Technically, a currency war occurs when one country intentionally devalues their own currency, because that helps their export industries. It is a common method to boost economic growth and import inflation, both of which help decrease the burden of debt. This is usually done by “printing money” or increasing the money supply greatly. However, it hurts other nations because their exports fall and imports increase, reducing their trade balance and increasing their unemployment. Currency wars really irritate trading partners. It is a serious thing and often leads to shooting wars!
So, I kept thinking about the possibility of another global currency crisis and decided to read this book again. Getting past the “ambush theme” this time, I noted that Rickards concludes there are only three possible outcomes, i.e., “paper, gold, or chaos.”
If we do nothing, Rickards argues that another currency war is inevitable, as developed nations must deal with their national debt and devalue their currencies. Doing nothing is a recipe for chaos.
He argues convincingly that a new world-wide currency, based on a basket of currencies (including the dollar, Euro, Yen, and Yuan) would preclude major currency wars in the short-run. I believe that! Then, he goes further by arguing that the new paper currency should be backed by gold, which would reduce the power of politicians. Since politicians would have to vote to reduce their own power, I’ve never thought this was a realistic scenario and never took it seriously.
One step at a time . . . let’s see the debate on a new world currency first. It will hurt our American pride to see the dollar de-throned as the sole reserve currency in the world now . . . but it will help everybody in the long-run, including us.