After Russia's invasion of Ukraine, the US took a number of extraordinary steps to cut Moscow off from the international financial system. The country immediately was hit with a slew of sanctions. It was cut off from the SWIFT payment system and it even had its dollar reserves seized. Prior to that, in 2021, the US took the rare step of seizing dollar reserves from Afghanistan's central bank after the Taliban's re-emergence to power. So how does the US control who gets to hold and transact in US dollars? Where did this power come from? What are the limits to US policing of its own currency? On this episode of the podcast, we speak with Bloomberg Senior Reporter Saleha Mohsin, author of the new book, Paper Soldiers: How the Weaponization of the Dollar Changed the World Order. We discuss the buildup of this tremendous financial power and also what it means for the dollar's status as a reserve currency going forward. This transcript has been lightly edited for clarity.
Key insights to the pod:
What inspired Paper Soldiers: How the Weaponization of the Dollar Changed the World Order? — 05:53
Trump and Treasury's stance on the dollar’s strength — 08:40
What’s the US limit to policing the dollar? — 11:40
Weaponizing the dollar versus technological ability — 15:23
How did we track illicit money flow pre- and post-9/11? — 17:54
The US government’s visibility into the dollar — 19:19
How SWIFT sought information — 21:33
How the world benefits from the dollar — 26:05
Cooperation in the dollar’s position and vulnerability — 31:48
What’s different now with the dollar’s position? — 34:12
Treasury’s stance on Russia sanctions — 37:11
Are new money-moving networks possible? — 39:07
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Joe Weisenthal (00:10):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:15):
And I'm Tracy Alloway.
Joe (00:17):
Tracy, you know, something that has always struck me about the financial system I guess, is that from the US perspective, it feels like any time anyone spends any money anywhere, or particularly dollars anywhere, the US could sort of go after them. Even if it's overseas, completely out of the country. It feels like the US basically has the prerogative to say ‘You are breaking the law in some way. You're doing something we're not going to allow.’
Tracy (00:48):
This is what exorbitant privilege looks like, right? This is it.
Joe (00:50):
Yeah, I guess that's it.
Tracy (00:53):
Well, I think you're hitting on something that's kind of fundamental about the current financial system, which is the dollar is the global reserve currency and there are some pros and benefits that come with that. One of them is that you can use it as a tool of statecraft, so you can go after people that you don't like or people that are breaking the law.
But there is also this tension on the other side where it seems like there are some downsides too, right? Like maybe at certain times, the US would desire a weaker dollar in order to jumpstart economic growth or certain exports, manufacturing, things like that. I think on the whole, most people would agree that the dollar's special status in the financial system has been a massive benefit for the US viz the huge deficit and people willingly funding that and things like that. But, there are downsides, and that debate kind of bursts into the public consciousness every once in a while.
Joe (01:57):
Yeah, one thing obviously, since early 2022, when Russia invaded Ukraine, that sort of seems to have, you know, and then the US responded with an extraordinary amount of sanctions and cutting off Russia from the dollar-based system in almost every way imaginable. It sort of, you know, maybe catalyzed a new round of talk of, okay, are parts of the world…
Tracy (02:23):
The power of the dollar.
Joe (02:25):
The power of the dollar [is] exactly right. And I think that was sort of a pivotal moment. I don't know if it'll be a pivotal moment for the future of the dollar, but at least it was a pivotal moment at least in this current cycle of people talking about dollar alternatives.
Tracy (02:40):
You know, it's interesting you bring that up because you're absolutely right. It feels like that was the catalyst for the current round of discussion about the power of the dollar and the future of the dollar in the financial system. But thinking back to some Odd Lots history, when I think about that question of the US maybe overreaching or using the dollar in this particular way, in the way they used it for Russia, I think about the conversation we had with the former head of Afghanistan’s central bank. Do you remember that?
Joe (03:13):
Yeah. That was a great episode
Tracy (03:14):
Because there were, I think, like 7, 8, 9 billion dollars worth of reserves held by the Afghan central bank. And when the Taliban took over, the US basically seized all of it. They put some of it aside for 9/11 litigation, and then some of it got put into a fund that was supposed to be dispersed to the Afghan people in some way. But that to me, and maybe we touched on it in the episode, but that to me was sort of the ‘Crossing the Rubicon’ moment when you can actually say ‘I'm going to take these central bank reserves.’
