James Rickards - 23 July

Currency Wars

The Death of Money

The New Case for Gold

The Road to Ruin

No Way Home

This book is about the aftermath of the 2008 global financial crisis and efforts by central banks first to prevent a complete collapse of capital markets, later to revive self-sustaining growth, then finally to withdraw from continual policy intervention. It also warns that the crisis never really ended and offers a path to preserve wealth in the next phase. Like the Odyssey, this ten-year journey cannot be understood without reference to the struggle that preceded it. We consider the before, the after, and the future of the greatest financial crisis since the Great Depression.

In Homers epic poem the Odyssey, Scylla and Charybdis confront the hero, Odysseus, sailing home after the Trojan War. Scylla and Charybdis were the most feared women of Greek mythology. They lived in caves, a bowshot apart on each side of a narrow strait. Although female in nature, they were monsters. Scylla had six heads. Each mouth had rows of razor-sharp teeth that made the shark in Jaws seem tame. Her waist was shrouded with heads of baying dogs. She swam and walked on twelve snaky legs and devoured all within reach.

Less is known about the look of Charybdis, yet her powers were as daunting as Scyllas. Three times a day Poseidons daughter would swallow the sea and spew it out, creating a whirlpool fatal to ships and sailors.

Odysseus is faced with a terrible choice. He must guide his vessel through the strait. Avoiding one peril needs put him in reach of the other. Odysseus orders the crew to steer clear of Charybdis, taking his chances with Scylla. He reasons that a whirlpool portends complete loss, while Scylla is a more selective threatan ancient exercise in risk management. The gamble pays off. Scylla devours six of the crew. Still, Odysseus and the remnant survive, their vessel intact, to continue their journey home to Ithaca.

This heros dilemma, known in modern idiom as being between Scylla and Charybdis, is a perfect metaphor for the state of the global economy today and the choices confronting policymakers. Odysseus could coolly calculate his choice based on the nature of the horrors he confronted. Policymakers face similar tough choices now, with no way to gauge which is worse. The history of central bank policy since 2008 is an odyssey back to normalized interest rates and balance sheets. In the original Odyssey, the hero eventually arrives home, despite the dangers. In 2019, central bankers are still wandering, their travels far from over.

This twenty-first-century central bank odyssey was preceded by its own version of the Trojan War. In 2000, Federal Reserve chairman Alan Greenspan faced four challenges in quick succession that caused near deflation. The first was the bursting of the dot-com stock bubble beginning in March 2000. Second was a cyclical recession beginning in the United States in March 2001, part of a global slowdown in developed economies. Third were the 9/11 attacks, which, in addition to their historic geopolitical consequences, caused $40 billion in insurance losses and a one-day 7.1 percent stock market decline. This decline followed the longest trading suspension, September 1114, 2001, since 1933. Finally, Chinas accession to full WTO membership in December 2001 opened world markets to the greatest agglomeration of cheap labor and abundant capital in history. Chinas emergence put downward pressure on prices that has not abated.

The result was a flirtation with deflation, a central bankers worst nightmare. The consumer price index, or CPI, rose 1.55 percent in 2001, the lowest reading since 1986, and before that, 1964. After a slight increase to 2.38 percent in 2002, the CPI dipped again to 1.88 percent in 2003. In response, the annualized Fed Funds effective rate plunged from 6 percent in January 2001 to 1.8 percent by the end of that year. Greenspan then held the Fed Funds effective rate below 2 percent until November 2004 in an effort to slay the deflation dragon.

Deflation is a central bankers greatest fear because it increases the real value of debt, which leads to defaults that jeopardize bank solvency. Similarly, an increase in the real value of debt shines a light on the growing burden of government debt and calls U.S. solvency into question. Price deflation also produces gains in citizens real standard of living that governments cannot effectively tax. Deflation makes cash more valuable, which discourages consumption, the linchpin of economic growth. Worse yet, deflation is a trap that central bankers cannot escape with existing policy tools, what John Maynard Keynes called a liquidity trap.

Greenspan succeeded in defeating deflation. In 2005, his last full year as Fed chairman, the CPI was back up to 3.42 percent, a comfortable cushion above zero. Yet Greenspan scored a Pyrrhic victory. That three-year stretch of sub-2 percent Fed Funds from 2001 to 2004 was rightly criticized as too low, for too long. Low rates gave rise to the housing bubble and subprime mortgage crisis that exploded in 2007. The following year saw the global financial crisis and near destruction of the banking sector and the international monetary system.