The message no one wanted to hear

In 1999, two Chinese colonels, Qiao Liang and Wang Xiangsui, wrote a groundbreaking book titled “Unrestricted Warfare” that was published by the People’s Liberation Army (PLA) Press. They begin the book with the simple acknowledgement that the Gulf War of 1991 changed warfare forever. Desert Storm was an overwhelming, all-encompassing victory against what had been considered one of the greatest military powers in the world, and it was accomplished in a mere 42 days. The key, of course, was the substantial technological superiority of the Americans. This victory shocked the Chinese to the core. They no longer had delusions that they could win in a direct military confrontation with the United States. They realized that “war by other means” would be necessary.

The book identifies some of these other means, including:

• Financial warfare (manipulation of currencies, banks and the stock market),
• Technological warfare (gaining primary control of various technologies),
• Resources warfare (manipulating the price of, or access to, key resources),
• Network warfare (control of the Internet and real-time communication), and
• Economic aid warfare (controlling other nations by creating economic dependencies).

There should be little doubt that the work of the two colonels has been followed carefully by the PLA in determining means of engagement. In fact, the book has become the de facto manual for economic warfare worldwide.

Risks and Responses. In late 2008, I received a copy of a 1944 letter written by President Franklin D. Roosevelt to Secretary of War Henry L. Stimson. In it, the president asked for a study on how U.S. war-making efforts were impacting the economy, industry and morale in Germany and Japan. This was different from previous studies undertaken by the Economic Defense Board and the Board of Economic Warfare, which had focused on procuring economic support for the U.S. war effort. FDR’s letter to Stimson requested just the opposite: an analysis of how warfare could be used to target economies. Roosevelt understood that to defeat the enemy’s economy was to defeat the enemy.  

The recently declassified letter came to me from a leader in the Irregular Warfare Support Group (IWSG) of the Pentagon. Along with the letter came a request that I help IWSG “develop the present-day economic warfare threat doctrine and strategic appreciation.” IWSG is a part of SOLIC (Special Operations, Low-Intensity Conflict).

My connection to IWSG stemmed from concerns I had shared with some Pentagon insiders regarding the cause and effect of the 2008 market crash. In “Unrestricted Warfare,” the two Chinese colonels explained that “a single manmade stock-market crash, a single computer virus invasion, or a single rumor or scandal that results in a fluctuation in the enemy country’s exchange rates, or exposes the leaders of an enemy country on the Internet, all can be included in the ranks of new-concept weapons.”

Having watched the 2008 collapse up close and personal as an investment manager, it was clear to me that something out of the ordinary had happened. At the request of DoD, I submitted a white-paper report that outlined my concern. Basically, it goes like this:

Terrorists brought down the World Trade Center both as a symbol and as a direct attack on the U.S. financial system. They accomplished their feat after careful study and several trial runs.

It’s not hard to imagine that the Bear Stearns attack was an initial attempt to bring down our financial system and influence elections.

Is it possible that enemies of the United States purposefully attacked our financial markets on or about Sept. 11, 2008? There is some evidence that al-Qaida may have short-sold airline stocks in advance of the Sept. 11, 2001, attacks. Could they have seen this to be a successful weapon to be used against our capitalist system?

The initial white-paper report went on to describe mechanisms for how such an economic weapon could be used and identified the key issues needed for further study. It prompted swift response. Based on emails I received, it appeared that the President’s Foreign Intelligence Advisory Board (PFIAB), the Department of Defense, and even the CIA had been caught off guard. Despite the fact that the 2008 global market meltdown had erased some $50 trillion of wealth, with about $13 trillion of the losses in the United States alone, there was virtually no consideration that it had been triggered as an act of warfare or terrorism. Everyone saw what was happening as normal economic forces, and the politicians lined up in partisan camps to blame each other.

In that context, I was contracted by IWSG to formally outline the risk. The commitment was made in January, during the waning days of the Bush presidency, and the paper was delivered in June with the title, “Economic Warfare: Risks and Responses – Analysis of Twenty-First Century Risks in Light of the Recent Market Collapse.” The unclassified paper included 110 single-spaced pages with 210 endnotes and nine appendices. Working with experts across various fields and with the strong support of Patrick Maloy, who had left a lucrative Wall Street career to serve a second stint in the Marine Corps, I developed a formal hypothesis of the crash, using a motive-means-and-opportunity analysis of who might have been involved, and why. The deeper we dug, the more interesting things became.

