Safe Haven No More, 3/5

Have we undermined the dollar?

In the WSJ, Jon Sindreu writes,

the entire artifice of “money“ as a universal store of value risks being eroded by the banning of key exports to Russia and boycotts of the kind corporations like Apple and Nike announced this week. If currency balances were to become worthless computer entries and didn’t guarantee buying essential stuff, Moscow would be rational to stop accumulating them and stockpile physical wealth in oil barrels, rather than sell them to the West.

For decades, governments were encouraged to hold monetary reserves in the form of dollar balances held at banks, including our Federal Reserve. But it turns out that we can erase these reserves at the stroke of a pen press of a keystroke by imposing sanctions.

For many decades, the dollar was treated as a “safe haven.” Individuals and governments wanted dollar-denominated assets “just in case.” Now, for any country that is not confident that it is in our good graces, dollar holdings are no longer safe.

Of course, one can argue that no one else has anything to fear. Alan Cole writes,

Few dollar users, if any, are likely to commit the same offenses as Russia or draw the same punishment.

And if you believe that, you also believe that the RICO statutes were never used against anyone not involved in organized crime syndicates.

For Russia, even if their reserves were unfrozen, in the present environment they would have difficulty using them. That is because, as the article notes, so many companies are refusing to sell to Russia.

Going forward, if dollars are no longer the risk-free asset, that is a change to the financial system with consequences that are difficult to predict. Some day, we may look back on this as the most significant outcome of the Russian invasion of Ukraine.