THE DEATH OF MONEY

The author of this authoritative study building on his previous book Currency Wars is an adviser on international economics and financial threats to the Department of Defence and the US intelligence community. As such, he is better informed than most analysts on the inside track. The international monetary system has collapsed three times in the last hundred years: 1914, 1939 and 1971. The issue in question is whether we are in imminent danger of a further collapse, in this case of the dollar, which underpins the entire international monetary system. Rickards shows how money and wealth have become detached from each other, the former being transitory while the latter is permanent and tangible. The situation has been hugely exacerbated since the 2008 meltdown as the Federal Reserve has sought to keep the show on the road by printing vast amounts of money, a policy also followed by other central banks. One should note in parentheses that the Federal Reserve is privately owned, unlike other central banks.

Since 2008, the Fed has increased the US money supply by 400%, from $800 billion to over $4 trillion. At the same time, the velocity of money has been in decline while this quantity has skyrocketed at a time of zero interest rates. This has propped up asset prices and stock markets, but the real danger is that this is in fact another asset bubble made all the more precarious by the staggering amount of derivatives in the market – some $650 trillion or more than nine times the global GDP. A collapse of confidence in these instruments will make 2008 look like a picnic. Amazingly but perhaps predictably, there had been no moves to regulate the creation of derivatives, largely because of the power the banking lobby. If and when a market collapse arrives, the Fed not be in the position to print a further $3 trillion, which means the IMF will have to step in - see further discussion below. In the meantime, it is important to note that capital markets exhibit the four characteristics of complex systems: diversity of agents, connectedness, interdependence and adaptive behaviour.

The three parts of the book discuss money and geopolitics, money and markets, and money and wealth. The first chapter discloses insider trading in airline stocks in the run-up to 9/11 and explains a sophisticated instrument for detecting this within the wider context of financial wars. The purpose here would be to degrade and enemy's capabilities while at the same time seeking further geopolitical advantage. We already know that China, Russia and the Middle East have a great interest in ending US monetary hegemony and the advantages that it has brought. China is not without its own problems with over $3 trillion of investments denominated in US dollars, an asset bubble in property and a demographic peak of working people approaching as the one child policy feeds fully into the system.

An important underlying theme is the tension between inflation and deflation. Rickards feels that the Fed cannot stop its easing policy while fundamental deflationary forces are in place, which puts them in a position of balancing on a tightrope without any net below. He comments that the Fed must promote inflation and inflate asset prices without causing the bubble to burst: 'it must exude confidence while having no idea whether its policies will work or when they might end.' (Another potential bubble is the $1 trillion of student loans). He is bullish about the euro and realises the powerful role that Germany is playing in the European economic and political landscape. When it comes to the nature of money, he observes that the US dollar is in fact a non-interest-bearing note that constitutes debt but also depends for its stability on trust and confidence.

This is where the IMF comes in as the de facto central bank of the world. They can issue Special Drawing Rights (SDRs), which can be seen as world money in disguise, being a store of value, a unit of account and a medium of exchange. The exact way in which these might be used and their relation to gold is not yet clear. Rickards also analyses in detail the nature of gold and its potential role in any financial system. It is very interesting to see the extent to which China has been increasing its reserves.

Rickards draws an important distinction between quantifiable risk and uncertainty, which is endemic in complex systems. We cannot know exactly how the dynamics of feedback loops may lead to a state of criticality and consequent collapse. His conclusion sums up the thesis of the book. He begins by pointing out that the printing of money is in fact an irreversible process and the crux of the current problem is not so much money but debt: money creation is being used to deal with defaulted debt and between 2009 and 2012, the US Treasury ran a $5 trillion cumulative deficit while derivatives creation by banks has continued unabated. He thinks that a new system will be required in order to regain confidence in the new store of value. The demise of the dollar could take three paths: SDRs, a new gold standard or social disorder and the circumstances are likely to involve a crash that will wipe out the assets of ordinary people. He gives seven possible signs of potential collapse including sharp movements in price of gold, IMF governance reform to give more power to China, and the failure of regulatory reform. He finishes by recommending five investments for the individual to protect their position: 20% gold, 20% land, 10% fine art, 20% alternative funds and 30% cash, commenting that it is best to be among those who have braced for the storm. This is a sobering and well-informed read - one can only wonder if pre-emptive action is in fact possible at this stage, even with the best intentions.