Is the U.S. Economy Headed for a New Great Depression? Jim Rickards Explains

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1:38You said the New Great Depression. Are we in a New Great Depression? We are. And by the way, thank you for mentioning my last book, Aftermath. If you have a copy of Aftermath handy, go to pages 288 to 291. now this book came out in july 2019 in those pages i say there'll be a pandemic in the next three years and there'll be social disorder riots in the streets it's your fault it's your fault anyone who read that book can't say they weren't warned so again to read the whole book by all

2:13Jim Rickards:means but can i say one more thing in in the book the road to ruin you warned also that there are military vehicles stationed all around America getting ready for the riots. Sure. And we were even closer with the book Aftermath. So everything we're seeing now was in that book. But Kim, to your point, the title of the book is The New Great Depression, Winners and Losers in a Post-Pandemic World. A lot of people don't know what a depression is because they, first of all, no one's ever lived through it. If you have a living memory of a U.S. depression, you are 90 years old. My mother's 90, so she remembers it.

2:52We still talk about it. But you're 90 or older if you remember the depression. So very, very few people in that category. Most people have never lived through a depression. They don't know what it is. They assume it must be a continuous declining GDP. It's not. Two quarters of GDP, of declining GDP, is the technical definition of a recession. But a depression means depressed growth. You can have growth in a depression. It's just the growth is below potential. So if your potential is 3%, 3.5%, and your actual growth is 1.75%, that gap between, say, 3.5 % and 1.75%, that gap is depressed growth.

3:31Now, if your debt is going up 5%, 6%, 7%, 8 % a year, which it is, and if your growth is 1.5%, 2 % a year, which it is, which it will be in my forecast, then your debt-to-GDP ratio, when your debt's going up faster than your income, you're going broke. It's as simple as that. so um but but people aren't uh we're looking at intergenerational changes and again it all comes out of the covid pandemic but the pandemic the social unrest and depression that all converged in 2020 a lot of people don't know the stock market reached a certain level in 1929 do you know when it we then it crashed 90 do you know when it regained the 1929 level when it got back to the 1929 level, 1954.

4:17It took 25 years to get back to where it was in 1929.

4:20Jim Rickards:The Dow hit 381 and it took until 1954 to hit 381 again. Correct. But it went down to about 30. I remind people that Joseph P. Kennedy became one of the richest men in the market by shorting stocks ahead of the Great Depression. So you can make money in the Depression and you just have to see it coming. Yeah. Anyway, the last question is the debate between inflation and deflation, and I don't know if you pay attention to Peter Schiff, but his definition of inflation and deflation are different than your definition of inflation and deflation. And so the question is, are we heading for wheelbarrow money, where it takes a wheelbarrow of money to buy a loaf of bread, or what else are we going into?

5:03Yeah, we're probably, I had a debate with Peter on this recently, kind of reminded me of the, I forget the character, in Manhattan, or maybe from Allison Wanderland, words mean exactly what I say, no more, no less. Peter has a definition of inflation that may work for him, but it doesn't work for the Federal Reserve, the European Central Bank, the United States Treasury, or anybody who's trying to figure things out. So I use consumer price inflation, just to be a little technical, the Fed uses something called personal consumption expenditure deflator year over year. That's a technical name, But it's basically just their personal core, by the way, core PC, the flavor of Europe.

5:45It's just their personal definition of inflation. That's the one I use. It doesn't matter if I agree with it or not. If I'm trying to figure out the Fed and the markets, I better use the same tools the Fed is using or else I'm going to miss it. Money supply has nothing to do with inflation. Inflation is caused by velocity, which is the turnover of money. So let's just say you took the money supply from$4 trillion to$7 trillion. dollars nominal gdp is money supply times velocity this is just the quantity theory money this is milton friedman's famous equation which actually goes back to erie fisher in the 1920s well they took the money supply to seven trillion okay what's seven trillion times zero it's zero in other words if you don't have velocity you don't have an economy the thing that drives inflation is not the money supply it's the turnover of money that's the that's the velocity that's the zero in my case velocity has been dropping since 1998.

