Jim Rickards’ most recent book, The Road to Ruin, has been his most provocative, following a stream of works that has gotten the attention of pundits and investors alike. There are many compelling aspects of his books, but the focus of this paper will be on the controversial topic of free trade, which Rickards covers in his latest one, and why he is mistaken in denying its validity in our modern economy. While he is generally supportive of free market principles, global free trade is not one of them.

The section titled” Apple and the Cat” in Chapter 7 starts with the concept of comparative advantage, which is the underlying foundation for free trade. In the current paper, there is no need to restate or analyze this theory since the author claims it’s validity in and of itself:

The issue is not that Ricardian theory is wrong; it’s that the theory relies on assumptions that don’t conform to the real world, and is therefore useless as a guide to policy.

He sees the principle as being susceptible to exogenous barriers that didn’t exist at the time of the principle’s formulation by David Ricardo. These non-market forces manipulate the mechanism of pricing and allocating production and labor, to the detriment of domestic growth and employment. It is necessary to take the author’s arguments against free trade and dissect each claim. This will prove that comparative advantage is universally valid regardless of any intervention that attempts to interrupt its process.

After summarizing comparative advantage, Rickards makes his first overall critique by stating that the concept is based on a “network of factors of production, costs, prices, markets, and money”, and outside distortions caused by international central banks and governments prevent this from doing its job. These prices and costs are ‘imperfect’, in that they aren’t reliable in allowing market actors to properly calculate profits and losses with precision.

He makes a fundamental mistake by thinking prices, barring any government intrusion, are ‘perfect’ in a sense. Prices are merely exchange ratios between goods and services on one hand, and money on the other. Information is imbedded in each price, providing the necessary data on the availability and desirability of each product. This information is almost never perfect, in the sense of being ‘correct’ with regard to prices businessmen charge and pay for labor and capital. If it were, we would be in what economists refer to as equilibrium where subjective expectations allow supply and demand to equalize and therefore profits be eliminated in the economy.

Rickards also critiques the model known as General Equilibrium earlier in his book, but this topic and it’s relation to the purpose of this paper won’t be covered here. Suffice it to say that his first general statement on the short comings of comparative advantage ignores the fact that our domestic economy also faces distorted and imperfect prices and signals for the same reasons (price controls, currency manipulations, government barriers, etc.), and yet the U.S. has seen the size of its economy triple in real terms since the early 1970’s, in addition to the number of jobs doubling, outpacing population growth in the civilian workforce. Any price distortions present since then have failed to prevent the tremendous increase in our real wealth. Rickards doesn’t seem to grasp that the domestic economy is ruled by the same economic laws as the international economy. Prices and production can be distorted, but the price mechanism always finds a way around barriers and flourishes in the end.

While this is the foundation of this paper’s argument, it is general yet not sufficient and further inquiry is necessary to show the flaws in his work that flow from his misunderstanding of price comparisons in the global economy. Before continuing, it must be said that despite the book’s claim that comparative advantage is supported by the ‘neoliberal consensus’ and elitist supporters of globalization(the definition of which is fuzzy and often misunderstood), it can be easily shown that heterodox economists also have unfaltering support for this principle.

A comparison is drawn by the author between comparative advantage with floating exchange rates as well as with the classical gold standard. In the latter, where a dollar was defined as a specific weight of gold, international prices fluctuated but prices allowed countries to properly make reasonable comparisons due to their monetary authorities linking their currencies to gold. This system contained what economists know as the price-specie flow mechanism, originally conceived by Richard Cantillon (Rickards wrongfully attributes this to David Hume in his previous book). Floating exchange rates, on the other hand, allow for price comparisons in so far as these rates are not influenced by exogenous forces with the intent to manipulate relative prices, costs, or interest rates. Unfortunately, according to the author, this occurs quite often in bilateral and multilateral ‘currency wars’, where central banks attempt to devalue the domestic nation’s currency with the goal of stimulating exports, employment, and growth.

This is overall a reasonable summary of both monetary systems, but some qualifications must be made to display confusions on Rickards’ analysis and solutions. First, it is true that currency hedges, which allow businesses and exporters to protect themselves from such devaluations, are typically only are available for 1 year contracts. However, this can be bypassed by rolling over these contracts when they are close to maturing, thus allowing capital investment to be implemented for longer periods while reducing the effect of devaluations on a company’s profits and costs.

