Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Allaway.
Speaker 1: Tracy, you know something that has always struck me about
Speaker 1: I don't know, the financial system, I guess, is that
Speaker 1: from the US perspective, it feels like any time anyone
Speaker 1: spends any money anywhere, particularly dollars anywhere, like the US
Speaker 1: could sort of go after them, even if it's overseas
Speaker 1: completely out of the country. It feels like the US
Speaker 1: basically has the prerogative to say, you're breaking the law.
Speaker 1: So what you're doing something we're not going to allow.
Speaker 2: This is what exorbitant privilege looks like.
Speaker 1: Right, Yeah, this is it. I guess that's it.
Speaker 2: Well, I think you're hitting on something that's kind of
Speaker 2: fundamental about the current financial system, which is the dollar
Speaker 2: is the global reserve currency, and there are some pros
Speaker 2: and benefits that come with that. One of them is
Speaker 2: that you can use it as a tool of state craft,
Speaker 2: so you can go after people that you don't like
Speaker 2: or people that are breaking the law. But there is
Speaker 2: also this tension on the other side where it seems
Speaker 2: like there are some downsides too, right, like maybe at
Speaker 2: certain times the US would desire a weaker dollar in
Speaker 2: order to jumpstart economic growth or certain exports, manufacturing, things
Speaker 2: like that. I think on the whole, most people would
Speaker 2: agree that the dollar's special status in the financial system
Speaker 2: has been a massive benefit for the US, viz. The
Speaker 2: huge deficit and people willingly funding that and things like that.
Speaker 2: But there are downsides, and that debate kind of bursts
Speaker 2: into the public consciousness every once in a while.
Speaker 1: Yeah, one thing, obviously since early twenty twenty two, when
Speaker 1: Russia invaded Ukraine, that sort of seems to have you know,
Speaker 1: then the US responded with an extraordinary amount of sanctions
Speaker 1: and cutting off Russia from the dollar base system almost
Speaker 1: every way imaginable. It's sort of like, you know, maybe
Speaker 1: catalyzed the new round of talk of, okay or parts.
Speaker 2: Of the world power of the dollar, the.
Speaker 1: Power of the dollar, exactly right. And I think that
Speaker 1: was sort of a pivotal moment. I don't know if
Speaker 1: it will be a pivotal moment for the future of
Speaker 1: the dollar, but at least it was a pivotal moment
Speaker 1: at least in this current cycle of people talking about
Speaker 1: dollar alternatives.
Speaker 2: You know, it's interesting you bring that up because you're
Speaker 2: absolutely right. It feels like that was the catalyst for
Speaker 2: the current round of discussion about the power of the
Speaker 2: dollar and the future of the dollar in the financial system.
Speaker 2: But thinking back to some all blots history, when I
Speaker 2: think about that question of the US maybe overreaching or
Speaker 2: using the dollar in this particular way, in the way
Speaker 2: they used it for Russia, I think about the conversation
Speaker 2: we had with the former head of Afghanistan Central Bank.
Speaker 2: Do you remember that, Yeah, because there was I think
Speaker 2: like seven or eight or nine billion dollars worth of
Speaker 2: reserves held by the Afghan Central Bank, and when the
Speaker 2: Taliban took over, the US basically seized all of it.
Speaker 2: They put some of it aside for nine to eleven litigation,
Speaker 2: and then some of it got put into a fund
Speaker 2: that was supposed to be dispersed to the Afghan people
Speaker 2: in some way. But that to me, and maybe we
Speaker 2: touched on it in the episode, but that to me
Speaker 2: was sort of the crossing the rubicon moment when you
Speaker 2: can actually say I'm going to take these central bank reserves.
Speaker 3: You know what.
Speaker 1: It sort of gets to this idea in my head,
Speaker 1: and I think that's a great example, which is that
Speaker 1: a dollar is not really a thing that you have
Speaker 1: to claim to capacity on this global, complicated dollar network, right,
Speaker 1: and so we think maybe it's like, oh money, it's
Speaker 1: you have it. It's sort of like property, but it's
Speaker 1: not like really like property. It's really just it's almost
Speaker 1: like it's almost like a ticket in some way to
Speaker 1: like a plane, but if the plane doesn't want to
Speaker 1: honor your ticket, if the airline like it can and
Speaker 1: so it almost feels like there's sort of a reminder
Speaker 1: that yes, you could theoretically hold dollars, but in the end,
Speaker 1: like the US could sort of decide like, actually, your
Speaker 1: dollars are no good here anymore.
Speaker 2: Yeah, there's conditions attached to that ticket or that it's
Speaker 2: not an actual piece of paper, but that line item
Speaker 2: in a computer system somewhere.
Speaker 1: And so I think it's really interesting, like what is
Speaker 1: the history of all of this, What are the limits
Speaker 1: to this power? How did we sort of emerge with
Speaker 1: this capability to sort of track the dollar flows and
Speaker 1: decide who gets access and how do we cut people
Speaker 1: off from the dollar system? It's extremely extremely interesting question.
Speaker 2: Yeah, and it's definitely core Audlot's content at this point.
Speaker 2: So in addition to speaking to the former head of
Speaker 2: Afghan Central Bank. We've had Sultan Poso Yeah, on a
Speaker 2: number of times to talk about his vision of dedollarization
Speaker 2: and Bretton Wood's three. We've had Perry Marling debate Sultan
Speaker 2: to talk about this particular issue. And I'm happy to
Speaker 2: say that today we have one of our own Bloomberg
Speaker 2: colleagues to talk about this.
Speaker 1: We literally have the perfect guest. We are going to
Speaker 1: be speaking with senior Washington correspondent for Bloomberg News, Salia Mosen.
Speaker 1: She is the author of a brand new book, paper Soldiers,
Speaker 1: How the Weaponization of the Dollar changed the World order. Seleia,
Speaker 1: thank you so much for coming on odd Laws.
Speaker 3: I'm so excited to be here.
