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BREAKINGVIEWS-Review: A world of reasons for the dollar to crash

Source: Reuters - Fri, 21 Mar 2014 13:30 GMT
Author: Reuters
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Martin Hutchinson

NEW YORK, March 21 (Reuters Breakingviews) - In "The Death of Money," author James Rickards sees a world of reasons for the dollar to crash and the world monetary system to collapse. The greenback does indeed have dangerous adversaries, from China to al Qaeda. However, Rickards lets the Federal Reserve and budget deficits off too lightly as generators of trouble, and his solutions would cause yet more havoc.

Rickards' collapses are less apocalyptic than some others; he includes the crises of 1914, 1939 and 1971 as examples of previous financial failures. Existing monetary systems broke down on those occasions, but all three were replaced in an orderly fashion by alternative systems that may have been botched but worked adequately nonetheless. Using a little more imagination, it's easy to imagine a debacle much worse than 1971.

He also appears unsure what will set off the mayhem, spending two chapters on dark investigations of what al Qaeda and China, respectively, might fantasize about doing. His detail on al Qaeda's insider trading shenanigans is fascinating, but he fails to take into account that the group's financial resources are far too limited to do much damage. As for China, pulling down the world's monetary system would severely damage its own export-oriented economy as well as trashing its own central bank's holdings of trillions of dollars of Treasuries.

Rickards fears both inflation and deflation. Early on, he makes an offhand comment that U.S. inflation is really 9 percent rather than the reported 2 percent, but doesn't back that up. He describes the loose money policies of the Fed, the Bank of England and the Bank of Japan as the "crime of the century" but doesn't appear especially concerned about the untraditional fiscal policies of the last five years.

In addition, he proposes the Fed should lower interest rates still further, to reduce the value of U.S. debt in real terms, thereby worsening the "crime" and solving the U.S. government's debt problem by punishing savers and foreign holders of Treasuries.

The book is not universally gloomy about the world economy. In particular, it likes the prospects for the euro zone, on the grounds that it has a more moderate monetary policy than the United States, Britain or Japan. Rickards makes the valuable point that the wage reductions necessary to rebalance the weaker European economies without devaluation, said by Keynesians to be impossible in a modern economic system, are in reality actually occurring.

Rickards' solution to current economic problems is a gold standard based on the International Monetary Fund's special drawing rights, calibrated at a gold price of around $9,000 per ounce.

This has two problems. First, it suggests an undue faith in the capability and integrity of the IMF, which is subject to the self-aggrandizement and public choice problems of all bureaucracies. Second, by monetizing gold at a price so far above the current market level, he would cause a major burst of inflation followed by a massive deflation as prices overshot the appropriate level. Essentially, this would recreate the monetary conditions of the 1929 bubble and the Great Depression, not an experience worth repeating.

Overall, the book is an interesting catalog of what could go wrong, but - and for this we should be thankful - fails to convince that the predicted doom will actually happen.

CONTEXT NEWS

- "The Death of Money: The Coming Collapse of the International Monetary System," by James Rickards, is published by Portfolio Penguin.

- For previous columns by the author, Reuters customers can click on (Editing by Rob Cox and Martin Langfield)

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