The Death of Money

by James Rickards

  I knew Chris was a night owl like me, and despite the hour, I called her at home. She was awake. “Chris,” I quickly said, “turn on your TV—you won’t believe what’s going on.” She did and grasped the significance immediately. A terrorist plot to bomb American Airlines was being broken up less than seventy-two hours after we had detected the insider trading on AMR shares. Making it all the more spooky, we realized that the plot was unfolding in exactly the time frame that our behavioral modeling had estimated.

  Of course, our signal had had nothing to do with foiling the plot. British intelligence agencies MI5 and MI6, with help from the CIA and the ISI, the Pakistani intelligence service, had had the plot under surveillance for months. President Bush was briefed on the plot at his ranch in Crawford, Texas, on August 5. On August 9 the plot mastermind, Rashid Rauf, was arrested in Pakistan. Rauf escaped prison in 2007 and was believed killed in a 2008 CIA drone attack, although reports of his death are disputed by some to this day.

  The terrorists sent an encrypted “go” signal to commence the operation on August 6. This message was intercepted by MI6 and relayed to Eliza Manningham-Buller, the head of MI5. It was this go signal that led MI5 and New Scotland Yard to commence the arrests we watched on CNN on August 10.

  Just as Chris and I did not know of plot details in advance, the plotters did not know they were about to be arrested. Instead, one of the terrorist associates in the London social network woke up on Monday, August 7, and started the trading in American Airlines that snowballed into the highly unusual pattern that had triggered the red light on our threat board. Someone had been betting on a sure thing, exactly as our behavioral modeling had predicted.

  The fact that our signal engine had generated a warning, loud and clear and ahead of the U.K. planes plot, soon attracted attention from the highest levels of the U.S. intelligence community. On February 2, 2007, I received an e-mail from Randy Tauss saying the CIA’s executive director, Mike Morell, wanted to see Chris and me to discuss the signal engine and the status of MARKINT. The meeting would take place on February 14, which gave us time to prepare the briefing.

  Morell had been with the CIA since 1980 and had a storied career. He was most famous for having been at George Bush’s side during 9/11 as the president hopped around the country in Air Force One while Dick Cheney, George Tenet, and others manned the command centers in Washington and Langley. Morell was also with President Obama in May 2011 monitoring the operation that killed Osama bin Laden. He twice served as acting director of Central Intelligence, including a stint after the abrupt resignation of David Petraeus in 2012, before retiring from the agency in 2013.

  At the time of our meeting in 2007, Morell reported to Director Michael Hayden. Other senior intelligence officials had been invited to join our MARKINT briefing in Morell’s office. This would be the highest-ranking audience the project had ever received.

  Randy’s e-mail also noted that someone from the CIA general counsel’s office would attend. There was no doubt that our project had legal issues, including privacy concerns, and full implementation would require coordination with the FBI, since the CIA was not a domestic law enforcement agency. We had spent an enormous amount of time on these issues and knew how sensitive they were. Still, it was not obvious why Morell wanted his lawyers on hand for a preliminary briefing on a new counterterrorist system.

  Morell’s office was capacious by CIA standards, with bright windows, a large desk near the back wall, and a meeting table just inside the door. A ubiquitous feature of Washington offices is framed photographs of the occupant together with powerful figures. Morell had his, but these were different. Instead of the typical two-shot taken at a name-tag event, Morell had large, somber black-and-white photos of himself in the Oval Office with the president leaning over documents in intense discussion, possibly taken during the President’s Daily Brief, in which the most sensitive and highly classified information in the world is imparted. If these were meant to impress the visitor, they worked.

  Chris, Randy, and I took our seats at the meeting table. The other senior officials were already there, and Morell got up from his desk to join the group. The atmosphere was cordial but businesslike, even intense. Chris and Randy briefed the group on the history of Project Prophesy and the signal engine capabilities. As the only lawyer on the MARKINT team, my job was to summarize the legal authority for our efforts and the privacy safeguards in place.

