This topic likely deserves far more detailed treatment. But I thought I’d park a couple of thoughts here, maybe to be revisited in the future.
Wall Street Journal points out that “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock.” I was getting ready to put on my doomsayer robes when email from one of the best macro analysis newsletters hit my inbox. If you’re not subscribed to Doomberg, and you have a bit of a passing interest in macroeconomic… well… doom, you owe it to yourself to head over to the Substack and subscribe.
Doomberg’s take, referencing the WSJ article:
The most stunning move by the US and its allies was cutting off the Russian central bank’s access to most of its $630 billion of foreign reserves. Without access, one wonders if these funds are really “its” reserves at all? What is ownership without access? No matter how justified that move might seem today, there’s no escaping that this action will reverberate for years to come.
Then Doomberg quotes directly from the WSJ article:
“Many economists have long equated this money to savings in a piggy bank, which in turn correspond to investments made abroad in the real economy. Recent events highlight the error in this thinking: Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing. Last year, the IMF suspended Taliban-controlled Afghanistan’s access to funds and SDR. Sanctions on Iran have confirmed that holding reserves offshore doesn’t stop the U.S. Treasury from taking action. As New England Law Professor Christine Abely points out, the 2017 settlement with Singapore’s CSE TransTel shows that the mere use of the dollar abroad can violate sanctions on the premise that some payment clearing ultimately happens on U.S. soil.”
The green chicken thinks this means very bad things for oil and gas, for commodities, etc. and for good reason. Because no sane foreigner and no sane foreign central bank would hold a lot of money in US banks knowing that the United States can just freeze them out. That in turn means that the USD can’t be the world’s reserve currency, since few companies and nations would want to be paid in “money” that can go poof with the stroke of a computer key.
Since I look at most things through a real estate and housing angle, I can’t help but wonder what such an “economic singularity” as Doomberg calls it could mean for say mortgage bonds.
That’s because oftentimes, these foreign central banks who have billions of USD in reserves (from their exports) often buy US Treasury Bonds or high grade corporate bonds, including mortgage backed securities. Those are pretty liquid, and earn a bit of interest, which is better than the kick in the teeth that holding cash gives them. If these foreign countries and foreign central banks start not wanting to take USD for exports, then they don’t have the USD to buy US bonds with. Alternatively, if they get paid in USD because of reasons, they have a strong interest in converting those dollars into something that the US government can’t make go poof with computer magicks… like gold, or oil, or jet fighters and cruise missiles, or real estate not located in the U.S., or luxury cars or yachts, or maybe Bitcoin.
Point is that countries looking to dump USD are not likely to be buying bonds denominated in USD, which includes MBS. Which means….
Rates skyrocket. Bond auctions fail, because not enough buyers want to own USD bonds when they don’t want USD.
Yikes. Keep your eyes on what develops here, y’all.
-rsh
