4 – Many in the U.S. Intelligence Community fear a 25-year Great Depression is unavoidable…
moneymorning.com BSSB.BE 26.12.2014
* This is an exclusive Money Morning interview with Jim Rickards, the Financial Threat and Asymmetric Warfare Advisor for both the Pentagon and CIA, moderated by Steve Meyers
STEVE MEYERS:vJim, are you seeing any signs that our stock market has reached a super-critical state?
JIM RICKARDS: Well, unfortunately, yes. We’re seeing a lot of signs of this. One of the signs that’s really fundamental, and really important, is the ratio of stock market capitalization to GDP.
Because, remember, the value of all the stocks in the stock market, that’s supposed to represent the fundamental economy.
It’s not supposed to be off in a world of its own. But if you look at what’s been happening to that ratio recently, it’s going sky-high. It’s 203%.
Just prior to the recession… That number was 183%
Go back to the famous tech bubble, the dot com implosion of 2000. At that time, it was 204%
And if you want the scariest news of all… Just prior to the Great Depression that number was 87%
In other words…The stock market capitalization, as a percentage of GDP, is twice as high as it was just prior to the Great Depression.
So, that’s a really good metric for saying, “Hey, is the stock market heading for a crash?”All the data says, “Yes, we are.” But there’s another metric, another warning sign, if you will, that’s even more frightening, which is the Gross Notional Value of Derivatives.
There are a certain number of shares of IBM that are outstanding, but we know what that number is.But there’s no limit on the derivatives.I can write options and futures on IBM stock all day long and all the other stocks on the stock market.And that’s what’s been going on.Now, the Gross Notional Value of Derivatives in the world today is over $700 trillion. Not billion.$700 trillion. That’s ten times the global GDP.
This collapse is unavoidable. So, we ask ourselves, how bad can this be? Well, what happened in 2007, 2008 when the markets collapsed… We all remember the value of stocks going down… Real estate going down, housing going down… All that lost wealth was $60 trillion.
The problem is now the system is bigger, so I would expect the lost wealth this time to be $100 Trillion – possibly a lot more. We’re in this critical state, getting close to the super-critical state where the system implodes. But it takes a catalyst, it takes a flashpoint. There are a number of potential flashpoints I’ve investigated.
STEVE MEYERS: Jim, in a few moments I want to discuss the steps Americans need to take with their investments and personal finances to prepare for everything you and your colleagues are predicting. But now let’s quickly focus on some of these major flashpoints.
JIM RICKARDS: One of the key flashpoints we’re looking at is foreign ownership of U.S. government debt. Now, this is a very important thing to understand. We all know that the Treasury has issued over $17 trillion worth of debt, the question is who buys it? A lot of U.S. debt is owned by foreigners. Who owns it?
China, Russia, other countries… Countries that are not necessarily our friends. But they can dump it when they want to. Well, guess what, that’s actually what’s been going on. Recently, foreign holdings of U.S. government debt have been plummeting.
But it gets even more interesting than that. We talked earlier about the project I did for the CIA…
Project Prophecy. And we said, you can see not only market action, but rivals, enemies, terrorists and others, operating in financial markets.
So, we all know that Russia invaded Crimea in the spring of 2014. Let’s say you’re Putin. You know you’re going to invade Crimea. You can expect U.S. financial sanctions.
So what do you do?
You basically mitigate the impact of the sanctions, start dumping treasuries in advance so that when you make your move and the Treasury tries to come against you, you’ve insulated yourself. So go back and look at October 2013, here’s Russia dumping Treasuries month after month.
That was a clear signal that they were getting ready to do something… To engage in financial warfare against the United States. But guess what? It’s worse than that.
We know the Russians and Chinese are working together. So is it any surprise that when the Russians started dumping… The Chinese started dumping also?
STEVE MEYERS: Does the Intelligence Community have the ability to defend our country in the event that this escalates even further?
JIM RICKARDS: Believe it or not, there’s an intelligence unit inside the Treasury. And they actually have a war room. That tells you that financial warfare is here and it’s real. So if the Russians are dumping… The Chinese are dumping… Who is going to buy all this debt? Well, a mystery buyer has shown up.
Recently, Belgium has bought enormous amounts… In the hundreds of billions of dollars of U.S. government securities.
STEVE MEYERS: So Belgium started loading up on treasuries, coincidentally at the exact same time Russia and China began dumping theirs?
JIM RICKARDS: It’s not the Belgians. These amounts are bigger than the Belgian current account surplus. These are not Belgian dentists who are buying these things. Belgium is a Front
You know, could it be the Fed itself?
That’s the point. Maybe the public doesn’t know who the mystery buyer is, but the national security community does. Now, the Treasury, operating through this war room, and the Fed – the mystery buyer in Belgium…
For now, they have managed to prop up the treasury market. It hasn’t collapsed yet. But they’re not going to be able to keep pulling these rabbits out of a hat, there’s a limit. This should be very scary, because if the Fed is tapped out – we talked earlier about how the Fed is leveraged 77 to 1.
So the Fed is at the limit of what they can do. The foreigners are now dumping treasuries and if no one buys it, guess what, interest rates go up. That’ll sink the stock market, that’ll sink the housing market. Higher interest rates mean the debt gets higher, so interest rates go up some more.
