So it’s a three-front currency war among the euro, the yuan and the dollar, it is getting serious and it is going to continue. This is very typical of what happens when you have not enough growth. When you have good economic growth, people don’t worry so much about their share, if somebody gets a little advantage over someone else because of the currency, they may grumble, but they are not overly concerned because they have the growth. But when you have no growth or insufficient growth, people begin fighting over the crumbs, and that’s when currency wars begin.
Do you think that a trade war is the next step of this currency war?
Logically, trade wars are the next step in currency wars, because not everybody can devalue against everybody else. You begin to devaluing against one currency, and then they retaliate by devaluing against you or some third currency also devalues against the first two. It becomes a kind of negative sum game. One way to play the game is to impose tariffs or surtaxes which is what the United States did in the 1970’s. Putting a 10 percent import tariff or a ten percent surtax on imports, is economically the same as a ten percent devaluation. It gets you to the same place, makes foreign goods ten percent more expensive in your country. I think the first step is a currency war, but that tends to be unsuccessful and all advantage is temporary. The next step is to move the currency war to embargos, tariffs and surtaxes, and beyond that outright capital controls and more stringent control on foreign trade. So yes, there is the danger that it goes very quickly from a currency war to a trade war.
On October 16, you’ve raised on Eric King’s “KingWorldNews.com“ in relation to the currency war the topic of gold by saying that the United States could commandeer all foreign depositors of sovereign gold at the New York Fed to West Point for example and make them part of the US gold reserves.i First of all, are you sure that the official gold reserve numbers of the US are valid or do you have your doubts (that could be easily wiped out once and for all with an independent audit for which GATA is asking in their freedom-of-information lawsuit versus the Federal Reserve)?
Well, a few things, Lars. Number one: I take the official figures at face value, I believe they are correct. To put it differently: I have not seen any evidence that they are not correct. So in my analysis, in my research I assume that they are correct. Having said that, I agree that an audit would be a good idea. I don’t see the harm in an audit if the gold is there. An audit would confirm that and would put a lot of doubts at rest. If the gold is not there, then the American people deserve to know and the world needs to adjust accordingly, because it is operating on the basis of a fraud. So in the first instance, I believe the gold is there, but I do agree that it should be audited. Again, if the gold is there, I don’t see any harm in the audit.
On your first point, I was not recommending that foreign gold in New York be converted to U.S. purposes immediately; what I was saying is that if the currency wars escalate and if we have a sequential collapse of paper currency, there may come a time – we’re not there, yet – but there may come a time in the future, when the dollar is collapsing, and in that case we will need to re-start a new currency backed by gold, which would be acceptable in world trade. And if that happens, it would make sense for the United States to commandeer not just the German gold, but all foreign gold in the United States, basically move it to a different location.
Right now it is at the Federal Reserve Bank of New York, which is an independent agency. So it would be good for the United States to in fact commandeer the gold and move it exclusive U.S. government control, away from the Fed, probably at West Point, because we have a good large gold vault there and good security. And at that point, the United States could launch a new version of dollar backed by gold and work with the Europeans, the Japanese and others to make this the new global currency that would be acceptable in world trade. In conversion of the gold we would give the Europeans some kind of treasury certificate in exchange for their gold.
Roughly 66% of the German gold reserves are located in the vaults of the NY Fed. You see them at risk in your currency war scenario?
I see them at risk in an extreme case. I do not see them at risk today or in the immediate future, but as the collapse of paper currencies progresses, the world would need another solution. There are really two competing solutions. One is a global currency backed by a global bank, such as the IMF. In effect, the G20 would reconstitute the IMF as a World Central Bank, there were already some steps taken in that direction, at which point the IMF, that I think of as the World Central Bank, would market and issue a new paper currency, probably based on SDR’s. ii That would be a way to liquify the world and get world trade revitalized. That’s one scenario.
The other scenario would be a gold backed currency, which would be in my view a lot more acceptable. The difference is that an IMF-SDR backed currency would have to be on a multi-lateral basis with large participation from the Chinese, whereas a gold backed currency could be controlled by the United States of America, in particular if we would convert the foreign gold. I would favor a solution which sees the United States in charge of the world economy.
Should Germany / the Bundesbank say to the Federal Reserve in New York City: “We want our gold back“? And do you think they might have already done so in the past without a positive outcome?
I have no information on whether Germany has ever made that request, I simply don’t know. But if I were Germany, yes, I would move my gold to a secure location somewhere in Germany, in Frankfurt or Berlin or maybe a secure facility outside one of the major cities. Remember, in the 1960’s, President Charles de Gaulle of France sent a French naval vessel to New York to pick up France’s gold.
