Is The US Becoming An Economic Outcast?

Over a year ago the US put Karim Khan on the Specially Designated Nationals (SDN) sanctions list. This means that Karim Khan's US assets are now frozen, US companies are prohibited from doing business with him, and even some non-US countries may be afraid to do business with him due to secondary sanctions.

Who is Karim Khan? Some Russian oligarch? A military general? No, he's the prosecutor for the International Criminal Court (ICC). And his 'crime' was issuing an arrest warrant against Benjamin Netanyahu and Yoav Gallant (former Israeli defense minister) for war crimes.

The ICC is based in the Netherlands, which is outside of the US's jurisdiction, they can't really arrest him. So they resort to sanctioning him instead.

Now I originally reported on this in February when the story just broke. But since then it has developed quite a lot. The US sanctions dragnet has expanded considerably to include over 10 additional members of the ICC and a UN reporter for some reason.

The UN reporter, Francesca Albanese, is actually a big one because the US is a member of the UN and the UN has a rule that says members are not allowed to do things like this. But the UN is also terrible at actually enforcing its rules, so the US will probably get away with this.

Then, more recently, there was the move against Autistici/Inventati (A/I) which is a company providing internet services. Hosting, encrypted email, mailing lists, that sort of thing.

They are on a counter-terrorism sanctions list. The 'official' explanation is that they allowed some terrorist groups on the platform. Which, as many have pointed out, doesn't really make sense because if a terrorist group joins Facebook you don't sanction all of Facebook. It also violates some procedural rules designed to avoid just this type of collateral damage.

So why did they do it? Well, A/I was providing services primarily to anti-war and environmental activists. And they were based in Italy, outside of US jurisdiction. So quite similar to the Francesca Albanese story. Just targeting many more people this time.

And finally, there is the latest attempt to weaponize the dollar: Operation Economic Outcast. This is an extension of the Iran War. You can hear about it here. Unfortunately the audio is not great.

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Basically, the US lost the war, so in an attempt to eke out some tiny semblance of a victory, they are sanctioning Iran even harder with secondary sanctions. Bessent actually compares this to an economic D-Day which I found interesting. I think D-Day was a pretty significant turning point in a very large war. I would not say the Iran war is like that at all.

Also, the Q&A section is quite interesting. Bessent was asked twice about Chinese banks and dodged the question both times. Like, if you're just going to dodge questions, why even bother having a Q&A?

Oh, and if you don't know why China is such a big deal, it's because China buys about 90% of Iran's oil. So if you're going to sanction something, it might as well be China, otherwise what's the point?

Also the second-largest buyer is Syria. So, yeah, good luck sanctioning them. And the third buyer? Venezuela. The country Trump kidnapped the leader of and is trying to get oil from. I guess it makes sense, the US has sanctioned Iran for a long time so the only people still trading with them don't care about sanctions.

Interestingly, when Bessent was asked why not impose the sanctions immediately, he said, 'Why would I want to blow up the global financial system?' Which undermines the credibility of the threat just a bit. It's like when he bought Yen just for it not to do anything, or how he said he was buying long-term bonds only to reveal it's only an additional $2 billion, which is nothing and predictably did nothing. Why'd Trump appoint this guy anyways?

China has already refused to stop buying oil from Iran, which isn't too unexpected. Cutting off China would 'blow up the global financial system'. Interestingly, Pakistan said they would continue trading with Iran as well. Possibly because they are so reliant on Iran that stopping trade with them would be worse than any sanctions. As of writing the US has decided to target an Egyptian bank though.

So will Economic Outcast succeed? No, it will not. You cannot destroy a country with air strikes, and you cannot do it with sanctions either. This will just make Iran do more business with the countries that don't care about US sanctions. I still have no idea what the US even wants from Iran. Iran has stated that if the US were to honour the memorandum of understanding there would be peace. But no, war it is.

But the bigger story here is not what will happen to the rest of the world. It will be what happens to the US. Because things are not exactly going great in the US. Bond yields are surging, and when bond yields surge, it raises the yields of every other bond because the government is always seen as safer and more likely to pay you back.

So if you want to take out a loan, you do not want to borrow in US dollars. You want to borrow in Euros or Yen or Renminbi (called Panda bonds for some reason). And that's exactly what we're seeing. I originally noticed this in corporate bonds, called 'reverse Yankee bonds'. This is when US companies issue bonds in something other than US dollars. Many AI companies are doing this now as it's cheaper than USD-denominated bonds and they have so much debt they need to issue. But now countries are doing it a lot too.

Pakistan (one of the countries to reject the US's secondary sanctions), Indonesia, Slovenia, Kazakhstan, Brazil, and Kenya all issued or are planning to issue Panda bonds this year. And the reason is obvious: the yields on Panda bonds can be almost a third the yield on USD-denominated bonds.

The US's massive debt is being increasingly seen as a massive liability. Combine this with the US's continued attempt to weaponize the dollar for unpopular reasons and one has to wonder: why bother with USD exposure at all? Why not just deal completely in another currency that won't give you any headaches? And that appears to be what the rest of the world is doing: they are packing up and leaving. Then one has to wonder: who's the real economic outcast?