The Looming Debt and Pension Crisis: An Introduction
by KEVIN D. FREEMAN on MARCH 8, 2018
As I write this, I’m tempted to do a “Winds of War (Part Five)” blog in continuation of the series begun ia little over a month ago (Part Four of Winds of War available HERE). The reason is that in the past week, there have been so many data points affirming everything we have been saying. To make things efficient, I’m just going to provide a brief recap by providing the headline and a link to the article followed by one of the links to when we initially shared the information with you. After that recap, I’ll start a new but related topic of extreme importance. The recap will share what our adversaries and enemies are doing while the new topic will highlight what may be our greatest vulnerability and what we can and should do about it.
WINDS of WAR RECAP (from just the past week)Regarding the Winds of War, here are just a few of the most significant headlines (with links to articles) from the past week that validate our concerns:
Freeman Gaffney March 5, 2018 Podcast: Play in new window Freeman Gaffney Podcast (part 2): Play in new window
We could go on but I think you get the point. We are seeing rapid-fire reporting of things we have told you about for years. And that is just reports from the last week. Of course, they come out in puzzle pieces while we endeavor to put the pieces together and show you the whole picture. The bottom line of all of this is that the Winds of War ARE Blowing Hard.
Facing The Big Vulnerability That No One Wants to DiscussBefore we delve deeply into a truly dire threat, let’s make it clear that there are solutions IF we are willing to face the problem. It is NOT too late if we take courage. But we cannot continue to ignore our vulnerability hoping it will go away. If you want some hope, make certain you see Darkest Hour and the performance of Academy Award winning Best Actor Gary Oldman as Winston Churchill. This will remind you that there is always hope IF we have the courage to do the hard things.
Of course, there are many who want to appease away the threat, hoping that if we allow the Chinese to continue to steal us blind via intellectual property theft on the hope that they might be benevolent enough to continue buying our debt allowing us to avoid the hard issue of addressing it. For those, I recommend a viewing of Oldman’s Oscar-winning effort in this clip.
So, do not despair. Just realize the importance of facing the brutal truth in ultimately solving the problem.
Here’s the deal. We owe more money than any nation in history ever has. We are on an unsustainable fiscal path. Rising interest rates threaten to swamp our revenue potential. Our politicians have been unwilling to address the problem. The Federal government is joined by state and local governments in being overwhelmed by a debt bomb. Our adversaries and enemies have been looking for ways to exploit this debt to our demise. The pensions and savings we think we have are at risk. Corporate and personal debt are also at unsustainable levels. Student debt is at all-time records. And all of this has happened with a decent economy. Just imagine what happens in the next recession. The derivatives we have allowed the financial system to create are a force-multiplying monster that can swallow whole our entire economy if things go really bad. The dollar will be attacked with the intention of making it as worthless as the Venezuelan Bolivar.
That’s probably a good enough start with all the depressing reality. In coming blogs we will take more bite-sized chunks of understanding. But do not fear. There is genuine hope if we take steps now. We just can’t continue to ignore the threat.
So, just to get the discussion started, let’s begin with the non-partisan Congressional Budget Office (CBO) long-term outlook on government spending and revenues. This doesn’t take into account corporate or personal debt. It also ignore municipalities and state governments. And, it doesn’t account for unfunded Federal promises. But it is a starting point that is really not debatable.
Here are some excerpts from a report that came out last year about this time:
At 77 percent of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II. If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would reach 150 percent of GDP in 2047. The prospect of such large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges.
Seeing this is akin to watching a counter slowly click down while attached to a nuclear bomb. Many people might see a digital clock hooked up to a nice briefcase. But for those in the know, it is a very frightening sight. Without a serious change in course, our nation will exceed the amount of debt we had at the peak of the Second World War despite the assumption of continuing economic growth and global peace. In other words, even if you are very sanguine in your outlook regarding peace and growth, there is plenty of reason to worry. Major economies have collapsed and nations ended with a smaller debt burden (relative to their economy) than the CBO projects for us over the next 20 years.
When you combine this sad reality with the fact that our adversaries are preparing for a financial war against us, you can see why we are concerned. The Russians, for example, believe that our debt could end America as we know it.
Rather than go any further, I think we should let this reality set in first. So take some time to read the 2017 CBO report and realize that it was BEFORE the recent tax cuts. There will be a new report soon and we will have comments on it. But for now just realize the main point. The path is unsustainable.
The Winds of War (Part Two)
by KEVIN D. FREEMAN
on FEBRUARY 5, 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 warned for nearly a decade that perhaps the war started in 2008, but we have simply failed to recognize it. From this perspective, and as written in Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and Why It Could Happen Again, we were expecting a “Phase Three.” This new phase would represent a simultaneous attack on the dollar, the integrity of the U.S. Treasury, a shock in interest rates, a collapse in bonds, and another possible market crash. Basically. everything we’ve witnessed in the past week. The Dow fell over 2,000 points on the Dow Jones Industrial Average in the first three trading days of February, more than half of that today, before a late afternoon rebound.
From another perspective, WAR was declared (albeit silently) in the 1990s as Chinese policy toward the U.S. shifted dramatically. In 1999, the Chinese book Unrestricted Warfare was published and explained exactly what was happening although it was (and remains) largely ignored by the West. This view would hold that the 9/11/01 attack was a part of an initial attack on the West. And, we believe that the financial heart attack that began on 9/11/08 began the next phase. The End Game is designed to permanently take down American leadership, collapse the dollar and removing its reserve currency status. This would effectively bankrupt the Treasury and de-fund our military. We have a tremendous amount of intelligence that demonstrates that this plan has been around for decades.
So, has Phase Three finally arrived? While we cannot rule out the possibility that the Chinese/Russian coalition is making its move now, it is too early to tell. This may be another weapons test, probing to see how we respond. There are a number of critical timing factors at work. First, today was the first day for the new Federal reserve leadership. Markets may be testing Chairman Powell’s approach. It is also on the heels of the President’s first State of the Union speech. It is also just after the meeting of globalists in Davos, Switzerland. Or, today’s drop could simply be a very normal correction after huge market gains. Until we learn otherwise, Occam’s Razor would suggest we stick with that.
It is important to understand that IF the Chinese or others had unleashed an economic weapon to wipe out our stock market, most people wouldn’t believe it. But such a weapon is certainly feasible and could prove far more devastating than an attack on a major city. And the attack would be difficult to attribute, meaning the potential for a first strike without retribution.
The point is this. Wall Street is inwardly focused, searching desperately for an explanation because the market had been so strong and calm for so long. This is a shock for certain. But we MUST NOT IGNORE the very real signals of looming war. This installment will cover some of the prepatory efforts that have been underway for years but now seem to be accelerating. While they are not a “smoking gun” by any means, they certainly demonstrate a pattern consistent with preparation for World War.
Let’s begin with the reality that our Western Financial System is vulnerable. Whether from an exogenous shock or a purposed attack, the absolutely existential nature of finance should be self evident. If the financial markets were gone, we would have no nation left. Simply look to the collapses of history and you will see that nations require a functioning financial system.
Global bigwigs met in Davos, Switzerland recently and produced an pre-meeting report from the World Economic Forum titled Global Risks Report 2018. Here is the relevant section from the actual report:
New technologies add a layer of economic vulnerability to geopolitical disruptions, with emerging risks of asymmetric economic warfare including potential cyberattacks designed to disrupt critical financial infrastructure.
