Fed Obfuscates on Inflation While Politicians Scapegoat Businesses

Mike Maharrey: Greetings, this is Mike Meharrey. I am a financial analyst and reporter for Money Metals and I'm here today with Saleha Mohsin. She is a senior correspondent, Washington correspondent and host of the Big Take DC podcast for Bloomberg News, and she's the author of a book that's just come out, Paper Soldiers: How the Weaponization of the Dollar Changed the World Order. Saleha, thank you so much for taking a little bit of time to chat today. I hope you're doing well.

Saleha Mohsin: It's so great to be here, Michael.

Mike Maharrey: Well, the first thing I want to do is just compliment you on writing a book that predominantly focuses on policy, but it honestly reads almost like a novel. You did a fantastic job of taking what could be a dreadfully boring, wonky subject and made it into a very interesting storytelling approach. And it's a really good read and I hope people won't be turned off by, "Oh, this is some kind of policy stuff." And I hope they'll pick this book up because you're going to learn a lot, but it's also, I don't know, there's a lot of interesting tidbits in it.

Saleha Mohsin: I appreciate that so much.

Mike Maharrey: Well, you're most welcome. Now, the first thing is I am very curious as to what motivated you to write this book. I mean, this isn't like the subject where you wake up one morning and think, ‘I'm going to write about the weaponization of the dollar.’ It's not exactly a top-of-mind subject. So what kind of motivated you to get into this subject?

Saleha Mohsin: I have covered government currency policy since 2013. I started off in Oslo, Norway for various reasons. That's where I was at the time in my life. And I started at Bloomberg and was a cub reporter. Didn't quite know exactly how the Bloomberg thing kind of went, but okay, I'm learning that currencies are a big deal. It tells you a lot about where the winds of policymaking are going. It can tell you a lot about how people are feeling about manufacturing, about foreign policy.

And so I learned about it in Norway in that context. And then in 2016 I came to the US and learned that, oh, well when you're covering the US Treasury Department, you're talking about the US dollar. And there was a whole other element to US currency policy, but I found that Treasury officials didn't really want to talk about it. There is this weird Kabuki game that yes, there's a currency policy, we don't like to talk about it. We defer to the Fed, the Fed defers to Treasury, the White House defers to Treasury. And it's this weird Bermuda Triangle and I'm a reporter and I thought, "Okay, well, I'm going to write a book on Treasury," because there's no other books just on Treasury, right? We've got Federal Reserve books, we've got autobiographies of Treasury secretaries, but no just Treasury book. I thought, "Well, let me cast this book about this department in a way that one tells you what the Treasury Department's role is in our lives, our ability to pursue the American dream, but also talk about the thing none of them want to talk about.

Mike Maharrey: That's fantastic. And you're absolutely right because I know for me, I tend to focus primarily on the Fed. And obviously in the spotlight they are kind of the dominant player in monetary policy, but the Treasury is a huge component of that and you do a really good job of laying that out. I learned a lot. I'll be honest, I haven't read the book cover to cover yet. I've skimmed and kind of gotten tidbits, but already learned a lot about how the Treasury fits into this equation. So I kind of want to start with a broad picture question for you. What do you mean when you say the weaponization of the dollar?

Saleha Mohsin: So there's two definitions to a strong dollar. There is one that is just the foreign exchange rate, how many foreign currencies our dollar can buy based on the laws of supply and demand and how the dollar is valued. The other definition is the dollar's hegemony. It's the fact that it is at the center of the global financial system. The world literally runs on dollars. You could be a multinational company, a oligarch, a tycoon. You could be someone who picks cocoa beans in Latin America somewhere. In order to engage in commerce and move goods or yourself around the world, you will be touching the global financial system, therefore you're touching the dollar.

That gives the US unique power because if the US controls the global financial system, controls money flows, that means it can encourage money flows when it wants to, and in the best case scenario, that's what it seeks to do. But it also can then police money flows and say, "Well, there is an entity," whether it's a foreign government, a central bank, a government official, an individual, a private company, a public company that is not abiding by our own foreign policy objectives, whether it's a humanitarian cause or causing volatility or political tensions in a region in the world like the Middle East or Asia or Europe. And the US can say, "Well then you no longer have the privilege of using the dollar." And that's the blunt way. Usually, it's a spectrum. We're going to start restricting your use of the dollar, that kind of stuff. And that can cause a country or a company to really lose out economically. It has a huge impact.

And so that has been used a lot. Those are economic sanctions. And in the past two and a half decades, the US has seen its use of sanctions rise by almost 1000%. And so the dollar is being used as a cudgel a lot. And so there are allies and adversaries both who are saying, "Well, do we really want to deal with the dollar if there's so many strings attached to it?"

