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Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. Well, things just get crazier and crazier in the world. And it seems the only way to keep your bearings is to take two steps back and look at the big picture. And this is especially true when it comes to what the central banks are up to and the geopolitical and economic realities that are taking shape as a result of that. So to help us take a necessary third step back today we are speaking with one of my favorite guests, Jim Rickards, seasoned financier, risk manager, and author. His recent bestseller, Currency Wars, which you really should read, has proven to be prophetic as well as his most recent book on thinking—oh let me do that over again. As well his most recent book, The Death of Money, The Coming Collapse of the International Monetary System, which just came out. Very provocative title, we will find out what he means.

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Now Jim is best known for his expertise in describing how currency wars are one of the most destructive and feared outcomes in international economics. And that history shows they always end badly. Last year in this program he warned that the world is engaging in a new currency war posing risks that every prudent individual should be aware of. Recent central bank actions from the US to Japan to the European Central Bank, or ECB, have shown that the race to debase has kicked up a few notches. Jim, welcome, always a pleasure to have you on.

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Jim Rickards: Thank you Chris, nice to be on with you.

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Chris Martenson: Great, well, let us start with your previous book, Currency Wars. One of the things you predicted back then was the possibility of China, Russia, maybe some other countries, would respond to the new currency war by buying gold. Ridiculed at the time, is anybody laughing now?

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Jim Rickards: No it is a very serious trend and this goes back—the book Currency Wars, Chris, came out in 2011. But in the book I was writing about something that happened in 2009. It was the first ever financial war game. So, sponsored by the Pentagon, we had uniformed military, we had the intelligence services, people from the treasury, people from the fed, people from think tanks. Even recruited a few Wall Streeters that said "if you want to manipulate markets get some people from Wall Street because they do it the best." [laughter] We certainly—we got down there and we launched a scenario that I devised with a few others where Russia and China would pool their gold reserves and issue a new gold-backed currency. But more importantly would say that from then on Russian natural resource exports and Chinese manufactured goods could only be paid for in this new currency.

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So they would turn their back on the dollar. And they said if you want the new currency you can earn it in trade or you can deposit your gold side by side with theirs and their bank would issue some of this new currency. And we had the bank in England and all that because of the rule of law and all of that was important. Well, we were actually laughed at by some of the—you know I don't have a lot of respect for Harvard, but some of the Harvard eggheads and think tank people, "oh, don’t you know gold is not part of the international monetary system and it never will be again? And then this is ridiculous and what are you doing."

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Well, since then, Russia has actually increased their gold reserves by seventy percent. China has increased their gold reserves by several hundred percent. No one knows the exact number because they are not transparent about it but we have enough data from mining output and Hong Kong imports as well as other information sources to estimate reasonably that China has let us say three or four thousand tons, certainly multiples of the one thousand tons they officially report. So China and Russia have done exactly what we said, which is basically increase their gold reserves. And they are acting more and more in concert. I was—even though we did the scenario I was shocked to learn recently Secretary Hank Paulson and the Secretary of the Treasury during the financial meltdown in 2008, he did an interview with the BBC. And he said that during the crisis five years ago, when he called the Chinese to reassure them to not worry about the Congress, in effect we are going to guarantee everything. And the Chinese said that the Russians had contacted them and talked about dumping their Fannie Mae stock and bonds together. Of course China and Russia both have Fannie Mae and US Treasuries and other instruments in the reserve positions—and dumping them to sort of sink the US once and for all. So the gold accumulation is going on. The coordination is going on. The financial wars are heating up.

