'American leaders do believe in the invulnerability of the dollar system, but they are misguided'
Feb 11, 2013 18:53 Moscow Time
In an exclusive interview with the Voice of Russia, James Rickards talks about currency wars, critical dynamics of monetary policy and the future of the US dollar. James Rickards is the author of the national bestseller, Currency Wars: The Making of the Next Global Crisis and a Partner in Tangent Capital Partners, a merchant bank based in New York.
He is a counselor and investment advisor and has held senior positions at Citibank, Long-Term Capital Management and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. His clients include institutional investors and government directorates. He has been interviewed in The Wall Street Journal and has appeared on CNBC, Bloomberg, Fox, CNN, BBC and NPR and is an Op-Ed contributor to the Financial Times, New York Times and Washington Post. Mr. Rickards is a visiting lecturer at Northwestern and the School of Advanced International Studies, has delivered papers on risk at Singularity University, the Applied Physics Laboratory and the Los Alamos National Laboratory and has written numerous articles on risk management. He is an advisor on capital markets to the Director of National Intelligence. Mr. Rickards holds an LL.M. (Taxation) from the NYU School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in economics from SAIS and a B.A. from Johns Hopkins.
Reality Check: First Deputy Head of the Central Bank of Russia, Aleksey Ulyukaev warns that “We are now on the threshold of a very serious, I think, confrontational action, which is called, maybe excessively emotionally, currency wars”. Such artificial currency devaluation is a way “to a separation, a split into separate zones of influence, up to a very sharp competition, up to the world currency wars, which is definitely counterproductive,” Ulyukaev said. Are we on the verge of a currency war or we are already in a state of currency war?
James Rickards: We are already in a currency war. It began in 2010 when President Obama declared a goal of doubling U.S. exports in five years as part of his January 2010 State of the Union Address. Since then, the U.S. Federal Reserve Bank has used quantitative easing to cheapen the exchange value of the dollar both to promote exports and to import inflation as part of the Federal Reserve's efforts to target nominal GDP. However, Ulyukaev is correct when he says the effects of currency wars are divisive and counterproductive. We should expect increased inflation due to global monetary easing to fight the currency wars. It is also true that currency wars lead quickly to trade wars which can reduce global output and break the global economy into distinct trading and currency blocs. Many countries are now fighting the currency wars, but the U.S. is primarily responsible for this outbreak because the U.S. abandoned its sound dollar policy in 2010.
Reality Check: Sergey Glaziev, economy adviser of Vladimir Putin, recently said that " unconstrained monetary emission is a form of legalized aggression" because it allows some countries to use their "printing presses" to acquire real assets and at the same time finance their own "pyramids of debt". Do you agree with this view?
James Rickards: Yes. The U.S. can be aggressive in the currency wars because it maintains the leading reserve currency, the dollar, and it can print dollars at will to promote U.S. goals. Many other countries such as Brazil, South Korea, Taiwan, Mexico and others do not have reserve currencies and are put to the difficult choice of either maintaining a peg to the dollar, which causes inflation, or allowing their currencies to appreciate, which hurts exports. So we are seeing worldwide distress and dislocation because of the U.S. easy money policies. The same easy money policies are being pursued by Japan and the UK. The losers in the currency wars so far are the BRICS and other emerging markets. In the end, the entire world will lose because of inflation and a collapse of confidence in the paper money system.
Reality Check: How would you comment on the proposal made by David Kemper, Chairman, President and Chief Executive Officer of Commerce Bancshares, Inc., and past President of the Federal Advisory Council of the Federal Reserve:
“I propose the Federal Open Market Committee’s next move be to take our central bank to a whole new level—a 2013 campaign that I call QE Cubed. Why not expand the Fed balance sheet exponentially, from its current $3 trillion to $33 trillion? Earning an extra 3 percent on another $30 trillion in bonds would allow the Fed to return an additional $900 billion to the Treasury—thus wiping out most of our federal deficit while avoiding actually having to do anything about current government spending”?