Joe (03:49):
It sort of gets to this idea in my head, and I think that's a great example, which is that a dollar is not really a thing that you have. It's a claim to capacity on this global complicated dollar network, right? And so we think maybe ‘Oh money, you have it, it's sort of like property,’ but it's not really property.
It's almost like a ticket in some way to like a plane. But if the plane doesn't want to honor your ticket, the airline, it can. And so it almost feels like there's sort of a reminder that yes, you could theoretically hold dollars. But in the end, the US could sort of decide [that] actually your dollars are no good here anymore.
Tracy (04:33):
Yeah, there are conditions attached to that ticket — it's not an actual piece of paper, right — but that line item in a computer system somewhere.
Joe (04:41):
And so I think it's really interesting. What is the history of all of this? What are the limits to this power? How did we sort of emerge with this capability to sort of track the dollar flows and decide who gets access and how do we cut people off from the dollar system? It’s [an] extremely, extremely interesting question.
Tracy (05:01):
Yeah, and it's definitely core Odd Lots content at this point. So in addition to speaking to the former head of the Afghan Central Bank, we've had Zoltan Pozsar on a number of times to talk about his vision of de-dollarization and Bretton Woods III. We've had Perry Mehrling debate Zoltan to talk about this particular issue. And I'm happy to say that today we have one of our own Bloomberg colleagues to talk about this.
Joe (05:25):
We literally have the perfect guest. We are going to be speaking with senior Washington correspondent for Bloomberg News, Saleha Mohsin. She is the author of a brand new book, Paper Soldiers: How the Weaponization of the Dollar Changed the World Order. Saleha, thank you so much for coming on Odd Lots.
Saleha Mohsin (05:45):
I’m so excited to be here, Joe and Tracy.
Joe (05:48):
Why did you write this book? What prompted this book about the weaponization of the dollar?
Saleha (05:53):
It's a crazy thing. It might have been Jan. 6, the insurrection. I don't know. It's hard for me to put a pinpoint where. For a journalist, it's a natural course to say ‘Maybe I'll write a book,’ but something happened that day. A lot of emotions. Let's set most of them aside and just talk about the Treasury Department and the dollar on Jan. 6., and in the couple of days that followed, we all saw reports.
And I reported on how then Treasury Secretary Steven Mnuchin may or may not have been involved in talks about the 25th Amendment, and do we need to sideline President Donald Trump? And I thought to myself, wow, the Treasury secretary's job has just gotten so huge. You know, a couple of weeks ago, he was in Congress trying to get another spending bill through. A couple of days after that, he was in the Middle East pitching our international economic policy, and economic sanctions programs, and other elements of geopolitics. And here we are now, he might be involved in removing the president.
That combined with an op-ed that Bob Rubin wrote right after Jan. 6. And he wrote an op-ed, it was about a couple of different things. But there was one sentence that I think kind of sums up the kind of reporting that I've done for many years now, and it sums up why I wrote the book. He said, in this column, “Faith in democracy and faith in markets go hand in hand.” And I just thought, oh my gosh, the dollar is part of our democracy. Democracy is part of our dollar. And that's kind of what started everything for me and my brain.
Tracy (07:36):
So I'm glad you brought up Trump here, because this came up on an episode relatively recently actually. I think Trump is kind of, for once, a very good prism — a very clear prism to view some of the debate around the dollar, because he sort of instinctually understands that a strong dollar might be in the US interest. It sounds good to be able to say like ‘We have the world's reserve currency and the dollar is great,’ etc.
But on the other hand, there were times during his administration when he would talk about the desire for a weaker dollar. And we need a weaker dollar in order to boost manufacturing, get more jobs back to the country, etc. In your reporting, was it ever clear to you which side he landed on? Or even broadening it out, the US Treasury kind of has a long and complex history when it comes to expressing its desire for the greenback, whether it wants a strong one or not.
Saleha (08:40):
Absolutely, and that's what Paper Soldiers is all about. It's all about the complexities of Treasury Secretaries and any other Fed or White House or congressional official talking about the dollar and how sensitive each and every syllable can be. You know, if we talk about Bob Rubin, how many words he used to describe his view on the dollar, what order those words were in?
Currency traders in the ‘90s used to listen to everything to determine how to make their trades. Now, on the question of Donald Trump in, you know, from 2017 through 2020 into 2021. As usual, he's a mercurial person. Lots of gray areas. He definitely saw the benefits of saying ‘Yes, we have a strong dollar policy. We have a strong dollar because it reflects a strong economy.’
