I continue to get lots of questions about this Jim Rickards ad from Agora, and the ad itself has been (clumsily) updated a few times since we covered it back in November of 2017 (the latest “by March 19, 2019” ad even suggests that Yellen is still President of the Federal Reserve, and the date under the signature is still July, 2017), so I’m (lightly) updating my coverage here…
I’ll cut to the chase at the start and say that no, President Trump did not nominate a “gold bug” to run the Federal Reserve, and the US did not cooperate with the world’s other major economies to form a new gold standard on January 1, 2018… and I’d bet you whatever you want that they won’t do it on November 8, 2018 or on March 19, 2019 either (those are all ‘critical deadlines’ that were hyped in previous versions of the ad).
So that’s a long way of saying that most of the article below was first published on November 7, 2017, when I first covered this ad. It has been lightly updated, with some additional sarcasm applied to cover the interim 15 months or so… indeed, I’d say it has been more carefully updated than the ad itself, which seems to have been updated solely through the use of a “find and replace” change for the dates and still refers to Janet Yellen as a member of the Federal Reserve Board of Governors, but, well, that’s just a little extra snarkiness from me — no charge.
This ad is so ridiculous I resisted spending time with it for a while… but the questions are piling up again, so let’s dig in and see what Jim Rickards is peddling. Be warned, I’ll probably use too many words and may do a bit of ranting.
The basic premise is the same one he has used for years now in his ads — the dollar is going to weaken (or collapse) and be replaced by some variation of the gold standard, because that’s the only way to solve the US dollar’s problems and reset the global economic balance (and deal with our massive debt). He used to refer to this idea as “Reagan Gold,” since Ronald Reagan was a proponent of returning to the gold standard but was reportedly talked out of it by his advisors… and the fearmongering for a while was focused on the Yuan supplanting the dollar as the world’s “reserve currency” … now it’s “Trump’s Reboot” that features as the ad headline.
I’ll go out on a limb and let you know my bias up front: I think that’s ridiculous. The notion that any government will willingly give up control of its money supply and be restrained by a gold backing of any sort is laughable. The cat is out of the bag, we’re not going to be able to catch it and stuff it back in.
I do agree that “fiat currencies” (that’s “all currencies,” in case you’re wondering — there are no asset-backed currencies currently) are going to lose value over time, and that we might see that accelerate into real inflation at some point, but I can’t see Donald Trump or Xi Jinping deciding that fixing the currency to some arbitrary amount of gold and giving up the ability to print and borrow from the future is a good idea. Those who have control don’t easily surrender it — candidates are happy to talk about the gold standard and a return to monetary discipline, but once they’re actually in office no one wants discipline if they’re told that it will hurt their ability to increase military spending, or provide tax cuts, or constrain their options in whatever way they care about.
If gold is used to somehow back a formal currency again, I suspect it would be by China in an effort to competitively leverage the yuan into prominence, as the US did with the dollar in the first half of the 20th century… and I suspect it wouldn’t work for long, because China is going to have to go on a deficit spending spree to keep its own population mollified in the next few decades, too, as their country ages and increases its consumption.
US debt and consumption and Chinese industrialization and manufacturing will no longer be the twin pillars of the global economy in the decades to come, most likely, but I don’t expect that the world will give up on its addiction to growth (which is partially fueled by inflation, and currency devaluation, because that makes people feel that they’re making progress), or that countries will surrender their ability to undercut their neighbors by devaluing their currencies — the world monetary order will probably evolve in some way none of us can predict, but it’s hard to imagine Germany and Japan and China lining up behind the US to support US consumption or monetary leadership again, as they have in the past, or even just to prop up their US customers.
So that long-winded screed is where I’m coming from… now that I’ve got that off my chest, let’s see what Rickards is actually recommending….
“I believe President Trump will host an international monetary summit at his ‘Winter White House’ in Florida, the historic Mar-a-Lago resort.
“Using his stature as leader of the free world, he’ll bring the financial leaders of the globe together.
“This would include delegates from the U.S., China, Japan, Germany, Italy, France, the UK and the International Monetary Fund.
“Then, they’ll agree to simultaneously revalue all of their currencies against gold until the price reached $10,000 per ounce. (If you’re skeptical, I’ll give you ironclad proof that this could happen in a second.)
“The Federal Reserve board will then call a special board meeting… vote on the new policy… walk outside and announce to the world that effective immediately, the price of gold is $10,000 per ounce.
“The Fed will make the $10,000 price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct ‘open market operations’ in gold.”
And dammit, he plays unfair by saying he’s going to use math! People hate math!
“For mathematical reasons I’ll explain in just a second, gold will need to be $10,000. No more, no less.”
And, of course, you’ll get rich from this if you own the right assets:
“This will immediately put an end to the currency wars and the debt-based dollar system.
