The Death of Money (40 page)

AFTERWORD

When I wrote
Currency Wars
in 2011, I diagnosed various dangers in the financial system and prescribed concrete
steps policy makers might take to mitigate those dangers. I identified ways to reverse
monetary and fiscal policy blunders around the world, particularly in the United States.
My tone was cautionary but hopeful. I specifically said it was late, but not too late,
to undo the damage caused by bankers and restore the financial system to a sound footing
that would support commerce instead of trying to siphon it dry.

In the two and a half years since I completed
Currency Wars,
conditions have indeed changed—but not for the better. Elites who in former times
were self-sacrificing have become self-serving. The world has passed the point where
there is much prospect of soft landings; there are no easy exits from the policy mistakes
that have been committed. All that remain are hard choices.

The hoped-for mild, middling inflation that becomes self-sustaining and seems to lift
all boats with money illusion is not in the cards. There is only high inflation, deflation,
disorder, default, and repression on offer. Exact paths and outcomes cannot be predicted,
but severe consequences can be foreseen. These consequences may play out over considerable
periods of time, but the underlying processes have already commenced.

The collapse of the dollar and the collapse of the international monetary system are
one and the same. Threats to the dollar are ubiquitous—lost confidence, financial
war, regional hegemons, hyperinflation, and more. These threats are looming larger
and may even converge as inflation erodes confidence and emboldens enemies in a feedback
loop that
gains energy like a hurricane on warm water. The savings of everyday citizens are
in the path of the storm.

Policy makers may not be alert to the dangers surrounding the dollar, but savers and
investors show much better sense. A tide in the direction of hard assets is perceptible
and growing stronger.

It may be too late to save the dollar, but it is not too late to preserve wealth.
We live in an ersatz monetary system that has reached its end stage. In our time,
the aureate has become brazen—the golden has become brass. A return to true value
based on trust is long overdue.

My sincere thanks go to Melissa Flashman and Adrian Zackheim for first encouraging
me to write on the challenging subject of international economics several years ago
and for supporting me in this task ever since.
The Death of Money
would not exist without their help and guidance.

There is scarcely a manuscript that cannot be improved by good editing, and I was
fortunate to have one of the best editorial teams around to help with
The Death of Money.
Will Rickards deftly handled the daunting burden of first-draft editing. Hugh Howard
did a fine job as development editor, enlivening didactic structures. Janet Biehl’s
attention to detail as copy editor rivaled that of Sherlock Holmes, with felicitous
results. Niki Papadopoulos, senior editor at Portfolio, was an inspiring muse and
rode herd on the entire process. The quality of this book owes a lot to all of them.
Any remaining errors are entirely my responsibility.

I am fortunate to have close friends among economists and market professionals, who
provide me with candid advice when I need to try out new ideas or explore those of
others. I have benefited greatly from their acumen, and I thank John Makin, Dave “Davos”
Nolan, Peter Moran, Chris Whalen, Bob Rice, Sorin Sorescu, Benn Steil, Steve Cordasco,
John Cassarini, Roger Kubarych, Steve Halliwell, Komal Sri-Kumar, Don Young, Richard
Duncan, and Art Laffer for their generosity of time and spirit to help me make sense
of an opaque financial landscape.

I owe a special debt to Ken Dam, who literally wrote the book on the IMF, gold, and
SDRs. His 1982 classic,
The Rules of the Game,
is the indispensable source for understanding the IMF today. I follow humbly in his
footsteps.

My many invitations to discuss finance in the public square of television, radio,
and the Internet have helped to sharpen my analyses in ways that have contributed
to this book. My sincere thanks go to Deirdre Bolton, Lauren Lyster, Adam Johnson,
Vielka Todd, Max Keiser, Stacy Herbert, Kathleen Hays, Demetri Kofinas, Amanda Lang,
and Annmarie Hordern for inviting me onto your programs and holding my feet to the
fire through countless discussions of the euro, gold, the Fed, China, and the new
depression.