But he was the first politician who in any real way realized that a strong dollar and that policy from the ‘90s, and that had persisted, was hurting certain parts of the country. And we're talking about the forgotten man in, you know, the manufacturing sector, the Rust Belt of the country. And in the book, I take you into Weirton, West Virginia, into Moraine, Ohio. And what happened to those factory workers in the manufacturing sector as globalization, which is underpinned by a strong dollar policy, sort of overtook everything and people kind of forgot about the economic scarring that happened as the manufacturing sector in the US kind of disappeared.
So he kind of looks at it both ways. But actually, earlier in March, Trump was on as a presidential hopeful again, on CNBC talking about how he thinks it's dangerous that people are talking about de-dollarization. He is wading into the de-dollarization debate, and we've all learned that he puts action behind those kinds of words.
Joe (10:48):
So there are two things, and they're sort of related, but they're also sort of separate. So there is the strong dollar in the sense of the price of the dollar against our trading partners, or the price of the dollar against the yen and the euro and all that.
And then there is the sort of strong dollar, which is, it is the currency that everybody for the most part uses globally to settle trade. And, you know, this sort of gets to the incredible power that the US has over this network. Just high level, what is the limit of what the US can do to the dollar network? To the various banks, etc., and messaging services where dollars and goods are traded? What is the sort of perimeter of America's ability to, I guess, police transactions in the dollar?
Saleha (11:40):
It’s a debate that's raging in political and economic circles in Washington, and I think in pretty much every capital around the world because the US is actually figuring out what that perimeter is, where that boundary is. There's been a couple of moments where the US has realized, ‘Ooh, I touched it and it was too hot.’
So there was in 2018 when Steven Mnuchin's Treasury Department sanctioned Oleg Deripaska, a Russian oligarch who owned a majority stake in Rusal at the time — one of the largest aluminum makers in the world. And Treasury and the US found out kind of the hard way that maybe we overdid it or didn't look into these sanctions deeply enough because we had a lot of blowback from them. You know, there were a lot of self-inflicted wounds there because commodity prices swung 20% on each headline about those sanctions. Any kind of change in the date that they would be implemented or what kind of carve-outs were coming, markets swung.
And that's not actually a goal of OFAC, which sort of oversees the Treasury Department's sanctions implementation, the Office of Foreign Assets Control. They want to move a little bit more softly without triggering this much turmoil. And what we saw was, you know, a little manufacturing plant in Ireland realizing that, ‘Well, sanctions might completely muck up our cash flow, so we might be forced to shut down our smelter.’
Okay, that smelter runs at 2,800 Fahrenheit. It costs a lot of money to shut it down, it should take days or maybe a couple of weeks to actually physically shut it down. But if they run out of money, they have to shut it down quickly. That means there's going to be all these toxins polluting the air and the water supply, but sanctions are going to trigger that closure. Treasury did not think it through. That was one example of the Treasury Department learning boundaries. And the other one is the one that Joe, Tracy, you guys just mentioned. The big sanctions in February 2022 with, you know, cutting Russia off from the dollar.
Tracy (14:17):
So you go into detail on this in your book. And by the way, I love that example of the smelter and sort of an unanticipated consequence of doing this. But you talk in your book about the internal debate of whether or not to sanction Russia. And I think you mentioned that Janet Yellen sort of had to be convinced and that there was this memory of the Oleg Deripaska incident sort of hovering around.
I guess what I want to ask is how much of this, this weaponization of the dollar is a question of political will and how far the US Treasury wants to push on that string, versus technological ability. It seems like the US does have the capacity to shut people off in some respects. So for instance, through the SWIFT system, which again you go into some detail on. But there is this overarching question of whether or not it should, whether or not it'll backfire either in the short term or in the long term by diminishing the desirability of the dollar as a reserve currency.
Saleha (15:23):
It's complicated, as things tend to be in Washington. There is huge political will to use economic sanctions and to make them even more sophisticated than they've ever been. What we've seen is we've gone from, you know, in the early 1900s up until pretty much 2001, OFAC was a bit of an orphan of the Treasury Department. No one really paid attention to them. Economic sanctions at that time, they were so blunt. It was just like embargoes on Cuba. It didn't really have this great big impact, it wasn't discussed.