Maloy was introduced to me by IWSG. He had been sending reports to DoD for several years with intelligence gathered in North Africa and the Middle East warning of a coming economic attack. When he saw my paper, he immediately knew that my hypothesis matched his experience. He also knew that there were no credible efforts in place to address a threat he knew to be all too real. He saw my work as an opportunity to provide a wake-up call and education for the defense and intelligence establishment.

The findings were simple. There was credible evidence to believe that a global economic war was under way that followed the ideas outlined by the Chinese colonels in 1999. Such a war had the potential to take the United States from the world’s largest economy and sole superpower to a second-tier nation in a decade or less.

Brett Decker, who co-authored “Bowing to Beijing” with William Triplett, acknowledged Chinese belligerence in a recent interview:

“China’s leaders are engaged in a war against America. They view us as a threat to their regime and way of life. Hence, they have embarked on a systematic, long-term program to surpass us militarily, economically and politically. They are willing to do anything – purchase our national debt, steal our intellectual property, spend obscene amounts to buy influence in Washington, engage in extensive espionage in our government and large corporations, and sell sensitive missile and nuclear technology to our mortal enemies – to defeat us.”

We know the Chinese are active in such means of conflict as cyber warfare, resources warfare, technological warfare and economic aid warfare. Should we be surprised if they have also been pursuing covert financial warfare? Probably not.

The Three Phases of War. We hypothesized a three-phase attack starting with oil-price manipulation from early 2007, when oil was about $50 per barrel, through mid-2008, when it reached almost $150 per barrel. This tripling of prices in 18 months was unprecedented, having occurred without a serious supply shock. In fact, supply actually increased slightly during the period, while at the same time demand declined slightly. A price increase under such circumstances is contrary to the laws of supply and demand.

The exogenous factor in this case was trading of “paper oil” in the futures markets. In mid-2009, according to research at Rice University, daily paper oil trades at the New York Mercantile Exchange were seven times greater than the actual oil used. This does not include trading in Chicago, London and Dubai, or off exchanges in private markets. All total, paper trades may be between 50 and 100 times the amount of actual oil used. And most of the trading is by neither producers nor major consumers. In other words, the price is set by financial speculation.

In mid-2008, when the price of oil was spiking, many denied the role of speculation. Now, nearly four years later, almost everyone acknowledges that reality, including ExxonMobil’s top executive officer, members of OPEC and leading policy think tanks. We know for certain that the massive increase in prices hurt the U.S. economy and worsened the effects of a bursting housing bubble and emerging recession. At the same time, it also drained over $1 trillion from Western economies and moved those funds to OPEC nations. In fact, the net effect was equal to, if not greater than, an actual oil embargo.

The beneficiaries, clearly, were oil producers. According to congressional testimony from Gal Luft, executive director of the Institute for the Analysis of Global Security, when oil was trading at $125 per barrel, the value of OPEC oil and gas reserves in the ground matched the value of all the world’s financial assets – every share of stock and every bond on the planet. The total value of OPEC energy in the ground was approaching 10 times the value of every company on the New York Stock Exchange.

In other words, we identified a vulnerability that clearly could be exploited through economic warfare. It had all the hallmarks of a great weapon, as identified by the Chinese colonels. Unfortunately, much of the paper oil trading had moved to opaque venues, such as “dark markets,” creating a perfect environment to use such a weapon – a classic example of opportunity.

Motive and means were easily identifiable in the equation as well. Dr. Walid Phares, who teaches at the National Defense University, had this to say:

“Sheikh Yussuf al Qardawi, Muslim Brotherhood ideologue and mentor of the Qatari-funded channel, spoke openly of Silah al Naft, i.e., ‘the weapon of oil.’ Indeed, it was called a weapon, as in a warfare situation – and most likely it was used as such. Of course, the producing ‘regimes’ will deny the existence of a real strategy to bring the U.S. to its knees by striking at its pumps. They will dismiss statements made by emirs and commentators in this regard. The ‘field jihadists,’ however, won’t deny the existence of such a battlefield.