Second, he defends the Bretton Woods international monetary system(1944-1971), stating it was a “golden age of growth and higher real incomes.” While this cannot be refuted on a statistical level, this regime was not without defects once one looks past the abstract data, and this paper will certainly argue that a monetary system of any kind can be seen as a success only if it 1) benefits society in terms of general well-being and 2) is sustainable. The former is not debatable, but there are several points to be made on the latter.


This fixed exchange system really wasn’t one system for 27 years. Economists generally divide it into two periods due to the convertibility of the national currencies within the Bretton Woods system. From 1946 to 1958 current accounts were partially restricted between Europe, Japan, and the U.S due to the dollar shortage (the U.S. held over 2/3 of the world’s gold reserves at the time). This meant that the currencies of the trading nations weren’t fully convertible until early in 1959, making it fully operational from 1959 until 1971 when Nixon closed the gold window. What Rickards didn’t acknowledge was that while this regime reduced exchange rate volatility (thus making trade more efficient and robust), it was not sustainable in a political sense. In the current economic system, it is impossible to separate politics from economics.

Looking at the second period of the Bretton Woods system, it is clear to see that U.S. budget deficits were, on average, much larger during this period where full convertibility between currencies allowed it to function properly and fluidly, particularly during the latter half of the 1960’s.



This in contrast to post-war Europe and Japan, where the lack of dollars held forced the U.S. to run current account deficits in order to provide enough liquidity for these countries to convert U.S. dollars into gold. Thus, inflationary policies increased the general ‘price level’, and the prices of U.S. exports, allowing other countries to run balance of payments surpluses, accumulating dollars abroad. What’s important about this point is that as these countries continued to accumulate dollars as reserves, and as the U.S. continued to pursue inflationist policies, the more they realized the value of their dollar holdings would deteriorate, thus incentivizing them to convert their dollars into gold.


What Rickards ignores is that as these dollars were being accumulated abroad(voluntarily as countries attempted to increase their reserve balances), the attempt to prevent the fall of the dollar’s value by the U.S. government through foreign investment disincentives, restrictions on foreign lending, efforts to stem the official outflow of dollars, and cooperation with other countries did not succeed(in addition to foreign trade restrictions). Inflation was beginning to rise by the late 60’s, approaching 6% , as was the gold outflows from the Treasury. In fact, it can be shown that the domestic gold stock began to plummet in 1959, in the beginning of the convertible phase of the Bretton Woods system.




An important distinction with these trends cannot be ignored, as Rickards has done. It seems he mistakes a system of price-fixing for a free market. The official price of gold was at $35 per ounce since 1933, and the settlement of trade imbalances in the Bretton Woods agreement was made exclusively by central banks. This was a price ceiling on gold, a form of government price control the government was willing to defend that could only lead to a devalued dollar. The central banks would not allow a rise in their currencies’ value. This is the motivation behind mercantilism. In addition, this agreement was political, not self-correcting or based on price discovery as the classical Gold Standard was. Gold settlements were to only be made between central banks, not citizens.

The London gold market, on the other hand, was a considerable vestige of the free market, where investors and speculators(as well as official institutions) could buy and sell gold in a parallel, yet more private exchange system. The fear of the banks was that private forces would anticipate the drop in value of the dollar from chronic U.S. budget deficits to cover the expenses of the Vietnam War and other inflationary government spending. This turned out to be true, with the London gold price rising to $40 per ounce in 1960. Foreign central banks could also dip into the London gold market and purchase gold instead of taking a political risk by going to the gold window at the U.S. Treasury.

While this was certainly a possibility, the U.S. government had temporary success convincing foreign central banks to not redeem their excess holdings of short-term dollar reserves in exchange for gold. However, they could not stop speculators from betting against the dollar by buying gold in the free market in London.

Despite several central banks, including the Federal Reserve, establishing the London Gold Pool in 1961 and pledging significant amounts of their own gold to it (the U.S. contributed 50% of the total gold pool), the continuous budget and balance of payment deficits, as well as the superfluous military spending by the government caused a run on the gold stock by both speculators and eventually other central banks. The value of the gold held by the U.S. Treasury in 1949 was $25 billion. Ten years later, it possessed roughly $22.8 billion. That number dwindled to $12.4 billion by 1967. And just one year later, that amount decreased even more steeply to $10.3 billion. The London Gold Pool was thus shut down by President Johnson due to the extreme outflow of gold due to foreign central banks (mainly France and Switzerland) redeeming their dollar holdings. This eventually led to President Nixon eliminating the link between gold and the dollar in 1971.