Mike Maharrey: Yeah. With great power comes great responsibility, right?

Saleha Mohsin: Peter Parker every time.

Mike Maharrey: Yeah. It's interesting to me because when you start talking about this, I think most average Americans look at sanctions as kind of the kinder, gentler warfare, that there's really no consequences to it. We can kind of nudge these belligerent nations to do what we need them to do without having to go to the extreme of lobbing missiles or bombs or that type of things. Of course too, the two often go hand in hand. But I think people are generally more favorable of what is really economic warfare as opposed to hot warfare. But I think you would probably agree that there are downsides to that. Can you kind of speak on that? What are some of the downsides of using economic sanctions as a policy tool?

Saleha Mohsin: It depends on who you are. If you're the US or you're aligned and allied with the US, the benefits are that the US can export its own foreign policy goals and agenda. The pros for allies is that okay, the US is here to protect and provide global security and peace, which as the owner of the world's reserve asset, also the world's largest economy, the superpower that the US is, that's a role that it plays.

The downsides to an adversary are obvious, right? You're cut off from the global financial system. You have to find other ways to trade and engage in commerce, and it can be quite painful. Other currencies are not quite as easily exchangeable in the markets. Not everyone wants Indian rupees. If you've sold everything and gotten rupees, you can't exchange that for goods and services as easily.

The cons for the US and its allies are that the more sanctions are used, the more other countries are coming together and having a substantive debate and dialogue about finding ways to work around the dollar. So kind of going into the financial systems plumbing and seeing can we create some new pipes here and work so that we're not touching the dollar and then we're not so beholden to the US and its goals.

Mike Maharrey: I saw an article yesterday that reported that there are some 40 countries that have now applied for membership in BRICS. How much do you think that this kind of US dollar policy might be driving the expansion of that economic block in both size and influence?

Saleha Mohsin: I think the world has gone from being kind of somewhat unipolar, built around the US, to a little bit more multipolar, where there are other countries that are gaining more power and finding that having alliances mean that you can kind of gather the strength of a couple of countries. So the BRICS, that's Brazil, Russia, India, China and South Africa, are trying to include some of the Gulf States, oil-producing nations like Saudi Arabia, the United Arab Emirates, to say why don't you join us as we try to reduce exposure to the dollar? And that's interesting, right? Because since the 70s or maybe earlier, most oil trades and contracts are settled in dollars. That was by design. It was a deal. And it kind of created this concept of petrodollars, of another way of having even more dollars in the system because everything has to be settled in dollars. And if the de-dollarization bid is successful, that means we've seen more oil transactions, commodities generally converting away from dollar transactions.

And so it's a solid effort. On the one hand, people say, "Oh, well, every decade has a new threat." In the 90s it was, "Oh, the Japanese yen is going to supplant the dollar." In the early 2000s it was maybe the Euro could take its reign, and now maybe it's the Yuan or Bitcoin or the BRICS currency. The difference is that this is the first time in more than half a century that the G20 club or the sort of the post-War World II Bretton Wood era, economic brotherhood is kind of coming apart and that feels a little bit different.

Mike Maharrey: Yeah. Yeah, I agree completely. And I think that... I like the term multipolar. I think that's a really good way to describe it because it's not like the dollars, there's an imminent collapse, but you are seeing efforts to create alternative payment systems and alternative... Again, doing business and other currencies and whatnot. And would you agree that even a modest diminishment of the number of dollars that are necessary out there is going to have economic consequences for the United States because we kind of depend on all of these dollars in order to be able to keep creating dollars here at home in order to sustain the borrowing and spending, right?

Saleha Mohsin: Well, we've already had a modest diminishing power because we're seeing that central bank reserves are dipping. It used to be, oh, most of them, 90% or 70%, and now it's like 60% of those holdings are dollars. There's a few other ways that you can cut the data that shows a modest dip.

I actually think that as a world reserve asset, it doesn't have to be quite the central frugal force that the dollar currently is to maintain its status as the world's reserve asset. If it were to diminish its current standing by just a little bit, even more, a bit more, but modestly, it could still be the world's reserve asset, still be very influential because it is deeply entrenched. It's like the English language is the lingua franca of the world. It will be very hard to significantly remove the dollar the way financial technology has evolved and moved.

And so if there's a bit of a diversification, there might not be anything wrong with that. I think it's still an adjustment for the US to see that, oh, we don't quite have the same heft and power, but that means responsibility can also be distributed, and we are seeing more inward-looking populist, domestic economic policies, and maybe some of that would give space for domestic economic policymakers to focus on what the country needs. Because ultimately, if the US is a strong economy and the world relies on the American consumer for global growth, nothing can really take that power away from the US. The US is the world's largest economy. You would have to take numbers two, three, and four, put them together to get bigger than the US. So a modestly diminished role for the dollar wouldn't have a huge impact.

