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Hidden Forces
War with North Korea, De-Dollarization and a new Federal Reserve Board
00:43:24
In this Market Forces segment of Hidden Forces,host Demetri Kofinas speaks with Jim Rickards about a timeline for war with North Korea, de-dollarization, and changes at the Trump Fed. Rickards is the author of multiple New York Times bestsellers includ...
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- [00:00]
Jim Rickards
Foreign.
- [00:09]
Demetri Kofinas
What'S up everybody? Welcome to this Market Forces segment of the Hidden Forces podcast where I speak with market professionals, business people, and anyone else with an economic perspective on current events. My guest for this segment is Jim Rickards. Jim is the author of multiple New York Times bestsellers, including the Road to Ruin the the Death of Money and Currency wars in the Age of Trump, an updated version of his 2011 bestseller that will be made available this November. He is the editor of the Strategic Intelligence Newsletter and the co founder of Maraglim, a new predictive analytics technology service that uses complexity theory and IBM's Watson AI technology as a service for investors. He's an advisor to the Department of Defense and the US Intelligence community on international economics and financial threats, and served as a facilitator of the first ever financial war games conducted by the Pentagon.
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Jim, welcome to Hidden Forces.
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Jim Rickards
Demetri, it's great to be with you.
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Demetri Kofinas
It's great having you here this early as well.
- [01:13]
Jim Rickards
A little unusual for both of us, perhaps, but that's just how the schedule rolls.
- [01:17]
Demetri Kofinas
So we were talking a little bit before we started recording and I want to continue our conversation. We were talking about. First of all, I told you I was at Jim Grant's Interest Rate observer conference yesterday.
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Jim Rickards
I'm a huge Jim Grant fan for going to the 80s, so I've been following him for a long time.
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Demetri Kofinas
Yeah, I love Jim. He's great. Everyone loves him. It was actually funny because he wasn't there for the beginning. And Phil, one of his sons, got up and just gave this speech and said there have been some changes to our organization. It was a joke. It looked very ominous, like Game of Thrones. But Chanos was there, he gave the opening and Singer was there. So those guys are regulars. There was this really interesting guy. What was his name? I have it here somewhere. Let's see. Frank Broson's. In any case, his conversation had to do with volatility. Kind of the ecology of volatility, which I found very interesting. And it was a different perspective than I'm used to. Our listeners are familiar with Christopher Cole, who I had on the program some months ago. I met Chris back in 2012 at a grants conference and he spoke about volatility, but his conversation was much more philosophical. Listeners will be familiar with that from episode five, but this guy had a chance. Just a more ecological sense, if that makes any sense. But that was really good. And of course, the highlight was Alan Greenspan, who Jim Grant interviewed.
- [02:35]
Jim Rickards
Right, right. Well, Greenspan, of course, is a historic character and still going strong and good for him and an interesting figure. But the thing I actually, I just left a meeting with a gold investor and we talked about Greenspan. I said if you look at his whole career prior to becoming fed chairman in 1987, he was a gold buy bug, gold advocate, advocate for the gold standard is very well known after retiring as Fed chairman in, I believe it was 2007. He might have been later than that. I think it was 2007.
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Demetri Kofinas
6.
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Jim Rickards
So 2006, since then he's been giving speeches and zoom at the grants conference the other day, saying very positive things about gold. So prior to being at the Fed he was pro gold. Since leaving the Fed he was pro gold. But somehow we're supposed to believe that while he was Fed chairman he did. Now I understand why the chairman of the Fed that Prince dollars can't have a kind word to say about gold. I get that. But I've always taken the view that he was on a shadow gold standard, not something he could talk about publicly. Occasionally he did, he said, look, we're not on an official gold standard, a legal gold standard or a strict gold standard. But I watched the price of gold the way I watch other things to tell me if I'm doing a good job in monetary policy. So I take the view that we were on a shadow gold standard the whole time. And if you look at a long time series of gold prices in dol, it traded in a range that entire time. It didn't really break out of the range until around 2000. So if you take the late 70s, it's just a crazy period where two oil shocks, four recessions in eight years, Nixon going off the gold standard, anti war protests, impeachment, the whole crazy time. And so of course it was volatile, nobody knew what was going on. But beginning in 1980 through 2000, so a 20 year period, gold in a range, it was a wide range, between 200 and $500 an ounce. But it wasn't up the $1,000, $1,500 et cetera, which it got to later, that was Greenspan keeping an eye on gold as a measure of monetary policy.
