CHAPTER NINE

THE NEXT ATTACK

Almost half the planet’s wealth was destroyed in the 2008 financial crisis, according to the Blackstone Group. “This is absolutely unprecedented in our lifetime,” explained Blackstone CEO Stephen Schwarzman.¹ As Elizabeth Wurtzel, author of Prozac Nation, observed in early 2009, “The market has lost a dozen years worth of wealth in a matter of months.... The whole system is warped.”²

The Asian Development Bank reports that the value of stocks, bonds, and currencies dropped over $50 trillion during 2008, equivalent to losing everything produced on the planet for a full year. “The loss of financial wealth is enormous, and the consequences for the economies of the world will unfortunately [be] commensurate,” lamented Claudio Loser, former IMF director. “There are serious economic and political stumbling blocks that may well cause the recovery to be costly and slow to consolidate.... Poor macroeconomic and regulatory policies allowed the global economy to exceed its capacity to grow and contributed to a buildup in imbalances across asset and commodity markets. The previous sense of strength and invulnerability is now gone.” Former IMF Managing Director Michel Camdessus agreed. “This crisis is the first truly universal one in the history of humanity,” he stated. “No country escapes from it. It has not yet bottomed out.”³

It isn’t even close, actually. Worse, our continuing vulnerabilities invite further financial attacks. As early as February 2009, the Associated Press reported that the recession, bailout, and stimulus “pose U.S. security risks” and “may have weakened some U.S. security interests abroad and hampered the nation’s ability to respond financially to an attack at home.”⁴

Potential attackers across the globe are already conducting dry runs, especially in Europe. In February 2010, the Spanish newspaper El Pais reported that Spain’s intelligence services were investigating foreign speculation they believed was intended to bring down the Spanish economy.⁵ Likewise, Greece’s intelligence service has investigated U.S. and London-based firms for allegedly launching financial attacks on their money markets.⁶ This is all just the tip of the iceberg. And, as we have demonstrated, it can be nearly impossible to trace the true origins of financial attacks.

In the United States, China is now the chief cause of concern over economic warfare and financial terrorism. In February 2009, the office of the Director of National Intelligence warned the Chinese government that if it sold off mass quantities of U.S. bonds, the United States would consider it “financial warfare.”⁷

The concern is well-founded, of course. Over the last decade, China has stacked foreign trade in its own favor. By depressing the value of the yuan, China has essentially used the exchange rate to subsidize its exports and put tariffs on imports. This makes American goods expensive for Chinese consumers and Chinese goods cheap in America. The net effect is that our goods can’t compete, we build up an enormous trade deficit, and the Chinese end up with huge amounts of dollars. Our manufacturing base is hollowed out and China’s booms. Normally, this process is self-adjusting; China’s acquisition of so many dollars should weaken the dollar against the Chinese yuan, boosting the competitiveness of U.S. exports to China. But the Chinese peg their currency to the dollar and keep it artificially low. This effectively exports jobs to China. To keep this system functioning over time, China returns the dollars by buying our Treasury debt. In other words, we get their goods, they get our jobs, and we end up owing them bundles of money.

Some of our politicians berate China for its currency manipulation, but the Chinese have us over a barrel since they already hold trillions of dollars of government debt. In addition, the Chinese effectively lobby both Democrats and Republicans in Washington, so that any meaningful suggestions to address the problem are met with dire warnings about sparking a “trade war.”

Now, this system also makes China dependent on the value of American currency; if the dollar collapsed, or if the United States could no longer pay off its debts, then China would lose money. This creates confidence that the Chinese would never attack the dollar. That is why the Chinese have been buying U.S. bonds at record rates—they want to allow the United States to spend its way out of depression so that we can keep buying Chinese products.

Or do they?

Contrary to popular belief, there is a perfectly rational reason why China may be willing to tank the dollar: they might do it if they can substitute the yuan as the world’s reserve currency. That would create a mass market for the yuan and dramatically strengthen it. If this happened, China would be able to have centralized U.S. dollars in order to shore up its economy, sell them off to destroy the dollar, and then allow other countries to invest heavily in China as they move toward the yuan.

Consider how a company becomes a monopoly: it gains a strong position in the market, then lowers its prices so much that it drives all competitors out of business. Then, it can raise prices as much as it wants.

