In this episode of Wealthion, host James Connor of Bloor Street Capital ( @BloorStreetCapital ) sits down with Jim Rickards, Former Advisor to the CIA and Pentagon, to discuss the current state of global affairs. Rickards, known for his deep insights into geopolitical and economic trends, shares his views on a range of topics including the ongoing Ukraine conflict, the precarious situation in the Middle East, the economic implications of China’s real estate crisis and if he thinks the stock market is a bubble that is about to burst.
James Connor 0:25
Hi and welcome to Wealthion. I’m James Connor. And today my guest is Jim Rickards. And Jim has had a fascinating career as a lawyer and as a banker. He’s also a very prolific writer on finance and politics. So he’s always got great insights on anything to do with politics and also the economy. Hi, Jim, thank you very much for joining us today. How are things in Portsmouth?
Jim Rickards 0:26
Thanks, James. It’s great to be with you. in Portsmouth, uh, you know, it’s called this time of year, but it’s a great it’s a great city great history. It’s actually the oldest city in the United States, not counting the old Spanish empire. So the couple places, you know, Santa Fe, and St. Augustine. Tallis might be a little bit older, but 1623, home of John Paul Jones and the oldest Naval Shipyard in the in the United States, founded in 1800s. So a lot of history and there’s a restaurant, Mecca also we have over 100, restaurants all, you know, kind of independent and all very good, not talking about chains and so forth. So yeah, it’s a fun, fun city. I enjoy living here very much
James Connor 0:06
Yeah, I have not had the pleasure of going to Portsmouth, but I had been to Bretton Woods. And that’s another place that’s had a lot of history. I’m sure you’re quite familiar with that place.
Jim Rickards 0:06
Yeah, I’ve been at Bretton Woods a number of times, it’s at the hash, just like a long, skinny state. So we’re at Portsmouth is at the southern end, about an hour from Boston and Britain was at the northern end of the state, not too far from the Canadian border. But I’ve been up there a number of times, it’s a great venue for events I did actually did a war game, facilitated and conducted a war game up there for for Boeing. Some years ago, they wasn’t sure why Boeing wanted a war game. But then I realized you’re the, I think, first or second largest exporter in the United States. And so they deal with foreign currencies and foreign trade all the time. So they, they were interested in that, but I’ve been there a few other times. I was there for the 75th anniversary of Bretton Woods, which was in 2019. So we had a big group, Larry Summers was their former Secretary of the Treasury and a number of other bright lights. Stephanie Kelton, she’s the big brain in modern monetary theory. So we had a good group. And that was a, that was a fun visit also.
James Connor 2:26
Yeah, it’s a beautiful part of the world. I would love to get back there. So let’s carry on. And I want to get your thoughts on what’s happening in the world right now. There’s so much going on with Ukraine and Russia and the Middle East, and also interest rates and inflation. And when you look at all of these various events, is there anything that really causes you a lot of angst right now? Or is there anything that keeps you up at night?
I tried to get a good night’s sleep, and I tried to be anxious for you. But if you’re asking whether any of those issues are caused her concern, the answer is yes. You mentioned five or six things. I could probably do one or two hours on each of them. So we don’t have 12 hours. But we’ll try to try to get the same. But yeah, they’re all They’re all cause for concern. And interestingly, they’re all connected in certain ways. So you can find connections if you take Ukraine, maybe the most direct I mean, I always tell people, pretty much everything you read in the New York Times, The Washington Post, LA Times to Reuters and others are just wrong or outright lies. It’s very difficult to get good sourcing on Ukraine. It took me awhile. It took me about six months. But I’ve developed that now. And I’ve got kind of reliable sources from a number of channels. But the bottom line is that Russia is winning. decisively. People don’t understand the Russian way of war. They’re never in a hurry. They’re very slow, methodical, thorough, they, they put up a great entrance defense, and then they fight a war of attrition. They basically annihilate the enemy without ever attacking because the enemy attacks them. They invented what they call crumple zones and make a sort of advance, but not in great strength and then the enemy counterattacks and they retreat, and then the enemy moves forward. But what they don’t realize is they’re going into a kill zone, and they then they get a massive artillery drawn and bomber bombardment and get annihilated with very high casualties. I think there were 500,000 Dead Ukrainian since the worst start. It’s a war that never should have happened. It was really a failure of us diplomacy, among other things, but where that never should happen. But now this far along, you know, be two years old next month. The you know, just to be clear, Russia, Russia is winning Ukraine is losing badly. They’re running out of man. USAID has dried up that’s tangled up in the Congress. They can’t get Ukraine aid passed through the house, the senate To the Europeans of South giving more money, Hungary has a veto, they might get a little bit dribbles over five year period, but not anywhere near what they need. You know, you see slansky running around Davos with 10 cup, trying to get money and comes back empty handed. The economy’s a shambles. A lot of the money we give them just goes to pay, you know, government salaries to the oligarchs and the Neo Nazis. So, you know, there’s this idea we’re fighting for democracy in Ukraine, which is nonsense. The US is having elections this year, Russia is having elections, Ukraine canceled their elections and the rest of their political enemies. So, you know, show me show me where the democracy is that that obviously doesn’t exist. So, but on the financial side, which I think our viewers are maybe most interested in, the financial sanctions have been a complete failure. That’s about to get worse. By the way. I’ll spend a minute on that. But I teach financial warfare seminar financial warfare at the US Army War College, in Carlisle, Pennsylvania, and I, when I did it, two years ago, in April 2022, right after the war started, I went through the sanctions, it’s a small class about 1213, all handpicked mid career officers, Lieutenant Colonel’s Navy commanders, some civilian CIA, State Department and a few others, but it’s an elite group there, they’ve been kind of hand picked as the future. Big brands, you know, by always asked how the whole classes are doing, you know, future three star generals or deputy national security advisors, etc. And the class was very gung ho was right after the war began. I said, just so you know, the sanctions are going to fail. And they’ll actually be worse than failure though boomerang and hurt the United States, more than they hurt Russia, Russia will not it will not change Russia’s behavior. And that sense, they’ll fail in terms of the immediate objective, but the actual actually the Russian economy will be fine. So then I taught the class again, this well, 2023, may 2023. And I said, By the way, in the 2022 class, I got a lot of pushback, because everyone was gone. And that’s okay as seminar style. And you’re supposed to have different perspectives. So that’s a good way to do