Summary: Fourth generation warfare takes place in a virtual space of the mind as earlier generations of war were waged in physical space. The battle for the moral high ground occurs in the media. Another battlefield are the markets, with flows of money replacing blitzkriegs by panzers. Here are excepts from two works about financial warfare, one old (Unrestricted Warfare) and one new (“The Strategic Consequences of American Indebtedness”). Both take us to the frontiers of thinking about modern warfare. This post is a follow-up to my July 2008 post Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ.
The first break-though text of 4GW was Unrestricted Warfare, by two Colonels in the China’s Air Force: Qiao Liang and Wang Xiangsui. They describe the 1997 attack by western hedge funds on the currencies of Southeast Asia as the first example of this new generation of warfare.
When people begin to lean toward and rejoice in the reduced use of military force to resolve conflicts, war will be reborn in another form and in another arena, becoming an instrument of enormous power in the hands of all those who harbor intentions of controlling other countries or regions. In this sense, there is reason for us to maintain that the financial attack by George Soros on East Asia, the terrorist attack on the U.S. embassy by Usama Bin Laden, the gas attack on the Tokyo subway by the disciples of the Aum Shinri Kyo, and the havoc wreaked by the likes of Morris Jr. on the Internet, in which the degree of destruction is by no means second to that of a war, represent semi-warfare, quasi-warfare, and sub-warfare, that is, the embryonic form of another kind of warfare. …
Financial War
Now that Asians have experienced the financial crisis in Southeast Asia, no one could be more affected by “financial war” than they have been. No, they have not just been affected; they have simply been cut to the very quick! A surprise financial war attack that was deliberately planned and initiated by the owners of international mobile capital ultimately served to pin one nation after another to the ground–nations that not long ago were hailed as “little tigers” and “little dragons.” Economic prosperity that once excited the constant admiration of the Western world changed to a depression, like the leaves of a tree that are blown away in a single night by the autumn wind. After just one round of fighting, the economies of a number of countries had fallen back ten years.
What is more, such a defeat on the economic front precipitates a near collapse of the social and political order. The casualties resulting from the constant chaos are no less than those resulting from a regional war, and the injury done to the living social organism even exceeds the injury inflicted by a regional war. Non-state organizations, in this their first war without the use of military force, are using non-military means to engage sovereign nations.
Thus, financial war is a form of non-military warfare which is just as terribly destructive as a bloody war, but in which no blood is actually shed. Financial warfare has now officially come to war’s center stage — a stage that for thousands of years has been occupied only by soldiers and weapons, with blood and death everywhere. We believe that before long, “financial warfare” will undoubtedly be an entry in the various types of dictionaries of official military jargon.
… Today, when nuclear weapons have already become frightening mantlepiece decorations that are losing their real operational value with each passing day, financial war has become a “hyperstrategic” weapon that is attracting the attention of the world. This is because financial war is easily manipulated and allows for concealed actions, and is also highly destructive.
Now Brad Setser, economist and expert on global capital flows at the Council on Foreign Relations, provides an analysis of America’s strategic weakness in this new dimension of war. As an economist, he writes mildly about a profound strategic weakness that could have terrible consequences. I highly recommend it. (Here is Setser’s blog at the CFR)
“Sovereign Wealth and Sovereign Power – The Strategic Consequences of American Indebtedness“, September 2008, 69 pages — Introduction:
In the 1870s, the scope of Great Britain’s financial empire exceeded the scope of its political empire. Dependence on British investors sometimes was a precursor, though, to informal — or even formal — political control. When Egypt’s khedive needed to raise cash to cover his personal debt to private British banks, he sold his large personal stake in the Suez Canal to the British state. Egypt’s ruler did little better managing Egypt’s public debt: difficulties making payments led Britain and France to assume control over Egypt’s treasury and, by 1882, to full British political control.
