Suicide by Confiscation

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Some moronic politicians have proposed that the US confiscate hundreds of billions of dollars of Russian foreign exchange assets held in US dollars, with the proceeds to be used to fund Ukraine in its war with Russia. Regardless of one’s opinions about the war and its adversaries, such an action would be economically suicidal.

The US benefits greatly from the status of the US Dollar as the world’s primary reserve currency. One can argue whether sudden elimination of that status and associated benefits would light a fuse that ignites the Debt Bomb, or merely would accelerate an implosion already in progress.  It cannot be argued that destroying the privileged status of the US Dollar would be other than utterly catastrophic to America.

Currency is a physical manifestation or a representation of units of money.  Money is anything that can serve as a medium of exchange of goods and services and the creation or payment of debts.  Types of money vary in quality.  “Good money” is widely accepted, portable, fungible and can act as a store of value.  Libraries have been written on the subjects of and theories about money and currency. 

A reserve currency is a currency (a representation or manifestation of the issuer’s money) that is widely accepted by individuals, businesses and governments as efficient and reliable for use in the settlement of the rights and obligations that arise from trade and government activities.  In order to serve its purpose, the reserve currency must be plentiful, widely accepted and easily bought and sold. To the extent that a currency is a reserve currency, there will be more of it in the world than is necessary to support the exchange of goods and services and performance of e.g. government obligations within the county that issues the currency.

After World War II, the US Dollar replaced the British Pound as primary world reserve currency.  The fact that the US economy was far larger than any other made the US dollar the inevitable choice to serve as the primary world reserve currency.  There are a lot more dollars in the world than are necessary to support the activities of the US economy.  This has allowed the US, among other things, to borrow more money (i.e. create more dollars) than it otherwise could have because the total demand for dollars exceeded the domestic need.

Over the years and to an accelerating degree, the US has abused its advantage as the issuer of the primary world reserve currency by borrowing far more money and creating far more future obligations than it can possibly repay or meet, absent tax levels that would destroy the domestic economy, or defaulting on obligations, either directly or through inflation.  Inflation allows the creation of obligations in current dollars and payment with future dollars that are less valuable in terms of what they can buy.

Recall that good money acts as a store of value.  The US dollar is becoming far less desirable as a store of value as the issuer (the US Federal government) borrows excessively to fund its absurd fiscal irresponsibility.  The moment the US confiscates the monetary reserves of another country – any country – for any or no reason, the US dollar will cease to be a reliable store of value.  Cessation of the US Dollar status as the primary world reserve currency would occur in a fraction of the time it otherwise would have.  If the US continues on its current course of destroying its money (and currency) slowly, the nation MIGHT be able to adjust over time.  If it dramatically accelerates the destruction of its status as issuer of the primary world reserve currency, the consequences will be sudden, complete, chaotic, and violent.  It may as well shoot itself in the head.

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