THE GOLD CHRONICLES
with James Rickards and Alex Stanczyk
Post Brexit analysis
Elite economic class is forecasting substantial problems for the global economy
Summary history of the Bank of England
Role of the Bank for International Settlements (BIS)
Analysis of total debt monetization in Japan compromising Shanghai Accord
Jon: Hello, I’m Jon Ward, on behalf of Physical Gold Fund. We’re delighted to welcome you to the latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.
Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.
Hello, Jim, and welcome.
Jim: Hi, Jon. It’s good to be with you.
Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund.
Alex: Hello, Jon. Likewise, it is great to be here.
Jon: Alex will be looking out for questions that come from you, our listeners. Let me just say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview. You’ll see a box on your screen for typing in your question, and as time allows, we’ll do our best to respond to you.
Jim, your warnings were vindicated; Brexit happened. The United Kingdom voted to leave the European Union contrary to the market’s expectations and to the betting odds they seemed to be counting on.
It was a grand drama, and there were plenty of alarmist prognostications. But, of course, the 24-hour news cycle moves on. We have new events consuming our attention now, some of them quite terrible, and the drama of Brexit seems largely to have slipped from view.
My question to you, has it all been much ado about nothing?
Jim: That’s a great question, Jon. It has multiple parts, so I’d like to break them down a little bit and take them one at a time, because there is a lot to say on this. Definitely much ado, but not much ado about nothing; much ado about quite a few significant things. I’ll take them one at a time.
First, a recap because the Brexit vote and the market reaction happened since we did our last Physical Gold Fund podcast. I know listeners have had a chance to learn about this, read about this, and absorb it from a variety of different sources. I assume most of the listeners are familiar with this series of events, but we haven’t really had a chance to talk about it on this podcast.
Just to recap briefly, on June 23rd, there was a referendum in the UK to remain or leave the European Union (the EU). It was that simple; the only question on the ballot. You could vote Remain or Leave, and each camp had very well organized campaigns. The vote was a shock to the markets.
I think it’s important for the listeners to understand why it was a shock. Not just to review the history, but also because, going forward, the type of analysis we did to warn people what was going to happen is the way I do a lot of analysis for gold markets and capital markets in general.
We were using the same tools prior to Brexit that I use all the time. It’s worth spending a minute on how the market “got it wrong.” It’s never really right or wrong; they are what they are. They’re information – aggregated information. The trick is not to think about it in terms of being right or wrong, but to think about it in terms of what the market is telling you.
I’m active on Twitter and have publications, and I was out on other channels on June 20th through the 22nd, the two or three days leading up to Brexit, saying, “Buy gold, short sterling. This is going to be a shock.” We were very well ahead of it.
The reason I said that is because the polls were actually too close to call. I did think that they were going to vote to leave, but I wasn’t hanging my hat on being able to call the outcome. What I was relying on was the fact that the market had decided that Remain was going to win, so the market priced for Remain.
What does that mean in practical terms? In the last couple of weeks prior to the vote, prior to June 23rd, gold dropped about $40/ounce. It went down from about $1,300/ounce to $1,260/ounce. Sterling staged a major rally from about $1.40 to $1.50. It was a 7% – 8% rally.
The markets were fully priced for Remain. I looked at that and said, “Gee, that’s odd. The polls are telling us this is too close to call, and yet the markets are pricing it at an 80% chance that Remain will win. What’s up with that? How do you reconcile those two things?”
The answer, or at least part of the answer, was that the betting odds were showing 80% Remain. There are a couple of big betting venues in the UK with a lot of punters as they call them. There are betting parlors on almost every street corner almost like ATMs in the US. I think Ladbrokes is the biggest, but there are online betting services such as Betfair and some others.
Those were showing 75% odds that Remain would win. The markets were saying, “Okay, we’re going to use those odds and say Remain’s going to win. We’re going to price for Remain.” That’s why sterling went to $1.50 and gold dropped to $1,260.
I said, “Wait a second. What’s going on here? The polls are showing it too close to call, but the betting odds are showing it with an 80% chance of Remain, and the markets are acting accordingly.” I say this not disparagingly, but there’s an old maxim, “A little learning is a dangerous thing.” And it’s true. I like to say that if you’re ignorant of something and you know you’re ignorant, that’s okay. You’re going to be cautious and aware of your own ignorance. If you’re an expert in something and use your expertise with the right amount of humility, that’s a good thing, too. It’s okay to be ignorant if you know you’re ignorant; it’s okay to be expert if you know you’re expert. The danger zone is when you think you know something and you actually don’t.