Today a book on finance is as much about Washington as it is about Wall Street, and
I am grateful to my friends in public policy, national security, and the media in
Washington who have guided me through thickets inside the Beltway. Thank you to Taylor
Griffin, Charles Duelfer, Joe Pesce, Mike Allen, and Rob Saliterman for your friendship
and great advice.

Of all the research challenges I faced in writing this book, the most daunting involved
the mysterious inner workings of the global gold market. I would not have been able
to meet this challenge without the assistance and guidance of gold market professionals
and friends Alex Stanczyk, Philip Judge, Chris Blasi, Ben Davies, John Hathaway, Ronni
Stoeferle, Mark Valek, and Jan Skoyles. Thank you all.

Some of my most valuable guidance came from friends and family who read early drafts
of this book, not as experts but as everyday citizens concerned about the economy
and the country as a whole. I am grateful to Glen Rickards, Joan and Erv Hobson, Diane
Rickards, Gwendolyn van Paasschen, and Bruce Orr for their feedback and early warnings
about passages that were too dense or took too much for granted.

My immediate family was a continuous source of support and encouragement. My daughter,
Ali; my son Will; my son Scott; his wife, Dominique; and their children, Thomas and
Samuel, never cease to amaze me as they grow, prosper, and confront the same economic
challenges I write about in this book. They are the future, and their generation gives
reason for hope despite the hurdles put up by my own generation. I am deeply indebted
to my wife, Ann, for her love, consolation, and endless encouragement. I’m grateful
to my entire family for your immense patience during my long stretches of antisocial
behavior known as writing. I love you all.

Introduction

“Suddenly Americans traveling abroad . . .”
:
Janet Tavakoli, “Who Says Gold Is Money (Part Two),”
Financial Report,
Tavakoli Structured Finance, August 30, 2013, http://www.tavakolistructuredfinance.com/2013/08/tavakoli-says-gold-is-money.

Chapter 1: Prophesy

“It was the most blatant case . . .”
:
John Mulheren, conversation with the author, CIA Headquarters, September 26, 2003.

His conviction was based on testimony . . .
:
John Mulheren’s 1990 conviction was overturned by the Second Circuit Court of Appeals
in 1991. This complete exoneration allowed his return to the securities industry.

September 5, 2001, was the day Osama bin Laden learned . . .
:
Elisabeth Bumiller, “Bin Laden, on Tape, Boasts of Trade Center Attacks; U.S. Says
It Proves His Guilt,”
New York Times,
December 14, 2001, http://www.nytimes.com/2001/12/14/world/nation-challenged-video-bin-laden-tape-boasts-trade-center-attacks-us-says-it.html.
The September 5 reference is to the New York time zone where markets were still open.
Bin Laden made the remarks in Afghanistan on September 6, 2001, local time, 9.5 hours
ahead of New York.

“I say the events that happened on Tuesday . . .”
:
Tayser Allouni, “A Discussion on the New Crusader Wars,” October 21, 2001, http://www.religioscope.com/info/doc/jihad/ubl_int_2.htm.

as well as family and friends
:
National Commission on Terrorist Attacks upon the United States,
The 9/11 Commission Report
(New York: W. W. Norton, 2004), pp. 222, 237.

A normal ratio of bets . . .
:
For options trading data, see Allen M. Poteshman, “Unusual Option Market Activity
and the Terrorist Attacks of September 11, 2001,”
Journal of Business
79, no. 4 (July 2006), pp. 1703–26, http://www.jstor.org/stable/10.1086/503645.

“Exhaustive investigations by the Securities and Exchange Commission . . .”
:
National Commission on Terrorist Attacks,
9/11 Commission Report,
p. 172.

the pre-9/11 options trading was based on inside information
:
See Poteshman, “Unusual Option Market Activity”; Wing-Keung Wong, Howard E. Thompson,
and
Kweechong Teh, “Was There Abnormal Trading in the S&P 500 Index Options Prior to the
September 11 Attacks?” Social Science Research Network, April 13, 2010, http://ssrn.com/abstract=1588523;
and Marc Chesney, Remo Crameri, and Loriano Mancini, “Detecting Informed Trading Activities
in the Options Markets,” Swiss Finance Institute Research Paper no. 11-42 (July 2012),
http://ssrn.com/abstract=1522157.

