Currency Wars: The Making of the Next Global Crisis

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."

While the book's title is about currency wars, it has a lot of good information on the history of the US dollar. Although the book was written in 2011, it still has a lot of useful insights, which I found very useful, especially understanding how to create wealth with currency and not lose money. Here are some of the key highlights.- At the very beginning of the book, the author mentioned President Nixon's announcement on Aug 15, 1971 - the US abandoned the gold standard in 1971 due to insufficient gold reserves to back the US dollar. However, Nixon's agreement with Saudi Arabia in 1973, for it to sell its oil exclusively in dollars in exchange for US military protection, saved the US dollar.- With globalization, very few goods are made from start to finish in a single country. Currency devaluation might not work for a manufacturing country as the cost of importing raw materials will be higher.- The gold exchange standard was supposed to be a self-equilibrating system. However, the central banks were able to make interest rates and other monetary policy decisions involving currency reserves as part of the adjustment process. As a result, the system began to break down.- Foreign investors wanted dollars to invest in the United States not just because of strong economic growth but because they have confidence in the US government. It is also the strong US military. For example, Western Europe and Japan are dependent on the United States for their defense and national security.- Most people understand Quantitative Easing (QE) is just printing money but not how it works and how it affects the rest of the world. When the Fed wants to create money, it buys Treasury debt securities from a select group of banks called primary dealers. The Fed takes delivery of the securities and pays the dealers with freshly printed money. When the Fed wants to reduce the money supply, they sell securities to the primary dealers.By buying intermediate-term debt, the Fed could provide lower interest rates for home buyers and corporate borrowers to hopefully stimulate more economic activity. However, inflation caused by US money printing was felt by many countries. Civil unrest, riots, and insurrection were seen in many countries as a result.- The Fed has a dual mandate to provide price stability and to reduce unemployment. It is also expected to act as a lender of last resort in a financial panic and is required to regulate banks, especially those deemed "too big to fail." The author was critical of how the Fed handled the panic of 2008. Instead of shutting down insolvent banks, the Fed and the Treasury bailed them out with TARP funds and other gimmicks so that the bondholders and bank management could continue to collect interest, profits, and bonuses at taxpayer expense.- The dollar may have lost 95% of its purchasing power. Even if wages and prices have gone up together, the impact has not been uniform. The ones who are using leverage, as well as those with a better understanding of inflation and the resources to hedge against it with hard assets such as gold, land, and fine arts, have fared better than those who are prudent savers and those who lived on fixed return are devalued by inflation. This is why the poor get poorer and the rich richer.