Speaker 1: Joe and Tracy, why did you write this book? What
Speaker 1: prompted this book about the weaponization of the dollar.
Speaker 3: It's a crazy thing. It might have been January sixth,
Speaker 3: the insurrection. I don't know. It's hard for me to
Speaker 3: put a pinpoint where, you know, for a journalist, it's
Speaker 3: a natural course to say, oh, well, maybe I'll write
Speaker 3: a book. But something happened that day. A lot of emotions.
Speaker 3: Let's set most of them aside and just talk about
Speaker 3: the Treasury Department and the dollar on January sixth, and
Speaker 3: in the couple of days that followed, we all saw
Speaker 3: reports and I reported on how then Treasure Secretary Stephen
Speaker 3: Mnushan may or may not have been involved in talks
Speaker 3: about the twenty fifth Amendment, and do we need to
Speaker 3: sideline President Donald Trump? And I thought to myself, Wow,
Speaker 3: the Treasure Secretary's job has just gotten so huge. You know,
Speaker 3: a couple of weeks ago, he was in Congress trying
Speaker 3: to get another spending bill through. A couple of days
Speaker 3: after that, he was in the Middle East pitching our
Speaker 3: international economic policy and economic sanctions programs and other elements
Speaker 3: of geopolitics. And here we are now he might be
Speaker 3: involved in removing the president. That combined with a op
Speaker 3: ed that Bob Rubin wrote right after January sixth, And
Speaker 3: he wrote an op ed. It was about a couple
Speaker 3: of different things, but there was one sentence that I
Speaker 3: think it kind of sums up the kind of reporting
Speaker 3: that I've done for many years now, and it sums
Speaker 3: up why I wrote the book. He said in this column,
Speaker 3: faith in democracy and faith in markets go hand in hand.
Speaker 3: And I just thought, oh my gosh, the dollar is
Speaker 3: part of our democracy. Democracy is part of our dollar,
Speaker 3: and that's kind of what started everything for me in
Speaker 3: my brain.
Speaker 2: So I'm glad he brought up Trump here because this
Speaker 2: came up on an episode relatively recently. Actually, I think
Speaker 2: Trump is kind of, for once a very good prism,
Speaker 2: a very clear prism to view some of the debate
Speaker 2: around the dollar, because he sort of instinctually understands that
Speaker 2: a strong dollar might be in the US interest. It
Speaker 2: sounds good to be able to say, like, we have
Speaker 2: the world's reserve currency, and the dollar is great, et cetera.
Speaker 2: But on the other hand, there were times during his
Speaker 2: administration where he would talk about the desire for a
Speaker 2: weaker dollar and we need a weeker dollar in order
Speaker 2: to boost manufacturing, get more jobs back to the country,
Speaker 2: et cetera. In your reporting, was it ever clear to
Speaker 2: you like which side he landed on, or even broadening
Speaker 2: it out. The US Treasury kind of has a long
Speaker 2: and complex history when it comes to expressing its desire
Speaker 2: for the green back, whether it wants a strong one
Speaker 2: or not.
Speaker 3: Absolutely, And that's what Paper Soldiers is all about. It's
Speaker 3: all about the complexities of Treasury secretaries and any other
Speaker 3: fed or White House or congressional official talking about the
Speaker 3: dollar and how sensitive each in every syllable can be.
Speaker 3: You know, if we talk about Bob Ruba and how
Speaker 3: many words he used to describe his view on the dollar,
Speaker 3: what order those words were in currency traders in the
Speaker 3: nineties used to listen to everything to determine how to
Speaker 3: make their trades. Now, on the question of Donald Trump
Speaker 3: in you know, from twenty seventeen through twenty twenty into
Speaker 3: twenty twenty one, you know, as usual, he's a mercurial person,
Speaker 3: lots of gray areas. He definitely saw the benefits of saying, yes,
Speaker 3: we have a strong dollar policy, we have a strong
Speaker 3: dollar because it reflects a strong economy. But he was
Speaker 3: the first politician who in any real way realized that
Speaker 3: a strong dollar and that policy from the nineties and
Speaker 3: that had persisted, was hurting certain parts of the country.
Speaker 3: And we're talking about the forgotten man in you know,
Speaker 3: like the manufacturing sector, the roust belt of the country.
Speaker 3: And I in book I take you into Weir in
Speaker 3: West Virginia, into Marine Ohio and what happened to those
Speaker 3: factory workers in the manufacturing sector. As globalization, which is
Speaker 3: underpinned by a strong dollar policy sort of overtook everything
Speaker 3: and people kind of forgot about the economic scarring that
Speaker 3: happened as the manufacturing sector in the US kind of disappeared.
Speaker 3: So he kind of looks at it both way. But actually,
Speaker 3: earlier in March, Trump was on as a presidential hopeful
Speaker 3: again on CNBC talking about how he thinks it's dangerous
Speaker 3: that people are talking about de dollarization. He is wading
Speaker 3: into the d dollarization to debate, and we've all learned
Speaker 3: that he puts action behind those kinds of words.
Speaker 1: So there's two things, and they're sort of related, but
Speaker 1: they're also sort of separate. So there is the strong
Speaker 1: dollar in the sense of the price of the dollar
Speaker 1: against our trading partners or the price of the dollar
Speaker 1: again and the end and the euro and all that.
Speaker 1: And then there is the sort of strong dollar, which
Speaker 1: is it is the currency that everybody for the most
Speaker 1: part uses globally to settle trade. And you know, and
Speaker 1: this sort of gets to the incredible power that the
Speaker 1: US has over this network, Like just high level, what
Speaker 1: is the limits of what the US can do to
Speaker 1: the dollar network, to the various like banks, et cetera,
Speaker 1: and messaging services where dollars and goods are traded, like
Speaker 1: what is this sort of what is the perimeter of
Speaker 1: America's ability to I guess police transactions.
Speaker 2: In the dot.
