In his 2011 book Currency Wars: The Making of the Next Global Crisis, James Rickards explains that we are in the third reincarnation of currency wars. He highlights the fact that the Fed is currently undertaking the biggest financial gamble in history.
James Rickards, an investment banker on Wall Street for over 35 years, has turned to counseling– and one of his clients is the US intelligence community. The content of Currency Wars seems fit for complete confidentiality; there is almost a question of “How was this permitted for print?”
But public awareness is key. After all, currency wars are not only for the financial and monetary communities to worry about. Currency wars are an issue of national and international security, and thus beg much wider attention than that of (central) bankers and investors.
Rickards claims that the Fed– with the quantitative easing (QE) keeping the liquidity tap running for several years since 2008– is engaging in the largest financial gamble in history. Never before has the monetary base been expanded to the extent it has today– and the strategy is multilateral.
In the wake of the recession, the European Central Bank, Bank of Japan, Bank of England and the Fed have furiously fought to gain a comparative advantage. By printing money and thus making their respective currencies cheaper, they have boosted exports and thereby generated growth.
Rickards introduces his agenda with a page-turning description of a war game conducted in the depths of the Pentagon.
Preeminent among these more abstract functions is the lab’s Warfare Analysis Laboratory, one of the leading venues for war games and strategic planning in the country… It was for this purpose, the conduct of a war game sponsored by the Pentagon, that about sixty experts from the military, intelligence, and academic communities arrived at APL on a rainy morning in the late winter of 2009… The only weapons allowed would be financial— currencies, stocks, bonds, and derivatives. The Pentagon was about to launch a global financial war using currencies and capital markets instead of ships and planes.”
He proceeds to offer a concise, chronological overview of past currency wars; the first occurring from 1921 to 1936 with Germany as first-mover, using hyper-inflation to try to improve competitiveness and lessen the burden of war reparations. In this period, England and France broke with the gold standard following devaluations against it. Currency War I ended with the Tripartite Agreement of 1936.
Currency War II, running from 1967 to 1987, began with the devaluation of the pound sterling of 14.3 percent due to a combination of trade deficits and inflation. The US dollar soon followed suit. But due to the Bretton Woods system, this implied a revaluation of the price of gold. Selling pressure on US gold holdings to maintain dollar-gold parity eventually led to the demise of Bretton Woods. The Louvre Accord in 1987, at which the G7 ministers came to agreement about ending the race to the bottom, ultimately ended the second currency turmoil.
We are currently witnessing Currency War III, which Rickards dates back to 2010. According to Rickards, “The struggle between China and the United States, between the yuan and the dollar, is the centerpiece of global finance today and the main front in currency war III.”
The remainder of the book is dedicated to a sketch of the next global crisis, as Rickards sees it. He takes the reader on a sweeping tour of the inside of G20 and Wall Street, Dubai and Moscow, Beijing and DC, the trenches of this currency war.
A good number of pages explain how modern-day economics and finance theories fail to account for the behavioural aspects of spending, investment and markets. Furthermore, he criticizes the Value at Risk (VaR) approach to measuring risk of an overall portfolio. Rickards deems VaR inadequate for the task and claims that “the role of VaR in causing the Panic of 2008 is immense but has never been thoroughly explored.”
In his final chapter called Endgame – Paper, Gold or Chaos, Rickards explores the possible outcomes of Currency War III. The option of multiple reserve currencies is considered unlikely to be successful, since it implies a lack of anchor, whether that is gold or a single currency like the US dollar. Rickards suspects that central banks would abuse their seignorage and print money at their leisure, so to speak.
Special Drawing Rights (SDR) is another possibility. SDR is world money, printed and controlled by the IMF and backed by nothing. There is no precedent and little to suggest that this scheme would be functional. Finally, there’s an orderly return to the gold standard of some kind, or chaos. It seems fair to say that Rickards hopes for the former, but expects the latter.
This is an important and courageous book for several reasons, one of them being its sober assessment of the predicament of the global financial and monetary system. “Currency Wars is as relevant as tomorrow’s headlines. No sleepy tome on monetary policy, Currency Wars is a white-knuckle exercise.”
Rickard’s second book, The Death of Money: The Coming Collapse of the International Monetary System, will be released on April 8, 2014.