it. In the 2023. Class, I said, Here’s what I told last year’s class, and I was right about everything. The sanctions had failed. They had hurt the United States, the Russian economy was fine. All the oil or natural gas that Western Europe didn’t want they sold it in the in China. The Russian ruble was was steady has gone down a little bit, but not much. But the idea that, you know, buying, we’re going to destroy the rootball we’re going to crush Russia. Not true. I mean, he actually doesn’t know what he’s talking about. The Russian economy is outperforming the US economy. Right now, the only economic problem Russia has is they have a labor shortage because their their economy is running so hot that it’s actually kind of hard to find people to fill all the jobs. But that’s, that’s a good problem to have a little bit of inflation, not much actually lower than the US and I’ll be our interview. Lena who’s the head of the Central Bank of Russia, I would say she’s the only central bank in the world who actually understands her job. She raised interest rates a little bit just to cool down the inflation. They were there on a complete war footing and making several million 155 millimeter artillery shells per year. Now over to the United States, UK, Western Europe Arsenal’s are depleted. We’ve given Ukraine you know, in some cases, almost everything we have the UK is out of Storm Shadow missiles the the US is out of 155 millimeter shells, Germany, France, same thing no 155 millimeter shells left. That’s why we started giving Ukraine cluster bombs. It’s a form of artillery, called a cluster bomb because we didn’t have any more than regular shells. We’ve given them I believe, four maybe more but at least for Patriot anti missile batteries. The Russians have blown up three of them destroy three of them with their hypersonic missiles the pages, they can shoot down a cruise missile, certainly a drone or other types of missiles, but they can’t stop a hypersonic missile and the Russians have done this goal. Missiles so the Russians just fire the Chicago missile and the block Patriot systems. They’re about a billion dollars apiece. So there’s 3 billion gone. So the Ukraine is running out of cruise missiles, Storm shows in particular, their their patriots systems are either blown up or don’t work. There was a famous Leopard tank, the Jeremy supplied leopard tanks to Ukraine. They went on the battlefield got blown up there were just all these images of burning leopard tanks everywhere. The US actually called Ukraine and said because we have sent them some Abrams tanks and said Please, please don’t use our tanks because we don’t want pictures of the Abrams burning on the battlefield. You know it’s bad For sales, so the Russian economy is fine Ukrainian economy scarcely exists. Russia is winning the war, but they’re taking their time. They’re not in a hurry the the member, the famous Ukrainian spring, fall, spring summer fall a counter offensive it made a few miles ago like two villages, and then they were pushed back to complete complete failure. They lost half their, you know, their Bradley Fighting Vehicles, their leopard challenger tanks, their air defenses are gone. There’s nothing stopping the Russians from doing whatever they want. So that’s a complete disaster now. So you say well, how can you make that worse US policy has been completely misguided, or how can you make it worse, but leave it to the White House to come up with a way when the worst started, we and NATO Allies froze Russian assets any any assets we could get our hands on. So if their central bank reserves Russian Central Bank reserves were in western banks, many of them were those were frozen. And it’s about $300 billion, mostly in US Treasury securities, the entire reserve position was little under 600 billion. Russia very intelligently put 25% of the reserves in gold. So they had about 150 metric tons of gold. Now they have 3000 metric tons of gold, but it’s about $150 billion of the $600 billion. So they got about 24% of the reserves that go, we can’t touch that it’s one of the attractions to go with physicals that digital so you just put it in the vault and keep an eye on it. But you can’t freeze it in the banking system. But anyway, we have this $300 Billion US Treasury securities, mostly in Europe, the amount in the United States is about 30 billion. But most of us in Europe it’s in it’s in Deutsche Bank and Barclays and HSBC, Unicredit, UBS and a few other banks. Now, what the United States wants to do when we’re actually passing legislation to authorize this, probably already authorized, but just to make it clear, is to seize the assets. And we’ve already frozen them, we frozen them, meaning Russia can’t sell them can’t collect the interest can’t transfer them, but they still belong to Russia. That’s what freezing is. Now what the government wants to do is seize them, confiscate them, basically, take them from Russia, steal them in effect, and then use that money to rebuild Ukraine. Now, there are a number of problems with that, number one, you’re not going to be able to rebuild Ukraine, because Russia will take over the whole country at the rate they’re going so there’ll be nothing. Russia might want to rebuild it, the Ukrainians might, but the West is not going to rebuild Ukraine, because the West is not going to be involved. That’s how badly they’re losing. But that aside, when you do that, that’s a default on US Treasury securities, I don’t care what you call it, you can just set up in legal language. I’m a lawyer. So I actually understand all this. But the rest of the world is going to look at that. And Saudi Arabia, Taiwan, China, South Korea, and other countries that have hundreds of billions, or in some cases, upwards of close to a trillion dollars. In the case of China, of US Treasury securities, things say, Hey, you just sold $300 billion, or 50% of Russia’s, the central bank of Russia’s reserve position. These aren’t This isn’t like oligarchy, oligarch money or, you know, something else we might be able to rationalize it. What if they don’t like what we do? What if they don’t like one of our policies, so all these countries is going to be highly motivated to get out of US dollars, you can’t do it all at once this will take time. And this then I said this is all connected. This then ties into the rise of the BRICS currency. The BRICS, Brazil, Russia, India, China, South Africa. They’ve been around, they’ve been meeting since 2006. That their last meeting in August, they added five new members. So I, they added five new members. So now sort of the bricks 10. But the members they added include Saudi Arabia and Iran. So now, if you look inside the bricks, you’ve got Saudi Arabia, Iran, and Russia. I believe UAE was also added United Arab Emirates and Abu Dhabi in particular. So now, you don’t need OPEC anymore. You have OPEC inside the BRICs. In fact, Russia has never been a member of OPEC, but now you have Iran, Saudi Arabia, UAE and Russia all inside the BRICs. So they have as much power probably more than than OPEC, and they’re working on a new currency and it’s all designed To create, basically we create the Bretton Woods institutions, we talked about that, but they have the New Development Bank in Shanghai, which is a clone of the World Bank. They have the conditional asset reserve as basically a clone of the IMF swing lender for countries that are experiencing capital outflows. And they have a lot of other institutions as well, but now they’re gonna have their own currency. They’re working on their own payments channels. So and I’ve told people, the Treasury and the Fed, Pentagon, I’ve had