Currency Wars: The Making of the Next Global Crisis by James Rickards

catastrophic. Still, it was one more swipe at the dollar and a nice parting shot from O.D.
    Finally, the white cell seemed to be impressed with Russia’s tenacity on the alternative currency, especially its overture to OPEC, and awarded the country additional national power points. This was a complete turnaround from day one, when Russia’s play had been ridiculed. China was awarded more points mostly for doing nothing. It was a case study in how to win a zero-sum game just by keeping your head down while everyone else blundered around. The United States lost national power, partly because of Russia’s dollar assault, but also because it appeared that East Asia was coalescing around a China-Japan bloc that would eventually include most of the region and exclude the United States from its key decisions on trade and capital flows. In the end, China gained the most by doing the least while Russia and East Asia gained slightly and the United States was the biggest loser.
    The rest of the session was taken up with debriefings. It had been a fascinating two days on top of all the work that had gone into the preparation. It is genuinely helpful to U.S. national security when so many experts, with varied perspectives and some from distant locations, gather under one roof to exchange ideas and give the military new ways of understanding potential threats. When the Treasury and Fed did scenarios, they usually thought about bursting bubbles and market crashes, not state-sponsored financial wars. Former Fed chairman Alan Greenspan liked to say that the Fed had no expertise in stopping bubbles and that its resources were better utilized cleaning up the mess after a bubble had burst. That Greenspan view works only for messes of a certain size. For the really big messes—those involving civil unrest, food riots, looting, refugees and general collapse—the Fed has no answer and societies inevitably turn to the military for solutions. So the military had a large stake in understanding the potential for economic catastrophes. We had at least given the Pentagon some framework for thinking about an economic surprise attack. My hope was that they would not need it; my concern was that they would.
    Over the next few weeks, with the recollections of the financial game fresh in my mind, I couldn’t help but be reminded that a real currency war had already broken out and was being fought hard around the world. In March 2009, no one was yet using the term “currency war”—that would come later—but still all the signs were there. The Federal Reserve’s first quantitative easing program, so-called QE, had begun in November 2008 with the not so hidden goal of weakening the dollar on foreign exchange markets. The Fed’s cheap-dollar policies were having their intended effects.
    Over the two years following the war game, stocks and gold both rose over 85 percent. Some analysts were initially baffled by the positive correlation of stocks and gold until they realized that exactly the same thing had happened in April 1933 when FDR smashed the dollar against sterling during the “beggar-thy-neighbor” currency wars of the Great Depression. The massive price gains in stocks and gold in 1933 and 2010 were just the flip side of trashing the dollar. The assets weren’t worth more intrinsically—it just took more dollars to buy them because the dollar had been devalued.
    In the world outside the war room, trashing the dollar was the easy part. The hard part was calculating what would come next, when exporters like China, Russia and Saudi Arabia tried to protect their interests by raising prices or avoiding U.S. dollar paper assets. That’s when the currency wars would really heat up, yet that was still in the future from the perspective of the war game in 2009.
    One lesson of the war game for the Pentagon was that, even if the dollar collapsed altogether, the United States still had massive gold reserves to fall back on. It is an intriguing fact