Currency Wars: The Making of the Next Global Crisis Paperback – August 28, 2012

One of the best texts of the economics genre ever written for a general audience. A couple years ago, I read "Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free", by Ellen Hodgson Brown, and I was captivated by how it walks the reader through the symbols of the "Wizard of Oz", elegantly introducing the reader to many of the problems associated with the private centralized bank that runs the United States. But after a little research, it became apparent that the book is a mixed bag, because it is infused with inaccuracies, and the alternatives it offers are problematic. While I still recommend the book to a discerning audience, it is really not appropriate reading material for a general audience because of these reasons.What Rickards offers here is great reading, and after seeing Rickards recently speak on this subject matter on the RT television news channel the other day, it reminded me that I had not yet written a review for his book. Essentially, the author argues that currency wars are a national security concern, not just an economic or monetary concern. And greater than any single threat is the very real danger of the collapse of the United States dollar. While my undergraduate economics coursework could have alerted students to a number of problems, it was only very recently that the Federal Reserve began its sustained effort to stimulate the economy by printing money on a multi-trillion-dollar scale.This book really explains the big picture rather well, both for the present and the past, in amazingly less than 300 pages. Because the author covers quite a bit of ground, and potential readers can find summaries in many of the reviews already written, what follows are some quotes that will hopefully garner some additional interest, since in my opinion this book is a worthy read for anyone in the United States who wants to understand from whence we came as well as where the author thinks we may be going as a result of the current administration's continued actions. If you do not have time to read the entire book, read the section on growth in GDP definition at the beginning of Chapter 3 ("Reflections on a Golden Age"), the section on Monetarism, Keynesianism, and Financial Economics at the end of Chapter 9 ("The Misuse of Economics"), and Chapter 11 ("Endgame - Paper, Gold or Chaos?").Chapter 6 ("Currency War III - 2010- "): "It is intriguing to think about how imbalances such as the U.S. bilateral trade deficit with China and China's massive accumulation of U.S. government debt would have evolved under the Bretton Woods system. China's accumulation of U.S. debt would have begun the same way and there would always have been a desire to hold some amount of U.S. Treasury securities for diversification and liquidity-management reasons. But at some point, China would have asked to cash in some of its treasury securities for U.S. gold held in reserves, as was allowed under Bretton Woods. A relatively small redemption, say, $100 billion of Treasury notes, done in early 2008 when gold was about $1,000 per ounce, would have equaled 100 million ounces of gold, or about 2,840 metric tons.""This amounts to 35 percent of the entire official gold supply of the United States. Indeed, a full redemption of all U.S. government securities by China would have wiped out the U.S. gold supply completely and left the United States with no gold and China the proud owner of over 9,000 metric tons. One can imagine Chinese naval vessels arriving in New York Harbor and a heavily armed U.S. Army convoy moving south down the Palisades Interstate Parkway from West Point to meet the vessels and load the gold on board for shipment to newly constructed vaults in Shanghai.""No doubt such a scene would have been shocking to the American people, yet that imagined shock proves a larger point. America has, in fact, run trade deficits large enough to wipe out its gold hoard under the old rules of the game. Still, the idea of the gold standard was not to deplete nations of gold, but rather to force them to get their financial house in order long before the gold disappeared. In the absence of a gold standard and the real-time adjustments it causes, the American people seem unaware of how badly U.S. finances have actually deteriorated."Chapter 7 ("The G20 Solution"): "Quantitative easing in its simplest form is just printing money. To create money from thin air, the Federal Reserve buys Treasury debt securities from a select group of banks called primary dealers. The primary dealers have a global base of customers, ranging from sovereign wealth funds, other central banks, pension funds and institutional investors to high-net-worth individuals. The dealers act as intermediaries between the Fed and the marketplace by underwriting Treasury auctions of new debt and making a market in existing debts.""When the Fed wants to reduce the money supply, they sell securities to the primary dealers. The securities go to the dealers and the money paid to the Fed simply disappears. Conversely, when the Fed wants to increase the money supply, they buy securities from the dealers. The Fed takes delivery of the securities and pays the dealers with freshly printed money. The money goes into the dealers' bank accounts, where it can then support even more money creation by the banking system."Conclusion: "As I noted at the outset, a book on currency wars is inevitably a book about the dollar and its fate. The dollar, for all its faults and weaknesses, is the pivot of the entire global system of currencies, stocks, bonds, derivatives and investments of all kinds. While all currencies by definition represent some store of value, the dollar is different. It is a store of economic value in a nation whose moral values are historically exceptional and therefore a light to the world. The debasement of the dollar cannot proceed without the debasement of those values and that exceptionalism. This book has tried to offer fair warning of the dangers ahead and be a compass to help steer away.""Social and financial collapses have happened many times but are easily ignored or forgotten. Yet history does not forget, nor do complex systems refrain from doing what they are wont to do. Complex systems begin on a benign organizing principle and end by absorbing all available energy while destroying the system itself. Capital and currency markets are complex systems and will collapse in the end unless they are broken up, contained, compartmentalized and descaled. Currency wars are ultimately about the dollar, yet the dollar today is just a jumped-up version of a former self due to derivatives, leverage, printing and the derogation of gold. It is not past time to save it. Still, the time grows short."