Yes, and Germany should do the same?
Well, I think it would be prudent of Germany. Germany is a gold power. If you look at the world and say: Who are the gold superpowers?, the answer is: the United States, Germany, France and Italy. Those are the four leading gold superpowers. So if I were Germany, I would want to have my gold in Germany in order to maintain my finacial superpower status. But as long as the German gold is in New York, it is vulnerable to confiscation by the United States, which would obviously act in its own best interests in the event of a global financial panic and the collapse of paper currencies.
I’ve asked the Bundesbank recently the following question without receiving an answer whatsoever:
In the past the Bundesbank stated with regards to the German gold reserves abroad „that transportation to Germany and safekeeping in the Bundesbank’s own vaults would entail high costs.“ Can you give an estimation of those „high costs“ and an answer why it costs less to keep them safe in the U.S. / NYC than in Frankfurt and/or Mainz? iii
Is this a reasonable question, Mr. Rickards?
Well, I think it is a reasonable question, but I would say the following: On the one hand, I have no idea what the actual costs of custody in New York would be versus those in Germany, I don’t know what those numbers are, and I don’t know what the transportation costs are – but I wuld say, that those costs are miniscule relative to the risks. In other words, you can’t just look at the costs of custody in New York and the cost of custody in Germany and say that’s the basis for your decision, because that completely ignores the risks of confiscation.
Now, if you think the risk is zero, it probably makes sense to leave your gold in New York. But if you think the risk is non-trivial, if you think that in extremis your gold might be in effect neutralized by the United States and controlled by the U.S. in a form of a gold backed dollar, then if you want to participate in that global financial arrangement, you need your own gold. Just look at China – China is not storing their gold in the United States. Russia is not storing their gold in the United States. So why is Germany?
Is this also a reasonable question:
Okay, Lars, you’re welcome.
i Max Keiser/Lars Schall: “Currency War: Germany about to lose 66% of its gold reserves“, published on October 16, 2010 under:
ii In May of 2010, Dominique Strauss-Kahn, Managing Director of the IMF, called for “a new global currency issued by a global central bank, with robust governance and institutional features,” and said that the “global central bank could also serve as a lender of last resort.” Compare Dominique Strauss-Kahn: “Concluding Remarks at the High-Level Conference on the International Monetary System”, Zurich, 11 May 2010, under:
See also Jeffrey Garten: “We Need a Bank Of the World”, published in Newsweek on October 25, 2008, under:
and Ambrose Evans-Pritchard: “The G20 moves the world a step closer to a global currency”, published in The Telegraph on April 3, 2009, under:
iii Lars Schall: “Some Justified Questions for the German Bundesbank“, published on December 1, 2010 under:
v Compare ibid. As the Bundesbank said in its official statement: “The Deutsche Bundesbank keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centres. This has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centres.“
vi Compare for example Jan Harvey/Veronica Brown: “ANALYSIS-BIS footnote unlocks major development in gold use“, published at Reuters on July 16, 2010 under:
vii Compare “China’s gold imports increase 480%“, published at People’s Daily Online on Dember 3, 2010 under: http://english.peopledaily.com.cn/90001/90778/90859/7220475.html
From the article: “China imported nearly 210 tons of gold between January and October in 2010, an increase of 480 percent over the same period of the previous year, Shen Xiangrong, president of the Shanghai Gold Exchange, said on Dec. 2.“
See also “China Massively Buying Gold“, published at MoneyNews on December 3, 2010 under:
From the article: “The Wall Street Journal reports Friday that gold prices are soaring to record highs as a new powerful factor has emerged as a driver of that rally — China.
According to the Journal, China is now buying huge amounts of gold fearing inflation as the Federal Reserve begins a new set of quantitative easing policies. The paper’s report — ‚China Buys In to Gold’s Allure‘ — cites key data released by China’s state-run Xinhua news agency showing that China imported 209.7 metric tons of gold in the first 10 months of this year. That’s a five hundred percent increase compared to the same period in 2009.“
viii Frank Meyer/Lars Schall: “An idea of epic grandeur for ‚anyone who wants to bankrupt a bank'“, Interview with Max Keiser, published at chaostheorien.de on November 18, 2010 under:
See also Rob Kirby: “Something’s Wrong in the Silver Pit: But It’s Much Bigger than J.P. Morgan“, published at SilverSeek on December 10, 2010 under: