Saleha Mohsin on *Paper Soldiers: How the Weaponization of the Dollar Changed the World Order*

The global strength of the dollar has provided many economic and geopolitical benefits for the US, but it has also come with numerous costs, both domestically and internationally.

Saleha Mohsin is a senior Washington correspondent for Bloomberg News, where she covers policy, politics, and power in Washington, DC. Saleha is also the author of a new book titled, *Paper Soldiers: How the Weaponization of the Dollar Changed the World Order,* and she joins David on Macro Musings to talk about it. Specifically, David and Saleha also discuss the intelligence and enforcement tools of the US Treasury, the basics and importance of SWIFT, the effectiveness of US sanctions, and a lot more.

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Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Saleha, welcome to the program.

Saleha Mohsin: Thanks so much for having me, David.

Beckworth: It's great to have you on. Now, I understand that you have your own podcast. Is that right?

Mohsin: I do. It's called The Big Take DC. We unpack a big DC issue every week and explain how what happens in Washington affects the rest of America and the rest of the world.

Beckworth: Yes, so, check it out, along with her new book. We'll provide links to both in the show notes, but we're here today to talk about your book. Now, your work at Bloomberg— you've covered, in the past, the Treasury markets quite a bit. Is that right?

Mohsin: I've covered the Treasury Department, and that includes a lot of things, because the Treasury's purview is so wide. So, it's debt issuance and how that has all played out in terms of fiscal policy. There's been politics surrounding that more recently and also international economic diplomacy, sanctions, tax policy. Anything that the Treasury Secretary was interested in, I had to be interested in.

Beckworth: So, is that the motivation for the book, then, that you were covering the Treasury department, and this issue came up probably multiple times, and you thought, “Man, this is a great topic. I need to get on it.”

Mohsin: Yes, absolutely. There's a lot of books on the Federal Reserve. There's a lot of books about Treasury, but they are books that are autobiographies of Treasury secretaries. But there's no book [that’s] just a Treasury book. There's a musical, Hamilton. A lot of people went to see that and listen to the music. So, I thought, let me write a Treasury book, and I thought, what's the best narrative arc that I can give a book about this one agency? To me, it was two-pronged. One, how does what officials at the Treasury department do affect Americans and our ability to achieve the American dream? Then, also, the main thrust— which is so newsy, so topical— how the power of the world reserve's asset— which the Treasury department is the steward of for the US— how that has affected Americans and the rest of the world.

Beckworth: In the book, you cover the weaponization of the dollar through the Treasury department and its tools. Maybe walk us through how we, as a country, use the dollar, its reserve currency status, as a way to weaponize and implement foreign policy?

The Weaponization of the Dollar on the Global Stage

Mohsin: This is a pretty key thrust of my book of how this power developed. Basically, the way I walk readers through in the book is, I unveil how the dollar became the world's reserve asset in the 1940s. There was a big Bretton Woods meeting— the 80th anniversary is the summer— and this was as World War II was ending, 44 allied nations and their economic policymakers gathered together in New Hampshire, and by design, found a way to create an economic brotherhood so that the world could become, slowly, deeply integrated and not so easily go to war with each other, in theory.

Mohsin: Part of that was creating the IMF and the World Bank, but also to crown the US currency, by design, as king dollar. So, the US became the owner of the world's reserve asset, and there was a lot that happened between then and the turn of the century, but the US consolidated that power. But the weaponization of it— in terms of using it as a way to export our American foreign policy and geopolitical objectives and use it to protect our national security interests, our borders and our homeland security— that really started with 9/11 when the Twin Towers came down.

Mohsin: I think a lot of people forget that the first act in George W Bush's war on terror was not a military tank rolling into a foreign country or actual war. Immediately, it was, by the stroke of a pen, the president gave the Treasury Department unique authorities to impose economic sanctions on those who were funding and financing terrorist activities. So, cut them off from the dollar, which means you get cut off from the global financial system, and also use Treasury's unique power— which comes by its being the steward of the world's reserve asset— using that unique power to track money flows and financial footprints of terrorists to see how they are moving money through the global financial system so that we can stop those efforts, stop the next attack.

Mohsin: Then, I take readers on a journey. I share what was going on domestically in our manufacturing sector in terms of how the currency policy was playing out. [I] Take you to Weirton, West Virginia [and] Moraine, Ohio, where big company towns driven by jobs at manufacturing plants were becoming hollowed out. It created the rust belt when we saw the effects of globalization— the glass half empty side of globalization. But the weaponization piece was happening overseas where the US discovered that between words and war— so, words being diplomacy and war obviously being kinetic action— there is a big space in-between where, if diplomacy isn't working, you don't need to jump to war. You can go to economic sanctions.

Mohsin: It spills almost no blood, the cost is much lower, and it can have an effect. And so, we saw that from 9/11 until now, the use of economic sanctions has grown by 1,000%, and behind it are stories of Treasury officials who got the Treasury Department a seat at the national security table for the US where, once, it was thought that Treasury just deals with economic growth and international economic diplomacy. Now, they are here to help use the dollar as a cudgel if there is a bad actor out there using the dollar or the global financial system for malign activities, and there is a responsibility to rein that in. And that's where we are now. The bookend of the book is that I start with February 2022 when Russia invaded Ukraine and the US led the world in some of the harshest economic sanctions imposed ever, but also, notably, on a G20 country, the world's 11th largest economy at the time. Then, I end on that note, too, of what does this mean? What does this weaponization of the dollar mean, going forward, for the dollar's power and America's power overseas?

