Jim Rickards: The economists are wrong – the worst is yet to come

hi everyone welcome to my channel where experts share their knowledge for this video i'm interviewing the economist james rickards he has written a book called the new great depression where he gives the dark dims of the next years let's hear what he has to say hi james thank you clements great to be with you yeah in your book you are casting a dark light of the upcoming decades but now with the vaccinations starting all over the world isn't it just a matter of time until we can go back to normal right the answer is no uh there will there won't be a normal we we will get through it uh at some point the pandemic will be over or uh or contained and life will go on but it will not be normal we're we're entering a new stage that is the kind of thing that happens with severe um crises whether it's the the first great depression my my book is called the new great depression but going back to the first great depression 1929-1940 uh things were never the same and that has been true of of other crises of this magnitude so um first on the vaccine yeah it's great that we have the vaccine it was almost a miracle that uh the the pharmaceutical companies were able to produce it in as short a time as they did as a number of different companies around the world uh about eight months so that was that's great uh the the creation of the vaccine was miraculous the delivery of it uh was was quite efficient um in the united states uh president trump uh picked a three-star general who was a logistical genius and he actually took over the us postal service to deliver the vaccine a lot of americans were complaining that they didn't get their christmas cards on time well that's true because they took over the postal center so they got the vaccine where it needed to be but the the governors and mayors have have badly bungled the uh the actual rollout the the administration of the vaccine particularly in new york um you see um governor cuomo uh that new york is actually pouring doses down the toilet because the way the vaccine some of the vaccines work they have to be frozen about 100 degrees below zero and they can do that and they get delivered but then when you're going to administer them you have to sort of defrost them get them to room temperature and then administer them but when you do that it's like a quart of milk it's only good for about two days and then it goes bad well new york was so inefficient at uh administering the vaccine that the doses started to go bad so on the one hand the governor's complaining about a shortage on the other hand they're flushing them down the toilet because they can't get them out fast enough so that's just you know good old-fashioned red tape inefficiency the same problems exist in france the only countries that have done a really good job of administering the vaccine are israel and the uae uh abu dhabi and dubai have done a good job a few others but basically it's very inefficient at the point of delivery meanwhile the pandemic itself is spreading faster than the vaccine can be administered it's spreading faster than it did last spring everyone remembers uh you know march april may of 2020 with the lockdowns in the quarantines and so forth uh but today the caseload uh is about 10 times higher the fatalities are almost double in other words the pandemic is worse than it was last spring spreading faster than it did last spring on top of which we have some mutations um it's not clear yet we don't have enough information as to whether the mutations are will succumb to the vaccine or not but um not it's not unusual for viruses to mutate but some mutations are harmless they don't affect the ability of the virus to spread but some are extremely harmful scientists actually call it mutation escape you can think of the the vaccine is as um creating antibodies to stop the virus but the but the virus doesn't end run around the vaccine comes up with a as it says some mutation so a um the roll out of the virus is uh poor sorry the rollout of the vaccine is poor b the virus is spreading faster than the vaccine can be administered and see um the the virus has shown some capacity not unusual to mutate around the the vaccine so best case best case the vaccine may have some beneficial impact late in 2021 early 2022. worst case is the the virus mutates and we get new waves and the vaccine is a very limited utility in in dealing with the new way so that's the first problem but the second problem uh which will be true is true whether the vaccine is highly effective or not um is the behavioral the behavioral adaptations we're talking about will be intergenerational uh and and i can give an example of that um i i grew up in the 1950s and the 1960s it was a fairly prosperous time in the united states i did not live through the great depression but my parents did and my grandparents did so i was actually raised with a kind of depression mentality if you will even though i didn't live in the depression we would take the rubber bands off of newspapers delivered in the morning and save them in a jar we went out as kids nine year olds with our wagons uh to collect newspapers and tin cans door-to-door um not for environmental reasons it might have been good for the environment but we were recycling we were recycling the tin because you could build um you know ships and planes with it so that didn't change until the late 1960s when the baby boom came of age and then you know credit cards and mortgages and you know the economy the consumer economy boom from there but my point