The leading academic study of terrorist insider trading . . .
:
Poteshman, “Unusual Option Market Activity.”

These techniques have proved reliable . . .
:
Erik Lie, “On the Timing of CEO Stock Option Awards,”
Management Science
51, no. 5 (May 2005), pp. 802–12, http://www.biz.uiowa.edu/faculty/elie/Grants-MS.pdf.

“There is evidence of unusual option market activity . . .”
:
Poteshman, “Unusual Option Market Activity,” p. 1725.

“Companies like American Airlines, United Airlines . . .”
:
Chesney, Crameri, and Mancini, “Detecting,” p. 19.

“The system was blinking red”
:
George Tenet quoted in
9/11 Commission Report,
p. 259.

“Get down to Disney World . . .”
:
George W. Bush quoted in Andrew J. Bacevich, “He Told Us to Go Shopping,”
Washington Post,
October 5, 2008, http://articles.washingtonpost.com/2008-10-05/opinions/36929207_1_president-bush-american-consumer-congress.

“CIA’s Financial Spying Bags Data on Americans”
: Siobhan Gorman, Devlin Barrett, and Jennifer Valentino-Devries, “CIA’s Financial
Spying Bags Data on Americans,”
Wall Street Journal,
November 14, 2013, http://online.wsj.com/news/articles/SB10001424052702303559504579198370113163530.

Chapter 2: The War God’s Face

“We studied RMA exhaustively . . .”
:
Quoted in “The Dragon’s New Teeth,”
Economist,
April 7, 2012, http://www.economist.com/node/21552193.

This classified plan, called “Air-Sea Battle” . . .
:
Greg Jaffe, “U.S. Model for a Future War Fans Tensions with China and Inside Pentagon,”
Washington Post,
August 1, 2012, http://articles.washingtonpost.com/2012-08-01/world/35492126_1_china-tensions-china-threat-pentagon.

“In the near future, information warfare . . .”
:
Major General Wang Pufeng, “The Challenge of Information Warfare,”
China Military Science,
Spring 1995, http://www.fas.org/irp/world/china/docs/iw_mg_wang.htm.

The People’s Liberation Army of China made this doctrine . . .
:
Colonel Qiao Liang, and Colonel Wang Xiangsui,
Unrestricted Warfare
(Beijing: People’s Liberation Army, 1999).

“Economic prosperity that once excited . . .”
:
Ibid.

China had been a net seller . . .
:
Floyd Norris, “Data Shows Less Buying of U.S. Debt by China,”
New York Times,
January 21, 2011, http://www.nytimes.com/2011/01/22/business/economy/22charts.html?_r=0.

the Chinese Investment Corporation (CIC) . . .
:
Andrew Ross Sorkin and David Barboza, “China to Buy $3 Billion Stake in Blackstone,”
New York Times,
May 20, 2007, http://www.nytimes.com/2007/05/20/business/worldbusiness/20cnd-yuan.html?pagewanted=print.

notorious for his sixtieth birthday party . . .
:
James B. Stewart, “The Birthday
Party,”
New Yorker,
February 11, 2008, http://www.newyorker.com/reporting/2008/02/11/080211fa_fact_stewart.

“I want war, not a series . . .”
:
Quoted in Andrew Clark, “The Guardian Profile: Stephen Schwarzman,”
Guardian,
June 15, 2007, http://www.theguardian.com/business/2007/jun/15/4.

“to put its vast reserves . . .”
:
Sorkin and Barboza, “China to Buy.”

suggested mounting an attack on the Japanese
 
. . .
:
Ambrose Evans-Pritchard, “Beijing Hints at Bond Attack on Japan,”
Telegraph,
September 18, 2012, http://www.telegraph.co.uk/finance/china-business/9551727/Beijing-hints-at-bond-attack-on-Japan.html.

