2149: Navigating the Dollar Hegemony: Understanding Global Finance Today

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It is my pleasure to welcome Sahela Motion to the show and she is the author of a new book entitled Paper Soldiers how the Weaponization of the Dollar Changed the World Order. This is a fascinating topic. Of course, we've discussed this topic before, but I can't wait to hear what she has to say about it. And we can really see how this whole picture Bretton woods forward. I believe she's going to talk about it that way and we'll see how that's going to play out in the future as well. So looking forward to it. Welcome. How are you?

I'm so glad to be here, Jason.

It's good to have you. And you're coming to us from Washington, D.C. right?

I'm in the capital of our nation.

You're in the belly of the beast. Good stuff. Well, tell us about Paper Soldiers, if you would. And it is really amazing how valuable the dollar has been to the United States in terms of the way it can export its power, its policy, and just do so many things. Having that reserve currency status, the US.

Dollar gives the country unique power overseas and domestically. There are two definitions of a strong dollar. One is just its strength in foreign exchange rate value. How many yens or sterling or euros you can buy overseas with the dollar at any given moment. And then the other strength is dollar hegemony, that the global financial system is underpinned by the dollar. It is deeply entrenched. And everyone's lives at some point touch the US Dollar because it owns and runs the global financial system. The book itself is a that reveals the powers of the U.S. treasury Department, how it has an influence on Americans ability to pursue the American dream. It is a story of how the country went from this Hercules in a cradle in 1776 to this global superpower. And it's told through the lens of our currency and our currency policy. And I take readers in powerful rooms in Washington, in the halls of Congress, the Oval Office, inside the Treasury Department, to finance ministries and G7 and 20 meetings around the world. But I also take readers on a journey to places like Moraine, Ohio and Weirton, West Virginia, where we've seen some of the negative effects and the downsides of having a strong dollar play out domestically and kind of unpack how that brought us to where we are today, which is a country that is looking at increasingly populist economic policies and also seeing some global uncertainty from foreign countries as they look at the US and seeing our global power being challenged, therefore the dollar's power being challenged.

Is it fair to say this all started with Bretton woods just before the end of World War II? Or you know, maybe paint us a picture if you would. What was the world like before that?

Yeah, so I actually, Jason, I start the book in 1862 when Treasury Secretary Salmon P. Chase. The US was in the midst of the Civil War and the Treasury Secretary saw that the government's coffers were empty. They needed money, the north needed money. And so he decided, okay, we need a paper currency which some lawmakers called, quote, immor. Which is interesting to think about how People talk about CBDCs and cryptos today that back then, paper currency.

Paper currency was immoral.

Yeah. So new technology is always scary.

But I mean, compared to gold, that was the comparison, right, Exactly.

There we look at avoid precious metals and go for paper. Right. How is this going to be? This is a joke. It was a country that was not even a century old. Everyone was kind of wondering when is this country going to run out of steam? Is it really Hercules in a cradle or something else? And so that is kind of where the starting point that I choose things really get are revved up with Bretton woods because as World War II was coming to a close, the US currency was by design. At the Bretton woods conference deemed the world's reserve asset. And that's really when the story in earnest begins. And then I take you through the rest of the 1900s. There's the Plaza Accord, the Louver Accord, when government officials worked hard to kind of control the currency market quite a bit in the dollar's value. And then I dig deep with Bob Rubin. And then the weaponization part really begins with nine. When George W. Bush, when he takes his very first act in the war on terror, which was not a military tank rolling in, it was economic sanctions and using the power of the dollar to track terrorist money flows. And then I kind of take you.

I mean, we did sanctioning before 9 11. That wasn't the first. Why, why 9 11? Why do you pick that? Because certainly one could argue that we were weaponizing the dollar in this. In 1971, maybe we weaponized it the most. Right. When Nixon took us off the gold standard. You know, that was really when the dollar. I mean, amazing, Karn, that we, we got away with that, really. I don't know if you agree, but.

