by Sam Waite
Bizet's face took on a pained expression as though he was grappling with some sort of paradox. "Yes, but it is not the most significant matter. Money has three roles: a store of wealth, a medium of exchange and a unit of account. It is the final role that gives America great advantage over other nations. It controls the currency in which much of international trade is priced."
Bizet rubbed the back of his neck and squeezed his eyes shut, as though he was working through a problem he didn't want to face.
"Suppose Venezuela told OPEC that it will price oil in euros. With the prospect that it could flood the world with cheap oil thanks to the magic bacteria, OPEC would have to follow suit. Then who knows? Malaysia might start pricing nickel and rubber in euros; Chile, copper; South Africa, diamonds; Russia, manganese; and so forth. Eventually, manufactured goods become priced in euros.
"Which would benefit the euro zone."
"The crisis of sovereign debts in Greece, Ireland, Italy wouldn't disappear, but they would become a footnote. External debt would no longer be an issue and it would make federalization of fiscal policy much easier to sell. Then Greece's deficit would be no bigger an issue than say Montana's deficit vis a vis Texas or some other state."
I was beginning to understand. "Interest-free debt."
Bizet brightened. "Exactly. Every country but America has to buy dollars to pay for most of their imports. America has a huge balance of payments deficit, but it doesn't matter much. As long as goods are priced in dollars, the global economy is effectively an extension of America's domestic economy. To use round numbers, say OPEC is charging a hundred dollars for a barrel of oil, and overnight the value of the U.S. dollar drops five percent against the euro. The next morning, America still pays a hundred dollars for the oil, at least in the short term.
"Nothing changes from America's viewpoint. But, a Frenchman, for example, is now paying five percent less for the dollars he buys to purchase oil. It is the OPEC member selling oil who loses. If he spends his oil money in Europe, his purchasing power is five percent less."
"So if you turned that around and had oil priced in euros, overnight, America would have had to pay one hundred five dollars for the same amount of oil with foreign currency it doesn't have."
Bizet smiled as though he were a care worker who just brought a bashful child out of his shell.
"Obviously things are much more complex, not all global trade is priced in dollars, and exchange rates can indirectly affect prices. But basically those are the dynamics. Charles de Gaulle said that the U.S. dollar lets America be indebted to the world free of charge. It was true when he said it. It has remained true until now."
"Except the dollar is more vulnerable now."
"Vulnerable was yesterday. With OPEC's decision, the end has begun. Look at the function of money as a store of wealth. The world is flooded with untold billions of dollars. If the currency loses its intrinsic value as the medium of global exchange, there is no reason for nations, central banks or corporations to hold great stores of them. So dollars would be exchanged for euros, yen, Swiss francs, gold. Eventually, they must return to America. With little demand outside the United States, the exchange rate thus plunges. Only this time, it makes a difference. Americans will have to buy increasingly expensive euros to purchase their next Audi or the petrol to fill it up with."
I held up a finger. I saw a catch. "But in that case, American goods become cheap, exports rise and the dollar strengthens."
Bizet grunted. "It would take a long time, but America would never be the same. Remember, the primary issue is pricing, not exchange rates. It would be decades before unwanted dollars abroad and U.S. exports balanced out. In the meantime, there would be financial disruption, along with political ramifications. It would become increasing difficult for America to maintain forward deployment of troops abroad, for example."
Troop deployment. Another piece of the puzzle might be falling into place. "Wouldn't havoc in America hurt China's economy?"
His expression serious, Bizet nodded.
"If China and Venezuela used the liquefaction scam to persuade OPEC to price in euros, then there must have been a motivation besides business."
"That would seem to be the case," Bizet said. "Maybe China thinks it's time to assert its mandate as the leading power in Asia and on the seas along its borders, if not in the western Pacific. If America is suddenly struggling with an imploding currency, there might not be much it could do."
The picture was getting larger than I had guessed. "A weakened U.S. Pacific fleet would give China control of shipping lanes from the Middle East to Japan and South Korea and beyond. As I recall, more than half of all global trade passes through the region."