is the the effects the behavioral effects of the great depression lasted for 30 years not you know 30 months now there's research that supports that and i talk about this in my book the new great depression from the federal reserve bank of san francisco and several academic collaborators they looked at every pandemic since the black death every pandemic in the last 650 years in which 100 000 or more people died and there were 15 of them that they identified and what they showed and they're economists not uh epidemiologists but they had the the the data the fatality data of course the two worst were the black death about 75 million dead and the spanish flew about 100 million dead by the way um covert 19 the current pandemic will end up already has ended up as number three on the list this is the third worst pandemic in terms of fatalities in the last 650 years but what they show with these 15 that i mentioned um is that the effects lasted for 30 to 40 years so when you know jay powell the chairman of the federal reserve says we're not going to raise interest rates until 2023 i say that's fine jay why don't you try 2043 because that's what we're talking about um you know when a little girl goes to school i have grandchildren you know five six years old and the mommy says uh you know honey put on your coat put on your hat and put on your mask and the kids do kids are adaptable they'll put on their masks but that's the kind of thing that stays with you your whole life so uh the notion that somehow you know monetary policy and fiscal policy can cure this which they won't explain that in chapter four of my book uh is isn't is it's just not true but as i say the behavioral effects will last for decades what makes you so sure that we are going to see a new depression most economists predict strong growth rates for this year why do you think this won't happen because most economists are wrong about almost everything they did not see the dot-com crash coming they did not see the 2008 financial crisis coming they did not see the pandemic coming they did not see the 2020 uh severe recession coming they get everything wrong time and time again because they have the wrong miles the chinese are even easier to analyze they lie about everything it's a communist regime and they they just lie so if you believe the chinese you know good luck uh to you but uh but i don't and and once you know they're lying it's it's it's at the beginning of trying to understand what actually uh is going on there so um economists use flawed models they use the phillips curve uh which is now flat at least i was pretty good at geometry i never remember curves being flat they're usually curved um so uh their the monetary model was wrong because they don't take account of velocity their fiscal model is wrong because they ignore the fact that gdp ratios are now in excess of 90 the research shows that at that level your keynesian multiplier is less than one meaning if you borrow a dollar and spend a dollar you get less than one dollar of gdp which means your debt to gdp ratio goes up people save more and spend less so so monetary policy will fail because of what's called velocity or the turnover of money for just to be specific our the federal reserve our u.s central bank has printed uh almost four trillion dollars in the past year uh this time last year the federal reserve balance sheet was about 3.6 trillion dollars give or take today it's about 7.5 trillion dollars so that's 4 trillion dollars of new money printing but the money printing doesn't matter it does not stimulate you can they call it stimulus but it's not it's not stimulating it does not cause inflation what causes inflation potentially is the turnover of money the technical word is velocity but it just means the turnover so for example um let's say i go out to dinner and i tip the waitress and the waitress takes the taxi home and she tips the taxi driver and the taxi driver takes the tip money and puts gas in his car well in that example my my dollar uh created three dollars of gdp uh the the the waitress tip the taxi tip and the gasoline so that that money has velocity of three uh three dollars of goods and services for one dollar money supply but if i stay home and watch tv and don't spend my money the velocity is zero there's no turnover i leave my money in the bank now seven trillion dollars times zero is zero meaning if you don't have velocity you don't have an economy and this is what economists don't understand it's it's fairly simple you don't need integral calculus you just need a little fifth grade math but the point being um there are behavioral changes that economists don't understand because they're too busy looking at closed form equations uh and and the point is um the people around the world i i can speak specifically about the united states but the same is true in europe and and elsewhere uh people have been scared uh they're afraid they've been lied to by their governments and now the governments are saying hey we want to reopen the restaurants people don't want to go out there they're too afraid so with and and this is in the data again i'm giving you the theoretical overview but you can look at the data you can look at velocity it's dropping like a stone it did a cliff dive in 2020. so my point is all the money printing does you no good because the velocity is dropping sharply the turnover money is not there and central banks at this point are impotent they they really have no role now over to fiscal policy uh deficit spending uh the united states has added about 5 trillion dollars