Buck: Welcome back to the show, everyone. Today my guest on Wealth Formula Podcast is a wealth of Knowledge. He’s been on the show before. He’s the editor of Strategic Intelligence, which is a financial newsletter to which I subscribe. He’s also a New York Times best selling author and economist. You may recall the books The New Great Depression. And then there was The Road to Ruin. The most recent book, though, is Sold Out! How Broken Supply Chains, Surging Inflation and Political Instability Will Sink the Global EconomySold Out: How Broken Supply Chains, Surging Inflation, and Political Instability Will Sink the Global Economy. Jim, welcome. Jim Rickards Welcome to our show again.
Jim: Thank you. Great to be with you.
Buck: So, yeah, you know, the last time I talked to you was actually before COVID and a lot has changed since that time. You know, the big elephant in the room ultimately is, you know, what’s going on with inflation. Why is inflation as high as it is? And where is this ultimately going to lead? And I know you have addressed this in the context of supply chains a little bit in your book. You want to do you want to start out with kind of giving us a broad perspective on, you know, why we’re at where we’re at right now?
Jim: Sure. I’d be glad to. Of course, the book is “Sold Out!”. It’s about the supply chain disruption. It was around this time last year, I think, November 2021, when I talked to my editor and we outlined the book. Of course, at that time you go back a year. The headlines were, you know, full of supply chain shortages, bare shelves. The paper goods aisles were cleared out. You know, it wasn’t, you know, East Germany in the 1950s. But by American standards, it was pretty severe. We hadn’t seen anything like it since. Well, certainly in gasoline, the oil crisis in 1974. Before that, I think you have to go back to World War Two. And when you had ration coupons and you could buy gas every other day or groceries and so forth.
But for two generations of Americans, this is something they had never seen before. And again, like I say, it was sort of like, wow, a year. One day would be the paper goods. Say you go back to the store. They might not have your favorite, you know, tomato sauce or corn chips or so whatever it was. But it was always something and it persists, persisted.
So we organize the book. It has three chapters specifically on the supply chain. So chapter one is mostly anecdotal and tells stories about the supply chain. For example, there’s a famous place in New York called Junior’s Cheesecake. They make this world-famous cheesecake. Well, they were out because cheesecake is 85% cream cheese and they couldn’t get cream cheese, so they couldn’t make their cheesecakes. I’m sure that’s disappointed some people in terms of dessert. But then there were more serious episodes last April, May. But even continuing today, the baby formula shortage, jeopardized the health of infants and was highly distressing to mothers and continues. So we just kind of chapter one, Chapter two, we take a deep dive with a lot of data to back it up in terms of why the supply chain broke.
It’s one thing to go to the store and ask where you are and people got that. I mean, it was kind of in your face. But then I said, well, why? And this is America in the 21st century. Why are we running out of good? So select a basis and we get the answers there. The war in Ukraine was part of it. The pandemic was part of it, but the origin really goes back actually to the Trump administration and the trade war on China. We have the data to back that up so we could show this really the breakdown started around 2018, but then it just kept getting worse. And then chapter three, we take the story forward. We explain why the supply chain there always supply chains, but it’s disruptive right now, why it will come back, but it will not be the same.
You can have a very different world, and that’s important from an investors perspective because whenever we have a you know, physicists call that a phase transition or mean quite a paradigm shift, whatever you like, you go from one what I call supply chain 1.0 to supply chain 2.0. It’ll still be around, but it will be different. But that produces winners and losers. And we identify the countries and the brands and the products that will be helpful in either category. So obviously a pretty simple from an investment point of view, avoid the losers and go for the winners. But I make the point that even in financial distress, you can still make a lot of money if you can see it coming and kind of act accordingly.
