Unrestricted Warfare Symposium 2009 Proceedings
James Rickards
Mr. James G. Rickards is Senior Managing Director at Omnis, Inc.
and Co-Head of the firm’s practice in Threat Finance & Market
Intelligence. Mr. Rickards previously held senior executive positions at Citibank and RBS Greenwich Capital Markets as well as Long-Term Capital Management and Caxton Associates. Mr. Rickards has directly participated in significant financial events such as the 1981 release of U.S. hostages in Iran and the LTCM financial crisis of 1998 in which he was the principal negotiator of the government-sponsored rescue.
Mr. Rickards holds an LL.M. (Taxation) from the New York University School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in International Economics from the JHU/SAIS, and a bachelor’s degree with honors from The Johns Hopkins University.
[my apologies for not reformatting this better]
p.18: "What the U.S. has just experienced is the breaking of numerous bubbles in residential housing, credit card debt, consumption versus savings, growth in derivative products, growth in structured products, and the willingness of investors to use leverage and sell volatility in order to chase illusory gains. These breaks are not characteristic of normal cyclical downturns of the type which occurred in 1990–1991 and 2001 or even the more severe down-turn of 1973–1975. We expect that the U.S. economy has entered a prolonged and steep decline that could reduce real GDP by 20percent or more over the next several years with no immediate
prospects for recovery."
p.19:
Worse even than the long, slow grind along the bottom
described in the foregoing section is a sudden catastrophic col-
lapse. In that context, the greatest threat to U.S. national security
is the destruction of the U.S. dollar as an international medium of
exchange. By destruction we do not mean total elimination but
rather a devaluation of 50 percent or more versus broad-based
indices of purchasing power for goods, services, and commodities
and the dollar’s displacement globally by a more widely accepted
medium. This can happen more easily and much more quickly
than most observers imagine. The following example hypothesizes
a single country, Russia, acting unilaterally to require that all of
its exports (principally oil and natural gas) henceforth be paid for
in a new gold-backed currency issued by a newly formed fiscal
agent of the Central Bank of Russia based in London. However,
variations on this plan can easily be imagined including a joint
announcement to similar effect by Russia and China or an even
larger group under the auspices of the Shanghai Cooperation
Organization and in affiliation with Iran.
The following invented press release (Figure 3) from the
Central Bank of Russia illustrates how quickly and easily a dollar
Pearl Harbor-style attack might be executed. This press release
addresses numerous technical issues including acceptable rule
of law, enforceability, settlement and clearance facilities, lending
and credit facilities, etc., all of which would be subject to further
analysis and the articulation of detailed policies and procedures
in a real-word implementation. However, there is nothing new or
particularly daunting in any of this. The point here is to show how
easily this could be done.
the Central bank of the russian Federation (bank of russia)
Press release, Moscow, May 13, 2010
The Central Bank of the Russian Federation (CBR) hereby announces the following
facilities and processes which are in place and available for counterparty inquiry
immediately:
Point 1. CBR has arranged long-term use of vaults in Zurich and Singapore capable of
holding up to 10,000 metric tonnes of gold. Security is provided by G4S and is state-of-the-
art including multiple security perimeters, biometric scanning, advanced encryption standard
264-bit encryption of communications channels, blast proof construction and redundant
power supplies. CBR has moved the gold component of the Russian Federation international
reserves to these vaults amounting to approximately 500 metric tonnes.
Point 2. CBR announces the issuance of the Gold Reserve Dolar (GRD) to be issued in
book-entry form by the Global Dolar Bank plc in London (SWIFT: GDBAGB) acting as fiscal
agent of CBR. One GRD is equal to one kilogram of pure gold (the Fixed Conversion Rate
(FC Rate)). The GRD is freely convertible into gold at the FC Rate and is freely transferable
to any designated party on the books of the Global Dolar Bank or any other approved
bank maintaining GRD accounts. CBR invites creditworthy and prudently regulated banks
worldwide to open GRD accounts and facilities on their books which can be cleared on a
real-time gross settlements basis via Global Dolar Bank. The Global Dolar Bank clearance,
settlement and accounts systems are operated on IBM Blade Servers using Logica CAS++
payments solution software.