Looking again at the money supply numbers, it can be seen that M1 had doubled from $111.9 billion in 1947, to $225 billion in 1971. This amount was relatively similar to the fall in gold holdings of the Treasury during virtually the same period. When put into context, the increases in the money supply are similar in scope as in any other multi-decade period in U.S. history. The mere existence of a pegged rate between gold and a reserve currency such as the dollar and the euro, while only allowing central banks access to exchanges, does not prevent manipulation and distortion of the kind Rickards attributes to the present international monetary nexus.

Thus, Rickards overlooks the sustainability of a system that, while providing a stable fixed-rate environment for international pricing, could not last due to the simple fact that the temptation for governments and politicians to overspend while using their central banks to enable such spending and budget deficits is too great. And while ‘free trade’ paired with floating exchange rates that are manipulated by protectionist central bank policy to stimulate exports is not a viable solution either, calling the Bretton Woods regime a “golden age” as the author has done cannot be taken seriously. His distinction between fixed and floating exchange rates is a false dichotomy. The real choice is between government fiat money, and a true free market in money, allowing citizens to choose what currency(s) provide the best stability and network effects, allowing them to avoid any such monies that tend to be susceptible to devaluation of the sort that troubles Rickards(and the current writer as well). The private banking system can sort out the type of monetary framework that can work in a free market.


The next problem Rickards sees is with the fall in manufacturing and high-value jobs since the early 1970’s. His claim is that protectionism created the “greatest industrial juggernaut the world has ever seen”, and since then the valuable jobs associated with our manufacturing base have been siphoned off by the unfair protectionist policies of Asia, particularly China and Japan. This is a classic post hoc ergo propter hoc fallacy the author commits. In this section, economic history will be the focus, since the author makes several false claims as to the origin of our current economic environment.

To start, one should question the dubious claim that manufacturing has decreased in any real sense. The problem with his assessment perhaps stems from his tendency to look at production from a physical standpoint instead of a subjective value standpoint, which is economically more relevant. To be sure, the total real output of manufacturing has been rising significantly in the past few decades. It nearly hit an all time high in 2015, with the output of durable goods three times higher than it was in 1980.

Rickards 20

And the value of each worker’s output has risen proportionately as well.




When this rise in value output is compared to other major countries, it is seen that the U.S. is not in any “seventy-year decline” as Rickards states.


As a matter of fact, according to economists John W. Kendrick, Robert E. Gallman, and Thomas J. Weiss, both the output and labor force associated with manufacturing and industry have actually been lower than service sector output since at least 1840.




Instead of taking Rickards’ unsubstantiated claim that the fall of manufacturing and industry was caused mainly by currency manipulation and protectionism from countries like China, we find that manufacturing as a percentage of the total U.S. economy was never really the dominant force relative to the service sector as is widely believed. However, further inquiry is needed to determine the cause of the fall in the amount of jobs in manufacturing and industry, especially since it is obvious that output in both physical and value terms has risen in recent decades.

We can see clearly that private-sector employment for the production of goods, with manufacturing included, in the private sector as well as a percentage of total private-sector employment has fallen steadily since World War ll. This fact will be applied to our discussion below after wages and income for both manufacturing and the economy in general are dealt with.



It’s often said by pundits and political commentators that wages in the U.S. have been stagnant for the last few decades. This is a mistake in methodology. Economist Don Boudreaux has recently found that wages have not “decoupled” from productivity(which has risen exponentially), despite Rickards’ claims:

The illusion is the result of two mistakes that are routinely made when pay is compared with productivity. First, the value of fringe benefits—such as health insurance and pension contributions—is often excluded from calculations of worker pay. Because fringe benefits today make up a larger share of the typical employee’s pay than they did 40 years ago (about 19% today compared with 10% back then), excluding them fosters the illusion that the workers’ slice of the (bigger) pie is shrinking.

