I have a pet theory that a good way to understand history is to examine the currency arrangements. Historians will address the rampant debasement of the currency by the Romans in the third century, for example, but they never try to explain events through the lens of currency. I think you can argue that the history of money is the history of man in the sense that the arc of civilization is the mastery of money by the people in charge.

Two good examples are Charlemagne and Offa of Mercia. They were contemporaries and both reformed the coinage and mastered seigniorage. Forever after them, a key goal of the ambitious ruler was to control the coinage and use it as part of his arsenal against his adversaries. Closer to home, the history of the world post World War II is all about the dollar and its role as the reserve currency of the world.

Anyway, it looks like James Rickards was right a few years ago when he said the world is descending into a another currency war. That’s a great book, by the way. The Wall Street Journal reports that China is debasing its currency and sending shock waves through the emerging markets.

China’s devaluation of its currency jolted global markets Tuesday, hitting stocks and commodities and boosting government bonds.

The Dow Jones Industrial Average fell 1.2% to 17402.84, erasing most of the previous session’s gains. The S&P 500 fell 1% to 2084.07. The pan-European Stoxx Europe 600 index closed 1.6% lower.

Oil and metals prices also fell sharply, while demand for haven assets pushed down bond yields in the U.S. and Europe, as investors worried that Beijing’s move signaled concerns over growth in the world’s second-largest economy.

The moves came after the People’s Bank of China on Tuesday pushed down the yuan’s trading range against the dollar, setting its daily fixing rate 1.9% lower. Investors reacted to the move by pushing the yuan down almost 2% from that level.

Financial markets saw it as a sign that Chinese authorities believe it is necessary to act to boost flagging growth, said Ewen Cameron Watt, chief investment strategist at BlackRock’s Inc.’s Investment Institute.

They call currency devaluation “beggar thy neighbor” for a reason. China, in an effort to boost exports, will start printing money, thus lowering its value against the dollar and other currencies. That will make Chinese products more competitive in US and European markets. This may be fine for the US and Europe as it means cheap goods and people like cheap goods for a while.

The trouble is everyone else will have no choice but to follow suit and debase their currency. It can easily become a race to the bottom. International management through central banks is probably enough to keep things from getting out of hand, but there are unknown unknowns. The biggest is the off the books carry trade market that is possibly over $9 Trillion USD now.

The entirety of this market is leverage. You borrow money to invest it in another currency. Presumably, settlement of both ends of the transaction leaves a profit, but big moves in the currency rates means huge losses. Those losses are covered by liquidating other assets to cover the loss. This can set off a cascading effect blowing up whole markets in days, even with the loss prevention systems governments have in place. The most obvious example is The Asian Financial Crisis of ’97.

Life is not a math problem and so economic problems become political problems. Brazil, which is already struggling, cannot withstand a currency war. This is not a country with a stable political and cultural foundation. The current president is already under fire so a deepening economic crisis will probably lead to political turmoil or worse. Military coup is the traditional way of doing things in Brazil so you never can rule that out as a possibility.

Currency wars never end well. The currency war that started in the 1920’s ended with depression and world war. The disorganized flight from the Bretton Woods system eventually led to the current system of towering world debt that may be about to tip over. The only way for the West to maintain their massive custodial states is through unlimited credit emissions. A full on currency war probably brings that to an end.