The Chinese could be behaving in a similar way. They have depressed their currency in order to achieve and maintain a dominant position in the world economy. American politicians are now pushing to have the yuan appreciate against the dollar to correct the existing imbalances. But what if the pendulum swings back too far? Is it possible that the Chinese could manipulate their currency in that direction? Of course it is. In fact, as recently as 1983 the Chinese pegged their currency at the rate of 2.8 yuan to the dollar, a massive overvaluation. That was a time when the Chinese leadership wanted cheap imports and infrastructure development.⁸ Americans would initially cheer the yuan’s appreciation, but it could portend something disastrous: the end of the reign of the dollar, and with it, the end of America’s global dominance.

The downfall of the U.S. dollar is discussed increasingly openly throughout the world. For example, Nobel Prize-winning economist Joseph Stiglitz in April 2011 advocated a new global currency.⁹ Beijing clearly agrees with him. In August 2011, Reuters reported, “China’s yuan could overtake the U.S. dollar as the world’s principal reserve currency as soon as the next decade.... Beijing has been promoting the use of the yuan beyond its borders since 2009 to settle trade transactions. The resulting build-up of deposits in Hong Kong has spawned a thriving yuan bond market. Internationalizing the yuan, also known as the renminbi, brings with it a host of financial and political benefits. Notably, it allows China to build up claims on the rest of the world in yuan rather than increasing exposure to foreign currencies, especially a dollar that it distrusts.”¹⁰

Indeed, China views the dollar’s demise as a vital part of its efforts to eclipse the United States on the world stage. Said Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, “Chinese economic dominance is more imminent and more broad-based—encompassing output, trade, and currency—than is currently recognized.” In fact, Subramanian commented, “By 2030, [China’s] dominance could resemble that of the United States in the 1970s and the United Kingdom around 1870. And this economic dominance will in turn elevate the renminbi to premier reserve currency status much sooner than currently expected.”¹¹

WOULD CHINA DO IT?

Right now, China is supposedly prevented from attacking the dollar because doing so would raise the value of the yuan and slow its economy. That’s the opinion of Fareed Zakaria, a liberal thinker who writes for CNN.com. According to him,

Here in the U.S. you hear many people worry that the Chinese government might stop buying American T-Bills. I think these fears are vastly overblown. The economic situation between China and the U.S. is the financial version of mutually assured destruction—that cold war doctrine of nuclear deterrence. If you destroy me, I will destroy you . . . . [Destroying the dollar] would in turn hurt the U.S. economy, which is China’s number one export market (not a good idea if you are the Beijing government trying to keep workers occupied in factories across China). China is addicted to a strategy of export-led growth, which requires that it keep its goods cheap. This means keeping its currency undervalued. That’s why it buys dollars.¹²

But China is a communist country, after all. Any government that can force a “one child policy” can control domestic production and consumption. At some point, Beijing will be forced to stop subsidizing exports. The regime understands there are benefits to a rising yuan; and it will explain how its citizens will benefit as consumers. If China can tolerate such a deflation, and if it can transition effectively, it will be sitting in the shade. There’s a reason top economists believe 40 percent of trade between China and Africa will be conducted in yuan by the year 2015—and that would kick off the reserve currency substitution war.¹³

That’s precisely what China is looking to do. “We now conceive of China challenging the US for number one slot by 2027,” said Goldman Chief Economist Jim O’Neill. “They are dominating the world growth picture even more than when the world was booming.... China has had a good crisis. In terms of China’s role in the world the crisis has arguably been very helpful because it has forced China to realize that the next stage of their development cannot be led by export growth.”¹⁴ Under purchasing power parity, the Chinese economy will expand to $19 trillion by 2016; the U.S. economy will be just $18.8 trillion at that point. A survey in June 2011 by UBS of major central bank reserve managers found that more than half thought the United States would lose its reserve status over the next twenty-five years. “Right now there is great concern out there around the financial trajectory that the US is on,” fretted Larry Hatheway, UBS chief economist. Robert Zoellick of the World Bank has already proposed a new monetary system that would be a basket of currencies, including the yen, pound, and renminbi. Most of the managers said that gold would be the prudent investment in years to come.¹⁵

Arguments against Chinese economic warfare incorrectly presuppose a monolithic China. In January 2011, for example, Secretary of Defense Robert Gates visited China and was shocked to learn that President Hu was unaware of the test flight of the new Chinese stealth fighter. It was a clear attempt by the People’s Liberation Army to show military independence from civilian authority. This was the same PLA that once proposed that Beijing consider entering into a nuclear exchange with the United States if China could secure a tactical advantage. This army is obviously not afraid to suffer short-term casualties in the pursuit of long-term objectives.