all those meetings at different times. I said you are. And I said this years ago said, You’re overusing sanctions, sanctions can work against a medium sized country that doesn’t have any alternatives, but against a major power like Russia, they don’t work at all. But by overusing them, you’re going to drive people countries away from the dollar and undermine the role of the dollar, first as a major global payments, currency, and then ultimately, as a reserve currency. I pretty I always got the meetings, but it pretty much got, you know, a left out of the room was one Treasury official, David dollar, interesting last name, but David was in charge of the dollar. In terms of treasury liaison with Asia, and he like one meeting, I said, pretty much what I just said. And he slammed his hands on the table. This was at the Pentagon, but palms down and said the dollar has been the global reserve currency. It is the global reserve currency today. And it will always be the global reserve currency asset, David, I feel like I’m in Whitehall and 1913 listening to John Bogle, talk about how sterling is the global reserve currency and always will be I said, That’s not true. I said, it could be true if you if you manage it properly, but you’re overusing sanctions, you’re going to know how many times you can hit the punching bag, before the punching bag gets up and walks out of the room. And that’s kind of where we are so so we’re we’ve pretty much lost the war in Ukraine, we’ve lost the financial war that goes with it, Russia is doing extremely well. And Russia is a key part of the bricks and the bricks are working together to create this new currency that will be linked to gold won’t be strict gold standard. But it will be the value of one brick unit. I don’t know what they’re gonna call it, I call it a brick for now, but maybe the court the bank or who knows, but it will be its valuable will return be determined by weight of gold weight of gold, not $1 equivalent, you can obviously the transitive law, convert that to dollars, but it they’ll let the dollar do the dirty work in the gold market. And they’ll just peg to a quantity of gold. You don’t even need that much gold to do it. You just say that’s what it’s worth. We issue it and we accept it. And so all that’s happening around us the White House is pretty much clueless. They don’t understand this. You know, like Mike Johnson is the new Speaker of the House. But he seems to be on board this Russia confiscation. I have spoken to some people that are going to try to take them aside and explain what a what a blunder that would be. But at least so far, they’re going ahead.
Very interesting comments, Jim and Ian, before we move on and discuss the Middle East, I just want to stay on Ukraine for a bit. First of all, why did Russia attack Ukraine? What was that they want it? What was their objective?
Jim Rickards 18:22
Well, they’ve stated their objectives. It’s not a mystery. They want a demilitarization D not suffocation, because it’s run by a lot of Nazi sympathizers. Not join NATO obviously. And well, those were the those were the three main three main object demilitarization, denazification, no membership, oh, and then neutrality. We had many examples of that. And Finland was neutral throughout the entire cold war until very recently, just on NATO. Probably a mistake but but until then, they had been neutral. Austria was neutral during most of the Cold War. That’s why Vienna was such a hub for for spies and like the third man with Orson Welles, but you know, Austria was technically neutral, they ultimately westernized but so there is a Switzerland maintains neutrality, so there’s plenty of precedent for that. And they wanted Ukraine to be neutral. Now, why did they attack when they did this the SMR special military operation, the United States provoked the War, the United States spent 14 years poking a stick in Russia’s eye and Russia eventually reacted but you go back to George W. Bush 2008, the Bucharest declaration. He said, Ukraine and Georgia should join NATO that we should start the process of letting Ukraine and Georgia join NATO. Four months later, Putin invaded Georgia. You know, you’re not paying attention. You said that you want them in NATO. Putin says Now we’re going to we did invade Georgia and they took off the country and She was in Georgia, obviously does not belong to NATO. So then flash forward to 2014 CIA and MI six provoked one of these color revolutions. I forget what color it was, might have been purple, but it was the my, my Dawn square demonstration of bear in mind. At the time. Ukraine had a duly elected president, they had an election. And it was fair by all accounts. And he was pro Russian fair to say but you know, he was talking to the EU, trying to do a trade deal with the EU also doing a trade deal with Russia, tilting to Russia, but you know, trying to play it down the middle Ukraine politics is such a tough game. But the CIA and the NMI Sikhs, and the local Neo Nazis staged a coup, and they drove him out, and they killed a lot of innocent civilians in my town square. And then the President Poroshenko, got on a plane and flew to Moscow, kind of had to run for his life. And then we install a puppet. So a couple of months after that, Putin took over Crimea. So like, what what part of invasion? Do you not understand? I mean, those every time the United States and really the Europeans are vassals at this point. Every time the US and his vassals provoke Russia, either by saying Georgia and Ukraine should join NATO, we’re staging a coup and sending the president you know, kind of running for his life. Putin would react by invading to you invaded Georgia, and you’ve had a Ukraine or sorry, Crimea, which is, which is now part of Russia, historically, part of our ship, but it was considered part of Ukraine. And we kept going, we kept going, I mean, they impeach Donald Trump for a phone call. A phone call was the Lansky and he gets impeached. Now you got, you know, Lindsey Graham and Nikki Haley and Joe Biden, all the other war mongers going to Kyiv they don’t get impeached. But somehow, Trump makes one phone call and that was enough to impeach him. So that was just the again the warmonger element. The State Department, you know, now you’re Tony Blinken, the National Security Adviser, sorry Tony Blinken, Secretary of State Jake Silva, National Security Adviser Victoria Nuland, Deputy Secretary of State there they’re the the the inner core of the warmongers. But there are plenty of them in Washington, no, no shortage. They just want war. They they they don’t understand Russia, they don’t understand history. They had this notion that, well, if we can just keep pushing, pushing, pushing, provoke a war, we can deplete Russia’s military capability, inflict major casualties on Russia, create dissension in Moscow, the Russians just you know, they don’t train, they just sit there and drink vodka. The generals are incompetent, the whole thing will fall apart, there’ll be an uprising of Western elites in Moscow and they’ll overthrow Putin, and we can get back to looting the place. None of that happens. None of that happened. They completely misunderstood. Basically everything about Russia. Putin is power base is not the oligarchs actually doesn’t like the oligarchs has to put up with them. And he’s told them, you know, you can keep your money but keep out of politics, and he put a few of them in jail, just to prove his point. But he’s never relied on the oligarchs Putin’s base as the military intelligence community, the Orthodox Church and everyday Russians. That has not been impacted at all. Their economy is doing