Following is an edited Q&A with James Rickards in Washington on Wednesday.
Q: U.S. appear to have triggered a local currency crisis. Is this a real-time example of the “financial warfare” you imagine in your book?
Rickards: The United States has unleashed blatant, outright financial war on Iran. … There is nothing new about sanctions. But what is new is that a few weeks ago, the President imposed sanctions on the Iranian central bank. … This is going for the throat. … The way we did it is we told all the other banks in the world that if you do business with you may not do business in dollars or access the dollar payment system. Deutsche Bank and Commerzbank don’t have to be told twice. They immediately red-lined Bank Markazi. What happened next was interesting. There was suddenly a dollar shortage in Iran. … Merchants and others need dollars to pay for imports. … The first impact was because of the shortage of dollars, the Iranian currency dropped 40 per cent in a single day. The reason was you suddenly needed more rials to pay for the imports, so Iranian merchants had to double the local currency prices. … So we caused a collapse in the Iranian currency, 40 per cent in two days, injected hyperinflation into the Iranian economy because their prices went up in local currency terms, the Iranian central bank responded by raising interest rates to 20 per cent because there was a run on the banks, people were pulling rials out of the banks because they were worth less and they wanted to get other assets, hard assets, dollars, gold whatever they could … and Ahmadinejad announced they were going execute anyone operating in the dollar black market. This was extremely disruptive to the Iranian economy … the fact that this occurred six weeks before the elections I doubt is a coincidence. This is using financial warfare to create popular discontent and restart the Green Revolution.
Q: In your book, you suggest the U.S. is vulnerable to financial attack. Yet the situation in Iran suggests America remains a force to be reckoned with. Why worry?
Rickards: Action, reaction. The dollar proved to be a very potent weapon in disrupting the Iranian economy. The reaction will be the Iranians, through gold, through barter, other payment mechanisms, other banking systems, trying to operate outside the dollar system completely, including outside of … . The dollar payment system if very powerful, but the SWIFT messaging system is even more powerful because I can transact in non-dollar currencies with non-European and non-U.S. banks, but I still have to go through SWIFT. The real missing link is can you create a final message traffic system involving, say, China, Russia, India, Iran and Central Asia. I haven’t heard of that, but it would surprise me to see something like that in the works. … To the extent that we already have forced the Russians and the Chinese to diversify away from dollars because we are debasing them, we make it that much easier for them to leave the system completely.
Q: What is your impression of the Fed’s new transparency policy?
Rickards: It’s a louder megaphone for manipulation and propaganda. The Fed is what I call non-transparently transparent. They go through the motions of telling you what they are doing, but they just want a bigger amplifier for their misleading messages. The Fed would like the world to know they are actually OK with 2 per cent inflation, when in fact they are trying to deliver something closer to 4 per cent. The purpose of this is to create a shock effect; create the impression that inflation is running away and people better hurry up and borrow at this negative real interest rates and spend before goods and services go up. It’s a way to increase velocity of money, which is fundamentally a behavioural phenomenon. So it’s a massive exercise in agitprop.
Q: Ben Bernanke would respond to your concern about inflation the same way he has responded to lawmakers who raise the same concern: There is none. That’s a strong counterargument. What’s your comeback?