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Demetri Kofinas
Yeah, well, it's interesting when we had Sebastian Malaby on the program and our audience may remember this, we talked about this specifically and that there was this moment of realization that Greenspan had, at least according to Malaby's honest interpretation of him, after having all those conversations for five years, which was that the politicians were always going to undermine gold in order to have an effective gold standard. You Needed to have an honest monetary policy, for lack of a better word. But the honest monetary policy negated the need for gold. And that was how Greenspan came to the view of it. What I found most remarkable, it's actually funny. There was also this really funny moment right before Greenspan came on. We had Paul Singer and we had this guy Frank. They both took swats at the passive management phenomenon of this indexing pro cyclical investing in markets. Then Greenspan comes on, not having heard those and not within very long. He says that he would be invested in index ETFs. The crowd gasps Jim chuckles under his breath and says, wrong crowd for this. It was extremely. But it was interesting seeing how he was even at this age, he was trying to balance it. I mean, you could like, you know, I think having. Again, I really studied Sebastian's book and I really value what he had to say. I took it to heart. And then also being there in the room and listening to Greenspan, I just came away with the impression that he knows much more than he's letting on. At the end of the day, he was Fed Chairman, he had the power, he did what he wanted to do.
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Jim Rickards
But, you know, well, Sebastian's a great guy and actually worked with him in his book before the Greenspan biography was More Money Than God, the History of Hedge Funds spent some time with him going through the Long Term Capital Management episode from the 1990s. Bumped into him in London and Bahrain, a few other places. He's a great guy. But his argument about Greenspan not needing gold is a little circular in the sense that Sebastian says, well, if you have an honest monetary policy, you don't need gold. Which is true as far as it goes. But then how do you have an honest monetary policy? It kind of begs the question, well, what is an honest monetary policy? Well, one form of honesty is actually to use gold as a benchmark. And I think that's what Greenspan did. He didn't have a strict gold standard, but he kept an eye on it and it helped him get credit for an honest monetary policy.
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Demetri Kofinas
Well, he would point to the example of Lyndon Johnson. I don't remember who was Fed Chairman at the time when Lyndon was president, but he brought him down to his ranch in Texas and he pointed his finger at his chest and said, you need to lower interest rates. Boys are dying in Vietnam, you don't care.
- [07:34]
Jim Rickards
Right. I think it was William McChesney. Martin, McChesney, Martin, McChesney, Martin. Of course, the guy who also got that treatment was Arthur Burns. When Richard Nixon was president. So in those days, the presidents knew how to kind of, as you say, persuade the chairman to do what they want. But that had a long history going back to the Treasury Fed accord in World War II and how the Fed finally broke away from that in the early 1950s. But today we have, as Jim Grant aptly calls it, the PhD standard. It's not the gold standard. And actually, I'm very encouraged by the fact that Kevin Warsh will be the next chairman of the Fed because He's not a PhD economist, thank goodness. He's a lawyer, he's a banker, smart guy, and not an ideologue. He's a pragmatist. He likes the Taylor Rule, he likes rule based monetary policy. And a lot of people have applied kind of a naive interpretation that said, well, if you like the Taylor Rule, the Taylor rule says interest rates should be 3% already. And so therefore you're a hawk and you're going to raise rates. That is an overly simplistic view of Warsh. Yes, he likes rule based policy. Yes, he likes the Taylor Rule. The problem with the Taylor Rule is that it does say that rates should be a lot higher today, but it also says that they should have been negative in 2010, 2011, 2012. And so when rates were not negative because the Fed never went past the zero bound, you have to ask yourself over a longer horizon, well, if I should have been lower than I was and I wasn't, does that mean I should be lower than the rule says now to make up the difference? In other words, if you average rates over a longer period of time, you get to something that approximates the Taylor Rule over time. So that's an argument for keeping the rates lower. But Warsh is also has taken the view that the Trump tax plan will be stimulative in terms of real growth.
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Demetri Kofinas
Well, if it gets passed.
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Jim Rickards
If it gets passed, you think it'll get passed? No, not this year. Maybe next year. I don't see it.
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Demetri Kofinas
Maybe if they take away Trump's phone.
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Jim Rickards
Well, I'm not sure that's what's standing in the way. I think there's a lot of problems in Congress as far as the tax bill is concerned, including elimination of state and local tax deductions. And then if you don't eliminate those, you blow a hole in the deficit and then you lose votes from people like Corker. So I don't think the dynamics are there in Congress, independent of Trump and his tweets and everything else. But as far as Warsh is concerned if you think the tax bill is coming and it may come next year and if you think it's going to stimulate real growth and Warsh has said that he does in a paper that he wrote with Glenn Hubbard and I think John Taylor, then if real growth substitutes for nominal growth or if you increase the capacity for real growth and you get it, then you have less inflation, there's less reason to raise rates. So plenty of reason to think that war shall be, I would just say a continuation of yellow. And yeah, the Fed wants to get, the Fed wants to get rates up for reasons that have nothing to do with the business cycle. They want to get them up so that they can cut them in the next recession because they should have raised them in 2010 and they didn't. But that's separate from how you view the business cycle. And I think Warsh will kind of be like Yellen. Like yeah, on balance I want to raise rates but I'll pause when I have to.
