Book Review: James Rickards' "Currency Wars"
3/14/2012 11:23:19 AM -
In virtually every airport bookstore in America right now you will find a little sleeper of a book in the business section which is as riveting as a thriller and as hard to put down. James Rickards Currency Wars made this reader remember what Secretary of the Navy John Lehman so vividly told Tom Clancy after reading his multi-million-seller Hunt for Red October: 'Who the hell cleared this?'
At the end of the Cold, and Middle East, wars, we have entered a perilous new world. Currency Wars is as relevant as tomorrow's headlines. No sleepy tome on monetary policy, Currency Wars is a white-knuckle exercise. It begins three years ago with a war game carried out by the Pentagon in a secret facility just outside of Washington DC.
'The Applied Physics Laboratory, located on four hundred acres of former farmland about halfway between Baltimore and Washington, D.C., is one of the crown jewels of America's system of top secret, high-tech applied physics and weapons research facilities.
'Preeminent among these more abstract functions is the lab's Warfare Analysis Laboratory, one of the leading venues for war games and strategic planning in the country. It was for this purpose, the conduct of a war game sponsored by the Pentagon, that about sixty experts from the military, intelligence, and academic communities arrived at APL on a rainy morning in the late winter of 2009. [T[he only weapons allowed would be financial currencies, stocks, bonds, and derivatives. The Pentagon was about to launch a global financial war using currencies and capital markets instead of ships and planes?'
Rickards describes this with flair.
'The rectangular room has four wall-sized screens at the front end and banks of smaller fifty-inch plasma video screens mounted on the walls along both sides to patch in additional participants from remote locations or to display additional graphics. The seating is tiered with a central trapezoid-shaped table for twelve on the lowest level closest to the wall screens; the trapezoid is flanked by four banks of long tables, two on each side, at a slightly higher level laid out in a chevron pattern around the center.'
Shades of Dr. Strangelove! But is it just a videogame on steroids? Rickards:
'China controls almost all of the supply of certain so-called rare earths, which are exotic, hard-to-mine metals crucial in the manufacture of electronics. In July 2010, China announced a 72 percent reduction in rare earth exports, which had the effect of slowing manufacturing in Japan and other countries that depend on Chinese rare earth supplies.
'On September 7, 2010, a Chinese trawler collided with a Japanese patrol ship in a remote island group in the East China Sea claimed by both Japan and China. When the release and apology were not immediately forthcoming, China went beyond the July reduction in exports and halted all rare earth shipments to Japan, crippling Japanese manufacturers. On September 14, 2010, Japan counterattacked by engineering a sudden devaluation of the Japanese yen in international currency markets. The yen fell about 3 percent in three days against the Chinese yuan.'
Nothing virtual about that skirmish. Rickards then walks his readers through a simple history of monetary policy. It starts with the prosperous 'Golden Age' of the classical gold standard, proceeds through Currency War I (1921 - 1936), Currency War II (1967 - 1987) and Currency War III (2010 - ). Rickards then takes us inside the 'G20 Solution.' This proves a fascinating guide to 'what do they really do there,' concluding 'Now, in addition to China, the United States and Europe all wanting to weaken their currencies, Japan found itself in the cheap-currency camp too. Not everyone could cheapen at once; the circle still could not be squared.'
Then welcome to Rickards' chessboard for 'The Next Global Crisis.' He first gives 'a new version of seventeenth-century mercantilism in which corporations are extensions of state power.' Then he takes his readers on a whirlwind world tour through Dubai, where 'Espionage, assassination, gold, currency and an international mix of actors at the crossroads of the world give Dubai its standing as the new Casablanca;' Moscow, from which 'energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble;' and Beijing, where 'China's hard asset endgame is one more ticking time bomb for the dollar.'
Penultimate chapters deconstructing 'The Misuse of Economics,' treat us to subchapters with excellent titles like 'Washington and Wall street the Twin Towers of Deception' ('Washington and Wall street both have a vested interest in the flawed models from the past.') and on Currencies, Capital, and Complexity (Epigram: 'The difficulty lies, not in the new ideas, but in escaping from the old ones.' Keynes), a primer on prospect and complexity theory and why Keynesianism and monetarism both tenaciously hang on, discredited and dysfunctional.
Rickards then goes to the Endgame: Paper, Gold or Chaos. In it, he takes up and dismisses the possibility, prophesized as 'a plausible and fairly benign conclusion' by Barry Eichengreen, of multiple reserve currencies. Rickards argues, persuasively, that this overlooks the a world where 'it will be open season with several central banks invited to (abuse their privileges) at once.' He then makes short work of the most preposterous of the common proposed alternatives to the reserve currency dollar, SDRs. 'In the end, the IMF's plan for the SDR as announced in its blue-print document is an expedient, not a solution. It confronts the imminent sequential failure of fiat money regimes by creating a new fiat money. It papers over the problems of paper currencies with a new kind of paper.'
Rickards offers two scenarios he finds plausible. The first is an orderly return to the gold standard. 'Gold is not a commodity. Gold is not an investment. Gold is money par excellence,' says Rickards, echoing Charles De Gaulle who said, as quoted the New York Fed's The Key to the Gold Vault: 'there can be no other criterion, no other standard than gold. Yes, gold, which never changes, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.'
This reader prefers the analysis of Prof. Lawrence White, of George Mason University, in his excellent Making the Transition to a New Gold Standard as published in freebanking.org, to that of Rickards as to the probable equilibrium price for gold under the gold standard. White's analysis also is fully consistent with that of iconic gold standard advocate Lewis E. Lehrman (whose eponymous institute this writer advises professionally) as set forth in his 2011 The True Gold Standard. Yet give Rickards full credit for systematically laying out his calculus.
Rickards' final scenario is full-on economic chaos. Perhaps it is one to be 'followed swiftly by the ascent of a new gold-backed dollar emerging phoenixlike from the ashes.' Or perhaps, he observes, it will be followed by 'the widespread breakdown of civil order and eventually a collapse of the physical infrastructure.'
Powerful people in Washington, D.C. are reading James Rickards' Currency Wars. The endgame by no means is predestined. Gold standard advocacy has become a staple of the conservative movement, a rising issue with the Tea Party, a part of the 2012 presidential race, and is becoming almost a commonplace topic in the elite media. In laying out the issues of real money compellingly, James Rickards adds intelligently to the policy debate.
To allow 'threats envisioned in the Pentagon's 2009 financial war game' to become 'more real by the day' represents a failure of statesmanship. America looks to Washington to get a grip on restoring the prosperity, security, dignity and liberty that comes with real money. History well may view James Rickards as the Paul Revere of the Currency War, our struggle to re-establish real money currency convertible to gold at a fixed number of grains. History may even come to hold Currency Wars as important for our era as was the famed Midnight Ride for American Independence.