Jim Rickards is an investment banker with over three decade’s experience in the markets. He is also a trained lawyer and has served as General Counsel at several financial institutions. Jim was the principal negotiator of the government-sponsored rescue of the LTCM hedge fund collapse of 1998, and also assists the Department of Defence in their understanding of financial warfare.
Jim has become a well-known figure in the precious metals markets due to his breadth and depth of financial knowledge, including monetary history and gold. He is another favourite on investment podcasts, financial news shows, and money websites. Jim’s book ‘Currency Wars: The Making of the Next Global Crisis’ became a New York Times bestseller, and is now a much read and cited financial book. During the promotion of this book economist Nouriel Roubini called out Jim via Twitter for his discussion of the gold standard. In our humble opinion Jim proved to be much better versed in the detail of this technical discussion than Mr Roubini, who continues to broad cast strong opinions of the direction of the gold price without much of a record.
You can regularly hear Jim talking gold, the markets and the economy on King World News, whilst his regular blogs on Seeking Alpha are also highly recommended. You can follow Jim on Twitter via @JamesGRickar
Review of Currency Wars - by Will Bancroft:
Posted Dec 30 2011 by Will Bancroft in Book reviews, Gold bullion with 4 Comments
In this review of a recent economic literary sensation we assess James Rickards’ recent book Currency Wars. Mr Rickards is a consultant and investment banker with over 30 years of capital markets experience who regularly appears on Bloomberg, CNBC and the wider financial media. Readers are treated to a detailed analysis of the three most recent currency wars and how these episodes benefit no-one, how sound money could play a helpful future role and what this could mean for the gold price.
My present to myself this Christmas was one of the two most talked about financial books this year, Currency Wars by one of our favourite analysts Mr Rickards. The other book that has captured headlines was Paper Money Collapse, by Detlev Schlichter, who we look forward to interviewing later in January 2012.
Mr Rickards’ book has been soaring up the bestsellers list, and not just in finance and economics. Being regular listeners to King World News, where Mr Rickards regularly features, we had been well prepared for its arrival.
Mr Rickards sees currency wars as the gravest risk facing us at this time, and has concerns about the paths the political and financial elites are pursuing to extricate us from this current and nearly five year old financial crisis.
Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries’ stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis greater than the panic of 2008. – James Rickards
Mr Rickards starts his book with a fascinating look at war games previously organised by the Pentagon to simulate a war where no kinetic weapons (bullets, tanks, missiles et al) are available to participants. The only weapons allowed were financial; currencies, stocks, bonds and derivatives.
In these simulated war games what was most interesting to hear of was Russia’s increase of power and influence largely by creating a new gold back currency and refusing to part with her resource wealth for any other currency.
The largest loser of these games was the United States, and her loss of power due to a decline of the dollar. After an assessment of a golden age of currency stability and progress from 1870 to 1914 under the Classical Gold Standard the book then begins an assessment of the 3 currency wars most relevant to us today.
Currency War I (1921 to 1936)
Currency War II (1967 to 1987)
Currency War III (2010 to ?)
Before looking to the three described currency wars, it was notable that Mr Rickards finds that:
The classical gold standard of 1870 to 1914 has a unique place in the history of gold as money. It was a period of almost no inflation… that increased productivity and raised living standards without increasing unemployment. The period is best understood as the first age of globalisation. – James Rickards
What is most interesting about Mr Rickards’s analysis of the three aforementioned currency wars, is that the problems and structural flaws within the monetary system that lead to imbalances, dislocations and disruptions to our progress are apparently due to a general lack of understanding of and derogation of gold.
We are informed the currency system of 1921 to 1936 failed due to the flaws of both the 1925 gold exchange standard and US monetary policy from 1928 to 1931.
Devaluing countries such as France and Germany gained a trade advantage, whilst countries like England, which tried to return to the pre-war gold standard, suffered, whilst the United States failed to live up to its international responsibilities. A gold standard has been criticised as causing or contributing to the Great Depression by the Neo-Keynesian school of thought.
