Luis Martín

After “Currency Wars” Comes “The Death of Money”

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“The world is getting closer to that end game every day,” says Rickards, who just finished writing the sequel to his bestselling Currency Wars.

James Rickards

James Rickards, bestselling author and partner in Tangent Capital a merchant bank based in New York.

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.

“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.

The Death of Money, The Coming Collapse of the International Monetary System (book cover)

The Death of Money, The Coming Collapse of the International Monetary System (Penguin Random House / April 8, 2014).

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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14 comments
Gold Skeptic
Gold Skeptic

The interesting discussion above highlights the question of whether or not the will exists among world leadership to avert total collapse and raises the possibility that such a collapse may in fact be the ultimate aim of our leaders. In order to determine whether it could be their intention, one must obviously first be able to identify who exactly those leaders are. It is no secret, of course, that the political colour of the various legislative bodies around the world is determined by the swinging vote phenomenon. The swinging vote naturally belongs to the popular media, so knowing who the media belong to (and, even more importantly, who there friends are) is logically the key to discovering the true powers behind the world's very temporary thrones. No matter how unlikely or how unsuited for office he or she may appear, the media favourite will always win the swinging vote and, therefore, "lead" the government - at least in the eyes of the populus. The fact that the swinging vote does indeed swing also shows us that these "éminences grises" have a vested interest in maintaining the time servers and career politicians referred to above by various contributors to this discussion in power... but in constant alternation. The insecurity of their tenure and their need to pander to the apparaently fickle swinging vote ensures that the fiscal irresponsibility alluded to by other readers is perpetuated. Such reckless mismanagement must, therefore, serve the purposes of the masters of the swinging vote, who would not otherwise alternate between blue and red candidates when choosing their favourites for the "swingers" to elect. This is, of course, the Hegelian dialectic at work. A struggle must appear to exist between blue and red, who are both in fact unwittingly working towards the same goal of ultimate chaos. That chaos must be total and global. 2008 was not the right time for such an objective, as it was still too tame and geographically contained a recession. The BRICs and others must be further involved in the deflationary maelstrom for it to work on a global scale. Only when faced with dire, worldwide hardship will the entire world accept a drastic global solution. That is when a single global electronic currency will not only seem acceptable, but highly desirable by a terrified global population, who will only too gladly adopt it when it is offered as the only viable solution. Fiat or confidence will no longer be necessary, as desperation will ensure that everyone wants it. Being able electronically to trace every transaction made by every man, woman and child on the planet to its source, will represent part of the enormous power these groups (our unavowed leaders who manipulate the swinging vote and world markets at will) so earnestly crave. Gold is the antithesis of this control and power with the anonymity and freedom it offers. It could not, in any case, be equally distributed (like the new deutschmark in Chancellor Adenauer's post war Germany) and would, therefore, not have the global appeal of a (falsely) egalitarian electronic currency. That is why it has no future as money. The same "groups" that lead us have been working very hard, even before President Roosevelt, to sideline the metal and will eventually manage to make it irrelevant, as a desperate, trembling world clutches its electronic chips or RFID tags for comfort (and why not implant them in the human body as foretold in biblical texts? "Security" could yet again be advanced as the reason for this... would the supermarket cashier not become immediately suspicious, if I tendered somebody else's head or hand to check out my groceries?) It is patently clear that so much power concentrated in the hands of so few on a scale never even dreamed of by Messrs Pol Pot or Kim Il Sung would be unimaginably dangerous and obviously lead to unprecedented despotism and oppression, but by then it will be too late. The frog will have been lulled to sleep by quantative easing and be unable to jump out of the now boiling water.

Finn
Finn

Well I guess it's time for you to write your own book.

Hugh
Hugh

The most effective and planned collapse will be one of hyperinflation. Quitting QE now or not bailing out the system in 2008 would be a deflation. Hands-off at the moment would create a deflationary depression, restore the market price function, clean out the mal-investments and set the country on a road to rebuild.They do not want this. They want to inflate. Their plan (in my opinion) is to destroy the idea of the individual by tampering with the system to create inflation which will destroy the wealth of Americans. When this happens, they will blame the current system, the “free market,” and seize power by the destruction of the rule of law.On one can convince me that Rickards and a few other have the knowledge and the leaders do not, when they have at their fingertips thousands of the world’s top minds. The leaders do not want a good outcome, they want ultimate power. I have read Rickard’s book. Not too impressed.

Finn
Finn

Hugh,All the critics of Jim Rickards certainly never read his book or listened to very many of his interviews.Jim has made it clear over the years that he has very little faith in world leaders. He believes they are self serving and do not give a rip about improving anything other than the balance of their own bank accounts.He has said on many occasions that we will see a gold standard as the solution to problems that are currently being ignored by incompetent leaders because we have experience with gold. Not because it's THE best system. But gold does work great as money.If world leaders wanted a collapse they would have done nothing in 2008. If they wanted a collapse they would pull the plug on QE, RIGHT NOW. They're not. Logic and experience are telling us they are just so wrapped up in themselves that they are ignoring the danger signs.

Hugh
Hugh

The basic problem with Rickard’s approach is that he assumes the leaders in charge want to make things better, and that the problem lies with their lack of knowledge and understanding of the underlying market functions and therefore make mistakes that will cause a collapse. During this collapse they will then see the light about gold, create a gold standard and then finally, things will get better.What if his basic assumption is wrong? What if leaders know full well what they are doing and are designing a collapse so that a full fledged dictatorship can be installed by an overthrow of our institutions?