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We see it in Crimea. Russia is taking over Crimea. Nobody thinks that there should be military intervention by the United States there, left, right, or center. I certainly do not think that. But the US does not want to appear to do nothing so we are engaging in economic sanctions which is a form of financial warfare. But if we escalate, the Russians will escalate. They have already said that. The third piece of the puzzle in addition to Russia and China is Saudi Arabia. Saudi Arabia feels stabbed in the back because the US has green lighted Iranian nuclear ambitions. The Obama administration did that last December. There were talks underway, but they're not producing anything. Iran still has its nuclear reactors, still has its centrifuges and its uranium enrichment program. So the old petrodollar deal where Saudi Arabia supports the dollar in exchange for us supporting them militarily—they feel stabbed in the back because now we are cozying up and having a detente with Iran. So they have no further reason to require that oil be paid for in dollars. And we may soon see oil paid for in Euros or Yen or Swiss Francs or maybe gold.

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So there is Russia, China, Saudi Arabia, again, all over the world you see all these threats to the dollar. Now it has not come tumbling down yet but you do not have to be a scientist to see this coming. This is like snow building up and you know the avalanche is coming, you do not know when. But it is very plain to see, very apparent.

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Chris Martenson: Jim what is interesting in that to me is obviously the United States is flexing what muscles it can over the Crimean situation, and seems to only be driving Russia that much closer to China. And also with Iran there have been deals inked on both sides with all those parties. And what is coming increasingly clear is this is being presented in the west as if "oh look, it is red team versus blue team. It is the good guys and the bad guys. It is Russians this and Americans that." But aren’t the things that Russia and China are doing really just what a prudent dispassionate investor who sees the United States printing billions and billions—tens of billions every month in QE and failing to gets its fiscal situation in order, aren’t these just prudent actions really on some level? Or do you think they really just have—are swamped by the geopolitical "us versus them" realities?

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Jim Rickards: Well it's really both but I think you make a very good point, Chris. And China is a perfect example. China has four trillion dollars in reserves. Almost all that, in paper assets. And the vast majority of that in dollar denominated assets, mostly US Treasuries. There is no bigger fan of the dollar than the Chinese. Now we know that China is acquiring thousands of tons of gold. We talked about that a little bit. And a lot of people speculate China is acquiring the gold because they want to launch a new gold backed currency and knock the dollar of its pedestal and all that. That is not actually the reason they are doing it. They may have to do that in an extreme case. But that is not what they want. China is a big fan of the dollar. If I had four trillion dollars in paper I would want a strong dollar, too.

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Chris Martenson: Yes.

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Jim Rickards: But they look at the United States, they see the United States trying to cheapen its currency, trying to cause inflation. Ten percent inflation in the US dollar is a four hundred billion dollar wealth transfer from China to the United States because their US dollar paper is worth less and we have to pay them less in real terms. So what they are doing with the gold is they are actually creating a hedge. And lets just say they have four thousand tons, that is worth about two hundred billion dollars, a little more, at the market. And so we have ten percent inflation and it knocks several hundred billion dollars off the value of the reserves, but that kind of inflation would cause gold to double or triple or maybe even more. So what they would lose on the paper they would make up on the gold. So in effect they want a strong dollar but they know we are trying to cheat them, so buying gold is a hedge. And that is what any investor can do.

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So I look at the Chinese buying thousands of tons of gold to hedge their paper dollar positions and I say well, are they stupid or do they see something coming that we do not? Well, they are not stupid. The Chinese are not stupid. So my advice to investors is if it is good enough for the Chinese it is good enough for us. Every investor should have about ten to twenty percent gold. I do not recommend all in. I do not recommend a hundred percent, but you should have at least ten percent of your investable assets in gold. If it is all good and nothing bad happens you will not get hurt and your other assets will perform well. But if we have the kind of collapse which I do expect, you will lose a lot of money on the paper but you will make a lot of money on the gold. That is kind of the insurance.

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Chris Martenson: Well, now that is a strong word right there and it is right in the title of your new book. What do you mean by the collapse of the international monetary system? Do you mean that literally?