In 2001, 9/11 hits and, you know, the Global War on Terror did not start with military tanks rolling into some country or American troops in their boots hitting the ground somewhere. It started Sept. 24th, 2001 with George W. Bush, with a stroke of a pen giving the US Treasury Department the authority to weaponize the dollar. To use the dollar to find out how do the terrorists finance those attacks?
Because 9/11, it cost those terrorists like $400,000 and later officials found out that that money was moved in the light of day. So the US realized that, okay, we can track these money flows and either stop the next attack or just choke off, you know, bad actors or terrorist organizations or terrorists themselves from money flow and the ability to get cash by cutting them off from the global financial system because we control the dollar.
That's kind of where it started and sanctions have gotten more and more sophisticated. Treasury created an entire unit called the Terrorism and Financial Intelligence Unit. That was created in the aftermath of 9/11 in 2004, and built out basically an intelligence unit within the Treasury Department. So Treasury in the US is the only finance ministry in the world with its own intelligence operation, basically.
Joe (17:29):
Yeah, this is so fascinating. And I thought this part of your book, where you talk about 9/11 was really interesting. So what were the sort of capabilities of OFAC or the Treasury in terms of tracking illicit money flows prior to 9/11? And then what was the difference between specifically what they did, what they could do, and then pre- and post-9/11?
Saleha (17:54):
They didn't have much before 9/11. Like I said, OFAC was this orphan. No one really paid attention to them. They did a lot of work, but their budget was small; their staffing was small. They didn't have a lot of access to the Treasury Secretary, which then you have no one to sort of lift the profile.
But also, the US wasn't looking at how to work in this space that's between kinetic action, which is, you know, sending tanks and forces in and diplomacy. That's what sanctions are, right? It's that spot in the middle, meaning diplomacy has failed us, but we are not ready for an actual live bloody war. So let's go in the middle and use sanctions and it's pretty cheap, right?
So that’s where, like what Tracy asked earlier, that's where the political will is. It's not as expensive and doesn't spill blood as a war, but it's a good option when diplomacy isn't working.
Tracy (18:45):
Wait, talk to us a little bit more about technological ability. This is why I was curious how much of it is politics versus what we are actually physically able to do in the financial system. So if I have a dollar, to Joe's point in the intro, there are certain conditions that are attached to that dollar and there is to some extent visibility on that dollar as well. Talk to us a little bit more about what a dollar looks like or how much visibility the US government can have into it.
Saleha (19:19):
That's such a good question, Tracy, because dollars are actually transported sometimes, wrapped in plastic shrink wrap and trucks like loaded into Afghanistan. The New York Federal Reserve actually sends money like this to Kabul or they did in the past, right? That's why the Treasury Department would have an attaché in Kabul there to sort of witness that millions of dollars of actual physical cash, greenbacks coming into the country.
So that's the really hard part, right? How to monitor that. Banks do have a responsibility to tell the Treasury Department through these suspicious activity reports (SARs) when they see transactions happening that touch their financial institution that look suspicious to them. But these SARs, it's just like throwing something in some obscure filing box and maybe someone sifting through it will see what they need to see. It's hard to see a pattern.
Basically, after 9/11 officials realized that they didn't have a ton of visibility, the US itself autonomously, to see how dollars are moving through the global financial system. And this is where it gets interesting. After 9/11, Treasury officials wanted to get that glimpse and they knew that SWIFT, based in Belgium, part of the EU and that jurisdiction, has data within its fortresses. You know, the building itself in La Hulpe, Belgium is, you know, looks like an actual fortress. But they have the data that shows the routing number and the transaction time in real time. SWIFT is basically the Gmail of the banking system.
Joe (21:06):
I like that.
Saleha (21:08):
Yeah, it's a way for banks to communicate with each other. Here's the bank account number, here's the name, here's the address, and the amount that needs to be moved. But it promises privacy, no one will know the nature of the transaction, right? And a couple of different central banks are involved in sort of that network that SWIFT has built up, including the Fed, Bank of Japan, Bank of England, and a couple of others.
And so Treasury officials got together and they spoke to SWIFT. The head at the time after 9/11 was Lenny Schrank — really interesting guy that I spoke to for the book, colorful character — and he said ‘Well, they approached me.’ And he said, he knew that that call, as soon as those planes hit the Twin Towers in Manhattan, he says he remembers he was in Europe for, I think Ireland, a meeting with a SWIFT board member.
