Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

In Weaponizing the Dollar Trump’s Lieutenants Flunk Finance 101

Politics / US Dollar Jul 17, 2020 - 02:09 PM GMT

By: Steve_H_Hanke

Politics

In a scoop, Bloomberg reported last week that Secretary of State Mike Pompeo and some of President Trump’s top lieutenants are considering fully weaponizing the U.S. dollar to undermine Hong Kong’s financial system. The idea has been hatched to punish China for its recent aggressions in Hong Kong.

Just what does the weaponization of the greenback entail? The U.S. dollar is the international currency. It is the major reserve currency held by central banks, the most prominent currency used to denominate debt, and the unit of account for invoicing goods and services in international trade. The dollar’s stable value means that it is used widely for both international payment and interbank transactions, as well as for official intervention in foreign-exchange markets. In short, the dollar is entrenched at the center of the international financial system. This gives the United States an “exorbitant privilege,” as the Frenchman Valéry Giscard d’ Estaing pointedly put it. For the U.S., the benefits are incalculable.


The greenback becomes weaponized when Washington imposes financial sanctions on individuals, institutions, or nations. These sanctions are designed to cut off those targeted from the use of the dollar, and thereby from the use of the financial system.

Sanctions are, of course, nothing new. They have been weapons of war for centuries. In the U.S., many presidents have embraced them. President Woodrow Wilson went so far as to proclaim that sanctions could be a “deadly force” and a very effective diplomatic tool. Even though the evidence supporting the success of sanctions is threadbare at best, White House after White House has latched onto sanctions to no avail. Just consider how well the weaponized dollar sanctions have worked against Cuba, Iran, North Korea, and Venezuela. Sanctions are a fatal attraction that have become ever more prominent since the Twin Towers came tumbling down on September 11.

This brings us to the Trump administration. President Trump, the counter-puncher in chief, has become drunk on financial sanctions. Indeed, anybody or anything that Trump and his lieutenants dislike is at a very high risk of being sanctioned. Financial sanctions are clearly the president’s weapon of choice. That is why Bloomberg’s reportage is so credible, disturbing, and dangerous.

Hong Kong is one of the world’s most important financial centers. It is not a Havana, Caracas, Tehran, or Pyongyang. Furthermore, Hong Kong is a uniquely dollar-based economy. Why? In 1983, Hong Kong established a currency board, which was designed by my colleague and collaborator John Greenwood. Hong Kong’s currency board is managed by the Hong Kong Monetary Authority.

Just what is a currency board? A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. As reserves, it holds low-risk, interest-bearing bonds denominated in the anchor currency. The reserve levels (both floors and ceilings) are set by law and are equal to 100 percent, or slightly more, of its monetary liabilities. A currency board generates profits from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities.

By design, and unlike central banks, a currency board has no discretionary monetary power and cannot engage in the fiduciary issue of money. It has an exchange-rate policy (which is fixed) but no monetary policy. A currency board’s operations are passive and automatic. The sole function of a currency board is to exchange the domestic currency it issues for an anchor currency at a fixed rate. Consequently, the quantity of domestic currency in circulation is determined solely by market forces; namely, the demand for domestic currency.

Since the Hong Kong dollar’s anchor currency is the U.S. dollar, the HKD is a clone of the USD, and Hong Kong is part of a unified currency area with the United States. From a strictly monetary perspective, it is as if Hong Kong were part of the United States.

So, if the U.S. imposed financial sanctions on Hong Kong, it would be equivalent to cutting California’s financial system off from access to the greenback. Such a maneuver would inflict a catastrophic blow on Hong Kong and a catastrophic blow on the U.S. and the greenback. Trust in the dollar would vanish.

It is clear that Trump’s lieutenants who are brainstorming the idea of preventing Hong Kong’s banks and the HKMA’s currency board from accessing their holdings of dollars have either not taken a course in finance — or, if they have, that they failed.

Follow me on Twitter.

By Steve H. Hanke

www.cato.org/people/hanke.html

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2020 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in