6:40It didn't start in 2008. It didn't start in 2020. It's been dropping like a stone since 1998. And it's getting closer to zero. So -

6:50Jim Rickards:Wait, Jim, what does velocity mean? Velocity is the turnover of mice. Let me give you a very simple example. So let's say I go out for dinner and I tip the waiter. And the waiter takes my tip and she takes the taxi cab home and tips the taxi driver. And the taxi driver takes the tip and fills up his car with gasoline, okay? In that example, my dollar had velocity of three. There was the waiter tip, the taxi driver tip, and the gasoline. So my dollar supported$3 of goods and services. So that's velocity of three. What if I stay home and watch TV and don't spend any money? The velocity is zero. That's the point.

7:28It's not how much money you print. It's whether people are lending and spending, and they're not. And it's psychological, and the Fed cannot control the psychology. And you've got to change the psychology, get out of that deflationary problem, which, by the way, the only guy who did it successfully was Franklin Delano Roosevelt in 1933. And how did he do it? He raised the price of gold. So they're sitting on it. They're not spending it. You're absolutely right, Kim. It's in the data. The personal savings rate, so savings rates have tripled or quadrupled, and that is what's actually happening. Those are Chinese levels of savings.

8:01So people are not spending the money. And they do, if they write a check, they're paying off debt. They're not using it for consumption.

8:07Jim Rickards:So the final question to you is that when I buy gold and silver, the velocity stops? Yeah, because you, you know, I'll speak for myself. You buy gold, you put it in a vault, and you sit on it. Well, I'm not spending the money. And that causes deflation. First of all, it has to do with the definition of a depression. And most people don't have a good definition of depression. And economists don't even use what I call the D word. They don't like it because let's compare it to recession, the R word, okay? So recession is well-defined. It's two or more or at least two consecutive quarters of declining GDP.

8:44There are a couple other bells and whistles about employment, and there's a referee in the National Bureau of Economic Research, a private econ think tank in Cambridge, Massachusetts. They call the balls and strikes. They tell you when a recession begins and when it ends, when the expansion ends, et cetera. But two or more consecutive quarters of the decline of GDP. That's the classic definition of a recession. So people go, huh, depression sounds worse than recession. And if recession is two quarters of the decline of GDP, a depression must be ten quarters of the decline of GDP. It must be way worse.

9:17And that's not the definition of a depression. First of all, ten quarters of the decline of GDP has never happened. If it did, we'd all be in trouble. but maybe during the Great Depression to some extent, but not otherwise. But that's not the definition of depression. Depression means depressed growth, meaning you can have growth in a depression, but the growth is depressed relative to trend, relative to potential. So in other words, if your economy, if the long-term trend of recovery, well, in a recovery, a growth in a recovery is 3.5%, which it is, and you're growing at 2%, which we were for 10 years, that's depressed growth.

9:57You're creating a wedge. So here's the 3 % trend line, and here's the 2 % actual growth. Well, in between those two lines, that's depressed growth. That's lost output. You could have been here, but you're actually here. And because it's a wedge, over time it gets bigger. I would say we've been in a depression since 2007, that the entire so-called recovery from 2009 to 2019, that was a 10-year recovery, the longest recovery in U.S. history, but it was also the weakest recovery in 10-year history. The average annual growth of that 10-year period was 2.2%. But for all post-1980 recoveries, average growth was 3.2%.

10:38And if you go back to post-World War II recoveries, it's closer to 4%. So if you have an economy that can grow 3%, 4%, and you're growing at about 2%, that 1 % is, 1%, what's the big deal? Sorry, 1 % of$20 trillion compounded for 10 years is a big number. You're talking about trillions of dollars of lost wealth, lost output, from the government's perspective, lost taxes. So that is the definition of a depression. John Maynard Keynes defined it that way. If it's good enough for Keynes, it's good enough for me. If I want a gold standard, I can't peg it at$1 ,800 because I'd have to cut the money supply by three-quarters or more.

11:16So what's the alternative? Raise the price of gold. So notice the same amount of gold can support any amount of commerce at a higher price. So then the question is just an eighth grade math problem. It's like, okay, well, what would the price have to be to match the money supply? And use M1 as an example. And I assume 40 % gold backing, you know, the Austrians and the monetarists, they bang the table. No, it has to be 100 % or, you know, your leverage. Okay, that's a debate for another day. So I'll be conservative and say 40%. So if you take 40 % of the money supply, and that's how much gold you need by value, and we know the weight, divide one by the other, and you come out to$15 ,000 an ounce.

