Currency Wars_ The Making of the Next Global Crisis - James Rickards [14]
At the end of move one, the white cell gave us the score. The United States had lost a small amount of power because it appeared that Japan had moved somewhat out of the U.S. orbit and the United States had not mustered an effective response. China gained a small amount of power essentially for doing nothing. Russia was heavily penalized for making what the white cell clearly regarded as a hostile move that showed a lack of cooperation with the rest of the world and had no immediate payoff. Net/net, Steve and I had collectively cost our teams some national power at the end of round one. However, we were playing what Russian Grandmasters call a deep game. There would be more moves to come.
Now it was on to move two. This baseline scenario did not mesh with my ideas about currency wars as well as the scenario used in the first move. This move had to do with an economic collapse in North Korea and the global reaction, which was intended to combine both geopolitical and humanitarian motives. It was a plausible scenario, but a strange choice for a financial war game. North Korea was about as unconnected to the global financial system as one country could get. It was difficult at first to see how to work the gold and currency angle into the North Korea scenario.
Sitting in our Chinese capital, I listened to my teammates earnestly discuss whether the United States might refuse to aid North Korea in order to let the situation deteriorate as a prelude to Korean unification. Since this was a risk-averse crew, they settled on a package of humanitarian aid coupled with some indication that China might support reunification at some future date on nonconfronta-tional terms.
At an appropriate lull in the conversation, I turned to Harvard and said, “Look, it’s not too late to revisit this gold currency thing. We could announce some support for the Russian initiative combined with some intention to study it and possibly join in the future.”
At this point Harvard began to lose patience. He clearly thought the issue had been buried and could be safely ignored. If China joined the Russian system, it would be swapping its dollar reserves for physical gold in order to back the new currency. Among other objections, Harvard thought the Russians had set the price too high. “Look,” he snapped back, “this whole thing makes no sense. Gold is not part of the monetary system and it’s not coming back no matter what the Russians do. They’re on their own. You want to use hard currency to buy gold at an inflated price; I’d rather keep the dollars—they’re much more valuable. Now let’s get back to North Korea.”
As a renowned Asia expert, Harvard clearly relished the chance to dig in on complicated bilateral East Asian problems rather than pursue what he thought of as a pointless conversation about currencies and gold. Yet I had been trained since law school to argue both sides of an issue without pausing for breath, so I quickly turned his argument back on him just to keep the idea alive.
“You think we’d be paying too much for the gold?” I asked.
“Right,” he said. “Way too much.”
“So why don’t we sell our gold to Russia?”
This was not just the lawyer’s instinct but also the trader’s. Every market has a bid side where someone is willing to buy and an offer side where someone is willing to sell. Market making is the art of price discovery between the bid and the offer. Someone may start out as a buyer, but if something is really priced too high she immediately becomes a seller. It was just this kind of dispassionate ice-water-in-the-veins mentality that typified the best traders I had ever met. I was calling Harvard’s bluff. If the price was too high to buy, then we should sell. I waited to see if he would take the bait.
“Fine,