That’s what happened in this case. A lot of traders, probably in their 30s, had heard about the Wisdom of Crowds phenomenon. It says that somehow if you aggregate a bunch of opinion, that result will be better than other sources of information or other expert opinions.
They were looking at the betting odds, applying the Wisdom of Crowds formula, if you will, saying, “Ah ha, the market is telling us 80% chance of Remain,” and they priced accordingly.
That was a complete misapplication of what the Wisdom of Crowds really teaches and how bookies work. If you know anything about bookies and betting, bookies don’t try to make money on the outcome. They just try to make money on the spread. They try to set odds so that they either make money (which is their first choice) or certainly not lose money.
The amount of money being bet was very heavily in favor of Remain. What was interesting was if you disaggregate that and say, “How many people are betting Leave and how many people are betting Remain?” the answer was that it was about 5:1 in favor of Leave. In other words, five more bets were being placed on the Leave side then on the Remain side.
The problem was the money. Leave bets were little bets: five quid, ten quid, or whatever. The Remain bets had people betting 1,000 pounds. I saw one instance of a woman who bet 100,000 pounds on Remain. The bookies had to give Remain short odds so they didn’t get wiped out.
If you know how bookies work, how odds are set, and you looked at those odds, you wouldn’t necessarily say that the Wisdom of Crowds was saying that Remain was going to win. What you would say is that the bookies were giving Remain short odds because they don’t want to lose a lot of money.
The other key point is that the betting pool generally was not a good reflection of the voting pool. There is self-selection going on. First of all, if you’re going to bet, you have to have money to lose. Not everybody has money to lose. Not everybody has 1,000 pounds they can throw on some bet, no matter how right they think they are. But everybody can vote, because voting is free.
The real Wisdom of Crowds experiment was to guess the weight of the cow or how many jellybeans were in the jar at a county fair. In the classic experiment, some expert would go up to the jellybean jar, get out a ruler and calculator, calculate the diameter and height of the jar, the cubic measure of the jar, the size of an average jellybean, and take into account the curvature of the jellybean, the open space, do all that math, and come up with a number. Generally speaking, that number would not be as good or as accurate as 1,000 people just saying, “I think there are so many jellybeans in the jellybean jar.”
That’s the Wisdom of Crowds. The way it works is that the extreme guesses filter out. Somebody says, “I think there are ten jellybeans in the jellybean jar.” Somebody else says, “I think there are a million jellybeans.” Those two are the outliers that cancel each other out on average. The fact is the average number tends to be highly accurate.
There are a lot of differences between the jellybean experiment I just described and the betting pool. Number one is the fact that there are no barriers to entry in the jellybean contest. You can do it for free. You don’t have to pay to do it, whereas in betting you do.
The other and more important thing is that the people actually stepping up to bet were city bankers. They were people with a vested interest in the outcome, so they were expressing their own biases.
There were a whole bunch of reasons why the betting odds were not a reflection of the actual vote, or a reflection of the polls, for that matter. But the market followed the odds, and that’s where the opportunity was.
The minute I saw that the outcome was 50/50 but the odds were 80/20, that’s the easiest trade in the world. I love those trades, because if you position for Leave and you’re wrong, you’re not going to lose much, because the markets are already priced for Remain. But if you bet Leave and the market is priced for Remain and Remain loses, you’re going to make a fortune. The market has to suddenly re-price and swing the other way.
It wasn’t so much about putting a stake in the ground on Leave versus Remain as saying you want to do the Leave trade with short sterling/long gold, because if it is Leave, the market has to re-price and you’re going to make a ton of money. If it’s Remain, the markets are already priced for Remain and you’re not going to lose very much. We had this “heads I win, tails you lose” situation, which are the best kind of trades.
The lesson here is that going forward, we’re going to have a national election in the US as well as some very big elections coming up in Germany and France next year. I do see these market participants, with a little knowledge of the Wisdom of Crowds but not really expert knowledge, using betting results the wrong way, assuming that’s the Wisdom of Crowds when it’s really the Wisdom of Bookies, and therefore drawing the wrong conclusion.
I’m going to be looking for this. There will be other opportunities like this. As I said, a little learning is a dangerous thing. Sorry to digress so much, but I think that lesson in statistical science, the Wisdom of Crowds and the difference between opinion polls on the one hand and betting odds on the other, is quite significant.
When you show up to vote, all votes are equal. When you show up to bet, the guy with a 1,000-pound bet is going to have a lot more weight than the guy with the five-pound bet. That’s one big difference right there.
That’s part of the reason why markets got it wrong. It was a fascinating thing to watch. I was incredulous and was like, “Wow, look at the pound at $1.50. Look at gold at $1,260. Man, if Leave wins,” which was a very good bet, “these things are going to snap back.” And they did.
