This time I really did save the best for last. Enormous thanks and highest professional respect are owed to Will Rickards, pride of the University of Colorado and Taft School, for serving as my research assistant and editorial assistant. Any clarity and coherence in this book emerged under his watchful and demanding eye. Any errors that remain are mine alone.
NOTES
Chapter 1
3 “The current international currency system is the . . .” “Q&A with Hu Jintao,” Wall Street Journal, January 18, 2011, http://online.wsj.com/article/SB10001424052748703551604576085514147521334.html.
3 The Applied Physics Laboratory, located on four hundred acres . . . Information on the history and activities of the Applied Physics Laboratory is from the center’s website, www.jhuapl.edu.
4 It was for this purpose, the conduct of a war game sponsored by the Pentagon . . . Details about the financial war game sponsored by the Office of the Secretary of Defense and hosted by the Warfare Analysis Laboratory of the Applied Physics Laboratory are from the author’s recollection and contemporaneous notes and from voluminous materials provided by the Applied Physics Laboratory, including agendas, seating charts, invitational e-mails and game materials: “Economic and Finance Game Player Book,” “Economic & Finance Game Mechanics,” “Economic & Finance Game Overview,” “Administrative Instructions—Global Economic Seminar 7–8 October 2008,” “Administrative Instructions—Global Economic & Finance Game Design Planning Seminar 18–19 November 2008,” “Economic and Financial Game Baseline Scenario—March 17, 2009,” “Global Economic Impacts on the DoD Final Report 31 March, 2010,” and “Global Economic Study: Appendix D: Economic Game 17–18 March 2009.”
Chapter 3
37 “We’re in the midst of an international . . .” Jonathan Wheatly, “Brazil in ‘Currency War’ Alert,” Financial Times, September 27, 2010.
37 “I don’t like the expression . . .” Interview with Dominique Strauss-Kahn by Stern magazine, November 18, 2010, www.imf.org/external/np/vc/2010/111810.htm.
44 The classical gold standard was not devised at an international conference . . . This extended discussion of the classical gold standard draws upon Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914, New York: Oxford University Press, 1995.
45 “Among that group of nations that eventually gravitated to gold standards . . .” Gallarotti, op. cit.
45 This highly positive assessment by Gallarotti . . . Michael David Bordo, “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve Bank of St. Louis, May 1981.
48 This panic began amid a failed attempt by several New York banks . . . This account of the Panic of 1907 draws upon Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, Hoboken: Wiley, 2007.
50 Now, literally in the rubble of the 1906 San Francisco earthquake . . . This account of the creation of the Federal Reserve System draws upon Murray N. Rothbard, The Case Against the Fed, Auburn, Alabama: Ludwig von Mises Institute, 1994.
53 However, a successful negotiation in Paris was by no means a foregone conclusion . . . This account of the negotiations with respect to reparations at the end of World War I draws upon Margaret MacMillan, Paris 1919: Six Months That Changed the World, New York: Random House, 2001.
54 The entire mechanism of credit and trade was frozen . . . MacMillan, op. cit.
Chapter 4
58 As inflation slowly began to take off in late 1921 . . . This account of the Weimar hyperinflation of 1921–1923 and its impact on the German people draws upon Adam Fergusson, When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany, New York: Public Affairs, 2010.
61 At exactly the same time the Weimar hyperinflation was spiraling out of control . . . The accounts of the interwar beggar-thy-neighbor devaluations and international financial conferences intended to mitigate their effects draws upon Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World, New York: Penguin Press, 2009.
65 Separately, the United States, after cutting interest rates in 1927 . . . For accounts of U.S. monetary policy in the years prior to the Great Depression and the conclusion that Federal Reserve monetary policy was unduly restrictive, see Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960, Princeton: Princeton University Press, 1963.
68 However, Roosevelt would not be sworn in as president until March 1933 . . . For an account of the early years of the Franklin D. Roosevelt administration and his actions with respect to the banking system and gold, see Allan H. Meltzer, A History of the Federal Reserve, Volume 1: 1913–1951, Chicago: University of Chicago Press, 2003.
