By Sumit Roy
James Rickards is the author of the national best-seller, Currency Wars: The Making of the Next Global Crisis, and a partner at Tangent Capital Partners. In 1998, he was the principal negotiator of the rescue of Long Term Capital Management sponsored by the Federal Reserve. His clients include institutional investors and government directorates. Hard Assets Investor's Managing Editor Sumit Roy caught up with Rickards to discuss his views on the Fed, gold, and the economy. (Note: This interview took place only hours before the Federal Reserve's surprise decision last week to hold off on tapering its bond-buying program on Sept. 18.)
Hard Assets Investor: The big news today is that the Fed may be set to taper its $85 billion bond-buying program. In your view, is the easy-money era finally over?
James Rickards: No. My view all along has been that they won't taper. But that’s the minority view, and it is a close call. But let's say they do taper today or later this year. They will be tapering into weakness. The fundamental economy is not sound. It's not growing in line with the Fed's forecast. It's not growing on a self-sustaining basis. It has been very dependent on monetary easing. And so if the Fed starts walking back that cat, I think they'll very quickly discover that they have to reverse course.
Remember, this is the third time they’d be doing this. They stopped QE1, and they had to come back with QE2. They stopped QE2 in June 2011, and they had to come back with QE3 in September 2012. Every time they’ve tried to curtail the easing, they’ve found that the economy tanks, and they’ve had to come back to the table.
If they taper, they may very well cause a recession in early 2014. And my expectation would be that, by June 2014, they would have to increase asset purchases. Now technically, they would say it’s all part of QE3, because if you look at what they said about QE3, they never set a time amount or a dollar amount. So they’ll say, "We will decrease asset purchases. But we reserve the right to increase them." And they may wake up in June and decide they need to increase asset purchases back up to the $85-billion-a-month level, and maybe higher. It will kind of look like QE4, because they tried to back away and they had to come back.
HAI: What do you think is the next big shoe to drop in financial markets? Is it that recession you see coming? Or do you see something bigger coming down the line?
Rickards: Well further down the line, I see bigger events. But yes, that recession would be a shock. Remember, everyone is saying, "We’re expecting the recovery to get stronger." Obviously, part of the Fed’s thinking behind tapering is that they see a self-sustaining momentum in the economy. And based on that, it’s ready to taper. But in fact, data are extremely weak. And the fundamentals are extremely weak. And all the gains are going to a very, very small slice of the population -- not even 1%; maybe one-tenth of 1%.
People are saying, "We’re waiting for this recovery to get stronger." What they may not realize is that this recovery is already four years old and it’s been anemic. It hasn’t made up for lost jobs. The average life of a recovery is about four and a half years. Just on that time frame alone, we might expect a recession. And certainly, if it starts to taper, that could just be what pushes it over the edge. That will be a shock. Most forecasters and most analysts are not prepared for a recession in 2014.
HAI: What do you think is the solution to all of these problems? It seems like you don’t think that the Fed’s stimulus is working. What do you think the Fed or the government or anyone should do? Or should they just stand out of the way?
Rickards: My own view, which has no chance of happening, is that they should stop asset purchases completely and start to sell assets and raise interest rates, and just say, "We don’t do stimulus. We’re a central bank. Our job is to maintain price stability. We’re not in the business of boosting the economy or propping up the stock market or propping up the housing market." I understand the Fed is doing that, and I understand why. But it has gone way outside the mandate.
I think we’ll look back at quantitative easing as one of the greatest failed experiments in history, as one of the greatest economic blunders in history. We’re not there yet. But I think that’s how it will be received. The problem with what the Fed is doing is there is no way out. As I said, every time they’ve backed away from the table, they’ve come back. So I expect that will happen again. This is the problem with manipulation; everyone becomes so dependent on the manipulation that you don’t have any way out. I would just go cold turkey, get out of the QE business, admit it was a failure and let the economy find its level.
I would expect stock markets to crash and housing markets to crash and banks to fail. And it would all be extremely healthy. We could get the bad assets out of the system, and then the economy would build from there, and we’d have a much more sound economy and much healthier, robust growth going forward. But the Fed is standing in the way of all that. So we really look like Japan right now, where you could expect 10 years of 1% to 2% growth.
HAI: What are your thoughts on gold after this year’s plunge? Is the bottom in? And can prices hit new highs again sometime in the future?
Rickards: Sure. The thing with gold is that it’s really just the inverse of the dollar. If the Fed tapers, and we go into recession and serious deflation takes hold, you could see gold going lower in nominal price, although it might very well outperform other asset classes in real terms. If gold went to $1,000, and the S&P 500 went to 700, what would you rather have, gold or the S&P? I’d rather have gold.
Gold doesn’t operate in a vacuum. I could see gold going lower, not because it’s not fundamentally an attractive asset, but because of Fed blunders. However, gold will find support because the Chinese are not done buying it. They need to buy a lot more. Every time gold dips, there’s massive physical demand.
If you’re in the paper market on the short side, you’re more and more vulnerable to a short squeeze, because physical gold is moving very rapidly into strong hands that don’t want to sell it. Inventories are being drawn down, the GLD ETF vaults are being drawn down, and physical is getting harder and harder to find. As long as you have a paper market, then it looks good from the outside. But if the paper longs ever decided they wanted physical, you’d find the makings of a classic short squeeze. And so that could cause gold to spike on a technical basis.
And then, longer term, over three years or four years, we’re looking at a much more serious risk of financial panic and collapse and a rise in gold to significantly higher levels. I would say $5,000 to $7,000 an ounce wouldn’t surprise me.
HAI: You touched on the fact that Asian demand for gold is surging. Why do you think that is? Do they know something that we don’t?
Rickards: They know we’re out to cheapen the dollar. They’re overallocated to dollars. They know that the United States has no way out of its debt problem except by inflation. And why would you want to hold dollars -- $3 trillion worth of U.S. dollars -- in a world where the Fed is going to try to inflate its way out of a debt crisis? The answer is that you wouldn’t.
I recommend gold to my clients and I buy gold myself. I can’t account for everyone else; if people don’t get it, then good luck. But it’s pretty easy to see what's going to happen.
HAI: Central banks can’t delay the inevitable forever, can they?
Rickards: Not forever, but they could do it for a long time. If you go back to my book, what I described as Currency War I lasted for 15 years, from 1921 to 1936. And what I described as Currency War II lasted for 20 years, from 1967 to 1987. We’re not always in a currency war, but when we are, they can last for 10, 15 or 20 years. This new currency war just started in 2010. I don’t expect it to be over any time soon.
The problem with currency wars is they don’t have a logical ending. Meaning, it’s tit for tat: One group devalues, and then the other group devalues, and then the first group devalues more. It’s like a ping-pong match that goes back and forth. I would expect it to go on indefinitely, with the understanding that there is an end point, but it’s usually a severe crisis or a collapse.