| December 16, 2014 | Archives | Unsubscribe | | | | |  | | | How War "Games" Beget the Real Thing | | | - Russia melts down. Luckily for you, you have your own CIA currency wars expert...
- Forget Risk... here's a real-life game of global domination...
- Then, Jim Rickards returns to explain why a strong dollar's not all bad… even if the Fed beggars to differ...
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December 16, 2014  Dear Reader, We begin today with news out of Russia. The ruble is "getting beat up pretty bad," comments our partner-in-crime Pete Coyne. Bloomberg puts it, more stolidly, this way: "In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17%, from 10.5%, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on debt." And yet the ruble still lost 2.5% against the dollar by noon today, wiping out an early gain prompted by the rate hike. Can you imagine interest rates at 17% in the U.S. today? You would have had to have been trying to buy your first home when Blondie was a Playboy Bunny to know what that would feel like. The U.S. hasn't seen rates above a heart-stopping 8% since October 1990. In fact, it's been six years to the month since the Fed adopted its zero interest rate policy, or ZIRP, as it's affectionately known. In the U.S., money remains free, at least for bankers. Not so much in overseas. | In Russia today, the images are more reminiscent of the currency meltdown in 1998. | In Russia today, the images are more reminiscent of the currency meltdown in 1998. Bloomberg tells the story of people running to exchange counters before their rubles lose more value before lunchtime.
"All of these comparisons to 1998 are making me nostalgic," confessed our own Jim Rickards by email this morning.
He already had two interviews lined up before 10:00 a.m. -- one on Bloomberg at 3:00 and another on RT at 4:30. The last time Russia had a meltdown, Jim's net worth crashed 92% as he was thrust into the trenches with the Federal Reserve, the Treasury and Wall Street's largest banks to negotiate LTCM's rescue.
"That makes me their 'go-to guy' on market meltdowns," he says, with only a tinge of irony.
Back in 1998, the S&P dropped over 60 points, or 10%, in the two weeks following Russia's financial crisis. But today, the real drama is behind the scenes in Russia's bid to acquire gold:  "Global growth is already threatened by divergence in the policies of major economies," writes Rickards, "But things could get worse quickly depending on the behavior of certain countries like Russia."
Mohamed El-Erian from Allianz calls them "wild card" countries.
"'Wild card' countries," El-Erian wrote for Project Syndicate recently, are those "whose size and connectivity have important systemic implications. The most notable example is Russia." Mr. El-Erian continues: "Faced with a deepening economic recession, a collapsing currency, capital flight, and shortages caused by contracting imports, President Vladimir Putin will need to decide whether to change his approach to Ukraine, re-engage with the West to allow for the lifting of sanctions and build a more sustainable, diversified economy.
"The alternative would be to attempt to divert popular discontent at home by expanding Russia's intervention in Ukraine. This approach would most likely result in a new round of sanctions and counter-sanctions, tipping Russia into an even deeper recession -- and perhaps even triggering political instability or more foreign-policy risk-taking -- while exacerbating Europe's economic malaise." Fact is, global finance now looks like a war game straight out the post-colonial era.
"Putin gives a speech and the ruble falls," Paul Mason observes in this morning's Guardian. "Europe's central bank boss gives a speech and the stock markets fall. OPEC meets in Vienna and the oil price plummets. Japan's prime minister calls a snap election and the yen's slide against the dollar accelerates.
"All these things in the last six weeks of an already fractious year," Mason points out. "There are suddenly multiple conflicts being played out in the global markets, conflicts the global game's usual rules are not built to handle." | "Nearly every currency in the world is down a lot against the U.S. dollar, except the Chinese renminbi." | "Whether it's an intentional war or an accidental war or side effect," our friend Jim Rogers commented to Wall St. Daily yesterday, "I don't know, but it's certainly happening. You just look around... you see that nearly every currency in the world is down a lot against the U.S. dollar, except the Chinese renminbi...
"I don't know if it's somebody sat around and plotted and said, 'Let's have a currency war.' They just said, 'What we need to do is print a lot of money,' without realizing it's going to cause currency fluctuations."
That's pushing investors into dollars, including Rogers, despite the fact that he has "no confidence in the U.S. dollar long term."
It's also how relatively tame financial wars turn into hot shooting wars. We remember suggesting as much on a radio program a few years ago and getting laughed at on air. The stakes, apparently, weren't perceived to be as high then. Today, the prospect doesn't seem so funny.
A top adviser to President Putin said yesterday if the U.S. kicks Russia out of the global payments system, it will be an act of war and the Russian ambassador should be recalled to Moscow immediately.
Seems like a good time to have a CIA financial strategist in your corner.
Bonne chance,
Addison Wiggin
The Daily Reckoning
P.S. "All this talk of the 'weak' ruble really means a strong dollar," Jim tweeted this morning, "which is deflationary when the Fed wants inflation. So how does that work out?"
It's a fitting question as the Fed begins its FOMC meeting today. He, then, suggests a reply below.
[Note: We're ready to unveil Jim Rickards' two new investment services. Each will help you make bigger, faster gains from Jim's currency wars and CIA-backed analysis. Click here to access them.] | | | | | | | | | How do the wealthiest seem to get richer (even during market slumps and depressions)... while the middle class seem to get poorer? The answer may shock you. | | | | | | | | The Daily Reckoning Presents... On the eve of the FOMC's meeting announcement, our CIA financial strategist suggests, "To beggar thy neighbor or not… that is the question."
