Could Currency Be Destabilized?
In 1933 the United States began to move away from the gold standard, the process was completed in 1971. To destabilize the currency of a country on the gold standard you would need to:
- Invent a method to produce lots of gold very cheaply, OR
- Run in with lots of tanks and GI Joes and steal their gold.
Most of the world depends on fiat currency, the value of money is related to the power of the nation, its sovereignty, and its balance of trade. It's essentially a trust model and it worked well and still works. The question is are there chinks in the armor?
Growing evidence indicates a variety of attacks could cause significant economic harm to a target, an attack specifically designed to destabilize a currency might now be possible especially if sponsored by a party with significant economic power (i.e., a major country) or executed with precise timing during a high stress period on the economy.
Internet-based Electronic Warfare
Traditional economic warfare seeks to disrupt the flow of commerce in a nation or reduce the confidence or willingness of participants to engage in economic activity. In the Internet world, the main tools are denials of service, identity (or information) theft, or fraud.Paul Kanjorski, the chairman of the House financial services subcommittee, went on C-Span January 27, 2009 and said that $550 billion was withdrawn from money-market accounts on September 15, 2008 in the space of "an hour or two", that Treasury "closed down the money accounts", and that if they hadn't done so, "by 2 PM that afternoon $5.5-trillion would have been withdrawn". The speech is documented on Youtube (hang tough till you get past the panicked lady.)[1] Kanjorski further said, if the Treasury had not responded by guaranteeing $250,000 per account the entire economy of the United States would have collapsed, followed by the rest of the world in 24 hours. If you are interested in learning more what actually did happen that week, I suggest Felix Salmon's blog posting.[2]
You may not have heard about this on mainstream media, because it does not appear to be based on solid sources, though it would make an excellent novel. However, there are chinks in the US Treasury: in a Moody's Triple A bond rating, the US and the UK were put in a class above that of Spain and Ireland, but below Germany, France, Canada and the four Scandinavian countries.[3] In 2008, Worldnet Daily reported, ""We decided to raise the flag," Tom Lemmon at Moody's told WND, "because the underlying credit rating of the U.S. government faces the risk of downgrading in the next 10 years if solutions are not found to our growing Medicare and Social Security unfunded obligations." In May 2009 Standard & Poor released a warning over Britian's credit rating, though they did not actually downgrade.
Economics of Currency Trading
The valuation of currency, at least in economies using "fiat" money, is based on the perception of that currency's general worth. This perception is based on several factors, the strength of the government's economy behind that currency, the willingness of governments to invest in that economy, and general geopolitical factors. For instance, the perception that the United States is overextended with its trade and budget deficits could adversely affect the valuation of the dollar.
Those who buy and sell currency each day, currency traders, are considered a savvy bunch. Because the information they rely on to make decisions crosses international boundaries into countries which may or may not necessarily be open with information, they have to rely on both conventional and unconventional information sources. In order to have a successful impact on a currency's value, one would need to successfully change the perception of a bulk of these currency traders.
Likelihood of Success
There are plenty of analogous examples that short-term influences can be made on valuations of stocks and such. For instance, several companies have been subject to false press releases that had dramatic effects on their stock prices. In those cases, the perpetrator was caught quickly and the stock resumed its previous value. People were able to make money trading options on that stock, but the long-term fundamental value of the company remained unchanged once people discovered the fraud.This would be likely true for the case of currency. Currency traders, a savvy bunch, might be able to be duped into believing false information that could cause a run on the currency. But likely value shoppers would find the scam and buy low when people rushed back in after the fraud was discovered. In the cases of manipulation of stock prices, the fraud was discovered in days, if not hours. If a similar fraud were attempted on a currency, the full weight of that nation's government would be levied to fix the problem quickly.
In order to have an impact on an economy the assets involved would have to be significant. For instance, the United States had a Gross Domestic Product (GDP) in 2008 of US$14.3 trillion.[4] Even launching an attack with $100 million would be like trying to bankrupt a major international corporation by running out the door with a fistful of nickels from petty cash.
One successful attempt at currency manipulation (or savvy investment, depending on your opinion on the matter) was Black Wednesday in 1992. George Soros bet 10 billion pounds against the Bank of England and broke the currency.[4] In that case, England's currency was already having problems and Soros was the "straw the broke the camel's back". At that time, he used an amount of money roughly equal to 1.5% of Britain's GDP. With significant investment of resources, a currency "on the brink" can be successfully attacked.