But then after that discussion, my others say, Well, Jim, merely the supply chain is causing inflation, so we have to have a chapter on inflation. So of course, we do. Yeah, I thought of that and we absolutely will do that. I said, All right, but I’m also going to write a chapter on deflation because that’s what people don’t see coming. There’s a deflation disinflation right behind the current inflation. Now we talk about that as well. So that’s kind of an overview of the book. I start with actually in the introduction before you even get to chapter one, I tell the story about a shipwreck off the coast of Turkey in a place called Lulu, marooned on the Mediterranean coast of Turkey that’s been dated to the late Bronze Age, around 1200 B.C. And in that vessel, a sponge diver found by accident, he saw a funny-looking jar, said, It’s got ears. All experts knew that the ears were handles, you know, to move the jar. You notify the authorities that it’s ten years of underwater excavation, and underwater archeology. And it was the greatest preserved cargo from the Bronze Age ever discovered. And in that they found, for example, Amber, which comes from the Baltic Sea gold, which at the time came from Sudan, and weapons which would have come from present-day Syria and Israel. Phoenicia at the time, Damascus and olive oil and figs and things that for foodstuffs that would have come from Greece or Italy. And there was even a carving of a Queen Aphrodite, who was probably on its way to Alexandria. But the point is this one vessel, there were goods from almost the Arctic Circle to almost the equator from as far east as Persia at the time, present day, Iran as far west as Spain. And that’s an area of 5 million square miles all on this one vessel. And they were pick yourself up and dropping things off as it went along. So I make the point the supply chains or at least go back at least to the Bronze Age, if not further. They’re always around, but they’re taking new a new form. And that’s what that’s what’s coming as what we talk about in the book.
Buck: So I presume your thesis is ultimately, obviously, that supply chains are the major factor for the inflation that we’re seeing right now. And if that’s the case, what’s going on with supply chains now? And does that potentially correct or potentially even overcorrect the problem in the coming months or years?
Jim: Yeah, it’s a great question. So first of all, they the inflation’s here is evident. And, you know, again, it’s in your face. You see it at the gas station, you see it in the meat counter and the dairy and eggs and clothing and a lot of other things. And this really started the inflation started in the middle of 2021. That’s back when Jay Powell was saying chairman of the Fed, Japan Reserve was saying it’s transitory. Transitory. Well, by November 2021, he gave up. He was actually testifying before Congress. He said it’s time to retire. The word transitory. So even Jay Powell recognized the persistence of inflation. Then it only got worse from there. And the readings throughout most of 2022 were the highest in 40 years.
You’d have to go back to 1982, even 1981, to find higher inflation. So that’s real, is persistent. And and again, people know it. They don’t they don’t need to be told that they see it every day. But here’s the here’s the problem. Inflation can come from two sources, broadly speaking. One is the supply side. It’s called cost push inflation.
The cost of supply goes up and it gets pushed down to consumers. That’s what we’re experienced. That’s what’s going on now. Energy shortages, transportation logjams, again, shortage of goods. So people obviously pay more for what they can get. So the inflation we’re seeing now is from the supply side. Now, inflation can also come from the demand side from consumers, and that’s mainly psychological. It involves the consumer saying, you know, gee, I was thinking of getting a new, you know, washing machine or couch or suit of clothes or whatever. What’s the hurry? But if you think prices are going up, you might run out and get it today, like, hey, I’m going to get it now because I’m worried the price is going to go up. And that’s called demand pull inflation. You’re pulling the demand forward by anticipating higher prices and you want to get something today. So two different kinds of inflation, but very different dynamics. Now, in the 1970s, we had an interesting sequence from one to the other. It started out from the supply side. There was the Arab oil embargo after the Arab-Israeli war in 12 and I started in 1973.
The Arab oil embargo was just seen in 1974, oil prices quadrupled. They went from $3 a barrel to $12 a barrel. Doesn’t sound like a lot by today’s standards, but a lot of the time and when you multiply anything by four, that’s a shock. So and that caused the initial bout of inflation. And if you remember, Jerry Ford was president and our Greenspan was the Council of Economic Advisors, and they were tallying these buttons that said win win, it’s super whip inflation.
