[00:02:51] Jim Rickards: I said, absolutely. Of course I thought that myself, but I said, I’ll do that. I’m also going to write a chapter on deflation because that could be coming very quickly behind the inflation. And everyone knows the inflation’s here. You know, I. Yeah, I see it at the grocery store, the gas pump home heating prices.

[00:03:07] Jim Rickards: A lot of other prices for because, and services, I mean, I may be a writer, but I put gas in my car and I go to the supermarket just like everyone else. So I see it firsthand. So people don’t really need to be told about inflation, but what is not well understood are the sources of inflation. And broadly speaking, there are two places inflation can come from.

[00:03:26] Jim Rickards: One is the supply side, there’s a name for it. It’s called cost push inflation. So costs go up and they get pushed onto the market, pushed onto consumer, and the prices of goods on the shelf go higher. And that’s certainly what we’re experiencing. The inflation we have right now is coming from the supply side.

[00:03:43] Jim Rickards: Whether it’s energy shortages, higher energy prices, and the war in Ukraine has made things a lot worse with the sanctions on Russia. You know, Russia produces a large percentage of the world’s aluminum and titanium. Well guess what? Aircraft are made from aluminum and titanium. Boeing gets about 35% of their titanium from Russia.

[00:04:01] Jim Rickards: So if they can’t export it or we sanction it, the Boeing’s assembly line, slow down, et cetera, and costs go up. So the inflation is coming from the supply side. That’s very clear. The other place inflation could come from is the demand side from consumers. And this is much more psychological. It’s, you know, you’re thinking about buying a new refrigerator and this thing there, Russia, no one works, but I want to get a new one.

[00:04:23] Jim Rickards: But if you think the price is going to go up, you might say, Hey, I’m going to go out and get it right now, because if I wait six months, the price is going to be higher. And why would I do that? And of course that’s called demand pull inflation. You’re pulling demand forward to beat the price. And of course it’s self-fulfilling.

[00:04:37] Jim Rickards: If enough people do that, then sure enough shortages appear and prices go up. But these are very different dynamics. The supply side dynamics and the demand side dynamic now in the seventies, interesting kind of test case we saw both. That started out from the supply side. There was Arab-Israeli War in 1973 that turned into the Arab oil embargo in 1973.

[00:04:57] Jim Rickards: 1974, the price of oil went up by a factor of four, from $3 a barrel to $12 a barrel. Those prices sound pretty low by today’s standards, but when you multiply it by four, it was a big shock back then. We had gas lines and so that inflation kicked in. Although there’s a funny twist to that, which I’ll come back to, which was , uh, at the time, people remember Gerald Ford and Allen Greenspan, who was on the Council of Economic Advisors at.

[00:05:20] Jim Rickards: They came up with this campaign, they had little buttons that said Win W i n and that’s stood for whip inflation. Now that was the whip inflation now campaign. Well, they whipped it. Okay. We had a severe recession in 1974. I remember I graduated from college in 73. I kept going to school because I guess it was easier than getting a job.

[00:05:37] Jim Rickards: But I was in graduate school at the time. But all my friends got out and they went to Wall Street and they were like, yeah, I’m on Wall Street. And you know, of course six months later I seen in New York, they were all fired because this recession, there was a stock market crash. But then the inflation came back because the oil price didn’t go away.

[00:05:51] Jim Rickards: And then we had two grossly incompetent chairs of the Fed, Arthur Burns and Jim William Miller. They put the pedal of the metal with money supply. Then the inflation took up, but then it morphed. Over to the demand side, as I described earlier, and by, you know, the late seventies, the city of seventies, 7 78, I started my career.

[00:06:09] Jim Rickards: I was working as a lawyer at Citibank, and it was funny, your boss would just give you a raise just because they’d say, Hey, here’s another $20,000 or whatever. You didn’t, you didn’t even have to ask. Inflation was so out of control, they were just handing out raises so people could keep up so they wouldn’t quit their jobs.

[00:06:23] Jim Rickards: And then finally, Volcker came along and crushed the whole thing with 20% of interest rates. So that was started from the supply side. Went to a mild actually not a mild recession, that was a severe recession in 74, but morphed over to the demand side, and then finally had to be crushed by the Fed. So here we are today.

[00:06:38] Jim Rickards: We have the inflation from the supply side. That’s very clear. There’s no evidence that the inflation, at least not yet, is coming from the demand side. The demand side is still very subdued, and that’s because the Fed is determined to get ahead of it. Unlike what happened with, I mentioned Arthur Burns , but William Miller J Powell learned the lessons of Paul Volcker

[00:06:57] Jim Rickards: he’s raising rising rates very rapidly. But here’s [00:07:00] the problem. The Fed can’t do anything about the supply side. They don’t drill for oil. They don’t build cars. They don’t plant crops. They don’t drive trucks. They don’t do anything to alleviate the bottlenecks on the supply side. The only thing they can do is raise interest rates so high that it destroys demand and basically crushes the economy.

[00:07:18] Jim Rickards: But ask yourself if the inflation’s coming from the supply side, and you can only control it from the demand side. How much demand destruction do you have to do to actually affect the supply side? The answer is a lot. You basically got to throw this economy into a very severe recession. So the inflation is here today.

[00:07:34] Jim Rickards: Again, it is at the store, at the gas pump. You see it everywhere. But the Fed is going too far. It’s not a big analytical challenge to say the fiscal committee mistake, because that’s all they ever do. They’ve made nothing but mistakes since 1913. But they’re going to crush the economy. They are going to get rid of the inflation.

[00:07:50] Jim Rickards: It’s going to come down more quickly than people expect. They will have to pivot. I mean, J Powell has told us they’re going to raise interest rates 50 basis points on December 14th. I’ll hit it and I would expect they’ll raise them maybe another 50 basis points. February 1st. We have the 2023 calendar for the Fed F omc, maybe 25 basis points in March.

[00:08:10] Jim Rickards: And there’s three more rate hikes from here from today. But they’re going to go too far. They, they’ve already done enough. They’re already at the terminal rate. They just don’t know it. They’ll be the last ones. Throw the economy in a recession and then here comes first disinflation and deflation.

[00:08:26] Jim Rickards: Disinflation is still a kind of inflation, but it’s coming down and it behaves more like deflation than inflation in terms of expectation. So inflation goes from eight to seven to six to four, you know, zeroing on two, which is the fed’s target. It’s still inflation, but when it’s coming down like that, it’s much more of a deflationary dynamic.

[00:08:45] Jim Rickards: So we have inflation now, we’ll have deflation, disinflation, and deflation sooner than people expect. A very severe recession because the Fed is raising rates too high, too fast. They’ve blown past the terminal rate. The terminal rate is not j hell, doesn’t know what the terminal rate is, but it’s kinda like Potter Stewart.

[00:09:02] Jim Rickards: He’ll know it when he sees it. And the point is the terminal rate is defined as that rate, which brings inflation down on its own without further rate increases. You can get there and sit tight and the inflation will come down. That’s true. It works that way, but we’re probably already there. Inflation is already turned around.

[00:09:20] Jim Rickards: But Powell doesn’t believe it doesn’t want to blink, so they’re going to throw the economy into very bad recessions. So get ready for the deflation coming soon. 

[00:09:29] Trey Lockerbie: Maybe describe for the audience why the fed can’t have deflation or at least doesn’t want it. Right? They’re, they’re very much against deflation. So if they do go too far and we enter into a big bout of deflation, what would their response be? Just assuming it’s not part of their ultimate goal. 

[00:09:46] Jim Rickards: Well, I can tell you what the response will be. I can also tell you right now it won’t work. Deflation is essential. Banker’s worst nightmare. And there’s several reasons for this. Well, the obvious one is that it increases. The real value of debt in deflation is funny.

[00:09:59] Jim Rickards: If you have cash people, Hey, cash, because there’s no yield and deflation, cash can be your best performing asset because even though the nominal return is quite low, the real return can be quite high. If you have deflation of 2% and your money just stays constant, your money’s worth 2% more because, That’s what deflation prices go down so your money goes further.