Concerns from Asia
Dr. Manzur Ejaz blogs about "Recent currency destabilization in the East Asian countries (Thailand, Philippine and Malaysia) by international speculators was a preamble to an unfolding of a broader picture." And a PBS interview with Dr. Mahathir bin Mohamad descibes the havoc he has had to deal with concerning the Malaysian currency. "In the old days you needed to conquer a country with military force, and then you could control that country. Today it's not necessary at all. You can destabilize a country, make it poor, and then make it request help. And [in exchange] for the help that is given, you gain control over the policies of the country, and when you gain control over the policies of a country, effectively you have colonized that country."Cryptocurrency
One of the main attractions to investors, (other than hoping they will get rich quick), is that the currency is outside of nation state control. Nations, such as Venezuela have floated the idea of nation state sponsored cryptocurrency, in this case backed by oil reserves.It will be years until we know if this is a lasting idea. For now we can simply watch the rise and fall, but one big idea in crypto currency is the idea of a coin trader. If you have X branded digital assets you can use a coin trader to make a purchase from a seller that requires Y branded assets.
This is not limited to digital money. Ripple has two payment products for banks: xCurrent and xRapid. Only xRapid utilizes Ripple’s XRP token. Many banks are testing/using xCurrent. Western Union just became the fifth customer to test xRapid.
This is important because one of the most important measurements of money is velocity, how fast the money can be spent and reused. Coin traders and trading instruments like Ripple greatly accelerate the velocity of money.
With these incredible advantages come risks. Coin traders, can and have been hacked and robbed, after all digital currency is bought and sold using imperfect computers. And speed also means if it goes bad, it can go bad quickly. The idea of a trillion dollars in value destroyed in the wink of an eye is becoming possible.
Debt, Inflation, Hyperinflation
A result of leaving the gold standard for most nations was the creation of debt. In the US today, we have record levels of personal, corporate, and national debt. Inflation is the friend of debt. If I borrow $100 from you and inflation occurs, the dollars that I pay you back with are worth less than the dollars I borrowed, i.e. I borrow $100, but pay you back with the equivalent of $85. However, one of the main jobs of the Feb in the USA is to ensure inflation does not morph into hyperinflation where it takes a wheelbarrow of money to purchase a loaf of bread.
Summary
In order to have anything but a short-lived and transitory effect on the value of a currency, it would take a significant amount of assets and other factors that have already placed the currency in a weakened state. With the combined weight of a government who has a vested interest in correct deception and savvy investors who would quickly discovery it, perception based electronic attacks would not be likely to succeed.It is possible that a large-scale denial of service attack could disrupt an economy enough to eventually lead to currency devaluation; however, the scale would have to be many orders of magnitude larger than has yet been seen. September 11th has shown that the American economy can sustain several days of suspended economic activity and few denial of service attacks have been able to be maintained for that long.
In short, without the full backing and commitment of another nation, a significant investment of resources, and a willingness to be identified (at least the nation) as being behind the attack, direct long-term currency manipulation is not likely. If anyone can disrupt the US economy, it is China, they hold something on the order of $2 Trillion dollars in US debt, they would have to take a loss to do so, the impact on the Yuan which has been tied to the dollar for a very long time can not be calculated.[6]
This article is based on earlier research by John C. A. Bambenek and Stephen Northcutt
John Bambenek is an academic professional at the University of Illinois at Urbana-Champaign and a handler for the Internet Storm Center.
1 http://www.youtube.com/watch?v=_NMu1mFao3w
2 http://seekingalpha.com/article/120220-kanjorski-and-the-money-market-funds-the-facts
3 http://uk.reuters.com/article/UK_COMKTNEWS_MORE/idUKLB77042220090212
4 http://en.wikipedia.org/wiki/United_States
5 http://cse.stanford.edu/class/cs201/projects-98-99/financial-transactions/large_investors2.htm
6 http://seekingalpha.com/article/120547-why-china-can-t-dump-u-s-treasuries
Additional links:
http://www.wnd.com/news/article.asp?ARTICLE_ID=59692
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/21/AR2009052104401.html
http://www.letstalkfutures.com/2009/05/28/can-the-us-lose-its-aaa-credit-rating/
http://users.erols.com/ziqbal/oct5.htm
http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_mahathirbinmohamad.html
https://commodity.com/blog/hyperinflation/