Some Chinese are willing to do anything to boost the country’s economic power against the United States. According to one estimate, as much as 30 percent of China’s economic growth over the past decade was the direct result of intellectual property theft—and that figure was probably an underestimate. Unfortunately, U.S. companies face a troubling dilemma: China is where the growth is, and American executives feel driven to do business there. Yet, all should know that China’s ascendancy compromises our nation’s future. Frighteningly, China’s corporate espionage and currency manipulation are peanuts compared to the PLA’s economic warfare plans. The Chinese are seeking to achieve both economic and military superiority over the United States within a decade, and they recognize the value of economic weapons, including collapsing the dollar, if needed to achieve their goals. For example, in August 2011, the Chinese Communist Party’s official People’s Daily newspaper suggested that China “punish” America for our arms sales to Taiwan: “Now is the time for China to use its ‘financial weapon’ to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcing it to do so.”¹⁶

According to Jim Rickards, “The struggle between China and the United States, between the yuan and the dollar, is the centerpiece of global finance today and the main front in Currency War III.”¹⁷ Rickards further explains, “The value of a nation’s currency is its Achilles’ heel. If the currency collapses, everything else goes with it.”¹⁸

Another official publication of the Communist Party, Qiushi Journal, acknowledged the coming currency war. In a lengthy essay, Qiushi made the case that China must show the United States that it isn’t afraid of war—and that China should use its key weapons:

What is the most powerful weapon China has today? It is our economic power; especially our foreign exchange reserves ($2.8 trillion). The key is to use it well. If we use it well, it is a weapon; otherwise it may become a burden . . . . Of course, the most important condition is still that China must have enough courage to challenge the US currency. China can act in one of two ways. One is to sell US dollar reserves, and the second is not to buy US 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 [sic] wealth will be enormous.... 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.¹⁹

Beyond simply letting the dollar collapse by restricting purchases of Treasury debt, the Qiushi essay outlines plans for financial war as a major Chinese strategy designed to directly attack the dollar:

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.²⁰

The article goes on to explain that these moves, though clearly intended as acts of warfare and even labeled as such, would be hidden as “market driven” policies so that China could escape blame. Essentially, they view the approach as a “sneak attack” that would go unrecognized until it was too late to respond. Jim Rickards explains the process in his book Currency Wars: “The Chinese could shift the mix of their Treasury holdings from longer to shorter maturities without selling a single bond and without reducing their total holdings.... The shift would make the Chinese portfolio more liquid, vastly facilitating a full Chinese exit from Treasury securities. The Chinese would not have to dump anything but merely wait the six months or so it takes the new notes to mature. The effect is like shortening the time on a detonator.”²¹

No wonder columnist Gideon Rachman of the Financial Times wrote in early October, “The dark interpretation of China’s actions is that nationalist forces and the country’s military are becoming more influential in Beijing. A younger generation is coming to power, schooled to believe that China has been victimized by the outside world because it has been weak. The current contrast in the economic fortunes of China and America has also increased China’s confidence and assertiveness.”²²

THE DRY RUN

The PLA has already engaged in economic warfare against the United States via cyberwarfare. That’s straight from the Unrestricted Warfare playbook, which states, “The goal should be to use all means whatsoever—to force the enemy to serve one’s own interests.... Financial warfare has become a ‘hyperstrategic’ weapon that is attracting the attention of the world. This is because financial war is easily manipulated and allows for concealed actions, and is also highly destructive . . . . The most unsettling aspect of financial terrorism is ‘hot money’ which is able to launch destructive attacks upon a nation’s economy within several days, and the target varies from national central banks to poor people.”²³ Cyberattacks are a big part of this strategy.

There are many indications that the Chinese have an extensive program for conducting cyberattacks. In November 2010, 15 percent of the world’s internet traffic was suddenly routed through Chinese servers by hackers. The redirection, according to a congressional commission, could have allowed “surveillance of specific users or sites [and] . . . could even allow a diversion of data to somewhere that the user did not intend.... Perhaps most disconcertingly, control over diverted data could possibly allow a telecommunications firm to compromise the integrity of supposedly secure encrypted sessions.”²⁴

In another incident, in February 2011, Chinese-based hackers infiltrated computer networks of five international oil companies that contained confidential information including bids. McAfee Security chief technical officer George Kurtz announced the hack, stating, “Starting in November 2009, covert cyber attacks were launched against several global oil, energy, and petrochemical companies. The attackers targeted proprietary operations and project-financing information on oil and gas field bids and operations.” How bad was the hack? According to Kurtz, the information “is highly sensitive and can make or break multibillion dollar deals in this extremely competitive industry.”²⁵

