This is the 4th and last installment of our The Winds of War postings. To catch up, parts one through three are linked here:
The Winds of War (Part One). by Kevin D. Freeman on January 29, 2018. Share this… Email this to someone Share on Facebook Tweet about this on Twitter Share on LinkedIn Share on Google+ Share on Reddit. There is a lot of positive economic news. Economic growth has substantially strengthened in the wake of …
Feb 4, 2018 – In last week's post, we warned that the scent of the next World War was already in the air. Readers know that we believe the next war will be cyber-economic in nature, at least in the early stages. We have […]
globaleconomicwarfare.com/2018/02/the-winds-of-war-part-three/In this final installment, we will discuss the final trigger that we believe may launch the next major conflict. In many ways, the next World War is already underway. It is playing out, however, in multiple back and forth moves that most Americans fail to recognize. Such was the case leading up to Pearl Harbor also, despite regular and repeated warnings regarding how vulnerable it was. In fact, Army General Billy Mitchell (the father of our Air Force) warned in a book published in 1925 (and otherwise before that the Japanese would attack our fleet at Pearl Harbor by air. He was met with extreme skepticism and even a Court Martial. We have been warning since at least 2008 in speeches and briefings, this blog since 2011, and in books since 2012 that a global economic war was underway. The next attack, we have long argued, will target American debt with the Chinese the main adversary. As it was with Billy Mitchell, our main thesis was met with skepticism by many inside the Pentagon. Here are a couple of links to articles that document the pushback in the Pentagon:
Feb 16, 2018 – In the past week, so much information has emerged that corroborates our basic thesis. The winds of war are blowing and the intensity is increasing. To catch up, please review our last two posts: The Winds of War (Part One) – […]
By Bill Gertz – The Washington Times – Monday, February 28, 2011. Evidence outlined in a Pentagoncontractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.
(be certain to scroll through the entire story) https://www.washingtontimes.com/news/2012/oct/…/inside-the-ring-new-wmd-threats/ Oct 10, 2012 – A Pentagon-sponsored report warns that the United States faces new threats from mass destruction weapons in the form of cyber, electronic and financial attacks, … On financial warfare, the report mentions the 1999 Chinese military book, "Unrestricted Warfare," which advocates that China‘s military utilize …
Pentagon on Financial threat Chinese military and Communist Party officials have threatened to "dump" some of China's holding of $1.17 trillion in U.S. Treasury securities to punish the United States and wage financial war in response to arms sales to Taiwan, according to a Pentagon report to Congress. The July report plays down the prospect of what has been termed the financial "nuclear option" by Beijing against the United States. "Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States," says the five-page report entitled, "Assessment of the National Security Risks Posed to the United States as a Result of the U.S. Federal Debt Owed to China as a Creditor of the U.S. Government."
While there has been a lot of pushback, we have also educated key leadership within the defense and intelligence establishment. You can read some comments from these leaders at this link and this link. Some of our earliest and best support came from Frank Gaffney, founder of the Center for Security Policy and one of the true leaders in the national security arena. Frank can certainly be compared to General Billy Mitchell because he has remained unafraid of the truth despite being attacked from multiple directions. He has frequently stated that "unless you are taking flack, you aren't over the target." In Frank's case, he seems always over the target in multiple areas. At one point, he was even dis-invited from CPAC, the largest gathering of conservatives in America. This year, however, he was invited back and given a standing ovation. In his main stage speech, Frank correctly identified and explained the serious threat we face. It is certainly worth watching.
Here are excerpts from a Breitbart recap:
by Edwin Mora 23 Feb 2018 National Harbor, MD
The communist People's Republic of China has been waging "unrestricted war" against the United States as its top financial and cyber adversary, cautioned national security expert Frank Gaffney during a 2018 CPAC event Friday.
…He called on President Trump to craft a strategy to retaliate against China, which top U.S. military officials recently will soon be able to challenge America across nearly all domains.
Referring to the China threat, Gaffney urged the Trump administration to: remain vigilant that China as an enemy has been waging war with us for almost 20 years and respond appropriately; craft a strategy for regime change in China similar to the Cold War-era plan that successfully destroyed the Soviet Union; and to fire McMaster and replace him with Bolton.
