Passing the Buck

February 01, 2012  

James Rickards says the dollar, not the euro, is the most embattled currency.

By Leah Spiro

Currency Wars: The Making of the Next Global Crisis 
By James Rickards  

When it comes to the U.S. dollar, James Rickards, former general counsel of hedge fund firm Long-Term Capital Management, is exceedingly bearish. He has written a plea for the U.S. government to protect its currency, and its central position in the world, before it’s too late.

In Currency Wars: The Making of the Next Global Crisis, Rickards sees Armageddon right around the corner. In his view, Federal Reserve chairman Ben Bernanke has flooded the world with cheap dollars, thanks to his quantitative easing strategy, and is devaluing the greenback and helping topple it as the world’s reserve currency.

Rickards is convinced that the U.S. is playing into the hands of its economic enemies — namely, China and Russia — who he says are plotting to dethrone the U.S. Their method: a currency war in which one country manipulates the decline of another country’s currency by nefarious financial schemes. "Currencies can be used as weapons, not in a metaphorical sense but in a real sense, to cause economic harm to rivals," he writes.

Rickards floats some interesting but sketchy ideas about how countries could attack the dollar. Sovereign wealth funds could manipulate underlying physical commodity or currency markets using leverage and derivatives due to the lack of market transparency. Another scenario: China stealthily replaces its 30-year Treasury bills with 30-day Treasuries and no longer props up the dollar. Or Russia could launch a new gold-backed reserve currency.

Rickards’s solution is a return to the gold standard. He believes that paper money is a travesty and that we are better off with a currency backed by a real asset. Rickards says gold should go to $7,500 an ounce, the price it would be pegged at if the dollar were close to 100 percent backed by the precious metal. Never mind that John Paulson lost big in 2011 by betting on gold, among other bets.

Rickards is so convinced of this doomsday scenario that he has urged the Pentagon to get better prepared against the threat of central banks ganging up on the dollar. Indeed, the most interesting part of the book is the first 34 pages, where the author gives an eyewitness account of the first financial war games, conducted by the Department of Defense at the Johns Hopkins Applied Physics Laboratory Warfare Analysis Laboratory and modeled on real military war games. Rickards was one of three Wall Street types who participated over two days in March 2009. Military leaders and academics convened in a war room, organized into superpowers and worked through a practice scenario. Rickards does a good job of showing the chasm between Washington and Wall Street, and how national security depends on closing the gap.

Rickards has seen action before. He was in the hurricane that swirled around LTCM, which was bailed out by Wall Street firms in 1998, with prodding by the Federal Reserve. Despite the role of the New York Fed in arranging that bailout, Rickards is not a Fed fan.

He ends the book with a doomsday scenario of a dollar collapse. He predicts that the U.S. president will use emergency powers to confiscate all private and foreign gold held at the New York Fed, prohibit exports of gold from the U.S. and close the stock exchanges. The U.S. would then hold 57 percent of the world’s gold, and the Fed would have the clout to create a new dollar, backed by gold, equivalent to ten old dollars.

Although Rickards is neither an economist nor a historian, his trader’s instincts help him get his point across. This is a book built on informed speculation, with a splash of fascinating reporting. Despite his alarmist tone, Rickards has identified Washington’s Achilles’ heel. For that alone, he deserves a hearing. AR

Leah Spiro is president of Riverside Creative Management, a literary agency.

Related Articles

Latest Poll

How will hedge funds finish 2017?

 - 73%
 - 12%
 - 15%

View previous results