Shelf Life

The next global crisis: Currency wars

Kai Ryssdal Nov 18, 2011

Kai Ryssdal: The dollar closed up against the Chinese yuan on foreign exchange markets today. But no sooner are those words out of my mouth than I realize they’re kind of meaningless. Because Beijing maintains a pretty tight hold over its currency. So too does the United States, now that we’re talking about it.

When countries do what both we and the Chinese are doing — intentionally lowering the value of our currencies to boost exports and promote growth — it’s called a currency war. And it never ends well. Jim Rickards explains in his new book “Currency Wars: The Making of the Next Global Crisis.” Good to have you here.

Jim Rickards: Thank you, Kai.

Ryssdal: I try not to, when I’m about to ask the question I’m about to ask you, I try not to do it in exactly this way, but make me care. If I’m a farmer in Iowa or a businessman in Houston, how does this currency war affect me?

Rickards: Well let’s just have a look at the last currency war, which was in the 1970s. President Nixon went off the gold standard in 1971 — grossly devaluing the dollar. The price of gold went from $35 an ounce to $800 an ounce. So what happened? We had three recessions back to back to back between 1974-1981. It was one of the worst periods of economic growth in American history. We had three recessions. That’s what happened the last time. Now we’re going into it again. So I would say for all Americans, if you’re worried about inflation, your retirement savings, your annuities, your insurance policies, any fixed income, that money is going to be eroded by the inflation that comes from currency wars. Every American should care about it.

Ryssdal: We’re not seeing a whole lot of inflation though.

Rickards: Well that’s because it’s all going to China. So far the Fed has printed about $2 trillion in the last three years. What the Chinese did, the Chinese wanted to maintain a peg to the dollar to help their exports, but as we were flooding the world with dollars, they had to print their own currency to soak up all the dollars. Well now the Chinese have decided that inflation is a problem. They have let their currency go up, but that just means inflation is going to come back to the United States. So look out for it in the year ahead.

Ryssdal: In the year, 12 months you think?

Rickards: Oh, in 12 months it will start to show up definitely and then this will play out over years. Once these currency wars get going, they’re not over quickly. They can last 5, 10, 15 years. So if you have young children, by the time they get to college, the value of the dollar could get cut in half.

Ryssdal: There is a certain “people who live in glass houses” element to this. Right? Because for all that the Chinese are doing to keep their currency cheap, we on this side of the Pacific Ocean have quantitative easing from the Fed. We have members of Congress saying China is a currency manipulator and threatening sanctions. It goes both ways.

Rickards: It absolutely goes both ways. There is no doubt the U.S. is the biggest currency manipulator in the world. Now just to be clear, all countries manipulate their currencies to some extent. It’s a policy tool no different than interest rates or fiscal policy or borrowing, so all countries engage in it. The problem now is that the Chinese have throw in the towel, they’ve let their currency go up. That’s going to be a problem for them and employment. But this is just the beginning and the inflation that results from that is going to come back to the United States.

Ryssdal: I was reminded as I was reading this book of that phrase — and I don’t know if it was Clausewitz or Sun Tzu or whoever it was — war is politics by other means.

Rickards: That was Clausewitz. “War is the continuation of politics by other means.” You’re exactly right. Cheapening your currency against other currencies is just a different form of inflation. Economists say that. Doesn’t really work. I’ll give you a simple example: the iPhone. We all love our iPhones. They come from China. Only 6 percent of the value added in an iPhone is Chinese, so if you lowered the dollar 50 percent against the Chinese currency, it would only affect the price of the iPhone by 3 percent because China value added is so small. Most of the value added from an iPhone comes from Japan, South Korea, and Germany in terms of the touch screens, the processors, and the other components. So you’ve now got to lower the dollar against every currency in the world to affect the price of something like that. And that just means that everything we buy is more expensive. So it really feels good in the short run, it looks like it works, but history shows it doesn’t work and that’s what I elaborate on in the book.

Ryssdal: The book is called “Currency Wars: The Making of the Next Global Crisis.” Jim Rickards, thanks a lot.

Rickards: Thank you.

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