David's speech came to mind. China takes Taiwan and extends its strike zone to Oahu. "If it came to it, though, Japan would join the fight."
"You might be too hopeful, M. Sanchez. Without U.S. muscle, Japan might capitulate. After all, China is nuclear and Japan isn't."
"Japan can develop nuclear weapons very quickly, if its security is seriously threatened. India and Australia might also worry about China becoming too strong. India is nuclear," I said.
"If India became embroiled in such a conflict, Pakistan might see it as an opportunity to redress old grudges and ally with China. India would be facing nuclear armed enemies on two separate borders. It bears the seeds of a very frightening scenario."
"Isn't there one significant problem with all of this?" I said. "The liquefaction process doesn't work. The other OPEC countries besides Venezuela might not know that now, but they will find out."
Bizet dismissed that concern with a little "pfft" sound. "By then it won't matter," he said. "Once the shift in pricing is made, there would be no reason to go back."
I was a lot closer to understanding, but one other thing bothered me. "If that's the case, then what would be the reason for the foreign exchange ploy."
Bizet shrugged. "I can think of a few rationales. Debasing the dollar would be a factor in influencing countries to abandon it. Also, China would need to offer Venezuela an enormous incentive to go through with the scheme. It's risky. Rigging the forex market would be a way to acquire many billions in euros for free, which China could use as a payoff. Another reason might be to prime the psychological pump so to speak. It has been a few hours since the OPEC announcement. There has been a lot of dollar selling, but nothing close to a panic. National treasuries and major players in the foreign exchange market would prefer to wait to see what develops. A gradual devaluation of the dollar would be much easier for everyone to live with. If China could engineer a steep, sudden drop there might be a rush to exchange as many dollars as possible while they were still worth something."
With that level of geopolitics at stake, why use a business consultancy. "You used to work with Winchell & Associates. Where do they fit in?"
"Official channels are not always the best way to get things done. There is a lot of deal making in this 'scam,' as you called it, and Winchell has extensive experience working under the radar for both governments and corporations."
I thanked Bizet for his time and promised to do all I could to get a line on the LIFFE systems chief.
After I left Bizet, I called Mumby to see if he had worked out a plan to bug Tom Hall's person. He had two, a main plan and a backup. The backup was the telephone repairman ploy. As for the main plan, I kept that to myself. I didn't think Bizet would understand.
Chapter 30
Pascal and Marie were watching a midmorning news report over coffee when I got back. China had test fired a missile that violated Taiwan's air space and splashed down in the Pacific.
I called Jim Burroughs. "Do you have any idea what that missile test was about?"
"I reckon China's making its move, saber rattling, shaking things up."
"Has that got anything to do with their dollar attack? I thought foreigners bought dollars when politics got nasty."
"They go to a safe haven. That used to be the dollar. It's a di
fferent game after OPEC's announcement. Heavy selling had already started a short while before the missile test was announced. Now it's gaining momentum, with most of the buying going into euros and gold. Hold on."
While Jim took care of whatever called him away, I wondered how far and how fast China was going to take its ambitions.
Jim returned. "I just got a message that Japan briefly considered intervening in the currency markets. Apparently, they thought the yen was going up. After they realized it was dollar that was going down, they quashed the idea. Washington is trying to talk the dollar up. The administration was blindsided by OPEC's announcement. It's still trying to figure out what's going on. Even if the U.S. knew exactly what's happening, there's not much it could do. It has roughly a hundred and forty billion in foreign currency reserves, about the same as Great Britain and way less than Mexico, or even Thailand or the city of Hong Kong. China has more than four trillion dollars. Economically, it wouldn't make sense for China to dump dollars. Strategically, maybe another matter."
"How is your search for investors in your counter instrument going?"
"Not good. We're up to a few hundred million. That's not enough to push it one way or the other. I tried to get my SEC friends to convince the Fed or Treasury that we might have information they could use for intervention. If you look at it from their perspective though, why would they listen to us? They're bureaucrats. Their careers would be safer if they did nothing than if they lost a few billion dollars based on info that originated with some private detective. No offense."