Now we run this big anti-inflation campaign. The problem was that the high oil prices threw us into a recession, a bad one. The stock market crash in 1974 got hit with the recession. Unemployment went up, the inflation kind of disappeared briefly. But then it came back because the oil prices continued to go higher. Nixon had gone off gold and then we had two really incompetent chairs of the Federal Reserve, Arthur Burns and Chu William Miller. They put the pedal to the metal in terms of money supply and then the inflation psychology did tip over into the demand side. From the supply side to the demand side. I remember very well I started my career at the time I was working at a I was international tax counsel, Citibank in the late seventies. They would just give you a raise. She didn’t even have to have said, We just give you a raise. Here’s another 20,000, which was a lot of money at the time. But the point is, they were, where are you going to quit and take another job or whatever that went out of control. And then famously, Paul Volcker comes in and takes interest rates to 20%, destroy the inflation.
So there you had both our supply side morphed into the demand side and Volcker snuffed it out with high interest rates. Now, here we are today. The inflation has come from the supply side. That’s real enough, but it has not taken off on the demand side. The investor psychology has not changed. People are very fearful. They’re nervous, a lot of uncertainty. They’re not spending money. They’re spending some actually both, but not spending as much. Their credit cards are maxed out. We’re probably heading into recessions kind of starting right now. And the point is that houses that demand what’s called demand pull inflation has not taken over. Now, here’s the problem. Jay Powell, chairman of the Fed, is determined to eliminate inflation.
He wants to get rid of the supply side, inflation. I just described. But the Fed can’t do anything about the supply side. They don’t jump off oil. They don’t drive trucks. They don’t have farms, they don’t wash crops. They don’t do anything that you need to deal with supply shortages and supply chain disruptions. The only thing they can do is raise interest rates so high that you can destroy demand and then, yeah, that’ll play out on the supply side because as I say, you know, maybe the price of filling up your Ford F-150 truck has doubled from $75 to $150. That’s inflation. But if your business fails and you get fired, you’re sitting home and you don’t buy any gas. That’s a that’s a different kind of outcome. That’s that will bring prices down a lot. But so here’s the question. How much how much demand destruction do you have to do to squash inflation? From the supply side, the view on the demand side is different, but to squash on the supply side, using demand destruction, you have to destroy the economy.
You have to basically crush demand, raising interest rates very high, and then they’ll feed back to the supply side eventually. You know, the old saying the cure for high oil prices is high oil prices when they’re high enough, long enough, the costs get too high and people and businesses fail. So that’s the path the Fed is on right now.
Buck: You’re talking about the supply side. You know, obviously with the supply chain issues that we dealt with during COVID and thereafter, that was a big part of it. In addition to everything that you said, is there is it your sense that the supply side itself could naturally increase just because things are back, are getting back to normal and that supply chains are less, you know, volatile now? And that in itself could potentially, you know, help with the inflationary pressures.
Jim: Short answer is no. Now, I think it’s important to make the point, as I said before, this is Whac-A-Mole. It’s not every shelf is bare all the time, but it is popping up in different places. But the really good question, Buck. And I’m hearing this a little bit later saying, well, Jim, you know, it’s great that you have a book on supply chain, but, you know, that was last year story. This is pricing in crisis is over. Kind of interesting that, you know, it’s over and stuff is starting to come through. That is not true. Some things, yeah, it has improved a little bit. Container prices are down. Shipping lanes are less jammed than they were this time last year. So capacity is back. It’s actually cheaper. You can get it.