Speaker 3: It's a debate that's raging in political and economic circles
Speaker 3: in Washington and I think in pretty much every capital
Speaker 3: around the world, because the US is actually figuring out
Speaker 3: what that perimeter is, where that boundary is. There's been
Speaker 3: a couple of moments where the US has real ooh,
Speaker 3: I touched it and it was too hot. So there
Speaker 3: was in twenty eighteen when Steven Mnusian's Treasury department sanctioned
Speaker 3: olag Derpaska, a Russian oligarch who owned a majority stake
Speaker 3: of Russol at the time, like one of the largest
Speaker 3: aluminum makers in the world, and Treasury in the US
Speaker 3: found out kind of the hard way that maybe we
Speaker 3: overdid it or didn't look into these sanctions deeply enough,
Speaker 3: because we had a lot of blowback from them. You know,
Speaker 3: there was a lot of self inflicted wounds there because
Speaker 3: commodity prices swung twenty percent on each headline about those sanctions.
Speaker 3: Any kind of change in the date that they would
Speaker 3: be implemented, or what kind of carve outs were coming.
Speaker 3: Markets swung, And that's not actually a goal of OPAC,
Speaker 3: which sort of oversees the Treasure Department's sanctions implementation. The
Speaker 3: Office of Foreign Assets Control. They want to move a
Speaker 3: little bit, a little bit more softly without triggering this
Speaker 3: much turmoil. And what we saw was, you know, a
Speaker 3: little manufacturing plant in Ireland that is realizing that, well,
Speaker 3: sanctions might completely muck up our cash flow, so we
Speaker 3: might be forced to shut down our smelter. Okay, that
Speaker 3: smelter runs at two eight hundred degrees fahrenheit. It costs
Speaker 3: a lot of money to shut it down. If it
Speaker 3: should take days or maybe a couple of weeks to
Speaker 3: actually physically shut it down, but if they run out
Speaker 3: of money, they have to shut it down quickly. That
Speaker 3: means there's going to be all these toxins polluting the
Speaker 3: air and the water supply. But sanctions are going to
Speaker 3: trigger that closure. Treasury did not think it through. That
Speaker 3: was one example of the Treasure Department learning boundaries. And
Speaker 3: the other one is the one that Joe Trees you
Speaker 3: guys just mentioned the big sanctions in February twenty twenty two,
Speaker 3: with you know, cutting Russia off from the dollar.
Speaker 2: So you go into detail on this in your book,
Speaker 2: and by the way, I love that example of the
Speaker 2: smelter and sort of an unanticipated consequence of doing this.
Speaker 2: But you talk in your book about the internal debate
Speaker 2: of whether or not to sanction Russia, and I think
Speaker 2: you mentioned that Janet Yellen sort of had to be
Speaker 2: convinced and that there was this memory of the oh
Speaker 2: like dere Paska incident sort of hovering around. I guess
Speaker 2: what I want to ask is how much of this,
Speaker 2: this weaponization of the dollar is a question of political
Speaker 2: will and how far the US Treasury wants to push
Speaker 2: on that string versus technological ability. It seems like the
Speaker 2: US does have the capacity to shut people off in
Speaker 2: some respects, so for instance through the swift system, which
Speaker 2: again you go into some detail on, but there is
Speaker 2: this overarching question of whether or not it should, whether
Speaker 2: or not it'll backfire either in the short term or
Speaker 2: in the long term by diminishing the desirability of the
Speaker 2: dollar as a reserve currency.
Speaker 3: It's complicated, as things tend to be in Washington. There
Speaker 3: is huge political will to use economic sanctions and to
Speaker 3: make them even more sophisticated than they've ever been. What
Speaker 3: we've seen is we've gone from you in the early
Speaker 3: nineteen hundreds up until pretty much two thousand and one.
Speaker 3: OPHAC was a bit of an orphan of the Treasure Department.
Speaker 3: No one really paid attention to them. Economic sanctions at
Speaker 3: that time, they were so blunt. It was just like
Speaker 3: embargoes on Cuba. It didn't really have this great big impact.
Speaker 3: It wasn't discussed in two thousand and one. Nine to
Speaker 3: eleven hits, and you know, the global War on terror
Speaker 3: did not start with military tanks rolling into some country
Speaker 3: or American troops in their boots hitting the ground somewhere.
Speaker 3: It started September twenty fourth, two thousand and one, with
Speaker 3: George W. Bush, with a stroke of a pen, giving
Speaker 3: the US Treasury Department the authority to weaponize the dollar,
Speaker 3: to use the dollar to find out how did the
Speaker 3: terrorists finance those attacks? Because nine to eleven it costs
Speaker 3: those terrorists like four hundred thousand dollars, and later officials
Speaker 3: found out that that money was moved in the light
Speaker 3: of day. So the US realized that, okay, we can
Speaker 3: track these money flows and either stop the next attack
Speaker 3: or just choke off, you know, bad actors or terrorists, organizations,
Speaker 3: or terrorists themselves from money flow and the ability to
Speaker 3: get cash by cutting them off from the global financial
Speaker 3: system because we control the dollar. That's kind of where
Speaker 3: it started, and sanctions have gotten more and more sophisticated.
Speaker 3: Treasury created an entire unit called the Terrorism and Financial
Speaker 3: Intelligence Unit that was created in the aftermath of nine
Speaker 3: to eleven in two thousand and four and built out
Speaker 3: a basically an intelligence unit within the Treasure Department. So
Speaker 3: Treasury in the US is the only finance ministry in
Speaker 3: the world with its own intelligence operation.
Speaker 1: Basically. Yeah, this is so fascinating, And I thought this
Speaker 1: part of your book where you talk about nine to
Speaker 1: eleven was really interesting. So what were these sort of
Speaker 1: capabilities of o FAC or the Treasury in terms of
Speaker 1: tracking illicit money flows prior to nine to eleven and
Speaker 1: then like sort of what was the difference between specifically
Speaker 1: what they did, what they could could do, and then
Speaker 1: pre and post nine to eleven.
Speaker 3: They didn't have much Before nine to eleven, Like I said,
Speaker 3: OPHAC was this orphan No one really paid attention to them.
