Weaponizing the US Dollar. Can It Work?

Yves here. Michael Hudson kindly provided an article to distill and extend some of his recent YouTube discussions about where US imperialism and the dollar are headed. Hudson’s makes clear that Trump’s aspirations (they have not yet been reduced to plans but soon will be) have considerable internal tensions and contradictions. But even though Trump seems intent on intensifying the use of the dollar as an implement of US power, and that seems certain to backfire eventually, as we have pointed out repeatedly, there are not any near or even intermediate-term alternatives. For instance, at the Kazan BRICS summit, the declaration reaffirmed that the participants expected the US-dominated IMF to be the lead actor in country rescues. This comes at a time, when Jomo and other development economists have warned, that financial crises look set to begin across many Global South countries. So even though terrible US stewardship ought to, on the merits, lead to a quick reversal, what seems more likely is lots of unnecessary harm (to the US and others) and more slow erosion.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization

Trump has promoted a number of plans to make America strong – at other countries’ expense. Given his “we win; you lose” motto, some of his plans would produce the opposite effect of what he imagines.

That would not be much of a change in U.S. policy. But I suggest that Hudson’s Law may be peaking under Trump: Every U.S. action attacking other countries tends to backfire and end up costing American policy at least twice as much.

We have seen it become normal for foreign countries to be the beneficiaries of U.S. policy aggression. This is most obviously the case for America’s trade sanctions against Russia. If the United States is not itself the loser (as in cutting the Nord Stream pipeline led to its soaring LNG exports), then its allies will bear the cost. The cost in a few years may be that the United States has lost Europe and NATO as a result of the pressure by European countries to declare their independence from U.S. policy.

To speed the parting European guest, NATO leaders are demanding sanctions against Russia and China, saying that “imports equal dependency.” What follows will be Russian and Chinese counter-sanctions blocking other raw-materials from sale to the EU.

 In past shows we’ve discussed Trump’s plan to raise U.S. tariffs, and to use them much like imposing against countries that seek to act in ways that don’t dovetail into U.S. foreign policy. There is a lot of pushback on this proposal from vested Republican interests, and ultimately it is Congress that must approve his proposals. So Trump probably threatens too many vested interests to make this a big fight early on in his administration. He’ll be busy fighting to clean up the FBI, CIA and the military that have been opposing him since 2016.

Will Trump’s Attempt to Weaponize the Dollar Succeed Any Better Than the U.S. Trade sanctions?

The real wild card may turn out to be Trump’s threats weaponize the dollar. At least that foreign-policy sphere is more under control of his Executive Branch. Along with his drive to control the world’s oil trade and key media platforms, Trump wants to be able to hurt other countries. That is his idea of a negotiation and being transactional.

In the weekend edition of the Financial Times, Gillian Tett’s article on Trump’s proposed “Maganomics” quotes Stanford professor Matteo Maggiori pointing out that national power “touches not just goods, but money too. We estimate that the US geoeconomic power relies on financial services, while Chinese power relies on manufacturing.”[1]

 So, along with aiming to control the world’s oil and LNG supply, Trump wants to base US power on its financial system. He recently threatened to punish BRICS countries to seek an alternative to the dollar.

That strategy is based on countries needing access to U.S. dollars and financial markets, just as they need oil and information technology under U.S. commercial control. The US tried blocking Russia and other countries from the SWIFT bank-clearing system, but as usually happens with sanctions, Russia and China have created their own fallback system, so that plan didn’t work.

The United States got the Bank of England to confiscate Venezuela’s gold supply and offer it to the right-wing opposition. That worked. And the EU and United States together confiscated Russia’s $300 billion of foreign dollar holdings. That worked, and the EU just gave the interest (about $50 billion that had accumulated) to Ukraine to help fight Russia.

But first, the United States seized all of Ukraine’s monetary reserves as safe keeping, ostensibly to help it pay back the debts it has been running up. I don’t think this gold will be made available for Ukraine’s rebuilding. It simply reflects a U.S. pattern of asset grabs. The U.S. military grabbed Libya’s gold supply when Gaddafi tried to use it to create an African gold-based alternative to the dollar for central banks to hold. And the US also grabbed Syria’s gold supply on its way out, leaving only the oil exports as a U.S. trophy of its conquest. It did the same with Afghanistan’s gold reserves on the way out. So obviously the United States anticipates gold returning to a major role in the world’s monetary system. (To add insult to injury, when U.S. officials finally gave back Iran money that it had seized from its reserves, it called this a gift and Congress attacked the act.)

 The big question is how aggressive U.S. financial policy can work over the long run? Will it drive other countries away? Will it become as self-defeating as other U.S. international game-playing?

Let’s Talk About How the World’s Monetary System Is Likely to Evolve in Response to American Attempt to Gain Financial Control

To me, any such attempt seems impossible to achieve. How can America or any other nation imagine that it can base its international power on finance alone? All countries can create finance and money. But not all countries can industrialize – or in the case of the United States and Germany, to re-industrialize.

The United States has deindustrialized, and its neoliberal privatization policies have loaded down the economy with an enormous overhead of debt service, health insurance costs and real estate costs. the FIRE sector (Finance, Insurance and Real Estates) has increased its share of reported GDP, but its income is not really for a “product” at all. It is a transfer payment from the production and consumption economy to the rentier sector. That makes America’s GDP much “emptier” than that of China and its socialized market economy. When the cost of credit and rents go up, so does GDP.

Money today is created on the computer. Any strong and self-sufficient nation or regional grouping can create its own money. They no longer need to base their money and debt on silver and gold bullion.

