US Declares Financial War Using Powerful Sanctions

This blog tries to monitor events that might impact the global monetary system and even lead to significant change to that system. Not much has happened in that regard for some time as we waited to see how Trump Administration policies might impact things. 

Up until now, nothing the Administration has done seemed likely to disrupt the US dollar based monetary system that has run the world for a long time now. Today something happened that might be different. 

Trump admin unveils Iran sanctions plan, says China not exempt

Here is a key quote from the article linked above:

“Any entity that facilitates money laundering on behalf of Iran will be removed from the U.S. dollar system,” he said. “The clock just started ticking.”

We have covered just about everything related to this topic over the last decade here on this blog. One thing we have monitored is whether or not the monetary system is evolving into a multi polar system of basically East vs. West with the US leading the West and the BRICS emerging as an alternative to the US based dollar system. The US has used the global reserve currency status of the US dollar to wield enormous power and clearly has no intention of losing that power as seen in this announcement. 

This announcement today is for sure something everyone needs to watch carefully. We need to see how US allies and enemies (both of whom rely on the US dollar based monetary system) react to the announcement. We need to see if the US can actually enforce this policy if nations or financial institutions try to bypass it. We need to see if this policy can be bypassed by adversaries using gold to settle trade balances if they get shut out from using US dollar denominated funds. 

I view this announcement by the US as equivalent to a threat to launching a tactical nuclear weapon if it were a kinetic action in a shooting war. No one can be sure what this kind of move will lead to in terms of either compliance or resistance from enemies. If things turn more combative, this is the kind of thing that can destabilize the entire monetary system which is what we watch for here. So readers are advised to monitor this very closely as events unfold in the next few weeks and months. 

Will the War Impact the Monetary System?

In a new interview, Jim Rickards offers his take on what kind of impact the war might have on the monetary system. You can watch it here.

My added comments: In this interview I see a couple of nuances worth pointing out. First, Jim addresses the question of whether the world at large is engaged in "de-dollarization" as many analysts and economists are saying. Jim sees that a bit differently. While he agrees that central banks are buying gold and boosting gold reserves in general versus dollar denominated reserves, he does not agree that a broad "dump the US dollar" movement is taking place around the world. He believes that much of the selling of US bonds that goes on is being done not with an intent to "de-dollarize", but rather to raise cash to meeting pressing economic needs of those selling the bonds. His point is that you cannot spend bonds and have to convert them to cash if you need cash to spend immediately. 

Secondly, he makes a distinction between inflation caused by an increase in the money supply (M2) that many say is happening and inflation caused by higher energy costs due to supply and demand not being in balance (which then permeates through the economy raising prices). Jim does not believe an increase in the M2 money supply alone causes inflation. He believes it must be accompanied by an increase in the velocity of money (it's turnover rate in the real economy) to create that kind of inflation. He says that is not happening because the money being created by the Fed is just going to the big banks inside the Fed system who turn around and deposit the funds back at the Fed to earn interest on it. He does not believe that causes inflation because the money never enters the real economy. It just creates a revenue stream for the big banks supporting their financial position.

Those two nuances are important to note because they are an alternative view to the idea that a global intentional "de-dollarization" movement is happening around the world and that a Fed increase in the M2 money supply automatically causes inflation in the economy. Jim's view does not support the idea that any fundamental change to the fiat US dollar based system is on the near horizon. But he does see gold continuing to rise as ongoing efforts to maintain the debt based system stay in place which of course requires ongoing creation of new fiat money by the Fed whether it enters the real economy or not. 

A Little Fun with Ratios (Gold and Silver Related)

If you follow various monetary system views and debates very long, you will discover there is kind of a never-ending debate/discussion about whether a monetary system works best on or off a gold standard (and if silver should play a role in a monetary system). Just for a little fun we'll post the links below from a hard-working rancher who decided to think about some unusual ratios involving gold and silver you won't see on Bloomberg or CNBC :-)

Cattle & Gold: The Surprising Relationship

The Silver to Cattle Ratio Is Telling Us Something BIG

While watching these videos I couldn't help but think of a couple of often repeated mantras you hear from each side in the debate/discussion on this topic.

From gold advocates - Instead of thinking in terms of how many dollars something costs, you should think in terms of how many ounces of gold (or silver) does it take to acquire something. 

From gold detractors - You can't eat gold.

I guess these videos offer up something for both sides.  

Hat tip to Joseph Potvin who tipped me off to these fun videos.

Added note 2-12-26:  Texas offers new official state gold and silver bullion products.