By Dave Gonigam
Kashkari puts on his best poker face as your editor asks Jim Rickards’ question
[Screengrab from Minneapolis Fed video via YouTube]
If you’ve been reading Jim’s work for any length of time — or even following our thumbnail sketches of his work in The 5 — you know Jim believes it’s politically untenable for the Fed to blow up the balance sheet again the way it did from 2008–2014…
That is, the torches and pitchforks will come out if the Fed embarks willy-nilly on a new round of money printing. From $4.5 trillion now to $8.5 or $9 trillion? Not happening. Especially not when the Fed is already leveraged more than 100-to-1.
In a crisis, the liquidity to save the system will have to come from the only solvent institution left standing — the IMF. It will print SDRs in mass quantity to be distributed among the globe’s governments and central banks. You and I will continue to transact in dollars — but thanks to the proliferation of SDRs, those dollars’ purchasing power will shrink dramatically, and in a hurry.
This isn’t Jim’s idle speculation; the plan was laid out in an IMF white paper in January 2011.
Kashkari dodged this one too — as best he could.
To begin with, he said, “There’s nothing on the horizon that tells us another ’08 crisis is imminent” — even as he allowed that “by their nature you never see the risk until it blows up in your face.”
Alrighty then…
“I think the Fed still has a lot of tools in our arsenal,” he went on. He itemized them as follows: zero interest rate policy, or ZIRP. More quantitative easing. And forward guidance, which is Fed-speak for how the Fed jawbones the markets about its intentions.
In other words, more of the same.
“Whether we could expand our balance sheet another $4 trillion, I don’t know. I don’t know what the limits would be in the Treasury market or the mortgage-backed securities market. But I think we would have a lot of tools at our disposal. And ultimately if it were another ’08-type crisis, Congress would have to get involved again.”
Kashkari is an adamant defender of the 2008 bank bailouts that Congress approved and he oversaw. “We hated to do it. It was the right thing to do.”
[Recovered history: He left out the part about how his boss, Treasury Secretary Hank Paulson, threatened Congress that if it didn’t act, the resulting economic meltdown would necessitate martial law. This story was confirmed at the time by both Rep. Brad Sherman (D-California) and Sen. Jim Inhofe (R-Oklahoma).]
“A disappointing answer, but not too surprising coming from a Fed official,” Jim tells me this morning.
“The answer about ZIRP, QE, forward guidance, etc., is the playbook for a recession (from Yellen’s 2016 Jackson Hole speech). It’s not the playbook for a crisis, which is completely different.”
A while back, Jim himself asked the same question of Timothy Geithner, Obama’s first Treasury Secretary… and got an equally unsatisfying answer.
If you find this episode a little unsettling — especially the part about “no imminent crisis” even though Kashkari admits central bankers do a lousy job of anticipating crises — you might want to take some of the precautionary measures now. Rickards’ suggests increasing your allocations to 10% of your investable assets in gold.
Best regards,