"I might be able to contact someone a little more desperate."
"Someone with a few billion dollars in foreign currency?"
"More than four hundred billion in foreign exchange. A lot of it in euros."
"Hah! Good luck Sanchez. I assume you have contacts with our island friends. If you need help, let me know."
I could see Jim slapping his forehead. It hadn't taken long for him to guess I was talking about Taiwan. China's four trillion dollars in reserves dwarfed Taiwan's, but the island had enough to move the market with a surprise entry and leveraged instruments. With a good presentation, we might convince the government to join Jim's party.
I called David and asked him to meet me. Then I called Bizet and told him what I had in mind. He said he would clear his calendar for us. As the son of an elite government official, David must have been accustomed to a privileged lifestyle, but when he saw Bizet's town home he was visibly impressed.
We worked on him for nearly an hour with CNN playing in the background giving updates—between sports and celebrity stories—on the dollar's fall, oil pricing and the Chinese missile test. We had him talk to Jim Burroughs. Finally, he agreed to contact his father. Bizet set up an Internet conference call that included Burroughs. Things were worse than the news reports. David Chou's father said that warships had sailed out of Shanghai, Zhoushan and Fujian.
Since the end of the cold war, China has shifted its military focus from defending against a massive land invasion from Russia to its Navy. A particular emphasis has been on strengthening its amphibious capabilities, including small, armed "swimming" vehicles that can be launched from LSTs a mile off shore. If it wanted to invade Taiwan, it had the goods.
The test missile was fired from a Russian-built stealth frigate. The fleet playing war games included destroyers armed with Russian made cruise missiles that were nuclear capable. They also carried antisubmarine helicopters.
Head-to-head, the Chinese surface fleet would not survive a confrontation with the U.S. navy, even with support from nuclear and conventional submarines and land-based airplanes, but it wasn't necessary to win. All China needed to do was inflict enough damage to prevent a timely rescue of Taiwan.
It sounded like China would lose a big chunk of its Navy in a fight. "I still have trouble accepting that China would really pay that price," I said.
"Perhaps not," Mr. Chou said, "but there are higher long-term stakes. China has a mid-term goal that it calls the 'green-water active defense strategy.' The idea is to develop naval defenses that encompass an arc from Vladivostok to the north, to the Strait of Malacca to the south. The arc would extend eastward to the 'first island chain'—the Aleutians, Kuriles, Ryukyus, Taiwan, Philippines and Greater Sunda islands.
"Once that region is secured, the operational areas would be pushed to the "second island chain"—the Bonins, Guam, Marianas, and Palau islands. Beyond that there is a plan to establish a base in Myanmar, which would give Chinese war ships direct access to the Strait of Malacca and the Bay of Bengal. That checks the Indian Navy and establishes Chinese domination of the world's most vulnerable shipping lanes. I am sure that occupation of Taiwan is pivotal to that plan."
The naval battle Chou described would also mean severe U.S. losses. The contest then would be who could rebuild faster. If the U.S. economy was severely distressed, China would win. Reason enough for China to try to sink the dollar. A good defense costs money. As for Chinese problems with Europe in the Pacific, there weren't likely to be any. The Continent's interests in that ocean extended to maybe Tahiti and Pitcairn. With cash and Taiwan in its pockets, China's green-water strategy would play out with virtually no opposition.
Chou was antsy about the situation and was willing to listen to informed ideas. Bizet and Burroughs weighed in with as much as they knew of what was happening. I described aspects of the murders.
Chou must have been convinced. He said he would contact his boss, the National Security director, as well as the minister of finance and ask for an emergency meeting with the President.
I left David with Bizet. He would stay there until this was over, so he could interface with his father. It would also keep him safe in case Wu ever figured out what he was up to. There was less than two hours in the LIFFE trading day by the time I got back to Pascal's apartment. I wasn't there long before Burroughs called.
