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In recent years, it's become conventional knowledge that the dollar's status as the world's reserve currency is under threat. In his new book, Currency Wars: The Making of the Next Global Crisis, James Rickards makes a compelling case for not just why the dollar will lose its reserve status, but how.
In the book and the accompanying video, Rickards, a veteran investment banker and hedge fund manager, describes four different scenarios by which the dollar will lose its reserve status, which he calls the "Four Horsemen of the Dollar Apocalypse":
The "Kumbaya Approach": Since 2000, the dollar has fallen from 70% of the world's currency reserves to 60% today as nations diversify their holdings into euros, gold, yuan and other dollar alternatives. U.C. Berkeley professor Barry Eichengreen, among others, argue this diversification trend will continue until we live in a world of multiple reserve currencies. But Rickards says this "Kumbaya approach" is destined to fail because without a gold standard it will be "a race to the bottom" as nations seek competitive devaluations. (See: The Next Global Crisis: Currency Wars Have Already Begun, Rickards Says)
IMF as Global Central Bank: Since 1969, the IMF has had the ability to print Special Drawing Rights (SDRs), which nations can use to maintain a portion of their currency reserves. Although not available for use in private transactions (yet), Rickards notes SDRs can be used by nations to settle trade balances with other nations. "The SDR is world money, controlled by the IMF, backed by nothing and printed at will," he writes. The 2008 financial crisis led to a "new concerted effort by the G20 and IMF to promote the use of SDRs as the global reserve currency alternative to the dollar."
If and when the world loses faith in the dollar, expect the G20 and IMF to redouble efforts to make SDRs the globe's new reserve currency, Rickards says.
Go for Gold: Like many others, Rickards advocates a return to the gold standard. (See: Bye-Bye Bernanke? The Case for the Gold Standard)
Unlike most fans of the gold standard, he actually has a plan to return to a gold-backed monetary system without causing major upheaval to the global financial system by addressing three key questions: What's the definition of 'money' (M1, M2, etc.)? What percentage of the money supply should be backed by gold? Will the U.S. act alone or in concert with other nations? "Answer those questions and it's really just 8th-grade math" to figure out what the implied price of gold will be, he says.
While arguing it has the "best chance of success," a return to the gold-standard is the "least likely" of the four scenarios, Rickards says. "The power elites hate [the gold standard] because it takes away their ability to print money; when you print money you rig the game, you control the game."
Chaos: Given myriad challenges to the three scenarios above, a "sudden, systemic collapse" of the dollar-based financial system is the "most likely" outcome, Rickards says, predicting the ensuing chaos will be "much bigger" than the 1987 crash or the crisis of 2008.
Faced with such upheaval, Rickards suggests the U.S. will invoke the International Emergency Economic Powers Act of 1997, which gives the President "near dictatorial powers to respond to a national emergency."
In addition to seizing all foreign gold on U.S. soil, Rickards envisions the President closing the stock exchanges, suspending trading of U.S. Treasuries by foreigners and prohibiting exports of gold from the U.S., among other draconian steps.
In the aftermath, the U.S. would control about 70% of the world's gold system and all us to "reboot the system and have a new gold-backed Bretton Woods," he says. "That would be a good scenario if we got their by consent and by multilateral action...but to do it on an emergency basis in the face of a collapse in confidence in paper currencies; it would solve the problem but it would not be a good scenario."
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
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