Yellen Finally Wakes Up to The Fact That Dollar Weaponization Doesn’t Work

It’s a fact of life that in any group of students, some are likely to be smarter and quicker than others, while some just can’t keep up. It’s unfortunate that Treasury Secretary Janet Yellen has turned out to be the slow kid in the class when it comes to economic sanctions and financial warfare.

Almost ten years ago, I sat in a secure conference room at the Pentagon and explained to a group of U.S. national security officials from the military, CIA, Treasury, and other agencies that the overuse of the U.S. dollar in financial warfare would eventually drive countries away from using dollars in international transactions for fear that they could become the next target of U.S. displeasure. Some took note, some ignored the warning, and one Treasury official slammed the table and said, “The dollar has been the global reserve currency, it is the global reserve currency now, and it always will be the global reserve currency!”

I told him I felt like I was in Whitehall in 1913, listening to John Bull say the same thing about sterling. Sterling would begin to be pushed aside by the dollar just one year later with the start of World War I.

More recently, I taught a seminar at the U.S. Army War College on financial warfare in which I explained that U.S. financial sanctions would not have a material impact on Russia, that Russia would not change its behavior in Ukraine based on the sanctions, and that the U.S. would suffer more from its own sanctions than Russia because adversaries and neutral countries would create alternative payment platforms that did not use dollars. I encountered skepticism from the class (that’s OK; the purpose of a seminar is to engender competing views).

Events of the past year have proved my forecast in every respect. Many others have pointed out the same weaknesses in the weaponization of the dollar. It seems the only parties who didn’t see the danger to the dollar were the Wall Street cheerleaders and top U.S. government officials.

Now, the failure of U.S. dollar-based sanctions has become too obvious to ignore. The failure is so obvious that even Janet Yellen admits that sanctions are not working.

In this article, she says, “There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar. Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative.”

One could say that realizing the dangers ten years too late is still better late than never. The issue is whether it’s already too late to undo the damage. Once new trading currencies and new payment channels are put in place (which is happening quickly), there’s little incentive to go back to a dollar system where the U.S. can threaten your economy.

Yellen is once again putting her incompetence on full display. She’s a textbook neo-Keynesian with little understanding of monetary policy, fiscal policy, or the international monetary system.

I’ve consistently said that the greatest threat to the dollar comes not from abroad but from the U.S. Treasury because they take confidence in the dollar for granted. Yellen is proving my point.

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