[00:10:19] Jim Rickards: So it’s worth more in a world of 2% deflation, the real return on your cash is plus two. Even if the banks pay you zero because it’s worth 2% more. It helps creditors, but it hurts Debters. But who’s the world’s biggest debtor? United States government. So they don’t want the real value of the US debt. 31 trillion would go up in a deflationary environment, and they don’t want that.

[00:10:42] Jim Rickards: That’s one reason. But the real reason, the more powerful reason, this is what keeps ’em up at night. They can’t stop it. See, with inflation, the Fed has always been confident. You get inflation, okay? They don’t want it, but it happens. But when it does, we can crush it with high interest rates. And that’s what Volcker did, and that’s what J Powell’s doing, right?

[00:10:59] Jim Rickards: But when you get deflation, they don’t have any tools. Now they’ll do qe. The QE is a joke. I mean, QE is like a mirage or a psychological game. They play with people. How does QE actually work? Well, the way it works is it’s money printing of a kind. So the Fed buys bonds from dealers, from the primary dealers by treasury notes or bills, et cetera.

[00:11:18] Jim Rickards: They call out, they get an offer. Offer. They say Don the Goldman or city, whoever it is, sends the treasury notes to the Fed and the Fed pays for it with cash that comes out of thin air. What do the banks do with the cash? They give it back to the Fed as excess reserves, so that money doesn’t go anywhere.

[00:11:33] Jim Rickards: You’re inflating two sets of balance sheets, the bank and the fed. The money doesn’t get loaned out. It doesn’t get spent. It doesn’t increase velocity, it doesn’t create jobs. The money doesn’t go anywhere. It just sits on the Fed’s balance sheet, so you can do it. They did do it. They increased their excess reserves to 9 trillion back in the pandemic back in 2020, but didn’t do any good.

[00:11:54] Jim Rickards: The other thing they can do is take interest rates at zero and they will, this is the famous pivot. Wall Street correctly anticipates the pivot in the ways that the Fed does not. But where Wall Street gets it wrong is they think the pivot’s a good thing in the sense of, oh, well the Fed’s going to over tighten and inflation’s going to come down and they’re going to realize it and pivot to interest rate cuts.

[00:12:13] Jim Rickards: And so that’s the soft landing. And biotech stocks, that’s kinda how Wall Street thinks about it. Very kinda one, not even two dimensional. The reality is the Fed is plundering. They are raising rates. Inflation is going to come down, they are going to have to cut rates, they’ll be the last to know, but they’ll be cutting rates for a very bad reason, which is we’ll be in a severe recession, stocks will be down 30%.

[00:12:33] Jim Rickards: So the idea that you’re going to have a Goldilocks ending or self landing is not true. The Fed will pivot, but they’ll pivot too late. The damage will be done and the damage to the economy, as they say, will be severe. And getting back to deflation, they can lower a rates to zero and they will. But then they’re stuck.

[00:12:49] Jim Rickards: There is no evidence that negative interest rates are more easing, if you want to call it that. Europe, Switzerland, and Japan. Other countries have all tried negative interest rates. They don’t work. In fact, this is a good example of how PhD economists lack understanding of the economy and common sense. So their theory is, if I cut rates from two to zero, that’s stimulative.

[00:13:12] Jim Rickards: Well, it isn’t really, but they can pretend that. So if I take them negative, it’s more stimulative. But everyday citizens in the United States, they look at that and they go, wait a second. Why does the Central Bank have negative interest rates? They must be scared to death of deflation. And if they are, I’m going to save my money.

[00:13:28] Jim Rickards: I’m not going to spend it. First of all, the money will be more valuable as I described. It also means there’s a really bad economic outcome on Horizon, which is exactly when you would want to spend less, save more, you know, build up cash reserves. So the idea of lowering interest rates into negative territory is, Hey, you better go out and spend it because you know you’re going to lose it if you keep it in the.

[00:13:48] Jim Rickards: But people do the opposite. They hoard it, but actually it’s worth more in real terms, as I described. So you get the opposite of what they think. But again, the economists lack common sense. So negative interest rates don’t work. QE doesn’t work, nothing works. You can’t get out of deflation. There’s only one way out.

[00:14:04] Jim Rickards: And this was shown, by the way, everything I’m describing actually took place between 1929 and 1933 during the worst stage of the Great Depression and fdr, one of his first jobs, I mean, FDR was sworn in. The first thing he did, like on the first day or second day by executive order, he closed every bank in America, every bank in the United States.

[00:14:22] Jim Rickards: Can you imagine a president getting on TV today and saying, my fellow citizens, as of now, all the banks are closed, all them. We’ll get back to you when they reopened. Well, that’s what he did in 1933. And then they went through like a phony stress testing and reopened them a week later. And that worked okay.

[00:14:36] Jim Rickards: But his other problem was de. And the way F D R broke the back of deflation and we had very good growth in 33, 34 and 35, he devalued the dollar against gold and he raised the price of gold, 75% from $20 ounce to $35 ounce. And it wasn’t to enrich holders of gold. In effect, he confiscated all the gold first and then devalued the dollar.

[00:14:59] Jim Rickards: So it was like an inside trade. He had all the gold. So he took the profits for the United States Treasury instead of US citizens. But that aside, he didn’t do it to reward holders of. He did it to break the back of a deflationary psychology. What he wanted and what he got. If the price of gold went up, which he did, the price of corn, wheat, steel, energy, everything else went up and he turned the deflation around, turned it into inflation.

[00:15:23] Jim Rickards: 1933 was a great year for the stock market. So it was 1934. We had good growth. Unemployment came down, stocks rallied, and then the fed, you know, right on queue, screwed it up again in 1937 with premature monetary tightening. We went into a second severe recession in the middle of the Great Depression. But getting back to the point, what can essential bank do about deflation?

[00:15:43] Jim Rickards: The answer is nothing but a government, a treasury, and a White House can devalue the dollar. Now, it doesn’t do any good to devalue against euros or yen or you know, the Chinese yuan or any other currency because that’s the race to the bottom. But my first book, currency War was about, you know, I devalue the new devalue, then I devalue some more, and you devalue some more.

[00:16:02] Jim Rickards: We never get any further ahead. In fact, it’s a negative sum game. But gold is different. Gold can’t push back. If you devalue against gold, gold just sits there. They can’t devalue. It’s not a currency. There’s no central bank of gold. So it’s perfect for that. The problem today, of course, is that we’re not on a gold standard.

[00:16:17] Jim Rickards: You can’t break a peg that doesn’t exist. So you don’t even have the F D R toolkit from 1933. So deflation is one of the most serious economic problems you can have. It keeps the central bankers up at night because they know they can’t do anything about it. And you can’t even play the gold card because you don’t have a gold standard, you don’t have a gold page. So it’s a very, very serious problem. 

[00:16:39] Trey Lockerbie: So touching on gold there for a minute, because I know you’ve been a big proponent of gold throughout this fact in the book, and I think this is something that, you know, if you’re just going about your normal. You don’t really think about this, but you highlight that inflation, even at its average rate of around 3%, cuts a dollar in half in about 23 years.

[00:16:56] Trey Lockerbie: So if we start to see disinflation or deflation, and we [00:17:00] just get down to like a five or 6% range, I mean, for a prolonged period perhaps, how does an investor best protect themselves, whether it’s gold or maybe some other assets. 

[00:17:09] Jim Rickards: Sure it, it’s a very good example. You know, I use calculus when I have to, but I always tell people most economic problems can be solved with like fifth grade math.

[00:17:17] Jim Rickards: To your point, trade, let’s just take 6% inflation. It’s pretty high. 6% inflation cuts the value of the dollar and half in 12 years. Okay, 12 more years, it’s half again. So from birth to the age of 36, which is this kind of your early, mid-career. The value of your dollar has been cut by 84%. That’s with 6% inflation.

