Currency Wars: The Making of the Next Global Crisis by James Rickards
March 1, 2012 by Bob Livingston
In Currency Wars: The Making of the Next Global Crisis, James Rickards discusses how nations have purposely debased their currencies both to benefit themselves and hurt others. He posits that there have been three currency wars just since 1900, and we are currently engaged in the third one. The first, Rickards writes, lasted from 1921 to 1936. The second was from 1967 to 1987. The one happening now began in 2010.
Rickards is a counselor, investment banker and risk manager with more than 30 years of experience in capital markets. He’s also an adviser to the U.S. Department of Defense, the U.S. intelligence community and major hedge funds on global finance. He is a regular contributor to the cable network financial programs and guest on NPR.
Currency Wars begins with Rickards describing his participation in a war games scenario held at the government’s Applied Physics Laboratory and conducted by the Department of Defense. His charge was to help the Pentagon understand what might happen in a financial war.
Rickards was dismayed to learn that, aside from him, the participants in the war games — representatives of the Department of Defense, cabinet agencies like Commerce and Energy, academicians, theoreticians and military officers — knew a lot about war but little to nothing about finance. So he obtained permission to recruit people who understood the markets, hedge funds and exchanges, and financial weapons.
The games, which Rickards describes in detail, showed the DoD that it wasn’t prepared for a financial war. It was so unprepared, in fact, that when they gamed a scenario that had Russia decide to replace U.S. dollars with gold as accepted payment for its natural resources, the game’s judges cried foul. But the next day, a Drudge Report headline screamed the news that Russian Prime Minister Vladimir Putin was considering just that.
After detailing the war games, Rickards gives a brief history of U.S. finance and the gold standard. Then he discusses the currency wars of the 20th century.
The first was begun by Germany in 1921 with hyperinflation designed to improve competitiveness that devolved into an effort to destroy an economy weighed down by the oppressive war reparations resulting from World War I. The ensuing responses by other governments created a worldwide depression.
Rickards ties the beginning of the second currency war in 1967 to Lyndon B. Johnson’s 1964 election and his “guns and butter” platform. The United States was benefitting from a strong economy, boosted by John F. Kennedy’s tax reduction program that was signed by Johnson shortly after Kennedy’s assassination.
But funding the growing war in Vietnam and deficient spending on the Great Society programs set in place an inflation that would run out of control for 20 years. The problem was compounded when Richard Nixon announced on Aug. 15, 1971 his “New Economic Policy.” It established wage and price controls, a 10 percent surtax on imports and the closing of the gold window. That, finally, separated the dollar from the gold standard — a process that actually began with the establishment of the Federal Reserve in 1913.
The new currency war began in 2010 as a consequence of the 2007 depression. Rickards writes that the dimensions and consequences of this war are just coming into focus. He believes there are three theaters to this war: a dollar-yuan theater across the Pacific, a dollar-euro theater across the Atlantic and a euro-yuan theater across the Eurasion landmass. He explains each of these in detail.
Finally, Rickards discusses the endgame: paper, gold or chaos. According to Rickards, a gold standard is inevitable if we are to ever get on sound financial footing. He explains in great detail how it could happen.
But ultimately, Rickards writes, the most likely outcome of the currency wars and the debasement of the dollar is a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments attempting to maintain some semblance of a functioning system of money, trade and investment. He has history as a guide. It has shown that currency wars never end well.
Rickards’ book is spot on. He dismisses Keynesian economists and their wrong-headed — and plain wrong — approach to finance. He makes the case for sound money in a way that few people are able to do.
This book is a must-read for anyone who wants to understand government, economic history and world finance.