James Rickards, The Death of Money: The Coming Collapse of the International Monetary System (New York: Portfolio Hardcover, 2014)
The men and women working at the Eccles Building in Washington D.C. have sliced, diced and, with quantitative easing (QE) pureed the dollar, but it it keeps on ticking as the world’s reserve currency. America’s central bankers have bravely thrown themselves in front of the deflation train by quadrupling their balance sheet. Paul Krugman believes the Fed has been less than heroic, and instead, downright timid. He taunts Austrian economists, wondering where’s the hyperinflation you guys said was imminent?
James Rickards doesn’t see it Krugman’s way. In his book The Death of Money, Rickards says Fed policy “is an invitation for disaster.” Everything the Austrians are predicting will come true, just not in the order they have been forecasting. The book is a follow up to author’s Currency Wars published three years ago where Rickards chronicled the first two currency wars and explained how currency war III was just beginning. He says much has changed since he wrote that book, but not for the better.
Anarcho-capitalists will notice right away that Rickards isn’t one of us. He may be disgusted with central bankers but the author has great reverence for the military and has done work for the CIA and other government agencies. He’s no fan of Edward Snowden and the beginning of book is meant to convince you that Rickards is working for the good guys in the global financial wargames. In the end he offers ways for government to solve the mess it made. Nonetheless, The Death of Money is both interesting and valuable.
The military may be clued into financial warfare but Treasury and Fed officials still have their heads stuck in equilibrium models that assume rational and efficient markets, “that have no correspondence to real markets.”
Market crashes, flash and otherwise, prove Rickards’ contention that “Capital markets today are anything but fail-safe. In fact they are increasingly failure prone.” This has much to do with the hubris of today’s central bankers, who are “both bold and arrogant in their efforts to bend markets to their will.” Rickards calls them for what they are, central planners, and they will create failures like all central planners do.
Instead of markets functioning properly, the author explains, “Market participants have been left with speculation, churning, and a game of trying to outthink the thinkers in the boardroom at the Federal Reserve.” Today’s markets are stymied by “the dead hands of of the academic and the rentier [who] have replaced the invisible hand of the merchant and the entrepreneur.”
It’s ironic that Lord Keynes in The General Theory described financial markets the same way, as “a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”
Rickards speaks of today’s controlled and perverted markets through the lens of what Adam Smith, F.A. Hayek and Charles Goodhart had to say; central planning is not only undesirable it’s impossible.
Rickards emphasizes that economic order emerges spontaneously from economic complexity instead of being imposed by central bankers and their policies. So what we have now with central bank central planning is disorder and continuous malinvestment.
Ex Fed chair Ben Bernanke was keen to keep his eye on the financial markets, famously telling a Jackson Hole crowd in 2011 the Russell 2000 was up 30% since QE had been announced, “I do think that our policies have contributed to a stronger stock market, just as they did in March of 2009,” Bernanke said, believing higher stock prices increased consumers propensity to spend, what academics call the wealth effect. Rickards has his doubts about all of this, citing a study that the wealth effect from an increase in housing prices can vary from 1.7% to 21 percent, a spread wide enough to cast doubt on the whole notion.
So while Fed-created money has gone into financial assets, why hasn’t it gone into consumer prices? Rickards believes America has exported its inflation. As trading partners support their exports, they print money to “soak up the dollar flood coming into their economies in the form of trade surpluses or investment.” Americans get the cheap goods from overseas, foreigners get the inflation.
A continuous theme in The Death of Money is the battle central bankers are waging with deflation. The bankers are deathly afraid of prices sinking while debts, especially the U.S. government’s, remain high. Technology, cheap goods from emerging markets, and demographic shifts are pushing prices down, while central banks print to keep prices up.
Cheap goods make everyone more prosperous, right? Yes, but, “If the Fed relented in its money printing, deflation would quickly dominate the economy,” Rickards writes, “with disastrous consequences for the national debt, government revenue, and the banking system.”
