Latest Target for American Sanctions Is… America!

When Washington policymakers want to influence — or punish — other nations, they often impose “economic sanctions.” The idea is to force other people to change their behavior.

Over the past decade, the U.S. has placed sanctions on businesses, individuals and governments in Russia, Iran, Syria, Venezuela and North Korea, to name just a few.

Now the U.S. government has a new target for sanctions — a country you know all too well.

It’s called the United States of America.

But if recent history is any guide, these actions will likely fail.

Just like they’ve failed in most other places too.

Let’s dig into this…

The underpinnings of U.S. sanctions trace back to the early days of World War II. In July 1940, before the U.S. got into the actual fighting, President Franklin D. Roosevelt (FDR) embargoed the sale of U.S. goods and services to Japan, especially oil, refined products and steel.

Later, in July 1941 FDR froze all Japanese assets in the U.S. This ended commercial relations between the two nations.

FDR’s sanctions essentially punched the stopwatch in terms of Japanese timing. The country had limited stockpiles of oil, about a year’s worth. At its highest political-military levels, Japan made the fateful decision to seize oil producing areas across East Asia. To do that, however, Japan had to confront U.S. power in the Western Pacific region.1

Sanctions were the deciding point for Japan; the country determined to wage war against the U.S. By August 1941, the Japanese war machine began planning to attack and destroy the U.S. fleet at Pearl Harbor, which is exactly what happened.

Stated another way, U.S. sanctions backfired. Instead of forcing Japan to back off from aggression in China, the economic pressure widened the Asia-Pacific war.2

At war’s end in 1945, the U.S. was in a position of great power relative to the rest of the world. The U.S. homeland was unscathed, while many nations in Europe and Asia were devastated. Wrecked cities, towns, roads, bridges, factories, mines, mills, power stations, water systems. Bombed or blasted to rubble. But to Americans, the damage was all “over there,” to borrow a phrase… Not in the U.S.

Post-war U.S. industry was in solid shape too, with tens of thousands of modern plants and equipment, supplemented by a large, well-trained workforce. Add in mass-manufacture of wartime goods, coupled with extensive application of statistical quality control methods. All this placed U.S. industry in the world’s forefront.

Meanwhile, the U.S. dollar emerged from war as the world’s new “reserve currency,” courtesy of the Bretton Woods Agreement. That strong dollar was as much an advantage to the U.S. as was, say, the B-29 bomber or atom bomb. The dollar was a key element of national power.

With its powerful economy and strong dollar, the post-war U.S. government institutionally clung to the idea — and the legal mechanism — of using sanctions as a “weapon” against other nations. When diplomatic notes didn’t work, the U.S. government used the dollar as a club.

Throughout the Cold War, for example, the U.S. and allies placed sanctions against the Soviet Union and Soviet partners to prevent Western technology from falling into the hands of key adversaries. These sanctions were reasonably effective, although not airtight by any means.

Over time, the U.S. used sanctions in other instances with a mixed record of success.

In recent years though, sanctions have been a failure. Since 2014, the U.S. has sanctioned Russia over Crimea and Ukraine, and for allegedly “interfering” in U.S. elections. But to no real effect, as we’ll see in a moment.

Plus, there are ongoing U.S. sanctions against Iran and North Korea over nuclear matters. And sanctions against Syria over its conduct of its internal civil war/foreign invasion. And sanctions against Venezuela over its governance. Again, without achieving outcomes desired by U.S. policymakers.

It’s not that sanctions don’t work at all. It’s more that sanctions can be effective in some situations but lead to unintended consequences in others.

Begin with the fact that sanctions cause economic problems and often inflict severe hardship on innocent populations. As a practical matter, sanctions deny imported goods to ordinary people. Sanctions also create an environment where smuggling thrives along with corruption at many levels.

In other words, sanctions tend to spark a general breakdown in societal honesty and rule of law.

Meanwhile under sanctions, banking and foreign travel are more difficult. People cannot exchange currency, transfer funds or obtain visas. Well, they can’t until they can. Again, here’s where graft and corruption again play in.

Due to lack of access to normal banking routes, sanctions force people to turn to other means to pay for things, often to precious metals. Over the past 10 years, we’ve seen a rapid rise in using gold for monetary transfers across the Middle East and Asia. It’s not so much that Iran doesn’t export oil, for example. It’s that Iran exports oil and uses gold to settle accounts.

Sanctions disrupt business, to be sure. And then, export goods pile up unsold. Again though, they pile up unsold until they sell… often at a discount, paid off the books and then moved through smugglers.