The second mistake is to use the Consumer Price Index (CPI) to adjust workers’ pay for inflation while using a different measure—for example the GDP deflator, which converts the current prices of all domestically produced final goods and services into constant dollars—to adjust the value of economic output for inflation. But as Harvard’s Martin Feldstein noted in a National Bureau of Economic Research paper in 2008, it is misleading to use different deflators.

Different inflation adjustments give conflicting estimates of just how much the dollar’s purchasing power has fallen. So to accurately compare the real (that is, inflation-adjusted) value of output to the real value of worker pay requires that these values both be calculated using the same price index.

Consider, for instance, that between 1970-2006 the CPI rose at an average annual rate of 4.3%, while the GDP deflator rose only 3.8%. Economists believe that such a difference arises because the CPI is especially prone to overestimate inflation. Therefore, much of the increase in the real purchasing power of workers’ pay is mistakenly labeled by the CPI as mere inflation.

Mr. Feldstein and a number of other careful economists—including Richard Anderson of the St. Louis Federal Reserve Bank and Edward Lazear of the Stanford University Graduate School of Business—have compared worker pay (including the value of fringe benefits) with productivity using a consistent adjustment for inflation. They move in tandem. And in a study last year, João Paulo Pessoa and John Van Reenen of the London School of Economics compared worker compensation and productivity in both the United States and the United Kingdom from 1972-2010. There was no decoupling in either country.




This sentiment is also echoed by James Sherk of the Heritage Foundation in a working paper on wage compensation. Here is the abstract:

Conventional wisdom holds that worker productivity has risen sharply
since the 1970s while worker compensation has stagnated. This belief
rests on misinterpreted economic data. Accurate and careful comparisons
show that over the past 40 years measured productivity has
increased 100 percent and average compensation has risen 77 percent.
Inflated productivity measurements account for most of the remaining
23 percentage point difference. An apples-to-apples comparison shows
that employee compensation continues to closely follow productivity.
American workers continue to earn more as they become more productive.
To help Americans advance economically, policymakers should
seek policies that will increase productivity.


This shows that Rickards does not take into account these factors which is surprising considering his in-depth focus in each of his books on the effects of inflation in terms of wealth distribution and accumulation. To be clear, his motivations are not being questioned here, just his methods for analyzing data and the inconsistencies that his newest book shows. In addition to this wage-productivity analysis , Boudreaux and other economists have found a similar trend in U.S. income distribution.

Since the early 1970’s, the percentage of middle class and lower class households dropped considerably, while wealthier income households more than doubled between 1975 and 2009. Thus, more people have been moving to higher income brackets. This can only mean wage and income mobility is 1) due to higher value productivity and 2) becoming more flexible making upward movements less difficult for former lower-income families to obtain higher standards of living. Thus the claim by Rickards that the middle class is stagnating due to job losses and wages not rising is clearly not true.



The question remains however, of why employment in the production of manufactured goods and exports have fallen while the total value of output and incomes of those workers still in those markets has risen exponentially. The answer is actually quite simple. Productivity gains from improvements in information technology and automation have allowed workers to create more output with an increase in the amount of capital accumulated. Thus, fewer workers are needed to create the output necessary for businesses to compete. According to a study done by Michael J. Hicks and Srikant Devaraj of the Center for Business and Economic Research at Ball State University:

Three factors have contributed to changes in manufacturing
employment in recent years: Productivity, trade, and domestic
demand. Overwhelmingly, the largest impact is productivity.
Almost 88 percent of job losses in manufacturing in recent years
can be attributable to productivity growth, and the long-term
changes to manufacturing employment are mostly linked to the
productivity of American factories…

Exports lead to higher levels of domestic production and employment,
while imports reduce domestic production and employment.
The difference between these, or net exports, has been negative since
1980, and has contributed to roughly 13.4 percent of job losses
in the U.S. in the last decade. Our estimate is almost exactly that
reported by the more respected research centers in the nation.


