Jim Rickards on the global economy, Australia

By Leith van Onselen

Above is an interesting interview with Jim Rickards, author of the best selling book Currency Wars, shown last night on ABC’s The Business (by far the best business/finance show in Australia).

In the interview, Rickards explains why he believes the outlook for the global economy remains weak, and why actions by the Reserve Bank of Australia (RBA) are unlikely to be effective in rebalancing growth as the mining boom fades.

Key points from the interview include:

  • US economy is weaker than everyone thinks. Economic and income growth remains tepid, and there are still large numbers of Americans either unemployed, on food stamps, or on disability. Given this weakness, Rickards does not believe that the Fed will unwind quantitative easing as quickly as everyone thinks.
  • The Chinese economy is also fragile. Growth has been artificially inflated by excessive ponzi lending, which has been channeled into unproductive fixed asset investment. As such, China is facing a significant adjustment.
  • The RBA is foolish in pursuing lower interest rates in an attempt to lower the exchange rate. Such a move is likely to significantly increase imported inflation without materially boosting exports, which are instead reliant on higher productivity, better education, and innovation.
  • The RBA would have been better-off issuing longer-term infrastructure bonds to foreigners and using these funds to build well-targeted, productivity enhancing, infrastructure. That way, it would have supported growth, whilst also expanding the nation’s future productive capacity, productivity, and living standards.
  • The RBA also could have printed money and used these funds to buy gold. That way, it would have placed downward pressure on the currency, whilst also getting to keep the gold.

Overall, the interview provides an interesting alternative perspective.

The original HD video can be viewed here.

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Comments

  1. The joke is he said he actually met with the RBA a year ago so presumably would’ve made these same suggestions to them directly.

    What wasn’t asked was his opinion on if he thought the RBA’s priority in lowering interest rates was to slow growth in housing defaults and stop land price deflation as opposed to doing it in an effort to boosting exports?

  2. LabrynthMEMBER

    Reading his book now, from what I can tell the US is pissing everyone off by its QE policy. Rickards also blames the US for causing the up-rise of the people in the middle east (unintended consequence). When the US prints it exports inflation. In the developing world a person earning $12,000 can bare the increase in food prices but someone earning $3,000 it can be the difference between life and death. The more the US prints the more the poor around the world will suffer.

    Also, he came to the conclusion that the Euro would not be allowed to fail. A Euro break up would be devastating to Germany, US and China.

  3. “The RBA would have been better-off issuing longer-term infrastructure bonds to foreigners and using these funds to build well-targeted, productivity enhancing, infrastructure. That way, it would have supported growth, whilst also expanding the nation’s future productive capacity, productivity, and living standards.”

    Isn’t that something a few here have said?

  4. I consider Rickards to be a nutcase. Mr. Market determines rates, NOT the RBA. The RBA can tweak rates a bit but that’s all.

    Falling rates are actually a sign of more economic weakness.

    More over, Rickards thinks that (Hyper-)Inflation is more likely and that makes himself a laughing stock.

    • It’s a bit hard to say the market determines rates when central banks have the power to print as much currency as they like. With the US Fed buying ~70% of all government bonds they are the ones forcing down rates not the market. The low rates have many other effects such as creating asset bubbles which provide opportunity for the market to exert its forces in various medium to long term time frames but the whole system is pretty complicated and no one simple explanation is possible. I liked Satyajit Das (yesterday on ABC 1 Businees Today) and others who see QE as not working in stimulating the economy. US he said (I think) is monetising 1 trillion/yr (85Bn X 12 mths) and running fiscal deficits of 600Bn/yr for growth of 300B/yr. Not a great deal really is it? He said it hasnt helped the real issues of structural imbalances or high underlying debt levels, it has just goosed assets. It was supposed to give policymakers time to implement reforms that could improve productivity and perhaps restructure debt but that hasnt happened. That leaves us at square one ie: exposed to 2008 type crises. in that sense indeed the market will decide rates in another panicked flight to safety. There are good analyses of the probability of hyper inflation on pragmatic capitalism which show that massive fiscal expenditure combined with a wipe out in a nations productivity are necessary pre conditions for hyperinflation. QE alone wont do it. Conditions like this include wars or a revolution that turns nasty like in Zimbabwe. It seems to me that we need to reset the system in a big debt jubilee. That will cause its own chaos but given the debt will never be repaid anyway is a more straightforward and simple common sense response. The alternative is ongoing deflationary and low growth which only increases and embeds further already unsustainable debt/GDP ratios. But on the other hand the world environment desperately desperately needs humans to make their impacts smaller and this would happen if we stuff up our economy here. It seems the only way we actually do reduce our impacts collectively. But really the best way would be to implement a war on carbon and spend big time to address the issue. This would also reduce our productivity hence satisfying both of the above preconditions for hyper inflation. That would eradicate the debt. But who can see such bold action coming out of our democratic politics however? Instead we are coming to it via crises – the old fashioned way.