Mike Maharrey: Okay. I can accept that argument for sure. You mentioned domestic policy, and this was interesting to me because when I first saw the title of the book, I assumed that it was going to primarily focus on foreign policy and the interaction with US government and other countries, but you actually spend a lot of time focusing on what you call domestic threats to the dollar. Can you kind of highlight a few of those that you think are maybe particularly significant?

Saleha Mohsin: Yeah. You and I, Mike, have already talked about some of the foreign threats, but what I argue in the book is that no foreign threat can actually hurt us the way an internal one could. Like I said, as long as we're strong, no one can touch us. But okay, let's examine our strength then, because the reason we are the owner of the world's reserve asset, this happened by design in 1944. The world came together and looked at the US and said, "You're it." And the reason it has had that, that it has endured is because the US has a strong and stable democracy.

One genesis of this book for me was that after the January 6th insurrection, Bob Rubin, the storied Clinton era Treasury Secretary wrote a column and he said, he had one line in it that said, "Faith in democracy and faith in markets go hand in hand." And that's when I realized, it really drove it home for me that the world relies on the US and the world has an insatiable appetite for US Treasuries no matter how many we issue, or when there's volatility somewhere else in the world like last week, Iran and Israel, the US dollar was a safe haven. That status has been preserved because we have rule of law, we have free and fair elections, we have independent institutions like the Federal Reserve cannot be politicized. The Supreme Court is independent. So all of these things underpin the dollar's hegemony. And if those things are being questioned right now, then that means our dollar strength could be questioned.

Now, I think the reason we're a strong democracy is because we are willing to be self-critical, and that plays out very publicly. And so we are in a self-critical moment. This has happened in our history many times before. We forget and dismiss those occurrences because we see that it was eventually wrapped up and taken care of and now we're still here. And right now you can't really see your way out. But if we can emerge from this, and if our trajectory continues as it has historically, then the world kind of knows that they will always... In 50 years, they will have a stable democracy, predictable elections meaning predictable, not predictable, like who's going to win, but just the electorate chooses. That means the business environment that they offer is also predictable.

Now, let's talk about what some of the internal threats are right now. We have election interference from foreign countries. Also, we have people questioning election results in the country, wondering about our own election integrity. We also just have a deeply divided country, not just the lawmakers, but the constituents. The biggest threat to the dollar right now is our deficit, right? $34 trillion. No other country with our fiscal profile could issue this much debt. And still people still want to soak up Treasuries. But to address that, you need bipartisanship. It's tough decisions to cut spending, and then those lawmakers need to sell it to the public. And unless there's unity, you can't really get there.

Mike Maharrey: Yeah, I think that's a really good point. And I talk about this a lot. I'm convinced that the United States has a significant spending problem, and we have a partisan environment where Republicans finger-point at Democrats, Democrats are finger-pointing at Republicans, but they're both spending trillions of dollars. And I think people get so caught up in the politics and the red team, blue team stuff that they miss the bigger picture. Would you agree with that?

Saleha Mohsin: Oh, absolutely. Deficits are not a sexy topic to try to get voters excited about, but it matters. But also we're just living in a period where there's a dog whistle, where there's certain keywords that get the woke side angry, and there's certain keywords that get the really ultra-right or conservatives angry. And the middle is just this helpless gap. And no one is willing or able to agree on basic facts.

Mike Maharrey: Yeah. And I am not really sure what the solution to that is, to be honest with you. Sometimes I think it's going to require some type of crisis to kind of pull people, their heads out of the sand so to speak.

I want to kind of back up and just touch on something that I found pretty significant. You have a chapter that kind of starts off with the whole situation with 9/11, and I felt like you were kind of making a case that that really put the dollar on the weaponization path. What do you see as the significance of 9/11? How did that turn policy even more strongly towards this kind of weaponization path?

Saleha Mohsin: Yeah, Mike, so before 9/11, Treasury's economic sanctions unit called the Office of Foreign Assets Control, OFAC, which has been around for decades, many, many decades, way before 9/11, it was considered an orphan of Treasury. There was no undersecretary sort of assigned to it. The Treasury Secretary of the day rarely paid attention to it. Economic sanctions were these blunt tools, embargo on Cuba, does it work? We don't really know. With 9/11, what came forth very quickly was that the terrorists used money to finance the attack. Those Twin Towers, it cost, at the time it was like 300,000 or $400,000, and it moved in broad daylight in banks that we all know and can name [inaudible 00:20:25] in increments of 5,000 or $7,000. And that's using the global financial system. It's using the dollar.

