Well we know what the most pessimistic bear case is: former Long Term Capital Management general counsel Jim Rickards warns that a 70% – 80% stock market crash followed by rioting and the rise of neo-fascism is one of the possible outcomes from growing systemic instability, and the other two are terribly rosy either. In an interview with Christoph Gisiger at leading Swiss business newspaper Finanz und Wirtschaft, Rickards explains that why he believes the US is actually in a recession and that monetary policy is merely papering over deep structural problems.

Jim Rickards

US is in a depression, says Rickards

“These value at risk models and stochastic equilibrium models are underestimating the amount of risk in the system and therefore they allow too much leverage and too much risk. So the system becomes very vulnerable to a rapid collapse,” says Rickards, without trying to put an exact date on when it might occur. “Perhaps in one year or two years, but we’re not going to make it six years before the next crisis.”

Rickards argues that the US is actually in a depression, but that most people misunderstand what that really means. While a recession is defined by two or more quarters of GDP contraction, he says that a depression is really an extended period of below-trend growth. Monetary solutions like the Fed’s qualitative easing assume that economic growth will eventually pick up the slack; but if that’s not true then structural weakness will show back up once the Fed finishes tapering its asset purchases.

Rickards recommends gold

So if accelerating growth and a full recovery isn’t in the cards, what does Rickards expect? Again, he doesn’t claim to be an oracle, but he only sees three roads forward, all of which end in a crash.

The first is that Federal Reserve chair Janet Yellen sees the developing weakness and, just as the markets are gearing up for rate hikes, announces QE4, possibly as early as March 2015. But this would just fuel what he sees as overpriced assets and over-leveraged financial institutions, and with an already historically large balance sheet the Fed will be in no position for another bailout. The second possibility is that we finally get the inflation that some analysts have been warning about for years. Rickards says the reason we haven’t yet seen inflation is because printing money alone won’t do it – you need velocity of money to really kick things off. But with so much liquidity in the system, he thinks that we would quickly pass through target inflation to ‘hyperinflation’ of 9% or more.

And if worst comes to worst, “Broker firms fail, brokerage accounts are wiped out, inflation wipes out the value of savings, the stock market crashes 70 to 80%.” People who have already had their savings wiped out twice will lose them now for a third time, irrevocably breaking trust in the system. Based on the severity of his predictions you can probably guess his advice to investors: buy gold.