“The world is getting closer to that end game every
day,” says Rickards, who just finished writing the sequel to his
bestselling Currency Wars.
In
the winter of 2009, lawyer, investment banker, and advisor on capital
markets to the Director of National Intelligence and the Office of the
Secretary of Defense, James Rickards
took part in a secret war game sponsored by the Pentagon at the Applied
Physics Laboratory (APL). The game’s objective was to simulate and
explore the potential outcomes and effects of a global financial war.
Two years later, Rickards published what would become a national
bestseller, Currency Wars: The Making of the Next Global Crisis.
In Currency Wars,
Rickards concluded that a dangerous global financial crisis was not
only in the making, but that it was inevitable.
Based on that financial war game inside a top-secret facility at the APL’s Warfare Analysis Laboratory, a historical analysis of international monetary policy in the twentieth century, as well as his assessment of the events leading to and adopted after the financial debacle of 2008, Rickards laid out the endgame that would result from the global financial chaos of the first currency war of this century; the collapse of the U.S. dollar and the eventual replacement of fiat money with a return to the gold standard.
Based on that financial war game inside a top-secret facility at the APL’s Warfare Analysis Laboratory, a historical analysis of international monetary policy in the twentieth century, as well as his assessment of the events leading to and adopted after the financial debacle of 2008, Rickards laid out the endgame that would result from the global financial chaos of the first currency war of this century; the collapse of the U.S. dollar and the eventual replacement of fiat money with a return to the gold standard.
“The world is getting closer to that end game every day,” warns Rickards, who just finished writing the sequel to Currency Wars, titled The Death of Money, The Coming Collapse of the International Monetary System.
Due out in bookstores next April 2014, The Death of Money
picks up on the disturbing predictions outlined in Currency Wars and
carries the analysis further into how the international monetary system
might collapse and what new system will replace it.
While Currency Wars “looked at
global macroeconomics through the lens for foreign exchange rates
including periods when exchange rates were pegged to gold and the more
recent floating exchange rate period,” Rickards explains, “The Death of Money
looks at the global macro economy more broadly considering not just
exchange rates and the dollar, but also fiscal policy and the need for
structural change in the U.S., China, Japan and Europe.” In addition,
Rickards elaborates, “Currency Wars made extensive use of history to develop its main themes about the dollar and gold, The Death of Money relies less on history and more on dynamic analysis.”
Where
some see a seemingly calm climate enveloping the global economy and
financial markets eagerly embrace the U.S. Federal Reserve System’s zero
interest rates and easing monetary policies, Rickards sees the
prevalence of patterns that only confirm his forecast for an impending
storm.
Rickards expects the Federal Reserve policies aimed at importing inflation into the United States “to offset the deflation that had arisen because of the ongoing depression and deleveraging”
to continue well into 2015 and perhaps beyond. He also points to other
developments that are aligning in favor of the increasingly demise of
confidence in the dollar as the world’s reserve currency: “U.S.
fiscal policy, stockpiling of gold by Russia and China, money printing
by Japan and the UK, and the rise of regional groups such as the BRICS.”
According to Rickards, the inexorable character of the next global financial storm is essentially due to the fact that “the
world is facing structural problems, but is trying to address them with
cyclical solutions. A structural problem can only be solved with
structural solutions including changes in fiscal policy, labor policy,
regulation and the creation of a positive business climate. Monetary
solutions of the kind being pursued are not an answer to the structural
problems we face. Meanwhile, monetary solutions threaten to undermine
confidence in paper money. The combination of unaddressed structural
problems and reckless monetary policy will ultimately produce either
extreme deflation, borderline hyperinflation, stagflation or a collapse
of confidence in the dollar.”
I expect the Mexican economy to outperform the U.S. economy in the years ahead.
So
how does the rest of the world currently fare up in Rickards’ analysis?
Asked about Mexico, the United States’ second-largest trading partner,
he explains:
“The Mexican and U.S.
economies are closely linked because of NAFTA and immigration and that
will continue to be the case, however, the U.S. will be less important
to Mexico in the future and China will become more important. The U.S.
should expect increasing inflation in the years ahead because of its
reckless monetary policy. Mexico should be able to avoid the inflation
because of its energy exports and relatively inexpensive labor. The
result will be a gradual strengthening of the Mexican peso against the
U.S. dollar, something that has already appeared. Mexico will be a major
magnet for Chinese investment also. In short, I expect the Mexican
economy to outperform the U.S. economy in the years ahead. Mexico will
begin to delink to some extent from the U.S. and to link more closely
with the rest of the world, especially Europe and China.”