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Demetri Kofinas
So you think Kevin Warsh is a shoo in or What?
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Jim Rickards
Well, not 100% but yeah, as close to a shoe in as you can get. But I said that 10 months ago when all the Washington insiders, oh, Gary Cohn, they were all spun up on Gary Cohn, my friend Ben White, morning money. Ben was like practically a cheerleader for Gary Cohn all summer. And I was just, you know, I talked to some of the people, a lot of the reporters down there and I told them, I said it's going to be worsh and didn't get a lot of buy in. But that is playing out.
- [11:17]
Demetri Kofinas
So even Kevin is, he was actually at grants last spring or fall. I don't remember when it was when I saw him there, but he was clearly he made a point that he didn't think much of this. Looking at this data driven Federal Reserve system of looking at backwards data backdated numbers. This guy who's skeptical, you think is still going to be a continuation of Yellen is what your point is? Well, yes, and that we're not going to have a rate hike in December.
- [11:45]
Jim Rickards
The reason I say that is Yellen is a data geek. Her academic home is Berkeley, which is ground zero for frequentus statistics as the anti bayes in other words. So she's a data geek and she's model driven and particularly bad models, equilibrium models and the Phillips curve. And I like to say the Phillips curve is like a unicorn. You can describe it and draw pictures of it, but it doesn't actually exist. There is no Phillips curve. It's just a construct that doesn't sync up with reality and how labor markets work and how inflation works and what drives inflation. But the thing about Warsh, I would say above all, as I mentioned, he's a pragmatist. And what's interesting is that Yellen, with her flawed models and her backward looking data, ends up in the same place as a pragmatist for completely different reasons. And what that means is that you cannot tighten into weakness, you cannot tighten into weakness without causing recession. The Fed made that mistake in 1937. Now, the Fed, going back earlier to 1927, the problem there was you had a stock market bubble. And the Fed decided to lean into the bubble, pop the bubble, which they did. But they helped to trigger the Great Depression, which then went on for another 10 years. But we kind of got out of that, or we started to get out of that when FDR devalued the dollar. 75% against gold. Gold went. Gold was the only thing that went up in the Great Depression. It went from $20 an ounce approximately to $35 an ounce, 75% gain in the dollar price of gold, which is a dollar devaluation. It didn't cause inflation. What it did is it broke the back of deflation. Deflation was the problem. An extreme revaluing of gold. Devaluation of the dollar broke the back of deflation. And we started to get out of that. 1933, in the middle of the Great Depression, 33, 34 was one of the great years for the stock market of all time. It was one of the great stock market market rallies of all time in the middle of the Great Depression. But that was because FDR finally did something that started to get us out of it. But they should have kept that going. And what happened was by 1937, 36, 37, the Fed started to worry that things were getting too hot again. And they tightened and then threw us right back down into the second technical recession inside the Great Depression. And we didn't get out of that until 1940 and really 41, the beginning of World War II. So the Fed hasn't made that particular. They made a lot of mistakes, but they haven't made that particular mistake since 1937. And Yellen has to be conscious of that. And if not, there are plenty of people from Martin Wolfe to Larry Summers to Christine Lagarde who will remind her. And so that's why she's been. That's why they take these pauses. I mean, the Fed model that actually works. And I think we might have talked about this in the last time we did this podcast. It's really simple and it's. I call it the Fed model. It's not my model, it's the model the Fed actually uses. But if you understand it, it makes forecasting pretty easy. They're going to raise rates four times a year, 25 basis points every March, June, September and December, like clockwork, until through 2019, until they get the Fed funds target up to.
- [15:09]
Demetri Kofinas
That's the plan. That's what they're saying.
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Jim Rickards
That's the plan. And the reason for that has nothing to do with normal business cycle economics or fears of inflation. All that. It has to do with the fact that, that it takes 3 percentage points of rate cuts to get out of a recession. So if we had a recession sometime soon, which we will, how do you cut rates 3% when they're only at 1%? The answer is you can't. And the evidence is very good that negative rates don't work. Separate story.
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Demetri Kofinas
You would agree that cutting rates is really, it's not about the actual interest rates and the availability of money and liquidity. It's really about the perception that the Fed can actually make a difference. And having the ability to cut rates sends a signal to the market and says, hey, we still have the ability to do something. But really, would you agree that the last, especially since 2008, a lot of the theories of monetarism have been debunked around what the Federal Reserve can do with interest rate policy?
