Book review

On

“Currency war”

Submitted by:

Priyanka Khadka

MBA V

Section ‘A’

Submitted to:

K.B Manandar

Faculty of international finance

ACE INSTITUTE OF MANAGEMENT

Introduction:

In the complex realm of global finance, where economies and currencies are interwoven, lies a
hidden but immensely impactful battlefield—the currency war. In "Currency War: The Making
of the Next Global Crisis," James Rickards, a seasoned financial expert with extensive
experience in the field, takes readers on a thought-provoking journey through the intricacies of
international economics and the looming specter of currency wars. As a Senior MD at Tangent
Capital Partners LLC and a prominent figure in the financial industry, Rickards is well-
positioned to offer a compelling analysis of the risks and consequences of these covert financial
battles.

This book serves as both a warning and an exposé, shedding light on the often-overlooked forces
that shape our global economic stability. Rickards argues convincingly that the next major global
crisis may not manifest in the familiar forms of stock market crashes or banking meltdowns, but
rather in the less visible, yet equally destructive, form of currency wars. As we embark on this
journey, we will explore the historical origins of these currency conflicts, tracing them back to
the Great Depression, and unravel the complex web of strategies nations employ to manipulate
their currencies for economic advantage.

Rickards' work provides invaluable insights into the inner workings of the international monetary
system, demystifying complex economic concepts for a wide range of readers. Through
accessible explanations and compelling arguments, he dissects the potential risks that threaten
our global financial stability. In the chapters that follow, we will delve into the book's content,
analyzing each chapter's contribution to our understanding of currency wars and their
ramifications. Join us as we explore the past, present, and future of this financial battleground
and consider the urgent need for international cooperation to avert a looming global financial
crisis.

Chapter 1: Prewar

In this opening chapter, James Rickards sets the stage for the exploration of currency wars. He
introduces the historical backdrop, revealing that currency wars are not a new phenomenon but
have deep roots dating back to the Great Depression. Rickards hints at the dire consequences that
may await if currency wars are not addressed. The chapter also offers a glimpse into the author's
personal involvement in a significant financial seminar related to currency wars, emphasizing the
gravity of the issue.

Chapter 2: Financial War

In this chapter, Rickards continues his narrative of the ongoing war game conducted at the APL,
elucidating the game's mechanics. Notably, despite the majority of participants dismissing their
theories, Rickards is taken aback when Vladimir Putin voices Russia's concerns, advocating for
the abandonment of the dollar as the world's primary reserve currency in favor of a commodity-
backed currency. This concept piques Rickards' interest, as he recognizes that the first country to
transition from the current system could gain a substantial advantage. He skillfully describes the
unfolding of the war game, underscoring the Pentagon's unpreparedness for an imminent
currency war. This exercise serves as a valuable lesson, alerting the Pentagon to the fact that,
even in the event of a complete collapse of the dollar, substantial gold reserves offer a measure of
security. Nevertheless, it becomes increasingly apparent that the United States is rapidly
approaching a financial peril reminiscent of the challenges faced in the 1930s and 1970s.

Chapter 3: Reflections on a Golden Age

In this section, Rickards delves into the ramifications of currency wars, using real-world
examples to illustrate their detrimental effects on national economies. He emphasizes that
currency wars can be triggered by factors like inflation, stagnation, and financial crises, all of
which spell disaster for a country's economic health. Rickards also notes that financial experts
often avoid the term "currency war," opting for milder terms like "adjustment" or "rebalancing"
to describe their efforts to reset exchange rates. He highlights the limitations of a low exchange
rate, as it relies on comparison with another currency and can lead to protectionist policies when
tariffs are introduced. Despite the terminology, Rickards stresses the ongoing tension in
international circles, especially as nations vie to gain an advantage through currency devaluation.
Additionally, Rickards explores the benefits of the Classical Gold Standard and its impact on
countries like Japan, Germany, and the United States, concluding with the establishment of the
Federal Reserve and the potential for future currency wars amid the uncertainties of the 1920s.
Chapter 4: Currency War 1 (1921-1936)

In this section, Rickards delves into the repercussions of the first currency war, spanning from
1921 to 1936. He details how Germany, aiming to settle World War I reparations in foreign
currency rather than its own Mark, resorted to excessive banknote printing, resulting in
hyperinflation and a dramatic devaluation of the Mark against the US dollar. By 1925, the US
lifted its gold export ban and established a new price of $35 per ounce, sparking a series of
currency devaluations and renewed gold sales by various nations. Unfortunately, these actions
came too late to prevent the economic devastation that contributed to the rise of the Nazi party in
Germany. Japan also faced turmoil as a military faction took control, launching conquests across
East Asia. By 1942, global chaos reigned, with countries struggling between the Axis and Allied
powers, and England grappling with deflation and high unemployment. Despite its substantial
gold reserves, the US failed in its international responsibilities by tightening credit conditions
instead of easing them.

