History is
replete with the carcasses of failed currencies destroyed through
misguided intentional debasement by governments looking for an easy
escape from piling up too much debt. James Rickards, author of the
recent bestseller Currency
Wars: The Making of the Next Global Crisis, sees history
repeating itself today – and warns we are in the escalating
stage of a global currency war of the grandest scale.
Whether it
ends in hyperinflation, in the return to some form of gold standard,
or in chaos – history is telling us we can have confidence
it will end painfully.
On the Cause
of Currency Wars
A currency
war in the simplest form is basically when there is too much debt
and not enough growth. The overhang of debt impedes growth because
it clogs up bank balance sheets and clogs up the savings to investment
mechanism and has a lot of negative effects. So there is not enough
growth to go around. So countries, in effect, try to steal growth
from their trading partners by cheapening the currencies.
And indeed, the Fed and the Treasury are trying to do that right
now. They are trying to cheapen the dollar, probably for the reason
I mentioned. The problem is it does not stop at that. It invites
retaliation...
A couple things happen. Number one – we cheapen our currency
but other countries try to cheapen their currency also, so you
get into these tit-for-tat devaluations where nobody wins. All
you do is unleash inflation, restrict world trade without anyone
getting an advantage. I like to say that in the currency wars,
all advantage is temporary. You give it up pretty quickly.
The other
thing is that for countries that cannot necessarily devalue, they
can use capital controls, they can use import excise taxes. Currency
wars can turn into trade wars. Ultimately, they can even turn
into shooting wars. So you get all these bad effects.
So if the
US could cheapen the dollar in isolation, if nothing else happened,
maybe there would be some quick advantage. But that is not what
happens. But it is a temptation that politicians and policymakers
can not resist, but it ends very badly.
On Current
US Monetary Policy
There is
no question. It is quite clear that the Treasury and the Fed are
trying to inflate their way out of the problem and debase the
dollar.
The problem
I see is they might not get there, and here is why. The Fed thinks
they are playing with a thermostat. You know, you can, if the
room is too cold you dial it up. If the room is too hot, you dial
it down by adjusting the money supply and working a little bit
with expectations on the behavioral side that can gradually tweak
economic behavior and lending and spending velocity and money
supply that achieve a desired result. The problem is they are
actually playing with a nuclear reactor. They are playing with
a complex system that is in or near the critical state. Now, you
can dial a nuclear reactor up and down but if you don't get it
right, the consequences are worse than having to put on a sweater.
The consequences are catastrophic. You can melt down a reactor
and ultimately, the entire financial world.
So the danger
I see is the Fed thinks they are playing with a thermostat. They
are playing with a nuclear reactor and they risk collapsing the
entire system.
On the Importance
of Understanding What's Happening
So that
is what the Fed is trying to do. They are trying to get that lending/spending
machine going again, get the velocity of money up and kind of
inflate their way out of this problem.
A couple
problems with that. Number one, two percent inflation is not so
benign. Two percent inflation cuts the value of the dollar by
seventy five percent in the course of a typical lifetime. So it
cuts it in half in thirty-five years and then in the following
thirty-five years, cuts it in half again. So now, you are down
seventy five percent from where you started. So from the time
you are born to the time you die, your dollar is going to lose
seventy-five percent of its value. That is at two percent inflation.
At four percent inflation, it will cut the value of a dollar in
half by the time your children go to college. So these are cancerous
rates of inflation. Two percent sounds warm and fuzzy. It is not.
The other
thing economists say is, you know, who worries about inflation
because your wages are going up and it all comes out in the wash.
Well, I mean, this is the kind of thing that only an economist
could say. But the fact is some of it does come out in the wash
on average. But we do not live on average. We live our individual
experiences.
And the
fact is in inflation, there are winners and there are losers.
The winners are people who can see it coming, who understand what
you and I and hopefully the listeners are talking about and hedge
their position by getting gold or silver or land or fine art or
investing in railroads as Warren Buffett is doing, some kind of
hard asset play. The losers, those are savers, people with insurance
policies, annuities, pensions, retirement plans – anything
denominated in dollars that are not going to go up when the inflation
kicks in.
This interview
is so insight-packed I had trouble winnowing down the quotes to
highlight. It is a 'must-listen' for those concerned about preserving
the purchasing power of their wealth.
Click the play
button below to listen to Chris' interview with James Rickards (runtime
29m:25s):
James Rickards
is the author of Currency
Wars: The Making of the Next Global Crisis, published by
Penguin/Portfolio, November 2011. He
is Senior Managing Director at Tangent Capital Partners LLC, a merchant
bank based in New York City, and is Senior Managing Director for
Market Intelligence at Omnis, Inc., a technical, professional and
scientific consulting firm located in McLean, VA. Mr. Rickards is
a seasoned counselor, investment banker and risk manager with over
thirty years experience in capital markets including all aspects
of portfolio management, risk management, product structure, financing,
regulation and operations. Mr. Rickards' market experience is focused
in alternative investing and derivatives in global markets. He has
also served as General Counsel at several alternative asset management
companies and a stock exchange facility and is expert in fund governance
and international fund structures.