[00:17:37] Jim Rickards: Of course, you know higher rates of inflation even faster, but even 2% inflation cuts it in half. In 35 years, half again, in 35 years, average lifetime to the age of 70, your dollar has purchasing power has been cut by 75%. That’s what, 2% inflation? Not that high. Why central banks think that’s the target rate?

[00:17:54] Jim Rickards: I have no idea. The way I’ve described it is it’s like eight little kid who sees a lot of money in his mother’s purse and it’s like 50 bucks. If I steal the 50 bucks, I’ll get caught, but if I take two bucks, nobody will notice. So I’ll just take the two. So the Fed figures a very low rate of inflation over a long enough period of time, diminishes the value of the dollar and helps to pay off the national debt, and that is what we did from World War II until 1980.

[00:18:17] Jim Rickards: Now the debt to GDP ratio went from 120% to 30% when Ronald Reagan was sworn in, but it’s been going up ever. So that’s why the Fed likes a little bit inflation, but not enough to notice. I would put it that way. But the danger is in trying to get there, they go too far because they don’t really know what they’re doing.

[00:18:33] Jim Rickards: If they do in theory, but their models don’t work and they actually end up in this deflationary trap that we talked about. Now, where does gold come in? Gold holds its value. It doesn’t mean I have a lot of, I know a lot of people have asked gold. I talk about gold all the time, and they’re like, you know, they, particularly the Austrians, you know, they’re banging the table.

[00:18:49] Jim Rickards: We have to go back to a gold standard, get away from a fractional reserve bank and let’s have a gold standard. I say, well, be careful what you wish for. because if you have a gold standard, you’re not going to make any money. Gold will be pegged then that’ll be that. You might as [00:19:00] well, you know, go to sleep. It’s only in a world without a gold standard where you have blundering central bankers that the price of gold goes up a lot and it preserves wealth.

[00:19:08] Jim Rickards: You know, I mean, Gold’s been going sideways for a few years at NA and peak of 2030 $9 an ounce in March, 2021. So very little over a year ago, about a year and a half. But in 1999 it was $200 an ounce. And today, if it’s 1800, okay, it’s not 2000, but 1800, that’s still nine times your money in about 23 years.

[00:19:29] Jim Rickards: So it does this job, but certainly in inflation we’ve been talking about inflation, deflation In the tug of war, we have inflation. For the short run, we’re going to have disinflation borderline deflation early in 2023 cause we’re going to have a very severe recession. But if the Fed decides to print money to get out of the recession, then the inflation may come roaring back again. So it’s like a pendulum, but gold will serve you very well through those cycles. 

[00:19:52] Trey Lockerbie: So wanted to highlight another aspect of this, which is the velocity of money, which has been declining since the late nineties and has [00:20:00] only begun to take up slightly from its all time low. So I’m wondering, does this play into the idea that inflation has peaked, and this is the argument for deflation, and how much should investors be watching velocity in their kind of macro assessments here?

[00:20:14] Jim Rickards: Velocity is as important as any other variable. It explains why all the people screaming about money printing, you know, don’t really understand the interaction of monetary policy and economic growth. So a lot of ways to write the GDP equation, a lot of ways to calculate it. But one of the ways that the Monetarists do it, and Milton Friedman advocate this, so the really Irving Fisher invented it much earlier, you know, in the 1920s.

[00:20:39] Jim Rickards: But a very simple equation, not to get too geeky, but M times V equals P times Q. Well, M is money supply. We kind of all know what that is, and people watch that. V is velocity, which is the turnover of money. And just to illustrate that, you know, if I go out to dinner and tip a waiter, and the waiter takes the tip money and takes an Uber home, and the Uber driver puts gas in her car with the tip money, my dollar had velocity of three.

[00:21:02] Jim Rickards: It supported the tip. The tip, the Uber driver, and the gasoline. So my $1 produced $3 of goods and services. But if I stay home and watch TV and don’t spend any money, I have velocity of zero. So velocity is just that turnover of money. How rapid is it? And I remind people that the money supply is now about 25 trillion, but 25 trillion times zero is zero.

[00:21:24] Jim Rickards: Meaning if you don’t have velocity, you don’t have an economy. So it’s not just money supply, it’s money. Supply times velocity equals nominal. G D P and no, only GDP has two parts. P is a price index and Q or Y, you know, different people use different variables is real gdp. So you take real GDP times the price index gets you nominal gdp.

[00:21:44] Jim Rickards: So the Y is inflation or deflation. So Milton Friedman looked at that and said, well, okay, we want Y to be one. Meaning we don’t want inflation or deflation, we want nominal G D P equal to real G D P. So we want Y to be one real G D P in a mature industrial economy can grow about three and a 5%. And that’s about right.

[00:22:03] Jim Rickards: It was right about that. It varies, but that’s a pretty good central tendency. So looking at the other side, he said velocity is constant. So it’s pretty simple. If P is one and Y can only grow at three and a half percent and velocity is constant, then all you have to do is dial the money supply up or down to target.

[00:22:22] Jim Rickards: You know, no inflation, no deflation, maximum real growth. And that’s monetary Nirvana. And he Freeman used to joke, you know, you don’t need a board of Governors, the Federal Reserve, you just need a computer to do what I just described. There’s a little more to it than that, but that’s basically it. But Freeman was wrong about one important thing, which is velocity is not constant.

[00:22:39] Jim Rickards: It was from 1950 to 1980, which is the main part of his career. So maybe you cut him a break there, but velocity is not constant. It has plunged velocity is just GDP divided by money supply. But there are different measures of money supply. I always find it curious. Everyone thinks they know what money is.

[00:22:53] Jim Rickards: Well, the Fed doesn’t know cause they got M zero, M one, M two, you know, they’re making it up as they go along. But if you take M one, which is the Fed money currency, plus bank checking accounts, which is a pretty good measure in my view. That velocity has gone from 10 to one in the last 10 years in those $1 used to produce $10 of business services.

[00:23:12] Jim Rickards: Today it produces about $1 of business services and dangerously close to getting below one where you could actually print money and it would reduce GDP because people are hoarding it, not spending it anyway, it ticked up a little bit very recently, but it’s not clear that that’s going to be sustainable. But we’ll see.

[00:23:27] Jim Rickards: But either way, the velocity has. And this is why we never had any inflation of any magnitude from 2009 to 2019. So from the end of the global financial crisis to the pandemic. So those are kind of extreme bookends, if you will. But for 11 years from 2009 to 2019, average annual growth was real. Growth was 2.2%.

[00:23:49] Jim Rickards: It wasn’t 3.5, which you know, Friedman can hypothesize. It was 2.2 and inflation was barely at about 1.6. The fed’s target was two the whole time. They only got there a couple times and it didn’t last for more than a month or two. I always say it’s a sad day when essential bank wants inflation and they can’t get it.

[00:24:06] Jim Rickards: So the whole time the Austrians are screaming, and I shouldn’t pick an Austrian, the neo canes ends and monitors said the same thing. You know, money supply, money, supply fed printing, fed printing are going to cause inflation. There wish no inflation. It just wasn’t, the Fed couldn’t even reach their. But the reason was velocity.

[00:24:22] Jim Rickards: The money printing was there for sure into the trillions, but the velocity wasn’t. So here we are today. The Fed, by the way, for those screaming about money supply, money printing, the Fed is burning money. The Fed is actually reducing the balance sheet. They’re reducing M zero, which is their base money by selling bonds to Wall Street so that it’s the opposite of money creation.

[00:24:42] Jim Rickards: When you sell the bonds, you get the money and it disappears. When just as the Fed creates money outta the thin air, the money disappears into thin air once it gets inside the Fed. So the Fed is not only raising interest rates, they’re reducing their balance sheet, they’re reducing the money supply, and I expect that’ll hurt velocity even more.

[00:24:59] Jim Rickards: So this is really extreme for our money tightening, which will cause the recession we talked about. 

[00:25:05] Trey Lockerbie: I’d like to segue here and talk about supply chains, which is what this book is not all about, but at least half or so of the book is really this huge deep dive into how supply chains work and why they’re important.

