An exclusive interview with Jim Rickards... Inflation vs. deflation... What does well in either scenario...
Editor's note: We recently held an exclusive interview with financial expert Jim Rickards. Jim is a financial lawyer with a doctorate and multiple advanced degrees... He's a hedge-fund manager and a New York Times bestselling author. Many media outlets, including the Financial Times, CNBC , the New York Times, and others seek Jim's expertise.
Today, Jim serves as an advisor to the Office of the Director of National Intelligence, which oversees the Central Intelligence Agency, National Security Agency, and 14 other U.S. intelligence agencies. And in the past, Jim has helped the government investigate everything from the stock market "tells" preceding 9/11 to consulting for the Pentagon on the national security risks of financial chaos.
Jim recently wrote what we think is one of the most important books of the year – The Death of Money. In it, he explains the financial turmoil happening today and what it will mean for the world moving forward – and what you can do to protect yourself.
This book is so important, we arranged a deal with Jim and his publisher to give you a free copy. You can get the full details at the end of today's Digest. But first, enjoy the first installment of our exclusive interview with Jim...
We began the interview asking Jim to explain the differences between inflation and deflation – the two most important and combating forces in today's economy. Throughout the interview, Jim explains whether inflation or deflation is the most likely outcome... how to profit in either scenario... the moment when foreign central banks will lose faith in the U.S. dollar... what the current sanctions against Russia mean for the global economy, and many other topics...
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Inflation is generally a condition where prices are going up, and deflation is a situation where prices are going down. That sounds fairly simple and straightforward, but it actually has profound consequences, because what we're talking about are what are called nominal prices... meaning the actual price that you pay for something. So if gasoline is $4 a gallon at the pump, and one day you pull up and it's $4.20, that's 5% inflation. That price went up. And prices can go down. In that example, if it goes from $4 to $3.90, that would be 4% deflation.
These things happen. Sometimes, they happen gradually. It's still meaningful. What a lot of people don't understand is that even mild inflation can erode the value of savings.
To explain the effect of inflation... Let's say you have a certain number of dollars in the bank. You have a retirement income. You have an annuity. You have a pension. You have a certain check every month – it could be anything from Social Security to withdrawal from your 401K, etc. – that is a fixed amount of dollars.
But it doesn't mean that that is a fixed value. The value could go actually up, meaning your dollars are worth more in deflation. If you think about it, when prices go down, your dollars go a little further. That's generally a good thing. In inflation, the opposite is true: Prices go up and your dollars don't go as far. That's usually a bad thing. There's more to it than that, but that's a general description.
Today, one of the hardest and most important questions in economics is which of these forces will prevail. Over the last 60 years – certainly since the end of World War II and beyond – the economy has experienced inflation. Sometimes the inflation is worse than others. In the five-year period from 1977 to 1981, inflation ran out of control. It was 50% during that five-year period, so the value of a dollar was cut in half in the five-year period from 1977 to 1981.
In good times, inflation has been more mild... It might only be 1% a year, which sounds fairly tame. But we've had inflation all the way through. We've had a couple quarters or months of deflation, but they're very rare. Since World War II, we've had almost nothing but inflation.
But America has had deflation before. From 1929 to 1933, there was a five-year period where deflation was more than 25%. In other words, in that five-year period, prices fell by more than 25%. We have experienced both. But you'd have to be 90 years old to remember that deflation from 1929 to 1933. So virtually everyone alive today has only experienced inflation and not deflation.
Now, if we knew which way the economy was heading, investing would be a lot easier. In inflation, certain assets do very well, meaning the prices go up – gold, land, silver, energy, hard assets, things like that. In deflation, believe it or not, the thing that goes up is cash. Your cash is actually worth more.
Of course, what central banks are supposed to shoot for is price stability. Where there's no inflation or deflation, prices are constant, and that way we can make investment decisions not based on trying to gain the inflation or the deflation advantage, but just based on the merits of the investors. That's the ideal world, but we rarely ever achieve it.
The problem today is that the U.S. economy is experiencing both inflation and deflation at the same time. That sounds a little peculiar, but it's actually true when you look beneath the surface.
On the surface, price indices are going up a little bit. They're going up 1% or 2%, which doesn't sound like much. So you would say, on the surface, we have very mild inflation. But that mild inflation is just the net result of two very powerful forces. There's a deflationary force coming from the fact that the economy is in a depression.
We're in a global depression. Not a recession. A depression, which started in 2007 and will probably continue indefinitely. The natural state of a depression is deflation. The two go hand in hand. People are overindebted, so they sell assets to pay off debt and reduce their balance sheet. When they sell assets, it tends to drive prices down. That puts other people in distress. They sell assets too, to pay off their debt. Everyone is reducing his balance sheet. The process feeds on itself, and that's called the debt deflation theory of depression.
On the other hand, we have massive money printing by the Federal Reserve. The Fed has printed almost $4 trillion of new money since 2008. That's normally very inflationary. Certainly, monitors would say that massive money printing, all things equal, would lead to inflation.
So you have a deflationary vector coming from the depression and an inflationary vector coming from central bank policy. The two are pushing against each other, so the net result is not much change in prices, but that's an unstable situation.
