NYC finance lawyer: U.S. tariff war could be a disaster
36:33 Share

In 1997, a young trader named Scott Besant, working under George Soros' Quantum Fund, took part in one of the most ruthless financial offensives in modern history. By shorting bloated Asian currencies, the hedge fund helped trigger a chain reaction that crashed economies in Thailand, South Korea and much of Asia. What I did was to anticipate that there will be a crisis.

and so did many other people. Now, 20 years later, that same hedge fund manager is no longer just a private trader. He's the 79th U.S. Secretary of the Treasury. And in this episode of Deep Dive, finance lawyer Ting Shen joins me from New York City to unpack how Trump's inner circle may have mapped out America's economic war against the world and why it could lead us toward a dangerous future. It's Saturday, April 19th.

Mr. Shen, you wrote the article on March 9th in your newsletter, Scott's Percent's Coming War Against China, and that was one month before Trump's Liberation Day and the announcement of global tariffs. And now looking back at this piece, do you think everything has turned out the way you expected over a month ago?

In a way, I don't know if I expected it to be this disastrous for the United States. But I think that my prediction was largely correct, which was that our Treasury Secretary, Scott Besant, has a sort of career and perhaps a life fixation on the

attacking the Chinese economy and this dates back to at least 1997 when the Soros when the Soros hedge fund the quantum fund with Scott Besson sort of as the field marshal of this currency attack waged war across Asia and collapsed the currencies and then ultimately the economies of a number of countries and

including Indonesia, Thailand, Malaysia, South Korea. But the big target was China. The big fish, the white whale, was China via Hong Kong. And in looking back on this, it dawned on me that this was timed. I don't know if this was

coincidental but i doubt it it was timed almost immediately after the handover of hong kong back to china in 1997. right so the private trader at that time is now the 79th u.s secretary of treasury and he has much more resources at his disposal much bigger than the quantum fund that he worked in so perhaps to understand his strategy now we could look back at what happened

back in 1997. And I think first we need to get the terminology straight. And can you help a noob like me understand how exactly does shorting the country's currency work? I mean, in layman's terms, how does that work? Sure. I mean, you can short, you can profit off the drop in value of any asset

simply by finding someone who owns that asset and is willing to lend it to you. So if I can borrow an asset, any asset, whether it's a stock, a currency, a house, anything, right? Any piece of property. If I can borrow it from you with a promise to return something, meaning return the same or equivalent asset back to you at a later point,

then when I borrow it and I sell it, all I have to do is buy it back when it's cheaper and return it to you. So where does the profit come? It comes from the willingness of someone who owns it to hold it while it drops in value. So in that case, Besant and the Quantum Fund, they borrowed money or let's say they borrowed the Asian currencies and then returned it later.

Correct. Yeah, so they would borrow just like a stock you would borrow the stock they would take out loans from banks They would enter into currency derivatives Where they would have to deliver the local currency in the future Hmm a set amount in the future and when they got their hands on the borrowed currency, they would start selling it into the market In exchange for US dollars. Okay, so they would convert that

By selling, this is the difference. So a typical short seller in a micro sense is betting that the price will fall for various reasons. Right. But when you're dealing with a currency raider of the scale of the Soros fund, they're betting that by selling,

the size of the sales, so by the very act of short selling that currency, they will trigger the collapse because they believe there's structural unsoundness at the bottom of that country's economy. So it's kind of like triggering, you know, putting a dynamite inside

a cave and trying to collapse the cave. They believe that the very act of short selling will drive the price down. So it's a little bit, they call it reflexivity, was the term that Soros used for it, which is

they'll actually trigger a collapse by short selling. Okay, and now in hindsight, we know that it somehow led to the 1997 Asian financial crisis. And is it fair to say that Besant and Quantum Fund's shorting of the Asian currencies had caused that financial crisis or they were a catalyst in that crisis?

I think the feeling was that it was, I would say that the Soros view of it is that they were simply a catalyst to bring down an economy that was, quote, a house of cards. But I'm not so sure that that's really the case. I think that that's to be determined. I think it's from the perspective of, let's say, Indonesia or Malaysia,

to have your currency attacked in such a coordinated way doesn't seem to be really an act of financial discipline. It seems to be a genuine attack on, you know, the sovereignty of your country. And, you know, if that was the case, if it was simply a catalyst, then why would, you know,

Why would Western capital, like in the form of IMF loans, come rushing in to bail the country out? Right. So if you look at it from that sort of macro perspective, why would you collapse this economy simply to come and spend your own money to bail it out again? Yeah. So what happened from Quantum Fund and later IMF just felt very coordinated now in hindsight.