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Jim Rickards: Well, when I say—that is the subtitle, The Coming Collapse of the International Monetary System but the main title of course is The Death of Money. When I say that it is not meant to be a provocative statement. The international monetary system actually has collapsed three times in the past hundred years: in nineteen fourteen, nineteen thirty-nine, and again in nineteen seventy-one. So it is not a rare event. It does happen every thirty or forty years (and by the way, it has been forty years since the last one.) By collapse what I mean is a generalized loss of confidence in the paper money or government’s ability to, in effect, steal your wealth by creating inflation in paper money. Either way if you are relying on dollars, let us say, because you have an insurance policy, an annuity, a retirement check, a social security, anything where you are relying on any kind of fixed amount of dollars, you are extremely vulnerable to inflation. And ten, twenty percent inflation is just like the stock market going down twenty percent.

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You lose that wealth. And so when people lose confidence in the dollar and they no longer consider it a store value they get out of it. Now you may be making dollars but you want to dump your dollars. You want to go buy gold or silver or land or fine art or energy assets. And by the way, the biggest guy doing this right now Warren Buffet. He is known as the stock market guy, but a couple years ago Warren Buffet went out and he bought the Burlington Northern Santa Fe Railroad. Well, what is the railroad? It is all hard assets. It is land, right of way, mining rights adjacent to right of way, rail, rolling stocks, signals, switches, yards, buildings, it is all hard assets. How does a railroad make money? It moves other hard assets: coal, wheat, corn, steel, et cetera in the form of freight. So buying a railroad is the ultimate hard asset play. It is a hard asset that makes money moving hard assets.

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So when I see Warren Buffet do that, what I see is a guy dumping paper money, getting into hard assets. Now he would not say that but I would say watch what they do, not what they say. So for everyday investors, maybe we cannot afford to buy a whole railroad like Warren Buffet but we can put some of our assets in gold and accomplish the same thing. And so that is the insurance element of it. And a collapse is a loss of confidence, and when that happens you are going to want to have these hard assets. And now is the time to prepare for it. It may be too late because this could come very quickly.

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Chris Martenson: So by hard assets, railroads being one, some gold you have mentioned, what sort of other plays are you advising people take a look at right now?

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Jim Rickards: Well, actually my best performing asset the last five years, gold is my second best. My best performing is fine art. And there you see a guy and some of these multi-billionaires go out and buy Picasso for a hundred and fifty million dollars and you say "well, I cannot afford a hundred fifty million dollars for a Picasso." Well, very few of us can. But the point is there are some funds, you have to be careful, you have got to get the right managers. But there are some art funds where you can pool your assets and the manager will buy the art and manage it, sell it, and produce those kinds of returns. But I like to say fine art behaves the way gold would behave but for a sense of bank manipulation. In other words, clearly central banks do manipulate gold. And I talk about this and give evidence of this in my new book The Death of Money. But Janet Yellen does not care about the art market. So the art market actually performs like gold without potential banks squashing it every now and then. So it is a good asset. Land is another one. So as I say there are a number of things you could do in addition to gold.

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Chris Martenson: Well, let us talk about that for a minute because I get this question a lot which is—what is different this time is that there is no border to duck over. You are mentioning fine art as potentially a virtual border that we could go over. But if you are somebody—if this is a game of elephants at this point in time—so I am—let us pick something, I am the Sovereign Wealth Fund for Norway, right? I have got some stupid amount of money. I have got nearly a trillion dollars that I have got to do something with. And suddenly I get concerned about the idea that there is this big currency war and that the international monetary system might collapse and a new one be born, what do you think those players are going to be doing in the face of this information?

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Jim Rickards: Well, if you have, I mean, the Sovereign Wealth Fund of Norway, they have got several hundred billion dollars. And when you have that much to invest, this kind of—there is not enough gold in the world at these prices. I mean, if you went out to buy even ten percent gold you would probably double or triple the price. That is pretty clear. I mean, they diversify. They buy a lot of fixed income investments. But if you are Norway you would have to ask yourself, should you leave the oil in the ground if that is feasible, and maybe that is your best store of value, is keeping the oil. It will be worth more down the road. But they operate these things along very conventional lines. I happen to be familiar with the Sovereign Wealth Fund of Norway. It is very heavily diversified. They do not take any active positions. It is just a large kind of index fund of stocks and bonds.

