1. The Gold Symposium 2012
Luna Park, Milsons Point, Sydney, Australia
October 22, 2012
The Future of the
International Monetary
System: Paper, Gold or
Chaos?
James Rickards
Partner, JAC Capital Advisors LLC, New York, NY USA

2. What is a Currency War?
 Devaluation of one country’s currency against
that of another in order to increase exports and
economic growth
 Important to place in historical and economic
context in order to understand today’s trends

3. Currency War I (1921-1936)
Began with massive war reparations and war debts
Weimar hyperinflation – 1921-1922
French devaluation and gold exchange standard – 1925
Fed policy blunders: Too loose 1927-28; too tight 1929-1931
English devalue in 1931 / U.S. devalues in1933
Tripartite Accord - 1936

4. Currency War II (1967-1987)
Bretton Woods prevails beginning in 1944
UK has massive overhang of Sterling claims from WWII
U.S. Policy of “Guns and Butter” begins in 1965
Bretton Woods begins to break down in 1967
London Gold Pool 1961-1968
Nixon Shock – 1971; Smithsonian Agreements
Inflation, recession, oil shocks 1973 - 1979
Volcker, Reagan and the return of “King Dollar” 1980-1984
Plaza Accord 1985 and Louvre Accord 1987

5. Currency War III (2010 - )
The Warning: Japan’s Lost Decade and LTCM
The Prelude: Glass-Steagall, Swaps Repeal, VaR, Basel III
Chinese export model meets U.S. consumption model
Greenspan and Bernanke “puts”
The Depression of 2007 and the Panic of 2008
Aftermath: Debt, Depression and Deleveraging.....Again

6. Dynamics of Currency Wars
Attractions of Currency Wars
Stimulates net exports when there are no other growth engines
Generates inflation when banks won’t lend
Steals growth from neighbors
Requires no legislation or taxes
Permanent rebalancing of terms of trade
Downside of Currency Wars
Invites retaliation in beggar-thy-neighbor fashion
Invites capital controls, withholding taxes, other tools
Supply chains are complicated and diverse
Increases prices for your imported components
Inflation hurts growth in the long-run
All advantage is temporary

7. Origins of a Currency War
Examining Growth – Fiscal Policy
Roots of Currency Wars are in debt, deleveraging, deflation
The debt overhang impedes growth for a decade or more
Fiscal Analysis
GDP = C + I + G + (X – M)

8. Origins of a Currency War
Examining Growth – Monetary Policy
Monetary Analysis
pY = Nominal GDP
Y = Real GDP and p = Inflation/Deflation
M = money supply and V = velocity of money
MV = pY

9. Fed Expansion of U.S. Money Supply

10. Velocity of Money Both Volatile and
Declining Sharply

11. Monetary Math is Easy!
1+4=5
4+1=5
Nominal debt requires nominal GDP growth

12. Understanding the Statistical Properties of Risk
in Currency and Capital Markets
Fed and other central banks persist in using equilibrium models
Evidence for complexity and non-equilibrium states is convincing

13. Are Capital Markets Complex Systems?
Diversity
Connectedness
Interaction
Adaptability

14. Characteristics of Complex Systems
 Emergent Properties
 Phase Transitions
 Critical State Dynamics
 Power Law Distribution

15. Comparison of Normally Distributed Events to
Power Law Distribution,
Bell Curve and Power Curve –
Decay, Tails and Truncation
Bell Curve Power Curve

16. Sub-Critical and Critical States
Assume 100 People repudiate the dollar in each case
in total population of approximately 310,000,000 people
T = Critical Threshold for each cohort
Case 1 Case 2
Sub-critical Thresholds Critical Thresholds
1,000 people / T= 500 1,000 people / T= 100
1 million people / T = 10,000 1 million people / T = 1,000
10 million people / T = 100,000 10 million people / T = 100,000
100 million people / T= 10 mil. 100 million people / T= 10 mil.
200 million people / T = 50 mil. 200 million people / T = 50 mil.

17. FX Trading & Investment Implications
Bizarre Love Triangle – USD/CNY, USD/EUR, EUR/CNY
Key to understanding Euro strength
Key to understanding QE3 or NGDP Targeting
Germany vs. Periphery
€
US provides liquidity China provides solvency
via swap lines via bond purchases
$ ¥
Political fight about inflation & unemployment

18. Possible Solution to Euro Dilemma:
Convergence of Unit Labor Costs between
Germany and the Periphery
Case 1
Periphery Labor Costs
German Labor Costs Extreme Deflation for Periphery
Case 2
Periphery Labor Costs
Mild Inflation for Germany
German Labor Costs
Look for ECB rate cuts, higher inflation in Germany. Whither the Euro?

