Of course, what happened is the Federal Reserve truncated that process. They intervened. It’s just like dropping a steel wall in a row of falling dominoes. One Domino is going to hit the wall and the next one’s still going to be standing. The way they did that was with tens of trillions of dollars of swaps, and I’m not talking about the money printing on the Fed’s balance sheet. We’ve seen that. They printed $4 trillion or almost $4 trillion over the following eight years. That’s a big intervention manipulation in and of itself, but not known at the time. 

We found out later they did these massive [swaps]. It was $10 trillion of swaps with the European Central Bank, and what was going on there was European banks had dollar loans, and they were funding them with our liabilities. Those liabilities were mostly short term bank CDs and IOUs that were held by US money market funds. 

Now, there was a panic in the US investors were taking their money out of the money market funds, those money market funds could no longer roll over those liabilities of the European banks. The European banks had a funding or liquidity crisis, so they turned to their own central bank. The European Central Bank is the lender of last resort. 

But the problem was the European Central Bank can’t print dollars. They can only print euros, and these banks needed dollars, so what they did is the European Central Bank printed up trillions of euros. The Federal Reserve printed up trillions of dollars, and they swapped the dollars for the euros. The Federal Reserve actually got €10 trillion, or they invest. The European Central Bank got the $10 trillion. They used that money to bail out their own banking system. 

In addition, in this country, the Fed and the FDIC guaranteed every bank deposit in America, regardless of size. There was an FDIC insurance fund that would guarantee up to $250,000. But let’s say, you’re an auto dealer, you’re a successful entrepreneur, and you’ve got a million dollars in the bank as your working capital, etc. They guaranteed the whole thing regardless of size. They also guaranteed every money market fund in America, not legally required. They did that to stop this run on the money market funds which I described earlier, so massive, massive intervention. 

You have the sequence: in 1998 Wall Street bails out the hedge fund. In 2008, the central banks bailed out Wall Street. 

In 2018, who’s going to bail out the central banks? In other words, each bailout, it’s bigger than the one before. Each crisis gets bigger than the one before, and then you have to keep looking for who’s got a bigger balance sheet and who’s left. In other words, to conduct these bail outs. The answer points directly to the International Monetary Fund. They have a printing press. They can print world money. 

They call it special drawing rights or SDRs, which is a geeky name, and no one will understand what it is. It’s world money. That’s all it is. They can print that in unlimited quantities. Their balance sheet is fairly clean. They’re leveraged about three to one. By the way, the Federal Reserve today is leveraged about 113 to 1. It looks like the worst hedge fund you’ve ever seen. 

The next bail out is going to come from the IMF. It’s going to come in the form of this world money, the SDR, but that will completely and irrevocably change the International Monetary System. From then forward, the SDR will be the benchmark global reserve currency. We’ll still have dollars. They’ll still be around, and they’ll still be held in reserves. But they will no longer be the world standard. 

You won’t see oil priced in dollars. It’ll be priced in SDRs. It will be transformative and highly inflationary. All of this is baked in the pie. You can see it coming. It’s not that difficult. I take readers through it in the book. It’s also very well documented and well supported. I don’t like to make claims without backing it up, so in a 300-page book, you’ve got 151 endnotes and 30 pages of sources, but there’s plenty there for readers to sink their teeth into.

Preston Pysh  9:36  

Jim, in your book, you talk a lot about some of these engagements that you have with some of these Fed officials from time to time. I know that you’re floating this idea with the SDRs, pass them as being the next step and the thing that’s really going to kind of bail out the bailouts [of] the bailouts. Are they the ones kind of supplying you with that notion that this is the direction this is going or are you basically shooting that idea past them, and then kind of seeing how they react?

Jim Rickards  10:03  

That’s a great question, Preston. The answer is it’s a little bit of both, depending on the official you speak to, and it’s funny. These individuals, they’re not homogeneous. Let me just for the listeners benefit, let me kind of paint the picture a little bit. 

