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Chapter 1322: Financial Warfare, Part Five

Paris.

In his study on the second floor of Versailles Palace, Joseph cheerfully flipped through the report the Security Bureau had just delivered.

“October 2nd. The Brunswick royal family sold off 50,000 pounds sterling of British national debt. The discount rate in the British bond market climbed to 1.13%—”

“October 4th. The Salzburg government sold off 30,000 pounds sterling. The discount rate rose to 1.5%—”

“October 6th. Salzburg sold off 30,000 pounds sterling. Mecklenburg sold off 50,000 pounds sterling. Cologne sold off 50,000 pounds sterling. Saxony sold off its holdings. The discount rate surged to 2.4%. The Security Bureau's financial advisor believed the North German states were choosing to sell early to minimize losses, so Major Hart prevented several other countries from continuing to offload British national debt.”

“October 7th. Oldenburg sold off its holdings—”

This was Joseph's tactic for undermining British national debt: continually selling publicly, causing market expectations for British bonds to turn increasingly bearish. Meanwhile, rating agencies would lower Britain's credit rating, ultimately making investors wary of buying British bonds.

To stabilize confidence in the national debt market, the British government would have no choice but to continuously buy up these dumped bonds.

On one hand, this would force the British government to expend a large amount of cash, increasing fiscal pressure. It might even find that new national debt issued in the second half of the year wouldn't cover the cost of absorbing the old debt.

Of course, the British could simply start their printing presses, which was precisely the outcome Joseph preferred. With soaring sugar prices, Britain was already experiencing significant imported inflation; coupled with rampant money printing, inflation figures would quickly skyrocket. This would also severely deplete Britain's strongest 'weapon' — its financial resilience.

On the other hand, after the German states sold off their British bonds, the cash they received would likely be used to purchase French national debt. This would effectively make them switch their 'reserve currency'.

Furthermore, a railway construction boom had recently emerged in the German regions. Even if they didn't buy French bonds, the money would likely be invested in railways.

Currently, the world's sole train manufacturer, the setter of railway standards, and the leader in railway construction technology were all — France.

After circulating through railway investments, most of the money would ultimately flow back into France.

With this ebb and flow, even if Britain's 'health bar' was long, supported by numerous overseas colonies, there would come a day when France would exhaust it!

As Joseph turned to the last page of the report and saw the line at the bottom — 'British bond market discount rate rose to 2.1%' — Eman's voice came from outside the door. "Your Highness," the butler announced, "General Lavalette and Monsieur Godan request an audience."

"Let them in," Joseph replied.

The two men entered and offered their salutes. Lavalette spoke first. "Your Highness, according to news just returned from London, the Bank of England has announced an increase in the national debt interest rate to 12.6%."

He turned to face the Finance Minister.

Given the immense importance of shorting British national debt, Godan himself was serving as the Security Bureau's financial advisor.

Godan quickly chimed in, "Your Highness, rumors suggest British bond rates will continue to rise. Under these circumstances, I recommend halting the next phase of the 'financial warfare' — ah — plan, to avoid fiscal losses."

He was still somewhat unfamiliar with the term 'financial warfare', as His Royal Highness the Crown Prince had only 'invented' it a month prior.

Joseph suddenly stood up, a hint of excitement in his voice. "You mean, the British have chosen to raise interest rates?"

"Yes, Your Highness." Godan bowed slightly. "With such high interest rates, selling the British bonds held by our nation would result in a loss of 500,000 to 750,000 francs. Furthermore, the German states would likely choose to continue holding British bonds."

France had previously acquired 320,000 pounds sterling of British national debt from Saxony and Hesse — the former used to offset Saxony's war reparations, and the latter was the ransom Louis X paid for the Hessian-Kassel prisoners of war.

According to the original plan, these British bonds would be sold at extremely low prices, serving as 'heavy artillery' to penetrate the British bond market.

Godan continued, "Moreover, after the interest rate increase, the British bond market should quickly stabilize. If International Standard and First Credit continue to lower Britain's credit rating, it would only cause both companies to lose credibility."

Significantly downgrading Britain's credit rating was also part of the financial warfare.

Following the previous rhythm, a rating agency downgrade would lead to a bearish British bond market, which would then lead to another downgrade and an even more bearish outlook. After a few cycles, investors would consider the rating agencies' judgment accurate and trust the ratings even more.

But stimulated by high interest rates, the British bond market would surely attract a wave of investor enthusiasm.

Joseph, however, shook his head decisively. "Why should we halt the plan? This is a rare opportunity. Not only can't we stop, we must intensify the attack."

Godan hastily tried to persuade him. "Your Highness, Britain's high interest rates will significantly devour their finances over the next few years. We have already achieved a victory. Continuing to invest, if I may be so frank, would likely yield little further result."

Joseph looked at him in surprise. "Have you not noticed? Now we can drive Britain's inflation to an extremely high level."

This time, before Godan could speak, Lavalette quickly interjected, "Your Highness, that should be highly unlikely. High interest rates and inflation absolutely do not occur simultaneously. Ah, this is Hume's theory."

Recently, to execute the attack on British national debt, he had been studying financial knowledge with Godan, having read some of the works of Adam Smith and Hume.

Joseph saw that Godan also wore a look of profound agreement and asked with a frown, "Do all the financial theories you've studied assert this?"

"Yes, Your Highness," Godan nodded. "Raising interest rates can curb inflation, that is—"

He had initially intended to say 'common knowledge', but to save the Crown Prince's dignity, he changed it to: "This is a theory widely accepted in the economics community."

Joseph, recalling something, asked again, "Then, have you heard of 'stagflation'?"

Godan 'scraped' his mind for a few seconds before shaking his head. "Never heard of it, Your Highness."

Joseph smiled. "No wonder the British would choose such a terrible response as a sharp interest rate hike."

Godan was a top expert in French economics, and his British counterparts certainly wouldn't have theories much more advanced than his.

"Generally speaking, raising interest rates can indeed suppress inflation, but in certain circumstances, both can occur simultaneously. And whenever they do, it causes immense devastation."

Joseph saw the Finance Minister's 'listening to a fairy tale' expression and patiently explained what stagflation was: "So, when production slows, currency continuously depreciates, and public income struggles to increase, a forced interest rate hike will lead to higher production costs and rising commodity prices, further compressing public purchasing power."

"And the decrease in social purchasing power will, in turn, negatively impact production."

"A significant reduction in produced goods will inevitably trigger panic buying, which in turn leads to price increases. Rising commodity prices, naturally, lead to increased inflation."

"To curb inflation, the government raises interest rates again. High interest rates lead to further increases in production costs."

"The ultimate result is that factories make no money, workers lose their jobs, and both inflation and interest rates climb together."