Beckworth: Yes, your book is a really interesting read. You tell stories. You tell people— Treasury officials, civil servants, you tell this story, and it's really fascinating. Again, I highly recommend the book. We'll provide a link to it, and we'll come back to some of these people in a minute, but let's park here for just a few more minutes and talk about these tools you just outlined. So, the Treasury is now part of the intelligence community. It has its own Office of Terrorism and Financial Intelligence. You highlight that in the book. You also mentioned that the US government and Treasury got access to SWIFT information.

Beckworth: That's the correspondence between banks. We can maybe talk about that a little bit more. Then, also, the Office of Foreign Assets Control became this really powerful part of Treasury that many people feared. They have a list that you don't want to be put on. So, maybe talk about those tools a bit, and then we'll move on to the history of the people behind them. How are those tools used and what are they?

The Intelligence and Enforcement Tools of the US Treasury Department

Mohsin: Yes, so, the Office of Foreign Assets Control— I got to take an after-hours, behind-the-scenes tour of this little office. It's existed for decades, but it really came to the fore after 9/11. Until then, it was considered an orphan of Treasury. No one really paid very close attention to it. All of a sudden, now, it's at the center of a lot of geopolitical strategy and national security plans. This little office is where we have somewhere around 200 civil servants, no one politically appointed. They don't make policy decisions. They implement policy decisions.

Mohsin: It's a very powerful office. It's a nondescript building. If you saw it, you wouldn't think that it contains so much power. Basically, the stroke of a pen of [the] office of the OFAC director means that sanctions are now a regulation that needs to be given to the private sector. Once they post that the US government has decided to sanction an entity or to start the process of sanctioning an entity and slowly tighten that vice, they post it to their website, and financial institutions and business tycoons and governments around the world monitor this website very closely and carefully to see what is the next business, or what parts of the global financial system will soon be closed off to certain companies or foreign officials or individuals.

Mohsin: So, it has a lot of power, and that was developed, more and more sophisticated economic sanctions start to come out, and we've seen it evolve, right? So, OFAC brings to the table this immense power. There is a lot of signaling that's involved, almost a bit of forward guidance that sanctions could come out. It's used as a threat to see if the threat of losing access to the dollar could actually change alleged bad behavior. And we've seen it play out with Venezuela, North Korea, and now, more recently, Russia. We've seen the entire economy— like Iran's economy over decades has shrunk since it couldn't sell oil. The lifeblood of its economy, all of a sudden, was not welcome in global financial markets because of the US's power over it.

Beckworth: So, you have OFAC, which you just described, and there's also the Office of Terrorism and Financial Intelligence. Is that also a part of Treasury?

Mohsin: Yes, so basically with 9/11, in 2004, with the creation of the USA Patriot Act, the government was reshuffled, right? The executive branch created the Department of Homeland Security, and that pulled units from different agencies. From Treasury, it meant that the Secret Service was moved over out of Treasury, but what happened was that they wanted to boost Treasury's economic sanctions and capabilities to track the financial activities of terrorists, so they created a new unit. So, since 2004, Treasury has been made up of three large units. [There’s] domestic finance, which is all of the debt and tax policy and regulations, the financial regulation stuff. There's international affairs, which is all of the G20, G7 currency policy elements and more. Then, there's TFI, which is Terrorism and Financial Intelligence. OFAC sits within TFI. It just got this grander home, and it now has its own undersecretary as of 2004.

Beckworth: Is it located in the main Treasury building too, or is it across the street with OFAC?

Mohsin: TFI, yes. OFAC is across the street. It's connected by these cool tunnels underneath Treasury. In fact, I got to walk these tunnels and rumor has it that these tunnels might've been how Marilyn Monroe, at one point, made it into the White House way back when.

Beckworth: Fascinating, yes.

Mohsin: But TFI's undersecretary actually has a beautiful office inside of main Treasury.

Beckworth: So, there's a lot going on inside of the Treasury building, and this book does a great job outlining it. Maybe we should talk briefly about SWIFT. I suspect many of our listeners know what SWIFT is, but for those who do not, explain what SWIFT is and then why that was an important part of the story as well.

Breaking Down SWIFT and Its Importance

Mohsin: Yes, SWIFT has come up a lot recently because of the Russia sanctions. SWIFT is the Society for Worldwide Interbank Financial Telecommunication. I do not know this off the top of my head. I quickly Googled it because it's such a complex title, but SWIFT is not a bank. It's basically the Gmail for banks, right? If one bank wants to transfer money to another bank on behalf of an account holder, that means that you have to share account numbers and timestamps and names and maybe addresses and phone numbers and other personal details of an account holder and their account.