Mr Rickards takes on members of this academic establishment, such as Bernanke, Eichengreen and Krugman, and argues that it was not a gold standard that was the problem, but the gold price which was used to implement it. By choosing a pre-war gold price, after having printed lots of money to fund WW1, countries implementing a new gold standard enforced a deflationary straight jacket on their economies.
This academic debate will rage on, and investors may have been interested to witness a Twitter spat between Mr Rickards and Nouriel Roubini since the publication of Currency Wars. However, we find Mr Rickards’s arguments well considered and more compelling than those of Bernanke et al.
Read more in part II.
Will Bancroft regularly contributes to investment and finance sites such as Market Oracle, Seeking Alpha, Stockopedia, Renegade Economist and more. His passion for politics, philosophy and economics led him to develop a keen interest in Austrian economics, gold and silver. Read more of his articles.
Posted Jan 2 2012 by Will Bancroft in Book reviews, Gold bullion with 0 Comments
Continuing on from part I, read on for part II of our review of Currency Wars by respected analyst and financier James Rickards. See how his thoughts and forecasts might affect your portfolio, gold investment and the gold price.
Currency War II will be more familiar to investors today, having occurred during the lifetimes of many. Mr Rickards assesses a range of phenomena within this currency war, including but not limited to.
The Bretton Woods currency system, based on a dominant dollar anchored to gold
The failure of the London Gold Pool in 1968, when gold bullion outflow from the pool was running at the rate of 30 tonnes of gold an hour
The shock of 1971 when Nixon closed the Gold Window in the face of a run on US reserves
Currency War II is deemed to have come to an end by 1987 where “there was relative peace in international monetary matters, yet this peace rested on nothing more substantial than faith in the dollar as a store of value based on a growing US economy and a stable monetary policy by the Fed”.
Currency stability was contingent to what could not be guaranteed and gold was gone from international finance. The world was set for Currency War III to unfold.
This is where the analysis of currency wars becomes most relevant to investors today. Mr Rickards does not pull his punches in his concerns about intellectual dogma affecting the heart of US monetary and economic policy, Washington’s relationship with Wall Street, and the corruption of academia by high finance and financial economics.
As fans of Benoit Mandelbrot and Didier Sornette we were pleased to see the book take issue with concepts such the Efficient Markets Hypothesis and Value at Risk (VaR).
Mr Rickards has great concerns about current US policies
potentially making matters worse rather than better and involving a
reckless gamble with the heart of the US economy; the dollar.
“The
entire system of fiscal policy, monetary policy, banking and risk
management was intellectually corrupt and dishonest, and the flaws
persist to this day”.
The chapters covering today’s currencies, capital, complexity, and futures of paper, gold or chaos are superbly considered and articulate. Their intellectual founding and careful prescriptions are closely aligned to our [?] world view.
We will let you enjoy the book yourselves to discover the depth and weight of Mr Rickards’s diagnosis and prescription. Mr Rickards’s hope is that Currency Wars offers warnings of certain dangers and can be used like a compass to steer ourselves towards sounder financial foundations. He closes with a quote that distils much of our worldview and the rationale behind investing in precious metals.
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. – James Rickards [So apparently some of the above is by Rickards himself ?]
In our eyes Currency Wars has undoubtedly jumped up to join the pantheon of great books with affiliations to Austrian economics and sound money. I would recommend this book as being as worth reading as totems such as George Soros’ The Alchemy of Finance.
Investors that already share part of their worldview with ours may find this book as useful as Gold Wars [Ferdi Lips] and End the Fed [Ron Paul], two books that are often cited as the bibles of precious metals investing. A reader’s time is well invested and investors may find a whole new perspective on the contemporary financial landscape and the power struggles within it.
I found it particularly revelatory to understand that the way to affect the US, is not to dump her bonds in an effort to collapse the Treasury market where the President can close the market to stop continued damage, but to undermine her currency and so much of trade that is denominated in US dollars.
We thus see in new perspective the recent currency and trade agreements being agreed by China, Russia and Japan that will not use the US dollar as their means of exchange.
As Mr Rickards urges gold is money par excellence. What prospect of returning to a sound money system, once more anchored by gold and silver? We have a currency war to witness before we find the answer. Thanks for the excellent read Mr Rickards.
