Washington & Wall Street: The Death of Money
My friend and fellow monetary historian James Rickards has written an important new book, “The Death of Money: The Coming Collapse of the International Monetary System.” Jim and I both worked together at Tangent Capital Partners in New York and we frequently discuss the evolution of the global financial system. As students of political economy and people familiar with the workings of Washington, I always enjoy his perspective.
This new book follows his successful 2011 effort “Currency Wars,” which talked about the emerging currency war between the US and China. Rickards is a student of Asia and frequently travels to China. His opinions on Asia and its leaders are well informed and equally well-considered. In “The Death of Money,” however, Rickards turns the focus on the Federal Reserve System and how the US central bank is destroying the special role of the dollar in the international monetary system. He writes:
“The international monetary system collapsed three times in the past hundred years—in 1914, 1939, and 1971—and the next collapse is already in sight. This time the dollar won’t save us. In fact, the dollar itself will be the cause of the crisis.”
Rickards is near and dear to my heart because he understands that the “Keynesian Conceit,” a term coined by writers from F.A. Hayek to David Stockman, is actually killing working Americans. The socialist majority on the Federal Open Market Committee led by Janet Yellen pretend that keeping interest rates at zero and expanding the US money supply some 300% since the start of the subprime crisis in 2007 is somehow helpful to stimulating jobs and economic activity. He writes:
“Critics to from Richard Cantillion in the early eighteenth century to VI Lenin and John Maynard Keynes in the twentieth have been unanimous in their view that inflation is the stealth destroyer of savings, capital and economic growth. Inflation often begins imperceptibly, and gains a foothold before it is recognized. This lag in comprehension, important to central banks, is called money illusion, a phrase that refers to a perception that real wealth is being created, so that Keynesian ‘animal spirits’ are aroused. Only later is it discovered that bankers and astute investors captured the wealth, and everyday citizens are left with devalued savings, pensions and life insurance.”
As we noted in my last column, the socialist tendency led by Paul Krugman are entirely in control of the Federal Open Market Committee and most of the US economic profession. Because most of the media and the US economics community are entirely cowed by the post WWII narrative of borrow and spend, critiques like that of Rickards will be largely ignored inside the Fed and broader economist community. But this carefully researched and written book will find a wide audience among those who worry about the future of our country – especially as we watch the specter of deflation reappear on the American scene.
As we have discussed in this space (See “Washington & Wall Street: The Denationalization of Money”) the Federal Open Market Committee is taking the US down the road to hell in a monetary sense. F.A. Hayek predicted the outcome we all face, namely hyperinflation and currency collapse. Rickards tells that story from start to finish in his latest tome. As we have discussed in these columns, current Fed policy is actually feeding deflation. Rickards notes:
“Deflation feeds on itself and is nearly impossible for the Fed to reverse. The Fed has no illusions about the difficulty of ending deflation… This is why the Fed has printed over $3 trillion of new money since 2008 – to bar deflation from starting in the first place. The most likely path of Federal Reserve policy in the years ahead is continuation of massive money printing to fend off deflation.”
Rickards concedes that the Fed may soon be forced to end its money printing efforts for the simple reason that Americans will be so horrified by the central bank’s policies that they will react in horror. “Deflation may prevail despite money printing,” Rickards writes, reflecting my own view of the tactical situation. “This can occur when the Fed throws money from helicopters, but citizens leave it on the ground because picking it up entails debt… The US would suddenly be back to 1930 facing outright deflation.”
Rickards ends his book with three grim scenarios: replacing the dollar as the world currency with “Special Drawing Rights” care of George Soros and the International Monetary Fund; a return to a gold standard led by China and Russia; and political collapse and disorder as the fiat money system created by Abraham Lincoln to fund the Civil War finally collapses. He raises the specter of a return to economic emergency with wage and price controls and confiscation of gold as was seen in the 1920s and 1930s, something most Americans do not even vaguely remember. As Rickards notes: “In the ontology of state power, order comes before liberty or justice.”
I tend to be a little less alarmist that Rickards for the simple reason that America remains the most free and chaotic nation on earth. Yes, the Chinese and the Russians can back their currencies with gold tomorrow, but nobody trusts these regimes. The ultimate question is whether the US can navigate the transition from decades of spending the future without destroying the rule of law. The ultimate betrayal of the neo-Keynesian socialists is to encourage the Fed’s current policies without articulating an exit strategy for the central bank.
But as Rickards suggests the limited political tolerance for zero interest rates and endless money printing by the Fed may eventually force the US into the next phase of the crisis, namely debt liquidation and restructuring as in the 1930s. In that respect, “The Death of Money” is a crucial primer for investors and consumers for what lies immediately ahead for the United States and a world that remains entirely dependent upon the dollar as a means of exchange and unit of account, even if not as a store of value.