The Road to Ruin

by James Rickards

  In a seminal 1963 paper, Lorenz: Edward N. Lorenz, “Deterministic Nonperiodic Flow,” Journal of the Atmospheric Sciences, Vol. 20, January 7, 1963, accessed August 8, 2016, http://eaps4.mit.edu/research/Lorenz/Deterministic_63.pdf, 133.

  A starting place for: For a comprehensive history of Bayes’ theorem including numerous contemporary applications, see Sharon Bertsch McGrayne, The Theory That Would Not Die: How Bayes’ Rule Cracked the Enigma Code, Hunted Down Russian Submarines, and Emerged Triumphant from Two Centuries of Controversy (New Haven, CT: Yale University Press, 2011).

  Before the G20 meeting is quite over: Lael Brainard, “What Happened to the Great Divergence?,” Board of Governors of the Federal Reserve System, February 26, 2016, accessed August 8, 2016, www.federalreserve.gov/newsevents/speech/brainard20160226a.htm.

  At the conclusion of the Shanghai G20: David Keohane, “Did the G20 Agree a Currency Accord and Does It Matter?” Financial Times: FT Alphaville, April 12, 2016, accessed August 8, 2016, http://ftalphaville.ft.com/2016/04/12/2159112/did-the-g20-agree-a-currency-accord-and-does-it-matter/.

  Also at the Shanghai G20 meeting: “G20 Promises to Promote Economic Growth, Avoid Devaluations,” Voice of America, February 27, 2016, accessed August 8, 2016, www.voanews.com/content/g20-promises-to-promote-economic-growth-avoid-devaluations/3210931.html.

  Federal Reserve chair Janet Yellen makes: Janet Yellen, “The Outlook, Uncertainty, and Monetary Policy,” Board of Governors of the Federal Reserve System, March 29, 2016, accessed August 8, 2016, www.federalreserve.gov/newsevents/speech/yellen20160329a.htm.

  Luc Everaert, the IMF’s mission chief: Toru Fujioka, “IMF Sees No Cause for Japan to Intervene Now in FX,” Bloomberg, April 13, 2016, accessed August 8, 2016, www.bloomberg.com/news/articles/2016-04-13/imf-sees-no-cause-for-japan-to-intervene-now-in-currency-market-imyf459k.

  Lagarde also says she is “quite pleased”: Christine Lagarde, “Transcript: Press Briefing of the Managing Director,” International Monetary Fund, April 14, 2016, accessed August 8, 2016, www.imf.org/en/News/Articles/2015/09/28/04/54/tr041416.

  An unnamed ECB official tells Reuters: Balazs Koranyi, “ECB Not Aiming to Weaken Euro Against Dollar: Sources,” Reuters, April 15, 2016, accessed August 8, 2016, www.reuters.com/article/us-imf-g20-currency-ecb-idUSKCN0XC2RS.

  Adaptive behavior arises in many: This discussion of adaptive behavior in complex social systems, including crowd and anticrowd behavior, is based on similar examples and related experiments presented in Neil Johnson, Simply Complexity: A Clear Guide to Complexity Theory (London: Oneworld, 2012), 72–85.

  Research conducted by physicists Neil Johnson, Pak Ming Hui, and Paul Jefferies: Pak Ming Hui, Paul Jefferies, and Neil F. Johnson, Financial Market Complexity: What Physics Can Tell Us About Market Behavior (Oxford: Oxford University Press, 2003), 19–54.

  Neil Johnson and other physicists: See Johnson, Simply Complexity, 115–24.

  Professor Neil Johnson puts the matter starkly: Ibid., 117.

  CHAPTER 4: FORESHOCK: 1998

  “I have reflected a long time”: Stanley Fischer, “General Discussion: Has Financial Development Made the World Riskier? Chair: Malcolm D. Knight,” Proceedings—Economic Policy Symposium—Jackson Hole, Federal Reserve Bank of Kansas City, August 25–27, 2005, accessed August 8, 2016, www.kansascityfed.org/publicat/sympos/2005/pdf/GD5_2005.pdf, 392.

  LTCM’s story was told in detail: Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000).

  A coming-out announcement for LTCM: Saul Hansell, “John Meriwether Rides, Again, Without Salomon This Time,” The New York Times, September 5, 1993, accessed August 8, 2016, www.nytimes.com/1993/09/05/business/john-meriwether-rides-again-without-salomon-this-time.html.

  LTCM coinvented the sovereign credit default swap market: Gillian Tett, Fool’s Gold: The Inside Story of J. P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe (New York: Free Press, 2009).

  To illustrate, imagine an office desk: The following example using file drawers is based on highly similar examples from Johnson, Simply Complexity, 21–24, 41–50.

