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April 6, 2014 5:02 pm
The Death of Money: The Coming Collapse of the International Monetary System, by James Rickards, Portfolio Penguin, RRP£14.99/RRP$28.95, 368 pages
Everyone loves a disaster story but few more than Jim Rickards. The Death of Money is a fast-paced and apocalyptic look at the financial future, taking in financiers’ greed, central banks’ incompetence and impending Armageddon for the dollar.
The imminent danger is not simply a catastrophic loss of faith in the world’s reserve currency. The machinations of the US Federal Reserve, particularly trillions of dollars of bond purchases through its quantitative easing programme, will ultimately lead to a flight to alternatives to paper money, destroying the “parasitic” banking system in the process. Demand for gold, Bitcoins and electronic barter are evidence of the desire for hard money not manipulated by central bankers.
At the heart of the book, a follow-up to 2011’s Currency Wars, is the claim that the Fed has been doomed to its current course by its own mistakes and its desire to help bankers. It is forced to print money to create inflation to offset the deflationary effects of the debt overhang from the banking crisis and government borrowing to rescue Wall Street. But the tussle between inflation and deflation is sure to end with the victory of one or the other; the forces are too great for the Fed to balance the two indefinitely.
Even without the nightmare of serious deflation or hyperinflation, the Fed’s weapons will inflict damage on the dollar, as money-printing and devaluation reduce the world’s willingness to use it. This is the beginning of the end of the “exorbitant privilege” of automatic foreign funding for the US current account deficit.
This is not merely a new philosophical tract for Tea Partiers, who are dismissed along with economist Paul Krugman, the standard bearer for US political liberals. Rickards – a former general counsel for hedge fund Long Term Capital Management, whose 1998 collapse reverberated through Wall Street – sets out to be the acceptable face of those pushing for a return to the gold standard. He even pitches the International Monetary Fund’s own currency, special drawing rights, as an alternative new global money. Few non-believers are likely to be convinced.
He makes two big assumptions. First, that we are living in a depression; since 2007 slow economic growth has been structural. Central banks, assuming it is cyclical, are tackling it with the wrong tools. Second, gold is the only “true money”. Neither assumption is sufficiently supported by the book.
For Rickards, the US economy is like a climber on a ridge at 28,000ft with a glacier on one side and a sheer cliff on the other. Pressing on becomes ever harder but turning back – ending QE – means facing up to the pain avoided in 2009.
It is a nice analogy but it is flawed. Since 2010 the US economy has grown in line with the Fed’s range of estimates for sustainable long-term growth of 1.8 per cent to 2.4 per cent a year, and is widely expected to grow faster this year. This is not the subpar activity that defines a depression.
It is true, however, that such growth has been achieved only with the biggest programme of monetary support in history, leaving justifiable fears over what will happen as the Fed pulls back from quantitative easing. Broad measures of unemployment remain extremely high, too.
Nonetheless, many mainstream economists take the more optimistic view that the economy is about to reach self-sustaining growth after a long period of household debt reduction. This case, part of the reasoning behind the Fed’s tapering of bond purchases, is simply ignored.
Gold is even more problematic. Rickards insists – citing scripture, the founding fathers and King Croesus – that gold is the true store of value and everything else, including the dollar, fluctuates relative to gold. The claim is hard for non-believers to swallow.
Readers steeped in the conventional monetary theories of the past three decades may lose patience. But Rickards has latched on to genuine and interesting issues, even if his rhetoric is frequently overheated (“as the dollar’s 9/11 moment approaches, the system is blinking red”).
It is an easy read, with entertaining diversions including an apocalyptic vision of tit-for-tat tactics in a financial war involving stock exchange hackers and hedge fund sleeper cells. His aside on why US student loans could be the new subprime mortgages bears more attention from markets – and his summary of the credit problems in China is handy for those who have not been following closely.
Rickards may be right that “the system is going wobbly”. But only the most ardent millenarian would follow his portfolio prescription of holding 20 per cent each in gold, land and hedge funds/private equity, 10 per cent fine art and the rest in cash.
The writer is the FT’s investment editor
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