[00:25:17] Trey Lockerbie: And I wanted to kind of call out what you, I don’t know if you came up with this phrase yourself, but you refer to it as this meta supply chain. That’s what we’ve evolved into now. So as we enter this new age of potential de-globalization, well first of all, explain what a meta supply chain is, but then also how does the meta supply chain unwind potentially in de-globalization, and what would be the risks in ramification of that?

[00:25:41] Jim Rickards: Sure. Well, let’s start with a simple supply chain and we’ll kind of build up from there. So you’re in a supermarket and somebody’s buying a loaf for bread, and you say to them, where’d the bread come from? And you go, oh, well, there’s a bakery on the other side of town and they bake it, and they send it over here on a truck and I buy the bread.

[00:25:55] Jim Rickards: Okay, that’s a simple supply chain. But even that, it’s not so simple because who made the truck? You know? Where’d the diesel come from? Where was that refinery? Where’d the truck driver get his training, et cetera? Oh, the law for bread? Well, it has a wrapper. Was it plastic or paper? Well, it could be either one, but that came from somewhere.

[00:26:11] Jim Rickards: And, and then you get over to the baker. But let’s just go further. So looking at the baker, how did they bake the bread? Well, they baked it in an oven. Where’d the oven come from? You know, it’s got tempered glass and steel and the semiconductors and thermostats and all kinds of parts. Might be from 15 or 20 different countries that was assembled and put together, and then the oven was produced.

[00:26:30] Jim Rickards: Well, how do you make bread? Well use flour Well, okay. Where’d the flower come from? Oh, it came from the middle. Okay. Well how did it get from the middle to the baker? Well, it came on a truck. Oh, another truck, another diesel, another driver, et c. How did the mill make the flour? Where did they get their ingredients?

[00:26:45] Jim Rickards: Well, they got wheat from the farmers. Really? How did it get there? Well, it came on a train. Well, trains run on diesel, who built the train? You know, et cetera. Then back to the farmer where the farmer get the seas, and by the way, the farmer needs tractors and diesel fuel and workers and gps and a lot of other scientific equipment, irrigation systems, and they need fertilizer nitrogen fertilizer to grow the wheat.

[00:27:04] Jim Rickards: And where does that come from? How does it come from Russia? Russia’s in a little war right now. We’re not buying their fertilizer, you know, so forth. So you can kinda keep going. So that’s what’s called the extended supply chain. So Baker does store is the simple supply chain, but you know, farmer fertilizer, on the one hand from Russia to the store with all those intermediate inputs is the extended supply.

[00:27:24] Jim Rickards: But then if you think about it, if you think of the supply chain as being horizontal from, you know, farmer to store with 10 stops in between the transportation lanes, every one of those intersecting points is a vertical supply chain. Again, all the components in the oven, all the components in the truck, et cetera.

[00:27:41] Jim Rickards: And you pretty quickly, this is where I, I say this in the book, the supply chain is not part of the economy. The supply chain is the economy and the meta supply chain is this vertically and horizontally expanded supply chain of supply chains that I described. And you can just kinda keep going in terms of inputs and all the way back to mines and semiconductor fabrication plants and so forth.

[00:28:02] Jim Rickards: And you realize that if it’s not literally infinite, it might as well be infinite because you cannot model it. You can model it theoretically, and you can do some computational work around it, but there’s not enough computing power in the world to end, nor is there all the data in the world, nor enough proper algorithms take everything I just described and put it into a computer.

[00:28:18] Jim Rickards: It can’t be done, but you can manage it in certain ways. So that’s the meta supply chain. But I also talk about what I call supply chain 1.0 and Supply Chain 2.0. And to your point about where this is all going. So supply chain 1.0 I date from 1989 to 2019. So what happened in 1989? I mean, I actually start the book with a story in the introduction about a shipwreck found off the coast of Turkey in a place called Ulu Barro by a sponge diver.

[00:28:46] Jim Rickards: It was a Bronze Age shipwreck dated to around 1200 bc. It was a sponge diver who found a pot, and he, he said, had the ears. Well, experts knew the ears were handles, and let’s say you moved the pot around, but notified the authorities, the Turkey archeological. The bureau went in, they did the 10 year underwater excavation, and it was by far the most laden interesting, diverse shipwreck they had ever found.

[00:29:09] Jim Rickards: Again, we’re talking the bronze Age, but in that vessel they found amber. Which comes from the Baltic region. They found gold, which comes from, at the time, came from Sudan, not far from the equator. They found weapons, which were made in present day, Syria, Damascus what was Phoenicia at the time? They found figs and olives and olive oil, which would’ve come from Italy or Greece.

[00:29:31] Jim Rickards: They even found a little carving of Queen Nephite, which is probably on its way to Alexandria Egypt. Point is I plotted out all those locations and you know, the Baltic Sea, not that far from the Arctic Circle. Sudan, not that far from the equator. As far east as present day Iran, Persia, at the time as far west as you know, Italy, maybe Spain, it was 5 million square miles.

[00:29:51] Jim Rickards: That’s how big that supply chain was on a single vessel in 1200 bc. So there’s nothing new about supply chains, but what was new in 1989 was supply chain science. It was a combination of increased computing power, algorithms, applied mathematics, artificial intelligence, better data collection. With that toolkit, you know, engineers and scientists, mathematicians could get a much better grip on supply chains and make them more efficient.

[00:30:15] Jim Rickards: You know, in terms of things like just in time delivery and, you know, with sourcing certain, you know, reducing your number of supply or your transport lanes and, you know, reducing a number of warehouses, et cetera. You know, Walmart invented something called cross docking. It used to be a truck pulled up in a warehouse and they moved the goods from the truck to the warehouse, and another truck pulled up.

[00:30:33] Jim Rickards: They picked the goods outta the warehouse, put ’em on the truck, and went on its way. And Walmart said, wait a second, why don’t we skip the warehouses, move it from truck A to truck B, send it to its destination, that’s called cross docking. And they did. And that’s very efficient. And for that matter, what’s the idea behind a big box store?

[00:30:49] Jim Rickards: A big box store like Costco or Walmart is the warehouse. They don’t need warehouses because the store is a warehouse. So all that was done in the name of efficiency and cost reduction and it worked. And cost reduction could either mean higher profits for a supply chain participant or lower cost for consumers.

[00:31:07] Jim Rickards: And in practice it meant both. So it was very, very efficient in that respect. But something else happened around that time, which was 1989. You had the fall of the Berlin Wall, 1999, you had the dissolution of the Soviet Union. In 1992, Deng Jin conducted what he called the Southern Tour, which was really when China entered the global economy.

[00:31:25] Jim Rickards: They had some success in 1980s, but that went off the rails in 1989 with the TNA Men Square Massacre. And the US backed away from China. I was traveling in China at the time in 91, 92, and I went all over. It wasn’t like in downtown Beijing. I was in Wuhan, actually Ji elsewhere. I didn’t see a single American.

[00:31:44] Jim Rickards: I mean, there were Brits, Germans, Ozzies, but no Americans. But in 92, we patched things up, and then that’s when China really started to boom. So in this very compressed period from 89 to 92, you had the fall, the Berlin Wall, the Soviet Union, the opening of China, new Republics in Central Asia, more in independent republics in Eastern Europe and so forth.

[00:32:03] Jim Rickards: And that was the beginning of the edge of globalization. And I had been involved in international finance and, and long commerce for a long time before that. And in the nineties, you know, my kids were college Asia at the time, and their friends, all they wanted to talk about was globalization. I said, well, what’s this globalization?

[00:32:18] Jim Rickards: We did international economics for a long time, but globalization really was new because now China was in the game, Russia was in the game. Supply chains were longer. Supply chain science worked, and it became more and more and more efficient and reduced costs. But here’s the problem. When something’s that densely connected, when something’s as complex and that stretch, there were hidden costs, the visible costs were passed along to the consumers, but the hidden costs were not taken into account.

[00:32:44] Jim Rickards: When something that is that complex is extremely fragile, extremely fra. To the point that if one aspect of it, one link in the chain breaks, the whole thing collapses. And that’s where we are now. We’ve reaped the benefits of what, you know, Walmart car calls everyday low prices, but we’re now paying the cost of the hidden costs of the breakdown.