So there are certain aspects of the supply chain that you can point to that have that are much improved. But the problem is, well, the problem the supply chain disruption has just moved to different part of the process. Let me give you a concrete example. Literally this week, this is brand new, just to illustrate my point. So right now, go down to your Walgreens, your CBS, your Rite Aid, or wherever your local pharmacy is, you can’t get or else the shelves will be greatly depleted, but you can’t get Tylenol, Ibuprofen, Motrin is a over-the counter medicine called Tamiflu. I was a kid. We called a cough medicine that basically relieves some flu like symptoms. Okay, You can’t get those. Why is that? Well, the answer is no. I’ll just digress a little bit. But, you know, China has had this zero-covid policy, which makes no sense. I mean, the the lockdowns, the mass, all that, none of that stuff works. The vaccines don’t work. They don’t even have a very good vaccine. And our vaccines don’t work either. So what’s the point? But they have been doing that. They’ve been locking down Shanghai, a city of 26 million people, a locked down Beijing, a city of 22 million people. And they’ve been doing this for several years. Well, finally got to the breaking point. November 24th, end of November, there were riots or demonstrations. People went out. They tore down the COVID testing centers, in their words, are basically tents. Every three blocks. They tore those down, broke down barricades, you know, riots in the streets. They had to put it down with, you know, tear gas and water cannons and worse. A lot of people got arrested.
But this was a this is kind of an existential threat to the leadership of the Communist Party of China. This reminded them of the Tiananmen Square demonstrations. They weren’t riots. They were demonstrations in 1989, which were ended with a massacre of they don’t even know how many people, but several thousand people were killed when they put that demonstration down. So all of a sudden, the leadership in China does a 180. They’re like, Yeah, you know what? We had such success and this is all lies, but this is what they say. We’ve had such success with zero. Copy that. We’re now in a position to ease up. So now if you test positive, they’re like, Hey, just stay home. We’re not going to, you know, well a steel I-beam to your door to lock you and make you a prisoner. We’re not going to lock down whole cities. We’re not going to require you to be tested every two days. We’re just going to do a real ease up on the zero colored policy that has implications in terms of where the virus goes from here.
But I can tell you just briefly, the math is pretty simple. The 1.4 billion people in China, if you if you let the virus up, you and zero COVID, you just let this thing rip, you’re going to get at least a 30% infection rate that’s based on data from the U.S. and Europe could be higher. But let’s just say 30% to be conservative, 30% at 1.4 billion people is 420 million people. The fatality rate is about a quarter of 1%. So good news is 99.75% survival rate. But a quarter of 1% will die, maybe more. But at least that may well, one quarter of 1% of 420 million is over a million people. If you let this virus ship, you’re going to have a million people dead and tens of millions more in the hospital. The problem is China doesn’t have the intensive care units, the oxygen, the hospital beds and all the and the clinical facilities that we have in the United States are as were stressed or China is going to be super stressed because they don’t have them. Now, the Chinese people are smart enough to know this. They can see this coming.
So guess what they’re doing? They’re running down to the drugstores and they’re buying all the ibuprofen and the Tamiflu and the Advil they can get because they know they’re going to have to self-medicate when this virus gets out of control because they don’t have the medical facilities to deal with it. Well, guess what? We get 90% of our stuff from China. All those brands I just described, maybe the brands are different, but the medicine is the same. We get that from China. The Chinese are stripping the shelves bare and hoarding it. Therefore, there’s not enough to ship to the United States. Therefore, our shelves are now bare. So somebody says, well, how can a public policy decision in Beijing, a fact whether I can get ibuprofen for my kid and, you know, Portland, Oregon?
The answer is it does. And it works exactly the way I just described. So, yeah, some alleviation of some parts of the supply chain. Yes. The new problems emerging all the time. And that’s what happens with a complex, dynamic system. Say there’s basically a domino effect and the impact goes from one area to the other. So the supply chain situation is still a mess will remain. So new problems are solved, all problems in solve the new problems are emerging all the time. So the book is more timely than ever and this is going to persist.
Buck: Talk about that transition then, like the forces behind the transition to, you know, the inflation that we have, what the Fed is doing about it, and also, you know, this transition into I see not necessarily deflationary, but, you know, rapidly decreasing inflation. Like how does that happen? If you could talk about the pressures that will ultimately create that scenario.
