“Xue, you are remarkably orthodox. I am surprised.”
Li raised his eyebrows. “What surprises you, Ben? Chinese can’t be orthodox? Or is it that members of the Communist Party can’t be orthodox? Facts are facts. Or as Deng Xiaoping said, ‘Does it matter whether a cat is black or white as long as it catches mice?’ America’s central bankers and Britain’s central bankers all at least have had the pretense of being orthodox. But that hasn’t stopped them from exploiting the time value of money in terms of printing it, now, has it?
“We Chinese are the same. Your talk on a flexible gold standard even referenced our experience during the Ming Dynasty with silver. It is human nature, is it not?” Li stopped, saying nothing, creating a long, pregnant pause. Ben intuited that this was a calculated pause, one that preceded the beginning of the actual negotiation.
Finally Li said, “Very well, then. Let us get down to business.”
* * *
For Bernadette the first order of business was distraction.
Important in magic, critical in espionage. Make your target think you’re trying to do one thing while you’ve done something else right under his nose.
Bernadette started kicking against the inside of the trunk, trying to yell for help through the masking tape and pillowcase.
“Knock it off, princess,” came the voice from the front. Yes, definitely an Irish accent. There was so much Bernadette wanted to do with that information, but her energy was needed elsewhere.
Exaggerating her sounds of struggle, she rolled from her back onto one side and pushed with her feet until her front was pushed against one wall of the trunk. She now had enough clearance to push her arms up as far as they would go from her back. It was rough going, as tight as her captors had made the zip tie against her wrists, but that was going to work to her advantage.
She slowly inhaled and held her breath and squinted her eyes to prepare for the pain. the cramped conditions were far from ideal, but she likely only had this one chance.
Bernadette rolled slightly, stretched her arms up against the ache from being tased as far as she could, and then slammed them down as hard as she could against her butt. There was a snap and her wrists separated, followed by a burning wave of pain down her hands. She kept making noise, kicking her feet and making muffled screams, no need to fake them this time.
“Stop it,” shouted the voice, “or I’ll come put a bullet in your kneecap.”
Bernadette yanked the pillowcase from her head and eased the duct tape off her mouth, breathing until the pain subsided, excited because she had done it. She put the tape on the left sleeve of her blouse and the pillowcase in her pocket, then inched toward the trunk lid.
Most sedans had an escape cord to pull on the inside of the trunk with a glow in the dark tab to make it easy to find. She groped to find it, staring to find the pull, but there was none. This was either an older car, or the pull had been cut off.
No matter. There were other things she could do.
Bernadette reached up to one side and clawed at the inner paneling until it gave way, filling the trunk with a red glow from the rear taillights. Her eyes welcomed the light, eerie though it was. She reached and probed with her fingers until she found wires and then worked them until they pulled loose. The trunk went dark.
Keeping her movements slow, she shifted around and did the same to the lights on the other side.
Now one of two things would happen. Without taillights, the car could be rear-ended in which case she’d have to stay toward the body of the car and stay alert. The sound of screeching brakes would give her mere seconds to brace herself.
Or the lack of lights and a turn signal would invite a traffic stop from local law enforcement. She wasn’t sure which one she preferred. In either case, she needed to be ready to make as much noise as possible. Fortunately, the trunks of automobiles typically had lots of things in them that could be used as noisemakers. And in a pinch, they could be used as something else as well.
* * *
Li continued. “The yuan is now fifteen to the dollar. That will not work from China’s point of view. With the dollar pegged at $400 to the gram, that would mean only 6,000 yuan to the gram. We would not have enough gold to turn into coins to cover the issues in our banking system. Of course, for full coverage we would need to have something closer to 15,000 yuan to the gram. I am sure that would be unacceptable to you, and it would be very inflationary for the Chinese economy.”
“No disagreement so far,” Ben said, waiting to see if it would go where he predicted.
“I to propose just 8,000 yuan to the gram. That would set the implied dollar exchange rate at twenty.”
Ben kept a poker face. He had called it. Simple enough for him—it was the math that led one there if one had the responsibilities that Li had. But he had responsibilities as well.
“Xue,” he said, “that is a thirty-three percent depreciation against the dollar at a time when most analyses would say the yuan is already undervalued.”
“Those analyses are of course severely flawed, Ben. Though of course I knew you would say that. We need that kind of coverage of our bad bank debts in order to keep our banking system afloat.”
“Xue, you left out one word. Perceived. All that matters is that your public perceives that your banks will stay afloat. There are many ways of doing that. In fact, you have already made a demand that is key to the credibility of your gold coins—foreign acceptance. And you have tasked me with helping you do that.
“Surely having the Chairman of the Federal Reserve make a pitch for your gold coins would help change perceptions in China as well. Even better, If the Japanese and the Koreans and Singaporeans and others buy your coins, it would ensure the perception that your coins represent a credible defense of your banking system. I doubt very much those countries would make such a purchase as a means of financing a major depreciation of the yuan, either against the dollar or any of their currencies as well. I believe you know that.”
