Jim Rogers on the looming crisis

I don't know how to take Jim Rogers. Though a graduate of Yale and Oxford, he has no advanced degree, but that shouldn't necessarily count against him as an interpreter of the economic and financial scene.

Since economists routinely disagree about even the most basic issues, there is scope for others who have some expertise in finance and related areas to make their contributions. And, arguably, pragmatic freelance investors – whose only concern is to get things right (primarily for their own portfolios but also for reputational reasons) – have an important role to play in the public debate.

And Rogers has no doubt been a phenomenally successful investor. This means something, even if you put it down to mere luck and commonsense.

His ideas are worth looking at not because they are interesting but because they have an 'emperor's new clothes' quality – and (who knows?) he may just be right.

His economic assumptions are not doctrinaire, in the sense that they appear to have been arrived at independently. They just happen (as Rogers has himself observed) to correspond with some of the main tenets of the Austrian school.

He emphasizes the relevance of morality to the markets, but not in a naïve or objectionable way, it seems to me.

So here are some extracts from a recent interview in which he talked (amongst other things) about morality and the markets and the coming crisis (as he sees it) for the US, Europe and Japan.


Félix Moreno: [You have written that] the US [is the] largest debtor in the history of the world.

Jim Rogers: That’s not an indictment, that’s a fact. If you consider it a negative fact, it’s an indictment. It happens to be a fact that it is the largest debtor nation in the history of the world. The debt is going through the roof, you know with all the shady rates. I do criticise it. I don’t like it. I’m an American citizen. I’m an American taxpayer, so I hate what’s happening with the debt situation in America. No nation in history has gotten itself into this situation and got out without a crisis. So I guess it is an indictment.

FM: Do you expect the US politicians to do something about the debt? To balance the budget any time soon?

JR: No, not at all. Not either the present politicians or future politicians. The situation is so dire that it would be almost impossible to balance the budget and pay down the debt without an enormous amount of pain. Now suppose that somebody could win an election on that platform – well within six months or a year or two, he would either be assassinated or give up because the people would say “wait a minute, we didn’t know it was this much pain. This is not what we had in mind” and he would be thrown out and his policies reversed. No it’s not going to happen until there’s a crisis or a semi crisis. That’s the lesson of history. Nobody gets out of this situation until there’s a crisis.

FM: What would you say to those that see the current situation as perfectly sustainable, especially in reference to the money printing, quantitative easing, etc.

JR: I would suggest that they get out a couple of simple history books and see if there has ever been a way out. For what it’s worth, there has not been and there won’t be. I suggest that they look it up. They don’t have to listen to people like me, look it up.

FM: Do you think that Bernanke and the Fed have an exit plan from QE and zero-rates?

JR: Mr Bernanke’s exit plan apparently is that he is going to leave his job. He doesn’t want to stick around for the hangover. He doesn’t want to be around for the consequences of what he’s doing. I don’t know if there’s an exit plan. If and when they stop it’s going to cause lots of ramifications in the market and lots of, perhaps even chaos, but certainly turmoil and upset. The only exit plan that he’s talked about is to let it all mature. That sounds wonderful, but it’s not very practical.

FM: It seems that the whole “let’s get out before it crashes” worked well for Alan Greenspan.

JR: Well, Alan Greenspan did get out before it collapsed, more or less, but if nothing else, history has figured out that he is a charlatan who didn’t know what he was doing in the first place.

FM: So you don’t think that they have an exit plan. Does that mean that you are in the inflation camp? Do you think that the crisis is going to come from high inflation like in the ‘70s and ‘80s, or are you in the deflation camp? That it will come through bankruptcies, banking collapses and debt defaults?

