The weaponization of the US dollar by US agencies continues with a ruling by the FDIC…
In March, the FDIC seized nearly $14 billion in foreign deposits at Silicon Valley Bank, most of of the deposits were from Asia.
Foreign depositors have been waiting access to their money. The FDIC now affirms, sorry, too bad.
The Pain of Silicon Valley Bank’s Collapse Is Being Felt by These Depositors
The Wall Street Journal reports The Pain of Silicon Valley Bank’s Collapse Is Being Felt by These Depositors
Two months after the failure of Silicon Valley Bank, the lender’s depositors in the Cayman Islands have been left out in the cold.
The California-based bank’s American depositors were protected when the Federal Deposit Insurance Corp. took control of SVB on March 10 and guaranteed all of their funds. SVB’s U.S. branches, as well as its loans and deposits, were acquired by First Citizens Bancshares in late March.
It has been a vastly different story for customers of SVB’s Cayman Islands branch, which was left out of the First Citizens deal and placed under FDIC receivership. The branch in the offshore tax haven was set up to primarily support the bank’s activities in Asia, according to SVB. Its depositors, which include multiple Chinese investment firms, haven’t been able to access their funds—and have been in limbo since SVB’s collapse.
The FDIC’s notice surprised customers who had thought an earlier statement from U.S. regulators that said all SVB depositors would be made whole also applied to them.
Systemic Risk Assessment
The FDIC made a “systemic risk exception” for SVB to protect depositor funds beyond its limit of $250,000 per bank account.
FDIC’s stated “insurance” is for US depositors only. But the exception to make all US depositors whole means foreign depositors bear 100% of responsibility for the collapse of SVB.
Since bond holders rate higher than unsecured depositors, and the FDIC had significant losses rated to SVB, foreign depositors may get zero cents on the dollar.
Get Out Now
The clear message by the FDIC is don’t bank in the US. If you do, it better be at a one of the giant too big to fail banks.
If you are a foreign depositor at any small or midsized bank, the FDIC is affirming that you better get your money out now.
Let the foreign deposit run begin.
Federal Reserve Act
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Nowhere does the act give the Fed the right or power to confiscate the reserves of sovereign nations. But that is exactly what the Fed did when it seized Russia’s US dollar reserves.
If the Fed can confiscate Russia’s reserves, who’s next?
Weaponization of the US Dollar
By weaponizing the banking system against enemies outside and within, advanced economies are losing their ‘risk free’ status. This may not change the global currency order for now, but could lead to a wild scramble for gold and other tangible assets.https://t.co/QFkdkBMnf4
— Joseph Wang (@FedGuy12) March 7, 2022
What Does China Do With a Dollar That’s No Longer Risk Free?
In light of Fed actions against Russia, I pinged Michael Pettis at China Financial Markets some questions on China’s reserves on March 18, 2022.
Please consider my Pettis Q&A post What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?
Q&A With Michael Pettis
Mish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?
Michael Pettis (emphasis mine):
1: “Given that so much of China’s “reserves” are now indirect and held by state-owned banks (all the increase since 2017) it’s hard to say what the currency composition of China’s reserves are.
2: “Officially the US dollar is still by far the biggest component, but it is slowly declining.
3: “I expect that this will continue as far as the official reserves go but, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be, and with such high and growing reserves (once you include the indirect reserves at the state-owned banks) that is a very difficult question to resolve.”
The Hard Part
The hard part is precisely why all the discussion on BRICs and a new currency backed by gold or some sort of weighted or commingled currency is 95% hot air. I previously stated 99% hot air, but I have reassessed.
The 5% that isn’t hot air is the significant recognition phase that what the US foolishly did to Russia, it implicitly threatens do to any country it wants.
Recall that the EU was in a similar situation in wanting to trade with Russia’s Gazprom and also with Iran. Regarding Gazprom, Trump threatened to sanction any company that helped complete a natural gas pipeline to the EU.
Regarding Iran, the EU announced am effort to end reliance on SWIFT, part of an international payment system, but failed. SWIFT avoidance by the EU never got off the ground.
What Is SWIFT, and Could Sanctions Impact the U.S. Dollar’s Dominance?
Please consider the Richmond Fed article What Is SWIFT, and Could Sanctions Impact the U.S. Dollar’s Dominance?
The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar’s dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.
The Richmond’s Fed’s assessment is self-serving. Yet, it appears accurate. Importantly the Fed even admits weaponization, the emphasis was mine.
But if it was so easy to avoid the dollar, the EU would have done that years ago, before Russia’s invasion of Ukraine.
Every country is tired of the US setting sanction policy for the entire world. As a Libertarian, so am I. Frankly, we all should be.
As a side note, Trump and Biden are amazingly close on sanction policy, tariff policy, trade wars, China foreign policy, and willingness to weaponize the dollar.
Brazil’s President Calls for End to US Dollar Trade Dominance, So What?
On April 1, I commented Brazil’s President Calls for End to US Dollar Trade Dominance, So What?
That post is accurate other than my reassessment of the hot air percentage. Please give it a look.
BRIC-talk is compounded by the fact that the yuan does not float. And none of these countries have much of anything in common other than a desire to escape the dollar.
Not Now Does Not Mean Never
The demise of the current US-dollar financial system with SWIFT at the heart of it is underway. I just cannot tell you when the system crumbles, nor can anyone else.
Although the dollar avoidance the BRICs seek is much easier said than done, not now doesn’t mean never. The recognition phase has started.
Most do not realize the EU is involved even though it wants no part of the BRIC structure. Importantly, the EU’s annoyance at SWIFT is far more significant than any yapping by Brazil.
So, don’t be surprised if something truly significant starts with the EU, not the BRICs. That’s an idea I have not seen anyone else suggest. And the EU nations do all have something in common making Swift avoidance much easier in theory.
Regardless of where de-dollarization picks up steam, it will mark the end of global sanction madness by Trump and dramatically escalated by Biden. Bring it on.
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