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Op-Ed: US dollar blues — Shaking a very shaky house of global economic cards

A credit meltdown is possible.

Like the rest of the world, inflation has surged in Mongolia, while the tugrik has tumbled against the dollar - Copyright AFP BYAMBASUREN BYAMBA-OCHIR
Like the rest of the world, inflation has surged in Mongolia, while the tugrik has tumbled against the dollar - Copyright AFP BYAMBASUREN BYAMBA-OCHIR

The rise of the US dollar (USD) has triggered a lot of trading issues. A lot of trade is conducted in USD. That means that purchasing power of other currencies is getting hit hard. Debt is also often in USD, which makes debts more expensive. That’s why the global financial system is having kittens as the USD rises.

Interest rate rises exacerbate the issues. The Federal Reserve did the right thing by doing one large rise rather than a series of smaller rises. The one-step rate rise allows for a pause to rate rises for a while. It also gave markets, notably, the credit market, a look into the void as vast numbers of huge loans became more expensive.

The irony here is that the big loans were based on lower rates. One of the reasons for the rises in property markets, apart from greed and lousy economics, was low rates. People could suddenly afford to borrow more. Higher rates put that in perspective; this ain’t Kansas anymore for big borrowers.

That includes nations. The UK, for example, is deeply, and unwisely, in debt. The rise of the USD means serious costs just to pay the interest on those loans. It also directly impacts revenue and government spending. It’s a grim outlook for a country already basically assassinated by Brexit. The Bank of England can only do so much.

As the world's dominant reserve currency, an official US digital dollarcould be a game changer for the global financial system
As the world’s dominant reserve currency, an official US digital dollar could be a game changer for the global financial system – Copyright AFP/File JIM WATSON

Countries with weaker currencies can join the train wreck if they don’t hold USD. If they don’t, trading, borrowing, and doing business can become a lot more expensive, to risky levels. Most do hole significant amounts, but the situation is tricky at best and dangerous in any case.

The strategic position tangle

There’s an interesting, but very brittle, strategic situation for geopolitics here. China, for example, can theoretically benefit from a lower yuan, making its goods cheaper. The problem is that the massive, horrendously expensive drought and import needs make that situation much more complex. Buying food and other imports can be a lot more costly.

Trading only in yuan, you’d think, would be simpler and cheaper for China. Yes it would, but the USD is the dominant global currency. The yuan is fine for trading with China. For China’s trading partners, getting yuan at a lower rate doesn’t make doing business in USD any easier. Converting yuan to USD means a lower return relative to the USD these nations need to trade elsewhere.

The offshore yuan has hit its lowest level against the dollar on record
The offshore yuan has hit its lowest level against the dollar on record – Copyright AFP STR

For the US a strong dollar does bring some benefits. Acquisition is easier and imports are cheaper. Debt repayment gets easier, too. Against this, tariffs become more expensive, and foreign purchasing power of US goods and services is weaker.

To bang away on the obvious – There is however a problem in the US, and it’s domestic. The insane and inexcusable consumer price rises have triggered what looks like a major contraction in the US economy. Main Street is feeling queasy with good reason. This contraction isn’t proven, but quite likely. Inflation suddenly tanked in August to an almost absurd 0.1% according to BLS figures. That definitely means some sort of big hit, somewhere, and soon.

Well, what do you expect? A while back, a survey was done indicating most American households couldn’t handle an unexpected $400 cost in any given month. So you raise the rents by hundreds per week? Idiots. You can’t foreclose on nothing, or evict people who can’t even afford to rent.

The Euro went down a month or so ago and has just raised rates to an all-time high. The Euro is a reliable currency, but it’s also operating in a strong dollar environment, with similar if much less threatening issues.

Economic uncertainty is weighing heavily on the British pound against the US dollar and the euro
Economic uncertainty is weighing heavily on the British pound against the US dollar and the euro – Copyright AFP Arun SANKAR

The Russian rouble, that merry little prankster, will come under severe direct pressure. To stabilize the rouble earlier this year, Russia raised its rates to 20%. Can that hold up against a much stronger dollar? Probably not.

Raising rates isn’t the only issue for the Euro. Rate rises can’t necessarily fix the problems, just mitigate them. The European banking system is also exposed to the USD, with the neurotic exchange rate affecting a whole spectrum of business and trading issues.

Longer view

The markets are buying USD like mad. That means that at some point the USD will go off the boil. The question is when. A lot of global debt can’t just wait for that to happen. A credit meltdown is possible.

Trader at NYSE: © AFP/File

“Meltdown” means borrowing becomes prohibitively expensive.  That applies to borrowers like banks, which may find themselves borrowing at higher rates, which of course gets passed on to the wider economy. Credit cards, mortgages, business loans, whatever, we’re talking trillions up in the air here.

That doesn’t mean everyone’s in a hurry to go over the nearest cliff. More rate rises aren’t necessarily better. At some point, rate rises could be simply dead weight on an overloaded market. So there is no reason to believe the central banks or anyone else are in any hurry to go over the cliff. The risks are far too obvious.

You may find yourself reading a lot about debt management, restructuring, and perhaps tarring and feathering. Much past and future verbosity on this subject always translate into “stay solvent” as the working principle.

The world has nothing to gain from a serious credit crunch. Skeptical as any self-respecting house brick would be of the immense tangles of dubious debt around the world:

Wall Street in the Financial District of New York City. — © AFP

A crash, however much the pampered, unquestioned credit market deserves it, helps no one.

Real money, not the fictional type created by the markets, could be at risk. Think sandcastles and tides, and you get the picture.

Even the sacred money launderers could be at risk. The money they hold could become worthless.

Price pressures have to go down, a lot and credibly. (No sympathy for greedy fools who lack the talent to make money by other means and over-commit to a nutcase market. You should know better, if you’re pretending to be an adult.)

The likely reason for big cash cost increases like rent is that someone needs a lot of cashflow all of a sudden. Sure they do. All these self-proclaimed geniuses suddenly need hard cash? When they’re doing so well, according to them? No. They’re overcommitted, more like, and severely, so the world should pay for their mistakes.  (COVID isn’t and wasn’t a credible reason for rises. None of those costs were mysteries to anyone.)

Political irresponsibility must cease. Capitalism ceases to be an ideal when it ceases to function. That’s the risk, and governments, even pretend ones run by morons, must adapt.

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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.

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Editor-at-Large based in Sydney, Australia.

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