  In February 1999, just months after: Joshua Cooper Ramo, “The Three Musketeers,” Time, February 15, 1999, accessed August 8, 2016, http://content.time.com/time/covers/0,16641,19990215,00.html.

  CHAPTER 5: FORESHOCK: 2008

  “A financial market is riddled with feedback”: Johnson, Simply Complexity, 114.

  My early theoretical advances were compiled: Studies in Intelligence, Vol. 50, No. 3, September 2006, Journal of the American Intelligence Professional, Central Intelligence Agency, CLASSIFIED EDITION, accessed August 8, 2016, www .cia.gov/library/center-for-the-study-of-intelligence/csi-publications/csi-studies/studies/vol50no3/index.html.

  Between June 30, 2001, and June 30, 2007: “Statistical Release, OTC Derivatives Statistics at End-June 2013,” Monetary and Economic Department, Bank for International Settlements, November 2013, accessed August 8, 2016, www.bis.org/publ/otc_hy1311.pdf, Graph 1, 6; Table A, 9.

  Over the same period, the Herfindahl index: Ibid., Table 9a, 31.

  Cramer told colleague Erin Burnett: The Jim Cramer interview with Erin Burnett quoted is available in video format. The quotation was transcribed from the video, accessed August 8, 2016, www.youtube.com/watch?v=rOVXh4xM-Ww.

  At the Federal Open Market Committee (FOMC) on June 28, 2007: Press release, Board of Governors of the Federal Reserve System, Federal Open Market Committee, June 28, 2007, accessed August 8, 2016, www.federalreserve.gov/newsevents/press/monetary/20070618a.htm.

  Shortly before, on March 28, 2007: Ben S. Bernanke, “The Economic Outlook,” Statement before the Joint Economic Committee, U.S. Congress, March 28, 2007, accessed August 8, 2016, www.federalreserve.gov/newsevents/testimony/bernanke20070328a.htm.

  I presented a detailed written analysis: This written proposal is retained by the author among his private papers and in digital form.

  On December 21, 2007, the major banks: David Ellis and Ben Rooney, “Banks to Abandon ‘Super-SIV’ Fund,” CNN Money, December 21, 2007, accessed August 8, 2016, http://money.cnn.com/2007/12/21/news/companies/super_siv/index.htm?postversion=2007122116.

  On Wednesday, March 12: Henry Blodget, “Did Bear Sterns CEO Alan Schwartz Lie on CNBC?,” Business Insider, March 19, 2008, accessed August 8, 2016, www.businessinsider.com/2008/3/bear-stearns-bsc-did-ceo-alan-schwartz-lie-on-cnbc-.

  The advice was sent as an email: The original email text of this written proposal is retained by the author among his private papers and in digital form (emphasis added).

  This was my first public effort: James G. Rickards, “A Mountain, Overlooked,” The Washington Post, October 2, 2008, accessed August 8, 2016, www .washingtonpost.com/wp-dyn/content/article/2008/10/01/AR2008100101149.html.

  CHAPTER 6: EARTHQUAKE: 2018

  “No single incident can really be imagined”: Eric H. Cline, 1177 B.C.: The Year Civilization Collapsed (Princeton, NJ: Princeton University Press, 2014), 174.

  “If the crowded, interconnected, urbanized”: Ian Morris, “The Dawn of a New Dark Age,” Stratfor, July 13, 2016, accessed August 9, 2016, www.stratfor.com/weekly/dawn-new-dark-age.

  One infamous example was prominent economist: The New York Times, October 16, 1929, accessed August 9, 2016, http://query.nytimes.com/mem/archive/pdf?res=9806E6DF1639E03ABC4E52DFB6678382639EDE.

  Bayesians solve problems: For a detailed history of the debate between frequentist and Bayesian statistical methods, see McGrayne, The Theory That Would Not Die.

  In 2014, gold on deposit at the Fed: International Summary Statistics, “Selected Foreign Official Assets Held at Federal Reserve Banks (3.31),” Board of Governors of the Federal Reserve System, July 2016, accessed August 9, 2016, www .federalreserve.gov/econresdata/releases/intlsumm/forassets20160731.htm.<
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  over half that decline: Koos Jansen, “Federal Reserve Bank New York Lost 47t of Gold in November,” BullionStar.com, December 29, 2014, accessed August 9, 2016, www.bullionstar.com/blogs/koos-jansen/federal-reserve-bank-new-york-lost-47t-of-gold-in-november/.

  Scholar Barry Eichengreen brilliantly laid out: Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1995).

  In “The Hollow Men,” T. S. Eliot: T. S. Eliot, “The Hollow Men,” 1925, All Poetry, accessed August 9, 2016, https://allpoetry.com/The-Hollow-Men.