Rickards’ point about government revenue is that real incomes go up if salaries stay the same but prices fall. The same is true if salaries increase and prices increase by a lower percentage. The difference is that government can’t tax an increase in real wages when prices drop, but it receives more tax revenue on increased salaries and higher prices.
To get investors off the sidelines after the ‘08 crash Bernanke referred back to his academic work. “It will pay to invest…when the cost of waiting…exceeds the expected gains from waiting.” Rickards calls this passage the “Rosetta stone for interpreting all of Bernanke’s policies…” After 2008, Bernanke pushed rates to zero, thereby increasing the cost of waiting.
The author even found this revealing Bernanke quote, “It would not be difficult to recast our example of the …economy is an equilibrium business cycle mold. As given, the economy…is best thought of as being run by a central planner.”
Rickards spends three chapters discussing the worlds other principal currency players, China, Germany, and the BRICS and BELLS countries. While some see China as an emerging power, the author emphasizes the country’s malinvestment. Instead of creating capital, “China is destroying wealth with this model.”
In discussing Germany, Rickards explains the staying power of the euro with “Markets are powerful, but politics are more so.” He pooh-poohs Euro sceptics who are stuck to Keynes’s sticky wage theory. Wages will fall and “Over the next ten years, the EU is destined to evolve into the world’s economic superpower.”
Russia won’t prosper because oligarchs and politicians steal everything except just enough to keep the game going. China is a big polluter stealing technology, and India continues to be strangled in its own red tape. The author has much rosier view of Spain and Italy, calling them “true economic giants.”
Rickards is well known for supporting a gold standard. He dismisses the idea there isn’t enough gold, it’s all about the price he contends. Murray Rothbard told us the same thing in class back at UNLV. Murray said you could have a gold standard with just one ounce.
Rothbard was friends with Howard Buffett, congressman from Nebraska, who was a staunch gold standard advocate. Buffett’s son, Warren, is anything but, constantly dismissing gold as worthless. But Rickards makes the case that Buffett turned to hard assets after the ‘08 crash when he bought Burlington Northern Santa Fe Railroad. “A railroad is the ultimate hard asset,” writes Rickards. Don’t have enough money to buy a railroad? Rickards says a small investor “can make the same bet by buying gold.”
Of course there is no gold standard and instead the U.S. central bank creates dollars to buy Treasury debt and increase inflation. And with nothing stopping it, Rickards lays out a way for the Fed to print the country out of its debt jam. If inflation can be increased without increasing borrowing costs the debt to GDP ratio will decline. But if there is no GDP growth government borrowing is unsustainable.
Rickards says its not about the absolute level of government debt that triggers a crisis as Carmen Reinhart and Kenneth Rogoff contend, but the trend. If there is no growth and politicians won’t reduce spending, the Fed must inflate.
This sort of financial repression worked after WWII, bringing the U.S. debt-to-GDP level down from 100% in 1945 to less than 30% by the early 1970s. It’s a tricky operation where plenty can wrong. Asset-liability mismatches and counterparty risk in the unfathomable $650 trillion derivatives market has pushed systemic risk to the limit.
When it all comes tumbling down who will bail out the bailouters? Rickards penned a surprising chapter speculating on an IMF monetary takeover. The shadowy creation of Bretton Woods, expanded its currency, the number of SDRs (Special Drawing Rights), considerably after the 2008 crash to bailout Europe. Christine Lagarde and her deputy director Min Zhu will be ready when the next crisis comes. After all, SDR issuance is only limited by central banker imagination. “They [SDRs] are fake money,” Dr. Zhu explains, “but they are a kind of fake money that can be real money.”
If you are sanguine about the world monetary system, Rickards’ book, with his talk of crashes and civil unrest, will rattle you. He proposes ways to put the system on sound footing, but they are politically untenable. Gold bugs may stand and applaud the idea of setting the yellow metal’s price at $7,000 per ounce but that world would not be a pretty place.
Readers want writers to tell them what to do, and the author obliges, providing seven signs the crash is coming and five investments to weather the storm with. But, he admits his crystal ball is cloudy. Nobody knows what day they’ll die. It’s the same with money.
This review originally appeared in the Journal of Prices & Markets