  A few minutes into my presentation, the agency’s counsel interrupted and said, “Look, we’re concerned about what you guys are doing. You’re going through trading records and making referrals to the SEC. CIA is not a law enforcement agency. We’re not comfortable with that.”

  I countered that we did not use individual trading records but relied entirely on open-source market price feeds available to everyone; I told them it was not much different than watching TV. As for the SEC referrals, I said we were just being responsible citizens and could stop completely if the agency wanted. The SEC was building similar systems of its own and would not depend on us in the future anyway. Counsel’s concerns seemed like red herrings.

  Then Morell leaned forward. “What we’re concerned about here is perception,” he said. “You guys may be doing everything right, but The New York Times could spin this as ‘CIA trolls through Americans’ 401(k)’s.’ That is not a risk we should take right now.”

  Morell’s concern was far from imaginary. The New York Times had already compromised national security by revealing intelligence community access to banking transactions in the SWIFT payments system in Belgium. SWIFT is the nerve center of international banking and had been a rich source of information about terrorist finance. The Times story had sent terrorist financiers underground to word-of-mouth networks called hawala and phony front companies.

  The CIA was also in the midst of a news frenzy about enhanced interrogation techniques such as waterboarding. The last thing it needed was another media black eye, even if our program was effective and legal.

  In fact, Morell’s instincts proved prophetic. On November 14, 2013, The Wall Street Journal actually did run a headline that said “CIA’s Financial Spying Bags Data on Americans.” But coming as it did in the midst of a wave of similar revelations by defector Edward Snowden, this disclosure went almost unnoticed.

  I told Morell that we would end our SEC referrals, and I offered to provide him with the technical specifications needed to assure the agency that the information we used was open source and involved no individuals. He thanked me, and with that the meeting was over. Only later did I realize that MARKINT, at least as far as the CIA was concerned, had just become a dead letter.

  Near the beginning of Project Prophesy, I remarked to Randy Tauss that the team was doing extraordinary work and a counterterrorist system that could prevent spectacular attacks seemed within reach. Randy, the thirty-three-year veteran, smiled and said, “Jim, let me tell you how things work around here. We’ll do a great job, and this thing will work like a charm. Then it will go nowhere and be put on a shelf. One day there will be a spectacular attack, and it will be apparent there was advance insider trading. The agency will pull our work from the shelf, dust it off, and say, ‘See, we have the solution right here. We have a system that can detect this next time.’ That system will get millions in funding and be built the way we wanted. But it will be too late to save lives in the next attack.”

  Sadly, Randy’s words proved prescient. Sure enough, MARKINT was put on the shelf. But we still felt that the signal engine had a valuable role to play, even without the CIA as a home. If the civilian agencies had scant interest, we still had one friend at court—the Department of Defense. The Pentagon had the greatest resources, the fewest operational constraints, and the most forward-leaning mind-set. The ranks of senior military officers are filled with engineers, Ph.D.’s, and many more experts with graduate-level degrees in history, languages, and strategy. After
all, this is the branch of government that can claim credit for the Defense Advance Research Projects Agency (DARPA), which invented the systems that led to the Internet and World Wide Web.

  As it happened, our contacts with the Pentagon developed in 2007 and 2008 at exactly the time the civilian intelligence community was backing away from our efforts. But to grow this relationship, MARKINT itself had to evolve. Chris Ray and I were aware, from the early stages, that MARKINT was not just a counterterrorist tool. If it could detect terrorist footprints in capital markets, why couldn’t it also be deployed to monitor the marketplace actions of dictators, strategic rivals, and other state actors? All we needed to do was calibrate the signal engine to focus on specially tailored target sets of securities.

  With this broader mission in mind, Chris and I began looking for other phenomena besides insider stock trading. One that we identified was Venezuela’s conversion of its dollar reserves into gold; it presaged Hugo Chávez’s war on the dollar and his later demand that Venezuela’s gold be repatriated from vaults in London.