Now to the second part of your question, “The news cycle has moved on – is it safe to go back in the water?” The answer is, absolutely not. The media shock is over and the markets re-priced. We instantly had a 14% drop in sterling and about a 5% rally in gold, literally within hours of the polls closing at 5:00 PM New York time, 10:00 PM London time on June 23rd.
Actually, the first poll results tended to favor Remain. Everyone was like, “Yes, see, we told you.” Then, boom. I think it was Sunderland and some other districts started coming in. It was clear after a few hours that Leave was going to win, and the markets re-priced violently.
They did not wait for Friday morning in London. The markets are 24 hours, gold is traded 24 hours, and currencies are traded 24 hours. The Tokyo markets were open, so the re-pricing began immediately, and we saw those shocks on Thursday night.
To watch a currency drop 14% and gold go up over 5% in hours were shocking developments, but they were what we warned investors about and told investors to position for in advance.
That’s over and now they’ve bounced back a little bit. Gold is up; it’s high. Sterling is off its lows, not too extreme, but to some extent. Things have calmed down. The Conservative Party has made a very smooth leadership transition, and we have a new Prime Minister, Theresa May. I wish our Presidential transitions were as smooth and well managed as the British, because they did that without too much difficulty in a very short period of time.
All that has happened is that they have now settled on a team. The thing about the Leave group – Boris Johnson, Nigel Farage, Michael Gove and others – is that they were campaigning for Leave, but they didn’t have a Day 2 plan. They didn’t know what they were going to do if they won. There was no plan as to what to do if Leave won.
Well, Leave did win so they had to come up with a plan. It was clearly being improvised, but now there is new leadership. Theresa May has committed to the Brexit which will probably take a year and a half to negotiate.
All that’s really happened is they have a team. That’s a good place to start, but they don’t have a plan or a strategy, so there’s going to be some improvisation. Europe itself is divided as to what should happen. Initial indications are the French want to take a hard line. Sadly, the French have more things on their minds right now than Brexit. Germany wants to be a little less punitive and make this thing work.
The US is coaching from the sidelines, although I would say that the US should keep out of it. I think Obama going over there and telling Leave they’d be at the back of the queue if they voted Leave probably did more harm than good in terms of the Remain vote.
For all these reasons, we’re just going into a lot of uncertainty. On top of that, it looks like the UK may be headed for a recession. This would have a lot to do with the vote to leave. I’m not saying the two things are unrelated, but the UK may be in a recession before we ever get around to the serious negotiations on Brexit.
Why is that? It’s because of uncertainty. Economists actually have a name for it called Regime Uncertainty. When you’re trying to plan capital expenditures, you’re a global portfolio manager trying to allocate among various currencies, markets, and jurisdictions. There are too many other choices out there.
This will hurt direct foreign investment going into the UK and will hurt expansion. There are some winners to offset the losers. The fact that sterling came down so much will give a little boost to some UK exporters making goods to ship to the continent. They’ll probably get a few more orders because they look a little bit cheaper at the moment.
On the whole, uncertainty tends toward recession because people don’t want to spend, corporations don’t want to invest, and foreign capital does not want to come in. It’s not that it’s all bad, it’s just that there’s too much uncertainty, so they shy away.
These are the ingredients of recession. The UK probably had a property bubble going on independent of Brexit, and three major property funds have shut their doors. That doesn’t mean they’ve lost all the money, but they’ve suspended redemptions. If you’re an investor in those funds and you thought you could get your money out, guess again. You’ve been informed that you can’t get your money out until further notice. That could be years, depending on how liquidity goes.
There is plenty of reason to take the view that the UK is heading into recession. There will be surprises. Scotland is pushing hard for another referendum on Scottish independence. The last referendum was not extremely close, but it was close enough to believe that when you put Brexit on the table, if the Scots had to do it again, they would vote to leave the UK.
With the UK leaving the EU and Scotland potentially leaving the UK, that’s disruptive in its own way. Does that mean Scotland joins the euro? Very likely, in my view, because what are you going to have? A Scottish pound? You could. Leave aside the fact that what little gold England has remaining, I doubt they’re going to ship Scotland’s share, whatever it might be, to Edinburgh or Glasgow. And Northern Ireland is in play once again – it’s been in play for 100 years.
No, I don’t think it’s safe to go back in the water. We’ve got some signals pointing in the direction of recession, and the pound has a lot further to fall. I understand it’s bounced back a little bit. It got to a low of around $1.25 and has struggled its way back to about $1.33.
