In Friday's blog we often try and focus on something different. The phrase “currency war” is one that is banded about quite a lot, and for those who are curios to understand this notion and decide if the world’s central bankers are currently at war with each other, James Rickard's in his book “Currency Wars” describes how he believes we are now in the third world currency war. The book starts in the pentagon and goes on to walk the reader through what he believes were the first two currency wars, carried out in the twentieth century. The author argues that the Federal Reserve's current quantitative easing policy has negatively impacted other parts of the world by artificially weakening the dollar to improve its own competitiveness, and by doing so it exported inflation to economies like China. The book then goes onto suggest a scenario where the rest of the world, namely Russia and China, could club together to destroy the dollar as the reserve currency of the world in retaliation. The author’s solution to prevent currency wars is to empower the IMF as the world's central bank and to reintroduce the gold standard by once again fixing the value of currencies to the price of gold. Many reading this blog will know this idea was tried before and was effectively abandoned in 1933 when president Roosevelt outlawed the private ownership of gold as the reliance on the gold standard was seen as part of the reason for the great depression.
Our view is that the world’s central bankers are not involved in a war, but rather in a concerted effort to work together to stimulate the global economy. Why would it be in the best interests of Russia and China to try and destroy the US economy? Surely it was important post the crash of 2008 to stimulate the worlds engine, namely America, and the best way was for that to happen was increase its competitiveness by the devaluation of its currency. Now that the US economy seems to be the life support and is starting to show signs of a sustained recovery, the dollar also is starting to show strength once again.
One passage of the book centred on the role of Dubai in the jigsaw of the global economy and compared the modern day Dubai to that of Casablanca during the Second World War. Casablanca was made famous by the Humphrey Bogart movie, and described as a place “where enemies could mingle at ease”. The analogy for Rick's bar is the Atlantis hotel on Palm Island.