Currency Wars_ The Making of the Next Global Crisis - James Rickards [84]
Internal social instability caused by the excess population of single men along with food price inflation and mass unemployment is a greater threat in the eyes of Chinese rulers than the U.S. military. This instability can be smoothed over in part through infrastructure investments that create jobs, which China depends on its currency reserves to finance. What happens when the United States devalues those reserves through inflation? While inflation may make sense to U.S. policy makers, the resulting wealth transfer from China to the United States is viewed as an existential threat by the Chinese. Maintaining the real value of its reserves is one of China’s keys to maintaining internal social control. The Chinese are warning the United States that they will not tolerate dollar inflation and will take countermeasures to prevent a loss of wealth. The U.S.-Chinese currency war is just getting started, and the Fed’s quantitative easing makes it entirely plausible to say the United States fired the first shot.
The clearest exposition of Chinese thinking on financial warfare is an essay called “The War God’s Face Has Become Indistinct,” included in a book on unrestricted warfare written in 1999 by Colonels Qiao Liang and Wang Xiangsui of the People’s Liberation Army. One passage in particular is worth quoting at length:
Financial warfare has now officially come to war’s center stage—a stage that for thousands of years has been occupied only by soldiers and weapons.... We believe that before long, “financial warfare” will undoubtedly be an entry in the . . . dictionaries of official military jargon. Moreover, when people revise the history books on twentieth-century warfare . . . the section on financial warfare will command the reader’s utmost attention.... Today, when nuclear weapons have already become frightening mantelpiece decorations that are losing their real operational value . . . financial war has become a “hyperstrategic” weapon that is attracting the attention of the world. This is because financial war is easily manipulated and allows for concealed actions, and is also highly destructive.
Consideration of such military doctrine suggests that the future of geopolitics might not be the benign multilateral ethos of Davos Man but a rather more dark and dystopian world of resource scarcity, infrastructure collapse, mercantilism and default. China’s call to replace the U.S. dollar as the global reserve currency, routinely dismissed by bien-pensant global elites, might be taken more seriously if they were as familiar with Chinese financial warfare strategy as with Keynesian theory.
China’s main link with the global financial system is the U.S. government bond market. China may be history’s oldest civilization and a rising superpower, but on Wall Street it is more likely to be viewed as the best customer in the world. When China needs to buy or sell U.S. Treasury bonds for its reserves, it does so through the network of primary dealers. Large customers like China prefer to trade with primary dealers because their privileged relationship with the Fed gives them the best information about market conditions. Relationships are the key to knowing what is really going on in markets, and China taps into those relationships.
When China calls a bank dealer, the call never goes to voice mail. Direct lines are installed from China’s central bank and sovereign wealth funds to arena-sized trading floors at UBS, J. P. Morgan, Goldman Sachs and other major banks. A salesperson knows China is on the line before she picks up the phone. Code names are used so the salesperson and trader can engage in market-making conversations safe from eavesdropping. When China wants to trade U.S. bonds, it typically