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U.S. Sanctions Erode Its Foreign Influence
A few days ago the Leveretts looked at the effects of U.S. financial sanctions and the other ways the U.S. pisses off major countries. They find that the current path of U.S. foreign policy will erode the U.S. dollar hegemony and lead to a destruction of the “extraordinary privilege” (de Gaulle) the U.S. has had with the ability to print the world’s reserve currency. The political erosion of the dollar will be felt in the commodity markets and especially in energy deals which will then have further effects in foreign relations: Petrodollars, Petroyuan, and the Ongoing Erosion of American Hegemony
Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions. It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies—a prospect America’s political class has hardly begun to ponder.
Sadly, only few will listen to the Leveretts but now Bloomberg picked up the theme: Russia Sanctions Accelerate Risk to Dollar Dominance
While no one’s suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001. The drumbeat has only gotten louder since the financial crisis in 2008, an event that began in the U.S. when subprime-mortgage loans soured, and the largest emerging-market nations including Russia have vowed to conduct more business in their currencies.
“The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, chief market strategist at Bank of America Corp.’s U.S. Trust, which oversees about $380 billion. “This nasty turn between Russia and the West related to sanctions, that can be an accelerator toward a more multicurrency world.”
Some five years ago we already looked at this decline of the U.S. dollar as reserve currency and its effects:
So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions.
The European Union which stupidly followed the U.S. sanctions on Russia with its own is also hurting itself:
Financial interdependence offers a powerful opportunity for coercive diplomacy.
But the unintended message Europe’s leaders sent is that financial interdependence is a source of vulnerability that countries like Russia, but also China, Iran and others, would be wise to avoid.
…
Europe’s financial sanctions against Russia likewise add incentives for countries to look for alternative arrangements that reduce financial interdependence.
Moreover, those incentives will only increase if the sanctions are successful. Even if Europe encourages the Russian government to change its policy toward Ukraine, the Russian government will respond over the longer term by seeking financial arrangements that leave it less exposed to such coercion.
It will take years until the dollar will lose its reserve status but the decline is already visible. More and more deals are now made bilateral between partners in their own currencies and get settled outside of the financial channels the U.S. tries to sanction, block, spy on or to criminalize.
The U.S. foreign policy reliance on sanctions, pressure and war is sawing off the high branch the U.S. is sitting on.
The chief danger to the dollar’s reserve status is the employment of economic sanctions and the Treasury’s megalomania.
Most countries are quite happy to continue to use the dollar and to grant the US the privileges implied. They are, after all, generally ruled by clones of the clowns in Washington and are intent on keeping their bourgeoisies happy.
But Washington is not content to allow others simply to follow its economic lead;it insists that they dance precisely to each tune that it has a passing whim to play.
One reason for this is that sanctions are a deceptively easy option, no troops get sent abroad, no coffins arrive in Maryland airports, no wedding parties get bombed, no sound is heard except that of politicians making stump speeches to the effect that they have done the necessary and that no animals were harmed in the making of this movie.
But the long term damage is enormous: gradually the globe’s rich, the oligarchs in Russia, the billionaires in China, the German Central Bank, come to the realisation that the US Treasury has arrogated to itself the right to use their wealth as it chooses; to ‘keep’ the bullion (or to sell it without informing its owners), to seize bank accounts, to impose multi billion dollar fines to deter trade with ‘enemies’, to use the New York courts to impose judgements it requires and to act, in finance as in diplomacy as if might were right.
Last week The Hague, acting on behalf of the US, ordered Russia to pay shareholders of the Yukos oil scam $50 billion. In New York an obscure judge, acting on behalf of the Department of State and the lowest elements in the Wall St sewers, ordered Argentina to make vast restitution payments to vulture funds which had picked up debt at pennies in the dollar, because the debt was worthless. I’ve already mentioned the Germans’ lost 350 tonnes of gold bullion.
Setting up an alternate system is the last thing that the BRICS want to do- they are part of the current system and doing well out of it. BRICS are not Bolivarians looking for a path out of the imperialist maze, they have no ideological objection to Wall St or the dollar as reserve currency. It is simply that they have no alternative: to continue to rely on the dollar means to sacrifice their sovereignty.
If they wish to be able to resist the US in its seizure of hegemony they have to be able to make arrangements which do not allow US judges (or in The Hague’s case Canadian puppets of the US) to make off with their national savings accounts and dictate their budgets. And that is why the current barter and currency swap agreements are likely to grow rapidly into an alternative system to by-pass the US Treasury’s megalomaniac diktats.
It is not that they want to but that they have to. And they will.
And, as they do so, as eurasia, based on the Shanghai Cooperation agreement and drawing in Iran, Qatar and increasing numbers of Latin American, African and Asian countries, becomes a semi-autarchical trading bloc, it will rapidly develop into a military and diplomatic alliance which will overshadow the US Empire so that it withers away.
And it will be because of US hubris, the exertion of power without thought of consequences, the sheer thrill of doing whatever the fuck it chooses just because it can, right up until it realises that it cannot. By which time it will be too late.
Sanctions against Russia, following the judgements against Argentina, and France’s biggest bank, the confiscation of Libya’s carefully built up reserves, the theft of billions of Iranian money, the seizure and sale, over decades now, of long lists of private fortunes and public resources, have reached the tipping point at which change is inevitable. And, in my view, it will not take long.