“For years now, Salafist web sites and al-Qaida spokespersons have loudly called for an ‘oil jihad against infidel America and its lackeys’ ...  more revealing are official speeches by Osama bin Laden and his deputy on the ‘absolute necessity to use that weapon.’”

This clearly describes motive.

All that was left to identify was means. With trillions in Middle Eastern sovereign wealth funds and even as much as $200 billion in the West under the control of Muammar Gaddafi at the time, there were certainly sufficient financial resources to spark an oil-price jump. The key is that continual financial pressure on oil prices would yield a very real benefit for producers. Obviously, this required obscurity. To be successful, it was necessary to hide who was behind the buying and why. To accomplish this, there was an intense media narrative being pushed regarding “peak oil” and massive emerging market demand. Neither was the sole cause of higher prices. It was speculation, at least some of which came from the Middle East.

The second phase was even more devastating. It involved targeted “bear raids” against major financial-services firms like Lehman Brothers through the use of financial manipulations, such as naked short selling and naked credit default swaps. This gets fairly complicated, but is well documented and fully explained in my white-paper report. Essentially, there were large bets that the stock prices of Lehman Brothers and others would collapse, accompanied by large positions in derivatives that essentially cut off their access to the funding markets. After the fact, even George Soros, in a Wall Street Journal commentary, admitted that bear raids had been used as weapons against Lehman Brothers. Soros is considered an expert on the subject, because as a hedge-fund manager he was credited for profiting from what may have been the biggest bear raid of the 20th century: breaking the British pound in 1992. The two Chinese colonels identified him by name in “Unrestricted Warfare,” which stated:

“We believe that before long ‘financial warfare’ will undoubtedly be an entry in the various types of dictionaries of official military jargon. Moreover, when people revise the history books on 20th-century warfare in the early 21st century, the section on financial warfare will command the reader’s utmost attention. The main protagonist in this section of the history book will not be a statesman or a military strategist; rather, it will be George Soros.”

Available data show that Lehman Brothers and the other major financial companies were killed off by manipulation. Most of this was done in secret, using any and all means of market obscurity. When Lehman failed, the entire credit market collapsed, and the world nearly entered a new Great Depression. As with the first phase, market obscurity made it difficult to directly trace the financial attacks. This fits the pattern of financial warfare which requires “concealing oneself and shielding,” according to the Chinese colonels. Was it possible that some group could have brought down Lehman Brothers in an act of economic warfare? Our research showed that it was. But who had the ability and desire to pull off such an effort? As with the first phase, there are a number of key suspects, including al-Qaida.

According to an article in the May 2011 issue of The Atlantic, “A key facet of bin Laden’s anti-American warfare has always been economic ... His strategy of economic warfare went through several iterations over time, as al-Qaida responded to external events, seized upon opportunities provided to it, and incorporated lessons learned by the group over time.”

Bin Laden himself told a Pakistani journalist that “al-Qaida’s supporters are ‘aware of the cracks in the Western financial system as they are aware of the lines in their own hands.’”

Hopefully, the deaths of bin Laden and Anwar al-Alwaki have reduced the threat from al-Qaida. It is interesting to note that, according to German Press reports, bin Laden had a strategic economic warfare plan to attack Europe at the time of his death. Perhaps coincidently, the Europeans are banning the use of naked short selling and naked credit default swaps, key weapons of bear raids.

In addition to al-Qaida, other possible suspects include Venezuela, Iran, North Korea, Russia and even China. We do know that bin Laden wanted to crush our economy and was very likely a fan of the “Unrestricted Warfare” book, in which he was frequently mentioned. We also know, thanks to former Treasury Secretary Henry Paulson, that the Chinese warned in 2008 that the Russians were plotting to dump holdings in Fannie Mae and Freddie Mac to force a bailout that would strain the U.S. economy. The Russians did dump a huge holding of Fannie and Freddie that year, adding significantly to the turmoil.

