Wednesday, February 1, 2017

The Economy: "The Ice-Nine Lockdown"

"The Ice-Nine Lockdown"
by Jim Rickards

"I am often asked, ‘Does Ice-Nine put gold at risk of lockdown or confiscation?’ First, Ice-Nine is a phrase borrowed from author Kurt Vonnegut. Vonnegut wrote a book in the early 1960s called "Cat’s Cradle," and it’s a doomsday scenario. In "Cat’s Cradle," a doomsday machine is created. Scientists discovered a molecule called Ice-Nine, very similar to water (H2O), with two differences. Number one, it has a melting point of 45 degrees Celsius, which means it’s frozen at room temperature. The other characteristic is that if a molecule of Ice-Nine comes in contact with a molecule of water, the water turns to Ice-Nine. In other words, it turns to a form of ice.

The plot of the book was that there was only a small amount of this Ice-Nine, and the scientist gave it to his three children in vials. As long as the vials were sealed, it was all good. If you opened the vial and poured the Ice-Nine into a stream, the stream would freeze, then the lake would freeze, a river would freeze, an ocean would freeze- the entire planet would freeze. We would be in a new ice age, and life on Earth would be wiped out.

It’s a doomsday machine: I took that as a metaphor to explain what’s going to happen in the financial system and the next financial crisis. In 1998, we saw Wall Street get together and bail out the hedge fund Long-Term Capital Management. Then in 2008, the central banks got together and bailed out Wall Street. In the next crisis, 2018- maybe sooner; maybe tomorrow- who’s going to bail out the central banks?

Each bailout gets bigger than the one before. Each crisis gets bigger than the one before. We are now at the point where the ability of central banks to reliquefy the system is in doubt because they’re heavily stretched. The central bank balance sheets are extremely bloated. Central banks have printed so much money already, it’s not obvious that they can do it again from the current levels without destroying confidence in the dollar, and all major currencies. The question is, where will the liquidity come from in the next financial crisis if it can’t come from the central banks?

The answer is the IMF. The International Monetary Fund has the only clean balance sheet out of the major financial institutions. It can print money. They call it the SDR- the special drawing rights. I call it new world money. The IMF can flood the market, and the world, with trillions of SDRs equivalent to more than trillions of dollars, which is exactly how they’ll do it. There is a problem with this model at the IMF though. It’s got a 24-member executive committee representing 24 nations around the world, or groups of nations. Every five years, it changes the voting rights.

It just so happens that 2017 will see one of those five-year reviews take place, whereby the IMF is going to increase the voting rights of Brazil, Russia, India, China and South Africa (BRICS). The so-called BRICS are going to get more votes and potential veto power within the IMF model. When it comes time for the IMF to issue world money (SDRs) to reliquefy the world, there’s going to be a negotiation period. It will take months to complete. During the last crisis, this took 11 months. When the crisis hit in September 2008, we saw Lehman Brothers hit a wall. The IMF only began to issue SDRs in August 2009.

Even though the IMF reacts on a case-by-case basis, it’s going to take an estimated three or four months- at least- to get SDRs issued. In that interim period between the crisis and the time the IMF can react, central banks will be paralyzed. They’re likely going to lock down the system. When I say lock down, they’ll start with money market funds. I can’t think of a greater misnomer than the money market funds. People think money market funds are money. They’re not money; they’re mutual funds regulated by the SEC. People think they can just call up their broker, sell to the money market fund, and the money’s in their bank the next day.

That will not be true in this crisis because everyone will be doing the same thing. That is what happened in 2008 when Ben Bernanke and Hank Paulson told the president that the system is melting down and he must act.

That was such a shock then that, when it happens again, they’re not going to give you your money. They’re going to lock it down. The problem- and this is where the Ice-Nine metaphor comes in- is that when it is spreading, you can’t just lock down part of the system. If you lock down money market funds, people are just going to take their money out of the banks. Then you’re going to have to close the banks. Then people are going to sell their stocks. Then they’re going to have to close the stock market. Every time you shut one path to liquidity, people are going to turn to another path.

The metaphor of Ice-Nine is that it spreads from molecule to molecule, institution to institution, requiring a freeze on the entire system. It happened in part in 1914, 1931 and 1933, and to gold in 1971. There’s no precedent for a total freeze but we’re getting closer to that point. Ice-Nine is a freeze of the financial system. It’s something that’s happened before, and it’ll happen again in the next crisis. Physical gold and silver is the answer to Ice-Nine, and you should get it while you still can.”
And when the giant $1.5 QUADRILLION derivatives wave hits the Good Ship "World Economy"...

As Yogi Berra said, "You could look it up."

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