That’s fine, but again, with the uncertainty, the lack of gold, the economic recession at least in Europe, the upcoming polls, and the French, among others, looking to be punitive towards the UK, there’s good reason to think that sterling will go a lot lower from here.
The shock effect is over, the market re-pricing is over, and the leadership vacuum is over, but all that does is set up a blank sheet of paper to start the negotiation that’s going to go on for a year and a half with a lot of uncertainty.
I think it’s still a problem for global markets. Global markets have a lot of problems already with the slowdown in China and the United States, what’s going on in Brazil and Russia, sanctions, not to mention, sadly, the war on terror and terrorist attacks. The world has enough problems – put it that way – without one more, but we do have one more.
Jon: Thanks, Jim. Let me turn to a slightly different topic although there is a subtle overlap. In the last issue of your newsletter, Strategic Intelligence, you wrote at length about what you call the “global monetary elites.” At first sight, it might seem a rather vague concept, but in that article, you actually give it a very precise definition.
Would you take a moment and tell us what this phrase, the “global monetary elites,” mean to you? And what should it mean to us?
Jim: I’m happy to expand on that. First of all, I have been using the phrase “global monetary elites” and “international financial elites” – there are variations usually with the word “elite” in there somewhere – for years going back to my first book, Currency Wars, which came out in 2011, and even earlier.
I remember at the time I first started using it, I got a lot of pushback from readers, friends, colleagues, and editors, saying, “You know, Jim, you’re throwing this word ‘elite’ around. It sounds a little mysterious. It sounds like a tinfoil-hat conspiracy, something like a scene out of Spectre, the James Bond movie. Are you sure that’s a good way to describe it?” I felt strongly that it was, and I still do.
What’s interesting is how frequently I’m seeing the word “elite” from the elites! You read it from Larry Summers, Anatole Kaletsky, Adair Turner, and other commentators. I’m sure most people know who Larry Summers is. Adair Turner and Anatole Kaletsky are the Chairman and Director of a think tank called the Institute for New Economic Thinking financed by George Soros, which is one of the leading venues, if you will, for financial ideas in terms of the New World Order. These people are using the phrase “elites.” Gillian Tett, Martin Wolf at the Financial Times, and others.
Of course, everyone I just mentioned is part of the elite, but they’re talking about elite failure starting with Brexit, which was a little bit of an English-driven popular revolt. Jon, you know England far better than I do. When I say, “England,” I use that very advisedly.
Americans tend to take England, Britain, and the UK and mush it all together. That’s not true. England is a part of the UK, a part of Britain, with deep historical roots and the tradition of English independence. Scotland is Scotland. Wales and Northern Ireland are different parts of the UK.
We may be getting back to England. If Scotland goes its own way, if Northern Ireland sees some opportunity for reconciliation with the Republic of Ireland (I’m not so sure about Wales), we may be getting back to some concept of England.
My point being that if you look at the way the Brexit vote skewed, Scotland, Northern Ireland, and London were heavily in favor of Remain.
Where did the Leave vote come from? It came from smaller cities like Humberside and Leeds – the countryside far west of England, Cornwall, and elsewhere. It was really an English vote as much against their partners in the UK as their partners in the EU. This was considered an elite failure. Why did the elites not see it coming? Why did the elites not do a better job of appealing to the everyday English subject, etc.?
You hear it with regards to Donald Trump. The Trump phenomenon is amazing. I’m not going to get into the politics or pick sides. That’s not what I do; there are others with plenty of radio shows and podcasts to cover that ground. But I would point out that, at least in the United States, you go back a little over a year to early June 2015, when they first said that Trump wouldn’t run. Then he announced he was running, and they said, “He’s a joke.” Then he turned out to have a serious campaign, and they said, “Well, he can’t win primaries.” Then he started winning primaries, and they said, “Well, he’s capped at 30%.” Then he blew past 50%, and they said, “Well, he won’t get the nomination on the first ballot.” Now he’s locked in the nomination on the first ballot, and they say he can’t beat Hillary.
Where I come from, if you’re wrong five times in a row, I’m not supposed to listen to you the sixth time. In other words, the elites have been wrong every single time: whether he would run, whether he could win, whether he could get the nomination, etc. I think they may well be wrong about whether he can beat Hillary. That remains to be seen.
The point being the Remain elites were wrong in the UK. The US elites were wrong about Trump. There’s a lot of soul-searching among the elites as to how out of touch they are. They are out of touch. The problem with being in the bubble is you don’t know you’re in the bubble.