Will Bancroft is one of the Co-Founders of the Real Asset Company. Read more of his writing and ask him questions on Facebook or Twitter
Other Reviews of Currency Wars - from on Amazon:
14 of 14 people found the following review helpful
5.0 out of 5 stars Very fine book, 9 Jan 2012
By bobbreeks "benthicbob" - See all my reviewsThis review is from: Currency Wars: The Making of the Next Global Crisis (Portfolio) (Hardcover)
James Rickards is one of the most intelligent analysts in the world today, he is never prone to hyperbole or rhetoric, which is a common trait (trend even) of some economic essayists blogging and publishing today.
Clearly James Rickards is well thought of enough to be included in US govt Economic War games, and his story of being involved in just such an event makes fascinating reading.
The central section of the book detailing the three currency wars, (1921-36, 1967-87, 2010-),
is the most detailed and interesting, it really adds to the cannon of currency study. And as such, would in my eyes, sit alongside Murray N Rothbard's, "What has Government done to our money" and Ferdinand Lips "Gold Wars".
What of-course makes the work more than just an historical reflection, is it's ability to incorporate the economic disasters of central banks and their masters since 2008. In an economic landscape that Ludwig Von Mises could never have imagined in his worst nightmare, James Rickards brings us up to date, with some helpful ideas that we can only hope the politicians and their economic lackeys implement sooner rather than too late.
A stirring book that doesn't avoid the complexity of currency manipulation, but rather, draws the reader into a ripping morbid adventure. And that makes it quite special.
28 of 32 people found the following review helpful
5.0 out of 5 stars Be afraid, 20 Nov 2011
By Hande Z (Singapore) - See all my reviews
(TOP 1000 REVIEWER) This review is from: Currency Wars: The Making of the Next Global Crisis: The Making of the Next Gobal Crisis (Portfolio) (Kindle Edition)
The first two chapters may appear like a fantasy story about countries engaging in war games using their national currencies as weapons. Rickards quickly move into the history of the real currency wars (three, since 1921 and the third beginning in 2010). The "military" manoeuvres seem complex because the hardware does not consist of bombs or bullets but paper currencies.
At the bottom of it all is the question of national wealth and the its connection with the individual wealth of its citizens. That's partly what makes it all complicated. National wealth depends on its GDP and that depends partly on the ability of its citizens to consume and produce. When there is an imbalance (in international trade) there is no money to pay for imports. debts rise. The debtor nations can call on the debts (worst case scenario). Classic defensive responses is to inflate faster than deflation caused by trade deficits because if it can't, and the creditor comes calling, the scenario painted by Rickards is that of Chinese ships arriving at US ports to collect the gold that the USA had stored in Fort Knox and West Point, and ship them all away. By that time, the paper currency system would have collapsed and the USA would also have lost its solid gold. In other words, it will be flat broke. That is why severe and drastic moves are underfoot to prevent the collapse of the paper (fiat) currencies. Not just the US dollar but the Euro dollar as well. So to pay off debts, the US traditional response has been to lower interest rates to deflect acquisition of US dollars. Interest rates are down to zero. The Fed is out of ammo on this front. The only other move is to print more money, "Quantitative easing" (lovely name for a double-edged sword). It's not that simple. China counters by devaluing it's Yuan. So what is the end game? It's not clear but Rickards sets out the scenarios in his final chapter. If paper currency cannot be saved (there is a very real danger of that eventuality) the world may revert to a new Gold standard - or descend into chaos. That explains why gold prices shot from less than $100 to $1,000 and climbing. There will be leadership changes in the USA and China in 2012. The citizens have to vote wisely for a wise leader in the respective countries. But Rickards points out in this book that the currency wars will be fought in many theaters all over the world, it is not just USA vs China.
20 of 23 people found the following review helpful
3.0 out of 5 stars A little disappointing, 15 Dec 2011
By Graham O. - See all my reviewsThis review is from: Currency Wars: The Making of the Next Global Crisis (Portfolio) (Hardcover)
I bought this book after rave reviews on KingworldNews.
