Currency Wars
Popular account of competitive devaluation as policy.
Summary
Rickards, a lawyer and consultant who had been general counsel at Long-Term Capital Management, argued that competitive currency devaluation had resumed and would produce a monetary crisis.
The historical framework identifies three currency wars. The first ran from 1921 to 1936, covering the German hyperinflation, the British return to gold at prewar parity, competitive devaluations after 1931 and the American gold revaluation. The second ran from 1967 to 1987, covering the strain on Bretton Woods, the 1971 suspension of convertibility, the inflation of the 1970s, and the Plaza and Louvre accords. The third, he argued, began in 2010 with quantitative easing and the resulting pressure on other countries' currencies.
His analytical claims include that devaluation is a zero-sum action which invites retaliation; that currency conflict escalates into trade conflict and can escalate further; that the dollar's reserve position is not permanent and that its loss would be abrupt rather than gradual; and that the international monetary system has no anchor and no mechanism for resolving imbalances.
His policy discussion covers financial warfare, including his participation in a Pentagon exercise simulating economic conflict, and his proposals include a return to some form of gold link at a substantially revalued price.
The forecasting record is poor. Rickards predicted dollar collapse, hyperinflation and monetary system breakdown, none of which occurred in the following decade, and he has continued making similar predictions since. The historical framework is a reasonable organising device and the account of the earlier currency conflicts is competent. The analysis of the current period is not supported by what followed, and readers should treat the predictive claims accordingly.
Key takeaways 7
- Competitive devaluation is zero-sum across countries and therefore invites retaliation rather than resolving anything.
- The interwar currency conflict escalated into trade restriction and contributed to the collapse of international commerce.
- The 1971 suspension of dollar convertibility ended the last formal anchor in the international monetary system.
- The current system has no anchor and no mechanism for resolving persistent imbalances between surplus and deficit countries.
- Reserve currency status can be lost, and historical transitions have been abrupt rather than gradual.
- Quantitative easing in one country exports currency appreciation pressure to others, which invites reciprocal action.
- The book's specific predictions of dollar collapse and hyperinflation did not occur, which readers should weigh against its analysis.
Who should read it
Readers who want the historical framing of currency conflicts, discounting the predictive claims that the subsequent decade did not support.
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