How to Lose Friends and Make People Hate You
The New York Times reports that American prosecutors, in the wake of the decision against French bank BNP Paribas, have shifted their attention now towards German banks. Just as in its conduct of foreign policy, the US government fails to appreciate the concept of “blowback” in its heavy-handed treatment of foreign banks.
This is one of the major problems with having a banking system that is set up and controlled by the government. Unlike a true market-based banking system that is geared towards providing services to consumers, the current banking monopoly in the United States is often treated as an adjunct of the government and as just another tool in the arsenal of the government’s imperialist foreign policy.
Because of the dollar’s status as the world reserve currency, the US government has seen fit to pass sanctions bills that threaten to cut off foreign banks from the US banking system if they do business with banks or individuals from certain countries, usually Iran, North Korea, and Sudan. Since the dollar is still the world’s major currency and used in so many international transactions, especially purchases of oil, foreign banks are really over a barrel. If they fail to comply with American legislation, not only do they face fines, but they also might find themselves cut off from any ability to do business in dollars.
This situation will not last forever. You can only go around punching your friends in the mouth so long before they are no longer your friends. In the wake of the BNP Paribas incident, the French have already indicated that they would seek to move away from the dollar when engaging in international transactions. We can imagine that the Germans will now seek to do the same, whether they state that openly or not. While the United States’ heavy-handedness towards European banks may solve its short-term desire to deny funding to countries the US seeks to punish, in the long term it will lead to a shift away from the dollar and a corresponding decline in U.S. influence in the international arena.
Ever since the Bretton Woods agreement was signed near the end of World War II, the dollar has been the dominant world currency. For 70 years, the United States has profited from that. Under the gold exchange standard the US printed more money than it could redeem for gold, benefiting from exporting inflation to its allies. Once Europe got wise and began to demand gold, the US sought to delay and delay, and finally closed the gold window in 1971. Since then the US government has engaged in an orgy of debt-based spending, relying on foreign investors to purchase its debt and allow it to continue living beyond its means. But the rest of the world is tired of having to continue sacrificing its own well-being to fund American extravagance.
When the only thing propping up the dollar’s value is the willingness of friendly foreign nations to do business in dollars and dollar-denominated assets, providing them with extra incentives not to have anything to do with your currency and your banking system will only increase the speed at which your currency loses its status as the primary reserve currency. Just as with the Federal Reserve’s loose monetary policy, the focus on short-term benefits will lead in the long term to economic collapse.
Reprinted with permission from the Carl Menger Center for the Study of Money and Banking.