ONE ECONOMY TO RULE THEM ALL:

Following the Russian invasion of Ukraine last month, the United States and its allies imposed among the strictest sanctions possible on the Russian economy. Russian financial institutions were cut off from the interbank messaging system SWIFT, dealings with Russian corporations (besides energy exporters) were heavily restricted, and hundreds of billions of dollars in Russian foreign currency reserves and sovereign wealth fund assets were effectively frozen. The effects on the Russian financial system were immediate and drastic--the price of the ruble plunged, many international companies abandoned their Russian operations, and the central bank raised rates from 9% to 20% within hours in an attempt to prevent a complete crisis.

At some level, this was an incredible economic "show of force" from the US. As the issuer of the world's reserve currency--the currency used for the vast majority of international trade, payments, and savings--the US has unique power over the global financial system. In recent years it has deployed this power extensively against geopolitical rivals, but the only countries previously hit with sanctions of similar size and scope were smaller economies like Iran and Venezuela. Never has a country as large, populous, or economically powerful as Russia been hit with sanctions this extreme.

Yet in the wake of sanctions the primary concern appeared to not be for Russia's currency but for America's. Reporters asked Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell if they expected the US Dollar to lose its reserve currency status. Rumors about Saudi Arabia coming to a deal with China to price oil sales in Chinese Renminbi received breathless coverage on Twitter. This is far from just a social media phenomenon--Credit Suisse's preeminent global money expert Zoltan Pozsar predicted a new global monetary system headed by China and "backed by a basket of commodities."

Yet all of this worry belies a critical truth: the US Dollar's position as global reserve currency is so strong as to be nearly unassailable. No other country has the proper mixture of deep capital markets, clear rule of law, massive economic size, and technological dynamism. 

Tweet   @brothersjudd