Jim Rickards: What's Coming Is WORSE Than A Recession...

this is about the most indebted period in the history of the world I never thought I would see so much debt so quickly as we have seen in the last few months so what we're really talking about is government debt because no one expects governments to go bankrupt although we all know that occasionally they do default we've seen many cases of that but certainly not you know the United States or the UK or Spain or France uh no one expects any of those countries to default anytime soon but the way I think about that is

I use the de to GDP ratio because debt is not automatically a problem it may be a problem or it may not be a problem it all depends on how much income or output you have to service the debt so just to give a simple example let's say you have a credit card and you have a uh $50,000 balance on your credit card you owe the bank $50,000 is that a problem well if you make $20,000 it's a big problem you're probably going to go bankrupt but if you make $200,000 you could probably you know

write a check and pay it off so the answer is to whether the debt is a problem or not can only be thought about in relation to your income and so I use the debt to GDP ratio I say how much debt does a country have how much debt is outstanding and how big is their GDP and when you use that ratio if you're at say 30% or even 40% that's a comfortable ratio yes you have some debt but you also have say a strong economy and your ability to service the debt by collecting tax

taxes or other sources of revenue is very reasonable and that debt level is sustainable but when you get up to 60% 60% happens to be the Level under the master treaty where the members of the European Union are not supposed to have debt in excess of 60% of their GDP now many of them do I'm not saying this is a hard and fast rule but that's where Anglo Merle gets a little bit upset when you're above 60% and Spain and France and some other Italy certainly are above that threshold but there's another threshold that's important

which is 90% And 90% comes out of the research of Ken rogoff and Carmen Reinhart what they've shown in developing markets developed markets throughout the 20th century recently in the distant past no matter where they look once the country gets above 90% debt to GDP a couple things happen Number One debt is no longer productive the idea of borrowing is I'll borrow a dollar I'll spend the dollar but I'll get a120 of GDP because you know I'll spend it on something but then the recipient he'll spend it and then someone else will spend it and

by what's called velocity or the turnover of money you'll actually get more than you borrow that's keian economics very simplified version of it but what rogov and Reinhardt have shown is once you get past 90% that's no longer true you borrow a dollar and you spend a dollar but you might only get 90 cents or 80 cents of GDP in other words you reach a point where you cannot borrow your way out of debt you cannot borrow your way to get enough productivity to get out of debt and then you're sort of in a doom

Loop or a death spiral well I mentioned 30% is comfortable 60% is a problem in Europe 90% this is critical threshold the United States today is at 106% but we are very rapidly moving to 120% when you take the additional $5 trillion of new deficit spending that the Congress has approved and put that on top and bear in mind the GDP has gone down right so your denominator is shrinking your numerator is going up which means the fraction is going up and now the debt is well in excess of 100% it's actually coming into 120%

so all of a sudden the United States starts to look like Italy or for that matter Lebanon or Japan which is highest of all now the modern monetary theorists mmt modern monetary Theory whom I completely disagree with I know a lot of them I know Stephanie Kelton she's big brain she's one of the thought leaders she has a new book coming out they say uh so what they say it doesn't matter that you can take your debt to GDP ratio to not only 100% but 200% or in theory even 300% it just doesn't matter for

two reasons number one you can always print the money to pay off the debt um by the way everything I'm talking about does not apply if you're borrowing in a different currency if you're Argentina and you print you know pesos but you're borrowing in dollars that's a a problem because you can't print dollarss but of course the United States can print dollars the ECB can print Euros Bank of Japan can print yeah if that's the currency of your debt you know just print up the money what's the problem they have other Solutions if inflation starts

to take off just raise taxes I'm not so sure about that you bar yourself into Oblivion you get inflation and you think you can tax your way out of it that doesn't sound like a very good way to go but the bottom line is that all the countries starting with the United States but all the major developed countries are now in these sky high and Rising that the GDP ratios now the question is what's going to happen next interest rates are extremely low the central banks have made them low so the debt service is not

that great the debt is huge but if you're only paying you know a fraction of 1% as not as if you're incurring a lot of interest expense which of course adds to the deficit so that's the first thing we don't have inflation people who say that you know the money printing that the central banks are doing to buy the debt which they are is inflationary that's not true that's a a kind of gross Miss understanding comes out of milk treatment Etc it's not true what does cause inflation is velocity which is the turnover of money

people decide people lose confidence in money and they spend it and someone else gets it and they spend it everyone's spending it because they want to run into hard assets land gold silver Fine Art real estate you know Etc or just buy a car because they think the price is going up or refriger whatever it is if you get that kind of Blas inflation can happen very quickly and we saw this in the late 1970s so the real warning is not that any of these countries are going to default own their debt they're not going

to default own their debt because they can print the money the danger is inflation now if you said do I see inflation right now absolutely not we're going to see deflation which is a different kind of danger deflation causes debt defaults Japan has been Trapp into that like for 30 years yeah and Japan's been in a depression in my view since 1990 my view the US has been in a depression since 2006 s we're in our second loss decade you know Japan's entering their fourth loss decade but it's as if all the countries in the

