1. India’s War on Cash Degenerates Into Social Unrest and Money Riots

    By now, you’ve heard about the government of India’s decision to make 1,000- and 500-rupee notes worthless. A 1,000-rupee note is worth about $15.00, not exactly the equivalent of a $100 bill.

    What happened in India is the same as waking up one morning in the U.S. to find that President Obama had declared $20 and $10 bills to be worthless. The only recourse for Indian citizens is to bring the currency to the bank, where they can receive new bills in exchange. Of course, the tax authorities are waiting at the banks, so much of this money will simply be destroyed.

    The effect on the Indian economy has been devastating. The replacement bills are the wrong size for the ATMs, so the ATMs have ceased to function. The government did not print enough of the new bills, so the country is literally running out of cash. Riots have broken out at banks and supermarkets. Truckers cannot buy gas, and fisherman cannot buy supplies, because no one will accept their 1,000-rupee notes.

    Click here  to see how this is just one more example of out-of-touch elite technocrats pursuing so-called solutions without regard to the welfare of everyday citizens.

    Jim Rickards, Meraglim Chief Global Strategist

  2. The Tax Man Commeth. Not for the Rich but for the Working Man

    Governments are insatiable when it comes to taxing their own people. Periodically a rough equilibrium is established between taxes and government spending, but governments then proceed to break the truce by increasing spending and trying to collect even more tax. While governments always talk about “taxing the rich,” the truth is that taxes are levied on the middle class, because that’s where the money is. The middle class lacks recourse to lobbyists to protect them with loopholes.

    Click here  to read about the latest example in the U.K. There, workers are allowed to give up part of their taxable pay in exchange for tax-free benefits such as health care, gym memberships and other perks. The U.K. now proposes to end these programs because of lost tax revenue. This proposal is the functional equivalent of a tax increase on the middle class. The rich can easily afford the “perks;” there are no new proposals to increase taxes on the rich.

    The same kind of tax targeting of the middle class can be seen in value-added tax (VAT) and sales tax increases from Japan to New Jersey. This pattern of more spending and higher taxes will never end until governments go broke or citizens change governments, either at the voting booth or by moving to another jurisdiction.

    Jim Rickards, Meraglim Chief Global Strategist

  3. Trump’s Policies Are a Bundle of Contradictions. Which Version Will Win?

    The entire world is guessing as to the final form of the Trump economic program. Right now there is something for everyone. The supply-side advisers are pushing for tax cuts. The Trump loyalists from the “Make America Great Again” camp are pushing for huge infrastructure spending. Some advisers, such as Steve Moore and Mike Pence, are in favor of free trade. Other advisers, such as David Malpass and Steve Bannon, favor a renegotiation of existing trade deals.

    The Trump team seems to favor a strong dollar and higher interest rates. But the strong dollar is deflationary and pushes the Fed away from its inflation target. Fed rate hikes will do the same thing. On the other hand, if the Fed is slow to raise rates while spending takes off, inflation could surge out of control.

    The truth is that Trump economic policy has not been set, and both inflationary and deflationary outcomes are in play.  This article  is a good summary of these contradictory forces. We’ll have to await further information, such as the names of Trump’s appointees to the Fed board of governors and the results of the Dec. 14 Fed meeting, before reaching more definitive conclusions about the shape of things to come.

    Faced with this uncertainty, it’s a good time to increase your cash allocation until we can get better visibility on the Trump plan.

    Jim Rickards, Meraglim Chief Global Strategist

  4. First Brexit, Then Trump, Now the Italian Referendum. Is a New Shock in Store?

    Italian Prime Minister Matteo Renzi speaks during a rally in downtown Rome, Italy October 29, 2016. REUTERS/Remo Casilli

    This has been a year of political shocks. First came the Brexit vote by the U.K. to leave the EU, on June 23. Then came the election of Donald Trump as 45th president of the United States, on Nov. 8. In both cases, the polls and pundits got it wrong. Elites expected the U.K. would remain in the EU (it voted to “leave”) and that Hillary Clinton would be president.

