Authors: James Rickards
THE DEATH OF MONEY
THE COMING COLLAPSE
OF THE INTERNATIONAL
PORTFOLIO / PENGUIN
PORTFOLIO / PENGUIN
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First published by Portfolio / Penguin, a member of Penguin Group (USA) LLC, 2014
Copyright © 2014 by James Rickards
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Write down, therefore, what you have seen, and what is happening, and what will happen
The Death of Money
is about the demise of the dollar
By extension, it is also about the potential collapse of the international monetary
system because, if confidence in the dollar is lost, no other currency stands ready
to take its place as the world’s reserve currency. The dollar is the linchpin. If
it fails, the entire system fails with it, since the dollar and the system are one
and the same. As fearsome a prospect as this dual collapse may be, it looks increasingly
inevitable for all the reasons one will find in the pages to come.
A journey to the past is in order first.
Few Americans in our time recall that the dollar nearly ceased to function as the
world’s reserve currency in 1978. That year the Federal Reserve dollar index declined
to a distressingly low level, and the U.S. Treasury was forced to issue government
bonds denominated in Swiss francs.
Foreign creditors no longer trusted the U.S. dollar as a store of value. The dollar
was losing purchasing power, dropping by half from 1977 to 1981; U.S. inflation was
over 50 percent during those five years. Starting in 1979, the International Monetary
Fund (IMF) had little choice but to mobilize its resources to issue world money (special
drawing rights, or SDRs). It flooded the market with 12.1 billion SDRs to provide
liquidity as global confidence in the dollar declined.
We would do well to recall those dark days. The price of gold rose 500 percent from
1977 to 1980. What began as a managed dollar devaluation in 1971, with President Richard
Nixon’s abandonment of gold convertibility, became a full-scale rout by the decade’s
end. The dollar debacle even seeped into popular culture. The 1981 film
starring Jane Fonda, involved a secret plan by oil-producing nations to dump dollars
and buy gold; it ended with a banking collapse, a financial panic, and global riots.
That was fiction but indeed was powerful, perhaps prescient.
While the dollar panic reached a crescendo in the late 1970s, lost confidence was
felt as early as August 1971, immediately after President Nixon’s abandonment of the
gold-backed dollar. Author Janet Tavakoli describes what it was like to be an American
abroad the day the dollar’s death throes became glaringly apparent:
Suddenly Americans traveling abroad found that restaurants, hotels, and merchants
did not want to take the floating rate risk of their dollars. On Ferragosto [mid-August
holiday], banks in Rome were closed, and Americans caught short of cash were in a
The manager of the hotel asked departing guests: “Do you have gold? Because look what
your American President has done.” He was serious about gold; he would accept it as
payment. . . .
I immediately asked to pre-pay my hotel bill in lire. . . . The manager clapped his
hands in delight. He and the rest of the staff treated me as if I were royalty. I
wasn’t like those other Americans with their stupid dollars. For the rest of my stay,
no merchant or restaurant wanted my business until I demonstrated I could pay in lire.
The subsequent efforts of Fed chairman Paul Volcker and the newly elected Ronald Reagan
would save the dollar. Volcker raised interest rates to 19 percent in 1981 to snuff
out inflation and make the dollar an attractive choice for foreign capital. Beginning
in 1981, Reagan cut taxes and regulation, which restored business confidence and made
the United States a magnet for foreign investment. By March 1985, the dollar index
had rallied 50 percent from its October 1978 low, and gold prices had dropped 60 percent
from their 1980 high. The U.S. inflation rate fell from 13.5 percent in 1980 to 1.9
percent in 1986. The good news was such that Hollywood released no
. By the mid-1980s, the fire was out, and the age of King Dollar had begun. The dollar
had not disappeared as the world’s reserve currency after 1978, but it was a near
Now the world is back to the future.
