Sanctions: The Straw Breaking The Dollar's Back- Goldman Sachs
Why The Dollar Will Continue To Decline- Goldman Sachs
Friday, China announced its first public deal in which it used Yuan to pay for coal. It will not be their last Yuan deal. This event along with a million others is indicative of the global USD hegemony slowly ending. The Dollar’s role as the dominant international currency will likely continue to decline over the coming years, reinforcing the view that the Dollar will weaken over the medium term argues Zach Pandl Co-Head of Global FX, Rates, EM Strategy for Goldman Sachs in an April 28th report entitled (De)Globalization Ahead.
‘While domestic currency use is dictated by government rules and regulations, international trade is a different story’ he starts. Since the 1960’s the US Dollar has been the world’s dominant international currency as a function of two key advantages to using it.
Convenience in transaction
Lack of suitable alternatives
But both of those advantages are under attack now. On the first advantage; Due to heavy use of sanctions, the dollar is not so convenient to use anymore. As to the second advantage; Digital Yuan, alternatives to Swift, Bitcoin, and (soon to be) blockchained-Gold fix that. Taken together, these developments are serving to accelerate shrinking Dollar dominance from Global FX reserves by reducing the two main Dollar advantages.
The Over-Reliance of Foreign Policy on Sanctions
The heavy-handed use of extraterritorial financial sanctions by the US effectively shuts not just the sanctioned entity, but the Western Financial entity out of the global financial system. The EU understands this. US Sanctions against Iran effect financial pain onto EU countries and threaten their own economic sovereignty. Goldman’s Pandl explains:
For example, an EU business could be prevented from trading with Iran, even if it’s legal under domestic EU law, because its bank could run afoul of US sanctions.
Further, overuse of sanctions act as a deterrent from new growing countries in transacting business in dollars to begin with. Jacob Lew, former Treasury Secretary said in 2016: that the US “must be conscious of the risk that overuse of sanctions could undermine our leadership position within the global economy, and the effectiveness of our sanctions themselves… if they excessively interfere with the flow of funds worldwide, financial transactions may begin to move outside of the United States entirely—which could threaten the central role of the US financial system globally.”
Similarly, as it pertains to sanctions as retaliation for Russian aggression, Henry Kissinger said about the Crimea back in 2014:
“I do have a number of problems with the sanctions [on Russia for its annexation of Crimea]. When we talk about a global economy and then use sanctions within the global economy, then the temptation will be that big countries thinking of their future will try to protect themselves…
His fear was, countries who saw no benefits on balance of remaining in the Swift system, would try to protect themselves against potential dangers, and as they do, they will create a mercantilist global economy. Mercantilism, as we’ve discussed here before practically everyone else, (Rabobank, Goldman Sachs, etc) except for Kissinger:
From China and the USA : The Next 50 Years in 3 minutes
Mercantilism is an economic practice by which governments used their economies to augment state power at the expense of other countries. Governments sought to ensure that exports exceeded imports and to accumulate wealth in the form of hard currency that can be used for international trade in a low trust environment. Like Gold, Silver, or possibly Bitcoin now.
Sanction Familiarity Breeds International Contempt
Post their invasion of Ukraine, when the Russian government needed its reserves to stabilize the country’s financial system, the US and its allies immobilized them with sanctions. One can argue if it is fair or not. Russian assets needed for a crisis (that they started) were denied them. The fact remains, chronic use of sanctions as a tool diminishes their effectiveness.
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