Let me step back a second and talk about who the elites are. I’ll come back to the subject, because it’s an important one. This is not some vague, amorphous, hooded conspiracy meeting around a boardroom in a dimly lit milieu. We know who they are by name. It’s Christine Lagarde, head of the IMF, Larry Summers at Harvard, Mario Draghi at the European Central Bank, Janet Yellen, Stan Fischer, and Bill Dudley of the Federal Reserve Bank. It’s think-tankers. It’s people like Anatole Kaletsky and Adair Turner, whom I mentioned.
It’s a combination of policy-makers, government officials, think-tank experts, professors, and some journalists. I’ll throw the journalists in for good measure. We know them all by name. It’s not a mystery, because we know who they are.
Their biggest problem is they hang out with each other. Christine Lagarde is not on this call listening to you and me. She’s probably talking to Larry Summers. If you don’t get it, if you’re out of touch and the only people you talk to are other people who don’t get it and are out of touch, then you’re never going to get it.
This is what I mean when I say when you’re in the bubble. You hang out in Georgetown this time of year, Nantucket or the Hamptons. Or in the winter you go to Davos and in August you go to Jackson Hole. In the spring you go to the Milken Institute and all these elite venues. When that’s your world, and you’re in the world of private jets, private dinners, and only talking to your own ilk, then you actually are out of touch. You don’t understand.
One of my favorite lines is from an old song by Bob Dylan called Ballad of a Thin Man. The refrain is, “There’s something happening here, but you don’t know what it is, do you, Mr. Jones?” Our listeners should be grateful I didn’t try to sing it, because I can’t sing, but I can recite the line.
There’s something happening in the world, and the elites don’t know what it is. They’re finding out the hard way. They’re starting to come up the learning curve, because when they start losing some big events, like Brexit, and possibly the election of Trump, they’re going to have to learn fast.
That’s who the elite is. They do run the system. I’d like to say that they are transparently non-transparent. What I mean by that is, again, they do not operate in secret. Yes, there are secret meetings and dinners on the sidelines of G20 and IMF meetings. I understand that, but they actually are bigmouths. The publish papers, they give speeches, they do interviews, they have websites, they’re actually putting out a lot of material. That’s the transparency side.
The non-transparency side is nobody understands it. They have a very specific jargon. You have to be a trained expert to know what all these terms mean. I’m not saying they’re incomprehensible. I’m saying you actually have to be an expert to know what they’re talking about.
They’re not that widely read compared to this podcast, for example, or some of the things we do. Not that many people go to Larry Summers’ website. I do, because I’m a geek. I’m not an elite, but I am a geek, so I’ll go read what Larry Summers has to say, but most people have better things to do on a Friday afternoon in the summer.
What they’re really doing is writing for each other. Larry Summers is writing in the Financial Times so that George Soros can read it. Anatole Kaletsky is writing in Project Syndicate so that Christine Lagarde can read it. They’re talking to each other. What they’re saying is fascinating; they’re saying that the system is close to collapse.
When you actually read papers from people like Claudio Borio, at the Bank for International Settlements, he’s the Chief Monetary Economist at the central bank for central banks. How geeky is that, but he’s a really thoughtful guy and a good writer. Read his stuff. He’s saying that the debt situation is not sustainable. It’s getting worse by the day. We can’t tax people anymore, we can’t get growth, we’re stuck in stagnation, and debt-to-GDP ratios are going up. We’re going to have waves of defaults coming from emerging markets like China, the energy sector, etc.
Christine Lagarde won’t go on television and say, “Hey, people, run for the hills. This is all going to collapse.” But if you read between the lines and understand the jargon, that is kind of what she’s saying. I’ve said this before. Sometimes I feel like an anthropologist going into the Amazon jungle, speaking the native languages, and then coming back and reporting what they’re actually saying.
Because I went to the graduate schools in economics where people are trained for the IMF, and most of my career was spent in banking, including more meetings at the Fed than I care to remember, and I’ve studied quite a bit, my training, background, and experience give me the facility to understand all this. I guess I’ve got the stamina to actually read it all, although some of it is painful. Then all I do, really, is put it in plain English.
When I give warnings, it’s not me making things up. It’s not me trying to frighten people. Some people have accused me of scaring people. I’m not scaring anybody, because they’re already scared.
I’m trying to shed a little light on the situation and maybe put people’s minds at ease in the sense that there may be some frightening things out there, but if you can understand it, it’s a little less frightening. Most importantly, there are steps you can take, including buying physical gold, to preserve your wealth when this all comes tumbling down.
Once more, there is an elite, but they’re not mysterious. We know who they are. They’re actually out there yakking away or writing away, but it’s a little bit in code, so you’ve got to get your translator decoder ring out to understand what they’re saying. A lot of their dialogue is not for the benefit of everyday citizens. They’re actually talking to each other, bouncing policy ideas around.