world are getting more and more like Japan I had a meeting with uh saki karasan he was very famous in the 1980s he was known as Mr Yen he was an assistant Finance Minister in Japan but he was called Mr Yang but very smart guy very nice guy and I confronted him on this I said you know second sign your de keeps going up and your debt to GDP ratio is Sky High and your GDP is kind of flat and he said yes but you're missing one thing he said our population is going down which

is true so on an overall basis they're flat but on a per capita basis their GDP is actually outperforming so the logic of that is someday there'll be one person left in Japan and she will own the entire country and be the richest person in the world well it's very bad for Argentina and here's why if you borrow in dollars and then we have deflation what does that mean it means the value of cash cash is going up but it also means the value of the debt is going up so even if you have very

low interest rates which we do when you borrow in dollars and the dollar is worth more that's what deflation is your dollar is worth more that means your debt is also worth more meaning you owe more debt in real terms the nominal debts the same so if you borrow 100 million you owe 100 million that doesn't change but if you have deflation so that the 100 million is actually more valuable this hasn't happened since the 1930s people don't understand no one alive has really lived through a strong deflationary period a lot of us have experienced

with inflation we had it in the United States in the late 70s and you're right Argentina has had it on multiple occasions and we can name other countries people have a sense of what to do an inflation but no one alive has experienced serious deflation since the 1930s and if you did you were 95 years old today so people don't really understand it but one of the things it does it makes the real value of debt go up so in real terms you owe more money so if you were in trouble to begin with and

you borrowed money to get out of trouble but the value of the debt goes up now you owe more money now where do you stand it may not show up in interest payments but every dollar becomes more and more difficult to get the dollar is worth more so what it means is that you see a strong dollar now your local currency uh could be weaker against the dollar that's true that could help exports it could help tourism if you have a really strong dollar in theory you know an American could or european for that matter

could look at Argentina you know I've been to Argentina many times it's one of the most beautiful countries in the world and you know nice people great restaurants so but it could look kind of like a bargain to somebody with a very strong currency but that's not really Argentina's problem Argentina needs more high-tech industry more high value added industry it needs to break out of What's called the middle income trap where you you get to a certain point but you can't get past that point because you can't just do it with assembly style manufacturing jobs

you need high value added jobs you need technology is what you need and all the developed economies are facing the same that applies to all Latin America Chile Mexico Colombia correct but it applies to most of Asia as well this is uh China's problem China's not going to continue the kind of growth we've seen over the last 20 years because they've used up that you know when I studied development economics in the 1970s in graduate school and we used to think that the hard part of development economics was getting from low income to Middle income

and then we say if you get to Middle income it's a straight path to High income turns out that's not true getting from low income to Middle income is actually pretty straightforward you have to get rid of corruption and you need to ease up on regulation but you can if you have foreign direct investment and people come from the country to the cities and you do you know kind of simple manufacturing Etc you can get a really good export machine going and earn hard currency reserves so that part's easy the hard part is getting from

middle income to high income because it turns out you can't just do more of the same you actually need more high value added you need technology today and that's what I would advise every country to be working on including Argentina where the Argentina has a very highly educated Workforce I Me Argentina would be a good case to why don't we make you know iPhones in Argentina instead of China the United States is going to bust up the supply chain to China we're going to shut over time won't happen overnight but we're going to pull those

factories out or shut them down and move them elsewhere so the question is if I were advising any developing economy I would say how can I become a supplier to the United States if they're going to get rid of China which we are for a lot of reasons I'd want to be in the list and we're actually looking at Jordan as a country that could make cell phones um India is a big case because they have cheap labor Argentina I think is a better candidate just because they have a more Highly Educated Workforce the debts

not going up at 2% or 3% the debts going up 89 10% or more the US had a $1 trillion Baseline budget deficit or trillion dollar per year deficit for fiscal 2020 pre pandemic the Congress threw $3 trillion of emergency aid on top of that I'm not even criticizing all those programs I mean the paywell protection plan loans the extended unemployment benefits The increased unemployment benefits imagine where we'd be if we hadn't done that but that aside debt is debt they pile $3 trillion on top now this is going to take the US debt to

