the Chinese Investment Corporation (CIC) . . . : Andrew Ross Sorkin and David Barboza, “China to Buy $3 Billion Stake in Blackstone,” New York Times, May 20, 2007, http://www.nytimes.com/2007/05/20/business/worldbusiness/20cnd-yuan.html?pagewanted=print.
notorious for his sixtieth birthday party . . . : James B. Stewart, “The Birthday Party,” New Yorker, February 11, 2008, http://www.newyorker.com/reporting/2008/02/11/080211fa_fact_stewart.
“I want war, not a series . . .”: Quoted in Andrew Clark, “The Guardian Profile: Stephen Schwarzman,” Guardian, June 15, 2007, http://www.theguardian.com/business/2007/jun/15/4.
“to put its vast reserves . . .”: Sorkin and Barboza, “China to Buy.”
suggested mounting an attack on the Japanese . . . : Ambrose Evans-Pritchard, “Beijing Hints at Bond Attack on Japan,” Telegraph, September 18, 2012, http://www.telegraph.co.uk/finance/china-business/9551727/Beijing-hints-at-bond-attack-on-Japan.html.
Chinese hacked the Reserve Bank of Australia . . . : “Australia: Reserve Bank Networks Hacked,” Stratfor Global Intelligence, March 11, 2013, www.stratfor.com.
These combined efforts will prove useful to China . . . : For a detailed account of China’s efforts to use military intelligence to steal secrets and other intellectual property through cyberwarfare, see Mandiant, “APT1: Exposing One of China’s Cyber Espionage Units,” 2013, Mandiant Intelligence Center Report, http://intelreport.mandiant.com.
“A highly secretive unit of the National Security Agency . . .”: Matthew M. Aid, “Inside the NSA’s Ultra-Secret China Hacking Group,” Foreign Policy, June 10, 2013, http://www.foreignpolicy.com/articles/2013/06/10/inside_the_nsa_s_ultra_secret_china_hacking_group.
Quantum Dawn 2 . . . : “Fact Sheet: Quantum Dawn 2, July 18, 2013,” SIFMA, http://www.sifma.org/uploadedfiles/services/bcp/qd2-fact-sheet.pdf?n=19890.
“to cause depreciation of the rial . . .”: Kasia Klimasinska and Ian Katz, “Useless Rial Is U.S. Goal in New Iran Sanctions, Treasury Says,” Bloomberg, June 6, 2013, http://www.bloomberg.com/news/2013-06-06/useless-rial-is-u-s-goal-in-new-iran-sanctions-treasury-says.html.
by dumping dollars and buying gold . . . : Jack Farchy, “Iran Bought Gold to Cut Dollar Exposure,” Financial Times, March 20, 2011, http://www.ft.com/cms/s/0/cc350008-5325-11e0-86e6-00144feab49a.html.
an oil-for-gold swap . . . : Dheeraj Tiwari and Rajeev Jayaswal, “India, Iran Mull over Gold-for-Oil for Now,” Economic Times, January 8, 2011, http://articles.economictimes.indiatimes.com/2011-01-08/news/28433295_1_bilateral-issue-oil-india-imports.
Turkish exports of gold to Iran . . . : “Turkey’s Gold Export to Iran Rises Again,” Hurriyet Daily News, May 1, 2013, http://www.hurriyetdailynews.com/turkeys-gold-export-to-iran-rises-again-.aspx?pageID=238&nid=46002.
a cargo plane with 1.5 tons of gold on board . . . : “Cargo Plane with 1.5 Tons of Gold Held in Istanbul,” Hurriyet Daily News, January 5, 2013, http://www.hurriyetdailynews.com/cargo-plane-with-15-tons-of-gold-held-in-istanbul-.aspx?pageID=238&nid=38427.
Reports from the Voice of Russia speculated . . . : “Gold Seized at Istanbul Airport Was Allegedly for Iran,” Voice of Russia, January 6, 2013, http://voiceofrussia.com/2013_01_06/Gold-seized-at-Istanbul-airport-was-allegedly-for-Iran.