fine. Guesses Arsenal’s are depleted, not Russia, arms were the ones running out of patriots were the ones running 155 millimeter shells with a one ones who can’t make the cruise missiles fast enough were the ones who don’t have enough drones, etc. Russia has all that and more because they put their economy on a war footing. Putin is more popular than everybody is going to win reelection as president next month. And so they got everything wrong, which means that they are ideologically driven not they’re not because students of history they don’t understand the Russian way of war. Just study the Battle of Kursk study what happened on the Eastern Front. In World War Two, the Wehrmacht went in and they killed 5 million Russians. And they were on the outskirts of Moscow. They invaded Stalingrad they had Leningrad today St. Petersburg, you know surrounded and they were starving them out. And it looked like very close to a complete victory. But what they didn’t understand is that they killed 5 million Russians but then the Russians said 5 million more and 5 million more meaning the Russia had reserves and what’s called strategic depth Then population, and all of a sudden the Wehrmacht, they suffered, you know, 5 million casualties. But they were done. They didn’t they didn’t have Germany’s much smaller country, they didn’t have 5 million more than Russia went all the way to Berlin. But that didn’t happen overnight. It took two and a half years. And in that in those two and a half years, the Russian strategy was kind of an envelopment. They would, they would stop your advance, but they would kind of fight a war of attrition, but they would surround you in the meantime, and only when they had pretty much annihilated you and surrounded you, but they go in and and basically kill everybody. And then you know, maybe a few escaped to the west. But they did that over and over and it took it took two and a half years. So anyone who studied that would have said, Ah, the Russians have you know, practically inexhaustible reserves, enormous industrial capacity, the discipline to go on a war footing, and they’re very slow but very methodical, and they always win. That’s what you would have concluded they the Victorian Newlands and Tony Blinken. So the world where are intellectual lightweights? I mean she she went to Brown but that’s the bachelor’s degree but she has no advanced training. Jake Solomon’s a campaign hack who ended up as National Security Adviser. He’s just trying to get the word going until the election is over. They don’t have any strategic vision. So you know, I do look at the US foreign policy establishment and I asked myself you know, and and other countries ask themselves the same thing. Where were the Henry Kissinger’s the James Baker’s the Dean rusks. John Foster Dulles is the Dean Acheson’s George Shultz, I mean, were able Harman mcgeorge bundy wears that kind of talent. And, and learning and brilliance, you know, they made mistakes. But but the point is, there was never any shortage of talent there. And today, we have all these hacks. But it shows up in the results. I mean, since Biden went and we had a humiliating retreat from Afghanistan, a lot of Americans killed for no reason. We’ve we have a war in Ukraine that we’re losing badly. We’ve depleted our Arsenal’s now we have a war in Gaza, which is, you know that that’s going to take a while but the hoodies are close the Red Sea and, and the Suez Canal, and now the Iranian proxies are killing Americans. So thank you, Joe. Nice job.
James Connor 27:29
Jim. Before we move to the Middle East, one more question on on Ukraine. And it sounds like the resolution of the only resolution is complete takeover of Ukraine by Russia. And so my question to you is what who’s next?
Jim Rickards 27:43
No one this is all this is all Russia wanted. I mean, they they, it sort of depends on how NATO reacts. Now, the US has said they’re going to give Ukraine F six teams, they haven’t arrived yet. But there that’s supposed to happen later this year. They got to train the pilots have problems because the pilots don’t speak English, a lot of them. But but that is this teach me English or they can teach them how to fly an F 16. There are all kinds of logistical difficulties with that. First of all, you need a 6000 foot runway to fly an F 16. They don’t have any new crane. They’ve all been bombed if they try building why the Russians would vomit. And so it’s not even clear how you can station of sixteens in Ukraine because they don’t have the infrastructure to support them or maintain them or long enough runway. So what do you do? Well, you could station them in Poland and five men to Ukraine. But now Poland is at war with Ukraine. Now, in that scenario, I’m not saying that’s going to happen. But in that scenario, Russia would probably bomb Poland. So when you say who’s next? My answer is, well, it depends on what the other guy does. Why she’s not gonna invade Poland for the fun of it, then this is not, they’re not on some spree to take over. Even Eastern Europe, let alone Central Europe. But if, if Poland is dumb enough to allow their country to be used as a base for attacking Russians in Ukraine, they should expect retaliation. And so it’s really and the real concern me when I look I spend a lot of time thinking about as the escalatory dynamic, you know, one raises the nav element goes higher than higher and higher. Next thing, that’s how you get to nuclear war and I’ve been studying nuclear warfighting since the 1960s. And there are a lot of great analysts, you know, Herman Kahn and Paul nets, Albert, Roberta will steder Henry Kissinger and and others and they had different approaches and different emphases. But they all said the same thing in the end, which is don’t go there, meaning nobody wakes up and says, Oh, nice day for nuclear war think I’ll fire a missile. That’s not how it happens. It happens to us escalation. And the escalation dynamic continues to a point where one side feels that they’re in a corner. And it’s existential, and they have no choice. And what’s interesting in that situation is this is where the game theoretic analysis comes in. If the other guy’s backed into a corner and ready to launch nuclear weapons, it’s a good idea for you to shoot first, the, you know, the first first strike always has always has the advantage, those situations, even though we’ve got to face potentially face a second strike, but particularly if your first strike can be extremely damaging to the second strike capability of the target. So So you actually are on the path to nuclear war. The question is, is there enough wisdom or understanding to back off that path and de escalate, which is what we did in the Cuban Missile Crisis in 1962. And they were Able Archer was was dangerous 1983. And before that, there was another computer glitch on the Russian side where they, they had five incoming us ICBMs. And these system gave a launch signal meaning attack the United States and one guy took it upon himself to ignore the order, but probably the risk of his own life and the future of the Soviet Union at the time. So. So you don’t want to go there is the point. But I’ve seen so much stupidity on the NATO side, I don’t have any assurance that they want. So if you ask me, Does Russia have? Does Russia have goals beyond Ukraine in terms of military attacks? The answer is no. But could they as they were provoked into attacking Ukraine, after 14 years of us provocation? Could they be provoked into further action? is a response to something really stupid by Poland or Romania? Yeah, you can’t rule that out, because the stupidity is pretty widespread.
