Currency War

by Lawrence B. Lindsey

  Ben nodded. “Thank you, sir. May I say that gives us another bargaining chip as well? I think that Li will be very helpful in defusing the situation when the time comes to do that. But we have to keep him alive and well in the meantime. Although he would never be so indiscreet as to say so directly, he knows that China has blundered by selling the Treasuries. So when the powers that be realize that as well, he would be a natural negotiator for them.

  “And he was the one who tipped us off to the takeover of the Chinese freighter. Although it was not in time to save the ship, it did give us enough time to stop more boats from joining the blockade. I think that should be made public so the Chinese know that we know. It will give him face back home, especially once we free the freighter. If I might volunteer, since the Chinese know that we met, although they think it was at the Bank of England, I could give a hot tip to one of my favorite reporters. And I could add it as a matter of fact without it being an intelligence issue.”

  “I like it.” By saying so the President sealed the deal. No one wanted to litigate the point. There was too much to discuss. “Okay, Bernadette. What do you make of all this? Can we use this nephew as a bargaining chip to diffuse the heat that’s going to come from this pirated ship?”

  “Sir,” she said, “bargaining chips are best used when you are playing an aggressive game and have your opponent where you want him. The purpose is to provide a way for them to back down rather than push into a full-blown crisis.

  “Naturally, Attorney General will have to impound both the ship and the cargo as evidence, and some company, probably either state-owned or invested in by someone high ranking, will have some money on the line. How we prosecute and the extent to which we freeze domestic troublemakers will also be an important signal to the Chinese.

  “We have made a lot out of how the boycott is a matter of individual choice, so the Chinese think we are weak. They will respect us more if they know we have cards to play at home and are willing to play them. If I may be so bold, they will respect you more if you play tough on this.

  “Finally, our waiter friend should be held as long as possible and not even mentioned. Let Deng think that we intend to hold him forever. You need to increase the pressure on him. And the fact that it was the First Lady and that her life may have been endangered gives you a rationale.

  “Politics in China are very much a family business. By showing that they can’t mess with your family and that we are prepared to punish those who do very severely, you will only be gaining respect. Perhaps Mr. Flynn could put an attempted murder charge alongside the espionage charge on Tuesday?”

  The Attorney General look puzzled, “But we have no evidence. The capsule in the lip balm was clearly intended for him to take his own life.”

  “What if you told him that the First Lady had taken ill after drinking some of their tea, and that the lab results came back positive for toxins?”

  “Are you suggesting perjury? By you, the First Lady, the FBI—”

  “Nonsense,” said Bernadette. “But I’ve seen enough of your cop shows to know that they’re allowed to bluff and outright lie to get confessions, and pile on charges to make the perpetrator’s situation look dire. When it comes down to brass tacks, bargain off the charges they can’t make to look like the perpetrator is getting a deal, only prosecuting the ones with the best case.”

  Out of the corner of her eye she could see Hector covering his mouth to suppress a smile.

  The Attorney General noticed it as well. “You spies like to spin tangled webs, don’t you?”

  Hector said, “Only if they catch flies.”

  “Enough,” said the President. “If it makes our hand look stronger, so be it. But we have to be careful how long we push the bluff.” He turned his attention to Ben. “We just heard from our best analyst on organizational behavior that bargaining chips should be played when you have your opponent where you want him. How close are we to having our opponent there?”

  “Let’s move backward though the steps along the decision tree,” Ben said. “The key is when the people of China start lining up at their banks again to take their money out. And it must be happening in Beijing and Shanghai, not just in the provincial cities, so everyone notices. That will happen when the price of gold reverses and starts to look like it is never coming back anytime soon.

  “We should open on Monday very close to the Chinese target—somewhere between eight and nine thousand. My bet is that they use some bellicose language about the piracy to drive it up. It will start rising in Asian trading, the Europeans will follow through, and then we will jump on the bandwagon. There will doubtless be some follow through on Tuesday. This sets up what market technicians call a climax top.”

  “Leading up to my speech on Wednesday night,” the President said.

  “Precisely. We will announce an emergency FOMC conference call the next day, which will be highly unusual since we just had a formal meeting on Tuesday and Wednesday. All the chatter will be about how we are going to stop it. The rise in gold is a vote against the dollar as well as the yuan. The speculation will be that we will have to hike rates.”

  “Is there a way to push back against that?” said Bernadette.

  “Yes,” Ben said. “Mr. President, my suggestion is that you move your address to a time when the market is still open. Ideally around noon. You lay out the Metropolitan Plan. You have the bipartisan Congressional leadership ready to announce that they will move on it very quickly. This will create enormous volatility. At first gold might actually rise further as some will think that we are pegging the dollar at $400 a gram. In fact, we are not. We are merely offering an alternative medium of exchange at that price. When it dawns that we will be dumping gold on the market, the price will start down.

  “To eliminate any confusion I can have an impromptu press conference around 2 p.m. after your speech. We will let it run on until the case is made. Fed staff will be monitoring the markets throughout and will signal me how it’s going. I might even have a live quote device on the table with me. It will help me know where emphasis might be needed. By the end of the day, the goal will be to have gold between seven to eight thousand.”