“passengers flying from Kabul to the Persian Gulf . . .”: Matthew Rosenberg, “An Afghan Mystery: Why Are Large Shipments of Gold Leaving the Country?” New York Times, December 15, 2012, http://www.nytimes.com/2012/12/16/world/asia/as-gold-is-spirited-out-of-afghanistan-officials-wonder-why.html.
strict enforcement of a prohibition on gold sales . . . : “U.S. to Block Sale of Gold to Iran in Sanctions Clampdown,” Al Arabiya, May 16, 2003, http://english.alarabiya.net/en/business/economy/2013/05/16/U-S-to-block-sales-of-gold-to-Iran-in-sanctions-clampdown.html.
In late 2012 the United States warned Russia and China . . . : Benoît Faucon, “U.S. Warns Russia on Iranian Bank,” Wall Street Journal, December 11, 2012, http://online.wsj.com/news/articles/SB10001424127887323330604578145071930969966.
Iranian hackers had reportedly gained access to the software systems . . . : Siobhan Gorman and Danny Yadron, “Iran Hacks Energy Firms, U.S. Says,” Wall Street Journal, May 23, 2013, http://online.wsj.com/article/SB10001424127887323336104578501601108021968.html.
The Syrian government was forced to conduct business . . . : Steve H. Hanke, “Syria’s Annual Inflation Hits 200%,” Cato Institute, July 1, 2013, http://www.cato.org/blog/syrias-annual-inflation-hits-200.
This cat-and-mouse game . . . : “Three Nukes for $5 billion,” Debka-Net-Weekly 13, no. 588 (May 24, 2013), http://www.debka.com.
a highly sensitive 104-page final report: The author was a direct participant, presenter, or contributor to the Bahrain, Federation of American Scientists, Boeing, and National Defense University financial war game events described in the foregoing paragraphs.
Swiss troops defended their country . . . : Henry Samuels, “Swiss War Game Envisages Invasion by Bankrupt French,” Telegraph, September 30, 2013, http://www.telegraph.co.uk/news/worldnews/europe/switzerland/10344029/Swiss-war-game-envisages-invasion-by-bankrupt-French.html.
Cyberattacks on U.S. infrastructure, including banks . . . : Leading documented studies and white papers on the scope and pervasiveness of cyberattacks on U.S. systems, including financial systems, originating from various sources including China and Iran, are: “Global Energy Cyberattacks: ‘Night Dragon,’” McAfee Foundstone Professional Services and McAfee Labs White Paper, February 10, 2011, http://www.mcafee.com/us/resources/white-papers/wp-global-energy-cyberattacks-night-dragon.pdf; Nicolas Falliere, Liam O. Murchu, and Eric Chien, “W.32.Stuxnet Dossier Version 1.4,” Symantec, February 2011, http://www.symantec.com/content/en/us/enterprise/media/security_response/whitepapers/w32_stuxnet_dossier.pdf; and Mandiant, “APT1: Exposing One of China’s Cyber Espionage Units,” 2013, Mandiant Intelligence Center Report, http://intelreport.mandiant.com.
The official was Mary Shapiro . . . : Senior SEC official, conversation with author, September 2012.
the Syrian Electronic Army claimed credit . . . : Max Fisher, “Syrian Hackers Claim AP Hack That Tipped Stock Market by $136 Billion. Is It Terrorism?” Washington Post, April 23, 2013, http://www.washingtonpost.com/blogs/worldviews/wp/2013/04/23/syrian-hackers-claim-ap-hack-that-tipped-stock-market-by-136-billion-is-it-terrorism.