Mohsin: That should not be publicly shared, so, SWIFT was created to be a trusted network to share that information. That means that SWIFT has data that can track, in real time, when, let's say, an alleged terrorist is moving money around. And so, one of the really interesting stories that I got to tell in Paper Soldiers— and most of it I tell in a chapter that's called “A Crystal Ball of Terror,” because SWIFT is kind of that crystal ball. If SWIFT can tell you where and when money is moving, then that means that anyone who has access to that information can see when or where the next terrorist attack could be.

Mohsin: So, if I take 9/11, in retrospect, Treasury officials realize that the attack cost a couple of hundred thousand dollars, and that money was moved in broad daylight in increments of $5,000 to $10,000 across just banks that you and I know. Back then there was one called SunTrust, which recently changed names. And if you know the name of a terrorist organization or where they're located, and you have visibility into this real-time information, the US Treasury Department was able to use classified information about where terrorist activity was happening and what the intelligence community was picking up, and then go to SWIFT and, through a lot of negotiation, tap into SWIFT's data, in a very narrow format, by sharing some of that classified information to say “Hey, if we have access to this financial data, then we could actually thwart a future attack,” and they did.

Mohsin: There's examples that I touch on in the book of actual attacks that were going to happen, but because the financial footprints had been tracked, they were able to block those. Now, this was really controversial, because SWIFT is on the board for several central banks, including the Federal Reserve, and at the time— when the Twin Towers came down, the CEO, or the head of SWIFT at the time, said he knew when that happened that Treasury was going to come calling saying, “We want some of this real-time information,” but SWIFT didn't want to be politicized.

Mohsin: They wanted to make sure that you can't just easily come and ask for this information, because then the power of SWIFT itself is diminished. But because the request had to do with protecting the world's largest economy, who also provides global security, and it's coming with the credibility and integrity of an agency that is the owner of the world's reserve asset, that request was granted with a lot of strings attached and a lot of nuance and a lot of care.

Beckworth: So, is that the same arrangement today? If someone wants to get information from SWIFT, they come in with an appeal, a warrant. How does that work today?

Mohsin: It’s interesting, I don't actually know what the latest is on that. The funny thing is that SWIFT— so they named this program of Treasury working with SWIFT, they named it Turtle, the operation, because it's the opposite of SWIFT. And it worked really well, apparently, before anyone knew about it, and in 2006 or 2007, it actually came out in a couple of news articles— the New York Times and The [Wall Street] Journal, I believe— and it was only a matter of time before it came out. And, I think, once it was known that this is what the US is doing, the bad actors, the bad guys, they started to find other ways to move money around. And also, since then, we've seen financial technology evolve very rapidly; a tech revolution when it comes to the financial system as well. So, it is a little bit harder to track money, especially when you have the dawn of Bitcoin and crypto.

Beckworth: Okay, so, SWIFT may not be as important as it was back then for tracking particular people. It's still a very important system [for] keeping track of records overall, but it may not be as important. So, very fascinating account, and, again, you provide stories, people. So, we have the Office of Terrorism and Financial Intelligence and, underneath that, OFAC. They have a list, and if you get on that list you are in trouble financially. We have these sanctions. Let's use one of your stories, and we'll get to the history, as I mentioned, but let's do one story that you bring up in your book, just to paint this picture, and that's in 2018 when Treasury Secretary Mnuchin applied it to a Russian oligarch, a friend of Putin, and it just created havoc for aluminum markets. So, tell us that story.

Sanctioning Russian Oligarchs

Mohsin: The power of US sanctions— it's immense, and it can't be used just willy-nilly. What happened was that in 2018, April of 2018, I won't forget. I was in the newsroom when Treasury sent out an embargo statement to reporters that they are going to announce sanctions on Oleg Deripaska. And Treasury has a rule, it's called the 50% rule, that any— let's say, David, that you are sanctioned. Anything that you have 50% or more ownership [in] is also automatically sanctioned. So, with Deripaska, that meant Rusal, one of the world's largest aluminum makers at the time. So, if you're going to sanction an aluminum maker, that means that aluminum, the product, might become more scarce.

Mohsin: And so, the minute those sanctions came out, commodities markets as a whole saw wild swings and volatility, because it looked like there's going to be less aluminum supply. Now, the thing about those sanctions was that it showed us that, maybe, there are entities that are too big to be sanctioned, because every headline, any wrinkle or shift in OFAC's messages about those sanctions, would send global metals markets into a tizzy, and that's not the goal. They're not supposed to be moving markets. They're supposed to be changing bad behavior, getting Deripaska to change behavior, or Russia, et cetera, et cetera.

Mohsin: Instead, they caused utter turmoil. Let me give you one example, and it's in the book, that there was a plant that was run by Rusal in, I think, Ireland, and because the sanctions meant that they might not have the cash on hand to keep running the factory, they were going to have to shut it down. But you can't shut [down] a factory where they have something burning at 2,000 degrees Fahrenheit to create the aluminum and refine it. You can't shut that down quickly unless you want to release all sorts of toxins into the environment. But, without cash on hand, they had to shut it down quickly.

