Wednesday, April 16, 2014

Currency wars and the Fed: Inflation and a new monetary system

From page A1 | December 05, 2012 | 6 Comments

Currency Wars300

Currency Wars

This is the third installment of a three-part series on the Fed, inflation and currency wars.

Upheavals in the economic order are starting to undermine the stability of the world’s monetary system. Or at least that appears to be what we are witnessing, according to James Rickards, who is the author of the best-selling book “Currency Wars: The Making of the Next Global Crisis.”

In an interview conducted in November, Rickards said the world is currently in the middle of a currency war that started in 2009-10. He said it was formally kicked off when U.S. Treasury Secretary Timothy Geithner told members of a G20 Summit that it was the goal of the U.S. to double its exports in five years.

“Well that sounds good,” said Rickards, “but how are you going to double exports in five years and the answer is … you cheapen your currency 30 to 40 percent. Quantitative easing (QE) is just a fancy word for printing money. It’s just a different way of debasing the currency.”

Rickards said that since then, the Federal Reserve and Treasury Department have been pursuing policies in pursuit of that objective including offering zero interest rates and QE to cheapen the dollar.

However, cheapening the dollar has the effect of putting pressure on other countries as their exports become more expensive. This in turn sets up a trade war. Rickards noted that the “pushing and shoving between the U.S. and China” over trade and currency issues is spreading to other countries and becoming more intense.

Currency debasement and inflation

Rickards lays the blame for debasing the country’s currency on the doorstep of the Federal Reserve and the government.

He says the hidden agenda behind the Fed’s actions is to generate inflation so the value of debt is reduced in real terms and we can afford to pay it. He said the usual way of getting inflation is to cut interest rates, but that has failed because rates are already at zero. In addition, no one wants to borrow and the banks don’t want to lend.

Another way is to cheapen your currency so imports become more expensive and exports less expensive. “The endgame is to get inflation to reduce the value of our debt so we can afford to pay it,” he said.

Currently the inflation that is being generated from all the money printing is being exported but Rickards said eventually it will come home. “For the time being, inflation is going abroad and is contributing to inflation in other countries because they are trying to peg their currency to the dollar and the way it works, we print more dollars and they find their way abroad in the form of purchasing their exports or direct foreign investments or hot money capital flows. If you’re China or another country and we’re trying to maintain your peg to the dollar, you have to print more of your own currency to soak up the dollars. The faster we print money, the faster other countries have to print to soak up dollars if they want to maintain the peg to the dollar.” Rickards said many countries may be forced to let their currencies appreciate, which means inflation will come back to the U.S. initially in the form of higher prices for imports and later in the supply chain.

America’s exorbitant privilege

As bad as the economy is in America, we are currently not suffering the same level of “austerity” that other countries are because the dollar is the world’s reserve currency. What that means, Rickards said, is that if you’re Nigeria, for example, you have to pay for goods and services in dollars and you have to earn them through exports. “But the U.S. can buy things just using its currency. It’s as though you decided you want to go out and buy something and you just print up some money at home to do so. Charles De Gaulle called it an ‘exorbitant privilege.’

“But with privileges comes the responsibility for maintaining the value of the dollar because other countries are relying on that. But starting in 2008-2009, the U.S. abandoned the dollar standard and we saw this concerted effort to cheapen dollar. The problem is the U.S. wants the privilege of printing dollars but we don’t want the responsiblity of maintaining the value of the dollar.

“But that is a dysfunctional system that will eventually lead to a collapse of the international monetary system which is not as apocalyptic as it sounds. It has collapsed three times in the past 100 years — in 1914, 1939 and 1971. Each time, countries come together and come up with new system. The collapse will come sooner than later and people will reject dollars and will come up with something new.”

The whole system is rotten

When asked why there isn’t more discussion and outrage at what is happening, Rickards said many people don’t know or understand what is happening or they believe the propaganda coming from the government.

“We rely on government regulators, the Justice Department, prosecutors and others to do the right thing. The problem is the whole system is rotten. The bankers are completely corrupt but government officials are no better because of the cronyism, the revolving doors, the fact that half of government officials used to work on Wall Street or half of them plan on working on Wall Street next year. Everyone is bailing out their friends.

“It’s even to the point where Ron Suskind, the Pulitzer Prize Winner, reported in his book ‘Confidence Men’ about the first two years of economic policy making in the Obama administration when Geithner told the Justice Department to go easy because the banking system is fragile enough. ‘We don’t need the sight of bankers led away in handcuffs. So kind of lay off,’ he is reported to have said.