James Connor 32:11
Well, that’s a great overview of what’s happening in Russia and also with the with Ukraine, why don’t we move on now and discuss the Middle East? What’s your current view on how things are unfolding there? And has your view changed since October?
Jim Rickards 32:26
Well, I mean, interestingly, the dynamic in the Middle East is exactly the same dynamic in Ukraine that we just discussed different parties, different goals, but it’s on an escalatory path. So Hamas goes into Israel on October 7 2023, kills more Jews in one day than anytime since the Holocaust. And worse than killing them. There were rapes and murders, you know, torture. And a lot else. Some of it too. I mean, too graphic to describe are certainly nothing you want to dwell on. But horrific is a good word. Israel responded militarily, as one would expect. They’ve systematically cleaned out a Gaza City, they’re now in the southern part of Gaza. It’s not that big. It’s only I think it’s about 28 miles by seven or eight miles. Yeah, I would call it you know, 210 square miles. But that’s it for the whole place. And so yeah, Hamas struck first horrific attack Israel struck back. So there’s your first, you know, escalation. The they think they estimate then these numbers are exactly the estimate, there are about 45,000 Hamas fighters, you don’t have to kill everyone. Generally, if you kill a third of the opposing force with a heavy concentration of officers and leadership, that’s enough to cause the force to disintegrate, the rest of them just kind of go home and maybe hide their rifles under the bed or whatever. So they’re gonna have to kill about 15,000 Hamas fighters. I don’t know the exact number. They’ve killed seven or 8000. So they still have a way to go. CES is gonna last for a little while there might be a ceasefire and exchange of prisoners that would be good, but I doubt that’s the end, the end of the war. But so then, but then what else is happening? That’s the point getting back to escalation. Well, now we see Hezbollah firing missiles into northern Israel. They’re up in Lebanon, mainly on the northern border of Israel. We see Houthi rebels firing shipping in the Red Sea and the Gulf of Arabia, Arabian Gulf. And both Hezbollah and the Houthis are Iranian proxies. So you can be very sure that Iran is behind it, but around supplying them financially militarily with the John’s with the missiles, etc. Israel has begun to respond to that. But now Americans have been killed, and American shipping has been hit and the Red Sea is closed. And by extension, the Suez Canal is closed and oil from the Middle East to Europe has or natural gas for that matter has to go around Cape of Good Hope been there, it’s pretty placed. It’s pretty far from the Red Sea. So what does that do just financially? Well, it adds a lot to your transportation costs, which means you that will put upward pressure on the price of oil. I mean, we are in $1, and the US in particular are in a serious disinflationary mode, maybe dangerously close to deflation, which is worse or at least harder to get out of, and it has creates a lot of difficulties for for debtors. And then the debtors default, and that loss goes to the banks and the banks start to fail. So you have the makings of a recession and possibly a bank panic. Well, now this, but the one thing that is going up other than gold is the price of oil, less because of the geopolitical tensions we’re describing. But those transportation costs are gonna go up a lot insurance costs are going to go up. That’s going to go cut against what the Feds trying to do, which is to get disinflation, it’s gonna cut against weather. Otherwise, disinflationary trends, that means the Fed will not cut interest rates, as Wall Street has been wrong about the pivot for two years as sort of become a running joke. I mean, they started the pivot dialogue in the summer 2022. So not quite two years or so a few months away. But, you know, if you’re wrong for two years, maybe you’ll be right eventually. But while she’s been completely wrong about the pivot, and we’ll see what the Fed says, you know, in this current meeting, but the the idea of the fed the Fed isn’t going to cut anytime soon because the price of oil is going up. And that is that isn’t even filtered through. It’s only in the past month price is up 15%. That’s at the wholesale level, but meant the the the the near month futures contract West West Texas Intermediate on the NYMEX, but that hasn’t even filtered through to the guests of the palm transportation costs for food, clothing and everything else we do, but it will with a live. So the headline CPI is going to remain high for at least the next several months, even in a world that wants to deflate. So thank you who these you’re, you’re messing up the fabric. Again, it goes back to I said earlier about how this is all connected. Now the question is, what is the United States going to do about the dead US service men and women? And will that involve an attack on Iran? I don’t know. Some lot of people are calling for that we’ll see. But it fits this escalatory dynamic where it’s, you know, Hamas, Israel, who these United States, Hezbollah, Iran, and recently Iran attack Pakistan. I mean, did they not know that? Do they not know that Pakistan is a nuclear power? Israel’s nuclear power rushes on the sidelines. They’re a nuclear power. I was just in Dubai recently. The Dwight Eisenhower aircraft carrier battle group, I didn’t see it, but it was in tall buildings. I was looking for them. But they were they were right off shore. They were out there in the Straits of Hormuz, I was pretty, pretty close to that area, while I was in that area, in Dubai. And there plenty of nuclear armaments in that battle group does aircraft carriers don’t travel alone. They go with destroyers and cruisers and submarines. And there’s a separate nuclear armed submarine in the area as well, in the most recent in the Red Sea. I’m not sure exactly where it is right now. But it’s somewhere in the area. So between Israel, Pakistan, Russia and the United States, you’re surrounded by nuclear powers. The UK is involved as well. And then Iran is probably just weeks away from being able to test the first nuclear weapon. And yet here we are we the United States and Great Britain, in an escalatory dynamic with a ramp. I’m not saying there shouldn’t be some response to the killing of American service people. What I am saying is, Where was your diplomacy? Where was your ability to think two moves ahead? You know, four months ago, why did why are you in this situation? Why do you not but did you not see it and think about ways to de escalate rather than escalate and the answer is they’re not that smart and they’re not that talented. I mean in the United States,
James Connor 40:03
fascinating discussion. So, before we talk about the economy, we have to talk about China. It’s the second largest economy in the world, so it warrants a discussion. And even though one never really knows what’s happening in China, the narrative right now is that the real estate market is imploding. And just recently, China Evergrande, China’s largest property developer, was forced into bankruptcy. What are your thoughts on China and its impact on the global economy?
