- Rickards, James.
Currency Wars.
New York: Portfolio / Penguin, 2011.
ISBN 978-1-59184-449-5.
-
Debasement of currency dates from antiquity (and doubtless from
prehistory—if your daughter's dowry was one cow and
three goats, do you think you'd choose them from the best
in your herd?), but currency war in the modern sense first
emerged in the 20th century in the aftermath of World War I.
When global commerce—the first era of globalisation—became
established in the 19th century, most of the trading partners
were either on the gold standard or settled their accounts
in a currency freely convertible to gold, with the British
pound dominating as the unit of account in international trade.
A letter of credit financing a shipload of goods exported from
Argentina to Italy could be written by a bank in London and
traded by an investor in New York without any currency risk
during the voyage because all parties denominated the transaction
in pounds sterling, which the Bank of England would exchange for
gold on demand. This system of global money was not
designed by “experts” nor managed by “maestros”—it
evolved organically and adapted itself to the needs of its
users in the marketplace.
All of this was destroyed by World War I. As described here, and in
more detail in
Lords of Finance (August 2011),
in the aftermath of the war all of the European powers on both
sides had expended their gold and foreign exchange reserves in
the war effort, and the United States had amassed a large fraction
of all of the gold in the world in its vaults and was creditor in
chief to the allies to whom, in turn, Germany owed enormous reparation
payments for generations to come. This set the stage for what the
author calls Currency War I, from 1921 through 1936, in which central
bankers attempted to sort out the consequences of the war, often
making disastrous though well-intentioned decisions which, arguably,
contributed to a decade of pre-depression malaise in Britain, the
U.S. stock market bubble and 1929 crash, the
Weimar Germany hyperinflation,
and its aftermath which contributed to the rise of Hitler.
At the end of World War II, the United States was in an even more
commanding position than at the conclusion of the first war. With
Europe devastated, it sat on an even more imposing hoard of gold,
and when it convened the
Bretton Woods conference
in 1944, with the war still underway, despite the conference's list
of attendees hailing from 44 allied nations, it was clear that the
Golden Rule applied: he who has the gold makes the rules. Well, the U.S.
had the gold, and the system adopted at the conference made the U.S. dollar
central to the postwar monetary system. The dollar was fixed to gold
at the rate of US$35/troy ounce, with the U.S. Treasury committed to exchanging
dollars for gold at that rate in unlimited quantities. All other currencies
were fixed to the dollar, and hence indirectly to gold, so that
except in the extraordinary circumstance of a revaluation against the
dollar, exchange rate risk would not exist. While the Bretton Woods system
was more complex than the pre-World War I gold standard (in particular,
it allowed central banks to hold reserves in other paper currencies in
addition to gold), it tried to achieve the same stability in exchange rates
as the pure gold standard.
Amazingly, this system, the brainchild of Soviet agent
Harry Dexter White
and economic charlatan
John Maynard Keynes,
worked surprisingly well until the late 1960s, when profligate
deficit spending by the U.S. government began to cause foreign
holders of an ever-increasing pile of dollars to trade them in
for the
yellow metal.
This was the opening shot in what the author deems Currency War II,
which ran from 1967 through 1987, ending in the adoption of the present
system of floating exchange rates among currencies backed by nothing
whatsoever.
The author believes we are now in the initial phase of Currency War III,
in which a perfect storm of unsustainable sovereign debt, economic contraction,
demographic pressure on social insurance schemes, and trade imbalances
creates the preconditions for the kind of “beggar thy neighbour”
competitive devaluations which characterised Currency War I. This is, in
effect, a race to the bottom with each unanchored paper currency trying to
become cheaper against the others to achieve a transitory export advantage.
But, of course, as a moment's reflection will make evident, with currencies
decoupled from any tangible asset, the only limit in a race to the bottom is
zero, and in a world where trillions of monetary units can be created
by the click of a mouse without even the need to crank up the printing
press, this funny money is, in the words of Gerald Celente, “not
worth the paper it isn't printed on”.
In financial crises, there is a progression from:
- Currency war
- Trade war
- Shooting war
Currency War I led to all three phases. Currency War II was arrested
at the “trade war” step, although had the Carter administration
and Paul Volcker not administered the bitter medicine to the U.S. economy
to extirpate inflation, it's entirely possible a resource war to seize
oil fields might have ensued. Now we're in Currency War III (this is the
author's view, with which I agree): where will it go from here? Well,
nobody knows, and the author is the first to acknowledge that the best a
forecaster can do is to sketch a number of plausible scenarios which might
play out depending upon precipitating events and the actions of decision
makers in time of crisis. Chapter 11 (how appropriate!)
describes the four scenarios Rickards sees as probable outcomes and
what they would mean for investors and companies engaged in international
trade. Some of these may be breathtaking, if not heart-stopping, but
as the author points out, all of them are grounded in precedents which
have already occurred in the last century.
The book begins with a chilling wargame in which the author participated.
Strategic planners often remain stuck counting ships, troops, and
tanks, and forget that all of these military assets are worthless
without the funds to keep them operating, and that these
assets are increasingly integrated into a world financial system
whose complexity (and hence systemic risk, either to an accidental
excursion or a deliberate disruption) is greater than ever before.
Analyses of the stability of global finance often assume players
are rational and therefore would not act in a way which was ultimately
damaging to their own self interest. This is ominously reminiscent
of those who, as late as the spring of 1914, forecast that a general
conflict in Europe was unthinkable because it would be the ruin of
all of the combatants. Indeed, it was, and yet still it happened.
The Kindle edition has the table of contents and
notes properly linked, but the index is just a list of unlinked terms.
November 2011 