Putting these facts into context, there’s no denying that U.S. wages, when fringe benefits and proper inflation adjustments are accounted for, reflect manufacturing and productivity gains since Rickards’ aforementioned period of higher growth and incomes ending in 1971. This flies in the face of his assertions that free trade is an obsolete concept which no longer applies to international economics. Protectionism did not play the huge role he claims that turned the U.S. into a dominant economic power because manufacturing has composed a relatively small part of the U.S. economy since at least the middle of the 1800’s. And while currency manipulation may have a negative effect on trade flows and export markets, it’s obvious that the areas of the market most affected by this can not only breathe, but flourish regardless of foreign protectionist barriers and currency wars. However, there are still some discrepancies in his economic analysis that need to be rectified.


Abstracting from the previous analysis, there are numerous other errors and fallacies that Rickards proposes as truth to his readers. To start, this paper must point out what was briefly mentioned earlier. And that is he seems to mainly focus on lost jobs and China when discussing the detriments of globalization and protectionism. He states:

Even if one accepts that there will be winners and losers in a global trading system, what happens when the number of winners is few, and the losers are many? The answer is lower labor force participation, lower productivity, stagnant wage gains, and greater income inequality.

When the transfer of input factors is complete, comparative advantage is lost forever. The United States is left with dead-end jobs or no jobs at all.

The claim by Rickards of lower productivity and stagnant wages has already been refuted. However, labor participation is often cited as a problem of our shifting economy and supposedly indicates that many capable people are dropping out of the workforce. Fortunately, this has more to do with demographics than free trade. The trends we are seeing are that older citizens are retiring in larger numbers and women in general are choosing not to work as much as they did in the past. In addition our youth are extending their educations and going to college, sometimes for longer periods. He is a report from the Bureau of Labor Statistics:


This follows the basic premise that markets tend to adjust. Rickards connects this lower rate to the manipulation of free trade. But there is a problem with this. There is no shortage of jobs. We live in a tremendously intricate division of labor, and that system is constantly changing. Jobs are being added or changed, or sometimes even becoming obsolete. But to think that the number of jobs in the U.S. are somehow “fixed” is a fallacy. Economist Richard Ebeling writes:

Now labor, too, is not homogeneous and interchangeable. (To view it as so is to commit the “lump of labor” fallacy.) In an intensive capital using market economy, an inevitable complement is a growing specificity of skills and experience within the “labor supply.” A medical doctor is not an interchangeable substitute for the knowledge skills of a lawyer, or an accountant, or an economics professor, or a computer programmer, or an auto mechanic, or an interior decorator, or a hair stylist, or . . .

Since labor is part of a heterogeneous structure of inputs, there are costs involved with refitting and reorganizing proportions of labor with capital in order to create new products or improve old ones, thus creating new ways to improve this structure of production. Rickards pays lip service earlier in his book on the “varied and diverse” forms of capital and labor especially, but fails to apply this statement when looking at jobs as an aggregate concept. The main point is that there is always work to do since diverse desires and demands are never truly satisfied in an economic sense. The lump of labor fallacy (as well as comparative advantage) is a topic that Austrians, Monetarists, Keynesians, and Neoclassicals all typically agree on, and many members of each school can certainly not be described as “neo liberal” or “elite globalists” as Rickards states.

He then proceeds to mention that the kind of labor that doesn’t provide positive externalities are what the U.S. is left with due to other countries manipulating free trade:

Certain jobs persist yet go nowhere, and do not drive growth. A barista may have a steady job at decent wages, but that’s all … Lego-style assembly jobs are not, without exogenous effects, a source for additional jobs.

There are several faults one can find in just these few sentences alone. The first is the concept of externalities. It’s true that businesses in foreign countries often create negative outcomes with questionable production techniques (Rickards’ example of China dumping cyanide into rivers is a legitimate concern), and that is inexcusable. But to deny the existence of positive externalities with service sector jobs ignores a concept called derived demand. When someone becomes a barista or a retail clerk, they instantly provide new effective demand in the market(Say’s Law). For example, if they demand a new pair of tennis shoes, that means the demand for all of its inputs, or factors of production, increase as well. So with demand for leather, rubber, and other synthetic materials increasing, the need for more labor and capital(both human and technological), not to mention research and development, to extract and utilize these materials to make these shoes means that wages and jobs will increase in those industries, as will profits. Rickards fails to understand this important positive externality.

