18 12, 2023

Karen Petrou: Why U.S. Soft Power is So Squishy

2023-12-18T09:28:13-05:00December 18th, 2023|The Vault|

Late last week, Treasury issued a super-perky blog post asserting that U.S.-led sanctions will soon subdue Russia’s military might.  However, judging by the data Treasury rallies, saying sanctions subdued Russia’s war-making capabilities is akin to a Yorkie’s confidence that it can tackle a Rottweiler.  The terrier can indeed get in a few painful nips, but bring the big dog down?  It could if sanctions worked.  But, they don’t.  The more Treasury persuades itself they do, the faster U.S. might dissipates thanks to resolute attacks and internal insouciance.

Why has U.S. soft power gone so squishy?  Some problems are of the U.S.’s making, some not, but all pose a significant challenge as the world has again become a very dangerous place for a faltering super-power that not-unreasonably still thinks of itself as the bastion of democracy.

As I noted in a talk last week, one foundation of American might has long been the “Almighty dollar.”  As a lot of data make clear, the dollar remains potent, but it’s no longer decisive.  Nations come and go as reserve-currency issuers and the U.S. is going because, as I detail, it’s squandered the payment-system, financial-market efficacy, sovereign-obligation impregnability, and unquestioned rule-of-law pillars on which reserve-currency status rests.  Enemies wielding currencies they seek to turn into global go-tos combined with the anonymity and evasion power of digital assets don’t help, but the U.S. seems to be doing its damnedest to speed the dollar’s demise not by express action, but rather by unfounded assumptions that, …

21 03, 2022

Karen Petrou: How to Set Course to a Digital Future

2023-04-03T13:18:42-04:00March 21st, 2022|The Vault|

Last week, we laid out the macrofinancial implications of the Ukraine crisis – i.e., its impact on the global financial-and-regulatory order.  Some of this analysis is founded on President Biden’s digital-asset executive order, which also has profound and immediate impact on critical macroprudential issues at the border of innovation and regulation to which we now turn.  To forecast how digitalization will come upon us, the digital-asset order must be read in the Administration’s broader context in which high-impact political issues, such as racial equity, weigh at least as heavily as the complexities of CBDC or even the benefit of a future financial crises foregone.

Administration policy based on Democratic politics is set not only by the digital-asset order, but also by other White House directives that will define the boundaries of what Treasury and the agencies – the Fed included at least to a point – will do.  To forecast digital-asset policy, one must thus also divine the outcome of two other executive orders.

First, there’s the President’s competition directive.  Every critical consumer-protection question under the CFPB’s purview is now considered first and foremost in terms of competition, with the agency’s director making it manifestly clear that almost anything done by any big bank is a target for structural reform.  Director Chopra doesn’t like fintech or biotech much better than most banks do, but his approach to digital assets is likely only to squelch big banks as much as he can and thus to drive cryptoassets further into …

14 03, 2022

Karen Petrou: The Collapse of the Global Financial Order and What’s to Come

2023-04-03T15:09:21-04:00March 14th, 2022|The Vault|

The Great Depression’s role sparking the Second World War led the victors to create the Bretton Woods agreement establishing stable reserve assets under-girding a world prosperous and peaceful enough to prevent another conflagration.  After 2008, the world reinforced another set of global norms, setting cross-border financial standards over the next fifteen years by newly empowered transnational financial agencies.  Now, what was left of Bretton Woods is in ashes and national geopolitical interests will again dictate critical financial requirements.  Although it’s of course possible that Russia’s devastating invasion will end without still more cataclysmic carnage, it has done irreparable damage to the largely frictionless cross-border finance on which it and its oligarchs relied.  China should take a lesson.

To be sure, this globalized and increasingly financialized construct was imperfect even for the hegemonic states and systemic financial companies in whose interests it worked the best.  As Rana Foroohar pointed out last week, it was premised on the optimistic “end of history” reasoning that expected an interdependent world to be all-for one and one-for-all.  Quite simply, if you must go through someone else’s space to get where you want to go, then you are more likely to abide by the rules applicable in that space to ensure you get there.  Over time, this creates a macrofinancial system in which currencies, payments, assets, and risks moved with few speedbumps from one end of the earth to the other.  Even where rules might slow all of this down, safe-haven states constructed high-price bypasses.  This, …

28 02, 2022

Karen Petrou: What’s to Come as SWIFT Sanctions Take Hold

2023-04-04T14:58:10-04:00February 28th, 2022|The Vault|

A few years back, I gave a speech at SWIFT’s annual meeting knowing little of what it did beyond the speakers I was invited to join.  While the meeting was in a cavernous conference center, the off-hours discussions in magnificent chateaus were small, serious, and — at least for me — insightful as to the awesome power of a seemingly-simple “messaging system”.  Now, of course, the world knows why Swift matters– indeed, Vladimir Putin is taking this so seriously that we’re all reminded of the literal meaning of the “nuclear option.” Putin is right –America’s “soft” economic power gives it a weapon of formidable might.

Will it backfire?  One of the questions I’ve repeatedly gotten over the weekend is whether U.S. banks can withstand market disruptions now or under even greater stress if sanctions expand to still more Russian banks and thereafter also to those still doing business with them.  In short, there is no doubt that banks in the U.S. will withstand near-term stress and even less-resilient ones in the EU and Japan will do the same.

The reason for this is the demonstrable certainty that central banks will intervene to ensure dollar liquidity across the world and financial-market liquidity wherever it seems threatened.  Unlike 2008 and 2020 when Fed windows were opened too wide and too long, this geopolitical crisis is of no financial firm or central bank’s making. What all this new money might do to already-bloated financial markets is yet to be known, but central banks …

21 01, 2022

Karen Petrou: Few Financial Fall-Out Shelters If Russia Invades Ukraine

2023-04-24T11:51:21-04:00January 21st, 2022|The Vault|

Perhaps nothing says as emphatically that market valuations are divorced from reality as the fact that equity and bond markets are essentially ignoring the increasing risk that Russia invades Ukraine.  Investors have grown used to shrugging off geopolitical risks – see just the brief chills after Russia’s previous invasions of Crimea and Georgia as cases in point.  But this time is different because this time Ukraine is a critical link in Europe’s energy supply, macroeconomic stress in Europe will have immediate global repercussions, and Vladimir Putin is making it more than clear that this time he’s not just playing around with minor nations he thinks of as vassal states.  This time, he will go to the economic map if he believes the Western response to his invasion might pose too much risk to Russia’s economy and his popularity and there’s no reason to doubt him.  As a result, I hope Treasury and the Fed are keeping a careful eye on the Treasury market and global payment system, not to mention on the cyber-security on which core market infrastructure rests.  The threat is all too real.

Treasury has long known that the “nuclear option” when it comes to economic sanctions is denying Russia access to any financial institution with any kind of domicile in the U.S. or any point of access to the U.S. payment system topped off by SWIFT sanctions blocking Russian access to the global payment system.  If Treasury fires these high-powered missiles – and it’s likely to have …

19 10, 2021

FedFin on: Banking Dems, GOP Demand More, Tougher Sanctions

2023-06-07T15:42:15-04:00October 19th, 2021|The Vault|

Today’s Senate Banking hearing with Treasury Deputy Secretary Wally Adeyemo showed bipartisan concern that the Administration is failing to implement sanctions required by law, especially when it comes to China, North Korea, and Russia.  Senators also stated that they will not tolerate what they call continued defiance of Congressional mandates without making clear what they intend to do to enforce their will should Treasury fail to act.

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