Market Chatter:
Follow up to my previous post there is another great piece at this link below:
counterpunch.org
Tocco
Below are some excerpts from the article "Dollar Imperialism, 2015 Edition":
The Fed effectively acts as the world’s central bank, but sets monetary policy only in its own interest. Under the pressure and the orders of financial oligopolies, it fixes interest rates and prints money to suit itself, sending economies across the globe into tailspins. When the Fed wanted to halt the decade-long decline in the profit rate and to pull the US out of stagflation in the late 1970s, it raised its rates sharply – the Volcker shock of 1979-1981, when the federal funds effective rate jumped to more than 20% at the beginning of the 1980s – throwing many developing countries into freefall, default and debt servitude. As their debts were denominated in dollars and rates jumped, suddenly they were paying drastically heavier debt service burdens, which they could only cover by taking out more debt under the draconian conditions of the IMF. In 1997, the US interest rate hike of only a quarter of a point was one of the main reasons for the “Asian crisis,” as hot money fled South-East Asia. Today in 2015, the end of QE, a strengthening dollar and an anticipated rise in US interest rates could wreak havoc in developing economies. Since 2009, trillions of dollars hot off the printing press or borrowed at near zero rates have been flooding into the global South and East. But today’s monetary tightening is already leading to an exodus of hot money that is destabilizing these countries, with the effect of keeping the United States’ rivals in the “emerging” world down.
The dollar is rallying less because of any supposed US recovery than because of higher global demand for dollars due to investors’ risk aversion, in the wake of the Fed pulling the plug on QE. Parenthetically, the US economy is definitely not recovering. According to Jim Clifton, chairman of Gallup, for the first time in 35 years, more businesses are closing than starting up. He also reports that the official unemployment rate of 5.6% is “misleading,” and that only 44% of working-age Americans have a job at least 30 hours per week for an organization that provides a steady paycheck. Shadowstats puts real US unemployment at 23.2%. A survey done for the Fed says that 48% of Americans don’t have savings enough to cover an emergency $400 expense. The Pew Research Center reports that Americans are 40% poorer than in 2007. And, completely unrelated, the dollar is indeed rallying: talk among US conservatives about a dollar crash and hyperinflation because of QE, and their comparisons with Weimar Germany, are entirely off: they haven’t understood that Weimar Germany was not the hegemonic power controlling world monetary policy. It’s not the quantity of dollars in circulation but its demand that establishes its “value.” This demand is still extremely strong, related to the fact that the dollar’s status as international currency is based on the only remaining way in which the US is superior to other countries, that is, its military hegemony – despite the weakness of its economy and monetary policy.
The dollar index has gained around 18% since last July, when it started taking off and emerging currencies began to tumble. The Russian ruble, despite the sanctions enacted in the spring last year, didn’t start plunging until July. The other BRICS currencies (apart from the floating-pegged yuan) as well as developing countries’ currencies from Indonesia to Mexico to Algeria, also started dropping last summer, and began their freefall in November, just after the end of QE at the end of October. After years of US pressure to revalue the yuan higher, China may be forced to devalue it, which would spur further capital flight. The IMF and BIS have warned about the risk of massive defaults in emerging markets. This currency instability and capital flight comes on top of falling commodity prices and the threat of a US rate hike. Investors may be hoping to transfer the carry trade to euros, given the new euro QE, but the ECB can’t supply dollars, which are what’s in demand – in fact, euro QE will only strengthen the dollar more.
The Financial Times wrote on February 22:
“History suggests that severe accidents are more likely when the Fed is tightening, and the dollar is rising. […] Whether it likes it or not, the Fed is the world’s central banker, more than ever before. The dollar has become the unit of account in a foreign credit market that is half as large as US GDP. All of the major emerging markets are deeply embroiled, including China, Brazil and India. The market is plenty big enough to cause trouble in the US economy itself, should an accident occur. An accident certainly cannot be ruled out. […] Even in retrospect, it is not easy to identify viable policy options for the emerging markets (EM), other than extremely cumbersome capital controls, that could have insulated the emerging economies from the Fed’s unconventional easing. […] Portfolio managers in the global bond market may dump EM debt very quickly as interest rates begin to rise, forcing some EM corporates to buy dollars to redeem maturing debt. This could push the dollar higher, tightening monetary conditions even more. And this would reduce capital investment in the EMs, raising the risk of recession and inducing bond managers to dump more EM credit into the market. The BIS is worried that the results could resemble the collapse of a traditional leverage bubble in the banking sector, even though the institutional components would be very different.” |
