What have the tensions between the US and North Korea, Iran and Russia in common? Answer: It is that they are components to a wider financial war. Russia and Iran (together with China) happen to be the three key players shaping a huge (almost half the global population) alternative currency zone. The North Korean issue is important as it potentially may precipitate the US – depending on events – towards a more aggressive policy toward China (whether out of anger at Chinese hesitations over Korea, or as part and parcel of the US Administration’s desire to clip China’s trading wings).

The US has embarked on a project to restore America’s economic primacy through suppressing its main trade competitors (through quasi-protectionism), and in the military context to ensure America’s continued political dominance. The US ‘America First’ National Security Strategy made it plain: China and Russia are America’s ‘revisionist’ adversaries, and the US must and intends to win in this competition. The sub-text is that potential main rivals must be reminded of their ‘place’ in the global order. This part is clear and quite explicit, but what is left unsaid is that America is staking all on the dollar’s global, reserve currency status being maintained, for without it, President Trump’s aims are unlikely to be delivered. The dollar status is crucial – precisely because of what has occurred in the wake of the Great Financial crisis – the explosion of further debt.

But here is a paradox: how is it that a Presidential Candidate who promised less military belligerence, less foreign intervention, and no western cultural-identity imposition, has, in the space of one year, become, as President, a hawk in respect to Korea and Iran. What changed in his thinking? The course being pursued by both states was well-known, and has offered no sudden surprise (though North Korea’s progress may have proved quantitatively more rapid than, perhaps, US Intelligence was expecting: i.e. instead of 2020 – 2021, North Korea may have achieved its weapons objective in 2018 – some two years or so earlier that estimated)? But essentially Korea’s desire to be accepted as a nuclear weapon state is nothing new.

It is ‘the Federal debt’, and a pending ‘debt ceiling’ that is crucial. There is little doubt that the US military is not what it used to be, and the Republican Party possesses a wing that is quite fundamentalist about limiting debt (Freedom Caucus). A serious military crisis is possibly the only way Trump is likely to get a huge ramp-up of military expenditure past Congress’ fiscal hawks. President Trump – the Tax Bill saga tells us — is going to be a big spender as part of MAGA (Make America Great Again). The increase in proposed US defence spending alone, more or less equates to the whole annual Russian defence spending. US Federal debt is already above $20 Trillion, and accelerating fast: the borrowing requirement is ballooning and interest payments to service this additional borrowing, normally would be expected to rise.

But Trump is also explicitly a low interest rate, expanding balance-sheet, sort of guy. So, how does one finance a truly ballooning budget deficit, whilst keeping interest rates low, or at zero? Well a fear-driven rush by foreigners into ‘risk free’ US Treasuries (i.e. military crisis again), historically serves to keep rates low – and dollars plentiful — as ‘overseas dollars’ return ‘home’ to Wall Street. This could be a solution, of course, but it would be entirely contingent on maintaining the present dollar status, and the large pool of dollars held externally for the principal purpose of having to transact trade in dollars.

And why is it that in place of détente with Russia, we have Herman Gref, the CEO of Russia’s largest commercial bank, telling the Financial Times that any further tightening of anti-Russia sanctions, including the potential exclusion of Russian banks and corporations from the SWIFT payment system (the global network of secure financial messaging services) would have such a devastating effect that it would “make the Cold War look like child’s play”? (The US Treasury is expected to present its report on further sanctions to Congress as early as February 2018, the Financial Times reports). What is the point? Why should the US and Europe proceed down this particular rabbit hole — it would be particularly damaging for Europe? Well, the answer, probably, is similar: the imperative to maintain the dollar’s global status for a programme to reclaim America’s pre-eminence, which – given the overhang of additional debt in the wake of 2008 – has to be contingent on the dollar’s global status.

And from the US perspective, President Putin has declared himself to be an opponent to dollar special privilege when, at the BRICS summit in September 2017, he insisted on “the BRIC countries’ concerns over the unfairness of the global financial and economic architecture which does not give due regard to the growing weight of the emerging economies”. Putin further stressed the need to “overcome the excessive domination of a limited number of reserve currencies”. Russia consequently has duly earned American wrath for this stance. Saddam Hussein and Muamar Gaddafi both questioned the dollar hegemony, and look what happened to them.

Financial war, of course, is nothing new. The US began staging annual financial war ‘War Games’ as long ago as 2005. General Hayden, the former director of first the NSA and subsequently of the CIA, has characterised financial war as the primary means of warfare in the twenty-first century, and sanctions as its Precision Guided Munitions (PGMs). But what, it seems, might be bringing matters to a head is not just President Trump’s need for a higher debt ceiling, and low-cost debt availability to fund his revival of the American economy; but rather that the new bulbs that were planted over the years, for monetary revolution, might suddenly break through the covering soil as new shoots, emerging ready to flower, in due course.

