It remained to be seen whether the G20 could divert the United States from its runaway fiscal and monetary policies, which were flooding the world with dollars and causing global inflation in food and energy prices. For its part, the United States sought allies inside the G20 such as France and Brazil to apply pressure on the Chinese to revalue. The U.S. view was that everyone—Europe, North America and Latin America—would gain exports and growth if China revalued the yuan and increased domestic consumption. This may have been true in theory, but the U.S. strategy of flooding the world with dollars seemed to be causing great harm in the meantime. China and the United States were engaged in a global game of chicken, with China sticking to its export model and the United States trying to inflate away China’s export cost advantage. But inflation was not confined to China, and the whole world grew alarmed at the damage. The G20 was supposed to provide a forum to coordinate global economic policies, but it was starting to look more like a playground with two bullies daring everyone else to chose sides.
In the run-up to the G20 leaders’ summit in Seoul in November 2010, Geithner tried to paint China into a corner by articulating a percentage test for when trade surpluses became excessive and unsustainable from a global perspective. In general, any annual trade surplus in excess of 4 percent of GDP would be treated as a sign that the currency of the surplus country needed to be revalued in order to tilt the terms of trade away from the surplus country and toward deficit countries like the United States. This was something that used to happen automatically under the classical gold standard but now required central bank currency manipulation.
Geithner’s idea went nowhere. He had wanted to target China, yet, unfortunately for his thesis, Germany also became a target, because the German trade surplus was about as large as China’s when expressed as a percentage of GDP. By Geithner’s own metrics, the Germany currency, the euro, would also have to be revalued upward. This was the last thing Germany and the rest of Europe wanted, given the precarious nature of their economic recoveries, the structural weakness of their banking system and the importance of German exports to Europe’s job situation. Finding support in neither Europe nor Asia, Geithner quietly dropped the idea.
Instead of setting firm targets, the Seoul G20 leaders’ summit suggested the idea of “indicative guidelines” for determining when trade surpluses might be at unsustainable levels. The exact nature of these guidelines was left to a subsequent meeting of the finance ministers and central bank governors to work out. In February 2011, the ministers and governors met in Paris and agreed in principle on what factors might be included as “indicators,” but they did not yet agree on exactly what level of each indicator might be tolerated, or not, within the indicative guidelines. That quantification process was left for a subsequent meeting in April and the entire process was left up to the final approval of the G20 leaders themselves at the annual meeting, in Cannes in November 2011.
Meanwhile, the empowerment of the IMF as the watchdog of the G20 continued apace. In a March 2011 conference in Nanjing, China, attended by experts and economists, G20 president Nicolas Sarkozy said, with regard to balance of payments, “Greater supervision by the IMF appears indispensible.”
Saying that the G20 process moves forward at a glacial pace seems kind. Yet with twenty sovereign leaders and as many different agendas, it was not clear what the alternative would be if a global solution was to be achieved. This is the downside of Geithner’s theory of convening power. The absence of governance can be efficient if the people in the room are like-minded or if one party in the room has the ability to coerce the others, as had been true when the Fed confronted the fourteen families at the time of the LTCM bailout. When the assembled parties have widely divergent goals and different views on how to achieve those goals, the absence of leadership means that minute incremental change is the best that can be hoped for. By 2011 it appeared that the changes were so minute and so slow as to be no change at all.
The G20 was far from perfect as an institution, but it was all the world had. The G7 model seemed dead and the United Nations offered nothing comparable. The IMF was capable of good technical analysis; it was useful as a referee of whatever policies the G20 could agree on. But IMF governance was heavily weighted to the old trilateral model of North America, Japan and Western Europe, and its influence was resented in the emerging markets powerhouses such as China, India, Brazil and Indonesia. The IMF was useful; however, change would also be needed there to conform to new global realities.
In late 2008 and early 2009, the G20 was able to coordinate policy effectively because the members were united by fear. The collapse of capital markets, world trade, industrial output and employment had been so catastrophic as to force a consensus on bailouts, stimulus and new forms of regulation on banks.
By 2011, it appeared the storm had passed and the G20 members were back to their individual agendas—continued large surpluses for China and Germany and continued efforts by the United States to undermine the dollar to reverse those surpluses and help U.S. exports. Yet there was no Richard Nixon around to take preemptive action and no John Connally to knock heads. America had lost its clout. It would take another crisis to prompt unified action by the G20. Given the policy of U.S. money printing and its inflationary side effects around the world, it seemed the next crisis would not be long in coming.
That crisis arrived with a jolt near the city of Sendai, Japan, on the afternoon of March 11, 2011. A 9.0 earthquake followed quickly by a ten-meter-high tsunami devastated the northeast coastline of Japan, killing thousands, inundating entire towns and villages, and destroying infrastructure of every kind—ports, fishing fleets, farms, bridges, roads and communications. Within days the worst nuclear disaster since Chernobyl had commenced at a nuclear power plant near Sendai, with the meltdown of radioactive fuel rods in several reactors and the release of radiation in plumes affecting the general public. As the world wrestled with the aftermath, a new front arose in the currency wars. The Japanese yen suddenly surged to a record high against the dollar, bolstered by expectations of massive yen repatriation by Japanese investors to fund reconstruction. Japan held over $2 trillion in assets outside of the country, mostly in the United States, and over $850 billion of dollar-denominated reserves. Some portion of these would have to be sold in dollars, converted to yen and moved back to Japan to pay for rebuilding. This massive sell-dollars /buy-yen dynamic was behind the surge in the yen.