One way to think about it: Imagine you're standing right on the San Andreas Fault and it's not moving that day. You can stand there and say it's stable, but we all know that deep below the surface there are massive tectonic plates pushing against each other.
It may be stable at that point in time, but it's just a matter of time before one of those forces gets the upper hand, the thing snaps, and you have an earthquake that causes massive destruction. That's sort of the situation today, where you have these two forces pushing against each other.
So the question really is, which way is it going to snap? It could go either way. That's what makes it difficult for investors. If I had to bet, I would bet that inflation will probably prevail, and the reasons for that have to do with the effect of deflation on federal finance and sovereign finance in general.
Deflation makes debts more expensive, makes the real value of the debt higher, makes it harder to pay, and destroys tax collections. It hurts the banks, because people default on their debts, so there are a bunch of reasons why central banks fear deflation more than any other outcome.
Therefore, they must cause inflation, and they do that by printing money. If you print a lot of money and you don't get inflation, then print more... That seems to be the policy of the major central bank. Deflation and inflation are battling each other. The central bank is scared to death of deflation, so it's printing money trying to cause inflation. It will keep doing that.
But what concerns me, or what troubles me, is that in the course of printing so much money to create the inflation, it'll actually destroy confidence in the money itself. And that's why in my book, The Death of Money, I talk about lost confidence in currency starting with the dollar, but ultimately including all the major currencies around the world.
Editor's note: In the next installment of our interview with Jim, he'll discuss the likelihood of negative interest rates in the U.S. – and the effects those would have. He'll also explain the scenario and consequences of foreign creditors losing faith in the dollar.
In the meantime, I'd encourage you to get a free copy of Jim's new book, The Death of Money. The book normally costs $20. We only ask that you pay $4.95 for shipping and handling. You can pick up your free copy here...
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In today's mailbag… one satisfied put seller weighs in. Send your comments to feedback@stansberryresearch.com.
"After reading the comments by Mr. Ed Riska and Mr. William A. Kinder, I decided to comment as well. I have been a paid-up subscriber since, I think, 2005. During this period I have read countless Stansberry Research reports, including the S&A Digest Premium and DailyWealth Trader. In every research report and publication, Stansberry has been meticulous in explaining the details involving various strategies and investments in general. Stansberry always gives explicit instructions on what to do and what not to do. All one has to do is thoroughly read the reports and pay attention to the details. That includes regular visits to the Stansberry Training Center.
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Sean Goldsmith
August 8, 2014
Being the hero of your own story...
Yesterday, Porter's mentor and business partner Bill Bonner discussed the role of government that he details in his brand-new book Hormegeddon.
In today's Digest Premium, he explains why it really pays to think about what other people want...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Being the hero of your own story...
Editor's note: Yesterday, Porter's mentor and business partner Bill Bonner discussed the role of government that he details in his brand-new book Hormegeddon. In today's Digest Premium, he explains why it really pays to think about what other people want...
The title of the book – Hormegeddon – comes from the word "hormesis." It's a phenomenon of biochemistry where if you give somebody a little of something, it helps them... But if you give them any more, something terrible happens that may even kill them. This phenomenon can be applied to almost everything. It's also known as "declining marginal utility."
There is a little-appreciated point regarding the difference between civilization and barbarism. Most of humanity's time on the planet was spent in an uncivilized world. The reason being is you did not get a return from being civilized, because the world was not a reciprocal world. There was reciprocity in it, but people usually gained an advantage by using force. All of prehistory is one group conquering another group, or one person killing another and taking his property, and so on.
It's only with the advent of capitalism in the last few thousand years (and especially in the last few hundred years) that it really pays to think about what other people want. To get what you want, you have to give other people what they want. It's fundamentally a trade or an exchange of goods and services. So you have to figure out what goods and services people want and how to offer it to them, and so on. If you don't do that, you're thinking in a more primitive way, which a lot of people do.
Just walk around Baltimore at night and you'll probably find someone who doesn't believe in the system of reciprocity. Go to the U.S. government in Washington D.C. Nobody in Washington believes in reciprocity. They believe in taking things from people and figuring out what to do with them.
It's much more complicated – and in a way, more simple – than people realize. When you get right down to it, everybody wants to be the hero of his own story. Being the hero of your own story is not nearly as simple as losing weight or making money. We see that all the time.
People come to us and we think they want to make money, so we offer them money-making ideas as much as we can. Making money is like losing weight. You just have to work at it really hard. But people don't want that. They want something else. They need to do something, learn more, or understand an idea in a way that other people don't understand.
– Bill Bonner
Editor's note: Bill will be the first person to admit he isn't a great businessman or investor. But he's one of the richest men in America, worth nearly $1 billion. He attributes his success to a unique philosophy, which he shares in his new book Hormegeddon.
Right now, you can't buy a copy of Hormegeddon on Amazon or anywhere else. But we've found a way for you to get a hardback copy and early access to his brand-new newsletter. You can learn more about the book Porter says "might turn out to be one of the most valuable things you'll ever read" by clicking here.
Being the hero of your own story...
Yesterday, Porter's mentor and business partner Bill Bonner discussed the role of government that he details in his brand-new book Hormegeddon.
In today's Digest Premium, he explains why it really pays to think about what other people want...
To continue reading, scroll down or click here.