[00:33:02] Jim Rickards: I can give you another concrete example. So Germany’s very well known for their car manufacturing. So you got Mercedes and Pality and BMW and Volkswagen and the rest. Well, it turns out in a car there’s about a hundred miles of wire, which is not surprising. You mean to think of all the connectors and gauges and lights and radios and, you know, telecommunications, you name it you’ve got all the wire.

[00:33:23] Jim Rickards: We can’t just throw the wire on the front seat or stick it on the floor. They have these conduits, these custom made plastic conduits that they run the wires to, and it’s one of the first things you have to put in the car, in the assembly line so you can get all the wires to where they’re supposed to go.

[00:33:36] Jim Rickards: Turns out those conduits are made in Ukraine. Well, sadly there’s a little war going on and they can’t get those conduits produced, so you had to shut down. This did happen. Shut down BMW assembly lines in Germany because you couldn’t get a single plastic part from Ukraine. Now you, you call around, you scramble, you find another provider.

[00:33:56] Jim Rickards: You know, eventually someone has that part, but it just goes to show how fragile the whole thing is. And then that’s just one example. I could give you many, but you take the point that as these things break down and in a complex system when it starts to break down, I mean, the best way to understand it, I don’t like to overuse metaphors, but sometimes they’re helpful.

[00:34:13] Jim Rickards: If you have like a beautiful Oriental Boz and somebody like knocks it over and it breaks into 5,000 pieces. You don’t sit there on the floor and try to put the pieces back together. You’ve gotta go get a new boss. And that’s what happened to the supply chain. It’s broken. It cannot be put back together.

[00:34:29] Jim Rickards: It’s just cascading one cascading failure after another. And we’re going to need a new supply chain. They’ve always been around. We’ll get into one, but it’s going to look very different. 

[00:34:37] Trey Lockerbie: I’m curious to see what you think about the recent news of Apple onshoring. Its production and T S M C building chip factories now in America, and what that might do to inflation.

[00:34:48] Trey Lockerbie: Does that mean apple’s margins go down, or does that mean iPhone prices go up? 

[00:34:53] Jim Rickards: Well, maybe both, but this is an example of what I call supply chain 2.0 and yeah, the insuring example, it is true and you know, people kind of root for that, how you get more high paying jobs in the United States, that’s a good thing, but it’s a lot bigger than that.

[00:35:06] Jim Rickards: Take what you just said and you’re exactly right, and just kind of expand that. So Taiwan Semiconductor, good example, largest and most sophisticated semiconductor producer in the world by far. They’ve got the best chips and they’re huge. So they’ve announced, as you described, Trey, and you’re right, they’ve announced 40 billion to build four new semiconductor fabrication plants, so-called fabs in the Phoenix area.

[00:35:29] Jim Rickards: Well, wait a second. They can build them in Taiwan. They can probably build ’em in China or Vietnam. Why are they building them in Phoenix? The answer is that there’s a danger and probably a growing danger that China might invade Taiwan. And the US military has a doctrine, we call it the brokenness theory, and it’s based on a Chinese proverb, ironically.

[00:35:49] Jim Rickards: And the proverb is, if the nest is broken, how can the eggs survive? And the answer is they can’t. So tsm c Taiwan semiconductor know that if China and invades we know that if China invades Taiwan, the US military is going to destroy Taiwan semiconductor physically. Whether you burn into the ground, bomb it, whatever it takes, destroy it.

[00:36:08] Jim Rickards: because we don’t want it to fall into Chinese hands. Taiwan semiconductor know that. So they’re like, okay, well we want to survive as a company. We’ll build in. So on the one hand, it’s a defensive place, so the company survives if there’s an invasion by China. But on the other hand, it’s a really good example of ons ensuring, and by the way, what are you doing?

[00:36:25] Jim Rickards: You’re reducing those supply chains. Remember I said they were 9,000 miles long from S in New York or Shanghai to Amsterdam. Well now you’re compressing them, you’re making it simple. It will probably increase costs in some ways in the short run. Maybe reduce margins to some extent. But I describe it as like buying insurance.

[00:36:43] Jim Rickards: You know, you have insurance. I have insurance. Nobody wants their house to burn down. But if, sadly, if something happens, you’re glad you have the insurance. And when you pay that insurance bill, when you write a check or you know, pay it online or whatever, You don’t think you’re wasting your money.

[00:36:56] Jim Rickards: You’re incurring a cost, but you say it’s money well spent because I’m getting insurance against this catastrophic outcome. It’s the same thing with supply chains. You know, maybe skilled labor in Phoenix is a little more expensive than skilled labor in Taiwan. Maybe not, by the way. That’s an interesting question.

[00:37:10] Jim Rickards: But even if it is, you’re getting robustness in resilience that you don’t have sitting there with your factories in Taiwan. G Yellen coast is friend shoring. We’re going to, you know, bring our trading relationships to friendly countries. Manuel Macron is called it Constellation of Nations. He has a vision for a new EU that would be, I guess, side by side, but different rules.

[00:37:31] Jim Rickards: Maybe get the UK involved or whatever. I refer to it in my book as the College of Nations, but basically the idea is yeah, we’ll still have supply chain, we’ll have some outsourcing. We’ll have trade, but it will be like a club. And to be in the club, you’re going to have to be kind of a democratic liberal, you know, in the political sense, society with a good rule of law.

[00:37:49] Jim Rickards: That’s an important part of it that respects human rights. And that would be, you know, the United States and Canada, Australia, New Zealand, and Japan, Western Europe, probably India. You know, people think it’s this emerging market. Well, it is, but it’s the largest democracy in the world. 1.4 billion. So they’ll be in the club and they’ll trade with each other.

[00:38:06] Jim Rickards: But China will not be in the club because of, you know, genocide and killing baby girls, 20 million baby girls and ethnic cleansing and concentration camps and torture and a lot else they’ll be out of the club. They can form their own group and they may team up with aian members, south Asian members central Asian Republics, Russia and others.

[00:38:24] Jim Rickards: But this will be a, probably more than a bipolar world, maybe a multipolar world of clubs who trade with each other inside the club, but not with members outside the club. And that would be kind of a little bit more of the way it was in the Cold War. I remember I think it was late 1960s, maybe early 1970s, PepsiCo announced they were building a bottling plant in near Moscow.

[00:38:46] Jim Rickards: You would’ve thought that world peace had broken out. It was like unbelievable. You know, you get a Pepsi and Moscow, it was one bottling plant. I mean, it wasn’t more than that, but that’s how a restricted trade was at the time that a single soda plant in Moscow was greeted with, you know, cheers to the rafters and Russia, you know, traded.

[00:39:03] Jim Rickards: But they were pretty much just producing oil and, you know, some basic commodity exports. But the world may be going back to a place like that because of, first of all, the need to build more robust resilience supply chains, and also because for a variety of ideological and geopolitical reasons. 

[00:39:19] Trey Lockerbie: So, speaking of China, there a sentence in the new book stood out to me, which was that you claim China’s turn towards totalitarianism is a symptom of weakness.

[00:39:29] Trey Lockerbie: And you go as far as to say that we’ve just seen Peak China, if I’m not misquoting you there. And so this really was interesting because I know your older book, currency Wars was a huge influence on Ray Dalio. He gifted it to his entire company at one point, I believe. But he just wrote a new book as well.

[00:39:43] Trey Lockerbie: And this is the Changing World order where I think he’s alluding to a world where China is actually the rising power and as we’ve just yet to see them become the next world order. Right. So I’m curious where the disconnect is here because it seems to fly into the face of his theories. 

[00:39:59] Jim Rickards: Well, look, I know Ray and he is a great guy and world’s greatest head of manager and deserves a lot of crazy smart guy.

[00:40:04] Jim Rickards: He’s still kind of coming up the curve in terms of history and geopolitics and so forth. But yeah, the conventional wisdom is the 20th century was the American century. The 21st century is going to be the Chinese century or the Asian century, and they’re going to blow past the United States in the matter of years in terms of being the world’s largest economy, higher G D P technology coming on stream, artificial intelligence, quantum computing, stronger military.