He was biting into a sandwich when he heard that 9/11 happened. He found out exactly the depth of the problem and then he knew right then ‘I'm going to get a call from the Treasury department. They're going to want data. They're going to want to know how did money that financed that attack moved through this system? How did we miss it and how can we catch the next one?’
Because bring yourself back to Sept. 12 and 13. We were terrified. Everyone, at that time internationally, said ‘I'm an American today because if someone can attack this country, they're attacking everyone.’ If you remember the Queen of England at the time, she sang the national anthem. The American National Anthem. Because she said ‘I stand with America.’
So Lenny Schrank, an American himself, knew that that call was coming. So when Treasury finally called, he was ready. You know, it depends on who you ask, but it's possible that Treasury might have approached SWIFT a couple of times before then looking for some data, and they'd always kind of said no.
And so they finally got to talking about specifics and Lenny Schrank spoke to a couple of the different central bank governors that were involved. According to one source, Alan Greenspan at that time was against it initially. Against Treasury having any insight into SWIFT data because he said ‘Gentlemen shouldn't read gentleman's mail.’ So he didn't like the idea at first.
Joe (23:30):
First of all, I think you wrote in your book that this only came out like in 2006 that the Treasury had approached SWIFT about getting access to more data? It was done pretty surreptitiously or secretly for a while?
Saleha (23:43):
Yeah. So SWIFT, speed, that's what it alludes to. Treasury's code name for the whole program was Turtle, the opposite of SWIFT.
Tracy (23:52):
I love that.
Saleha (23:53):
Yeah, it's great.
Tracy (23:54):
The Turtle and the SWIFT. Aww.
Saleha (23:55):
So if you were at an airport maybe in 2001 through 2006 and saw these government, you know, gray or sort of muted suits, a man maybe handcuffed to a briefcase. And if they were talking about a turtle, they were talking about SWIFT. So they used SWIFT, they were able to come to an agreement, they would have to subpoena the information. There was a lengthy process there. Lenny Schrank said ‘I want the US to have the information that they need and not a bite more.’
Because he didn't want it to be abused and he wanted to set a precedent. He did say to me that the only reason that the US was able to get that information was the power of the dollar. It is the owner of the world's reserve asset coming to SWIFT saying ‘We need to protect our economy and our financial system.’ Because after 9/11, the stock market was wiped out. $1.4 trillion of value disappeared that day. The S&P 500 plunged over a couple of weeks.
The markets were closed because physically the heart of [the] American stock market had been attacked, right? The financial district was right by the
World Trade Center. So he said ‘That's why, that's the only persuasive power. If any other country had come to us, it was a very easy no, we wouldn't even have to explain.’
Tracy (25:13):
So one thing that I think often comes up when we're debating the role of the dollar, I mean obviously people can see the benefits that it has for the US. There is that idea of exorbitant privilege and the US is able to issue a lot of dollar-denominated debt and fund a lot of different things — thanks in part to its currency.
But I guess one thing that often doesn't get discussed or doesn't get discussed as much, is the idea of what the rest of the world gets from the dollar's special position. Can you talk a little bit about that? Why does the rest of the world agree to do stuff like invoice in dollars or buy US Treasury debt or have large reserves of dollars that it holds at the New York Fed and things like that?
Saleha (26:05):
Tracy, the answer to that question actually begins like 70, 80 years ago. 1944. Bretton Woods, lots of economists and wonks here in Washington and around the world, in financial and economic policy circles love to talk about Bretton Woods. This is when, by design, the dollar was crowned as the reserve asset, the most important asset in the world.
At the time, the world had just emerged from back-to-back global wars. Europe's fiscal position, most of the countries there, it wasn't good. The UK had held the reserve asset, the British Pound. They were no longer the largest economy in the world. And since their actual physical infrastructure was so damaged after two wars, they had a lot of spending they had to do. The US was sort of this Hercules in a cradle emerging to take on the global superpower role that it had been heading toward for decades. And it was ready for it. Everyone was looking at America like they have got this figured out, they're going to lead us into the future. All the technology is there and everything is clean and shiny over there. They're a stable country and helped wrap up the war.
