Currency Wars_ The Making of the Next Global Crisis - James Rickards [53]
The world is now entering its third currency war in less than one hundred years. Whether it ends tragically as in CWI or is managed to a soft landing as in CWII remains to be seen. What is clear is that—considering the growth since the 1980s of national economies, money printing and leverage through derivatives—this currency war will be truly global and fought on a more massive scale than ever. Currency War III will include both official and private players. This expansion in size, geography and participation exponentially increases the risk of collapse. 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. Given these risks of catastrophic failure, Currency War III may be the last currency war—or, to paraphrase Woodrow Wilson, the war to end all currency wars.
The Pacific Theater
The struggle between China and the United States, between the yuan and the dollar, is the centerpiece of global finance today and the main front in Currency War III. The evolution of this struggle begins with the emergence of China from a quarter century of economic isolation, social chaos and the doctrinaire suppression of free markets by the communist regime.
The modern Chinese economic miracle began in January 1975 with the Four Modernizations plan announced by Premier Zhou Enlai, which affected agriculture, industry, defense and technology. Implementation was delayed, however, due to disruptions caused by Zhou’s death in January 1976, followed by the death of Communist Party chairman Mao Zedong in September of that year and the arrest one month later of the radical Gang of Four, including Madame Mao, after a brief reign.
Mao’s designated successor, Hua Guofeng, carried forward Zhou’s vision and made a definitive break with the Maoist past at a National Party Congress in December 1978. Hua was aided in this by the recently rehabilitated and soon to be dominant Deng Xiaoping. Real change began the next year, followed by a period of experimentation and pilot programs aimed at increasing autonomy in decision making on farms and in factories. In 1979, China took the landmark decision to create four special economic zones offering favorable work rules, reduced regulation and tax benefits designed to attract foreign investment, especially in manufacturing, assembly and textile industries. They were the precursors of a much larger program of economic development zones launched in 1984 involving most of the large coastal cities in eastern China. Although China grew rapidly in percentage terms in the mid-1980s, it was working from a low base and neither its currency nor its bilateral trade relations with major countries such as the United States and Germany gave much cause for concern.
Today’s currency war is marked by claims of Chinese undervaluation, yet as late as 1983 the yuan was massively overvalued at a rate of 2.8 yuan to one dollar. However, this was at a time when exports were a relatively small part of Chinese GDP and the leadership was more focused on cheap imports to develop infrastructure. As the export sector grew, China engaged in a series of six devaluations over ten years so that, by 1993, the yuan had been cheapened to a level of 5.32 yuan to the dollar. Then, on January 1, 1994, China announced a reformed system of foreign exchange and massively devalued the yuan to 8.7 to the dollar. That shock caused the U.S. Treasury to label China a currency “manipulator” pursuant to the 1988 Trade Act, which requires the Treasury to single out countries that are using exchange rates to gain unfair advantage in international trade. That was the last