Right. I mean, agree or disagree doesn't I kind of set that aside. But that moment when Nixon went off the gold standard had more to do with domestic policy. You know, inflation was kind of running rampant. The US didn't have enough dollars to continue the peg to gold. And so that was almost, you could say it's a technical thing. Like it's just not sustainable for us anymore. And yes, it happened in secret. There's no good way to give that kind of message to the world. The reason I start with 911 in terms of weaponization is that, yes, the US did impose economic sanctions. The first round, I think, were on Great Britain in the 1800s. So we've had, yeah, the sanctions unit, treasury, the Office of Foreign Assets Control, or ofac, has existed for more than a century, I think. But until 911 it was a very blunt and almost underdeveloped instrument without great big returns. And actually the unit at treasury was considered an orphan of Treasury. No one paid attention to it. It didn't have an undersecretary that was following it. Treasury secretaries didn't pay attention to it.

Interesting.

9. You know, the leaders realize that if we can get to how terrorists are financing their attacks using the dollar and corrupting the system and using the dollar for corrupt means, then we can choke that off and thwart future attacks. And that's what happened. And since 9 11, the US has seen the use of economic sanctions increase by almost a thousand percent since 9 11. Treasury has established a separate terrorism and financial intelligence unit to really amplify economic sanctions work. And since 911 that tool has become incredibly sophisticated. The space between words and war. So diplomacy and war, that gap is what economic sanctions are. And there is so much to be done there by the us We've seen it with Venezuela, Iran, North Korea and now Russia.

Certainly Russia. Yeah. You know, it just begs the question, doesn't it? Will that backfire or has it already backfired? I mean the Russia sanctions have been so enormous and so widespread, Biden just issued another batch of them recently. It's making a lot of Americans look at second citizenship options and you know, they look at the way they've attacked the oligarchs and so forth. And I'm not really making a like a moral judgment on it, but whenever someone else is a target, you always have to realize you might be next. Right? It may be just or not, it doesn't matter. The fact that they're using this weapon is something that concerns people. Has it backfired at all or will it backfire, do you think?

The case I make in the book is that it's too soon to say, but something has shifted for sure. I start the book and I end the book on February 26, 2022 at 5:13pm at the exact moment that those economic sanctions were announced. Now one thing to remember is that they were US led sanctions. So 30 countries came together with the US and imposed the harshest sanctions that the world has seen on a G20. At the same time, they're incredibly porous. You know, they, you talk about de swifting, cutting banks off from Swift. There are like 200 banks in Russia that you swift like 10 of them were cut off. So you have all these other options also different things. Like in the last year alone, Russia has imported $1 billion worth of microchips, advanced microchips from US and European companies without violating sanctions. So the whole plan is very porous. But the expectations were so high. You had President Biden a couple of weeks after those sanctions came down in March of 2022 saying the ruble is now rubble. Right. Once he said that, he set the benchmark of how we are supposed to judge these sanctions. And Russia's economy is still going, it's converting to a war economy. Sure, they've had some economic pains, they've had to make some changes, but they transformed and they are still on track for expansion this year.

Yeah, that has amazed me because when the invasion happened I thought Russia was just going to be ruined. I mean, those sanctions were so severe, so harsh, so widespread that I thought they would just, just be ruined. And I thought that was a big, you know, what is that cryptocurrency that is really for the banking system. I thought that was going to be the big benefactor of it. Xrp, I think it's called. I'm not into that deeply. But if they were going to be de swifted, I thought that would, you know, be a big play and that would, that would be kind of one of the next big things. I don't think that really happened or played out. But it's surprising how Russia has been pretty resilient in the face of all of this, isn't it?