Jim: Sure. Let’s go back to Jay Powell and the Fed being on a path to crush inflation. So they’re running the Volcker playbook right now. Now, Jay Powell has given four speeches in recent last few months, August 26th, to Jackson Hole, September 21st, that following the FOMC meeting in Washington Federal Open Market Committee on November 2nd, another FOMC meeting in Washington and November 30th at the Brookings Institution. And he’s got another one coming up December 14th, another FOMC meeting, sadly, five speeches altogether. He said the same thing every time. He said inflation is job one. We’re going to crush it. We’re not going to stop until we do, and unfortunately, we’re going to be in a recession. He does not use the R word. He can’t. But you don’t need a decoder ring to understand.
He’s saying there’s going to be a recession and unemployment is going to go way up. And it’s too bad about the employment recession. But that’s the price of getting inflation under control. And if we don’t, inflation gets worse, the price is going to be even higher. So whatever pain you feel right now, sorry about that, but we’re trying to prevent something worse. We’ve got to get inflation in a box, and that’s what he’s doing now. They going back to March 20, 22 and March 1st, 2022, interest rates are zero. The Fed policy rate was zero. Yeah, right now they’re four and a quarter is going to be 50 basis point hike on December 14th. That’s going to get it to four and three quarters.
In the next meeting we have the 2023 calendar or some secrets on the Fed website. The next meeting is February 1st. The one after that is March 22nd. I expect Jay Powell to raise rates another 50 basis by 75 to 50 on February 1st and perhaps 25 basis points on March 22nd. So we have three more rate hikes coming December 14th, February 1st, March 22nd. That’s going to take the Fed funds policy rate, Fed funds target rate to five and a half. So from zero March 1st, 20, 22 to 5 and a half by March 2023, that’s Volcker country. I mean, that’s Volcker was doing higher levels, but five and a half percent in one year. That’s that’s crazy. There’s rarely been anything like it.
Buck: Along that lines. Are you surprised, Jim, that we haven’t you know, the employment numbers are actually surprisingly good still. Look, it just seems like the nine months and 5% you would expect there would be, you know, some effect on the labor markets. Now, are you surprised about that?
Jim: I know for a couple of reasons. Number one, labor conditions are a lagging indicator. They’re not a leading indicator. So when you’re an employer or a small business, you’re running a restaurant or dry cleaner or, you know, whatever, the last thing you want to do is lay off workers. You will if you have to. But that’s the last thing you do. You cut expenses. You you know, you don’t get bonuses. You argue with your vendors, with their risks. And then when you’re desperate and the recession has kicked in and your business really is hanging by a thread, that’s when you lay off workers. So, number one, it’s a lagging indicator. And number two is completely misleading. And this is why the Fed always gets it wrong.
I’ll explain in a minute why they’re getting it wrong again. But they use these this Phillips curve, which is says there’s an inverse relationship. So between unemployment and inflation, so low unemployment can mean higher inflation, high unemployment can mean lower inflation. So this inverse relationship and you’re right that the unemployment rate is 3.7%, which is low historically, you have to go back to the 1960s to find an employment base like that. So the Fed says, well, that must mean inflation is still strong. So we have to keep raising rates. First of all, the Phillips curve is junk science is worse than climate change science, which is complete junk. The last time I looked at the Phillips curve, you know, you plotted out just a bunch of numbers. It was flat like where I went to school, workers were flat, they were curved.
But that was it doesn’t work at all. And then seeing ingredient, if you will, is the and you see this in the labor force participation rate. So the way it is to be unemployed, to be counted as unemployed, of course you don’t have a job, but you have to be looking for a job. You have to show up at the unemployment office or go online or you go to a job interview, make some effort to find a job, and then you’re counted as unemployed. If you’re just sitting home eating Doritos, watching the, you know, World Cup or whatever, and you’re not looking for a job, they don’t count you as unemployed. You are unemployed, but they don’t count you. Now, how big is that cohort? The answer is 8 to 10 million people who are not who are in the labor force, but they’re not counted as unemployed because they’re not looking.