In the 1950s, Egyptian president Gamal Abdel Nasser’s decision to nationalize the Suez Canal led Britain — together with France and Israel — to occupy the Canal Zone. But Britain’s financial position had deteriorated, and it now depended on external financing to sustain the pound’s peg to the dollar. The United States — then Britain’s most important creditor—indicated that its willingness both to provide direct financial support to Britain and to back an International Monetary Fund (IMF) loan hinged on Britain’s willingness to respect a UN General Assembly resolution calling for Britain, France, and Israel to withdraw from the Suez. The U.S. ultimatum forced Britain to reconsider its position. British prime minister Anthony Eden explained: “We were therefore faced with the alternatives, a run on sterling and the loss of gold and dollar reserves till they fell well below the safety margin — or make the best we could of UN takeover and salvage what we could.”2 Britain’s decision to withdraw from the Suez duly prompted the United States to back a larger than expected IMF loan.
The lesson of Suez for the United States today is clear: political might is often linked to financial might, and a debtor’s capacity to project military power hinges on the support of its creditors. The United States is militarily far stronger than Britain was in the 1950s — and unlike Britain, it is not committed to maintaining the dollar’s external value. However, in some ways the United States’ current financial position is more precarious than Britain’s position in the 1950s. While Britain ran a small current account surplus in 1956, the United States ran a $750 billion current account deficit in 2007 — 5.5% of gross domestic product (GDP). Britain’s main source of financing was a close political ally. The United States’ main sources of financing are not allies. Without financing from China, Russia, and the Gulf states, the dollar would fall sharply, U.S. interest rates would rise, and the U.S. government would find it far more difficult to sustain its global role at an acceptable domestic cost.
To date, the fears concerning reliance on foreign governments for financing have not been borne out. … Because the United States’ ability to borrow huge sums at favorable rates seems unlimited, many have come to see reliance on foreign finance not as a source of vulnerability but as a sign of strength. Others argue that the United States is simply too big an economy to fail. Foreigners cannot withhold credit from the United States because the resulting decline in the dollar and fall in U.S. consumption would undermine their own exports.
This report takes the opposite position. It argues that the United States’ current reliance on other governments for financing represents an underappreciated strategic vulnerability. The willingness of foreign central banks … to build up dollar reserves has long provided a stable, but limited, source of external financing. But the United States increasingly relies on financing from central banks that already hold far more reserves than are needed to assure their own financial stability. It is true that foreign central banks have an interest in keeping the dollar strong. But the United States might have more to lose from a disruption of this relationship: financial flows create mutual interdependence, but the interdependence is asymmetric. The longer the United States relies on central banks and sovereign funds to support large external deficits, the greater the risk that the United States’ need for external credit will constrain its policy options.
Conclusion
This is perhaps the key aspect of the problem: “To date, the fears concerning reliance on foreign governments for financing have not been borne out.” So we do nothing to prepare ourselves against this danger.
“On September 23 his fleet hove in sight, and all came safely to anchor in Pevensey Bay. There was no opposition to the landing. The local fyrd had been called out this year four times already to watch the coast, and having, in true English style, come to the conclusion that the danger was past because it had not yet arrived had gone back to their homes.”
— A description of William the Conqueror’s arrival, from History of the English Speaking People by Winston S. Churchill
Let’s hope that someone senior in the new Administration reads Setser’s article. And Unrestricted Warfare. Forewarned is not prepared, but a step in the right direction.
“Surprise is an event that takes place in the mind of a commander.”
— From Prince of Sparta, by Jerry Pournelle and S. M. Stirling (1993)
Other posts about national security
- America’s grand strategy: lessons from our past (30 June 2008) – chapter 1 in a series of notes
- President Grant warns us about the dangers of national hubris (1 July 2008) – chapter 2
- America’s grand strategy, now in shambles (2 July 2008) — chapter 3
- America’s grand strategy, insanity at work (7 July 2008) — chapter 4
- Justifying the use of force, a key to success in 4GW (8 July 2008) – chapter 5
- The world seen through the lens of 4GW (this gives a clearer picture) (10 July 2008) — chapter 8
Click here to see a list of all posts about strategy and military theory.