Speaker 3: They did a lot of work, but their budget was small,
Speaker 3: their staffing was small. They didn't have a lot of
Speaker 3: access to the Treasury Secretary, which you know, then you
Speaker 3: have no one to sort of lift the profile. But
Speaker 3: also the US wasn't looking at how to work in
Speaker 3: this space. That's between kinetic action, which is you know,
Speaker 3: sending tanks and forces in and diplomacy. That's what sanctions are, right,
Speaker 3: It's that spot in the middle, meaning diplomacy has failed us,
Speaker 3: but we are not ready for like an actual, live,
Speaker 3: bloody war. So let's go in the middle and use sanctions.
Speaker 3: And it's pretty cheap, right, So that's where the like
Speaker 3: what Tracy asked earlier, that's where the political will is
Speaker 3: that it's not as expensive and doesn't spill blood as
Speaker 3: like a war, but it's a good option when diplomacy
Speaker 3: isn't working.
Speaker 1: We talked us a.
Speaker 2: Little bit more about technological ability. This is why I
Speaker 2: was curious, like how much of it is the politics
Speaker 2: versus what we are actually physically able to do. In
Speaker 2: the financial system, so if I have a dollar, to
Speaker 2: Joe's point in the intro, there are certain conditions that
Speaker 2: are attached to that dollar, and there is to some
Speaker 2: extent visibility on that dollar as well talk to us
Speaker 2: a little bit more about what a dollar looks like
Speaker 2: or how much visibility the US government can have into it.
Speaker 3: That's such a good question, Tracy, because dollars are actually transported,
Speaker 3: sometimes wrapped in plastic shrink wrap and in trucks like
Speaker 3: loaded into Afghanistan, Like the New York Federal Reserve actually
Speaker 3: sends money like this to Cobble, or they did in
Speaker 3: the past. Right, That's why the Treasure Department would have
Speaker 3: an attache in Cobble there to sort of witness that
Speaker 3: millions of dollars of actual physical cash greenbacks coming into
Speaker 3: the country. So that's the really hard part, right, how
Speaker 3: to monitor that. Banks do have a responsibility to tell
Speaker 3: the Treasure Department through these Suspicious Activity Reports sars when
Speaker 3: they see transactions happening that touch their financial institution that
Speaker 3: look suspicious to them. But these sars are just it's
Speaker 3: just like throwing something in some obscure filing box and
Speaker 3: maybe someone shifting through it will see what they need
Speaker 3: to see. It's hard to see a pattern. Basically, after
Speaker 3: nine to eleven, officials realize that they don't have a
Speaker 3: ton of visibility the US itself autonomously to see how
Speaker 3: dollars are moving through the global financial system. And this
Speaker 3: is where it gets interesting. After nine to eleven, Treasure
Speaker 3: officials wanted to get that glimpse, and they knew that
Speaker 3: SWIFT based in Belgium, part of the EU, and that
Speaker 3: jurisdiction has data within its fortresses. You know, the building
Speaker 3: itself in Lahoopa, Belgium is you know, it looks like
Speaker 3: an actual fortress, but they have the data that shows
Speaker 3: the routing number and the transaction time in real time.
Speaker 1: You know.
Speaker 3: Swift is basically the Gmail of the banking system.
Speaker 2: It is like that.
Speaker 3: Yeah, it's a way for banks to communicate with each other.
Speaker 3: Here's the bank account number, here is the name, here's
Speaker 3: the address and the amount that needs to be moved.
Speaker 3: But it promises privacy. No one will know the nature
Speaker 3: of the transaction, right And a couple of different central
Speaker 3: banks are involved in sort of that network that SWIFT
Speaker 3: has built up, including the Fed, Bank of Japan, Bank
Speaker 3: of England and a couple of others. And so Treasury
Speaker 3: officials got together and they spoke to Swift. The head
Speaker 3: at the time after nine to eleven was Lenny Shrink,
Speaker 3: really really interesting guy that I spoke to for the
Speaker 3: book Colorful Character, and he said, well, they approached me,
Speaker 3: and he said he knew that that call as soon
Speaker 3: as those planes hit the Twin Towers in Manhattan. He
Speaker 3: says he remembers he was in Europe for I think
Speaker 3: Ireland for a meeting with a Swift board member. He
Speaker 3: was biting into a sandwich when he heard that nine
Speaker 3: to eleven happened. He found out exactly the depth of
Speaker 3: the problem and then he knew, right then, I'm going
Speaker 3: to get a call from the Charges Department. They're going
Speaker 3: to want data. They're going to want to know how
Speaker 3: did money that financed that attack move through this system,
Speaker 3: how did we miss it, and how can we catch
Speaker 3: the next one? Because bring yourself back to September twelfth
Speaker 3: and thirteenth, we were terrified. You know, everyone at that
Speaker 3: time internationally said I'm an American today because if someone
Speaker 3: can attack this country, they're attacking everyone. If you remember
Speaker 3: the Queen of England at the time, she sang the
Speaker 3: national anthem, the American national anthem, because she said I
Speaker 3: stand with America. So Lenny Shrink, an American himself, knew
Speaker 3: that that call was coming. So when Treasury finally called
Speaker 3: he had he was ready. You know, it depends on
Speaker 3: who you ask, but it's possible that Treasury might have
Speaker 3: approached Swift a couple of times before then looking for
Speaker 3: some data and they always kind of said no. And
Speaker 3: so they finally got to talking about specifics, and Lenny
Speaker 3: Shrink spoke to a couple of the different central bank
Speaker 3: governors that were involved. According to one source, Alan Greenspan
Speaker 3: at that time was against it, initially against Treasury having
Speaker 3: any insight into Swift data because he said gentlemen shouldn't
Speaker 3: read gentleman's mail, So he didn't like the idea at first.
Speaker 1: First of all, I think you wrote in your book
Speaker 1: that this only came out like in two thousand and six,
Speaker 1: that the that the Treasury had approached Swift about getting
Speaker 1: access to more data, like it was done pretty surreptitiously
Speaker 1: or secretly for a while.
