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  A week before meeting Trump, Abe had signed a civil nuclear cooperation agreement with India on November 11, six years in the making. India’s prime minister Narendra Modi called it an “historic step in our engagement to build a clean energy partnership.” The two countries, both wary of China’s presence in the East and South China Seas and the Indian Ocean, were also exploring enhanced military and naval partnerships.247

  To continue to hedge its US alliance, Japan forged tighter relationships with Russia, a strategy that culminated in a meeting between Abe and Russian president Vladimir Putin in mid-December 2016.248 Greater synergy between the two countries could solve three issues for Japan: temper any threat from China, fortify Japan’s position regarding South and North Korean geopolitics, and diversify economic problems. That said, the issue of the Kuril Islands weighed heavily on that possibility.

  THE MONEY-CREATION ALLIANCE SHIFT

  What the Fed, BOJ, ECB, and other money conjurers had succeeded in doing in the wake of the financial crisis was alter the availability and magnitude of money to the financial system and its elites. But there was no such aid or direction of this money to the foundational economy. Their policies thus hadn’t meaningfully altered economic stability, only certain parameters that were considered positive reflection of it, such as the level of the stock market.

  The BOJ’s insistence on buying ten-year Japanese government bonds to bring its yields or interest rates down was a tripling down on the ineffectiveness of its massive quantitative and qualitative easing policies. As the bullish trend of the dollar extended after the Fed raised rates by 25 basis points in December 2016, the BOJ and other central banks kept “printing” money for reasons that had shifting goals. This, while citizens routinely voted against sitting governments and, in the case of Europe, against allegiances with their neighbors. If the Fed raised rates further, the BOJ would be forced to reconsider its negative rate policy.

  From Japan’s standpoint, if a second financial crisis was to emanate from the United States, it would be safer if it were allied with China, with the BOJ allied with the PBOC. China fashioned regional free trade agreements with South Korea and other neighbors in the late 1990s, but not with Japan. Those were the years of Japan’s own big bank crisis, and its government body, the Financial Services Agency,249 wanted Japan to focus on regaining stability in its own backyard.

  Japan aimed to uphold the free trade rules of the WTO, which China joined in 2001. The WTO wanted a broader role in dictating how China’s trade and financial liberalization would evolve, but China wanted to do things at its own pace. According to Kumiko Okazaki of the Canon Institute of Global Studies in Tokyo and a former BOJ official (September 2007 and February 2016250), the first “symbolic” regional free trade agreement was between Japan and Singapore in 2002.251

  When the prevailing currency swap agreement between the PBOC and BOJ expired in March 2002, the program was not renewed because of territorial island disputes. An underground agreement was prepared, but the respective governments were publicly opposed to it.

  Starting in December 2008, the PBOC signed more than thirty bilateral currency swap agreements. As of May 15, 2015, its total value of effective currency swap agreements was RMB 2.9 trillion (US$468 billion). In 2014, an equivalent of RMB 1.13 trillion (US$182 billion) of swaps was conducted under these agreements.252 They did not cover Japan or the United States, even though many US and Japanese companies did business in China.253

  However, Japan had other avenues of connection with the PBOC that the Fed did not. The BOJ, PBOC, and Bank of Korea254 heads had established a tripartite group in December 2008.255 The group held regular meetings ever since, despite any geopolitical rumblings to the contrary.256 However, the results of those meetings were not publicly disclosed. The BOJ did, however, have a currency swap agreement with the Bank of Korea, as did the PBOC, so technically there was coverage through the South Korean won (currency) in the event of a regional crisis.

  TRUMP’S PROMISE OF FRIENDSHIP TO JAPAN

  On January 20, 2017, Donald J. Trump became the forty-fifth president of the United States. Three days later, he signed the executive order to officially remove the United States from the Trans-Pacific Partnership, an agreement to “promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in the signatories’ countries; and promote transparency, good governance, and enhanced labor and environmental protections.”

  The TPP contained measures to lower both nontariff and tariff barriers to trade and to establish an investor-state dispute settlement (ISDS) mechanism. Before Trump opted out, it was to cover twelve countries, including the United States and Japan, but not China. To Japan, it had represented an excellent competitive opportunity relative to China. But if the United States wasn’t involved, Japan would have to expand with other TPP members, as well as with China through other means.

  The Trump White House geared up to make its mark on the US and global economy with policy directives that included financial deregulation and bilateral trade agreements. America doesn’t exist in a vacuum, not politically, militarily, or financially. The mistakes made in handling the financial crisis and the Fed’s artisanal money activities shifted the perception of the United States regarding nationalism and Wall Street’s role in maiming the economy.

  President Xi Jinping reacted by strengthening China’s trade ties throughout Asia, championing China’s own version of the Trans-Pacific Partnership. Indeed, by the time Obama and then Trump said no to the TPP, China had established free trade agreements (FTAs) with nine of the twelve countries of the TPP and was pursuing more.257 Japan, on the other hand, took the route of forging a tighter US connection, continuing its monetary policy collaboration, but it needed China economically.