- [16:06]
Jim Rickards
Yes and no. I would say that QE has been debunked. The evidence, now that we're past it, QE3 ended in November 2014. Now that we're past it, there's a lot of. That's three years ago and a lot of research has been done and the evidence is coming in that it doesn't work. There have been some comparative studies, US vs Canada, US vs Japan, where countries did more or less QE and they all had kind of the same performance. And so you would say, okay, there are other factors driving performance, but QE wasn't one of them because Canada didn't have a lot of QE and had kind of the same economic performance as the United States. So I don't think QE works. QE2 and QE3 meant nothing that has been debunked, except for the fact that the Fed is now desperate to unwind the balance sheet, reduce the balance sheet and get back to normal so they can do QE4. QE1 was different. QE1 was not really stimulative. It was an emergency liquidity response to a genuine liquidity crisis. That is the central bank's job. So I'll give them a pass on QE1, not on QE2, QE3. But interest rate cuts are different. Interest rates. When you cut interest rates, you actually do increase the price of asset values. That's the whole idea. All of a sudden stocks look more attractive, real estate looks more attractive, gold looks more attractive. And so I'm not a big believer in the wealth effect. But look, the Fed doesn't have a magic wand. The Fed doesn't control fiscal policy. The Fed doesn't control psychology, except a little bit through signaling. So they have a limited toolkit. But interest rate is probably where QE almost certainly does not. But going back to my first point, how do you use the interest rate tool effectively when interest rates are not that high to begin with? The answer is you can't. And so they're trying to raise them so they can cut them, but that has nothing to do with the normal business cycle, with the fact that the economy is too hot or inflation is too high or unemployment's too low. Even though Yellen talks about the Phillips Curve, it has to do with the fact that they're behind the curve.
- [18:11]
Demetri Kofinas
Right? All right. And Trump has the ability to affect the composition of this Fed like no other president in history. I think he will effectively come to control six of the seven spots. But what I think I'm getting from you is that it's not really going to make much of a difference. I mean, it's not going to make a practical difference. At the end of the day, the Fed is still going to have to cut, they're still going to have to stop raising rates, etc.
- [18:36]
Jim Rickards
Well, again, going back to the model, I said they'd raise four times a year like clockwork, but I didn't get around to pointing out the exception to that. The exception is they will do that, but they will pause when one of three pause factors is present. The three pause factors are a disorderly market decline, stock market decline, which is not happening, at least not now. Disinflation, which is happening in a big way. Pce, PCE deflator core, year over year, has been down or flat nine months in a row and has lost 0.6 of 1% on kind of a two point scale. That's huge. Moving in the wrong direction, Moving persistently and quickly in the wrong direction. That's what keeps Yellen up at night, and that's why she won't raise rates in December. But on top of that, we now have. We had job losses in September. I understand it was the hurricane. I get the fact that that'll reverse. But, you know, loss is a loss that's like football, you know. So we now have two of the three pause factors in play, declining job growth and disinflation. And you're tightening into weakness. Anyway, those are all reasons why the Fed will pause in December. But going back to the board composition, yeah, it's Trump's board, But Warsh talked to the transition team in November. He was in Trump Tower after the election. And the conversation kind of went like this. They said to Warsh, you want to be chairman? He said, in effect, yeah. And they said, okay, well, we'll put you on the board. And then come this is last year, then come November, December 2017, we'll name you as chairman. And Warsh didn't bite on that. He said, kind of like, yeah, can you put that in writing? See, here's the thing. He had already been on the board. He was already on the board of governors. And so he had no interest in returning to the Board of governors unless he could be chairman and didn't want to take the board seat without some kind of guarantee. So he said, get back to me. And they said, okay. Then there was a continuation of that conversation, which War says, look, you're going to have all these other vacancies. No surprise. I mean, there were two vacancies going in, and then Tarullo resigned very quickly thereafter. So there were three vacancies. And then everyone knew that Yellen's term was up in January and Fisher's up next year. And then Fisher accelerated his departure with his resignation. That wasn't known at the time, but even at a minimum. And you could see three vacancies. And Warsh said, look, I want to have a voice in those vacancies. He didn't want to be chairman of a board of bozos. He said, I don't want to be chairman if you're going to appoint some crazy people. So, you know, Trump likes to be in control. He wasn't too warm to that, but they had the dialogue. So the point is, this has all been worked out for almost a year. It's a package deal. It'll be Warsh, and they'll name the other people around the same time probably pretty soon. And. And so if Warsh has a voice in those appointments, which he does, they're going to be kind of like Warsh. So it's. So, yeah, you got a lot of seats being filled. And Torillo is not a voice of monetary policy. He's. I'm sorry, Randy Quarles. Randy Quarles replaced Torrillo in the regulatory role. He's the new vice chairman of the Board for regulation. You know, smart guy. And he'll do a good job in regulation, but he's not there to have a voice on monetary policy. So he'll do whatever the chair wants. So you're going to have warships. You got Randy Quarles, who's going to go along. You got Jay Powell, who's a Republican. He's going to go along. And you've got three other seats where Warsh is going to have a voice. So you can say it's Trump's board, but it's really Warsh's board. And therefore, I think it's pretty easy to see that. Well, I think it's easy to see that monetary policy will continue, not because Warsh agrees with everything that Yellen says, but because they're all constrained. They're constrained by the real economy, which is bigger than the Fed. They're constrained by their fear of deflation, which is what keeps central bankers up at night. They're constrained by a need to get rates up because they Lew it in 2010 by not raising at the time. So you can have very different views from somebody else and still pursue the same policy, not because you agree with them on everything, but because it's a constrained problem and that's what we're facing.