I think so. I mean, if you asked, you know, if the what the what the total profits were to the quantum fund and source investors, and it's not publicly disclosed because it's a private investment vehicle. It was estimated to be in the range of one between one and two billion dollars, which all in all doesn't sound like a lot of money when contrasted with the amount of damage that they caused.

So, you know, I don't necessarily think that this was all just purely driven by trading profits, which is, you know, what an ordinary hedge fund would do. I think this seemed it seemed coordinated. And the fact that this was happening right on the cusp of I just kind of noted this in my article.

that this was happening just as China was entering the WTO seemed to me at least consistent with the idea that there was a deep geopolitical aspect to what was going on. So behind the financial offensives, there may be a deeper political motive behind that. Yeah, and if you see what happened to the countries that fell victim

to this currency attack they were saddled with IMF bailout loans and forced to make political reforms the standard package of neoliberal reforms the scaling back of government I believe the Suharto government which was a very sort of like centralized power was that actually collapsed the the

The ability for the government to intervene or to direct their national economy was scaled back. And, you know, in general, the ability for that country to regulate its own economy was scaled back to sort of meet the standards of.

what the IMF deemed to be appropriate levels. So this whole thing of shorting another country's currency sounds quite, I mean, I don't know, for a person like me outside the financial sector, it sounds quite vicious. But I understand that as horrible as it sounds, it's actually legal under the global financial rules, isn't it?

Yeah. I mean, the, the, when you say global financial rules, that's really the rules set in the currency markets, which are predominantly in the global currency markets, which are predominantly in New York and London, the big money center, uh, cities. And there is really no restriction on entering into, you know, very large volumes of derivatives trades and spot market trades, which, um,

are designed to short a currency, meaning to...

have spurts of coordinated selling of one currency in order to specifically to drive the price of that currency down. And Besant and Quantum Fund then went shorting. They succeeded in the markets in Thailand, in South Korea back in 1997, but their strategy had failed in Hong Kong. And what went wrong for them

What went wrong in Hong Kong, and I think this is something that Soros had gone on record saying, was that they underestimated the willingness of the Hong Kong Monetary Authority, HKMA, in coordination with the PBOC, I believe, which had given sort of a blanket...

sort of unlimited line of support. I don't think they ever needed to reach it, but the HKMA itself had a lot of US dollar reserves, something close to 100 billion or something like that. They were willing to, number one, burn a huge amount of those reserves in order to defend the Hong Kong dollar's peg to the US dollar.

So, and I did, this is where I did my research. So when you say, when you use the term, the terminology pack, that means one country is pinning its currency to another, a foreign country's currency, and in most cases, US dollar. So a fixed rate between one country's currency and another one's. Correct. Yeah. And that, that is, that gives the, that gives the, um,

the country that's setting the peg a good amount of control over the economic policy of that country, how much it produces, how much it exports, how much it imports, etc. But in order to defend that peg, if a large coordinated investment group, let's call them, currency raiders, come and start flooding the market with sales

of a huge amount of the currency that it's borrowing and starts to drive the price down. The whole point of that is to flood the amount of demand for that currency under normal market conditions. And so the only way to quote defend that peg, meaning to keep that peg at the rate necessary, the local country, the central bank is going to have to enter the market directly

and purchase back all of the currency that Soros or whatever investor group is trying to overwhelm the market with. In the case of Hong Kong, they had a very deep well of reserves, and Soros knew that, but I think they – and Besant knew that, but they mis-

sorry, so Besant was the field marshal for Soros. When I say Soros, I mean the hedge fund group. But Besant was really the sort of the field marshal that was coordinating this. And they said that they believe that they underestimated the willingness of the local authorities in Hong Kong, as well as China, how much of their own foreign US dollar reserves they were willing to burn to defend this peg.

