Monday, Feb 26, 2024
the longer-term impact of sanctions, what ECB messaging is masking, ETH breakout
“We do not measure a culture by its output of undisguised trivialities but by what it claims as significant.” – Neil Postman ||
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IN THIS NEWSLETTER:
The longer-term impact of sanctions
What European Central Bank messaging is really saying
Ethereum’s breakout
WHAT I’M WATCHING:
The longer-term impact of sanctions
Some anniversaries are extremely unwelcome.
Saturday marked two years since Russia invaded Ukraine. Two years of destruction and death, with a loud absence of the diplomacy and negotiation that usually accompany hard conflict. Two years of painful expense with virtually no gain, of existential determination on both sides, of finger-pointing and of geopolitical realignment.
We’ve also had two years to witness what could end up being one of the quietest economic earthquakes of this civilizational cycle: the beginning of the end of supreme dollar power.
While the initial round of sanctions was swift, the noisiest move was the freezing of Russian central bank foreign reserves in the US and Europe. At the time, mainstream media proclaimed this to be a “death blow” to the Russian financial system, and a few voices worried about the precedent this was setting. Indeed, 2022 saw the steepest slump on record in foreign holdings of US government debt.
Yet the death blow turned out to be no more than a scratch – the Russian financial system is still functioning. What’s more, 2022 was the year the Federal Reserve started hiking rates, making US bonds a less attractive asset and most likely triggering some sales for portfolio management reasons. And foreign holdings of US debt are again on the rise; at the end of Q3, they were back up to pre-Ukraine invasion levels.
(chart via the St. Louis Fed)
On its own, freezing sovereign reserves was not enough to dent the global need for liquid assets that perhaps are not as safe as originally thought, but are still safer than pretty much anything else that is as liquid or as easy to convert into dollars. Plus, there’s that attractive yield.
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