“But that’s a disgrace. Think about what that says to bankers. What you’re being told in effect is that you’re above the law. You can do what you want and don’t have to worry about failing because you’ll be bailed out and you don’t have to worry about prosecution because you’ve above the law.

“The whole too big to fail thing on Wall Street is that if a firm gets indicted, it will fail. And this goes back to firms indicted in the ’80s and ’90s. Indicted firms fail. So therefore these firms cannot fail or be indicted. They are too big to fail so can’t be indicted.”

Rickards said the country has always had periods of corruption but the degree of corruption these days is relatively new. “There have always been scandals and cronyism but the scale and scope are unprecedented,” he said. Repeal of the Glass-Steagall Act during the Clinton Administration was one sign of the incipient corruption. He noted that the law worked well for 65 years but was repealed in 1999. “What happened was a repeat of why the legislation was passed in the first place: banks originated garbage loans, packaged them as securities, sold them to customers, and the whole thing collapsed. Now the answer is to reinstate Glass-Steagall and separate commercial and investment banking but that’s not going to happen because the banks own Congress.”

What’s next in the currency wars

Rickards expects the international monetary system to become increasingly unstable and for a new monetary system to arise out of it. He said some kind of gold-backed currency might arise or the use of SDRs (Special Drawing Rights) tied to the International Monetary Fund. “(SDRs are) the preferred solution by the power elite,” he said. “They don’t like gold because it limits their ability to control the economy that favors their interests. Gold is much more popular because it protects people against the hidden wealth confiscation or hidden taxation that governments like to impose through inflation. It could go either way.” He advises people to invest in hard assets and some gold to protect themselves against inflation and currency debasement.

G. Edward Griffin also believes that we are witnessing the slow death of the dollar. He thinks the next currency will be a regional one based on the creation of a North American union that includes Canada, the U.S. and Mexico. He says that will eventually be phased out and replaced with a true world currency along with a world government. “That’s the progression that they — those astride and in control of the international monetary system — that’s what they want to see happen,” he said.

Contact Dawn Hodson at 530-344-5071 or Follow @DHodsonMtDemo on Twitter.



Discussion | 6 comments

  • Phil VeerkampDecember 04, 2012 - 2:52 pm

    Ms Hodson’s final article was rolling along passably well until the last paragraph. The inclusion of G. Edward Griffin’s assertion, “That’s the progression that they — those astride and in control of the international monetary system — that’s what they want to see happen.” Nobody – repeat – NOBODY is in control of the international monetary system. The system is temporarily managed, manipulated, steered with varying degrees of success through varying periods of stability. But the money function is an exponential function that in the long run IS UNMANAGEABLE. All exponential functions eventually explode. Isn’t it interesting that the ancients seemed to know this with their admonitions against lending with interest. That is why I sometimes use the word “beast” metaphorically in referring to, " A = P(1+r/n)^nt. "

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  • ZGR 12/5/2012 | Zephyr Global ReportDecember 04, 2012 - 11:11 pm

    [...] [...]

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  • CatherineDecember 05, 2012 - 8:52 am

    Fractional reserve banking is not something unique to the US and the Fed, it is how almost all large countries manage their money. China adjusts the percentage of reserve required as a way to help manage inflation. We could even create money to satisfy certain debts without putting that money into circulation in an inflationary manner.

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  • Phil VeerkampDecember 05, 2012 - 9:44 am

    We could even create money to satisfy certain debts without putting that money into circulation in an inflationary manner. - Catherine, isn't that the essence of Timmy's QE1, 2, 3 . . . .? There is a part of me that suspects a "managed deflation" is being attempted. When the real-estate derivative bubble burst in ’08 and Paulson asked for 700 billion to prevent total deflation I suspect that it would have been better to just “give” it to him. Instead, politicians insisted on managing the cure because it was argued that 700 B was ridiculous in the hands of “one man”.

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  • Phil VeerkampDecember 07, 2012 - 12:55 pm

    Catherine - a very minor PS to the recent conversation. I argue that today we see a mini reenactment of the '08 derivative bubble burst. Others probably see a generic market correction. I’m speaking of the “Apple crash”. A huge percentage of Timmy’s deflation QE 1,2,3 went looking for a home. Much went to the sidelines out of unclear direction and for safety. Much went into stocks in an attempt to “buy low” or find the next big deal. What’s kool? APPLE! This week some Timmy’s QE money went back to “money heaven” and is now happily reunited with its ’08 ancestors. It would be so sweet to know that Timmy was deep into Apple . . . not likely . . .

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  • Phil VeerkampDecember 07, 2012 - 12:57 pm

    . . . of Timmy’s reflation QE . . .

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