So the US helped create the infrastructure of the World Bank, the International Monetary Fund. All ways to knit the world together so that we're so economically integrated that we cannot start a war with each other because then there's that deep self-inflicted wound because we are so economically aligned. So much trade going on amongst us. Everyone kind of relied on the dollar to lead the way forward the same way they relied on the US to lead the way forward because it was a safety net, right?
At the time, the dollar was pegged to gold. And so there was this promise that as long as we continue dollar dependency, then we will all stick together and emerge from the ashes of two wars, stronger. And in those 80 years, global GDP did grow a lot because of globalization, because of that economic integration.
And so as the United States rose and consolidated power, its superpower status, people were more and more invested in dollars themselves and depending on the dollar. And it turns out that when, you know, a crisis hit, whether it's a regional crisis in some part of Asia, or Europe, or Latin America, or there was political instability in another country, or something that was more global, a pandemic, a global financial crisis — even if that financial crisis started in America, that dollar has been seen as a safe haven. ‘Let's all flee to this place because we know that this country has rule of law, free and fair elections, a strong and stable democracy. If we park our cash and our wealth and our savings in this asset, it'll be there when we come back to it.’
Joe (29:09):
So, you know, you hold dollars, like there's the network effects of everyone using the same currency. There's the general price stability, there's the rule of law, etc. Now as we said in the introduction or what we were talking about earlier, like the sort of sanctions in 2022, or as Tracy mentioned, the seizing of the Afghanistan dollars, it seems to have woken much of the world up. That yes, there are benefits to holding the dollar for maybe obvious economic reasons. But it comes with strings or it comes with risks.
Do you think that there's a sort of, I don't know, maybe a gap in that realization? Where maybe people around the world, actors understood the benefits of transacting in the dollar network and it only clicking later on, that as conditions to part of that network, that the US essentially has quite a bit of power to police your actions?
Saleha (30:04):
Absolutely. I think that this was something that kind of crept up on us without maybe us realizing right away. I mean, for one thing, the dollar and the US have immense dominance across the world. The world's largest economy is the US. The next three countries on that ranking put together and you get maybe to where the size of the US economy [is]. So by sheer strength and just internal power, a lot of innovation happens in the US. We have a lot of fiscal spending, which drives more research and development.
Tracy (30:52):
So the other thing that tends to happen in this type of conversation is people will say ‘Oh well, the dollar’s the reserve currency because it's a unipolar world and the US has dominated at least up until relatively recently.’ But as you point out, it's kind of almost the opposite. There was a lot of consensus building going into the initial stages of building up the dollar as the reserve currency.
And it feels like even now there is still a degree of cooperation here. And you mentioned SWIFT, for instance. I mean, SWIFT seems to have the cooperation of several central banks, which you already mentioned. But I guess my question is A) how much cooperation goes into the dollar's special position? And then B) how vulnerable do you think some of that consensus is in [the] current day?
Saleha (31:48):
That's such a good question. There is so much consensus and I'm going to point you to history again. If you look at the 1980s, a really interesting and exciting thing happened. I almost wish I was a financial journalist back then covering The Plaza and The Louvre Accord. So in [the] 1980s, let's think. Inflation was really high, the dollar was really strong because interest rates had been hiked up to combat inflation.
And manufacturing sector, farmers, a lot of our exporters, were complaining about how strong the dollar was. And other countries were saying that the US has this quote “benign neglect of the dollar”. They don't care that it's so strong, it's damaging its own economy. There are, you know, folks inside are complaining, and overseas it's making it hard for other countries to buy goods that America is making and trying to sell. So at the time, it was the G5. It was West Germany, Japan, the UK, the US and I think France [that] got together at the Plaza Hotel in Manhattan.
And I went there to research the room, what it looks like. I asked somebody, one of the bellhops or something, like okay, has this room been the same since the ‘80s because I got to write about it? And they all secretly met with then-Treasury secretary Jim Baker, to collectively agree that they were going to meddle in currency markets to weaken the dollar. And that's kind of what triggered the whole strong dollar policy lore of journalists and currency traders trying to figure out what does a Treasury secretary says about the dollar because maybe there's going to be government intervention in the dollar because they did it, right?
Joe (33:31):
What about now? So does this feel like a different moment? Because as Tracy and I have talked about on multiple episodes, and, you know, both of us have only been reporters for about 15 years. But in those 15 years, there [have been] like multiple waves of people talking about the post-dollar era, the multipolar era, and new alternatives. Does 2022 to 2024 and beyond, does this feel like something different where the conversation is ‘Oh, this right really might be a change?’ Or does this feel like another time in multiple cycles where there's plenty of talk about a post-dollar era, but it doesn't really amount to much?