19. Recent Developments in the Currency Wars
IMF Rescue of Europe Depends on SDR Debt, Global Participation
U.S. Launches Financial War or Iran – SWIFT – Iranian Response
Nigeria to Allocate 10% of Reserves (USD4 billion) to CNY
BRICS announce plan to launch new development bank
Rumors of a War – Iran, Israel, Russia, Turkey Syria and the U.S.

20. China: Between the Rock of Inflation and the
Hard Place of Unemployment
China can have any GDP it wants if it has debt capacity
SOES can “invest” their way to growth – but most is wasted
Rebalancing to consumer implies state sector must drop sharply
But if state sector declines sharply, how do you “pay off” cronies?
Currency wars a form of ease – China turns this on and off

21. Currency Wars Lessons for
Emerging Markets Currencies
Pegging to US Dollar imports inflation from US due to QE
Allowing currency to appreciate weakens export competitiveness
Either inflation or appreciation increases unit labor costs
Countries may choose to permit inflation to protect jobs, exports
The US will not relent in currency wars; expect global inflation

22. Australia: Watch for strength in AUD/USD and
AUD/EUR
Chinese flight capital will give AUD/CNY a boost
China may continue to import even with slower growth
Don’t underestimate U.S. desire to fight and win “currency wars”
Australia’s easing and currency deval may start to import inflation
Use of AUD as a reserve currency and trade currency will grow

23. Japan: An Exception that Proves the Rule
Japan is aggressively weakening JPY to promote exports
Given Japan’s demography & resources, it has few options
The U.S. will give Japan a “pass” in the currency wars – to a point
The U.S. has geopolitical motives to help Japan beyond trade
Japan has to work hard to overcome flight to quality

24. The Four Horsemen of the Dollar
Apocalypse
Multiple Reserve Currencies SDR’s
Gold Chaos

25. A World of Multiple Reserve Currencies
 Reprises 1920’s and 1930’s per Barry
Eichengreen
 U.S. Dollar Declined from 70% to 60% of Global
Reserves between 2000 and 2012
 Future Reserve Mix could be 35% USD, 35% EUR,
10% JPY, 20% GBP, CNY, CHF, CAD, AUD, other
 Dynamically unstable without an anchor

26. The SDR Solution
 Introduced 1969. Issued in 1972, 1981, 2009
 Obviated in 1980’s by commercial banks
 Preferred path of the power elites
 Ten-year plan includes issuers, buyers, dealers, repo,
derivatives and new allocations
 SDR’s will not be local currency, but used for oil, global
corporations, balance of payments
 Turns IMF into proto-world central bank with currency and
expanded balance sheet

27. A New Gold Standard
 What is a Gold Standard?
 What is the proper measure of Money?
 What is the proper reserve ratio?
 Which nations are included?

28. Official Gold Holdings Total 30,462 Metric Tonnes
9,000
8,133
8,000
7,544
7,000
6,000
Metric Tonnes
5,000
4,000
3,406
2,966
3,000
2,451 2,435
2,000
1,054 1,040
1,000 765
668
0

29. Holdings with Eurosystem – Total 30,462
Metric Tonnes
12,000
10,798
10,000
8,133
Metric Tonnes
8,000
6,000
5,098
4,000
2,966
2,000
1,054 1,040 765 668 557 423
0

30. Gold Prices Based on U.S. Monetary
Aggregates
50,000
45,000
40,000
USD per Ounce of Gold
35,000
$30,868
30,000
25,000
20,000
15,000
$12,347
10,000
$6,475
5,000 $2,590
0
M1 (.40) M1 M2 (.40) M2

31. Gold Prices Based on Global Monetary
Aggregates
(US, ECB, China)
50,000
$44,552
45,000
40,000
USD per Ounce of Gold
35,000
30,000
25,000
20,000 $17,482 $17,820
15,000
10,000
$6,993
5,000
0
GM1 (.40) GM1 GM2 (.40) GM2

32. What Happens When Gold is the Numeraire?
The S&P500 Index in Gold Ounces

33. Chaos

35. Thank you
James Rickards, Partner
JAC Capital Advisors LLC, New York, NY USA
james.rickards@gmail.com
@JamesGRickards