  CHAPTER 7: BONFIRE OF THE ELITES

  “The tragedy of bad economic ideas”: Thomas I. Palley, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics, 1st ed. (New York: Cambridge University Press, 2012), 9.

  The theoretical foundation for free trade: See David Ricardo, The Principles of Political Economy and Taxation (Mineola, NY: Dover Publications, 2004).

  This somewhat counterintuitive idea: Ian Fletcher, Free Trade Doesn’t Work: What Should Replace It and Why, 2nd ed. (Sheffield, MA: Coalition for a Prosperous America, 2011), 97 (emphasis in original).

  Joseph A. Schumpeter, in his 1942 classic: Joseph A. Schumpeter, Capitalism, Socialism and Democracy, (New York: Harper Perennial, 2008), 103.

  Economist Thomas I. Palley summarizes: Palley, From Financial Crisis to Stagnation, 46.

  The United States had average tariffs: See Fletcher, Free Trade Doesn’t Work, 135–41.

  In 1989, the cold war ended: John Williamson, “What Washington Means by Policy Reform,” in John Williamson (ed.), Latin American Adjustment: How Much Has Happened? (Washington, DC: Institute for International Economics, Conference Volume, 1989), accessed August 9, 2016, https://piie.com/commentary/speeches-papers/what-washington-means-policy-reform.

  In a definitive 2014 study (the “Geneva Report”): Buttiglione, et al., “Deleveraging? What Deleveraging?,” 11.

  The Geneva Report describes this dangerous mix: Ibid., 19.

  The report shouts alarm at: Ibid., 22.

  A useful taxonomy of crises: Ibid., Appendix 3A, 27–34.

  According to the data shown: Ibid., 21.

  As defined by Keynes: John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harvest/Harcourt Inc., 1964), 249.

  In the words of the Geneva Report: Buttiglione, et al., “Deleveraging? What Deleveraging?,” 34.

  CHAPTER 8: CAPITALISM, FASCISM, AND DEMOCRACY

  “There is little reason to believe”: Schumpeter, Capitalism, Socialism and Democracy, 375.

  “Show me the man”: As quoted in “The Criminalization of Almost Everything,” Cato Institute Policy Report, January/February 2010, accessed August 9, 2016, www.cato.org/policy-report/januaryfebruary-2010/criminalization-almost-everything.

  This was succinctly stated by Schumpeter: Schumpeter, Capitalism, Socialism and Democracy, 82–83.

  “In analyzing . . . business strategy”: Ibid., 88–89.

  In the words of his biographer: Ibid., Introduction, x.

  In the United States, median household income: Justin Fox, “Where Median Incomes Have Fallen the Most,” Bloomberg, August 19, 2016, accessed August 25, 2016, www.bloomberg.com/view/articles/2016-08-19/where-median-incomes-have-fallen-the-most.

  A McKinsey Global Institute study: Richard Dobbs, Anu Madgavkar, James Manyika, Jonathan Woetzel, Jacques Bughin, Eric Labaye, and Pranav Kashyap, “Poorer Than Their Parents? A New Perspective on Income Inequality,” McKinsey Global Institute, July 2016, accessed August 9, 2016, www.mckinsey.com /global-themes/employment-and-growth/poorer-than-their-parents-a-new-perspective-on-income-inequality, Preface, viii.

  The McKinsey study highlights: Ibid.

  “Success in conducting a business enterprise”: Schumpeter, Capitalism, Socialism and Democracy, 388.

  And Schumpeter perfectly anticipated: Ibid., 386.

  Schumpeter summarized the endgame: Ibid., 398.

  His description of Russia: Ibid., 404.

  Finally, Schumpeter foresaw: Ibid., 401–2.

  Criminalization of the quotidian: Harvey A. Silverglate, Three Felonies a Day: How the Feds Target the Innocent (New York: Encounter Books, 2011).

  “An average, busy professional”: “The Criminalization of Almost Everything,” Cato Institute Policy Report, January/February 2010.

  Author Radley Balko in his book: Radley Balko, Rise of the Warrior Cop: The Militarization of America’s Police Forces (New York: PublicAffairs, 2013).

  One account by Balko: Ibid., 116–17.

  Balko relates one example: Ibid., 317.

  Balko gives the account of one eyewitness: Ibid., 246.

  Author Matt Taibbi, in his book: Matt Taibbi, The Divide: American Injustice in the Age of the Wealth Gap (New York: Spiegel & Grau, 2014), 101–2.

  He begins with the fact that: Ibid., 117.

  “You’re paying the fine not for what you did”: Ibid., 118.

  Reporter Dara Lind explains the disparity: Dara Lind, “The NYPD ‘Slowdown’ That’s Cut Arrests in New York by Half, Explained,” Vox, January 6, 2015, accessed August 9, 2016, www.vox.com/2015/1/6/7501953/nypd-mayor-arrests-union.