“It will be a one-time “reboot” period that will put the world on solid footing for economic growth for decades to come.
“The immediate adjustment would create a massive windfall for gold bullion holders and owners of gold mining shares (though that’s not the true opportunity here).”Are you getting our free Daily Update
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You can’t create value out of nothing, of course, not on a grand scale, so if this does turn out to happen it would not be because gold suddenly becomes four or five times more valuable… it would be because the value of the US dollar is slashed versus gold. So yes, the gold price would go up dramatically in dollar terms — but in that case, there would also likely be massive stock market inflation in US$ terms. Everything would go up in dollar terms, but the dollar would collapse (as it arguably should… but who would vote for that?)
I think the problem, at least in Trump’s view and in the view of most recent Presidents, if they were being honest behind closed doors, is not that the US economy needs a stronger backing to the dollar… it’s that the US needs a weaker dollar to help deter imports and encourage exports and make it more feasible to service the mounting federal debt and meet other financial obligations. Rickards cites a Stratfor article about Trump’s interest in a new global monetary accord to reset exchange rates (with or without gold being involved), like the Plaza Accord of the 1980s or the Bretton Woods Accord after World War Two, and that’s worth a read if you want a broader perspective.
I’m not an internationally renowned economist, I haven’t written any books about monetary policy… that’s just my opinion and assessment. I might be wrong, I’d just urge you to keep an open mind to the many different possibilities that exist — the same story about the end of the US dollar has been peddled with vigor by newsletter and TV pundits since the financial crisis (well, really since the 1970s, off and on), and the return to some sort of gold standard, and wealth for those who choose the right gold-related investment, is the common thread that runs through most of those pitches in recent years.
So far, those predicting the collapse of the dollar have all been very, very wrong — or, at the least, absurdly hyperbolic. The dollar is collapsing… it’s just happening very, very slowly.
Unsustainable debt in the 1980s became catastrophic deficits in the 1990s and the end of the world in the 2000s and the rise of the Yuan and Euro to crush the US$ in the 2010s, and we’ll soon find out what the predicted calamity is for the 2020s… sometimes some of the predictions of doom will be right, at least for short periods of time, but taking all of them seriously and being frightened out of the market for any big chunk of the last thirty or forty years could easily have been catastrophic for your portfolio.
So yes, read the doomsayers, sure, but don’t believe everything you read — for the past thirty-plus years it has been pretty easy to build a logical argument for the collapse of the US dollar (or of the United States in general), and for the past 30 years that has been the wrong argument to follow. That doesn’t mean it will always be wrong… but it means making a big bet on the timing is foolhardy.
And this is the risk of so many investment teasers that sound smart and logical. Logical-sounding arguments are easy to build in complex systems, especially when the writer is (or sounds like) a well-informed expert in areas that the reader doesn’t understand fully… and even more so when the people who are reading that argument already have an ideological axe to grind (as most of us do in this poisoned partisan environment, where “winning” is better than being intelligent or correct).
In general, if you find yourself nodding at these kinds of ads and saying to yourself “that’s what I’ve been telling everyone all along!” … you’re being played.
Newsletter ads use political figures as attention-getters — they know that if you love Reagan or Trump or Obama or Clinton (or loathe them), using those names will get your attention, and if you agree with the ad’s premise (that Obama destroyed the economy and Trump is heroically trying to save it by switching to a gold standard, in this case), then you’re almost on the hook — that’s how they use the tribalism of the American voter to get you to type in your credit card number (this guy agrees with me, he must be smart! Us smart guys gotta stick together! We’re the only thing keeping the world from falling apart! Thanks for letting me send you $79, Mr. Rickards, please send me the ad for your $2,000 service next!)
It works the other way, too — it’s just not as clean, and not as lucrative, because the core of the modern newsletter business is built on appealing to the people who are most likely to be active investors and have extra money, which, on average, is a 60-year-old white man who leans conservative. That’s not true of every newsletter, of course, nor of every subscriber, but I think age and wealth are the most reliable demographic indicators for “might want to subscribe to a newsletter,” and they’re also the most reliable demographic indicators for “conservative politics” … and if you can appeal to someone’s instincts and form a bond with them, you’re halfway to a sale. All you have to do after that, is convince them that you’ve got the secret to make them rich.
So let’s move on to that, shall we?
January 1 November 8March 19, President Trump Could Have Total Control Over the Federal Reserve. The First Time for Any President Since 1914
January 1 November 8, 2018March 19, could end up being a conservative date.
“Everything I’m explaining could conceivably happen much sooner than I’m explaining here…”
Yes, President Trump has the opportunity to fill more seats on the Federal Reserve, though he picked his new chair in Jay Powell ages ago now, got him approved, and then spent much of last year complaining about Powell raising interest rates and hinting that he wanted to fire him (the ad still says that Rickards thinks a “total gold bug” has the inside track to be the next Fed Chair after Janet Yellen, but that obviously didn’t happen).
