A BRIC House and an International Dollar Default by the United States – Mish Talk

Global Isolation Impossible 

The US and EU have tried mightily to isolate Russia, even to the point of a de facto but unrecognized default on US dollars. 

Yet, total isolation is impossible, says Eurointelligence founder Wolfgang Münchau in a A BRIC, Impenetrable to Sanctions.

Remember the Brics? This acronym stood for Brazil, Russia, India, China and South Africa. They are not strategic allies of Russia. But they, and many other countries, will continue to trade with Russia.

The west, meanwhile, has taken the biggest gamble in the history of economic warfare. We have frozen the assets of the Russian central bank. 

But we did not think this through. For a central bank to freeze the accounts of another central bank is a really big deal. Economically, what this means is that the entire transatlantic west has defaulted on our most important asset: our fiat money. 

With this one sanction, we have done all of the following: undermined trust in the US dollar as the world’s main reserve currency; forestalled any challenge the euro might ever make; reduced the creditworthiness of our central banks; encouraged China and Russia to bypass the western financial infrastructure; and turned bitcoin into a respectable alternative transaction currency. At least the blockchain is not going to default on you.

Now consider what the Chinese will make of our sanctions. The Chinese government knows that its large exposure to US assets is equally at risk. What the US did to President Putin over Ukraine can be done to President Xi over the Uyghurs. The process of de-dollarization will take time. But China is never in a hurry.

As a direct result of these decisions, we have turned the dollar and the euro, and everything that is denominated in those currencies, into de facto risky assets. The probability of default of a dollar or euro denominated asset can no longer be credibly put at zero. With a single decision, we have created a tail risk.