as well as to go do things like raise the interest rate to something like 60, 70%. So what they call the high bore rate, which is the Hong Kong overnight rate, they raised it, usually typically low single digits, they raised it to 70%, which makes it incredibly expensive for the Soros Fund to maintain interest.

the loans of these Hong Kong dollars that they're short selling, but at great risk to their own economy. Right. So the borrowing rate within the Hong Kong economy essentially put their own economy at great risk. And other things, I think the HKMA directly intervened also in the stock market to prop

stock and real estate prices up. So they underestimated the amount of resources that the Hong Kong authorities were willing to spend on this because from their perspective, it made no economic sense. I mean, they're saying the peg isn't defendable. It's not worth defending. Why not just drop it? And they believe, and I think this might be really the case, is that

the Hong Kong authorities understood that this wasn't simply an economic transaction, that this was a political fight. And so they were willing to expend a lot more capital than if it was just simply about dollars and cents. And in other words, if the local authority didn't show that resolution to defend the currency, then the same economic collapse that took place in

Thailand and South Korea could have also happened on the Hong Kong currency as well back in 1997. I think that's right. And to some extent, I think that was the purpose was to, you know, as China and Asia as a whole was being...

brought into the system of international trade. China entered the WTO not long after that. I think they, it seems to me that there was some effort to sort of haze these countries to show that, you know, entry into the system, the system of global trade required that they understood that they were subject, that they were vulnerable

to these kinds of attacks and that they better be wary of them and perhaps recognize the authority and their junior status in this system. Yeah. And now fast forward to 2025, Bassett is now the US Secretary of Treasury. And I particularly like this

paragraph from your newsletter that Besant's whaling ship simply wasn't big enough and his firepower too limited. And nearly 30 years later, Besant has finally rounded up a big enough ship to go hunting for his white whale once again. And so this white whale is implying China. And do you think now he is in a better position to recreate his playbook against China? And

If so, does he have other resources measures beyond the tariffs that we have seen so far? He certainly has resources. But the problem now is that instead of a private hedge fund with maybe a few tens of billions of dollars or something like that,

He has the entire US Treasury behind him. So he has massive amounts of firepower. He also has a different toolkit now. He has the ability to control trade directly, right? So he's not just limited to the currency markets. He can directly affect trade policy. So he's got a bigger ship as well as a much larger set of weapons that he can use.

The problem may be that it's just simply too late and the condition of his armada is not fit for purpose. And I think we saw that where before this armada of his was even able to exit the harbor, it malfunctioned. And our own, you know, this time it was the U.S. currency and the U.S. bond market that started exhibiting...

You know quite a bit of alarming instability. This is the kind of thing that terrifies us it's also the kind of thing that we were imposing at a much larger magnitude on these countries in Asia and Force them to live through it. And now we're starting to feel the effects of it except it's self-imposed and It's it's causing quite a bit of fear and panic I would say at least in the top leadership in

in the United States? Fear in a panic, because following the government's announcement of the tariffs, we have seen actually the Chinese government move very quickly to stabilize the stock market, while China

It was the U.S. markets that lost billions in just a few days. And so far, has this trade war played out the way that Trump's administration had anticipated? And do you think so this turbulence in the U.S. stock market as well as the bond market was part of the reason for Trump to backtrack from the tariffs?

I don't think... I think they predicted... I think they were pretty certain that the stock market would suffer from this. But not to this extent. But that's not a big issue. Even... I mean, they might... I don't think the stock market has really been that horrifying, right? I mean, it's taken a hit for sure, but it's not... I don't think the stock market alone...

is what troubles Trump. I think what is really troubling to understand why what happened in the bond market is so disturbing is that typically when there is a flight, if there is a significant amount of volatility and fear in what we call the risk markets, like equities and things like that,

There's almost always a reflexive, what we call flight to safety, meaning that global capital sells out of risk assets like stocks and flees to safety, meaning they start purchasing U.S. treasuries. Right. Yeah. So the safest place to put my money in times of uncertainty is always with the U.S. government. That has been the sort of like background. It's almost a law of finance.

