I'm the Dauphin in France

Chapter 1322 Financial Warfare, Part 5
Paris.

In his study on the second floor of the Palace of Versailles, Joseph was happily flipping through the report that the Security Bureau had just sent.

[October 2nd. The Brunswick royal family sold £50,000 of UK government bonds. The discount rate in the UK bond market rose to 1.13%...]

[October 4th. Würzburg government sells £30,000 worth of goods...discount rate rises to 1.15%...]

【10月6日。萨尔茨堡抛售3万英镑……梅克伦堡抛售5万英镑……科隆抛售5万……萨克森抛售……折价率升至1.4%……安全局财政顾问认为北德各国为减少损失而选择提前抛盘，所以哈特少校阻止了其他几国继续卖出英债。】

[October 7th. Oldenburg sell-off...]

This was Joseph's tactic for attacking British government bonds—relentless public selling, fueling market expectations of a bearish outlook on British bonds. Meanwhile, rating agencies downgraded the credit ratings of British bonds, ultimately creating a situation where investors were hesitant to buy them.

In order to stabilize confidence in the government bond market, the British government had no choice but to keep buying up these sell orders.

This would force the British government to spend a lot of cash, increasing its fiscal pressure—and even the new government bonds sold in the second half of this year might not be enough to cover the investment in absorbing the old debt.

Of course, the British could simply start printing money, which is exactly what Joseph would prefer. Britain is already experiencing significant imported inflation due to high sugar prices; further rampant money printing would quickly send inflation figures skyrocketing. This would also severely deplete Britain's strongest asset – its financial resilience.

On the other hand, after selling off British bonds, the German states will likely use the cash they receive to buy French government bonds. This would effectively mean a shift in their "reserve currency."

Moreover, a railway construction boom has recently emerged in the German region, and most of the money that isn't used to buy French bonds will be invested in railways.

Currently, the world's only train manufacturer, railway standard setter, and railway construction technology leader is France.

After the money invested in railways goes around in circles, most of it ends up flowing back into France.

With the balance of power shifting, even if Britain, supported by a large number of overseas colonies, had a long "blood bar," it would eventually be drained by France!
As Joseph turned to the last page of the report and saw the line at the bottom, "The discount rate in the British bond market has risen to 2.1%", Emmanuel's voice came from outside the door: "Your Highness, General Lavalette and Mr. Godan request an audience."

"Let them in."

The two entered the room and bowed. Lavallet spoke first: "Your Highness, according to news just sent from London, the Bank of England has announced that it will raise the interest rate on government bonds to 12.6%."

He turned to look at the finance minister.

Because of the gravity of this short-selling of British government bonds, Godan personally served as the Security Bureau's financial advisor.

Godan quickly added, "Your Highness, rumors suggest that British bond yields will continue to rise. In this situation, I suggest halting... ah, the next step in the 'financial war' to avoid fiscal losses."

He was still somewhat unfamiliar with the term "financial warfare," as it was something His Highness the Crown Prince had "invented" just a month prior.

Joseph suddenly stood up excitedly: "You mean, the British have chosen to raise interest rates?"

“Yes, Your Highness,” Godan bowed. “At such high interest rates, selling our holdings of British bonds would result in a loss of 50 to 75 francs. Furthermore, other German countries are likely to choose to continue holding British bonds.”

France had previously received £32 in British debt from Saxony and Hesse – the former was used to offset Saxony’s war reparations, and the latter was the ransom paid by Ludwig X for prisoners of war in Kassel, Hesse.

As originally planned, these British bonds were to be sold at extremely low prices as a "powerful weapon" to breach the British bond market.

Godan continued, "Moreover, the UK bond market should stabilize quickly after the interest rate hike. If Standard International and First Credit Suisse continue to downgrade UK bonds, it will only damage the reputation of both companies." A significant downgrade of UK bonds is also part of the financial war.

Following the previous pattern, rating agencies downgraded ratings – the UK bond market became bearish – further downgrades – even more bearish sentiment. After this cycle, investors tend to believe that the rating agencies' assessments are accurate, thus increasing their trust in the rating results.

However, stimulated by high interest rates, the UK bond market is bound to see a surge in investor interest.

Joseph shook his head resolutely: "Why should we stop the plan? This is a rare opportunity. Not only should we not stop, but we should intensify our attack."

Godan hurriedly advised, "Your Highness, Britain's high interest rates will devour their finances in the coming years. We have already won. If we continue to invest, I'm afraid it will be difficult to achieve any further gains."

Joseph looked at him in surprise: "Haven't you noticed? We can now push the inflation level in Britain to a very high level."

Before Godan could say anything, Lavalette interjected, "Your Highness, that's highly unlikely. High interest rates and inflation can never occur simultaneously. Ah, that's Hume's theory."

In preparation for his mission to attack British bonds, he has been studying finance with Gordan and has read some of the works of Adam Smith and Hume.

Seeing that Godan also seemed to agree, Joseph frowned and asked, "Is this what the financial theories you've learned all say?"

“Yes, Your Highness.” The latter nodded. “Raising interest rates can curb inflation, this is…”

He originally intended to say "common sense," but to save face for the Crown Prince, he changed it to: "This is a theory that is widely accepted in the economics field."

Joseph, as if struck by a thought, asked, "So, have you heard of 'stagflation'?"

Godan racked his brains for a few seconds, then shook his head: "Never heard of it, Your Highness."

Joseph smiled and said, "No wonder the British would choose the worst possible response: a sharp interest rate hike."

Gaudin was a top expert in French economics, and his British counterparts certainly weren't much more advanced in their theories.

"Generally speaking, raising interest rates can indeed suppress inflation, but in some cases, the two can occur simultaneously. And when they do occur simultaneously, they can cause enormous damage."

Seeing the Finance Minister's expression of utter disbelief, Joseph had no choice but to patiently explain to him what stagflation was:

"...Therefore, with production slowing down, currency continuing to depreciate, and people's incomes struggling to increase, forcibly raising interest rates will lead to higher production costs, causing commodity prices to rise and further compressing people's purchasing power."

"The decline in social purchasing power will, in turn, have a negative impact on production."

"A significant reduction in the production of goods will inevitably trigger panic buying, which in turn will lead to price increases. Price increases will exacerbate inflation."

"In order to curb inflation, the government continues to raise interest rates. High interest rates lead to a continued increase in production costs."

"The end result is that factories are not making money, workers are losing their jobs, and inflation and interest rates are rising together."

(End of this chapter)