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China Investment Corporation, the Chinese Sovereign Wealth Fund, they are a little more concentrated. They buy hedge funds and do some other things. But with those kinds of pools of capital they are almost too big to be nimble. But that is not true for individuals. Individuals I think can seek some of these alternative investments, and there is a place for stocks and bonds. But even if you are going to have stocks you would want to look at transportation and energy and some of the fields that are linked to hard assets. And then you can buy hard assets themselves as I mentioned such as land, gold, and fine art. People talk about gold at, you know, say thirteen hundred dollars an ounce. And my forecast is that it will go much higher for some of the reasons we have talked about. But a Picasso is sort of five hundred thousand dollars an ounce if you think of it just—weighs a couple hundred—it costs a couple hundred million and it only weighs a few pounds. So you do that math.

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And by the way, in the United States when we talk about the old money, you talk about family fortunes that are maybe a hundred years old. But when you go to Europe and talk about the old money this is dynastic wealth that has been around in some cases for four or five hundred years or even longer. They have had to survive the Thirty Years War and Napoleon and Louis the XIV and The French Revolution and World War I and World War II and all that. And you talk to them and say well, "how does your family preserve wealth for four hundred years?" And what they tell you is: "a third, a third, and a third." And what they mean by that is one-third art, one-third land, one-third gold. And then some cash on the side for your jet or your yacht or whatever.

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And so you are in your capsule and some general is burning down the next town, he is heading your way, you can take your art off the wall, roll it up, stick it in your backpack, put your gold coins in a purse, hop on your horse and ride away and come back a few years later when the dust settles, put your art back on the wall, put your gold coins on your table, reestablish title to your land. You are good to go. You are as wealthy as ever and all your neighbors have been burned down. So there is something to this kind of investing because it really preserves wealth in very adverse conditions.

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So if you think everything is fine then be happy with your cash. But if you are concerned that this massive instability we are facing—a catastrophic level of collapse. By the way there is good—this is not just speculation—there is good science behind this and I discuss that science in my book, The Death of Money. So I give the reader a lot to go on. I help them—I actually give them a toolkit. You can disagree with it or you can debate it but I will give all the information, the history, the analysis, the science that you need to understand it. And if you see that coming you would want to have some of these types of assets.

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Chris Martenson: Well Jim I found Currency Wars was just a very, very good description of the last three years. It came out in 2011; here we are in 2014. It did a very nice job. The Death of Money —is that going to help people understand what is coming over the next three years?

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Jim Rickards: I think it will Chris. It was written that way. In Currency Wars there was some description of what was coming and again, we talked about that in the war games chapters. But a lot of Currency Wars was history. There were five chapters of history. And I thought that was important because I knew that I wanted to talk about gold but you know as well as I do if you jump right into gold people ridicule you, they call you a nut job or gold bug. They do not pay attention to you, et cetera. And I thought well, if I can tell the story through history—let the reader understand that gold has been a part of the system for a long time. And it was only—it was not that long ago, only forty-three years, that the United States went off the gold standard. If you are a certain age you remember. I certainly was a student in the days of the gold standard and had to study it in economics class. It has not been taught in forty years but it was taught when I was in the university.

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And so if you could understand it that way, then when you talk about it in the modern context it does not seem quite so exotic. So now what is different about my new book, The Death of Money, it does not have as much history. It certainly has some; I find that valuable. But because I told that story in Currency Wars I did not think I needed to repeat it. But what I do want to do is take the story forward and give investors a very good detailed look at what is coming and what they can do to preserve wealth. So it is a sequel in that sense. I do have some history though. I talk about—in case readers and listeners are interested—how Charlemagne in the ninth century AD actually invented quantitative easing. Charlemagne's kingdom, like I say in the ninth century, was on a gold standard but there was very little gold in Europe at the time. And so the gold standard was something that had come out of the Roman Empire. So he switched to a silver standard, still a precious metal, but there is a lot more silver around. So that was a form of quantitative easing because when you switch from gold to silver there was just more money and that actually led to some economic growth and expansion in his kingdom. So I call the Charlemagne the father of QE. But he was not doing it with paper he was doing it with silver and silver is still a good store of value.