"For almost 20 years now, communist China has been implementing a strategy of its own towards the United States — it was described in a book published in 1999 by two People Liberation Army [PLA] colonels entitled ‘Unrestricted Warfare,'" said the CSP chief.
As examples of China's "unrestricted warfare," Gaffney identified Beijing's illegal financial and cyber tactics.
"They're engaging in cyber warfare, not just against our [private sector] companies … [but also] including by the way all of our defense contractors whose intellectual property, much of which you pay for to try to protect us is being ripped off by the Chinese communists," declared the national security expert. In the past, the U.S. government has suggested that a cyber attack at the hands of a foreign government, even if it targets a privately owned company, may constitute an act of war.
Gaffney acknowledged Beijing's well-known currency manipulation as a form of battle with those affected by it, conceding that it allows the communist nation to try to demolish the U.S. dollar as the reserve currency in the world.
‘They're putting into place, ladies and gentlemen, all of the ingredients they need to basically supplant the financial institutions that we built in the immediate post-World War II period. That's the building block for economic as well as financial warfare against us," he said.
…Gaffney noted, "the Chinese are considered to be in advance of us' in quantum computing … which will give them an ability to have codes that cannot be broken and easy ability to break ours among many other applications."
"About 80 percent of the U.S. electronics are now supplied by China … this means among others things that cameras that we use for all kinds of home monitoring and other surveillance, including official government state and even national security compromised because China is the supplier," he concluded.
Frank Gaffney has been full aware of this threat for years and the Center for Security Policy has written an important book on the subject (Warning Order) to which I was honored to contribute. Frank and I have had many meaningful discussions on the topic on his radio program (Secure Freedom Radio) as well. Here is a link to a recent example: Consequences…
The fact that Frank Gaffney and others are paying attention is the good news. The bad news is that so many still don't get it. For example, nearly everyone in the Washington establishment ("Deep State") and on Wall Street is overlooking the obvious, searching for benign explanations regardless of whether or not they make sense. That would be like catching a Japanese spy in Oahu in 1939 explaining away his behavior as "scouting out locations for a new Benihana restaurant." Maybe, just maybe, he had worse things planned.
Here are two very recent examples where there appears to be a serious problem that is benignly explained away. First, on February 21st, Chinese currency moves are viewed as Beijing propping up their currency to appease President Trump:
- The Chinese yuan has gained 10 percent against the dollar since the start of 2017.
- Experts say Beijing is allowing the move so it will not appear to be manipulating its currency downward.
- Against a trade-weighted basket of currencies, the Chinese yuan is still mostly stable.
Huileng Tan | @huileng_tan CNBC The Chinese yuan has appreciated 10 percent against the dollar since the start of 2017, quelling some criticism that the export giant has been deliberately suppressing its currency to gain economic advantage over its trading partners.
This is all going according to China's plan, experts said.
Although the strength of the yuan against the dollar is in part due to the greenback's weakness, experts said the world's second-largest economy is also propping up its currency to appease President Donald Trump.
The article correctly recognizes the unusual strength of the yuan vis-a-vis the dollar. But the explanations miss the crystal-clear intent of dethroning the dollar over the long term. The behavior was contrary to expectations but explained away.
The second example is no less dramatic:
Reuters BUSINESS NEWS FEBRUARY 21, 2018 / 8:17 PM David Lawder
WASHINGTON (Reuters) – The U.S. Treasury's top diplomat ramped up his criticisms of China's economic policies on Wednesday, accusing Beijing of "patently non-market behavior" and saying that the United States needed stronger responses to counter it.
David Malpass, Treasury undersecretary for international affairs, said at a forum in Washington that China should no longer be "congratulated" by the world for its progress and policies…
He said market-oriented, democratic governments were awakening to the challenges posed by China's economic system, including from its state-owned banks and export credit agencies. And he reiterated his view that China had stopped liberalizing its economy and was actually reversing these trends.
