Treasury's War Page 42
Other nontraditional currencies offer criminals and terrorist groups similar opportunities for theft and anonymous movement of money. “Linden” dollars are the virtual currency for the world of Second Life, a digital alternate reality, the first virtual currency to float. They are traded on the LindeX exchange, which is run by the Linden Lab, the creators of Second Life, and can be exchanged for real-world currency. By 2010, user transactions on the LindeX exchange topped $567 million in Linden dollars and users cashed Linden dollars into $55 million in US dollars.
“Ven” is the digital currency of the social networking community Hub Culture, which operates by invite and includes physical “pavilions” where members meet and collaborate. Members from different countries can exchange a wide array of goods and services in ven at a single global price within the pavilion communities as well as online. Although in 2007 the ven was originally given a fixed exchange rate (10 ven to the dollar), it is now a floating currency and was recently tied to carbon futures, making it one of the world’s first “green” currencies.
Bartering has also become a more active way of circumventing the classic financial systems used in local or international trade. Barter exchanges facilitate trades between parties by assigning members “trading credits” equal to the values of goods and services. These credits function similarly to money. Members can exchange goods for credits and use the credits in future transactions. ITEX, the country’s largest barter network, which is based in Seattle and boasts more than 24,000 members, charges both a subscription fee ($20 per month) and a transaction fee (6 percent for online trades, 7.5 percent for in-person transactions). Its trading credits are called “ITEX dollars.” The country’s five hundred bartering exchanges have become enormously popular in the wake of the financial crisis, which both limited access to cash and eroded trust in banks for many people. The International Reciprocal Trade Association estimates the annual US bartering market at around $12 billion. Many participants prefer bartering because it encourages local purchases, links businesses with customers they would not otherwise have found, and increases their ability to sell surplus goods or services. Many communities now use local currencies and Local Exchange Trading Systems (LETS), community-specific systems based on mutual credit. A Community Exchange System (CES) offers a global alternative to LETS, setting up a much larger currency and trading marketplace that operates in a similar fashion.
Just as nonstate actors are willing to leverage new digital technologies, states are increasingly willing to leverage nonstate actors for nefarious purposes. Journalist Moisés Naím has written about the rise and threat of Mafia states—countries that look and act like criminal organizations. The increasing convergence of financial interests between criminal networks and certain nation-states represents an alliance of financial rogues that threatens the international system. States are able to leverage the resources and reach of networked organizations while claiming an arm’s-length distance from their nefarious activities. If coordinated, those alliances could target the economic vulnerabilities of the United States.31
Directed Threats and Alliances of Financial Rogues
Nonstate actors have been quick to recognize and prepare for the coming age of economic and financial warfare. The treasure trove of documents found in Osama bin Laden’s Abbottabad compound spoke of a strategic strike at the economy of the United States by hitting oil tankers and critical energy infrastructure. Indeed, Al Qaeda and its associated movements have focused their rhetoric and strategy more and more on bleeding and bankrupting America.32 Part of this strategy involves killing the United States with a thousand cuts by baiting US overreaction and overspending. Al Qaeda in the Arabian Peninsula (AQAP) has labeled this “Operation Hemorrhage.” Another part of this strategy involves hitting key targets and vulnerabilities at a time when the US and global economy is weakened, so as to prolong and exacerbate economic malaise. Energy nodes, transportation chokepoints, and ports around the world provide terrorists and nefarious actors with ample opportunity to shock the interconnected international commercial system. Al Qaeda attempted to do just this in 2006, with the failed attack on the enormous Saudi oil facility at Abqaiq, as well as in 2002, with an attack on the French oil tanker MV Limburg off the coast of Yemen.
