Cold War 2.0 Is a Financial War
Stock-Markets / New Cold War Aug 07, 2014 - 12:38 PM GMTBy: Money_Morning
James Rickards writes: Editor's Note: James G. Rickards is the New York Times best-selling author of The Death of Money and Currency Wars. Today, he'll tell us about a new kind of global conflict – one that could wipe trillions in personal wealth off the map…
Relations between the United States and Russia are now at their lowest ebb since the end of the Soviet Union on Christmas Day 1991.
The reset in Russian-U.S. relations that President Obama and then Secretary of State Hillary Clinton hoped to achieve in 2009 is in tatters.
Recently, Time magazine captured this zeitgeist with an iconic cover of Vladimir Putin shadowed by a commercial jetliner and the title Cold War II: The West is losing Putin's dangerous game.
Stress between the U.S. and Russia comes on top of a long list of global crises involving civil war, invasion, and terrorism in Syria, Libya, Iraq, Israel, Gaza, and Ukraine.
The situation will grow worse in the years ahead. The active war zones are the visible hot spots, but there is growing tension just beneath the surface as well.
Here's what's happening – and what you need to know in order to act…
"The world is a mess."
China's ambitions in the South China Sea are clashing with the legitimate interests of Vietnam, Malaysia, Taiwan, and the Philippines. Nuclear weapons and ballistic missile development continue in North Korea and Iran. Horrific stories continue to emerge from Nigeria, Sudan, and elsewhere in Africa.
As former Secretary of State Madeline Albright recently remarked, "To put it mildly, the world is a mess."
Such a dire geopolitical landscape is of obvious concern to diplomats, the military, and policy makers. It should be no less troubling to investors. This is because geopolitics is no longer confined to the use of kinetic weapons and diplomatic horse-trading.
Today the weapons are as likely to be financial as military. Economic sanctions, asset freezes, and prohibitions on banking transactions are now the weapons of choice. The New York Times recently reported that a senior official responsible for asset freezes in the U.S. Treasury was "President Obama's favorite combatant commander." The danger for investors is that their portfolios and life's savings could end up as collateral damage as the battlefield moves to the banking system.
This Almost Worked Against Iran
The U.S. waged a successful financial war against Iran from 2012 to 2013 by pushing Iran out of the international payments systems. This meant they could not receive hard currency for their oil exports and could not pay for needed imports of equipment and gasoline. This caused a run on the banks and hyperinflation in Iran.
The U.S. was getting close to regime change in Iran without firing a shot when President Obama declared a truce in December 2013 and allowed Iran to gain access to billions of dollars of frozen assets as part of his new détente with Iran.
The U.S. is now trying the same financial tactics against Russia and Vladimir Putin because of Putin's annexation of Crimea and threats to invade eastern Ukraine.
But there is a crucial difference between having Putin as an adversary instead of Iran. Russia has a far greater capacity to fight back. If Russia is pushed too hard, it will strike with financial weapons of its own.
An Old, Deadly Dynamic
This dynamic harks back to the Cold War doctrine of Mutual Assured Destruction or MAD. During the Cold War, both Russia and the U.S. had enough missiles to destroy each other. They also had enough missiles to survive an attack and strike back. Neither side would attack because it knew it would be destroyed in the second strike counterattack. Both countries would be wiped out, so neither country would start the conflict.
Something similar exists today in capital markets: We live in a world of mutual assured financial destruction.
It is true that the U.S. could freeze major Russian banks out of the global payments system and prevent normal credit card processing in Russia by Visa and MasterCard. But Russia could strike back by dumping U.S. Treasury notes, freezing U.S. assets in Russia, and working with the BRICS nations to create alternatives to the U.S. dollar payments system.
Russia's Financial Doomsday Weapon Is Already on American "Soil"
Russia also has a financial nuclear option that is even more threatening than freezing assets. In its July 27, 2014 issue, BusinessWeek reported the discovery of a Russian "attack code" computer virus buried inside the Nasdaq Stock Market systems. An official of the NSA said the virus "might be capable of wiping out the entire exchange." The Russian attack code was discovered inside Nasdaq in 2010.
On August 22, 2013, the Nasdaq was shut down for half the day due to an unexplained computer glitch. To this day, no credible explanation has been offered as to what caused the shutdown.
Was it a hack attack by Iranians?
A practice run by the Russians?
Another bug planted by the Chinese?
If the explanation were straightforward, it should have been offered by now. If the explanation is nefarious, there is good reason not to tell the public. Investors everywhere might be panicked into dumping their stocks if they knew that their digitally recorded investments could be wiped out in the blink of an eye.
Financial warfare is no longer in the realm of war games and futurists. It is happening now all around the world. Wiping out stock exchanges is no longer the stuff of science fiction films. The enemy viruses are already in place.
The only thing holding back full-scale financial warfare is the threat of retaliation, exactly as happened in the Cold War.
Now, in Cold War 2.0, the retaliation is not with nuclear weapons but with paralyzing freezes on stock exchanges and bank payments. Any miscalculation by politicians or accidents caused by technicians could be enough to wipe trillions of dollars of value off the face of the earth.
How to Prevent Your Retirement from Becoming "Collateral Damage"
Investors have very little idea this is happening and are completely unprepared for the consequences.
Investors are not helpless in this brave new world of financial warfare…
They can rely on assets that are not digital and do not depend on stock exchanges or digital brokerage accounts. These assets include gold, silver, cash, land, fine art, private equity, and certain hedge funds.
There are convenient ways to invest in these asset classes even for those who are not planning to pay $100 million for a Picasso. Some diligence and care is required, but putting part of one's portfolio in assets that are robust to the dangers of inflation, deflation, and financial warfare is not that difficult to do.
The time to start is now.
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