  The two Asian giants had already collaborated on a unified Sino-Japanese equivalent of the TPP, called the Regional Comprehensive Economic Partnership (RCEP), which predated the TPP. On November 20, 2012, at the East Asia Summit in Cambodia, leaders from the Association of Southeast Asian Nations and its free trade agreement partners launched the negotiations.

  The RCEP was an Association of Southeast Asian Nations (ASEAN)–centered proposal that initially included the ten ASEAN member states and countries with existing FTAs with ASEAN—Australia, China, India, Japan, New Zealand, and the Republic of Korea. It complemented Australia’s participation in bilateral FTAs with individual countries and its plans for the Trans-Pacific Partnership agreement (TPP).258 The RCEP included sixteen countries, representing half the world’s population and 30 percent of global GDP.259

  Abe believed he could convince Trump to reembrace the TPP. He figured that the TPP (which lacked China’s participation) would be “meaningless” without US involvement.260 The Brookings Institution estimated that had the United States joined the twelve-country agreement, which represented 40 percent of global GDP and 20 percent of global trade, it stood to gain $77 billion annually and Japan even more, $105 billion annually.261 But Trump wouldn’t budge.

  Japan had much to consider: Would the nation work with Trump on a separate bilateral trade agreement that would render the US and Japanese economies (both growing more slowly than China’s) more codependent? Would it strengthen existing arrangements with China and other countries? Or would it try to do both?

  Without the old TPP, China emerged a clear victor in terms of trade. It could strengthen its regional and global role with no competition from a broad Asian coalition in which the United States and Japan were involved. China could subsequently collaborate with Japan on finding other ways to modernize their frosty relationship, economically speaking anyway.

  A number of uncertainties plagued Japan. The primary one was the Fed and how possible US rate hikes might strengthen the dollar, though a weaker yen would be good for the export sector. There remained the threat of banking system instability and a possible “Lehman moment.”

  Th
en there was the matter of what Trump would do relative to Japan and China in regard to economic, military, and trade policy. In Europe, Brexit provided negotiation opportunities for Japanese corporations with UK-based headquarters. The insertion of China’s yuan in the IMF’s special drawing rights basket signaled the financial order was shifting from the West to the East, which would elevate tension in the FED, ECB, and BOJ’s monetary policy alliance.

  IMF influence as a counter-voice to Fed policy rose, as did the importance of the SDR and gold as counterweights to the dollar and related policies. The SDR represented not just a currency but a geopolitical shift. Gold remained a turbulent hedge and its possible future inclusion a way to rebalance power away from the dollar. Japan could decide to hedge its US monetary and currency relationships through accumulating more gold.

  Central bank intervention had supported and distorted markets, subsidizing a flawed banking system. Artificial stimulus inflated real estate, debt, and asset bubbles and had the indirect effect of hurting the real economy by deflecting funds away from it. Conjured money propelled stock markets to stratospheric heights; they were literally high off cheap money, hitting dizzying heights pumped up by speculative capital that had no cost and no accountability.

  Japan was in a new phase of repositioning itself in the changing financial and geopolitical order. With the onset of the Trump presidency and its tendency toward bilateral rather than multilateral trade agreements, Japan faced new opportunities to establish better ties with the United States as well as to continue to explore them with the United Kingdom, the rest of Europe, Latin America, Asia, and Russia separately. China was an economic necessity, but the military situation between the two countries required more careful diplomacy. Either way, Abe would have to balance his relationship with the United States and Trump while enhancing relationships with Europe and China.262

  Kuroda would find ways to conjure money for whatever the situation. He was optimistic about the possibility of fiscal stimulus for infrastructure building that Trump promised during his campaign and first months in office, which could benefit from partnerships with Japan. But he considered that Trump’s “advocacy of protectionist policies—could be a matter of concern.”263

  At a news conference at the Tokyo headquarters of the BOJ, on April 27, 2017, he announced the latest expansion of the Chinese-led Asian Infrastructure Investment Bank (AIIB), established in 2015 and boasting seventy members, more than the regional development bank, the Asian Development Bank (ADB), which he had run from February 2005 to March 2013.

  Kuroda endorsed this “healthy competition” from Chinese, Indian, and Japanese initiatives in terms of building infrastructure and boosting regional economic growth. His most solid support for the AIIB was especially important because he had headed the rival regional development bank, the ADB, jointly led by the United States and Japan. The United States, having initially opposed the AIIB’s establishment, was not a member, nor was there a chance it would become one under the protectionist Trump administration. Kuroda’s enthusiasm was a sign the winds of West-to-East change would continue to sweep Japan’s focus from the United States to other international allies.264

  The next key sign arrived during the summer of 2017. Just before the G20 meeting in Hamburg, Germany, Japan and the EU announced a new free trade alliance in Brussels, Belgium. The agreement would span about 30 percent of the global economy, 10 percent of its population, and 40 percent of trade. Now, two of the G3 nations—whose central banks’ policies had altered the world through their post-crisis monetary policies—had forged an economic relationship independent of the United States and, as a result, of the Fed and the dollar.

