Jim Rickards: The Inflation Race  


The fears of the debt contagion spreading throughout Europe has been a source of concern this week as investors question which are countries too big to bail out. The acronym for the countries in question—Portugal,Italy, Ireland, Greece and Spain is perfect—PIIGS.

These countries oinked out spending like it was going out of style and now they can't pay their debts. But unlike sending off a fat pig to slaughter, the economic ramifications of letting any of these pigs going belly up could create what many fear an economic catastrophe for the euro itself.

I decided to speak with Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, about this threat.

JR: What would be the cost of not bailing out Portugal? Think about the alternative. If you let any of the member states of the Euro default on their bonds, you are going to have a catastrophe for the euro itself. Which could possible break apart the euro.

The costs of the bailout are high but the costs of not bailing out are even higher. I think Germany, France and the other lead countries in the Euro will do whatever it takes. They are adopting the same posture as Ben Bernanke.

LL: Portugal's Finance Ministry confirmed the Portuguese government has sold EUR1.1 billion worth of medium-term bonds to China in a private placement last week. China has also been making deals and promising support for the Spanish debt markets. What's your outlook on this debt buying spree?

JR: China has their own agenda. They have a big interest in supporting the euro. They actually export more to Europe than the United States. So China wants to control its exchange rate relative to the dollar. They have just as much concern over in Europe as they do here because they do not want to see the Euro collapse against the Yuan because that would hurt their exports as well. They maintain the Yuan/dollar peg through the process of buying up dollars and they are propping up the Euro in the same way.

This should not be viewed as an act of generosity. Its really an act of self interest. The way I look at it is, China is not doing this to be a nice guy. They are doing it to try and protect their own export machine, their own job creation machine. They've got their own agenda and that's why they are doing it.

LL: Is that why the bank of korea in surprise move hiked rates quarter point to 2.75 to fight inflation?

JR: Yes, the inflation issue is not confined to China but includes South Korea, Vietnam and others. So the rate hikes can be expected across the board as a kind of regional response to Fed monetization of debt.

LL: A lot of people are asking if any country is too big to bail out. What do you think?

JR: The answer is no because the bigger you are, the more capacity you have to bail out yourself.

The U.S. is too big to be bail out but it doesn't need a bail out because we can print our own money. At the same token, countries like Germany and France, they are too big for anyone else to bail them out but they can bail themselves out because they control the ECB and at the end of the day, they can print more money. Now it's not pretty. You may create inflation. You may cause your currency to decline although its not clear if Europe has a problem with that because a cheaper Euro helps German exports.

Germany is one of the fastest growing major economies in the world today. They are an export power house- be it selling BMW's to China, selling computer systems in the Middle East, they are doing fairly well. So they don't mind if the Euro goes down a bit.

LL: Italian Economy Minister Giulio Tremonti is pushing hard for a euro bond. Does that mean trouble is just over the horizon or is it already here?

JR: The trouble is already here. It's baked in the pie. Not only do all these countries including the United States have unsustainable fiscal policies, they have created more debt than they could possibly repay in real terms.

There is no combination of growth and taxation that will enable any of these countries to repay their debts. They have been relying on their ability to refinance and that's what's being called into question. They have kept the game going this long because of this refinancing game.

More taxation on the other hand stifles growth so what do you have left? Outright default is one way and it could come to that but the tried and true way is through inflation. By inflating the currency, you pay back the currency in nominal terms but not in real terms. All the indebted countries of the world are going to try this trick but the problem there is inflation is a form of devaluating your currency and not everybody can do it at once.

The U.S. wants inflation but we can't do it because inflation is showing up in China. Now I think those inflationary chickens will come home to roost once China allows their currency to depreciate which is what they seem to be doing right now.

Europe has the same problem right now as well. This is what the currency wars are all about. The manifestation of countries trying to inflate their currencies so they can defacto default on their debts.


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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."