Just in the course of my consulting and a lot of my clients are government directorates or different affiliations I have, different invitations I receive, a lot of different venues, but I have had the opportunity to have one-on-one conversations with Ben Bernanke, of course, a former chairman of the Federal Reserve, members of the Board of Governors, regional Reserve Bank, presidents, senior Treasury officials. Sometimes I’m invited in to consult with them and that’s how I meet them. Other times, you run into them. You might be at the same dinner table at some small event and a lot of different venues. Regardless of the sources, I have had a lot of encounters. 

Now, they fall into two categories. There are certain US officials, who I would say, don’t get it. The kind of things we’re talking about such as the international monetary fund, the rise of SDRs, and the instability in the system. They just don’t get it. 

By the way, none of these people are dumb. They’re all smart. They wouldn’t be in the position that they’re in if they weren’t talented and smart. You can be very talented and very smart, but if you’re trained a certain way, if you’re using certain models, and if you have not acquainted yourself with the latest scientific advances in understanding the statistical properties of risk, then you’re just going to think about the world a certain way. It’s like thinking the world is flat instead of round. A lot of people do that for a long time. 

There are a lot of examples. For example, I was in a war game type of thing. It was a closed-door session. There were about 20 of us seated around the table. There were Fed officials, Treasury officials, CIA, military, think tank people, and we were doing a financial war game type scenario. I said something not different than I just said on this podcast, Preston, about SDRs and world money, and this person sitting to my right, a Senior Treasury official, he kind of *inaudible* and said, “What are you talking about?” He almost didn’t know what SDRs were. I mean, he knew, but he didn’t really think that it was a very topical subject. 

He said, “The dollar has been the global reserve currency. It is today, and it will be forever,” worse to that effect. I said, “I feel like I’m sitting in Whitehall in 1913, listening to John Paul talked about how Sterling is the global reserve currency and always will be.” Of course, it was just one year later that the demise of Sterling began, and it was completely [obsolete] not long after that. That kind of inability to see dynamic change and to see the dynamic processes underway, you do encounter. 

I’ve had discussions with senior monetary officials. They’re research-type people in the monetary economics branch of the Federal monetary research. I’ll introduce or start talking about some of the complexity models and other models that I use, and they literally can’t process it. It’s not even that they disagree. They say, “I’m going to have an argument,” or “I’m going to disagree with you.” I welcome this. I’m always up for debate. They don’t even do that. They just can’t process what you’re saying.

Having said that, there are other people who are very plugged into this world. I’m thinking of people like Zhu Min, who just recently left as Deputy Managing Director of the IMF. He’s the second or third highest official there, depending on how you want to count, but he was also the former Deputy Governor of the People’s Bank of China. 

So imagine that. Here’s a PhD economist, who was deputy governor of the People’s Bank of China and Deputy Managing Director of the IMF. He really has a foot in both camps, the kind of communist Chinese camp. Someone like that has an understanding, which is much more subtle and much more sophisticated. They understand perfectly what we’re talking about here. They see it coming, and that’s a source. 

Beyond that, we can do a deeper dive on this. A lot of this stuff is just on the website. I like to say the IMF is transparently non transparent. They are making, call them “forecasts,” but they’re not really forecasts. I like to say, “The future is here today. The future is embedded in the present.” You just have to know where to look for it and understand the process.

Preston Pysh  14:00  

I know you’re really big on the Complexity Theory idea of how the economy works, and I forget what book it was we’re reading. Maybe it’s “The Alchemy of Finance.” Stig, you and I were talking about a speech that George Soros had given. The thing that we find really amazing about the way Soros sees the economy, and I know a lot of people don’t like him for his politics and a bunch of other things. 

However, from an economic standpoint, that guy is brilliant. One of the things that is really interesting about his approach is that he says the entire system is unstable. His fundamental thesis is that the whole thing’s unstable. 

