In 2011–13, the Obama administration waged an effective war on Iran using financial weapons alone without firing a shot. Iran was denied access to the global dollar payments system (Fedwire and the Clearing House Association) and later denied access to the global payments system for all major currencies (SWIFT). The result was a collapse of the Iranian currency, the rial, as black-market rates for scarce dollars revealed the value of the currency had been cut in half.
This led to hyperinflation and bank runs. The Iranian banks had to raise interest rates to 20% to keep deposits from flooding into the black market. Social unrest was soaring and Iran was moving closer to regime change.
Obama declared a truce in 2013 in exchange for negotiations on Iranian promises to curtail its nuclear weapons programs. Those negotiations resulted in a deal in 2015 (the so-called JCPOA, or Joint Comprehensive Plan of Action) that was in place until President Trump ended it in May 2018 because of Iranian cheating. Now we’re back where we left off in 2013, except this time the sanctions will be far worse and far more pervasive.
This article reports on a recent speech by U.S. Secretary of State and former CIA chief, Mike Pompeo. The Pompeo demands on Iran are extensive and are unlikely to be agreed upon by Iran. If Iran does not agree, Pompeo and the White House threaten “the strongest sanctions in history.” This time the White House won’t mind if regime change happens.
The problem for investors is the collateral damage that may arise from the Iranian response. In 1941, FDR put extreme sanctions on Japan by freezing their bank accounts and putting an embargo on Japanese oil imports. A few months later, Japan bombed Pearl Harbor in a sneak attack.
Iran will not send dive bombers to the U.S. but may use terrorist bombers in retaliation for sanctions. Even more likely is a cyberattack that could close the New York Stock Exchange or disable systems at major banks. Investors should prepare by having multiple bank accounts, building cash allocations and buying physical gold, which cannot be hacked or frozen in cyberwarfare.
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