"One of the challenges for the world is that as China has grown and not moved toward market orientation, that means that the misallocation of capital actually increases," Malpass said. "They're choosing investments in non-market ways. That is suppressing world growth." …
Basically, the West has been sold for decades on the notion that China had abandoned communism and was embracing Western freedoms. The problem is that their actions never matched the rhetoric.
The truth is that this has always been a strategy of Unrestricted Warfare as Frank Gaffney described. We have documented that fact repeatedly in hundreds of blogs, speeches, and briefings over the past decade. We have uncovered and deciphered a mountain of supporting evidence. One of the most direct examples was published in the official house organ of the Chinese Communist Party. Here is an English translation from ChinaScope (I excerpted and added the bold for emphasis on critical points):
[Editor's Note: On December 10, 2010, the website of Qiushi Journal, the official publication of the Central Committee of the Communist Party of China, published an article examining six strategies that the U.S. has developed to contain China: a trade war, an exchange rate war, a public opinion war, an anti-China campaign, military exercises and simulated warfare, and the development of an anti-China alliance. The author also analyzed seven counter-strategies for China to adopt. The entire article is translated below.Days after Chinascope published this translation, Qiushi website took down the original Chinese and then restored the article with an additional sentence added at the end: "The above article only represents the personal views of the author and does not represent the position or views of Qiushi Journal or this site." Chinascope has kept a Google cached copy of the original article. To read that copy, please click here.]
When faced with an aggressive U.S., how should China respond? The article "Cast Away Illusions; Prepare for Struggle" that Mao Zedong published on August 14, 1949, is still applicable to today's situation: Our wishes to persuade the imperialists and those who are against China to be kindhearted and repent are fruitless and will never come to pass. The only way is to organize forces to fight against them. One fundamental principle that we must follow is the strategy, "If friends come, treat them with wine; if jackals come, we have shotguns for them."
China's Counter Strategies
1. Economic Warfare. Of course, to fight the U.S., we have to come up with key "weapons." What is the most powerful weapon China has today? It is our economic power, especially our foreign exchange reserves. The key is to use it well. If we use it well, it is a weapon; otherwise it may become a burden. Counting on the fact that the U.S. dollar is the international currency, the U.S. government has increased the number of dollars in circulation, leading to its devaluation. The countries with high reserves in dollars will suffer, but the U.S. itself loses nothing. However, for this to be true there is a premise. Someone must purchase those excess dollars they printed. If no one purchases them, then they will only be circulated domestically, inside the U.S., and cause inflation. In order for the countries with foreign exchange reserves in the U.S. dollar to restrain the U.S. from over-issuing U.S. currency, they must act together and not buy U.S. dollars. There are two ways to achieve this. The first is for all these countries to reach a consensus and act together as one. The second is if one country takes the lead, does not buy U.S. dollars, and other countries then follow. Which alternative should China choose? The first tactic requires countries with foreign exchange reserves to reach a consensus. China, Japan, the U.K., India, and Saudi Arabia are all countries with high foreign exchange reserves. Japan is constrained by the Japan-U.S. Security Treaty and will not break away from the U.S., so the probability of Japan cooperating is very low. Great Britain has always followed the U.S., so the probability that it will cooperate with China is also pretty low. There have been recent changes in Britain's political structure. Prime Minister Cameron has adopted a new strategy toward China that increases the possibilities for cooperation, making it a more likely player than Japan. Also, the U.K.'s foreign exchange reserves, which are market adjusted instead of sovereign funds, are to a large extent subject to market impact. India has stayed closely allied with the U.S. in recent years, and Obama promised to support India for a permanent membership in the UNSC. Thus, the probability for India to cooperate with China is also not great. India's purchasing power of foreign exchange reserves is very limited anyway, so it cannot influence the overall situation much. Saudi Arabia does not have much political interest in the U.S.; its purchase of foreign exchange reserves is purely commercial. So they are more likely just to follow the market. Based on this analysis, it is very unlikely that China and these countries would ever reach a consensus. Therefore, we are left with the second option, which is to take the lead in affecting the