Why I Don't Take Jim Rickards Seriously
James Rickards writes "the end is near" books. He writes about finance.
His latest potboiler is titled, The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis.
When you read it, you will find that there actually is no secret plan. In fact, it's the same old deal. He announces this in Chapter 2, which is titled, "One Money, One World, One Order." Here, we read:
What is the elite agenda? The agenda is unchanging, pursued in centuries past by Caesar and Napoleon, and in the 20th century by the Rockefeller, Roosevelt, and Bush dynasties. The agenda thrives today in institutions with anodyne names like United Nations and international monetary fund. The agenda is simple: world money, world taxation, and world order (p. 58).
Ho . . .
Hum!
So, let me get this straight. Caesar developed this plan. Napoleon did. (Note: he offers no evidence for any of this.) Anyway, it's the same old, same old.
Has this 2000-year-old plan ever worked? No. Rome never persuaded Persia. It never persuaded China, with which it traded. It surely never persuaded the Scots. Hadrian built a wall across northern England as a way to avoid having to impose it on the Scots. That was money well spent.
Has this plan ever come close to working? No.
Well, with respect to the international gold coin standard, yes: 1815-1914. It worked because the elite could not manipulate it. It was the product of market forces. That is why it was abandoned in 1914: fiat money inflation was easier for the governments to steal with.
There have been a few proposed plans for global taxation. He does not mention this, but one such plan stretches back to the League of Nations. Nothing has ever come of any of these plans.
What about a one-world order? This has been talked up ever since the Peace Conference at Versailles in 1919. The League of Nations was a bust. The United Nations is a tax-dodge that provides tax-free income for impotent bureaucrats. There have been other announcements of a New World Order. There are bits and pieces of it: uncoordinated international bureaucracies with no powers of enforcement. The European Union is part of it, but it is now in crisis. It is a regional political order.
Meanwhile, the euro is on the verge of falling apart. Second, there has never been any international taxation. Third, the New World Order is visibly falling apart in Europe. Think "Brexit." Yet here is Rickards telling us that these visibly dying programs are in some way going to be imposed by a bunch of frantic elitists who have overseen the breakdown of their own unholy, half-baked system.
This comes to mind.
So, the fact that today's elite has a 2000-year-old secret dream is irrelevant for either economic analysis or economic forecasting. It's mere background noise. It is not worth a book, except for the sake of the author's royalties.
WHO IS JIM RICKARDS, AND WHAT HAS HE DONE?
We learn from Wikipedia:
As general counsel for the hedge fund Long-Term Capital Management (LTCM), he was the principal negotiator in the 1998 bailout of LTCM by the Federal Reserve Bank of New York.
I see. He was the legal spokesman for the high-leverage firm that engineered the biggest bankruptcy of the 1990's. Wikipedia's entry for Long-Term Capital Management informs us:
LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives". Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months following the 1997 Asian financial crisis and 1998 Russian financial crisis requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000.
The loss required a $3.6 billion bailout by the banks that had lent LCTM the money.
He talks about his five years at LTCM in Chapter 4. He refers to it as a spider web (p. 123). But the market ate the spider. The partners were the biggest investors. They lost everything. "Every big bank in the world wanted a piece of the action" (p. 127). They lost billions.
His point: the smartest guys in the room were economic idiots. Leverage ruined them.
Austrian economics had warned about this back in 1912. Nothing new here.
Chapter 4 is a nice insider's story on the blindness of an outfit with two Nobel Prize winners on the board.
Did the experience make Rickards a man who could forecast the economic future? No. In 2009, he predicted imminent hyperinflation. His entry on Wikipedia says:
On March 24, 2009, Rickards presented his view at a symposium at Johns Hopkins, that the U.S. dollar was facing imminent hyperinflation and was vulnerable to attack from foreign governments through the accumulation of gold and the establishment of a new global currency.
If this is scientific economics, include me out.
Yet he keeps writing best-selling books about the imminent collapse of the financial system.
AUSTRIAN SCHOOL ECONOMICS
Far be it from me to say that there are not lots of systemic risks and uncertainties in the fractional reserve banking system. I have said it since 1964. But what Rickards is doing is something very different from using systematic economic theory to forecast trouble for banking. He is parading himself as some kind of an expert who possesses analytical tools superior to those possessed by Ludwig von Mises, Murray Rothbard, and the entire modern Austrian School of economics. He doesn't think those out-of-date tools are good enough. They're not up to snuff. Or, as he writes in his latest book,
The Austrian understanding of the superiority of free markets over central planning is sound. Still, the Austrian school needs updating using new science and twenty-first-century technology. Christopher Columbus was the greatest dead-reckoning navigator ever. Yet no one disputes he would use GPS today. If Frederick Hayek were alive, he would use new instruments, network theory, and cellular automata to refine his insights. His followers should do no less (p. 6).
I knew Hayek. I have studied his works for over fifty-five years. I have written extensively on his epistemology. Here, Mark Skousen and I are together with him in 1985. (Photo by John Mauldin.)