The first two chapters are interesting in their financial war context, but are not a smooth read. Subsequent chapters seem better written. WHy do I find the book a little disappointing? Well, there is not a single reference to the effects of Fractional Reserve Banking which is the true underlying cause of our boom and bust business cycles, and Rickards failure to weave this into the story really undermines the whole book for me. I even bought extra copies as gifts on the basis of other reviews, but really think that the book leaves a lot of the real currency war story untold. Maybe that's OK in the context of most decision makers in this story also probably being oblivious to the real cause of our global financial problems.
7 of 8 people found the following review helpful
2.0 out of 5 stars Sometimes compelling, often sloppy, 5 Mar 2012
By AlexHanin - See all my reviewsThis review is from: Currency Wars: The Making of the Next Global Crisis (Portfolio) (Hardcover)
Let's start with the positive: war currency themselves are clearly explained, mainstream economics is dismissed as it should be, and the flaws/excesses of the financial sector are exposed.
The case for the flexible gold standard is rather nuanced and convincing, a rare quality among gold partisans (who are often fundamentalists, see Schlichter's awful 'Money paper Collapse' for example).
Unfortulately, a good deal of Rickard's arguments are clearly biased. [And so are you. No politics, please. -FNC]
Rickards argues that FDR did not manage the crisis as he should have. He trashed the dollar, resorting to 'beggar-thy-neighbor' policies, and confiscated the citizens' gold in a less-than-democratic fashion. That's may be right, but what else could he do? It's bad to beggar-thy-neighbor, but everyone was doing so anyway, with or without the US. That's not an excuse, but what to do? All in all, FDR's policies gave rather good results.
According to Rickards, it's better for the governemet to step out and let the market purify itself and go back to to growth `naturally': 'The result may be the discovery that short-term government austerity brightens long-run economic prospects by increasing confidence and the propensity to spend.' Strangely enough, Rickards could have found suitable examples of austerity, but doesn't even mention them.
Hoover was president of the US when the Great Depression broke loose; FDR succeeded him only in 1933. The name 'Hoover' appears only twice in the whole book, and Rickards doesn't say a word about his policies during those years. That's remarkable. The fact is that Hoover, and Treasury secretary Mellon, started with the view that the budget should remain balanced and that the market was to be left to its own device. The result was dreadful, and the debt/GDP soared. Only afterwards did he try a limited stimulus.
In Germany, Brüning was appointed chancellor on 29 march 1930. He resorted to austerity to fight the crisis. Unemployment soared and misery spread, which benefited greatly the communists and the nazis. Rickards talks at great length about Weimar's hyperinflation (and rightly so), but Brüning apparently doesn't deserve a single word.
Today, Europe is trying Rickard's austerity, mainly in Greece, Ireland, Spain, and Portugal. The results are dismal. Unemployment has peaked, as well as and Debt/GDP ratio. There's no sign of recovery ahead.
So Rickards claims that FDR's policies were wrong, altough GDP started growing again at a good pace from 1933 (slumpin in 1937, when austerity was briefly implemented), and overlooks completely the awful consequences of the austerity he advocates.
The government spending multiplier is another example of sloppy argument. Rickards asserts that Barro, Woodford and many others have clearly demonstrated that the multiplier is < 1. In fact, Barro looked mainly at government spending during WWII, when private consumption and investment were subjected to restrictions, so of course private spending went down. In a 2010 paper, Woodford actually writes that `A multiplier well in excess of 1 is possible when monetary policy is constrained by the zero lower bound, and in this case welfare increases if government purchases expand to partially fill the output gap that arises from the inability to lower interest rates.' So what is Rickards talking about? [The fact that it has gone under one - again. -FNC]
Rickards goes on and dismisses Obama's fiscal stimulus and the Romer and Bernstein's study. The study was wrong: the expected results didn't materialize. That's right, because the federal stimulus barely offset the cutbacks at the State and local level. So there was no big stimulus after all, something many keynesians already claimed in 2009. Still, this minor effort did create jobs, even Rickards aknowledges it, but `The problem was that the recovery was artificial and not self-sustaining, because it had been induced by government spending and easy money rather than by private sector consumption and investment.' God only knows what `artificial' means. You see, when the government hire people to mend old infrastructure, it's 'artificial', it can do no good. Yes, those people get a job -and a useful one-, yes they earn money, yes they spend a good deal of it, but hey, it's'artificial'.
