The Spectacle Blog

Financial Brinksmanship at Home and in Russia

By on 5.1.14 | 5:04PM

The United States is already at war with Russia and stands on the precipice of the death of the dollar. Our banking system is a potential financial avalanche waiting for just one snowflake to unleash the calamity.  

That's what financial consultant and hedge-fund director James Rickards expects. In Washington promoting his new book The Death of Money, Rickards observed that bad monetary policy and a large helping of corporate greed will inevitably reduce the dollar to the status of a local currency like the lira or the peso. As for U.S. relations with Russia—the war is ongoing, and it's a financial one.

The Federal Reserve is just not equipped to handle the next financial disaster. Rickards highlights the Fed's overleveraging of 80:1, its leadership under ideologues like Janet Yellen (he thinks she's worse than Bernanke), and the fact that the five big banks hold more assets and derivatives than they did before Dodd-Frank's implementation as evidence that markets will endure a whopper of a correction. And when that correction comes, Rickards predicts the IMF ("the only clean balance sheet in the world") will be the institution that picks up the pieces as the Fed and the Treasury prove feckless.

A likely successor to the dollar is the international reserve asset called the SDR, which Rickards insists is nothing more than a fiat currency. In the wake of the death of the dollar, SDRs would become the reserve currency for most nations, and Americans should not be surprised when they open up an annual report or financial statement and find that dollar signs have been replaced with SDRs. The IMF has already advocated for such a change.

So, when—on our current trajectory it's "when," Rickards says, though there's still a chance to reverse course—the dollar is defunct, what will happen to most Americans? Savers—the average American—will see their wealth disappear very quickly. People who own hard assets such as real estate will fare better. Look to Warren Buffett, who is buying up hard assets like a madman.

Rickards, who once participated in Pentagon-sponsored war games testing possible outcomes of economic conflict (China won), observed that financial war between nations—sanctions are one weapon in such a theater—follow game theorist patterns. The United States waged a successful economic war (until Obama decided to completely reverse course) against Iran mainly because there was little Iran could do to retaliate. Economic war with Russia would be a much bigger deal, perhaps constituting economic M.A.D—mutually assured destruction. Although Russia would suffer from the United States' control of critical financial institutions and favorable ties to banking nations like Switzerland, Russia would have its own means of inflicting pain on the U.S.; Rickards called hackers the "ultimate weapon" in this sort of conflict, and contends that a shutdown of the stock market is not an unrealistic if cyberterrorism is unleashed.

Rickards fears that the White House and other policy makers don't operate in a game theory mindset while they fight financial war. His concern was raised when he noticed the Treasury Department had leveled sanctions against Igor Sechin, the Russian oil oligarch who Rickards believes is one the major powers behind the Putin throne. Expect Russia to retaliate "within a matter of days, not weeks," because Sechin is not someone with whom to trifle, Rickards warned.

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