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.”
“And Bush made my tail fall off.”
You know what?
I don't think they care about that AT ALL.
Agreed.
I get so tired of these “The financial problems are Obama’s fault” replies, I could choke.
I AIN’T defending Obama.
But he doesn’t have the power to cause or prevent the problems - he was basically a freakin bystander.
We have almost three decades of loose credit. We have a real estate market that was inflated beyond 95% of Americans ability to pay. There are people out there who’s tropical fish got credit card applications in the mail. Congress will buy off anyone - ANYONE - to get the votes to get reelected to get the votes to get reelected to get the votes to get yada yada same old over and over.
The banks are proving themselves to have more thieves working for them that ever walk in the door - some poor jerk can walk in a bank and steal a grand and spend the rest of his life in lockdown, but some dude with a suit and a tie can STEAL BILLIONS and never even go to court, much less get tasered and arrested.
It’s a mess. And it all came from selling notes. Hopes and wished and greedy dreams instead of due diligence.
Maybe - Just maybe - if we lose our butts in the whole thing, but the thing we find and get back is basic honesty and fairness and integrity, it will be worth it.
All true. Where is Sarbanes-Oxley?
Your entire post makes the right points.
Life is far too pleasant and nice in DC. Idiots flourish. Thieves like Franklin Raines flourish
It was amazing how James Cramer tore into Chris Cox two nights ago
I'm told he does this once or twice a week
I have stuck with Bush even while criticizing him
But this George Bush approved bailout with Paulson as the dictator is a travesty and shows who really controls America no matter whether Democrats or Republicans are nominally in charge
Paulson has bailed out out all his Wall St & banker friends.
He gave more money to those responsible for this derivatives disaster
They refused to loan it out. Paulson knew this in advance. It was a charade put on for the sheeple
http://www.salon.com/opinion/greenwald/2008/10/31/pearlstein/index.html
...”As long as their money is well guarded, they could care less”...
YES! Most of us have little power against this huge federal government, much of which has become corrupt. Add to that the ignorance of a population which has elected people who wouldn’t know how to mop a floor, much less assess any kind of financial situation and you have a recipe for obliteration. In addition, only 15 states elected the President. The other states might just as well have not voted. Democracy? I think not. So, what do normal people, by the millions, do? Well, I think it would be a good idea to organize our own communities into giant “neighborhood watches” which study and recognize problems and potential problems before they erupt. Train people in First Aid and CPR and encourage neighbor helping neighbor while teaching that the parasites will not be accomodated. Everyone has to participate in one way or another to enjoy the security of the members. We cannot rely on the government for our well-being. That is clear. They have destroyed our freedom and possibly, our nation through avarice and greed. Trying to preserve what is left is the issue. I believe our currency could become worthless and then, personal skill and bartering will be the currency. And, oh, yes, you had better learn how to protect yourself which is something none of us is comfortable with. We have lived in a false sense of security for a long time. I thought 9-11 would cause people to wake up but it only seemed to deepen our former problems. America is in a state of denial because the truth is too scary to look at. People need to prepare for the worst while hoping for the best. Just waiting around for someone to tell us what to do will not work.
Another thing - we hear big news about a 50B fraud. But is that all?
Anytime you study numbers, you learn the distributions - the bell curve.
For every big chunk of something, you usually have many, many more times the amount of smaller chunks.
So if somebody hears about a 100M fraud now, they’ll just say “Hey, that’s peanuts” even though for every 50B fraud you have, there are probably literally a thousand 500M frauds.
“Where is Sarbanes-Oxley?”
Do we like SarbOx on FR now?
I read somewhere recently that what we are headed into is likely to be similar to “The Paninc of 1873”. I’d not heard about this period of time before, so I started looking into it. In certain respects, it makes the Great Depression look like a cakewalk. The Panic of 1873 lasted for six years, the worst part, I’d guess was the mob violence of the downtrodden poor and unemployed. Now in the last several days, articles are appearing about plans for US Military to patrol the streets, etc. We’ve got millions of welfare accustomed types in every large city. It’s not hard to imagine a scenario where the US is unable to make those monthly welfare payments, or cuts them by some degree. You can’t get blood out of a turnip and the American taxpayers have been bled dry and are likely close to a tax revolt, witness the actions by the State of New York and what California Dems are trying to do with taxes.
