Book review: Currency Wars by James Rickards
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This is an excellent, easy to digest read that confronts the 800lb gorilla twins – the US deficits.
Mr Rickards starts by setting out two important theories. That the dollar collapse is inevitable as the preconditions of past currency collapses are in place, and that the third currency war in a hundred years started two years ago.
According to Mr Rickards, a major currency collapse is not as far-fetched as many assume. Many do not know what to angle and the theories of devaluation and ‘beggar thy neighbour’ that caused the first two currency wars are recurrent. This makes this read a must-have for politicians and central bankers more than those looking to find out how to profit from a currency war. Few win, and those that do by buying gold are likely to be hit by a tax windfall for having the foresight.
There is plenty of history in the book with a nice loop from the inception of the Federal Reserve System, set up to bail out banks until 2008, when Citibank received the bailout its then-owner put in place nearly a hundred years earlier. The Fed attracts a lot of criticism throughout, with startling similarities between actions today and previous emergencies, along with delving into Bernanke’s academic work, research and ideas on manipulating asset prices and public consciousness prior to becoming head of the Fed.
The book points out very simply how and why devaluations do not work in the long run, especially in today’s interconnected world with plenty of recent anecdotal evidence that ‘Currency War III’ is already in place. Currency Wars will make you think more about the difference between what central banks (specifically the Fed) and administrations say and do.
According to Mr Rickards, the Fed was created by bankers to save themselves from themselves. Furthermore, by referring to policy mistakes and history there is abundant information on how policymakers can avoid the worst outcomes on both market practice and central bank policies. This includes some interesting work on behavioural economics and complexity against the current obsession with VaR and efficient markets, which – despite the last crisis – is still in use by banks and funds today.
The recurrent theme is that for the sake of global trade, all currencies need a golden anchor. For example, had China decided to call in its debts in gold, Chinese navy vessels would have been picking up the entire US gold hoard in 2008 – a sobering thought as to how far the situation has got. Unfortunately, you cannot help but get the impression from this book that sensible action will be forced on policymakers in an emergency instead of by their choosing with rational heads.