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Demetri Kofinas
Sure, sure. All right, so let's talk about a bigger problem that we're facing, which is North Korea. And I know you have views on this, and I actually think it's. Actually, I personally think this is far more significant than the Federal Reserve, not just because it's a larger F tail, the negative outcomes are worse. But I think, at least my perspective has been that in recent crises, we were constrained by factors that fell within the parameters of the geopolitical system. And I think that looking at what's happening with North Korea, it's challenging and undermining just one more step in undermining US Geopolitical dominance and its ability to act unilaterally if need be. Why don't you take. Can you walk us through a little bit about what your views are? Because you're actually doing something that's uncharacteristic. I've never heard you specifically put out a date for when you think an event is going to happen or a time frame, I think you've said about six to eight months, that we would have a hot war or some kind of hot confrontation with North Korea. Maybe you can just walk us through and explain what you're thinking.
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Jim Rickards
Right. Look, I don't do dates when I don't have enough information to make a smart forecast. But I don't mind doing dates if I think I do. And here's one where there's good reason to think that we do have the information based on the operational tempo of Kim Jong Un's weapons, nuclear weapons and ICBM programs, and the fact that he's blown away every intelligence estimate of when he could do certain things. In other words, if you go back a year, so let's say it's the middle of 2016 and you went to the intelligence community and said, when will Kim Jong Un have an H bomb? They would have said, meh, we think 2020, 2021. Okay, when will he have an ICBM? Maybe about the same. When will he be able to marry a miniaturized weaponized H bomb? Ruggedized H bomb with good guidance Systems and an IBM that can hit Los Angeles 2022 within a year? He hit every one of those milestones except for one. He's got the H bomb, he's got the icbm, he's got the improved guidance systems. It looks like the only thing he doesn't have so far is the ability to miniaturize and ruggedize the warhead and marry the two and actually kill 3 million people in Los Angeles so that.
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Demetri Kofinas
It can survive reentry.
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Jim Rickards
Correct. That's what we mean by ruggedized. These things went to space. If you saw the movie Apollo 13, Old Tom Hanks film, remember the drama was when the it was hard getting the thing back from the moon, but when the Apollo capsule had to re enter the atmosphere, you know, hits all that friction and heat and vibration and you lose communications, contact, and you don't know whether they blew up or burned up or whatever. And then of course they come down.
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Demetri Kofinas
They don't have any questions about his ability to achieve altitude, the type of altitude he needs to actually hit the continental United States.