Chinese hacked the Reserve Bank of Australia . . .
:
“Australia: Reserve Bank Networks Hacked,” Stratfor Global Intelligence, March 11,
2013, www.stratfor.com.

These combined efforts will prove useful to China . . .
:
For a detailed account of China’s efforts to use military intelligence to steal secrets
and other intellectual property through cyberwarfare, see Mandiant, “APT1: Exposing
One of China’s Cyber Espionage Units,” 2013, Mandiant Intelligence Center Report,
http://intelreport.mandiant.com.

“A highly secretive unit of the National Security Agency . . .”
:
Matthew M. Aid, “Inside the NSA’s Ultra-Secret China Hacking Group,”
Foreign Policy
, June 10, 2013, http://www.foreignpolicy.com/articles/2013/06/10/inside_the_nsa_s_ultra_secret_china_hacking_group.

Quantum Dawn 2 . . .
:
“Fact Sheet: Quantum Dawn 2, July 18, 2013,” SIFMA, http://www.sifma.org/uploadedfiles/services/bcp/qd2-fact-sheet.pdf?n=19890.

“to cause depreciation of the rial . . .”
:
Kasia Klimasinska and Ian Katz, “Useless Rial Is U.S. Goal in New Iran Sanctions,
Treasury Says,”
Bloomberg
, June 6, 2013, http://www.bloomberg.com/news/2013-06-06/useless-rial-is-u-s-goal-in-new-iran-sanctions-treasury-says.html.

by dumping dollars and buying gold . . .
:
Jack Farchy, “Iran Bought Gold to Cut Dollar Exposure,”
Financial Times,
March 20, 2011, http://www.ft.com/cms/s/0/cc350008-5325-11e0-86e6-00144feab49a.html.

an oil-for-gold swap . . .
:
Dheeraj Tiwari and Rajeev Jayaswal, “India, Iran Mull over Gold-for-Oil for Now,”
Economic Times,
January 8, 2011, http://articles.economictimes.indiatimes.com/2011-01-08/news/28433295_1_bilateral-issue-oil-india-imports.

Turkish exports of gold to Iran . . .
:
“Turkey’s Gold Export to Iran Rises Again,”
Hurriyet Daily News,
May 1, 2013, http://www.hurriyetdailynews.com/turkeys-gold-export-to-iran-rises-again-.aspx?pageID=238&nid=46002.

a cargo plane with 1.5 tons of gold on board . . .
:
“Cargo Plane with 1.5 Tons of Gold Held in Istanbul,”
Hurriyet Daily News,
January 5, 2013, http://www.hurriyetdailynews.com/cargo-plane-with-15-tons-of-gold-held-in-istanbul-.aspx?pageID=238&nid=38427.

Reports from the
Voice of Russia
speculated . . .
:
“Gold Seized at Istanbul Airport Was Allegedly for Iran,”
Voice of Russia,
January 6, 2013, http://voiceofrussia.com/2013_01_06/Gold-seized-at-Istanbul-airport-was-allegedly-for-Iran.

“passengers flying from Kabul to the Persian Gulf . . .”
:
Matthew Rosenberg, “An Afghan Mystery: Why Are Large Shipments of Gold Leaving the
Country?”
New York Times,
December 15, 2012, http://www.nytimes.com/2012/12/16/world/asia/as-gold-is-spirited-out-of-afghanistan-officials-wonder-why.html.

strict enforcement of a prohibition on gold sales . . .
:
“U.S. to Block Sale of Gold to Iran in Sanctions Clampdown,”
Al Arabiya,
May 16, 2003, http://english.alarabiya.net/en/business/economy/2013/05/16/U-S-to-block-sales-of-gold-to-Iran-in-sanctions-clampdown.html.