Saleha (34:12):
You're right. A lot of people for decades since the Bretton Woods Agreement in the 1940s, have been wondering when is the dollar's hegemony going to end. Who's going to be the one to take over? Is it going to be the Japanese yen when the euro came onto the landscape? Oh, maybe the euro will take over the dollar and no one has really done that.
What's different now is Trump. He came onto the scene. He disrupted so many of our long-held economic assumptions. To the point where we've got Biden and his first State of the Union speech, gave it a different delivery, emphasize different words, capitalize different letters, and it could have been something that Trump said because Biden was talking a lot about Buy America. And now we hear Janet Yellen talking about friend-shoring. All of this to me sounds like populism and making America great and America first.
And so we are seeing that Trump's disruption continued. He shifted the trajectory, you know, now let's get really wonky. The US Treasury Department twice a year releases a currency policy report. And when I was covering Treasury, I loved this report. I even sprung it loose once ahead of schedule. And even civil servants were wondering ‘How on earth Saleha got ahold of this report.’
Because everyone wanted to know [if] the US going to designate China a currency manipulator because they were the most obvious contender for that tag. And what we've seen is that Trump has brought action behind his words and he has shifted the debate. So now, if the US wanted to get a bunch of countries together to manipulate the dollar, it's a totally different ballgame. For one thing, currency markets are just too big to be able to allow a couple of governments to influence it.
And then, who's going to join the US in that? The US does not have the same standing that it did 10 years ago or 40 years ago when the Plaza Accord happened. Now we're in 2024. You know, in 2018 and 2019, there's a deep chapter in the book on this when Trump actually talked about intervening in the dollar, which would've been a huge deal. And Larry Kudlow, you know, he's sitting on the other side of the resolute desk inside the Oval Office, said to Trump ‘Who's going to join us? No ally is going to want to work with us on this.’
Tracy (36:34):
So on a similar point, you know, there is this vibrant debate now about whether or not the sanctions against Russia have been effective. Whether or not the US, in one way or another, overstepped the bounds when it decided to cut off Russia from the banking system — or even going back to the Afghanistan reserves and things like that. I know you're not covering the Treasury specifically now, but presumably, you're still talking to plenty of people in DC, where you're based. What are they saying now about that decision?
Saleha (37:11):
The current administration has ended up in a bit of a defensive posture when it comes to talking about the dollar. The minute we started hearing Janet Yellen say there's no threat against the dollar — and I'm going to give you the extreme example — it's like when Nixon said ‘I'm not a crook,’ right? So it's like there's nothing to see here. That's super extreme.
But if she's talking about it, if the Treasury secretary and the Fed — Fed Chair Powell, earlier in March, testified and said to Congress ‘There's no threat to the dollar from Russia sanctions.’ Fed official Christopher Waller did a speech dedicated to the dollar's role in the global financial system and what its outlook could be. And he also said ‘Russia sanctions are not affecting the dollar.’ So it's kind of like, well, if you're saying it, that means you're studying it, that means you thought it was worth looking into. So maybe there's something there.
At the same time, we have a lot of countries who are wondering like ‘Oh, are we too dependent on the dollar?’ Because if they cut off Russia, a G20 country that in 2022 was the world's 11th largest economy, so closely knitted with Europe and they cut them off. And it was pretty wild for the country, right? Here in the US, our gas prices at the pump went up because of those sanctions. And at the time, Americans were willing to pay that price. But that's not going to last forever.
Joe (38:35):
By the way, I looked up the SWIFT headquarters after you mentioned that it looks like a fort. It is an incredible building actually, you are not exaggerating. In fact, it's far grander than what I expected.
When Russia was cut off from SWIFT in 2022, that was just seen as this like watershed move, the sort of finance equivalent of a nuclear option. Do you see, going back to your answer just now, like a building up of new alternative networks of moving money around?
Saleha (39:07):
When the Trump administration blew up the JCPOA, the agreement around Iran's nuclear program, and withdrew from it, we saw European countries wondering ‘How we continue to transact with Iran and abide by our agreement with Iran and not violate US sanctions?’ Because Trump then re-imposed 971 or more economic sanctions on Iran. And so Europe didn't want to be in violation of those.
