Author Warns of Unforeseen Consequences of Currency Manipulation

Devaluing a country’s currency may provide a temporary boost to the economy, but it is not a good long-term solution, a global finance expert told an audience at Fordham’s Rose Hill campus.

“Devaluing currency is not the path to prosperity,” said Jim Rickards, author ofCurrency Wars (Portfolio, 2011). “You might get some temporary bump, but at the end of the day, there’s retaliation from other countries devaluating their currencies, or engaging in a currency war that can turn into a trade war. It’s a zero sum game.”

The author of spoke on Thursday, Feb. 16, as part of International Business Week, a four-day long series of lectures, workshops and information sessions organized by the Gabelli School of Business.

Rickards touched on the two previous currency wars the United States fought—from 1921 to 1936 and from 1967 to 1987—and the third currency war, which started in 2010 and is ongoing with Iran and China at the heart of the conflict.

He advocated a return to the gold standard and argued against the popular notion that Winston Churchill’s decision to return to the standard in the 1925 was responsible for the bringing on a Depression in England. Churchill’s mistake, he said, was linking the value of the country’s currency value to an ounce-of- gold value that was much too low for the times.

“Gold has been disparaged ever since the 1920’s by mainstream economists . . . for bringing on the Great Depression,” said Rickards. “The reason wasn’t the gold; it was the price [Churchill decided upon].”

Regarding today’s currency war, Rickards noted that net exports have become the main tool of choice for the U.S. to revive its economy. For that reason, the Obama Administration is deliberately devaluing the dollar so that American companies can compete in places like China.

This, he said, would trigger inflation—which would be good to a point. The problem is that the Fed cannot always control the rate, and that too much inflation would be devastating to the U.S. economy.

An example of how nations use financial instruments as weapons would be the squeeze currently being enacted by the United States and Europe to cut off Iranian banks from international markets. The U.S. recently decreed that multinational banks—such as UBS and Deutsche Bank—would be punished if they do business with Iran’s central bank.

This made it impossible to get U.S. dollars in Iran. As a result, Rickards said, the local currency value dropped 40 percent in two days when the ban was enacted.

“If you were going to sell your goods in the Rial, you needed more Rials to buy the dollar, so some prices doubled overnight,” he said.

This injected hyperinflation into the Iranian economy, which triggered a run on the banks and thus forced bankers to raise interest rates to try to keep Rials in the bank.

“In a matter of days, we trashed their currency, created a dollar shortage, injected hyper-inflation into their system and forced them to raise interest rates above 20 percent,” he explained.

Since the U.S.’ goal has always been to convince Iran to abandon its drive for nuclear weapons, it is still too early to declare this move against the Iranian currency a success.

“Be careful what you wish for,” he warned. “Because you can envision a world in which China, Iran, Russia, Central Asia, Malaysia and a few other countries, actually create a non-dollar payment system which would use other currencies backed by gold or oil.”

On thing the United States doe not have to worry about is the amount of U.S. debt held by China.

“There’s an old joke that if I owed you a million dollars, I have a problem. But if I owe you a billion dollars, you have a problem,” he said.  “We owe china three trillion, so they have a problem.”