to its deficit in the past 12 months with more on the way but you have to look at something called the debt to gdp ratio how much debt do you have divided by the size of your economy uh under the maastricht treaty that is meant to be capped at 60 percent uh angela merkel has been very adamant about keeping it at 60 the research is clear that when you get to 90 percent the keynesian multiplier is less than one meaning at lower debt levels if you borrow a dollar and spend a dollar you can get maybe a dollar 20 of gdp but beyond a 90 ratio if you borrow a dollar and spend a dollar you get less than a dollar of gdp maybe 80 cents the point being at that level your gdp your um your debt is going up faster than your gdp your ratio is getting worse and you're in a debt death spiral so where is the united states so at the beginning of the trump administration that ratio was 106 well past the 90 you know danger zone today it's about a hundred and thirty percent it's all happening very quickly because we pile we piled as i say five trillion dollars of debt on a declining gdp so you increase the the uh numerator by five trillion on a 22 trillion dollar base and you shrink the denominator by about one trillion because of the contraction in 2020 your ratio is about 130 so who who's in that club the 130 percent club italy greece and lebanon so there's your lunch table even france and france and spain are much better shape they're they're uh about 90 percent maybe a little bit higher they have their own problems but the us is far worse the point being that you you now do not get growth so money printing doesn't work because of velocity uh deficit spending does not work because of the debt to gdp ratio and everyday americans you don't need a phd in economics it's probably a disability actually but uh people people have an intuitive sense they know something's wrong they know we'll have a bad end there are only three ways for this to end one is default the other one is inflation where you basically you know devalue the debt and the third is higher taxes but the u.s won't default because we can always print the money and the same thing with the ecb there won't be a default by the developed economies because they can print the money but that leaves you with inflation and taxes they're both bad outcomes uh and so people just save more they just say i don't know how this is going to end but i'm going to i'm going to save more because i know and badly they're going to raise my taxes they're going to do something so again it does not have the stimulative effect and this is in the data this is uh this i'm referring to work by uh kenneth throgoff as a professor of economics at harvard and carmen reinhardt uh formerly at harvard now chief economist of the world bank but they they published a lot of work on this so monetary policy is impotent because of velocity fiscal policy is impotent because of the debt to gdp ratio behavioral adaptations will last for decades um this again this is all hard data and we haven't even mentioned lockdowns which which don't work the evidence is clear lockdowns do not stop the spread of the virus they do destroy economies they're very good at that but um if lockdowns work why are case loads 10 times higher than they were less spring well the answer is they don't work so how are the next years are going to look like higher unemployment and low growth rates yeah best case unemployment will remain persistently high growth rates uh will be low this is why i call it the new great depression um the the point being uh people don't understand what the word depression means because economists have have banned the d word as i call it from the from from usage they pretend they prefer to ignore that depressions even exist um there is a technical definition of a recession at least in the united states it's it's two consecutive quarters two or more consecutive quarters of declining gdp and a few other things and there's a group that declares recessions when they begin and when they end economists like that because it's numeric it's quantifiable and you can put it in an equation uh and a lot of people say well if a recession is two quarters of declining gdp and a depression is worse that must be ten quarters of declining gdp but no that's not the definition of a depression depression means depressed growth you can have growth in a depression but it's depressed relative to trend and relative to potential and that's dangerous because again your debt to gdp ratio is going up you're spending you're borrowing faster than you're growing uh and it's not the growth is not strong enough to cure the unemployment problem etc or the debt problem so it's kind of a a long-term slow motion stagnation uh and that would be the forecast now certainly for this year and next year and uh you know if you use 2019 as a baseline the last good year if you want to think of it that way the united states best case will not get to 2019 levels of output until 2023 uh and we will not get to 2019 levels of uh unemployment low levels of unemployment until 2025. so best case you're looking at two to three years or more of exactly what i'm describing uh you know depressed growth malaise worsening debt to gdp ratios etc it could be worse than that i would say that right now first quarter of 2021 the u.s is in a second recession uh technical recession we had a recession in the first half of 2020. we had very good growth in the third quarter off a very low base we do is i i analogized it you know you fell into a 50-foot hole and you climbed out 20 feet well nice going