My last blog post was a review of Eswar S Prasad’s The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance (2014) (see review here). As I mentioned, Prasad admits the possibility of a dollar crash but is hesitant to work out the triggers. This is carried forward by financial expert James Rickards in The Death of Money: The Coming Collapse of the International Monetary System (2014). Rickards, an aficionado of complexity theory, intrepidly peers through the curtain and forecasts what looms in front of us.
“A depression’s natural state is deflation,” states Rickards. The US has been battling a deflation since the 2008 crisis. “Deflation is every central bank’s nemesis because it is difficult to reverse, impossible to tax, and makes sovereign debt unpayable by increasing the real value of debt,” according to Rickards. Hence the Fed has carried out quantitative easing in an attempt to reinflate the economy.
As Rickards puts it: “The Fed’s manipulations have left it in a position of a tightrope walker with no net, one who must exert all his energy in a concentrated effort just to keep moving forward, even as the slightest slip or unexpected gust could cause a catastrophic end to the enterprise. The Fed must promote inflation (while not acknowledging it) and must inflate asset prices (without causing bubbles to burst). It must exude confidence while having no idea whether its policies will work or when they might end.”
Rickards analyzes the state of the world in trying to predict the future. And the picture is not pretty. China is on the verge of a collapse due to its malinvestments and overdependence on “wealth management products”. The European Union “is like an aircraft with a single wing; it can choose to remain grounded, or it can build the other wing. Efforts to deal with the immediate crises in 2010 and 2011 … have been sufficient to avoid a collapse, but they are not sufficient to correct the fundamental contradictions in the design of the euro and the ECB.”
The only alternative to the dollar as reserve currency is the IMF printing its special drawing rights (SDRs) which might take the form of world money. Even that is not a satisfactory solution since the SDRs are also fiat money backed by nothing.
The world is not ready to revert back to a gold standard but may be forced to do so sooner than later due to unavoidable circumstances. This will imply a steep increase in price of gold with resulting quantum leaps in prices of oil and food grains.
The Death of Money is a gripping read and lived up to my expectations by being as interesting as its prequel Currency Wars (see review here).
“A depression’s natural state is deflation,” states Rickards. The US has been battling a deflation since the 2008 crisis. “Deflation is every central bank’s nemesis because it is difficult to reverse, impossible to tax, and makes sovereign debt unpayable by increasing the real value of debt,” according to Rickards. Hence the Fed has carried out quantitative easing in an attempt to reinflate the economy.
As Rickards puts it: “The Fed’s manipulations have left it in a position of a tightrope walker with no net, one who must exert all his energy in a concentrated effort just to keep moving forward, even as the slightest slip or unexpected gust could cause a catastrophic end to the enterprise. The Fed must promote inflation (while not acknowledging it) and must inflate asset prices (without causing bubbles to burst). It must exude confidence while having no idea whether its policies will work or when they might end.”
Rickards analyzes the state of the world in trying to predict the future. And the picture is not pretty. China is on the verge of a collapse due to its malinvestments and overdependence on “wealth management products”. The European Union “is like an aircraft with a single wing; it can choose to remain grounded, or it can build the other wing. Efforts to deal with the immediate crises in 2010 and 2011 … have been sufficient to avoid a collapse, but they are not sufficient to correct the fundamental contradictions in the design of the euro and the ECB.”
The only alternative to the dollar as reserve currency is the IMF printing its special drawing rights (SDRs) which might take the form of world money. Even that is not a satisfactory solution since the SDRs are also fiat money backed by nothing.
The world is not ready to revert back to a gold standard but may be forced to do so sooner than later due to unavoidable circumstances. This will imply a steep increase in price of gold with resulting quantum leaps in prices of oil and food grains.
The Death of Money is a gripping read and lived up to my expectations by being as interesting as its prequel Currency Wars (see review here).
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