We interviewed him here and here.
Let me assure you that if Frederick Hayek were alive today, he would dismiss "new instruments, network theory, and cellular automata" as utterly useless to throw light on economic theory. Rickards is just one more amateur economist who does not understand Austrian economic thinking and who thinks that there's some way to combine Austrian economic logic with statistical patterns derived from computerized data. He expects new economic theory to come out of this combination. This is the heart, mind, and soul of what the Austrians have always dismissed as scientism. No one was more skeptical of scientism than Hayek was, as he wrote in his book, The Counter-Revolution of Science (1952). Scientism is the belief that data derived from supposedly neutral data-gathering sources can in some way shed light on economic theory.
What evidence is there that Hayek ever used statistics to make forecasts? None.
Well, then, who is his ideal economist? He begins his book with this statement: "Felix Somary was perhaps the greatest economist of the 20th century." You have never heard of Felix Somary. Hardly anybody has. He was an astute Austrian investment banker, 1910-1940. But with respect to any contribution to economic theory, he didn't leave a book on his theory of economics. He was a friend of Schumpeter's, and he studied under Carl Menger. He wrote a book on banking. It is not important enough to have been translated. Yet Rickards thinks he was better than Mises, Hayek, Rothbard, and everybody else. This gives you some indication of Jim Rickards' lack of connection with anything remotely resembling economic knowledge.
Rickards' book hints that he, unlike the well-meaning but out-of-touch Hayek, has access to insights available to up-to-date economists with access to "new instruments, network theory, and cellular automata." He, unlike the Austrians, has access to science. The rest of us are also-rans. Worse, we are dangerous. We believe in fixed economic laws -- doctrine.
Scientists understand that all theories are contingent; a better explanation than the prevailing view usually emerges. Newton is not considered wrong because Einstein offered a better explanation of space and celestial motion. Einstein advanced the state of knowledge. Unfortunately economists have shown little willingness to advance the state of their own art. The Austrians, Neo-Keynesians, and monetarists all have their flags firmly planted in the ground. Research consists of endless variations of the same a few themes. The intellectual stagnation has lasted 70 years. Ostensible innovation is really imitation of ideas limned by Keynes, Fisher, Hayek, and Schumpeter before the second world war. These are originals were transformative, but the postwar variations are limited, obsolete, and if used doctrinally, dangerous (p. 6).
He avoids a crucial historical question: How was it that the Austrians predicted the housing bubble as early as 2005? The evidence is here. Why did none of the other schools of opinion do this?
Rickards says we Austrians are hopelessly out of touch. He, in contrast, knows what works.
This book is about what works. Since the 1960s, new branches of science have been revealed. Since the 1980s, cheap computing power has allowed laboratory experimentation on economic hypotheses that cannot be tested in real-world conditions. The rise of team science, long common in medicine, facilitates interdisciplinary discoveries beyond the boundaries of any one area of expertise. . . .The three most important new tools in the finance toolkit are behavioral psychology, complexity theory, and causal inference. These tools can be used separately to solve a particular problem or combined to build more robust models (p. 9).
And what did these tools reveal to him? That America was facing hyperinflation in March 2009.
His book shows no traces of the actual applications of behavioral psychology, complexity theory, and causal inference to the specific problems facing the banking system. He cites no detailed studies based on even one of these these analytical techniques that validates his predictions.
My theory: his zero-context use of the words "behavioral psychology, complexity theory, and causal inference" is public relations puffery. In the South, it is part of a program called "puttin' the shuck on the rubes." It goes like this: "Step right up. Let me show you how my fully tested forecasting elixir, with its unique, 100% scientific ingredients -- behavioral psychology, complexity theory, and causal inference -- can cure what ails you!"
A RECENT INTERVIEW.
MarketWatch interviewed him recently.
James Rickards sees threats in many places. In his latest book, "The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis," he paints a picture of how that crisis will unfold. He argues that rather than pumping the financial system with liquidity, as happened in 2008, "elites" will freeze the financial plumbing until the crisis has passed.That means banks will close, as will exchanges. Money-market funds will be inaccessible. Forget trying to get your hands on money.
This deserves clarification. Which banks will close? In which countries? For how long? If it is for over 90 days, the world economy will collapse. About 90% of the West will be dead of starvation. There will be no trucks delivering food to cities. Credit cards will not work. The international division of labor will collapse.
I remain skeptical. So do you. If you believed it, you would move to a small farm.
Begin here: "I don't believe any of this. I want proof."
Rickards, who was the principal negotiator of the 1998 bailout of Long-Term Capital Management as the hedge fund's general counsel, calls this new world "ice-nine," after a fictitious substance in Kurt Vonnegut's "Cat's Cradle." Freezing customer funds in bank accounts is what happened in Cyprus is 2012 and Greece in 2015, he says. In the U.S., the Securities and Exchange Commission adopted a rule in 2014 that lets money-market funds suspend redemptions.Prefer stockpiling cash? Governments are eliminating high-denomination bills, and Kenneth Rogoff, a former IMF chief economist, has written a book that Rickards describes as "an elite step-by-step plan to eliminate cash entirely."