Knight Capital fiasco . . . : Scott Patterson, Jenny Strasburg, and Jacob Bunge, “Knight Upgrade Triggered Old Trading System, Big Losses,” Wall Street Journal, August 14, 2012, http://online.wsj.com/news/articles/SB10000872396390444318104577589694289838100.
bailout of the hedge fund Long-Term Capital Management . . . : The author was general counsel of Long-Term Capital Management and the principal negotiator of the 1998 bailout arranged by the Federal Reserve Bank of New York. While LTCM was a well-known trader in fixed-income and derivatives markets, the extent of its trading in equity markets was not well known. LTCM was the largest risk arbitrageur in the world, with over $15 billion in equity positions on pending deals. Upon reviewing the books and records of LTCM with the author and CEO John Meriwether on September 20, 1998, Peter R. Fisher, then head of open market operations at the Federal Reserve Bank of New York, remarked, “We knew you guys might take down the bond markets, but we had no idea you would take down the stock markets too.” The Fed’s effort to orchestrate a bailout commenced the next morning and was completed on September 28, 1998.
the highly classified plans for continuity . . . : Marc Ambinder, “The Day After,” National Journal, April 11, 2011, http://www.nationaljournal.com/magazine/government-still-unprepared-for-disaster-20110411.
Chapter 3: The Ruin of Markets
“The peculiar character of the problem . . .”: Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35, no. 4 (1935), pp. 519–30, http://www.econlib.org/l
ibrary/Essays/hykKnw1.html.
Charles Goodhart first articulated Goodhart’s Law . . . : The paper has been reprinted in several publications. See Charles Goodhart, “Problems of Monetary Management: The U.K. Experience,” in Anthony Courakis, ed., Inflation, Depression, and Economic Policy in the West (Lanham, Md.: Rowman and Littlefield, 1981), pp. 111–46.
the wealth effect from housing prices . . . : U.S. Congress, “Housing Wealth and Consumer Spending,” Congressional Budget Office Background Paper, January 2007, http://www.cbo.gov/publication/18279.
“We find . . . a positive connection . . .”: Sydney Ludvigson and Charles Steindel, “How Important Is the Stock Market Effect on Consumption?” FRBNY Economic Policy Review, July 1990, http://ftp.ny.frb.org/research/epr/99v05n2/9907ludv.pdf.
heavily concentrated among the rich . . . : Sherif Khalifa, Ousmane Seck, and Elwin Tobing, “Financial Wealth Effect: Evidence from Threshold Estimation,” Applied Economics Letters 18, no. 13 (2011), http://business.fullerton.edu/economics/skhalifa/publication13.pdf.
“The idea of a wealth effect . . . : Christopher Flavelle, “Debunking the ‘Wealth Effect,’” Slate, June 10, 2008, http://www.slate.com/articles/news_and_politics/hey_wait_a_minute/2008/06/debunking_the_wealth_effect.html.
rising consumption may increase stock prices . . . : U.S. Congress, “Housing Wealth”; and Ludvigson and Steindel, “How Important.”
“The issue here is not whether . . .”: Lacy H. Hunt, “The Fed’s Flawed Model,” Casey Research, May 28, 2013, http://www.caseyresearch.com/articles/the-feds-flawed-model.
“Since wages remained soft . . .”: Ibid.
the reason for this damage to SME lending . . . : Steve H. Hanke, “The Federal Reserve vs. Small Business,” Cato Institute, June 3, 2013, http://www.cato.org/blog/federal-reserve-vs-small-business-0.
Federal Reserve low-interest-rate policy . . . : Giovanni Dell’Ariccia, Luc Laeven, and Gustavo Suarez, “Bank Leverage and Monetary Policy’s Risk-Taking Channel: Evidence from the United States,” IMF Working Paper no. WP/13/143, June 2013, http://www.imf.org/external/pubs/cat/longres.aspx?sk=40642.0.
This is not certain to happen but is likely . . . : This analysis is based on data and reporting in Buttonwood, “The Real Deal—Low Real Interest Rates Are Usually Bad News for Equity Markets,” Economist, October 20, 2012, http://www.economist.com/news/finance-and-economics/21564845-low-real-interest-rates-are-usually-bad-news-equity-markets.
“The Market for ‘Lemons’”: George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970), pp. 488–500.