The hacks were highly sophisticated, indicating the culprits were full-time professionals. The Chinese government brushed off the report, remarking, “As for these types of reports, we see them quite often.”²⁶ Yet a 10-second clip on the Chinese military affairs television station showed Colonel Du Wenlong explaining cybersecurity issues—and the video then showed a screen demonstrating a PLA-driven “distributed denial-of-service attack.” “However modest, ambiguous—and, from China’s perspective, defensive—this is possibly the first direct piece of visual evidence from an official Chinese government source to undermine Beijing’s official claims never to engage in overseas hacking of any kind for government purposes,” said Andrew Erickson and Gabe Collins of the China SignPost analytical service.²⁷

It turns out the attack was even more extensive than first believed. McAfee revealed in August 2011 that the cyber-espionage had hit seventy-two governments. Victims included the UN, Taiwan, the United States, the International Olympic Committee, Vietnam, and Canada. Six U.S. government agencies and thirteen defense contractors were hacked. In 2010, China also hacked Google.

Firmly implanting its head in the sand, the White House refused to say anything of substance. “Cyberthreats to information and communications infrastructure pose an economic and national security challenge for the United States and our partners, which is why the president has made cybersecurity one of his top priorities,” said White House Press Secretary Jay Carney, in typical bureaucratic doublespeak.²⁸

In February 2011, the NASDAQ announced it had found suspicious files on its computer servers. The National Security Agency was called to investigate. “By bringing in the NSA, that means they think they’re either dealing with a state-sponsored attack or it’s an extraordinarily capable criminal organization,” said Joel Brenner, former head of U.S. counterintelligence in the Bush and Obama administrations.²⁹ An FBI investigation into a simultaneous attack on the computer networks of the International Monetary Fund found that China was likely behind it.³⁰

Congressman Mike Rogers, chairman of the House Intelligence Committee, took the opportunity to lambaste the Chinese government. “Beijing is waging a massive trade war on us all, and we should band together to pressure them to stop,” he declared. “Combined, the United States and our allies in Europe and Asia have significant diplomatic and economic leverage over China, and we should use this to our advantage to put an end to this scourge.” Michael Hayden, former director of the CIA and NSA, said at the hearing, “I say that as a professional intelligence officer, I step back in awe at the breadth, depth, sophistication and persistence of the Chinese espionage effort against the United States of America.”³¹

As we’ve explained, America’s high volume trading system is a systemic vulnerability that could have catastrophic consequences. In April 2010, the European Union attempted to crack down on high frequency trading, believing it could be used to manipulate prices.³² They weren’t fast enough. Remember that in the flash crash of May 6, 2010, a trillion dollars in equity was lost in six minutes, triggered by algorithm activity. Who’s to say the codes weren’t stolen, hacked, or altered? MIT researchers have also pointed out that even without algorithms or trading codes, markets could still be manipulated based on high-frequency trading.³³

Beyond algorithms and trading codes, the SEC investigated whether so-called “quote stuffing” occurred during the flash crash—situations in which high frequency traders manipulate stock prices and attack other investors by making enormous numbers of trades and then quickly cancelling them. These situations, in fact, comprise the bulk of the market. On February 18, 2010, the NASDAQ traded 1.247 billion shares—but traders submitted offers to buy or sell stock for almost 90 billion shares.³⁴

Could the flash crash have been economic terrorism? As Leon Cooperman, chairman of Omega Advisors, said, “There is no economic reason for markets to go up 5% a day and down 5% a day. There are definitely things going on.” Are we vulnerable to another flash crash? You bet we are. “We will have another flash crash, yes without question,” warned James Angel, associate professor of finance at Georgetown University. “The combination of human nature, markets and technology means that at some point, something will misfire.”³⁵ Former SEC Chairman Harvey Pitt told Newsmax that the chances of another flash crash are “still high.... What troubles me is that if you read the May 6 Flash Crash report that the SEC and CFTC did, it doesn’t instill one with a great deal of confidence. What is absolutely critical is to have a trail of accountability or an audit trail.... What we want are markets that operate fairly and that aren’t subject to the kinds of wild gyrations that go unexplained for as long a period of time that happened after May 6.”³⁶ Added Senator Ted Kaufman, “Why would [people] not be concerned? We are playing with dynamite here.”³⁷