If you put those people in the unemployment calculation, the rate would be like more like eight or 9%, and that is recession level rates of unemployment. So some of it’s legitimate. Some of those people are homemakers, some are early retirees, some are students. They’re perfectly good reasons not to be looking for a job, but not 10 million people. That’s a huge number. So so two things are wrong. Number one, unemployment is a lagging indicator, starting to go up now. It will go up a lot worse, but that’s probably because the recession is already here. And number two, it doesn’t count upwards of 10 million Americans who just aren’t looking for jobs. But you do see that in the labor force participation rate, which has been coming down, meaning a smaller percentage of the total labor force is either working or looking for a job.
So that unemployment rate is a very misleading number. I’m not saying they cook the books. I mean, I’m sure they calculate it correctly. I’m just saying doesn’t mean what the Fed thinks it means. And they’re missing the black hole in the whole thing, which is this large group who are just not looking for work. And then I expect unemployment to go up from here.
Buck: So you see, obviously, this can’t persist and will probably end up in a fairly deep recession based on what’s going on now, correct?
Jim: Yes, mainly because of the Fed’s blindspot, which we just talked about. So so what is what is Jay Powell looking for? Where is he going to when is he going to stop raising rates? Well, he doesn’t know. I think five and a quarter, five and a half percent is a good estimate. But he’s he’s sort of like I have looking for the white whale. And like in Moby Dick, he’s looking for what they call the terminal rate. So what’s the terminal rate? No one knows what I don’t know about us. No, he’s like pirates two or, you know, and he sees it. But the definition of the terminal rate, it’s a Fed funds target rate that’s high enough to bring inflation down on its own without further rate hikes.
So we’ve taken it to the point where inflation we don’t have to do anything. We just have to pause and wait and inflation will come down on its own because we reach the terminal rate. And that does not mean that interest rates have to be higher than inflation. They don’t. They just have to be high enough to make inflation come down on its own. And that’s what Powell is looking for right now. He thinks it’s five and a quarter or five and a half, and he’ll get there in March. What if and I think this is the case by the way, and Wall Street’s kind of saying the same thing, although I diverge from them on other matters. What if they’re already at the determined rate?
What if they’re there and inflation is coming down? And by the way, in the last couple of months, inflation has come down. It’s still too high. I’m not wishing it away and it needs to come down more. But the fact is, starting to come down on its own suggests that they’re at a terminal rate. They just don’t know it. So if they keep going, this is like, you know, wild card running off the cliff and not realizing is off the cliff. It always is three more times, which I expect. But they’re already at the turnover rate. That means they’re going to go way too high, strangle the money, have monetary tightening that’s way too strong and throw the economy into a severe recession, which is what I see coming.
Now, here’s where now Wall Street’s saying something similar, but not exactly the same. Wall Street’s kind of saying, hey, you know, inflation is coming down, growth is slowing. Maybe you are at the terminal rate and that’s a good thing because you’ll hold off on that March increase, maybe not even to the February increase. You’ll cut rates by March. This is the famous pivot, you know, pivot to rate cuts that at these monetary conditions will have a soft landing, Goldilocks ending and so by stocks, I mean, well, Wall Street always ends up everything just by saying buy stocks, you know. But so so they’ve got, you know, the power is at the rate as a terminal rate. Inflation is coming down those up so I’m Goldilocks buy stocks here’s where I diverge I think I would agree with Wall Street that we probably are at the terminal rate that’s probably true.
Inflation is coming down. That’s in the data. You want to debate it. You can see it coming down, but the path is going to keep raising rates. He’s not going to get the memo and this is going to throw us into a severe recession. It’s not going to be a soft landing. It’s going to be a crash landing and Goldilocks is going to get hit by the bears. So that’s a very different outcome that Wall Street expects. They both start from the same place, which is said the Fed’s already there. Rates are higher, not they shouldn’t go higher, but Wall Street says he’ll get he’ll get the message is off. Yeah, I’ll live happily ever after. My view is he will not get the message. He’ll keep tightening.
The Fed may pivot by June or July. They may lower rates by June and July. I don’t think that’s a stretch, but not for good reasons. So do it because we’re in a severe recession, severe contraction, unemployment soaring, stocks are down 30%. And the Fed’s like, oh, gee, it looks like we made a mistake better cut rates. So they will cut them, but they don’t see that now. And it will be for all the wrong reasons, which is we’ll be in a severe recession.
