Use as a starting point the video titled the Death of Money which can be found in the link below:
Critically analyse then discuss the following statement:
James Rickard postulates that the US dollar is fiat paper backed by a promise to repay. It leads to global inflation and endangers the International Monetary System.
USING THIS STRUCTURE
- Context of economic of essay – 10%
- Critically evaluate three of James Rickards Arguments (three pro and three con) – 30%
- Use of appropriate theoretical exchange rate model – 15%
- Summary of main body – 5%
- Your personal view of James Rickards’ arguments supported by at least one theoretical model of exchange rate determination (credit will be given for the appropriate use of theoretical models) – 25%
International Financial Risk and Control: Death of Money
The weakening of the dollar since back in 2002 is an issue of great concern both to the public and to those in government. To most, such a concern is due to the presumption that such a decline is as a consequence of a larger economic problem, including economic recovery, diminished global economy standing, and the rising public debt. The global economic performance of different countries could be affected by a falling currency. Some of the effects of a falling dollar on the economy include decreased purchasing power at the international level, increased net exports, increased interest rates, and rising commodity prices. James Rickards argues that the dollar is on its way to a major drop in terms of international ranking and that the economy will be hurt. This paper is going to review Rickard’s arguments and provide a perception towards the general issue of the decline of the dollar.
James Rickard’s Arguments
It is important to note that a decline has been previously experienced in terms of the international monetary system including back in 1914, 1939, and 1971 (Eichengreen, et al., 2005, p. 15). After each of this collapses followed a period of tumult in terms of civil unrest, war, or a major damage to the economy of the entire globe. This leads one to question whether such a decline in the monetary system is propelled by natural or economic flow of things or it is propelled by certain forces within the government. This is the issue that is addressed by James Rickards in his works on the Currency Wars, where he suggests that the entire institution of money is currently placed in a risky position as a result of the currently approaching decline in the dollar (Rickards, 2012, p. 35). Ever since the establishment of the monetary system, the dollar remained as the global reserve currency, the only one that could be converted in gold equivalents (Eichengreen, et al., 2005, p. 10). As such, it is a highly important currency to the entire globe. With such considerations in mind, Rickards argues that a decline in the dollar would lead to an inevitable failure of the entire global monetary system. This is because there is no other currency that has been developed with the same depth of assets that are required to sustain the global monetary system.
Others argue that the dollar has already established a status in which societies are highly confident in, hence can never be shaken by anything ranging from dysfunctionality of the government or a high increase in the national debt (Frenkel, 2012, p. 76). Nevertheless, the risk towards which the dollar is exposed has become significant to the level that it cannot be avoided. As much as the US government is struggling with solving the countries long-term problems, its largest competitors including Russia, China, and countries that produce oil from the Middle East are increasing their efforts towards mitigating the monetary hegemony held by the US (Rickards, 2012, p. 58). As a result, the potential consequences of such efforts include deflation, financial warfare, market collapse, hyperinflation, and chaos.
Rickards emphasizes that the major threat to the decline of the US dollar is the increased detachment between money and wealth (Rickards, 2012, p. 87). As such, he argues that money remains ephemeral and transitory, and it is likely to become worthless if politicians and bankers continue with their current approaches. On the other hand, true wealth is tangible and permanent, an aspect that increases its real value worldwide (Wadley, 2011, p. 48). Such key financial players across the world, including big banks, national; governments, and multilateral institutions take advantage of citizens and small enterprises who save on a daily basis believing that the system will remain as it is. These forces easily establish rules that would guide the financial environment while suiting their needs. Nevertheless, Rickards is keen to note that there is still time to adequately prepare for the ultimate death of the dollar. He emphasizes on the importance of converting money, which is unreliable, into real wealth such as land, gold, fine art, and any other long-term value storage avenue.
Theoretical exchange rate model
Based on economic models of demand and supply, it is clear that various forces point towards the declination of the dollar against other currencies and hence its declination as a currency reserve. It is important to note that with an increase in income and economic growth within the US, there will be an increase in consumer consumption of services and goods, including imports (Levine, 2012, p. 61). If an assumption is made that there are no changes that occur in terms of foreign economic growth rates, the rate of demand for US exports will also remain the same. Such increases in terms of imports and decreases in constant export raters has important implications for the microeconomic environment including an increase in the availability of the dollar within foreign markets as a result of procurement of imports. As a result, the dollar depreciates against foreign currencies, a trend that is likely to continue considering the continued growth of the US economy.
In addition, the rate of inflation is of great importance when analyzing the dollar’s performance at the international level (Eichengreen, et al., 2005, p. 41). The rate of inflation in the US is continuously growing as compared to other countries. With an increase in the rate of inflation leads to a decreased exportation and heightened consumption of imports. Like in the case of economic growth, increased inflation leads to an increase in the presence of the home currency in the foreign market and hence facilitates weakening of the dollar against the other currencies with which it is exchanged (Levine, 2012, p. 129). With an interplay of such factors, the dollar is bound to depreciate against other currencies, an aspect that will affect not only the US’s economic play, but that of the entire world considering the dollar’s importance as an international currency.
It is evident that the dollar faces a great risk in
terms of weakening as a result of the current financial trends and that a
financial failure as a major international currency is inevitable. As such, it
is important for the national government to effectively respond to this
inevitability by converting their monetary investments into real value assets,
as the value of such assets is not likely to be affected by the strength of the
dollar and in some cases, the value of the assets such as land may appreciate
with time. I agree with Rickards that the dollar is bound to depreciate and
weaken as an international currency, as informed by the Flexible Price Monetary
Model. It is without doubt that foreign prices are declining considering the
pricing initiatives of low production cost countries such as China and India.
According to the model, with a decrease in the foreign price, P*, the PPP line
becomes less steep, an aspect that leads to an increase in the exchange rates
and hence a depreciation of the domestic currency. As such, the reductions in
foreign prices are likely to negatively impact the dollar’s strength.
Eichengreen, B., Eichengreen, B. & Flandreau, M., 2005. Gold Standard In Theory & History. London: Routledge.
Frenkel, J. A., 2012. Forex for Beginners: A Comprehensive Guide to Profiting from the Global Currency Markets. New York: Springer-Verlag.
Levine, D. K., 2012. Is Behavioral Economics Doomed?: The Ordinary versus the Extraordinary. Cambridge: ÒpenBook Publishers.
Rickards, J., 2012. Currency Wars: The Making of the Next Global Crisis. London: Portfolio/Penguin.
Wadley, J. H., 2011. Economic Theory. Bloomington, IN: AuthorHouse.