This wasn’t the only flash crash. August 2011 saw a flash crash in slower motion when the stock market erased $2.2 trillion in value from August 1 to August 10. The volume of trading spiked sharply, again largely due to high frequency trading and leveraged ETF activity. “We’re seeing a tremendous amount of high-frequency trading,” explained Gary Wedbush, head of capital markets at Wedbush Securities, the largest broker supplying bids and offers on the NASDAQ and one of the two trading firms singled out in the “Red Flags” report. “Their business is a trading business, and volatility creates far more opportunities. Some of their algorithms and automated systems are trading two, three or five times as many shares as they would have in a more normalized volatility environment.”³⁸

And Barron’s reported the possibility of an even more dangerous crash occurring—a “splash crash” in which “a dislocation by high-speed trading computers . . . could simultaneously splash across many more asset classes and markets.”³⁹ Essentially, everything melts down all at once. While Barron’s dismissed the notion that foreigners caused the flash crash, it did report that “witnesses before an informal convocation of the House Committee on Homeland Security on July 20 [2010] were united in their conviction that the nation’s 10 or so stock exchanges and 50-plus related trading venues are absolutely vulnerable to attacks from traders overseas.”⁴⁰ In September 2011, CNBC commentator Jon Najarian reported that another flash crash was underway, with high-frequency trading driving market volatility through the roof.

None of this should come as a surprise. The Chinese laid out this methodology years ago in Unrestricted Warfare: “The Americans have not been able to get their act together in this area. This is because proposing a new concept of weapons does not rely on the springboard of new (military) technology, it just demands lucid and decisive thinking. However, this is not a strong point of the Americans who are slaves to technology in their thinking.... As we see it, a single man-made stock market crash, a single computer virus invasion, or a single rumor or scandal that results in a fluctuation in the enemy country’s exchange rates... can all be included in the ranks of new-concept weapons.”⁴¹

THE BEGINNING

If the Chinese were to undercut the dollar, they’d begin by encouraging investment in gold—and that’s precisely what they’re doing. In the first quarter of 2011, China became the world’s largest buyer of gold bars and coins. Between January and March, Chinese investors bought 93.5 tons of gold, a 55 percent jump from 2010. China now accounts for one quarter of all gold investment demand; India comes in second with 23 percent. Chinese citizens are running to gold to avoid domestic inflation, of course, but their government would not allow this unless it suited their purposes—in this case, by artificially inflating the price of gold against the dollar.⁴² “In March 2010, we predicted that gold demand in China would double by 2020; however, we believe that this doubling may in fact be achieved sooner,” the World Gold Council’s Managing Director for the Far East, Albert Cheng, stated.⁴³

During just the first two months of 2011, China imported 200 metric tons of gold. China trails far behind the United States in gold holdings—which were once used to bolster the dollar’s status as reserve currency—but if China keeps picking up gold at anywhere near that pace, within just four years it would overtake America’s holdings. Gold is the easiest currency in which to trade, since none of the other currencies are yet stable enough to become a reserve currency.⁴⁴ Nonetheless, China, Russia, Brazil, India, and the Mid-East oil powers have been moving into the euro, despite its structural weakness, rather than the dollar. China’s foreign exchange reserves grew by $200 billion from January to April of 2011, and most of that was invested in currencies other than the dollar. “It certainly appears that China’s finally following through on its policy to diversify its foreign reserve holdings away from the U.S. dollar,” said Stephen Green of the Standard Chartered Bank. It’s difficult to tell just how much China is doing that, since they disguise their trading via London and Hong Kong.⁴⁵

Secret Chinese gold buying has also been hidden behind sovereign wealth fund buying from 2004 to 2009 in a “clandestine operation,” according to Jim Rickards. He continues, “What other financial operations are being pursued in secret today? While the Chinese proceed on numerous fronts, the United States continues to take its dollar hegemony for granted. China’s posture toward the U.S. dollar is likely to become more aggressive as its reserve diversification becomes more advanced. China’s hard asset endgame is one more ticking time bomb for the dollar.”⁴⁶

By May 2011, Reuters was reporting that “Americans worried about a weaker dollar may want to get used to it.... If the yuan appreciates between an annual 5-7 percent against the dollar over the next five years, as some analysts and traders expect, then the dollar is likely to slide anywhere between 20 to 30 percent on trade weighted and other indexes based on baskets of currencies.” Investors were already predicting that a rise in the value of the yuan against the dollar would mean less lending to the United States by China, undercutting the spending ability of the country. If the value of the yuan jumped, so would the value of Latin American, Australian, Canadian, and New Zealand currencies.⁴⁷