Mohsin: So, they're thinking, “We have to shut this plant down.” It's going to be damaging to the environment. People are going to lose their jobs. You can't just turn the plant back on when Treasury has figured out the situation, because it's hard to just turn that temperature so high up [again]. And it turns out that OFAC didn't really— or the Treasury Department hadn't spent enough time digging into all of the ramifications of sanctioning an entity with such deep tentacles into the financial system, into metals markets, into a key commodity for the world. And it just turned out to be this wild moment, somewhat of regret of [how] we've revealed to the world that some things are too big to be sanctioned.

Mohsin: And, in the end, a lot of Treasury and White House and State Department officials said to me on background that, yes, that was a bit of a mistake, or we could have handled that better. On the record, and off the record, and on background, Steven Mnuchin contended to me, until the last time I spoke to him about the topic, I think, two years ago, that they knew exactly what they were doing.

Beckworth: Okay, well, it shows that the power or the reach of the dollar is really enormous. That's one thing that struck me is that that is how widespread the dollar market is, such that you target one person, and all of these industries are affected, because they're all tied into dollar markets, including this big plant in Ireland. Okay, let's move on to the history that you provide in the book. So, you've outlined the tools, the way the dollar has been weaponized via the Treasury for foreign policy objectives. And you provide a long history of Treasury secretaries, but let's move forward into President Clinton's administration, and a very central figure in your book is the Treasury Secretary Bob Rubin. He was also an advisor in the White House before he became Treasury Secretary, but tell [us] why he is so central to your story.

The Importance and Significance of Robert Rubin

Mohsin: Yes, the '70s and '80s, it was a period of a lot of government intervention in markets. I explain all of this in a chapter that's called “Control Freaks and Vigilantes.” The control freaks are finance ministers who keep trying to control the value and exchange rate of their currency. The vigilantes are like the bond vigilantes in the markets who are unhappy with how governments are acting. And Bob Rubin, coming from Goldman, was Wall Street royalty. He came in, and he saw that this volatility is not good. The world was heading toward an era of what we now know as globalization.

Mohsin: And, to do that, you need to have predictable terms of trade, predictable currencies, where foreign exchange rates are, for the most part, determined by the rules and laws of supply and demand, not the whims of finance ministers. And so, he launched a multi-year effort to bring calm to all of the jitters, because currency markets and traders were listening to each utterance of a finance minister— particularly the US Treasury Secretary— what they were saying about the dollar. It would cause all of these moves in markets, and so he decided, "I'm going to bring calm to this by having a very boring statement about the dollar, and I'm just going to repeat it every single time."

Mohsin: And so, it’s called the strong dollar policy, or the strong dollar mantra, Rubin's mantra. Basically, it was something along the lines of, “A strong dollar is in the nation's best interest,” and he would say this in a couple of different ways, but that was the gist of it. And the goal was to just cool temperatures, "Nothing to see here, guys. I'm not going to make a lot of new comments." And he actually did have some action behind it. He slowly curbed Treasury's interventions into currency markets at the same time.

Beckworth: So, something I learned from your book, surrounding this statement, is that I always took it in terms of economics. We don't want to intervene in the markets. We want the dollar to be strong for economic reasons, but a big implication from your book is also for national security reasons. You want that strong dollar to be there so you can weaponize it if you need to. So, that statement had dual meaning that I didn't really appreciate until I read your book. So, i was really neat to see the history there and Bob Rubin's role. And then, after him, we have Larry Summers, and we move forward to President George W. Bush.

Beckworth: And we've already touched on, during his administration, how important 9/11 was. Treasury becomes an intelligence agency, along with several others, and OFAC gets its teeth in terms of sanctions. Now, in the book, you mentioned that there were multiple Treasury secretaries under President Bush. What was going on there? Why was that an important part of the story?

The George W. Bush Era of the Treasury Department

Mohsin: Yes. For one, David, the switch to W. Bush, it did have markets and Wall Street investors wondering, "Will the strong dollar mantra be a bipartisan one, or was this just for Clinton or just for Democrats?" And Paul O'Neill— the very first Treasury Secretary under W. Bush— he made it a bipartisan thing by sticking to it. The stories that I tell of Paul O'Neill and then W. Bush's second Treasury Secretary, John Snow, it's interesting. Neither were from Wall Street. They were from industry. One was an economist, professorial, and the other one was from the aluminum industry, so, the manufacturing sector, looking at the world differently.

Mohsin: And neither of them were particularly strong Treasury Secretaries, and I tell the story of why they weren't— they were lovely gentlemen— but why they weren't right for that role through their struggles in talking about currency policy, because by not coming from Wall Street, traders didn't trust them immediately. They also didn't understand, perhaps, quite the nuance behind each word and the way markets worked, and so it just kicked off this time of the president having to come in and clean up after a Treasury Secretary sometimes, and markets not necessarily trusting them, and what that credibility of a secretary can mean and why the country needs it at times.

Mohsin: Then, you get to Hank Paulson, who came in 18 months before the global financial crisis hit, and I get into how the Bush White House was able to bring him in, because Paulson was at the top of Wall Street. He was making millions of dollars, and the Bush administration— after the Iraq war and a lot of other incidents, his approval rating, W. Bush’s, was really low. Also, you're saying, "You want me in for the last two years of an administration? That's [a] lame duck [period]. What can I really do?” [So], we get Hank Paulson, and all of a sudden investors are like, "We're not missing Rubin so much anymore, because we've got our guy here.”