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Jim Rickards
He's demonstrated that. And the way they do that is called lofting. So when you fire a ballistic missile from North Korea and you're trying to hit Los Angeles, you put that at a kind of shallow trajectory. It does go into space and it re enters. But what they do when they test them, it's a much steeper trajectory. It's called lofting. And then it comes down, you know, goes over Japan and comes down somewhere in the Pacific Ocean. But what you can do is you can do the math and say, okay, the missile had the following performance. It followed the. This certain trajectory. If we were to flatten the trajectory, where would it end up? And the answer is Los Angeles. And so, yeah, he has demonstrated that. And when he said, I'm going to detonate an H bomb over the Pacific Ocean, that was not gratuitous, because what that would prove. And he has not done this yet, although he's done everything else he said he was going to do that would prove that he has now miniaturized and ruggedized the H bomb. It's not just, I want a big boom in the sky. What it says is, no, I took my. See, when you set off a hydrogen, called a weapon, technically, they called it a device. Okay, so he caused a fusion reaction, and they basically detonated a hydrogen bomb. But that thing could have been the size of a truck. But can you shrink it down to the size of, you know, something larger than a grapefruit, let's say, and put it on a warhead? That's harder. But that's the only thing he hasn't done. So my point, Demetri, is having hit every goal years in advance of the intelligence community estimate. The only prudent thing now is to say he's going to hit this last goal sooner than we expect. And that's why you can bring in the timeline from 2019, bring it into 2018, so there's really only one. And he's also in what they call breakout mode. Breakout mode is different from what the Iranians are doing. Clearly. The Iranians are working on missiles, they're working on enrichment, working on weaponization, they're working on all the things that North Korea is working on, but they're trying to tiptoe around it, do it underground, do it through stealth, take a timeout, get slapped on the wrist by the US with some sanctions, back off, come back. It's sort of like a little kid trying to sneak an extra piece of pie when Mom's not watching, right? That's a normal weapons development program. Breakout is when you say, I don't care. I'm just going for it. I'm Tom Brady. I'm in the red zone. I'm going for the touchdown. I don't care what you see, I don't care what you observe. I'm going for it. And if you decide and Kim Jong Un has made this decision, if you decide that you're better off with the weapons than without them, that your regime is more stable with them than without them, and you're going to go for it, then you might as well just go for it. There's no point in delaying it. So he's in breakout. We're looking at an existential threat. And there's only one question. Will the United States decide to live with a nuclear capable North Korea or will we engage in preventive war?
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Demetri Kofinas
So let's actually narrow down these assumptions. There have been people like Richard Haass that have come out and said all roads to Pyongyang lead through Beijing. But what we are also learning from guys like Evan Osnos and others who have written articles on this, who have visited North Korea, is that the relationship between China and North Korea is not as cozy as people would may have hoped. And so our ability to sort of influence the North Koreans through China is overstated.
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Jim Rickards
I agree with that. I disagree with Haas. Look, Beijing potentially has a very powerful influence on North Korea, there's no question about that. But there's one more road in. I haven't been to North Korea, but I have been to Beijing and Moscow. North Korea shares a border with Russia and that's not, you look at a map, it's like, hey, North Korea is right next to, you know, has a border with China, which it does, but there's a little about 20 mile stretch adjacent to the sea that is a border with Russia. They've got rail lines, they've got communications lines, they've got highways. Putin is shipping in coal. He is North Korea's lifeline. And then the other lifeline they need is financial. How do you transact in hard currency? I mean obviously North Korea is kicked out of swift. Their banks are sanctioned, no one's allowed to do business with them. But the way they do it, banks that are in swift front for North Korea in what are called MT201S and 101S. These are message traffic signals through Swift. And you're supposed to list the name of the beneficial on it, but you just leave it out. So it looks like a message transfer from VTB or Sberbank or some of these other banks, but it's actually fronting for North Korea and Putin can control all that. So they have another lifeline. And North Korea is a master at playing off Russia versus China. And then the final question is, is why is it a bad thing? Human tragedy aside, which is obviously the most significant thing, but why is it a bad thing if the US Gets dragged into a war with North Korea for China. I mean, we spend a trillion dollars we don't have. We get that much closer to going broke. We waste blood and treasure. We're sort of a pariah around the world because we would have started the war. This is a preventive war. And those are all kind of bad things for the U.S. even though we'd be doing it for existential reasons. China can just sit back and enjoy.
- [31:01]
Demetri Kofinas
The show, but that introduces the uncertainty of war. I mean, the Chinese, no one can control a war once it breaks out on that scale.
- [31:08]
Jim Rickards
Well, that's true. Unless, and here's what I would expect, the US Will turn to China. By the way, Trump's going to China and South Korea next month, which in my view is sort of, you know, less clear chance, say, hey, you know, face to face with Xi in China. We're going to do this unless a couple things happen and it's on you. But when the war is about to begin, or shortly prior, not long prior, because you can't trust the Chinese not to give the North Koreans a heads up. But you can see this coming. We'll say to China, look, we're going to work. We're going in. It's preventive war. Here's what we're going to do without giving away all the secrets, but we recognize you have interests, so a couple things. We're not going to get anywhere near the Yalu River. We don't have to. We're not. We're going to decapitate the regime, but we're not looking to reunify the peninsula on terms necessarily favorable to us. We are willing to have a condominium with you so that China and the US Together can restructure governance on the Korean Peninsula so that your interests are not threatened. And in other words, respect China's interests, but go in anyway. And if you're China, you should take that deal. And I think they will.