That wasn’t idle speculation. In April 2011, the Treasury Department reported that China was dramatically reducing its holdings of U.S. debt. China’s ownership of U.S. treasuries hit its apex in October 2010 and then declined each month thereafter, from $1.1753 trillion in October to $1.1541 trillion by the end of February 2011. Just how vulnerable is the United States to such sell-offs? As of February 2011, the total U.S. debt amounted to $14.195 trillion; $9.566 of that was public treasuries. And 47 percent of that total was owned by foreign entities. Overall, China owned 12 percent of all publicly held U.S. debt.⁴⁸ By September, China was signaling it wanted to invest its foreign reserve holdings in companies and physical assets rather than treasuries. “Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,” said Li Daokui, a key rate-setter for China’s central bank.⁴⁹

In July, the Bank of China worried that the U.S. sovereign debt problem was far worse than the European debt crisis. It further indicated its belief that the risk would continue to rise—a great excuse for unloading it. The China Daily adhered to the same rationale: “The debt crisis in Europe and uncertainty in Japan could mean that there will be no strong alternatives to dollar assets, so it has a great chance that the US might walk away from its debts and, at the same time, borrow more money from other countries.”⁵⁰

Sadly, China isn’t wrong. As of July 2011, while Greece’s debt-to-GDP ratio was 143 percent, America’s was already 97 percent—and that doesn’t count the $5 trillion for which American taxpayers are obligated to Fannie and Freddie, or the $62 trillion in total liabilities and unfunded obligations for Social Security and Medicare, or the bailouts. “By some measures,” wrote Addison Wiggin of Forbes magazine, “the United States is even more deeply in hock than Greece.”⁵¹ Foreign countries continue to invest in gold at record rates. “It is very scary: the flight to gold is accelerating at a faster and faster speed,” lamented Peter Hambro, chairman of Britain’s biggest pure gold lister. “One of the big US banks texted me today to say that if [the next round of inflation] actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money.”⁵²

The timing here is fortuitous for a Chinese move. In a little-noticed development, Reuters reported in March 2011 that the Chinese national bank announced that due to overseas demand that the yuan be used as a reserve currency, it would pursue a policy of forcing all its exporters and importers to pay for cross-border trades in Chinese currency.⁵³ Meanwhile, as China was divesting itself of U.S. debt and buying up massive amounts of gold, it was discussing the possibility of a multicurrency reserve and trading system with the other BRICS nations. In April 2011, those countries held a conference in Southern China.⁵⁴ The BRICS announced they wanted to see a “broad-based international reserve currency system providing stability and certainty.” China’s President Hu Jintao led the way, proclaiming, “The world economy is undergoing profound and complex changes. The era demands that the BRICS countries strengthen dialogue and cooperation.” The BRICS also agreed to establish enormous credit lines in their local currencies for one another, rather than via the dollar.⁵⁵

China’s allies like Venezuela are more than eager to help sink the U.S. currency by investing elsewhere and using other forms of currency. As of August 2011, Venezuela announced its intention to transfer $6.3 billion in cash reserves to banks in BRIC members Russia, China, and Brazil, and in the process undercut the dollar. Venezuelan strongman Hugo Chavez will also shift 211 tons of physical gold back into Venezuela. Venezuelan Foreign Minister Nicolas Maduro announced the goal: the dollar, he said, “had entered into a crisis of uncertainty and we are planning to construct a new international monetary system, and especially in South America, protect ourselves from this situation.”⁵⁶

While baffled economists claimed the move doesn’t make any financial sense, it makes perfect sense from a geopolitical anti-American perspective, which is Chavez’s driving motivation. It is no coincidence that China gave Venezuela a $20 billion credit line in 2010 (Venezuela has also received additional credit lines of $4 billion each from China, Russia, and Brazil), or that Russia has supplied incredible amounts of arms to Chavez.⁵⁷ Speaking of Russia, Vladimir Putin agrees with the Venezuelan geopolitical outlook: “They [Americans] are living like parasites off the global economy and their monopoly of the dollar. Countries like Russia and China hold a significant part of their reserves in American securities.... There should be other reserve currencies.”⁵⁸ He says that U.S. monetary policy is “hooliganism . . . . Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone—in other words, the whole world—with government bonds. There is no way we will act this way anytime soon.”⁵⁹ Both the UN and the IMF have also endorsed a non-dollar reserve currency.