Jim Rickards 40:32
Well, I mean, the impact is huge. But China is imploding Evergrande. Yeah, they, they technically filed for bankruptcy, but they they were bankrupt two years ago, everyone can see that coming. Every new, everyone knew what the impact would be. The housing market has been crashing for the better part of two years, that Chinese people everyday people, even if you have a good job and have some savings, they can’t, they can’t invest in that much. They, they, they, they can’t invest in western stocks. Because of capital controls, they can only take I think, $50,000 a year, out of the country, there are workarounds, and there’s money laundering and all that. But basically, it’s very difficult for the Chinese to invest in anything except Chinese stocks and Chinese real estate. But they both in crashing Chinese real estate has been crashing for a while, it’s going to get worse. Now the banks are going to be distressed because they let all the money to all the properties that are going bankrupt. And then the Chinese stock market has been crashing, it’s down over 10%, I think closer to 15%. In the past month, so So what do you do with your savings? Well, he put it in a bag, these wealth management products are failing. They’re kind of like junk bonds. They were they were sold as equivalent bank deposits, but they’re not bank deposits. They’re not guaranteed they’re not protected. The money was used to invest in a lot of these crazy real estate projects that we just talked about. And so they’re failing as well. World Trade is contracting, that rarely happens even in a recession. World Trade kind of keeps his head above water, but it is contracting, something less seen on a large scale during the Great Depression. The US is putting a lot of technological controls on Chinese exports, and not allowing China to import some of the any of the high tech semiconductor equipment or chips. The Trump tariffs are still in place. You know, Biden made a big deal about undoing everything Trump did. Well, he certainly did that at the US tech at the Texas border. The southern border of the United States, but he did not remove the Trump tariffs. They’re still in place. And so as you can see, Chinese holdings of US Treasury securities are declining. The Treasury has something called the US Treasuries. I’m gonna go the tick report comes out. So the monthly quarterly loose monthly, but it shows changes in foreign holdings of US Treasury securities, among other things. And China’s are declining. So a lot of people, a lot of analysts look at that, particularly Wall Street analysts. They go, Aha, you know, China’s dumping the dollar, they’re getting out of dollars to selling their treasuries, et cetera, et cetera. That’s not why they’re doing it. They are selling treasuries. But they’re selling treasuries, not because they want to get out of them. There’s a serious global dollar shortage. They’re selling treasuries to raise dollars to finance their own banks, which have a lot of dollar denominated loans that are going into default that were, you know, so it goes to the central bank, to the commercial banks to the to Chinese corporations, state owned enterprises, etc. They’re all connected. It’s all controlled by the state. But the reason they’re selling their treasuries and they are I mean, that’s empirically correct. It’s not because they want to dump them, it’s quite the opposite. They wish they had more, but they need the dollars because there’s $1 shortage and a collateral shortage going on. So that’s another sign of acute economic distress. So look at China. You know, the only way they they keep their economy going at all is with infrastructure spending. But and I’ve been to China many times I’ve been not just Beijing, Shanghai, but I’ve been in Wuhan Xian. Xiang, Xiang and, you know, Yangtze River, a lot of other parts of the country. They do these infrastructure projects that are amazing. I mean, I was in the Nanjing South train station. It taken three years to build and it was 20,000 jobs for the whole three years. And it’s real, you know, it’s real steel and copper and marble and glass, and electronics and escalators and it’s all All real, but it’s empty. I mean, there are 128 escalators, and there’s very few people there. And they subsidize the train tickets. So I bought the the bullet train is 305 kilometers per hour, took the bold bullet train from Shanghai to Nanjing. And I gotta have the Nanjing train. And but the ticket was like 32 bucks. I mean, if you take the XL off in New York to Washington, I’m done lately, but it’s, I don’t know, I think it’s like a $300 ticket, maybe more, and they lose money. So this bullet train is amazing. I mean, that’s much better than anything we have in the United States. I’m close. And you know, it’s quiet, and it’s fast, and the service is good, and all that. But a $30 train ticket doesn’t cover the cost that’s obviously heavily subsidized. So my point being, they, they build these infrastructure projects, they do import the raw materials, or they have the fabrication manufacturing in China, it does create jobs, and they do get a finished product. That’s all true. But they’re white elephants. I mean, they, they just, they will never repay the debt, they will never make money, and they’re mostly empty. So how, how long can you do that before? You’ve bankrupted the country? Well, maybe we’ll find out. But obviously China is in very bad shape, their growth is slowing enormously. There’s statistics. I’m sure they overstate the growth. They’re not honest about the numbers, but you can take the numbers and do some kind of mental adjustments or taking what you know, including, for example, under generally accepted accounting principles, if you build an infrastructure project and was worth nothing that counts to say, Well, fine, you got to write it off. You can you write it down to zero, keep it on your balance sheet. At zero, it’s