Currency Wars_ The Making of the Next Global Crisis - James Rickards [19]
Over the next few weeks, with the recollections of the financial game fresh in my mind, I couldn’t help but be reminded that a real currency war had already broken out and was being fought hard around the world. In March 2009, no one was yet using the term “currency war”—that would come later—but still all the signs were there. The Federal Reserve’s first quantitative easing program, so-called QE, had begun in November 2008 with the not so hidden goal of weakening the dollar on foreign exchange markets. The Fed’s cheap-dollar policies were having their intended effects.
Over the two years following the war game, stocks and gold both rose over 85 percent. Some analysts were initially baffled by the positive correlation of stocks and gold until they realized that exactly the same thing had happened in April 1933 when FDR smashed the dollar against sterling during the “beggar-thy-neighbor” currency wars of the Great Depression. The massive price gains in stocks and gold in 1933 and 2010 were just the flip side of trashing the dollar. The assets weren’t worth more intrinsically—it just took more dollars to buy them because the dollar had been devalued.
In the world outside the war room, trashing the dollar was the easy part. The hard part was calculating what would come next, when exporters like China, Russia and Saudi Arabia tried to protect their interests by raising prices or avoiding U.S. dollar paper assets. That’s when the currency wars would really heat up, yet that was still in the future from the perspective of the war game in 2009.
One lesson of the war game for the Pentagon was that, even if the dollar collapsed altogether, the United States still had massive gold reserves to fall back on. It is an intriguing fact that almost all of the U.S. gold hoard is located not in civilian bank vaults but on military bases—Fort Knox in Kentucky and West Point along the Hudson River in New York. That says something about the connection of national wealth and national security.
The 1930s currency devaluations led quickly to Japan’s invasions in Asia and Germany’s attacks in Europe. The 1970s currency devaluations led quickly to the worst period of inflation in modern history. The United States was now entering a period of financial danger, similar to the 1930s and the 1970s. The Pentagon’s financial war game was ahead of its time, but only slightly, and seemed like part of the preparation for more dire days ahead—more of a beginning than the end to a new world of financial threats.
PART TWO
CURRENCY WARS
CHAPTER 3
Reflections on a Golden Age
“We’re in the midst of an international currency war.”
Guido Mantega, Finance Minister of Brazil,
September 27, 2010
“I don’t like the expression . . . currency war.”
Dominique Strauss-Kahn, Managing Director, IMF,
November 18, 2010
Acurrency war, fought by one country through competitive devaluations of its currency against others, is one of the most destructive and feared outcomes in international economics. It revives ghosts of the Great Depression, when nations engaged in beggar-thy-neighbor devaluations and imposed tariffs that collapsed world trade. It recalls the 1970s, when the dollar price of oil quadrupled because of U.S. efforts to weaken the dollar by breaking its link to gold. Finally, it reminds one of crises in UK pounds sterling in 1992, Mexican pesos in 1994 and the Russian ruble in 1998, among other disruptions. Whether prolonged or acute, these and other currency crises are associated with stagnation, inflation, austerity, financial panic and other painful economic outcomes. Nothing positive ever comes from a currency war.
So it was shocking and disturbing to global financial elites to hear the Brazilian finance minister, Guido Mantega, flatly declare in late September 2010 that a new