James Rickards: This view is consistent with that espoused by so-called Modern Monetary Theorists and is not far removed from views expressed publicly by President Charles Evans of the Chicago Fed and President Dennis Lockhart of the Atlanta Fed among others. This view is highly flawed because it assumes that money supply is a linear dynamic that can be dialed-up or dialed-down at will by central bankers in a predictable fashion with predictable results. In fact, monetary policy exists in a critical state dynamic. If it is pushed too far, it will "go critical" and catastrophically collapse in the same way that uranium can "go critical" and turn into a nuclear explosion when put into a certain configuration. Proponents of unlimited monetary easing are risking a sudden and unpredictable collapse in the international monetary system.
Reality Check: According to mainstream economists, if a country borrows money and stimulates consumption, this consumption is supposed to start a "virtuous cycle of growth" that is supposed to replace the "vicious cycle of deflation". During the last several years we've seen multiple massive stimulus programs but a "virtuous cycle" is nowhere to be seen. Why? Where are the "green shoots"?
James Rickards: This theory is based on Keynesianism and is widely discredited. So-called "stimulus" programs to not stimulate. They rob the private sector of valuable capital and waste it on politically motivated projects of little value.
Reality Check: Mainstream economists often say that the American currency system is designed in such a way that the US cannot go bankrupt and that the “dollar system” in which the dollar is the primary reserve currency of the world is irreplaceable. Do you think that the American leadership believes in the invulnerability of the dollar system?
James Rickards: American leaders do believe in the invulnerability of the dollar system, but they are misguided. The dollar system is based on confidence in policy. Once that confidence is lost, the dollar system can collapse very quickly as it almost did in 1980.
Reality Check: German Bundesbank began the process of gold repatriation from the New York Fed and Banque de France. Why are the Germans doing it now? Bill Gross of PIMCO tweeted that this is a sign of mistrust between the world’s central banks. Do you agree with this view?
James Rickards: Yes. As long as foreign gold is left in New York it can be confiscated by the United States in the event of an economic emergency. It is far more prudent for each gold power nation to keep most of its gold at home. A modest portion might be left in London or New York for trading purposes.
Reality Check: Several central banks, including Russia’s Central Bank have started gold acquisition programs. This situation presents a stark contrast to the situation when European central banks used to sell their gold. What has changed? Why is gold becoming popular with the central banks of the BRICS?
James Rickards: Gold was officially demonetized by the IMF in 1973 shortly after the U.S. broke with the Bretton Woods gold standard in 1971. What we are witnessing today is the slow remonetization of gold. This is evidenced by the following events:
* Russia has increased its gold reserves 50% in the past four years.
* China has increased its gold reserves over 200% in the past four years.
* Germany is requesting that its gold kept in New York and Paris be delivered to Frankfurt.
* Venezuela has repatriated its gold from London to Caracas.
* Azerbaijan has repatriated its gold from London to Baku.
* The Netherlands is considering repatriating its gold from New York, as are others.
* Vietnam, Philippines, Mexico and others have all made significant gold purchases recently.
This is a slow-motion run on the bank in terms of gold reserves. This can be expected to accelerate. There is no reason for a central bank to acquire gold or demand physical possession unless you believe that gold is money. If gold is money, then the implications for the price of gold based on the ratio of gold to paper money are an implied price of $7,000 per ounce, or higher.
Reality Check: Your book, Currency Wars: The Making of the Next Global Crisis talks about the currency wars phenomenon. A war is supposed to have a winner. Who will be the winners of the global currency wars?
James Rickards: The only winners in a currency war are those who refuse to fight. Countries that fight the currency wars will all lose due to inflation. Countries and currency blocs that do not fight the currency wars and maintain a strong currency and promote low corporate taxes and a sound business environment will be the winners. These winning countries include Germany and other members of the European Monetary System, Australia, Canada and Singapore.
Reality Check: If you were to pick only one asset class in which you could invest for the year 2013, what would it be and why?
James Rickards: Gold, because it performs well in conditions of inflation and deflation.