Speaker 3: Yeah, so Swift, okay, Speed, that's what it alludes to.
Speaker 3: Treasury's code name for the whole program was Turtle, the
Speaker 3: opposite Swift.
Speaker 2: I love the Yeah, it's great.
Speaker 1: Yeah.
Speaker 3: So if you were like if you were at an
Speaker 3: airport maybe in two thousand and one through six and
Speaker 3: saw like these government, you know, gray or sort of
Speaker 3: muted suits. A man may be handcuffed to a briefcase.
Speaker 3: And if they were talking about a turtle, they were
Speaker 3: talking about swift. So they used swift. They were able
Speaker 3: to come to an agreement. They would have to subpoena
Speaker 3: the information. There was a lengthy process there. Lenny Schrank said,
Speaker 3: I want the US to have the information that they
Speaker 3: need and not a bite more because he didn't want
Speaker 3: it to be abused and he wanted to set a precedent.
Speaker 3: He did say to me that the only reason that
Speaker 3: the US was able to get that information was the
Speaker 3: power of the dollar. It is the owner of the
Speaker 3: world's reserve asset. Coming to Swift, saying we need to
Speaker 3: protect our economy in our financial system because after nine
Speaker 3: to eleven the stock market was wiped out. Up one
Speaker 3: point four trillion dollars of value disappeared that day, the
Speaker 3: S and P five hundred plunged. Over a couple of weeks,
Speaker 3: the markets were closed because physically the heart of American
Speaker 3: stock market had been attacked right the financial district was
Speaker 3: right by the World Trade Center. So he said, that's
Speaker 3: why that's the only persuasive power. Any other country had
Speaker 3: come to us, it was a very easy no. We
Speaker 3: wouldn't even have to explain.
Speaker 2: So one thing that I think often comes up when
Speaker 2: we're debating the role of the dollar. I mean, obviously
Speaker 2: people can see the benefits that it has for the US.
Speaker 2: There is that idea of exorbitant privilege, and the US
Speaker 2: is able to issue a lot of dollar denominated debt
Speaker 2: and fund a lot of different things, thinks in part
Speaker 2: to its currency. But I guess one thing that often
Speaker 2: doesn't get discussed, or doesn't get discussed as much, is
Speaker 2: the idea of what the rest of the world gets
Speaker 2: from the dollar's special position. Can you talk a little
Speaker 2: bit about that, Why does the rest of the world
Speaker 2: agree to do stuff like invoice in dollars or buy
Speaker 2: US treasury debt or how large reserves of dollars that
Speaker 2: it holds at the New York Fed and things like
Speaker 2: that terracy?
Speaker 3: The answer that question actually begins like seventy eighty years ago,
Speaker 3: nineteen forty four Breton Woods. Lots of economists and monks
Speaker 3: here in Washington and around the world in financial and
Speaker 3: economic policy circles loved to talk about Breton Woods. This
Speaker 3: is when, by design, the dollar was crowned as the
Speaker 3: reserve asset, the most important asset in the world. At
Speaker 3: the time, the world had just emerged from back to
Speaker 3: back global wars. Europe's fiscal position most of the countries
Speaker 3: there it wasn't good. The UK had held the reserve asset,
Speaker 3: the British pound. They were no longer the largest economy
Speaker 3: in the world, and since their actual physical infrastructure was
Speaker 3: so damaged after two wars, they had a lot of
Speaker 3: spending they had to do. The US was sort of
Speaker 3: this hercules in a cradle emerging to take on the
Speaker 3: global superpower role. It had been heading toward for decades
Speaker 3: and it was ready for it. Everyone was looking at
Speaker 3: America like they have got this figured out. They're going
Speaker 3: to lead us into the future. All the technology is
Speaker 3: there and everything is clean and shiny over there. They're
Speaker 3: a stable country and helped wrap up the war. So
Speaker 3: the US helped create the infrastructure of the World Bank,
Speaker 3: the International Monetary Fund, all ways to knit the world
Speaker 3: together so that we're so economically integrated that we cannot
Speaker 3: start a war with each other, because then there's that
Speaker 3: deep and self inflicted wound because we are so economically
Speaker 3: aligned so much trade going on amongst us. Everyone kind
Speaker 3: of relied on the dollar to lead the way forward,
Speaker 3: the same way they relied on the US to lead
Speaker 3: the way forward, because it was a safety net. Right
Speaker 3: at the time, the dollar was pegged to gold, and
Speaker 3: so there was this promise that is, as long as
Speaker 3: we can continue on dollar dependency, then we will all
Speaker 3: stick together and emerge from the ashes of two wars stronger.
Speaker 3: And in those eighty years, global GDP did grow a
Speaker 3: lot because of globalization, because of that economic integration, and
Speaker 3: so as the United States rose and consolidated power, its
Speaker 3: superpower status, people were more and more invested in dollars
Speaker 3: themselves and depending on the dollar. And it turns out
Speaker 3: that when you know a crisis hit, whether it's a
Speaker 3: regional crisis in some part of Asia or Europe or
Speaker 3: Latin America, or there was political instability in another country,
Speaker 3: or something that was more global, a pandemic, a global
Speaker 3: financial crisis, even if that financial crisis started in America,
Speaker 3: the dollar has been seen as a safe haven. Let's
Speaker 3: all flee to this place because we know that this
Speaker 3: country has rule of law, free and fair elections, a
Speaker 3: strong and stable democracy. If we park our cash and
Speaker 3: our wealth and our savings in there in this asset.
Speaker 3: It'll be there when we come back to it.
