President Trump should immediately begin bombing North Korea—with counterfeit versions of its own currency.
As drones rain down phony North Korean won, like confetti, over every city and commune, the NK won would quickly collapse. Already weak in value relative to the U.S. dollar and Chinese yuan, due to its recent history of double-digit inflation (estimated at 112% in 2012), there is little that Pyongyang could do to save it.
As its money evaporates, North Korea’s rulers will feel their control over the party elite slip away. The powerful will be busy shifting their money into harder currencies and into overseas accounts, where those funds will become reachable by sanctions. The ensuing financial panic will paralyze political decision making and set back the dictatorship’s missile- and bomb-building plans.
Won’t the already miserable poor suffer, when hyperinflation makes food and fuel prices gallop far ahead of wages? That’s what economic theory tells us to expect. Thanks to a 2009 quirk in the history of North Korea’s currency, we know that the general theorists will likely be wrong.
For most of its history, the North Korean currency was pegged to U.S. dollar at a fixed exchange rate that supposedly was numerically related to then-dictator Kim Jong Il’s birthday. That peg disappeared in the early 2000s and inflation has plagued the currency ever since. In 2009, the regime bungled a currency reform and inflation exploded. At the peak of hyperinflation, prices doubled every nine days. The black-market exchange rate climbed from less than 1,000 won to the U.S. dollar in 2009 to more than 9,000 to the dollar in 2011, according to the Daily NK, an English-language, Seoul-based news service that tracks black-market prices in its northern neighbor. The government wobbled, its legitimacy and hold on power becoming shakier by the day.
University of Maryland economist Steve Hanke, one of smartest thinkers on currencies, described what happened next in a fascinating 2013 Cato Journal article: To save itself, the communist government permitted the black market in food to expand (today, about half of all calories consumed in North Korea come from these informal markets, Daily NK estimates) and it allowed restive workers, especially in the capital or near the Chinese border, to receive their wages in dollars or yuan. Those changes have stuck. Today, more than half of transactions in the capital and at the Chinese frontier are in dollars or yuan. As a result, North Korea became more dependent on hard currency, foreign banks and foreign trade than ever before. And, importantly, though the poor suffered, their leaders relented on ideology to keep them from dying in vast numbers. The 2009-11 period tells us that the poor can survive hyperinflation.
It also tells us that, when faced with another bout of hyperinflation, we have a pretty good idea of what the Hermit Kingdom will do. It will respond, as before, by meeting worker strikes with hard currency and turning a blind eye to the emerging market economy. Only this time, the dollarization and yuanization will spread from half of the economy to the whole of it.
Quite simply, North Korea’s won would disappear as a medium of exchange. Dollars, yuan and other regional currencies will be used to settle nearly all accounts (certainly including payments to Pyongyang), making North Korea absolutely dependent on a consistent supply of outside money. This is leverage that they civilized world may use against it.
Meanwhile, North Korea’s black market would grow in reach and power. It would set the price of goods and, soon enough, of labor. The command economy would command less than ever before. Kim Jon Un’s power would shrink in the face of the laws of supply and demand.
Unable to pay for its missile parts and bomb-making technology with its own currency, North Korea would have to earn foreign currency to pay for its dangerous devices. At the same time, it will desperately need more dollars and yuan to pay its own people, to stave off rebellion, food riots or industrial strikes.
Once weakened by hyperinflation followed by dollarization, the U.S. could target its few sources of hard currency.
Here is how that could work: North Korea, which has an economy estimated at 2% the size of South Korea’s, feeds its war machine from: its slave labor force (estimated at 800,000) toiling away in Russia and China, its sale of coal and timber, its trafficking in narcotics and other drugs, its weapon sales (mainly to Iranian and African dictators), cyberattacks (including ransomware) that siphon funds from banks in at least 18 countries, and interest payments from Chinese banks. Sanctions and other measures could meticulously cut off these flows of hard currency.
Let’s consider each in turn.
Sadly, little can be done about North Korea’s slave labor services for Russia and China. Some smart sanctions could be crafted to hit the firms that benefit, but the effect will likely be small. Still any disruption in payments to Pyongyang will be useful.
Its sale of coal, timber, illegal drugs and weapons can be slowed (if not stopped) by aggressively enforcing the right, under international law, for American and allied navies to board and inspect North Korea vessels in international waters. The presence of any illicit cargo could be used to seize the entire ship and its contents, where after it would be held in a neutral port until trial.
Lifting U.S. regulations on coal production would flood the global market with coal, driving down the hard currency earnings for North Korea from coal sales while enriching Trump voters in West Virginia and Kentucky. Imagine if all foreign sales of coal were exempted from all U.S. environmental regulations… The global price of coal would likely drop below North Korea’s price of coal production.
Ending all commercial, International Monetary Fund or World Bank loans to any nation that trades with North Korea would have an enormous effect, but would require Herculean diplomatic efforts. Given the immense stakes, many major countries would doubtlessly comply (except, ironically, South Korea, which has investments in the north and a new leftwing leader).
