Let me explain why monetary sanctions are a circular firing squad, ie. a form of suicide.
First we need to understand what fiat currency is and how it works, and in order to understand that, we first need to see what money is and how it works. Money is by definition a universally acceptable commodity. This means that, if ancient Egyptians wanted to trade with the ancient Babylonians, they had to agree on what is acceptable payment, and they had to agree on some form of measurement of value. Practicality dictated simplicity, so money couldn’t be some complicated basket of commodities. It had to be one metal, so that values of other commodities could be easily calculated, which was necessary for conducting trade. If you wanted to trade cows for wheat, you needed to know how much a cow is worth and how much a measure of wheat is worth. Measuring value of cows in wheat, only to later try to calculate value of cows in wood or copper, was impractical. When multiple metals were used as money (for instance gold, silver and copper) this already complicated things, but usually a fixed exchange rate was maintained for long periods of time, and things usually worked.
Conducting international trade doesn’t necessarily mean that actual gold ever changed hands. Gold was an instrument of debt clearing – a way of keeping score. You agreed to trade cows for wood planks, and usually this meant that goods of identical value were both imported and exported, which means you bartered cows for planks, and gold was used only for calculating how much wood you can get for a cow. Only if you had a trade deficit did gold actually change hands, but since countries didn’t like parting with their gold, and it was obvious that it can’t be kept up indefinitely, trade deficits were avoided. What gold was actually used for, was paying tribute to foreign powers; basically, it was a way of avoiding war.
The concept of “sanctions” by not allowing someone to trade with you is not something that makes much historical sense; basically, you didn’t trade with someone if you were at war. If you were at peace, trade was desirable, but not waging war while at the same time prohibiting commerce, that would be seen as inherently irrational. Also, the concept of not accepting someone’s money as payment, or prohibiting others from using your money as payment, that would be seen as silly, since any amount of foreign gold would just be melted and forged into your own coinage, whereby all “foreignness” would be erased from it.
Now let’s introduce paper money. Paper money started as a bank note promising to pay a certain sum of real money (gold or silver) to the bearer on demand. Since the bank notes were seen as completely reliable, people started to conduct mutual trade in those, not even bothering to exchange them for gold coins, which were cumbersome at bigger quantities. Then the states and central banks seized monopoly on issuing bank notes, which increased reliability of money in circulation against bankruptcy of the issuer; basically, if a bank that issued your banknotes went bankrupt, your paper money was suddenly worthless because its value was based on the ability to exchange it for gold. With state-issued currency, the things were simplified; the state issued paper currency guaranteed by the gold in its treasury. Also, since paper currency was merely a pointer to value, and not value in itself, second order pointers, such as orders to transfer money from one person to another became popular. A form of such an order is a cheque. Another form is a telegram between banks, through authorized channels, authorizing payment from one account to another. With popularity of such “wire transfers” of money (which is a term that is still used for SWIFT, SEPA and similar transfer orders), the banks no longer had to physically transfer money, either in form of gold or its first-order pointers, the banknotes. The banks no longer had to store physical money; they just had an account with the central bank, and account with other banks, so that they could perform inter-bank transfers for their clients. The concept of “correspondent bank” was formed; that’s a bank in which both bank A and bank B have accounts, and so when the bank A wants to transfer money to bank B, in which it doesn’t have an account, the money is transferred to the bank B’s account in bank C, where bank A also has an account. As a result, there isn’t actually any physical money in any of the accounts, just information stating how much money is owed to whom. In case where someone demands banknotes, they are created on demand by the central bank, and those banknotes replace some of the numbers in the computer. When the physical banknotes are used to repay a commercial bank’s debt to the central bank, the banknotes are withdrawn from circulation, because, let’s remember, they are a promise by the central bank to pay a certain amount. When they are back in possession of the central bank, it means they have been redeemed.
This entire system was based on two premises:
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the central bank will redeem all issued banknotes in gold (or silver) on demand; always, without exceptions and preconditions;
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all debts within the banking system will be honored; always, without exceptions and preconditions.
What does that mean, in practice? The countries constantly conduct commerce. If a country can say “I don’t like you, so I won’t honor my financial obligations to you”, it basically makes all international commerce impossible, because countries simply won’t trade with someone who might confiscate their assets or refuse to pay back the money they owe for some capricious reason. Also, a bank can’t say “I don’t like you, so I will just confiscate your money”, because nobody in their right mind would use such a bank to store his money.
That’s the theory. Now let’s see what we have in practice.
