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Jim Rickards sees 'Currency Wars' destroying dollar
James G. Rickards spoke at GATA's Gold Rush 2011 conference in London in August.
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By Jon Rosen
USA Today
Monday, December 26, 2011
http://www.usatoday.com/money/books/reviews/story/2011-12-23/book-curren...
To most Americans, the term "quantitative easing" is arcane economic jargon, introduced following the global financial crisis and, like most U.S. policies intended to spur recovery, yet to make much progress in reducing unemployment.
Yet to author James Rickards, QE, as it is known, is the United States' secret weapon in an unfolding global war -- one fought not with soldiers, tanks, or drones but with currencies.
In driving down long-term interest rates by flooding the market with freshly printed currency, the policy, Rickards says, is a combative attempt to boost U.S. exports by weakening the dollar while undermining the competitiveness of China and other U.S. trading partners.
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As he argues in his new book, "Currency Wars: The Making of the Next Global Crisis," QE is an "exercise in deception" that offers little chance of promoting long-term economic recovery. Worse, it has left the dollar highly vulnerable to speculation and, ultimately, a cataclysmic crash.
According to Rickards, a Wall Street insider with more than 30 years' experience as a financial adviser and investment banker, the championing of QE by Federal Reserve Chairman Ben Bernanke is the "greatest gamble in the history of finance," one that is setting the stage for a global financial meltdown far greater than the last.
While readers may view Rickard's argument as scaremongering, the author adds heft to his analysis by exploring the disastrous history of attempts to promote economic growth through currency devaluation. According to Rickards, the currency war that began when QE was launched, creating growing exchange rate antagonism between the U.S. and China, is the world's third in the past 100 years.
The first, which began after World War I when Germany sought to devalue its currency in an effort to boost postwar recovery, contributed to two of the 20th century's most concentrated episodes of human suffering: the Great Depression and World War II.
Currency War II, which ramped up in the early 1970s when the Nixon administration orchestrated a stark devaluation of the dollar, did not result in global cataclysm but did produce the worst economic crisis since the Depression, with massive unemployment, runaway inflation and a huge surge in the price of oil.
As in the days of Nixon, Rickards argues, current U.S. government efforts to weaken the dollar have placed the U.S. economy on an unsustainable path, one made more treacherous by rising mountains of debt, increased global interconnectedness and a financial system more concentrated than before the 2008 crisis.
Rickards, never an optimist, maintains that the most plausible scenario moving forward is a chaotic debasement of the dollar, characterized by a gradual loss in investor confidence and created "like an avalanche brought about by the layering of one last financial snowflake on an unstable mountainside of debt."
This hypothetical scenario, he admits, is not inevitable. A gradual move away from the dollar as the dominant global reserve currency has the potential to bring about a softer landing, as does the growth in use of the Special Drawing Rights, an existing medium of exchange between nations issued by the International Monetary Fund. Still, the best way to ensure financial stability, he argues, would be the adoption of a "flexible gold standard," in which major currencies are linked to the price of gold, as they were in past periods of global economic calm: prior to World War I and in the two decades following World War II.
Like his radical dollar pessimism, Rickards' nostalgia for gold places him well outside the mainstream of contemporary economics. On the whole, his provocative ideas are sure to find critics on both sides of the political aisle.
While generally in support of low taxation and government spending, he is as critical of theories of free-market ideologue Milton Friedman as he is of the traditional spending-centered Keynesian response to recessions, generally embraced by liberals, including Treasury Secretary Timothy Geithner.
Even "Currency Wars" skeptics, however, stand to benefit from exposure to Rickards' outside-the-box thinking. As the world learned the hard way from 2008's near-global financial meltdown, calls of alarm that stray from the pack should be taken seriously. While many will reject his dim prognosis, Rickards' views form an important contribution to the nation's economic dialogue. This makes "Currency Wars" an invaluable resource, even -- or perhaps especially -- for those who maintain a crash of the dollar is impossible.
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