The most terrifying book I’ve ever read

I just finished reading James Rickards’ book Currency Wars, and I’m torn between telling everybody I know to read it or going to CostCo to stock up on canned food and bottled water. I wish I were joking.

Rickards starts with a historical tour, highlighting the near-catastrophic results of two previous currency wars — the first of which led to the Great Depression and World War II, and the second of which led the malaise and stagflation of the 1970s. In each case, governments desperate to bolster domestic employment vastly increased the supply of their currency (by printing money or through other means) in order to prop up exports. In some cases this tactic worked to some degree over the short term, but over the long term it resulted in competitive currency devaluations with disastrous social and economic consequences.

Delving into the current world financial situation, he explains how the Fed, the U.S. Treasury and the IMF are responding to recession and unemployment with the same tactics that decisively failed in the past, and shows how the current situation is in several key ways far worse than other past crises. With Obama’s stimulus having failed to accomplish anything but vastly increase federal debt, consumers in debt up to their eyeballs, and a third round of “quantitative easing” on the horizon, the powers-that-be are rapidly running out of sleight-of-hand maneuvers to rebuild confidence and get people spending. Rickards sees a wholesale collapse of the dollar — and, by extension, the global financial system — looming ahead. He roots his arguments in recent developments in complexity theory, which seem to indicate that current policymakers vastly underestimate the risk of a systemic collapse.

He proposes some common sense reforms to forestall that collapse: breaking up “too big to fail” banks, outlawing most derivatives (which increase complexity while masking risk), and limiting the involvement of banks in risky trading and underwriting — and one more controversial move: going back to a gold-based currency. This last may seem extreme, but in Rickards’ view we are likely headed back to a gold standard (or something worse) whether we like it or not, and it would be better to adopt this standard in an orderly, reasoned manner than to wait until the dollar simply collapses, leaving gold as the de facto standard.

This book is a well-written, shrewdly argued, balanced and concise account of the predicament we find ourselves in at the beginning of 2012 — and what we can do about it. You must read this book.

(I’m heading to CostCo.)