The U.S. has been caught totally unprepared for the mini-run on the dollar currently underway. In April 2011, Treasury Secretary Tim Geithner told the press there was “no risk” the United States would lose its AAA credit rating. “Washington is a hard place to read. And it’s hard for people to look past the political rhetoric and try to understand whether the leadership of Washington is going to take the tough steps necessary to get ahead of this problem,” Geithner said. “I think the prospects for a bipartisan agreement are better than they’ve been in a long period of time. Of course, we have to turn that into action.”⁶⁰

Naturally, that didn’t happen—the Obama administration has shown no intention of shoring up the dollar by cutting spending and curbing inflation. In June 2011, a Chinese ratings house announced the U.S. was already in default.⁶¹ By August 2011, China’s rating agency, Dagong Global, cut the credit rating on U.S. debt to A from A+, putting us in the same boat as Russia. Dagong maintained that the U.S. needed to cut its deficit by $4 trillion within five years to maintain its debt load. China also hinted that the Treasury market was not going to be a steady ride.⁶² China’s official Xinhua news outlet warned that there should be “international supervision over the issue of U.S. dollars” and—surprise, surprise!—the creation of “a new, stable and secured global reserve currency.”⁶³ The newspaper proclaimed, “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.... [The United States] should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.”⁶⁴

Meanwhile, the committee of bond dealers and investors that advises the U.S. Treasury warned that the dollar could lose its world reserve status. “The idea of a reserve is that it is built on strength, not typically that it is ‘best among poor choices,’” the committee reported. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”⁶⁵

And we cannot forget the piggybacking short sellers—at the end of July, somebody made a $1 billion trade betting that the U.S. government would lose its AAA status. As Jack Barnes of Money Morning wrote, “You only do this if you see an edge. This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.”⁶⁶ Sure enough, at the beginning of August, right around the time that China was cutting the U.S.’s credit rating, Standard & Poor’s downgraded the U.S. government’s credit rating from AAA to AA+.⁶⁷ Some believe that the bettor was none other than George Soros.⁶⁸

Beijing isn’t prepared for the big showdown just yet—it still fears what would happen if its currency appreciated too quickly. But make no mistake about it—China is testing the waters.

THE EUROPEAN DOMINO THEORY

The weakness of the dollar, and not coincidentally, of the euro, means that we’re seeing renewed interest in credit default swaps. With people worried about the risk of default, they’re buying insurance against it. “The U.S. CDS market is much less liquid than other sovereign markets as up until recently no one thought the chance of a U.S. credit event was very high,” explained Ira Jersey of Credit Suisse. “The market is getting nervous over the risk of a default.”⁶⁹ And just as before, heavy investment in CDSs precipitates bear raids.

In February 2010, several major hedge funds made enormous bets against the euro, shorting it in incredible amounts. The Wall Street Journal said that CDSs were pushing down the market.⁷⁰ Said George Soros, “This crisis is still the continuation of the same crisis. In 2008, the financial system collapsed and it had to be put on artificial life support. The authorities managed to save the system. But the imbalances that caused the crisis have not been removed.... Of course, speculation will always make a crisis worse. If there is a weak point, it will expose it. And you are right, the CDS market is a very dangerous instrument and I think it should not be allowed. I am one of the very few people who argue that the CDS is a dangerous instrument because it is so lop-sided in favor of a negative outcome.”

That didn’t stop Soros from using it, though—in fact, it was Soros who sparked the February 2010 short selling spree targeting Greece.⁷¹ So we should respond with skepticism when Soros proclaims, “There is only one choice.... You have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word: ‘euro bonds.’”⁷² No wonder John Taylor, chairman and CEO of hedge fund FX Concepts, which specializes in currency speculation, says that Soros is plotting against the euro. Soros himself stated, “Financial markets have a very safe way of predicting the future. They cause it.”⁷³

In early August 2011, the Dow underwent a mini-crash of more than 500 points precipitated by direct assaults on the Italian, Spanish, French, and Belgian economies by market participants. Weaker players were targeted in much the same way Lehman Brothers was in 2008. Wall Street hedge funds took the blame, but as in 2008, we believe that whoever is moving the markets may have more than profits in mind. Without transparency, there is the overwhelming risk of financial terrorism or economic warfare with the intention of destroying the euro and even the European Union. The collapse of a major European economy will set us up as a future target. Dominoes can and do fall. Once the United States’ reserve currency status is destroyed, our dollar will be just as vulnerable as these other assets—perhaps far more so.