Li Xue took a deep breath. “It would seem that we have to solve a simultaneous equation and not just pick a price. You are correct that the key is going to be credibility and that foreign purchases would help provide that credibility. The lower the exchange rate, the more foreign purchases. So how do we maximize credibility with the right mix of foreign purchases and profit generated from yuan depreciation?”
“That is the nature of any business decision,” Ben said. “You have to make a stab at it, take a guess at what will work in the market. You never know for sure until you produce the product and actually try and market it. That is what we did for our gold coins. We picked a substantial markup from the prevailing market price for gold—roughly one-third. In some ways that was probably too much. But our objective function really was to maintain monetary flexibility, just as yours is to establish credibility. The greater the differential, the more room the Fed has for future monetary expansion if needed before the gold coins constrain us. Given our uncertainty with regard to the current crisis, that credibility was essential.”
“Ben, you are suggesting a very low depreciation figure for us because you have already grabbed most of the ability to mark up above the gold price and there would be a limit to our ability to go further. I guess they call that ‘first mover advantage.’ The first currency to adopt some form of gold-backing for its currency pockets most of the advantages. Followers-on get the crumbs. And sadly, China is a follower, not a first mover.
“The problem is that if the crumbs this follower is able to grab are too few, he will not be able to sell the program back in Beijing. Then the other side wins our internal power struggle, and if we do not have a mutually agreed upon solution, it moves the battle to a field of their choosing. That would be a tragedy for the world.”
Ben thought for a moment. Then it hit him.
“Xue, you said earlier that we were lucky not to go through life simply having followed the natural order of things, but to have the opportunity of changing th
at order? Maybe we are underestimating how much we can change things.”
“I also said caution is a virtue.”
“When the Medici and other Florentine families introduced the florin it revolutionized trade in Europe and made a major contribution to the continental economic expansion. The key was that the Republic of Florence did what no one else had done—they kept the size, design, and gold content of the florin stable for 180 years. When people can count on a store of value, international commerce can expand rapidly. What if we make an agreement today that does that? One that introduces some monetary stability for each of our countries, and for global trade and commerce as well?
“You said that you needed more than crumbs in order to stabilize your banking system. Devaluation would give you crumbs. But real international recognition would give you credibility. Certainly, getting Japan and the other countries of East Asia to procure some of your coins, like they did ours, would help. But what country would give your coins the greatest amount of credibility, not just globally, but even among the people of China?”
Xue paused for a moment to think about where Ben was going. “I think I know where you are headed. But I dare not speak it out loud.”
* * *
The car had been going straight for a while, probably on a back road judging from the apparent lack of traffic. It could have been minutes; it could have been hours. Her sense of time and direction was totally gone from the initial twists and turns she had experienced in the van.
They made a left turn. Bernadette added it to her mental inventory, but she was starting to see this as a futile game. Escape and evasion had talked about that too. No matter how futile things seemed in the moment, keep focused. Everything depended on it.
Then there was a loud squawk from behind and her heart leapt. It was a siren, the short burst used to let you know that an officer was behind you and wanted you to pull over.
A muffled curse from up front and then, “Keep quiet, princess, or you’ll be responsible for this cop’s death.”
Okay, think this through. How do you want to play this? Risk the cop’s life by banging on the side? You know they’ve called in the plate number if they’re making a stop—
She could hear the car door open. “Can I help you, officer?” said the man with the Irish accent.
A woman’s voice. “Back in the car, sir. This is routine.”
Bernadette decided. She grabbed the tire iron she had found and reared her arm back to start banging.
“Your taillights—”
Two shots. Bernadette screamed.
A hand slammed on the trunk. “You’ve been a bad girl, princess.”
She rolled onto her back, tucking the tire iron beneath her.
Keys rattled and the trunk popped open. Bernadette squinted against the sudden influx of light.
“Her death is your fault.” A hard face looked down at her, then gave a grudging smile. “You’ve been busy, I see.” He picked up the pillowcase. “I’m sure you learned these tricks from those British bastards back at MI6. I would have been disappointed if you’d just laid there and cried, I suppose. Your reputation and all.”
The man grabbed her under one arm and hauled her out of the trunk. “Guess I should thank you. We have a nice new ride now, with police radio and lights and sirens. We’re going to fly now.”
Bernadette’s legs wanted to give when she stood, but she pushed against the weakness and took a step. She looked around, trying to drink the scene in. A small two-lane highway surrounded by trees and scrub. Western Virginia? Maryland? The sun not that high in the sky, not as much time had passed as she thought. A black woman in a uniform was crumpled, half on the road, beside the nondescript grey sedan she had just been pulled from.
