The Day the Dollar Dies

Twenty-one men representing China’s most powerful institutions file into a conference room atop the icc Tower looming over Victoria Harbor. The Politburo Standing Committee has mustered the ceos of China’s four largest banks, Sinopec, and several other state-owned multinationals, plus officers from the Central Military Commission and a pair of academics from China’s top technology universities.

The general secretary formally opens the meeting. “As you know, the United States of America continues to manipulate its currency,” he begins. “It is devaluing its dollar, which steals away trade and reduces the value of its debts. The Standing Committee manages the yuan’s value to protect our manufacturing base and support employment.”

The secretary leans back ever so slightly to say what everyone in the room already knows, and the reason why they are here. “Three days ago, the Federal Reserve System announced its sixth quantitative easing policy in the past seven years.”

And now, the marching orders.

“The Central Politburo Standing Committee of the Communist Party has agreed that it is time to use every financial measure of the People’s Republic to preserve the state of its economy. It has approved liquidating the government’s holdings of U.S. treasuries.”

The order from the stone-faced secretary sounds broad, even bland. But it means very specific, very powerful things to each man in this room. It means pulling the trigger on a huge number of massive initiatives. And it’s backed by more than a trillion dollars.

The Chinese economy will suffer some collateral damage as well, but the decision has finally been made. To encourage and to enforce the point, the secretary concludes with a proverb: “Good medicine tastes bitter.”

He could’ve used a different one: “Wait long, strike fast.”

Back in the real world …

Although the dates and events in this scenario are obviously fictitious, the principle isn’t.

In fact, such an economic disaster is imminent enough that the Pentagon held its first-ever financial war games back in 2009. Instead of carrier movements, tactical strikes and aerial bombardments, the weapons were currencies, stocks, bonds, interest rates and derivatives. But just like real war exercises, the purpose was the same: to discover fatal weaknesses and how the enemy might exploit them.

Wall Street banker Jim Rickards participated in the war games. In his book Currency Wars, he writes that the Pentagon is clumsy at financial warfare.

Financial war is not beyond America’s horizon. Whether or not politicians and the Fed will publicly acknowledge it, the war has already begun.

Full article: The Day the Dollar Dies (The Trumpet)

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