In college, they teach you literally the exact opposite of that way of thinking. They tell you that the system’s always stable and that it goes together. And so, whenever I see some of your writing in your book, where you talk about Complexity Theory in that, and you’re talking about some of these central bankers that do see the world through that lens. I find it really interesting to see this rivalry that I think is occurring right now in economics, where some people don’t see it that way. Then, you got the traditional way of thinking that everything is stable.

Stig Brodersen  15:06  

Yeah, because I think everyone out there, they’re probably thinking right now that they’re talking about two different worlds. Could you try to quantify that? On one hand, we have the equilibrium models and what we call the stability models. That is what we teach in colleges all over the world, and then on the other hand, you also have people who are not that many like Jim, who are talking about complexity. So Jim, perhaps you would be the best person to explain the difference between the equilibrium models that might be broken, and then another theory, the complexity theory that you advocate for in your book.

Jim Rickards  15:42  

The complex dynamics or complex phenomena have been around for 14 billion years. The Big Bang was a complex phenomena. The creation of stars and planets and gases and supernovae and things that people have witnessed since the beginning of time or the beginning of civilization are all complex phenomena. There’s nothing new about complexity, but it is new as a science. When I say science, I mean you can define it. You can describe it. You can write equations. You can do experiments. You can test it. That’s what makes something scientific. Because as I say, you can test hypotheses and get useful information from it, and then use that for forecasting. Complexity as a science really goes back to about 1960. 

Now, Soros talks about reflexivity. Although, it’s kind of the same thing. He’s really talking about feedback loops or what a mathematician will call recursive function, which is a function where the output is the input. 

I write the equation. I plugged in some variables, made some assumptions, solved the equation, and I got an output. And then, I take that and plug it back into the same equation and run it again. I get a different output and so on. You do it iteratively, creating back. You can do it a million times, and you can plot the output on a graph and actually look at the graph and draw out conclusions about the dynamic system itself. 

Does it kind of collapse on itself? That’s called a fixed point attractor, where you get a certain answer, and then you run it against the same answer and run it again. It’s the same answer to infinity. That’s called a fixed point attractor, where everything converges on a single point, or you get other variations of that where the answer is different. You run against different [things]. There’s no pattern. It’s chaotic. 

And then, there are patterns in between recurring patterns. This is fascinating to watch, but that’s what Soros means by reflexivity. What he’s saying is that when you pursue a policy or pursue an action, you cannot just understand it in a linear way. You cannot just take it and extrapolate and assume we’re the same. 

What happens is that the output of the action becomes the input in the next version, then it collapses in on itself and produces totally unexpected results. And that is a good understanding, whether Soros has a working knowledge of the mathematics. It kind of doesn’t matter. I think he’s on the right track in terms of the surprise element in the system now, and I agree with that. 

Where I part ways with Soros is that I lean the other way. I would say, “Look, the less government, the less regulations we have, we can actually disaggregate and break up these systems and make them less dangerous.” Thus, it’s not that we’re ever going to be able to control human behavior, but we can make the outcome of human behavior less dangerous to financial stability by doing some smart things like breaking up banks, reducing derivatives, and so forth. These are policy solutions. We’re kind of still running through the theory at this point, but I do talk quite about this in the book. 

And look, if you want to be a scientist, bring it on. Let’s describe the science, write the equations, test it, do models, look at output and look at actual empirical data, and see what works. When you do that, what you discover is that equilibrium models are a really poor description of how a market works and complexity models fit extremely well. You don’t have to torture the bell curve to get a fat tail. A power law distribution actually has a fat tail. It’s a feature not a bug, as the saying goes, so you’re right. 

I actually had a lot of difficulty with undergraduate economics. I went to graduate school in economics, and I studied quite a bit on my own ever since. I shared an office with Myron Scholes for six years. Myron is the winner of the Nobel Prize in Economics in 1997, and along with Robert C. Martin, who was another partner of mine in Long-Term Capital Management, so I’ve had ample exposure to the brightest minds in economics. 

