Power & Market

Nuclear Option Has Foreign Central Banks Dodging the Dollar and Going for Gold


In the currency playground, the United States is the world’s biggest bully. With the world’s reserve currency Uncle Sam doesn’t use the dollar for diplomacy but for destruction. Responding to Russia’s attack on Ukraine in 2022, the U.S. “responded with an extraordinary amount of sanctions and cutting off Russia from the dollar-based system in almost every way imaginable,” Bloomberg’s Joe Weisenthal said on the Odd Lots podcast.

It was Woodrow Wilson’s theory that sanctions are a “peaceful, silent, deadly remedy” against recalcitrant foreigners that replace the “need for force.” But, as Justin Raimondo explained “the slow death of economic strangulation can so degrade an entire people that they are reduced to a pre-civilizational state, modern savages living at a subsistence level.”

China took notice of America’s savage actions. If the U.S. Treasury could freeze out Russia, it could do the same to other countries. China’s central bank, along with other central banks began diversifying away from the dollar and into gold. Thus, the yellow metal’s price increased. The Chinese central bank grew its holding in gold for the 17th straight month in March, reports the New York Times. “Last year, the bank bought more gold than any other central bank in the world, adding more to its reserves than it had in nearly 50 years,” write Claire Fu and Daisuke Wakabayashi. 

The U.S. government still owes the PBoC plenty, $775 billion, but that’s down from $1.1 trillion in 2021. Plus, the People’s Bank is not buying gold with renminbi, but with dollars and other foreign currencies. Guan Tao, global chief economist at BOC International in Beijing told the NYT that U.S. sanctions had rocked the “foundation of trust for the current international monetary system” and forced central bankers to diversify their holdings. “We can see this wave of gold’s rise may be different from the past.”

Despite the buying binge, the Times reporters make the point that China’s 4.6% holding in gold is just half of what the central bank of India maintains. Meanwhile Chinese consumers, not eager to plunge back into a crushed real estate or a jittery stock market, are buying the yellow metal. Gold purchases increased by 9% last year and have jumped another 6% in the first quarter of this year. “China is unquestionably driving the price of gold,” said Ross Norman, chief executive of MetalsDaily.com, a precious-metals information platform based in London. “The flow of gold to China has gone from solid to an absolute torrent.”

Weisenthal’s co-host Tracy Alloway made the broader point, “ 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.” 

Saleha Mohsin, author of Paper Soldiers: How the Weaponization of the Dollar Changed the World Order told Alloway and Weisenthal, “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.”

Ms. Mohsin went on to explain that the Treasury Department created the Terrorism and Financial Intelligence Unit in the aftermath of 9/11 in 2004. This group is an intelligence unit within the Treasury Department. So the US Treasury is the only finance ministry in the world with its own intelligence operation. 

Since Bretton Woods, the U.S. dollar has been the world’s reserve currency and in the wake of 9/11 the Treasury staff went to the operators of the SWIFT system and said we have the world’s reserve currency and “We need to protect our economy and our financial system.” SWIFT is described by Mohsin as “basically the gmail of the banking system.” It was the money flow data from SWIFT that the US Treasury demanded. 

Ultimately, as Weisenthal said, “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.”

That nuclear option has made the rest of the world taking a shine to gold while leery of the dollar.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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