11:58So the reason I'm explaining that, Robert, is I want to be clear that there's not a central bank in the world who wants a gold standard. They're not going to go to it voluntarily. But if they have to because of collapsing confidence in the dollar, then it follows that you have to go to$15 ,000 an ounce because any smaller, any lower valuation is deflationary, and that's the last thing you want.

12:19Jim Rickards:There have been three Feds. The greatest prosperity was between the second and third Fed, and why do we have the third Fed? Right. Well, you can say we had three Feds. We actually had three central banks, but one of them was called the Fed because they didn't want people to know. There was a reason for that, Robert. You make a good point because they didn't want people to know it was a central bank. Yes, the Fed is our third try. The first bank of the United States, I think it was kind of 1797 to 1816. It had a 20-year charter, so it went from the late 1790s to around 1814, give or take. And then they shut it down.

12:58They said, well, we don't need this. This is concentrating. It was actually based in Philadelphia. Concentrated too much power in Philadelphia, the eastern merchants and all that. So they let the charter expire. Well, then we got, then it was kind of a hangover from the War of 1812, and we needed finance, and the trade was disrupted, et cetera. So they, I guess the first bank ended around 1812, but then after the war, we needed a new one. So they chartered a new one in 1816, and that was called the Second Bank of the United States, also a central bank, on Chestnut Street in Philadelphia. The building's still there.

13:34It's a beautiful old building. Now, that was a 20-year charter also, so it ran until 1836. Well, guess who was president in 1836? Andrew Jackson. And he hated the central banks. And he came from Tennessee. He campaigned to shut down the central banks. Well, it was one of the biggest fights in history with the Congress who got the rise of it or not. He vetoed it. And so the second bank in the United States ended in 1836. So two tries, two failures. We had no central bank from 1836 to 1913. There was no central bank. And that was, as you point out, Robert, one of the greatest periods of prosperity in American history.

14:15I mean, the telegraph, the telephone, the electricity, the automobile, you know, I guess the airplane kind of came along at the tail end of that. You know, harvesters, machinery, ocean shipping, steam, you know, railroads, you name it. I mean, we just grew and grew and grew from coast to coast, massively productive. Inflation was not a problem. Actually, deflation was a problem, but it was kind of a good kind of deflation where, you know, when prices go down, if you make the same amount of money, you get a raise. You can buy more for your money. What's wrong with that when you think about it? So, yeah, and there were – you get guys who just sort of lost their way like Paul Crookman.

14:58But look at all the financial panics during the gold standard. It's like, yeah, I could list them. You know, 1893, 1898, there were a lot of financial panics, by the way. Look at all the financial panics without the gold standard. You know, 1990, we had a serious recession. 1987, the stock market fell 22 % one day. 1998, we came within an hour or so shutting down every market in the world and the LTCM crisis. 2000, the NASDAQ lost 80 % after the dot-com bubble blew up. 2008 after Lehman bankruptcy. Again, the world was hanging by a thread. 2020, the stock market collapsed 30 % in about one month.

15:45And there are many other crises, the tequila crisis, 1994, et cetera, et cetera. The point is, there are financial crises on a gold standard. There are financial crises when you're not on a gold standard. Guess what that tells me? As a statistician, you would say there's no correlation between gold and financial crises. Financial crises happen, but they don't happen because of gold, and otherwise gold works fine.

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18:06The stock market crashed in October 1929, but it bottomed in June 1932. That was a three-year moving crash or rolling crash, whatever you want to call it, with some rallies along the way, And the total damage was over 80%, not 30%, not 40%, down 80%. And what people don't know is you said, okay, then it rallied in 1933 and 1934. The Fed messed up again and blundered again, as they usually do in 1937, and threw us into a double dip. But if you ask people, okay, well, everyone knows the stock market crashed in 1929. When did it regain those highs? How long did that take? The answer is 25 years. It was 1954.

18:53It was 1954 before the market recovered from 1929. Now, it doesn't mean there weren't gains along the way or you couldn't make money. You could. But if you say, oh, I'll just sit tight and wait till it comes back. Well, a lot of people didn't live long enough. They never saw their money back. because they didn't live 25 more years. So that's a real bear market. It's happened before. And so the point is you need to be prepared for things like that. And there are no one alive, but very few people alive have seen anything like that. So I think that's the right framework to put it in. And if you say, well, what if we had another market crash right now?