The euro is the strongest major currency in the world and will be getting stronger.
Rickards is also bullish on the European Monetary Union, as he underlines that “the euro is the strongest major currency in the world and will be getting stronger.”
Yet
some analysts today warn of the euro’s increased appreciation as a
dangerous centripetal force to the euro zone’s integrity. Why does
Rickards see the opposite?
“Most analysts
do not understand the dynamics driving the Euro. They mistakenly assume
that if growth is weak, unemployment is high and banks are insolvent
that the currency must we weak also. This is not true. The strength of a
currency is not driven by the current state of the economy. It is
driven by interest rates and capital flows. Right now, Europe has high
interest rates compared to the U.S. and Japan and it is receiving huge
capital inflows from China.”
Will Germany go all in to preserve the European single currency?
“Germany
benefits more from the Euro than any other country because it
facilitates the purchase of German exports by its European trading
partners. Citizens throughout Europe favor the Euro because it protects
them from the devaluations they routinely experienced under their former
currencies. No countries will leave the Euro. New members will be added
every year. Germany will do whatever it takes to defend the Euro and
the European Monetary System. Based on all of these developments, the
Euro will get much stronger.”
What about
Spain with its increased poverty levels, 2003 per capita income levels, a
soon-to-reach 100% debt to GDP ratio and massive unemployment? Isn’t a
strong currency the opposite of what the country needs?
“The
difficulties Spain has faced for the past five years are part of a
necessary structural adjustment to allow Spain to compete more
effectively. Most of this adjustment is now complete and Spain is poised
for good growth in the years ahead. Unit labor costs have declined more
than 20% since 2008, which makes Spanish labor more competitive with
the rest of the world. Unemployment is difficult, but it gives Spain a
huge pool of untapped labor that is now available as new capital enters
the country. Increased labor force participation from among the
unemployed will allow the Spanish economy to grow much faster than its
overall demographics would suggest. The Euro has given Spain a strong
currency, which is extremely attractive to foreign investors. Ford and
Peugeot have recently announced major new investments in Spain and more
should be expected. Chinese capital is also eager to invest in Spanish
infrastructure. Spain has successfully made structural adjustments and
put its major problems behind it, unlike the United States where the
structural problems have not been addressed and painful economic
adjustments are yet to come.”
Agencies such as the Defense Department and the intelligence community are concerned about the future stability of the dollar.
Given
the national security aspect to Rickards’ work and the mere threat on
the dollar’s future stability, one would expect for the defense and
intelligence community in the U.S. to pressure policy makers into taking
action. Not the case, says Rickards:
“Various
government agencies and private think tanks and corporations have
continued to do war game type simulations of financial warfare and
attacks on capital markets systems since the Pentagon financial war game
in 2009. I have been an advisor to and a participant in many of these
subsequent efforts. However, these national security community and
private simulations have had very little impact on policy as pursued by
the U.S. Treasury and the Federal Reserve. Agencies such as the Defense
Department and the intelligence community are concerned about the future
stability of the dollar, but the U.S. Treasury is far less concerned.
This has created some tension between those who see the danger and
cannot do much about it, and those who can affect dollar policy but do
not see the danger.”
Ultimately, however,
Rickards argues that if his predictions come true (and in his opinion
it is only a matter of time), the collapse of the dollar would lead to a
reset in the world’s monetary system whereby gold would regain its
historic role as the standard unit of value. What happens after the end
of fiat money would then depend on how each country is positioned in
terms of its gold reserves.
Can the point of no return in the path to the death of money be averted?
“The point of no return may already have passed,” says Rickards, “but the consequences have not yet played out.”
In Rickards’ view, it’s a catch-22 situation from this point forward: “the
Fed has painted itself into a corner. If they withdraw policy and
reduce asset purchases, the economy will go into a recession with
deflationary consequences. If the Fed does not withdraw policy, they
will eventually undermine confidence in the dollar. Both outcomes are
bad, but there are no good choices. This is the fruit of fifteen years
of market manipulation by the Fed beginning with the Russian – LTCM
crisis in 1998. The Fed will cause either deflation or inflation, but it
cannot produce stable real economic growth.”
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