Must read: Jim Rickards' Currency Wars

Jim Rickards offers a new take on central banking and the global monetary system in Currency Wars: The Making of the Next Global Crisis. He explains how governments use currency as a weapon, with historical examples and predictions for the next decade. From my perspective, the book didn't have a lot of new information because I listen to all of Mr. Rickards' KingWorldNews interviews, as well as a watched a few YouTube videos. For everyone else, the book is a great way to quickly come up to speed on the "intersection of global capital markets and national security." (Even if you read the book, the interviews and videos are still good if you want a longer and more in-depth discussion of the ideas presented in it.)

The beginning of his book will be most interesting to political junkies and readers interested in national security. He describes a Pentagon war game designed around financial warfare, in which he and two associates try to open the eyes of the U.S. national security apparatus. The government is aware of cyber threats and the U.S. government used Facebook and Twitter as part of the Arab Spring, but Rickards argues that the government is not as aware of financial war, specifically the role of currencies and how they can be manipulated to achieve political goals.

There is a huge gulf of understanding between the general public and economists when it comes to the global financial system, to say nothing of the politicians who are in a position to implement policy. After reading Currency Wars, you will realize that there's just as large a gulf between economists and the real world, a scary thought given that they are the ones advising the politicians. Nouriel Roubini launched a Twitter war with Rickards because Rickards discusses the gold standard. Talking about the gold standard with mainstream economists is like waving a red flag at a bull, but the facts are on Rickards' side. One of the common misconceptions he tackles is the idea that the gold standard caused the Great Depression. Rickards argues that it was bad central bank policy that caused the depression, not gold. Gold was a component of that policy, but as he says in the book, blaming gold for the depression is like blaming a robbery on the bank teller. Gold was present, but it was not the cause. The largest factor in the Depression was central bankers who set the gold standard at the wrong price. The world wasn't on a pure gold standard where paper money was 100% backed by gold, rather paper currencies were partially backed by and pegged to gold. Setting the price too low resulted in deflation; setting it too high would have caused inflation. Rickards goes through the round robin currency devaluations during the Depression, as each nation tried to beggar-thy-neighbor. Their devaluations were necessary because the price of gold was set too low, but they did it in a disorderly fashion and this helped lengthen and deepen the depression. Murray Rothbard's America's Great Depression covers this topic in greater depth, if you are interested.

Rickards also discusses the use of IMF special drawing rights (SDRs) and the IMF's role in the global monetary system. He puts forth several possible outcomes for the current crisis, one of which is the IMF as global central bank. SDRs are a unit of currency created by the IMF, based on a basket of fiat currencies. SDRs are not backed by currency though, they only use fiat currency as a reference to value the basket. Central banks, governments and large banks would use SDRs, but everyone else would still use their local currency. Rickards doesn't endorse solving a fiat currency crisis with another fiat currency, or failed central banking with a bigger central bank because the result will be an even greater collapse in the future. Rickards also favors U.S. sovereignty over the rule of unelected central bankers (there would be no way for the people of any nation to check the power of a global central bank.) Given that central bankers always inflate, handing the power of money creation to unelected central bankers who would be unaccountable due to no single nation having authority over them would result in a particularly spectacular collapse.

Other solutions to the current crisis include using gold. Rickards doesn't believe a pure gold standard will return, but it can be used as part of a new global monetary order. As part of this argument, he estimates several prices for gold, with partial backing of the U.S., European and Chinese money supply coming in at around $7,000 an ounce. Needless to say, Mr. Rickards is bullish on gold.

One interesting part of the book is where Rickards takes up the arguments of Joseph Tainter and Eric Chaisson. Both of these men deal with complexity theory. I'm familiar with Tainter, having read The Collapse of Complex Societies. Rickards weaves their ideas into the complexity of the financial system, but he only discusses it for a few pages. The intersection between Tainter's theories and the current financial crisis merit their own book, as even well read and open-minded economists do not understand the argument. As someone knocking around these ideas in my head, I would have liked a deeper exploration by Rickards. I have an 18-month old draft post exploring the ideas in Tainter's book that I have yet to finish because my thoughts on the matter are incomplete. To be fair, this topic would not be interesting to general audience readers, but Rickards' discussion will spark an interest in those searching for a deeper understanding of the current crisis. If you are one, reading The Collapse of Complex Societies is the next step.

Finally, one can apply socionomics to Currency Wars. One area is in the conflict between nations. Rickards proposes various solutions and possible outcomes, but socionomics can be used to narrow the field, since cooperation is unlikely during a period of declining social mood. IMF as central banker to the world could happen if there's a big bounce in social mood, something Precther shows as one possible path for the markets based on his Elliot Wave count, but since the current forecast is that 2000 was the supercycle top, social mood will decline again and this could set up an IMF failure sometime in the 2020s, taking down the global economic system with it. An alternative is that there's no IMF solution now, something Rickards suggests given that it could take 5 years to launch SDRs as a viable currency and in tune with the current declining social mood.

Socionomics also plays a role in the possibility of currency collapse. On page 213 and 215 of the book (and in one of the YouTube videos linked above), Rickards shows two tables of critical thresholds for dollar repudiation. In one chart, it takes 500 people repudiating the dollar to cause the next 1,000 people to repudiate. In the second table, there are lower initial thresholds, where only 100 people are needed to cause the next 1,000 to repudiate the dollar. Part of the complexity theory mentioned above involves the idea that the same event can produce wildly different results. Tainter argues that civilizations survive earthquakes and barbarian attacks throughout their history, but for some reason one earthquake or attack, no worse that before, leads to collapse. Rickards uses the example of lightning bolts striking a forest. Sometimes there is no fire, sometimes a small one, and sometimes there's a raging fire that causes massive destruction. For the dollar, this is crowd psychology. Investors are familiar with the "dollar is trash" arguments, but at what point does this turn critical and cause a change in state? During rising social mood, these arguments could be quite loud, but amount to nothing. See the early 1980s as an example, when people feared a dollar collapse, but it didn't happen. Ricarkds says we don't know these threshold levels, but with socionomics, I believe we can expect them to become smaller during declining social mood, and that means extreme events, such as currency collapse, have a higher potential. We are in a heightened state of criticality, where the next snowflake has greater odds of setting off an avalanche.

In Currency Wars, Rickards covers a range of complicated topics in clear and simple prose. Issues such as the collapse of the U.S. dollar, the rise of the yuan and euro, and the strategic goals of major world powers are discussed. The book is great for all readers and perfect for those who cover their ears and close their eyes when the discussion turns to gold and currency wars. One cannot be an informed investor, or even an informed voter, without understanding the issues discussed in Currency Wars. It is a must read.

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