In late 2012 the United States warned Russia and China . . .
:
Benoît Faucon, “U.S. Warns Russia on Iranian Bank,”
Wall Street Journal,
December 11, 2012, http://online.wsj.com/news/articles/SB10001424127887323330604578145071930969966.

Iranian hackers had reportedly gained access to the software systems . . .
:
Siobhan Gorman and Danny Yadron, “Iran Hacks Energy Firms, U.S. Says,”
Wall Street Journal,
May 23, 2013, http://online.wsj.com/article/SB10001424127887323336104578501601108021968.html.

The Syrian government was forced to conduct business . . .
:
Steve H. Hanke, “Syria’s Annual Inflation Hits 200%,” Cato Institute, July 1, 2013,
http://www.cato.org/blog/syrias-annual-inflation-hits-200.

This cat-and-mouse game . . .
:
“Three Nukes for $5 billion,”
Debka-Net-Weekly
13, no. 588 (May 24, 2013), http://www.debka.com.

a highly sensitive 104-page final report
:
The author was a direct participant, presenter, or contributor to the Bahrain, Federation
of American Scientists, Boeing, and National Defense University financial war game
events described in the foregoing paragraphs.

Swiss troops defended their country . . .
: Henry Samuels, “Swiss War Game Envisages Invasion by Bankrupt French,”
Telegraph,
September 30, 2013, http://www.telegraph.co.uk/news/worldnews/europe/switzerland/10344029/Swiss-war-game-envisages-invasion-by-bankrupt-French.html.

Cyberattacks on U.S. infrastructure, including banks . . .
:
Leading documented studies and white papers on the scope and pervasiveness of cyberattacks
on U.S. systems, including financial systems, originating from various sources including
China and Iran, are: “Global Energy Cyberattacks: ‘Night Dragon,’” McAfee Foundstone
Professional Services and McAfee Labs White Paper, February 10, 2011, http://www.mcafee.com/us/resources/white-papers/wp-global-energy-cyberattacks-night-dragon.pdf;
Nicolas Falliere, Liam O. Murchu, and Eric Chien, “W.32.Stuxnet Dossier Version 1.4,”
Symantec, February 2011, http://www.symantec.com/content/en/us/enterprise/media/security_response/whitepapers/w32_stuxnet_dossier.pdf;
and Mandiant, “APT1: Exposing One of China’s Cyber Espionage Units,” 2013, Mandiant
Intelligence Center Report, http://intelreport.mandiant.com.

The official was Mary Shapiro . . .
:
Senior SEC official, conversation with author, September 2012.

the Syrian Electronic Army claimed credit . . .
:
Max Fisher, “Syrian Hackers Claim AP Hack That Tipped Stock Market by $136 Billion.
Is It Terrorism?”
Washington Post,
April 23, 2013, http://www.washingtonpost.com/blogs/worldviews/wp/2013/04/23/syrian-hackers-claim-ap-hack-that-tipped-stock-market-by-136-billion-is-it-terrorism.

Knight Capital fiasco . . .
:
Scott Patterson, Jenny Strasburg, and Jacob Bunge, “Knight Upgrade Triggered Old
Trading System, Big Losses,”
Wall Street Journal,
August 14, 2012, http://online.wsj.com/news/articles/SB10000872396390444318104577589694289838100.

bailout of the hedge fund Long-Term Capital Management . . .
:
The author was
general counsel of Long-Term Capital Management and the principal negotiator of the
1998 bailout arranged by the Federal Reserve Bank of New York. While LTCM was a well-known
trader in fixed-income and derivatives markets, the extent of its trading in equity
markets was not well known. LTCM was the largest risk arbitrageur in the world, with
over $15 billion in equity positions on pending deals. Upon reviewing the books and
records of LTCM with the author and CEO John Meriwether on September 20, 1998, Peter
R. Fisher, then head of open market operations at the Federal Reserve Bank of New
York, remarked, “We knew you guys might take down the bond markets, but we had no
idea you would take down the stock markets too.” The Fed’s effort to orchestrate a
bailout commenced the next morning and was completed on September 28, 1998.