The global backlash against QE2 (Federal Reserve quantitative easing) is growing and the showdown between the G-20 nations, President Obama and U.S. Treasury Secretary Timothy Geithner is on. The outcry of criticism over the Federal Reserve's policy of putting more dollars into the economy by buying government bonds has been attracting criticism at home and abroad.
I decided to get the perspective on what to expect from at the G20 meeting in Korea as well as the United States new role as currency "villain" from Jim Rickards, Senior Managing Director of Market Intelligence from Omnis.
LL: The criticism on QE2 is mounting. How will this impact the G-20?
JR: I can not believe how quickly the United States has gone from victim to villain in the currency wars.
Six months ago the United States had sympathy—China was a currency manipulator holding their currency artificially low and the U.S. was suffering and all of a sudden that has turned completely around. Much of the world, including, China, India and Brazil Russia, Europe and others are saying no, you, the United States are the currency manipulator. Because all China ever did was to say we'll peg to the dollar and in effect outsource our monetary policy to the United States and rely on the United States to doing the "right thing".
Well, the United States thought doing the right thing was not in their best interest. Instead they cheapened the dollar and started doing QE1 and QE2 etcetera and doing anything to destroy the dollar. This is going to put President Obama and Secretary Geithner in a difficult position when they go to the G-20. They will be playing defense, not offense this time.
LL: You've got two different camps when it comes to deficit and spending—the Ron Paul's and the Krugman's of the world—who's right?
JR: I think Ron Paul is closer to common sense and what has worked historically than Paul Krugman. Krugman is all about Keynesianism, which is based on deficit spending by the government under the premise that it can be a good thing because for every dollar of spent you can get a larger number like a dollar thirty or dollar fifty of GDP. The problem is, there's no empirical support for that at all.
There is a lot of rigorous research on this be it from the IMF, Robert Barro of Harvard, John Taylor and his colleagues at Stamford, that says the Keynesian multiplier is not more than one.
In fact, in some cases it is as low as zero or even negative in some cases. The range is 0.4 to 0.7 which means every dollar the government takes from the private sector and spends, you're only going to get 40 to 60 cents of GDP which means it actually destroys wealth. Because remember, the dollar is not free.
You have to take it from the private sector in order for the government to spend it. There is no foundation to what Krugman is saying so he had to resort to name calling. He can't write a column without calling someone a Neanderthal or barbarian or now he's calling Robert Zoellick the stupidest person on earth. I think when you call someone names it's really a reflection on yourself rather than the person you are making fun of.
Ron Paul is looking for some variation of the Gold Standard which Zoellick spoke about in his recent op-ed. And Zoellick said let's not go to the Gold Standard tomorrow, let's study it and consider it. I agree. You need to study it. Many gold aficionados think you can switch over to the Gold Standard in a snap. Well you can't.
Remember, it took ten years of rigorous research to do the Euro. Europe actually set up a dedicated think tank just to solve the technical problems of moving to the Euro. Going to a gold standard would require the same kind of thought. You need to look at what price should you peg it to, what's your definition of money supply for purposes of the peg, what kind of open market operations are you going to run and number four, what fractional reserve do you want behind it?
And they all relate to one another because more of one, could mean less of another. These are really technical things that ought to be studied. That's what Zoellick is calling for and I completely endorse that.
LL: Do you think the dollar's days are numbered?
JR: I think the dollar's days are numbered if we keep going down the path of quantitative easing. If Bernanke keeps printing money as far as the eye can see then yes, there's a serious risk of the complete collapse of the dollar.
But the dollar's days may not be numbered. In fact, the dollar may bounce back very strongly if we can go to some sort of gold standard.
I think the United States economy and the dollar as a currency still have the capacity to lead the world, but you have to lead from strength, not from weakness. Our problem is weak leadership both at the Fed and at the White House so I think if we could pick up on Zoellick's suggestion, and get to some sort of gold standard, then the dollar could be the strongest currency in the world. But not the way it's going now.
LL: Do you think the Administration's head is in the sand on this?
JR: It's a serious concern. Their head is in the sand. They just don't get it. They have blind faith in not only Keynesian Economics but monetarism, which itself is highly flawed.
They always thought you could dial up or dial down GDP with the monetary policy but they are ignoring velocity. Velocity is not constant. It is very hard to predict and control. It can flip the other way. Its like putting nitroglycerin on plastic explosives.
Basically, you'll get far more inflation than anything you have ever expected not because you're printing more money but because velocity takes off. Intellectually, the Fed is extremely weak because they don't understand the complexity and dynamics of this system.
I think intellectually the White House is weak. Obama really doesn't know anything about economics. He was a street organizer, a political organizer with a rapid political career. He wasn't really in the Illinois State Senate or the United States Senate for very long before he became President so he is smart but not that smart.
He is very ill prepared for what he is doing so he has to rely on his advisors. It's really a bubble. When Rahm Emanuel left, you were hoping they would replace him with someone from outside the bubble but instead they brought in Peter Rouse who is just another insider.
They haven't replaced Larry Summers, they replaced Christina Roemer with Austan Goolsbee and Austan's a good guy but he is another insider. There is no sign that there is any fresh air intellectually in the White House. The only good news is the new Congress will put a halt on to fiscal stimulus so we will stop making the fiscal mistakes by spending too much. But I don't see what's stopping the Fed. The only thing that will stop the Fed is the market.
LL: Do you think the Fed should have some competition like Ron Paul suggested?
JR: I think it was a creative suggestion. I have said all along, the first country to go to a gold-backed currency will have the most powerful currency in the world because it will the one that everyone wants and therefore it would be worth the most and you'll be able to do the most with it in terms of direct foreign investment, acquiring hard assets, acquiring intellectual property and valuable assets around the world.
The reason why the Fed can do what they are doing is because they have a legal monopoly and what Ron Paul is suggesting is let's not destroy the Fed but take away the monopoly. Let's have some competition in currencies and see how they d
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