71 “I, Franklin D. Roosevelt . . . declare that . . .” Executive Order 6102, April 5, 1933, www.presidency.ucsb.edu/ws/index.php?pid=14611&st=&st1=#axzz1LXd02JEK.
Chapter 5
79 Gross national product rose over 5 percent in the first year of the tax cuts . . . All statistics for United States gross domestic product are from the United States Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data, www.bea.gov.
80 Inflation, measured year over year, almost doubled from an acceptable 1.9 percent in 1965 . . . All statistics for United States inflation (consumer price index) are from the United States Department of Labor, Bureau of Labor Statistics, http://data.bls.gov.
80 The British balance of payments had been deteriorating since the early 1960s . . . Richard Roberts, “Sterling and the End of Bretton Woods,” XIV International Economic History Congress, University of Helsinki, Finland, 2006.
82 He called for a return to the classical gold standard . . . “Money: De Gaulle v. the Dollar,” Time, February 12, 1965.
83 revealed in a letter from Karl Blessing, president of the Deutsche Bundesbank . . . Letter of Karl Blessing to William McChesney Martin, March 30, 1967, Lyndon Baines Johnson Library and Museum, Austin, Texas, www.lbjlibrary.org.
84 On November 29, 1968, not long after the collapse of the London Gold Pool . . . “The Monetary System: What’s Wrong and What Might Be Done,” Time, November 29, 1968.
86 Nixon wrapped his actions in the American flag . . . Richard M. Nixon, “Address to the Nation Outlining a New Economic Policy: ‘The Challenge of Peace,’” August 15, 1971, www.presidency.ucsb.edu/ws/indexphp?pid=3115#axzz1LXd02JEK.
Chapter 6
98 “The purpose . . . is not to push the dollar down . . .” Wall Street Journal, “Fed’s Yellen Defends Bond-Purchase Plan,” November 16, 2010, http://online.wsj.com/article/SB10001424052748703670004575617000774399856.html.
98 “quantitative easing also works through exchange rates . . .” Christina D. Romer, “The Debate That’s Muting the Fed’s Response,” New York Times, February 26, 2011, www.nytimes.com/2011/02/27/business/27view.html.
101 Today’s currency war is marked by claims of Chinese undervaluation . . . For a discussion on the history of exchange rate changes between the Chinese yuan and the U.S. dollar, see Xiaohe Zhang, “The Economic Impact of the Chinese Yuan Revolution,” paper prepared for the 18th Annual Conference of the Association for Chinese Economic Studies, Australia, July 13, 2006.
103 The resulting decline . . . Statistics on United States interest rates are from the Board of Governors of the Federal Reserve System, Statistics and Historic Data, www.federalreserve.gov/econresdata/releases/statisticsdata.htm.
104 The speech, entitled “Deflation . . .” “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” remarks by Ben S. Bernanke, National Economists Club, November 21, 2002, www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm.
104 Bernanke spoke plainly about . . . Bernanke, op. cit.
106 In 2006, Senator Charles E. Schumer of New York called . . . Press release from the office of United States Senator Charles E. Schumer, February 19, 2006, http://schumer.senate.gov/new_website/record.cfm?id=259425.
<
br /> 108 In 1950, the United States had official gold reserves of over 20,000 metric tons . . . All statistics on official gold holdings are from World Gold Council, Investment Statistics, Changes in World Official Gold Reserves, www.gold.org.
112 A bipartisan group of U.S. senators . . . “U.S. and China Agree to Negotiate Investment Treaty,” Associated Press, June 19, 2008.
117 By 2010, European sovereign finance was a gigantic complex web composed of cross-holdings of debt . . . The discussion of European sovereign debt cross-holdings by banks is from “Europe’s Web of Debt,” New York Times, May 1, 2010, www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html.
121 As late as 1994, Brazil maintained a peg of its currency, the real, to the U.S. dollar . . . The discussion of Brazilian currency crises and developments draws on Riordan Roett, The New Brazil, Washington, D.C .: Brookings Institute Press, 2010.