market for U.S. dollars. This approach is market-driven, so others will not be able to easily blame China. It is a good solution, and also we will not owe anyone anything for the favor of becoming our partner. The key issue is that China must have people who understand the market well and are good at using the market at the right time to impact the exchange rate of the U.S. currency. Of course, the most important condition is still that China must have enough courage to challenge the U.S. currency. China can act in one of two ways. One is to sell U.S. dollar reserves, and the second is not to buy any U.S. dollars for a certain period of time. The first option may cause the U.S. dollar to devalue, so China must consider whether it can take a loss resulting from the depreciation of the U.S. dollar. However, the U.S.'s over-printing currency will also cause the dollar to depreciate and will cause the foreign exchange reserve to shrink even more in value. Thus, in comparison, we will probably end up losing less. For the second option, if we do not buy the U.S. debt, what should we buy instead to increase our foreign exchange reserves? Options are the Euro, the British sterling, Japanese yen, Indian rupee, Russian ruble, and Brazilian currency. At the same time, buying the debt of these countries will help promote good relations and economic and trade cooperation between China and these countries. It will enhance China's economic influence in these countries. Therefore, this is a highly cost-effective tactic, and, more importantly, China is the biggest buyer of U.S. debt. China's actions will have a demonstrable effect on the market. If China stops buying, other countries will pay close attention and are very likely to follow. Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans wealth will be enormous. The U.S. will not be able to withstand this pressure and will curtail the printing of U.S. currency. The dollar will then appreciate. Most importantly, through this, China's foreign exchange reserves will no longer be "the meat of the Tang-dynasty monk"  for the U.S. Instead, they will become a major economic force to constrain the U.S. The key to success is that China needs to have enough courage and determination to take the U.S. pressure. This is exactly what we need. It just shows how much the U.S. needs China. The more pressure we can take, the more successful this strategy. It will indicate that this "weapon" is highly effective and the U.S. will start to fear us.
2. Financial War. The fact that the U.S. dollar is the world's reserve currency makes the U.S. a financial superpower. Currently, China's increased share in the International Monetary Fund and its increased voting rights are a very big step forward. The problem is not that the value of this share is expressed in U.S. dollars, but that it would be best if the share could be expressed in RMB. Therefore, for China to challenge the position of the U.S. dollar, it needs to take a path of internationalization and directly confront the U.S. dollar. The path of internationalization can be done in four ways. First, use Hong Kong as a springboard to increase the payment of the amount and the issuance of RMB bonds; there has been much progress, but not enough; we should believe in the popularity of the RMB in the international community. Second, using the huge foreign exchange reserve as a guarantee, we can issue RMB bonds globally, allowing other countries to use RMB as their foreign exchange reserve; we can consider setting up a central foreign exchange bank, specializing in the deposit and lending of foreign exchange reserves and related financial services. The huge foreign exchange reserves serve the same role as gold, to ensure that offshore RMB can be exchanged for foreign currency at any time. Third, create an international version of the Chinese securities market to attract foreign companies. Participants can buy the securities with RMB or foreign currencies. Overseas companies that are listed can raise funds in yuan or other currencies. Then the listed companies or a foreign exchange policy can determine the specific proportion of RMB or other currencies. Fourth, establish an international currency trade center, allowing world currencies to trade, forming an international financial market and a foreign exchange market. Specific trading rules and the national currency trade volume can be adjusted according to market demand. China's 30 years of history of reform and opening up show that the Chinese government and its people's understanding and application of the market mechanism and free trade will be on par with the U.S. and other Western countries. China's ability to grasp the laws of the market and the ability to control economic trends are not inferior to those of Western countries. The market mechanism can propel the internationalization of the RMB, rather than relying on government negotiations. We fully trust the Chinese government's capacity to handle the market and the regulations. If these four suggested actions can be implemented smoothly using the market mechanism, the RMB will become the world's reserve currency, putting pressure on the U.S. dollar and undermining U.S. financial strength.