It appears now that the US modest stimulus gives better results than the EU textbook austerity, but let's not look at contrary evidence.
Rickards explains that Chaisson showed that civilizations collapse because of increasing complexity, which requires more and more input for always diminishing returns. I haven't read Chaisson, but Rickards' account of it is so synthetic and simplistic that you hardly understand why the US should fall like the civilizations described by Chaisson. Rickards writes `Have Washington and other sovereigns gone so far down the road of higher taxes, more regulation, more bureaucracy and self-interested behavior that social inputs produce negative returns?' That's foolish: taxes haven't gone up at all in the US. Once again, what is he talking about? Besides, total tax revenue as a percentage of GDP are much, much lower than in countries like Norway, the Netherlands or Austria, which economies are much, much sounder that the American one.
Stimulus could work, maybe, if the country wasn't so indebted, says Rickards. But you know, `keynesianism' has indebted us : `For Washington, Keynesianism is an excuse to expand spending'. Instead of keynesianism, here's something better: `Although the Fed was independent of the White House, Reagan and Volcker together constructed a strong dollar, implemented a low-tax policy that proved to be a tonic for the U.S. economy and launched the United States on one of its strongest periods of growth in history.'
There is just a tiny drawback, so tiny that Rickards doesn't even mention it: public debt started to get out of hand at the beginning of the 80'. When Obama spends, it's terrible; when Reagan spends... let's drop it and talk about the wonderful growth he created. Actually, it was not `one of its strongest periods of growth in history', but nevermind. And Vockler created the crisis with super-high interest rates to break inflation, so of course the economy (housing mainly) sprang back when rates where lowered. Well okay, but at least Reagan `implemented a low-tax policy', right? Not even. Reagan cut taxes for the very rich, but increased them for others (TEFRA).
`Twenty-five hedge fund managers were reported to have made over $22 billion for themselves in 2010 while forty-four million Americans were on food stamps. CEO pay increased 27 percent in 2010 versus 2009 while over twenty million Americans either were unemployed or had dropped out of the labor force but wanted a job.' This, of course, has nothing to do with Reagan and Bush huge tax cuts for the rich, deregulation, and union busting. No, the culprit is the Big State! A lot of European countries have bigger States and much smaller inequalities than the US, but whatever. It's always the State's fault, everyone knows that.
I give the book 2 stars: it provides many valuable insights, but you cannot simply omit a lot of data and twist facts to push an agenda forward.
7 of 8 people found the following review helpful
5.0 out of 5 stars James Turk about Currency Wars, 20 Nov 2011
By James Turk - See all my reviewsThis review is from: Currency Wars: The Making of the Next Global Crisis (Portfolio) (Hardcover)
October 27, 2011 ' It was my good fortune to receive an advance copy of Jim Rickards' new book, Currency Wars. It is a great book, and I highly recommend it.
The book is split into three parts, with the first part being almost surreal because it reads more like a novel than non-fiction. It details Rickards participation in an exercise at the Warfare Analysis Laboratory near Washington D.C. This group is one of the Defense Department's leading venues for war games and strategic planning, but in a first-ever event, the game in which Rickards joined was not a war-fighting simulation. Rather, several dozen people from the military, academic and intelligence communities fought a global financial war using currencies and capital markets to support national interests. Rickards and two colleagues were invited to give the simulation some real-world, Wall Street expertise about markets, which they certainly did.
I guarantee that when you start reading this part, you won't put the book down until you learn the outcome of the war. It reads better than a suspense novel, even though the ending is somewhat anti-climactic and predictable. While I won't spoil it for you by divulging the ending, I will note that gold has a big role to play. In fact, gold reappears throughout the whole book.