“Irreversibility, Uncertainty . . .”: Ben S. Bernanke, “Irreversibility, Uncertainty, and Cyclical Investment,” National Bureau of Economic Research, Cambridge, Mass., July 1980, http://www.nber.org/papers/w502.
Even with huge pools of unused labor . . . : Jason E. Taylor and Richard K. Vedder, “Stimulus by Spending Cuts: Lessons from 1946,” Cato Institute, Cato Policy Report, May–June 2010, http://www.cato.org/policy-report/mayjune-2010/stimulus-spending-cuts-lessons-1946.
the classic distinction between risk and uncertainty . . . : Frank H. Knight, Risk, Uncertainty and Profit (1921; reprint Washington, D.C.: Beard Books, 2002).
“It will pay to invest . . .”: Bernanke, “Irreversibility, Uncertainty.”
“It would not be difficult to recast . . .”: Ibid.
the counterproductive nature of Bernanke’s reasoning . . . : Robert E. Hall, “The Routes into and out of the Zero Lower Bound,” paper prepared for the Federal Reserve Bank of Kansas City Symposium, Jackson Hole, Wyo., August 13, 2013, http://www.stanford.edu/~rehall/HallJacksonHole2013.
Chapter 4: China’s New Financial Warlords
“Things grow and grow . . .”: Tao Te Ching, trans. Stephen Addis and Stanley Lombardo (Indianapolis: Hackett, 1993).
the current Communist leadership’s greatest fear . . . : David T. C. Lie, eldest grandson of Zhang Xue Ming, mayor of Tianjin in the 1930s, conversation with the author, Shanghai, June 6, 2012.
“The Myth of Asia’s Miracle”: Paul Krugman, “The Myth of Asia’s Miracle,” Foreign Affairs, November–December 1994, p. 62, http://www.pairault.fr/documents/lecture3s2009.pdf.
“China is on the eve of a demographic shift . . .”: Mitali Das and Papa N’Diaye, “Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?” IMF Working Paper no. 13/26, January 2013, http://www.imf.org/external/pubs/cat/longres.aspx?sk=40281.0.
In 2010 the ten most profitable SOEs . . . : James McGregor, No Ancient Wisdom, No Followers (Westport, Conn.: Prospecta Press, 2012), p. 23.
These megaprojects cover sectors . . . : Ibid., p. 34.
the interlocking interests of the political and economic elites . . . : “Heirs of Mao’s Comrades Rise as New Capitalist Nobility,” Bloomberg News, December 26, 2012, http://www.bloomberg.com/news/2012-12-26/immortals-beget-china-capitalism-from-citic-to-godfather-of-golf.html.
One report on WMP sales . . . : Xiao Gang, “Regulating Shadow Banking,” China Daily, October 12, 2012, p. 8, http://www.chinadaily.com.cn/opinion/2012-10/12/content_15812305.htm.
“In June, a Chinese man touched down . . .”: Alistair Macdonald, Paul Vieira, and Will Connors, “Chinese Fly Cash West, by the Suitcase,” Wall Street Journal, January 2, 2013, p. A1, http://online.wsj.com/news/articles/SB10001424127887323635504578213933647167020.
“Tackling inequality requires confronting . . .”: Bob Davis, “China Tries to Shut Rising Income Gap,” Wall Street Journal, December 11, 2012, p. A14, http://online.wsj.com/news/articles/SB10001424127887324640104578161493858722884.
corruption, cronyism, and income inequality . . . : Minxin Pei, “China’s Troubled Bourbons,” Project Syndicate, October 31, 2012, www.project-syndicate.org.
“Investment in China may currently . . .”: Il Houng Lee, Murtaza Syed, and Liu Xueyan, “Is China Over-Investing and Does It Matter?” IMF Working Paper no. WP/12/277, November 2012, http://www.imf.org/external/pubs/cat/longres.aspx?sk=40121.0.
“Let us . . . give China five years to bring . . .”: Michael Pettis, “The IMF on Overinvestment,” Michael Pettis’ China Financial Markets, December 28, 2012, http://www.economonitor.com/blog/2012/12.