Buck: What is your timeline for all this? Because you mentioned Putin easily the Fed could be in a position by June. So we’re only talking about six, seven months here. Do you think that as you as you’ve kind of alluded to, we’re in a recession now and then those numbers come back and that in itself maybe slows the Fed down with rates and then, you know, they’ve had this nine months of raising rates without waiting to see if it actually does anything. And then during this big recession and that’s when they reverse the rates and they actually start coming down. And you think that’s all in six, seven months?
Jim: Yes, but the damage will be done. And they say that the Fed will pivot in June is not an encouraging sign, because what it means is that they held on too long rates and too high. We’re in a severe recession. Okay. You got a recession. They’re going to cut rates. That’s obvious, but it’ll be too late. They will have already caused the severe recession. So that’s where I don’t see that as as a so-called soft landing. And there’s a reason for that. You got to get and Jay Powell said a little bit here, why won’t Jay Powell see it? Why won’t Jay Powell pivot the way Wall Street wants him to? Why will he persist in driving off the cliff?
This goes back to 1980, something called the Volcker mistake. And recall Paul Volcker became Fed chair in 1979. Inflation was already out of control. He started raising rates immediately and raised them pretty significantly in 1980 and was on the path that we’re talking about. The one Jay goes on now. But 99 or 1980, we had a severe recession. It seemed to come out of nowhere. It had nothing to do with Volcker or the Fed or monetary policy. It was a regulatory screw up by the Carter administration. They put a cap on credit card interest rates, and the banks said, okay, well, we’ll get out of the credit card business if we can’t make any money. And that caused a severe credit contraction. And then the economy plunged. Now it got so bad that farmers across America, they were driving tractors and front loaders and they surrounded when they started driving tractors up the steps of the Federal Reserve, Congress was up in arms. People wanted to burn Paul Volcker in effigy. And Volcker blinked because the recession came out of nowhere. It was banned.
The protest was so bad, Volcker interest rates seven percentage points, not 770 basis points, seven percentage points from a pretty high level, because this recession that was a huge blunder for a couple of reasons. Number one, the recession was over very quickly. It never did have anything to do with monetary policy. But the job at the fight against inflation was not over. And when Volcker cut rates, inflation took off again and went even higher. And that’s when And in 1981, he had to raise interest rates to 20% and he caused a second recession. The second or two years that was the worst recession since the Great Depression. So Volcker looked back on that and said that I blinked. I never should have done that. I should have kept raising rates, recession or no recession. Just keep going until the job’s done. Now, that’s economic history. But Powell knows that Powell does not want to be that guy. He does not want to be the guy who blinks. The guy who books cuts rates too early, then inflation takes off and he’s got to raise them even higher.
And he’s repeating the Volcker mistake. So and the difference is that in Volcker’s case, going back to what we said earlier, the inflation was coming from the demand side. Today, the inflation is coming from the supply side. You really can’t question if you raise rates high enough. We see it already with mortgage rates and monthly payments going up and housing prices start to go down immediately. So but Powell doesn’t want to repeat the Volcker mistake. He’s going to persist, you know, until inflation starts to come down a lot more. But when it does, it’ll be it’ll be it’ll have a life of its own. It will be because we’re in a recession. The damage will be done. And at that point, even a pivot, meaning a rate cut in June 2023, which is entirely possible, will be too little, too late. It will already be in recession.
Buck: Fascinating stuff, Jim. I know you. I know you are off to London here for the book launch. The book is out here. It’s called Sold Out How Broken Supply Chains, Surging Inflation and Political Instability will Sink the Global Economy. If you have not read a Jim Rickards book, I highly encourage it. He’s a great speaker, obviously, but a tremendous writer as well. By the way, Jim, I have to say thank you. Thank you so much, Jim, for being on the show and good luck to you.
Jim: Thank you.
Buck: We’ll be right back.