By Leah Spiro
|Currency Wars: The Making of the Next Global
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
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
Leah Spiro is president of Riverside Creative
Management, a literary agency.