So I think that Trump is living in a past world – especially given the right-wing Republican “hard money” crowd pining for the old gold-exchange standard, insisting that government money creation is inherently inflationary (as if bank credit is not at all). I guess that’s what makes him a genius: He’s able to hold two opposing views at the same time, each with its own logic that contradicts his other view.

The United States was very strong in the bygone world when gold was the major asset of central banks. In the wake of World War II the U.S. Treasury was able to monopolize 80% of the monetary gold of the world’s central banks by 1950, when the Korean War broke out. Other countries needed dollars after World War II to buy U.S. exports, and to pay debts denominated in dollars, and they sold their gold to get these dollars.

But by 1971, U.S. foreign military spending had dissipated that control. The statistics that I compiled for Arthur Andersen in 1967 showed that the entire U.S. balance-of-payments deficit – the deficit that was draining U.S. gold – was U.S. military spending abroad. So the monetary reserves of central banks came to consist mainly of U.S. Treasury debt that they spent their dollar glut on. That was the change that my book Super Imperialism described in 1972. But U.S. attempts to weaponize finance has led countries not only to try to avoid holding more dollars, but to avoid leaving their gold in storage in the United States or Britain. Even Germany has asked for its gold reserves to be sent back to it from the New York Federal Reserve bank where much of Europe’s central bank gold holdings have been held since the 1930s saw a flood of flight capital to the United States as World War II was looming.

Like domestic currency, international money is debt, unless it is a pure asset such as gold. The US was able to replace gold with U.S. government and private debt largely because it provided a platform for international payments. That seemed to make it “as good as gold” for international reserves.

 This does not look like it’s going to be a permanent state of international affairs. Anyone can create money. But how do you get it accepted? That’s the problem facing the United States today. As U.S. debt grows, how long can it get the dollars accepted by other economies if there’s no inherent need for other countries to use it to make payments on their own foreign trade, lending and investment?

Money is public debt. Whether it is issued in paper or electronically, it preserves its value ultimately by being accepted to be paid in taxes. But Trump and the Republicans want to cut taxes. If there’s no need to obtain dollars to pay taxes, why hold them?

The Foreign Debt Tangle

One support for the dollar is the need for Global South and other debtor economies to obtain dollars to pay the foreign debts that they have run up. But how long can this last? Here’s the problem: If they pay the foreign debts that they have run up by following destructive IMF, World Bank and other Washington Consensus policies, they will not have money to invest in their own economic growth. Whose interests will they put first: those of U.S. bondholders and banks, or those of their own economy?

Stated another way: How long will debtor countries agree to remain in a system that had promised to help them grow, when all it has done is leave them further in debt and forced them to sell off mineral rights, infrastructure and public enterprise to raise the money to pay these debts in order to maintain their exchange rates? The system is rigged against them.

This problem is being exacerbated today by the dollar’s rising exchange rate against many other currencies. Trump’s ideas are very muddled in trying to confront this problem. On the one hand he has talked about wanting a lower exchange rate for the dollar. He believes that competitive devaluation would somehow be able to make U.S. exports more competitive. But the U.S. economy already is too de-industrialized under neoliberalism to rebuild its industrial power in the foreseeable future. So forcing the dollar lower is impractical as a means of spurring U.S. exports.

Trump has spoken about reducing interest rates to help fuel a stock and bond-market boom. For many countries – such as Canada – lowering interest rates leads to a capital outflow to foreign countries paying higher rates. But the U.S. economy is different. QE’s lowering of interest rates actually attracted foreign capital, thus raising the dollar’s exchange rate. Lowering U.S. interest rates after Paul Volcker’s interest-rate peak of 20% in 1980 led the biggest bond market rally in history, along with a booming stock market attracting international investors.

For starters, anticipation of Trump’s policies have been driving it way up. Just since last October the Canadian dollar’s exchange rate has depreciated so that the US dollar buys C$1.44 up from C$1.34. The price of a euro against the US dollar has fallen from $1.12 to $1.03. And the currencies of Global South countries are under heavy pressure as a result of trying to keep current on their US dollar bonds and other loans denominated in dollars.

So for better or worse, it looks like we’re in for a strong dollar this year. And Trump has made it clear that he wants to keep the dollar’s “exorbitant privilege” of being able to simply prin money, leaving other countries to keep their currencies from appreciating and hurting their exports by recycling their dollar inflows to keep buying US Treasury IOUs. But these IOUs are soaring as the budget deficit explodes.

A related problem is how long easy Federal Reserve credit can keep inflating stock and bond prices, given the rise in arrears and defaults. The largest threat is that of commercial real estate, whose schedule mortgage payments exceed current rental income as older buildings face rising vacancy rates. Take commercial real estate. 40% occupancy rates in old buildings. And they can’t be gentrified for residential use, because they don’t have open windows for fresh air, or good views—or neighborhood support.  Like London’s financial City area, Wall Street and other U.S. financial centers in high-rise glass buildings no amenities, views, mixed-use neighborhoods, or fresh air from  opening windows.

In the consumer sector, automobile loans, credit-card debt and student loans are falling deeper into arrears.

Something has to give. And this will affect not only U.S. financial markets, but the balance of payments as foreign capital flees to safety by leaving the United States. That would be the first time in more than a century when this flight to safety is away from the United States, not to it.

The U.S. economy has been re-designed to inflate financial gains, even while de-industrializing by outsourcing its labor force. So what seemed to be U.S. industrial has been replaced by financialized de-industrialization.

That means that the drive by BRICS to defend themselves collectively against U.S. hegemony implies really a fundamental broad and split in what is a desirable way to organize economies. opposing finance capitalism as predatory. Esp. as Trump is trying to push it, by imposing sanctions against countries moving away from dollars.

[1] Gillian Tett, “That is Maganomics,” Financial Times, January 4, 2025.