CBJ Interview with James Rickards, author of Currency Wars
The Making of the Next Global Crisis
By James Rickards
(Portfolio; Nov. 10, 2010, Hardcover)
Are the actions undertaken by U.S. policymakers in response to the last financial crisis setting the stage for the next one? In Currency Wars, The Making of the Next Global Crisis (Portfolio/Penguin; November 10, 2011), James Rickards argues that the answer is yes. But, it’s not too late to change course.
Currency wars explains how the unprecedented actions taken by U.S. policymakers in recent years attempt to prop up economic growth are prompting a currency war, the consequences of which could be devastating for America’s economy and its national security.
Drawing upon his extensive expertise in global capital markets and his experience as a consultant to the U.S. defense and intelligence community, Rickards provides a history of currency wars of the past and a better course of actions to prevent the next economic catastrophe.
In the book, Rickards argues that government attempts to shield themselves from the global economic crisis by devaluing their currencies is the beginning of a financial crisis on a scale much greater than any we are facing currently, precipitated by the collapse of the U.S. dollar and potentially into civil breakdown.
Rickards says that we are already in the throes of a currency war, with fiscal policies, or currency “manipulation”, as the biggest weapons, and that since the writing of the book, things have escalated at a faster pace than he could have predicted.
Rickards’ thesis is playing out before our eyes; U.S. congress has issued a new report that says the Chinese currency could threaten the U.S. currency’s dominance within this decade; in late November, Germany failed to sell the full allocation of its bonds on offer.
“[These events] fit into the narrative very well but it’s happening a bit faster than I expected when I wrote the book,” says Richards. “I would say I anticipated distress, I anticipated a rescue of the system by the International Monetary Fund (IMF) using the special drawing rights I talk about in the book, and a resort to paper money and that ultimately fail. When I wrote it last spring I would have said these things will play out over a couple of years, they seem to be happening almost in real time.”
Rickards believes this quickened pace forces the elites and international monetary system (finance ministers, secretaries of treasury, central bankers, people of the IMG and World Bank) to move more quickly toward “what I always thought would be their preferred solution which would be to get the IMF involved.”
“The [Federal Reserve] has a printing press, and the [European Central Bank] has a printing press, but what is less well known is the IMF has a printing press also,” he says.
So why are countries, so quick to turn to deflation, rather than default or spurring growth? Ease and speed, says Rickards. “It’s mostly political. It isn’t any great revelation that politicians are more focused on next election than long term economy. It can work in the short term—for instance, third quarter GDP U.S. exports were strong.”
When asked what he thinks the odds of authorities understanding the issues put forth in the book and taking action to prevent it, Rickards rephrases and questions whether they miscalculated the instability of the system. “Do they think they have more time than they really do?
That is a concern. I think they think they can muddle through some ECB purchases or European Sovereign Bonds, some IMF allocations etc., but they discover too late that there has been a more general loss of confidence in the system.
“They do not fully grasp how unstable the system really is.”
Just to be clear, Richards explains every country or central bank manipulates its currency to some extent. “I call it manipulation, they call it policy. The U.S. is the biggest manipulator of money because the U.S. has the biggest economy and biggest reserve currency and the best ability to do so. I’ve always understood quantitative easing and the other federal gimmicks of recent years as being more about trashing the dollar or basically reducing the exchange value of the dollar relative to other currencies moreso than just domestic monetary ease. Most pople have looked at it in the context of monetizing the debt or easing monetary conditions in the states and there is some of that but the primary objective has been to weaken the dollar and for exchange markets to improve U.S. exports and create some jobs with that.
“Sounds good but as I point out in the book it never works because it just invites relatiation, inflation and stagnation.”
James Rickards has over three decades of experience in capital markets as a counselor, investment banker, and risk manager. He advises the Department of Defense, the U.S. intelligence community and major hedge funds on global finance and served as a facilitator of the first ever financial war games conducted by the Pentagon. A frequent guest on CNBC, CNN, Fox, C-SPAN, Bloomberg TV and NPR, Rickards also lectures at Northwestern University and at Johns Hopkins University’s School of Advanced International Studies.