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October 1, 2024 | As we completed the revisions to “Inflated: Money, Debt & the American Dream” last week, we had an opportunity to speak with a number of close observers of the dollar and the Treasury market about what has changed in the political-economy over the past 15 years. Answer, a lot. We asked a number of people if the dollar will still be the dominant reserve currency in 50 years for the American tricentennial.
In particular, we were able to speak with our friend and fellow Lotosian James Rickards, who is releasing his latest book “MoneyGPT: AI and the Threat to the Global Economy.” Below are some excerpts from our wide-ranging conversation last week. You can read more in the upcoming second edition of “Inflated,” to be released in 2025 by Wiley Global.
The IRA: Jim, thanks for making time and congratulations on the new book. During our research for the new edition of “Inflated,” we spent a lot of time describing the changes that have occurred in the US financial markets since 2008, particularly the explosion of public debt under President Barack Obama and the annihilation of the primary dealers. How do you view this period?
Rickards: There has not been a Fed funds market since 2008. Prior to 2008, we had banks and excess reserves, but today there is no Fed funds market.
The IRA: Agreed. Are we headed back to the future of President Abraham Lincoln and Treasury Secretary Salmon Chase, who created the fiat paper dollar to finance the Civil War? That is, a bank market for Treasury debt without the non-bank dealers who supported the government debt markets for 75 years after WWII? Are we witnessing the slow-motion collapse of the Treasury market? Almost all of the Primary Dealers are now banks.
Rickards: A big part of my career was at Greenwich Capital Markets, which got its primary dealer designation by acquiring a failing primary dealer. What that meant was we were allowed to call the Fed and trade Treasury securities. Our small firm was often among the top three dealers in longer-dated Treasury debt. We arbitraged and traded Treasury bills and notes with the Fed, which we could finance overnight in the repo market. It was the ultimate example of insider trading because all of the dealers talked to one another, but that is what the Fed wanted in order to maintain an orderly market in Treasury paper.
The IRA: The Fed created the dealer market in the 1950s to provide an indirect way to finance Treasury debt instead of having the banks buy it directly, as they had done through the Depression and WWII. You won’t find any discussion of this on the Board of Governors web site. Americans have wandered blissfully through the 20th Century until 2008, when half the primary dealers disappeared and the other half were acquired by banks. Then in 2020, again the Treasury market collapsed and the Fed rode to the rescue. Where are we heading now?
Rickards: We may find out sooner rather than later. We are in another contraction, but not in terms of the Fed. The central bank is almost irrelevant at this point. The banks are crucial today and the oxygen supply is in the repo market. Money creation comes from the banks, not the Fed. But as the Fed and the dealer community became more and more concerned with the Treasury’s needs, we did not create any new growth in the economy, no new commercial activity. Gold took a bad wrap in the 1930s for being the cause of deflation, but in fact it was because banks were unwilling to lend and we slipped into a debt deflation.
The IRA: In the 1930s, holders of paper assets fled to gold, so FDR had to attack gold or the greenback franchise was out of business. Irving Fisher was right after all. Is the US economy growing or have we already fallen into a period of stagnation as the federal debt explodes?
Rickards: We have been in a depression since 2007. I use the definition of depression by Lord Keynes in the General Theory, which is a period of below trend growth with neither a tendency to collapse or grow stronger. In other words, an economic depression is depressed growth. So, if your potential growth is three and a half percent, but your actual growth is two, then you’re in a depression. By the way, from 2009 to 2019, the compounded rate of economic growth was just over two percent.
The IRA: Jim, in your new book you note that Americans “no longer know what money is.” What does money mean to American society in 2024? In Chapter Three of “MoneyGPT,” appropriately entitled “Moneyness,” you seem to suggest that society is reverting back to a pre-written world of sound and sung narrative. You write: “We are returning to Homeric modes after 2,500 years of linear script. We are replacing money with moneyness.” Will we be using large rocks in Central Park as a form of money soon?
Rickards: Money is one of the foundations of civilization. Money is not the point of civilization and it’s far from the most important feature. Still, it’s part of the bedrock and performs crucial roles. Money is an advance on barter. Money is an alternative to violence. Money facilitates commerce and investment, and acts as a store of wealth. Money is among the institutions, along with law, religion, and the family, that enable civilizations to be civil and avoid a Hobbesian war of all against all. Just as money supports civilization, so money relies on civilization for its value. Money’s value springs from trust, and trust itself depends on some institution— a central bank, a rule of law, a gold hoard, an AI algorithm— to sustain it. When institutions break down, and trust is lost, the value of money is lost as well, only to await the rise of new institutions and new forms of money so the cycle begins again.
The IRA: So how does this movie end? Is the dollar headed to a long-term decline? The portion of global reserves denominated in dollars has fallen to the lowest point in 30 years according to the IMF. What should a future President do to signal that the dollar is not declining?
Rickards: Humans are incredibly adaptable when it comes to money. Witness crypto as a case in point. If you are the shepherd of the dollar, you cannot take the currency for granted. People will create new currencies when the old money fails. That is why the Treasury should begin to buy gold again to demonstrate that the dollar is real.
The IRA: Exchanging paper dollars for gold sounds like a good trade. But somehow we just cannot imagine a nouvelle socialist like VP Kamala Harris repudiating FDR’s 1933 currency devaluation. A future President Donald Trump could easily begin to exchange fiat paper dollars for gold. Maybe President Trump could also issue gold coins denominated by weight as a rejection of the New Deal devaluation? We’ll put Judy Shelton’s image on the one ounce “MAGA Eagles.” And just by coincidence, Allex Pollock and Paul Kupiec of American Enterprise Institute just published an article on whether the Fed can buy gold.
Rickards: The Treasury buying gold would restore confidence in the dollar and perhaps make people believe again that the currency has real value. The price of gold in dollars would clearly go up, but buying gold would be a statement to the world that we are not just going to go down the print-the-dollar rabbit hole. This does not mean that we are going back to a gold standard, but it does say that we are going to honor our obligations. But to make it to 2076, we need to think really hard about whether we have lost the thread about what money really is for America.
The IRA: Buying gold would certainly be a better investment than a sovereign wealth fund or the Fed’s purchase of mortgage backed securities. The Fed’s accumulated losses on its interest rate mismatch now top $200 billion and climbing. Imagine if a future President Donald Trump atoned for the terrible sin of FDR for taking gold away from Americans in 1933 and the less significant act of President Richard Nixon finally closing the gold window for other nations in 1971. Thanks Jim!
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