3. Military exercises and simulated warfare. No doubt the U.S. military exercises challenge China's strategic bottom line. China should certainly actively respond, but the issue is how to respond skillfully. Wherever the U.S. chooses to conduct its military exercises, let's pick another location for our military exercise. This is not to avoid confrontation; it is "besieging Wei to rescue Zhao."  The timing can be the same, but the location can be different. In areas where the U.S. once engaged in a military exercise, the Chinese military should immediately arrange a military exercise with a clear target, simulating war. There is no need for China to fear the U.S. aircraft carrier. During the Korean War, when the contrast in military strength was much greater than it is now, we were not afraid; why should we be now? Would the U.S. really dare to start a war with China? Facts prove that America is a paper tiger that cannot even handle Iraq or Afghanistan, not to mention China. We should definitely have the strategic determination and courage to defy such an enemy. As for aircraft carriers, they should not put any military pressure on China. Courageously contacting the U.S. carriers will only benefit us, not harm us. Only by in-depth contact can we truly understand the U.S. aircraft carriers. The fundamental purpose of war simulation via military exercises is to show China's determination to meet challenges instead of avoiding them. This will send a clear message to the world that China has the strong will to resolutely safeguard its national sovereignty.
4. Space war. All U.S. strategic forces rely on its strong space facilities, which are both an advantage and a weakness for the U.S. As long as China can fully demonstrate its ability to destroy any space facility, and in particular to attack U.S. satellite facilities with precision, at a minimum cost, China can pose enough of a threat and place enough pressure on the U.S. Compared to U.S. aircraft carriers, U.S. military satellites are more vulnerable to attack. China's missiles can directly attack the military satellites, which usually orbit at an altitude less than 10,000 kilometers. In 2007, when China test fired missiles to destroy an abandoned satellite, the whole United States was shocked. China should make efforts to develop space weapons as soon as possible, as this is the most effective military means of attacking the U.S. If we can eventually fire missiles from a satellite, the U.S. will find that it has nowhere to hide; it will find itself entirely exposed to the attack radius of Chinese weaponry. At the same time, China's satellite technology is what it is most proud of, most good at, and what is most independent (from foreign forces). It is only a small step behind the U.S. and Russia. Vigorously strengthening the building of our space military forces should be not only the focus of our national defense, but also the most powerful weapon to deter U.S. military blackmail. We should learn to explore independence in making more strategic choices and in developing weapons of strategic importance, instead of following the direction of the U.S. military. Of course, the Chinese government should not be afraid of Western media hype about the China threat. Defending our own interests is more important than any PR stunt. When the U.S. government sent troops to occupy Iraq and Afghanistan, it didn't even care about criticism from other countries. Following our own way is a reflection of our self-confidence and is also a strategy.
5. Attacking a nearby enemy. The U.S. seems highly interested in forming a very strong anti-China alliance. It not only made a high-profile announcement of its return to East Asia, but also claimed to lead in Asia. What is especially unbearable is how the U.S. blatantly encourages China's neighboring countries to go against China. We cannot completely blame the U.S., as flies do not stare at seamless eggs. Countries like Japan, India, Vietnam, Australia, the Philippines, Indonesia, and Korea are trying to join the anti-China group because they either had a war or another conflict of interest with China. They are attempting to gain benefits by using the U.S., and these are the countries that surround China. Throughout the history of the new China (since 1949), peace in China has never been gained by giving in, only through war. Safeguarding national interests is never achieved by mere negotiations, but by war. Therefore, China must adhere to a basic strategic principle: We will not attack unless we are attacked; if we are attacked, we will certainly counterattack. We must send a clear signal to our neighboring countries that we don't fear war, and we are prepared at any time to go to war to safeguard our national interests. China's neighboring countries need China's international trade more than China needs them, with the vast majority of China's trade deficit caused by these countries. Therefore, they, but not China, will suffer greater damage by antagonizing China. China should make good use of these economic advantages and strategic power. This is also the most effective means to avoid a war.
