Some five years back, James Rickards, presented the scenario of impending global currency wars by war gaming with the assistance of Pentagon and a number of military, economics and financial experts. His book Currency Wars attracted a stunned readership from all around the world. A Forbes review said: At the end of the cold, and Middle East, wars, we have entered a perilous new world. Currency war is as relevant as tomorrow’s headlines. No sleepy tome on monetary policy, Currency Wars is a white knuckle exercise. It begins three years ago with a war game carried out by the Pentagon in a secret facility just outside of Washington DC.
The exercise hypothesized a financial panic caused by some highly-charged actions assumedly taken by the global states that matter; for example, the Russian initiative of withdrawing its gold reserves from depositary countries and issuing a new ruble to be used in all future oil and gas transactions. The reaction of top economies like the United States, China and others — to the initiative — was then put on the speculative drawing board.
The Forbes review ends with the following pragmatic assertion: ‘America looks to Washington to get a grip on restoring the prosperity, security, dignity and liberty that comes with real money. History well may view James Rickards as the Paul Revere of the Currency War, our struggle to re-establish real money – currency convertible to gold at a fixed number of grains. History may even come to hold Currency Wars as important for our era as was the famed Midnight Ride for American independence.
A telling reminder to those who have put James Rickards’ book Currency Wars on the shelf of forgetfulness now comes in the shape of a recent article penned by Mohammed A El Erian, Chief Economic Adviser at Allianz, and Chairman of President Barack Obama’s Global Development Council. The article is titled: An Accidental Currency War? It opens with the following lines: ‘Six and a half years after the global financial crisis, central banks in emerging and developed economies alike are continuing to pursue unprecedentedly activist – and unpredictable – monetary policy. How much road remains in this extraordinary journey?
In the last month alone, Australia, India, Mexico and others have cut interest rates. China has reduced reserve requirements on banks. Denmark has taken its official deposit rate into negative territory. Even the most stability-obsessed countries have made unexpected moves. Beyond cutting interest rates, Switzerland suddenly abandoned its policy of partly pegging the franc’s value to that of the euro. A few days later, Singapore unexpectedly altered its exchange rate regime too.
More consequential, the European Central Bank (ECB) has committed to a large and relatively open-ended program of large-scale asset purchases. The ECB acted despite a growing chorus of warnings that monetary stimulus is not sufficient to promote durable growth, and that it encourages excessive risk-taking in financial markets, which could ultimately threaten economic stability and prosperity (as it did in 2008).
After the creation of fiat money, the abolition of Gold Standard and the establishment of IMF and World Bank, the most destabilizing blow came with the abolition of Fractional Reserve System. The highly consequential impact of the move came in the aftermath of the global financial crisis when the faltering world financial markets were temporarily steadied with the help of a spate of freshly printed US dollars. With the Quantitative Easing, sounded the war drums. The war is open-ended, with no end in sight.The world’s most esteemed and feared central bank, Fed, was setting the tune for the war-drums squad. China, the top exporter to the US was first to realize the gravity of the move. In view of yuan’s pegging with the dollar, China had itself to print extra currency notes to maintain balance. The resultant fall in the value of Chinese currency didn’t suit the United States and diplomatic pressure started mounting on China for revaluation of the yuan. After the QE move, the norm with the exporting countries has had been to keep their currency in the depreciative zone. The currency wars are on – the taste of blood is in every mouth, including that of the US.
With the advent of a new financial regime after the World War I. the balance of power has shifted from the statesmen and politicians to the bankers. Taking a cue from the Fed, the world central bankers have ventured to rule the world without appreciating their limitations. Monetary policies can control money, not the production of goods and services, which is dependent on so many other factors falling outside the ambit of central banking. Economic growth is a function of economic resource base, geographical conditions, technological advancement, national education and good governance. Good monetary policies can sure support the entire process of growth. Bad ones can lead to high speculation and financial anarchy. The fluid and cash-awash economies are not a guarantee to sustained global economic growth. These lines of Mohammed A Al Erian appear ominous: ‘This new round of central-bank activism reflects persistent concerns about economic growth. Despite a once-unthinkable amount of monetary stimulus, global output remains well below potential, with the potential being itself at the risk of being suppressed.’