It is striking how sanguine financial markets have remained while political and geopolitical risk has jumped in recent years. Given current market dynamics, it may not be rational for any single market participant to price in rising political and geopolitical tensions. The risk is that we will hit a tipping point at which point everyone prices in these tensions, with a rush to the exits that hits asset prices, strains the resilience of the global financial system and tests whether policymakers retain the firepower to prevent deep and long-lasting impacts on the real economy.
This report is barely a week old (based on extensive interviews and surveys with previous and expected Davos participants over the past several months) and yet we are watching it play out just as written. This could be asymmetric economic warfare using cyber and other means to undermine markets. The resulting panic could produce a tipping point.
This is not news to the Chinese. In fact, they have been preparing for it along with the support of Russia. It is not news to readers of the Blog or our books. We have been at the forefront of warnings for the past decade. But it is news to most Americans and other Western investors, the very ones who will react in panic and also could be hurt the worst.
So what has China been doing? They have been lining up allies. Some are bought off, some are influenced, and some bullied. But they have certainly been pulling together a formidable alliance in case of a financial confrontation with the United States. In addition, the Chinese have made a fervent and concerted effort to compromise political factions in our nation that would clearly divide any attempted response we might prepare. The learned the lesson from our failure in Vietnam. Sometimes what happens on the battlefield matters less than how it is reported to the American people. As a result, a very powerful influence operation has been underway for years, softening our resolve and unity.
The influence operation started with the Clinton Presidency in the late 1990s. It is almost laughable that the media and Democrats today are desperately searching for any hint of Russian influence when they clearly overlooked what China was doing in the mid 1990s. Look it up. People went to jail because the DNC was flooded with serious money from illegal Chinese donations. What did they get in return? Missile technology, supercomputers, Most Favored Nation trade status, and a welcome into the World Trade Organization. It also opened the door for outright Intellectual Property theft:
According to a Wall Street Journal account from Clinton days, a bipartisan congressional inquiry “found Beijing has stolen U.S. design data for nearly all elements needed for a major nuclear attack on the U.S., such as advanced warheads, missiles, and guidance systems. Targets of the spying ranged from an Army anti-tank weapon to nearly all modern fighter jets. Most wasn’t done by professionals, but by visitors or front companies. Lax security by the Clinton Administration is blamed in part, and satellite makers Hughes and Loral are criticized.”
The IP theft has continued almost unabated. Only occasionally do we catch them in the act. But make no mistake, we have been stolen blind. The cost to Americans has been estimated at $5 trillion…per year!
The Chinese have used this newly appropriated technology to take over our industrial base. They have used it to win friends and influence nations. And they have used it to develop serious military capabilities, in some cases surpassing our own. In fact, one analyst has called China’s development of a powerful Rail Gun a “Sputnik moment,” reminding us of the day we realized that the USSR was winning the Space race.
China just now is calling America out for starting a new Cold War. The truth, however, is that President Trump is the first President since the fall of the Berlin Wall to understand we are already in a new Cold War and we have been losing. This news greeted CNBC readers over the weekend, before the market’s very rough ride today (excerpt below):
China accuses US of ‘Cold War mentality’ with new nuclear policy
“We hope that the United States will abandon its Cold War mentality, earnestly assume its special disarmament responsibilities, correctly understand China’s strategic intentions and objectively view China’s national defense and military build-up…,” the ministry said in the statement posted on its website.
In other words, “nevermind our military buildup…you be responsible and disarm!” We must not be fooled, however, as noted by the International Business Times recently:
China overtaking US as scientific superpower ‘will affect worldwide national security’
While this topic is not new for us, it is only recently that some serious people are beginning to recognize it. The latest example is noted economist Robert Samuelson.
So, China warns us not to build military capabilities just as they are doing that. Similarly, China warns us not to be protectionist just as they are that. They have been acting as if a trade war were underway while chiding us to be free and open. They have demanded that we back off from Taiwan while they appear to be preparing for an invasion as suggested by their military flight patterns as well as their building landing craft specifically designed for Taiwan.
Just imagine how this might work. What if we had a market meltdown just as there was a Washington debate over the debt ceiling and government shutdown. Then, as we are panicked over a collapsing economy, questioning if we can afford any military expenditure possibly accompanied by a power blackout from EMP, the Chinese invade Taiwan but also offer to fund our debt. Or, to simply promise to not dump their massive Treasury holdings. We know that these type of scenarios have been discussed at length in Beijing.
So how would they get away with any of this? They have conducted an extensive campaign based on Unrestricted Warfare. The strategy has also been labeled The Three Warfares:
China – … Rather than tanks, jets, or cruisers, China’s “Three Warfares” relies upon psychological, legal, and media warfare to try to outmaneuver potential adversaries. Unlike Russian or Iranian political warfare, China’s version depends heavily upon the existing rules-based liberal world order, as it seeks to bend international opinion and laws to achieve its own ends. This variation of political warfare indicates a clear Chinese desire to resort to military activities only when all other options have been expended.[xv] The Central Military Commission and Chinese Communist Party codified the “Three Warfares” in 2003, and many China experts have pointed to several subsequent disputes in which the Chinese have applied these approaches with varying degrees of success.[xvi] In most of these cases, the aggrieved countries have struggled mightily to decide how best to respond to China’s “Three Warfares” given the ambiguity this approach creates from an international perspective.
How have they accomplished this? By infiltrating American higher education. By compromising American business. By buying off some allies and bullying others. China has also developed institutions such as international courts that will be subservient to Chinese demands. And all of this is very strategic. A great example is China’s mystery purchase of JD Powers and Associates, the well-known ratings firm. They have also compromised our IT Supply Chain.
This is all very real and extremely well documented. But we have been conditioned to ignore it. The good news? The President’s National Security Strategy finally is demonstrating awareness and a plan to respond. No wonder the Chinese are starting to threaten us overtly (as noted in these headlines):
Trump alarms China with ‘Cold War’ rhetoric in State of Union addressChina and the US ‘are about to ride a bumpy journey,’ state news agency saysChina accuses US of ‘Cold War mentality’And, here is the proof that the Administration is recognizing all we have been saying:
Throwdown: Trump Challenges China’s ‘Economic Warfare’ in National Security StrategyKristina Wong Breitbart 16 Dec 2017
The Trump administration’s upcoming National Security Strategy — a document required by Congress — will be the first one to have a deep focus on economic competitiveness, particularly with China, according to a source familiar with it.
Towards that end, the NSS is expected to be actionable, in terms of recommending certain economic trade laws be reformed, the source told Breitbart News on Friday. The NSS is expected to be released on Monday.
In the Trump administration’s view, the United States’ greatest weapon is a strong and sustainable gross domestic product (GDP).
Along those lines, the NSS is expected to have a heavy focus on reciprocal and fair trade, economic strength, economic competitiveness, and economic warfare directed towards the U.S.
President Trump made American economic competitiveness with China a key campaign issue. The administration has made it a key focus, at the same time attempting to work with China to denuclearize North Korea.
National Security Adviser H.R. McMaster earlier this week at an event in Washington provided a preview of the NSS, outlining the four core pillars: Protecting the homeland, advancing U.S. prosperity, peace through strength, and advancing U.S. influence.
He also outlined the nation’s five major threats: revisionist powers like China and Russia, rogue states like Iran and North Korea, and transnational terrorist groups.
Bottom Line? We are feeling the Winds of War. In our next post we will delve into how far this might go. For now, we should start preparation.
The Winds of War (Part One)
by KEVIN D. FREEMAN on JANUARY 29, 2018
There is a lot of positive economic news. Economic growth has substantially strengthened in the wake of regulatory reform, corporate repatriation, and tax cuts. The stock market is at all-time highs. Interest rates are appearing to normalize, at least in small measure.
