U.S., Russia, Arcu discussed on The Breakdown with NLW
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In short, foreigners who had long supported America's largest by eagerly buying its debt, were buying less and less of our new debt issuance. Foreign ownership of U.S. debt declined from 34% in 2015 to 24% at the end of 2021. China's ownership declined from 1.25 trillion in 2015 to under 1.1 trillion in 2021. To compensate for this diminished outside interest, the U.S. looked inward for new creditors. The Federal Reserve held around 4% of U.S. debt in 2009 that figure has climbed to 19% today. These purchases made with dollars summoned out of thin air come with a giant asterisk. They do not derive from organic demand for our debt. They are only sustainable as long as inflation is tolerably low, which it no longer is. In February it hit a 40 year high of 7.9%. The exact explanation for the lost appetite among foreigners for U.S. dollars in U.S. debt is hard to pin down. It may have been a delayed reaction from the 2008 crisis. When the fed made it clear it had the ability to print unlimited dollars to support domestic markets at the expense of foreigners. It might have been the aggressive sanctions the U.S. instituted against Russian banks after Russia's invasion of Crimea in 2014. The most economically powerful nation the U.S. had ever targeted in such a manner. Previously, sanctions had been reserved for small economically unimportant nations. At the time, the U.S. threatened to exclude Russia from the swift international transfer system entirely, but back down due to the severity of the measure. Russia took the threat to heart and its Central Bank divested most of its US Treasury exposure and set up a swift alternative called SPF S even as the Russians took steps to free themselves from dependence on the dollar system, the U.S. wisely walked back from the brink, realizing that American and European banks were hopelessly intertwined with Russian ones. At the time, president Obama laid out a prescient warning regarding the risk to the dollar system that arbitrary exclusions could pose. In 2015, he cautioned in the context of unilateral Iran sanctions, we can not dictate the foreign economic and energy policies of every major power in the world. We'd have to cut off countries like China from the American financial system. And since they happen to be major purchasers of our debt, such actions could trigger severe disruptions in our own economy, and by the way, raise questions internationally about the dollar's role as the world's reserve currency. Joe Biden did not heed the warning of his former boss. First, the U.S. seized Afghan Central Bank assets held in New York and bizarrely handed a large portion over to the plaintiffs in a 9 11 lawsuit. While the seizure may have been predictable, expropriating the savings of ordinary Afghans and distributing them to Americans affected by 9 11, an attack perpetrated by Saudis is deeply unusual. Partly as a consequence, the Afghan banking system is kneeling over, worsening a humanitarian crisis. Not content with that, Biden then dropped a financial nuke on Russia with the seizure of her reserves. It's important to untangle the perceived morality of this action, a reaction to an unjust invasion, and it's prudence. While seizing Afghan or Russian reserves may feel righteous and just, the immediate effect of such actions is to completely undermine the credibility of dollar debt as an international savings device. The U.S. wants to have its cake and eat it too. We need foreigners to buy our debt to the government can finance its structurally high levels of spending. But we increasingly seek to impose moral conditions on who can hold that debt. The U.S. will find that their creditors are increasingly unwilling to pass these purity tests, and will choose to hold the money that doesn't require the owner to comport with Washington's latest political fashions. Author Luke grohman pulled no punches asserting that the fed and European Central Bank quote completely discredited sovereign debt as an FX reserve completely, adding that quote the multi currency multipolar world was likely fully born on Wednesday night. Fed blogger Joseph Wang calls the freezes of FX reserves financial WMDs, adding that quote foreign sovereigns must now diversify as a matter of national security, and some citizens must now diversify as a matter of self preservation. Wang points out that India and China both of whom voted abstain on the United Nations motion to condemn Russia's invasion of Ukraine, maintain heavily FX based sovereign reserves that they will now be eyeing uneasily. Russia made the fundamental miscalculation of not realizing all of their foreign Fiat reserves were at risk. Other nation states falling afoul of the U.S. will not repeat that mistake. Most notably the celebrated Credit Suisse interest rate strategist sultan bozar, declared an end to bretton Woods two. The post 1971 pure Fiat period based on the petrodollar and treasury recycling. Quote bretton Woods two was built on inside money and its foundations crumbled a week ago when the G 7 seized Russia's FX reserves. While the reach of gold bugs and fed critics might extend only to narrow echo chambers on Twitter. Pulsar's words reverberate around the financial community. For once the difference between golden dollars historically clear. Outside of James Bond novels, gold can not be immobilized at a distance. Dollars and dollar assets can. While not as dramatic as the Nixon shock, the Biden sanction was just as genuine a default. U.S. treasuries in the post 1971 era were global risk free assets used by friends and enemies alike to reliably store value. Rug pulling the Russians even if warranted introduced for the first time, genuine doubt into the quality of the commitment the U.S. can maintain towards foreign creditors. The prospect of total asset and validation is an unacceptable tail risk, and any nation state wary of falling afoul of U.S. sensibilities, especially as the U.S. becomes ever more capricious and less interested in the well-being of the international sphere it used to govern. We'll consider diversifying out of U.S. treasuries and other freezable assets. In 2022, posar is outside money is king. For now that's gold, but even the former skeptic has some time for its digital analog, concluding Bitcoin, if it still exists after the war will probably benefit from all of this. Back to MLW here. I think one of the things that's hard about this moment and about distilling insight from the noise. Is how rhetorically valuable in the context of social media and readerships and digital publications is to propose the end of one era and the beginning of another. This is the type of proclamation that makes for immensely good reading and immensely good pondering and immensely good content. It's also something that humans are biased to think about themselves and their time. We all like to imagine ourselves as living through significant eras of being a part of something larger. It's why, for example, so many generations throughout history have seen themselves as the last, and the end of times. And so perhaps because of that, it's easy to be skeptical when someone declares something so huge as the closing of this monetary era. However, in those moments, it's worth doing a few things. First, asking about the source of those proclamations. And what their biases are to fall trap to that great moment of history sort of fallacy. In this case, for example, Nick isn't trying to get clicks outside of sharing what he thinks. It's not his business. He's also written enough that we know that he doesn't fall prey to hyperbole. So, Nick becomes a more interesting, more valid source, at least for me. When it comes to this sort of big picture power shift, is not to say, is there a clean break from history. But have the recent actions of leaders made a sufficient crack on the face of history for new forces to seep in. And that's, I think, what someone like Nick in this piece and others beyond him and other pieces are arguing about the seizure of Russia's Central Bank reserves. It's not so much that this definitely means the end of U.S. dollar hegemony. It means that there's a new crack in a once largely impervious pillar of the global financial order. That pillar was the neutrality and imperviousness of U.S. treasuries in the U.S. dollar as a way to store global wealth, and that crack is the idea that it could be made political. Now, of course, this is an extreme circumstance. It's a belligerent nation making an unwarranted unjustified attack on a smaller nation. Largely for the sake of its own economic or political or nationalistic or even individual reasons, and to perhaps that will temper just how many forces slide into that crack. But it doesn't change that crack in the pillar is now there. What that means and how that will play out will be the story of the decade to come. For now, I want to say thanks again to my sponsors nexo IO, arculus and FTX. Thanks to Nick Carter for another excellent piece. And thanks to you guys for listening. Until tomorrow be safe and take care of each other. Peace. Hey breakdown listeners, come join coin disks consensus 2022. 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