SBP Research Bulletin Volume 8, Number 1, 2012
The Making of the Next Global Crisis
James Rickards Penguin Books Ltd, 2011, London During a war between two nations, one can imagine a nation printing currency of the rival illegally to damage her economy; however, Rickards makes an interesting point that, in the modern age, the rivals can manipulate the value of their own currencies in order to steal growth from the others. Germany, for example, did this during early decades of the last century and US, according to the author of this book, is doing the same tactics since early years of the current century against its main economic rival, i.e., China. The author of the book, James Rickards, being an investment banker seems well aware of tactics used in the currency and derivative markets to influence the global economic outcomes. Since the dollar is playing a key role in the monetary system of the world, the analysis has been directed to it. As the role of dollar in the financial world have experienced a little setback after the introduction of euro, the rise of China and several other political events, the author is trying to predict the future scenario when the dollar will no longer be a dominant currency. Rickards foresees four possible outcomes: multiple reserve currencies, special drawing rights (SDR)1, gold standard and a chaos. The probability of occurring the last one, i.e., chaos is greater than the other three, the author concludes. The book consists of three parts. The first part is about a mock financial war game. The second part tells about the history of currency wars and the last analyzes the outcomes of the third currency war that, according to the author, have started since 2010. The book starts with a description of the Applied Physics Laboratory located halfway between Baltimore and Washington D.C. The author was invited there to 1
SDR is a currency controlled and issued by International Monetary Fund (IMF). The IMF keeps its books and records its assets and liabilities in SDR units. However, it is not used in the selling and purchase of commodities like other currencies. It, however, satisfy the traditional definition of money in many respects. It is used as one of the reserve currencies by the member countries of IMF. In case of trade deficits or surpluses, countries can settle trade balances with each other in SDRdenominated instruments.
SBP Research Bulletin, Vol. 8, No. 1, 2012
participate in a financial war game. He, then, continues with an account of his participation in the war simulation. Acting on the advice of the author, the Russian team decides to no longer accept the dollar as a payment to the export of its oil and natural gas. Instead the Russian government, in the war game scenario, announced to issue a new gold-backed currency. The overall message of the first section is to show how unprepared the US policy makers are if dollar is rejected by the major economic powers as a trading currency of the world. The second part of the book is a concise history of the exchange rate manipulation starting since the end of First World War to the present time. The author divides the history in three periods and names it currency war I, II and III. The first currency war was started in 1921 and ended in 1936. I appreciate the author’s analysis of the historical events particularly the policy conclusions he has made. Hyperinflation can be used as a policy lever, I learned from this book. The author cites the example of the Germany that gained from this policy lever. The Reichsbank (Germany’s central bank until 1945) designed a massive devaluation of its own currency initially to achieve competitiveness and then to get out from onerous war reparations demanded by the Allied nations after the First World War. The debasing resulting in hyperinflation made those Germans poor who kept their funds in...
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