Despite this, according to this week’s BARRON’S, capital is fleeing the US (BARRON’S, January 29, 2018, “Talking Down the Dollar”):
That’s despite the U.S. having higher interest rates than most other economies and a stock market whose performance the president cites as a barometer of the success of his policies. In fact, capital is flowing away from the U.S. despite these positives, according to Northern Trust senior economist Ryan James Boyle.
Mutual fund flows were negative for U.S. equities in 2017 but positive for the rest of the world. “Essentially, the U.S. has gone from being the source of the best investment opportunities, to merely being one of many great destinations for capital. The dollar’s slide can be at least partially attributed to this change,” Boyle writes in a report.
This analysis would suggest that the United States has simply lost its advantage of growth to other parts of the world. Thus, other economies have supposedly increased in relative attractiveness even though we are doing quite well. But what if something more sinister is at work? What if we are witnessing without understanding the early phases of the next great war?
The first thing we must recognize is that the global financial system is already under severe stress. Some of this is natural. Some of it is induced. And, in our view the induction is purposed as an act of Unrestricted Warfare.
Readers of this blog already have a detailed understanding of the efforts underway to displace the dollar as the primary reserve currency of the world. Beyond that, there are massive dividing lines being formed regarding the global financial system. With the help of Russia, China has developed a complete alternative financial infrastructure. In addition, the Chinese have used their considerable influence to establish new trading alliances that purposely exclude the United States. They are also establishing a command and control structure over all companies doing business with China regardless of where they are domiciled. Finally, they have established technological leadership, in part based on brazen intellectual property appropriation over the past few decades.
China has been preparing for a war footing. There are multiple clues that when pieced together suggest that a combination attack plan using economic pressure, technology, and physical invasion to assert Chinese dominance in Asia and ultimately over the planet. It is no longer acceptable to naively overlook this reality.
The good news is that the Trump National Defense strategy is perhaps the first since President Reagan to properly acknowledge the threat and to begin the process of addressing it. The bad news is that we still have a great deal of work to undertake just to get on the same page.
Let’s begin with an acknowledgment of the financial stresses already in operation. Quoting Ambrose Evans-Pritchard from last week:
The world financial system is as dangerously stretched today as it was at the peak of the last bubble but this time the authorities are caught in a “policy trap” with few defences left, a veteran central banker has warned.
Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.”
All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.
Basically, the concern is that Western Central Banks flooded the system with easy money to offset the risks of the last financial collapse. Now, there is too much debt and misallocation of capital resulting in a policymaker’s dilemma. To stabilize, interest rates must normalize. However, rising rates could threaten to destroy a debt-laden house of cards. There is a push for inflation but a fear that it could get out of control. And, trying to tamp it down could set off another shock.
Of course, it is normal for economies to go through cycles. This one is different for two reasons. First, the response to the last crisis was extraordinary, a massive debt buildup of historic proportions. We warned about this in the report produced for the Department of Defense in 2009 (Economic Warfare Risks and Responses) and again in the 2012 book Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and Why It Could Happen Again. In the “what’s next section of the DoD report and Chapter Nine of the book, “The Next Attack,” we outlined what Phase 3 would look like. First, there would be a massive build-up of debt on Central Bank balance sheets as well as a massive increase in U.S. Federal Government debt. At some point this would trigger almost unstoppable inflation. It would seem unstoppable because the requisite increase in interest rates would collapse the debt pile. Then, China and others would move against the U.S. dollar, replacing it as primary global reserve currency and wresting control of the global financial system. When we wrote that years ago, many said it far-fetched (along with a few less-kind comments). Yet, we are seeing everything play out right on script today.
Of course, everything looks good on the surface. The global economy is performing about the best it has this decade, thanks in big part to the Trump tax cuts and regulatory reform. Even the head of the International Monetary Fund admits this to be true. And, we are more than pleased to see growth return. But it is more than obvious that there are signs of global financial stress. One of these is the rise of Bitcoin. Another is the still-remaining large amount of money loaned at negative interest rates (where the lender pays the borrower). Only now are European government rates almost set to turn positive. after years in negative territory
The point is that despite growth, the global financial structure is still vulnerable and in some ways increasingly so. It is in precisely this context that a move against the West might succeed. And, as we have been sharing, China and Russia have been planning just that.
Rather than go into all the details, just review the following headlines and articles that support this concern:
Russia and China Are Dead Serious About Ditching the Dollar(Russia Insider, January 24, 2018) The Russian government has recently announced it will issue nearly $1 billion equivalent in state bonds, but denominated not in US dollars as is mostly the case. Rather it will be the first sale of Russian bonds in China’s yuan. While $1 billion may not sound like much when compared with the Peoples’ Bank of China total holdings of US Government debt of more than $1 trillion or to the US Federal debt today of over $20 trillion, it’s significance lies beyond the nominal amount. It’s a test run by both governments of the potential for state financing of infrastructure and other projects independent of dollar risk from such events as US Treasury financial sanctions….
The steps to begin issuing Russian state debt in yuan are paralleled by another major development towards broader international yuan acceptance vis-a-vis the US dollar. On December 13, Chinese regulators completed final testing in preparation for launch of not a dollar-backed, but rather, a yuan-backed oil futures contract to be traded on the Shanghai Futures Exchange. The implications are potentially large. China is the world’s largest oil importing country. Control of financial oil futures markets until now has been the tightly guarded province of Wall Street banks and the New York, London and other futures exchanges they control. Emergence of Shanghai as a major yuan-based oil futures center could significantly weaken dollar domination of oil trade….
Command and control: China’s Communist Party extends reach into foreign companies(Washington Post, January 28, 2018) American and European companies involved in joint ventures with state-owned Chinese firms have been asked in recent months to give internal Communist Party cells an explicit role in decision-making, executives and business groups say.
It is, they say, a worrying demand that threatens to put politics before profits, and the interests of the party above all other considerations. It suggests that foreign companies are no longer exempt from President Xi Jinping’s overarching vision of complete control.
“The creeping intrusion by the party apparatus into the boardrooms of foreign-invested enterprises has not yet manifested itself on a large scale, but things are certainly going down that path,” said James Zimmerman, a managing partner of the law firm Sheppard, Mullin, Richter and Hampton and former chairman of the American Chamber of Commerce in China….
China just reminded the United States that Beijing is its banker(CNBC, January 11, 2018) Markets took a hit following a Bloomberg News report that cited unnamed sources as saying that officials in Beijing have recommended China, the largest holder of U.S. Treasurys, to slow or even halt its purchases of that debt…
China’s foreign exchange regulator publicly refuted the Bloomberg report on Thursday, saying it cited “false information.” But the jolt to markets may have been designed as a warning to Washington, which is clashing with China over trade and other issues.
China sidelining US in Asia with growing economic clout- Nikkei Asian Review(Nikkei.com, January 6, 2018) TOKYO — Asian economies that once relied on the U.S. are reaching a turning point as China comes to the fore, a trend that may weaken Washington’s ability to promote democracy and free markets.
The U.S., as the world’s largest consumer market, was the dominant export destination for Asian countries for decades after World War II. But this has changed in recent years. The Association of Southeast Asian Nations exported more to China than to America in the decade following the global financial crisis. The bloc’s China-bound shipments totaled $143 billion in 2016 — 9% more than its exports to the U.S.
Chinese economic influence is also growing in Japan, where exports to China for the 11 months through November totaled 13.38 trillion yen ($118 billion), topping the full-year record set in 2014.
