Monday, 16 January 2012

Book Review: Currency Wars

I've been recommending this all over the place of late so I thought it was about time that I wrote a book review of Currency Wars by James Rickards. Being as it is probably one of the better books I've read on finance recently its certainly earned its high spot on my (Kindle) shelf.

Currency Wars is two things, first it is an intelligent discussion of the world we find outselves in and the likely outcomes of the ongoing competition between states and the hyper-rich organisations which are now able to operate at a nation state level when it comes to finance. It also acts as a superb historical resource, charting how modern currency emerged as what we all recognise in the 21st century. Suffice it to say that this was a messy process.

The book starts off with one of my favourite topics, war games. As it transpires the US military ran a war game(s), involving Rickards in which they tried to assess whether currency could be used as a tool of inter state conflict. The short answer is that yes it can, but its very hard to predict how it could be used safely. Any sufficiently powerful state or group of states (Read, China, Russia, EU, America, possibly a few of the BRIC countries operating together) can kick off some pretty messy business to their own short term benefit, however controlling the consequences would be nigh on impossible.

The other factor which has only emerged in relatively recent history, which further complicates this world, is the previously mentioned hyper rich non state entities. The role Rickards paints for them is largely to add randomness to the whole situation (I paraphrase), in that it is hard to see which way they will jump in any particular circumstance, as they do not have the same loyalties or institutional memories that a state like Russia or China might have.

I'll set aside an analysis of the history section of the book as ultimately, that's too complicated to easily summarise in a single blog post. Suffice it to say it is an eloquent and cogent analysis of how the world we have now has emerged, it also sets the scene for what is to come very well.

Rickards posits a group of scenarios which he believes to be the most likely in the next few years, they make for grim reading. One of the scenarios is entitled "Chaos" and in essence suggests that we could end up in an endlessly downward spiral, with no end in sight, as critical infrastructure deteriorates to the extent it can never be regenerated. Where that spiral ends up, who knows, but I certainly want to buy a lot of canned goods after reading it.

There are of course more positive scenarios however they all rely on at least the majority of actors having a large degree of courage and the ability to lead the world out of crisis. As I was reading it I have to admit, for a short moment, I miss Gordon Brown. Say what you like about him, at a critical moment he was willing to lock a group of world leaders in a room and deny them an exit until they agreed to drag the world out of the fire in 2008. He didn't finish the job by any means, but at least he was able to achieve something. The current Conservative Government is extremely beholden to the City and will not take a leadership position on any issue which might threaten those institutions

We also cannot depend on China to help rescue us and I believe, as does Rickards clearly, that China has its own domestic concerns which will limit its ability to affect change on the world stage. China is a relatively new actor at this level and has demonstrated its primary goal is to protect its own finances and currency.

America is in rapid and probably unstoppable decline, a readjustment at least two decades in the making is occuring there. Europe has been revealed to have huge systemic flaws in the institutions of the Euro which do not look solvable in the short term. Russia is mired in an increasingly autocratic system, and its economy is supported largely by the export of energy resources, not wildly helpful when diversity is needed.

Add to that the fact that countries natural position when it comes to economies and currencies is conflict. That is what they are geared up for and the way they will continue to operate naturally. Operating in another way will require powerful leadership and the ability to make rational strategic choices, the impact of which will last over the next decade or more, a timeline which few democratically elected politicians are willing to consider any more.

Who knows how it will all turn out, but in the interim, read this excellent book and find out just how bad it could get. Or check out this bit of the Financial Times which is dedicated entirely to currency wars, in case you thought this was a nice bit of theory.

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