By the way, that’s how you can predict policy. When you see seven or eight elites in seven or eight different publications all saying the same thing, you know they’ve been passing the Kool-Aid. You know they’re in the hallways and closed dining rooms where it is hard to get into, and among themselves they’ve said, “You know what? Monetary policy, quantitative easing, and negative interest rates are not working. What we need is debt monetization, structural change, fiscal stimulus, helicopter money.”
When you see it coming from seven or eight different sources, you know it’s coming. That makes it easy to predict policy.
To sum up, I would say there is an elite, and we know who they are. With the right training, we can follow what they’re saying. They are issuing warnings, but there are things people can do. We’re not helpless.
Jon: That’s really illuminating. Thank you. Before we move on, what you said about England intrigued me, because I’m an Englishman. Actually, it’s only in the United States I’ve had to learn to call myself a Brit, not a term I would ever have used at home.
Jon: Speaking of which, included in your definition of the global monetary elites is the Governor of the Bank of England. I wondered if we can turn our attention to that institution just for a moment. I also have a sentimental interest, because I went to school within walking distance of Threadneedle Street.
Two more serious reasons: First, historically, it would seem that the Bank of England helped give shape to the modern central bank. Then looking forward, Mark Carney, the bank’s current Governor, will have his hands full managing the fallout from Brexit with all the global repercussions you’ve mentioned.
I’m wondering if you can share your thoughts about the Old Lady of Threadneedle Street?
Jim: I’d be happy to. If the listeners are not familiar, the Old Lady of Threadneedle Street is the nickname for the Bank of England, because it’s located on Threadneedle Street in the City of London.
I distinguish between the Bank of England as a historical institution, really the first central bank formed in exactly the way it was formed – fabulous monetary history, great institutional memory, great traditions, and all of that – from what have today, which is really just a pale shadow of what the Bank of England used to be.
There is this dichotomy between old and new. We’ll talk about that a little bit, but let’s start with our friend, Mark Carney. As the Governor of the Bank of England, he is, in effect, the equivalent of Janet Yellen, who is the Chairwoman of the Board of Governors of the Federal Reserve System.
He doesn’t have the sole word – there is something called the Monetary Policy Committee of the Bank of England. People go on and off it.
Howard Davies was on it at one time, and David Blanchflower, a professor at Dartmouth these days, was on it. People kind of come and go from the Monetary Policy Committee, in effect the equivalent of our Federal Open Market Committee, which, on a collegial basis, get together and set rates. There’s no doubt that Mark Carney is, by far, first among equals. As I said, he performs a role similar to Janet Yellen.
What people may not know is that before he was Governor of the Bank of England, Mark Carney was Governor of the Bank of Canada, the central bank of Canada. I think there ought to be term limits, maybe geographic limits. I don’t think you should be the head of two central banks. That seems a little bit over the top, but he was.
I don’t know of anyone else who was the head of central banks in two different countries. Actually, Stan Fischer comes close. He was head of the Bank of Israel and today is the Vice Chairman of the Board of Governors of the Federal Reserve System. He was #1 in Israel and #2 at the Fed, but Mark Carney was #1 in Canada and #1 in the UK, so I think he takes the prize.
He’s sort of a super-elite, meaning not only was he the head of two different G7 central banks, he’s a board member of the Bank for International Settlements.
I call the Bank for International Settlements (BIS), based in Basel, Switzerland, a tree house for central-banking boys and girls. They meet there once a month and have a lunch overlooking the river that runs nearby. No minutes, no notes, no press releases, no statements, no press conferences, nothing. They just close the doors and talk among themselves.
This is really where the central bankers rig the system. It’s completely beyond the scope of any jurisdiction. It’s legally formed in Switzerland, but when the charter was set up, Swiss law agreed that they wouldn’t exert jurisdiction over the BIS. It might as well be in outer space or planet Mars or something in terms of legal jurisdiction. It’s almost like no country in the world, including the country where it is located, can tell them what to do.
It’s about as secretive, autonomous, and non-responsible as you can imagine. One of the things they do is function as secret broker for gold between countries and banks. If the Federal Reserve wants to lease gold to JPMorgan for the account of the IMF, the transaction would run through the BIS so that we would never see it.
You can look at the footnotes of the BIS financial statements and find evidence that they do this activity, but you won’t find the specific names or the specific transactions. They just disclose that this is what they do.
It’s where the physical gold market is manipulated. The paper gold market just goes to the COMEX, but physical gold is manipulated. Gold is moved around among central banks at BIS. Global policies are coordinated at BIS. It’s a super-secret institution.