However, when I was studying economics as an undergraduate, I had a really hard time. And I thought that I just wasn’t that smart like I didn’t get it. I found that decades later that it didn’t make any sense. The reason I didn’t get it was because it was nonsense. So, I feel better about that because I was failing to comprehend nonsensical theories, but one of them is [the] Equilibrium Theory. 

And what they teach you is that the market produces a natural equilibrium. So prices get too high, consumption goes down, and then inventories build up and the producers stop producing as much, and then prices get lower, then people buy more and the whole thing. It was in itself equilibrating, whenever anything gets a little bit out of whack, it causes a kind of linear reaction, which brings it back into equilibrium. 

And then, when you apply that to policy, you say, “Okay, the economy hums along in a nice equilibrium, but every now and then inflation gets a little too high or unemployment gets a little too high, or maybe it’s too low. That drives inflation. It’s like a top. It starts to wobble. And if you just straighten out a little bit, we’ll be back on a nice equilibrium, and the role policy is just to give it that little push to put it back into equilibrium. 

In fact, that’s not how the world works at all. That’s the worst possible model you can have. The economy resembles an equilibrium system most of the time without being an equilibrium system. It is a complex dynamic system capable of producing extreme unexpected results almost out of nowhere. It is what scientists call “emergent properties.” 

And so, this is why policymakers are surprised over and over again. They did not see the 1998 crisis coming. They did not see the two thousand seven mortgage crisis coming. They did not see the 2008 panic coming from the global liquidity crisis in 2008. 

For the last eight years, the IMF and the Federal Reserve, each one of them gives a one-year forward forecast. The IMF actually does it twice a year. Fed does it once a year. They have been wrong by orders of magnitude. I don’t mean a little bit wrong like you say, “Oh, I think it’s going to be 3.2% growth. It comes out of 3.1.” I would say, “Nice going, guys. That’s a really good forecast.” No, they say 3.2. And it’s, 2.1. Then, they lower 2.5. And it’s 1.8. Then, they say 2.2. And it’s 1 point. It’s ridiculous. They’re not even close. 

Well, if you have the wrong model, you’re going to get the wrong output every time. It’s no surprise. You can go back to the minutes of the FOMC meetings in the spring of 2007, think vividly March 2007. And Ben Bernanke, he’s on the record saying, “This mortgage stress will blow over, and we’ll be fine,” or “There’s never been a time when housing prices decline in the entire United States at the same time like that housing price declines are regional or local.” 

Maybe they went down in Texas in 1984 because the banks were having problems down there. They went up nationally, but they’ve never gone down nationally, ever. Well, that’s exactly what happened in 2007-2008. 

They never see it coming. It’s not a surprise. They’ve got the wrong models. What is interesting is when you get the right models. As I say, there’s a lot of data to support this. You get very good results, and that’s not perfect. There’s always some uncertainty around it. You need to have a good dose of humility, when you do this kind of forecasting. However, once you see the system for what it is, your capacity to forecast goes way up.

Stig Brodersen  22:37  

Amazing. Amazing discussion, Jim. I would actually like to transition into talking specifically about your book because one of the interesting things in your book is that it starts off with a conversation between you and a high ranking representative from BlackRock. Surprisingly, you learned that the regulators pressured BlackRock not to sell securities during an upcoming crisis. 

This is an event I just want to put out there that happened very recently. Not selling securities during a crisis might sound like a good thing to many people since one could argue that it would stabilize the economy, but could you elaborate on why this seemingly reasonable initiative to protect the financial markets might turn out to be disastrous if put into effect?

Jim Rickards  23:25  

Sure, the conversation you’re referring to, Stig, involves something called SCIFI, S-C-I-F-I, and that stands for systemically important financial institutions. Then there’s a GSCIFI, which is a globally systemically important financial institution. And then, they have variations on that, where finished institutions, specifically refers to banks, but they’ve swept in other kinds of companies, including at the time, General Electric. 

General Electric Credit Corporation were releasing credit cards, consumer finance, etc. Interestingly, in the years since I started writing the book, The Road to Ruin, the regulation of General Electric got so onerous that they actually sold all those divisions. General Electric today is kind of out from under what we’re talking about right now, because they returned to their roots as an industrial equipment and electronic technological corporation. 