  That was a game-changer. One of many.

  In October 2017, Abe won a landslide political victory in his self-called-for snap elections. With that, he fortified his position of domestic and international power. The by-product of that vote was the implicit approval of Kuroda’s monetary policy. And thus, Japan’s rise in the world’s hierarchy stood secured.

  5

  EUROPE PART I: The Trichet Files

  It is important to recall that, as the turmoil went on, central banks strengthened their cooperation, first through enhanced information exchange and collective monitoring of market developments and later on by coordinated steps to provide liquidity.

  —Jean-Claude Trichet, president of the European Central Bank, June 3, 2008

  The foundation of the European Union (EU) was, by its construct, a shaky entanglement of diverse nationalities, economies, and historical legacies. The entire premise required member states to open borders, trade as one, and share a common currency, the euro, regardless of economic disparities between them.

  One central bank, the European Central Bank (ECB), was set up to coincide with the launch of the euro, a new supracurrency, on January 1, 1999. The ECB would dictate monetary policy for all the EU members—in theory, weighing all their diverse needs.

  The euro promised growth and currency stability to the periphery countries of Europe. For a time, these nations did enjoy higher consumption levels, greater investment (especially in real estate), and economic growth. From 1999 to 2008, Ireland grew by more than 5 percent per year and Greece by 3.5 percent in comparison to the Eurozone average of 2.1 percent. European integration proved the Eurozone’s greatest strength and most vicious weakness.

  During the financial crisis, however, that union of twenty-eight economies, cultures, and backgrounds morphed into a bastion of inequality in power and prosperity. It was no surprise that the main monetary policy kingpins who presided over the ECB had different ideas about how to conjure money. Jean-Claude Trichet (who was referred to as “Monsieur Euro” or “Guardian of the Euro”1), a French national, served as head of the ECB from November 1, 2003, to October 31, 2011, and an Italian national, Mario Draghi (or, “Super Mario”), assumed the post on November 1, 2011. His term runs through October 2019.

  The French hawk and the Italian dove controlled money according to their monikers and on the basis of their individual relationships with the US elite. And though Trichet was slightly reluctant to follow the Fed’s easy-money lead at first, Draghi would adopt the Fed’s policies, hook, line, and manufactured-money sinker.

  Running the ECB, or indeed most central banks, is lucrative. The president of the ECB makes over $400,000 per year, a little less than the governors of the central banks of Belgium, Italy, and Germany, and somewhat more than the Fed’s chair at $199,700.2 That salary doesn’t include all the exclusive travel perks to meet with other bankers (Bank of England governor Mark Carney makes $599,000 per year). Although the income of a central banker pales in comparison to private bank CEO compensation, power and influence over business, government, and the world has its comparative benefits; ones that we populations finance.

  TRICHET’S TRAJECTORY INTO THE FINANCIAL CRISIS

  Four years before Jean-Claude Trichet would be thrown headfirst into one of Europe’s most calamitous financial crises, partly ignited by one of its most prominent French banks, his European pedigree was already firmly established.3

  By the time Trichet assumed the stewardship of the ECB on November 1, 2003, he had rotated through the world’s most prestigious central banks in the previous decades. Noted for his stellar taste in fashion and aristocratic elegance,4 he went on to place number five on Newsweek’s global elite list in 2008. During his illustrious career, he played an array of senior roles at important central banks and as government adviser on economic, energy, and industrial matters. But he stayed away from the private sector.

  After he graduated France’s École nationale d’administration in 1971, Trichet entered the Ministry of Finance initially as a Socialist before waxing more centrist, and he rose to become director of the Treasury of France in 1987.5 That year, he was appointed alternate governor of the IMF and the World Bank. He also became a member of the elite Washington-based Group of Thirty, which convenes twice a year in a major global city to discuss internation
al finance away from the fray of ordinary people.

  Trichet was governor of the Banque de France from 1993 until 2003 and a member of the board at the BIS. An engineer by training, he adopted a hawkish approach to monetary policy early on, preferring to keep a lid on inflation and a watchful eye on rising oil and food prices, and support the euro without manifesting buckets of money. When he left the ECB, he said that he planned on retiring to Brittany, where he could devote himself to poetry.6

  Midway through Trichet’s tenure, the financial world fell apart at the seams. Even before the financial Armageddon of the fall of 2008, signs were prevalent in Europe. On August 9, 2007, French mega-bank BNP Paribas suspended redemptions for several funds because its portfolio managers couldn’t evaluate the securities in them amid the US subprime crisis.7 That precipitated a crisis at Northern Rock bank in the United Kingdom, requiring the ECB to pump a record €94.8 billion into Europe’s money markets.8 On September 14, the Bank of England (BOE) stepped in to support Northern Rock as its shares cratered, though the next day, customers, in shades of the Great Depression, executed a run on their money.9 The banks were all connected, and on January 11, 2008, Northern Rock sold a £2.2 billion portfolio of mortgages to US bank JPMorgan to help repay loans it received from the Bank of England. The international merry-go-round of crisis aid between central banks and the private bank arena had begun.