JR: Throughout history when you print staggering amounts of money, it has always led to inflation. Now, you can have an inflationary boom, an inflationary feel-good period, but usually the politicians just keep printing. No politician is going to run on a platform, or could get elected on a platform of “we are going to have pain”, so they are going to continue to print money. You know as Mr Bernanke is doing, the BoJ, the Bank of England, the ECB. They all say the same thing. They are all doing the same thing. So they are going to continue to print money. Eventually of course what always happens is that inflation gets higher and higher and then the bubble pops and you have deflation and harder times. But between here and there is a long way, because they are not going to stop printing money. That’s all they know how to do. It’s the wrong thing, but it’s all they know to do.

FM: ...[Y]ou give examples of banking crises where there were no bailouts. What is your opinion on the bailouts?

JR: It’s not supposed to work that way. You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work. That’s not the way morality is supposed to work. I know politicians don’t care about morality. It’s not going to work. You see what happened in Japan. Japan has had two lost decades. Their stock market is down by 70-75% from where it was 23 years ago. This system has never worked.

In the 1920s America had this problem and America balanced the budget and raised interest rates... They had a terrible 18 months, but then they had the most exciting economic decade in American history. Scandinavia did the same thing in the early ‘90s. When the Japanese were refusing to let people fail, the Scandinavians let people fail. They had a terrible two or three years, but since then Scandinavia has been an extremely strong and exciting part of the world. This way (the bailout way) doesn’t work, and there are no examples of something like this having ever worked. It’s not going to work this time either.

FM: Some argue that a current example are the eastern European countries: Estonia, Lithuania, etc, who made big cuts within one year of the crisis and are now growing faster than the rest of Europe.

JR: There’s no question. You can look at other places: Iceland, Ireland – you know, the places that did take some pain have certainly done better than the places that denied reality.

FM: From the Spanish perspective, it’s certainly not better to have a lost decade or two by trying to postpone all the big budget-balancing hard work.

JR: You can postpone it all you want, but the problems just mount. There is no country in Europe that’s going to have lower debt this year than last year, or lower debt the next year than this year. Every one of them will run up the debt, instead of decreasing the debt.

FM: Do you expect the Euro to lose the currency wars? Which will fall down the cliff first? The yen, the euro or the dollar?

JR: It depends on what standard of measure you are talking about. The Japanese claim that they are going to print “unlimited” amounts of money. That’s their word, not mine. Unlimited amounts of money. I would expect the yen to go the furthest the fastest. But America has also said “wait guys, we’ll print a lot of money too” – though they didn’t say “unlimited”. And the British said “we should do it”. So I don’t really know. It’s a very good question, which one to own. I don’t own the yen, because “unlimited” is a pretty hefty amount of money. I grapple with this every day, which currencies to own. Believe it or not I was even contemplating putting money into the ruble – only because it seemed less flawed at the moment than these others.

FM: You seem to have had a change of heart recently regarding Russia.

JR: In recent months I have seen that Mr Putin and people in the Kremlin have changed their attitude. It will take a while for all this to sink in. They said for many years that they welcomed foreigners and capital, but they were lying. They shot you, they put you in jail, and they confiscated your wealth. But now Mr Putin seems to understand that he has to play by international rules, he cannot go on putting people in jail and taking their money. If he wants to play on the world stage he has to treat international capital, and domestic capital, in a proper way. You can ask me in 10 years if I got it right or not...

As Obama speaks

Here are a few random thoughts on the upcoming U.S. presidential election and the economic situation.

Mitt Romney seems to be holding his own in the polls, and his campaign seems to have some momentum. He has shown himself to be steadier and more astute than John McCain four years ago (for example, in his choice of a vice presidential running mate). Also, I have heard a lot about younger voters losing enthusiasm for the President and being less likely to vote than older voters are.

And then there are the one million or so undecided voters in swing states whom commentators believe will determine the election outcome. I would not be surprised if all Romney has to do to win most of them over is to continue to look like a competent economic manager in an economic environment which increasingly looks like it desperately needs just that. (A couple of days ago it was announced that U.S. manufacturing contracted for a third straight month in August.)