[00:40:27] Jim Rickards: It’ll be at at worst, Western Pacific hegemon, if not a global hegemon, and it’s all China and they’re going to roll the world. Everything I just said is wrong. But that is the conventional wisdom and you see variations of that all over the place. You know, Jeffrey Sachs, Richard Haas, you know, Ray Dalio, all smart people, but that’s fundamentally flawed.

[00:40:46] Jim Rickards: Now, the Peak China thesis, and to give credit, and I mentioned the names in the book, there’s been advanced by Michael Becky and I forget how’s last, he’s a scholar at the John Sal’s Club of Vater National Studies. Becky’s a scholar at Tufts University and they took a hard look at this and said, no, this is as good as it gets for China right now.

[00:41:05] Jim Rickards: They point to a number of reasons and I, I can kind of go down the same list. I’ve done the same research. Charles, half the water in China is poisoned. It’s not just dirty. You gotta clean it up before you can use it. It’s poisoned. I know a lot about the mining industry. I invested mines and I know that in the US and Canada, for example, if you use cyanide to extract gold from gold or which you do, that’s pretty standard.

[00:41:25] Jim Rickards: You gotta weigh the cyanide before you use it, then use it, case it, weigh it again, and it better be the same. Like none of that cyanide can escape, you know, careful control and disposal. In China, they do the same thing. They dump the cyanide into the rivers and a lot of ize in terms of mining, industrial output and so forth.

[00:41:41] Jim Rickards: So heth water is poisoned. They don’t have that much water to begin with, not enough of the size of the country. If you look at the geography of China, half of its desert or high plateau or mountains. People picture rice pads less about 20% of the land in like the southeastern corner. Most of it’s quite high and quite dry.

[00:41:57] Jim Rickards: They don’t have enough water to begin with. They’ve got a real estate collapse that makes what happened here in 2007 look like a picnic. They’ve got massive defaults. Not, I’ve been around China, like to say I got mud on my boots, but I was wearing Italian loafers. But I was out on construction sites looking at the ghost cities being built and.

[00:42:14] Jim Rickards: And just to give you one example, in the US when you buy a house, if you get a mortgage, the mortgage lender shows up for the closing and they give the seller the check. You sign the note and they record it. And you’ve got a mortgage in China, they have a mortgage system, but you take out the mortgage before the house is even built, and then you take the money and you give it to the developer and they use it to build the house.

[00:42:33] Jim Rickards: Well, guess what? The developers stole the money. They used it to cover out their debts. The houses never got built, but you still have the mortgage, you sign the note and the banks are trying to collect on mortgages from people who never got the houses. So this is leading to some, you know, that’s not rise demonstrations and social unrest.

[00:42:49] Jim Rickards: And you know, the government’s bail out the banks and the banks are billing out the lenders, but that’s a complete real estate collapse. So the water’s poisoned real estate sector, which is one of their biggest internal investment sectors, is collapsing. There’s a dollar shortage. You see the reserves coming down, treasury information available.

[00:43:04] Jim Rickards: You look at ’em, month by month of reserves are coming down sharply and they don’t have the technological edge. Anything they’ve got, they sold from us or firms in Europe, Siemens, or something like that. And that’s not being cut off. It’s worked for them so far. When I started developing economics in the 1970s and we thought that the hard part was to get from low income to middle income, but if you could do that, then it was straight path to high income.

[00:43:26] Jim Rickards: You would just kind of keep going. Turns out that’s not true. It’s actually kind of easy to get from low income to middle income. You don’t have too much corruption, which is you bring the population from the countryside of the city and you give them basically assembly type jobs. It’s like, people say iPhones are made in China.

[00:43:41] Jim Rickards: Not really. They’re assembled in China. Those parts come from 26 different countries. The semiconductors come from South Korea, but they assemble them in China, but that’s kind of Lego style manufacturing. And you can get there and you can get to $10,000 per capita annual income, although not evenly distributed, but getting from middle income to high income.

[00:43:58] Jim Rickards: That’s really hard and that requires technology and high value added production, and they can’t get there. They’re stuck in what is known as the middle income trap. But the biggest problem, while bigger than everything I just mentioned, is they are facing and is here now. It’s going to play out over a a 50 year, 55 year period, the greatest demographic collapse in history, worse than the Black death.

[00:44:21] Jim Rickards: Worse than the 30 years war, worse than the Spanish flu of 1918, they’re going to lose 600 million people in the next 50 or 60 years. Population’s going to go from 1.4 billion to about 800 million. Now, there are a lot of different equations for gdp, but the simplest one is workforce times productivity. How many people are working times?

[00:44:40] Jim Rickards: How productive are they? That there’s your gdp? How do you maintain any kind of economy if you’re going to lose 600 million people, which they are, and it’s worse than that because they’re losing them because their birth rate is so low. The magic number or the key number is 2.1. If two people have 2.1 kids, that’s enough to keep your population constant.

[00:45:02] Jim Rickards: Like why not to? Well, the answer is infant mortality and not every birth makes it to maturity so they can have. But on average, two people have 2.1 kids that’ll keep your population constant. The replacement rate, that’s the replacement rate earth rate in China right now, they say 1.7, but they always lie about their numbers.

[00:45:20] Jim Rickards: Other experts put it at kind of 1.2. Some people think it’s one that is behind the demographic disaster. But the reason it’s worse is that while you’re not getting new births to replace the population, the existing population is getting older and hundreds of millions are moving into their seventies, eighties, and nineties.

[00:45:37] Jim Rickards: Those age groups are highly age cohorts are highly correlated with Alzheimer’s, Parkinson’s, dementia, various kinds of cognitive decline, all of which are common at that age. They’re incurable and the progressive in the sense that they get worse. So they’re there, they’re alive, but they’re not the least bit productive.

[00:45:54] Jim Rickards: And then you need a large segment of the kind of what’s called working age population 25 to 54 as caregivers. To the people in their eighties and nineties who are suffering dementia. Now, that’s a very worthy occupation, but it does not lend itself to productivity gains. There’s been no, no increase in productivity in giving someone a bath in 5,000 years.

[00:46:15] Jim Rickards: I mean, maybe okay, 1870 indoor plumbing and hot water. Nice going, but that’s it. So you’re taking productive people, putting them as caregivers, which is a, which does not lend as self to productivity increases. A large segment of your population is not productive at all and some many suffering from a severe cognitive decline.

[00:46:35] Jim Rickards: So the portion that’s left who were actually productive working age people doing productive things, not caregivers, and not people in their eighties and nineties, keeps getting smaller. Some scholars estimate that that’s actually inflationary. Because you’re going to need to pay them more. And we did see this after the Black death in the late 14th century, early 15th century, returns to labor went up, wages went up because there weren’t enough workers.

[00:46:57] Jim Rickards: Now, it didn’t last, maybe last 75 years, but eventually the monarchs got the upper hand again. But it was a good, very good period for labor because the third of the European population was dead. 

[00:47:07] Trey Lockerbie: Well the answer I think to how do you grow your GDP with less people is AI and robotics, which might be why they’re so interested in developing that. And there’s a kind of race going on. And as you were talking, I was thinking about this that might also explain or further explain their interest in Taiwan. Right. And, T S M C being based there. You talk about in the book how if China is to invade Taiwan that now would be the time to do that. And if that’s true, then what would be the economic implications? And if it’s not, where does that leave? 

[00:47:36] Jim Rickards: By the way, that is part of this peak China thesis, and the scholar’s name is Hal Brands. I didn’t think of his last name. Hal Brands and Michael Beckett were the two leading proponents of this, but other scholars are looking at the same thing. So I just gave you a long digression on Chinese decline and it’s all, you know, factually based, there’s lot to back that up.