    Now comes another key vote with major market implications. On Dec. 4, Italy will vote on a package of constitutional reforms. The particular reforms are less important than the populist backlash against the proposal. If Italians vote “no” in the referendum, Italian Prime Minister Matteo Renzi will resign and a new government will have to be formed after elections. This could lead to a period of political chaos, with implications for the EU and the euro.

    Right now polls show the “no” vote ahead. Of course, polls were wrong about Brexit and the U.S. election, so they may be wrong again. But there is good reason to believe that “no” will prevail. What is significant about Italian polls is not just that “no” is in the lead, but also that the vote is trending toward “no.” Such trends dominate any statistical margin of error in predicting outcomes.

    Click here  to see why even though elites may see this Italian result coming more clearly than Brexit and Trump, that does not mean they are prepared for the consequences. Get ready for another political shock and the market volatility that comes with it.

    Jim Rickards, Meraglim Chief Global Strategist

  5. China Had Real Estate and Stock Bubbles. Now Comes the Credit Bubble

    In recent years, China has evolved from the Middle Kingdom to the bubble kingdom. China experienced a massive real estate bubble that popped in 2014, only to be followed by a stock market bubble that popped in 2015.

    So far, the Chinese government has been able to contain the damage from these bursting bubbles with monetary ease, bailouts and market manipulation. But the biggest bubble of all — the credit bubble — may now be getting ready to burst. This has implications not only for China, but also for global capital markets.

    This article  shows that bank lending is out of control through higher leverage ratios, “shadow” banking and so-called wealth-management products that even the chairman of the Bank of China called a massive Ponzi scheme. China’s hard currency reserves have been reduced from over $4 trillion to about $3 trillion over the past 18 months. The capital outflows have accelerated lately. As much as $1 trillion of the remaining reserves may be illiquid in an emergency (because they are represented by assets such as hedge funds, private equity and foreign direct investment). This means China may be down to $2 trillion with which to solve a $2 trillion credit problem.

    At some point, China could actually go broke and be forced to borrow from the IMF. That’s not likely in the short run, but the longer-term trends are not in China’s favor.

    Jim Rickards, Meraglim Chief Global Strategist

  6. After the War on Cash, Get Ready for the War on Gold

    India’s decision to make 1,000- and 500-rupee notes worthless (see story above) is having devastating ripple effects in the Indian economy and the market for gold. The consequences of the decision are both appalling and encouraging — appalling because they show governments’ ability to destroy wealth, and encouraging because they show the ingenuity of individuals operating under the thumb of an oppressive government.

    One immediate consequence is that paper money began trading at a discount to face value. In plain English, you might be able to sell your illegal 1,000-rupee note to a middleman for 750 rupees in smaller denominations. You would get legal tender for your worthless 1,000-rupee note. The middleman presumably has some connection with the banks that allows him to deposit the funds without being harassed by the tax authorities. It’s not unusual for bonds to trade at a discount due to changes in interest rates or credit quality, but this is the first time I’ve ever seen cash trading at a discount (although I did predict this development in Chapter 1 of  my new book, The Road to Ruin  released today).

    The second distortion is that gold is selling in India for over $2,000 per ounce at a time when the world market price is about $1,275 per ounce. This is because Indian citizens are rushing to buy gold for cash. The gold dealers can then deposit the cash for full value. This is just another form of discount on the face value of the cash. It’s not that gold is more valuable; it’s just that your $2,000 is worth only $1,275 (in rupee equivalents) when it comes time to buy the gold.

    Click here to read how, by Friday, Nov. 11, the entire banking system in India was beginning to run out of cash and alternative forms of payment such as gold and barter were emerging. Don’t think of this as something that happens only in poor countries.  Click here to see how  similar scenes will play out in the U.S. and Europe as elites become more desperate to take your money.