Should this momentum continue, it could alter the balance of power between Washington and Beijing in the region.
Pakistan is ditching the dollar for trade with China(CNBC, January 3, 2018) A day after the U.S. leader slammed Islamabad for harboring terrorists in a New Year’s Day tweet, Pakistan’s central bank announced that it will be replacing the dollar with the yuan for bilateral trade and investment with Beijing.
The same day, Chinese Foreign Ministry spokesman Geng Shuang defended Islamabad’s counter-terrorism track record…
The Chinese Regime is Spreading a New World Order under its ‘China Model’(The Epoch Times, December 22, 2017) The Chinese regime has been promoting its “China model,” which opposes the ideas of human rights and democracy promoted by the United States. While the concept is making the rounds in the international community, many China watchers have warned that the system presents a new form of hegemony under a totalitarian system based on absolute control.
China expert Steven Mosher details this system in his new book, “Bully of Asia: Why China’s Dream is the New Threat to World Order,” and explains the nature of the system the Chinese Communist Party (CCP) is attempting to press onto the world. The China model is based on the concept of what the CCP refers to as “socialism with Chinese characteristics.” While many are familiar with the communist goals in socialism, the CCP’s definition of “Chinese characteristics” is often less understood. This system can be traced back to dictator Mao Zedong, who led the CCP after it seized control of China in 1949. As part of Mao’s strategy to apply the Leninist and Marxist models of communism to China, he studied classical Chinese texts and histories of Chinese emperors, creating his new Maoist system….
The CCP is spreading its system using a variety of tactics that are outside of conventional military force. This includes militarized use of businesses, education, law, media, and other institutions to spread its control without needing to engage in conventional warfare.
Mosher noted that former CCP leader Deng Xiaoping declared a war on the United States in 1991, “saying there was a new Cold War between the United States and China, and China will win. It was a war on all fronts.”
China is trying to influence other countries from the inside, and the West isn’t happy about it(CNBC, December 18, 2017) Officials in the U.S., Australia, New Zealand and Germany — major recipients of Chinese foreign direct investment — have been questioning the extent of Beijing’s interference on their home turfs amid recent developments that suggest rising Chinese clout….
Experts widely believe that Beijing is using education, spying, political donations and people-to-people diplomacy to gain a greater say in local decision-making in these countries. And at a time when Beijing is dominating the global trade conversation, the issue threatens to strain bilateral relations between China and Western economies….
Xi’s team also has spent billions “to shape norms and attitudes in other countries, relying on the cultivation of relationships with individuals, educational and cultural institutions, and centers of policy influence,” Shanthi Kalathil, director at the International Forum for Democratic Studies, the National Endowment for Democracy, said at the CECC hearing. This complex network of liaisons falls under the domain of the United Front Work Department, a Communist Party agency driving the nation’s push for global soft power.
Confucius Institutes, Beijing-sponsored educational organizations aimed at promoting Chinese language and culture on global university campuses are a major example of how Beijing is looking to alter global narratives.
China’s using cheap debt to ‘bend other countries to its will,’ academic says(CNBC, December 22, 2017)
China’s continents-spanning Belt and Road network threatens to “shackle” partner countries and deprive them of valuable natural assets, according to one critic. Beijing is financing and executing massive infrastructure projects across the 68 nations participating in the ambitious scheme, which snakes along Europe, the Middle East and Asia. These recipient countries, many of them emerging economies in dire need of investment, obtain funding in various forms such as sovereign loans from Chinese President Xi Jinping’s administration and credit from Chinese state-owned banks. But concerns of developing countries taking on unrealistic financial obligations have sparked allegations of what’s being called ‘dept-trap diplomacy.’ Earlier this year, Indian Prime Minister Narendra Modi’s administration released a statement warning of unsustainable debt burdens being created by Belt and Road….As a result, the world’s second-largest economy holds political leverage over governments and can “force borrowers to swap debt for equity, thereby expanding China’s global footprint by trapping a growing number of countries in debt servitude.”
Three critical points. First, this is now out in the open. We have been writing on this for a decade now but finally the truth is being recognized. Second, most of Wall Street is mostly unaware of what’s happening or the implications. Wall Street continues to view China more as opportunity than threat.
Third, these are the “winds of war.” Herman Wouk wrote a tremendous novel with that title published in 1971, that is considered by many to be a masterpiece of historical fiction. It documented with human drama the prelude to World War II. It was presented in a miniseries in 1983 starring Robert Mitchum.
What we are experiencing today is quite possibly the prelude to World War III. We should not ignore it. The good news is that for the first time in decades, the President’s National Security Strategy suggests a clear understanding of the challenge and outlines a plan to address it. We will review this strategy, and what we ought to be doing with it in the next installment.
The Looming Debt and Pension Crisis (part three: China’s Latest Threat)
by KEVIN D. FREEMAN
on MARCH 25, 2018
One simple truth of life is that if you spend more than you take in, you have to either cut your spending, increase your income, or borrow some money. That is true for individuals and it is also true for governments.
If you already owe a lot of money, your spending is further crimped by interest and debt payments, meaning you have to earn even more, cut other (non interest) spending even more, or borrow even more.
This is the unenviable position our nation faces. We now owe more than $21 trillion of Federal Debt. The Congress just passed a $1.3 trillion omnibus spending bill and that will last about six months. Clearly we have not cut spending. In addition, the Federal Reserve is intent on raising interest rates as they did at last week’s meeting. With a $21 trillion debt (up $1 trillion in six months), every 1% increase in rates equates to about $210 billion in extra interest expense annually.
In terms of increasing our income, it is true that faster economic growth will help. That was the purpose of the tax cuts, to get faster growth. While somewhat counter-intuitive, lower tax rates can and usually do produce higher tax revenues due to increased growth. And, we have seen a reduction in the regulatory burden, which should further assist growth. Higher interest rates may be somewhat of a drag on the economy but many believe that the impact will be negligible, at least in the early stages. In fact, some believe that normalizing interest rates will help restore confidence. Over the longer term, addressing our nation’s huge trade gap and the theft of intellectual property by China will be a positive for economic growth. In the short run, however, it might be negative, especially with fears of a global trade war. When you pull it all together, we may see stronger growth this year but there are multiple cross currents. The bottom line is that we can’t count on a sufficient short-term income boost to offset the higher spending, at least not yet.
So, if our Federal income is not rising as fast as our spending, we will have to borrow more. And this is where China is threatening. Last week when we warned the Chinese that we would no longer stand for being at a trade disadvantage and that the days of Intellectual Property theft were ending, they responded with a threat to stop buying our debt.
China Signals It Could Ease Treasury Purchases to Counter TrumpBloomberg March 23, 2018, 10:40 AM EDTChina’s ambassador to the U.S. wouldn’t rule out the possibility of the Asian nation scaling back purchases of Treasuries in response to tariffs imposed by President Donald Trump.
“We are looking at all options,” Ambassador Cui Tiankai told Bloomberg Television, when asked whether China would consider reduced purchases of U.S. Treasuries. “That’s why we believe any unilateral and protectionist move would hurt everybody, including the United States itself. It would certainly hurt the daily life of American middle-class people, and the American companies, and the financial markets.”
China is America’s biggest foreign creditor. It held $1.17 trillion in Treasuries as of January, or about 19 percent of all foreign holdings of U.S. government securities.
The U.S. can ill-afford to see weaker demand for its debt from its major buyers. With budget deficits rising in coming years and tax cuts approved in December expected to hurt revenue, the Treasury has to sell more securities to pay the government’s expenses. The Federal Reserve is already scaling back purchases of Treasuries as it gradually reduces its $4.4 trillion balance sheet…. [Read more at Bloomberg…]
This came as a shock to many but is fully in line with previous statements from senior Chinese officials. In fact, we’ve already seen the Chinese reduce their holdings of our debt over the past six months.
