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7/28/2019 Jim Rickards - Spring 2013
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Easing at the Zero Bound:
Beyond QE & the“Foolproof Way”
J ames Rickards
Partner, J AC Capital Advisors, New York, NY USA
Grant’s Interest Rate ObserverSpring Conference 2013 – Plaza Hotel, New York City
April 9, 2013
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Origins of a Currency War,
The“Foolproof Way
”to Ease
Monetary Drivers of Fed Policy
Monetary Analysis
PQ = Nominal GDPQ = Real GDP
P = Inflation/DeflationM = Money supply
V = Velocity of money
MV = PQ
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Fed Expansion of U.S. Money Supply
QE1
QE2
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Velocity of Money Both Volatile andDeclining Sharply
Velocity is collapsing
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Fed Must Bend the Velocity Curve
Changing Velocity is a Socio-Psychological Task
Primary Tools are:
Negative Real Interest Ratese.g. Nominal Rates of 2% and Inflation of 4% =
Real Interest Rate of -2%
Inflation Expectations Shock
e.g. Expectations of 2% inflation and actual inflationof 4% causes an inflationary shock
Both Tools Require 4% Inflation
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How Does Fed Achieve 4% Inflation?
✔ Cutting Interest Rates (2007)
✔ Quantitative Easing (2008)
✔
Communications Policy (2008)
✔ Currency Wars (2010)
✔ Operation Twist (2011)
✔ Nominal GDP Targets (2012)
✔ Try Harder (2013)
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Monetary Math is Easy!
1 + 4 = 5
4 + 1 = 5
Nominal debt requires nominal GDP growth
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The G4 Solution to Currency Wars –U.S., UK, J apan, Europe Ease Together
The Year of the Snake Redux
Problems: Europe, Emerging Markets, Inflation
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What Could Possibly Go
Wrong?
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Fed Misapprehends the Statistical Propertiesof Risk in Currency and Capital Markets
Fed and other central banks persist in using equilibrium models
Evidence for complexity and non-equilibrium states is convincing
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Are Capital Markets Complex Systems?
Diversity
Connectedness
Interaction
Adaptability
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How Connected are we? How close to the Critical State?
Source: Professor Eve Mitleton-Kelly, London School of Economics. Used with permission.
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Interconnectivity of Financial Institutions, Insurers andOther Entities
Source: Systemic Risk from Global Financial Derivatives, Sheri M. Markose, IMF Working Paper WP/12/282
Caveat: Relative size and density shown on a net rather than gross basis
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The Future of the InternationalMonetary System
Multiple Reserve Currencies SDR’s
CollapseGold
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A World of Multiple Reserve Currencies
Reprises 1920’s and 1930’s per BarryEichengreen
U.S. Dollar Declined from 70% to 60% of GlobalReserves between 2000 and 2012
Future Reserve Mix could be 35% USD, 35% EUR,10% J PY, 20% GBP, CNY, CHF, CAD, AUD, other
Dynamically unstable without an anchor
Solvesno roblems createsnew one
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The SDR Solution
Introduced 1969. Issued in 1972, 1981, 2009
Obviated in 1980’s by commercial banks
Preferred path of the power elites
Ten-year plan includes issuers, buyers, dealers, repo,
derivatives and new allocations
SDR’s will not be local currency, but used for oil, globalcorporations, balance of payments
Turns IMF into proto-world central bank with currency andexpanded balance sheet
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A New Gold Standard
What is a Gold Standard?
What is the proper measure of Money?
What is the proper reserve ratio?
Which nations are included?
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8,133
3,406
2,966
2,451 2,435
1,054 1,040 937765
7,544
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
United
States
Germany IMF Italy France China Switzerland Russia J apan All Others
M e t r i c T
o n n e s
Official Gold Holdings – Total 30,731 Metric Tonnes
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10,798
8,133
2,966
1,054 1,040 937765
557 423
5,098
0
2,000
4,000
6,000
8,000
10,000
12,000
Eurosystem United
States
IMF China Switzerland Russia J apan India Taiwan All Others
M
e t r i c T o n n e s
Holdings with Eurosystem – Total 30,731 Metric Tonnes
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$6,993
$17,482 $17,820
$44,552
0
5,000
10,00015,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GM1 (.40) GM1 GM2 (.40) GM2
U S
D p e r O u n c e o
f G o l d
Gold Prices Based on Global Monetary Aggregates
(US, ECB, China)
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What Happens When Gold is the Numeraire?
The S&P500 Index in Gold Ounces
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Collapse
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Thriving in a world of inflation, currency wars and
potential collapse
Long
Banco Santander (ADR) (NYSE:SAN) – On Euro, TBTF, LatAMBank of Ireland (ADR) (NYSE:IRE) – On Euro, TBTFGold – Physical or non-bank fund will allocated barsFine Art – Twentieth Century Masters Collection – Sandy KemperCurrencies: EUR, SGD, AUD, CAD, KRW
Short
J PMorgan Chase & Co (NYSE:J PM) – Poor risk managementCurrencies: USD, GBP, J PY, BRL
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Thank you
J ames Rickards, Partner
J AC Capital Advisors LLC, New York, NY USA
james.rickards@gmail.com
@J amesGRickards