They didn’t even bother to update the ad, other than using that new “subscribe now!” March 19, 2019 date — Rickards’ ad still refers to Janet Yellen as a Fed Governor, though she retired more than a year ago when Powell was sworn in to replace her. So take those dates with a HUGE amount of skepticism, they’re designed to spur action on the subscription, not to predict the future — Rickards probably wouldn’t be right in predicting the future with any specificity anyway, of course, because he’s a human being, but this date is almost certainly coming from the marketers. They sent out essentially the ad back in November of 2017 with a January 1 2018 “deadline”, then again in March of 2018 with a March 21 deadline (also failing to update for Jay Powell succeeding Yellen as Fed Chair), and now I’m getting the latest version again with a March 2019 date. It’s all marketing hooey.
Presidential candidates hate the Fed, Presidents love the Fed, and Powell is very much a moderate Fed insider and has followed Janet Yellen’s path pretty precisely in raising rates over the past year, and then becoming dovish as soon as it appeared the global economy and trade wars might be slowing things down at home, with no sign of inflation ramping up… and the Fed’s policies and leadership have not been particularly partisan, we’ve seen the same easy money and dollar devaluation policies hold pretty strong sway under both “Republican” and “Democratic” Fed Governors for decades now.
Incidentally, the tea leaves that Rickards is reading to determine Trump’s plans are also hopelessly out of date — it’s probably completely worthless to waste time trying to figure out what President Trump’s opinion on something will be a few months from now, given how quickly his “gut” changes, but this is the Tweet Rickards cites:
Which is a real Tweet, but what he doesn’t quote is that it’s from 2011, well before Trump ever even started campaigning for the Presidency. Reading Trump’s incredible barrage on twitter over the past decade is a lot like reading tea leaves — it can give you evidence of just about whatever sentiment you want to find.
More recently, of course, President Trump has been complaining about rising interest rates and tightening from the Fed (the reverse of that “flood”), and about the weakness of the Chinese Yuan and the strength of the US Dollar — which has been strong compared to other major currencies partly because the US economy is relatively strong and attracting global investment dollars, and partly because higher interest rates make it more appealing to park your money in US bonds instead of zero-yield (or negative yield) European or Japanese bonds. Money goes where its treated best, and it can move right on to the next thing very quickly if that calculus changes.
And President Trump does still have two vacant seats to fill on the Federal Reserve, though that doesn’t seem to be a priority and I don’t think anyone other than Jim Rickards thinks he’s itching to get new nominees in there who will push for a new gold standard. There have been two or three vacancies on the seven-member board since late in Obama’s presidency, and the two nominees Trump had before the Senate were essentially left to languish (one, Marvin Goodfriend, was controversial), and were not renominated this year, with, according to Larry Kudlow, no urgency to name new nominees… and, of course, we’d likely see a tighter battle for any controversial nominee to any post these days because the House has changed leadership and seemingly half of the democrats in the Senate have launched nomination campaigns for the 2020 presidential election (only the Senate has to confirm nominees, to be clear, but the tenor on Capital Hill in general has surely changed).
Remember that math we threatened? Here’s where Rickards re-introduces it:
“If they choose more than $10,000 per ounce, we’ll have severe inflation.
“And if they choose less than $10,000 per ounce, we’ll have severe deflation.
“It needs to be $10,000 per ounce.
“That’s a mathematical certainty….
“($26.5 trillion x 40%) ÷ 1 billion oz. of gold = $10,000 per ounce.”
$26.5 trillion is what Rickards things “Global M1” is, the total money supply. I don’t know where he gets that — the US M1 is, as reported by the Fed, about $3.7 trillion, and I’ve seen “global money supply” numbers that range from $20-40 trillion, though that only counts actual paper (and coin) currency and “demand deposits” (checking accounts, pretty much) so it excludes a vast amount of what most people would consider “money” (CDs, money market accounts, etc., probably totaling about 3-4X that amount). More broadly, the total value of all the money plus non-physical deposits and money market accounts and similar cash equivalents is probably in the $80-100 trillion neighborhood.
The 40% is the “gold backing” percentage that he thinks will be implemented (since that’s in the original Federal Reserve authorization legislation), and the one billion ounces is roughly how much gold currently exists in the world (above ground). That’s fine, and we know what numbers he’s working with — but to say that this equation has only one possible set of inputs and one possible answer as a “mathematical certainty” is to ignore that any possible “reboot” of the world’s monetary relationships would be the result of a negotiation performed by human beings. It also somehow sets this theoretical standard for all the gold and all the world’s money, not just US gold and US money.
Rickards is arguing that gold is critical and is the only “real” money… but he also says that arbitrarily increasing the gold price by more than 600% and fixing the gold price won’t cause d