When it was released a year ago this month, James Rickards' Currency Wars: The Making of the Next Global Crisis was widely hailed and quickly adopted as a guidebook of sorts for economic conservatives, Fed critics and gold bugs -- especially gold bugs given Rickards' support for a return to the gold standard.
Since the book's release, the Federal Reserve has tripled-down on its policy of quantitative easing, effectively pledging to keep rates at zero indefinitely — or until the job market dramatically improves. Nevertheless, predictions of the dollar's demise have proven unwarranted, or certainly premature. Among other issues, concerns about Europe's debt crisis have driven global investors into the greenback, rather than fleeing from it as Rickards (among others) predicts.
In the past 12 months, the Dollar Index is up about 3.3% while gold has been largely stuck in the middle of a range between the low $1500s and high $1700s, well below its August 2011 high of $1900 per ounce.
The dollar may strengthen further in the near-to-intermediate term if Israel's clash with Hamas proves to be a prelude to war with Iran next year, Rickards predicts.
'Blunt & Threatening' Fed
That said, he's sticking with a long-term forecast of the dollar's demise as the world's reserve currency. "The Fed wants a cheaper dollar but that doesn't mean they're going to get it" right away, says Rickards, a partner at JAC Capital Advisors says. "If they don't get it, they'll have to try harder."
As evidence, he cites Fed chairman Ben Bernanke's "blunt and threatening" speech in Tokyo last month, which many observers took as a response to criticism of Fed policy by global finance ministers, notably Brazil's Guido Mantega.
"What Bernanke said, reading between the lines is: 'do what you want, we'll keep printing until the dollar gets weaker,'" Rickards says. "'Your choices are inflation if you want to keep pegged [to the dollar] or higher export prices if you let your currency go up.'"
In a speech Tuesday in New York, Bernanke primarily spoke about the need to avoid the fiscal cliff but did nothing to dissuade investors from the idea the Fed would continue its policy of quantitative easing and perhaps add to it in the coming year.
"We will continue to do our best to add monetary-policy support to the recovery," Bernanke said during Q&A. "What the Federal Reserve can do and will do is continue its stated policy which is to do additional asset purchases, buy [mortgage-backed securities], and take whatever actions are appropriate to try to ensure that the outlook for labor markets improves in a sustained way and a substantial way."
The Fed could increase the amount of securities it is buying from the current plan of $40 billion per month and has set "no time limit" for when QE will stop. "They've got a long way to run," Rickards says. "We're not always in currency wars but when we are they last for a long time."
While admitting timing the dollar's downturn is difficult, Rickards says currencies are prone to "sudden shifts" and believes the notion of currency wars has "gone global," citing comments in recent months from policymakers in Taiwan, Mexico, Hong Kong and South Korea.
"When do the chickens come home to roost?," he asks. If trading partners do start to let their currencies get stronger and the psychology of U.S. consumers changes about the threat of inflation. "Instead of nice smooth path from 2% to 3%, [inflation] could gap to 6% in a matter of months," he says.
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