Point 3. The Gold Reserve Dolar may be acquired in any quantity by delivery of the
appropriate amount of gold at the FC Rate to any one of the vaults noted in Point 1. Upon
receipt of good delivery, the pertinent number of GRD’s will be credited to the delivering
party’s account at Global Dolar Bank. Gold Reserve Dolars are freely redeemable into gold
in any quantity by instruction to Global Dolar Bank and by providing delivery instructions
to one of the vaults.
Point 4. All matters pertaining to title, transfer and operation of GRD’s and Global Dolar
Bank plc are determined solely under English law and heard exclusively in English courts. All
matters pertaining to physical possession, delivery and receipt of gold in the vaults will also
be determined solely under English law and may be heard either in English courts or courts
located in Switzerland and Singapore respectively. Opinions of law from Queen’s Counsel
and leading counsel in Switzerland and Singapore respectively are available for inspection.
Point 5. Effective immediately, all sales of Russian exports may be negotiated,
denominated and paid for in GRD’s only. The existing Russian Ruble will continue to be legal
tender for domestic transactions conducted solely by parties within the Russian Federation.
Point 6. Effective immediately CBR announces a tender for unlimited quantities of gold.
Any gold tendered under this facility will be paid for by delivery to the seller of U. S. Treasury
bills, notes or bonds at an exchange value calculated by reference to the market value of
securities determined in USD closing prices on Bloomberg and the market value of gold
determined in USD by the London fixing, both for the average of the three business days
immediately proceeding the settlement date of the exchange.
Point 7. CBR will provide GRD lending facilities and GRD swap lines via Global
Dolar Bank plc for approved counterparties with eligible collateral as determined in the sole
discretion of CBR.
The intention of Central Bank of Russia would be to cause
a 50 percent overnight devaluation of the U.S. dollar and dis-
place the U.S. dollar as the leading global reserve currency. The
expected market value of gold resulting from this exchange offer
is $4,000 per ounce, i.e., the market clearing price for gold as
money on a one-for-one basis. Russia could begin buying gold “at
the market” (i.e., perhaps $1,000 per ounce initially); however,
over time its persistent buying would push gold-as-money to the
clearing price of $4,000 per ounce. However, gold selling would
stop long before Russia was out of cash as market participants
came to realize that they preferred holding gold at the new higher
dollar-denominated level. Gold will actually be constant, e.g.,
at one ounce = 25 barrels of oil; it is the dollar that depreciates.
In this scenario, we are not pricing gold in terms of dollars, we
are repricing dollars in terms of gold, so, one dollar is eventu-
ally redefined as ? 1/4000th of an ounce of gold. This can be a
very attractive tradeoff for a gold power like Russia. Thereafter,
we can start to divide the world into gold haves and have-nots
the same way we do with oil reserves today. For those dealing
in gold, oil, grain, and other commodities, nothing changes. It
is only the dollar that goes down. Basically, the mechanism is
to switch the numeraire from dollars to gold; then things start to
look different and the dollar looks like just another repudiated
currency as happened in Weimar and Zimbabwe. Russia's paper
losses on its dollar securities are more than compensated for by
(a) getting paid in gold for its oil, (b) the increase in the value of
its gold holdings (in dollars), and (c) watching the dollar collapse
worldwide.
Another important concept is the idea of setting the global
price by using the marginal price. Russia does not have to buy all
the gold in the world. It just has to buy the marginal ounce and
credibly stand ready to buy more. At that point, all of the gold in
the world will reprice automatically to the level offered by the
highest bidder, i.e., Russia. The market may test its willingness to
buy (just as hedge funds periodically test the credibility of central
banks to defend their currencies). However, before Russia would
be forced to buy $200 billion worth of gold (about 1,500 metric
tonnes @ $4,000 per ounce; $200 billion being about how much
U.S. dollar liquidity they have), the world would decide they like
holding onto their gold at the new price. So the world will wake
up to find a new dollar/gold equilibrium. If China joins Russia in
this plan, its success is assured.