The specifics of how the first and second phases took place are too complex to describe here. In fact, they take up the bulk of my book, “Secret Weapon,” published by Regnery in January. Suffice it to say, the phases had a huge impact and altered the course of our nation and the world. Even still, the third phase, as outlined more than two years ago, appears to be under way. It exploits weaknesses exposed in the first two phases and has the potential to permanently alter America’s position in the world.

The Coming Third Phase. The third phase requires the loss of America’s Triple-A credit rating (which happened last August) and ultimately the removal of the U.S. dollar as the world’s primary reserve currency. This type of attack would put the United States in a similar position as Greece and Italy, mandating severe defense cuts and a major reduction of U.S. power around the planet.

When my white-paper report on economic warfare was first presented in 2009, there was a good deal of pushback. The defense community said they didn’t really understand the economics. The economists couldn’t grasp why anyone would do this, since harming the U.S. economy would hurt other nations, especially China. Even as we saw the predicted third phase unfold before our eyes and even as China gained vis-à-vis the United States from the crisis, the pushback continued.

The Chinese colonels understood in 1999 that financial warfare would be difficult for Americans to grasp. They wrote:

“The Americans have not been able to get their act together in this area. This is because proposing a new concept of weapons does not rely on the springboard of new technology; it just demands lucid and incisive thinking. However, this is not a strong point of the Americans ...”

The potential of the third phase was articulated by the Chinese themselves in early 2011. This time, it came from the official journal of the Communist Party, Qiushi:

“Of course, to fight the U.S., we have to come up with key weapons. What is the most powerful weapon China has today? It is our economic power, especially our foreign exchange reserves (USD 2.8 trillion). The key is to use it well. If we use it well, it is a weapon; otherwise it may become a burden ... This approach ... is market-driven and it will not be able to easily blame China.

“Of course, the most important condition is still that China must have enough courage to challenge the U.S. currency. China can act in one of two ways. One is to sell U.S. dollar reserves, and the second is not to buy U.S. dollars for a certain period of time, which will weaken the currency and cause deep economic crisis for Washington. If China stops buying, other countries will pay close attention and are very likely to follow. Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans’ wealth will be enormous. The U.S. will not be able to withstand this pressure ....” 

Unfortunately, despite the fact that the Chinese are openly discussing the use of economic weapons, there is no clear national response in preparation on our side. According to some press reports and my personal experience, the Department of Defense no longer believes the issue belongs with the Pentagon. The Treasury Department is at best conflicted because it has $15 trillion of U.S. debt to roll over in the credit markets, and the best-positioned potential buyers are in the Middle East or China. It’s kind of hard to sell bonds to the very people you may be investigating for economic warfare. The FBI has separate units for financial crimes and terrorism, and this issue covers both. The SEC has no counterterrorism mandate.

I have given briefings to a number of congressional members, as well as to past and current heads of government agencies, and the general conclusion is that there is no existing federal effort currently positioned to monitor and respond to the economic warfare issues that we have identified. In FDR’s day, the War Department was charged with such a responsibility, but in today’s vast government the issue of economic warfare slips between the cracks. Worse still, the knowledge sets required for such an undertaking are siloed in departments that rarely intersect. The national defense teams really don’t interact with economists or financial experts.

Thanks to Rep. Mac Thornberry, R-Texas, the House Armed Services Committee included language to require the Pentagon to review and respond to my 2009 report. This is a good step. History and recent research alike confirm that we must be prepared for the reality of economic warfare, the doctrine having been published over a decade ago, well in advance of attacks and events that are shifting the balance of power in the world.

Whether these events and attacks were deliberate steps in a global battle plan or not, the evidence, from 9/11 to the crash of 2008 and subsequent meltdowns, is sufficient to demand a response. The only question is whether or not we can find the attention, creativity and will to do so. 

Kevin D. Freeman is author of the New York Times best-seller “Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and How It Can Happen Again.” Learn about the book and his work at www.secretweapon.org. He is the founder and CEO of Freeman Global Holdings, LLC, and his work has appeared on multiple media outlets, including CNBC, Fox News, The Washington Times, UK’s Daily Mail and the Times of London.