James Rickards: Next Crisis Will Be Worse Than Last One

Central banks won't come to the rescue, emergency plan may involve shutting down banks and exchanges
By Valentin Schmid
Valentin Schmid
Valentin Schmid
Valentin Schmid is the business editor of the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.
November 7, 2016 Updated: November 10, 2016

James Rickards has predicted major changes in financial markets, and his latest prediction is his biggest yet. A lawyer, portfolio manager, government adviser, and lecturer, Rickards has foreseen changes like competitive currency devaluation, the rise of gold, and the plan to replace the dollar as the world’s reserve currency, as written in his bestselling books “Currency Wars,” “The Death of Money,” and “The New Case For Gold.”

Epoch Times spoke to Rickards about his new book, “The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis,” and about central banks’ inability to stop the next financial crisis, as well as a possible financial market lock down.

Epoch Times: Why will the next crisis be worse than the last one?

James Rickards: To analyze that, I use the two prior crises: the 1998 Long-Term Capital Management crisis and the 2008 banking crisis.

In 1998, I was a participant [in the crisis] as the general counsel of the hedge fund Long-Term Capital Management. I negotiated that bailout. We could see we were just hours away from the closure of every market in the world—that’s not an exaggeration.

The markets didn’t collapse in the end, but it came extremely close. In 2008, it was the same thing—we were days away from the sequential collapse of every bank in the world. Bear Stearns collapsed in March 2008. Then Fannie Mae and Freddie Mac were taken over by the government in early September and Lehman Brothers went bankrupt later in September that year.

They were falling like dominoes, and they all would have fallen: Morgan Stanley, Goldman Sachs, Bank of America, and JPMorgan Chase.

Best selling author James Rickards talks about his new book "The Road To Ruin" (Courtesy of James Rickards)
Best-selling author James Rickards argues in “The Road To Ruin” that central banks are tapped out, almost guaranteeing the next financial crisis will be larger than what came before. (Courtesy of James Rickards)

But then the Federal Reserve truncated the process.

They dropped a steel wall between the dominoes so the next one would not fall. But that’s not a cost-free exercise. It’s like stopping an earthquake right in the middle and not letting it finish; it doesn’t really solve anything. An earthquake is just a release of energy. So that energy would just be stored up, and it will be a worse earthquake the next time.

In financial markets, it’s the same. Each crisis is bigger than the one before, each bailout is bigger than the one before. Just as 2008 was worse than 1998, the next crisis, whether it’s in 2018 or sooner, will be bigger and worse than the ones before.

Central Banks Are ‘Tapped Out’

Epoch Times: And you say central banks won’t be able to handle it this time?

Mr. Rickards: The central banks won’t be able to stop it. In 1998, Wall Street bailed out a hedge fund; in 2008, the central banks bailed out Wall Street. In 2018 or sooner, who is going to bail out the central banks?

The central banks are tapped out. The Fed is leveraged 113 to 1. On a bad day, it is technically insolvent on a mark-to-market basis. Not every day, but on certain days in the last five years, if you had marked the Fed’s balance sheet to market, they were insolvent, their liabilities were greater than their assets, and their capital would have been wiped out.

I believe that there is a visible confidence boundary that you pass. You won’t know where it is until it is too late. You will find out the hard way that you destroyed confidence in your money and then you won’t be able to get it back.

The only clean balance sheet left, the only entity that can pull money out of thin air, is the International Monetary Fund (IMF). It’s the central bank of the world. They can print the world money, the Special Drawing Rights (SDR) currency, to re-liquefy the system.

Epoch Times: But not without closing banks and financial markets?

Mr. Rickards: It will take the IMF some period of time—I would estimate a minimum of three to six months—to issue the SDRs and to get the money out there.

In the meantime, the panic will begin, and the national authorities will work together to lock down the system. They are going to have to close banks; money market funds are going to suspend redemptions; and stock exchanges will be closed. People won’t be allowed to get their money for at least some time, until this new money is created.

So it will be worse, more dramatic, larger. People will lose more, suffer more. All I’m trying to do is explain these dynamics in my new book “The Road to Ruin” and give people a warning and some options to preserve their wealth.

I am warning people that they are not going to get their money when they expect, but at some point, [the authorities] will come up with an SDR solution and they will gradually reopen the exchanges.

Global Plan

Epoch Times: But you also say the global elites, including the IMF, would like the SDR to be global reserve currency, with or without a crisis. What is the evidence?

Mr. Rickards: We have had some landmarks recently regarding the SDR. On Oct. 1, the Chinese yuan was included in the SDR reference basket.

It’s not even close to being a reserve currency, but they bent the rules for political purposes. They can see the crisis coming; they see they will have to bail out the world, and they will need China’s vote.

There is no way you could do something like that without China’s approval. China says, “Why should we approve something like that if we are not part of the SDR?” So they included the yuan in the basket.

In July, the IMF issued a technical paper calling for the market-based use of the SDR. The IMF was encouraging the creation of a private SDR market. Then the World Bank came out and issued $2.8 billion worth of SDR bonds in September. And there is another issue coming by Standard Chartered Bank.

It’s important because if countries use the SDR, they need investable assets. Just the other day, the IMF issued a call to a group of experts and academics to form a working group to comment on the expansion of the SDR market.

So all these things are underway, and if left to their own devices, it might take another 10 or 15 years. But what I expect will happen is that the crisis will come before the lead plan for SDR is fully realized.

So they will have to issue the SDRs on an emergency basis to re-liquefy the world, and everything that they are talking about will be accelerated, compressed into a shorter period of time, and then we will have an SDR reference system before we know it. That will involve pricing oil in SDRs, and oil contract settlement and payments in SDRs.

That said, dollars will still be around; we will still have dollars, but it will be like a local currency if you will, like the Mexican peso, or Turkish lira, or any other local currency.

Epoch Times: What can people do to protect themselves?

Mr. Rickards: I think gold wins either way. There is not a central bank in the world that wants the gold standard, but they may have no choice. They may have to go to a gold standard to restore confidence.

The other scenario is that somehow this SDR plan works and you get inflation. Then the gold price will go up because of the inflation. If the SDRs works, gold goes up because of inflation. And if the SDR fails and you turn to gold to restore confidence, gold goes up because it has to support the money supply.

Valentin Schmid is the business editor of the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.