jim rickards - spring 2013

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Easing at the Zero Bound:

Beyond QE & the“Foolproof Way”

J ames Rickards

Partner, J AC Capital Advisors, New York, NY USA

Grant’s Interest Rate ObserverSpring Conference 2013 – Plaza Hotel, New York City

April 9, 2013



Origins of a Currency War,

The“Foolproof Way

”to Ease

Monetary Drivers of Fed Policy

Monetary Analysis

PQ = Nominal GDPQ = Real GDP

P = Inflation/DeflationM = Money supply

V = Velocity of money

MV = PQ



Fed Expansion of U.S. Money Supply

QE1

QE2



Velocity of Money Both Volatile andDeclining Sharply

Velocity is collapsing



Fed Must Bend the Velocity Curve

Changing Velocity is a Socio-Psychological Task

Primary Tools are:

Negative Real Interest Ratese.g. Nominal Rates of 2% and Inflation of 4% =

Real Interest Rate of -2%

Inflation Expectations Shock

e.g. Expectations of 2% inflation and actual inflationof 4% causes an inflationary shock

Both Tools Require 4% Inflation



How Does Fed Achieve 4% Inflation?

✔ Cutting Interest Rates (2007)

✔ Quantitative Easing (2008)

✔

Communications Policy (2008)

✔ Currency Wars (2010)

✔ Operation Twist (2011)

✔ Nominal GDP Targets (2012)

✔ Try Harder (2013)



Monetary Math is Easy!

1 + 4 = 5

4 + 1 = 5

Nominal debt requires nominal GDP growth



The G4 Solution to Currency Wars –U.S., UK, J apan, Europe Ease Together

The Year of the Snake Redux

Problems: Europe, Emerging Markets, Inflation



What Could Possibly Go

Wrong?



Fed Misapprehends the Statistical Propertiesof Risk in Currency and Capital Markets

Fed and other central banks persist in using equilibrium models

Evidence for complexity and non-equilibrium states is convincing



Are Capital Markets Complex Systems?

Diversity

Connectedness

Interaction

Adaptability



How Connected are we? How close to the Critical State?

Source: Professor Eve Mitleton-Kelly, London School of Economics. Used with permission.



Interconnectivity of Financial Institutions, Insurers andOther Entities

Source: Systemic Risk from Global Financial Derivatives, Sheri M. Markose, IMF Working Paper WP/12/282

Caveat: Relative size and density shown on a net rather than gross basis



The Future of the InternationalMonetary System

Multiple Reserve Currencies SDR’s

CollapseGold



A World of Multiple Reserve Currencies

Reprises 1920’s and 1930’s per BarryEichengreen

U.S. Dollar Declined from 70% to 60% of GlobalReserves between 2000 and 2012

Future Reserve Mix could be 35% USD, 35% EUR,10% J PY, 20% GBP, CNY, CHF, CAD, AUD, other

Dynamically unstable without an anchor

Solvesno roblems createsnew one



The SDR Solution

Introduced 1969. Issued in 1972, 1981, 2009

Obviated in 1980’s by commercial banks

Preferred path of the power elites

Ten-year plan includes issuers, buyers, dealers, repo,

derivatives and new allocations

SDR’s will not be local currency, but used for oil, globalcorporations, balance of payments

Turns IMF into proto-world central bank with currency andexpanded balance sheet



A New Gold Standard

What is a Gold Standard?

What is the proper measure of Money?

What is the proper reserve ratio?

Which nations are included?



8,133

3,406

2,966

2,451 2,435

1,054 1,040 937765

7,544

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

United

States

Germany IMF Italy France China Switzerland Russia J apan All Others

M e t r i c T

o n n e s

Official Gold Holdings – Total 30,731 Metric Tonnes



10,798

8,133

2,966

1,054 1,040 937765

557 423

5,098

0

2,000

4,000

6,000

8,000

10,000

12,000

Eurosystem United

States

IMF China Switzerland Russia J apan India Taiwan All Others

M

e t r i c T o n n e s

Holdings with Eurosystem – Total 30,731 Metric Tonnes



$6,993

$17,482 $17,820

$44,552

0

5,000

10,00015,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

GM1 (.40) GM1 GM2 (.40) GM2

U S

D p e r O u n c e o

f G o l d

Gold Prices Based on Global Monetary Aggregates

(US, ECB, China)



What Happens When Gold is the Numeraire?

The S&P500 Index in Gold Ounces



Collapse



Thriving in a world of inflation, currency wars and

potential collapse

Long

Banco Santander (ADR) (NYSE:SAN) – On Euro, TBTF, LatAMBank of Ireland (ADR) (NYSE:IRE) – On Euro, TBTFGold – Physical or non-bank fund will allocated barsFine Art – Twentieth Century Masters Collection – Sandy KemperCurrencies: EUR, SGD, AUD, CAD, KRW

Short

J PMorgan Chase & Co (NYSE:J PM) – Poor risk managementCurrencies: USD, GBP, J PY, BRL



Thank you

J ames Rickards, Partner

J AC Capital Advisors LLC, New York, NY USA

[email protected]

@J amesGRickards

jim rickards - spring 2013

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