Collapse

After this Cook’s Tour of financial hot spots, it is daunting to consider what may be the greatest risk of all—correlation. As applied to global financial warfare scenarios, correlation refers to two or more threats originating abroad that might produce adverse shocks at the same time, either because of coordination or because one acts as a catalyst for the others. If Russia wanted to launch a natural resources attack on the West through a cutoff of natural gas supplies, it might make good sense for the Chinese to accelerate their efforts to diversify away from paper assets into hard assets because of the expected price spikes produced by Russia’s move. Conversely, if China were ready to announce an alternative reserve currency backed by commodities, it might make good sense for Russia to announce that it would no longer accept dollars in payment for oil and natural gas exports, except at a greatly devalued exchange rate to the new currency.

At a more malign level, China and Russia might find it beneficial to secretly coordinate the timing of their commodity and currency assaults so as to be self-reinforcing. They could accumulate large positions in advance of their actions using leverage and derivatives. This not only would be a financial attack but would involve advance insider trading to profit from their own misdeeds. Iranians with access to Dubai banks observing these developments might decide to trigger a war with Saudi Arabia or a terrorist attack, not because they were necessarily communicating with the Russians or Chinese, but because the financial force multiplier from an attack would be that much greater.

Throwing a Russian resources assault, a Chinese currency assault and an Iranian military assault at United States interests in a near simultaneous affront would produce predictable effects in the hair-trigger world of capital markets. Markets would experience the financial equivalent of a stroke. They would not just collapse; they might cease to function entirely.

The foregoing threats are fast arriving. They are not extreme worst-case scenarios, but the culmination of events happening today. Consider the following:

• October 28, 2008: Interfax reports that Vladimir Putin, prime minister of Russia, advised Wen Jiabao, premier of China, to abandon the U.S. dollar as a transaction and reserve
• November 15, 2008: The Associated Press reports that Iran has converted its financial reserves into
• November 19, 2008: Dow Jones reports that China is considering a target of four thousand metric tons for its official gold reserves to diversify against the risks of holding U.S.
• February 9, 2009: The Financial Times reports that transactions in gold bullion have reached an all-time
• March 18, 2009: Reuters reports that the United Nations supports calls for the abandonment of the U.S. dollar as the global reserve
• March 30, 2009: Agence France Presse reports that Russia and China are cooperating on the creation of a new global
• March 31, 2009: The Financial Times reports that China and Argentina have entered into a currency swap, which would allow Argentina to use Chinese yuan in lieu of
• April 26, 2009: Agence France Presse reports that China is calling for the reform of the world monetary system and replacement of the U.S. dollar as the leading reserve
• May 18, 2009: The Financial Times reports Brazil and China have agreed to explore conducting bilateral trade without using
• June 16, 2009: Reuters reports that Brazil, Russia, India and China, at a BRIC summit, call for a more “diversified, stable and predictable currency ”
• November 3, 2009: Bloomberg reports that India has purchased $6.7 billion worth of IMF gold to diversify assets away from the weaker dollar.
• November 7, 2010: World Bank president Robert Zoellick states that the G20 should “consider employing gold as an international reference point of market expectations about inflation, deflation and future currency ”
• December 13, 2010: French president Nicolas Sarkozy calls for the consideration of a wider role for SDRs in the international monetary system.
• December 15, 2010: BusinessWeek reports that China and Russia have jointly called for the dollar’s role in world trade to be diminished and are launching a yuan-ruble trade currency settlement

This is just a sample of the many reports indicating that China, Russia, Brazil and others are seeking an alternative to the dollar as a global reserve currency. A role for commodities as the basis for a new currency is another frequent refrain.

These are daunting trends and pose difficult choices. Upholding U.S. national security interests cannot be done without knowing the dynamics of global capital markets. U.S. dependence on traditional rivals to finance its debt constrains not only fiscal policy but U.S. national security and military options. Geopolitical dominoes are already falling in places such as Pakistan, Somalia, Thailand, Iceland, Egypt, Libya, Tunisia and Jordan. Much larger dominoes are waiting to fall in Eastern Europe, Spain, Mexico, Iran and Saudi Arabia. Challenges to U.S. power grow stronger as the U.S. dollar grows weaker.

Then there are the geopolitical big three—the United States, Russia and China. Of those, the United States is the most secure against foreign financial attack yet seems intent on undermining itself by debasing its dollar. Russia is visibly weak, yet its weakness can be its strength—it has a history of turning its back on the world and surviving in autarky. China appears resilient but, as shown throughout history, is the most fragile, having repeatedly fluctuated between centralized empires and fragmented warring states for five thousand years. It is hard to appreciate how much the Chinese leadership lives in dread of the least sign of unrest from the unemployed, the countryside, the Falun Gong, the Tibetans, the Uighurs, North Korean refugees or the many other centrifugal forces at play. A global economic crisis possessed by a complex dynamic could be a catalyst that undoes sixty years of Chinese Communist Party rule. Waiting in the wings is Iran, which sees U.S. economic weakness as the ultimate force multiplier, something that gives Iran more bang for the buck when it decides to strike its neighbors in the Middle East. We have begun a descent into the maelstrom. The nexus of unrestrained global capital and unstable geopolitics is a beast that has begun to show its claws.

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