Jim Rickards lit up the Agora Financial Investment Symposium in Vancouver telling the crowd the price of gold will soar north of $7,000 per ounce in an inevitable global currency reset, the fourth reset since the founding of the Federal Reserve. The first was in 1914, the second in 1939, and the third in 1971.
The big picture is that governments inevitably reduce the value of their currencies to their intrinsic value. But in the meantime, politicians are looking for votes, and governments look for advantages over competing governments. It is not just rockets and bombs that are fired; war is also raged on the economic front, with currency manipulation as the primary weapon. This brutal economic warfare is the subject of James Rickards’ outstanding book, Currency Wars: The Making of the Next Global Crisis.
Fans of financial TV will recognize Rickards as a fast-talking, straight-shooting pundit on banking and the macroeconomy who actually talks seriously about the world returning to some form of gold standard. In fact, in Currency Wars, he lays out a plan to return to gold, and sees it as the only way the financial world can avoid collapsing into total economic chaos.
But before he gets there, Rickards gets the reader’s pulse surging with the warning of a complete collapse in the book’s preface, telling readers that Fed chair Ben Bernanke “is engaged in the greatest gamble in the history of finance.”
Bernanke’s attempt to print America’s way out of its economic jam is in essence the declaration of a currency war on the entire world. Mainstream economists are oblivious to the real-world gun battle, resting comfortably amongst their equations and graphs.
But while academics may choose to go about their business unperturbed, the average person doesn’t have that luxury; as Rickards writes, “The new currency war is the most meaningful struggle in the world today — the one struggle that determines the outcome of all others.”
Rickards told the Vancouver Agora crowd, “Now we are all at sea. Nobody knows which currency to follow. Some economists argue that we should have multiple reserve currencies, but that is just too unstable.” He later sounded an ominous tone, saying, “The U.S. dollar could collapse much faster than you might think. A complete collapse of confidence in the dollar is much closer than ever. But nobody knows exactly what the crucial threshold will be.”
Before chronicling Currency Wars I and II, Rickards tells of participating in a war games exercise at the Applied Physics Lab, located between D.C. and Baltimore. There were no simulated missile launches or ground assaults in this mock battle; the only weapons used were financial — currencies, stocks, bonds, and derivatives.
When the Russian team floated the idea for a gold-backed currency, threatening the dollar’s status, one of Rickards’ teammates, described by the author as “our Harvard guy,” couldn’t grasp the implications of the Russian move. “Gold is irrelevant to trade and international monetary policy,” sniffed the Ivy Leaguer. “It’s just a dumb idea and a waste of time.”
Despite it being a war games exercise, the administrative cell even declared Russia’s gold move “illegal.” Rickards reminded the participants that it was not so long ago that the world had gold-backed currencies. The move was then reconsidered and deemed merely “ill-advised.”
When The Drudge Report featured Vladimir Putin calling for a gold-backed alternative to the dollar the following morning, Rickards and his guys were vindicated. But the academics remained unconvinced of gold’s relevance.
The author explains that while currency wars are fought on the world stage, they begin with a domestic economy lacking in growth, with high unemployment, a weak banking sector, and worsening public finances. With economic growth stymied, time and time again, countries look to depreciate their currencies to promote export growth and investment.
Many historians mistakenly describe much of the period from 1870-1914 as a deflationary dark age. Rickards doesn’t fall into that trap. He explains that this period of the classical gold standard was marked by gently falling prices leading to increased productivity, raised living standards, and the first glimpses of globalization.
The classical gold standard, besides being self-equilibrating, operated like a club, with members strictly adhering to the unwritten but well-understood rules. Free-market forces prevailed, government interventions were minimal, exchange rates were stable, and there was no U.S. central bank to mess up monetary matters.
This monetary tranquility was jarred with the creation of the Federal Reserve in 1913. In Currency Wars, Rickards leans to the standard story that the Panic of 1907 gave rise to the Fed’s creation, a theory disputed by Murray Rothbard. Professor Rothbard pointed to the Indianapolis Monetary Convention in 1897 as germinating the central bank.
What Rickards calls Currency War I began with the German hyperinflation in 1921 and ended with France breaking with gold in 1936 at the same time England was devaluing the pound sterling. In between were continuous monetary fireworks.