    – Jim Rickards, Meraglim Chief Global Strategist

  7. China Is Going Broke, and the Chinese Government Can’t Stop It

    As recently as 2014, China seemed like an unstoppable financial juggernaut. The GDP of China had surpassed that of the U.S. using a purchasing power parity (PPP) measure. (I don’t consider PPP the best way to measure GDP. I use a measure that still shows the U.S. as the world’s largest economy. But many publications were shouting, “China’s No. 1!” when the PPP news was revealed.) China’s hard currency and gold reserves exceeded $4 trillion, and its economy was growing at over 8% per year.
    Suddenly, conditions have changed for the worse — much worse. Growth has slowed to 6.7% per year, and even that is overstated. Much of the “growth” is from wasted infrastructure investment that should be written off before the cement dried. China’s debt-to-GDP ratio (counting provincial debt and state-owned enterprises) exceeds 200%, about double the U.S. and not far behind profligate Japan.
    Most worrying of all, China’s reserves have fallen by almost $1 trillion and continue to bleed at a rapid rate. These capital outflows are driven by businesses and individuals who worry about the devaluation of the yuan. Any party holding yuan balances will lose money measured in dollars, euros or gold unless they can get the money out of China. Capital outflows from China explain the booming housing markets in New York, Vancouver, Sydney, London and Melbourne. Chinese are buying luxury condos they don’t even live in just to get their money out of China and into hard assets in another currency.
    We’ve seen these capital flight crises before, in the U.K. in 1992, Mexico in 1994 and Argentina in 2000. They always end with a “maxi-devaluation” designed to stop the bleeding once and for all. U.S. stocks fell 11% in August 2015 when China devalued by 3%. A new 20% devaluation by China would probably push U.S. stocks down 30% or more in a borderline panic scenario.
    Crises like these can be avoided for a time but always end the same way.  Click here to see why  a currency shock from China, with ripple effects around the world, is growing closer by the day.
    – Jim Rickards, Meraglim Chief Global Strategist
  8. Ken Rogoff Is out to Steal Your Money. He Just Can’t Decide How

    This new article by Ken Rogoff has three ideas to steal your money. The first is negative interest rates. The second is the elimination of cash (governments can do this by declaring the $100 bill worthless, just as India did last week with the 500- and 1,000-rupee notes). The third way is to set higher inflation targets. Rogoff wants to raise the Fed’s inflation target from 2% to 4% per year. At a 4% rate, the value of a dollar is cut 75% between the time you’re 30 years old until a normal retirement age of 65. The money you save in your younger years is nearly worthless by the time you need it.

    Why should we care what Ken Rogoff thinks? Because Rogoff is not just another big brain. He’s a professor of economics at Harvard University and the former chief economist of the International Monetary Fund. More importantly, his name is frequently mentioned as a possible nominee for a seat on the Board of Governors of the Federal Reserve. If Rogoff were on the Fed board, he’d be in a position to turn his confiscatory ideas into policy. But even if Rogoff remains at Harvard, his views are highly influential on economic policy in general. Rogoff is not alone in his views.

    If you do not already have a 10% allocation of investible assets to gold, it’s time to make that allocation.  Click here to see why  gold is almost the only way to avoid the plans for confiscation that Rogoff and others have in mind.

    – Jim Rickards, Meraglim Chief Global Strategist

  9. All Systems Are “Go” for a Fed Rate Hike in December, With More to Follow

    Federal Reserve Vice Chairman Stanley Fischer is seen during the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming, August 29, 2015. REUTERS/Jonathan Crosby

    We’ve warned you for months that the Fed is on target for a rate hike in December. We said this before the election of Donald Trump as president and made the point that the rate hike was not dependent on the outcome of the election. The December rate hike was baked in before the election. This was due to rising inflation fears, the desire to hike rates so the Fed can cut them in a recession and the Fed’s political decision not to raise rates at the November FOMC meeting because of the pending election and a desire to lay low.

    We’ve also told you that there are only four voices at the Fed worth listening to — Janet Yellen, Stanley Fischer, Bill Dudley and Lael Brainard — all of the other Fed heads can safely be ignored.  Click here to see how one of those power players, Stan Fischer, has now confirmed our view that the rate hike is coming. That comes as no surprise. What is surprising is Fischer’s comment that he is “reasonably confident” that a Fed rate hike would have no spillover effects in emerging markets. That’s troubling and almost certainly represents wishful thinking on Fischer’s part. In fact, there’s already a global dollar shortage. A stronger dollar resulting from a Fed rate hike could tip emerging markets into a full-blown liquidity crisis.

    November was volatile because of the election. December may be even more volatile as the Fed leans into the dollar shortage and makes matters much worse.

    – Jim Rickards, Meraglim Chief Global Strategist