Currency Wars by James Rickards

Reading notes

Julia Wu
Julia Wu
Nov 28, 2019 · 4 min read

Nothing positive ever comes from a currency war.

Brazilian finance minister Guido Mantega flatly declared in late September 2010 that a new currency war had begun.

At the heart of every currency war is a paradox: currency wars are fought internationally but they are driven by domestic distress.

They begin due to insufficient internal growth. High unemployment, low or declining growth, weak banking sector and deteriorating public finances.

Difficult to generate growth in purely internal means. Promotion of exports through devalued currency becomes the engine of last resort.

GDP is characterized by Consumption, Investment, Government spending, Net exports (exports minus imports)

GDP = C + I + G + (X — M)

Consumption is stagnant or in decline due to unemployment

Investment is measured independently from consumption but tied to it. A business will not invest if no consumption is expected

Government spending can be expanded independently when C and I are weak (recommended by Keynesian economics) but governments rely on taxes or borrowing. But voters are reluctant to support that when consumption is low.

The last resort is to increase net exports, X — M. The fastest/easiest way to do that is to cheapen the country’s currency so the nation’s goods are more attractive to foreign buyers.

The US can manipulate the value of the dollar by lowering interest rates, making the dollar less attractive to international investors, or printing money to debase the dollar. It can also intervene directly in currency markets by selling dollars and buying euros to manipulate the euro back up to the desired level.

Protectionism: tariffs, embargoes and barriers to free trade

Example: duty on imported German cars. US price of those cars goes up. US offsets benefit of cheaper Europe through a tariff on imported goods roughly equal to the value of that benefit gained by the Euro, thereby eliminating the Euro’s edge in the US market. Protects US industry and auto workers.

The classical gold standard: 1870 to 1914

Gold served as international currency. No single defined meaning. Can be everything from natural gold coins or paper money backed by gold.

Classical gold standard was period fo almost no inflation — benign deflation.

It was not imposed top-down by an organization. Rather, more like a club that member nations joined voluntarily. No written rulebook. For those who joined, capital markets were open and currency exchange rates were stable against one another.

Germany, Japan, France, Austria, Argentina, Russia, India. US was on de facto gold standard but didn’t adopt standard until 1900.

Gold club: abnormal capital movements were uncommon. Competitive manipulation was rare, international trade was high, payments problems were few. Capital mobility was high.


Milton Friedman (Winner of Nobel Prize in Economics, 1976) stated that changes in money supply are the most important causes for changes in GDP. These changes can be broken into real (actual gains) and inflationary components.

Nominal increase = real + inflationary

Increase in money supply to increase output would work only up to a certain point. Beyond that, any nominal gains would be inflationary, and not real.

The Fed could print money to get nominal growth, but there is a limit to how much real growth would result.

In the short run, printing money might increase real GDP but inflation would show up later to offset initial gains.

These ideas are encapsulated in the Quantity Theory of Money equation.

MV = Py

M: money supply

V: Velocity of money

P: Price changes

y: Real growth

Can also be seen as

money supply * velocity = nominal GDP

Money supply M is controlled by the Fed. The Fed increases money supply by purchasing government bonds with printed money. It decreases money supply by selling the bonds for money that then disappears.

The velocity of money is a measure of how quickly money turns over.

Is there a natural limit to the amount that real economy can expand before inflation takes over?

Monetarist: if you have economic growth at 4%, then money supply should grow at 4%. If velocity is constant and price level is constant, there would be consistent growth and near 0 inflation.

A computer program could do this: start with good estimate of real growth rate for economy, dial up money supply by same target rate. Then just watch economy grow without inflation. Fairly simple as long as velocity of money is constant. But it isn’t that simple.

Velocity can’t be controlled by fed. It’s a behavioral phenomenon — a powerful one. Money supply is like the gears of a bicycle. Velocity is the brakes. The bicycle rider is consumer.

If rider puts on brakes hard enough, bike will slow down regardless of gears. Drop in velocity resulted in panic of 2008. Consumer slamming on the brakes.

Julia Wu

Written by

Julia Wu

Engineer thinking about fintech, AI, China, and our civilization | @Apple, @Microsoft, @BrownUniversity

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