This interview was originally published on April 10, 2010 — but these are issues worth pondering on the 4th of July …
A few weeks ago, I asked Fred Hickey what he would do as chairman of the Federal Reserve. In the remainder of our interview, I asked Fred whether we can avoid recessions in a business cycle, what will happen to the US Dollar, how our creditors are behaving, and what advice he can offer given the new economic environment.
Damien Hoffman: Fred, can we create a perpetual business cycle where we don’t get recessions?
Fred: No. I have a quotation on my board here that says, “The final outcome of the curve expansion is general impoverishment.” That means if we continue down this path the outlook, unfortunately, is general impoverishment for the country.
I hope that’s not how it’s going to play out. But I’m not particularly optimistic with the current leadership that we have in government today.
At some point the dollar is going to break down — really break down. Right now there’s still a rush to safety from the worry about Europe. But I don’t know why they’re so worried about Europe when we’re the ones with the trillions of dollars of deficits.
Damien: It’s an ironic flight to safety. It’s almost a cosmic comedy.
Fred: It’s just a Pavlovian reaction. However, at some point that won’t be the reaction and the dollar will get crushed. Eventually there will be some recognition that this country is broke. No one seems to be talking about this, but in a recent US Treasury foreign holdings report I saw a flat line where the mainland Chinese were not buying our treasuries anymore. Their position was holding; meaning, they were buying just enough to offset the maturing bonds. Now we’re seeing outright declines. This has gone on for several months and now it’s an outright decline.
Damien: What about the Russians?
Fred: The Russians are also reducing their positions. They reduced $10 billion in December and it’s dropped from a $140 billion almost to $118 billion over the last few months.
The Russians have been out there saying they’re buying gold, Canadian bonds, and diversifying their positions. Well, here they are doing it. At some point, enough people around the world will say they don’t want to be in dollars anymore and they will get out. It looks to me that the Chinese and the Russians are getting out.
The smart guys are leaving the ship and it looks to me like we’re replacing them with are our own printed money as well as hedge funds who are borrowing money and buying treasuries. This is a very bad group to have. Those are not long term holders. That could reverse very quickly. If that happens you can have a dollar collapse.
Damien: So is gold the hard currency which will continue to win?
Fred: I never loose sleep with my big gold position, but I do loose sleep when I have a big dollar position. I always see pullbacks in gold as buying opportunities because what I’ve discussed are the big forces really moving things. There are very few people on this planet that understand the big macro picture behind the movement to gold. We’re now in a 10 year bull market in gold. We ran a twenty year bear market, so it might be a twenty year bull market. We may be only halfway through.
I’m not sweating $1100 gold as the top like so many others in this country. They see bubbles everywhere in gold. They never saw the bubble in real estate, never saw the bubble in stocks, never saw anything. However, all these people in the U.S. see a bubble in gold. I don’t see it. I sleep like a baby with my gold position.
Damien: Fred, given the situation our country faces, what type of advice do you give your children?
Fred: That’s a hard question. First, you must be willing to work hard at anything you do. Try to find something you enjoy and you can feel good about. It helps you work hard.
Save your money and don’t build up debts. I never get myself in any kind of trouble because I never had any debt. So, if I’m wrong I’m never going to get really destroyed because I don’t have leverage. Debt is a four letter word. I’m an old fashioned guy.
Don’t ignore history. There are a lot of lessons to be learned that many people seem to never learn. I have my kids reading what I consider to be many of the investment classics.
Damien: That’s great advice especially keeping out of debt. If most Americans just followed that one simple principle, we’d be in a whole different position right now.
Fred: If most individuals and our government.
Damien: Right. Well, thank you very much for the rare interview, Fred. Our readers really appreciate you taking the time.
Fred: My pleasure. All the best.