Mohsin: “He understands the plumbing of the financial system. He speaks our language." Lo and behold, 18 months later, it was very fortunate that you had someone who had gravitas, who had credibility instantly when he walked into a room, instantly when he became Treasury Secretary. And I also lay out how the Bush White House made a few mistakes. They didn't allow their first Treasury Secretaries to truly be the lead economic policymakers. Paulson saw that, and as he was joining before he officially said yes, he made it his condition that [he] will be the chief spokesman of economic policy for this administration, always, of course, maintaining a good relationship with the president and working in tandem with his boss.

Beckworth: So, he restored Ruben's mantra. He brought confidence to markets, which is nice. You also mentioned that he had a role in negotiations and discussions with China. Talk about that.

Mohsin: Yes, this was interesting. He created the strategic economic dialogue with China. He already had deep ties and relationships through his time at Goldman in China, and he realized that the two leading economies in the world should have a strong relationship, but there was a lot of differences. And so, he endeavored to bring each rung of economic policymaking in each government together so that everyone is talking to their counterpart to maintain stability. And that came in quite handy during the global financial system, because the US and China— I label the chapter that's dedicated to this relationship.

Mohsin: I call it “A Turbulent Marriage,” because it is turbulent. It's always been turbulent. It is now, but also back then, even though there was strong dialogue and lots of photo ops and family photos and meetings that don't quite exist as much of a routine today. There were still a lot of differences, but the two countries, economically, really need each other. They depend on each other, but also sometimes struggle to see eye to eye.

Beckworth: Yes, you reminded me in the book, and it was a stark reminder, of how many GSEs China held, more so than even Treasuries. And so, I remember that there was a Bloomberg story— maybe it was you or one of your colleagues who wrote it— but there was a phone call to Paulson during those tense moments that China wanted reassurance that those GSE securities would be solid going forward.

Mohsin: Yes, and that's part of that symbiotic relationship, that the US relies on China to invest in the US economy in many different ways, including through the purchases of Treasuries, of holding GSE debt, Fannie and Freddie debt, but that means that China relies on the US to maintain the health of those investments so that that money, those trillions of dollars, don't go down the tubes. So, yes, there was a moment with Paulson, and possibly also with Geithner, where China wondered, are these investments safe? 

Beckworth: Yes, so, you highlight the important role he played in dealing with the great financial crisis. [In] 2008, 2009, he brought in TARP. He was very aggressive for a Republican. In fact, he got the nickname “Mr. Bailout” by some of the more conservative Republicans. And that leads me to one of the critiques of him. I wonder if you have any thoughts on this, and that is that they let Lehman Brothers fail, and that lead to this big money market run, and some say that we could have saved it, we could have gone in. He contended that it was insolvent. Were there any discussions about that, that things could have been done differently? Because when that institution went down, that's when you really saw the runs on the money markets and the true big bank panic of that period. So, any discussions on that?

Mohsin: Absolutely. There's a book on that. There's a great book. I forget— it's a University Press, but it's Hank Paulson, Tim Geithner, Ben Bernanke, and maybe one other person who got together, and they unpack exactly what they did for all of these complicated parts of the financial crisis, and then they have sections for each one, lessons learned. Here are the mistakes that we made, and here's how we could have fixed them retroactively, or whatever, as a way to educate for future crises, create a bit of a playbook, so that the same mistakes aren't repeated.

Mohsin: But there were definitely moments, and I do highlight this in a chapter that's called “Just Call Me Hank,” because he doesn't like people to call him Secretary Paulson or Mr. Secretary. He likes to just be called Hank. Everyone's on the same level, and he can learn from everyone as everyone can learn from him, and I really appreciated that. But I do go into how there were times [when] he was criticized in real time and afterward, that some of the decisions were made too quickly, [and that] some of the decisions could have been hashed out a little bit better.

Beckworth: So, in the chapter on Hank Paulson, you also bring up an individual named Mark Sobel. He was at International Affairs, and as listeners will know, I actually spent some time in International Affairs, so I was way beneath him. But, occasionally, he'd be like the acting secretary whenever the political ones would be in transition. So, I got to know Mark. In fact, I had him on the podcast not too long ago. So, tell us your story about Mark in the book.

Mohsin: Yes, Mark is terrific. In Paper Soldiers, one of the things that I really wanted to do was not just give profiles of the secretaries whose names are somewhat well-known, especially to your listeners, I'm sure. People know about John Snow, Hank Paulson, Tim Geithner, and these are men, and now one woman, whose oil paintings are hung in the hallways of the Treasury Department. But I also wanted to highlight that there is a whole class of public servants who are not political. They’ve worked at Treasury for decades, and they give their lives to serving the government at Treasury, and I also see them as stewards of the dollar.

Mohsin: And so, I was lucky enough to spend some time with Mark Sobel. He had been at Treasury for 40 years, and he left in 2017. And I share how these lesser-known people are just as important in maintaining the dollar and protecting the dollar. And I got to share how, in transitions from one administration to the next, no matter how tumultuous— especially the most recent two transitions— how important their role is, and how they can often be there to advise Fed Chairs and Treasury Secretaries on moments where the dollar needs to be protected, and also protect secretaries themselves from accidentally making statements that they'll then have to clean up or deal with later.