Mark Carney is on the Board of the BIS, Governor of the Bank of England, former Governor of the Bank of Canada – a kind of super-elite. He’s had an interesting role.
By the way, until 1971 – well, technically 1973 when the IMF demonetized gold – the Bank of England did operate a gold standard. There was discretionary monetary policy side-by-side with the gold standard. There were numerous devaluations of sterling. I’m not saying it was a flawless performance by any means, but technically they were on a gold standard.
Prior to 1914, it was a very rigorous gold standard. We’re talking about a period from the early 17th Century until 1914, almost 300 years, when the Bank of England ran a gold standard with about 20% gold. Actually, not that much. It was enough to stand up to the market, but nowhere near 100% of the currency. Yet the pound sterling, the Bank of England note, was considered as good as gold.
They also had a gold coin issued by the Royal Mint called the sovereign. The sovereign is a one-ounce gold coin. It was not 24 karat, which is the not practical. It was 22 karat, exactly like the American Gold Eagle, which means it had a little bit of alloy. You still had your ounce of gold, but the alloy was there to give it some durability so it wouldn’t wear out as it was getting passed around. Gold is soft, so a 24-karat coin wears out, which you don’t want.
As an example, in 1898 an Englishman boarding a steamship in Southampton heading for Bombay (today Mumbai) in India, part of the British Empire at the time, would have taken a certain number of Bank of England notes and a certain amount of physical gold sovereigns with him or her. On arrival, that would have been good money.
That was world money. You could go anywhere in the world. It didn’t have to be a British colony. It could be China, Russia, South America or the British Empire at the time, later the Commonwealth of Australia. That money he put in his pocket in London was money good anywhere in the world.
It was the last time the world really saw a global monetary standard, at least one that was stable. They had price stability through that whole time. There were a couple of suspensions, which one would expect, during the Napoleonic Wars. Nothing wrong with suspending convertibility during wartime. War is existential, so you have to do whatever is necessary. To their credit, the Bank of England went back to the gold standard not long after the Napoleonic Wars ended in 1815. Then it again maintained it under the classical standard all the way up to 1914.
They understood banking. What amazes me today is how central bankers don’t understand banking. When I say that, I’m not being facetious or derogatory. They’re PhDs who went to MIT and Harvard. They understand financial economics, or they think they do. They understand some version of financial economics that bears very little relationship to the real world. That’s what they know. That’s what they got their PhDs in.
They’re not actually bankers. I wish we had more bankers in the central bank, but we don’t. We’ve got academics. I was fortunate to have started my career in banking in the ‘70s when the idea of banking still meant something. Back in the day, bankers understood it was all based on confidence.
Every banker knew there were never enough liquid assets to pay the depositors. There was never enough gold to cash in every note. What you had were some liquid assets and some gold, so you could meet some demand, but you knew it was never enough if it got out of control. So you did everything possible to maintain confidence and integrity.
That’s all gone by the board. Today, bankers have squandered their integrity. I call JPMorgan the world’s largest criminal enterprise. They are an extended exercise in greed who put themselves first instead of the customers. In my day, the customer always came first. You figured you put the customer first, and you could make money. Unfortunately, all this has been turned upside down. Today, it’s like, “How do I make money? To heck with the customer.”
It was all based on confidence; that’s the classic banking function. Today, bankers don’t worry about confidence, because they know the central banks will bail them out. They know that if they get in trouble – which they do like clockwork, because banks always screw up – the central bank will be there with tens of trillions of dollars of new liquidity, easy money, zero interest rates, negative interest rate, currency swaps, guarantees. In other words, whatever it takes.
I have enormous respect for the economic and financial banking history of the Bank of England. For anyone who studies that history, I would particularly recommend a book about the UK money markets called Lombard Streetby Walter Bagehot. Walter Bagehot, interestingly, was a journalist. He was not a trained academic, but he was one of these people who understood banking.
All of the things we’re talking about on this podcast – gold standard, lender of last resort, how do you maintain confidence, how do you maintain integrity, the importance of character – these are all covered in that book. It’s a short book, not too difficult to read, so if you want to know what banking used to be like and may be again (hopefully), that’s a good book to read.
Unfortunately, all that’s gone by the board. What we have are people like Mark Carney, Janet Yellen, and Stan Fischer. They’re not bad people, they’re not dumb people, and they’re a lot smarter than I am, but they kind of know the wrong things. They know a version of financial economics that does not correspond well with the real world.
Jon: Thanks very much, Jim. What a great tour of that significant piece of history and its implications for the present.
Now, over to you, Alex. What questions do you have today from our listeners?