It could all get very ugly, very fast. God help us all and I thank God I’m nowhere near a large population center.
Here’s a short piece about “The Panic of 1873” :
Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany’s inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls “the real Great Depression.” She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms “tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police,” a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.
Thank you for such an interesting article and comparison of times. Your time spend is greatly appreciated.
My one concern is that this economic tailspin will be used as a way to introduce a one world currency.
Do you perhaps mean "copyright theft?"
Regards,
“Well, I think it would be a good idea to organize our own communities into giant “neighborhood watches” which study and recognize problems and potential problems before they erupt.”
Good advice. I’d also recommend that people pack and leave states run by thieving liberals, and move to states that have strong Christian values, respect for private property rights and believe in the rule of law, especially our Constitution. These are the places where the safety and well-being of your families will be a primary community concern, and America will be reborn.
ping
“Unemployment, he says, could approach 15 percent. “
The Clinton administration changed the way unemployment was calculated in ‘94. They eliminated people who had stopped looking for a job.
Using the traditional method unemployment is more like 12-13%.
It’s almost as bad as he is already predicting.
The problem with debt is that there’s only two ways to clear it:
1) live frugally and pay it off
2) go bankrupt
The asset bubbles that have been created are massive and reach into almost every phase of the economy. That debt has to be brought back to its actual value again, and there’s not many options on how to achieve that.
>So why was only mccain bashed when Bush was just as bad if not worse?<
It’s not polite to bash Bush on FR. I am one of the few who hasn’t been PC or polite when it comes to bashing him. I will say that I probably have beat on Juan McCain harder than I did Georgio, the sombrero lover.
So we’re supposed to put faith in a person whose single accomplishment was a failed hedge fund???
My one concern is that this economic tailspin will be used as a way to introduce a one world currency.
My take on this article is that it is a reminder / warning to get ready for the introduction of the NWO’s Amero dollar. Perhaps next summer or fall depending on how rapidly Canada’s economy collapses.
“A Euro Dollar, an Amero Dollar, an Asian Yuan, a South American Peso and the Russian Ruble financial systems is what I am expecting when they are done wringing us out to dry. Five or six separate but similar money systems that will smoothly interact. The IMF will accept any or all of them.
Devaluation of the US Dollar will ease the swap over to the new, stronger Amero Dollar. Maybe 10 or 15 to 1.”
http://www.freerepublic.com/focus/chat/2135081/posts?page=7#7
One perfect storm after another comes for 0bama.
The only thing that can stop him now is the (left wing) Washington Bureaucracy.
I think out IT industry in general is extremely robust. Much of what has been off shored is being produced by American companies, so Americans are still (fundamentally) in charge.
Defense is another issue. Between 1988 and ~2003, the Defense industry took a hiring holiday, both in and out of the Government. I am not convinced we have the know how or manpower to keep our Defense infrastructure going as the Baby Boomers retire. Of course, some will not fully retire—especially if their retirement assets are depleted—but stay on as part time advisors (which may cushion the blow).
There are a whole host of things from aircraft to nuclear weapons that are waiting to bite us in the ass. When you don’t build these things on a regular basis, you’re industrial base won’t be there if (when) you need it.
I enjoyed you post. Have you considered that the UN Charter is being measured and framed to take over the spot on the wall where our U.S. Constitution once hung.
This recession has some disturbing issues that could lead one to think it was preplanned, the most disturbing of which is the installation of a non citizen to lead us into further fiscal collapse.
I keep hearing about all this stimulus programs. The fact is that Americans have been over stimulated for years. It is the crux of the problem. People have gone into debt and are tapped out—some are on the razors edge even both spouses working multiple jobs. Now, they are losing those jobs while the value of their assets have gone down. Those people can no longer be stimulated — its like beating a dead horse. And stimulate to do what? Buy more Chineses goods or overpriced homes? A period to retrench and regroup is inevitable, even if it results in severe recession. Sadly, our Government and Financial leaders are too out of touch to understand this. They will just make it worse by spending more $$ we don’t have.
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