[00:47:54] Jim Rickards: But they said that that makes China more dangerous right now. And the reason is, if you were the rising power, if you had, you know, if the Ray Dalio theory were correct and pic ray, you could mention a lot of people say the same thing if that, you know, increasing power theory were correct. If the US were declining power in China were an increasing power.

[00:48:11] Jim Rickards: What’s the hurry? You wouldn’t invade anything right now. You would just wait. Why not wait until that gap gets bigger? Why not wait until you get relatively stronger than you are today? And then do the invasion be that much easier when you do? But the opposite is the case, by the way. If we know it, the Chinese know it.

[00:48:26] Jim Rickards: China’s a declining power as of now or as of very recently. And if that’s the case, this is as good as it gets. If you’re going to invade, like you may not be stronger than the United States, but on a relative basis, this is as strong as you’re going to get. It doesn’t make sense to wait because you’re going to get weaker.

[00:48:43] Jim Rickards: And if you’re going to do it, do it now. And there’s a lot of historical precedent for this. In 1941, nobody thought the Japanese Navy was stronger than the US Navy, but it was as good as it was going to get because FDR was ramping up production in anticipation of being in World War ii. So the Japanese said, it’s now or never, and they went for it at Pearl Harbor.

[00:49:01] Jim Rickards: Same thing with Germany and World War I. Nobody thought the German Navy was stronger than the Royal Navy. But again, the Royal Navy was expanding. The Germans were stuck. They didn’t have the resources. They said, this is as good as it gets. So that peak Germany, peak Japan, and now peak China is a very dangerous period because it’s not that they’re superior, but the relative strength is at a peak. And if you’re going to go for it, go for it. And that is a danger. 

[00:49:26] Trey Lockerbie: Now circling back to the College of Nations, as you described it in the book, you highlight that for that to work you actually need sound money, and you’ve been pounding the table to raise awareness of the STR’s and I guess gold would be maybe your first choice for sound money to back that.

[00:49:41] Trey Lockerbie: And I’m curious, I have some questions around that. The SDRs, though, are interesting. It’s essentially the IMS currency and they would like to see that become the new global reserve. But it seems like the literature coming out, I’m seeing at least is paving this path more towards CBDC or Central Bank Digital Currency, which is kind of the opposite of sound money.

[00:49:59] Trey Lockerbie: Right. I would think. Right. So is there an argument to be made that CBDC in the US at least, could preserve the global reserve dominance we currently have? Or does it only kind of expedite its demise? 

[00:50:11] Jim Rickards: When we talk about, you know, the rising falls of currencies, you know, kind of broadly and I have mentioned SDRs and I mentioned gold.

[00:50:17] Jim Rickards: To me it’s a horse race. There were probably five or 10 entrances in the horse race, and I talk about all of them, but we’ll see which one comes out on top at the end. But it’s really important in this discussion to distinguish between a reserve currency and a payment currency, because they’re two different things.

[00:50:31] Jim Rickards: Now, the reserve currency is a big deal and you say the US dollar is 60% of global reserves, which it is. That’s not really dollars, it’s not really the currency. The people’s bank in China does not have pallets of a hundred dollars bills, you know, stacked up in their basement. What they have is a dollar denominated security.

[00:50:47] Jim Rickards: So they have treasury bills and treasury notes, which are denominated and priced and dollars, and you need dollars to buy them. But it’s not really the currency that’s the reserve, it’s the security that’s the. And what gives the US dollar its strength in the form of US Treasurer Securities primarily is the fact that you have a large liquid, pretty good rule of law securities market that can absorb global savings.

[00:51:08] Jim Rickards: Now, if you don’t have that, you can’t be a reserve currency because nothing to invest in. You know, it won’t be the Chinese you want, forget it. There’s no Chinese bond market of any magnitude. There’s no rule of law in China and nobody would buy a Russian rubble bond. There’s no good rule of law in Russia, and it’s not just having bonds.

[00:51:24] Jim Rickards: This says, say you started issuing bonds. Well, great. You need dealers, you need primary dealers, you need repo. You need futures. You need options. Settlement clearance, rule of law, hedging techniques. You need a whole infrastructure that takes, oh, you know, at least 10, maybe 20 years to build if you set it out to build it.

[00:51:40] Jim Rickards: The US treasury market has been around since Alexander Hamilton, so we’ve had 230 years to get this right. So it’s going to be very, very difficult to dislodge the dollar as the reserve currency as a payment currency. That’s completely different. When we were kids, we could use, you know, baseball cards and bottle caps if we wanted to.

[00:51:55] Jim Rickards: And basically anything that I wanted to tender that you’re willing to accept is a potential payment currency. Now here, there is a lot more ferment, if you will, the bricks, as you know, Brazil, Russia, Indian, China South. But they now style themselves Brick Plus. So when they have their meetings, they invite Argentina and Iran Turkey and others.

[00:52:12] Jim Rickards: They are working on a new commodity backed currency that they would use for trade between and among themselves, the Shanghai Cooperation Organization, Russia, China, and some of the central Asian republics. But again, they’re welcoming new members, including Pakistan and others they’re working on. There’s something called the Eurasian Economic Union, which is kind of Putin’s answer to the European Union.

[00:52:33] Jim Rickards: Same thing. They’re working on a new payment currency. Comrade Xi Jinping from China is in Saudi Arabia as we speak, meeting with the Crown Prince and the King, king Salman and MBS Mohammed bin Salman to talk about, you know, a lot of things, but occluded among them. Would the Chinese, or sorry, would the Saudi be willing to sell oil for Chinese Yuan?

[00:52:52] Jim Rickards: Again, I’m not saying it’s the reserve currency, it’s not, but as a payment currency, it’s something you could swap in the markets for other kinds of currencies. Yeah, that’s entirely feasible. So that’s going on around the world. One of the things that’s driving it, this was happening anyway, but one of the things that drove it was the US sanctions, which are, and EU sanctions of Russia, which are complete blunder.

[00:53:10] Jim Rickards: I actually teach financial warfare at the US Army War College, and it’s a seminar style in elite class of about, you know, 11 or 12. They’re, you know, lieutenant colonels, navy commanders, folk, colonels, all branches, state department, CIA a and others, but small group, about 12. They’re the future big brains, you know, future national security advisors and so forth.

[00:53:28] Jim Rickards: And when I took the class in April, not far from the start of the war, I said, these sanctions are going to fail. I said, it’s going to be worse than fail because they’re actually going to backfire and hurt the United States more than it hurts Russia. And there’s some skepticism in the class, and I welcome that and I think it’s good, you know, they should express that.

[00:53:44] Jim Rickards: But I was exactly right. The Russian ruble today is significantly stronger than it was at the beginning of the war in Ukraine. Remember, Biden running around, we’re going to destroy the ruble. You know, rubles stronger today than it was then. Russia has not lost oil sales. Whatever Western Europe doesn’t want to buy.

[00:53:59] Jim Rickards: India’s buying it. China’s buying it. India never bought into the sanctions. They’re friends with the United States. They’re a democracy, but they’re like, Hey, this is not our fight, and we’re going to buy all the oil from Russia that we can get. So I said, very little impact on Russia. Some, but not a lot. It’s been awful for Western Europe and the United States.

[00:54:16] Jim Rickards: You know, they ran around and they seized all these oligarch assets. You know, townhouses in Belgravia yachts. You know, we got all this stuff. We’re taking all this wealth away from the oligarchs. Putin should send Biden like a handwritten thank you note. He hates the oligarchs. We’re doing Putin a favor by taking down the oligarch.

[00:54:31] Jim Rickards: Putin’s support. He never wanted to take these guys on cause they, they were somewhat powerful. But what he said was to the oligarchs, this is 20 years ago, you can keep your wealth but keep out politics. Don’t get my way. And they put Korosi in jail. There’s the head of Yukos and he’s been in jail ever since because he didn’t get the memo.

[00:54:47] Jim Rickards: But now it’s even better than that because we’re destroying the oligarchs. And actually some of the oligarchs are taking the wealth back to Russia as a safe haven. Putin’s strength is the military, the intelligence, the Orthodox church, and everyday Russians. Those are the four pillars of his strength. The oligarchs are not part of it.