A similar constellation of symptoms to those of 1978 can be seen in the world economy
today. In July 2011 the Federal Reserve dollar index
hit an all-time low, over 4 percent below the October 1978 panic level. In August
2009 the IMF once again acted as a monetary first responder and rode to the rescue
with a new issuance of SDRs, equivalent to $310 billion, increasing the SDRs in circulation
by 850 percent. In early September gold prices reached an all-time high, near $1,900
per ounce, up more than 200 percent from the average price in 2006, just before the
new depression began. Twenty-first-century popular culture enjoyed its own version
a televised tale of financial collapse called
Too Big to Fail
The parallels between 1978 and recent events are eerie but imperfect. There was an
element ravaging the world then that is not apparent today. It is the dog that didn’t
bark: inflation. But the fact that we aren’t hearing the dog doesn’t mean it poses
no danger. Widely followed U.S. dollar inflation measures such as the consumer price
index have barely budged since 2008; indeed, mild
has emerged in certain months. Inflation has appeared in China, where the government
revalued the currency to dampen it, and in Brazil, where price hikes in basic services
such as bus fares triggered riots. Food price inflation was also a contributing factor
to protests in the Arab Spring’s early stages. Still, U.S. dollar inflation has remained
Looking more closely, we see a veritable cottage industry that computes U.S. price
indexes using pre-1990 methodologies, and alternative baskets of goods and services
that are said to be more representative of the inflation actually facing Americans.
They offer warning signs, as the alternative methods identify U.S. inflation at more
like 9 percent annually, instead of the 2 percent readings of official government
measures. Anyone shopping for milk, bread, or gasoline would certainly agree with
the higher figure. As telling as these shadow statistics may be, they have little
impact on international currency markets or Federal Reserve policy. To understand
the threats to the dollar, and potential policy responses by the Federal Reserve,
it is necessary to see the dollar through the Fed’s eyes. From that perspective, inflation
a threat; indeed, higher inflation is both the Fed’s answer to the debt crisis and
a policy objective.
This pro-inflation policy is an invitation to disaster, even as baffled Fed critics
scratch their heads at the apparent absence of inflation in the face of unprecedented
money printing by the Federal Reserve and other
major central banks. Many ponder how it is that the Fed has increased the base money
supply 400 percent since 2008 with practically no inflation. But two explanations
are very much at hand—and they foretell the potential for collapse. The first is that
the U.S. economy is structurally damaged, so the easy money cannot be put to good
use. The second is that the inflation is coming. Both explanations are true—the economy
is broken, and inflation is on its way.
The Death of Money
examines these events in a distinctive way. The chapters that follow look critically
at standard economic tools such as equilibrium models, so-called value-at-risk metrics,
and supposed correlations. You will see that the general equilibrium models in widespread
use are meaningless in a state of perturbed equilibrium or dual equilibria. The world
economy is not yet in the “new normal.” Instead, the world is on a journey from old
to new with no compass or chart. Turbulence is now the norm.
Danger comes from within and without. We have a misplaced confidence that central
banks can save the day; in fact, they are ruining our markets. The value-at-risk models
used by Wall Street and regulators to measure the dangers that derivatives pose are
risible; they mask overleveraging, which is shamelessly transformed into grotesque
compensation that is throwing our society out of balance. When the hidden costs come
home to roost and taxpayers are once again stuck with the bill, the bankers will be
comfortably ensconced inside their mansions and aboard their yachts. The titans will
explain to credulous reporters and bought-off politicians that the new collapse was
nothing they could have foreseen.
While we refuse to face truths about debts and deficits, dozens of countries all over
the globe are putting pressure on the dollar. We think the gold standard is a historical
relic, but there’s a contemporary scramble for gold around the world, and it may signify
a move to return to the gold standard. We greatly underestimate the dangers from a
cyberfinancial attack and the risks of a financial world war.
Regression analysis and correlations, so beloved by finance quants and economists,
are ineffective for navigating the risks ahead. These analyses assume that the future
resembles the past to an extent. History is a great teacher, but the quants’ suppositions
contain fatal flaws. The first is that in looking back, they do not look far enough.
