How the US Dollar Became an International Weapon of War

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, you know, something that has always struck me about, I don't know, the financial system, I guess, is that from the US perspective, it feels like any time anyone spends any money anywhere, particularly dollars anywhere, like the US could sort of go after them. Even if it's overseas, completely out of the country, it feels like the US basically has the prerogative to say, you're breaking the law in some way, you're doing something we're not gonna allow.

Tracy Alloway (0:48)

This is what exorbitant privilege looks like, right?

Joe Weisenthal (0:51)

I guess that's it.

Tracy Alloway (0:52)

Well, I think you're hitting on something that's kind of fundamental about the current financial system, which is the dollar is the global reserve currency.

And there are some pros and benefits that come with that. One of them is that you can use it as a tool of statecraft. So you can go after people that you don't like or people that are breaking the law. But there is also this tension on the other side where it seems like there are some downsides too, right? Like maybe at certain times, the US would desire a weaker dollar in order to jumpstart economic growth or certain exports, manufacturing, things like that. I think on the whole, most people would agree that the dollar's special status in the financial system has been a massive benefit for the US vis the huge deficit and people willingly funding that and things like that. But there are downsides, and that debate kind of bursts into the public consciousness every once in a while.

Joe Weisenthal (1:57)

Yeah, one thing, obviously, since early 2022, when Russia invaded Ukraine, that sort of seems to have, you know, then the US responded with an extraordinary amount of sanctions and cutting off Russia from the dollar-based system in almost every way imaginable. It's sort of like, you know, maybe catalyzed a new round of talk of, okay, are parts of the world...

Tracy Alloway (2:23)

The power of the dollar.

Joe Weisenthal (2:24)

The power of the dollar, exactly right. And I think that was sort of a pivotal moment.

I don't know if it will be a pivotal moment for the future of the dollar, but at least it was a pivotal moment, at least in this current cycle of people talking about dollar alternatives.

Tracy Alloway (2:40)

You know, it's interesting you bring that up because you're absolutely right. It feels like that was the catalyst for the current round of discussion about the power of the dollar and the future of the dollar in the financial system.

But thinking back to some Odd Lots history, when I think about that question of the US maybe overreaching or using the dollar in this particular way and the way they used it for Russia, I think about the conversation we had with the former head of Afghanistan's Central Bank. Do you remember that?

Joe Weisenthal (3:13)

Yeah, that was a great episode.

Tracy Alloway (3:15)

Because there was, I think, like, seven or eight or nine billion dollars worth of reserves held by the Afghan Central Bank.

And when the Taliban took over, the US basically seized all of it. They put some of it aside for 9-11 litigation, and then some of it got put into a fund that was supposed to be dispersed to the Afghan people in some way. But that to me, and maybe we touched on it in the episode, but that to me was sort of the crossing the Rubicon moment when you can actually say I'm going to take these central bank reserves.

Joe Weisenthal (3:49)

You know what it sort of gets to, this idea in my head, and I think that's a great example, which is that a dollar is not really a thing that you have. It's a claim to capacity on this global, complicated dollar network. And so we think maybe it's like, oh, money, you have it, it's sort of like property, but it's not really like property.

It's almost like a ticket in some way to a plane, but if the plane doesn't want to honor your ticket or the airline, it can. And so it almost feels like there's sort of a reminder that, yes, you could theoretically hold dollars, but in the end, the US could sort of decide, actually, your dollars are no good here anymore.

Tracy Alloway (4:32)

Yeah, there's conditions attached to that ticket or that, it's not an actual piece of paper, but that line item in a computer system somewhere.