From Fed Guy (personal views of a former fed trader) March 7:
The banking system is built on trust that the money one places in the
care of others will be there when needed. This is as true for the
retail investor with deposits at the local commercial bank, as it is for
the sovereign with FX deposits at a foreign central bank. Hard earned
trust is part of the magic that enables developed market sovereigns to
massively deficit spend with limited consequence. The world happily
holds their liabilities, be it in the form of deposits or sovereign
debt. But that trust is weakened when sovereigns are seizing the assets
of their own citizens and other sovereigns without due process of law.
The liabilities of the banking sector and sovereign then cease to be risk free assets.
Foreign sovereigns must now diversify as a matter of national security,
and some citizens must now diversify as a matter of self preservation.
This regime change can force a wild scramble into stores of value
outside of the banking system including gold, real estate and even
crypto.
Financial WMDs
Western
sovereigns appear to increasing view the banking system as an efficient
weapon for enemies both abroad and within. Targeted financial sanctions
have the advantage of quickly subduing without the death and
destruction of conventional weapons. The Russian economy was brought to
its knees overnight through sanctions that effectively confiscated the deposits the Central Bank of Russia (“CBR”) held at major central banks. There is even ongoing discussion of confiscating
the CBR’s assets held at the IMF. Without access to its foreign
reserves, the CBR was unable to defend the ruble from significant
outflows and watched helplessly as it collapsed by 50%.
Ruble depreciated 25% against the dollar overnight then continued to bleed
[already out-of-date. 132.7500 -5.5000 last after getting as weak as 154.7150 roubles to buy a dollar]
Canada also recently deployed similar measures against its own citizens. Canadian Prime Minister Trudeau invoked emergency powers to seize the bank accounts of truckers protesting pandemic related restrictions. Reports also suggested
that donors who made legal donations to the protestors were prosecuted
based on a retroactive application of the order. Protestors lost assets
without any warning, due process of law, or potential recourse. Although
this happened in Canada, many outside Canada took note and interpreted
it in light of the rapid expansion of government power they see in their
own countries. They realize that money in a bank can go poof at anytime
regardless of deposit insurance.
Just in Case
Sovereigns
across the world are now all alerted to sizable tail risk that they must
manage. Foreign reserve managers are a risk averse group who are far,
far more interested in safety than profit. They will happily accept -5%
real yields, but even a remote prospect of losing all their assets is
completely unacceptable. They now understand that the US and EU view
banking sanctions as an effective tool that can even be deployed against
prominent members of the global community. Risk free assets are no
longer risk free.
Just as the unveiling of nuclear weapons in WWII
set off a global arms race, so this revelation will start a scramble
for alternatives. Any sovereign who aspires to conduct its affairs
without kowtowing to foreign powers must be able to survive the
confiscation of its foreign reserves. A quick glance shows enormous
vulnerabilities for China and India, who both interestingly voted “abstain”
on the UN resolution condemning Russian actions. Fiat currencies will
continue to be essential for global trade, but there is no point in
keeping so much if they may disappear when most needed. A much larger
gold allocation is a necessary safeguard against the existential risks
posed by financial sanctions.
China and India hold only a sliver of their fx reserves in gold.
Some members of the public will also hedge their assets in fear of government seizure. At least in the U.S., a sizable percentage of the population already perceive that they will lose their job or be
“cancelled” for holding dissenting opinions. Trudeau’s actions confirmed
their worst suspicions – “debanking” as a tool to suppress dissent....
