10 Currency War Insights From Jim Rickards

In his latest TV interview, Jim Rickards gives an update on currency wars and explains several key principles. We have summarized them in this article in ten different insights:

  1. The current currency war started in 2010 and could go on till 2020. The previous two currency wars lasted between 10 and 15 years.
  2. Currency wars are like a real wars; there is not a continuing war all the time but there are different battles over time.
  3. The most recent big battle was the one in Japan, based on “Abenomics” (i.e. the huge monetary stimulus announced by Japan’s government and central bank).
  4. Currency valuations fluctuate based on fundamental factors, for instance changes in competitive advantage, demographics, innovation and technological advances, resource discoveries.
  5. By contrast, currency wars occur when countries intentionally debase their currency with the sole purpose to steal trade from their neightbours. The tools they use are interest rate cuts or QE (quantitative easing).
  6. The underlying reason why countries go into currency war is to import inflation and get nominal GDP higher.
  7. Risk of currency wars can be mitigated (by individuals) by owning gold. The same goes for countries. Too much debt and an exptected increase in inflation in order to achieve nominal growth risks to result in a complete collapse of confidence. Countries could be forced to go to a gold standard.
  8. The international monetary system has collapsed 3 times in the 20th century: 1914, 1939, 1971. A fourth collapse could be coming, although it’s not given. When it happens major powers sit together and rewrite the rules of the (international monetary) game.
  9. Gold and SDR’s are both options for a monetary standard. China and Russia are fed up with the dollar hegemony.
  10. China is not a candidate (yet?) to replace the dollar because the currency does not have a large deep pool of investable assets (whic his a condition for a world reserve currency). For instance, they do not have a bond markets with dealers, repo, settlements rules, etc. Probably they do not want it either; they would prefer the SDR’s because it will give them an increasing vote in the monetary system.

 

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