From the U.S. perspective, the rise in the yen relative to the dollar seemed to fit nicely into the U.S. goals, yet Japan wanted the opposite. The Japanese economy was facing a catastrophe, and a cheap yen would help promote Japanese exports and get the Japanese economy back on its feet. The magnitude of the catastrophe in Japan was just too great—for now the U.S. policy of a cheap dollar would have to take a backseat to the need for a cheap yen.
There was no denying the urgency of Japan’s need to cash out its dollar assets to fund its reconstruction; this was the force driving the yen higher. Only the force of coordinated central bank intervention would be powerful enough to push back against the flood of yen pouring back into Japan. The yen-dollar relationship was too specialized for G20 action, and there was no G20 meeting imminent anyway. The big three of the United States, Japan and the European Central Bank would address the problem themselves.
Under the banner of the G7, French finance minister Christine Lagarde placed a phone call to U.S. Treasury secretary Geithner on March 17, 2011, to initiate a coordinated assault on the yen. After consultations among the central bank heads responsible for the actual intervention and a briefing to President Obama, the attack on the yen was launched at the open of business in Japan on the morning of March 18, 2011. This attack consisted of massive dumping of yen by central banks and corresponding purchases of dollars, euros, Swiss francs and other currencies. The attack continued around the world and across time zones as European and New York markets opened. This central bank intervention was successful, and by late in the day on March 18 the yen had been pushed off its highs and was moving back into a more normal trading range against the dollar. Lagarde’s deft handling of the yen intervention enhanced her already strong reputation for crisis management earned during the Panic of 2008 and the first phase of the euro sovereign debt crisis in 2010. She was the near universal choice to replace the disgraced Dominique Strauss-Kahn as head of the IMF in June 2011.
If the G20 was like a massive army, the G7 had shown it could still play the role of special forces, acting quickly and stealthily to achieve a narrowly defined goal. The G7 had turned the tide at least temporarily. However, the natural force of yen repatriation to Japan had not gone away, nor had the speculators who anticipate and profit from such moves. For a while, it was back to the bad old days of the 1970s and 1980s as a small group of central banks fended off attacks from speculators and the fundamental forces of revaluation. In the larger scheme of things, Japan’s need for a weak yen was a setback to the U.S. plan for a weak dollar. The classic beggar-thy-neighbor problem of competitive devaluations had taken on a new face. Now, in addition to China, the United States and Europe all wanting to weaken their currencies, Japan, which had traditionally been willing to play along with U.S. wishes for a stronger yen, found itself in the cheap-currency camp too. Not everyone could cheapen at once; the circle still could not be squared. Ultimately the dollar-yen struggle would be added to the dollar-yuan fight already on the G20 agenda as the world sought a global solution to its currency woes.
PART THREE
THE NEXT GLOBAL CRISIS
CHAPTER 8
Globalization and State Capital
“It is a doctrine of war not to assume the enemy will not come, but rather to rely on one’s readiness to meet him; not to presume that he will not attack, but rather to make one’s self invincible.”
Sun Tzu,
The Art of War,
Late fifth century BC
H
istorically a currency war involves competitive devaluations by countries seeking to lower their cost structures, increase exports, create jobs and give their economies a boost at the expense of trading partners. This is not the only possible course for a currency war. There is a far more insidious scenario in which currencies are used as weapons, not in a metaphorical sense but in a real sense, to cause economic harm to rivals. The mere threat of harm can be enough to force concessions by rivals in the geopolitical battle space.
These attacks involve not only states but also terrorists, criminal gangs and other bad actors, using sovereign wealth funds, special forces, intelligence assets, cyberattacks, sabotage and covert action. These financial maneuvers are not the kind that are the subject of polite discussion at G20 meetings.
The value of a nation’s currency is its Achilles’ heel. If the currency collapses, everything else goes with it. While markets today are linked through complex trading strategies, most still remain discrete to some extent. The stock market can crash, yet the bond market might rally at the same time. The bond market may crash due to rising interest rates, yet other markets in commodities, including gold and oil, might hit new highs as a result. There is always a way to make money in one market while another market is falling out of bed. However, stocks, bonds, commodities, derivatives and other investments are all priced in a nation’s currency. If you destroy the currency, you destroy all markets and the nation. This is why the currency itself is the ultimate target in any financial war.
Unfortunately, these threats are not given sufficient attention inside the U.S. national security community. Bill Gertz, reporting in the
Washington Times
, noted, “U.S. officials and outside analysts said the Pentagon, the Treasury, and U.S. intelligence agencies are not aggressively studying the threats to the United States posed by economic warfare and financial terrorism. ‘Nobody wants to go there,’ one official said.”
An overview of the forces of globalization and state capitalism, a new version of seventeenth-century mercantilism in which corporations are extensions of state power, is a step toward understanding the grave dangers facing the world economy today. Financial warfare threats can be grasped only in the context of today’s financial world. This world is conditioned by the triumph of globalization, the rise of state capitalism and the persistence of terror. Financial warfare is one form of unrestricted warfare, the preferred method of those with inferior weapons but greater cunning.
Globalization
Globalization has been emerging since the 1960s but did not gain its name and widespread recognition until the 1990s, shortly after the fall of the Berlin Wall. Multinational corporations had existed for decades, but the new global corporation was different. A multinational corporation had its roots and principal operations in one country but operated extensively abroad through branches and affiliates. It might have a presence in many countries, but it tended to keep the distinct national identity of its home country wherever it operated.
The new global corporation was just that—global. It submerged its national identity as much as possible and forged a new identity as a global brand stripped of national distinction. Decisions about the location of factories and distribution centers and the issuance of shares or bonds in various currencies were based on considerations of cost, logistics and profits without regard to affection for a nominal home country.