Most data used on Wall
Street extend ten, twenty, or thirty years into the past. The more diligent analysts
will use hundred-year data series, finding suitable substitutes for instruments that
did not exist that far back. But the two greatest civilizational collapses in history,
the Bronze Age collapse and the fall of the Roman Empire, occurred sixteen hundred
years apart, and the latter was sixteen hundred years ago. This is not to suggest
civilization’s imminent collapse, merely to point out the severely limited perspective
offered by most regressions. The other flaw involves the quants’ failures to understand
scaling dynamics that place certain risk measurements outside history. Since potential
risk is an exponential function of system scale, and since the scale of financial
systems measured by derivatives is unprecedented, it follows that the risk too is
While the word
as applied to the dollar sounds apocalyptic, it has an entirely pragmatic meaning.
Collapse is simply the loss of confidence by citizens and central banks in the future
purchasing power of the dollar. The result is that holders dump dollars, either through
faster spending or through the purchase of hard assets. This rapid behavioral shift
leads initially to higher interest rates, higher inflation, and the destruction of
capital formation. The end result can be deflation (reminiscent of the 1930s) or inflation
(reminiscent of the 1970s), or both.
The coming collapse of the dollar and the international monetary system is entirely
foreseeable. This is not a provocative conclusion. The international monetary system
has collapsed three times in the past century—in 1914, 1939, and 1971. Each collapse
was followed by a tumultuous period. The 1914 collapse was precipitated by the First
World War and was followed later by alternating episodes of hyperinflation and depression
from 1919 to 1922 before regaining stability in the mid-1920s, albeit with a highly
flawed gold standard that contributed to a new collapse in the 1930s. The Second World
War caused the 1939 collapse, and stability was restored only with the Bretton Woods
system, created in 1944. The 1971 collapse was precipitated by Nixon’s abandonment
of gold convertibility for the dollar, although this dénouement had been years in
the making, and it was followed by confusion, culminating in the near dollar collapse
The coming collapse, like those before, may involve war, gold, or chaos, or it could
involve all three. This book limns the most imminent
threats to the dollar, likely to play out in the next few years, which are financial
warfare, deflation, hyperinflation, and market collapse. Only nations and individuals
who make provision today will survive the maelstrom to come.
In place of fallacious, if popular, methods, this book considers complexity theory
to be the best lens for viewing present risks and likely outcomes. Capital markets
are complex systems nonpareil. Complexity theory is relatively new in the history
of science, but in its sixty years it has been extensively applied to weather, earthquakes,
social networks, and other densely connected systems. The application of complexity
theory to capital markets is still in its infancy, but it has already yielded insights
into risk metrics and price dynamics that possess greater predictive power than conventional
As you will see in the pages that follow, the next financial collapse will resemble
nothing in history. But a more clear-eyed view of opaque financial happenings in our
world can help investors think through the best strategies. In this book’s conclusion
you will find some recommendations, but deciding upon the best course to follow will
require comprehending a minefield of risks, while poised at a crossroads, pondering
the death of the dollar.
Beyond mere market outcomes, consider financial war.
Are we prepared to fight a financial war? The conduct of financial war is distinct
from normal economic competition among nations because it involves intentional malicious
acts rather than solely competitive ones. Financial war entails the use of derivatives
and the penetration of exchanges to cause havoc, incite panic, and ultimately disable
an enemy’s economy. Financial war goes well beyond industrial espionage, which has
existed at least since the early 1800s, when an American, Francis Cabot Lowell, memorized
the design for the English power loom and recreated one in the United States.
The modern financial war arsenal includes covert hedge funds and
cyberattacks that can compromise order-entry systems to mimic a flood of sell orders
on stocks like Apple, Google, and IBM. Efficient-market theorists who are skeptical
of such tactics fail to fathom the irrational underbelly of markets in full flight.
Financial war is not about wealth maximization but victory.
Risks of financial war in the age of dollar hegemony are novel because the United
States has never had to coexist in a world where market participants did not depend
on it for their national security. Even at the height of dollar flight in 1978, Germany,
Japan, and the oil exporters were expected to prop up the dollar because they were
utterly dependent on the United States to protect them against Soviet threats. Today
powerful nations such as Russia, China, and Iran do not rely on the United States
for their national security, and they may even see some benefit in an economically
wounded America. Capital markets have moved decisively into the realm of strategic
affairs, and Wall Street analysts and Washington policy makers, who most need to understand
the implications, are only dimly aware of this new world.