  Cheryl K. Chumley, author of Police State U.S.A.: Cheryl K. Chumley, Police State U.S.A.: How Orwell’s Nightmare Is Becoming our Reality (Washington, DC: WND Books, 2014), 70–71.

  In an award-winning series called: Robert O’Harrow Jr., Steven Rich, Michael Sallah, and Gabe Silverman, “Stop and Seize,” The Washington Post, September 6, 2014, accessed August 9, 2016, www.washingtonpost.com/sf/investigative/2014/09/06/stop-and-seize/.

  Blurring of public and private: Robert O’Harrow Jr., Steven Rich, and Michael Sallah, “Police Intelligence Targets Cash,” The Washington Post, September 7, 2014, accessed August 9, 2016, www.washingtonpost.com/sf/investigative/2014/09/07/police-intelligence-targets-cash/.

  Cash confiscation became so pervasive: Robert O’Harrow Jr. and Steven Rich, “D.C. Police Plan for Future Seizure Proceeds Years in Advance in City Budget Documents,” The Washington Post, November 15, 2014, accessed August 9, 2016, www.washingtonpost.com/investigations/dc-police-plan-for-future-seizure-proceeds-years-in-advance-in-city-budget-documents/2014/11/15/7025edd2-6b76-11e4-b053-65cea7903f2e_story.html.

  “The President, is at liberty”: Wilson quote found in Jonah Goldberg, Liberal Fascism: The Secret History of the American Left from Mussolini to the Politics of Meaning (New York: Doubleday, 2008), 86.

  “Government does now whatever experience permits”: Ibid.

  Insight into fascism’s nonideological nature: Ibid.

  Goldberg summarizes Wilson’s regime: Ibid., 80–81.

  Writer and social critic Waldo Frank: Frank quote found in ibid, 161.

  Schumpeter clearly foresaw the end of capitalism: Schumpeter, Capitalism, Socialism and Democracy, 134.

  He presciently said: Ibid., 131.

  CHAPTER 9: BEHOLD A BLACK HORSE

  “There is a high likelihood”: Buttiglione, et al., “Deleveraging? What Deleveraging?,” 81.

  An official joint staff report: Joint Staff Report, “The U.S. Treasury Market on October 15, 2014,” U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, July 13, 2015, accessed August 9, 2016, www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf, 1 (emphasis added).

  As recently as the month before revaluation: Press release, “Swiss National Bank Introduces Negative Interest Rates,” Swiss National Bank, December 18, 2014, accessed August 9, 2016, www.snb.ch/en/mmr/reference/pre_20141218/source/pre_20141218.en.pdf.

  One prominent foreign exchange market participant: Peter S
pence, “Swiss Franc Surges After Scrapping Euro Ceiling,” The Telegraph, January 15, 2015, accessed August 9, 2016, www.telegraph.co.uk/finance/currency/11347218/Swiss-franc-surges-after-scrapping-euro-peg.html.

  The wisdom of crowds concept: See James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economics, Societies, and Nations (New York: Anchor Books, 2005).

  This move was followed by an IMF study: “Staff Note for the G20: The Role of the SDR—Initial Considerations,” International Monetary Fund, July 15, 2016, accessed August 9, 2016, www.imf.org/external/np/pp/eng/2016/072416.pdf.

  As if on cue, the World Bank: Daniel Stanton, Frances Yoon, and Ina Zhou, “China to Lead Way with Landmark SDR Bond Offerings,” Reuters, August 1, 2016, www.reuters.com/article/china-debt-bonds-idUSL3N1AI2L7.

  This was demonstrated by the Nobelist: Robert C. Merton, “On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts,” The Journal of Business, Vol. 54, No. 3, July 1981, accessed August 9, 2016, www.people.hbs.edu/rmerton/onmarkettimingpart1.pdf.

  On September 10, 2009, I testified: Details of this hearing including witnesses, written statements, and a video of the testimony are available at: Committee on Science, Space & Technology, Subcommittee on Investigations and Oversight, “The Risks of Financial Modeling: VaR and the Economic Meltdown,” September 10, 2009, accessed August 9, 2016, https://science.house.gov/legislation/hearings/subcommittee-investigations-and-oversight-hearing-risks-financial-modeling-var.

  CONCLUSION

  The debate proposition was a loaded gun: The debate proceedings including participants, audience participation, outcome, and moderator are available at: “Declinists Be Damned: Bet on America,” Intelligence2 Debates, February 11, 2015, accessed August 9, 2016, http://intelligencesquaredus.org/debates/past-debates/item/1251-declinists-be-damned-bet-on-america.