After all, once they are freed of US control these sovereigns will be free to start imposing controls on the US. Worms are turning.
Posted by: bevin | Aug 6 2014 21:04 utc | 45
b wrote:
So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions.
b, with all due respect to your otherwise wonderful insights and reporting here, you do not understand what the US sovereign non-convertible currency on a floating exchange rate is. You do not understand US federal government accounting. (paulmeli above does)
Before I begin, please understand that all US dollars since August 15, 1971 remain within the US banking system by law, with the exception of physical dollar bills that leave with tourists to a max of $10Gs per. This also means that all (global) foreign bank accounts (or correspondent bank accounts) that denominate in US dollars are located in accounts at one of the 12 Federal Reserve regional banks. By law. That’s why, and because, we are the reserve currency. If you wire money in US dollars to buy a house in Provence, you are operationally moving the money from your checking account in the US to the French seller’s bank at one of the 12 Federal Reserve regional banks for onward forwarding to the French seller’s account. If the French seller wants to keep his money in US dollars, it remains at the Fed, even though he thinks it’s in France. If the French owner wants to have EURO, he exchanges his US dollars on the open exchange and the US money changer now has those dollars is his US bank account, and the EURO are wired to France. No US (bank) dollars ever leave the US banking system.
Access to these foreign Federal Reserve bank accounts is why the US can apply sanctions lickety-split. They are located within this country.
Now for some edgakayshun.
1. All US dollars are created by one entity worldwide: the US federal government. It is a completely closed system. No one else has the legal right globally to create them, or it’s counterfeiting.
2. If you’re good at 1 + 1 = 2 arithmetic, that should tell you a federal government surplus equals the private sector deficit to the penny (which is what happened in the late 90s when the government ran a large surplus and the private sector had to take out equity loans to make ends meet because (1) Greenspan didn’t explain federal accounting to Clinton, and (2) Greenspan didn’t give a shit, his real interest was helping his Wall Street buddies accrue citizen debt).
3. The US federal government issues currency (physical dollars, coins, treasury securities). Everyone else uses the currency. These users are foreign banks and govts, state and local govts, all businesses, all households, everyone but the US federal government.
You need to understand that “Debt” is not “Debt”
Federal “debt” is new money, new ‘net financial assets’. The government spends first on goods and services it needs to provision itself. [So does Great Britain, Canada, Japan, and Australia, who also have sovereign non-convertible currencies with a floating exchange rate.] The US federal government creates this spending with congressional appropriations.
AFTER Congress appropriates, the US Treasury tells its banker, the Federal Reserve, to mark up its General Account in the amount of the approved spending, and gives it the names of the vendors to transfer money to through the system.
THEN, the US Treasury issues treasury securities in the same amount of the spending at auction on the 15th of month. The US Treasury issues these securities out of ‘thin air’. They ‘print’ them. Anyone with more than $250,000 in a private bank savings account scrounges to buy them because private banks only insure to the FDIC limit: $250,000. They are typically gone within nanoseconds. Treasury securities offer the safety of the “full faith and credit” of the United States Government up to the amount of the treasury securities, which could be billions.
The money supply is restored to balance. (The federal government doesn’t have to do this, but it does from long-time congressional rules from the gold standard days. The US Treasury also calculates the amount of interest on treasuries needed every year and issues treasury securities to cover that amount as well. Taxpayers are nowhere to be found in this.)
The non-federal government sector “debt” on the other hand—foreign banks and govts, state and local govts, all businesses, all households, you and I—experience what you and I know as real debt. We have to take out US dollar loans with collateral, and repay with interest on a pre-arranged schedule, or we lose the collateral.
The only reason they call money-creation “debt” at the federal level is because it’s a double-entry accounting term. It’s marked in the Liabilities column. It’s as simple as that. The asset side, the other side of the ledger, records the congressional spending appropriation.
The National Debt, that huge $17+ trillion figure, is a record of all the currency created since 1791 minus the amount of currency destroyed (taxes). It is a record of what we own, not what we owe. The National Debt is in the savings accounts and pension funds of businesses, households, grandma’s savings bonds, university trusts, annuity funds, stocks savings plans, state and local governments, foreign banks and govts, etc. To the goddam penny.
The US federal government does not borrow from abroad
The US federal government doesn’t need to borrow from anyone. Period. There is no factory in downtown China manufacturing dollar bills that we borrow.
The Federal Reserve only has four classes of clients: the US government, US banks, foreign governments, and foreign banks. No one else. The Federal Reserve only has two types of accounts: checking and savings (called something more exotic).
When Walmart pays China for 20 million tires at $5 per, it wires that money to China’s checking account at the Federal Reserve. That’s the way the settlement system works.
China has four choices: keep the money in checking basically earning zip, buy something American with the dollars, exchange to yuan and wire it home, or keep the money in the US and earn interest instead.
Let’s say it chooses the latter: keep the money in the US and earn interest.
China instructs the Fed to transfer the $100 million from its checking account to its savings account and buy treasury securities.
When the bonds, bills, or notes come due, or when China wants to liquidate them for whatever reason, it instructs the Fed to sell the treasury securities and move the principal and interest back to its checking account.
The act of moving its principal and interest from savings to checking is called paying off the National Debt.
Nothing more complicated than that.
Posted by: MRW | Aug 6 2014 21:39 utc | 53
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