Beckworth: Let's talk about another individual who is also at Treasury, but not a secretary, but played an important role, and that's Stuart Levey. You have him in the book. Talk about him for a minute.

Mohsin: Oh, yes. His last day was quite exciting, and that's where I start with Stuart Levey. So, Stuart Levey was the very first undersecretary for TFI, Terrorism and Financial Intelligence, and he played a pretty influential role in helping Treasury secure a seat at the national security table, which wasn't easy, right? The State Department and DoD and Pentagon, it was a little bit of a head-scratcher why the economic agency would want to be here. Then, slowly, by way of explaining how sanctions work and people seeing their influence, Stuart helped secure that table.

Mohsin: And so, it's a chapter called “Nerd Warriors at Work,” which are all of the financial intelligence folks who are also warriors in war, in a different kind of war. And so, I talk about how Stuart Levey, on his last day, the Obama Administration wanted to freeze or immobilize assets that belonged to Gaddafi and the Libyan government that he oversaw. And they're looking around— It's a nation of 6 million people. They're looking for his money, because he thought that his money is the government's money, the government's money is his money. And they're thinking, “Maybe we can immobilize a couple million, maybe $10-12 million worth, because we’ve got to find it.”

Mohsin: These gumshoes at OFAC, financial gumshoes, are trying to find this money, and on the last day, Stuart Levey gets an email from OFAC, the director, the head over there, that says, “We can actually find you $30 billion” He thought, “Oh, there's a typo. It's $30 million. It must be $30 million.” So, he wrote back saying, “Did you mean an M or a B there, for $30 billion?” And he heard that, no, it's a B, $30 billion, and his jaw dropped. He couldn't believe that this agency— that TFI started in 2004, OFAC had been an orphan until 2001— that these officials who worked there had been able to— and their authorities and capabilities had become so sophisticated that they found $30 billion that they could immobilize and freeze as part of the effort to deal with Libya. And so, that was a pretty big moment that he thought— it’s the largest sum, at that time, of assets that the US government had ever seized. And so, it was a pretty big moment for TFI, and it showed how far they had come since their creation, just a couple of years. They were created in 2004, and this was sometime in 2011, I believe. And so, [it showed] how far you've come and then how much further we can actually go.

Beckworth: What a great last day, way to go out. You catch this big prize, you find the money, and then you leave. Well, let's move into President Obama's administration. You already touched on it, and we talked about Tim Geithner, Treasury Secretary, and it was fun reading his chapter, because it brought back to mind the speech he gave where he really didn't have any answers.

Mohsin: The Cash Room speech.

Beckworth: Yes, and I vividly remember the Saturday Night Live skit, you also brought that up. But I was thinking in my head, “Oh yes, that skit,” and there you had it on the next page, talking about how he was made fun of by Saturday Night Live. But one of the big things that I want to spend time on with the Obama administration is this Iran deal, the Joint Comprehensive Plan of Action, because it becomes important later under Trump, because he abandons it. Tell us what this plan was about and how it plays into the role of sanctions.

Breaking Down the Joint Comprehensive Plan of Action

Mohsin: Yes, so with Iran, the US developed really revved up economic sanctions in terms of how sophisticated their use can be, and they created secondary sanctions. And there's a bit of a breathless explanation of that in the book, because it's not the easiest concept to get a hold of. But with Iran, what happened was that the US led an effort to bring Iran slowly back into the global financial system after decades of being a pariah, and it gained significance because a couple of years later, Donald Trump became president, and he kept his word that he will pull out from the Iran deal.

Mohsin: Europe didn't want to do that. The US had made a unilateral move. It was a multilateral effort to create the deal and enter it. It was a unilateral effort, a move for the US, to come out of it, and Europe wanted to stick to it and abide by it. What's significant is that they tried it. They tried to create a way to continue trading with Iran, as promised, as part of the JCPOA, without violating US sanctions, by discussions of creating a special purpose vehicle, an SPV, that would allow them to circumvent the dollar. Treasury was not happy about this. Under Trump, the person who took Stuart Levey's role was Sigal Mandelker, and she was instrumental in letting Europe know that this is a bad idea.

Mohsin: If you try to evade US sanctions, work around the dollar like this, we will retaliate in some way. So, she sent letters, she visited. In the end, it didn't happen, right? It turns out that no European country wanted to be the home of this SPV. No one wanted to own the thing that was making Treasury so mad. And so, the effort didn't work, but it's still significant, because that means that there is an effort, paperwork there, the light sketches. The ghost of what a future SPV could look like has now been born, and that's where things start, too, in terms of de-dollarization or trying to avoid U.S. sanctions, which, by trying to avoid them, and success in avoiding US sanctions, will eventually make future US sanctions weaker.

Beckworth: Absolutely, and what's interesting is that President Trump abandoning the Iran deal was the second blow to his European partners. They were, really, also disappointed, as you outline in the book, that he abandoned the Rubin mantra, right? He was all for, “We're going to let the dollar lose value,” and the Europeans were very upset about that. Then, here he goes and blows up the Iran deal as well. So, it was kind of a two-punch throw at them, and so, they were disappointed. You also note that under President Trump, it was the first time that the foreign exchange report that the Treasury Department does labeled China as a currency manipulator.

