Bear Market Numbers

Currency Wars by James Rickards Part I

In this review of a recent economic literary sensation we assess James Rickards’ recent book Currency Wars. Mr Rickards is a consultant and investment banker with over 30 years of capital markets experience who regularly appears on Bloomberg, CNBC and the wider financial media. Readers are treated to a detailed analysis of the three most recent currency wars and how these episodes benefit no-one, how sound money could play a helpful future role and what this could mean for the gold price.

My present to myself this Christmas was one of the two most talked about financial books this year, Currency Wars by one of our favourite analysts Mr Rickards. The other book that has captured headlines was Paper Money Collapse, by Detlev Schlichter, who we look forward to interviewing later in January 2012.

Mr Rickards’ book has been soaring up the best sellers list, and not just in finance and economics. Being regular listeners to King World News, where Mr Rickards regularly features, we had been well prepared for its arrival.

Why the concern about currency wars?

Mr Rickards sees currency wars as the gravest risk facing us at this time, and has concerns about the paths the political and financial elites are pursuing to extricate us from this current and nearly five year old financial crisis.

Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries’ stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis greater than the panic of 2008. – James Rickards

Gold and other weapons in financial war

Mr Rickards starts his book with a fascinating look at war games previously organised by the Pentagon to simulate a war where no kinetic weapons (bullets, tanks, missiles et al) are available to participants. The only weapons allowed were financial; currencies, stocks, bonds and derivatives.

In these simulated war games what was most interesting to hear of was Russia’s increase of power and influence largely by creating a new gold back currency and refusing to part with her resource wealth for any other currency.

Hard assets, gold, and mineral wealth shone through

The largest loser of these games was the United States, and her loss of power due to a decline of the dollar. After an assessment of a golden age of currency stability and progress from 1870 to 1914 under the Classical Gold Standard the book then begins an assessment of the 3 currency wars most relevant to us today.

  • Currency War I (1921 to 1936)
  • Currency War II (1967 to 1987)
  • Currency War III (2010 to ?)

Nostalgia for a golden period

Before looking to the three described currency wars, it was notable that Mr Rickards finds that:

The classical gold standard of 1870 to 1914 has a unique place in the history of gold as money. It was a period of almost no inflation… that increased productivity and raised living standards without increasing unemployment. The period is best understood as the first age of globalisation. – James Rickards

What is most interesting about Mr Rickards’ analysis of the three aforementioned currency wars, is that the problems and structural flaws within the monetary system that lead to imbalances, dislocations and disruptions to our progress are apparently due to a general lack of understanding of and derogation of gold.

Currency War I and the misuse of gold

We are informed the currency system of 1921 to 1936 failed due to the flaws of both the 1925 gold exchange standard and US monetary policy from 1928 to 1931.

Devaluing countries such as France and Germany gained a trade advantage, whilst countries like England, which tried to return to the pre-war gold standard, suffered, whilst the United States failed to live up to its international responsibilities. A gold standard has been criticised as causing or contributing to the Great Depression by the Neo-Keynesian school of thought.

Mr Rickards takes on members of this academic establishment, such as Bernanke, Eichengreen and Krugman, and argues that it was not a gold standard that was the problem, but the gold price which was used to implement it. By choosing a pre-war gold price, after having printed lots of money to fund WW1, countries implementing a new gold standard enforced a deflationary straight jacket on their economies.

This academic debate will rage on, and investors may have been interested to witness a Twitter spat between Mr Rickards and Nouriel Roubini since the publication of Currency Wars. However, we find Mr Rickards’ arguments well considered and more compelling than those of Bernanke et al.

Read more in part II.

Will Bancroft regularly contributes to investment and finance sites such as Market Oracle, Seeking Alpha, Stockopedia, Renegade Economist and more. His passion for politics, philosophy and economics led him to develop a keen interest in Austrian economics, gold and silver. Read more of his articles.

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About the Author

Will BancroftWill Bancroft is Co-Founder of The Real Asset Company, a market place for individuals to invest in gold, silver and precious metals. Will also contributes commentary and analysis to the Research Desk. His interest in financial markets and investment led to a keen interest in monetary economics, gold and silver. Will is passionate about gold’s role in a portfolio and his views appear on sites and media such as Kitco, Market Oracle, Seeking Alpha, Stockopedia, The Telegraph and Yahoo Finance. Follow Will on Google+, and get his commentary via our RSS feed.View all posts by Will Bancroft