The US Dollar started as a unit of mass, defined in both gold and silver. Such metal Dollars were forged as coinage, and the paper banknotes were merely the first-order pointers, the promises to pay coinage to the bearer. Then it dawned to the American state that it can run a deficit by issuing many more banknotes than it had gold in reserves, because people trusted them and were very unlikely to redeem them. When people started understanding what’s going on, they started redeeming Dollar bills for physical gold coins. The state invented the term “gold hoarding” to describe the practice as something nefarious, started propagandizing against it and eventually introduced a law demanding that everybody exchanges their gold bullion for paper currency, and outlawed possession of gold bullion by the citizens. When the citizens handed over their gold, the Dollar was promptly devalued in terms of gold, which means that the state defrauded its citizens, and is normal and expected if one understands what state actually is, as opposed to what it claims to be. A state should be considered a self-interested player that acts according to game theory. This means that citizens should not consider the state a benevolent superstructure that acts for their benefit, but an opponent they must constantly play against and assume that it constantly plays against them, and will defraud, rob, abuse and murder them whenever it is found beneficial to its interests.
To continue our story, the Dollar was still pegged to gold in international trade, but the citizenry was denied access to gold, and thus had reduced sovereignty. When the second world war ravaged most of the world (except America), in Bretton Woods conference the nations agreed to use American Dollar as the “reserve currency”, which essentially means using the Dollar as the first-order pointer to gold instead of their own gold reserves for debt clearing, because moving gold around was seen as risky in 1944. Basically, the countries had an account with the American federal reserve bank (created when they sent their gold to America), and clearing was done by telegraphing a transfer order which moved Dollars between accounts. This meant that the money was “safe” in America. It also gave America an incredible opportunity to print as many Dollars as it liked, regardless of the actual gold reserves, which they of course used to finance the cold war and the space race. What happened next was the “gold hoarding” crisis of the 1930s, only on the international level; for instance, in August 1971 Charles de Gaulle called America’s bluff and sent a ship full of paper Dollars, to be exchanged for gold, because that was theoretically permitted, despite the fact that nobody actually did it because they trusted America. Immediately following that, Nixon “temporarily” suspended convertibility of Dollar to gold. This essentially made paper Dollar a null-pointer, and, since all other currencies were based on the Dollar according to the Bretton Woods agreement, it referenced the entire global economy to a null-pointer. Huge turmoil and insecurity ensued, and America reacted by creating the “petrodollar” system in 1974, by promising the Al Saud family military backing if they agree the sell the Arabian oil for US Dollars only. This was later extended to all OPEC countries, creating the system where US Dollar not only could be redeemed for petroleum, but was in fact necessary for obtaining petroleum on the market. This was actually an excellent move, because the difference between gold backing, silver backing or any other universally desirable commodity backing is unimportant. What actually matters for a currency is its acceptability, and people accept currency not because the government mandates it; people in fact routinely evade such government mandate in states with failed currency. People accept currency because they can buy things with it, and it retains stable value. If you need oil to power your entire economy, it makes oil-backing of currency in fact more reliable and sensible than gold-backing, because gold is nowhere near as necessary. The problem with the petrodollar is not that it makes petroleum the new gold; the problem is that it makes America able to print as many Dollars as it wishes, and other countries are forced to sell their precious assets for Dollars if they want to buy oil. What it means is that America found a way to export its inflation worldwide, which means it can run a huge budgetary deficit, it can run an infinite trade deficit, and use the proceedings to finance a huge military that will keep the rest of the world in a state of fear if they don’t accept the position of America’s satrapies and colonies. The only limit to such a condition, in game theory, is when America increases the pressure it applies to other actors to the point where open warfare with America starts to look like a lesser evil.