In the second section, Rickards analyzes the first two currency wars (CWI and CWII). He provides an interesting historical account of the global monetary twists and turns, ups and downs that marked much of the twentieth century, with keen insight into the motivations why these currency wars were fought. CWI lasted from 1921 to 1936. Even though CWII came much later from 1967 to 1987 both wars were fought by competing national interests, which brought into the battle competitive devaluations and other interventionist actions of government. It is noteworthy that currency wars are a product of the post-Classical Gold Standard period that began in the aftermath of World War I, when the monetary role of government began to morph, as gold was driven out of day-to-day circulation, and then expand in new ways never before seen.
The final section of the book explains why the world is now fighting Currency War III, which Rickards believes began in 2010. He speculates that there are three possible outcomes from CWIII paper, gold or chaos. Each of these alternatives is analyzed in detail, providing readers with much food for thought.
It has been said that book reviews are supposed to include something critical. Nevertheless, I have nothing negative to say about Currency Wars. It is a great book, and you will not be disappointed with it. But I do have one important thought to keep in mind as you read it.
US real income and living standards peaked in early-1973, less than two years after President Nixon closed the gold window. As their closeness in time suggests, these two events are interconnected. The world's financial system experienced a profound change from the edicts of Mr. Nixon's pen, with the consequence that private enterprise was negatively impacted.
The harmful effects from abandoning gold still impair economic activity today because the necessary discipline has been removed from the monetary system, creating the global imbalances, debt loads, insolvent banks, risky derivatives and other problems that plague our world. So as economic activity sinks ever deeper into an abyss, think about the cause. Namely, governments have created this mess, so we cannot rationally expect governments to get us out of it, which is something I have intuitively understood for some time but was also the main conclusion I reached from Rickards book. Whether Rickards intended readers to reach that viewpoint, I am not sure. Nevertheless, it is clear to me, the answers and the direction we need so urgently now to avoid falling further into the abyss will not come from government, but rather from private enterprise and hard work, the source of all solutions, and indeed all wealth.
My point is that money should not be a weapon used to fight perceived national interests. We have learned from the last century that currency wars can lead to shooting wars. The Warfare Analysis Laboratory hopefully recognizes that reality. So the role of providing currency should instead be returned to where it rightfully belongs with private enterprise. The logic for doing so is simple and straightforward.
Aside from the fact that war is a product of government and not private enterprise, governments do not have bottom-line accountability. In contrast, if companies do not deliver a product or service that people want, they go out of business. Governments, however, do not close up shop and disappear, even when the outcome they create is horrific. So in my view, the sooner this incontestable tenet is recognized, the sooner we will reach the end of CWIII, and thereby avoid another global shooting war.
1 of 2 people found the following review helpful
5.0 out of 5 stars forward thinking, 21 Feb 2012
By Paul Cookson - See all my reviewsThis review is from: Currency Wars: The Making of the Next Global Crisis (Portfolio) (Hardcover)
ive read a lot of financial books around the current debt issues. its a pleasure to read a book with opinions and very insightful at that. it really does give food for thought rather than regurgitation of other books and history.
Interview of Rickards - by Eric McWhinnie:
February 13, 2012
Currency Wars: The Making of the Next Global Crisis is a national bestseller that discusses the serious financial threats facing the U.S. dollar. Readers will discover that currency wars have happened before and they always end badly. The U.S. dollar is currently at the center of a new currency war, which threatens its very existence.
Author James Rickards offers valuable insight to readers through more than 30 years of experience in global capital markets. He is Senior Managing Director of Tangent Capital Partners, a merchant bank based in New York specializing in alternative asset management solutions. He has also held senior executive positions at Citibank, RBS Greenwich, Long-Term Capital Management and Caxton Associates.
I recently had the pleasure to speak with Mr. Rickards about his new book [Currency Wars] and the assault taking place on the U.S. dollar.
Eric McWhinnie: What is the key take away from your new book?
Mr. Rickards: You can not take the dollar for granted. I think there is a sense among many of the policy makers and Federal Reserve board governors that the dollar will always be the key reserve currency, and there is no good alternative. Therefore, you can borrow or print as much as you want and have as much debt as you desire. The thinking is that we will eventually grow and pay it back, or there will be inflation or some other remedy. The belief that the dollar is a punching bag that will never break is incorrect. We need to be more conservative or we risk a general collapse of confidence in the dollar.