not worth anything. Obviously, they don’t do that in national accounting and China. But if you did their GDP, they probably already be in recession. So that’s deflation deflationary well at least disinflationary or deflationary. And you look around the world, you see Europe’s in a recession, Germany, Germany’s absolutely in a recession by conventional definitions, Europe has had practically no real growth for five years now. It was up and down, you know, a little bit of volatility, but France, Netherlands, now the farmers are taking the streets or while they’re driving their tractors to The Hague, and Paris and Berlin and shutting these countries down. Because none of it, none of it makes sense. So how does the US, you know, kind of prop up its headline GDP when China’s slowing dramatically Europe’s in recession? You know, Eastern Europe’s in a war, you know, cetera. And the answer is the fiscal policy that we were piling, we’re spending upwards of $3 trillion a year of deficit spending, well, you’ll monetary policy doesn’t work and monetary policy is kind of a joke. But fiscal policy can work. The question is, is this sustainable if you have to spend $3 trillion to have deficit spending to get $2 trillion of GDP, that those are about approximately the numbers? How long can you keep that up? Then the answer is if you have to look at the debt, the debt to GDP ratio, if your debt is going up faster than your GDP, your ratio is getting worse, which according to a lot of great work by Carmen Reinhart, and Ken Rogoff says that you’re going to slow growth even more and the only way out of that they’re kind of four ways out default, restructuring inflation or hyperinflation and growth leading and forget growth we’re you know, we’re we’re we don’t have the policy set for that. And the debt to GDP ratio is too high. There’s no reason for the US to default a restructure not because we print the money that Argentina has to do if Argentina prints pesos and borrows in dollars. They can’t print dollars so they do have to restructure default on their dollar denominated debt. But the US debt is dollar denominated we print dollars so there’s no reason to default or restructure, but you will get inflation and I’m not saying this year. In fact, this year will probably be one of disinflation, maybe deflation, but on a longer term basis. It’s the only way out.
James Connor 49:45
Jim, before we leave China, I want to get your views on Taiwan. Mainstream media loves talking about Taiwan and China taking it over. What are your thoughts do you think that’ll ever happen?
Jim Rickards 49:56
Well, Evers a long time I Uh, I don’t think it’s imminent. There’s a lot of talk about it, there’s a lot of, you know, kind of threats back and forth. Taiwan just had elections, the party that one is a leans kind of as a pro Independence Party, but at the same time, they their vote was a little smaller than the last time. So I don’t think that the you know, that they are the ruling party for now, they did win the elections, but the support for that view was not was you know, close to evenly divided, not overwhelming. But in China threatens, but China’s China’s not in a good position to invade Taiwan. I’m not saying they couldn’t do it. But logistically, it’s enormous lift. The US would most likely intervene, Taiwan’s getting a lot of new arm sales preparing to defend itself. I don’t I don’t want to predict, you know, whether that will happen or not, or what the outcome might be. I think those are highly uncertain things. But I don’t see anything imminent, I think it’s mostly, you know, a lot of hype at this point. Having said that, there is one key factor that might keep China from attacking, which is what’s called the birds bird nest theory, the birds nests theory. And the nest theory says, goes to a Chinese proverb, and it says, if the nest is broken, how can the eggs be? Okay, knows, they’ll fall to the ground and crack. So was that to do with geopolitics of Taiwan? Well, the answer is that they are the largest, most sophisticated semiconductor industry in the world, particularly national, Taiwan, sorry, Taiwan, semiconductor manufacturing Corporation, TSMC. They make the man along with AMD, and maybe Intel, they make the smallest chips, fastest chips possible using nano technology. And you would not want that technology to fall into the hands of China. So the plan is, if China ever invaded, either way, or the Taiwanese would destroy all that semiconductor manufacturing capability, they would get there, but they would just be in ruins. And China knows it. So it’s kind of like, well, I like to technology. They’re their separate technology input prohibitions in place. But do I really want to see it destroyed. And if I take Taiwan and all that’s gone, what’s left? Taiwan Semiconductor knows this, obviously, they’re investing believe over $20 billion, maybe more, and building fabs and semiconductor fabrication plants in Arizona. And so they’re already looking ahead to the day when maybe Taiwan falls, and they want to get as much of their capacity out of Taiwan into the United States. So there are things like that going on behind the scenes that I think very, that tell you a lot. But I guess the short answer is I can’t I’m not ruling anything out in the long run. But in the short run, I don’t think Taiwan I don’t think China is ready to invade Taiwan.
James Connor 53:17
So we discussed all of these geopolitical events that are happening in the world with Russia, Ukraine, the Middle East, and also China and potentially Taiwan. And when you look at them, collectively, they’re going to have an impact on the global economy. And I want to get your views on what this time period is like compared to other time periods. And I know you’re a real student of the financial markets, but the time that we’re living through right now, do you think it’s more like the 1920s or the 1970s or the early 2000s?