  We got a chance to show our system to a military audience in December 2007, when we presented the MARKINT signal engine to the U.S. Strategic Command (STRATCOM) in Omaha, Nebraska. Participants at that meeting included civilian scientists in addition to uniformed military. We demonstrated how the system could be used for early warning of attacks on the U.S. dollar and on efforts to crash U.S. markets.

  Suddenly the technology was seen in a new light. We weren’t alone, of course, but we were seeing the future of warfare: not wars with kinetic weapons, but wars fought on an unrestricted battlefield that included chemical and biological weapons, cyberweapons, and in our case, financial weapons.

  It was becoming apparent to the Pentagon that U.S. dominance in conventional air, land, and sea battle had caused our rivals to seek new ways to confront us. Future wars would be fought in an expanded battlespace that included stocks, bonds, currencies, commodities, and derivatives. Our signal engine was the perfect early warning device.

  Remember the truism No one trades alone. For every buyer, there is a seller. If one side of a trade is a threat to national security, it leaves a trace that the enemy did not intend. The enemy trader is like a fish swimming in the water; it leaves ripples. Even if the fish is invisible, the ripples can be seen, and the presence of the fish inferred. The forward-thinkers at that meeting in Omaha recognized that our signal engine could detect the ripples, that we had devised the perfect early warning device.

  MARKINT would have a future after all. It would be not the narrow counterterrorist tool we had set out to create, but rather a broad-based system, a sort of radar for the marketplace that was designed to detect incoming financial threats. MARKINT had grown up. Our team and technology had now entered the new, larger arena of financial war.

  CHAPTER 2

  THE WAR GOD’S FACE

  If it’s . . . possible to start a war in a computer room or a stock exchange that will send an enemy country to its doom, then is there non-battlespace anywhere? . . . If [a] young lad setting out with his orders should ask today, “Where is the battlefield?” the answer would be, “Everywhere.”

  Colonel Qiao Liang and Colonel Wang Xiangsui

  People’s Liberation Army, China

  1999

  Now our enemies are also seeking the ability to sabotage our . . . financial institutions. . . . We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy.

  President Barack Obama

  February 12, 2013

  ■ Future War

  One purpose of war is to degrade the enemy’s will and economic capacity. Surprising as it may sound, wealth destruction through a market attack can be more effective than sinking enemy ships, when it comes to disabling an opponent. Financial war is the future of warfare, and no one works harder to see the future than senior Defense Department official Andy Marshall.

  Seated at a table in a secure Pentagon conference room on a rainy fall morning in September 2012, Marshall moved forward in his chair. Around the table were three prominent investment managers, three SEC officials, and several think-tank experts, along with members of Marshall’s staff. Our carefully selected group was there to discuss financial war.

  “That’s interesting,” Marshall said. What prompted his comment, after an hour of complete silence on his part, was our discussion of China’s stockpiling of gold and its possible use as a financial weapon in undermining the dollar’s exchange value.

  Andy Marshall is called “Mr. Marshall” even by associates as a sign of respect, and at ninety-two years of age, he has earned the deference. His official title is Director of the Office of Net Assessment in the Office of the Secretary of Defense. Unofficially he is the Pentagon’s chief futurist, the man responsible for looking over the horizon and assessing threats to U.S. national security long before others even know they exist. Marshall has held this position since 1973, through eight presidential administrations.

  His involvement in national security strategy goes back even further, to 1949, when he joined the RAND Corporation, the original think tank. The list of his former associates and protégés includes Herman Kahn, James Schlesinger, Don Rumsfeld, Dick Cheney, Paul Wolfowitz, and other giants of national security policy over eight decades. Only the late Paul Nitze is comparable to Marshall in terms of the depth and breadth of his influence on strategic affairs in the period since World War II.