[00:55:03] Jim Rickards: So that doesn’t affect things one way or the other. But just look at energy prices in Europe. Europe, they’re going to freeze in the dark this winter it’s already happening in, the Germans are running around saying, we got our reserves up to a hundred percent. And you know, natural guest reserves up to a hundred percent.

[00:55:16] Jim Rickards: Well that’s true, but they don’t tell you that the reserves are only 20% of the require. Sometimes they have a hundred percent of 20%. They don’t have the rest. And it’s not coming from anywhere. Not anytime soon, not for years. And we all know what’s going on with energy prices, home heating prices in the United States.

[00:55:30] Jim Rickards: This is feeding the inflation that’s making people poorer. And you know, there’s more to it than that. But the point is, these sanctions have been a complete disaster and what remain so, and Biden said, we’re not removing the sanction until Russia leaves Ukraine. Well, I get news to the president. Russia’s not leaving Ukraine.

[00:55:45] Jim Rickards: You could have had that deal before the war. There’s never been a war that was easier to prevent. But us wanted the war. You know, Victoria Newland and Tony Blanken and Jake Sullivan and Susan Rice, and all the other war mongers in the White House. They wanted the war. They got it Now, good luck.

[00:56:00] Trey Lockerbie: It seems to me like you keep a pretty close eye on gold inflows.

[00:56:04] Trey Lockerbie: I’ve seen you on Twitter and and elsewhere kind of monitoring gold inflows into Russia, especially with the sanctions you just mentioned there. There’s been a lot of talk about the circumvention of the US dollar, but I mean, as of late, from what I’m seeing, it sounds like they’re almost embracing crypto options, you know, perhaps Bitcoin or something of the sort.

[00:56:21] Trey Lockerbie: How do you see Russia adopting sound money in the near future or, or do you agree that that’s still what they’re going after with those inflow? 

[00:56:29] Jim Rickards: Well they did in advance. They anticipated this Elvira Nabiullina, who’s the head of the Central Bank of Russia. I describe her as the only central bank in the world who knows her job.

[00:56:37] Jim Rickards: She built Russian reserves. 20% of Russian reserves are ring gold, round numbers, about 500 billion, a little more, actually about 600 billion reserves, of which over a hundred billion, about 120 billion are in gold. So they anticipated this. And going back to your earlier question, Trey, about why are these other countries looking for ways out of the dollar?

[00:56:57] Jim Rickards: We put sanctions on the Central Bank of Russia now, but I don’t want to debate the war in Ukraine as I bought will, but that’s a separate debate. But my point is the world was shocked, is like, Hey, it’s one thing to, you know, sanction titanium exports or something. You froze the reserves of Central Bank. So countries like Turkey, China, Saudi Arabia, they’re watching this and saying, Hey, what if the US doesn’t like something we.

[00:57:19] Jim Rickards: What if they don’t like us next year and they freeze our reserves, we better get out from under the dollar before that happens. And one of the ways to do that is gold. I mean, buying German buns doesn’t put you much further ahead because Germany’s kind of a vasal state of the United States when it comes to this until they break away.

[00:57:34] Jim Rickards: But gold does it. Gold isn’t an alternative. Crypto is not, my crypto’s not going to come to much, but Central Bank digital currencies will. That’s different. They’re not cryptocurrencies, they’re not recorded on a blockchain. The ledger is maintained by the Central bank or the Treasury finance ministry as the case may.

[00:57:50] Jim Rickards: They’re definitely coming. They’re already here in some places coming soon. The US Biden has signed an executive order, accelerating that path beyond the research, the r and d phase, into a pilot program that it will be coming very soon. And that is the last step in the totalitarian agenda because they’ll have to do two things at once.

[00:58:08] Jim Rickards: They’ll have to bring in the CBD C, but also eliminate cash because we don’t like Central Bank digital currencies. You’ll just say, well, okay, I’ll get a big pile of cash and pay cash, and the heck with that. So you gotta get rid of cash also. But once you do, you’re now in the total surveillance state. So right now, if I go into a bookstore and I buy a book like, you know, I love Ron DeSantis, A MasterCard may know, maybe, maybe not.

[00:58:29] Jim Rickards: They know I bought a book, but all of a sudden the government and the FBI, the Weaponized FBI and the new Ko Nu Gustapo, they’re going to know that I bought a book in praise of one of the president’s political enemies. And that makes me a political enemy. Or if I give a campaign contribution to a Republican politician and so forth.

[00:58:46] Jim Rickards: So they already know you’re there. You’ve got your iPhone. Unless you turn it off and stick it in into Fairday sac, they know you’re there. Through GPS, they don’t know exactly what you’re doing. They could subpoena a MasterCard. I guess that’s, you need judicial help with that. Both the Central Bank digital currency.

[00:58:59] Jim Rickards: They would know. And then they can retaliate very simply with a couple keystrokes. Freeze your account, seize your account. And for example, I say you work and you get a regular job and you get a paycheck. Well, they withhold tax. They’s withholding tax on your paycheck. You get a W2 at the end of the year, file your tax return, do a reconciliation.

[00:59:16] Jim Rickards: But that’s not true for doctors, lawyers, consultants, architects, small business people, entrepreneurs, professionals, et cetera. They don’t have withholding tax. And but all of a sudden they could, they say, Hey, you know, your lawyers, your doctors, we’re going to take 10% out of your bank account every month with a couple keystar.

[00:59:31] Jim Rickards: And again, they’ll send you a 10 99 or whatever, 10 99 crypto and you know, you can sort it out with us a year later on the tax return. Those kinds of seizures freeze us withholdings, political surveillance, weaponized FBI, that will all come to a peak as a result of the Central Bank digital currency.

[00:59:47] Jim Rickards: That’s the bad news. The good news is Americans, I would say people all over the world are extremely adaptive and inventive when it kind of created, when it comes to making new forms of money. When I was a kid, you know, they’re 10 years old. It’d be some uncle or somebody would say, Hey kid, don’t take any wooden nickels, and I was like, what’s a wooden nickel?

[01:00:02] Jim Rickards: Well, it turns out during the Great Depression, there actually were wooden nickel. There was the Fed screwed up, so barely there wasn’t enough money. Communities would make their own money out of wood and paint a little logo on it, and merchants accepted it. It circulated it. It was a way to expand the money supply and they’ll be able to do that.

[01:00:17] Jim Rickards: The reason was to do it, by the way, was silver dollars, which is where the whole American currency system started, just so you know, went out. Mary Silver Eagle, if I’m willing to tender it and you’re willing to accept it, the heck with your Central Bank digital currencies, people will go to that. Once they realize and they’re realizing that this is a tool of political surveillance and political enforcement by weaponized FBI, maybe they’ll have wood nickels, but I think American silver dollars work just fine.

[01:00:42] Trey Lockerbie: Well, Jim, it’s always a pleasure and I always learned so much from your books and also from your interviews, and I’m very excited that we got the opportunity to do this with you today. Best of luck with the book. I definitely want to give you the opportunity to hand off to the audience where you’d like them to find more about you and the book and whatever else you’d like to share.

[01:00:58] Jim Rickards: Yeah, a couple places. I’m the editor of uh, [01:01:00] the, really the number one leading financial newsletter called Strategic Intelligence. So if you just Google Jim Rickards, strategic Intelligence, you’ll find the landing page. I’m very active on Twitter. My handle is @JamesGRickards. Interview, links articles, commentary on baseball.

[01:01:16] Jim Rickards: I put that all out on Twitter. And of course, my book sold out available on Amazon, Barnes and Noble and bookstores in your town. 

[01:01:22] Trey Lockerbie: Fantastic. Well, Jim, thanks again. 

[01:01:25] Trey Lockerbie: All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app, and if you’d be so kind, please leave us a review.

[01:01:31] Trey Lockerbie: It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerbie. And don’t forget to check out all of the amazing resources we’ve built for you@theinvestorspodcast.com. You can also simply Google t i p Finance, and it should pop right up. And with that, we’ll see you again next time.

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