They’re very happy making jet engines and wind turbines and electric locomotives, and a lot of other things. They took one look at what life was like under the thumb of the Federal Reserve, and they basically sold off all their financial assets. They’re kind of out of that trap. A lot of others are not, including Metropolitan Life Insurance, Prudential Insurance, and of course, the one you mentioned Stig, which is BlackRock. 

Now, again for the listeners’ benefit. BlackRock is the largest asset manager in the world that most people have heard [about] them, but if you haven’t, their assets are in the tens of trillions of dollars. They are bigger than most sovereign wealth funds, and they’re bigger than any of their competitors. 

The question that came up at this dinner that I described in the book with one of their senior officials, and a lot of times in these things, I don’t mention the person by name. There’s no point in that. The conversation is what counts. 

We were talking about the government’s efforts to include BlackRock in this specific category, so they could in effect regulate them. That has been in the papers, and I said something to the effect, “Well, it’s kind of a pain, but they really just want your information, and they want to know your positions. That’s a little more [compliance] for you, but it’s not something you can’t live with. You guys have the resources to do it.” 

And she kind of leaned forward and said, “No, that’s not it. They want to tell us we can’t sell securities. They want to actually stop us from doing that if there’s no financial panic.” That hit me right between the eyes. It was a shock, but the reason for it became very clear. Now, BlackRock was pushing back against all this and against the government’s efforts to do this. Their argument was, “Hey, we’re not a bank. We don’t have liabilities.” 

A bank is a leveraged institution. It has assets in the form of securities and investments and loans and so forth. And then, it has liabilities, mostly in the form of deposits and liquid B-bonds and notes and other things on the liability side. 

But a run on the bank is when all the depositors want their money back, they line up with the bank, and the bank can’t sell the assets fast enough to get the money. They owe the money short term, but the assets are long term. They start dumping them, and that sends security prices down and causes a market panic. This is kind of a typical bank run, and the phenomena is pretty well known. There’s some precautions against that. 

However, BlackRock is saying, “We don’t have those liabilities. We’re an asset manager. We take assets under management from clients. We charge a fee. We manage them, but those assets belong to the clients, and there are no liabilities.

We’re not funding this with debt and deposits. There are just things that people own, and we manage that for them. So why on earth should we be included in this?” That was the argument? Well, it makes pretty good sense on its face. You’re not going to have a run on BlackRock. There’s nothing to run. They don’t have liabilities, but what this conversation revealed is that that was not the government’s agenda. The government wanted to basically freeze BlackRock, and tell them that they couldn’t sell in a panic. 

Now, who are the clients of BlackRock? Well, it’s China Investment Corporation. It’s CalPERS, California employees, a public employee retirement system. These are some of the biggest accounts in the world. So, when you control BlackRock, you indirectly control China. If you tell BlackRock, they can’t sell client assets, you’re effectively locking down China. The United States has no jurisdiction to tell China what they can do with their money. However, if you put BlackRock in the middle and assert some regulatory control over them, then you can, and this is part of a much larger effort. 

I have a whole chapter in my new book, “The Road to Ruin,” on this called, “Ice Nine.” For those not familiar, Ice Nine is an idea lifted from Kurt Vonnegut, a famous author and novelist of the 20th century. The plot device of Ice Nine in the book was there was sort of a brilliant physicist, who invented this doomsday machine. He called it, Ice Nine. It was a polymorpher, a molecular variation of the H2O molecule for water. It had two differences from water. One is that it had a melting point of 114 degrees Fahrenheit, which meant that it was frozen at room temperature. And the other characteristic was if a molecule of Ice Nine came in contact with a molecule of water, the water turned to Ice Nine. And so, he had it in a couple vials. 

