Posted on 12/17/2008 11:32:28 PM PST by iowamark
What’s the worst that could happen?
That’s a question that James Rickards spends a lot of time pondering these days, as he sifts through the national security implications of the financial crisis facing the United States.
Rickards will lay out his worst case scenarios in a lecture sponsored by the Navy and the Office of the Secretary of Defense for Policy tonight. And his forecasts aren’t for the faint of heart.
Rickards calls it the “A to Z” problem: What are the threats that could make the U.S. economy look less like America and more like Zimbabwe? He sees them everywhere – in the Chinese ownership of vast amounts of American debt, in Russia’s increased centralization of its economy, in Al Qaeda’s long-established fascination with damaging the U.S. economy.
In many ways, Rickards is the ultimate bear. He’s not just thinking about whether the stock market will decline, but whether or not the stock market will survive.
All that puts Rickards decidedly outside mainstream economic and political thinking in America. But he does have an influential audience: the United States intelligence and defense communities.
Rickards is a regular adviser on financial issues to the director of national intelligence's office, and he lends his financial advice to the national security community.
His lecture comes as part of an annual “Rethinking Seminar” produced by the Johns Hopkins University Applied Physics Laboratory. Rickards argues that government is not doing nearly enough to prepare for the worst. “Here’s the policy problem for the United States,” he said in an interview. “We have experts in defense and intelligence, and huge depth in capital markets experience at the Fed and at Treasury. But they’re separated by the Potomac River. And they’re not talking to each other.”
Rickards came by his economic experience the hard way. He was the general counsel at Long Term Capital Management, the hedge fund that collapsed in spectacular fashion in the late 1990s and nearly took the global economy along with it. That near-economic death experience gave him a healthy appreciation for risk. Today, he’s the senior managing director for research at Omnis, an applied research firm.
Four of the scenarios keep him up at night:
The Bait Effect
Terrorists, and al Qaeda in particular, are fascinated with the idea of destroying the U.S. economy. Rickards worries that the economic meltdown in the United States could serve as bait of sorts for a terrorist attack, as plotters calculate that a strike now could have a “force multiplier” effect because of the already skittish U.S. stock market.
The China Syndrome
The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billons more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae. And a general sense of mutually assured financial destruction keeps them from wielding that debt like a weapon: if the Chinese dumped U.S. debt on the global market, their own holdings of U.S. debt would decline in value, the U.S. economy would be damaged, ultimately harming the Chinese economy by reducing American ability to buy more Chinese goods.
They’d have to be crazy to try it. But Rickards points out that governments don’t always do the rational thing. And in the meantime, their holdings give the Chinese incredible power over American decision making.
“It gives the Chinese de facto veto power over certain U.S. interest rate and exchange rate decisions,” Rickards explained. “For example, there’s a limit to how much dollar depreciation the Chinese would tolerate.”
That potentially closes off one American economic strategy: allowing the dollar to decline in value in order to help boost U.S. exporters. And China’s leverage is only growing as each federal bailout adds to the U.S. deficit.
The Existential Crash
A pessimist by nature, Rickards believes that many economic forecasters are wrong, and the recession will get far worse than predicted.
He sees an epic disaster scenario in which the U.S. gross domestic product declines by a staggering 35 percent over the next six to seven years. Crippling deflation could take hold. Unemployment, he says, could approach 15 percent.
That’s a calamitous rate, but it would not be an all-time high: unemployment hit 25 percent during the Great Depression.
“The national security community needs to be conversant with this,” Rickards said. “In defense, intelligence, and national security, you earn your money by preparing for things that may be remote, but pose an existential threat if they come to pass.”
In this scenario, the possibilities for global unrest increase dramatically as a staggering United States retreats from foreign aid and global diplomacy and the list of dangerous failed states grows sharply.
The Alternate-Dollar Nightmare
“The Number One vulnerability is the dollar itself,” Rickards concluded. “We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice.” That is, there simply aren’t enough Euro- or Yen-backed securities for investors to shift their money out of dollars and into some other currency.
But what if some kind of global coalition – say a trillion-dollar sovereign wealth fund allied with several countries around the world – banded together to create a gold-backed alternative to the dollar?
Rickards says investors – many of whom already resent that they have no alternative to the dollar – would sell American currency in huge numbers to take advantage of the new opportunity. “If that happens, that’s the end of the dollar,” Rickards said. “You’d have high unemployment, deflation, and interest rates would go up. It would take what already looks like a strong recession and make it a Great Depression or worse.”
Still, even Rickards sees a silver lining to all this. He looks around the world to the problems facing other countries such as Russia, China, Iran, and those in the Middle East.
“There are vulnerabilities for the United States, but also opportunities,” he said. “I’d rather be the United States than any of these other countries.”
In case you don’t have enough to worry about.
The first step towards the realization of these scenarios already happened: the election of Obama.
