Last week we reported how some big names in money management had been very public about their reasons for moving more heavily into gold.
But it’s not just hedge fund managers that are getting more publicly positive on the thesis for holding gold. We’re also seeing it with establishment economists.
Read on to see why this might be happening now…
As you may know, the “Shanghai Accord” is a secret plan created by the G-4 (China, the U.S., the eurozone and Japan) on the sidelines of the G-20 meeting in Shanghai, China, on Feb. 26.
The plan is to strengthen the euro and the yen and ease the dollar. With the Chinese yuan pegged to the dollar, this combination gives China financial ease and a competitive advantage over its trading partners.
The Shanghai Accord will be an operative reality in global currency markets for the next several years.
The message is that Japan should not even think about market intervention to weaken the yen. But the G-20 is a high-level club with no secretariat or staff of its own. Who does the dirty work when the G-20 wants to send a message? The answer is the IMF.
The International Monetary Fund acts as the eyes and ears of the G-20 and makes sure all of the members stay in line and live up to their commitments. The IMF has already threatened Japan publicly (in polite language, of course).
The IMF essentially said, “Let the exchange rate move however it wants to.” That means the strong yen trade will continue. Japan has been warned.
Where is the world going under the Shanghai Accord?
To answer that question, I recently attended the IMF Spring Meeting in Washington, D.C. This was a larger version of the G-20 meeting in Shanghai. It was the first time that all the “five families” of the global monetary system had gotten together since a smaller meeting in Paris on March 22.
One of the most remarkable events I saw in Washington was Christine Lagarde’s press conference on April 14. This is where Lagarde put on her Godfather hat and threatened Japan. Here’s the exact transcript of the question and answer:
Question: Secondly, central bank stimulus, is it not preparing the world for further asset inflation that we have seen? Arguably, you could say that all the extra debt that we see around the world is evidence of that. If not, should perhaps Japan or others consider direct monetary financing?
Ms. Lagarde: … As far as Japan is concerned, we have fairly robust criteria under which intervention is legitimate, and that clearly can happen in a case and only in a case where very disruptive volatility must be avoided. So we are watching carefully what is happening in the Japanese markets.
The substance and tone here are unmistakable. After the Shanghai Accord, the yen strengthened materially, with clearly negative implications for Japanese growth and Japanese stock markets.
There was enormous pressure on the Bank of Japan from the Japanese government to intervene to weaken the yen (contrary to the Shanghai Accord).
In her press conference remarks quoted above, Lagarde is warning Japan not to intervene in foreign exchange markets to weaken the yen. She says the only time for intervention is “very disruptive volatility,” which is not the case today. (The yen is strengthening, but in an orderly way.) She then goes on to warn Japan, “We are watching very carefully.”
That’s an implied threat that if Japan reneges on the Shanghai Accord, there will be a price to pay. The IMF has leverage because it is the de facto central bank of the world. It has leverage to provide dollars or special drawing rights (SDRs) in the event of a liquidity crunch or market panic in Japan (which may be coming soon).
The IMF has used this kind of muscle on Greece, Cyprus and Ukraine in recent years. Now the Godfather was making Japan an offer they couldn’t refuse — stick to the Shanghai Accord and we’ll be there for you if needed; renege, and you’re on your own.
The elites deny the Shanghai Accord even exists. David Lipton, the first deputy managing director of IMF, for example, said there is no Shanghai Accord. The head of the Bank of Japan also came out denying its existence.
But there’s an old saying from a British journalist: “Never believe anything until it’s officially denied.” I find the fact that the people in the room are denying it is very good proof that it exists.
For further evidence that the Shanghai Accord is an actual effort to weaken the dollar and the yuan at Japan’s expense, I refer you to a Reuters article from last Wednesday. It was titled, “U.S. Wants Japan to Refrain From FX action: PM Abe’s Aide.”
According to one of Abe’s key economic advisers, U.S. officials made it “pretty clear” they don’t want Japan taking any steps to weaken the yen.
“‘For Japan,’” the aide is quoted as saying, “‘it would be a choice of enduring [unwelcome yen rises] a bit longer or intervene in the market,’ knowing that doing so could anger the United States.”
U.S. officials haven’t issued Japan any direct warnings demanding it refrain from weakening the yen. But tellingly, a U.S. Treasury Department report released this month added Japan to a list of countries it was monitoring for currency manipulation. That’s not an accident.
Below, I show you the one way to produce inflation that doesn’t require the Shanghai Accord or destructive currency wars. And the elites are finally starting to talk about it publicly. What’s their next plan? Read on…
The world’s monetary authorities, including the Federal Reserve Policy and the Treasury, will not rest until they produce inflation.
If debt is growing at 3 to 4% a year, while the economy is only growing at 2% a year, you’re not growing out of your debt. Debt is growing faster than the economy. That puts us on the path to Greece. That’s going to lead to a crack-up. That’s why monetary elites are desperate for inflation.
The world has been battling deflation since the 2008 crisis. That deflation is fueled by three trends, and it’s not just the unwinding of the housing bubble. One is demographics, which is a very powerful force. Populations are declining. If you have a declining or flat population and decreasing productivity, growth will suffer.
One of the reasons the U.S. population is still increasing is not because of its birth rate, but because of immigration. Meanwhile, populations are declining in places like Russia and Japan. China’s population has actually leveled out. These are very serious problems for the future growth of these economies.