The plot was if you opened the vial and poured the Ice Nine into any stream, then that stream and the river and the oceans and the lakes and all bodies of water in the world would freeze. The planet would freeze, and life on Earth would die. That was the doomsday machine, and I bring that into the financial sector as a way of describing how the elites will freeze the monetary system and freeze the financial system in the next panic because it’ll start somewhere.

 

Let’s say it starts in the money market funds. You lock down the money market funds, and the money market funds suspend redemptions. They say we won’t give you your money back. Then, everyone will just go to the bank and take the money out of the banks. You’ve got to close the banks and reprogram the ATM, so you can only get maybe $300 a day for gas and groceries. 

Well, if you close the money market funds and close the banks, everyone will sell stocks. Thus, you have to close the stock exchange, etc. And the same way that Ice Nine molecule spreads exponentially, geometrically from molecule to molecule until all the water in the world is frozen. 

By the same token, you’re going to go institution to institution, market to market, and lock down entire systems, so nobody can get their money back. Thus, that’s why I call it, “Ice Nine,” as a shorthand for this plan to basically close all the markets and freeze everything. They’ll say it’s temporary. We’ll see how soon they reopen it, but it will basically be to buy time in a panic until the IMF can [intervene] in a meeting, get their act together, and reliquify the world with these SDRs.

Stig Brodersen  29:50  

I think it’s a really interesting discussion here, Jim, because I know a lot of people out there, they’re probably thinking, “It seems too much out there. Are they really going to freeze the system?” But I also know there will be a lot of Europeans listening and saying, “Well, look at what happened in Cyprus in 2012, and in Greece just a year ago.” Could you tell us what actually happened in those two countries? And is it really true that we might see this on a much grander scale and how those situations compare?

Jim Rickards  30:20  

That’s a great question, Stig. It kind of goes back to the point I made earlier. In the last segment, I was talking about closing the banks, closing the money market funds, closing the exchanges, freezing the system, and I can just picture our listeners rolling their eyes and go, “Boy, this guy’s really out there. It sounds extreme. That would never happen. It can’t happen here.” I said earlier that I never make any claims without providing the backup. 

The point is every single thing I described, the legal authorities are there. Many of these legal authorities have recently been changed to specifically allow what I’m describing, and everything I’m talking about has happened before, elsewhere in the world, and in the United States. There’s nothing unprecedented. Nothing for which the elites are not prepared along the lines I just described. 

Now, let me give you specifics on that. Until very recently, really just in the past couple months, money market funds were not allowed to suspend redemptions. By the way, money market funds is one of the great misnomers of all time. People go, “I have my money in a money market fund,” but no, you don’t. It’s not money. If it’s in a money market fund, you’re a unit in a particular form of mutual fund. 

Also, people go, “Oh, yeah. But I can call up my broker and sell my units, and they’ll wire the money to the bank. That money will be in the bank tomorrow, so I can pay my kids’ tuition or buy a house or whatever I need that money for.” Well, what if the money market funds suspend redemptions, what if the bank is closed, etc. You may not be able to get it. 

The point being, in 2008, there was a run on the money market funds. Everybody was pulling the money out and moving it to the banks. They’re doing exactly what I just described. Whatever they can sell the assets for, that’s what you get, number one. But more importantly, this is what’s going to happen. They have the ability to suspend redemptions, which means they don’t have to give you your money back. 

They can issue an announcement saying, “Sorry, house closed. We’ve pulled up the drawbridge, closed the gates, and you cannot get your money back until further notice.” This is very new and was done specifically to prevent a repeat of 2008, because they don’t want to guarantee you all these money market funds again. They don’t want to watch the system be bled dry. They’re just going to freeze those accounts, and people don’t realize that. 

They might have gotten their monthly brokerage account statement from Merrill Lynch or Charles Schwab or whatever. They get a paper saved, and they put these little fliers in there. I usually take them and throw them in the trash. I’m sure a lot of other people do likewise. But if you read them, what they say in the fine print is that we can do this. 

Now, this has always been true with hedge funds. I’ve read hundreds of hedge fund offering documents. I’ve never seen one that didn’t have the ability to suspend redemptions, but investors know that. I mean, sophisticated investors know that. They know what they’re getting into. 