So you start a death spiral and there’s no way out of it.
STEVE MEYERS: An attack on our treasury market is obviously a very serious flashpoint that could ignite this Great Depression you predict in your book. Let’s talk about another flashpoint.
JIM RICKARDS: What I call flashpoint number two has to do with the petrodollar.
STEVE MEYERS: Can you explain what you mean by the petrodollar?
JIM RICKARDS: It’s basically a system whereby oil exports are priced in dollars. Oil doesn’t have to be priced in dollars. It could be priced in euros, Japanese yen, Swiss francs, gold. It could be priced in a lot of things. But, in fact, the whole global oil market is priced in dollars.I was actually very close to the birth of the petrodollar system.
My first visit to the White House on official business was in 1974, with a small group, about five of us. We met with Helmut Sonnenfeldt, who was the Deputy National Security Advisor at the time. He was the number two to Henry Kissinger. And, this was at a time you have to remember… At the beginning of the ’70s oil was $2 a barrel. At the end of the ’70s, oil was $12 a barrel.
This Was an Oil Shock
The price of oil was skyrocketing. Inflation was getting out of control. There were gas lines. You know, a certain generation of Americans remembers this very well. We were in the White House talking about what to do about this. One of the scenarios we discussed was the U.S. military would invade Saudi Arabia. We would secure the oil fields and create a military perimeter around them.
We would pump the oil and set it at a price that was favorable to us. Now, we would give the money to the Saudis. We didn’t want to steal their money. We didn’t want to steal their oil. We just wanted to set the price. Now, fortunately, that plan was not carried out. But it shows you how desperate things were at the time.
But what did happen? Why did we not invade Saudi Arabia? Well, the answer is Kissinger and the Saudis worked out a deal. And the Saudis said, “Okay, we’ll price oil in dollars, so that secures the role of the dollar as the global reserve currency.” But there was a quid pro quo. We agreed to guarantee the continuation of the House of Saud, the royal family of Saudi Arabia.
And by extension, the national security of Saudi Arabia. Because they’re a relatively weak military power. And it’s a bad neighborhood – a lot of enemies in the region starting with Iran and others.
So the question would be, obviously, did this petrodollar deal work? And it ABSOLUTELY did work.
Once it kicked in, the dollar roared. This was the period – sometimes people call it the king dollar period, the strong dollar period. This was after Volcker and Reagan in the 1980s. But this only continued up to a certain period of time… Up until around 2000.
And since then, the dollar has been in a decline.
STEVE MEYERS: So what could cause the fall of the petrodollar?
JIM RICKARDS: Well, we’re seeing it in real time. Think of the petrodollar, or the dollar as the global reserve currency… Think of it as a three-legged stool.
So, here’s the stool and it’s got three legs. As long as the legs are standing, the foundation is firm and the dollar will remain as a global reserve currency. But, one by one, those legs are being pulled out. What are the legs?
Well, the first one is Saudi Arabia. That was where the petrodollar deal began. Our side of the deal was we would guarantee the national security of Saudi Arabia. But lately – going back to December of 2013… President Obama stabbed the Saudis in the back by anointing Iran as the regional-hegemonic power.
You know, the President has been withdrawing American power from around the world and his view is, well, we’ll leave a friendly cop on the beat. Every sort of bad neighborhood around the world will have a cop on the beat. The President has decided that Iran is going to be the cop on the beat in the Middle East. They’re going to be the heavyweight regional power. Where does that leave Saudi Arabia? Out in the cold.
So now Saudi Arabia is saying… “Wait a second, you’ve undermined our national security, you’ve reneged on your side of the petrodollar deal, why should we hold up our end? Maybe we’ll start pricing oil in gold or euros or maybe Chinese yuan.” Because now, increasingly, Saudi Arabia is selling more and more oil to China. So, the first leg of the stool has been pulled out.
The Saudis are going to back away from the petrodollar, because we are no longer guaranteeing their security – we’re playing footsie with Iran.
The second leg of the stool is Russia.
Now, Russia is not a member of OPEC, but they are the world’s largest oil exporter, one of the world’s largest energy exporters, actually bigger than Saudi Arabia. So even though they’re not a member of OPEC, they also price oil in dollars. So, they’ve signed onto the petrodollar deal in their own way.
But, we’re now engaged in financial warfare, Russia is ready to fight back. And this is not classified information. This is being said publicly. Andrei Kostin, President and Chairman of Russia’s VTB Bank, it’s one of the largest banks in Russia, he recently said… “It’s time to change the entire international financial system that considers the dollar the key reserve currency. The world has changed.”
A member of the Russian Parliament, he said…
“The dollar is evil. We will sell rubles to consumers that rely on gas and later we’ll exchange the rubles for gold. If they don’t like this, let them not do it. Let them freeze to death.
So, two of the legs of the stool, Saudi Arabia and Russia, have already been pulled out.
The third leg is China. And that is coming out too.
*This is not the whole article, if you what to find more information and to read the other parts of this interview, you can find them with the same title with their number (1, II, III, V, VI)