Some are looking to Federal Reserve Board Chairman Ben Bernanke for a solution, but his policies are increasingly being questioned. Many economists and bankers are talking about a fundamental structural shift having occurred in the U.S. economy.

At the recent Jackson Hole meeting, James Bullard (St Louis Fed president) suggested that the sluggish recovery and persistent unemployment stem not so much from cyclical weaknesses as from longer-term structural factors. Other Fed district bank presidents - and many economists - agree, doubting the wisdom of further easing action on the part of the Federal Reserve.

The Federal Reserve Bank of Dallas recently published a paper by the former chief economist at the Bank of International Settlements, William White, which warns of the unintended consequences of ultra easy monetary policy. White sees the economy as a complex adaptive system which cannot be readily modelled. He believes that cheap credit leads to malinvestment and has a pernicious effect on the financial sector, essentially corrupting markets.*

Governments and the financial sector will resist tightening but the current easy money environment is not sustainable. The long-term risks include hyperinflation and deflation.

On the fiscal front, President Obama has, as I understand it, no long-term plan for dealing with the national debt. (Under his proposals, the debt would stabilize and then start to rise again after ten years.) It's clear, at least, that the Republicans take the debt issue more seriously than the Obama team.

The national debt constitutes a threat to America's long-term economic future and geo-political standing, and the problem seems all the more intractable given the alarming degree of political polarization (and social fragmentation?).

I am not an American so I can't speak with any authority on this - and I hesitate to speak at all on these matters - but it certainly seems that the country is seriously divided, and President Obama has been contributing to this with his class-oriented rhetoric. (I find this mildly shocking, actually, coming from the head of state of an advanced country.)

As I write this, President Obama is giving his acceptance speech at the Democratic National Convention. I am not tuned in but will check news reports before posting, just to make sure nothing unexpected happened or was said. Suspect that many in the audience will be cheering like mad but secretly wondering how it all could have gone so badly wrong.


* Dallas Fed president, Richard Fisher, who has openly supported White's views, is a former Democratic Senate candidate and worked for the Clinton administration. (He has an interesting background. Born in L.A. to an Australian father and a South African mother (of Norwegian descent), he grew up mainly in Mexico and struggled financially before completing degrees at Harvard, Oxford and Stanford.)

Genetics and political orientation: some further thoughts

Let us assume that - as the research (which I discussed briefly in a previous post) seems to indicate - our political and other values are heavily influenced by genetic and genetic/environmental factors and even reflected in brain structures. What consequences flow from this?

First of all, it will make one skeptical about one's own political beliefs and values. As with someone 'born into' a particular religion, skepticism is definitely called for. But, just as my being born into a particular religion does not mean that the doctrines of that particular religion are necessarily false, so my having a genetic predisposition to believe or value certain things does not mean that these things are not true or valuable.

Even if our political beliefs were completely determined, this would not necessarily reflect on their truth, rightness, viability, plausibility - on their value and worth in other words. But are value and worth matters which can be objectively assessed?

I would suggest that the policy prescriptions of the right or the left or any other political perspective or orientation can be assessed in various ways. Whether particular methods or policies work in practice can be tested (and history can be seen as a record of such experiments). Science can be brought to bear on factual matters, from biology to economics. But basic values - such as whether to value equality over prosperity and individual freedom, etc. - seem not to be amenable to objective assessment.

Another lesson one might draw from the research is that people are different - every brain is unique, of course, but there are also differences which reflect general patterns of thought; and consequently changing someone's mind about a deep ideological issue will not be achieved simply by setting out a logical argument. Of course conversions occur, and people change their own minds (though often, as one of the commenters on the linked post said, as a result of much reading and reflection).

But presumably conversions occur when the new ideology is compatible with underlying brain structures, in other words when elements of that ideology are already present in a latent form. Given the research results, unconscious constraints and unconscious proclivities and tendencies clearly shape the possibilities for individual belief and orientation.

