An extension of the ongoing cold war that never ended:
We’re in the throes of Currency War III, and Ben Bernanke has won the first offensive by flooding China with inflation.
If this sounds like a geeky online game, recall how Chinese prices surged after the Federal Reserve unleashed its quantitative easing in 2009 and 2010, one of many moves James Rickards parses in his somber book, “Currency Wars.”
“It was the perfect currency-war weapon and the Fed knew it,” he says, describing how the Fed’s expanding money supply forced China to print more yuan to maintain its peg to the dollar. “China was now importing inflation from the United States through the exchange-rate peg after previously having exported its deflation to the United States.”
Enough was enough, as President Barack Obama has now summed up the U.S. view that the yuan remains undervalued.
Rickards, whose CV includes stints at Citibank Inc. and Long-Term Capital Management LP, has written one of the scariest books I’ve read this year. Though I was tempted at first to dismiss him as alarmist, his intelligent reasoning soon convinced me that we have more to fear than fear itself.
Part history, part primer and analysis, the text covers topics ranging from the “misuse of economics” to complexity theory. The pieces, although disparate, fit together snugly, as in one of those mystery jigsaw puzzles that come with clues in lieu of cover art. The picture that emerges is dark yet comprehensive and satisfying.
Chapter One aptly sets the stage with a behind-the-scenes look at the Pentagon’s first financial war game, which opened on a rainy day in March 2009 at the Warfare Analysis Laboratory halfway between Washington and Baltimore. Rickards describes how he helped design the exercise and recruited two Wall Street pros, Steve Halliwell and Bill O’Donnell, to participate alongside platoons of economists, intelligence officials and military analysts.
Together, the threesome conspired to lob a heat-seeking missile into the battlefield: Without warning, the Russian Central Bank announced it was transporting its gold to Switzerland and issuing a new gold-backed currency through a London bank. Russian oil and gas exports would henceforth be paid for in the new currency, not dollars. By the end of the game, the U.S. was the biggest loser.
Continue reading article: Bernanke Bludgeons China With Inflation as Currency War Intensifies: Books (Bloomberg)