  If Marshall is less known to the general public than the figures to whom he is compared, that is quite by design. He almost never gives interviews or speeches; nor does he appear in public, and his writings are mostly classified. In a meeting, he has a sphinxlike demeanor, listening for long periods in complete silence, occasionally uttering a few words that show he has absorbed everything and is now thinking three moves ahead.

  While most Americans have not heard of Andy Marshall, the Chinese military have. Marshall was a leading theorist of the late twentieth-century “revolution in military affairs” or RMA, which presaged radical changes in weaponry and strategy based on massive computing power. Precision-guided munitions, cruise missiles, and drones are all part of RMA. People’s Liberation Army general Chen Zhou, the principal author of several recent Chinese strategic white papers, told The Economist, “We studied RMA exhaustively. Our great hero was Andy Marshall in the Pentagon. . . . We translated every word he wrote.”

  Marshall is no stranger to potential confrontation with China. In fact, he is the principal architect of the main U.S. battle plan for war with China in the western Pacific. This classified plan, called “Air-Sea Battle,” involves blinding China’s surveillance capabilities and precision missiles, followed up with massive air power and naval attacks.

  On this occasion, Marshall was not being briefed on kinetic weapons or air-sea tactics. He was hearing about sovereign wealth funds, stealth gold acquisition, and potential threats to national security caused by U.S. Federal Reserve policy.

  China has over $3 trillion of investments denominated in U.S. dollars, and every 10 percent devaluation in the dollar engineered by the Fed represents a $300 billion real wealth transfer from China to the United States. It is not clear how long China will tolerate this raid on its accumulated wealth. If China were not able to defeat the United States in the air or on the sea, it could attack through capital markets.

  The threats discussed with Andy Marshall that day were entirely consistent with Chinese military doctrine. Unrestricted warfare doctrine, including financial war and cyberwarfare, has roots as far back as 1995. That year Major General Wang Pufeng, former director of strategy at Beijing’s Military Science Academy, published a paper called “The Challenge of Information Warfare.” After paying tribute to Andy Marshall in the paper’s opening lines, Wang went on to write:

  In the near future, information warfare will co
ntrol the form and future of war. We recognize this developmental trend of information warfare and see it as a driving force in the modernization of China’s military and combat readiness. This trend will be highly critical to achieving victory in future wars.

  The People’s Liberation Army of China made this doctrine even more explicit in a 1999 book entitled Unrestricted Warfare. Unrestricted warfare tactics include numerous ways of attacking an enemy without using kinetic weapons such as missiles, bombs, or torpedoes. Such tactics include the use of weapons of mass destruction that disperse biological, chemical, or radiological elements to cause civilian casualties, and terrorize populations. Other examples of unrestricted warfare include cyberattacks that can ground aviation, open floodgates, cause blackouts, and shut down the Internet.

  Recently, financial attacks have been added to the list of asymmetric threats first articulated by Wang and others. Unrestricted Warfare spells this out in a chapter called “The War God’s Face Has Become Indistinct.” It was written not long after the 1997 Asian financial crisis, which cascaded into the global financial panic of 1998. Much of the distress in Asia was caused by Western bankers suddenly pulling hot money out of banks in emerging Asian markets; the distress was compounded by bad economic advice from the Western-dominated IMF. From an Asian perspective, the entire debacle looked like a Western plot to destabilize their economies. The instability was real enough, with riots and bloodshed from Indonesia to South Korea. The ill will escalated to the point of name-calling between Malaysian prime minister Mahathir Mohamad and hedge fund maven George Soros in an infamous confrontation at the IMF annual meeting in Hong Kong in September 1997.

  The Chinese were less affected than other Asian nations by the panic, but they studied the situation and began to see how banks, working in conjunction with the IMF, could undermine civil society and possibly force regime change. One of their responses to the crisis was to accumulate massive dollar reserves so they would not be vulnerable to a sudden “run on the bank” by Western lenders. The other response was to develop a doctrine of financial war. The lessons of the 1997–98 crisis were summarized by two Chinese military leaders in a passage both poetic and prophetic: