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This is Mark Sobel us chair office. Today I'm delighted to be joined by cilia mosun, Senior Washington correspondent for Bloomberg News, covering policy, politics and power in Washington, DC. Cilia formerly covered the US Treasury Department for Bloomberg, and has just written a great book based on that experience. Paper soldiers how the weaponization of the dollar changed the world order. Welcome cilia.

Hi, I'm so excited to be here, Mark.

Well, we'll see if you have that same reaction when we're through. So let's start easy, obvious question. Why did you write this book?

Well, Mark, I've been interested in the government's role in currency policy, since I was a reporter in Oslo, Norway, where they have the world's largest sovereign wealth fund, and the way they use the profits of those funds to support its economy. I had a huge impact on the kroner and the I don't know how else to say it. But the hotness of the economy because they were always worried about heating it up too much with too much money. It's a great problem to have. And then I came to Washington, to the Treasury beat in 2016. And to get my feet wet, I started visiting with as many current and former Treasury officials as I could sort of dig up and the dollar policy Reubens mantra always, always came up in conversation. And a lot of people will tell would tell me about it. Oh, you know, you shouldn't you should know the policy, you should know the mantra and I read a lot of articles about it. But in the autobiographies of the secretary, treasury secretaries from moving onwards, it wasn't really mentioned much a couple of lines, even in Reubens autobiography, maybe there's a page and a half dedicated to the dollar. I read the chapters related to economic policy and all the Presidential autobiographies of the era and in that same thing wouldn't come up a lot. And so I just felt like, here's this Kabuki game, there's a subject that no one wants to talk about it. I'm a reporter. So let me just keep talking about it and keep asking about it. The other reason was that there's a lot of Fed books out there a lot of books on the Federal Reserve's, and there's nothing just on Treasury. We've got secretaries, biographies, we've got a couple of great books on just on economic sanctions, but nothing on the whole building. So I decided, all right, let's give this a try. Well,

thank you. So you just alluded to it, you write a great deal about the strong dollar mantra, which Secretary Rubin kicked off in the second half of the 90s. And then it went through a lot of ups and downs under subsequent treasury secretaries. Can you discuss that for us?

Yeah, it was really cool to report on this for the book, I was able to get inside the rooms where dollar discussions happened through people's living memories, including where, you know, the the room where the mantra was created, Roger Altman, Bob Rubin, sometimes Tim Geithner, Larry Summers, all piled into a room at the White House discussing economic policy and how it relates to government currency policy. And then I just dissected exactly how we got to the point where it is a mantra. So there was this one two punch that I heard about that Larry Summers, who at the time was the undersecretary of International Affairs, and Alan Greenspan, the Federal Reserve Chair, did this one two punch when they both had hearings, the same week in July in the mid 90s, in Congress, and so they decided they were going to do these deliver these comments about the dollar. And then a couple of weeks later, Bill Clinton was travelling in Italy, I think it was a g7. And he mentioned that the dollar and I was able to piece together, how this mantra came together. That led to Bob Rubin at his confirmation hearing before senators sort of the first time he stated it as an incoming Secretary. And from there, it was really interesting to sort of live through its evolution in real time not constantly thinking about knowing what's happened since then, but then we get to Paulo mele. And I read in newspaper articles of the day that everyone traders and investors and of course financial journalists were wondering, well is is the strong dollar mantra that has truly brought some calm to currency trading and the relationship between traders and US government economic policy. makers, Broadcom to them is that going to continue in not only a Republican administration, but also under Paul O'Neill, the Treasury secretary designate who was coming from industry, he came from aluminium markets where a weak dollar would be a good thing for American exporters and American manufacturers. And so watching how that evolution happened was interesting. And then I traced in the book, the media spectacle, it got really, really bad with O'Neill, particularly, and Jon Snow, who came after him. When I read somewhere, I think it was a Bloomberg article from that time that Jon Snow when he became secretary, he was trapped travelling, and I think, Missouri and had visited a Build A Bear factory. And he's holding one of those little house containers that a Build A Bear comes in, and he bought it for his granddaughter. And he's asked by a reporter about the dollar. And I just thought, what a wild thing that that has happened in in our country's economic history, this tiny little moment that I wanted to highlight. And from there, you get to Hank Paulson, where the policy and the mantra kind of the discussion of it went quiet. So I spent a bit of time asking people why that was. And it seemed like there was a link to Paulson's gravi toss that he was bringing a return to a secretary who came from Wall Street invest the investor community. In fact, he was Wall Street royalty coming from Goldman. And then I trace it to, you know, 2008, when you would think an American made global financial crisis would make people run away from the US dollar, but they actually ran toward it as a safe haven. And then, you know, we get through Jack Lew and then Stephen or, you know, Geithner and Jack Lew, I kind of lump into the post financial crisis era of the dollar. And it really did kind of go dormant. I remember writing a story in 2016, as a, you know, had just started covering Treasury when I was learning about the strong dollar policy. And I just wrote a story about how this thing is dormant. No one cares anymore. And then lo and behold, Stephen Venusian, you know, under the Trump era starts and it becomes a thing. You know, we have a treasury secretary for the first time in almost a quarter of a century not afraid, necessarily to opine about a weaker dollar and its benefits. And then that gets carried over into the Biden administration. When Janet Yellen does not restore Treasury's currency policy to the Rubin era one, even though, you know, Larry Summers openly called for it saying Whoever Biden's first treasury secretary is this norm should be reinstalled, and she didn't. And I found it interesting and revealing about where US economic policy was heading, if someone like Yellen was also not willing to bring it to return. Well,

thanks. I mean, of course, Yellen has not really spoken about the dollar and just avoided it. But let me be in that vein, a bit provocative. I mean, what did a strong dollar mean, other than a Potemkin village mantra to shield the secretary from often talking about currencies and the associated possible market disruptions? So I mean, as you know, I found constant journalistic questioning about the strong dollar to be a bit of an annoying, cute gotcha game, it seemed to me that many simply wanted to get an exciting headline, I think, as your book points out, a secretary surely can't engage in substantive dialogue about currencies without causing volatility. And then the media, you knew we weren't going to intervene. And the Fed, of course, is in charge of monetary policy, even if Treasury is responsible, in principle for exchange rate policy. So what's your reaction to that?

I think all the above is accurate. And then some, you know, it did really become this wild game, you know, you had, like I said, Jon Snow standing with bears for his granddaughter. And also, I lay out in the book, like I broke down this one scene in Deauville in France, where Jon Snow at a economics a PhD in economics, who had this professorial, like, quality to him, and he when he tried to have just an open conversation with reporters about the dollar to say, Hey, this is not a big deal. It backfired on him. I think that it's both it definitely got out of hand. But if you move the clock backwards to the 80s, you know, the reason i i have one chapter that's called control freaks and vigilantes, the control freaks, are government economic policymakers who were actually intervening in currency markets in the 80s. So that's where it started. You would hear stories about when Jim Baker was treasury secretary under Reagan, you he, if he didn't like where the dollar was at, he would pick up the phone from his office and call a Reuters journalist and make some comments on background. And so all of a sudden, you know, traders couldn't necessarily trust where markets, the laws of supply and demand and what they were revealing about the foreign exchange rate. Because secretaries were involved. I mean, you had two secret meetings in the 80s, one at the Plaza hotels that the Plaza Accord where finance ministers from the G five snuck into the hotel, and most of Reagan's cabinet didn't even know about that meeting at after what I think it was the Secretary of State at the time, who was angry saying I didn't even know this was going to happen and and they intervene in the currency. They wanted to control it somewhat. And then the Louvre. And, you know, Rubin, want it you brought in the Montra created it to bring calm and to untangle some of that tension. And to a large extent, it worked, things did calm down. But I think, since then, we've seen examples of how once markets believe there's no manipulation, you're just not going to do it, because you've said it. There's the temptation from the policymaker side, could become pretty strong. I think about how in I think it was early 1997, Rubin did want to tinker with the dollar. He did say that, you know, he switched around the wording of how he delivered his statement to say we have had a strong dollar for some time now. And in his book, he actually does say, Yes, I added those words for some time now, by design. So it was kind of this scenario where policymakers had told traders to watch the words carefully. Geithner, when I interviewed him for the book, he said to me that we talked about what it meant. And he said, you know that it was a policy, that strong dollar policy was designed to be a policy of all seasons. It's not a statement of what the rate, the exchange rate should be by design. And he said that the Another virtue of the framing as it was created under Rubin was to make it harder for successors to abandon the policy. So it seems like according to Gartner, there was some intention behind making it so that you should ask the question, because it might reveal where economic policy is headed. And the one example, that's outside the US that kind of comes to me is I wasn't a Bloomberg newsroom in 2015, when the Swiss national banks, Thomas Jordan, abandon the Swiss franc peg, and he took advantage of being able to shock markets, because I think just weeks before he had said, there is no plan to abandon the peg. And so the surprises have been there. And that's what makes traders and then journalists want to come back and find out is there anything else here that we need to be aware of, and then it just starts this this vortex where no one can get out of this cat and mouse game?

