First Major Misstep by New House Speaker

After several weeks of seeming chaos in October, the House of Representatives finally elected a new Speaker of the House.

There were several rounds of voting. Steve Scalise was popular but fell far short of the votes needed to be elected speaker because he was opposed by the most conservative Republicans.

Jim Jordan was the next candidate. He had the support of conservatives and got more votes than Scalise, but still fell short because he could not attract moderate Republicans who held a grudge because of what happened to Scalise.

Tom Emmer was next up, but he withdrew his name before even getting to the voting stage.

Finally, the Republican caucus decided to hold a vote-a-thon and simply keep voting until someone won. In the end, they elected Mike Johnson, a mild-mannered but solidly conservative and relatively new member from Louisiana.

I like Johnson, partly because he’s a brilliant constitutional scholar. He got off to a good start by separating financial support for Israel from support for Ukraine. Both bills will probably pass, but by separating them, Johnson avoided the trap of having to vote for Ukraine in order to support Israel. Many members support the latter but oppose the former and now they can make their voices heard with separate votes. So far, so good.

Now Johnson has committed a blunder so egregious that it could rock the global financial system and cause a financial panic. Unfortunately, Johnson’s lack of experience in international monetary affairs has left him blind to the dangers.

Right now, the U.S. holds about $300 billion of Russian assets that were frozen after the Ukraine war broke out in February 2022. Most of those assets came from the Central Bank of Russia and consist of U.S. Treasury securities.

Technically, those assets have not been converted to U.S. ownership; they have merely been frozen and still belong to Russia even though Russia cannot use them. Now, Johnson wants to convert those assets to U.S. ownership and use the proceeds to pay for the War in Ukraine.

Johnson said, “It would be pure poetry to fund the Ukrainian war effort with Russian assets.” Pure stupidity is more like it.

Such an action would amount to a default on U.S. government debt since the securities were legally owned by Russia. Nations around the world would take note and accelerate their dumping of Treasury securities and their flight from the U.S. dollar.

This will increase interest rates in the U.S. and hurt everyone from home buyers to everyday consumers. It will make U.S. debt permanently more difficult to sell and less desirable to hold. It will introduce a new risk premium on U.S. debt over and above the existing inflation premium.

At its worst, it could trigger a dollar panic and full-scale flight from the dollar. Johnson is playing with fire and has no idea what he is doing. Let’s hope he receives some sound advice before he goes too far.

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