Where is this plan? How could it possibly work? Why is it needed? The vast majority of money in banks is digital. It is held by hedge funds. They cannot legally withdraw currency. There are no ATM's that dispense $10,000,000 at a time. Joe and Jane Lunchbucket have less than $1,000 in the bank. So, American banks are in no way threatened by withdrawals of currency.
About 70% of $100 bills have been sent to Latin American nations by workers living here. This has been true for 30 years.
Then, Rickards says, there are rules on banks and other institutions. Capital controls could be imposed to keep money from fleeing across borders.
No, sorry; this cannot happen, except for currency, which has been sent out for 30 years. Digital money has to stay inside the legal boundaries of a national banking system. This is why domestic central banks and commercial banks control the money supply.
There is no such thing as digital money that flows across borders. What happens is this: there is an exchange of ownership of digital money in separate national banking systems. Digital money always remains inside the legal entity called a national banking system. If this were not true, the Federal Reserve could have no final power over American money. Let me assure you, it has final power over American money.
Whenever you hear that the government plans to impose capital controls to keep money -- digital money -- from leaving the country, you know the person hasn't a clue about how a banking system works. Controls can make financial exchanges illegal, but the economy would be in recession within a month. The percentage of the economy involved in trade and international finance is over 20%. Capital controls would paralyze trade.
And the U.S. is still under the state of emergency declared by President George W. Bush days after the Sept. 11, 2001, terrorist attacks and renewed annually since then. Rickards argues that such measures can be applied in any emergency, "including money riots in the event of a financial system breakdown and ice-nine asset freeze."
If he thinks the FDIC and the Federal Reserve will freeze the bank accounts of Americans with less than $500,000 (joint account) in banks, then he really should stop smoking ice-nine. The Treasury and the FED have extended a $500 billion line of credit to the FDIC. That is more than enough to take care of any withdrawals by the Lunchbuckets. And, in any case, as soon as the Lunchbukets spend their currency, the businesses they bought from deposit it at the local banks. There cannot be a bank run on the U.S. banking system by the masses. Congress would have to pass legislation authorizing the end of the FDIC. To predict this is off-the-wall nutty.
Rickards, who now advises the Defense Department and U.S. intelligence community on international economics and financial threats, discussed his latest book with MarketWatch.
The thought of Rickards advising the Defense Department is like the thought of his advising Long-Term Capital Management. It does not inspire confidence.
He says:
Yet I make the point in the book that the exact date is unimportant. What is most important is that the crisis is coming and the time to prepare is now. It could happen in 2018, 2019, or it could happen tomorrow. The conditions for collapse are all in place.It's simply a matter of the right catalyst and array of factors in the critical state. Likely triggers could include a major bank failure, a failure to deliver physical gold, a war, a natural disaster, a cyber--financial attack and many other events. The trigger does not matter. The exact timing does not matter. What matters is that the crisis is inevitable and coming soon. Investors need to prepare.
I see. Prepare for money riots. Prepare for bank freezes.
But how, pray tell, does one hedge against all this?
MW: Who will be the big losers in the next crisis? And how do you recommend that investors position themselves?J.R.: Losers will fall into two groups. The first are those who hold wealth in digital form, such as stocks, bonds, money-market funds and bank accounts. This type of wealth is the easiest to freeze in a panic. You will not be able to access this wealth, except perhaps in very small amounts for gas and groceries, in the next panic. The solution is to have hard assets outside the digital system such as gold, silver, fine art, land and private equity where you rely on written contracts and not digital records.
I see. No open banks -- digital. No digital transactions. No delivery of food to cities -- paid for digitally. Got it.
Now exactly what should I do to prepare?
The solution to this is to allocate 10% of your investible assets to physical gold or silver. That will be your inflation insurance when the time comes.
"Gold? In what form? Digital accounts?" No
"Then what about gold coins?" Good idea. "Where can I buy them?" At small coin stores. "How?" By calling on the phone? "And what then?" Listen to the busy signal. "For how long?" I don't know, really.
"But where will I be able to barter them for the things I need?" Walmart. "But Walmart is digital. Also, Walmart's check-out counter bar codes don't do gold coins." Then sell the coins back to small coin stores for cash. "But what about the busy signals?" Exercise patience.
CONCLUSIONS
Sorry, but all this sounds like a way to sell books. It does not sound like cogent economic analysis.
Of course, I'm a stodgy old Austrian School economist, with only Mises, Hayek, and Rothbard to guide me. I have no network theory, cellular automata, behavioral psychology, and complexity theory.
But I do have causal inference. When I am told that Felix Somary was a better economist than Ludwig von Mises, I draw conclusions. I plan to keep money in local banks.
If you want to wet your Depends, read David Stockman. You can safely ignore Jim Rickards.
I will say this. The royalties from The Road to Ruin will surely help Mr. Rickards avoid anything remotely resembling ruin.