Beckworth: So, you outlined that there have been many attempts before to label China as a currency manipulator, but for political reasons, that never happened, even though maybe it should have happened. And so, finally, under President Trump— and I guess maybe speak to the bigger point here, and that is that President Trump was responding to something, right? He was responding to the angst, maybe the unease, the concern with the strong dollar policy and what effect it had on manufacturing and labor, that movement.

The Trump Administration, China, and the Rise of Populism

Mohsin: Actually designating China [as] a currency manipulator, to me, reminds me of Hank Paulson's comment about a bazooka, that if you have a bazooka and people know it, you probably won't have to use it. If you do, people might realize the limits of its power. So, the US designates China [as] a currency manipulator, and nothing really happened, nothing really changed. So, unless everyone knew it was a toothless designation— and everyone assumed or thought it was a toothless designation, all of a sudden, you know it, because there is data now, right?

Mohsin: But what we were seeing was actually Trump listening to the American electorate's economic scarring from globalization. Globalization and the recovery from the global financial crisis helped a lot of people. A lot of people recovered or gained new wealth in the world. Globalization is the reason for a lot of global economic growth, the US economic growth and expansion. But even as the seeds of globalization were being planted in the ‘90s and early 2000s, it was known that there are going to be people who might lose their jobs. Maybe we need to retrain factory workers into other types of work, and it never really happened.

Mohsin: 9/11 came, the global financial crisis happened, but also the naivete or, I don't know, just somewhat ignorance of policymakers not realizing that you can't just take a middle-aged person who's worked at a factory in the Midwest their whole lives and say, well, now you have to retrain to do something else. So, there was a lot of economic scarring, [and] I take readers to small towns in the country where a manufacturing plant shut down, because all of the materials and all of the goods were made overseas. It is cheaper to buy goods that are made in Bangladesh, made in China, made in Vietnam, than made in America, but a lot of people suffered.

Mohsin: It was the glass half empty part of the glass half full that hadn't been acknowledged. And so that's what Trump was reacting to. That's what, in part, helped him get to the White House, that got him so much support that surprised a lot of establishment Republicans. And, really, it changed the trajectory of economic diplomacy for the US for both parties. Because Trump called it Make America Great Again and America First, [and] Biden calls it Buy America and Friendshoring. It's all populism. And so, both parties are now looking towards somewhat more protectionist and populist policies, because that's what the country needs.

Beckworth: I remember when Trump started changing trade policy, and this is all part of the conversation. And I was questioning, is this just a bump in the road or is this a change in the trend, the trajectory of trade policy? And as you just noted, it's a completely different trajectory. Both Trump and Biden are much more protectionist, and so we have seen a big change. Going back to the impact of the strong dollar policy, I was reading and thinking through “what if” scenarios. What if we had done a better job coming out of the great financial crisis, so that there would have been more healing? Would the outcome have been much different? Would Trump have been elected as easily?

Beckworth: Also, part of the challenge with this China shock, with the effects of globalization that you mentioned, the scarring, is that people didn't pack up and move to where there were jobs. And one story that an economist would say is, “Well, you lose your job in the Midwest, move down to Texas where there's employment.” But that didn't happen. We've seen that that hasn't happened, or to California. And one of the issues that's been highlighted is that it's simply hard to move to places where housing is really expensive. So, another counterfactual that I had in my mind as I read your book is, well, what if we'd had better housing policy all along? Would this scarring have been consequential?

Beckworth: So, both of those things may have led to a very different outcome. But let's move forward for the sake of time here, and let's go to the present, because the present— and we've touched on some of the issues, but the Russian sanctions, they were really next level manifestation of the sanctions, and I presume we learned the lessons from 2018 when we overdid it with the aluminum industry, so maybe it was more precision strikes. But my question is, have they been effective, in your view? Have they really made a difference in the effort in the war of Ukraine against Russia?

Evaluating the Effectiveness of the Russia Sanctions

Mohsin: I don't really have an opinion on this, but [what] I can say is that the efficacy of sanctions— and those ones in particular— this is a debate that's going on in every capital in the world, every economic and financial circle of every capital of the world. And what I'll say is that, first of all, it was multilateral. They were US led sanctions. More than 30 countries joined the US in those sanctions. And the way sanctions are— sanctions are a tool, not a policy, right? Sanctions are a tool that is part of a broader foreign policy or geopolitical strategy. So, to say that sanctions have succeeded or failed is like saying that my house fell apart and the hammer failed, right?

Mohsin: The hammer is a tool that is used by contractors and construction workers and architects to build something. Sanctions kind of equate to that in terms of foreign policy in the same way. The other thing is that it's a very muddled game, right? It depends on what the initial stated goal [was] of economic sanctions, and that's muddled on both sides, right? At the time— I don't know when the narrative took off that sanctions would stop the war. I actually do, at some point, want to dig into that, but it didn't help when President Biden, a couple of weeks later, said, “Well, look at what our sanctions have done to the Russian economy.”