Eric McWhinnie: Do you think the Fed’s Operation Twist could be used by the Chinese to harm the U.S. dollar?
Mr. Rickards: One of the most widely discussed areas of financial confrontation involves the Chinese holdings of Treasury debt. The Chinese have overwhelming chosen to park reserves into U.S. dollar denominated instruments. The vast majority of reserves are in U.S. Treasury obligations. They have over $2 trillion of these, and their total reserve position is about $3 trillion equivalent. It is often suggested that if Chinese wanted to do massive harm to the U.S., they could dump all their bonds and cause interest rates to increase. This would cause damaging and catastrophic effects to the housing market, stocks and unemployment.
This is extremely unlikely to play out for two reasons. First, which I personally do not put much weight on, the Chinese would be shooting themselves in the foot as the price of their remaining bonds would be dragged down by selling a large portion of the bonds. If you sell 10 percent of your portfolio, you might move the price adversely on the entire 100 percent and incur massive losses. This reason is technically true, but this just might be the cost of inflicting harm on your enemies. It is not as if aircraft carriers or missile forces are free. Incurring trading losses on a bond account may or may not be worthwhile.
The better and more powerful answer in my view, to as why this bond dumping would not take place, is that the President of the United States has emergency economic powers to stop the Chinese in their tracks. All Treasury obligations today are in electronic book entry form, as opposed to bearer paper form. All the government bonds and money moved and cleared through the banks go through a system called Fedwire, which is controlled by the Fed. The Treasury and the Fed together control the choke points for dollar transactions worldwide and U.S. government security transactions. If the Chinese started dumping bonds, all it would take is one phone call from the President to the Treasury to freeze the bond accounts.
There is one variation to that. China could say fine, we are not going to dump anything. But with Treasury securities maturing all the time, the Chinese have reinvestment decisions. They could choose to reinvest in 30-day, 90-day or 1-year Treasury bills, and shorten their maturity structure. This would cause much less exposure to volatility and increase liquidity. It is like shortening the fuse on the time bomb. I think the Chinese are in fact pursing that path and reducing their exposure to the U.S. by shortening the maturities. As far as Operation Twist is concerned, it does not really affect the Chinese one way or another. At the margin, it does improve the pricing and makes it a little bit easier to do, but it won’t really affect their ability to do it.
Don’t Miss: Warren Buffett Trashes Gold, But What About Silver?
Eric McWhinnie: How does the Fed’s recent decision to keep interest rates at record lows until 2014 play into currency wars?
Mr. Rickards: This is the main weapon in currency wars. The quantitative easing programs, including QE1, QE2 and soon to be QE3, and the Fed’s zero interest rate policy are all part of currency wars. The Fed wants to cheapen the dollar, plain and simple. They won’t come out and say that, but that is the policy. The reasons for this are straightforward. The Treasury, Fed and White House believe a cheap dollar will help U.S. exports by making our goods less expensive to people who buy them from abroad. That will promote exports and help GDP and economic growth, leading to a creation of jobs at U.S. factories to satisfy demand. It all sounds really good, but the problem is it never works. The U.S. does not operate in a vacuum, there is always some push back or retaliation when we try to cheapen our currency. Other countries also try to cheapen their currency, which is the nature of currency wars. This can quickly lead to trade wars and a replay of the 1930s. People often say the Fed is out of bullets with zero interest rates, but this is untrue. The Fed still has quantitative easing to cheapen the dollar.
Eric McWhinnie: Do you think central bank gold purchases will continue, and do you think it is a contrarian indicator?
Mr. Rickards: I do think central banks will continue to purchase gold. Investors need to separate the Fed from other central banks. The Fed got many things wrong and I do not think the Fed understands the statistical properties at risk. I also think they have done a lousy job as regulators and their economical forecasting skills are minimal. But the Fed is not the central bank buying gold. Asian and Russian central banks tend to be the ones buying gold as they do not hold enough relative to the size of their economies and paper money supply. For all its faults, the U.S. has 8,000 tons of gold. China, which has an economy almost half our size and a money supply larger than ours, only has officially a little over 1,000 tons of gold. They have a fraction of our gold for an economy half as large. Clearly, the U.S. is a gold giant while China is a gold pigmy. [Hmmm. -FNC]
If I were China, I would be buying all the gold as fast as I could. The problem comes with the market impact of the strong demand. [The 'China Put'. -FNC] You want to operate by stealth to avoid bidding up the price. You should operate by using agents, banks and other intermediaries to buy the gold for you so the market does not know it is you. It is a delicate game, and I do not blame the Chinese for playing it like they do. I think the central bank buying is not a contrarian indicator, but a very bullish indicator. The people who are buying are the people who do not have enough gold to begin with. They are trying desperately to increase their gold reserves to support the paper money supply. This tells me they think at some point the paper money system will break down.