Dollar Skeptic
Dollar Skeptic

In response to the comment by Gold Skeptic: The dollar is not money - it is a currency. Money, by definition, has to have value. Currency is a representation of money (both paper and its electronic equivalent), and is only accepted in exchange for goods and services when it is based upon mutual trust. Unfortunately, the dollar is continuing to lose trust throughout the world - and for good reason.After the end of World War II, the U.S. enjoyed a tremendous goodwill among the other nations and, through the Bretton Woods Agreement, was able to establish the dollar backed by gold as the world's reserve currency for international transactions. In 1971, the U.S. removed gold as the foundation for the dollar, and instead replaced it with trust. Without the confinements of a gold-backed currency, the U.S. has enjoyed the "exorbitant privilege" of being able to creating money out of nothing to purchase its needs. This lack of discipline has resulted in the U.S. being unable to produce a balanced budget (and has not for 58 of the last 63 years), not having the political will to address its fiscal problems (as evidenced by the continuing unresolved battles in Congress and with the President), and being forced to borrow about 40% of its operational expenses.Those countries that have loaned the U.S. money have rightly become concerned, and evidence of this growing mistrust is represented by the increasing number of bilateral trade agreements between countries eliminating the use of the dollar. When the tipping point has been reached and the world no longer has trust in the dollar, the holders of dollar wealth will experience a substantial loss in the value of their wealth. The central banks and world governments will certainly do everything possible to maintain the acceptance of paper currencies and the concurrent ability to spend more than is collected from their citizens, and propose some new world currency. The question then will be whether the people of the world will have learned their lesson and demand real money to back their currency, or commit the same error and accept another new currency backed by nothing.No one should be trusted with the power to create money out of nothing - it always leads to excess and abuse. Currencies must be backed by real money. Historically, there has been only one universal money standard for thousands of years - and that is gold.

gold skeptic
gold skeptic

There is little doubt a crisis to end all crises is on the horizon. While Mr Rickards' analysis seems highly clairvoyant, the suggestion that a return to the gold standard will be the ultimate dénouement, appears somewhat naïve. Even though such a return undoubtedly makes good economic sense and, indeed, gold may very well see a huge appreciation in value in the initial stages with the demise of the US dollar as a world standard, Mr Rickard's assessment appears to ignore two major developments in monetary history since gold was abandoned by the Federal Reserve. President Roosevelt could not have imagined the extent to which electronic transactions would replace paper currency. Inherent to any electronic transaction, of course, are the originator and beneficiary's exact identities. Running parallel to the electronic trend, there have been a surrender and usurpation of anonymity and freedom by the general public and major institutions respectively, which are too precious for the latter to surrender, considering the near-absolute power this information represents. A more likely scenario would be the solution adopted in postwar Germany by Chancellor Adenauer when the German economy lay in ruins: cancel the currency and replace it with a new one, allocating the same amount to each individual (German millionnaires jumped out of high windows in droves, by the way, in 1948). Instead of replacing the paper reichmark with the paper deutschmark (plucked out of thin air), however, the 21st century solution will be to link the new currency to personal identity to preserve the unparalleled advantage of ample information and perfect traceability of transactions. The other major historical development apparently overlooked by Mr Rickards, is the global interconnectedness of money and trade and everything else. When the US economy enters the inevitable major crisis, it will drag the rest of the world with it, no matter how much the BRICs attempt to shift the focus away from it. It is simply too large. The next crisis will be unprecedently global and will therefore require a global solution, ie a single electronic world currency (plucked out of thin air, like the deutschmark in 1948 or bank loans today) that will be tied to each person's identity just like our credit and debit cards at the moment. Gold is far too anonymous, despite attempts regulate it, and simply will not suit the major regulators and paper fiat currency is almost as difficult to control. In this electronic era, when cell phones and tablets are commonplace in the jungles of New Guinea and deserts of North Africa, the stage is set for the single global electronic currency. Naturally, having an all-powerful "Global Reserve" manage it should send shivers down the spines of most thinking men and women and the ultimate fate of the new economic system will be nothing short of apocalyptic. The dismal failure of East Bloc planned economies with their starving masses dependant on wheat imports from a then relatively free US will pale into insignificance by comparison, as there will be no free world left to run to. Maybe the evangelicals are right about the mark of the beast and the biblical prophecies of a single world monetary system. In any case, gold is not the solution. Not by a long chalk.

turtle
turtle

Truly great comment regard the swing vote. And and who owns the media?Re gold - but there will always be unofficial (black) markets and currencies (gold) for those who want to fight for their freedom.

turtle
turtle

Indeed.Taking this idea one step further: “So Rickards is rubbing elbows with the Pentagon, DOD officials, sovereign wealth fund managers, hedge fund managers, central bankers, politicians.”…. Should we blindly put our faith in him?And if this is part of the plan then why not another deflation/reflation fleecing of the sheople (or several - until they catch on) before it is implemented and while the plans are still being finalised:http://www.nakedcapitalism.com/2013/11/the-global-corporatocracy-is-almost-fully-operational.html

Finn
Finn

So Rickards is rubbing elbows with the Pentagon, DOD officials, sovereign wealth fund managers, hedge fund managers, central bankers, politicians....etc., and you disagree and have a better idea?Sorry, but I'll stick with Rickards recommendations. Did you read his book?

Luis
Luis

Very interesting comment! Thank you very much for sharing your thoughts.