6. Befriending distant enemies. To attack a nearby enemy and befriend distant enemies was one of the most brilliant bits of political wisdom (articulated) during the Spring and Autumn Period. It should still be the best diplomatic strategy for China. Regarding the U.S. attempt to build an anti-China alliance, China's counter strategy of befriending distant enemies can have three components: First, disintegrate the traditional U.S. allies, particularly the European Union. Second, strengthen strategic cooperation with the U.S.'s neighboring countries. Even if we do not form an anti-American alliance, at least we can let the U.S. feel the pressure. Third, step up cooperation with Africa and other regions that the U.S. does not pay attention to. Let's first analyze how to implement the first strategy. The disintegration of the Soviet Union and a weakened Russia removed it from being the European Union's biggest threat and strategic rival. The thought of war is far removed from the EU, and peace is the norm. There is no reason for the U.S. to exist in Europe. Almost certainly, Europe does not need the U.S. in the military arena. So is there any economic need for the U.S.? The economies of the U.S. and the EU are quite homogeneous; they are more mutually competitive rather than interdependent. The global financial crisis has saddled Europe with huge losses and the U.S. with almost none. This has made Europe recognize that the U.S. has a reduced value. Many European countries have come to realize that Europe does not need the U.S. The estrangement between Europe and the U.S. is an opportunity for China. The complimentary economic relationship between China and the EU is greater than the mutual economic dependence between the EU and the U.S. Therefore, China should make Europe the focus of its strategy of "befriending distant enemies." Recently, China has increased exchanges with France, Portugal, Greece, Spain, Germany, and the UK, thereby significantly strengthening the cooperation between China and the EU. This is the right strategic direction. We must have the courage to implement the second strategy. The enemy's enemy is our friend; even if it is not our friend, it can be used to contain the U.S. In the Americas, countries surrounding the U.S. are not monolithic. China can further expand its cooperation with Cuba, Venezuela, and other countries that are not taking orders from the U.S. In addition, China should strengthen its cooperation with Mexico, Brazil, Argentina, and other countries in the Americas, both in their economies and in trade. These countries' economies do not vigorously compete with the Chinese economy, and there are broad areas of cooperation, particularly in agriculture. China should weaken its agricultural trade with the U.S. but enhance it with other American countries. China should make good use of the huge agricultural market, an important strategic diplomatic tool, to contain the diplomatic strategy of the U.S. On this strategy, China hasn't done good planning and implementation. It should seize the current opportunity, that the U.S. is overlooking the Americas, to weaken the U.S.'s strategic backyard. Third, we should vigorously cultivate Africa. At present, the diplomatic relationship between China and African countries is built upon a good base and prospects are promising. The African countries are not only helping China in competition in the international diplomatic situation, but, in recent years, we have also been strengthening economic and trade cooperation with them. However, there haven't been many military exchanges, so China's strategic and economic interests in Africa are not effectively protected. Piracy is rampant in Somalia and the international community is crying out, but doing very little that is effective in the fight against piracy. Therefore, China can make use of this situation to expand its military presence in Africa
7. Public opinion war. The basic function of public opinion is to arouse the attention of the majority of the population, who are either for or against a certain issue. The media's influence on public opinion agitates for support of or opposition to a person, an issue, or a country. So far, compared to the U.S., China's position in international public opinion is vulnerable. It is often in the position of being opposed, with the initiators usually being the U.S. media. However, is the U.S. media loyal to the U.S.? No, the media is loyal to the market. Whoever can ensure that the media makes a profit can control the media. The media's greatest goal is to expand their influence and expand their market share. In this regard, we can capitalize on the current advantage, which is that China is the object of a high degree of concern in the world, to fully use the role of the market to leverage the tone of international media coverage. For example, the Chinese leaders can take the initiative to accept some important Western media interviews, showing the world the real China and real Chinese leaders. In the past, Chinese leaders' tendency to appear in a group has been very different from that in Western culture, which focuses on individuality. Westerners like to see more concrete and vivid individuals, especially the leaders. Therefore, Chinese leaders who have more charisma, personality, and the courage to accept a Western media interview are usually popular in the West. There are a number of media outlets in the world, but the opportunities to interview Chinese leaders are scarce. Being able to interview the Chinese leaders would certainly help to improve the media's influence, would be conducive to attracting attention, and would expand the market. Therefore, Chinese leaders can fully take advantage of the market to let the world know the real China, understand China's policies, and understand the Chinese people and government, so as to win the support of upright people, increase China's influence, and create a favorable international environment. Past history has proven that whenever Chinese leaders take the initiative to actively accept the Western media, our policies are in an advantageous position, the Western media's reports on China are more objective and comprehensive, and the Western public's understanding of China is comprehensive and concrete. Recently, there has been a great breakthrough in Chinese leaders' acceptance of Western media interviews, but there is still great flexibility in the choice of media and in the way interviews are conducted. We can further explore this area, and choose how to publish information that Western people are used to. For example, we can do television interviews, publish articles in newspapers, give comments on the Internet, and even post a message on the micro-blog. Internet tools played a great role in U.S. President Barack Obama's election campaign. We can use the new media and actively seize the international public opinion market.