The Chinese workforce is now dominated . . . : Houng Il Lee, Xu Qingjun, and Murtaza Syed, “China’s Demography and Its Implications,” IMF Working Paperno. WP/13/82, March 28, 2013, http://www.imf.org/external/pubs/cat/longres.aspx?sk=40446.0.
Chapter 5: The New German Reich
“the most learned man anywhere”: Einhard, The Life of Charlemagne (ninth century; reprint Kessinger, 2010).
“The final step was cannibalism . . .”: Lauro Martines, Furies: War in Europe, 1450–1700 (New York: Bloomsbury, 2013), p. 118.
“No statement about how to deal . . .”: John Williamson, “What Washington Means by Policy Reform,” Peterson Institute for International Economics, 1990, http://www.iie.com/publications/papers/paper.cfm?researchid=486.
“the Beijing Consensus . . . is flexible enough . . .”: Joshua Cooper Ramo, The Beijing Consensus (London, Foreign Policy Centre, 2004), p. 4.
the five pillars . . . : John Williamson, “Is the ‘Beijing Consensus’ Now Dominant?” Asia Policy, no. 13 (January 2012), pp. 1–16.
six of the top ten applicants . . . : World Intellectual Property Organization, WIPO IP Facts and Figures 2012, WIPO Economics and Statistics Series, http://www.wipo.int/export/sites/www/freepublications/en/statistics/943/wipo_pub_943_2012.pdf.
The average European corporate tax rate . . . : “Corporate Tax Rates Table,” KPMG, http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx.
For rail freight traffic . . . : Leo Cendrowicz, “Switzerland Celebrates World’s Longest Rail
Tunnel,” Time, October 20, 2010, http://www.time.com/time/business/article/0,8599,2026369,00.html.
“So if there were really a large excess . . .”: Paul Krugman, “Sticky Wages and the Macro Story,” New York Times, July 22, 2012, http://krugman.blogs.nytimes.com/2012/07/22/sticky-wages-and-the-macro-story.
“In a currency area comprising many regions . . .”: Robert A. Mundell, “A Theory of Optimum Currency Areas,” American Economic Review 51, no. 4 (September 1961), pp. 657–65, esp. 659.
Europe has lagged behind the rest of the developed world . . . : Indermit Gill and Martin Raiser, “Golden Growth, Restoring the Lustre of the European Economic Model,” International Bank for Reconstruction and Development, 2012, http://issuu.com/world.bank.publications/docs/9780821389652.
“As Chinese companies and entrepreneurs have moved . . .”: Howard Schneider, “As Chinese Capital Moves Abroad, Europe Offers an Open Door,” Washington Post, February 26, 2013, http://articles.washingtonpost.com/2013-02-26/business/37297545_1_direct-investment-chinese-investors-rhodium-group.
“was an early investor in bonds . . .”: Lingling Wei and Bob Davis, “China’s Zhu Changhong Helps Steer Nation’s Currency Reserves,” Wall Street Journal, July 16, 2013, p. C1, http://online.wsj.com/article/SB10001424127887323664204578606301739504368.html.
the ten largest money-market funds in the United States . . . : Howard Schneider, “In a Two-Faced Euro Zone, Financial Conditions Ease and Joblessness Rises,” Washington Post, March 1, 2013, http://articles.washingtonpost.com/2013-03-01/business/37373712_1_euro-zone-holdings-euro-zone-17-nation-currency-zone.
Data for the first quarter of 1999 . . . : IMF, “Currency Composition of Official Foreign Exchange Reserves (COFER),” http://www.imf.org/external/np/sta/cofer/eng/index.htm.
The cheap-dollar policy was made explicit in numerous public pronouncements . . . : Barack Obama, “Remarks by the President in State of the Union Address,” January 27, 2010, http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address; and Ben Bernanke, “U.S. Monetary Policy and International Implications,” remarks at IMF–Bank of Japan seminar, October 14, 2012, http://www.federalreserve.gov/newsevents/speech/bernanke20121014a.htm.
The Death of Money Page 36