but you're still 30 feet underground that's the problem with third quarter growth but the west growth so if you say that recession is over we're now in a new recession and the reason is that um the virus is back it's worse than ever and they're locking down again lockdowns don't work uh but they don't work to stop the spare of the virus that evidence is very clear but they do destroy economy so we're destroying our economy again and there's nothing we can do about it you just said that a monetary and fiscal policy won't work so there isn't much left oh there is one thing it's right here in my book the uh the new great depression uh there is one thing we can do and i describe it in chapter six and in the conclusion you mean the gold thing well the gold thing is uh it's just a tool right it's i'm not saying gold is the answer to everything but it's a tool that has been used before and it's very effective here's what it does um everything i'm describing has a deflationary bias so even if growth is a little better i don't expect it will be but you know there's some room for variability but it all has a deflationary bias because of low velocity because of technology because of demographics and other factors governments cannot tolerate deflation because they don't know how to tax it number one and number two deflation increases the real value of debt so everyone says well that must be good for the banks because they they hold the notes they hold the debt and the real value of debt is going up isn't that good for the banks it's good right up until the moment the debtor defaults and then the entire loss falls on the bank instantaneously and we're seeing that for example in commercial real estate tenants again i'll speak to the united states but i've seen data from france it's the same thing they're not paying the rent tenants are not paying rents about eighty percent of them um some of them have many of them have gone out of business and they'll never pay the rent they're done the stores are closed up boarded up uh but but even tennis with some working capital have called the landlord and said you have to reduce my rent or you have to give me six months free run etc if you can't pay the rent what happens to the landlord well they're leveraged themselves they borrow the money they have mortgages that's how landlords operate so if you don't pay the rent to the landlord the landlord can't pay the mortgage and people say well doesn't that mean the loss falls on the banks it might but banks have very cleverly packaged the mortgages into securities and sold them to uh to to you uh right they're in your retirement again just take a look they're in there um at least for at least in the united states so the point being there will be this slow-motion commercial real estate ripple default playing out over the next year or so and that will get worse so that's the deflationary aspect how do you you can't have that you can't deal with that you'll just you'll destroy the banking system also governments don't know how to tax it so you need inflation so that's the answer we need a lot more inflation but the the federal reserve and other central banks around the world have been trying for 13 years to get inflation and they failed there's no inflation uh and so how do you actually get inflation well the only way to do it is to raise the dollar price of gold which has almost nothing to do with gold it has to do with the devaluation of the dollar so uh people look in in the 1970s for example so 1971 the price of gold was 35 dollars per ounce in january 1980 the price of gold was 800 dollars per ounce that's a more than 2 000 percent increase in the price of gold so everyone says oh gold went up not really i mean an ounce of gold is an ounce of gold it doesn't change it's atomic number 79 it's an element cyst in your drawer it doesn't do anything but what really happened was the dollar was devalued by 80 that's what really happened uh in other words it took two thousand percent more dollars to buy an ounce of gold at the end of ten years so what they did and no one talked about this way but what they did is they devalued the dollar by more than 80 percent measured by weight of gold that's inflation from 1977 to 1981 the u.s had 50 inflation 5-0 well that's a problem in and of itself it hurts people on fixed incomes it hurts a lot of people but it makes the debt go away really fast and so that's what we need um but the central banks have forgotten how to do it they think you can print money and get inflation but then milton friedman was wrong the monetarists are wrong the neokinesians are wrong they think that printing money creates inflation and it doesn't inflation is caused by velocity which is psychological and behavioral so you actually have to change behavior you have to change inflationary expectations and the easiest way to do that in fact perhaps the only way to do it today is to increase the dollar price of gold not to reward gold investors it would but that's not the point the point is it makes the price of everything else go up this is what fdr did franklin deland roosevelt did in 1933. the point of taking gold to 10 or 15 000 an ounce which i expect is to get you know that get the price of oil to 400 a barrel silver 100 an ounce wheat you know 20 dollars a bushel etc get the price of everything else to go up there's your inflation the inflation melts the debt away the nominal amount of the debt is the same but the real value is cut in half uh and then people will start spending money like crazy because they want to get out of dollars so