Chapter 7
127 Author David Rothkopf brought this concept to light . . . David Rothkopf, Superclass: The Global Power Elite and the World They Are Making, New York: Farrar, Straus and Giroux, 2008, 174–75.
127 “We have a convening power here that is separate from the formal authority of our institution . . .” Rothkopf, op. cit.
132 The plan was contained in the official leaders’ statement . . . “Leaders’ Statement: A Framework for Strong, Sustainable and Balanced Growth,” G20 Pittsburgh Summit, September 24–25, 2009, www.cfr.org/world/g20-leaders-final-statement-pittsburgh-summit-framework-strong-sustainable-balanced-growth/p20299.
132 “Our collective response to the crisis has . . .” “Leaders’ Statement,” op. cit.
137 “Policy makers in the emerging markets have a range of powerful . . .” “Global Imbalances: Links to Economic and Financial Stability,” speech by Chairman Ben S. Bernanke at the Banque de France Financial Stability Review Launch Event, Paris, France, February 18, 2011, www.federalreserve.gov/newsevents/speech/bernanke20110218a.htm.
139 Instead of setting firm targets . . . “Leaders’ Declaration,” G20 Seoul Summit, November 11–12, 2010, www.g20.utoronto.ca/2010/g20seoul.pdf.
Chapter 8
145 “It is a doctrine of war not to assume the enemy will not come . . .” Sun Tzu, The Art of War, Oxford: Oxford University Press, 1963.
146 “U.S. officials and outside analysts said the Pentagon, the Treasury and U.S. intelligence agencies . . .” Bill Gertz, “Financial Terrorism Suspected in 2008 Economic Crash,” Washington Times, February 28, 2011, www.washingtontimes.com/news/2011/feb/28/financial-terrorism-suspected-in-08-economic-crash/print/.
149 While these companies operated as private stock companies . . . Material on mercantilism and the history of the East India Company and the Dutch East India Company draws from Stephen R. Brown, Merchant Kings: When Companies Ruled the World, 1600–1900, New York: St. Martin’s, 2009.
160 The clearest exposition of Chinese thinking on financial warfare . . . Colonel Qiao Liang and Colonel Wang Xiangsui, Unrestricted Warfare, Panama City: Pan American Publishing, 2002.
163 In a single transaction in 2009, SAFE transferred its entire position . . . “China Admits to Building Up Stockpile of Gold,” Reuters, April 24, 2009.
Chapter 9
171 In the classic formulation of nineteenth-century economic writer Walter Bagehot . . . All references to Bagehot’s principles for central banking are from Walter Bagehot, Lombard Street: A Description of the Money Market, New York: Scribner, Armstrong, 1873.
174 “We conclude this crisis was avoidable . . .” The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, New York: Public Affairs, 2011, xvii.
175 In 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco . . . “Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says,” Bloomberg, March 26, 2009.
181 Svensson’s paper is the Rosetta stone of the currency wars . . . Lars E. O. Svensson, “Escaping a Liquidity Trap and Deflation: The Foolproof Way and Others,” Working Paper No. 10195, National Bureau of Economic Research, December 2003.
182 “Even if the . . . interest rate is zero . . .” Svensson, op. cit.
182 “If the central bank could manipulate private-sector beliefs . . .” Svensson, op. cit.
185 In a famous study written just before the start of President Obama’s administration . . . Christina D. Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” report prepared by the Council of Economic Advisers, January 9, 2009.
185 One month after the Romer and Bernstein study . . . John F. Cogan, Tobias Cwik, John B. Taylor and Volker Wieland, “New Keynesian Versus Old Keynesian Government Spending Multipliers,” Working Paper No. 14782, National Bureau of Economic Research, February 2009, www.volkerwielandcom/docs/CCTW%20Mar%202.pdf
186 Empirical support for Keynesian multipliers of less than one, in certain conditions, was reported in separate studies . . . See Charles Freedman, Michael Kumhof, Douglas Laxton, Dirk Muir and Susanna Mursula, “Global Effects of Fiscal Stimulus during the Crisis,” International Monetary Fund, February 25, 2010; Robert J. Barro and Charles J. Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” Working Paper No. 10-22, Mercatus Center, George Mason University, July 2010; and Michael Woodford, “Simple Analytics of the Government Expenditure Multiplier,” paper presented at the meetings of the Allied Social Sciences Association, January 3, 2010.
