In a recent interview conducted at the Nasdaq stock exchange headquarters in New York, macro analyst and financial commentator James Rickards warned of a potential upcoming financial panic in the run-up to the release of his latest and final book in a series of four called “Aftermath“.
The bestselling author thinks that the US Federal Reserve (FED) raising the interest rate from zero all the way to the current 2.25% to 2.5% over the last couple of years may be a ploy from the central bank to give it the opportunity to then cut rates in the event of another potential economic downturn.
Rickards has had a long history on the frontlines of financial panics. He had a role as the chief legal counsel for the now-defunct hedge fund Long-Term Capital Management. The firm was infamous for the bailout it received organised by the Federal Reserve Bank of New York to the tune of $3.625 billion following heavy losses for the firm following the 1997 and 1998 Asian and Russian financial panics.
Since then, Rickards has spent time on the sidelines and bore witness to the 2008 financial crisis and subsequent bailout – this time directly from the US Treasury.
Moving forward another 10 years, he thinks we may soon be on the precipice of another major economic downturn, but this time the mess will be too big for even state-backed central banks like the FED to get us out of trouble.
The FED won’t be able to bail out the system again
Commenting on what he thinks the FED may do in the event of another financial panic, Rickards said: “They’re going to freeze accounts and shut the stock exchanges because they won’t be able to bail it out again.”
He went on to say the FED “printed four trillion dollars to bail out [the system] last time, and I was standing with our modern monetary theorists to say that you’re not gonna be able to print another four trillion to bail it again.”
Rickards thinks that this will inevitably cause the FED “to turn to the IMF”.
He believes a move like this may have “a lot of implications” due to the role the IMF plays in today’s global economic framework as essentially “the central bank for central bankers”. A future bailout may result in many central banks all around the world needing to turn to the only place left with a clean balance sheet for a liquidity injection in the form of SDRs – or what Rickards calls “world money”.
The @IMF is ginning up talk of its world money SDRs again. https://t.co/35HR2nnoIM. By the way, I'm speaking at Bretton Woods on the 75th anniversary of the original conference (July 23). Details here: https://t.co/djDCT0bT1X
— Jim Rickards (@JamesGRickards) April 6, 2019
No classic reasons to raise rates
Rickards posed the retrospective question of whether anyone at the FED in 2010 (following QE2) thought that we’d be in this situation of having a non-normalised balance sheet in 2019. He said: “There was no normal business cycle reason to raise rates until you see inflation or capacity and labour market constraints putting a dampener on growth in the market.”
He thinks that there is no risk of capacity constraints now that “you have 700 million people in China willing to work for next to nothing”.
Rickards concluded: “The FED is raising rates to undo the damage of taking them so low and keeping them low for so long – it’s getting ready for the next recession.”