What makes this so significant is that there are only three categories buyers of our national debt: domestic investors, foreign investors, and our Federal Reserve. We already know that the Fed is on a course to reduce its share of our debt. If the Chinese and other foreign sources also stop buying, the burden would fall on domestic parties exclusively. This would likely slow the economy and produce higher interest rates, further exacerbating the economy. That’s why the Chinese threat seems so ominous.
Now, it is true that if China dumped our bonds, they would be hurt in the backlash. The value of their debt holdings would fall sharply and their economy would be hurt. But that does not mean they are completely unwilling to take such a risk. In fact, they have been planning for it. Their long-term goal is to supplant our dollar with their yuan. And, they have been collecting allies around the world, most notably Russia.
If the yuan displaced the dollar, our huge debt would prove to be a noose around our economic neck. Unless the rest of the world sees value in our currency, we would be left only with our own buying and the money printing of our government and central bank (aka the Fed). This is essentially the dire situation that Venezuela is facing. Foreigners no longer value the Bolivar and this has created a huge crisis. From The Washington Post:
Venezuela hopes to tackle the world’s worst inflation by deleting zeros from its currencyMarch 23, 2018, CARACAS, Venezuela — Economic pledges may be par for the course in election campaigns, but in hyperinflationary Venezuela, the candidates’ dueling promises are going further, with the incumbent vowing to lop a few zeros off the currency, while his main challenger calls for the adoption of the U.S. dollar.
President Nicolás Maduro late Thursday briefly outlined his monetary rescue plan. In a country where a dozen eggs can cost 250,000 bolivars ($5) amid worsening inflation, he would chop three zeros off the currency — arguably bringing the price for those eggs down to 250…. [Read more at The Washington Post…]
At present, we are a long way from Venezuela’s collapse. But that fact does not change China’s threat or determination to supplant the dollar and place us in a serious position of weakness. Can they do it? That’s a fair question but there should be zero doubt about two things. One, we are more vulnerable than we care to admit. Two, the Chinese are planning for that day. This is not the first time we have shared this warning. In fact, we were part of a book a couple of years ago that described in detail the key issues.
One very current signal of Chinese intent is the fact that this coming week, China will offer 24-hour trading of oil contracts in yuan. From the current issue of BARRON’S:
China Seeks Greater Role in Global Oil TradeMyra P. Saefong March 24, 2018 BARRON’S
…The crude-oil futures will begin changing hands on March 26 on China’s Shanghai International Energy Exchange. They will be traded in the Chinese currency, in a market that’s ruled by the greenback-denominated West Texas Intermediate, the U.S. benchmark (ticker: CLK8), and Brent crude(LCOK8.UK), its global equivalent. “China is the largest net buyer of oil and [other petroleum] products,” says Seymour, and is intent on securing enough energy for its needs.
In 2017, China imported 8.4 million barrels of oil a day, versus 7.9 million for the U.S., according to the Energy Information Administration. China wants its importance as the top importer “reflected in its stature in the world,” says Matt Badiali, senior analyst at Banyan Hill. “What better way to do that than to supplant the U.S. dollar with the yuan?” He believes that oil futures traded in China will “become a global benchmark, based on the crude basket that will be offered, and the power of China’s economy.” They will “directly challenge WTI and Brent.” [Read more at BARRON’S…]
If this were the only indication that China wants to dethrone the dollar it would be less significant. But we have so many indications over the past few years that we can no longer afford to keep our head in the sand.
Here are three action steps we should take:
Michael Pillsbury: Trump Seeks to Thwart China’s Hundred-Year Plan for Economic and Military Dominanceby John Hayward 23 March 2018
China expert Michael Pillsbury of the Hudson Institute, author of The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower, joined Sirius XM host Rebecca Mansour on Thursday’s Breitbart News Tonight to defend President Donald Trump’s trade battle with China.… Pillsbury cautioned that many Americans retain an “out of date” image of China as poor, technologically backwards, and reluctant to provoke economic warfare with wealthier nations while so many of its people struggle with poverty.
“I wrote my book against that idea,” he said. “One of President Trump’s key advisers, who was obviously present today at the meeting with the president and has gone on television since, is a gentleman – a professor, actually, University of California Irvine in the past – named Peter Navarro. Very courageous fellow, he wrote three books blowing the whistle on Chinese unfair trade practices.”
“One of his books is called Crouching Tiger: What China’s Militarism Means for the World. What this caused is the opening of a debate among China experts in America: are the Chinese really as friendly and poor? Often people say they will collapse soon. They sort of present a picture of China as about to collapse. While all this debate has been going on, the Chinese have doubled their economy again. They’re quite close to passing us. This is really a shock to most people. How can a poor, backward country surpass the size of the American economy? It’s just astonishing,” he said…
“I happen to think they need us more than we need them,” he said. “I don’t measure just trade. I measure all the things we’ve essentially — I hate to use this phrase — given away to China over the last 30 or more years. They still need our investment, our technology, our goodwill, our buying their products, the scientific programs we share with them – there’s an extremely long list of the benefits China gets from the United States, counting everything.”…
Pillsbury lamented that many people don’t appreciate the severity of the challenge to American interests posed by China….
“They want to continue what I described in Hundred-Year Marathon as a kind of stealthy acquisition of the role of the Number One economy in the world. They will blow all that if they follow the kind of rhetoric that the Chinese ambassador in Washington used. He actually did this on Fox News! Fox News called him up, apparently, and he made this comment,” he marveled….
“We need to harden our own economy against Chinese theft, Chinese investment,” Pillsbury recommended. “Sometimes it can come in a small company. They will buy a technology in a joint venture or through a small company, let’s say in Silicon Valley, that no one’s ever heard of. Back in the days when robotics and artificial intelligence wasn’t a household word, they were acquiring these high technology companies, sometimes very small.”
“Frankly that scared friends of mine in the Pentagon, that American military superiority in the world depends largely on technology. Sure, we like to say that we have smarter troops, but technology is a big part of making weapons succeed. If we lose our technological edge, my Pentagon friends told me, we can’t get it back,” he noted.
“So China will be not only the dominant economy in the world, which they’re well on their way to doing, but they’ll be the dominant military power in the world. Now, this isn’t in the next few months or the next few years, but this is the trend. What President Trump is doing is trying to halt that too with these restrictions on Chinese investment in our high-tech sectors,” said Pillsbury. [These are just excerpts. To read and listen to the full interview, go to Breitbart.]
The Bottom Line is this: Our ever-increasing national debt makes us vulnerable, not only economically but also as a matter of national security. The massive omnibus spending bill only exacerbated the problem. It is time to WAKE UP and start applying basic wisdom. Our future as a nation depends on it.
The Winds of War (Part Three)
by KEVIN D. FREEMAN on FEBRUARY 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) – Global Economic Warfare/
Jan 29, 2018 – That’s despite the U.S. having higher interest rates than most other economies and a stock market whose performance the president cites as a barometer of the success of his policies. In fact, capital is flowing away from the U.S. despite these positives, according to Northern Trust senior economist Ryan …
The Winds of War (Part Two) – Global Economic Warfare
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 cybereconomic in nature, at least in the early stages. We have […]
There are three recent revelations that directly tie to what we have been saying.