Traditionally, transformation of the global monetary system conventionally has been thought of not as something sudden, but rather as a slow, incremental displacement of one system by another, (or by several). But these bulbs really began to be planted in 2012 after Washington blocked international clearing for every Iranian bank, froze $100 billion in Iranian assets overseas, and curtailed Tehran’s potential to export oil. The consequence was a severe bout of inflation in Iran that debilitated the currency.

Then, in 2014, Saudi Arabia engineered the oil price drop against US shale oil production, but also to punish Russia for its support for President Assad. And to rub salt into the wound, the US Treasury facilitated a ‘bear raid’ on the Rouble, which only was brought to a halt by China quietly intervening in the foreign exchange market, to prevent a collapse of the currency. It was clear at this point, that China, Russia and Iran shared a common strategic interest to establish a currency zone, with the depth of markets and infrastructure, to operate independently of the dollar sphere. These states have made it very clear that they are committed to a long-term strategy to stop using the US dollar, as their primary currency, in global trade.

Trump’s Security Strategy – if prosecuted seriously – precisely risks an upset to the precarious balance to this ongoing, (and until now) slowly unfolding, financial war. Pursuing aggressive financial sanctions against any of these three states risks now precipitating a premature triggering of substantive monetary change in retaliation (and, a concomitant risk of financial chaos). It is possibly this latter outcome to which Herman Gref was hinting when he told the Financial Times that blocking international clearing for Russian banks would have such a devastating effect, that it would “make the Cold War look like child’s play”.

The key here is China: China’s economy is about nine times that of Russia. Mr Trump already had accused China of various trade and intellectual property infractions during his Presidential Campaign, threatening tariffs in retaliation. That was before Treasury Secretary Mnuchin, in September, warned China that the US could impose additional sanctions on China – potentially cutting off access to the U.S. financial system (the Treasury’s ‘neutron bomb’ of blocking the SWIFT clearance system) – if China failed to impose sanctions against North Korea, sufficient to satisfy the US demand. Now, in the US National Strategy statement, China repeatedly is cast as an economic miscreant, a “revisionist power” and “rival” to America’s economic and political primacy. The writing of aggravated relations, clearly is on the wall.

How might China react? The western view is sanguine: China has more to lose in any financial war (because of its US Treasury holdings), and there is anyway, nothing that can substitute for the dollar, with its unique market depth. But is this complacency misplaced? What is clear is that China and Russia and the BRICS have been thinking and preparing – as best they can – for an escalation of financial war arising from whatever pretext is used to launch it.

China, too, it would appear, shares Mr Hayden’s view that today’s conflicts primordially are geo-financial. In brief, the opinion of China’s strategic advisors is likely to be that America’s renewed desire to escalate military tensions – this time directed at North Korea, Syria and possibly Iran – is a front for America’s continual financial war, and that China needs to prepare its riposte. I have written on this before, but for clues, we should, as Alasdair Macleod suggests, “look at this from China’s point of view. The People’s Liberation Army’s most influential strategist, Major-General Qiao Liang, laid out his overall strategic philosophy at a book-study forum of the Communist Party’s Central Committee in Autumn 2015. His view can be taken to be that of the Chinese leadership.” As Qiao puts it:

The U.S. avoided high inflation by letting the dollar circulate globally. It also needs to restrain the printing of dollars to avoid a dollar devaluation. Then what should it do when it runs out of dollars? The Americans came up with a solution: issuing debt to bring the dollar back to the U.S. The Americans started to play a game of printing money with one hand and borrowing money with the other hand. Printing money can make money. Borrowing money can also make money. This financial economy (using money to make money) is much easier than the real (industry-based) economy. Why will it bother with manufacturing industries that have only low value-adding capabilities? Since August 15, 1971, the U.S. has gradually stopped its real economy and moved into a virtual economy. It has become an “empty” economy state. Today’s U.S. Gross Domestic Product (GDP) has reached US$18 trillion, but only $5 trillion is from the real economy. By issuing debt, the U.S. brings a large amount of dollars from overseas, back to the U.S.’s three big markets: the commodity market, the Treasury Bills market, and the stock market. The U.S. repeats this cycle to make money: printing money, exporting money overseas, and bringing money back. The U.S. has thus become a financial empire.

Macleod comments: “In other words, America’s wealth is sustained by a pump-and-dump operation facilitated by the dollar’s reserve status, replacing genuine industrial production. It is worth clarifying one point: foreign owned dollars never leave the US, only their function. It is more correct to state that the US Government causes dollars to be diverted from foreign trade and investment in manufacturing, to be invested in Treasuries”.

