Will Putin Destroy The Dollar While He’s Trying To Destroy Ukraine?

The headlines are full of stories about the financial war going on between the U.S. and Russia alongside the shooting war in Ukraine. U.S. financial sanctions imposed on Russia are extreme and have no doubt caused serious damage to the Russian economy and the global economy.

These sanctions are likely to last long after the shooting has stopped, which means the economic damage will linger as well. It is likely that costs imposed on the U.S. from the sanctions will be greater than the costs imposed on Russia, although Biden says Americans should bear those costs.

Still, the costs to the U.S. may be even greater than most analysts estimate. The ultimate cost may be a steep decline in confidence in the role of the U.S. dollar as the leading reserve currency. That reserve currency status is more valuable to the U.S. economy and U.S. citizens than many realize.

It means we can print our way to prosperity by using money we create to pay for imported goods and services and by forcing trading partners, including adversaries, to buy our debt because there’s not much else to do with the dollars we send them. In short, our trade deficit, our fiscal deficit, and our lifestyle based on imported goods and oil are all based on the unique role of the dollar as the global reserve currency.

This article by leading monetary scholar Barry Eichengreen describes how that reserve currency status is now under threat. Adversaries of the U.S. such as Russia, China, Libya, and Iraq have held a large portion of their reserves in U.S. dollars.

Libya and Iraq were both invaded by the U.S. and their leaders were killed. Russia is now under severe sanctions. China has suffered steep tariffs on its exports. All of these actions have been imposed because of U.S. control of the dollar and the global dollar payments system. How long before the targets step out of the way and try to leave the dollar system?

As Eichengreen points out, this is easier said than done. Other nations do not have the sophisticated and large, liquid bond markets needed to absorb the proceeds from oil sales or trade surpluses that our trading partners have to deploy.

Still, in markets and economics, everything happens at the margin. A move away from the dollar can begin in small ways but gain momentum and turn into a collapse. If our enemies are diversifying away from the dollar, shouldn’t investors consider some diversification also?

Some allocation to gold right now is a smart move to preserve wealth. If events spin out of control, you may not be able to get gold in the future at any price.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®.