Sanctions strengthen the dollar? 4/30
Well, it has gotten stronger
Michael P. Dooley, David Folkerts-Landau & Peter M. Garber write,
An influential academic theory for persistently depressed real interest rates in the center is that the US supplies “safe assets” to the rest of the world. This is only part of the story. The US also produces assets that are unsafe to those who misbehave. The center country must provide safety for good behavior and punishment for bad behavior.
. . .If China also exits, or more likely starts to prepare for an exit, this will be a far more important change in the international system. Our main conclusion, however, is that the dollar will remain the central reserve currency of the remaining dollar-based system and that the role of the dollar and the demand for dollars will increase.
But a lot depends on what counts as “bad behavior.” In their earlier papers, bad behavior consists of the peripheral country expropriating foreign capital. The argument in this new paper strikes me as something of a swindle.
The dollar has gotten stronger recently, which indicates that we are still the preferred country when there is an international crisis. But I imagine that the long-term effects might be different. Freezing individuals’ assets does not reassure someone looking for a safe haven.
I'm not convinced that the current strength of the dollar has anything to do with US being the safe asset to the world. It could be simply that we are planning to raise rates more aggressively than the ECB, BoE, BoJ, and the like.
Another related example is that for all our supposed exorbitant privilege, US interest rates are generally higher than those of our rich world peers (https://www.econlib.org/myths-we-teach-our-children/).
The USD being the safe haven asset to the rest of the world has been a huge plus for the, more oblivious than ungrateful, USA. Yet this has long been known to most who studied Econ. The idea that punishing bad actors by freezing their assets will increase the safe haven value is novel - my own prior assumption was that such a contract violation would lessen the desirability for others to enter a similar contract. I could well be wrong - but so could they.
The increased fluctuations of dollar values reflect the highly increased uncertainty - and a possibly temporary strength doesn't prove nor disprove any medium / long term theory.
I suspect they might be correct (40%), but for reasons they don't explicitly discuss:
As globalization creates interconnected trade & capital flows, and especially cosmopolitan elites, the financial punishment of Putin is a plausible argument to stop Xi from invading Taiwan. And to assert more strongly that countries can NOT invade "innocent" neighbors. Like Saddam should not have invaded Kuwait in 1990 (nor, arguably, Iran earlier).
Establishing an ever stronger inviolability of agreed to borders can hugely bolster the value and security of Foreign Direct Investment throughout the world. Tho Dooley et. al. might claim this was an unspoken part of their "punish bad behavior" argument.
They could easily be wrong (60%) in the mid term 2-5 year time frame: Russia and India do more trade, in Rubles. Russia and China do more oil, gas, resource trade, in Renminbi (or Chinese Yuan or Rubles). The values are tracked by conversion rates with US Dollars (or Euros?), but are legally done in other Great Power currencies. This begins the weakening of US dollar dominance in a viable alternative with increasing trade.
But even if this trade hugely increases, the USD trade might well increase faster and to a much higher level.
I want peace in Ukraine. I also want justice, and for Ukraine to not lose the Donbas - altho Crimea is more realpolitik likely to remain Russian. Ukraine doesn't get the justice without a LOT of fighting and dying, of Ukrainians and Russians. As long as the Ukrainians are willing and able to fight against the (literally!) Imperialist invaders, we should support them as best we can.
Our support should include paying the higher costs, lower standards of living, on NOT trading with Russia, which had been win-win, so instead we accept the lose-lose of Russia not trading with us. More financial pain for Russia means they'll be more eager to agree sooner to a less desirable peace.