Author James Rickards says President-elect Donald Trump will be helpless to stop the next financial crisis.
“A financial crisis is certainly coming. What is most important is that the crisis is coming and the time to prepare is now. It could happen in 2018, 2019, or it could happen tomorrow. The conditions for collapse are all in place,” he told MarketWatch.
“Likely triggers could include a major bank failure, a failure to deliver physical gold, a war, a natural disaster, a cyber–financial attack and many other events. The trigger does not matter," he said.
"The exact timing does not matter. What matters is that the crisis is inevitable and coming soon. Investors need to prepare,” said Rickards, who was the principal negotiator of the 1998 bailout of Long-Term Capital Management as the hedge fund’s general counsel.
“Since we have vastly increased the scale of the financial system since 2008, with larger banks, greater concentration of banking assets in fewer institutions, larger derivatives positions, and $70 trillion of new debt, we should expect the next crisis to be much worse than the last. The next crisis will be of unprecedented scale and damage,” he said.
He argues that rather than pumping the financial system with liquidity, as happened in 2008, “elites” will freeze the financial plumbing until the crisis has passed, MarketWatch explained. That means banks will close, as will exchanges. Money-market funds will be inaccessible. Freezing customer funds in bank accounts is what happened in Cyprus is 2012 and Greece in 2015, he says. In the U.S., the Securities and Exchange Commission adopted a rule in 2014 that lets money-market funds suspend redemptions.
Rickards says the U.S. is still under the state of emergency declared by President George W. Bush days after the Sept. 11, 2001, terrorist attacks and renewed annually since then. Rickards argues that such measures can be applied in any emergency, “including money riots in the event of a financial system breakdown and ice-nine asset freeze.”
He said the Trump administration is focusing on macroeconomic policy relating to taxes, spending and regulation. "That’s fine, but it does not address the issue of systemic risk, which exists separately from normal business-cycle and credit-cycle considerations,” he said.
“The policies to avoid a systemic catastrophe in the financial system that I would recommend to the Trump administration include reinstatement of Glass-Steagall, breaking up big banks and banning derivatives. The odds of any of these policies becoming law are close to zero because of the power of bank lobbyists," he explained. "These policies could make a huge difference but are unlikely to happen; therefore my systemic-risk forecast is still intact,” he said.
He said victims of the next financial disaster will fall into two groups. “The first are those who hold wealth in digital form, such as stocks, bonds, money-market funds and bank accounts. This type of wealth is the easiest to freeze in a panic. You will not be able to access this wealth, except perhaps in very small amounts for gas and groceries, in the next panic," he said.
"The solution is to have hard assets outside the digital system such as gold, silver, fine art, land and private equity where you rely on written contracts and not digital records,” he said.
“The second group are those who rely on fixed-income returns such as life insurance, annuities, retirement accounts, social security and bank interest. These income streams are likely to lose value, since governments will have to resort to inflation to deal with the overwhelming mountain of debt collapsing upon them. The solution to this is to allocate 10% of your investible assets to physical gold or silver. That will be your inflation insurance when the time comes.”
Trump certainly may have his work cut out for himself.
Every Republican president since World War II has been in power during at least one recession, Bloomberg reported.
Bloomberg explained "with the economic expansion soon to become the third-longest on record, the risk of a contraction occurring during his time in office can’t be cavalierly dismissed.
“Republican presidents seemingly can't do without” recessions, Joachim Fels, global economic adviser for Pacific Investment Management Co., wrote in a blog post dated Dec. 12.
And it seems that the party is the difference.
"The U.S. economy has performed better when the president of the United States is a Democrat rather than a Republican," Princeton University professors Alan Blinder and Mark Watson wrote in a paper published in the American Economic Review this year.
The difference isn't due to more expansionary fiscal and monetary policies under Democrats, according to Blinder, who served in the Clinton White House, and Watson.
Instead it appears to stem from less costly oil shocks, a more favorable international environment, productivity-boosting technological advances and perhaps more optimistic consumers, they wrote. Some of those disparities may be down to better policies, but luck also played a role.
(Newsmax wire services contributed to this report).
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