However, this is brand new in money market funds, and it is the law today. There are other legal authorities that go all the way back to the trading with the Enemy Act of 1917 that allows the US to freeze assets. There’s something called the International Emergency Economic Powers Act of 1977. It gives the president dictatorial powers to basically do anything, close banks, and close stock exchanges. 

In 1933, President Roosevelt by executive order, closed every bank. Just closed it. Imagine that. By executive order, on his first day in office, he said that the banks are closed. He did not say when they would reopen. Turns out it was about eight days later, but nobody knew that at the time. Nobody knew when those banks were going to reopen. 

In 1914, the New York Stock Exchange was closed for five months from July to December of 1914. And you’re right, we can look at Cyprus and Greece. In Greece in 2015, people were flying from Athens to Frankfurt with empty luggage, filling it up with euros, and flying back to Athens, so they could spend some euros. The ATMs were closed. The banks were closed. The debit cards didn’t work. The credit cards didn’t work. People resorted to barter as they left the country coming back with notes. So, don’t tell me this can’t happen. It has happened. 

Just to wrap up this bit, Stig, but again to make the point. In November 2014, Brisbane, Australia in the G20 Meeting, a Leaders Summit. So, who’s there? Leaders present were Angela Merkel, President Xi of China, and President Obama of the United States. They issued a final communique, and in that communique were working papers. One of which is the Bail-In Plan. This is the Ice Nine Plan, and they laid it out. 

They said, “We’re not going to use taxpayer money to bail out the banks anymore. We’re going to use the depositors’ money, the stockholders’ money, and the bondholders’ money. We still have a hole on the balance sheet. We still have to see somebody’s money, but it’s not going to be the taxpayers. It’s going to be people with investments, stocks, bonds and deposits.” That’s what I mean by Ice Nine.

Preston Pysh  34:43  

Yeah, that’s what I think a lot of these people that are potentially buying some of these really scary banks over in Europe, call it Deutsche Bank or whatever. They own the debt and those bonds. I don’t know if they aren’t aware of what bail-ins are, but that would be my biggest concern on some of these banks.

Jim Rickards  34:59  

Right. 

Preston Pysh  35:00  

I can’t imagine buying some of this debt on some of these banks over there. The other thing I want to highlight, Jim, that I think really goes well with this is a topic from Ray Dalio, because we listen to a lot of things he says. 

One of the things that we love that he talks about is the focus that the typical investor has the span of their reference point or their baseline is usually like a couple years, a decade at most of what they think is in the realm of possible because of what they’ve actually seen in their lifetime or what they’ve participated in. 

When you take and widen that scope, and you open up that aperture within a lifespan, or you even go a lifespan and a half, how much more could potentially happen in the future or what you could potentially be aware of. It just goes exponential. 

You’re talking a lot about things that happened in the United States back in the 1920s, 30s, and 40s, and for most people, A, they have no idea what some of those events are, and B, they have this frame of reference, “Oh, that could never happen. That was 100 years ago. That could never happen in my lifetime.” 

And that’s where I think people really don’t place enough respect for what the realm of possibilities might actually occur. Like you said, 2015 in Greece, people couldn’t even go to an ATM and pull money out. This was last year. 

Jim Rickards  36:18  

Right.

Preston Pysh  36:18  

It’s just last year!

Jim Rickards  36:19  

It’s a developed economy. It’s a member of the euro. We’re not talking about Zimbabwe here. You’re absolutely right, Preston. I’ll give you a personal anecdote along these lines, but I was at Long-Term Capital Management from start to finish. I was there in early ’94 before the fund had its money, before the fund closed, and then I was there through the panic in 1998. I stayed a year after that to kind of clean up the mess and [when everything] start[ed] to wind down. 

