It’s a fact of life that in any group of students, some are likely to be smarter and quicker than others while some just can’t keep up.
It’s unfortunate that Treasury Secretary Janet Yellen has turned out to be the slow kid in the class when it comes to economic sanctions and financial warfare.
Almost 10 years ago, I sat in a secure conference room at the Pentagon and explained to a group of U.S. national security officials from the military, CIA, Treasury and other agencies that the overuse of the U.S. dollar in financial warfare would eventually drive countries away from using dollars in international transactions for fear that they could become the next target of U.S. displeasure.
Some took note, some ignored the warning and one Treasury official slammed the table and said, “The dollar has been the global reserve currency, it is the global reserve currency now and it always will be the global reserve currency!”
I told him I felt like I was in Whitehall in London in 1913 listening to John Bull say the same thing about sterling. Sterling would begin to be pushed aside by the dollar just one year later with the start of World War I.
We’re Our Own Worst Enemy
More recently, I taught a seminar at the U.S. Army War College on financial warfare in which I explained that U.S. financial sanctions would not have a material impact on Russia, that Russia would not change its behavior in Ukraine based on the sanctions and that the U.S. would suffer more from its own sanctions than Russia because adversaries and neutral countries would create alternative payment platforms that did not use dollars.
I encountered skepticism from the class (that’s OK; the purpose of a seminar is to engender competing views).
I’ve said to the military and intelligence community, “I don’t think other countries can destroy the dollar, but we can do it ourselves. We are our own worst enemy.”
We, of course, meaning the United States. We’re destroying the dollar with the sanctions (and through other misguided policies). The U.S. is doing more to destroy the dollar than our enemies.
Events of the past year have proved my forecast in every respect.
Many others have pointed out the same weaknesses in the weaponization of the dollar. It seems the only parties who didn’t see the danger to the dollar were the Wall Street cheerleaders and top U.S. government officials.
Russia Has Been Preparing for This
Russia saw all this coming, and has been preparing accordingly.
In 2009. Russia’s gold reserves were about 600 tons. By the time the sanctions were imposed in 2022, Russia’s gold reserves were close to 3,000 tons. They had spent that 13-year period acquiring 2,400 metric tons of gold.
If you think that’s easy, it isn’t. It’s not easy at all to acquire anywhere near that amount of gold. But they were like Steady Eddie, The Little Engine That Could.
They bought 10 to 30 tons per month like clockwork, about 250 tons a year, sometimes more, sometimes less, but over 13 years they got to that 3,000-ton level.
They’re very transparent about it. But they were anticipating financial warfare from the U.S. and its allies.
So when the sanctions were imposed, Russia’s total reserves were approximately $600 billion, but almost 25% of that, about $150 billion, was in gold. And I’m talking about actual gold bullion held in safe storage in Russia, not gold futures contracts or ETFs because they’re just as easy to freeze as any other asset.
That was not a complete answer to the sanctions they were facing, but it was a very substantial move in the direction of insulating themselves from being kicked out of the dollar system.
Well, all I can say is that I warned the Pentagon about this in 2009 when I conducted financial war games. I also wrote about it in my book Currency Wars, which came out in 2011. Now it’s all playing out before our eyes. China, of course, has been doing the same thing as Russia to escape dollar dominance.
Could the Russian Economy Outperform the U.S. Economy This Year?
Incidentally, Russia’s growth should be higher than the United States this year, believe it or not. Russia’s estimated by the IMF to grow slightly less than 3%. And the U.S.? We’re probably already in recession, so we won’t get anywhere near 3%.
Meanwhile, Russian oil exports are higher than ever.
Russia’s buying high-tech goods from China, including some military hardware and other manufactured goods. China’s buying Russian oil and natural gas, in addition to agricultural output and weapons. That’s a big two-way trade, and the dollar isn’t being used. Russia’s paying yuan, and China’s paying rubles.
Now, the failure of U.S. dollar-based sanctions has become too obvious to ignore. The failure is so obvious that even Janet Yellen admits that sanctions are not working.
She recently said, “There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar. Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative.”
One could say that realizing the dangers ten years too late is still better late than never.
Why the Dollar Hasn’t Tanked — Yet
The issue is whether it’s already too late to undo the damage. Once new trading currencies and new payment channels are put in place (which is happening quickly), there’s little incentive to go back to a dollar system where the U.S. can threaten your economy.
I should add that there are reasons why the dollar is strong today that have nothing to do with what I’ve been discussing. It has to do with the banking crisis (that’s far from over, by the way). There’s high demand for dollar-denominated collateral, particularly short-term Treasury bills. That’ll break at some point, but not yet.
And so, the dollar is being propped up by the demand for dollar-denominated collateral, even though it’s under attack from all sides based on these new payment currency alternatives that are rapidly emerging.
Yellen is once again putting her incompetence on full display. She’s a textbook neo-Keynesian with little understanding of monetary policy, fiscal policy, or the international monetary system.
I’ve consistently said that the greatest threat to the dollar comes not from abroad but from the U.S. Treasury because they take confidence in the dollar for granted. We’re doing this to ourselves.
Yellen is proving my point.