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Chris Martenson: All right. Well as you look forward the next three years what do you see coming? Are you predicting or seeing that this game changes to a new phase, The Death of Money? Is that coming in the next three year window? Or do you use this playing out over a longer timeframe?

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Jim Rickards: No I think three years is about right. I mean, it is not necessarily going to be tomorrow. It could be tomorrow, by the way, the system is unstable enough. But it does mean we are going to get that catalyst tomorrow. But this is not a ten year forecast. I mean, I do not think we are going to make it ten years. I think three to five years is about the right timeframe, maybe shorter. But the reason for that, again, it is scientifically based in terms of the scale of the system. And by the way, go back and look at these crises. They come particularly fast. Memories are very short. I think we are all fighting with the two second—what I call the two second attention span. But October 19, 1987 the stock market lost twenty-two percent of its value in one day. That would be a three thousand two hundred point drop in one day.

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In 1994 we had the Mexican Peso crisis. In 1998, the Russia Long Term Capital Management crisis. And I was involved in that, by the way. I was the general council of Long Term Capital Management. I negotiated that bailout and I know how close the world came to complete economic collapse. In other words every stock and bond market in the world would have been closed on September 29, 1998 if we had not finished that bailout the day before. That is how close we came. Just because it did not happen, people kind of forgot about it and think it was a small event. But trust me, I was there. That was a very near catastrophe.

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In 2000 we had the dot-com collapse, NASDAQ dropped eighty percent. 2007 the housing market collapsed. 2008 the Lehman Brothers panic. So these things keep happening but here is the problem, Chris: the Fed has printed almost four trillion dollars to put out the fire from 2008. What is going to happen if we have a liquidity crisis next month or next year? They are at the limit of their balance sheet. They are already insolvent on a mark-to-market basis. And again, that is not guesswork. I actually was told that by a member of the Federal Open Market Committee. They are leveraged eighty to one. They cannot do more. They cannot print another four or eight trillion. They are at the limit of confidence. They are not at the legal limit, by the way. Legally they can do it but they are at the limit of what people will really trust, or before the Congress would intervene.

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So the next crisis is going to be bigger than the Fed. It is like they build a five foot sea wall and here comes a forty foot tsunami. There is only one clean balance sheet left in the world and that is the IMF. So the only way you are only going to reliquify the world in the next liquidity crisis is by the IMF printing their world money, these Special Drawing Rights or SDRs, and that is going to be the end of the dollar as a global reserve currency. Because if the IMF is going to print SDRs to reliquify the world they are going to need permission from China and Russia and other members of the IMF. The US has a big voice at the IMF but we do not control it. And so that really is going to be the end of the dollar right there. we may still have dollars. In fact we will, but it will be a local currency like the Mexican peso or Turkish lira. It will just be walking around money but it will not be used for the important things in the international monetary system. This you can actually see coming. You can see developments coming.

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Chris Martenson: And you think that—it has always been my perception that the IMF, kind of housed in Washington D.C., is a little bit of a US-centric sort of organization, if not a lot. You think China would really go along with that?

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Jim Rickards: I think China would favor it because the alternative is perpetuation of dollar hegemony. It would almost be to say that, no matter what the United States does, no matter how much we print, what deficits we run, what trade deficits we run, no matter how reckless we are we can always print our way out of it. And there is a limit to that. So China would actually like to see SDRs. There is a lot of talk about, again, China making their currency be one, a global reserve currency. That is not even close. They are very, very far away from that. They do not want that because they would have to open their capital account. They would lose control. But they would not mind seeing the SDR as a global reserve currency. They just do not want the dollar. But they are stuck with dollars for the time being but the next panic when the IMF has to use SDRs to reliquefy the world; I think China is going to have a big voice in that. You can say it is US-centric but the problem with the US is that the Treasury and the White House want a weak dollar.