****************************** | | | | A Strong Dollar's Not All That Bad | | | | By Jim Rickards | | |  If the United States has a strong dollar and you want to buy an iPad, an iPhone 6, a German car, a French wine, vacation in Australia or do anything requiring I transact with a foreign country, then the strong dollar is going to make those prices cheaper in dollar terms. They may be constant in Swiss francs or Australian dollars or Euros or whatever, but for a dollar buyer, those things are all going to get cheaper. That's deflationary. That is a good thing for you. But the Fed's wants inflation. Inflation, the theory goes inspires the economy to grow and employment to go up. A strong dollar gives them the exact opposite. So if you're the Fed, what do you do? Well, one thing you might do is keep interest rates low and try to cheapen the dollar. And you may even go back to QE4 in early 2016 if that's what it takes. That's the most likely approach and I'll explain why in a moment. | If you follow the Rickards approach you can imagine what happens in the meantime. | But first, there is another path to think about, which is: What if the Fed adopts the Jim Rickards theory? I don't expect them to, believe me. But let's just say they did. Assume they decided that a strong dollar's not all bad; that it would make the US a magnet for capital inflows from abroad as an attractive place to invest.
Grow the economy the right way -- by making structural reforms like building the Keystone pipeline, that get the U.S. economy back to a strong growth and high productivity. I don't think they're going to do that, but let's say they did. That could be very good a year and a half or two years from now.
If you follow the Rickards approach you can imagine what happens in the meantime.
If you get that kind of deflationary crash, you're looking at a recession, most likely. You're definitely looking at higher debt. You're looking at what everyone likes to call "austerity." I actually consider it to be a form of prudence. But you're looking at really a serious contraction in the United States: lower unit labor cost, wage cuts for labor, higher unemployment; all the characteristics of a recession.
But then, you make adjustments, you go through it and come out the other side, let's say in mid, late 2016, early 2017 with a much stronger economy having made structural changes, having made the economy more competitive, having attracted capital inflows, having increased productivity.
Good things can come out of a strong dollar. | | | | | | |
| At any moment, the U.S. government could make a critical mistake that sends us into a depression like we've never seen before. We could have only weeks... even days, to prepare. | | | | | | | | | Now imagine the short-term political pain, especially in 2016 which is an election year. Neither the Republicans nor the Democrats are going to be cheering the Fed if they're putting the US economy through the wringer.
While that's a possibility, it's not one I expect. Politicians and central bankers, for that matter, always like the easy way out. Which means a weaker dollar.
What I expect is this deflation will be short-lived. For the next few months, the dollar will get stronger. But then the economic data early next year is going to come in weaker than people expect. The job machine's going to stall. Growth is going to stall.
Then the Fed's going to panic. They're going to say: "Hold on, we tapered and we were getting ready to tighten, but it looks like we tapered and we're going to be tightening into weakness. This is deflationary. This is making the dollar too strong. We need to shift gears." And when they do, they'll hold a press conference. Send out some press releases. And they'll signal they're not going to raise rates in 2015 at all. They may not raise rates until 2016. We'll see.
Every country in the world is wishing for a weak currency, but you can't have it. If somebody's weak, somebody else has to be strong. So right now, the dollar is strong. The Euro and the yen and other countries' currencies around the world are weaker. This is by design. | Every country in the world is wishing for a weak currency, but you can't have it. | If you look at second quarter and third quarter GDP growth, kind of put yourself back in the middle of this year, June, July, August 2014, somewhere in that time frame It looked like the United States was by far the strongest economy. That's what a lot of the data indicated. And it looked like the United States could throw everybody else a lifeline, saying in effect: hey, Europe, hey, Australia, hey Japan, you guys can all have a weaker currency; we'll have the strong currency for now. That's the "beggar thy neighbor" approach. There's always somebody trying to steal some growth from somebody else because we look like we're doing okay. But starting early next month in January, February March, if the data comes in and the US economy looks a lot weaker, the United States will have to pull back the life preserver and use it ourselves. The Fed will do that by trying to weaken the dollar. When you look around the world, it's not a pretty picture. But the big question, is the Fed going to tolerate a strong dollar or not? If the Fed's going to tolerate a strong dollar, we're going to have other problems around the world: lower gold prices, lower oil prices, collapsing emerging markets debt, collapsing oil sector debt, credit crises, etc. And probably a really bad time. But the US itself might be in a better place a year and a half from now. And it will also have a rough go in the meantime. If, on the other hand, the Fed says we can't tolerate a strong dollar, we're back to "beggar thy neighbor." Regards, Jim Rickards for The Daily Reckoning P.S. Imagine a bunch of thirsty soldiers. They've been fighting in the heat. They get a break, and they've got one canteen. There are five of them. They have to pass the canteen so everybody can take a gulp, but they can't all drink at once, because there's only one canteen. That's the way to understand today's currency market. P.P.S. If you missed the big news about the two new projects I'm undertaking, click here. One of them gives you an exclusive way to profit from the global currency wars I covered today and yesterday. | | | | | | | | |  James G. Rickards is the editor of Strategic Inteliigence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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