“The first cycle identified by Qiao was the expansion of dollars aimed at creating a boom in Latin America in the mid-seventies. The second cycle was aimed at South-East Asia, which expanded on the back of a dollar that weakened from 1986 onwards. From 1995, the dollar began to strengthen, culminating in a bear-raid on the Thai baht, which spread to Malaysia, Indonesia and other countries in the region. The Asian Tiger phenomenon was created and destroyed, not by the countries themselves, but by the flood and ebb of dollar ownership and investment. Qiao notes that China escaped being caught up in this US-inspired operation".

"Qiao then turns his attention to the contemporary cycle (in 2015) of dollar management, claiming it was now aimed at China. In his words:

“It was as precise as the tide; the U.S. dollar was strong for six years. Then, in 2002, it started getting weak. Following the same pattern, it stayed weak for ten years. In 2012, the Americans started to prepare to make it strong. They used the same approach: create a regional crisis for other people. Unfortunately, the U.S. played with too much fire [in its own mortgage market] earlier and got itself into a financial crisis in 2008. This delayed the timing of the U.S. dollar’s hike a bit. If we acknowledge that there is a U.S. dollar index cycle and the Americans use this cycle to harvest from other countries, then we can conclude that it was time for the Americans to harvest China. Why? Because China had obtained the largest amount of investment from the world. The size of China’s economy was no longer the size of a single county; it was even bigger than the whole of Latin America and about the same size as East Asia’s economy.”

“Qiao goes so far to state that the most important event in the twentieth century was not the two world wars, but America’s abandonment of the gold standard in 1971. This is some statement”, exclaims Macleod.

It is indeed … And here lies the crux of China’s strategy. It will be some years before the Yuan assumes the status of a major reserve currency (it had been planning a ‘harmonious’ ascent – in China’s non-assertive parlance), but China dominates world trade, and is in a position at any time henceforth to tie oil (and commodities) to gold – as they originally were. The Shanghai International Energy Exchange (INE) has already run four production environment tests for crude oil futures. The latter will be convertible into physical gold on either the Shanghai or Hong Kong gold markets. And Russia’s central bank has opened an office in Beijing, specifically tasked with resolving the technical aspects of gold deliveries from Russia into China. Just to be clear: these contracts are only available to non-domestic traders, and any gold bullion acquired through the yuan-gold futures contracts will be sourced from international markets, not China nor her citizens. In the longer term, with oil becoming directly linked to gold, rather than the dollar, we may see a revaluation of gold in respect to the dollar.

And, in October 2015, China inaugurated its International Payments System (CIPS). CIPS has a cooperation agreement with the private, Belgium-based SWIFT international bank, clearing system, through which virtually every global transaction must transit, but in the event of China being excluded from SWIFT, as Mnuchin so hinted in September, China and Russia will be able to clear through CIPS.

So far, China’s policy has been to avoid instigating a disruption to the dollar sphere, preferring not to risk having global trade dislocated, which could easily occur if there was a substantive loss of confidence in the dollar. But might American belligerency toward China – tied in some respect to North Korea – be the trigger? In fact, Venezuela has already set the ball rolling by refusing to accept oil payments in dollars, thus demonstrating to the world that an alternative system to the petrodollar is indeed possible. Furthermore, Caracas has begun publishing an oil-price index denominated in Yuan.

The operational launch of the Chinese Yuan denominated oil futures option in time — depending how quickly contracts can be adjusted – holds the prospect for displacing the petro-dollar system, especially if Saudi Arabia agrees to sell crude to China in Yuan (perhaps as part of China buying a stake in the Aramco offering).

China has other options were the US to become more aggressive and attempt adversely to change the terms of trade against China. It might simply switch to trading goods exclusively in Yuan, thus displacing the dollar completely as the medium for transactions. China and Russia would almost certainly be joined by their major trading partner countries in the BRICS (Brazil, Russia, India, China, South Africa), as well as by their Eurasian partner countries of the Shanghai Cooperation Organization (SCO) — comprising a population of well over 3 billion people, some 42% of the entire world population.

But because China still owns large quantities of US Treasuries and dollar reserves, for the moment she might prefer more time before executing such a coup de grace. But if pressed hard enough by the Trump team, execute it, she will: Hence Gref’s warning.

So the bigger question, if Trump does pursue an economic ‘containment of China’ strategy – and China and allies respond – is what will be the effect on ‘risk free’ US Treasury values in the wake of a major segment of the global economy going its own way? And what too, will be the ability of the US government then to finance its debt at its current, and growing, levels? Matters to ponder, perhaps.