  “What will that do?” asked Lopez.

  “There’ll be tremendous volatility for the rest of the week. The thing to watch will be how sentiment moves over the weekend in China. If lines start forming at the banks by the next Monday morning, we will know we have won.”

  “So you are telling me,” said the President, “that this will all be over ten days from now?”

  “No, sir. I am telling you that will be the crisis point. Then comes the fun part—getting the Chinese to back down in a way that doesn’t wreck the world economy or start a military conflict. Meantime, how they try to wriggle free will be up to them.”

  “Okay, folks. Who wants to tell me how they are going to try to wriggle free?”

  The President’s question was met with silence.

  “Come on. You’re the experts. That’s why you are in the jobs you’re in. You’re supposed to tell me.”

  “Mr. President,” Bernadette said, “that is something we don’t know. It is one of those random nodes on the decision tree. But we can anticipate the kinds of directions they might move in.

  “They need two types of responses, an internal one and an external. On the internal side, one should expect them to make it as difficult as possible to have a bank run. I would think that a bank holiday would be in order. Just close them down. When riots break out, they will have to be more heavy-handed, but that will likely not be the primary response. I will leave it to the experts on the other couch as to how long they can function with the banks closed. The political response will be chaos—and who comes out on top is the real random event as the crisis rolls out. If we can neutralize Deng, the hardliners will be lacking a real leader.

  “The other part of the response is with foreign policy. That will depend on the ultimate outcome of the political struggle. But in the
midst of the chaos, one should expect each player to use the avenues open to them. The military will go on high alert and may even begin to saber-rattle with Taiwan and Japan. They will do this regardless of Deng. He is just part of the overall structure and the military will collectively view this as an existential threat. They will do anything to give us pause, and they know that we know that this is their strongest suit. An outright military conflict is at best a coin flip from our perspective.

  “On the diplomatic side I suspect that their entire foreign policy apparatus will be active. No movement at the summit level, but at the foreign ministry and ambassadorial level. Naturally, their economic team will be motivated. I suspect Li will be on the phone with Ben constantly beginning Wednesday afternoon.”

  “And the ultimate outcome of the political chaos?” asked the President.

  “Sir, after Churchill lost office in 1945, Stalin supposedly said, ‘the trouble with free elections is that you never know who is going to win.’ The upcoming chaos will not be a free election but a series of coups and counter coups. That is as unpredictable as any election.

  “But we do know that the status quo is unlikely to survive. Most likely, this all ends with a de facto military coup, with the military replacing the Party as the key governing structure. Sounds bad for us, but the military will be suddenly become inwardly focused as they take on new responsibilities. They really won’t want to be in a conflict with their own population near revolt and their economy is in chaos.

  “Or a hardliner could take over, possibly in alliance with the military. Call this the Return of Mao scenario. A hardline dictatorship can produce order, at least temporarily. But the price will be economic collapse.”

  “Is the Chinese political system really that fragile?” Hector said.

  Bernadette chimed in. “Mao’s Great Leap Forward and his Cultural Revolution were both economic disasters that led to widespread starvation. If real socialism actually worked, the Berlin Wall would still be up, or worse, the Germans and the French would be speaking Russian.”

  “And remember,” Ben said, “that the Chinese people are becoming unsettled over the instability of the economy. These bank runs are symptoms of a bigger cancer at play.”

  “Why wouldn’t the powers that be keep putting them down?” said the President. “Like what you saw. Remember Tienanmen Square.”

  “Tienanmen Square was a localized uprising,” Bernadette said, “relatively speaking.”

  “Exactly,” said Ben. “From what we’ve been able to piece together, these runs are a widespread thing. China might have the world’s largest army, but two-plus-million soldiers can only do so much when facing a billion-and-a-half people. It won’t be a simple matter of taking control in population centers. There are others in the political system who are watching this and understand that some problems don’t go away if you prod them with a bayonet.”

  “Reformists,” said the President.

  “Exactly,” Ben said. “The last scenario. The reformists could prevail. This might also involve a very complex calculation by the military. They might realize that an economic renaissance is a prerequisite for their ambitions. One thing about the Chinese, they can be very patient when they want to be. At the margin the military has been getting ten to fifteen percent of the expansion of their GDP.

  “Remember, they are now spending close to two-thirds of what we are spending, and they are getting a lot of things for free—such as manpower. So there are lots of new toys to play with. That makes them a real stakeholder in prosperity. The tough sell will be that even more economic freedom is the path to prosperity even though it might look like freedom has led to chaos.”

  “And the odds?”

  “I gave them to you in order,” Bernadette said. “Call it fifty-thirty-twenty. The good news is that the odds in each scenario are against a military conflict in the near term. That might not be the case in the long term.”

  The President nodded. “Hector?”

  “Bernadette has it about right,” he said. “I would be a bit less optimistic about the chances for a purely peaceful outcome, though. A foreign entanglement might be part of the strategy. Use patriotism as a reason for unity or a pretext for a crackdown.”