Absolutely. I think a lot of the US and those aligned with the US didn't quite realize how China and India would really help Russia transform into a war economy and remain afloat. The sanctions have proved porous. There's a lot of questions about enforcement of those economic sanctions and who has the power to make the next calls. You know, right now there's this big debate going on about being able to confiscate the frozen or immobilized Russian assets. Well, it's actually Europe calling the shots on that because most of the money is parked in euros right now. It's also triggered a debate across the brics nations, Brazil, Russia, India, China, South America or South Africa about should we de dollarize, come together, get some of the Gulf states or oil producing nations to come together and de dollarize. And that is, it's more talk than action right now. But that action starts with talk. On the other hand, a couple of data points to point to that reveal how deeply entrenched the dollar is in the global financial system. It's almost like trying to change the lingua franca away from the English language. That's how deeply the dollar is entrenched in financial transactions around the world. So Russia has sold a lot of oil to India and they have done that transaction in rupees. But Putin does not know how to spend all those rupees because it doesn't have the same exchangeability or demand. Just the same way you and I can't go to Walmart and say, well I've got rupees, can I buy these things? People will say no, we want dollars. In the global marketplace there's something similar going on. So there's that problem that kind of shows that it's harder to ditch the dollar than you think. The other one is Russian local companies are issuing debt in the Chinese yuan. And they are finding that there's some barriers there. One, because the yuan is not the regime around Chinese currency policy is not as transparent and the government has a heavier. In setting what the rate is, the costs for that debt can are volatile and unpredictable and high. And so they're running into a lot of roadblocks on how to work around the dollar, but they're still kind of going into the plumbing of the financial system and seeing what pipes can we create to work around this and maintain our economies.

Right. And they seem to be doing it pretty well. So rather than talking specifically about sanctions and whether they can backfire or not, maybe just talking in general about the paper soldiers, which is your book title, will these PA soldiers continue to be as effective as they've been? In other words, what does the future look like for reserve currency, status of the dollar and US Hegemony? Is that really under threat, as some say it is?

Look, I think it's not good to be complacent and assume. No, it's not under threat at all. I think the US US Officials are more on a defensive posture. You'll hear Chair Jay Powell of the Fed and Treasury Secretary Janet Yellen saying, well, there's no alternative and no, we're not under threat. And that means that they're kind of on the back foot, you know, and that's an interesting shift in the book. I tell a lot of stories about how in the 80s, a lot of government intervention had currency traders frustrated. Or in the 90s, there was talk about maybe the Japanese yen could supplant the dollar in the 2000s, maybe it's the euro that could supply the dollar.

And none of those, none of these things happen. Yeah.

One thing that I kind of look to is that if there's volatility for a, a crisis in any part of the world, whether it's a health or political crisis or financial economic crisis, if the dollar remains a safe haven. Right. Because it's all built on trust. And we saw earlier this month when the Iran Israel conflict ratcheted up in the Middle east, the dollar was the safe haven. It was the asset of choice for investors to pile into when things got uncertain. And to me, that kind of just shows that the dollar is here to stay. And the biggest threat is not actually going to be foreign. It's not going to be other countries coming together and finding ways to work around the dollar, because that's okay. A slightly diminished role would be fine. Diversification of different assets is also fine because of just how Strong the dollar is in terms of its global hegemony and the status that it has. I think that the bigger threat is internal. The reason investors and foreign countries pour into the dollar and the reason it is the world's reserve asset is all built on trust and faith in our democracy. There's Bob Rubin has given out that faith in democracy and faith in markets go hand in hand. The reason markets have faith in our dollar is because we have rule of law, we have free and fair elections and independent agencies like the Fed and the Supreme Court and others. But those are looking slightly shaky right now. And we're a strong democracy because we are not afraid to become self critical. And we're in a very self critical moment right now. And that's happened in America's history many times. And so when you're in it, it's hard to see your way out. But without unity, we can't address what is the biggest threat to the dollar, which is our $34 trillion deficit.