Speaker 1: So you know, you hold dollars like, there's the network
Speaker 1: effects of everyone using the same currency. There's the general
Speaker 1: price stability, there's the rule of law, et cetera. Now,
Speaker 1: as we said in the introduction, or we were talking
Speaker 1: about earlier, like the sort of sanctions in twenty twenty two,
Speaker 1: or as Tracy mentioned, the seizing of the Afghanistan dollars,
Speaker 1: it seems to have woken much of the world up
Speaker 1: that yes, there are benefits to holding the dollar for
Speaker 1: maybe obvious economic reasons, but it comes with strings, or
Speaker 1: it comes with risks. Do you think that there's like
Speaker 1: a sort of I don't know, maybe a gap in
Speaker 1: that realization where maybe it's like people sort of around
Speaker 1: the world actors understood the benefits of transacting in the
Speaker 1: dollar network, and it only clicking later on that is
Speaker 1: conditions to part of that network that the the US
Speaker 1: essentially has quite a bit of power to police reactions.
Speaker 3: Absolutely, I think that this was something that kind of
Speaker 3: crept up on us without maybe us realizing right away.
Speaker 3: I mean, for one thing, the dollar and the US
Speaker 3: has an immense dominance across the world. The world's largest
Speaker 3: economy is the US. The next three countries on that
Speaker 3: ranking put together and you get maybe to wear the
Speaker 3: size of the US economy. So by sheer strength and
Speaker 3: just internal power, a lot of innovation happens in the US.
Speaker 3: We have a lot of fiscal spending, which drives more
Speaker 3: research and development.
Speaker 2: So the other thing that tends to happen in this
Speaker 2: type of conversation is people will say, oh, well, the
Speaker 2: dollars the reserve cur andy, because it's a unipolar world
Speaker 2: and the US has dominated at least up until relatively recently.
Speaker 2: But as you point out, it's kind of it's almost
Speaker 2: the opposite, Like there was a lot of consensus building
Speaker 2: going into the initial stages of building up the dollar
Speaker 2: as the reserve currency, and it feels like even now
Speaker 2: there is still a degree of cooperation here. And you
Speaker 2: mentioned Swift for instance. I mean, Swift seems to have
Speaker 2: the cooperation of several central banks, which you already mentioned.
Speaker 2: But I guess my question is like, A, how much
Speaker 2: cooperation goes into the dollar's special position, and then B
Speaker 2: how vulnerable do you think some of that consensus is
Speaker 2: in current day.
Speaker 3: That's such a good question. There is so much consensus,
Speaker 3: and I'm going to point you to history again. If
Speaker 3: you look at the nineteen eighties, a really interesting and
Speaker 3: exciting thing happened. I almost wish I was a financial
Speaker 3: journalist back then, covering the Plaza and the Louver Accord.
Speaker 3: So in nineteen eighties, let's think it's inflation was really high,
Speaker 3: the dollar was really strong because interest rates had been
Speaker 3: hiked up to combat inflation, and manufacturing sector farmers, a
Speaker 3: lot of x you know, our exporters were complaining about
Speaker 3: how strong the dollar was, and other countries were saying
Speaker 3: that the US has this quote benign neglect of the dollar.
Speaker 3: They don't care that it's so strong it's damaging its
Speaker 3: own economy. They're, you know, folks insider complaining, and overseas,
Speaker 3: it's making it hard for other countries to buy goods
Speaker 3: that America is making and trying to sell. So at
Speaker 3: the time, it was the G five, it was West Germany, Japan,
Speaker 3: the UK, the US, and I think France got together
Speaker 3: at the Plaza Hotel in Manhattan and I went there
Speaker 3: to research the room. What it looks like. I asked
Speaker 3: somebody of one of the bell hops or something like, Okay,
Speaker 3: has this room been the same since the eighties? Because
Speaker 3: I got to write about it and they all secretly
Speaker 3: met with then Treasure Secretary Jim Baker to collectively agree
Speaker 3: that they were going to medal in currency markets to
Speaker 3: weaken the dollar, and you know, that's kind of what
Speaker 3: triggered the whole strong dollar policy lore of journalists and
Speaker 3: currency traders trying to figure out what does a treasure
Speaker 3: secretary say about the dollar? Because maybe there's going to
Speaker 3: be government intervention in the dollar because they did it right,
Speaker 3: what about now?
Speaker 1: Like, so, does this feel like a different moment? Because,
Speaker 1: as Tracy and I have talked about on multiple episodes,
Speaker 1: and you know, both of us have aaly been reporters
Speaker 1: for about fifteen years, but within those fifteen years there
Speaker 1: are like multiple waves of people talk about post dollar
Speaker 1: ear multipolar era, new alternative. Does this feel like does
Speaker 1: twenty twenty two to twenty twenty four and beyond. Does
Speaker 1: this feel like something different where the conversations like, oh,
Speaker 1: that's right really might be a change or does this
Speaker 1: feel like another time in multiple cycles where yes, there's
Speaker 1: plenty of talk about a post dollar ero, but it
Speaker 1: doesn't really amount to much.
Speaker 3: You're right, A lot of people for decades since the
Speaker 3: Bretonwoods Agreement in the nineteen forties, have been wondering when
Speaker 3: is the dollar's hegemony going to end? Where who's going
Speaker 3: to be the one to take over? Is it gonna
Speaker 3: be the Japanese yen? When the Euro came on the landscape,
Speaker 3: Oh maybe the Euro will take over the dollar, and
Speaker 3: no one has really done that. What's different now is Trump.
Speaker 3: He came onto the scene. He disrupted so many of
Speaker 3: our long held economic assumptions to the point where we've
Speaker 3: got Biden and his first Date of the Union speech,
Speaker 3: give it a different delivery, emphasize different words, capitalize different letters,
Speaker 3: and it could have been something that Trump said because
Speaker 3: Biden was talking a lot about buy America and now
Speaker 3: we hear Janet Allen talking about friend shoring. All of
Speaker 3: this to me sounds a lot populism and make America
Speaker 3: great in America first. And so we are seeing that
Speaker 3: Trump's disruption continued. He shifted the trajectory. You know, now,
Speaker 3: let's get really wonky. The US Treasure Department twice a
Speaker 3: year releases a currency policy report, and when I was
Speaker 3: covering Treasury, I loved this report. I even sprung it
Speaker 3: loose once ahead of schedule, and you know, even civil
Speaker 3: servants were wondering, how on earth it's to like I
Speaker 3: get a hold of this report because everyone to know.
