How Financial Warfare Could Bring America to Its Knees

Financial warfare is coming to the fore. It’s something that’s been talked about for some years, but now it’s actually being played out and practiced. Since 2012 the United States has been in a financial war with Iran. It’s not a shooting war, we’re not invading Iran, but because of their nuclear ambitions, the U.S. has tried to isolate Iran. We kicked them out of the dollar payment system so Iran could not transact in dollars. They said, well who cares, we’ll just transact in Euros or Yen or other currencies.

So, then the United States got together with our allies and kicked Iran out of the international payment system, so suddenly they were at a point where they could ship oil, but they couldn’t get paid, at least not get paid in any currency that they would actually want. So, they started doing workarounds, barter deals, they put hard currency in Chinese and Russian banks and let those Chinese and Russian banks front for them to the international payment system. So the money was moving, but it looked like it was coming from Russia, and not from Iran, and Russia never disclosed who is the real party in interest.

There was a run on the bank and Iran’s people wanted to get their local currency out, convert to dollars on the Black Market to preserve the value against what was collapsing in their own economy. They had to raise interest rates, and it caused inflation in Iran. It was very, very disruptive and destructive to the Iranian economy. It was almost to the point that if we had pursued it longer, we might have got regime change in Iran without firing a shot. But last December, the President relieved some of those sanctions and freed up tens of billions of dollars for use by the Iranians, so we kind of let them off the mat.

There’s another financial war brewing right now, which is with Russia around Crimea. Russia of course invaded Crimea. No one – left, right or center thinks the U.S. should use military force in Crimea. We’re not sending the 82nd Airborne into Sevastopol anytime soon, but the U.S. doesn’t want to be seen to be doing nothing, and so we’re engaging in economic sanctions, which is a form of financial warfare.

There’s a big difference, however, between confronting Russia and confronting Iran. Russia has a much greater ability to strike back — and just to show how this could escalate, so we put sanctions on, you know, some mid level bureaucrats, who cares, that’s no big deal.

But recently, we put sanctions on Igor Sechin, who is one of the most powerful men in Russia, close crony of Putin’s, former KGB. Russia might decide to escalate. What could they do? They could freeze U.S. assets in Russia, they could dump U.S. treasury bills, drive up U.S. interest rates, sink our housing market and our stock market, which are sort of propped up by low rates and ultimately, they could unleash their hackers and shut down the New York Stock Exchange, which they’re completely capable of doing.

And people say well, wait a second, don’t we have hackers? Can’t we close down the Moscow Stock Exchange and I say, of course we can, but who wins? The Moscow Stock Exchange is practically irrelevant to global capital markets, but the New York Stock Exchange is the beating heart, so we shut down each other’s stock exchanges, the Russians win.

So, these are the kind of things that could come out of the blue. Most investors aren’t thinking about it at all. Why should they? They’re not expert necessarily in international politics or financial warfare, but if we’re going to have wars that are not shooting wars, that are cyber and financial wars, but capitals markets are the collateral damage that investors can suffer even if they don’t see it coming.


Jim Rickards
for The Daily Reckoning


The Daily Reckoning