A doomsday scenario for stocks and bonds

THE DEATH OF MONEY: THE COMING COLLAPSE OF THE INTERNATIONAL MONETARY SYSTEM

By James Rickards

Since Richard Nixon took the U.S. dollar off the gold standard in 1971, the Federal Reserve and other central banks have been free to run their printing presses with no real backing to paper money. From Japan to the European Central Bank, developed nations are in a desperate fight to stave off deflation and revive economic growth and jobs. They are in a race to the bottom to devalue their respective currencies, boost exports and stimulate economic growth. Far from fearing inflation, most are trying to create it. In his authorial debut in 2011, the bestselling Currency Wars, former Pentagon war games strategist Rickards warned that the world has embarked on its fourth global currency war in a century.

His follow-up is less optimistic about the prospects of a soft landing to the mindless printing of paper money backed by nothing more than faith in governments. He expects confidence in the U.S. dollar will collapse, taking the international monetary system down with it. An alarming prospect, but this already happened at the outbreaks of the two world wars and in the aforementioned 1971. Previously, however, the U.S. dollar served as the global reserve currency and was strong enough to save the system. Next time, Rickards warns, the greenback may itself be the cause of the crisis, unless the world shifts in time to an alternative reserve currency.

That could be in China, now boosting gold reserves as quietly as it can, or it could be a basket of currencies that includes the euro, yen and ever smaller proportions of the greenback: SDRs or special drawing rights, developed by the IMF in 1969, and belatedly deployed in the financial crisis of 2008.

Rickards’s pessimism about the dollar extends to financial assets denominated in dollars, such as stocks and bonds. He suggests investors protect themselves by shifting to hard assets such as gold, farmland and fine art, plus old-fashioned cash and hard-asset alternatives such as hedge funds. His worst-case scenario he dubs “chaos,” with a total breakdown of global currencies and, hence, of the economic infrastructure of developed nations. If this starts to occur, he’s hopeful the system may yet be salvaged by reinstating a gold-backed dollar, even if it means letting the price of gold soar tenfold.

JONATHAN CHEVREAU