International organized crime syndicates have expanded the money-laundering operations that have helped fuel their growth and global financial reach, making them more layered and more varied in their use of investment vehicles.33 Such groups not only understand how to profit from the international system but also recognize that certain types of investments and influence can shield their activities and leadership from law enforcement and political pressure. Translated into a more aggressive posture, such groups and potential terrorist allies could see opportunities in controlling certain businesses or wielding influence over particular markets and states, distorting the political frameworks in which they operate through corruption, intimidation, and deepening influence.
As these criminal groups grow more interconnected in ways that transcend national boundaries, such networks are gaining influence in strategically vital markets that could impact the accessibility to and stability of these markets. In addition, the ability of such groups to provide their infrastructure and expertise to others (including terrorists)—whether through access to fraudulent travel documents or access to nuclear material—raises the specter of alliances of convenience and profit aligned dangerously against the United States.34
These unholy alliances already exist in some cases. For example, drug trade and human trafficking provided most of the finances for the Mumbai attack.35 The Treasury continues to identify and designate entities in certain jurisdictions—such as Belarus—that are providing weapons and financial facilitation to sanctioned countries—such as Syria.
Attack on the Dollar?
Attendant to this crisis of fiscal legitimacy are increasing challenges to the primacy of the US dollar. The standing of the dollar allows the United States to shape the global economic and political system and offers it greater influence abroad, greater flexibility at home, and greater insulation from international crises.36 For those who would downplay the benefits of dollar dominance, the British experience is instructive. Prior to World War II, the British pound sterling was the primary international currency, thereby allowing Britain to finance military expenditures and manage its wartime debt. Once the sterling was eclipsed by the dollar in the postwar years, Britain was no longer able to finance its war debt, a problem that contributed to its economic decline and exacerbated persistent financial crises during the 1960s.37
The sustainability of the dollar as the leading global reserve currency has been a near constant concern since the 1960s. During this time, foreign dollar reserves began to outgrow US gold reserves, and many international actors began to question the United States’ ability to convert dollars to gold at the fixed official rate specified by Bretton Woods. As this confidence declined, speculative attacks against the dollar abounded. The United States eventually abandoned the gold standard, but the dollar has retained its dominance ever since. Thus, anyone decrying the dollar’s current strength risks crying wolf.
Nevertheless, in the wake of the Great Recession, there are convincing signs that we are headed for a restructuring of the international monetary system as faith in the dollar faltered. The reality is that countries are now questioning the wisdom of carrying debt obligations solely in dollars, and they are moving toward baskets of currencies and alternate trading conventions and currencies to reduce their reliance on the dollar. The portion of global reserves in dollars declined from approximately 72 percent in 2000 to 62 percent in 2012 as the rest of the world attempted to decouple itself from the US economy.
The Chinese have begun to use their own currency, the renminbi, and reserves in certain trading situations and with some partners with more frequency. China recently completed a $1.08 billion currency swap deal with Kazakhstan and has similar arrangements with Argentina,
Belarus, Hong Kong, Indonesia, Malaysia, South Korea, Ireland, Argentina, and Iceland. China has also reached agreements with Russia and Brazil to gradually eliminate the dollar from bilateral trade.38 All five of the BRICS (Brazil, Russia, India, China, and South Africa, all of which have large, rapidly growing economies) have taken significant steps toward trading in their own currencies, diversifying their foreign exchange reserves, and hedging their bets against the growing instability of the dollar and the euro.
Prior to the G8 summit of 2009, China, Russia, and India explicitly called for an end to dollar dominance. On January 7, 2011, the International Monetary Fund (IMF) produced a paper outlining a plan for replacing the dollar with Special Drawing Rights (SDRs)—IMF-issued currency defined in terms of the weighted average of the dollar, euro, yen, and pound. The plan would create a liquid bond market for SDRs and thereby elevate the IMF to the de facto role of the world central bank.
This portends a world of multiple reserve currencies, one in which the dollar serves as the primary rudder, steering a steady course to prevent erratic devaluations, but in which the currents are more volatile than they have been for decades. In this scenario, the euro, the British pound, the Swiss franc, and the renminbi would play enhanced roles as regional currencies for Europe and Asia, thereby limiting US influence in these areas.