So the US realized, okay, so let's, first of all, we can use our power and authority as the owner of the reserve asset to track how that money is being flowed through the system from terrorists into the system, money being raised, using open accounts, and then financing this, and let's stop that. But also once we know who the terrorists are and the bad actors are, let's remove them, cut off their access to the dollar. If they're going to use our dollar, the global financial system for malign activities, then you're done. You lost that privilege.

So I think what people forget, and I didn't really realize that the very first act that George W. Bush took to launch his war on terror was not a military tank rolling into a country or US troops boarding a plane and going overseas. The first act was authority given to the Treasury Department to apply economic sanctions and to track financial flows and track the financial footprints of terrorists. And that's where it started. That's when economic sanctions since 9/11 have become incredibly sophisticated tools.

Now they're not a policy, they are a tool of foreign policy and geopolitical objectives and we've seen that evolve to the point where the USA PATRIOT Act, there's a lot of things that people remember about it. One thing that's a little bit less memorable to the average person is that it changed, it reorganized government. So now we had the Department of Homeland Security created, and also at Treasury, they got a whole new unit called the Terrorism and Financial Intelligence Unit to do exactly what the title of the office says. And now it was also a new home for OFAC, the sanctions unit with its own undersecretary and with Treasury secretaries paying closer attention to what they were doing.

Mike Maharrey: Yeah, I don't think you can understate the impact of the PATRIOT Act and some of the other legislation that came out of the post-9/11 years from surveillance to these financial tools that you're talking about, all of which it's kind of a double-edged sword, right? Because they can be used in a positive way, and yet they can also be very dangerous, as we've seen with some of the overreach that I would argue that there's been with the surveillance.

How can the United States moving forward, and we'll kind of wrap up with this, how do you think that the US can kind of balance those two things? That these can be tools that can be used for positive and yet pushed too far they can be horribly, not to overstate, but even tyrannical.

Saleha Mohsin: Yeah, that's such a great question and a good place to end. Well, in Paper Soldiers, I take readers, like you said, it's a bit of a novel. I take you through history of how the US became this dominant country through the lens of currency policy, how Treasury's work has actually helped allow Americans to pursue the American dream. And I take readers into not just the halls of power, the Oval Office, Congress, the Treasury Department of course, and around the world for these G7 and G20 meetings. I've traveled to a lot of these foreign finance ministries, interviewed Treasury secretaries on planes, trains, automobiles. I also take you into the heartland.

I'm from Cincinnati, Ohio, right? So I'm going to imbue some of that in there. So I take you to Moraine, Ohio, I take you to Weirton, West Virginia to see what the effects of the US currency policy through globalization has been, how that's panned out. I think that the... The second sentence of the book is, "All empires think they're special, but all empires fall." Now, the US isn't an empire in the historic or traditional sense, but we're a superpower. None of us can imagine the US with diminished power or falling, but I think that complacency is never going to be the answer. I end the book with American optimism that we can figure it out because we've always figured it out before, but let's not just hope that we're going to pull it out of the bag every time.

It's a scary moment that we're in. 2024 elections are unfolding right now. The American people, this is in the electorate's hands what happens next with American power. And that will come down, I don't want to say trickle down, but it will trickle down, not in the economic sense, but it will trickle down to everyone's lives and livelihoods and future generations. Can we afford to have the kind of fiscal spending that promotes innovation? Why is Google and Apple, all these big companies, they originate in the US because we spur that kind of innovativeness, and that all comes from the power of our economy and the power of our dollar. So I think that as long as we can come together as a democracy, that's just the line that I keep coming back to, then no one can really touch that strength.

Mike Maharrey: Yeah, that's a fantastic answer. So where can folks find the book?

Saleha Mohsin: Oh, Paper Soldiers is available wherever you can buy books and audiobooks, Barnes & Noble, you can go in and buy. You can buy it online at Amazon, your favorite independent bookstore, or the audiobook or the E-book.

Mike Maharrey: Do it because as she said, she does a fantastic job of really making it a story. I love there's actually a cast of characters at the beginning of this book, which they're real people.

Saleha Mohsin: There is.

Mike Maharrey: Yes. But they're real people. And I love that each chapter kind of starts off with, it's kind of anecdotal, very much humanizes these folks and kind of gets you out of this mindset that is all about policy. So I really think you've done a fantastic job with the book. I highly recommend it and appreciate your work on this subject because it's an important one.

Saleha Mohsin: Thank you so much.

Mike Maharrey: Well, you're very welcome, and thank you for coming on the show.