- [32:25]
Demetri Kofinas
I've heard that as well. I forget who I recently heard giving that sort of theory out there. The idea, essentially, if I understand you correctly, what you're saying is that the United States will go ahead, it will wage war on North Korea in order to prevent it from having the capacity to hit the United States once it develops ICBMs with nuclear warheads, and that the deal will be, hey, China, don't worry, we're not going to reunify the Korean Peninsula under our terms. We're going to basically let you guys handle it. You guys are going to be able to Sort of deal with this the way you want to. We're just there to stop the icbm.
- [32:56]
Jim Rickards
Right. And we're not going to. Well, more than that, stop the weapons program and decapitate the regime. But. So there will be regime change, but it doesn't mean that, you know, there are democratic elections and South Korea is in charge of North Korea. That's where we would step back a little bit. And it also means we're not going to put the 1st Marine Division on the Yalu River. So that's a way to respect Chinese interests. Now, if China doesn't go for that, I expect they will. But if they don't go for that, you're looking at then the potential for something that sort of looks like World War Three, where Russia, China, Japan, South Korea, US all get drawn in is on the table and. Absolutely. A trade war and currency war, sanctions war with China.
- [33:41]
Demetri Kofinas
Even in your best case scenario, you could have the death of millions of people in South Korea.
- [33:46]
Jim Rickards
Well, every death is a tragedy, but I wouldn't say millions estimates. The bad estimates are kind of 100,000. Before the US could totally suppress North Korean artillery fire. But that's without factoring in a secret weapon. The atomic bomb was a secret weapon until the minute we dropped it. Then it wasn't a secret anymore. Although the Japanese weren't persuaded, we had to do it again a couple days later. Why would people think that DARPA and the Pentagon and the Applied Physics Laboratory and Los Alamos and other centers of top secret weapons development haven't been working on one or more secret weapons that the North Koreans will find out about the hard way?
- [34:34]
Demetri Kofinas
But aren't we also talking about. I mean, the world today would be a very different world even if we were successful and there was minimum deaths in South Korea. We're talking about a complete shift in perspectives around sort of the stability of geopolitics. I mean, an invasion of North Korea and the fallout, even if it's in the tens of thousands or hundreds of thousands, that would still, I think, introduce a tremendous level of uncertainty around global opinion and sentiment.
- [35:07]
Jim Rickards
Well, how would you like a Los Angeles that makes Blade Runner look like a good day?
- [35:11]
Demetri Kofinas
No, I'm not saying that.
- [35:12]
Jim Rickards
Look, I'm not saying that that's the other side.
- [35:14]
Demetri Kofinas
And I'm not.
- [35:15]
Jim Rickards
You're right to be trying to say.
- [35:16]
Demetri Kofinas
That I'm not making a value statement. I mean, I'm not making. This is a, you know, that's separate entirely from making a value statement. I'm saying that it's Just a whole different world, you know what I mean? We would be living in a very different world at that point.
- [35:30]
Jim Rickards
Well, you know, North Korea has been working on this for 25 years. This was one where the Clinton administration did a fail deal, the Bush administration did a failed deal and Obama did nothing. So yeah, it's going to be Trump's decision and it's going to be ugly. But it's very hard to lay this at Trump's feet When you had 24 years of three two term administrations, Clinton, Bush and Obama, who either bungled it or did nothing. And North Korea has been working on this the whole time.
- [36:03]
Demetri Kofinas
I know you're going to have to go in a few minutes, so before you do though, I want to have an opportunity to talk about sort of of the way in which you see this impacting financial markets, or maybe even not necessarily the event itself impacting them, but how markets begin to cozy up to the notion the complacency has remained in financial markets. They have a very difficult time traditionally pricing geopolitical risk. It's something we've talked about here before. Are there signals that you're looking at in the market that will preempt a reversal in prices and a downturn? Prior to any kind of outbreak, we would see positioning, repositioning of people, of US Personnel on the peninsula, that would be for sure. But even before that, can we expect anything that would give us a heads up on a price action?
- [36:48]
Jim Rickards
Well, we're seeing them every day and the markets are ignoring them. The markets are sleepwalking off a cliff. I could and I can make a case that the stock market is in bubble territory. Even if North Korea were peace, love.
- [37:03]
Demetri Kofinas
And understanding, many would make that. Absolutely.