Okay, so I'm glad you brought that up because where I want to go is your thoughts on the future. Inflationary, deflationary, disinflationary. I say inflationary, but the $34 trillion. Now the interest cost, as you well know, is becoming so enormous, especially with higher rates that need to be paid to the holders of the debt. We're going to add a trillion dollars every hundred now just because of the debt service cost. It's hard to fathom the significance of that.

It's hard to fathom. And you can't explain that in like a pithy TikTok news bite way. Right. That grabs attention.

You mean you can't explain everything in a, in a, in a 59 second short on YouTube?

No, no. And it's something that's really serious, you know. Yes, our debt, interest costs, first of all, the debt load is so high, but also most of that debt was issued and piled on since, since 2001. And then especially since 2008, the global financial crisis and Federal Reserve interest rates have been so low and now they're creeping up and you know, we're still in the single digits. Right. In the 80s it was double digit interest rates, 13, 14, but that was lower then.

Yeah, you know, it's, it's kind of like people that talk about houses, right. And how unaffordable housing is and they say, well, you know, back when I bought my house, maybe Boomer says interest rates were 14 or 18 or whatever they were on a mortgage. But the house cost you $60,000. O it's a different deal.

True. I like this. I'm gonna start bringing this up. Okay, Boomer. Okay, Zoomer. Yeah. So the debt interest load is huge. And the thing is, to address it, to address the interest cost or just the core problem, the deficit, we need bipartisanship. And right now we have a country and we have lawmakers that can't agree on the color of the sky, the color of the grass. Right. And having to reign in the deficit. It's going to be a lot of. Of tough decisions that cause them economic pain. That needs to be sold to constituents who have faith in their leaders and their, their willingness to reach across the aisle and what they're getting out of.

It and we don't have, that's going to happen. You are much more optimistic than I. I mean, look, politicians get in power and stay in power by making lots of promises, by basically buying the votes. And to buy the votes, you need to hand out goodies and pork barrel legislation.

Yeah, yeah, well, that. You know, the very second sentence of my book is, all empires think they're special, but all empires fall. Now, the US May not be an empire in the historical traditional sense, but we're a superpower. And if you study past superpowers, many of them, most of them, the trouble starts when they are too deep in debt.

Yeah, right, right. Okay. So I appreciate your thoughts on the solution for it, even though I don't think it's going to happen. But I hope you're right. I hope it does. So what does the future look like them? Are we going to see just massive amounts of inflation because of this, this debt load and debt service costs, not to mention the unfunded entitlements, into the future? I mean, you know, some of Lawrence Cutlikoff's been on my show several times, and he estimates. Well, he used to estimate. He kind of walked that back a bit, but he used to estimate that that unfunded entitlement obligation was $220 trillion. Now, he has come off of that a bit, but. But it's still high no matter what it is. If it's 60 trillion, if it's 220 trillion, it doesn't matter. It's a lot of money to keep those promises into the future in addition to the 34 trillion we already have. Right. So what does the future look like?

To try to figure out what the future could possibly look like, you need to know how we got here. Right. So in the book, that's what I endeavor to do. I take you to rooms with treasury and press conferences with treasury officials to hear how treasury secretaries talk about currency policy, why it matters, why traders and the world care and should care. I also take readers to places like Weirton, West Virginia and Marina, Ohio, which I mentioned, to show how our US currency policy for the last 30 years underpinned globalization. But there were downsides to that. So I take you to the towns where that you can kind of see and illustrate what those negatives were and what brought the rise of Donald Trump, of Bernie Sanders, of other populist figures and policies around the world. Actually first we got a president who did an about face on globalism. It was so shocking to people. But he was the only one to hear how voters in America and across the Rust Belt states in the manufacturing sector had suffered through a lot of economic scarring and were overlooked by Washington for a long time as everyone else kind of benefited from globalization. So he had turned the country inward to more protectionist policies to protect our own economy first. Then that becomes a bipartisan about face because Biden adopted, you know, we went from America first and make America great again to buy America and friendshoring it's large, it's all populism and what the next generation of treasury officials who are helping run the economy or sort of executing on fiscal policy and economic policymaking, they're going to be dealing with a country with America that has a diminished role globally. And so there needs to be more behind diplomacy and diplomatic efforts than just words and the fact that we're the big guy and we're the biggest in the block. But what I will point to, and this is why I have hope is that that the US is the world's largest economy. The owner of the world's reserve asset has historically largely been whoever is the world's largest economy and has that political and economic influence. You would have to take numbers two, three and four on that list, put them together and then you'll get bigger than the US that is how far ahead we are from number two in any way. So as long as the US is not complacent and uses this self critical moment and whether is the criticism from abroad and the global rethink about about exposure to the US and being beholden to US policies because we kind of the US exports foreign policy goals through the dollar, it's dollar ownership, there's a rebalancing and as long as the economy remains strong and politically and domestically there is strength and the democracy remains strong, then there is hope.