The short story is that I think this book is excellent. I consider it required reading -- and in fact re-reading as well -- for investors who rely on an informed macroeconomic perspective to guide their decision-making, and for those interested in the science of monetary economics.Below are some passages from Currency Wars that I thought were especially insightful. They put forth prospective answers to many key questions that many traders will want to consider.How Does the Global Economic Crisis Get Resolved?"The new crisis will likely begin in the currency markets and spread quickly to stocks, bonds, and commodities. When the dollar collapses, the dollar-denominated markets will collapse too. Panic will quickly spread throughout the world. As a result, another US president, possibly Obama, will take to the airwaves and cyberspace to announce a radical plan of intervention to save the dollar from complete collapse, invoking legal authority already in place today. This new plan may even involve a return to the gold standard. If gold is used, it will be at a dramatically higher price in order ot support the bloated money supply with the fixed quantity of gold available. Americans who had invested in gold earlier will be confronted with a 90% "windfall profits" tax on their newfound wealth, imposed in the name of fairness. European and Japanese gold presently stored in New York will be confiscated and converted to use in the ervice of the New Dollar Policy. No doubt the Europeans and Japanese will be given receipts for their former gold, convertible into New Dollars at a new, higher price.Alternatively, the president may eschew a return to gold and us an array of capital controls and global IMF money creation to reliquify and stabilize the situation.This isn't far-fetched speculation. It has all happened before. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed."Is Widespread Military Conflict Likely?"A conventional military confrontation with the united States seems highly unlikely because of the United States' ability to suppress and ultimately decimate the opposing side. As a result, rival nations and transnational actors such as jihadists have increasingly developed capabilities in unconventional warfare, which can include cyberwarfare, biological or chemical weapons, other weapons of mass destruction or now, in the most unexpected twist of all, financial weapons...the costs of a financial war might be far less than the costs of an arms race and possibly be much more effective at undermining US power than a military confrontation."How Do Currency Wars -- When Economies Compete to Devalue their Currencies -- Start?"Currency wars begin in an atmosphere of insufficient internal growth. The country that starts down this road typically finds itself with high unemployment, low or declining growth, a weak banking sector, and deteriorating public finances. In these circumstances, it is difficult to generate growth through purely internal means and the promotion of exports through a devalued currency becomes the growth engine of last resort."Do Currency Devaluations Help an Economy?"A country that cheapens its currency may make final sales look cheaper when viewed from abroad but may hurt itself as more of its cheap currency is needed to purchase various inputs."Have Currency Wars Happened Before? What Was the Outcome?"Currency War I began in spectacular fashion in 1921 in the shadow of World War I and wound down to an inconclusive end in 1936. In round after round of devaluation and default, the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction along the way. The volatile and self-defeating nature of the international monetary system during that period makes Currency War I the ultimate cautionary tale for today as the world again confronts the challenge of massive unpayable debt."How does China play into the Euro crisis?"China has a vital interest in a strong Euro. The European Union surpasses the United States as China's largest trading partner. China's interest in supporting the Euro is as great or greater than its interest in maintaining the yuan peg against the dollar."How is China affecting the gold market?"Between 2004 and 2009, China secretly doubled its official holdings of gold. China used one of its sovereign wealth funds, the State Administration of Foreign Exchange (SAFE), to purchase gold covertly from dealers around the world. Since SAFE is not the same as the Chinese central bank, these purchases were off the books from the central bank's perspective."What are the Possible Outcomes for the end of the Reign of the US Dollar?"Taking a range of views from the conventional to the cutting-edge, we can foresee four outcomes in the prospect for the dollar -- call them The Four Horsement of the Dollar Apocalypse. In order of disruptive potential from smallest to greatest, they are: multiple reserve currencies, Special Drawing Rights, gold, and chaos."What are Special Drawing Rights (SDR)?"The SDR is world money, controlled by the IMF, backed by nothing, and printed at will. Once the IMF issues an SDR, it sits comfortably in the reserve accounts of the recipient like any other reserve currency."