Currency Wars

Summary

In 1971, President Nixon imposed national
price controls and took the United States off the gold standard, an extreme
measure intended to end an ongoing currency war that had destroyed faith in
the U.S. dollar. Today we are engaged in a new currency war, and this time
the consequences will be far worse than those that confronted Nixon.



Currency wars are one of the most destructive and feared outcomes in
international economics. At best, they offer the sorry spectacle of
countries' stealing growth from their trading partners. At worst, they
degenerate into sequential bouts of inflation, recession, retaliation, and
sometimes actual violence. Left unchecked, the next currency war could lead
to a crisis worse than the panic of 2008.



Currency wars have happened before-twice in the last century alone-and they
always end badly. Time and again, paper currencies have collapsed, assets
have been frozen, gold has been confiscated, and capital controls have been
imposed. And the next crash is overdue. Recent headlines about the debasement
of the dollar, bailouts in Greece and Ireland, and Chinese currency
manipulation are all indicators of the growing conflict.



As James Rickards argues in Currency Wars, this is more than
just a concern for economists and investors. The United States is facing
serious threats to its national security, from clandestine gold purchases by
China to the hidden agendas of sovereign wealth funds. Greater than any
single threat is the very real danger of the collapse of the dollar
itself.



Baffling to many observers is the rank failure of economists to foresee or
prevent the economic catastrophes of recent years. Not only have their
theories failed to prevent calamity, they are making the currency wars worse.
The U. S. Federal Reserve has engaged in the greatest gamble in the history
of finance, a sustained effort to stimulate the economy by printing money on
a trillion-dollar scale. Its solutions present hidden new dangers while resolving
none of the current dilemmas.



While the outcome of the new currency war is not yet certain, some version
of the worst-case scenario is almost inevitable if U.S. and world economic
leaders fail to learn from the mistakes of their predecessors.