Chapter 5: Currency War II (1967-1987)

Rickards outlines the second currency war, spanning from 1967 to 1987, and highlights the
impact of the "Nixon shock," which posed a threat to numerous economies. In 1971, President
Nixon introduced the New Economic Policy, involving price controls, immediate wage hikes,
and the closure of the gold window, accompanied by a significant 10% import tax. This move
prevented other countries from converting their money into gold, drawing international criticism
for potentially breaching international guidelines. Many mistakenly attributed the weakening
dollar to rising inflation, while Nixon blamed international speculators, when in fact, it was
driven by the US deficit and his own policies aimed at depreciating the dollar. However, within
two years, the US found itself in its worst recession since World War II, marked by collapsing
GDP, soaring unemployment, an oil crisis, inflation woes, and a substantial stock market crash.
This experience underscored the fallacy that devaluation and currency wars lead to economic
growth and job creation, instead of being a breeding ground for inflation.
Chapter 6: Currency War III (2010-)

This chapter delves into currency wars' intricacies, involving various participants like traders,
banks, automated systems, and institutions. The global economy revolves around three major
currencies: the US dollar, Euro, and Chinese Yuan, constituting 60% of global GDP. The Sino-
US relationship is pivotal, with China pegging its currency to the US dollar, promoting trade and
accumulating US securities. Rickards anticipates a third, potentially more severe, currency war
due to growing economies, involving numerous players and expanded global reach, increasing
the risk of collapse. The primary risk today is the fear of a monetary system breakdown, eroding
trust in paper currencies and driving people toward tangible assets. Rickards suggests this might
be the last currency war, with catastrophic consequences potentially ending such conflicts.

Chapter 7: The G20 Solution

Rickards discusses the second currency war from 1967 to 1987, triggered by the "Nixon shock"
in 1971. Nixon's economic policy involved price controls, wage freezes, closing the gold
window, and imposing a 10% import tax. This led to global speculation about policy compliance.
Misinterpreting inflation as the dollar's main problem, Nixon blamed international speculators,
neglecting the US deficit and his policy's impact. The consequences included the worst post-
World War II recession within two years, marked by GDP decline, high unemployment, an oil
crisis, inflation, and a stock market crash. Devaluation strategies failed to stimulate growth and
job creation, reinforcing that currency wars tend to produce inflation.

Chapter 8: Globalization and State Capital

Rickards emphasizes that a nation's currency vulnerability can lead to widespread devastation if
it collapses. While various markets may appear complex, they are interconnected and dependent
on currency stability. For example, stock markets may crash while bonds, gold, and oil markets
thrive, but they all rely on stable currencies. Currency wars emerge as countries recognize the
potential economic chaos a currency collapse can cause. The global landscape is evolving, with
companies operating globally, seeking the most favorable capital costs. State-owned and
subsidized firms in countries like China and Saudi Arabia gain currency advantages, prompting
discussions about fairness, given past US bank bailouts during the financial crisis.
Chapter 9: The Misuse of Economics

This chapter discusses the role of economists and the challenges facing economics. Economists,
often seen as experts with complex models and theories, have faced criticism due to recent
failures. Rickards highlights shortcomings in areas like Federal Reserve Policy, monetarism,
Keynesianism, and financial economics. He stresses the need to understand these failures, as they
have contributed to economic stagnation. Rickards also notes that increasing the money supply
has limits, leading to currency and asset inflation.

chapter 10: The Misuse of Economics (Continued)

In brief, as traditional economic theories falter, new paradigms like complexity theory and
behavioral economics are emerging. These offer fresh insights into addressing economic
challenges. Complexity theory, applied in various fields, including finance, acknowledges the
intricate interplay of market dynamics and human behavior. Behavioral economics,
understanding human irrationality, plays a vital role in utilizing complexity theory. Despite these
advances, some academics cling to oversimplified models based on the efficient market
hypothesis, which fails to capture the complexity of human behavior.

Chapter 11: Currencies, Capital, and Complexity

While the money-as-energy model based on complexity theory has its merits, it finds limited
favor among economists today. Mainstream economists are cautious about embracing behavioral
science. Central bankers acknowledge the dollar's weakness but don't anticipate an abrupt
collapse. However, such a collapse would have widespread international repercussions, given
that 61% of global currency reserves are held in dollars. Rickards presents four scenarios
regarding the dollar's fate, labeling them the "Four Horsemen of the Dollar Apocalypse." These
scenarios encompass multiple reserve currencies, a return to gold, chaos, and special drawing
rights, with Rickards providing detailed analyses of each.

Conclusion: The Future Looks Bleak

In the concluding chapter, Rickards asserts that we are heading toward a major collapse of the
dollar, although the exact outcome remains uncertain. He outlines four potential scenarios—
multiple reserve currencies, gold, chaos, and special drawing rights—and provides detailed
analyses of each. The chapter underscores the gravity of the situation and the need for vigilance
in a rapidly changing financial landscape.