p.24: [the writer fails to mention that China is now the greatest producer and consumer of gold]
CoLLAPSE oF ThE U.S. EConoMy And
CoLLAPSE oF ThE U.S. doLLAR AS A RESERvE
CURREnCy
Worse even than the long, slow grind along the bottom
described in the foregoing section is a sudden catastrophic col-
lapse. In that context, the greatest threat to U.S. national security
is the destruction of the U.S. dollar as an international medium of
exchange. By destruction we do not mean total elimination but
rather a devaluation of 50 percent or more versus broad-based
indices of purchasing power for goods, services, and commodities
and the dollar’s displacement globally by a more widely accepted
medium. This can happen more easily and much more quickly
than most observers imagine. The following example hypothesizes
a single country, Russia, acting unilaterally to require that all of
its exports (principally oil and natural gas) henceforth be paid for
in a new gold-backed currency issued by a newly formed fiscal
agent of the Central Bank of Russia based in London. However,
variations on this plan can easily be imagined including a joint
announcement to similar effect by Russia and China or an even
larger group under the auspices of the Shanghai Cooperation
Organization and in affiliation with Iran.
p.24:
The consequences of failing to detect the threat or act on it
are, in a word, devastating. Imagine a world in which the price
of oil measured in units of gold is held constant at one ounce =
25 barrels, but the price in dollars instantaneously becomes $155
= one barrel based on the new dollar/gold exchange rate. Then
apply similar ratios to all U.S. imports of commodities and manu-
factured goods. The result is that the U.S. would re-import the
hyperinflation it has been happily exporting the past several years.
U.S. interest rates would skyrocket to levels last seen in the Civil
War in order to preserve some value in new dollar investments.
U.S. exports of services such as insurance, education, software,
consulting, and banking could fare better, however, if priced in
the new unit of account. The U.S., China, and Japan might unite
in a closed dollar block to fend off the impact of the new Russian
gold currency. But at best this would restrict world trade, and it
seems more likely China and Japan would act in their self-interest
and try to make peace with the new currency in terms of their
own paper currencies. Gold-producing nations such as Australia,
Canada, and South Africa might do relatively better than some
others. Large gold-owning nations such as the U.S., U.K., and
Germany might stabilize by joining the new world currency, but
this is more likely to occur after suffering initial disruption rather
than proactively guiding the process.
google.com
Paper Gold vs the Dollar? Interview with James Rickards
Rickards: Agreed. To give you a sense of how much interest there is in financial matters in the national security community, I recently headed a panel at a program sponsored by the Johns Hopkins Applied Physics Laboratory, one of the premier private research centers in the U.S. for developing everything from new weapons to nuclear strategy. The topic of my paper was a hypothetical press release issued by the Russian central bank announcing the creation of a new, gold-back currency. In the hypothetical, the Russians also announce that exports of energy and other natural resources will have to be made in this new "gold ruble." The Russians would become a market maker in gold and effectively control the marginal price of gold transactions. This is basically a plan for taking down the dollar.
The IRA: It is an entirely plausible scenario. The Russians could establish a "gold" price for oil and then the paper currencies would trade at a discount. Thanks to the lack of leadership in Washington by either party, the U.S. is quite vulnerable to the creation of a gold-backed or commodity-backed currency. This August is the 40th anniversary of the decision in 1971 by President Richard Nixon, aided and abetted by a Treasury official named Paul Volcker and Fed Chairman Arthur Burns, to break the link between the dollar and gold. The excuse then was justified based on the short-term need for growth and inflation. As a senior Fed official told us, look at the period since the 1990s. Count how many quarters we have not had either fiscal stimulus or accommodative interest rates by the Fed to maintain the illusion of growth.
Rickards: Precisely. But what is interesting is that a couple of days ago, we saw the arrest of this seemingly hapless Russian spy gang. These people were a relic of the Cold War, running around Montclair, New Jersey, and meeting in New York coffee shops. But the one little tidbit that came out of the complaint filed by prosecutors is that the one subject that got a lot of reaction from Moscow was gold. Whatever these people were collecting for the Russians, the information about gold was of great interest. Often times in intelligence you care less about what the field agents are collecting than who is asking and why they are asking. The paper I did is getting written up all over the web. But the fact that the information on gold touched a nerve in Moscow confirms my view about their intentions toward the dollar.
The IRA: Well it is so obvious. We interviewed David Kotok of Cumberland Advisers last month, some of which will appear in Chris Whalen's upcoming book. Kotok just published a bullish book on Europe, Invest in Europe Now, and Kotok is even more bullish today. As he puts it, the Greeks gave the Germans a 20% currency devaluation. Kotok thinks that the crisis in Europe will eventually force the EU to fully integrate. But we speak to insiders with precisely the opposite view, who say the Europeans do not have a grip on the financial problems. Does the EU emerge stronger from the crisis?