North Korea’s cyber raids on the world’s banking system could be countered with cyberattacks on North Korea’s hacking project, known as “Lazarus,” and on its military infrastructure.
Finally, re-designating North Korea as “State Sponsor of Terrorism,” would give the U.S. Treasury real tools to go after North Korea. Six U.S. senators, including Ted Cruz, recently sent an official letter asking for North Korea to be added back to the list.
That seems like common sense. Critics say that North Korea doesn’t technically qualify as a “state sponsor of terrorism.” The 2013 hack of Sony Pictures hardly counts, they say.Others, such as Doug Bandow, say that North Korea doesn’t fit the technical criteria for returning to the list. These critics forget the 1988 bombing of a South Korean airliner by North Korean agents and that the evidence gathered after the savage attack overwhelmingly pointed to the so-called Hermit Kingdom. And let’s not forget its torture and murder of an American college student and its kidnapping and sexual enslavement of Japanese film stars.
Other critics argue that we have already imposed every possible sanction on North Korea and that re-designation provides few new tools. That’s true, but misleading. The point of the designation would be to go after North Korea’s trading partners. Under law, the Treasury department can go after other countries and third parties that do business with “state sponsors of terrorism,” such as the Bank of China. Cutting off those interest payments would hurt North Korea just as its gasping for dollars and yuan.
As for those still squeamish about counterfeiting North Korea’s currency, bear in mind that Pyongyang already counterfeits U.S. dollars. So turnabout is fair play. Indeed, the North Korean fakes are so good (down to the ink, the paper, the security features) that they actually are U.S. dollars in every technical respect. One Wall Street trader told me: The U.S. should buy that Swiss company, that makes the ink for U.S. dollars, just to prevent that firm from selling that ink to the North Koreans.
Let’s not forget why the North Koreans counterfeit U.S. dollars—they desperately need the hard currency. Their counterfeiting reveals their weakness.
All of this amounts to economic warfare, critics will say. Fair enough. Let’s ask, what are the alternatives, the other options?
Dropping real bombs would likely ignite a war that could easily consume tens of millions of lives, making it the deadliest conflict since World War II. Within the current range of North Korea’s missiles are some 50 million South Koreans and more than 120 million Japanese as well as more than 100,000 Americans, counting both military and civilians. North Korea’s almost 20 million souls would also be at risk. Those not felled by bullets or bombs would be haunted and hunted by starvation, disease, homelessness and banditry. The sheer scale of the human misery involved in any war on the Korean peninsula simultaneously beggars and staggers the imagination.
Doing nothing, often a wise diplomatic move, is also not a realistic option. In physics, there is a phenomenon known as “Brownian motion,” in which a particle moves but goes nowhere—think of a ballerina dancing in place—and that has, essentially, been the policy of the past three U.S. presidents. President Bill Clinton tried giving North Korea food and money; President George W. Bush tried removing the dictatorship from the State department’s list of State Sponsors of Terrorism (a carrot) while increasing sanctions (a stick); President Barack Obama leaned hard on the Chinese to win their help in dissuading the North Koreans from building their bombs. Nothing has worked.
Remember, there is no plausible reason to believe that the North Korean dictator could be talked out of his deadly weapons. If his state-run radio broadcasts are to be believed, he is proud of his missiles, enjoys the fear that they engender, and believes that the world is plotting to take his throne. And he is no fool. Consider recent history: Libya’s dictator surrendered his nukes and he was devoured by a crowd. Ukraine turned over its warheads and it lost Crimea and other swaths of its territory. By contrast, Iran was relentlessly continued its nuclear program and its mullahs enjoy safety and self-respect. Besides, what could America offer him that would be more valuable, to him, than his nuclear missiles?
Learning to live with North Korean nuclear weapons is also not a real option, despite the protestations of former National Security Adviser Susan Rice. Rogue regimes do not use atomic bombs by detonating them, but by threatening to do so… And with these threats, North Korea could make the region (and perhaps the world) either a hostage or a slave, depending on your point of view.
Thin about a world in which North Korea does have long-range nuclear weapons. In that world, its dictator could ban America’s ships from the Sea of Japan and the South China Sea, cutting off its most lucrative trade with Asia, disrupting the supply chains of American goliaths from Wal-Mart to Apple, and deeply wounding the U.S. economy. Or North Korea could simply demand a tax be paid for every transaction across Northeast Asia, bleeding America and her allies for years to come. Or whatever demand flashes across the frontal lobe of North Korea’s ruler on any given day.
Of course, America would bow to these and other demands. After all, no elected leader—especially a U.S. president whose party faces congressional elections every two years—would risk an atomic apocalypse to face down nuclear blackmail. So every demand would be appeased. We would North Korea’s leashed dog, ever fearful of another painful tug.
If that pitiful day ever comes, we will regret not raining down fake money on North Korea due to some diplomatic nicety and future generations will rue our lack of imagination when the crisis came.