Revelation One: Russian Efforts to Undermine AmericaToday, the Justice Department announced that 13 Russian nationals were indicted for interfering in the 2016 election in acts of “information warfare.” There are some really serious implications here and no doubt partisans will be attempting to spin this as either pro- or anti-Trump for political reasons. The indictment makes clear, however, that the effort did not change the outcome of the election. Further, it is clear that activity was both pro-Trump and anti-Trump, suggesting the goal was discord rather than a specific outcome. In fact, the activity began prior to Donald Trump entering the race. Finally, there is nothing in the indictment that suggests any willful collusion by any American. In fact, the indictment makes clear that the Russian instigators went to great lengths to hide the fact that they were Russian. They attempted to portray themselves as American activists under the banner of the Internet Research Agency.
Why is this so significant? This finding continues to demonstrate what we have shared over the past decade, mainly that Russia has been engaged in a type of warfare against the United States. That is fact. This effort is based on destabilizing our economy and unity following the playbook of Unrestricted Warfare.
Here are examples from just two of the many articles we have written on the topic:Putin Prepares for a Currency War that He Thinks (Hopes?) Will … (Read More...)
Feb 11, 2013 – MOSCOW — For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument — that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. — very seriously. Now he’s found an …
This first example shows a long-term Russian effort to undermine American solidarity. When you read the post, you will note that Putin dreams of a divided United States and has undertaken an economic war to achieve it.
The second example clearly shows that Russia sent spies to the United States in an effort to learn how to undermine our market using Exchange Traded Products (ETFs and ETNs).1,000 Flash Crashes at Once; What Role Did ETFs Play in Today’s (Read More...)
Aug 24, 2015 – And, don’t forget that a Russian spy was caught trying to learn how to “destabilize ” American stock markets using ETFs. Here is an excerpt from Justice Department charges regarding the case against three Russian spies: part_2. The Russians were seeking ways to destabilize stock markets with ETFs?
This post is very significant in light of the recent market turmoil and another revelation of the past week we will discuss. The bottom line here is that Russian subversion efforts are much wider than simply attempting to influence the electorate. In fact, the clear proof of Russian efforts to fund both sides of protests and rallies validates our concerns in many respects.
Revelation Two: The Entire U.S. Intelligence Community Now Confirms Our Decade-Long Warnings On February 13th, the U.S. Senate Intelligence Committee held important hearings featuring the top intelligence officers in our government. The hearings are worth watching. Here is a link to see them.
Perhaps the most dramatic testimony came from DNI Dan Coats. This is a refreshing contrast to the often political and certainly weak testimony of his predecessor. This DNI, however, not only knows the true threat but also is willing to admit it. You can read his report produced in conjunction with the Senate hearings here: 2018 DNI Worldwide Threat Assessment. Here are some of the important findings that were shared (as reported by Austin Bay in TownHall):On February 13, U.S. Director of National Intelligence Dan Coats appeared before the Senate Intelligence Committee and discussed his just-released “Worldwide Threat Assessment of the U.S. Intelligence Community” report.
That document synthesizes what U.S. military and civilian intelligence analysts, cyber warriors and counter-intelligence experts regard as the “sobering” (a word Coats used) threats to the American people and their interests.
During his testimony, DNI Coats was flanked by the directors of the FBI, CIA, the Defense Intelligence Agency, NSA and the National Geospatial-Intelligence Agency (NGA). Their agencies contributed to the assessment.
Coats’ initial threat statement is sharp, clear and dire, so I’ll quote it at length.
“…We face a complex, volatile and challenging threat environment,” he began. “The risk of interstate conflict is higher than any time since the end of the Cold War, all the more alarming because of the growing development in use of weapons of mass destruction by state and non-state actors.’
Sobering? Yes. Interstate wars can escalate into regional wars. When belligerents possess WMD, escalation can have global consequences.
However, on the cusp of the 21st century’s third decade, other wicked variables complicate diplomacy, spying, commerce, warfare and minute-to-minute human survival.
“Our adversaries as well as the other malign actors,” Coats continued, “are using cyber and other instruments of power to shape societies and markets, international rules and institutions, and international hotspots to their advantage.”
That summarizes many wicked activities. Examples include cyber disruption of communications, cyber crime, propaganda and false flag operations, economic warfare, political and economic penetration of international institutions and support for proxy warfighters in crises in order to destabilize a region.
But the DNI’s introduction was far from over. “We have entered a period,” Coats said, “that can best be described as a race for technological superiority against our adversaries who seek to sow division in the U.S. and weaken U.S. leadership.” Moreover, non-state actors “to include terrorists and criminal groups are exploiting “weak state” capacity in Africa the Middle East Asia and Latin America, causing instability and violence both within states and among states.”
Coats identified five “functional” types of threats to the U.S.: Cyber spying, propaganda and attacks directed by nation states, non-state actors and criminal groups; WMD and WMD delivery systems; Terrorism; Technological threats from space and in space; Transnational crime.
The cyber war has begun. “Frankly the U.S. is under attack,” Coats said, by “entities” using cyber pathways to penetrate security and economic activities. Russia, China, Iran, North Korea and crime organizations conduct disruptive cyber operations against the US. China is particularly adept at using cyber weapons.
All of this confirms both what we have shared with you over the past decade as well as the original research we conducted for the Pentagon and then relayed to multiple federal agencies starting in 2008. We are already in a global cyber-economic war. Our adversaries are the same ones we have described to you (including radical Islam). the weapons are as we have explained, cyber, market manipulations, economic warfare, propaganda, Intellectual Property theft, and so forth. Beyond that, we have explained in detail how China, coordinating with and perhaps led by Russia, has purposely sought to displace U.S. hegemony in the dollar and global financial system. Some see this as normal economic development. The reality, however, is far more sinister.
FBI Director Chris Wray was very direct during his testimony. If you’ve been reading this blog, it will seem quite familiar (quoting from Michal Kranz in Business Insider):
FBI director Christopher Wray reiterated a commonly held view on Tuesday that China is seeking to become a global superpower through unconventional means — but framed the threat China poses to the US as not just a governmental one, but as a societal one, too.
Speaking before the Senate Intelligence Committee alongside the heads of other US intelligence agencies, Wray told Senators that China is using a host of methods to undermine American military, economic, cultural, and informational power across the globe that rely on more than just China’s state institutions.
“One of the things we’re trying to do is view the China threat as not just a whole of government threat, but a whole of society threat on their end,” Wray said, “and I think it’s going to take a whole-of-society response by us.” …
Wray pointed to China’s use of unconventional intelligence sources at US universities as a salient example of China’s reach.
In intelligence jargon, “collectors” are individuals who collect intelligence on behalf of agencies or governments. And he said they’ve infiltrated American universities.
“I think in this setting, I would just say that the use of non-traditional collectors — especially in the academic setting, whether it’s professors, scientists, students — we see in almost every field office that the FBI has around the country,” Wray said.
“They’re exploiting the very open research and development environment that we have which we all revere, but they’re taking advantage of it,” Wray added, noting that there is a “naiveté” amid academics about the risks posed by foreign nationals at universities. …
While there is no evidence that a majority of Chinese students or academics pose any threat to US interests, there are a number of education efforts that the Chinese government uses as vehicles for soft power.
The first of these are the Confucius Institutes, which Rubio alluded to during his questioning of Wray and Coats at the Senate hearing.
These institutes mirror many other foreign-language education entities that countries fund around the world, but with a couple caveats. Rather than existing as stand-alone bodies, they are inserted into US universities, and in addition to teaching Mandarin Chinese, they also reportedly engage in disseminating Chinese propaganda and restricting what professors and students should say.