The Middle East is crisscrossed with the tire tracks of tanker trucks smuggling “gasoil,” a mix of crude oil and diesel. I’ve seen them. And I’ve personally seen massive air freighters at airports in the Middle East and Asia, stuffed with electronic goods and other items, heading for Iran. Of course, the paperwork is heavily altered.

Between gold and smuggled oil, Venezuela and Syria remain under the long-term management of their respective tyrants, while the general populace has borne the brunt of impoverishment.

Meanwhile, sanctions create incentive for nations to build their own industries, to supply things that cannot be purchased abroad. With Russia, “import substitution” has occurred on a continental scale. Indeed, after years of sanctions, Russia is now essentially self-sufficient in everything it needs, from shoes and socks to computer chips to jet engines.

With Iran, sanctions have made it tougher for the Ayatollahs to sell oil and raise cash. But as noted, Iran uses gold for trade. And Iran certainly has a regionally powerful military — a force to be reckoned with. For example, in January I discussed the impressive Iranian missile developments. Those guys hit where they aim, sanctions or no.

And despite sanctions, North Korea continues to function as the classical “Hermit Kingdom.” The leadership structure shows no signs of cracking. The country remains militarily strong, and still has a working nuclear program.3

Let’s bring it all back home to the U.S., where we’re just now beginning to come out of the coronavirus lockdowns. Back to “freedom!”, right? Yet we also see eerie similarities to what happens with foreign nations under sanction.

In the past four months we experienced the widespread arrival of coronavirus… Then came the lockdown… And over time, a broad sense of economic strangulation. Lost jobs, closed businesses, bankruptcies, etc.

It’s becoming clear how the country has been hit with a social and economic shock wave that will resonate for generations to come I suspect. It’s from self-inflicted, national-scale lockdown, and it’s equivalent to the effects of sanctions.

The lockdown seems to have demoralized people across the landscape, sparking widespread doubt over the stability of the underlying economic system. You see it in everything from falling consumer confidence to rising sales of firearms.

Now we have the next, sanction-like step in the process of “influencing” society, social destabilization. We see this manifestly in recent nationwide, race-focused protests, which in some instances descended into riots.

In essence the U.S. has become a showcase for the overall destructiveness of just plain shutting things down; aka the nation placing “sanctions” on itself.

The virus led to the lockdown of course. But all along, the country’s core problems have been more economic than anything else. The economy was dry tinder, awaiting its spark.

Now, as with all nations under sanction, the lockdown has made things far worse by kicking the ladder out from people who were already struggling to make their way up.

Add in more long-term issues, particularly widespread government overreach in the form of militarized policing, with a distinct racial focus…

And here we are.

Government policies – federal and state – have effectively “sanctioned” the nation into a class war, leavened with a strong element of racial and inter-generational strife. Four months into our self-inflicted economic shutdown, and now in many places people are literally at one another’s throats. They’re angry, outraged, closed-minded, suspicious…

The U.S. used to be a middle-class nation. Not anymore. Real wages for most workers are stagnant. Many workers have experienced declining purchasing power over time. Now add the lockdown, lost jobs and wrecked businesses.

While stock markets levitate, most of the population has grown poorer in real terms. Recently, I discussed how the U.S. has become a nation that’s “one country, two systems.”4 Asset owners are doing well, generally. But people outside the demographic that owns capital are showing disdain for the whole system.

Hence the whiff of “revolution” in the public forum. Or more accurately, we have the aroma of tear gas and burnt plastic wafting over dozens of American cities.

Face it; the lockdown – our home-grown sanctions regime – may have “flattened the curve,” but it was a disaster to the economy. At numerous levels of government, our leadership class “sanctioned” the country into a ditch.

It’s more than evident that our collective gaggle of politicians don’t know how to lead a fundamentally wealthy nation filled with talented people. And they certainly haven’t done much to improve the lot of those on the outside of asset ownership and privileged money flows.

At the end of the day, our leadership class has used its power to sanction the rest of us, and then allowed insiders and cronies to loot the place.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

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1 A superb overview of the origin and consequences of U.S. sanctions against Japan comes from Edward Miller, 2007, Bankrupting the Enemy: The U.S. Financial Siege of Japan Before Pearl Harbor.

2 Not to get off-topic, but… Some argue that FDR’s sanctions performed exactly as intended. That is, sanctions prompted Japan to attack the U.S. and pull both sides into a war that many American politicians wanted to fight in any event. Too bad about those ships and sailors at Pearl Harbor though…

3 The North Korea Story Nobody’s Telling

5 Riot, Rebellion and a Suspected Fake $20 Bill

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A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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