Yeah, and I think think I agree with you in that I believe you're optimistic about it. Right. And, and I agree with you. I don't think China is any big threat. I don't think the bricks are any big threat. I mean, the bricks can't even get along with each other. So they're not exactly. Granted, the United States can't get along with each other either, arguably. But, but it's, it's much different. You know, the US is so vastly far ahead in so many ways. I mean, China's banking, real estate, and demographic problems alone are enough to just really weigh on, on China's future. I think I agree.

The other thing that's a little bit less talked about, and it's almost indelicate to say, but I'm going to say it, is that as long as, you know, in 10, 15, 20, 50 years, we remain a democracy that has free and fair elections and the rule of law and the independent agencies, no one can really touch us. Because if you look at, at the other countries that are trying to become superpowers, if you look at the brics, plus a lot of those are run by autocratic nations.

Oh, no question.

Right. And so what happens, you know, when we have a transfer of power, it is, has so far been peaceful. Hopefully it remains peaceful and it's predictable. You know, every four to eight years there's a change and it's going to come down to votes in electoral college. But in other countries, it's someone's death that largely triggers it for a coup. And when those things happen, countries are focused inward, not to maintaining their alliances and new currency packs they're trying to figure out there's a paragraph, a power vacuum, how do we survive this social uprising, economic unrest, everything. And when that is all kind of happening, hopefully as long as the US Continues as we have for the last two centuries, we're fine.

Yeah, I couldn't agree more. Just wrap it up with any of your thoughts in general questions. I didn't ask you anything you want to tell the audience, just generally speaking about the book, about the future, whatever.

Yeah. I wrote this book because I covered treasury for eight years or six years before I wrote the book. And I've been covering currency policy from the government perspective for my whole 10 years at Bloomberg. And it's so fascinating. You can learn so much about what policymakers are thinking, what's going on in the economy through this currency lens. But the other thing is that I take you inside how an agency, a powerful agency works. You get to meet not just treasury secretaries whose names a lot of us know Hank Paulson, Tim Geithner, Stephen Mnuchin, Bob Rubin. But you also get to meet some of the unsung heroes, civil servants whose maybe their paintings are not hung on, you know, done in oil paintings and hung on the walls of treasury, but they are also stewards and courtiers of the dollar. And I think that's what this book brings is this it's almost like a novel of our currency policy history. You know, I've humanized it a lot, but also kind of brought in the global perspective of what could, what could happen next. So I hope.

Excellent. Well, I'm so glad you wrote the book. It's just such an important topic. Solea, go ahead and give out your social media or website or I mean of course the book is available with excellent reviews in all the usual places. Any resources you want to share with people?

Yes, I'm aleyamosin on Twitter. I respond to every Twitter and LinkedIn message that I get. The book is available on Amazon and everywhere you can buy books and audiobooks and also on your Kindle Saleya.

Thank you so much for joining us.

Thanks for having me. Jason.

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