US abuse of financial advantages will erode its legitimacy

The U.S. government has warned Iraq that if it expels U.S. forces, it may not be able to use its account with the Fed. This is yet another public announcement by the US government of the threat of a financial war on another sovereign state.

Currently, more than 250 foreign central banks or international financial organizations have escrow accounts with the Federal Reserve. Why do foreign central banks set up escrow accounts in the Federal Reserve? The main reason is to make it easier to trade US Treasuries. After foreign governments obtain US dollar foreign exchange reserves through trade and other methods, US Treasury bonds are usually the priority assets for foreign central banks to invest in foreign exchange reserves. According to relevant institutional arrangements, the Federal Reserve can provide foreign governments with a direct way to enter the US Treasury market. With the escrow account in the United States, foreign central banks’ purchase of principal and interest payments on U.S. Treasury bonds and settlement and settlement will become more convenient.

In addition, the Reserve Bank of New York has also provided overnight repurchase business for a long time, enabling the cash in foreign escrow accounts to obtain relatively high returns. There are ways, services, and higher returns. This is the main reason why foreign governments set up escrow accounts in the Federal Reserve. According to statistics, as of the end of 2019, all foreign government escrow accounts held US $ 2.96 trillion in government bonds in the United States, accounting for about 45% of the total US government bonds held by foreign investors.

These escrow accounts are no different from ordinary accounts in ordinary times, and trading in government bonds is normal and free. However, once the US government decides or threatens to impose financial sanctions on a country, theoretically, these escrow accounts in the Federal Reserve can be targeted by the US government for financial sanctions. The release of the above information by the US government that may freeze Iraq’s escrow account is clearly a threat. If the Iraqi government still decides to ask the United States to withdraw, the US government may indeed freeze its escrow account. Once this happens, the Iraqi government will face a severe shortage of foreign exchange in the short term, and the stability of the financial system and foreign economic exchanges will be severely impacted.

But if the United States adopts this approach, it will also pay the price-seriously damaging the trust of foreign governments in the United States. Although the Reserve Bank of New York has always declared that it will manage the custody accounts of foreign central banks “foreign”, it is clear to foreign central banks that the US government is likely to monitor these accounts and collect intelligence. The bottom line for foreign central banks is that as long as the US government does not compromise the security of the huge amount of funds in these accounts, there is no problem even if it is monitored, and it is considered to be “strategic transparency” passed by the US government. If the US government publicly undermines the security of these escrow accounts for its own diplomatic or strategic goals, it will cause a chain reaction.

The current US government has continuously used its financial hegemonic status to serve national interests through various financial sanctions. This poses a huge challenge to the normal operation of the international financial system. The harm is significant and the consequences are serious. Financial rules based on market principles are increasingly being eroded by US unilateral financial instruments. In fact, in order to resist or prevent the dangers of various types of financial sanctions in the United States, other countries are constructing financial protection, including separately or jointly bypassing the US dollar settlement system and US financial markets for financial settlement and financial investment.

It is foreseeable that if the United States abuses its financial superiority without converging, it will have to develop a unified international financial system in the direction of tearing. Other major economies will take necessary measures to maintain their financial and economic security. Therefore, this behavior seems to reflect the “power” of the United States in the short term, but it will undoubtedly impact American financial superiority in the long run and accelerate the decline of the legitimacy of American financial hegemony.