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I mean, what good does it do you when your own country wants to trash the currency? What happen to the strong dollar policy of Paul Volker and Ronald Reagan? By the way that was bipartisan. The strong dollar policy started with Volker and Regan but it continued through the Democratic administration of Bill Clinton and Secretary Bob Rubin and again both Bush administrations. It was not until January 2010 when Obama declared the currency wars in the State of the Union address. He called it the national export initiative. But the strong dollar stand was not really abandoned until 2010. So that did last through Republican and Democratic administrations. And it served the world very well. But that is over now and we're in the currency wars and that is going to lead to a collapse and ultimately we are going to see either gold or the SDRs the new store of value on a worldwide basis.

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Chris Martenson: Now what you are talking about here is a moment of reckoning, a period of time, could be years in the making. But the macro analysis that I have got shows me that we have been compounding our total credit in the OECD countries by roughly eight percent per anum for the past forty years. And you have got headline nominal GDP growth, less than that, nominal, real growth less than that, right? So this is—what you are really talking about here is—to get back to your avalanche, your snowflakes on the cornice analogy—what we are really talking about here is that there have been decades of excess that are sort of piled up. They have created imbalances, a lot of potential energy. And you are saying that somehow we get back to level. That all of those claims that have been built up, they have to be debased by one process or another. It is inflation or deflation. They either burn through the process of default or they burn through the process of debasement. Which way are you—is that about right?

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Jim Rickards: That is exactly right. That is exactly right. The debt has to be destroyed which means there are going to be massive losses. And there are two ways to destroy it. One is deflation which we saw in the nineteen thirties in which case borrowers—the real value of debt goes up. It becomes too much of a burden for borrowers and borrowers just walk away. They do not pay it. They file for bankruptcy. They walk away. They tear it up. Or inflation in which case the borrowers actually do pay it back but the money is not worth anything. They are both ways of—they are just different ways of destroying wealth. They have different winners and losers, by the way. And that is why investors have to be nimble. One of the things I like about gold, by the way, is that it performs well in inflation and deflation.

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Now the inflation side is pretty intuitive. People get that, you say oh yes, if inflation takes off the price of gold is going to go up and that will preserve wealth. And that is true. But they do not see how it performs well in deflation. But the answer is: deflation is a central bank’s worst nightmare. Governments actually cannot tolerate deflation because it, first of all, destroys the banks. And do not ever think that the job of a central bank is to help the economy. The job of a central bank is to help the banks. And so when you have the kind of deflation that makes the real value of debt go up and people default, where do those losses fall? Well, they fall on the banks and the lenders. And so the Fed does not want it because they are in business to help the banks.

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It also destroys tax collection. Just to give you a very simple example, let us say someone makes a hundred thousand dollars and they get a ten percent raise so now they are making a hundred and ten thousand. So that is a real increase in the standard of living but the government takes about half. The government takes about half of that ten thousand so you really only get five. But imagine another scenario where you make a hundred thousand, you do not get a raise, but prices go down ten percent. So you are making the same hundred thousand but the cost of everything you buy went down ten percent. So you have the same ten percent increase in your standard of living because everything you buy is cheaper but the government cannot tax that. In other words, the government can tax inflationary nominal gains. But they do not know how to tax deflationary real gains. So for all these reasons basically the government cannot tax, the banks are the losers, et cetera. And it also hurts our debt to GDP ratio because debt is still going up even if GDP contracts, which it will in nominal space if you have deflation.

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So for all these reasons central banks cannot tolerate deflation. So what does it mean when they are trying to get inflation and it does not work? And that is the situation we are in now. The central bank has been trying for five years to get inflation. They cut interest rates to zero, QE1, QE2, QE3, operation twist, currency wars, forward guidance, nominal GDP targeting. They have tried