Currency wars

James Rickards is the author of the national bestseller,Currency Wars: The Making of the Next Global Crisis and a Partner in Tangent Capital Partners, a merchant bank based in New York. He is a counselor and investment advisor and has held senior positions at Citibank, Long-Term Capital Management and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. His clients include institutional investors and government directorates.

He has been interviewed in The Wall Street Journal and has appeared on CNBC, Bloomberg, Fox, CNN, BBC and NPR and is an Op-Ed contributor to the Financial Times, New York Times and Washington Post. Mr. Rickards is a visiting lecturer at Johns Hopkins University and the School of Advanced International Studies, has delivered papers on risk at Singularity University, the Applied Physics Laboratory and the Los Alamos National Laboratory and has written numerous articles on risk management. He is an advisor on capital markets to the Director of National Intelligence and the Office of the Secretary of Defense. Mr. Rickards holds an LL.M. (Taxation) from the NYU School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in economics from SAIS and a B.A. from Johns Hopkins.

Zentuccio: You talk about financial weapons of mass destruction. Can you elaborate?
James Rickards: Financial weapons can come in 2 types. There are what I would call economic weapons, for example countries try to cut interest rates and then print money or engage in quantitative easing in an effort to cheapen their currencies relative to their trading partners. The basic idea is often said to be promoting exports but the real reason is to import inflation in a form of higher import prices. The US import a lot of manufacturing goods, Japan imports a lot of energy, with a cheaper currency those imports become more expensive, that creates inflation. Central banks are fighting deflation. Financial weapons can be things like cheapening your currency. There is a different level financial instruments can also be used as weapons of war. We are seeing examples with regards to Iran. The US has excluded Iran from the dollar system maintained by the Federal Reserve. The US has also excluded Iran from Swift, which is a payment system. What is going on between Iran and the US is a financial war. We do see stocks, bonds used as weapons.

Z.: What’s your take on the euro region?
J.R.: Well, I think Europe is actually doing everything right. Europe is the only one pursuing the correct policy. Europe is winning the currency war by not fighting. The euro has been very strong lately. The way you promote exports is not with a cheap currency but with innovation, technology, good labor management relations and a positive business climate. This is very characteristic of Germany. Germany is pushing their economic model on the rest of Europe. It’s been a painful adjustment. The restructuring is beginning to have some positive effect. We’re finding that unit labor cost in Spain, Italy, Greece, Portugal and some of the other so called peripheral countries are actually competitive on a global business. I’m sure that a 50 year old in Greece might not want to take a pay cut but a 25 year old who’s never had a job has no expectations of how much she should be making, might be willing to take an entry level position. Europe so far is keeping out of the currency wars.

Z.: Europe is a two speed region. The southern countries are suffering. Eastern Europe is not doing well.
J.R.: Europe is very diverse. When I was talking about the euro I was talking about the European monetary system. Economic growth in northern Europe has been stronger than the periphery. Even in the US we have a single currency and and some states have lower unemployment than the others. For the countries that are not in the European monetary system, primarily in Central and Eastern Europe, they have different results. Poland is doing very well. Some of the Baltic republics is doing okay. Hungary is fighting the currency war, trying to cheapen its currency, partly through monetary policy. This will turn out to be a mistake because it will result in inflation. The thing for Hungary to do is to move up the supply chain, use some of its advantages, its educated workforce, good geographic location. With a good business climate it could turn them into its advantage.

Z.: Can currency war lead to real war?
J.R.: There were two currency wars in the past hundred years prior to the currency war that we are in today. We can see from the earlier currency wars that we are not always in a currency war but once a currency war begins it can last for a very long period of time. Currency wars go stronger than ever. They don’t have a natural resolution. The US tries to cheapen their dollar, other countries also try to cheapen their currencies. Switzerland pegged their currency to the euro.