"It's starting," he said. "There is major selling of the dollar, and the action is widespread. It looks like the Fed is using its exchange stabilization cache in the International Monetary Fund, but it's miniscule. Malaysia has announced it will begin pricing nickel in euros. I heard from my SEC friends that the U.S. tried to cash in its special drawing rights with the IMF, but the dollar fell too fast for that to make an impact."
"Will it fall more than thirteen percent?"
"If it continues dropping tomorrow at the rate it has over the past half hour, it will come close. My guess is that it will pick up momentum on the down slope. The U.S. can't stop it on its own, and doesn't have many dollar friends right now. There's Japan, and their bureaucracy is calcified. We can't expect action."
If Mr. Chou came through, there might be one ready to act. Even if he did though, would the effect be big enough?
There didn't seem to be much to do, but wait to see if Mumby could plant the bug on Tom Hall. If he couldn't, then there was nothing to do at all. Chances are it wouldn't make any difference, but we decided to try to keep watch on everyone we could who was associated with any part of the case. I got Wu's phone number from David, but he wasn't answering. Neither was Alexandra or Ruiz. Pascal said there had been no activity in Ruiz's apartment for more than twenty-four hours. I called Gavizon in Venezuela to see if he knew where Cervantes was. He said he didn't and told me again to leave him alone. That left Gatineau.
I checked with Bizet to see if he knew the name of a director in the Houston office of Winchell.
He did.
I gave it to Marie. She called Gatineau's secretary and identified herself as the Houston director's personal assistant. Gatineau was in a meeting. He would not be available for two more hours. "Thank you," Marie said and told the Houston assistant that a callback wasn't necessary.
Two hours gave us plenty of time to set up surveillance. Then came the hard part. Waiting.
Marie had ridden a motorcycle and parked it within easy access to the building where Winchell was. I rode with Pascal who parked and stayed in the car. Mar
ie kept close to her bike, and I watched the entrance.
Frosty ears and tired feet later, I saw Gatineau leave. I fell in behind him and called Marie and Pascal periodically to keep them posted on my route. Marie was on her motorcycle. When Gatineau got into his car, she led the surveillance. Pascal picked me up and we followed.
We didn't have to go far. He drove to the Ledoyen restaurant off the Champs Elysées near Place de la Concorde. We couldn't go in without reservations. Besides he'd recognize me. We found a place to park that provided a view of the entrance. Pascal and I stayed in the car while Marie went to a grocery for cheese bread and wine. It probably wasn't up to the standard that Gatineau was enjoying, but it beat coffee and donuts.
"So who wants to bet on who he's meeting?" Marie was lying across the backseat of Pascal's car with her feet propped on an armrest.
"Cervantes is my guess." I figured I'd run into him before it was over.
"Ruiz," said Pascal. "That guy has to be somewhere."
Marie put her money on the oil men. "The Saudi."
We were all wrong. A bottle of wine and a trip to the loo later, Gatineau came out. He was with Oddsson and Alexandra. I was prepared for several eventualities, but not that.
Marie got out of the car and followed Gatineau on her motorcycle. Later she said he went straight home.
Alexandra went with Oddsson. Pascal and I followed them to his mansion. We stopped well away from it and watched him open the remote controlled garage door.
We hung around long enough to see lights turn on inside the house.
Chapter 31
Watching Alexandra with Oddsson had bothered me more than it should have. I went back to the hotel room that we once shared and called McNulty. He said he had invaded Tom Hall's home and planted a bug in his briefcase. If he kept it at his desk we should have live feed. I relayed that news to Burroughs and Bizet.
Then Pascal, Marie and I went to Bizet's town home to wait. David had convinced his father that Bizet could be trusted. Burroughs had also provided evidence that he was in fact who he said he was, the inventor of the PetaGrid. Mr. Chou had heard of him and was impressed. So too were Taiwan's president, finance minister and central bank governor. That information together with input from intelligence agents was enough to convince Taiwan to invest in the forex market as Burroughs advised.