187 Christ was saying that the impact of Keynesian stimulus . . . Carl F. Christ, “A Short-Run Aggregate-Demand Model of the Interdependence and Effects of Monetary and Fiscal Policies with Keynesian and Classical Interest Elasticities,” The American Economic Review 57, no. 2, May 1967.
192 The role of VaR in causing the Panic of 2008 is immense . . . The House of Representatives held one hearing on this topic, at which sworn testimony was provided by Black Swan author Nassim Nicholas Taleb, bank analyst Christopher Whalen and myself, among others. This hearing was held by the Subcommittee on Investigations and Oversight of the Committee on Science, Space and Technology on September 10, 2009. The ostensible reason for using the Science Committee was that VaR is a quantitative and therefore scientific discipline; however, I was informed that this was actually done at the request of Financial Services Committee chairman Barney Frank in order to establish a record on VaR while avoiding the lobbyists who typically influence witness selection and questions in the Financial Services Committee. The consensus of the witnesses was that VaR is deeply flawed and contributed significantly to the financial crisis of 2007–2008. However, this hearing had little impact on the final form of the resulting Dodd-Frank legislation, as no limitations on the use of VaR were imposed. The record is available at http://gop.science.house.gov/Hearings/Detail.aspx?ID=166.
Chapter 10
197 Robert K. Merton’s most famous contribution . . . Robert K. Merton, “The Self-Fulfilling Prophecy,” The Antioch Review 8, no. 2 (Summer 1948): 193–210.
197 A breakthrough in the impact of social psychology on economics . . . This work on what became the foundation of behavioral economics is contained in two volumes: Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames, Cambridge: Cambridge University Press, 2000; and Daniel Kahneman et al., eds., Judgment under Uncertainty: Heuristics and Biases, Cambridge: Cambridge University Press, 1982.
201 If they are diverse they will respond differently to various inputs producing . . . The extended analysis that follows, including elements of diversity, connectedness, interdependence and adaptability, draws on a series of lectures under the title “Understanding Complexity,” delivered in 2009 by Professor Scott E. Page of the University of Michigan.
207 However, there is strong empirical evidence, first reported by Benoît Mandelbrot . . . This discussion of fractal dimensions in market prices draws on Benoît Mandelbrot and Richard L. Hudson, The (Mis)Behavior of Markets: A Fractal View of Risk,
Ruin, and Reward, New York: Basic Books, 2004.
218 Chaisson posits that the universe is best understood . . . The discussion of Chaisson’s theory of free energy rate densities is from Eric J. Chaisson, Cosmic Evolution: The Rise of Complexity in Nature, Cambridge: Harvard University Press, 2001. Chaisson’s specific values for free energy rate densities are given as:
219 In his most ambitious work . . . Joseph A. Tainter, The Collapse of Complex Societies, Cambridge: Cambridge University Press, 1988.
219 Tainter stakes out some of the same ground as Chaisson . . . Tainter, op. cit.
Chapter 11
227 Barry Eichengreen is the preeminent scholar on this topic . . . For Eichengreen’s views on the prospects for multiple reserve currencies, see Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, Oxford: Oxford University Press, 2011; and Barry Eichengreen, “The Dollar Dilemma: The World’s Top Currency Faces Competition,” Foreign Affairs, September/October 2009: 53–68.
236 “Countries that left gold were able to reflate their money supplies . . .” Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit and Banking 27 (1995): 1–28.
237 In support of his thesis that gold is in part to blame . . . Bernanke, op. cit. Bernanke’s specific model states:M1 = (M1/BASE) × (BASE/RES) × (RES/GOLD) × PGOLD × QGOLD
Currency Wars: The Making of the Next Global Crisis Page 30