The bottom line is that there is a war underway and it is growing, not receding. Nothing demonstrates this more than the fact that our systems are probed daily and nothing is left off the table according to the DNI:
“Frankly, the United States is under attack by entities that are using cyber to penetrate virtually every major action that takes place.”
Even Defense Contractor Raytheon now demonstrates the understanding of just how big a problem this has become. Beyond cyber, there is the massive infiltration at all levels, including our own CIA. The Chinese have even made serious efforts to turn our own companies against our interests.
Read the DNI report. Watch the testimony. Now imagine my personal frustration based on the fact that I warned about all of this to major intelligence agencies for years only to have my work ridiculed, suppressed, and threatened. Now, finally we are seeing some reasonable recognition of the threat we face. In fact, we saw a piece of good news this week. The SEC rejected a Chinese attempt to buy the Chicago Stock Exchange (as noted by Reuters):
U.S. regulators on Thursday killed the politically sensitive sale of the Chicago Stock Exchange (CHX) to a group led by China-based investors, saying a lack of information on the would-be buyers threatened the ability to properly monitor the exchange after the deal. The move by the Securities and Exchange Commission (SEC) ends a two-year battle to gain approval for the sale and underscores the more hostile environment facing Chinese buyers under the administration of U.S. President Donald Trump.
Trump brought the CHX deal up twice during the election campaign as an example of how jobs and wealth were leaving the United States. SEC staff initially approved the sale of the privately owned exchange in August, but within minutes of the announcement SEC commissioners, led by Chairman Jay Clayton, a Trump appointee, put the decision on hold for further review.
U.S. lawmakers from both parties had harshly criticized the deal in joint letters to the SEC, arguing that it would give the Chinese government access to American financial markets and questioning the SEC’s ability to regulate and monitor foreign owners.
“This has been a long fight, and I am grateful we now have a President who recognizes the national security threats of allowing a Chinese government-affiliated company to own the Chicago Stock Exchange,” Republican Congressman Robert Pittenger said in a statement on Thursday.
This is extraordinarily significant in light of what we will share in Revelation Three. It also is reflective of an incredible shift in the national security approach from the last Administration. Our friend Joe Schmitz, a Trump Advisor and former Inspector General at the Department of Defense, wrote about this at the start of the year in a NewsMax article:
Recent presidents generally ignored American first things, e.g., core American principles such as Compact Theory, Popular Sovereignty, and Subsidiarity, which underlie our Declaration of Independence, Constitution, and Bill of Rights. Instead, they focused mostly on second things, e.g., money and survival — priorities for even atheist criminal thugs and Islamist jihadists.
In his forward to our new “National Security Strategy,” President Trump announced: “We have recommitted ourselves to our founding principles and to the values that have made our families, communities, and society so successful.” The first paragraph of the first page of the new “National Security Strategy” begins with this unapologetic recitation of American first things: “An ‘America First National Security Strategy’ is based on American principles, a clear-eyed assessment of U.S. interests, and a determination to tackle the challenges that we face. . . . And it is grounded in the realization that American principles are a lasting force for good in the world.”
The new “National Security Policy” then proclaims, “‘We the People’ is America’s source of strength,” followed by this veritable parade of American first things: “The United States was born of a desire for life, liberty, and the pursuit of happiness — and a conviction that unaccountable political power is tyranny. For these reasons, our Founders crafted and ratified the Constitution, establishing the republican form of government we enjoy today.
“The Constitution grants our national government not only specified powers necessary to protect our God-given rights and liberties but also safeguards them by limiting the government’s size and scope, separating Federal powers, and protecting the rights of individuals through the rule of law. All political power is ultimately delegated from, and accountable to, the people.”
Not since Ronald Reagan has an American president so courageously and publicly reaffirmed American first things.
This courage sets the stage for what the ancient Chinese philosopher Sun Tzu described as supreme excellence in warfare: “To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.”
And to help us achieve such a supremely excellent result, our new commander in chief, in stark contrast to the willful blindness of prior presidents, identifies our various jihadist enemies as “linked by a common radical Islamist ideology.” The new “National Security Strategy” describes this ideology as “wicked,” “barbaric,” and “evil.”
The new strategy also indicates that, “To prevail, we must integrate all elements of America’s national power — political, economic, and military.”
So now the implementation phase begins, but the foundation for success is well laid.Read Full Article Here Trump’s ‘National Security Strategy’ Consistently Puts America First | Newsmax.com
In other words, this Administration recognizes the total war we are in. The key to victory is drawing upon our national strength which is found in our spiritual, and economic fiber.
Revelation Three: Our Financial Markets Are at RiskThe stock market just enjoyed one of its strongest weeks in years after last week’s serious decline. People have been wondering what caused the sharp loss, which seemingly arrived out of the blue. Many experts point to the purchase and sale of “volatility” derivatives used by professional managers to hedge risks.
Without getting into the weeds on how this all happened (you can read an explanation here), a whistleblower came forward to warn that manipulation was at work (as noted in The Wall Street Journal this week):
A U.S. regulator is looking into whether prices linked to the stock market’s widely watched “fear index” have been manipulated, according to people with knowledge of the matter. The Cboe Volatility Index, known as the VIX, is derived from S&P 500 options prices. The Financial Industry Regulatory Authority is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures, the people said.
Separately, a letter from a law firm Monday representing an unidentified client urged U.S. regulators to investigate VIX manipulation, claiming it has cost investors hundreds of millions of dollars in losses each month. If evidence of manipulation is found, it would be a black mark for the VIX, which has soared in popularity over the last decade as a hedging tool for investors. The VIX is designed to track investor anxiety and tends to move in the opposite direction of the benchmark S&P 500 index. Investors purchase VIX futures and options to protect against declines in stocks….
Some market participants and observers of derivatives markets say VIX manipulation is feasible. More than a dozen traders and brokers told the The Wall Street Journal that they avoid the expiration days for VIX futures or advise their clients to do so, with some citing manipulation fears.
“There’s smoke there,” said Prof. Pirrong. “It’s definitely worth further inquiry.”
The amazing thing is that an estimated $8 billion in trades of volatility products (much of that in Exchange Traded Notes) could be responsible for $3 trillion in stock market losses. Considering that an enemy would only need to start the trade, the potential for manipulation is clear. In fact, a clever saboteur would find a way to profit from the turmoil.
Now, couple the reality of manipulation with the fact that our markets are all controlled by machines. A clever hacker could cause a complete collapse as we have warned. So, we know that Russia and China and others are hacking things daily. And, we know that Russia and China and others have purposed to so mayhem. Can we doubt that they are working on crashing our markets?
One MarketWatch contributor summed up the risk in a Valentine’s Day article. Here are excerpts:This is what happens when Skynet from ‘Terminator’ takes over the stock marketA massive amount of automated trading helped cause last week’s turmoil in the U.S. stock market.
It reminded me of Skynet. Remember Skynet?
“Skynet is a fictional … artificial general intelligence system that features centrally in the ‘Terminator’ [movie] franchise.Skynet gained self-awareness after it had spread into millions of computer servers all across the world; realizing the extent of its abilities, its creators tried to deactivate it. — Wikipedia ….
Those worried that Skynet has conquered financial markets are urged to read “Flash Boys” by Michael Lewis, who describes the proliferation of high-frequency trading. I believe the speed of the decline over the past week was driven by computers trading with other computers on high amounts of leverage. High frequency trading (HFT) routinely surpasses 50% of volume on most stock exchanges, and it may have made up more than 50% of volume last week. Early warnings of problems HFT proliferation have been consistently given by ZeroHedge.
