"What's Coming Is WORSE Than A Recession" ― Jim Rickards

This is about the most indebted period in the history of the world. I never thought I would see so much debt so quickly as we have seen in the last few months. So what we're really talking about is government debt because no one expects governments to go bankrupt, although we all know that occasionally they do default. We've seen many cases of that, but certainly not, you know, the United States or the UK or Spain or France. No one expects any of those countries to default anytime soon. But the way I think about that is I use the debt to GDP ratio because debt is not automatically a problem. It may be a problem or it may not be a problem. It all depends on how much income or output you have to service the debt. So just to give a simple example, let's say you have a credit card and you have a $50,000 balance on your credit card. You owe the bank $50,000. Is that a problem? Well, if you make $20,000, it's a big problem. You're probably going to go bankrupt. But if you make $200,000, you could probably, you know, write a check and pay it off. So the answer as to whether the debt is a problem or not can only be thought about in relation to your income. And so I use the debt to GDP ratio. I say, how much debt does a country have? How much debt is outstanding? And how big is their GDP? And when you use that ratio, if you're at, say, 30 percent or even 40 percent, that's a comfortable ratio. Yes, you have some debt, but you also have, say, a strong economy and your ability to service the debt by collecting taxes or other sources of revenue is very reasonable. And that debt level is sustainable. But when you get up to 60 percent, 60 percent happens to be the level under the Master's Treaty where the members of the European Union are not supposed to have debt in excess of 60 percent of their GDP. Now, many of them do. I'm not saying this is a hard and fast rule, but that's that's where Angela Merkel gets a little bit upset when you're above 60 percent. And Spain and France and some other Italy certainly are above that threshold. But there's another threshold that's important, which is 90 percent. And 90 percent comes out of the research of Ken Rogoff and Carmen Reinhart and what they've shown in developing markets, developed markets throughout the 20th century, recently in the distant past, no matter where they look, once a country gets above 90 percent debt to GDP, a couple of things happen. Number one, debt is no longer productive. The idea of borrowing is, you know, I'll borrow a dollar. I'm going to do something with that money. Yeah, I'll borrow the dollar. I'll spend the dollar, but I'll get a dollar twenty of GDP because, you know, I'll spend it on something. But then the recipient, he'll spend it and then someone else will spend it. And by what's called velocity or the turnover of money, you'll actually get more than you borrow. That's Keynesian economics, very simplified version of it. But what Rogoff and Reinhart have shown is once you get past 90 percent, that's no longer true. You borrow a dollar and you spend a dollar, but you might only get 90 cents or 80 cents of GDP. In other words, you reach a point where you cannot borrow your way out of debt. You cannot borrow your way to get enough productivity to get out of debt. And then you're sort of in a doom loop or a death spiral. Well, I mentioned 30 percent is comfortable. Sixty percent is a problem in Europe. Ninety percent is this critical threshold. The United States today is at one hundred and six percent. But we are very rapidly moving to one hundred and twenty percent when you take the additional five trillion dollars of new deficit spending that the Congress has approved and put that on top. And bear in mind, the GDP has gone down. Right. So your denominator is shrinking. Your numerator is going up, which means the fraction is going up. And now the debt is well in excess of one hundred percent. It's actually coming into one hundred and twenty, twenty percent. So all of a sudden, the United States starts to look like Italy or for that matter, Lebanon or Japan, which is is the highest of all. Now, the modern monetary theorists, MMT, modern monetary theory, whom I completely disagree with. I know I know a lot of them. I know Stephanie Kelton. She's she's a big brain. She's one of the thought leaders. She has a new book coming out. They say so what they say? It doesn't matter that you can take your debt to GDP ratio to not only one hundred percent, but two hundred percent or in theory even three hundred percent. It just doesn't matter. For two reasons. Number one, you can always print the money to pay off the debt. By the way, everything I'm talking about does not apply if you're borrowing in a different currency. If you're Argentina and you print pesos, but you're borrowing in dollars, that's a problem because you can't print dollars. But of course, the United States can print dollars. The ECB can print euros. Bank of Japan can print yen. If that's the currency of your debt, you know, just print up the money. What's the problem? And they have other solutions. You know, if inflation starts to take off, just raise taxes. I'm not so sure about value. You bar yourself into oblivion, you get inflation and you think you can tax your way out of it. That doesn't sound like a very good way to go. But the bottom line is that all these all the countries, starting with the United States, with all the major developed countries are now in these sky high and rising debt to GDP ratios. Now, the question is, what's going to happen next? Interest rates are extremely low. The central banks have made the most of the debt service is not that great. The debt is huge. But if you're only paying a fraction of one percent, it's not as if you're incurring a lot of interest expense, which, of course, adds to the deficit. So that's the first thing. We don't have inflation. People who say that, you know, the money printing that the central banks are doing to buy the debt, which they are, is inflation. That's not true. That's a kind of gross misunderstanding comes out of Milton Friedman, etc. It's not true. What does cause inflation is velocity, which is the turnover of money. People decide people lose confidence in money and they spend it and someone else gets it and they spend it. Everyone's spending it because they want to run into hard