollar as the reserve currency. Whether it succeeds or not is a separate issue, because when people have lost confidence in the dollar, why would they have confidence in the SDR?

Why this time IS different:

This time is different because the system is getting larger. Risk in the system is an exponential function of the scale and size of the system. Look back to 2008. We heard back then that the banks were “too big to fail.” Guess what, the 5 largest banks from the US are larger, they have a higher percentage of the total bank assets, their derivatives books are much larger. So what was “too big to fail” in 2008 is even bigger today. That means that the next crisis will be exponentially bigger. The difference this time is that it will be bigger than the US Fed. The Fed bailed out the world the previous time as they printed 3.5 million dollars. But they also provided tens of trillions of dollars of swap lines to the ECB, they provided bank deposits and money market funds, they did trillions of dollars of rescue operations. It did save the system from getting worse at that time, it did truncate the collapse. Now they have not that much fire power anymore. The next crisis will be bigger than the Fed. It will lead to a collapse of the dollar and a replacement of the dollar.

Rickards ends his interview by describing his projection of the new monetary world. He believes the new world reserve currency could be the SDR of the IMF, but it could also be gold. It could also be a hybrid solution: gold in combination with SDR. In either case, people will run to gold. Gold is not digital, it’s no bitoin, it’s the only form of money that is real. The implied price of gold in that world will be $7,000 per ounce or perhaps even higher.

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