Speaker 3: What everyone wanted to know, is the US going to
Speaker 3: designate China a currency manipulator because they were the most
Speaker 3: obvious contender for that tag. And what we've seen is
Speaker 3: that Trump has brought action behind his words and he
Speaker 3: has shifted the debate. So now if the US wanted
Speaker 3: to get a bunch of countries together to manipulate the dollar,
Speaker 3: it's a totally different ballgame. For one thing, currency markets
Speaker 3: are just too big to be able to allow a
Speaker 3: couple of governments to influence it. And then who's going
Speaker 3: to join the US in that The US does not
Speaker 3: have the same standing that it did ten years ago
Speaker 3: or forty years ago when the Plaza a cord happened.
Speaker 3: Now we're in twenty twenty four. You know, in twenty
Speaker 3: eighteen and nineteen, there's a deep chapter in the book
Speaker 3: on this when Trump actually talked about intervening in the dollar,
Speaker 3: which would have been a huge deal. And Larry Kudlow,
Speaker 3: you know, he's sitting on the other side of the
Speaker 3: resolute desk inside the Oval Office said to Trump, who's
Speaker 3: going to join us? No, ally is going to want
Speaker 3: to work with us on this.
Speaker 2: So on a similar point, you know, there is this
Speaker 2: vibrant debate now about whether or not the sanctions against
Speaker 2: Russia have been effective, whether or not the US in
Speaker 2: one way or another, overstepped the bounds when it decided
Speaker 2: to cut off Russia from the banking system or even
Speaker 2: going back to the Afghanistan reserves and things like that.
Speaker 2: I know you're not covering the Treasury uh specifically now,
Speaker 2: but presumably you're still talking to plenty of people in
Speaker 2: DC where you're based. What are they saying now about
Speaker 2: that decision.
Speaker 3: The current administration has ended up in a bit of
Speaker 3: a defensive posture when it comes to talking about the dollar.
Speaker 3: The minute we started hearing Janet Yellen say there's no
Speaker 3: threat against the dollar, and I'm going to give you
Speaker 3: the extreme example, it's like when Nixon said I'm not
Speaker 3: a crook, right, So it's like, oh, there's nothing to
Speaker 3: see here. That's super extreme. But if she's talking about it,
Speaker 3: if the Treasury Secretary and the Fed Fed chair Powell
Speaker 3: earlier in March, testified and said to Congress there's no
Speaker 3: threat to the dollar from russia sanctions. FED official Christopher
Speaker 3: Waller did a speech dedicated to the dollar's role in
Speaker 3: the global financial system and what its outlook could be,
Speaker 3: and he also said Russia's sanctions are not affecting the dollar.
Speaker 3: So it's kind of like, well, if you're saying it,
Speaker 3: that means you're studying it. That means you thought it
Speaker 3: was worth looking in, So maybe there's something there. At
Speaker 3: the same time, we have a lot of countries who
Speaker 3: are wondering, like, oh, are we too dependent on the dollar?
Speaker 3: Because if they cut off Russia, a G twenty country
Speaker 3: that in twenty twenty two was the world's eleventh largest economy,
Speaker 3: so closely knitted with Europe, and they cut them off,
Speaker 3: and it was pretty wild for the country. Right here
Speaker 3: in the US, our gas prices at the pump went
Speaker 3: up because of those sanctions, and at the time Americans
Speaker 3: were willing to pay that price. But that's not going
Speaker 3: to last forever.
Speaker 1: By the way, I looked up the Swift headquarters after
Speaker 1: you mentioned that it looks like a fort. It is
Speaker 1: an incredible building. Actually, you were not exaggerating in fact,
Speaker 1: it's far grander than what I expected. When Russia was
Speaker 1: cut off from SWIFT in twenty twenty two, that was
Speaker 1: just seen as like this, like watershed move the sort
Speaker 1: of like the finance equivalent of a nuclear option. Do
Speaker 1: you see, like when you talk about going back to
Speaker 1: your answer just now, like a building up of new networks,
Speaker 1: of alternative networks of moving money around.
Speaker 3: When the Trump administration blew up the JCPOA, the agreement
Speaker 3: around Iran's nuclear program and withdrew from it, we saw
Speaker 3: European countries wondering, how can we continue to transact with
Speaker 3: Iran and abide by our agreement with Iran and not
Speaker 3: violate US sanctions? Because Trump then reimposed nine hundred and
Speaker 3: seventy one or more economic sanctions on Iran, and so
Speaker 3: Europe didn't want to be in a violation of those. Now,
Speaker 3: the interesting thing that happened was that no European country
Speaker 3: wanted to own that non SWIFT network and get blamed
Speaker 3: by the US for creating that. The thing that I
Speaker 3: would point to and the thing that actually, you know,
Speaker 3: I end the book on a note of hope that
Speaker 3: I think that the US, you know, as a democracy
Speaker 3: is supposed to be self critical. We're in a very
Speaker 3: self critical moment right now, and that extends from social problems,
Speaker 3: political problems, economic finance, and like let's get long key
Speaker 3: currency policy. So I think that we're going to emerge
Speaker 3: from this hopefully stronger. Like that's my pie in the sky,
Speaker 3: hopeful thinking. If you look at some of the countries
Speaker 3: that are trying to create a network outside of the dollar,
Speaker 3: it's like the bricks plus and a lot of them
Speaker 3: are closed detocracies. They are not open democracies. The way
Speaker 3: the US is now. Where I find hope is that
Speaker 3: hopefully in a decade or two, we have shown that
Speaker 3: we continue to be a country that has a stable democracy,
Speaker 3: rule of law, free and fair elections, all those things,
Speaker 3: independent agencies. But those other countries, you know, if they're
Speaker 3: run by dictators, then that dictator, just like everyone else,
Speaker 3: their life will come to a close. What's going to
Speaker 3: happen at that moment? And when there's political instability, people
Speaker 3: lead to the dollar the next time there's some kind
Speaker 3: of global crisis. If every one runs to the dollar,
Speaker 3: I think you can put a big period on that question.