assets, land, gold, silver, fine art, real estate, etc., or just buy a car because they think the price is going up or refrigerate, whatever it is. If you get that kind of loss, inflation can can happen very quickly. And we saw this in the late 1970s. So the real warning is not that any of these countries are going to default on the debt. They're not going to default on their debt because they can print the money. The danger is inflation. Now, if you do I see inflation right now? Absolutely not. We're going to see deflation, which is a different kind of danger. Deflation causes debt defaults because Japan has been trapping to that for 30 years. Yeah. And Japan's been in a depression, in my view, since 1990. My view, the U.S. has been in a depression since 2007. We're in our second lost decade. Japan's entering their fourth lost decade. But it's as if all the countries in the world are getting more and more like Japan. I had a meeting with Saki Kibarasan. He was very famous in the 1980s. He was known as Mr. Yen. He was an assistant finance minister in Japan, but he was he was called Mr. Yen. But very smart guy, very nice guy. And I confronted him on this. I said, you know, Saki Kibarasan, you know, your debt keeps going up and your debt to GDP ratio is sky high and your GDP is kind of flat. And he said, yes, but you're missing one thing. He said, our population is going down, which is true. So on an overall basis, they're flat. But on a per capita basis, their GDP is actually outperforming. So I said, so the so the logic of that is someday there'll be one person left in Japan and she will own the entire country and be the richest person in the world. Well, it's very bad for Argentina. And here's why. If you or Chile, for that matter, if you borrow in dollars and then we have deflation, what does that mean? It means the value of cash is going up. It also means the value of the debt is going up. So even if you have very low interest rates, which we do, when you borrow in dollars and the dollar is worth more, that's what deflation is. Your dollar is worth more. That means your debt is also worth more, meaning you owe more debt in real terms. The nominal debt is the same. So if you borrow $100 million, you owe $100 million. That doesn't change. But if you have deflation, so that the $100 million is actually more valuable. See, people, this hasn't happened since the 1930s. People don't understand. No one alive has really lived through a strong deflationary period. A lot of us have experience with inflation. We had it in the United States in the late 70s. And you're right, Argentina has had it on multiple occasions and we can name other countries. People have a sense of what to do in inflation, but no one alive has experienced serious deflation since the 1930s. And if you did, you're 95 years old today. So people don't really understand it. But one of the things it does, it makes the real value of debt go up. So in real terms, you owe more money. So if you were in trouble to begin with and you borrowed money to get out of trouble, but the value of the debt goes up, now you owe more money. Now, where do you stand? It may not show up in interest payments, but every dollar becomes more and more difficult to get. The dollar's worth more. So what it means is that you see a strong dollar. Now, your local currency could be weaker against the dollar. That's true. That could help exports. It could help tourism. There's no tourism around. There's got to be more tourism. Well, you make a good point. There is no tourism today. I'm on a mountain and you're in a home or studio or someplace. There's no tourism going on today. But assuming it comes back next year, if you have a really strong dollar, in theory, an American or European, for that matter, could look at Argentina. I've been to Argentina many times. It's one of the most beautiful countries in the world and nice people, great restaurants. But it could look kind of like a bargain to somebody with a very strong currency. But that's not really Argentina's problem. Argentina needs more high-tech industry, more high-value-added industry. It needs to break out of what's called the middle-income trap, where you get to a certain point, but you can't get past that point because you can't just do it with assembly-style manufacturing jobs. You need high-value-added jobs. You need technology. That's what you need. And all the developed economies are facing the same issue. Correct. But it applies to most of Asia as well. This is China's problem. China's not going to continue the kind of growth we've seen over the last 20 years because they've used up that... I studied development economics in the 1970s in graduate school, and we used to think that the hard part of development economics was getting from low income to middle income. And then we say, if you get to middle income, it's a straight path to high income. Turns out that's not true. Getting from low income to middle income is actually pretty straightforward. You have to get rid of corruption, and you need to ease up on regulation. But if you have foreign direct investment, and people come from the country to the cities, and you do kind of simple manufacturing, et cetera, you can get a really good export machine going and earn hard currency reserves. So that part's easy. The hard part is getting from middle income to high income, because it turns out you can't just do more of the same. You actually need more high value-added. You need technology today, and that's what I would advise every country to be working on, including Argentina, where Argentina has a very highly educated workforce. I mean, Argentina would be a good case to... Why don't we make iPhones in Argentina instead of China? And we're going to bust up... The United States is going to bust up the supply chain to China. We're going to shut over time. It won't happen overnight, but we're going to pull those factories out or shut them down and move them elsewhere. So the question is, if I were advising any developing economy, I would say, how can I become a supplier to the United States? If they're going to get rid of China, which we are for a lot of reasons, I'd want to be in the list. And we're actually looking at Jordan as a country that could make cell phones. India is a big case because they have cheap labor. Argentina, I think, is a better candidate just because they have a more highly educated workforce.