Another point he makes in regard to “high-valued” manufacturing jobs that enable supply chain improvements in labor and capital processes is more nuanced than he realizes. The fact is there are no nations on earth with totally local manufacturing supply chains located strictly within their boundaries. Quite often intermediate products and unfinished goods are transported to other countries where they are completed or worked on further. So Rickards isn’t completely accurate in his assumption that an improvement in the supply chain from domestic manufacturing jobs will automatically create more jobs here in the U.S. In fact, this trend has actually been reversing for the past few decades, but it won’t be discussed at length in this paper. Suffice it to say that economies of scale are becoming less relevant over time and manufacturing as a “cultural icon” or a nationalistic concept is a fading ideal.

The more important problem Rickards mentions is the concept of growth. It’s mentioned numerous times in the book as a staple of prosperity. He praises this concept of economic growth as if it’s a tangible, visible thing. In reality it is difficult, if not impossible, to truly measure the value of the production of the economy, and it’s relation to prices and costs. This point is emphasized by economists Robert Wenzel and Martin Feldstein:

These tasks are virtually impossible, and the problem begins at the beginning—when an army of shoppers go around the country at the government’s behest to sample the prices of different goods and services. Does a restaurant meal with a higher price tag than a year ago reflect a higher cost for buying the same food and service, or does the higher price reflect better food and better service? Or what combination of the two? Or consider the higher price of a day of hospital care. How much of that higher price reflects improved diagnosis and more effective treatment? And what about valuing all the improved electronic forms of communication and entertainment that fill the daily lives of most people?

In short, there is no way to know how much of each measured price increase reflects quality improvements and how much is a pure price increase. Yet the answers that come out of this process are reflected in the CPI and in the government’s measures of real growth. This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.

As a writer on monetary economics, Rickards should be more focused on the effects of monetary theory on prices of final goods and costs of inputs, instead of looking at growth as an objective indicator of value.

Recently The Economist has questioned the usefulness of GDP as a measure of well-being, among a diverse array of economists. The usual reasons that GDP is not as useful as is thought by the mainstream is that it counts “goods” as well as “bads” which falls for the broken window fallacy, it omits black and gray markets which make up a considerable part of the production structure (especially with barter), and does not consider leisure as an economic good and thus overemphasizes the importance of work instead of relaxation which is a real measure of wealth. In fact, people work less today than they did before World War II. So Rickards’ obsession with growth as a measure of economic well-being is misleading at best, and only gives a rough estimation of the wealth of a nation over a period of time.

But perhaps the most egregious error of GDP is it inability to account for advancements in technology. 50 years ago the U.S. had much higher growth on average than today, yet the technology we possess has changed our lives and wealth in multiple ways. Obviously, the prices of phones, computers, and other similar technological innovations have generally decreased substantially, despite an otherwise inflationary environment. Not only does this improve the wealth of all individuals, it also reduces the prices of inputs and the time it takes to organize them to create the products which is beneficial to businesses as well. These technologies provide things that are not always tangible such as information, data, education, services, and networks. These are often free as well, like free banking apps or stock trading on an iPhone, which isn’t accounted for in GDP. This does not give an accurate picture of how American lives have improved to such a large degree in the last several decades, due to shorter working hours, increased value productivity, lower prices for life-enhancing information technology, and an increasing network of information and communication. None of these things are tangible and thus are largely ignored by conventional GDP accounting standards.



Rickards then moves on to China specifically and the concept of capital. He first states that Ricardo’s concept of comparative advantage cannot hold in a world of mobile factors. If labor and capital can be transported or moved from one country to another with ease then the principle cannot hold true when these capital movements are due to manipulations of trade.

This rests on several errors common to most financial analysts, and Rickards is no different. The first and most important of these is the concept of capital flight. Capital does not move across boundaries. What is known to economists as fixed capital, such as factories or complex machines, typically stays within a country’s boundaries. It is much too costly to have them deconstructed, shipped, and then assembled abroad for businessmen to consider it profitable to do so. If an investor sells a factory in the U.S. to build a factory in a foreign nation because of cheaper labor costs, the domestic factory still remains and is still owned by someone, and thus is able to produce products which still require labor to do so (at the right price).

