100 Books #61 - James Rickards' CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS

If there is one thing over which I am pretty sure I have no control whatsoever, it is global finance. So why can't I stop reading about (and listening about -- oh, how I love Planet Money and Marketplace!) what's wrong with it? I'm pretty sure I've even wondered and wailed about this on this blog prior to now, but I'm too demoralized to check.*

But hey, if you're one of those people (and I have been!) who always kind of squints and says "huh?" when you hear about, say, the U.S. accusing China of "currency manipulation," well, this is a very good book to consult, to read cover to cover and, probably, to read again a few months later when all of its very clearly presented points and arguments have faded from your memory.**

Wisely, Rickards leads it all off with a fictitious scenario, gleaned from his direct experience participating in the first ever Pentagon-sponsored war games to focus on financial war, which nicely illustrates what are the weapons, tactics, strengths and weaknesses of combat via spreadsheet, ledger and currency peg instead of all the other ways that usually grab headlines. Financial war never grabs headlines, because it can never be made to sound scary enough.

This book, though, takes a pretty good stab at making it scary enough.

Rickards spends a good third or so of the book walking us through the currency wars that have already come and gone, for despite his book's title's suggestion that this is all potential, stuff that could happen someday, we're actually right at the leading edge of Currency War III.***

When an economy stagnates and nothing else seems to work (as in the American past, for instance, government stimulus or upticks in consumer behavior have done the trick), a relatively easy fix is to devalue your currency relative to everyone else's, making your exports more attractive to buyers around the world. This, of course, only works if no one else is doing this, and our history in employing this kind of tactic is grim; the first time we tried it led to the Great Depression and World War II, the second to stagflation in the 1970s -- and neither of those, Rickards points out, happened to a world as intimately economically interlinked as ours. There was no Eurozone in the 1930s, and the Yuppies of the 1980s whose spending sprees largely pulled us out of stagflation are now aging out of productivity and have done everything they can to make sure that the generations who have to pick up after them have little to no opportunity to mimic them -- everybody is in debt up to his or her eyeballs, in this country.

And so, what are the Fed and our elected officials doing to bring us out of our current severe slump? Well, what is "qualitative easing"?

Oh yeah, it's printing more money, to deflate its value, to make our exports more attractive to other markets, which only works when no one else is doing it.

Except, you know, everybody else is doing it, in some fashion or other, especially China, who while not printing extra new money of its own "on purpose" is forced to do so to maintain its peg to the dollar at current levels, which China very stubbornly wants to do so that its exports do not become less attractive to other markets. Other markets like us.

Of course, if things continue in this crappy vein, we're not going to be able, as ordinary American consumers, to afford their exports, no matter how attractive they are, especially if what Rickards and friends fear most, the collapse of the dollar, happens. And reading between the lines of this book, and remembering everything else I've read on not just finance but history and neuroscience and psychology and culture, it's really pretty much not a matter of if that will happen so much as when -- chiefly because policymakers elected and appointed vastly underestimate the risk thereof, so are not even remotely prepared to deal with it when it comes.

But all is only lost if we keep trying to apply the same bad solutions to our current problems, he says.**** If we can get ourselves out of the rut of the devaluation mindset and take some corrective measures, we may yet come out of this without proving all the dystopians right (or at least not completely right): break up those "too big to fail' banks (I'd be happy to see that), re-regulate if not outlaw derivatives trading (again, fine with me) and... well, go back to the gold standard, which is something you usually only hear from Ayn Rand/Austrian economics types but is starting to make more sense to me now that I have had a long, hard look at what has become of us under a system of that economists call "fiat money" (basically, money the value of which is controlled by government regulation, i.e., by politics) -- though I still don't find a return to the gold standard an entirely comforting thought: gold is very much a finite commodity, and no one has shown me how such a return to a gold standard isn't also a return to a zero-sum game -- even if instead of just gold we say "gold as part of a larger basket of commodities." And the people who think a zero-sum game is just fine, thank you, are always the ones who grabbed first and grabbed most and are perfectly happy to sit on top of what they grabbed until the end of time and watch the rest of us beg.*****

Oh, and by the way, China is buying up a lot of gold on the sly, apparently. And water rights. WATER RIGHTS, PEOPLE. Including water rights on water no one has ever exploited, like Patagonian mountain ice caps. Because someday, that might be the only kind of water available. Oh, don't get me started on water war stuff, too, in this post. Just don't.

And but so, you know, China already controls something close to all trade in rare earths, without which we cannot currently make much in the way of high tech gear. And they've been pondering the strategic niceties of economic warfare, asserting that when histories of the 20th century are re-written it will be stories of currency war that command the most attention, for years now.******

Which all makes me think that Jim Munroe's sadly snarky new film, Ghosts with Shit Jobs, isn't so much lo-fi science fiction as a documentary that fell backwards a few years through time.



So if you're getting from this that Currency Wars is one of the scariest damn books I've ever read (and I've read all the Jeff Sharlets), then you're getting it right.

And like I said, there's really nothing I can do about it, except tell people about this book. Five stars, drawn with a very shaky hand.

*Well, except for one thing. Rickards spends most of Chapter 9 putting paid to the idea that economics somehow became a natural, instead of a social, science in 1947 or so, asserting that stealing science's clothes and giving each other Nobel prizes may have been fun, but the economists were no better at foreseeing or preventing financial crisis in 2008 than they were in 1908, thank you very much:

University biologists working with infectious viruses have airtight facilities to ensure that the objects of their study do not escape from the laboratory and damage the population at large. Unfortunately, no such safeguards are imposed on economics departments.

This made me smile even as I remember an incident in 1987 when I told my high school teacher that just because he was drawing a bunch of graphs on the board that didn't mean it was science. I feel weirdly vindicated, at least until I remember that said teacher basically told me to shut up and go back to reading that hobbit crap. Which, as there is ample evidence of on this very blog, I pretty much did.

**Which, of course, you won't notice has happened until you try to have a conversation about this stuff over mah jong with someone who gets all of his or her news from Rush Limbaugh, if your life is anything like mine.

***I haven't yet decided whether or not saying something like "World War III is here, and it's a financial war" is entirely accurate, but I'm leaning towards a yes, there.

****There is a whole section advocating for a shift on the part of policymakers toward the newish sub-field of behavioral economics that I won't even try to summarize here because I'm still thinking about it, but it's pretty damned interesting, and not just because it returns economics to the soft social sciences in general but also because it incorporates research and conclusions from complexity theory, psychology and neuroscience in place of lies, damn lies and statistics. Of course, behavioral economics can be as correct and awesome as it wants, but it does us no damned good if it isn't put to use, which Wall Street and the Fed do not seem likely to do as they're quite happy with the current system, however broken it might be, that allows them to bamboozle regulators with pseudoscience and way too much data. Sigh.

*****I must confess, though, that the section in which Rickards goes into great detail on how a return to the gold standard, at this stage of the game, might work, my eyes glazed over a bit.

******Oh, and there's a laughable passage in this book where someone makes the argument that our cultural exports to China can yet save the day, or at least the balance of trade. You know, software, Hollywood films, music. Because, yes, great respecters of intellectual property, the Chinese. I'm sure paying the full retail price for Blu-Rays of Celebrity Apprentice is definitely part of China's overall politico-economic playbook.