GDP ratio up to 135% it was 106% when Donald Trump was sworn in it's close to 130% today because remember you got two things going on it's a debt to GDP so debts your numerator and GDP is your denominator right well what happened well the denominator shrank this got smaller and this got bigger so what happens the ratio it blows up so now it's 135% if you get the laws of Economics right which is not easy because most economists don't but if you get them right it's really a reflection of human nature I mean what

is an economy other than all the people in the economy starting businesses buying selling traveling providing goods and services Etc so um human nature doesn't change at least it hasn't changed much in the last 100,000 years so the fundamental laws of Economics don't change either but circumstances change facts change and that's important now there is um a school of thought a growing one and an influential one that the debt doesn't matter it's like well wait a second so the debt to GDP ratio went to 135% which it did who cares what's wrong with it 180%

we got issues we got problems print up the money and monetize the debt and uh spend it and keep going what is the problem this comes under the banner of something called modern monetary Theory mmt it's flawed it's wrong but it's got its followers and those followers are now in the white house because one of the things Joe Biden had to do to get elected was to make peace with the Bernie Sanders wing of the democratic party they take the view that if the treasury didn't spend the money how would anybody make any money that's

ridiculous but that's what they say they say when the treasury spends money what do they do well they build aircraft they have benefit programs they have government contracts they do whatever they do but when the treasury gives you the money take the money and you spend it on somebody else goods and services go out to dinner have subcontractors whatever it might be that's the real source of money they also take the treasury and the fed and they merge them now that's not legally the case the treasury and the FED are separate institutions the treasury is

just part of the executive branch and the FED is an independent agency and the federal reserve banks are actually privately owned uh a lot of people know some people know that some people don't but the federal reserve banks are privately owned by banks in the district so City Bank Bank of America Etc uh so they're completely separate but the theorists ignore that and say no the treasury needs to spend money because that's how the economy grows and the FED can monetize the debt so you spend the money you don't have you borrow to cover it

you issue bonds to cover the borrowing and if the market wants to buy the bonds fine but if not the FED can buy them and put them away on the balance sheet wait 30 years and collect the money what's the problem who cares about the debt to GDP ratio it's kind of a statistical abstract but why should that stand in the way of using money to solve our problems which are free health care free child care free tuition forgiveness of student loans that's a $ 1.6 trillion doll ticket by the way and like look everyday

readers and investors there's no reason they should know all this stuff this is total inside baseball you have to be a geek like me that kind of keep up with it but uh but it's coming but what that means is we're going to test the Rogue off Reinhardt thesis now let me just take a minute to explain that up to a certain debt to GDP ratio there is a keian multiplier greater than one so the classic example is the UK was in a depression before the rest of the world they have been hit pretty hard

before the Wall Street Crash people aren't spending they're saving it's the liquidity trap so if you get money you pay down debt when you don't have any debt you put it in the bank whatever you do you don't spend it you hoard cash or people were buying gold they were accused of hoarding gold Etc but what they weren't doing was spending and there was a lack of aggregate demand and the banks were not lending so Keen said well if every day people won't do it the government must the government can borrow the government can spend

and what they discovered was that if you borrow a dollar and spend a dollar you can get a150 of GDP now there's a separate debate as to whether that's actually incremental or whether you're just pulling growth forward but so what even if you are pulling growth forward maybe that's what you need to do when you're in a liquidity trap but there's a problem he called it uh the general theory a general theory of uh employment interest and money but it was actually a special Theory I think had a little Einstein I mean because the general

theory of relativity but it's actually a special Theory which means it's a theory that works in a set of circumstances set of conditions the conditions where it works are you're either in a recession or just coming out of one you have excess capacity and the labor and Industrial capacity and you have very little debt in those circumstances you can borrow a dollar spend a dollar and get more than a dollar GDP the problem is that extra GDP you get for the borrowing spending it goes down as the debt to GDP ratio goes up what Reinhardt

and rogov discovered is that at 90% you go through the Looking Glass your payoff is now less than a dollar you borrow a dollar you spend a dollar and you only get 90 cents of GDP or 95 cents Etc so now not only are you not getting your dollars worth for the borrowed dollar or something more which you did at lower levels you're getting less than a dollar so now what's happening you're borrowing a dollar you're spending a dollar you're not getting a dollar of GDP but you are getting a dollar of debt which means

your debt to GDP ratio is going up and the 90 % is getting worse and I just mentioned the United States is at 135% so here are your two competing schools there's the Kian multiplier and creating aggregate demand with government debt and the Reinhardt Rog off more than a thesis I always say powerful evidence that Beyond 90% it doesn't work it goes less than one on the one hand and my friend Stephanie Kelton and Bernie Sanders and Camala Harris and the modern monetary theorists who say no it's all good how could you get growth if

you didn't spend money through the government these theories don't agree at all we're going to find out which ones work I'll give away the answer which is that Reinhardt rogov have it right keing had it right up to a point Reinhardt and rogov discovered that critical threshold that whe you want to call it Tipping Point or phase transition which physicists called or whatever the mon monetary theorists think the opposite and we're going to find out but what it means if Reinhardt and rogoff are right and I'm right and keing was right the more you borrow

it's actually a headwind to growth just as up to the threshold you got more and more and more oh sorry at a low level you got more but then it went down but it's like any uh diminishing marginal return you know the curve starts very steeply you get a lot of payoff then it flattens out then it goes down but it's still positive but at some point it goes below the zero line and your marginal return is negative and that's where we are