Currency Wars: Much Ado About Nothing New

Gary North

Feb. 9, 2012

Let it not be said that I do not appreciate a great marketing campaign when I see one. Jim Rickards' book promoter is running a great campaign.

The topic -- currency wars -- is about as unique as regional wars. There are always dozens of regional wars going on. There are always currency wars.

What was mercantilism, other than currency wars? It was marked by government attempts to control the flow of gold out of the country. These wars ended badly for those who pursued the policies most aggressively.

I say "ended." Of course, mercantilism is always with us. So are currency wars.

Why? Because governments are about coercion. Currencies are controlled by national governments. Hence, there are always currency wars.

Ho, hum. Nothing new under the sun.

But Rickards is aggressively selling his book, Currency Wars. So, he gets lots of interviews.

He has a theory of a series of currency wars in the 20th century. He says they lasted 15 years or so. This is just plain silly. They last forever. They are never settled. They will never be settled for as long as any government exercises sovereignty over money.

Yes, there are currency wars. So, what else is new?

He was interviewed by Peter Schiff. It's here.

Peter: What do you see as Washington's end-game for the present currency war? What is their best-case scenario?

James: Washington's best-case scenario is that banks gradually heal by making leveraged profits on the spreads between low-cost deposits and safe government bonds. These profits are then a cushion to absorb losses on bad assets and, eventually, the system becomes healthy again and can start the lending-and-spending game over again.

I view this as unlikely because the debts are so great, the time needed so long, and the deflationary forces so strong that the banks will not recover before the needed money-printing drives the system over a cliff -- through a loss of confidence in the dollar and other paper currencies. Peter: I don't think this scenario is likely either, but say it were... would it be healthy for the American economy to have to carry all these zombie banks that depend on subsidies for survival? Wouldn't it be better to just let the toxic assets and toxic banks flush out of the system?

James: I agree completely. There's a model for this in the 1919-1920 depression, when the US government actually ran a balanced budget and the private sector was left to clean up the mess. The depression was over in 18 months and the US then set out on one of its strongest decades of growth ever. Today, in contrast, we have the government intervening everywhere, with the result that we should expect the current depression to last for years -- possibly a decade.

Peter: How long do you think Currency War III will last?

James: History shows that Currency War I lasted 15 years and Currency War II lasted 20 years. There is no reason to believe that Currency War III will be brief. It's difficult to say, but it should last 5 years at least, possibly much longer.

A lot longer. Forever. Until nations get government out of the currency business, there will be currency wars.

There is no Currency War III. There is just one long currency war. It escalated in 1914, when Europe went off the gold coin standard and never returned. There was a fake gold standard, beginning in 1921: the gold-exchange standard. It ended on August 15, 1971, when Nixon killed it.

Roosevelt killed the domestic gold coin standard in 1933.

Any gold standard that can be killed by unilateral decree by a President was a government gold standard from day one. It is not worth the paper it's written on.

Peter: From my perspective, what is unique about a currency war is that the object is to inflict damage on yourself, and the country often described as the winner is actually the biggest loser, because they've devalued their currency the most. Which currency do you think will come out of this war the strongest?

James: I expect Europe and the euro will emerge the strongest after this currency war by doing the most to maintain the value of its currency while focusing on economic fundamentals, rather than quick fixes through devaluation. This is because the US and China are both currency manipulators out to reduce the value of their currencies. In the zero-sum world of currency wars, if the dollar and yuan are both down or flat, the euro must be going up. This is why the euro has not acted in accord with market expectations of its collapse. The other reason the euro is strong and getting stronger is because it is backed by 10,000 tons of gold -- even more than the US This is a source of strength for the euro.

The euro? With the European Central Bank printing billions of euros to lend to commercial banks to buy busted sovereign debt? Give me a break!

Central banks are all run by Keynesians. Central bankers are all inflationists. They are all promoters of fiat money.

I think the central bank that stops creating any fiat money will win the currency war until it starts printing again. The price of this policy: Great Depression II: at least a decade of corporate and personal bankruptcies, price deflation, and national default on the debt.

Europe? I don't think so.

Peter: You and I both connect the Fed's dollar-printing with the recent revolutions in the Middle East. This is because our inflation is being exported overseas and driving up prices for food and fuel in third-world countries.

Nonsense. There can be no exporting of inflation or deflation. All domestic monetary policies are set by the central bank.

As for food prices, the USA is the largest food exporter on earth. It is holding down food prices internationally.

What do you think will happen domestically when all this inflation comes home to roost?

More nonsense. The money never leaves a country's national bank system. It can't. Monetary policy is set domestically. No money will "come home to roost." Except for paper dollars used in third world countries as black market currencies, the money never left. It can't come home. It is home.

James: The Fed will allow the inflation to grow in the US because it is the only way out of the non-payable debt.

Initially, American investors will be happy because the inflation will be accompanied by rising stock prices. However, over time, the capital-destroying nature of inflation will become apparent -- and markets will collapse. This will look like a replay of the 1970s.

Excuse me? The 1970s were the greatest era of price inflation in US history. The stock market fell.

Peter: How long do you think China's elites will put up with the Fed's inflationary agenda before they start dumping their US dollar assets?

James: The Chinese will never "dump" assets because this could cause the US to freeze their accounts. However, the Chinese will shorten the maturity structure of those assets to reduce volatility, diversify assets by reallocating new reserves towards euro and yen, increase their gold holdings, and engage in direct investment in hard assets such as mines, farmland, railroads, etc. All of these developments are happening now and the tempo will increase in future.

Any American who tells you what Chinese Communist politicians will surely do is blowing smoke.

Peter: What, if any, silver lining do you see for us in the future?

James: I continue to have faith in the democratic process and the wisdom of the American people. Through elections, we might be able to change leadership and implement new policies before it's too late.

Trust American democracy? He is not only blowing smoke, he is inhaling.

Currency wars will continue for as long as politicians and bureaucrats have sovereignty over money. There will be no clear-cut winner in the long run.