I’m a pessimist when it comes to our future economy as well. I’ll keep my eye on this thread for others to reassure me why I shouldn’t be so worried.
The part about some global group coming up with a gold-based currency is interesting - and worrisome. Not sure how easy that would be to do though. I think that is one of the ONLY things going for us now - where else would you rather be invested?
I agree.....seems like they are talking about a one world coalition. I will be watching the responses also.
we could get back the china debt if lawyers would go after the Chinese like they do US citizens for copy-write theft!
Constitutional rights are extended to those trying to kill us, but they aren’t extended to those thieving our economic property.
What a country!
As opposed to what, McCain?
I got news for you: the current GOP administration increased our unfunded liabilities with Part D Medicare, more spending on more useless crap (billions for nonsense like AIDS in Africa) than we saw out of any POTUS before.
McCain has his lips firmly affixed to the posteriors of the DC press corps - and would have been only moreso if he had been elected.
Given the two choices we had in this election, here’s a newsflash for you: you were going to get screwed, either way you look at it. The only difference was that one of the two was promising to buy you dinner first. Just promising.
There wasn’t even evidence that he had actually made reservations.
What the ...?????
mccain voted against medicare part D. He actually tried to filibuster it
Interesting. I seem to remember references to China buying up gold, even as we and others (gov’t, not individuals) were dumping it. Will have to look for that ref.
Tomorrow I’ll see how much Soros is worth. (Well, maybe him, Gates, Buffett and a few of those Middle East Kings with their gold-plated 747’s!)
Re-Title:
If Eyore Were An Economist.
Yea he did. He’s also the guy who was sponsoring the immigration bill that would have more than made up for his veto on Part D with a huge increase in the drain on the Treasury by inviting in a huge number of third world medical basket cases. Flip a coin.
There’s only one GOP senator I’ve seen who actually treats the public’s money with anything but contempt: Coburn. After that, I don’t see anything in the GOP in the Senate that doesn’t have his/her nose in the trough alongside the Democrats.
Bush has already spent more than several previous Democratic administrations combined and has cost the GOP any and all credibility in fiscal responsibility, possibly forever. Add on crap like the “Bridge to Nowhere” and we have a party with no credibility whatsoever on fiscal or monetary policy.
We still have yet to see a SINGLE Wall Street figure be prosecuted for their malfeasance and violations of SarbOx, which Bush signed with a great flourish after Enron. What we have here makes Enron look like chump change left in a penny dish by the checkout. We have a SecTreas who is busy pissing money into the air with wild abandon and complete secrecy, a SEC chair who is a Harvard-educated Barney Fife, and malfeasance everywhere we look in DC and Wall Street.
Some people will try to respond “Oh, but they just arrested Madoff!”
No good for the GOP. Madoff confessed to a FBI agent. The SEC was nowhere to be seen.
People here on FR claiming to be scared of the financial consequences of Obama might as well hang it up. Bush has set the stage for socialism to run amok, and is busy socializing the economy before he even leaves office, mostly through administrative fiat.
What conservatives better think about first is purging the party of neo-cons and Bush-lites. Let’s just admit that we’re going to spend at least four years in the minority and clean house. That can start with sending McCain out to pasture and putting someone else in there who isn’t quite so eager to stab his fiscal conservative running mate in the back.
Don’t worry everybody, we have a not quite one term Democratic senator coming to Washington to save us all... with higher taxes, more welfare... and budget cuts in defense...on second thought, worry.
Here’s the deal with McCain. He was for a lot of crap. he deserved what was coming.
but he also opposed a lot of Bush’s nonsense and you didn’t see Republicans give him any credit. Bush could do no wrong so if you voted for his big spending, you were still considered a ‘conservative.’ Hannity would still say nice things about you. And Bush was also for that immigration bill. So why was only mccain bashed when Bush was just as bad if not worse?
ok... how about this one...
the US enjoys superiority on the battlefield today due to one thing; our IT infrastructure. who to hit, where to hit them, when, with what from where, etc...
couple that with two items:
1. the majority of our tech was developed by baby boomer engineers and scientists, which are retiring over the next 5-10 years.
2. for the last 10 years, the technology sector has been offshored to third world countries. these Americans have been forced out and have left the industry.
basically, within 15 years we will have a massive short fall of defense industry experts to keep our military viable and able to compete on tomorrows battlefield.
meanwhile, china will have all the manufacturing and IT capability through years of ‘training’ in the US
As Eeyore might observe, “He didn’t spell my name right, what else would I expect.”
Ping!
They are only interested in making lots of money ASAP. National security, borders, terrorism, i.e., a long-term survival of a country is not their concern. Actually, it is more of an impediment for them. Collaboration means passing up business opportunity for immediate profit for national security reasons, or long-term survival of the country. They are the ones who preach that borders will dissolve away pretty soon. As long as their money is well guarded, they could care less.
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