Get Assets Newsletter

James Rickards: Global Monetary System Headed for Collapse

The world currency system is riding down the road to catastrophe, says James Rickards, senior managing director of Tangent Capital Partners.

The world already has entered a currency war that began in Y 2010 on the heels of the US Federal Reserve’s massive easing program, he tells Wall Street Journal Digital Network. Since then, plenty of nations have joined in, including Brazil, Switzerland and Japan, says Mr. Rickards, author of “Currency Wars: The Making of the Next Global Crises.”

“All major central banks are easing,” he says. “Eventually so much money will be printed that this will lead to inflation. The endgame is collapse of the international monetary system, sometime sooner than later.”

In both the United States and Japan, the central banks are trying to “import inflation” to get their economies going, rather than trying to boost exports, through a weaker currency, Mr. Rickards says. “They’re scared to death of deflation. They are cut rates, and the last resort is to cheapen their currencies.”

The European Central Bank is actually doing the right thing, easing for liquidity reasons rather than to depress its currency, Mr. Rickards notes. The euro has risen to a 14-month high against the dollar as a result, and he thinks it can keep ascending.

His currency view makes Mr. Rickards a huge bull on gold. His long-term price estimate is $7,000 an ounce, more than four times the current price of 1,677. Gold could trade in a range between $3,000 and $10,000, Mr. Rickards says. “We are not going to get there all at once.”

One major factor is that China is “in a scramble to acquire gold,” he explains. With about 1,000 to 3,000 tons, compared with 8,000 tons for the United States, China doesn’t have enough of the precious metal.

When the international monetary system collapses, major financial powers will convene to plan the aftermath, he says. When that happens, each nation must have enough gold relative to its gross domestic product.

“China needs to get to 4,000 to 5,000 tons to look the United States in the eye and be an equal country,” Mr. Rickards notes.

The global economy can muddle through this year, but major problems begin in 2014, he maintains.

“The biggest risk is the rapid collapse of confidence in paper money. They can’t just keep printing. Then gold really comes to fore, whether it’s a gold standard or … gold as a reference price.”

Francesco Guerrera, The Wall Street Journal’s money & investing editor, agrees with Rickards that a currency war already has begun.

But he’s not as pessimistic about the future. “[T]here is a chance this confrontation might not end as badly as the destructive devaluations that followed the Great Depression or even the turmoil of the Asian financial crisis of 1997-1998,” Mr.Guerrera writes.

Like Mr. Rickards he thinks central bank easing isn’t designed to promote exports, but rather domestic demand.

The global easing represents “attempts to make up for non-existent fiscal policies,” Mr. Guerrera says. “The dirty secret is that using monetary policy to weaken a currency, whether voluntarily or not, is a shortcut to avoid unpopular decisions on fiscal and budgetary issues.”

But common sense could prevail, he says. The International Monetary Fund may be able to negotiate currency peace.

“If that sounds naive, consider the possibility that this huge bout of monetary stimulus will succeed in engendering a solid recovery driven by domestic demand,” Mr. Guerrera writes. “Or that fiscal policy will finally be put to work.”

Others are worried about the monetary system too. “I think the biggest danger is … a currency war,” hedge fund icon George Soros, chairman of Soros Fund Management, says.