The beginning of the end
By Steven Martinovich
It has become much in vogue recently to question the long-term sustainability of the U.S. dollar and – by definition – the world economy. From television commercials inviting us to a web site to watch apocalyptic warnings to more academic arguments the message has been pretty clear: These are the end times for the dollar and failing to act will assuredly mean the end of the its role as primary global currency and American economic dominance and prestige. The attributed reasons for this decline may vary depending on the pundit but end result is pretty much the same.
James Rickards, who has an extraordinary educational and career resume, recently waded into the debate with the compelling Currency Wars: The Making of the Next Global Crisis and his effort may be the most distressing yet. Rather than “simple” global economic dislocations which end with the United States assuming a second-tier economic role, civilization itself may collapse due to an unfortunate confluence of factors which includes the growing complexity of interconnected economies and civilization, out of control growth of government spending and debt, irresponsible economic policies and currency manipulation, among others.
Rickards argues that we’re currently entering the first stages of what argues is the third currency war – the first two occurred in the 20th century – with the primary combatants consisting of the U.S., China and Europe. This currency war, he writes, “will be truly global and fought on a more massive scale than ever. Currency War III will include both official and private players. ... Today the risk is not just of devaluation of one currency against another or a rise in the price of gold. Today the risk is the collapse of the monetary system itself – a loss of confidence in paper currencies and a massive flight to hard assets.” That collapse could include civilization itself, he states at several points.
The primary catalyst of this latest currency war, Rickards writes, is the ongoing erosion of the U.S. dollar thanks to irresponsible American government spending, a lack of tangible mooring of the U.S. dollar and an American financial services sector that is seemingly allowed to do as it wishes. To complicate matters, stresses in the Chinese economy and that nation’s resulting manipulation of the value of the yuan are impacting America’s ability to use its traditional weapons to paper over its economic weaknesses. In Europe, codependence on the U.S. dollar and decades of fiscal laxity are threatening to bring down the Eurozone.
Rickards brings all available weapons to bear in an effort to lay out his case. Everything from economics, politics, complexity theory and history are marshalled to support his analysis of the issues and possible solutions. Those solutions include financial industry regulations which include breaking up banks into smaller firms and limiting their abilities to traditional banking services, a reigning in of the size and scope of government, and a return to a modified gold standard. His agenda essentially calls for a leap backwards for Wall Street and the nation’s political elite.
Currency Wars is very much a worse case effort. Although Rickards does lay out some scenarios where utter collapse can be avoided, “soft landings” in the parlance of economists, it’s fairly clear that he doesn’t hold out much hope that his prescriptions will be taken before it’s too late. The forces in control of the world’s economic destiny are wedded to the very theories that have brought us to the state we’re in and the next economic crisis will, as he states at one point, merely see them add gasoline to the fire. The same tools will be used to combat a collapse which will inevitably see more money spent, government increase and further erosion in the faith of the paper currency.
Critics will point out that we’ve been able to deal with past economic crises with the standard toolbox employed by central banks and governments but Rickards makes a credible argument that the favoured hammer isn’t enough for the new nail. Even if Rickards’ predictions fail to come to pass, that doesn’t mean that he’s wrong about the disease. It’s clear that governments around the world are on unsustainable paths and while we may avoid civilizational collapse we’re well-placed to experience an extraordinary hangover from decades of fiscal and political insanity.
Steven Martinovich is the founder and editor in chief of Enter Stage Right.
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