- [37:05]
Jim Rickards
And that doesn't mean it ends soon. I mean, Greenspan said we're in a bubble in 1996 and it continues for three years until it popped. I could say we're in a bubble now, which I think we are, but it could continue for three years. I'm not going to stand in front of a moving train and short the index based on my bubble belief because you can get run over. But having said that, it's funny how the markets have normalized. The road to war go back just a couple months. North Korea would fire a missile over Japan and the market would go down 1%, not 5%, but 1%, 1.5%. Then everyone would would hold their breath and they would wait and then, okay, it's all good. Then the market would go up again. Well, after two or three episodes of that, the market said, well, what's the point in going down if we're just going to go back up again? So now they've normalized missile launches and they don't even care. So I think that you're going to actually almost have to see some shooting. And I think the one trigger is the one you mentioned, which would be an evacuation of US Personnel from South Korea, although that is practiced and rehearsed once a year, because it's not like this war has been over. The war didn't end in 1953. It was just an armistice. There's no treaty. They're still in a state of war. So that'll be a clear signal. But there was a signal yesterday where it was reported, and it's public that the Royal Navy are commissioning their newest aircraft carrier, the newest supercarrier, HMS Queen Elizabeth, on January 1st. Now, when you commission a vessel of that kind, you do, like, two years of shakedown cruises. You practice, you try systems, and you expect things to go wrong. It's like a software release. You know something's going to go wrong, but you have to release it to find out what it is. So it's like a beta test. But what they said, what the Admiralty said, is that we're commissioning January 1, 2018. Normally, it wouldn't be ready for active duty until 20, but we are willing to put this thing on active duty in North Korea now, which they did in the Falklands War with another vessel. So when I see, okay, why is the Royal Navy accelerating the deployment of their supercarrier by two years to go to North Korean waters if we're not on the path to war? So this is the disconnect. I mean, that's the kind of thing that it's a clear signal, but the market's ignoring it, and I can't account for that.
- [39:29]
Demetri Kofinas
One more thing, Jim. Today is Wednesday, October 11th. This week, the IMF and World bank are having their annual meetings in New York. The last time you were on this program, one of the things we talked about was de dollarization. What are your thoughts on this meeting? I know that we had that 15% or more than 50% voting target. Do you have any thoughts on that? Maybe you can give some context for our audience.
- [39:49]
Jim Rickards
Sure. The voting target was to do something big at the IMF. And when I say big, I mean big. Issuing 4 trillion SDRs in the next liquidity crisis, which would be tantamount to the beginning of the end of the dollar as the benchmark global reserve currency. You need an 85% vote, which means that anyone with 16% can stop it. No surprise. The only country in the world with more than 16% is the United States. And that gives us an effective veto over IMF actions. But I made the point that the BRICs, who have created their own institutions, have their own summit meetings, have their own documents, dialogue, et cetera, together have about 14.9%. It could be off by a tenth of a percent, 14.7%, 14.8% of the vote. But they represent over 22% of global GDP. So what they're saying to the IMF and the IMF agrees is, hey, we need a larger, what they call voice or quota or vote. So the IMF has agreed to that. There's a process of reestablishing the quotas, which, which in theory happens every five years, but it takes sometimes more than five years to do it on a five year cycle. So that by itself probably won't go into force until 2019. So they will talk about it this week, but it'll take a couple years to get there. But just to update that, so I have a new formula called BRICS plus V V for Venezuela. In other words, Venezuela is such a basket case that it has come under the wing of China and they've agreed to sell oil for yuan. So they've already abandoned the dollar. They're subject to U.S. sanctions. So Venezuela is a basket case under Chinese supervision. So if you take the Venezuelan vote in the imf, combine it with the brics. In other words, if China holds the Venezuelan proxy, you're already over 15%, which means BRICS Plus V can stop an initiative. And if we have a liquidity crisis, which is just a matter of time, and if the central banks have not normalized their balance sheet, which they will not have, have, and if you have to relique the world with SDRs, BRICS V will be in a position to stop that unless they get a quid pro quo. And that quid pro quo is the end of the dollar.
- [42:03]
Demetri Kofinas
And you mentioned the yuan based oil contracts that will be convertible into gold. That's something that continues that sort of conversation around de dollarization and the ability for the Chinese to have these bilateral trade relationships. And it also undermines US sanction regime, which brings us back to North Korea and this reconceptualization of the geopolitical framework. Jim, I know that you got to go and we got to wrap this up. Thank you so much for coming on the program. Great seeing you, Jimmy and audience. I want to mention it again. I mentioned it at the top of the program, but Jim's book, currency wars, is out on a revised version, currency wars in the Age of Trump. We covered some of that on this program when we spoke about the Trump Fed. But Jim goes in much more detail in his new book, which will be out in November. I also wanted to mention to you in the audience that we had a little bit of a glimpse glitch Monday morning, where next Monday's this upcoming episode on DLT and Blockchain, and a really amazing episode that we have coming out was released in the very early morning hours. And I got some emails from from confused listeners that was a mistake. These glitches do happen. But the episode will be released in its proper fashion this coming Monday. So look out for that. And as always, look out for us on Facebook, Twitter and Instagram iddenforcespod. Have a great week.