A more dangerous scenario is an intensification of what James Rickards has termed “Currency War III.” According to Rickards, this war began in 2010 and involved competitive devaluations of the yuan, dollar, and euro. These concerns were echoed publicly in 2013 by finance ministries and central banks. It is important to note that the biggest threat is not that yuan devaluation directly damages the US economy. The true threat is systemic. The current China-US monetary relationship is unsustainable and brings the fragility of the entire international monetary system into sharp relief. As Rickards contended, by 2011 both countries were “locked in a trillion-dollar financial embrace, essentially a monetary powder keg that could be detonated by either side if the currency wars spiraled out of control.”39 Economic historian Niall Ferguson has dubbed this presently symbiotic yet ultimately dysfunctional relationship “Chimerica.” In order to maintain employment for its massive population, China must keep its exports attractive to American consumers and keep the yuan tied to the dollar. As such, China must continue to buy dollar assets and increase its account surpluses. It is caught in a “dollar trap.” China’s current exchange-rate policy thus ironically helps to preserve dollar dominance.40 Chimerica is, for Ferguson, highly unstable. A sudden deterioration in political relations, perhaps stemming from a clash over natural resources or Taiwan, could trigger a major war and a corresponding collapse of the international financial system.41
Currently, China is the most competitive player in the so-called currency wars. Yet all major powers are attempting to influence the relative value of their currencies, a ruthless competition that places the entire global monetary system at risk. The currency war need not devolve into actual war for it to prove disastrous. A small but systemically critical event—such as the collapse of the Spanish bond market—could ignite a widespread loss of confidence in paper currencies and a massive transition to hard assets (gold) led by a shrewd and forward-leaning competitor state such as Russia or China.42
Even if one doubts the likelihood of such a crisis, China is nonetheless taking steps to internationalize the renminbi and thereby enhance its power relative to the dollar. This is happening in two ways. First, by purchasing sovereign debt of other Asian countries, China pushes up the value of these regional currencies and incentivizes its neighbors to reciprocate by buying Chinese debt in order to devalue their currencies against the yuan. The net result is a greater international role for the renminbi. Second, the Chinese government is finalizing programs that would allow select foreign financial institutions to invest their renminbi deposits in Chinese equity and bond markets. With increased stakes in renminbi-based businesses, these foreign firms will have more reasons to promote the renminbi so that they can reap the benefits of renminbi internationalization.43
Though the dollar remains predominant for now and seems to be the currency of choice amid economic turmoil in Europe, it—along with American financial predominance—is coming under direct assault.
Growing US Systemic Vulnerabilities
Perhaps most troubling, the United States faces unique systemic vulnerabilities and internal weaknesses that adversaries in the coming financial wars could exploit. The United States has been the driver of a globalized financial and commercial order, but it is also more dependent than other countries upon the economic and digital systems for trade, financing, and information on which that order has been built.44 As such, although the United States is well equipped to fight kinetic wars, it remains uniquely vulnerable to financial warfare.
Consider first that the United States finds itself increasingly vulnerable to dependency on foreign sources of funding for its fiscal survival. Foreign investors hold more than 50 percent of the publicly held and traded US securities.45 With the Chinese and Japanese owning 45 percent of US debt, and increasing doubts about American resolve to solve its fiscal and debt crises, the opinions and investment decisions of foreign governments—particularly China—become central to our national survival.46 The Chinese senior leadership has articulated these concerns in recent statements. Standard & Poor’s decision to downgrade the credit rating for the United States was another manifestation of these worries. But China—as both the United States’ primary foreign creditor and its greatest geopolitical competitor—is beginning to carry greater economic and political weight directly with the United States. China’s economic power derives from the size of its market and its potential, the US debt it holds, and Chinese willingness and ability to penetrate developing markets with massive private and public investments. Taken to the extreme, this accumulating economic power could be leveraged to weaken or limit US influence and reach.