And this is one of the most turbulent events in recent history. But instead of money fleeing into U.S. treasuries, they were leaving U.S. treasuries. This shouldn't happen. And so it's not just that the market went down, but it went down at the wrong time. This was predicted. Besant had predicted that the amount of...

uncertainty and volatility that this trade war would inject into global markets would actually bring the cost of borrowing for the American government down because everyone would be buying U.S. government bonds and that the exact opposite happened. And that has caused a lot of confusion

The Federal Reserve, J-PAL, is not pleased about this. Jamie Dimon, the CEO of JPMorgan, is not pleased about this. And so they've been warning with very publicly, I might add, they've been warning the Trump administration and Besant that they need to back off because they're putting a lot of they're they're creating a lot of instability

in the US Treasury market and thus in the US dollar itself. So what we're seeing now is the ramping up of what was, let's say, these currency attacks starting to backfire. And now we're seeing instability in the US dollar markets. And this is an existential threat for the United States. And I think this is something that we need to really take very seriously. And we are.

So the Trump administration was ready to see some sacrifices in the stock market. But what happened so far has gone beyond what they had prepared for. And that's perhaps why he's backing down on his tariff policies. On top of what happened so far, your article also suggested that China actually has

a powerful countermeasure, which is the nuclear option of crippling Apple. So can you walk us through how in practice that could actually work? I mean, I think we've seen the playbook because the United States has run that playbook against Huawei.

And, you know, you use it's, you know, targeted sanctions trying to disrupt the supply chain of that company, banning that company's products from your own market, pressuring neighbors and allies to ban that country's products from your market. Those are all probably tools that are on the table for China. Should they use it? I'm not I wasn't predicting that it would be used.

But you can see Apple itself is aware that this is possible. And they've been airlifting. If you see, they airlifted tens of millions of iPhones back into the United States as an emergency buffer supply for the U.S. market. Emergency reserve. I doubt that China would go so far as to arrest Tim Cook.

We we use that kind of tactic here. I doubt I doubt Apple Apple's employees in China fear that kind of retribution us what China would do but I think that the fact that in this trade war which goes back to 2016 at least It's probably from my perspective probably not lost on the Chinese leadership in

that destroying Huawei and what we call, what the economists called an assassination attempt. Right. This wasn't simply to limit Huawei's market share. This wasn't simply to compete in an aggressive way. This was to destroy Huawei and eliminate it as a business. And so if we're going to talk about trade war, the point of me pointing that out in that article is

was simply to say that we should really widen, we being Americans, should probably widen the scope of what we think is possible, or what is possible under conditions of war, because that's a very different kind of logic. Right, different scenario. Yeah, it's a very different kind of logic than negotiating a new trade agreement that benefits the both of us. We're trying to destroy each other.

So it's not like rocky science to destroy Apple. So China simply just has to do everything that US has put off on Huawei and use it on Apple, and that would destroy the company as well. Yeah, the difference is that it would actually work. And anyone can pull up Apple's annual report, annual shareholder report that it has to file by law. There's a public company in the United States that

And the purpose of this disclosure is to tell investors of potential risks to the company's business. And the number one disclosure in every 10K that Apple's put out for the past two decades

has been that substantially all of its manufacturing takes place via its partners in countries like China. And one of the biggest risk factors to Apple's bottom line is exactly this, is a trade war and the escalation of economic tensions between the U.S. and China. And Apple is keenly aware of this. And Apple has often used its power in the United States to try and calm

tensions between the two, but the risk remains. So perhaps China actually has more capabilities in doing what US did to Huawei from this sense.

I think it's undoubtedly true. We did everything we could to destroy Huawei. Every tactic, including arresting the chief financial officer and daughter of the founder. Yeah, we did everything. She was incarcerated for three years. These are very extreme tactics that...

I think as I think Americans, I think our leaders should be aware that the intensity of this economic war is more than, you know, we should not assume that China will simply mirror everything we do. So if we say raise tariffs, China will raise tariffs. If we lower tariffs, China will lower tariffs. And it makes us feel like we're in control.

that China will simply mirror everything we do. And I don't necessarily think as an American that that's a safe assumption. And it makes me very nervous that the Trump administration is operating on this belief. And I predict that this belief will not hold true. I think that China will not simply mirror what we do and make themselves completely predictable and predictable.

subject to our decisions. Yeah, at least up until this point, the Chinese government hasn't done so yet. Based on what US government did to Huawei, I think China has been very respectful and welcoming to American businesses doing business and investing in China. So,