Speaker 3: Is dedollarization happening? Because we are still the safe haven.
Speaker 3: And so then what's going to happen if Putin or
Speaker 3: Cheson Paying, or some of these other countries lose their
Speaker 3: dictators or their authoritarian leaders. There's a power vacuum, and
Speaker 3: there's a power grab, and there's instability. They don't have
Speaker 3: time to deal with trying to become a reserve asset
Speaker 3: or trying to outskirt or outrun the world's reserve asset.
Speaker 3: By creating this network, they're going to be dealing with
Speaker 3: their inside problems.
Speaker 1: Sleia Mosen, author of the new book Paper Soldiers, How
Speaker 1: the Weaponization of the Dollar Change the World Order. Thank
Speaker 1: you so much for coming on odd Lots and congratulations
Speaker 1: on the book.
Speaker 3: Thanks so much. I was an honored adjoin.
Speaker 1: TSEA. I really like Sleia's perspective that dollar strength is
Speaker 1: sort of downstream from political stability, and I think that's
Speaker 1: a really important element of all of this, which is
Speaker 1: that you know, we look at measures get to GDP
Speaker 1: and inflation, et cetera. But the real thing that sort
Speaker 1: of undergirds at all and that sort of needs to
Speaker 1: be maintained, is just this assumption that the US is
Speaker 1: a stable country at the rule of law, and probably
Speaker 1: the most stable with the strongest rule of law in
Speaker 1: the world.
Speaker 2: Now absolutely, I really liked her final answers, sort of
Speaker 2: linking a lot of the network effects and the politics together.
Speaker 2: And I think Charlie Kindelberger made this point ages ago
Speaker 2: that like, the reason the dollar reigns supreme, the reason
Speaker 2: there is this dollar hegemony like isn't necessarily because the
Speaker 2: US is imposing it on the rest of the world
Speaker 2: or because there is this unipolar world. Instead, it's because,
Speaker 2: like there has been decades of sort of consensus building
Speaker 2: and network building around this. And so the question is, Okay,
Speaker 2: if people are uncomfortable with the dollar because they're worried
Speaker 2: that the US can over exert its control of the system,
Speaker 2: such as what we saw with Russia getting kicked out
Speaker 2: of the banking system or Afghanistan reserves getting seized and
Speaker 2: that sort of thing, then they need to build up
Speaker 2: an alternative, which means they have to build a network.
Speaker 2: And frankly, as Sleia was sort of intimating towards the end,
Speaker 2: like dictators, they might not they might be busy, they
Speaker 2: might be too busy to build up a network, but
Speaker 2: also they might not be that good at it.
Speaker 1: Or yeah, I thought that was a great answer, or
Speaker 1: they might that no one could just have the confidence
Speaker 1: of sort of an internal policy stability after that, Leader Leaves,
Speaker 1: I thought it was a really fascinating point. Also, until
Speaker 1: her book, I hadn't really appreciated the degree to which
Speaker 1: nine to eleven specifically was a turning point for our
Speaker 1: our aggressiveness maybe or our ability to essentially monitor global
Speaker 1: financial flows.
Speaker 2: Yeah, it's such a it's taken for granted so much now,
Speaker 2: and it is such a given that it's kind of
Speaker 2: weird to hark back to a time. I mean, I
Speaker 2: guess it would have just been the year two thousand,
Speaker 2: so twenty four years ago, when the US wasn't using
Speaker 2: something like Swift to aggressively monitor terrorist financing. It is
Speaker 2: crazy to think about how much I mean, I guess
Speaker 2: it's a little bit obvious that nine to eleven was
Speaker 2: a watershed moment. But also in terms of the financial system.
Speaker 1: Yeah, totally't. I hadn't really appreciated that all. And also
Speaker 1: just this idea too of like there was a point
Speaker 1: and maybe we can never go back to that where
Speaker 1: it's like you actually have leaders coming together and coming
Speaker 1: to some consensus, not just in terms of like the
Speaker 1: sort of weaponization of the dollar or the ability to
Speaker 1: track dollar, but also coordination on price, as in the
Speaker 1: case of the Plaza Accord. All of these things that
Speaker 1: are like so rapidly changed, so dramatically different, the current
Speaker 1: system feels simultaneously obvious and also very new.
Speaker 2: Yeah, yes, it's like inevitable and also kind of mind blowing.
Speaker 2: Yeah it's happened at all. I'm sure we could go
Speaker 2: on for longer, and I'm sure we will have many,
Speaker 2: many more episodes on exactly this topic, but for now,
Speaker 2: shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our guests Seleia Mosen, She's at Seleia Mosen and
Speaker 1: check out her new book Paper Soldiers, How the Weaponization
Speaker 1: of the Dollar Changed the World Order. Follow our producers
Speaker 1: Carmen Rodriguez at Carmen Arman, dash Ol Bennett at Dashbot
Speaker 1: and kel Brooks at Kilbrooks. And thank you to our
Speaker 1: producer Moses On. For more Oddlots content, go to Bloomberg
Speaker 1: dot com slash odd Lots where we have transcripts, a blog,
Speaker 1: and a newsletter. And check out the discord discord gg
Speaker 1: slash odd lots where you can chat about all of
Speaker 1: these topics twenty four to seven with fellow listeners.
Speaker 2: And if you enjoy odd Lots, if you like it
Speaker 2: when we discuss the history of US dollar dominance, then
Speaker 2: please leave us a positive review on your favorite podcast platform.
Speaker 2: And don't forget if you are a Bloomberg subscriber, you
Speaker 2: can listen to all of our episodes absolutely ad free.
Speaker 2: All you need to do is connect your Bloomberg subscription
Speaker 2: to Apple Podcasts. Thanks for listening.