Currency Wars_ The Making of the Next Global Crisis - James Rickards [133]
Conclusion
The path of the dollar is unsustainable and therefore the dollar will not be sustained. In time, the dollar will join a crowd of multiple reserve currencies, be subordinated to SDRs, be rejuvenated by gold or descend into chaos with both redemptive and terminal possibilities. Of these four outcomes, the use of multiple reserve currencies seems least likely because it solves none of the problems of debt and deficits, but merely moves the problem around from country to country in a continuation of the classic currency war. The SDR solution is being promoted by some global elites in the G20 finance ministries and IMF executive suites, yet to the extent that it simply replaces national paper currencies with a global paper currency, it risks its own rejection and instability in time. A studied, expertly implemented return to the gold standard offers the best chance of stability but commands so little academic respect as to be a nonstarter in current debates. This leaves chaos as a strong possibility. Within chaos, however, there is a second chance to go for gold, albeit in a sudden, unstudied way. Finally, there is just chaos, followed by something worse.
The collapse of the dollar might be a particularly trying catastrophe of its own or occur as part of an even larger collapse of civilization. It might merely mark a turning away from the excesses of paper money or be a milepost on the way to a maelstrom. None of this is inevitable, yet all of it is possible.
It is not too late to step back from the brink of catastrophic collapse. Complexity starts out as a friend and ends up the enemy. Once complexity and large scale are seen to be the danger, the solution is a mixture of descaling, compartmentalization and simplification. This is why a ship whose hold is broken up by bulkheads is less likely to sink than a vessel with a single large hold. This is why forest rangers break up large tracts of timber with barren firebreaks. Every carpenter works by the phrase “The right tool for the right job.” Economists should be no less diligent than carpenters in selecting the right tools.
As applied to capital and currency markets, the correct approach is to break up big banks and limit their activities to deposit taking, consumer and commercial loans, trade finance, payments, letters of credit and a few other useful services. Proprietary trading, underwriting and dealing should be banned from banking and confined to brokers and hedge funds. The idea that large banks are needed to do large deals is nonsense. Syndicates were invented for exactly this purpose and are excellent at spreading risk.
Derivatives should be banned except for standardized exchange-traded futures with daily margin and well-capitalized clearinghouses. Derivatives do not spread risk; they multiply it and concentrate it in a few too-big-to-fail hands. Derivatives do not serve customers; they serve banks and dealers through high fees and poorly understood terms. The models used to manage derivatives risk do not work and never will work because of the focus on net risk rather than gross risk.
A flexible gold standard should be adopted to reduce uncertainty about inflation, interest rates and exchange rates. Once businesses and investors have greater certainty and price stability, they can then take greater risk on new investments. There is enough uncertainty in entrepreneurship without adding inflation, deflation, interest rates and exchange rates to the list of barriers standing in the way of innovation. The U.S. economy as guided by the Fed has seen continual asset bubbles, crashes, panics, booms and busts in the forty years since the United States left gold. It is time to diminish the role of finance and empower the role of commerce. Gold produces the greatest price stability in prices and asset values and