This article was published over seven years ago. Like the book Unrestricted Warfare, it has proven to be a virtual roadmap of Chinese activity. In every single area outlined, the Chinese have made serious advances. When this was first written, no one believed that the yuan would be added to the IMF reserve currency basket. But it happened in 2016. China has made clear its intentions in space. The Chinese play the media like a fiddle. And now, they are using their influence over American corporations.
Perhaps the most worrisome effort is the plan to dethrone the dollar and dump our debt. This may take place in stages but the threat is quite real. We have covered it in great detail even though we were once accused (like Billy Mitchell) of being conspiracy theorists. But the moves are so obvious in come cases that they are hard to ignore.
Here's the problem. We are vulnerable. Our debt is enormous and growing rapidly. We've already covered how the official US National Debt now exceeds $20 trillion. As this is written, the actual total is $20.763 trillion (according to USdebtClock.org). Our projected deficit is approaching $1 trillion per year and that is with extraordinarily low interest rates. Every 1% rise in interest rates adds another $207 billion per year to the deficit. A 5% Federal interest rate (certainly not unheard of) would mean we were paying $1 trillion per year in interest alone. Since we take in only a little over $3 trillion per year in taxes at present, a move to a 5% interest rate would consume almost one-third of all Federal tax revenues. Even at present, we are borrowing about $1 million per minute and this may reach $2 million per minute in FY2019.
The Chinese know this and view it as their greatest potential leverage against us. To them this is economic war.
We can go into great detail covering all aspects of the debt bomb we are facing. In fact, we will be covering in detail in a coming blog. It is important to know that the reported Federal debt is just the tip of the iceberg. There is the massive off-balance sheet debt in future promises made by government. This includes a massive pension problem that will undoubtedly be at the center of the next financial crisis. Beyond the Federal, and as just one example, CALPERS, the massive California Public Pension System was declared "near insolvency" by a former board member last week.
This is stunning and a serious problem that we will cover in detail at some point soon (the debt and pension crisis). The scary part about this is that the economy is booming. You might expect such dire debt-related issues in a recession but not in a very strong economy. Just imagine how bad things might be if we had a downturn?
Granted, we did endure sub-par growth over the past decade. And, the Trump economy is just beginning to get into high gear. But it is critical that we use this as an opportunity to reduce debt risk, not increase it. This is especially true as we are needing to borrow more just as the foreign appetite for our debt appears to be waning. This is exactly the circumstance that China was hoping for. We can't be ignorant of the fact that they are waiting for the optimal moment to displace the dollar and take advantage of the next debt crisis. And for those who doubt the long-term focus of China, or want to explain away as temporary the recent anti-market behavior, just consider this Wall Street Journal headline from two days ago:
Xi Jinping, President for Life
China's supreme leader abolishes term limits so he can stay in power.
China will amend its constitution to allow Presidents to serve more than two terms, the state-run news agency Xinhua announced Sunday. The change is momentous because it confirms Xi Jinping has become the country's most powerful leader since Mao Zedong. He is abolishing term-limit rules and other norms that Deng Xiaoping created in the 1980s to prevent a repeat of Mao's disastrous rule.
Fortunately, we have a number of key advantages in the economic war and finally a National Security Strategy that recognizes the threat. We can address the debt problem (as we will explain in our future post) and we can apply pressure on some serious vulnerabilities in China. So it does not have to be all gloom and doom. But it is absolutely critical that we properly flesh out our strategy and recognize that "the winds of war" are blowing hard. We should not have to wait for a "Pearl Harbor" moment.