Eric McWhinnie: What are some ways for investors to protect themselves?
Mr. Rickards: I recommend that every portfolio should have some gold in it, mainly as an inflation hedge and also as an attractive investment. For the conservative client I recommend a 10 percent allocation, and 20 percent for the aggressive client. I do not like the idea of putting a large amount of a portfolio into a single asset. If I am right about gold, and I expect I will be, the returns on that 10 percent or 20 percent will help preserve wealth. Bullion coins from the U.S. Mint such as an American Gold Eagle are also an excellent way to hold gold. You do not want to buy antique or collectible coins, gold is gold. The premiums that come with these coins are not worth it. American Gold Eagle coins are reliable, high quality and a reasonably priced way to hold gold.
More insight from James G. Rickards can be found on Twitter @JamesGRickards.
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HAT TRICK LETTER
Issue #98
Jim Willie CB,
“the Golden Jackass”
20 May 2012
Jim Rickards never mentions the Cover Clause whereby perhaps 5% of money would be
redeemable in gold. A string of other nations like Russia and China and the Persian
Gulf could enter the mix with a 2% to 3% cover clause in Ruble, Yuan, and Dinar
backing. The Euro Mark led by Germany could give the entire process respect and
credence, at a time when both are gone. Instead of changing official interest rates, the
central banks could alter their cover clause percentages.
Rickards is at times brilliant until he discusses gold management and gold-based solutions. Then he turns into a hired public relations talking head for the establishment.
He constantly talks about the USGovt physical gold held in reserve, when as consultant
to the LTCM in the 1990 decade, he had intimate knowledge of its systemic raids from
the Clinton-Rubin schemes. Rickards cites 31,000 tons of gold in central bank vaults as
though it is fact. It is not. The Western central banks might be 20,000 to 40,000 metric
tons short of gold bullion after two decades of gold leasing and certificate fraud. That
is precisely what my main gold trader source has been lecturing about for two years
running. The central bank fiat currency game has been defeneded only by depleting
their entire gold supply, and going into hock. They are short thousands of tons of gold,
soon to be revealed in a gigantic scandal.
Rickards wrote, "Gold cannot be used as a monetary standard because there is not
enough gold. This is one of the most frequent charges used by Gold Standard opponents. In fact,
the quantity of gold is never an issue. The issue is one of price. There are approximately 31,000
metric tons of gold held by central banks today and another 130,000 metric tons in private
hands. It is true that if this gold were valued at the current market price of about $1650 per
ounce, a money supply of equivalent value would be far less than the current money supply. This
would be highly deflationary and probably result in a contraction of world trade and gross
domestic product. However, the same quantity of gold valued at, say, $10,000 per ounce
would support today's paper money supply at a reasonable ratio of gold-to-paper in
line with historic gold standards. So, the issue is not the quantity. It is the price. Central
bankers do not want to face up to the fact that they have printed so much paper money that a
return to sound money would involve a one-time hyper-inflationary spike in all hard asset values
and a concomitant destruction of paper wealth. This adjustment will take place eventually. It
always does. The issue is whether we will face up to the reality sooner than later in a studied and
orderly way, or wait for a disorderly and catastrophic day of financial reckoning." The
adjustment, better called a revolt in transition, will be conducted and led by the East,
namely China, with Russia and Germany at their side. For more descriptions of the gold
cover clause, with potential layouts, and new currency discussion, see the public article
entitled "Gold Cover Clause Guidance" on Gold Eagle by the Jackass (CLICK HERE).