19:32We'll talk about reasons why in a second. Why couldn't the Fed just come right back in and print some more money and do the same thing over again and bail out the new failures, whoever they may be, whether it's, I call him Sam Bankman fraud, not Sam Bankman-Fried, but some people call him son of Sam Bankman-Fried. They're too young to know who's son of Sam is. Well, you can look it up. He's a serial killer. And this guy, Sam Bankman-Fried, is a serial killer of net worth. But, yeah, you can just kind of keep bailing things out. Why not do it again? What's the big deal? Well, the answer is each bailout is bigger than the one before.

20:09And that's the point. You can go all the way back, 1994, Mexico, 1998, Russia, LTCM, 2000.com, 2008, Lehman, 2020, pandemic. And they do bailout, but each one's bigger than the one before. I mean, we threw out$6 or$7 trillion of new debt on top of a$1 trillion a year baseline, $7 trillion in new debt to kind of dig our way out of 2020. So there is a limit. There comes a time when it's like, hey, this bill is going to be$20 trillion. Sorry, that check's too big. We're going to have to let some things fail.

20:43Jim Rickards:We talked about how the Fed is using what you call the equilibrium model. Right. And you prefer the Bayesian model. Could you explain Bayesian model forecasting? Sure. Bayesian statistics is a branch of statistics. And the main branch of statistics is called frequentist, just frequent. and basically says, give me more data. Data, data, data. The more data I have, the better prediction I can make. That's the Fed. That's the Fed. Well, that's the Fed and actually most academics, but it's exactly what the Fed does. But what do you do when you don't have any data? What do you do when you have to solve a life or death problem and you only have maybe one data point instead of a million?

21:23And this is the problem we confronted with the CIA after 9-11, which is we had exactly one attack of this kind. Now, a frequentist would say, well, okay, let's wait until there are 30 more attacks and 100 ,000 dead. And then we'll have a nice database and we can work with it. But you don't have that luxury. These are life or death problems. These are existential problems. So what you do when you don't have enough data, you make an assumption anyway. You use intuition. You use the little data you have. If you actually say, I have nothing to go on. I have no idea what's going to happen. You make it 50-50.

21:5550 % chance this will happen. 50 % chance it won't. But then as you go forward, more data comes in and you apply the data to the assumption on a conditional basis, meaning what is the likelihood that the second thing would happen if the first thing were true or not true? And then you update. And so if the subsequent data tends to confirm one part of the hypothesis, you increase that probability. Maybe you go from 50 to 55 to 60, et cetera. Or you decrease it. And this is the hard part because you have to be willing to confront data that contradicts your hypothesis. If something comes in that says, no, you were wrong the first time, you have to be honest and lower those probabilities.

22:34And that's where a lot of times it falls down because people – this is called confirmation bias. You reject the thing that disagrees with you and you accept the thing that agrees with you. Well, if you do that, you're pretty much going to be wrong. So you have to be humble and you have to be able to take data that contradicts what you're saying. But if it tends to confirm what you're saying, then you increase the probability. And our friend Felix Saint-Marie we were talking about earlier, he left the University of Vienna. But instead of becoming an academic economist, he became a wealth manager and banker, moved to Switzerland.

23:07And he was – but he was very plugged in. He ran the Central Bank of Belgium. He was considered the leading expert on foreign exchange at the time. And maybe if he were alive today, he still would be. But so this is a picture of July 1914. It's weeks before World War I. But until then, people looked around and said, this is the most prosperous time in history. The weather in Europe was great that summer. The British Empire was at its height. Prosperity seemed everywhere. The fact that Serbia and Austria were having a little dust up didn't seem too significant. again. But Summary had his antenna out and he talked to a cousin of the king of England who had just come back from meeting Kaiser Wilhelm, who was the emperor of Germany and the German Empire.

23:58And the other guy said to Summary, he says, well, I've just come back from meeting with my cousin, will you? And he says the odds of war between England and Germany are zero, just not going to happen. But Someret had more than an instinct. He knew that often the elites are the last to know. Everyone says, oh, you're rich, you're a billionaire, you're in the White House, you're whatever it may, Silicon Valley, you know more than anybody. It's usually not true. They are rich, given that. And they're smart. I'm not detracting from that. But their predictive ability is very low. And the reason is they're in a bubble.