Meanwhile, the nature of Europe will change. The New York Times reported in September 2011 that European leaders are now discussing the rise of “something resembling a United States of Europe.” The head of the IMF’s European unit recently stated, “If today’s policy makers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration. To put the crisis behind us, we need more Europe, not less. And we need it now.”⁷⁴

How does all of this help China? Chinese premiere Wen Jiabao said that China would help Europe—but only if Europe recognized China as a “full market economy.” That, he said, was “a way a friend recognizes a friend.”⁷⁵ That would only help China’s mission of divesting itself of so much foreign currency. Beijing is already looking toward full convertibility. Senior advisor to the People’s Bank of China Li Daokui said, “With a fully convertible currency there will be both inflows and outflows of currency. So currently there is a great, great potential for our households and enterprises to get our foreign currency reserves and go out and invest abroad.”⁷⁶

Despite China’s phenomenal economic growth of recent decades, some analysts believe its economy is heading for disaster. Although this is a minority view, there is some evidence supporting it; Beijing artificially inflated its real estate market domestically in much the same way that the United States did over the last decade—it funneled enormous resources into building new infrastructure and new housing, only to see demand level off, a trend that can cause severe economic dislocations. These observers will often dismiss our warnings about Beijing’s economic warfare capabilities, arguing that China is essentially doomed.

The problem is, economic catastrophe could make Beijing just as aggressive as economic strength does. In 2005, Defense Minister Chi Haotian said that he feared that if the Chinese economy began to sink, the Communist Party would collapse. The government would not allow that to happen. “If we do not have good ideas,” he said, “China will inevitably change . . . and we will all become criminals in history. After some deep pondering, we finally came to this conclusion: only by turning our developed national strength into the force of a fist striking outward—only by leading the people to go out—can we win forever the Chinese people’s support and love for the Communist Party.”

Overall, according to columnist J. R. Nyquist, “The rationale behind Chinese capitalism is not to eliminate Communism. The rationale is to fight fire with fire—to defeat capitalism by capitalist means.”⁷⁷ When that fails, war becomes inevitable. The Chinese have even suggested biological warfare. “It is indeed brutal to kill one or two hundred million Americans,” General Chi said in 2005. “But that is the only path that will secure a Chinese century.” Chi even took a poll to determine whether the “people [of China] would rise up against us if one day we secretly adopted resolute means to ‘clean up’ America.” Eighty percent of those polled approved the secret methods.⁷⁸ Why then would they shy away from economic warfare?

In addition to China and other foreign threats, the United States faces a significant challenge from U.S.-based anti-capitalist leftists. We’ve already discussed the plan of the SEIU’s Stephen Lerner to crash the stock market by destabilizing the banks.⁷⁹ There are many similar actors in America with similar goals. One of them is the computer hacking group known as “Anonymous,” which is backing the Occupy Wall Street protesters and is threatening to “erase the New York Stock Exchange from the Internet.”⁸⁰

None of this is coincidence. It even appears loosely coordinated. According to the Huffington Post, “Lerner currently directs SEIU’s banking and finance campaign, mobilizing SEIU members and other community groups across the country into action to break the decades-long stranglehold Wall Street and big banks have had on our economy and democracy. Through this campaign SEIU is also partnering with unions and groups in Europe, South America, and elsewhere to build a campaign to hold financial institutions accountable in a global economy.”⁸¹ Some have questioned if George Soros was funding the protests.⁸²

The other financial terror suspects also have connections to the Occupy Wall Street protests and their spinoffs around the country, including radical Islamic elements.⁸³ Arab newspapers report almost gleefully that these protests are the American version of the Arab Spring.⁸⁴ Connections have also been cited between the SEIU and Hamas.⁸⁵ This is in line with Osama bin Laden’s long-term plans to join Marxism and Islam in bringing down America.⁸⁶ If the goal is to crash the stock market as the Lerner tape indicates, and the players clearly include radical Islamic elements working with the domestic hard Left, there should be no doubt that this is financial terrorism. Add to this efforts in the Middle East to displace the dollar, and the risks increase exponentially.⁸⁷ In combination with the Phase Three plans of the Chinese, the outcome will be devastating.

Rather than directly confronting our military might, some of America’s enemies have chosen to use secret weapons to attack us. They have done it before, and they will do it again. Yet our government is unwilling to imagine the possibility of a catastrophic economic attack. When Phase Three fully arrives, it will make Phase Two look like a picnic.

So what can you do to protect yourself? Keep reading.