These dependencies move well beyond the world of global debt, finance, and macroeconomics. American dependence on the global trading system has grown over time, with oil, food, crucial minerals, and manufactured goods streaming into the United States from around the world—and a diminished US manufacturing base to make the goods US companies and customers need. America’s crippling dependence on foreign sources of oil in recent decades is well known—the United States imported approximately 45 percent of its oil from a world market where unfriendly countries and competitors played a major role in 2011.47 Iran, Venezuela, Russia, Qatar, and other countries whose interests may not align with those of the United States maintain an ability to disrupt supplies or affect price fluctuations in ways that impact the US economy. Three-quarters of crude-oil reserves are controlled by state-owned or -controlled companies such as Gazprom in Russia, CNPC in China, NIOC in Iran, and PDVSA in Venezuela, and the Organization of the Petroleum Exporting Countries (OPEC) controls 78 percent of the world’s conventional reserves. Large multinational companies—including ExxonMobil, BP, and Chevron—produce only 10 percent of the world’s oil and gas.48 The result is that the United States borrows $1 billion per day in order to import oil. The energy landscape—and America’s dependence on foreign oil—however, are changing dramatically with the revolution in shale gas exploration and America’s abundant natural gas resources. This development portends a historic geo-economic opportunity for the United States, which can take advantage of the shift toward energy independence and the ability to leverage oil and gas exports to stabilize markets and assist allies.
Less understood is the concentration of sophisticated manufacturing capabilities in sectors such as electronics, aerospace, biotechnology, and energy-specific products in foreign sources. Richard Elkus Jr., founder and CEO of several technology companies, sees this as a fundamental economic vulnerability for America’s future. He has argued that the loss of a manufacturing base in such sectors has not only made us more dependent on overseas nodes of manufacturing
(namely Japan, South Korea, and China) but also less able to innovate in design and manufacturing in a wide range of new technologies for the long term.49 With even more concentration of specialized manufacturing, these single points of failure represent potential vulnerabilities for the international system that could be exploited.50 For example, in 2002, an eleven-day shutdown of US ports on the West Coast—which handle 60 percent of US maritime imports and exports by value—due to a labor dispute was estimated as costing at least half a billion dollars, with one estimate suggesting losses of almost $20 billion.51
The devastating earthquake and tsunami in Japan in March 2011 closed 130 assembly plants and disrupted electricity supplies. Japan’s economy—which produces 60 percent of the world’s silicon wafers, 57 percent of the imager sensors, and 70 percent of the binding for lithium ion batteries—struggled to produce components used in electronics, batteries, cars, and computer systems around the world. Chairman of the Federal Reserve Bank Ben Bernanke commented that the earthquake disrupted supply chains enough to force some automobile companies to restrain production for a time.52 The effect was moderate and temporary, yet nevertheless a reminder of the single points of systemic failure that are the by-product of the increasing commercial entanglement of the world’s economies.
Such supplier and supply-chain dependencies translate directly into the military and defense realm. For example, the US military remains highly dependent on Global Positioning System (GPS) and other satellite-based platforms at a time when its space power is increasingly contested. Moreover, the United States imports 100 percent of its gallium, an element used in solar cells and semiconductor chips and an important component of satellites and radar.53 The bid of a Chinese state-controlled company to produce the next presidential helicopter prompted the Committee on Foreign Investment in the United States to produce new legislation restricting Chinese companies from bidding on US defense contracts.54 More recently, President Obama, acting on CFIUS’s recommendation, prohibited the Chinese-owned Ralls Corporation from acquiring four wind-farm project companies located in the vicinity of restricted air space at Naval Weapons Systems Training Facility Boardman in Oregon.55 These concerns led the Obama administration to issue a national strategy to secure global supply-chain security in January 2012.