The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis
by James Rickards
After three excellent books on the international monetary system and gold I was looking forward to read Jim Rickards’ new book The Road to Ruin. Right from the introduction he captivated me. Starting with his first book, Currency Wars, what I always appreciated most was Jim Rickards’ rigorous attention to detail and excellent analysis backed by data and facts. In the introduction of his new book, he explains his methodology when analyzing the economy, financial markets and especially the international monetary system. Coming from a scientific background, with most of my family engineers and doctors and myself a physicist, I loved reading an economist reminding us the basic principles of the scientific method that has so much been abused and misused by the finance and economics profession in the last forty years.
Jim reminded me of my first encounter with the scientific method more than fifty years ago, when in grade five at age ten, I first studied algebra, geometry, physics, chemistry and biology. The first thing we were taught was the basic principles of the scientific method. After school while going to my water polo training, my father was quizzing me on what the main steps of the scientific method are. They were three simple steps: hypothesis, experiment and demonstration and then conclusion and theorem. If the experiment denied the hypothesis it was back to the drawing board. This rigorous analysis became evident to me from each of Jim Rickards’ books and articles. Mr. Rickards besides the scientific method describes the blend of analytical methods he uses in his risk management work in the financial markets. He uses a blend of complexity theory, causal interference, behavioral psychology and historical perspective. He describes each one in his book.
At university during my physics degree I had to study complex systems and got acquainted with the butterfly effect Jim Rickards mentions in the book. It was coined by Edward Lorenz, mathematician, meteorologist, and a pioneer of chaos theory, and therefore also known as the Lorenz effect. The butterfly effect is a phrase that encapsulates the more technical notion of sensitive dependence on initial conditions in chaos theory. Small variations of the initial condition of a dynamical system may produce large variations in the long term behavior of the system. The phrase refers to the idea that a butterfly’s wings might create tiny changes in the atmosphere that may ultimately alter the path of a tornado or delay, accelerate or even prevent the occurrence of a tornado in a certain location. The flapping wing represents a small change in the initial condition of the system, which causes a chain of events leading to large-scale alterations of events. Had the butterfly not flapped its wings, the trajectory of the system might have been vastly different. While the butterfly does not cause the tornado, the flap of its wings is an essential part of the initial conditions resulting in a tornado. The image of the butterfly also draws upon the popular ideas of chaos theory, in which the beating of the wings of a butterfly can in principle cause a tornado on the other side of the globe.
The behavior of the system as a whole can never be understood by mechanistically adding together its component parts: just as a living creature is more than the sum of the individual cells which make up its body, so the economy, the market and society are more than the sum of the individuals who inhabit it. The often unpredictable interactions between individuals lead to a certain kind of self-regulation in the behavior of the system as a whole. We cannot say exactly where the system will be at any point in time, but we can often set bounds around the areas in which it will move.
Many today in the investment management profession dismiss or ignore history in their abuse and misuse of mathematics and computers with quantitative methods both technical and fundamental. Jim Rickards reminds us of the importance of history when trying to predict the future outcome of the financial markets and the international monetary system but not just the most recent history. He goes as far as 6000 years. Complexity theory is a guide to the future he says, yet there is no greater guide than history and I agree.
Jim Rickards recounts a conversation in an Italian palazzo of the Collona family in Rome originally built in 1200. When he asked how does a family hold its wealth so long the answer was “one third in land, one third in art and one third in gold … land, art and gold are the things that last”. So true! To my surprise after 50 years of communism thanks to my father’s believe in this principle the family has recovered land confiscated in 1944 I never expected will be returned. As for liquidity, a few gold coins well-hidden helped us start a new life when we emigrated to the West. Paper currency was worthless.
Two recent events are described in the book that almost collapsed the international monetary system and that signal that we are much closer to a major collapse than we realise. The first of those “foreshocks” precursors of a monetary collapse are the Long-Term Capital Management (LTCM) crisis in 1998 and the second being the recent 2008 Credit Default Swaps (CDS) financial crisis, that both almost collapsed the international monetary system. Jim Rickards is not the only one alerting us but also insiders at the highest level like the past governor of the Bank of Canada and current governor of the Bank of England who recently talked of the Minsky moment of the international monetary system and the past chairman of the US Federal Reserve who called the present system “incoherent” during a recent conversation with Jim Rickards in South Korea.
The global economy has made what seems like an incredible comeback after the financial crisis of 2008. Yet this comeback is artificial says Rickards. It became more and more obvious that there is no comeback. Central banks have propped up markets by keeping interest rates low and the supply of money free-flowing. World leaders understand the eminent risks of a collapse and are preparing for it, says Rickards.
G20 meeting 2016 in Hangzhou, China
In The Road to Ruin, Jim Rickards shows how governments around the world are secretly preparing an alternative strategy for the next big crisis: a lockdown. Instead of printing money to reliquify markets and prop up assets, governments are preparing to close banks, shut down exchanges and order powerful asset managers not to sell. They’re putting provisions in place that will allow them to do so legally. The next bailout attempt will come from the G20 and the International Monetary Fund (IMF). The IMF is leveraged about 3 to 1 and has a printing press of Special Drawing Rights (SDR). They will give it to countries but wouldn’t be available directly to people. Then countries can swap it for other currencies in the SDR basket and spend the money.
The global elite has already started making their own preparations, including hoarding cash and hard assets, says Rickards. Gold is money in extremis and is world money. It is the most liquid and marketable hard asset. The elite agenda, according to Rickards, is to hoard gold and substitute SDR as the currency of world trade and finance. He says that the “SDR exists primarily to provide liquidity from tin air when there is a liquidity crisis or lost confidence in other money forms. … The SDR, not the dollar, will be the reference point, or numéraire, for the world trade and finance. … and one interesting property of the SDR is that it solves Triffin’s dilemma.”
While writing this article, I received an invitation from the IMF to respond to a survey on the use of SDR as a unit of account. It confirmed to me Jim Rickards’ assumption that the world governments are preparing and that the SDR is part of this plan. The IMF acts like the permanent secretariat of the G20. Several IMF staff papers were published last year on the increasing role of SDRs in world trade and finance.
The Road to Ruin is an excellent book on the international monetary system, its collapse and how world governments are preparing for it. It’s a must read.