I remember talking to one of the partners after the crisis. We all stayed in place. The bailout was September 28, 1998, but I stayed around to August ’99. That year, late ’98, early ’99, we were unwinding the positions. We had new ownership that Wall Street had taken over the 14 “families,” as I call them. They had taken over the balance sheet, but I was talking to one of the quants. In my job, I was the lawyer. 

Again, I negotiate the bail out and negotiate a lot of the contract, so I was around. I knew everything that was going on, but I wasn’t at the time highly trained in risk management. I spent the 16 years or 18 years since then, doing exactly that, so I’m a lot more versatile with it today. 

I said to one of these guys, “How could this go so wrong?” We had all these models. You had all these computers. You had all these covariance matrix and regressions and present value calculations, and I know how much time and effort everyone put into it, so how could it go so wrong?” 

And the guy shook his head and said, “I don’t know. I don’t know.” We had these [relationships] and took these relationships all the way back to 1985. Although, what he meant was, in 1985, it was approximately the invention of the swaps’ market. 

Those were the earliest days of the swaps. So if you had the entire business history of the swaps’ market, it would have gone back to about 1985. However, I thought, “Well, they’re always substitutes.” You can look at the spread between government bonds and railroad bonds, right? 

In 1885, railroads were the best industrial credits out there. Their bonds were gilt edged, and they were doing a spread to treasuries. That would have been some indication of what credit risks looked like. I thought to myself, “But there’s a complete lack of imagination.” By the way, this guy had like a 160 I.Q. and MIT trained. He knew the numbers, but he didn’t know history. He didn’t have the ability to do exactly what you described, Preston, and what Ray Dalio said, which is “widen the aperture and get a longer perspective.”

Okay, so the swap market doesn’t go back to beyond 1985. That credit goes back to like 5000 B.C. There’s a famous book on the history of interest rates that goes back to Mesopotamia in 2000 B.C., so you can work this up.

And by the way, often the nicest compliments I get on my books, hopefully “The Road to Ruin,” but also “Currency Wars” and “The Death of Money” from younger readers, who like the historical parts, because they just haven’t been taught it, or they haven’t had time to acquaint themselves with it. And maybe they got a good modern education and economics or some applied mathematics, but for some reason, they never got the history. 

When you take them through the economic history, just make the point that all these things have happened before, and there’s no reason to think they won’t happen again. The idea that somehow, we’re twice as smart as people 50 years ago, we’re not. I mean, we’re the same. 

And we know a little more and maybe some scientific advances have been made, but we’re not smarter than people 100 years ago. We have the same cognitive biases. We have the same prejudices. We’re prone to the same mistakes. And so, there’s no reason these things won’t happen again.

Preston Pysh  39:45  

Hey, Jim, thank you so much for joining us for this first part of the episode. For everybody listening, next week, we have the second part of our interview with Jim, but before we hang up here and finish this first part of the show, I want to give Jim a chance to give a hand off to his websites, his books, and just kind of tell people, where they can learn more information about you, Jim.

Jim Rickards  40:06  

Thank you, Preston. I really appreciate that. My new book is The Road to Ruin. It’s available on Amazon, also Barnes and Noble, and independent bookstores. I have a website www.jamesrickardsproject.com. Twitter handle: @JamesGRickards, and I put out a pretty steady stream of comments about the international monetary system, so I look forward to welcoming all the listeners to those avenues.

Stig Brodersen  40:30  

At this point of time on the show, we would like to say a special thank you to a person in the TIP community, Christoph Wolf. Christoph is now in his third year of posting on our forum and the quality of the posts are always top quality. As a small token of gratitude, Christoph, we’d like to give you access to our chapter by chapter video course on the Intelligent Investor, and also our new course, How to Invest in ETFs. 

I do want to stress this is nothing compared to what you have done for the TIP community, and we still hope we can continue to repay you for all your hard work. For anyone that would like to check out our courses, we have also free investing courses in there, as well. You can check out TIP Academy, which you can find on the navigation bar on our website. That was all that we had for this week’s episode. Stay tuned for the second part of the interview with Jim Rickards next week.

Outro  41:23  

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.