that's it's worked before we know how to do it that's the answer but central banks are i like to say they're not uneducated essential bankers are not uneducated but they're they're miseducated they don't understand what we're talking about you predict a gold price of 14 000 until 2025. that's quite a bold statement uh well not really because uh for two reasons number one that's a smaller percentage increase than we saw in the 1970s so it has happened before uh from 1999 to 2011 gold went up 700 percent so the these things have happened before uh but but what people don't understand and again i always integral calculus is fine but you can do a lot of this good economics with fifth grade math um so if gold right now it's about one thousand eight hundred thirty dollars an ounce give or take but let's just use two thousand for a round number just for ease so if gold goes from two thousand dollars an ounce to three thousand dollars an ounce that's a fifty percent increase but if it goes from fourteen thousand dollars an ounce to fifteen thousand dollars an ounce that's only a seven percent increase the point being in both cases it's a one thousand dollar gain if you have an ounce of gold you just made a thousand dollars but at progressively higher levels the percentage increase of a fixed dollar amount is a smaller and smaller percentage which means it starts to look like one week's volatility it doesn't take that long now it may take a while to get from two thousand to three thousand to four thousand but then it goes very quickly from there because each percentage increment is smaller than the one before i mean you get you almost have to logarithmically to see what's actually going on so people say oh fifteen thousand dollars it seems so far away well it won't seem so far away when you're at 10 or 11 or 12 it'll happen very quickly all the more reason to have some gold today so you can participate in that none of what we're just it's all very simple it's all historical it's all happened before it's straightforward but central banks are too wound up in their phd thesis to really understand it besides holding gold what is the best investment strategy for the next years yeah high quality long long-term or medium-term government bonds so german bonds uh u.s treasuries um et cetera u.s treasuries in particular because u.s interest rates are still in positive territory you know all these bond bears uh you know bill gross uh jeff gundlach dan iverson and pimco uh they're all saying you know interest rates can't get any lower short the bond market is the greatest bond market bubble in history etc and one by one they're being carried out feet first they've been consistently wrong about this and they've lost a lot of money the reason is they don't understand the difference between nominal rates and real rates the nominal rate is the one you see on television now it's right now 10-year treasury note yield of maturity is about 1.1 okay that's the one you see on on cnbc or whatever but the real rate is actually quite uh quite high because you have to subtract inflation so if uh nominal rates are 1.1 which they are and inflation is 1.5 which is about right the real rate is only about negative 40 basis points i borrowed money in 1980 at 13 uh from my first mortgage my mother cried because her first mortgage was like 2 but i said mom i'm borrowing at 13 but at the time inflation was 15 so my real rate was negative two plus uh taxes but plus the interest was tax deductible and taxes in new york at the time were 50 so i got a 50 tax benefit on the mortgage interest so my real rate after taxes inflation was negative eight that's a low rate but right now real rates are about negative 0.4 so the nominal rate has to go all the way down to zero and perhaps probably go negative not because of fed policy but because of secondary market trading once you if you buy a 10-year note from me and you pay me a premium over face value that's greater than the strip of coupons your your yield to maturity is going to be negative so it doesn't require a fed policy rate a negative short-term overnight rate it just requires a premium greater than the future value of the coupons so and that can happen easily and it has happened in germany and elsewhere so as that happens there'll be enormous capital gains on 10-year treasury notes i also recommend cash um has no yield but it but has uh first of all it could be your best performing asset in deflation because the real value of cash goes up and uh it gives you optionality you you can be the one who sits back and oh a goal is going up well i'll buy some more gold uh you know jamaica's is wrong the economy is fine well now i'll buy some more equities the point is you can have you have uh optionality and flexibility and that's very valuable in an uncertain time so i would say 10 gold 30 cash 20 treasury notes there's room for equities um have a slice of equities but people 80 90 in the equity market are um i don't know how they sleep at night so i've got to uh uh hopefully that's all uh well helpful for the for the listeners uh uh uh on on our interview james thank you very much for taking your time thank you very much

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Keywords: James Rickards, Gold, GDP, Inflation, Depression, Corona, Covid, economy, economic collaps, Jim Rickards, The New Great Depression, unemployment, treasuries, equity, cash, deflation, interest rates, monetary policy, fiscal policy

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Length: 28min 11sec (1691 seconds)

Published: Wed Feb 10 2021