The classic gold standard was long gone, replaced by a deeply flawed gold exchange standard that allowed centrals banks to inflate, causing the boom of the 1920s and, therefore, the required correction of the 1930s exacerbated by government policy. FDR started his term in office by closing banks and then confiscating the people’s gold.
Citizens received $20.67 per ounce from the government, only to watch their new president move the price up to $35 an ounce over three months — a 70% devaluation.
Rickards places Currency War II from 1967-87. In between CWI and CWII was the Bretton Woods era, described by the author as a period of “currency stability, low inflation, low unemployment, high growth and rising income.” But as Henry Hazlitt and Jacques Rueff predicted, the phony gold-standard scheme created by John Maynard Keynes unraveled, setting the stage for CWII.
CWII began with a number of crises in the British sterling, and then a flight from the dollar into gold, with French President Charles de Gaulle calling for a return to the gold standard. This all led up to Richard Nixon closing the gold window on Aug. 15, 1971, blaming international speculators. It was money printing and budget deficits that were to blame. Nixon also instituted a 10% surtax on all imports, effectively devaluing the dollar in the trade arena.
The devaluation was to spur employment, but within two years, the United States was mired in stagflation. Paul Volcker took over as Fed chairman and quickly hiked interest rates, looking to stop the price inflation. The price of gold collapsed along with the inflation rate, and the dollar strengthened. According to Rickards, both Volcker and Ronald Reagan should be given credit for the dollar’s turnaround.
But dollar strength finally got in the way of export jobs, and the Plaza Accord of September 1985 was an attempt to drive down the greenback’s value primarily against the yen and the deutsche mark. And it worked. From 1985-88, the dollar fell 40% against the French franc, was cut in half against the yen, and fell 20% against the mark.
However, the devaluation did little for the U.S. economy, and by 1987, monetary authorities met in Paris at the Louvre. The Louvre Accord was hatched to stop the dollar’s fall. The Bank of Japan’s willingness to expand its money supply to depreciate the yen would fuel one of the biggest stock market bubbles of all time.
Currency War III has just begun, and the author contends that in addition to national issuers of currency, participants also include the IMF, the World Bank, the United Nations, hedge funds, global corporations, and private family offices of the super-rich. After 40 years of massive money printing and explosion of derivatives, CWIII will be fought on a massive scale, with a real risk of a collapse of the entire monetary system.
So how’s this currency war to end all currency wars going to turn out? The author paints a scary picture, using complexity theory and behavioral economics. Rickards develops hypothetical thresholds wherein the dollar is repudiated. Up to an uncertain number, people can begin to repudiate the dollar to no effect on prices or the dollar’s value. But once a critical threshold is passed, the collapse is triggered — as Hemingway once wrote about how bankruptcy happens — first slowly, and then all at once.
A small change in preferences among just a few people could lead to a collapse, because the financial framework is a weakly constructed Keynesian contraption of fiat money and government deficits. Any one of thousands of events could trigger the collapse, and, as the author notes, the last straw will not be known until after the fact.
Rickards explores four potential outcomes for the dollar: multiple reserve currencies, special drawing rights, gold, and chaos. For those interested in how much the price of gold would have to be under various gold coverage ratios to different monetary aggregates, this part of the book is especially interesting. In Vancouver, Rickards said 20-40% gold backing is sufficient to reinstitute a modern gold standard.
In his book, Rickards comes to a price of $7,500 an ounce, multiples above today’s $1,300 price. But as the author points out, the change in the value of the dollar “has already occurred in substance. It simply has not been recognized by markets, central banks, or economists.”
Rickards believes central banks are suppressing the gold price and ultimately will be willing to go to a gold backing, rather than continuing to manipulate the markets in order to provide the illusion of low inflation.
Inevitably, chaos is the most likely outcome of the latest currency war, with $70 trillion in derivatives crushing the banking industry. Nobody knows for sure when this ticking bomb goes off. Rickards make it clear what he thinks people should do to protect themselves — hold gold. For those who have lived only in the dollar era, Currency Wars is required reading. Don’t let ignorance of history make your finances a casualty of war.