It has been quite a while since we addressed the issue of the war to defend Ukraine’s borders.  Making predictions can prove painful when you put them in print.  But our assertion some time ago was that Ukraine would not likely prevail in a war against a larger adversary when the West will not widen the war.  Unless Ukraine can hit deep into Russia and disrupt the transportation and production of war material, we did not think they could win a purely defensive war of attrition.

So far, that prediction has withstood the test of time.

Ukraine remains outnumbered in men and artillery and the US and its allies have no clear definition of what winning looks like. We still have no clear goals and timetables to end this conflict.

The much-vaunted Ukrainian spring offensive went nowhere, Ukrainian losses were terrible, and they are now drafting men up to the age of 60.

Russian losses have been severe as well, but they have a 10:1 population advantage.

We would add that just because we think the war can’t be won and that US policy is flawed, does not mean we support Putin.  He is a tyrant and an international gangster. But he has the support of China and the US is largely silent about that, content to keep buying just about everything they are making and training their future engineers in our best universities.  If we were serious about winning the war, we would not continue to treat China with kid gloves.

As a general rule, a nation should not commit to war if it does not know what constitutes victory and is committed to achieving that end.

Obama let Putin seize Crimea, Putin went silent under Trump, and then broke out after Biden’s foolish statement about “It’s one thing if it’s a minor incursion and we end up having to fight about what to do and not do.”  What is, after all, a minor incursion?  Who is fighting about what to do or not do?  Dementia is not helpful with a commander-in-chief.

But one of the policy reactions taken by the US caught our attention and we said at the time we thought it had the potential for unexpected and serious consequences.  Excuse the self-quotation:

“As a peripheral matter, the US is doing some very strange things that can do significant long-term damage to ourselves. It is not just the tremendous expense and the drawdown of our own inventory of missiles and equipment.

Seizing Russian foreign reserves, with no judicial process at all, simply on the whim of the US, has demonstrated that the US dollar is not a safe place to put your foreign reserves. China, India, and Middle Eastern dictatorships, all took note of this. This has the potential to upend the entire post-war monetary framework built up after the Bretton-Woods Treaty.

The US has profited immensely by having the dollar as the reserve currency of the world and the oil settlement currency of the world. Did we just blow that up for a war we can’t possibly win?”

It appears that after having seized Russian reserves, the US and its European allies are now seriously contemplating stealing this $300 billion of frozen reserves and using it to support the Ukranian war effort.  The idea has been floated in the Wall Street Journal and the Financial Times.  

The FT notes: “The idea has gained traction in recent weeks as the US and EU struggle to secure political approval for fresh funding packages for Ukraine worth tens of billions of dollars. But legal experts warn it would represent a dramatic departure from normal practice, carrying legal and economic risks. It is also highly contentious among the allies.”

The WSJ says:” With Congress blocking funding for Ukraine, there is renewed impetus in Washington to find other sources of long-term financial support.”

Whether the cash is used directly or the funds are used as collateral for loans, we are stealing the Russian’s money.

We can’t think of a more serious way to undermine the role of the US dollar as the reserve currency of the world and all the advantages that that status has given to the United States since the end of WWII.

First, with no judicial procedure, you seize another country’s assets, and then you steal them to use them in a war against themselves.  Clever, but unprecedented outside of war. We froze Iranian reserves, and then Obama returned them with planeloads of cash, remember?  But, the US is not at war with Russia…or are we?

Moreover, this is a blatant attempt to undermine the Constitutional powers of Congress to appropriate money.  They are our elected representatives, not NATO bureaucrats.  Talk about undermining democracy!  Congress, for good reasons, is balking at further open-ended support of the war.  Apparently, Biden thinks he can go it alone by stealing Russian assets and going around Congress regarding appropriations and war-making powers.

Advocates say they have a good legal case to proceed.  We doubt that.  Seizing assets in war has been permitted, but we are not “at war” with Russia.  There has been neither a Declaration of War against Russia nor even a War Powers Resolution.  Ukraine is not part of the NATO alliance, so treaties have not committed us to their defense. The US is deeply divided on this issue and if Europe felt so fondly for this war, they would meet or exceed their defense appropriations pledges. They have not.  Stealing Russian money means not having to get consent from your own citizens.

It is an end run around democracy and Constitutional procedures.

Furthermore, look at the signal this conveys to countries that park their balance of trade surpluses in US dollar reserves.  It sets a precedent for any country getting crossways with the US. Countries like China, Japan, India, and Saudi Arabia are taking notice.  We are basically saying, that we can freeze your funds anytime WE think it is appropriate, and we may go beyond freezing to stealing your money.

With that being said, who would be dumb enough to park their excess monetary reserves in US dollars in Western Banks?  Why would you want to conduct business in US dollars, knowing that during the process, you might be subjected to non-judicial seizure of your funds?

We doubt the average American has the faintest clue as to how important our “reserve” status has been and how it has subsidized our standard of living.  We are the only nation that can print money to pay for both internal and external debts.  We can print money out of thin air and use that to purchase oil, copper, or any other valuable commodity we might need in both peacetime and war.

Further, when nations hold US dollars, they mostly do so in the form of bonds.  Their willingness to hold dollars helps the US government finance the deficit.  Absent large foreign purchases of dollar-denominated bonds, our expanding deficits would have to be financed solely by domestic investors.  If you reduce the demand for bonds, you lower their price, which is the same thing as increasing interest rates.

It is also worth noting that this is not like seizing bank accounts for say, a group on the terrorist list.  This is taking the property of a large country with nuclear weapons and a country that currently is leading the charge through the BRIC nations to dethrone the US dollar.

Incidentally, the development of a BRICS block of countries, that will settle trade among themselves in local currencies (not US dollars), reduces the demand for dollars. Falling demand likely means a weaker dollar, which means the costs of all imported goods will rise.  A casual inspection of where goods come from by visiting the local Wal-Mart would suggest a weak dollar will hurt US consumers badly.  Again, this could lead to higher inflation and interest rates.

Either our leaders are quite ignorant and just don’t know the implications of what they are proposing, or they do know and just don’t care.

BRICS started as just a few nations (Brazil, Russia, India, China, and South Africa) but as of last summer, over 40 nations had joined, including big Mid-East oil producers.  The next meeting in the fall will be in…Russia.

We would also note that these nations do not entirely trust each other or the US and are seeking a neutral international reserve asset that they can hold outside of the dollar-dominated Western banking system. This perhaps explains the reason for the largest central bank purchases of gold since the end of Bretton Woods over fifty years ago.

The center of the gold market has now moved from London and New York east to China.  The largest physical market in the world now is Shanghei.

Gold is the sole international banking asset that is not someone else’s liability.  It is not a promise to pay from the US and it can’t be printed out of thin air.  And you can hold it in your own vaults, outside of the weaponized international banking system.  The world operated on a gold standard for centuries, so it is not unproven as are cryptocurrencies. It can’t get hacked or have accounts frozen.  If you have it in possession, the holder controls the asset.

It will be interesting to see if this proposal to fund the war with stolen Russian assets proceeds.

If it does, we suggest it will do wonders for the gold price, but unfortunately, it will significantly lower the standard of living for Americans and likely cause higher interest rates than otherwise would be.  It could cause a breakdown in the international monetary order, just in time to take on a massive debt crisis.

This is like threatening a burglar with a shotgun and then blowing off your own feet.