Alex: Thank you very much. Jim, back to the fascinating points you were just making about the Bank of England. I’m a big fan of history myself.
You mentioned that they were on a gold standard for 300 years, and you stated that it was world money. I would contend that, based upon a little anecdotal point, it’s still world money.
Unless the US Air Force changed its procedures since the last time I checked, to my knowledge, they put an ounce of gold in the survival kit of Air Force Pilots when they are deployed overseas. My guess is that they can use this as money if they go down or if they crash. It’s accepted worldwide no matter where they are.
Jim: That’s right. There are a few global phenomena. One of them is the word “beer.” It’s the same in every language. Spanish is cerveza, but even in Japan, it’s bīru, and everywhere else you go, it’s some version of “beer.” That’s a universal. The other universal, in addition to beer, is gold. I agree with that completely.
Alex: The first question is coming in from Joel H. in regards to the Shanghai Accord. Joel, by the way, is something of a celebrity with almost 250,000 followers on Twitter, and we’re glad to have him on the webinar today.
His question is, “Does the threat of perpetual bonds in Japan disrupt the Shanghai Accord?”
Jim: That’s on the table. Ben Bernanke was there earlier this week meeting with Abe and recommending helicopter money. No surprise, from Helicopter Ben.
There’s some reporting in the last couple of days that when he was there on an earlier visit in April, he had spoken to the Japanese about perpetual bonds. This is a variation on modern monetary theory, monetization, a version of helicopter money. It goes by a lot of different names.
The scenario is something like this: What’s wrong with spending money? Why don’t we just have bigger deficits. Then we run these bigger deficits. We spend the money on whatever, infrastructure, build some new highways and airports. We need all that.
I’m not saying that infrastructure isn’t a need. Of course it is, but the US has 100% debt-to-GDP ratio, Japan has a 250% debt-to-GDP ratio, Greece is somewhere between the US and Japan, but Japan takes the cake. Maybe some infrastructure spending is fine. Maybe at these low interest rates, it’s not even a bad idea. But what is the outer limit on debt? How much debt can a country issue before investors lose confidence in the currency and in the debt itself and just start dumping it? In that scenario, the currency collapses and interest rates go to the moon.
It’s an interesting question. I’m certain there is a limit, and I am equally certain that I don’t know what it is. I can’t pinpoint it, but I look at the dynamic. I look for clues that we’re getting closer. I look for evidence that the collapse is coming. In intelligence, those are what we call indications or warnings. We look for it to try to figure these things out even though we don’t know the exact hour and day.
Modern monetary theory, and actually what Bernanke and Adair Turner and others are saying, is this: “No, it’s all good. You don’t have to worry about the confidence boundary. As long as the central bank can print the money and buy the debt, it’s all good.”
Governments should just spend as much as they want and hopefully put it to good use. I don’t really count on governments to do that, but that’s the theory, anyway. Once again, the theory and the reality tend to be two different things.
You have these deficits and ask, “How do I cover the deficit?” The answer is issue bonds. Have your Minister of Finance, your Treasury Department or your fiscal authority issue bonds. Then you ask, “What if nobody wants the bonds?” No problem. Just have the central bank buy them.
The last part of that puzzle is to say, “Okay, but it’s a two-year note. In two years, we’re going to have to refinance it, because that’s going to mature. We’re going to have to give the central bank their money back, and then we’re going to have to refinance the two-year note. What if conditions are rocky two years from now when I have to roll over my two-year note, or five years from now when I have to roll over my five-year note? What am I going to do then? What if interest rates are too high?”
Hey, no problem. Make it perpetual. Never pay it back. That’s the theory Bernanke was talking about. In theory, Japan would get its economy moving by spending money on infrastructure, they would cover the deficit by issuing bonds, the bonds would be perpetual, the Bank of Japan would print the money, buy the bonds, and hold them on their balance sheet forever.
The modern monetary theorists look at me and say, “What’s wrong with that, Jim? Tell me what’s wrong with that?” It’s a tough question, but I can tell you what’s wrong with it. You’re ignoring behavior, you’re ignoring history, you’re ignoring psychology. To put it in more scientific space, you’re ignoring critical thresholds, recursive functions …….
Jon: It seems we’ve lost touch with Jim. Alex, can you hear Jim?
Alex: No, we have lost him. That does happen from time to time on webinars like this.
Jon: Listeners, I regret we must call it a day here with apologies to those of you whose questions we didn’t get to. We’ll be sure to make extra time in our next podcast. Meanwhile, thank you, Alex, and our thanks to Jim as well. It’s always a pleasure and an education having Jim with us.
Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now, and we look forward to joining you again soon.
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