Taking this concept even further, capital in the sense of stocks, real estate, money, or funds also never leaves a nation’s boundaries, unless dollars are physically transported to the country that the new investment is located in(this is not what Rickards is talking about however). To be sure, dollars never leave the U.S. banking system since the majority of our international monetary system is digital. If one wants to purchase an investment or a good in a foreign country, they must acquire that nation’s foreign currency by exchanging dollars to purchase it whether it is real estate or stocks. But those dollars that are being exchanged never leave the American banking system or U.S. borders. A foreigner who is acquiring the dollars keeps them in our banking system, as the American keeps the foreign currency in that nation’s banking system. As there is a sale of digital dollars, there is also a purchase of digital dollars on the other side. This is why importers and exporters in the U.S. usually have foreign bank accounts of the countries they do business with. This is due to legal tender laws which heavily discourage the use of non-domestic currencies in a country’s boundaries. It is also a good way to diversify against currency risk.

In addition, the same concept applies to stocks and real estate. When an investor flees one stock in favor of another, that stock must be sold by the investor, which implies that there must be a buyer. The value and owner of the stock changes, but it is still owned nonetheless. So if a U.S. citizen chooses to liquidate a stock from a U.S. company, and purchases a stock on a foreign exchange, he must first find a buyer for his stock (who may be a foreigner), and then buy that stock with either his dollars or that foreign currency. If the purchase is made with dollars, then the seller of the stock must hold those dollars in a U.S. bank account. While this bank may be physically located within that foreign country, it is subject to U.S. laws. The capital itself, i.e. money, is not mobile as Rickards states. What’s mobile is ownership, and prices are flexible. They are in constant flux, but the capital stays in the U.S., where it is able to be invested at any time in the local economy. He misses this important nuance. This is true for investing in foreign businesses as well.

His other error is in looking at China specifically. He first states that China has cheap labor costs, but then goes on to say that it is due to this labor being more efficient than U.S. labor. This flies in the face of common economic theory. With higher labor productivity, labor costs like wages and benefits tend to rise proportionately. The reason for this higher productivity can be attributed to more and better capital, better education, better training, and a more stable legal system protecting property rights. U.S. workers are more productive, thus they can demand higher wages than Chinese workers(and they have better options). And it’s true that this can make it more difficult for U.S. manufacturers and exporters, but the source of the discrepancy is not what Rickards thinks it is.

Earlier it was said that the loss of comparative advantage and manufacturing jobs to countries like China were not due to trade manipulation, but automation and the fact that manufacturing has historically been a smaller portion of the whole U.S. economy relative to the service sector in value terms. But even the assertion that China has a large effect on our economy in terms of employment and prices is faulty.

According to economists Jay H. Bryson and Erik Nelson, the U.S. is not very dependent on China’s economy, especially its export markets. Only 7 percent of U.S. exports are sold to China, and that is less than 1 percent of GDP. This means that even under the commonly held belief that the devaluation of the Chinese currency, the Yuan, will reduce prices of their exports as well as make U.S. exports less competitive, this will not result in major job losses or significantly lower growth that Rickards so passionately asserts. On the contrary, the depreciation of the Yuan improves the purchasing power of U.S. citizens in terms of Chinese imports and has little correlation with U.S. consumer prices. As Bryson and Nelson state:

The devaluation of the renminbi should exert some
further downward pressure on Chinese import prices in coming months. Given the high
correlation between year-over-year changes in Chinese import prices and total import prices in recent years, a drop in the former should lead to some further decline in the latter. However, the correlation between import price inflation and core CPI inflation is rather low. Services account for 62 percent of the consumer price index, and the United States imports relatively few services from the rest of the world, let alone from China. In other words, yuan devaluation should have little overall effect on U.S. CPI inflation.


This non-issue with the Chinese devaluation is further emphasized by economist Steve Hanke from Johns Hopkins University:

The facts are that Chinese exports have steadily risen since 1995, but
they have not been powered by a depreciating yuan. In fact, the
yuan has slightly appreciated in both nominal and real terms. The
accompanying chart tells that story. So, what was said about the
yuan during the [presidential] debate is untrue. But, that yuan story is not a debate
slip. It is disinformation spread by unions, mercantilist of all stripes, and politicians.


One could add Rickards to this list. Again, his intentions are not being questioned here; just his analysis. His book has a tendency to claim foreign protectionism as a source of domestic stagnation, yet finds examples of how protectionism can and has helped the U.S. economy. One of his solutions for slow growth and low-value jobs is to implement:

…an immediate 30 percent import duty on all goods from all sources. This could be made revenue neutral by pairing the tariff with a 10 percent cut in payroll taxes.