One of the reasons Angela Merkel is letting a lot of Syrian and Turkish immigrants into Germany is because the German birthrate is low. It’s the same reason why the U.S. essentially opened its borders. It’s a big political debate. But to an economist, immigration can be one of the ways to produce growth.
The second deflationary headwind has been home mortgages and other kinds of debt. There hasn’t seen inflation because velocity isn’t increasing. The economists say people will spend money if you give it to them. But they haven’t actually spent it. They’ve been paying down debt.
The third vector in the deflationary story is technology. This is an old story. In the 1870s and 1880s, there was a sustained period of deflation because of the mechanization of farm equipment, steam ships, railroads, telephone, telegraph, electricity, and many other innovations. These were deflationary because of the great productivity they unleashed. We see it in computer technology today.
But the U.S. government won’t tolerate deflation these days because it’s highly destructive to government interests.
One thing that’s different today is our government debt-to-GDP ratio is at an all time high. It’s higher than ever, even at the end of World War II. That’s just if you count the amount of Treasury debt outstanding. That doesn’t include contingent liabilities like Social Security, Medicare, Medicaid, veterans benefits, guarantees from Federal Home Loan Bank Systems, FDIC insurance, student loans, etc.
How many of those guarantees are going to get called? The answer is a lot, particularly as baby boomers get older and student loan default rate goes up. When you hear a political candidate talking about upwards of $20 trillion of national debt, that’s just Treasury bonds. When you put all this contingent liabilities, multiply that by ten, that’s the true debt.
How are you going to meet all those promises? The easiest way to do it is with inflation. The government actually writes the checks, but they’re not worth very much. It’ll pay with inflated dollars. That’s traditionally the way the U.S. government gets out from under its debt.
Another possible option is outright default, but there’s no reason for the United States to default on its debts. Default is a very unattractive option.
So there are three ways out of debt. One is default, which is not a good option. One is growth, but it’s not happening. The third way is inflation. The government has to have inflation. If it doesn’t, there’s going to be a crack-up in the national debt.
But we’re not getting inflation from monetary policy. There’s another option, however. The idea’s been around for a long time, but now it’s being spoken about publicly by elites. That’s to have central banks, whether the Fed or the emerging markets, bid up the price of gold.
A higher gold price will also drive prices in the overall economy higher.
It’s possible to devalue every currency in the world against gold at the same time. Gold is money, but it’s a different kind of money. It’s not central bank money. Gold is the exception to the currency wars. Gold is the one form of money that every other form of money can devalue against simultaneously without fighting currency wars. Gold doesn’t fight back in the currency wars. That means a much higher dollar price for gold.
The elites are starting to come out and talk about it openly. This has never happened before. Here are two very specific examples…
In PIMCO’s April 2016 monthly commentary, one of their in-house economists named Harley Bassman talked about the Federal Reserve raising the price of gold:
“So in the context of today’s paralyzed political-fiscal landscape and a hyperventilated election process,” Bassman wrote, “how silly is it to suggest the Fed emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce?”
Here’s one of the chief economists of PIMCO, the largest bond fund in the world talking up gold. PIMCO is owned by Allianz Asset Management which is part of Allianz, the biggest insurance companies in the world. When you talk about Allianz and PIMCO, you’re talking about the establishment. This is not some blogger. And they’re talking about $5,000 gold, publicly.
Another example is economist Ken Rogoff. He was chief economist of the International Monetary Fund from 2001 to 2003. He’s a full professor at Harvard University and recipient of the 2011 Deutsche Bank Prize for financial economics. He’s also co-author of a book about the impact of debt on economic recovery.
Rogoff is a full fledged member of the establishment. Some of my inside sources, who must remain confidential, have told me that Ken is on the short list to fill one of the vacancies on the Federal Reserve’s Board of Governors.
And Rogoff wrote a May 3rd article titled, “Emerging Markets Should Go for the Gold.” Here’s what he said:
“I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold into gold. Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60% to 70% of their admittedly smaller official reserves in gold.”
Here’s Ken Rogoff suggesting emerging markets put 10% of their reserves into gold. If that sounds familiar, I don’t know how many times I’ve told people to allocate 10% of their liquid assets to gold. And here’s our Harvard professor saying that emerging markets should put 10% of their assets in gold.
Then he talks about the impact on price. Again, I’m quoting from the article:
“Many countries hold gold at the New York Federal Reserve and over time, the price can go up. It is for this reason that the system as a whole can never run out of monetary gold.”
Just take that last phrase, “The price can go up. It is for this reason that the system as a whole can never run out of monetary gold.”
I’ve also been saying this for years. It’s one thing when I say it in my books and speeches. But it’s another when you see Ken Rogoff — former chief economist of the IMF and potential nominee for a seat in the Federal Reserve Board, saying exactly the same thing. To me that’s highly significant.
Some people might panic if the Federal Reserve engineers higher gold prices, especially since it’s done nothing but disparage gold’s role in monetary affairs. But having the emerging markets drive gold higher provides the Fed some cover. It distances the Fed from the process.
To me, the elites are letting the cat out of the bag. Again, this is the top people in the system. A chief economist at PIMCO and a Harvard professor and former IMF chief economist who may be in the Federal Reserve Board, both argue that higher gold prices can produce the inflation the elites seek.
This is a signal telling you it’s coming.
James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.