Yves gets it right, of course.
Yves here. While I have every reason to assume the Russians mean to act on the currency front, on the surface, the remarks Wolf discusses in his post appear to be based on a misapprehension. First, Russia does not have the ability to tank the dollar, and a modest depreciation would be a plus for the US export sector. Second, the US is not dependent on foreigners to fund its fiscal deficits (we will not take the space to explain here, but we’ve gone over this terrain extensively in other posts).
However, there is a third possibility: that Moscow knows the economic reality full well, and is using aggressive “target the dollar” talk to shore up the ruble, which has fallen sharply and is far more exposed to speculative attacks than the world’s reserve currency. Russia’s best economic defense is not in the currency markets, but its ability to withhold oil and gas from Europe, which already has a flagging economy and is not well positioned to take a shock in terms of much higher energy prices.
Naked Capitalism
Wolf Richter: Kremlin – If The US Tries To Hurt Russia’s Economy, Russia Will Target The Dollar
Yves Smith
Wolf Richter: Kremlin – If The US Tries To Hurt Russia’s Economy, Russia Will Target The Dollar
Yves Smith
6 comments:
A week ago a friend asked me my take on this situation. The following is what I wrote to her. If i missed something important or am wrong about something, let me know…
"If Russia did try to abandon the dollar it’s interesting to consider the economics of it. According to the Yahoo article, Glazyev: "An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system.”
This is nonsense. The United States financial system is in no way dependent on Russian ownership of dollars or dollar-denominated financial assets - e.g. U.S. Treasuries. It’s essential to understand that dollars come from the United States. Russia doesn’t create dollars. They get them by selling us stuff. When we buy stuff from Russia, they get dollars from us… as digital bank account entries. Some of these dollars are in ‘checking accounts’ at the Fed (Reserve accounts), and some are in ‘savings accounts’ at the Fed (U.S. Treasuries, a.k.a. our National Debt), and some are in commercial bank accounts, which those commercial banks will then hold in ‘checking accounts’ and ‘savings accounts’ at the Fed.
So lets say Russia decides to dump all of their dollars and Treasuries. In order to get rid of them they’d have to exchange them for something. But for every seller there must also be a buyer. In order for Russia to get rid of its Treasuries, someone must buy them. It's a swap. In order for Russia to get rid of its dollars, they must buy something with those dollars. Again a swap. No big deal.
There are two concerns that often get talked about: 1) Interest Rate risks, and 2) Exchange Rate risks.
1) Interest Rate risks. If Russia attempts to quickly sell all its U.S. Treasuries, this could theoretically put upward pressure on long-term rates of U.S. Treasuries, but it won’t affect the short-term rate because the Fed sets that. Maybe this might cause some market hoopla on Wall St. initially, but once all the excitement dies down, the long-term rates will fall back to where market participants think they should be (subject to any Fed interventions, e.g. Quantitative Easing).
In sum: Russia really poses no interest rate risk. The Fed has the power to counteract anything Russia tries to do. Why? Because while Russia might have half a trillion in dollars and dollar-denominated financial assets, the Fed creates them in the first place, and out of nothing with keystrokes on computers; i.e. it has a bottomless well of dollars, and therefore cannot be bullied. “Don’t fight the Fed”
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2) Exchange Rate risks. What’s the fear here, that the dollar depreciates some? This would require a global movement away from dollars and there’s no reason to expect that. Russia can’t make it happen on it’s own. But even if there was some global pressure out of the dollar, and the exchange rate of the dollar fell, no big deal.
It would feel like some inflation for all of us as the cost of imports rose. But a weaker currency would also make our goods and services cheaper for the world to purchase, thereby increasing aggregate demand here in the U.S., increasing our exports, and likely bringing down our unemployment rate some. Frankly, since our own congress and president apparently are not interested in stimulating aggregate demand at home – via lower taxes and increased government spending – then a small depreciation in the dollar might even be desirable. But alas, China would likely fight it aggresively in the forex market… since China purposely keeps the yuan undervalued (dollar overvalued) in order to create jobs in China via American's consumption spending.
In sum: Russia really poses no exchange rate risk for the United States. And even if there was some depreciation, there would be benefits that come with the costs.
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The Russian official also threatened that Russia might not pay back loans to U.S. commercial banks. That could be troublesome for the balance sheets of those particular banks, but won’t threaten the system. Besides the Fed will probably just bail them out.
He also threatened that Russia could cut off oil to Europe. This is pretty serious if it were to occur. It would hit Europe hard -> inflation; e.g. consider the 1970s oil shock in the United States. I have no idea if a similar situation could be created by Russia in Europe, but anytime the supply of an important source of energy gets limited, this has huge ramifications. It’s a ripple effect because energy goes into almost everything: growing food, medicine, transportation, heating homes, etc.
The oil threat is probably just saber rattling, but it’s very serious if followed through with. Hence why we're always so wrapped up in the middle east -> oil. Energy is the lifeblood of modern civilization and must be protected at any costs."
These kind of pronouncements by Russia show that Putin is horribly, laughably advised. On the other hand if he were well advised, the West would be at his mercy. But he's comical. Target the dollar. LOL!!! Sell Treasuries. LOL. The irony is (and I've written on this before), the most effective thing he could do would be to use his country's oil wealth to buy up vast amounts of Treasuries, then we'd feel threatened (self-imposed), as we feel threatened by the thought of the Chinese "selling" you know, like, our "banker" is calling in the "loans." (Since we as a nation listen to Peter Schiff, of course.)
Admiral Mullen would be raising the white flag. Pathetic.
US blustering and bluffing with Russia over Ukraine crisis, which it appears the US may have helped to instigate, amounts to nothing short of going to war with Russia. That's not going to happen. However, if this fuels the perception that US foreign policy has become weak, it could undermine strength of the US$ on the FOREX markets purely on psychological grounds prompting traders to hit the sell button.
As far as Treasury debt goes, the latest Fed H.4.1 report shows custody accounts of foreign central banks and other institutions dropped $105 billion or 3.5% from March 5 to March 12. No way to know for sure, but media speculation is that Russia moved (not sold) the Treasuries somewhere else for safe keeping just in case economic sanctions were targeting Russia's Treasury holdings for sequester. In any event, Treasuries have rallied in the past week.
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