Well, thanks for that. A lot of thoughts in there. You know, I think the 80s was a different era, given the soaring dollar. I attribute that onto the back of the US monetary fiscal next. Thank you for your references to Secretary snow. He was one of this very smart man, very thoughtful kinds and whatnot. And I liked your comments on Tim Geithner, you could say that strong dollar meant to directional you know, the dollar should go up, you could say it meant, you know, the dollar should be firm kind of a level remark. Or you could say it really was about the underlying fundamentals of the economy should remain strong. But in any case, anytime you opened your mouth, it could create a lot of confusion. So always better to have a mantra, Potemkin village mantra, as I call it, great. Your book title asserts how the weaponization of the dollar changed the world order. You write nicely about how Treasury's Office of Foreign Assets Control evolved since 911. As did the really the build up in the Terrorist Finance and intelligence part of the Treasury? I'd like to hear about this and weaponization of the dollar.

Yeah, this was a narrative arc that kind of emerged, you know, I had written the first draft of the book, and then kind of come out of book leave. And in February of 2022, and all of a sudden, I saw we all saw us lead sanctions on Russia emerge, and then it was it just felt like the ultimate weaponization. And so I remember thinking okay, as terrible as this moment is, it's given me the arc for my book. This is the beginning and ending in through which I frame the story that I'm trying to tell I, you know, spent a lot of time on each of the units. I think as a reporter covering the building, I have a unique view of Treasury. And this is something that a UN official under Jack Lew told me when I first kind of arrived in Washington, he said, You know, I think it was Antonio Weiss, who said that domestic finance, international affairs tnfi, they're kind of siloed. And everyone has slightly different lingo, sometimes the same thing. We don't always talk to each other. But you select it, and reporters, like you talk to officials from all of the units and can kind of see everything in a little bit of a different perspective. And that's what I got to do here. So the story of the weapon of the dollar, the dollar is weaponization, and how Treasury kind of gains this power or realises and really starts to assert it starts with 911, when the Twin Towers were knocked down, and W Bush wanted to start his war on terror, I think it's easy to forget that that war on terror did not begin with a military tag rolling into a foreign country, or, you know, US troops landing somewhere it started at the Treasury Department. You know, George W. Bush stood with Paul O'Neill in the Rose Garden, and said that with a stroke of a pen at midnight, last night, I gave the Treasury Department authorities to impose economic sanctions and track financial transactions that had funded the terrorist attacks and could be funding future ones and track those money flows. And you basically it is using the US as ownership of the world's reserve asset and the visibility that then the Treasury is allowed to track money flows, to try to uncover that and stop another attack from happening. And a lot of that happened through the Office of Foreign Assets Control the sanctions unit. And at the time it OFAC was considered a bit of a orphan of the Treasury Department. I talked to David off Hauser who was a general counsel at Treasury in that era. And he said, you know, the Secretary, in the past hadn't paid that much attention to OS X activities. And all of a sudden, they were on deck with really complex economic sanctions. And from there, it just took off, you know, we had in 2004, when the Department of Homeland Security was created, it pulled bits and pieces from different agencies to create DHS, and Treasury lost the Secret Service at that time, the guns and badges left the building. And instead, TSI was great at the Terrorism and Financial Intelligence Unit. And it really beefed up oh FAQs role, the role of financial intelligence and tracking terrorist money flows. And then it actually gave Treasury a seat at the National Security Table. And as I write in the book, you know, I got to do these mini profiles in the book, not just a treasury secretaries, whose names we all know, but of civil servants who have served for decades. Also, you know, in my view, stewards of the dollar, you know, this public service and Stewart Levy, I write about how he really helped get Treasury that seat at the National Security table, because people thought, Well, why is why why is the Treasury official at this meeting? This is like intelligence community in the State Department, you're just talking about money flows. And so he really had to explain and get buy in from people around the table that Dodo, we have a role here. And we go from that to in 2022. Sanctions have become the go to tool for foreign policy. And that has to do with a couple of things. One, the American electorates, appetite for actual war and kinetic action and engagement has dropped, especially since the upon us non withdrawal I think, in August of 2021. And, you know, even before that, with the Iraq War, and everything, and also that, in this space between words and war, so words would be like just diplomacy to change bad behaviour. And a lot of times in history, the next step of diplomacy didn't work, okay, let's just go to war, the US realise, or the Treasury Department realise that there's a power in between where it's cheaper, it spills less American blood or any human blood, and it can have a big impact. And, you know, from 911 until now, we've seen almost 1,000% increase in the use of economic sanctions. And that, you know, through that, we've seen the fortification of certain parts of Treasury. We've seen a big read Think in not rethink but a lot of discussion these days about D dollarization. Has the US taken this weapon too far. And that's an active discussion, I think in Washington and most economic and policymaking circles and every capital of the world. But that's sort of where I bookended the actual weaponization and that story arc.