Mohsin: The ruble is now rubble, because the ruble had dropped 30%. Well, the ruble has recovered, right? Russia has transformed from a regular economy into a war economy, and it has gotten more help from China and India than the US as expected, and, also, had more resilience and desire and fortitude to become a war economy than America had expected, America and its allies. But on the other side, the war— when those decisions were being made, I remember talking to White House officials at the moment, and they were saying, “Well, we think that, in 72 hours, Kiev could fall.”

Mohsin: “And so, that's why we have to act so quickly.” Kiev didn't fall. Where, two years later, yes, the war is still going, so sanctions didn't stop the war, but Kiev didn't fall either. But, again, on the other side, you can't ignore the fact that, in the past year, there's a lot of data points that show that sanctions are porous, and they don't necessarily have the impact that we expect. One point that I give out is that, in the past year, a billion dollars worth of microchips from Europe and the US have made it into Russia to support their war technology, and none of that has violated sanctions. So, it's a really complicated and breathless topic to unpack, but the fact is that the war is still going.

Beckworth: So, do we have any evidence that this extension of sanctions has increased de-dollarization? Because that was some of the concern [over] the past few years. Everyone was worried about this. In fact, you mentioned a speech by the former Treasury Secretary Jack Lew where he highlights this concern. If we overuse sanctions, there's a possibility that we will see people looking for other alternatives to the US financial system.

Mohsin: Yes, it was a speech by Jack Lew. I encourage you guys to read the book. I label it in a chapter that has to do with Jack Lew's nightmare having come true, because he did foreshadow quite a few things, it turns out. But it's the same thing with Hank Paulson's bazooka. All of a sudden, the US came out with this bazooka, that we can sanction this big central bank, cut it off from the dollar, and now everyone knows how that plays out. And since those sanctions, the de-dollarization debate has popped up again, and it comes up constantly. Every decade, there's a new thought that maybe the yen will supplant the dollar, maybe the euro.

Mohsin: Now, it's maybe a couple of currencies that trade outside of the dollar, and I think that it has put US Treasury officials in a defensive posture to say, “Well, we're still the dominant currency, and there's no alternative anyway.” The minute you're saying [that] there's no one else, it reveals that there is a question, a worry, a threat, a concern. There's nothing wrong with the debate, [but] I think a couple of points that I look to is just most recently with the Israel-Iran conflict. On Friday, we saw investors flowing into the dollar, because it remains a safe haven asset.

Mohsin: So, if it still has that appeal, that means that it's a dominant and central force. Centrality has not actually been challenged. The other thing is that the dollar is really deeply entrenched, almost like the English languages is as the lingua franca for the world. So, there's more talk than action. The action is notable and interesting, and some of it has been successful, but one example I can throw out there is that India has bought a lot of oil from Russia and paid for it in rupees, but Putin doesn't know, Russia doesn't know what to do with all of these rupees. It doesn't have the same exchangeability as dollars. If he had dollars instead of rupees, he could buy a lot more with them around the world. And so, there are these little roadblocks that are being tested for the first time, and that is significant.

Beckworth: Yes, just recently, there was a Treasury official testifying before the Senate Banking Committee, and the issue was about Iran and its money. Where is it? Is it being used by Iran to continue its efforts? Of course, Republicans were going after the Democrat-appointed Treasury official, but it was interesting, because this individual pointed out that the money from Iran was parked in a bank in Qatar. And if the bank in Qatar really valued its access to the global dollar market, it wasn't going to allow Iran to use it. But that point slid by, I think, some of the senators. They didn't understand the importance of secondary sanctions [or] primary sanctions that you outlined in your book. So, going forward, what do you see as the big issues for sanctions or big, maybe, developments ahead of us; maybe a war in the Middle East, something else? What do you think is on the radar?

Threats to the US in the Future

Mohsin: I think, for me, the book— it's sort of like telling the story of America's rise through the lens of currencies and the dollar. A lot of people talk about foreign threats to our sanctions’ power, or to the dollar's hegemonic role in the world. I actually think that the biggest threat is not something overseas. It's not the BRICS+ coming together [and] creating a currency. It's not Russia and China, like a China-led coalition, finding ways to thwart or work outside of the US jurisdiction, expanding that space. I actually think that the bigger threat is any threat to American democracy.

Mohsin: We’re in a very self-critical moment right now, and that's part of what being a democracy is, that we will be open about our flaws and try to work them out in a very public way. We've been here before in the past and have gotten through it, and we're here again. And I think that as long as we emerge with reinforcing rule of law, free and fair elections, the independence of our agencies, like Supreme Court, without so many ethics scandals, a Federal Reserve that no one's attempting to politicize— I think that as long as these things are fortified, then no one can really touch the US's global dominance or the dollar's global dominance. Because the main problem, the biggest threat, I would say, to all of it, is our deficit. We have $34 trillion. In order to bring that down, you need bipartisanship, and until we can work out some of our problems right now, we're not going to edge toward bipartisanship.

Beckworth: Well, with that, our time is up. Our guest today has been Saleha Mohsin. Saleha, thank you for coming on the program.

Mohsin: Thank you so much for having me, David.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.