The man clamped a hand on her shoulder and pushed her toward the police car and laughed. “What? You not going to tell me how I’ll never get away with this? Don’t I know who you are? Because I do know who you are.”
She kept her mouth shut. That kind of banter, she knew, was the stuff of the movies. While being silent might keep him talking, he wouldn’t divulge whatever was on his mind. He’d sooner put a bullet into her. Real life worked that way.
He pushed her around the open driver’s door of the police car and against the side of the trunk. Looked down to open the rear passenger door and as he looked back up, she had the tire iron in her left hand and was swinging it at him with all her might.
* * *
“The answer,” said Ben, “is the United States of America. Suppose China and America jointly create the equivalent of the florin for the 21st century? Technically there would be two versions—yours and ours—but they could be considered interchangeable because the value of the gold content and the anti-counterfeiting microchip technology would be identical. The world’s two largest economies would both be on a flexible gold standard but with a common medium of exchange as an anchor that both countries would recognize.
“The key to success would be that we hold some yuan-based gold coins, and you hold some dollar-based gold coins. My suggestion is that we set the number large enough that it would be quite impressive to the world, say $100 billion worth of our gold coins held by the People’s Bank of China and 1.5 trillion yuan worth of your gold coins held by the Federal Reserve System. We would design it as a swap. It would be central bank to central bank with no net money changing hands, so technically the political authorities would not be involved. But, of course, they would have to approve.
“When we go to the other countries of the world and ask them to buy and hold some of these special gold coins, we will not be asking them to do something we ourselves would not have already done. There is no more effective sales pitch than ‘I do it myself.’
“It would also send a powerful geopolitical signal about the permanence of the economic relationship between the world’s two largest economies. We would be asking the countries of East Asia and the Pacific Basin to participate in the cornerstone of that relationship by buying these gold coins. Once it is widely accepted as the coin of the realm by the regions’ central banks, demand from the public would quickly follow.”
Li nodded slowly. “Yes. That is bold. But it very well might work. And such a new foundation for international trade cooperation might stabilize the Chinese monetary system and stabilize our economy as well.
“But—,” he paused for emphasis. “The one thing in your description that was noticeable was that there was no devaluation of the yuan relative to the dollar—none at all.”
“I actually think that is one of the keys to success of the whole plan,” said Ben. “Our pricing of the coin at $400 per gram captured the monetary policy advantage of the establishment of the coin. As we said earlier, all that are left for further devaluations are crumbs. But implicitly the fifteen to one price meant that China, as the second-largest holder of gold that now can be converted into gold coins, has also captured a major piece of that first-mover advantage for itself.
“The reason the coin trades at a premium above the price of raw gold is the imprimatur of the issuing state and the guarantee of constant value. And what protects the imprimatur is the microchip that prevents counterfeiting. Otherwise anyone could mint the coins if they had the proper die to apply the stamp. In effect, what this deal offers China is that, other than America, you will be the only party to be able to use that microchip technology.
“See, the technology is not just the chip, but the capacity to read those chips as well. And that technology will be held under very careful control. The patents and the production capacity would probably be held by a government-sponsored enterprise. The details of Chinese involvement in that enterprise could be negotiated.”
Li thought about this. “Relative to what our initial discussion involved,” he said, “you are modifying the concept of technology transfer, basically keeping the technology to yourself. It is America’s technology, so that is not crucial. You will really need our involvement in that enterprise, however, or
I assure you China will find a way of producing its own. But that is minor.
“The real issue is the fifteen to one ratio. I understand your argument and it is not without merit. It will make the deal harder to sell. I suppose that will actually make the deal easier to sell in Washington, however.
“In return, you are offering China the credibility of the United States government in support of our gold coins. Done right, that is absolutely priceless. I will have to discuss that with my colleagues in Beijing, in particular how to do it right. But one thing that will be absolutely crucial to that is your personal involvement.
“You will personally have to come to Beijing to make the sale to the people of China. You may not know this, but you are viewed very favorably in Beijing, despite having bested us with your move on the gold coins. Your very generous comments about me at your press conference and showing a lack of animus toward China helped. And your intervention on behalf of Deng Fei, despite the fact that your own wife was his one of his targets, was considered very statesmanlike. Of course, to the public at large it is the prestige that comes with your title that is most important.”
“Thank you, Xue. You flatter me too much. Meantime, the next step in this plan is for us to return to our respective capitals and get approval. But before then we must go downstairs to the courtyard and make a joint statement to the assembled reporters. We should say nothing in detail, but smile, shake hands, and send the world a signal that the crisis is ebbing.”
“I like that idea very much,” said Li. “There are some key words I will be using that will signal my colleagues in Beijing that I think we have success. It may start the process moving there in a way that will resolve the conflict.”
“Excellent,” said Ben. “But now I need a personal favor of you. I’d like you to personally buy three of your own gold coins and give them to me as gifts for others. Two of those might include a personal note with each. I will explain later.”
Currency War Page 38