The 1987 crash in the stock market was blamed on “portfolio insurance,” a form of computerized trading in which the lower the stock market went, the more the computer programs sold into the move lower, which created a quick avalanche effect. Some of last week’s moves felt like small avalanches….
The ETP (Exchange Traded Product) space is over $3 trillion. As that space has grown, so has the use of computerized trading that helps manage ETP securities. Much of the blame over the past week has been put on short volatility ETFs, which among other things take short positions in front-month Cboe Volatility Index futures.
The explosion of stock market volatility causes those ETPs to reverse their short VIX futures positions, causing a record surge in VIX futures buy orders after-hours, when such ETPs typically square their positions. On the day the Dow Jones Industrial Average declined 1,175 points, a surge in VIX futures buy orders created a surge in S&P futures sell orders as they are inversely correlated. Because of the record buying of VIX futures, their prices rose quickly after-hours, which caused many ETPs whose portfolios are short VIX futures to suffer record 80% declines after-hours, in effect blowing up their portfolios.
While most of the assets in short-volatility ETFs have already been liquidated over the past week, there are still over $3 trillion in assets in all ETPs, so I am sorry to say that Skynet is still lurking in the stock market. It looks to me like the regulators allowed a monster to grow in the face of the ETP industry and they will have a very difficult time reining it in.
So, we have a cyber risk (and we know of Russian, Chinese, North Korean, Iranian, and radical Islamist efforts here) and a risk of manipulation of Exchange Traded products (which we know that Russia specifically has targeted). These can no longer be denied.
RecapSo here’s the bottom line. We are at risk and under attack. But we finally have a recognition of this threat by our government with concrete action being taken (as evidenced by the denial of Chinese takeover of the Chicago Stock Exchange). We will have to be diligent. The good news, though, is that we are in a solid position to win this economic war. the National Security Strategy is very encouraging. Our nation is resilient and in a better position than any nation in the world. If we take the right steps, we will alert our adversaries and enemies to not mess with us. If they want a fight, we can and will be prepared to win.
I can tell you that we are doing our part to awaken America. We’ve written two best-selling books on the subject (Secret Weapon and Game Plan). We’ve briefed our government and thought leaders. We’ve written this Blog and spoken to groups across the country. Now, we are launching Economic War Roomwith Kevin Freeman, a new online television program that will clearly address the economic threats we face. We will offer understanding of the threat, solutions for the problems, and a clear message of hope. Register at EconomicWarRoom.com to be notified of our launch.
Phase Three in the Global Economic War Heats Up
by KEVIN D. FREEMAN on MARCH 31, 2018
Share this...We are monitoring events closely in the Economic War Room. Two things stood out this past week, both related to a coming Phase Three attack on the US dollar.
First, the Chinese finally launched an oil futures contract traded in gold-backed yuan. This is a big deal. In its debut, the contract exceeded trading for dollar-based oil contracts.
Many believe that this is one critical step in China’s long-held desire to de-Americanize the world and end the US dollar’s status as primary reserve currency of the world. The Chinese believe that since they are the largest importers of oil, their trading should no longer require American dollars. Further, they believe that when other nations understand that they can buy and hedge oil in yuan, the dollar will no longer be a necessary holding.
From ZeroHedge on March 26:
“As we most recently noted, after numerous “false starts” over the last decade, the “petroyuan” is now real and China will set out to challenge the “petrodollar” for dominance. Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), already warned last year that China launching a yuan-denominated oil futures contract will shock those investors who have not been paying attention. This could be a death-blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency.”
Since the US now has more than $21 trillion in Federal debt (and growing about $1 trillion per year), requiring more than $6 trillion of foreign nation holdings, the idea of reduced foreign buying is ominous. We had to borrow $300 billion in a single week. If foreigners stopped buying our debt or worse still started selling, interest rates would spike. Our Federal budget would be in shambles and there would be repeated calls to reduce our military. The $1.3 trillion omnibus spending bill would prove to be a disaster. There are still some steps remaining before the Chinese dollar attack is in place. But rest assured they are moving that direction.
The second major news item came from the UK. It is reported that Prime Minister Theresa May is considering banning the sale of Russian debt in London markets. This, too, is ominous as it portends a rapid escalation in the global economic war. The Prime Minister is understandably upset over a chemical weapons attack targeting a turncoat Russian spy that took place on British soil. And, the idea of ceasing bond sales is quite reasonable in context. The problem is that this could give excuse to Russia to dump their holdings of our debt and encourage China to do the same. This almost happened in 2008. If Russia had persuaded China then, we might still be in recession. Now, the Chinese are openly discussing their plans to punish us via our debt and also our stock market.
From China Daily on March 23:
“…China’s countermeasures should not be limited to goods trade; they should extend to the financial sector, including underselling the US’ Treasury bonds and undermining the US stock market. Since the stock market’s strong performance has been trumpeted by Trump as proof of the success of his economic policy to impress US voters over the past year, China should take strong measures to make Trump feel the ‘pain’ in this area.”
Remember, it was China’s Unrestricted Warfare doctrine that suggested that a “single man-made stock market crash” is a weapon.
Russia clearly has a long-term plan to remove the dollar from the world stage and destroy American hegemony. They have likewise threatened to crash our stock market (and even sent spies to see how best to do it). Putin is ruthless and looking for any opportunity to accomplish his long-term goals. Thus, a move against Russian debt (no matter how well deserved) would provide political cover for a retaliatory strike.
We will continue to monitor these developments and watch for further signs of the global economic war already underway. Hopefully, incoming National Security Advisor Bolton will be more aware of these threats and more receptive to addressing them.
One last word: Don’t Despair! There is HOPE! I am about to sign off for a celebration of resurrection Sunday. My Jewish friends are celebrating Pesach (Passover). This is a time to deeply know that the Almighty holds our future. To best protect our nation, we should follow the wisdom of the Creator who spoke to Solomon as recorded in the Old Testament:
2 Chronicles 7:14 (KJV)“If my people, which are called by my name, shall humble themselves, and pray, and seek my face, and turn from their wicked ways; then will I hear from heaven, and will forgive their sin, and will heal their land.”
May you be blessed in celebrating this Holy Week.
The Winds of War (Part Four)
by KEVIN D. FREEMAN on FEBRUARY 27, 2018
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) – Global Economic Warfare
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 …
The Winds of War (Part Two) – Global Economic Warfareglobaleconomicwarfare.com/2018/02/the-winds-of-war-part-two/
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 […]
The Winds of War (Part Three) – Global Economic Warfare
globaleconomicwarfare.com/2018/02/the-winds-of-war-part-three/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) – […]
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:Financial terrorism suspected in 2008 economic crash – Washington …
https://www.washingtontimes.com/…/financial-terrorism-suspected-in-08-economic-cr…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.
Inside the Ring: New WMD threats – Washington Times(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:
CPAC: Frank Gaffney Warns of China Waging ‘Unrestricted’ Financial, Cyber War on U.S.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:
China is letting the yuan crush the dollar — Trump is just one reason why
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:
U.S. Treasury official slams China’s ‘non-market behavior’Reuters BUSINESS NEWS
FEBRUARY 21, 2018 / 8:17 PM David LawderWASHINGTON (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):
How China Deals with the U.S. Strategy to Contain China[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 Journalor 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 LifeChina’s supreme leader abolishes term limits so he can stay in power.https://www.wsj.com/articles/xi-jinping-president-for-life-1519598379
By The Editorial Board of The Wall Street JournalFeb. 25, 2018 5:39 p.m. ET
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.