Jim Rickards 53:48
Well, I guess no two periods are exactly alike but there is a lot we can learn from financial history and political history. It’s it’s kind of a strange combination of the I think the 1930s and the 1970s At least that’s where we’re heading you know, the stock market is hitting new highs every day and you know, my view it’s it’s a bubble you know, people disagree and if you said it was a bubble year ago, but But you invested made a lot of money last year so I understand that but it still looks like a bubble to me. The problem of bubbles is they can go on longer than you think knowing and that you can you people say you can’t identify above I disagree. I think bubbles are easy to identify what’s hard is knowing when they’re gonna pop and they can go on a lot longer than you think so you don’t want to necessarily run out short the market but I’m not. I don’t feel like it’s a it’s a great time to dive in. But we’re we’re we’re definitely in a disinflationary trend with the possibility deflation, and a very severe recession. So that’s in the cards. But you have these anomalies, or nanometers or just counter trends in the price of oil was one of them, which we talked about. But that happened in the late 1970s, we had this whole Phillips Curve idea that there’s a measurable, reciprocal relationship or inverse relationship between unemployment and inflation is, is nonsense. It’s just not true. The Fed believes it’s true. And so you have to understand it if you want to do fed forecasting, which I do. But the idea is that low unemployment means higher inflation, and high unemployment means lower inflation. Not true in the 1970s. Unemployment was 11%. And inflation was 13%. And interest rates were 20%. So tell me that high unemployment means low inflation, it was the opposite. We have high unemployment, and high inflation and high interest rates, it was called stagflation. And it lasted pretty much for most of the period from 1977 to 1981. And the value of the dollar was cut in half in five years, you don’t have to go back to 1913, the Christian fed and all that, I mean, I know what those numbers are. But here’s a period, here’s a period where the value of the dollar was cut in half, in five years. So at the same time, money supply is decreasing. Velocity is, has been decreasing for 20 years, and is still at a very low level. So the combination of lower money supply and lower velocity means your nominal GDP is ready to fall off a cliff. I talked to Ben Bernanke about this. And in terms of what was going on in the early 30s, my interest was gold specifically, because the the the narrative or the rumor or the conventional wisdom, I guess, is that, you know, gold was a was a cause of the Great Depression, the gold standard prevented the Fed from doing what it needed to do. And the sooner you got off the gold standard, the faster you came out of the recession or not. But bernacchi made his academic reputation long before he became a central banker. Studying the Great Depression, probably after Milton Friedman and Schwartz, he’s maybe the number one scholar of the economics of the Great Depression, I read his book. And it and it showed that at the time, this is the early 1930s, the base money supplies m zero could not be more than 250%, of the amount of physical gold that the United States had valued at the market, the market at the time is $22.67 an ounce. So you took the amount of gold times 20.67, which was the dollar price for gold and on the gold standard, whatever that number was, at zero could not be more than two and a half times that. But in fact, m zero was never more than 100%. It could have been 250%. It was never more than 100%. Meaning that the Fed could have more than doubled the money supply more than doubled the money supply under the gold standard without breaking the law. And that’s how I read it. That’s what the number said. And I said to the demand, I said, Mr. Chairman, here’s here’s how I read your work. I said, Do I understand this correctly? And he said, Yeah, I set a goal was never a constraint. Because no, it was the fact that people didn’t want to borrow and the banks didn’t want to lend is a credit issue. And that’s why the money is basically the goal was is like the gold standard anyway, but for other reasons. But he was very candid about the fact that gold was not the problem in the Great Depression. So we see something like that today, which is m two which is a different money supply, broader, probably a better, m two is probably a better reflection of the economy than m zero. But m two is shrinking, and philosophies declining. We’re not on a gold standard. So you can’t blame gold. Whether it was true or not, you can’t blame gold because we’re simply not on a gold standard. So why are those? Why are those where are we not hitting on those two cylinders? And the answer is the same reasons during the Great Depression. Nobody wants to banks don’t want to lend because they’re worried about recession and people don’t want to borrow because they’re they’re worried about bubbles or declining commercial real estate values and they just want to hoard cash. So that’s that’s very much of a depression dynamic, but at the same time, we have this you know, the spike in oil prices and that could get worse. So it’s it’s a mixed bag, but I think, you know, I I’ve said I’ve said My books that the US economy has been in a depression since 2007. And then people don’t understand that they go well, you know, the tech, the definition of a recession is two consecutive quarters of declining GDP is a little more to it than that. But that’s the rule of thumb. So two consecutive quarters of declining GDP to a more is a recession, a depression is worse. So a depression must be like 10 quarters of declining GDP or something like that, which of course has not happened. But that’s not the definition. The definition of depression, I take this from John Maynard Keynes is a sustained period of below trend growth with no tendency to return to trend. In other words, it’s depressed growth, you can have growth in a depression. It’s just below potential if your potential is three and a quarter, three and a half percent, and your actual is 2%. That gap between the 3%. And the 2%, which gets wider over time, is depressed growth. And by that measure, yes, we had been in a depression since 2007. And the lowest wealth is now I mean, order magnitude is kind of five or $6 trillion, but getting bigger all the time. So So I think we’re in a depression using that definition, if it’s good enough for Kansas good enough for me. And with no way out of it, and possibly getting worse. So I would say the US will likely experience very severe recession may already be in one, then the question is, do you get a bet a banking panic on top of that, because banking panics or financial panics in capital markets, or banks are not the same as recessions, they’re different things. You can have a recession without a banking panic as we did in 1990. You can have a financial panic without a recession. As we did in 1998 2008, we had both. We had a panic and entered recession. But we may be in for something like that again.
James Connor 1:02:17
Well, Jim, that was a fascinating discussion. And as we wrap up, you’re a very prolific writer and an investor. We’d like to hear more about your thoughts on the economy or politics, where can they go?
Jim Rickards 1:02:29
You can go to to Well, I have a number of books, just go on amazon.com People like currency wars. So my first book, still very, very timely, about Ukraine, Russia, natural gas and warfare 12 years ago, and so it’s still it’s still fresh new case for gold is another one. But my main writing is my my newsletter strategic intelligence. And our publishers paradigm press. If you just go to paradigm.com and find the landing page, and you’ll if you’re interested in, in strategic intelligence, you’ll find it there.
James Connor 1:03:06
And you’re also very active on X or Twitter. Yeah,
Jim Rickards 1:03:11
@JGRickards, I use my middle initial Rickards at James G records on x. Yeah, do do quite a bit there as well. Thank you.
James Connor 1:03:21
Well, listen, once again, thank you very much fascinating discussion in the next time we get together I want to talk about long term capital management, we can do that. Well, I hope you enjoyed that discussion with Jim Rickards. One of the reasons we do these interviews is to provide you with insights on how to navigate the financial markets. And if you need assistance in doing so, consider having a discussion with a Wealthion endorsed financial advisor, wealthy on.com There’s no obligation to work with any of these advisors is a free service that will be on offers to all of its viewers. Don’t forget to subscribe to our channel, Wealthion.com and also hit that notification button to be kept up to date on future events. We have some amazing content coming up in the coming days or weeks that will help you navigate these financial markets. Once again, thank you for being with us today.