Now, the interesting thing that happened was that no European country wanted to own that non-SWIFT network and get blamed by the US for creating that. The thing that I would point to and the thing that actually, you know, I end the book on a note of hope, that I think that the US as a democracy is supposed to be self-critical. We're in a very self-critical moment right now and that extends from social problems, political problems, economic, finance, and like, let's get wonky, currency policy.
So I think that we're going to emerge from this hopefully stronger. That's my pie-in-the-sky hopeful thinking. If you look at some of the countries that are trying to create a network outside of the dollar, it's like the BRICS+. A lot of them are closed autocracies, they're not open democracies the way the US is.
Now, where I find hope is that hopefully, in a decade or two, we have shown that we continue to be a country that has a stable democracy. Rule of law, free and fair elections, all those things, independent agencies. But those other countries, you know, if they're run by dictators, then that dictator just like everyone else, their life will come to a close. What's going to happen at that moment? And when there's political instability, people flee to the dollar.
The next time there's some kind of global crisis, if everyone runs to the dollar, I think you can put a big period on that question of is de-dollarization happening? Because we are still the safe haven. And so then what's going to happen if Putin or Xi Jinping or some of these other countries lose their dictators or their authoritarian leaders, there's a power vacuum and there's a power grab and there's instability. They don't have time to deal with trying to become a reserve asset or trying to outskirt or outrun the world's reserve asset by creating this network, they're going to be dealing with their inside problems.
Joe (41:30):
Saleha Mohsin, author of the new book Paper Soldiers: How the Weaponization of the Dollar Changed the World Order. Thank you so much for coming on Odd Lots and congratulations on the book.
Saleha (41:40):
Thanks so much. It was an honor to join.
Joe (41:52):
Tracy, I really like Saleha’s perspective that dollar strength is sort of downstream from political stability. And I think that's a really important element of all of this, which is that, you know, we look at measures, debt-to-GDP, and inflation, etc., but the real thing that sort of undergirds it all and that sort of needs to be maintained, is just this assumption that the US is a stable country with the rule of law and probably the most stable, with the strongest rule of law in the world.
Tracy (42:23):
No, absolutely. I really liked her final answer sort of linking a lot of the network effects and the politics together. And I think Charlie Kindleberger made this point ages ago, that the reason the dollar reigns supreme, the reason there is this dollar hegemony, isn't necessarily because the US is imposing it on the rest of the world or because there is this unipolar world.
Instead, it's because there have been decades of sort of consensus building and network building around this. And so the question is, okay, if people are uncomfortable with the dollar because they're worried that the US can overexert its control of the system, such as what we saw with Russia getting kicked out of the banking system or Afghanistan reserves getting seized and that sort of thing, then they need to build up an alternative. Which means they have to build a network. And frankly, as Saleha was sort of intimating towards the end, dictators might be busy. They might be too busy to build up a network, but they also might not be that good at it.
Joe (43:32):
Yeah, I thought that was a great answer. Or no one could just have the confidence of sort of internal policy stability after that leader leaves. I thought it was a really fascinating point. Also, until her book, I hadn't like really appreciated the degree to which 9/11 specifically was a turning point for our aggressiveness maybe, or our ability to essentially monitor global financial flows.
Tracy (44:03):
Yeah, it's taken for granted so much now and it is such a given that it's kind of weird to hark back to a time, I mean, I guess it would've just been the year 2000, so 24 years ago, when the US wasn't using something like SWIFT to aggressively monitor terrorist financing. It is crazy to think about how much, I mean, I guess it's a little bit obvious that 9/11 was a watershed moment, but also in terms of the financial system.
Joe (44:33):
Yeah, totally. I hadn't really appreciated that [at] all. And also just this idea too of like, there was a point, and maybe we can never go back to that, where you actually have leaders coming together and coming to some consensus. Not just in terms of like the sort of weaponization of the dollar or the ability to track [the] dollar, but also coordination on price as in the case of the Plaza Accord. All of these things that have so rapidly changed, so dramatically different. The current system feels simultaneously obvious and also very new.
Tracy (45:10):
Yes, it's inevitable and also kind of mind-blowing that it's happened at all. I'm sure we could go on for longer and I'm sure we will have many, many more episodes on exactly this topic. But for now, shall we leave it there?
Joe (45:24):
Let's leave it there.
You can follow Saleha Mohsin at
@salehamohsin
.