1. Economic Sanctions Used by America May Hurt Us More Than Our Enemies

    The U.S. dollar and U.S. control over the dollar payments system are two of the most powerful weapons in the U.S. strategic arsenal. Over 60% of global reserves and over 80% of global payments are in U.S. dollars. All of those dollars have to be cleared and settled in one of a few dollar wire systems and clearinghouses such as Fed Wire, SWIFT, and the Clearing House Association.

    All of these systems are controlled by the U.S. and its allies or their regulated financial institutions. When the U.S. imposes financial sanctions on an adversary like Russia by cutting off access to dollar payments, it’s like cutting off the oxygen to a patient who can’t breathe on his own. The U.S. can destroy an enemy’s economy just as effectively with dollar sanctions as with bombs and missiles.

    The problem is that the dollar weapon is so powerful, the U.S. has a tendency to use it too frequently, and for non-critical purposes. Emerging markets are growing tired of U.S. sanctions and are working hard to develop alternative currencies and payment systems that do not rely on dollar or existing settlement channels.

    This will take time, but in the end the U.S. may find that the role of the dollar is greatly diminished due to the rise of alternative payment systems.  Click here  to read how, by overusing the dollar weapon, the U.S. will destroy that weapon and the dollar itself in the end.

    – Jim Rickards, Chief Global Strategist, Meraglim™

  2. Larry Summers Shows that His Ideology is Impervious to Facts

    Larry Summers has campaigned tirelessly for the elimination of the U.S. $100 bill. He has joined his Harvard faculty colleague, Ken Rogoff, in supporting steps to eliminate cash from the U.S. economy.

    But, when one his fellow elites, Indian Prime Minister Modi, actually did eliminate the most widely used forms of cash in India, the mostly cash-based Indian economy imploded. Businesses ground to a halt as vendors refused to accept cash for needed inputs like fuel and raw materials. Food shortages broke out as fishermen and farmers could not get goods to market. Banks and ATMs shut down and money riots broke out in certain locations.

    Did Larry Summers learn a lesson about the unintended consequences of egghead policies? Did he express some humility at the fact that currency is an important source of liquidity in every economy? No. In fact, Summers and his co-author have doubled down.

    In this article , they write: “On balance, nothing in the Indian experience gives us pause in recommending that no more large notes be created in the United States, Europe, and around the world.” Some people never learn.

    – Jim Rickards, Chief Global Strategist, Meraglim™

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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