- Rickards, James.
The Death of Money.
New York: Portfolio / Penguin, 2014.
ISBN 978-1-59184-670-3.
-
In his 2011 book Currency Wars (November 2011),
the author discusses what he sees as an inevitable conflict among
fiat currencies for dominance in international trade as the dollar,
debased as a result of profligate spending and assumption of debt by
the government that issues it, is displaced as the world's preeminent
trading and reserve currency. With all currencies backed by nothing
more than promises made by those who issue them, the stage is set for
a race to the bottom: one government weakens its currency to obtain
short-term advantage in international trade, only to have its
competitors devalue, setting off a chain of competitive devaluations
which disrupt trade, cause investment to be deferred due to uncertainty,
and destroy the savings of those holding the currencies in question.
In 2011, Rickards wrote that it was still possible to avert an era
of currency war, although that was not the way to bet. In this volume,
three years later, he surveys the scene and concludes that we are now
in the early stages of a collapse of the global monetary system, which will
be replaced by something very different from the status quo, but whose
details we cannot, at this time, confidently predict. Investors and
companies involved in international commerce need to understand what is
happening and take steps to protect themselves in the era of turbulence
which is ahead.
We often speak of “globalisation” as if it were something new,
emerging only in recent years, but in fact it is an ongoing trend which
dates from the age of wooden ships and sail. Once ocean commerce became
practical in the 18th century, comparative advantage caused production and
processing of goods to be concentrated in locations where they could be
done most efficiently, linked by the sea lanes. This commerce was
enormously facilitated by a global currency—if trading partners
all used their own currencies, a plantation owner in the West Indies shipping
sugar to Great Britain might see his profit wiped out if the exchange
rate between his currency and the British pound changed by the time the
ship arrived and he was paid. From the dawn of global trade to the
present there has been a global currency. Initially, it was the British
pound, backed by gold in the vaults of the Bank of England. Even commerce
between, say, Argentina and Italy, was usually denominated in pounds and
cleared through banks in London. The impoverishment of Britain in World War I
began a shift of the centre of financial power from London to New York,
and after World War II the Bretton Woods conference established the U.S.
dollar, backed by gold, as the world's reserve and trade currency. The
world continued to have a global currency, but now it was issued in
Washington, not London. (The communist bloc did not use dollars for
trade within itself, but conducted its trade with nations outside the
bloc in dollars.) In 1971, the U.S. suspended the convertibility of
the dollar to gold, and ever since the dollar has been entirely a
fiat currency, backed only by the confidence of those who hold it that
they will be able to exchange it for goods in the future.
The international monetary system is now in a most unusual period. The
dollar remains the nominal reserve and trade currency, but the fraction
of reserves held and trade conducted in dollars continues to fall. All
of the major currencies: the dollar, euro, yen, pound, yuan, rouble—are
pure fiat currencies unbacked by any tangible asset, and valued only
against one another in ever-shifting foreign exchange markets. Most of
these currencies are issued by central banks of governments which have
taken on vast amounts of debt which nobody in their right mind believes
can ever be paid off, and is approaching levels at which even a modest
rise in interest rates to historical mean levels would make the interest
on the debt impossible to service. There is every reason for countries
holding large reserves of dollars to be worried, but there isn't any
other currency which looks substantially better as an alternative. The
dollar is, essentially, the best horse in the glue factory.
The author argues that we are on the threshold of a collapse
of the international monetary system, and that the outlines of what will
replace it are not yet clear. The phrase “collapse of the international
monetary system” sounds apocalyptic, but we're not talking about
some kind of Mad Max societal cataclysm. As the author observes, the
international monetary system collapsed three times in the last century:
in 1914, 1939, and 1971, and life went on (albeit in the first two cases,
with disastrous and sanguinary wars), and eventually the financial system
was reconstructed. There were, in each case, winners and losers, and
investors who failed to protect themselves against these turbulent changes
paid dearly for their complacency.
In this book, the author surveys the evolving international financial
scene. He comes to conclusions which may surprise observers from
a variety of perspectives. He believes the Euro is here to stay,
and that its advantages to Germany coupled with Germany's economic
power will carry it through its current problems. Ultimately, the
countries on the periphery will consider the Euro, whatever its costs
to them in unemployment and austerity, better than the instability of
their national currencies before joining the Eurozone. China is seen as
the victim of its own success, with financial warlords skimming off the
prosperity of its rapid growth, aided by an opaque and deeply corrupt
political class. The developing world is increasingly forging bilateral
agreements which bypass the dollar and trade in their own currencies.
What is an investor to do faced with such uncertainty? Well, that's far
from clear. The one thing one shouldn't do is assume the present
system will persist until you're ready to retire, and invest your
retirement savings entirely on the assumption nothing will change.
Fortunately, there are alternative investments (for example, gold and
silver, farm land, fine art, funds investing in natural resources, and,
yes, cash in a variety of currencies [to enable you to pick up bargains
when other assets crater]) which will appreciate enormously when
the monetary system collapses. You don't have to (and shouldn't)
bet everything on a collapse: a relatively small hedge against it will
protect you should it happen.
This is an extensively researched and deep investigation of the present
state of the international monetary system. As the author notes,
ever since all currencies were severed from gold in 1971 and began
to float against one another, the complexity of the system has
increased enormously. What were once fixed exchange rates, adjusted
only when countries faced financial crisis, have been replaced by
exchange rates which change in milliseconds, with a huge superstructure
of futures, options, currency swaps, and other derivatives whose
notional value dwarfs the actual currencies in circulation. This is
an immensely fragile system which even a small perturbation can
cause to collapse. Faced with a risk whose probability and consequences
are impossible to quantify, the prudent investor takes steps to
mitigate it. This book provides background for developing such a plan.
June 2014 