Your newsletter on March the 9th, there was a narrative arc that strongly echoes the classic novel Moby Dick. And the piece was opened with, Besant is hunting for his white whale and we are all on board his Pequot. So that writing really left me a very deep impression as that evokes obsession, hubris,

an inevitable doom. And do you believe that Besant and perhaps many others in the current US administration, they are too fixated on taking down China economically? At the same time, they're overlooking China's capabilities in response, and perhaps worse, that they are unaware of the consequences that could be brought by this economic war.

that's a complicated question i think uh i was limiting my article to besant specifically because i think besant's career uh is and you know he started his own hedge fund key group and in 2016 again in coordination with uh soros uh tried to short the uh rmb directly and failed again in 2016. um

And again, that marked the beginning of the current hostilities, actually underreported, but worth looking into. I would say that Besant is not actually representative of Trump's political base and perhaps not in agreement with Trump himself. And if you look at Besant's statements

After the beginning of the tariffs what we call liberation day He has been changing the narrative that the plan all along was to gather a number a large alliance of countries they say 70 countries that have come to the United States and pledged allegiance to us and that we're now going to create a block a trading block against China and

And that the whole purpose of this was really to create a great firewall of a commercial and trading firewall against China. This is a very odd statement because this was the policy of Obama and the Trans-Pacific Partnership, or what was called TPP, was done in a much more methodical and well thought out way to create a trading alliance that excluded China

And it was one of the first pieces of Obama's work that Trump had ripped up when he took power in 2017. If you're going to put together an alliance, if you're going to get your allies together to go take on China, why would you send your vice president to Germany to tell your closest allies that we no longer share the same values and we need to go our separate ways?

Why would we alienate all of our closest economic partners, including Japan?

in South Korea, in Vietnam? Why would we alienate them if the whole purpose was to isolate China? So I don't believe that Besson's view is consistent with the broader view and purpose of Trump's trade war. And I think that what we're looking at now is a top leadership that is finally realizing

perhaps too late, that their motivations are not consistent with each other. They don't see eye to eye. Jerome Powell at the Federal Reserve is another example of someone who doesn't support this trade war at all. And so I think we're going to have a lot of infighting. And I predict, actually, that Besant may not be holding his position for much longer. That's just a guess, but I could see that...

when this trade war proves to be a disaster, that Besant will be forced to take the responsibility for it and to resign. But with him or without him in this position of the Secretary of Treasury, do you think this trade war, these tariffs will still go spiraling into a dangerous direction?

That I don't know. That's a really complicated question. I can't see it working. I don't know. The stated goals of this trade war don't really make much sense. The Mar-a-Lago Accords view of this, where we're going to renegotiate the global trading, the conditions of global trade don't make much sense.

Look, I mean, we're really a financial empire at this point. We're not the trading empire. We're not the trading superpower that we used to be. So we can dictate things about how the financial flows work. But we're realizing very quickly that that's not quite the superpower that we think it is. And we're not able to...

dictate realities solely through the manipulation of the financial networks. So it's been proven in the case of Russia, for example, you know, the sanctions, the shock and awe package of sanctions did nothing to cripple Russia. So I just, I don't think that

I don't think that the US is necessarily in a position to transform global trade when we are simply just a sort of like net consumer and not a producer into the global markets.

Right. But nevertheless, with or without a peasant steering this ship, we may have all been held hostage on board. And maybe the best thing is just to hope that Captain Ahab will take us to a better position. Perhaps. Though, just to be clear, I was just referring to us Americans. I think the real hostages are the people here in America. So, yes.

Thank you very much for your time, Mr. Shen. Thank you. It was a pleasure talking to you. Since the start of Trump's second term, a global tariff war has been heating up and history may be on the verge of repeating itself. We are all aboard America's Pequot, chasing the white whale of economic dominance. But this time, Captain Ahab isn't just risking the ship. He may be gambling with the future of the entire global economy.

And that brings us to the end of this episode of Deep Dive. If you enjoyed what you just heard, don't forget to follow us on your podcast platforms. Just search for Deep Dive. You can also leave a comment to let us know what you want to learn about China and beyond. This episode is brought to you by me, Li Yunqi, and my colleagues Zhang Zhang and Qi Zhi. Special thanks to finance lawyer Ting Shen. I'll see you in the next one.