  “Dianne?”

  “I’m with Hector. And quite worried. Remember, ever since the Wall came, down we have been a promoter of Chinese prosperity as a force for geopolitical stability. Our bet was that rich people don’t go to war. We are reversing that process.”

  “George?”

  “With all respect to the Secretary of State, it is not we who are reversing that process. The Chinese have dug themselves a deep hole with their own inept economic management. They used a very aggressive economic strategy that targeted us. We are simply responding to protect our own economy in the best way available to us. No one gets rich without American prosperity. So please don’t blame us.”

  The President decided to stop war from breaking out in the Oval. “I am quite sure Dianne was not blaming us. But I do share her concern about the use of foreign entanglement as a domestic political ploy.

  “So, Dianne, I want you pre-positioned in their time zone and able to go to Beijing on a moment’s notice. I suggest you fly to Tokyo with arrival Thursday morning their time, as markets open in Asia after my speech. The news will break overnight on Wednesday in Asia and you should pre-schedule meetings with the Foreign Minister and hopefully the Prime Minister. They are going to be nervous as hell.

  “Eric, I want that ship retaken no later than midnight Tuesday morning East Coast time. Serve the RICO warrants tomorrow if you have to on all of the leadership of Enough Is Enough. You can offer them what you want in terms of jail time. But we want them shut down financially without me seeming like a dictator, so getting that ship back without a shot being fired is worth a pardon in my book. Besides, I want this to be yesterday’s news when I get up to introduce this plan to the American people.

  “As to the actual boarders, they are going to serve time and you are to make sure of it. And the more I think about it, I want Uncle Deng to sweat a little regarding his nephew. We have a lot of chips on the military side, so let’s use the ones we have to the maximum.

  “Ben, I like the timing of moving the speech to noon on Wednesday because I won’t have to answer any questions. Make your part short and sweet. Fifteen minutes maximum. And we will need the bipartisan leadership wired to go. They seemed quite amenable. Of course, if it goes south, they will announce they had tried to talk me out of it and it is all my fault, that they went along out of a sense of patriotism. Hector, I want you and Ben to bang out a draft by tomorrow night.

  “So Ben, you’ve got the ball. And, by the way, if those distinguished members of the legislative branch are after my hide you can count on me to toss you their way first.” The President chuckled to show he was kidding. “But there is one part of the Metropolitan Plan you never told me about—how to pick up the pieces.

  “If it’s the military or the New Mao, we really don’t care. But having a plan to help out should the reformers win ought to be in the offing. It is the best chance I can see of altering the odds that Bernadette gave.”

  “I have been thinking about that,” Ben said. “We have a couple of things to do. But frankly, it is going to depend on the next moves by the Chinese. And I need a little more time to think things through.”

  “Okay, folks,” the President concluded. “We have our jobs to do. Busy week ahead. Dianne, you’re headed to Asia. Ben, I expect you to stay in this time zone and not go gallivanting all over the world. Not sure when you would have the time, but don’t do it. Sending a plane to fetch you in London practically broke the bank, though you’ll be buying the bonds to finance it. Regardless, Bernadette, it is your job to keep him in line.”

  “Yes, sir, I will do my best. But as you know, Ben is a tough fellow to manage.”

  “Oh, you’ll find a way.” Then he realized that Cynthia would almost surely scold him if she had
heard that one.

  * * *

  Like most casinos, there was a special area for the high rollers. All the bets were denominated in dollars. Bets in the high roller area started at $100 but most of the tables had $200 and $500 minimums.

  At first Bob Franks thought it was strange that dollars were the denomination of the chips instead of yuan as most of the customers were Chinese. Then he realized this was a great spot for money laundering. Customers bring in their yuan and convert them to dollars. The dollars stay behind in a safe deposit box or are deposited in an international bank of which he had counted at least six. Then the customers go back home having “lost” all their money in the casino.

  Bob and Tom Butler took their seats at a $10 table and each pulled $1,000 out of their wallets to buy chips. They had positioned themselves to keep an eye on the raised tables in the high limit area but to not be too obtrusive. Their positioning was rewarded. Eventually, Deng and his companion appeared. They were greeted by the pit boss in the high limit area and got a bow as greeting. They were given seats of honor where they could survey the action in the part of the casino reserved for table games. Their younger associates were positioned behind them, eyes alert. Bob and Tom made sure they never made eye contact and seldom even looked in Deng’s direction.

  “Time for some advertising,” said Tom. He proceeded to get up and look around for the men’s room. He made sure his search took him past the high limit area twice as he deliberately headed in the wrong direction on the first pass.

  Both Tom and Bob were ex-military and had endured six years of daily physical training. They each had made sure to visit the gym four times a week and regularly did road work. With desk jobs they knew they had to. They were solid but not overbuilt and enjoyed advertising their fitness back home.

  Here in Laos that meant tight but not quite form-fitting tee-shirts and shorts that ended a good five inches above their knees to expose solidly built thighs and calves. They wanted to look like a couple of very fit tourists, but not the kind who would look like they were stalking the hotel for customers.