Rickards: I agree with the view that says the EU gets stronger. I keep reminding people that the European Central Bank and the 16 members of the monetary system have over 10,000 tons of gold. They have more gold than the U.S. Treasury. We have just over 8,100 tons ourselves. If the EU were to go to even a partial reserve coverage with gold, say 20% backing, it would put Europe at an enormous advantage. They have enough gold today to set a target and make a two-way market in gold Ithink that the first major currency bloc that goes to gold will dominate the financial world because it will become the only currency anybody will want. The first mover will force the other nations to follow.
. . .
Rickards: We have been operating in a dollar world for decades. Notwithstanding the demise of Bretton Woods in 1971, it's still a dollar system. All of the world's expectations, all of its productive capacity, all of its allocations of capital are built around that system. When the caretakers of that system allow weeds in the garden and for the system to disintegrate and fall apart, which is what I see happening in the U.S., the immediate reaction is first confusion, then panic and then self help. This gets to the heart of the national security implications of the financial crisis. Initially other nations were content to wait for the U.S. response, but now I see nations like China, Russia and Germany increasingly willing to act on their own. [they all have planets that get activated by the cardinal T and the incentive to act]
. . .
Rickards: I very quickly reach the point where this is no longer about left or right, it's about the mathematics of compounding and the dynamics of complex systems. The Europeans get that point. We went from Dubai to Greece very quickly. The contagion effect was visible. You could not push Greece off the bus without unwinding the entire EU and the Europeans do not want to see that happen. You start with the Thirty Years War and work your way through Napolean, WWI and WWII. You have centuries of war and destruction in Europe. The Europeans arrived in the middle of the 20th Century and decided that they needed to come together to avoid another war. The monetary side has been a success, but political and diplomatic integration not so much to date. But the EU is the shinning success for Europe after centuries of war and holocaust and annihilation. They are not going to let it go.
. . .
Rickards: Well we are not there yet. Where the Treasury would like to lead us to is the SDR. Two important things happened in 2009. For the first time in history, the IMF leveraged its balance sheet. In the past, the IMF quota system was essentially equity. The IMF has obtained binding commitments to borrow over $500 billion worth of debt denominated in SDRs. The greater use of and acceptance of the SDR is step one and solves Triffin's dilemma. Then step two, as China rises, we can dial up the value of the SDR by including the yuan. Remember that the SDR is rebalanced every five years and the yuan is not currently reflected.
The IRA: So if you add the Chinese yuan to the SDR, you devalue the dollar?
Rickards: Yes. The dollar buys fewer SDRs. This not only solves Triffin's dilemma but also addresses beggar thy neighbor. We are not going to walk around with SDRs in our pockets, but this is how we balance global capital accounts and rebalance deficit and surplus countries in the trading system. You create a new asset against which you can devalue. But you also create a new asset which you can print without accountability to any democratic process. Nobody elects the G20 or the IMF.
. . .
Rickards: No, I think it just kicks the game upstairs and down the road. China was a big buyer of these SDR bonds. They diversified with minimal market impact. The IMF took in dollars for their SDR notes and lent the dollars to Hungary, Iceland, etc. Thus the IMF not only levered their balance sheet, but they also created over a hundred billion in new SDRs. The IMF essentially printed money and they spread them all over the world to all of the member nations. I see this as testing the plumbing. Now the IMF is on standby. The next time we are in the situation that existed in 2008, you won't see another $1 trillion stimulus package because we cannot afford it. Instead you'll see a trillion SDRs going out the door suddenly. Remember, when they were first created in the 1970s SDRs were called "paper gold."
The IRA: Global quantitative easing? So the old problem remains, namely supporting global growth. So here is the question going back to the EU: If you are Poland or the Czech Republic, do you align with NATO and the Europeans or cut a deal with Moscow? Does this SDR-based exit fantasy of Robert Rubin and Tim Geithner exist alongside the resurgent euro?
Rickards: I think you already see in formation a German-Russian axis.[they have the planets and could move on it late this summer] Merkel and Medvedev have been very active in their discussion. [Merkel was in Moscow on May day this year] I can't think of two economies in the world that are better matched than Germany and Russia. The former is an export technological powerhouse, Russia is a commodity producer and importer of technology. Russia has a credibility problem, but combined with the EU they would become the new alternative to the dollar.
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