Knowing this, one would not try to convert everybody to one's own way of thinking, but rather accept that many would not be able (without major mental re-engineering) to value the things one values and so think the way one thinks about social issues. One would concentrate on those whose basic values were compatible with whatever social philosophy one was seeking to promote.

Unfortunately, much argument and debate is entered into with the assumption that we all have a more or less identical faculty which we call 'reason' - a kind of logic machine in our heads which determines our views. But - leaving aside areas like mathematics and formal logic - this is not the case. Our thinking is bound up with feeling and with (often unconscious) values. The research results undermine the view that debate and adversarial discussion are truth-seeking activities. There could be a more limited role for discussion, however, in helping those who have certain predispositions to develop a conscious and coherent social philosophy which accords with those predispositions.

It would be nice if we could have a workable dual or multi-choice social, political and economic system, so that we could all just gravitate towards the option we prefer; but unfortunately capitalism needs to be a universal system if it is to work properly. A dual capitalist/socialist (or free market/collectivist) system will fail because the wealth-producing (capitalist) part will always face increasing demands to subsidize the collectivist component.

In fact this is arguably what is happening today. Most Western countries, though nominally capitalist, have large public sectors which are major employers and providers of welfare. A dual (private/public) system operates in many areas of society: there are private schools and public schools, private hospitals and public hospitals, private health insurance and public health insurance, self-funded retirees and retirees on state pensions, and so on.

And - surprise, surprise - public debt is jeopardizing the future of many Western economies and threatening global prosperity.

Democracy, debt and delusion

The Economist's 'Buttonwood' recently cited a BCA Research report which predicts - on the basis of some plausible assumptions concerning the continuation of current voting patterns relating to age, ethnicity and gender, and demographic trends - that the Republican Party will fade as a major force, and that even Texas will be a solidly Democratic state by 2030.

BCA believes that the deficit problems in the U.S. will not be tackled until 2013, and (this is based on new research from the Pew Research Center) that spending cuts - especially to Medicare and Social Security - will be resisted by voters. Taxes will rise substantially:

"[H]igher taxes will lead to lower labour supply and slower capital accumulation. Eventually, further tax hikes will become self-defeating. At this stage, the U.S. will likely experience a fiscal and political crisis on a scale that has few parallels in history."

The problems of American democracy are mirrored in many other Western democracies today, and they go beyond the fortunes of particular parties and indeed beyond politics.

The Western liberal democratic model seemed until relatively recently to have stood the test of time and to have achieved a degree of stability. But increased populism and the gradual erosion of traditional institutions within Western countries has led inexorably to chronic budget deficits and accumulating public debt.

In the dark days of the 1930s and 40s, a group of European and American thinkers tried to articulate a social philosophy which had at its core the key principles of economic liberalism. Ludwig von Mises and F.A. Hayek played leading roles in the movement, but there were many others, now mostly forgotten.

They shared, by and large, a belief that human reason could help to define economic and social possibilities and impossibilities as a guide to policy-making. They developed a very sophisticated understanding of the way free markets operate and are able to process and assimilate complex information. But their thought also had a socio-political dimension.

These thinkers shared a distrust of majoritarian democracy which they saw as a potentially fatal flaw in Western political thought and practice.

It is only in recent decades that the complex, traditional structures and institutions of the West (structures which often embodied privilege and elitism, but also social complexity and autonomy) have been effectively dismantled - leaving what? Naked majoritarian democracy and its corollaries, political populism and an unsustainable welfare state.

The idea of freedom, that as far as possible people should determine their own lives, is a powerful one, and most Western countries have managed - until now - to deliver a high degree of freedom with social order and prosperity. But the relative freedom and prosperity enjoyed in the West over the past two centuries or so was not just the result of a particular political model. It was also dependent on deep social, cultural and historical factors or preconditions.

And, arguably, those preconditions for an effective and prosperous free society are no longer in place in the U.S. and many other Western countries.