Okay, well, first of all, I'm absolutely shocked to hear about silos and the US Treasury Department. Look, I think it makes a big difference for the dollars global role, whether the US is using financial sanctions unilaterally at every turn, versus in concert with our allies. And with a clear strategic target, such as the 2015 Iran nuclear deal, or, more recently, the blocking of Russian oligarch and central bank assets, which I totally support. I think that kind of the unilateral use could accelerated decline in the dollars global role, whereas the latter, using it in concert with our allies would have a much more muted impact. What are your thoughts on this issue, which you already flagged?

I think that the dollar and our currency policy and our power that comes from ownership of this national treasure, this the reserve asset, is directly linked to America superpower status, which means that globally, there is a responsibility to lead and a responsibility to provide security and economic stability and lead into the future. And I think that America is a democracy and prides itself on being a democracy. And so then the US needs to lead in globally in a democratic way, as well. And so inherently, that dictates a multi lateral strategy. And anytime the US has gone out on a limb on its own, like you mentioned, with the 2015, Iran deal, you know, withdrawing from that there have been repercussions. And with Iran. It's a tiny thing. I don't not a lot of people talk about it these days, Mark, you know all about it, when Europe was trying to figure out how do we keep this Iran deal, even though the US on its own, tried to break it up, or it withdrew themselves, and they had thought about and tried to create a special purpose vehicle where they can go, they can continue trade with Iran and not violate US sanctions. And that's dangerous. All of a sudden, you have taken out some of the teeth of what American sanctions mean. And it didn't really take off that the SPV. But there is a paper trail in Europe, where the efforts were discussed, and there was a lot of discussion. And let's what are the mechanics and that means that that first step has been taken. And then now with Russia sanctions, you know, the question that I get the most is, are those sanctions working? And, you know, what I like to say is that, first of all, they are a US led sanctions, you know, dozens, dozens of countries came together with the US to impose those. So its success is not does not belong, just the US and it's possible failure also does not belong to the US. But I think that's the winning strategy. The minute you're isolating the US, then you're also isolating the dollar. So I do you agree that multilateral is the best approach. Okay.

You just mentioned that the dollars dominance is geopolitically related to me, it's also linked to the size of our economy, the depth of our capital markets, good rule of law. And then kind of the what I call the network and inertia effects set is it's it's already there. And if it ain't broke, why fix it? Is dollar dominance here to stay for the foreseeable future? And beyond weaponization, what, what do you see is the risks or key considerations?

I do think it's here to stay for the foreseeable future. The number one reason is that there's no alternative. I think that the discussions that have been going on these days about D dollarization. It's always a healthy thing to talk about, and for everyone to realise, particularly in the US, and particularly policymakers, government officials to realise that this is not something that you want to take for granted or be complacent about and that protecting this national treasure is something that at times of our history is going to be an active duty. But if there's any threat, you know, people say Oh, well, the BRICS countries want to get together and create their own currency or own a way to trade outside of the dollar. There's nothing wrong with a little bit of diversification away from the dollar. I don't think any foreign threat is as big of a threat as the domestic threats that we have. I think the dollar is king because in you know what Bretton Woods in 1944, the world wanted a stable democracy rule of law independent agencies. At the time the country had a much better fiscal outlook. Those are all the reasons that became King Dollar. And we need to attend to those. So make sure we're maintaining our democracy, make sure we are trying to actually address our deficits. And it starts with unity and democracy. If if the country's partisan divides continue as they are now, then there's no way that Congress can then get together and make the difficult decisions and spending cuts to bring down the deficit. If there's no rule of law, if we don't have free and fair elections, if we cannot agree, if we can't agree on the election results, if our agencies like the Fed, do not maintain their independence or even Supreme Court, you know, right now, public trust between Americans and the Supreme Court is that all time low, and some of that might have to do with ethics scandals. So unless we can really come and look at the foundation of democracy and make sure it's strong, we are our own greatest threat.

I totally agree with that. And I think that's a good note to conclude on us. You've emphasised that we need to keep our house in order, well manage our affairs and be seen as a trustworthy actor at home and in the global arena. And if we're able to do that the dollar will preserve its dominant role for the foreseeable future. But the benefits of such behaviour are far greater than just in the realm of the dollar, beneficial to Americans and our futures. So, well, let us wrap up, you undoubtedly have a busy schedule of places to go. Thanks for joining me today sharing your insights. And again, the book is entitled paper soldiers. How the weaponization of the dollar change the world order. Thank you, Celia.

Thank you, Mark.

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Transcribed by https://otter.ai