The expected outcome is that Apple would relocate good jobs to the United States, where it could reap the combined benefits of lower tariffs and lower payroll taxes. The impact of this policy goes beyond Apple and iPhones to include all high-value-added imports.

One could point to several problems with issuing tariffs to protect domestic industry, but there is one major error that Rickards misses completely that is imperative to his main concern about jobs and growth. To start, when a sufficiently high tariff is enacted in the U.S., foreign exporters are unable to sell to most U.S. importers and consumers due to higher prices. Rickards would agree with this point, but here is where he stumbles in his reasoning.

U.S. imports are bought with dollars. If foreigners are prevented from selling to U.S. consumers because a 30 percent tariff on all imports is made as Rickards suggests, then consumers will buy less of their exports. But if this is the case, then these foreign exporters will not acquire as many dollars for their sale of goods to the U.S. With less dollars, and thus purchasing power, to spend on U.S. exports, decreasing foreign demand will shrink our industrial and manufacturing sector. If this is the case, profits in these industries will be reduced, thus forcing export companies to cut costs causing layoffs and/or a reduction of wages and benefits for its higher-valued employees.

Again, Rickards misunderstands this point about digital capital. A foreigner needs dollars to purchase U.S. goods, and if exporters cannot acquire as many dollars from sales to the U.S., then they will be unable to effectively demand our goods and services in return. This will create more unemployment and reduce economic growth, the opposite of what Rickards claims. He might respond by saying that foreign exporters(as well as citizens) can simply exchange their saved currency, such as Yuan, for dollars if they truly want to purchase U.S. products. Unfortunately, this increased demand for dollars would raise its exchange value in terms of Yuan, making foreign exports cheaper and imports more expensive in terms of dollars relative to that foreign currency. This would be conceptually the same result as a foreign country devaluing its currency.

It should be noteworthy that Rickards disagrees with the notion of protectionism against the United States on the one hand, and proposes the same type of policy against foreigners on the other. He asks advocates of comparative advantage this question: “If U.S. workers cannot get better jobs, and are hobbled by high debts, who will buy what global companies make?” Considering the previous paragraph, the inverse question should be asked to Rickards: If foreign companies cannot get dollars for selling items that now are subject to U.S. tariffs, how will they buy what U.S. companies make?


What has been discovered overall is that Rickards, despite his seeming dedication to economic history and monetary theory, has created a mare’s nest of distortion that dovetails with neither theory nor history. He inadvertently follows in the footsteps of other pseudo-connoisseurs of macroeconomics. Unfortunately, the layman can be easily swayed by a lack of context, which is exactly why this paper was written; to give context to these intricate yet accessible concepts. Rickards’ book The Road to Ruin does contain some useful analysis of monetary policy, central banking, and political economy. But when it comes to free trade and some basic laws of economics, he fails to weave a holistic view of voluntary trade that would allow him to see the forest through the trees. The free market, which he pays lip service to, is like that forest. It’s a seeming confusion of complexities that can be thought of as a living organism or even a person, and therefore must be analyzed and treated with rigorous care. And while his diagnosis of catallactic causality could be thought of as a clinical error, Rickards’ main prescription is nothing short of economic malpractice.

NOTE: If you cannot access the link from the Wall Street Journal, here is a seperate link: http://neoliberalism-nightly.tumblr.com/post/79346673329/donald-boudreaux-and-liya-palagashvili-the-myth



  1. All this would be true only in one case:
    If the author had not tried to present the unjustified emission of dollars, as a blessing necessary for mankind.
    Unjustified emission of US dollars was a ploy by the US financial elites and served the interests of only the financial elites of the United States, contrary to the interests of other countries and humanity as a whole.


    1. There is nothing requiring you to use dollars in the U.S. From my previous paper titled CAN YOU PROFIT BY SAVING? AN EXTREME MONEY OVERTURE:

      Legal Tender laws are often confused with the idea that only legal tender can be used in both private and business transactions. But this is not true. From the Federal Reserve’s official website:

      “Section 31 U.S.C. 5103, entitled “Legal tender,” states: “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues.”

      “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.”

      Other countries and humanity, as you put it, are completely free to use something other than dollars in transactions(which many do).


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