Harris nodded. “It’s a mess. I made a serious mistake in getting involved with those people. And as soon as this flurry dies down, I’m getting out.”
CHAPTER 64
Ibrahim had remained silent all through Gage’s recounting of how he’d spent the days after he’d been called to New York by Milton Abrams.
“Abrams is driven by questions not only about Hennessy,” Gage said, “but about Relative Growth Funds. He thinks it’s a fraud and that they’re using your academic work as a kind of camouflage.”
Gage expected a protest. Instead, Ibrahim nodded.
“He’s right. It was all nonsense. I was doing what everyone else in academia and Wall Street was doing back then, descending into the occult. There’s no objective reality that matches phrases like ‘two-step binomial trees,’ any more than you can take a stroll down the block into the seventh dimension to buy a pack of cigarettes.”
“Then what did Minsky and Relative Growth want from you?”
Gage guessed the answer before he’d finished the question, and suspected that Abrams would’ve guessed it, too.
“Magic,” Ibrahim said. “You have all of those quantitative analysts on Wall Street and in hedge funds who pray to a mathematical god that speaks in equations. They needed one of their own. More even than money, they needed the magic and the mystery and the miracle. Minsky isn’t an economist. He’s barely a mathematician. But he’s a master psychologist. Untrained, but innate. Like a professional gambler or a mega-church evangelical minister. Newton said that he could ‘calculate the motions of heavenly bodies, but not the madness of people.’ Minsky can do both, but only some of the time.”
“Which means you set him up.”
“Of course. And very personally. It’s his own fault that he began to believe in his own magic. He deserves what’s coming to him.”
“And what’s that?”
“Humiliation.”
Gage shook his head. “Hennessy wasn’t worried about Minsky’s possible humiliation. It was something else.”
Ibrahim pointed at Gage’s flowchart. “It’s right there.”
“You’ve got better vision than I do.”
“Are there more boxes than you’ve shown me?”
Gage drew the rest from memory.
Ibrahim reached over and tore it up.
“Hennessy was close, but didn’t get it quite right.” Ibrahim then drew a new one.
Gage looked it over and said, “I take it that the arrowed lines are investors’ money going into Relative Growth?”
Ibrahim shook his head. “Not only money. The G12 put in something else. And that something else is the foundation for almost everything Relative Growth did.”
“China only has one other asset: U.S. treasury bonds.”
“Bingo. We have a winner. And they dumped every single one into Relative Growth.”
Gage inspected Ibrahim’s face, looking for a sign that the claim was hyperbole or exaggeration. There was no way China could’ve unloaded a trillion dollars’ worth of U.S. debt without anyone in the financial community realizing it.
“When you were in Marseilles,” Ibrahim asked, “did you notice the China-NexCo Towers?”
Gage nodded. The twin structures, slick glass and matte gray, had just risen fifty stories tall next to the container port. Like the Great Wall, they were large enough to be visible from space.
“The construction financing was provided by Relative Growth Funds,” Ibrahim said.
“It was in the news,” Gage said. “No one was hiding it. The money came from investors in the hedge fund.”
Ibrahim leaned toward Gage. “But what secures Relative Growth’s loan to NexCo for the construction?”
“What always secures loans, the land and the building. If NexCo defaults, Relative Growth forecloses and takes the property. No different than a home mortgage.”
Ibrahim shook his head, then grinned with owner’s pride and said, “The loans are secured by U.S. treasury bonds.”
Ibrahim paused to let Gage repeat the phrase in his mind. Only on the second time through did the reality of it hit him: The loan wasn’t secured by the hard asset, but by soft paper, by no more than a promissory note.
“And that’s not the only one,” Ibrahim said. “It’s the same thing with the tens of millions of acres they’ve bought in Africa for bio-fuel production to free themselves from their dependence on Middle East and Russian oil. Same for mines and platinum futures and currency speculation. If NexCo or any other Group of Twelve investment defaults on a loan, the Group of Twelve simply surrenders the treasury bonds to Relative Growth.”
Gage felt the vertigo of free-falling off a cliff. “And when the financial community discovers that China has dumped all of its bonds-“
“The bond value plummets and Relative Growth is left having to make good on the loans, but they won’t have the cash to do it. Their investors will lose trillions of dollars and the banks that Relative Growth borrowed money from will lose trillions more. The entire U.S. economy will collapse and take Western Europe with it.”
The assumption that China needed a strong U.S. economy and needed to support the dollar and the prices of treasury bonds had disintegrated.
Even worse. Gage remembered once listening to Warren Buffett on the radio as he was driving to an appointment in San Francisco. Buffett saying that it was impossible for the Chinese to dump their bonds because they’d just have to exchange them for dollars and if they didn’t, the bond prices would collapse faster than they could sell them since there would be a rush to sell by all of the world’s bondholders.
If Ibrahim was right, Buffett was wrong. Fatally wrong.
Buffeta-buffeta-buffeta. The secret had been in the ramblings of Hennessy’s deteriorating mind. It wasn’t the sound of a motorcycle, but the sound of wrenching chaos.
“It doesn’t make sense,” Gage said. “Why would they do something like that? The U.S. is their biggest customer.”
“For how long? The Chinese government came to the conclusion that the U.S. economy would eventually collapse under the weight of its debt-not just the mortgage-driven debt and the government debt, but the money Americans spent on junk. iPods, plasma TVs, and SUVs.”
“That’s a long way-“
“No it isn’t. Within ten years, the people of the U.S. will be spending ninety percent of their GNP on two things: debt servicing and food.”
“So they’re grabbing everything they can now and are turning the U.S. into a colony,” Gage said.
“Don’t be an idiot,” Ibrahim said. “It’s already a colony. Eighty percent of the goods in American stores comes from China now. And they’ll still come from there because the U.S. won’t have the money to rebuild its industries.”
“They’re insane,” Gage said.
Ibrahim looked away. Gage saw a flutter of uncertainty in his eyes, as if he himself was drowning in the meaning of the events. He then looked back at Gage, and said, “The Chinese have a concept, tian ming- “
“The mandate of heaven.”
Ibrahim nodded. “They watched the growth of religious and political millennial movements in the U.S. The fantastical self-deceptions and delusions of economists and hedge fund managers, the contradiction between building up companies and then cutting them up to sell off the pieces for a short-term profit-and realized that when the going got tough, Americans would turn on each other. American history may be invisible to Americans, but it’s not to the Chinese. They saw that if a civil war happened once, it can happen again. They remember the genocidal violence committed against the native people, and believe that it can be-will be-turned on immigrants and