As America grew economically weaker and ideologically more insane, it increased pressure using “economic sanctions”, which are essentially recursive, meaning that anybody wishing to participate in the Dollar system (which in today’s world means being able to use money, since it’s the basis of all international trade and the banking system) needs to enforce American sanctions or be sanctioned themselves. In game theory, if a very powerful actor pressures a small actor, the small actor will either be ruined or resort to mostly unsuccessful and highly unprofitable attempts to evade sanctions internationally. If a very powerful actor applies the same kind of pressure to a peer actor, the peer actor will form international alliances that will fracture the current Dollar system, introducing alternatives. If America tries the concept of recursive pressure, other smaller players will have to choose between being blackmailed by America, being sanctioned by America, or being militarily attacked by America. This will mean that America won’t have any friends, but will have many slaves. If this were a shopping mall, and you were looking at the map, it would say “you are here”, marked with a red dot. Well, this is the red dot. America is at the point where it forced the world into two camps: slaves and enemies. The slaves are mercilessly exploited and controlled to their detriment, and the enemies are under threat of imminent nuclear war. This is an unstable equilibrium, meaning that it holds for a while, but the present condition makes most of the players so profoundly dissatisfied with their condition that they will perform iterative adaptations of their respective strategies in order to procure a better arrangement. An example of an unstable equilibrium is a totalitarian state, in which the citizens are oppressed and they understand it, but they don’t dare to openly defy the government because the price of open defiance is too great. However, since the price of total obedience is also too great, most actors choose to make public displays of obedience while maintaining a subversive attitude in private. This makes the totalitarian state underestimate the level of opposition to its power, and when something changes in the balance of power, basically when the citizens feel that the state is vulnerable and their odds of succeeding against the government have improved, there is a sudden “flash revolution” that topples the government in ways we have seen across Eastern Europe in the 1990s. Unstable equilibria have historically proven themselves to be a very dangerous way of organizing a state, which is why democracy was invented as a form of a “fig leaf” that creates pretense of citizen participation, consent and influence in the system of government. If citizens think the system is fair and good, they won’t waste energy opposing it. However, if the system changes in ways that make people feel oppressed, they will rebel against it, and the system will have to respond by increasing the amount of force it applies against any threat. This increases the perception of tyranny, and the things iteratively degrade until the eventual collapse. Basically, if you abuse the system, you are initially likely to succeed, because the inertia of the system guarantees that most players will have more to lose if they abandon the system than if they tolerate your abuse. However, this encourages further abuse, and this iteratively degrades the system to the point where players have more to lose by participating in the system, than in open revolt, and that’s the point where tyrants die. Since tyrannies are inherently conducive to abuse, and abuse is inherently conducive to revolution, this makes tyrannies unstable and, as such, undesirable as a form of government. Keeping the system honest and trustworthy is the only long-term stable outcome. However, the short-term benefits of breaking the trust in order to benefit from the abuse of power are so great, that self-interested players in the position of power hardly ever resist the temptation. The solution is to create a system where power is sufficiently distributed, avoiding concentrations of too much power at any one point in the system, regardless of the apparent utility. That’s why the old system, where each sovereign power had its own vault with gold, could last for millennia, and the Bretton Woods system, which kept all the gold in one superpower’s vault, was abused almost instantly. Also, that’s why the temptation to print more money than you have gold is always too great.
The problem with the financial sanctions is different – they initially work and seem to be a good substitute for kinetic warfare, especially if you are so powerful that the sanctioned party needs you much more than you need them. In that case, that party is weakened, and you are actually strengthened, because other actors compete for the sanction party’s spot on the market. However, the more you do it, the more you degrade faith in the system, by creating the environment where the players have to assume that they are next, and they have to make covert steps to insure their safety in case they are. Basically, the situation is similar to the unstable equilibrium of a tyranny.
So, why are the sanctions against Russia so fatal to the Dollar system? Well, the only reason why the Dollar system still works is because all the players assume that Dollar is good for conducting international trade. If they can’t assume that their Dollars are safe in the bank (meaning, that America won’t just confiscate them), and they can’t assume that they will be able to buy assets from other actors for them, the Dollar suddenly becomes devoid of utility, meaning literally “useless”. Also, the Dollar was always a liability if you wanted to wage war against America, but since few ever did, it was a moot question. However, it is also a liability if America wants to wage war with you, and this is increasingly the case, to the point where the world is now divided into America’s vassals, and countries America wages war against. You do have in mind that most Dollars (and Euros for that matter) don’t actually exist in paper form. It’s not like a Russian bank has foreign paper money in its vault. The “money” is actually a number on a central bank account somewhere in America or Europe, and if this account can be “frozen”, it means that the issuer doesn’t honor his obligation to make it “legal tender for all debts, public and private”. It’s suddenly nothing. Also, the idea that Russia will accept Euros to buy Rubles, it’s ridiculous. What Euros, and where? The Euros are a mere number in a computer, that denotes someone’s obligation to honor a debt. If the issuer can decide not to honor debts, what use is there of having a number in your computer, as opposed to having it somewhere in Bruxelles, London or Zurich? You can’t accept foreign money that is used as a financial weapon, period. You need to force them to buy commodities with other commodities, for instance using gold as payment for gas, because euros are worthless if you’re prohibited from using them. However, when you revert to trading in commodities, in a situation where you don’t have an established point of reference in one commodity (gold or silver), you have to use a very complicated mechanism of referencing one commodity against others, or using an international weapon of financial pressure as a yardstick, which is unacceptable. Essentially, what just happened is that the established system of international commerce was broken, and the new system hasn’t yet been proposed. This means that chaos and war will ensue, because the established system was abused so hard for so long, that there are many players who will suddenly see a chance to set themselves free, creating conditions for a “flash revolution”. On the international scale, this means that all conditions are ripe for total, all-encompassing conflict.