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The Dollar Is Rising Much Faster Than the World Economy Can Tolerate Lombardi Letter 2018-05-10 12:07:55 u.s. dollar emerging economies european central bank federal reserve 2008 financial crisis oil price argentina argentinean peso The dollar—that is, the U.S. dollar—could spark socioeconomic chaos throughout the emerging market. Those living in the fashionable and wealthy centers of the United States may not care much now. Analysis and Predictions 2018,Inflation,News,U.S. Dollar,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/05/iStock-912989046-150x150.jpg

The Dollar Is Rising Much Faster Than the World Economy Can Tolerate

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Dollar Rising Faster

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Dollar Is Rising, Hurting Emerging Economies and Fueling Risk of Uprisings

What if the phenomenon of the Arab Spring, confined to the southern Mediterranean, were to spread globally, inflaming emerging economies from South America to Asia and Africa?

This potential “Global Spring” is an increasing likelihood because of the rising dollar.

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The dollar—that is, the U.S. dollar—could spark socioeconomic chaos throughout the emerging market. Those living in the fashionable and wealthy centers of the United States may not care much now. After all, they won’t be affected by the turmoil.

It should come as no surprise that the series of social and political protests in the Arab States—popularly known as the “Arab Spring”—erupted in the wake of the 2008 financial crisis.

EU members like France, Italy, Spain, and Greece faced the biggest economic downturn since the end of World War II. They stopped investing in their southern Mediterranean periphery.

The Arab Spring itself forced several regional and cultural tensions to emerge.

These mutated what started out as anger over economic depression into a conflict that persists to this day.

Even in Tunisia, where the protest effectively began and where some political stability did arise, conditions are precarious.

The fact that anti-status quo and Islamist parties won the recent administrative elections there shows that tensions remain.

A Butterfly Can Flutter Its Wings in Washington and Cause a Crisis in Buenos Aires

As Europe has shown, what happens in the periphery in the increasingly interconnected world has a way of spreading with dramatic results. Like the oil price, the dollar could act as the catalyst for the kind of black swan event that triggers a major stock market crash or worse.

Americans—not to mention many Europeans and the newly minted millionaires of Asia and South America—live in cocoons. They rarely confront the harsh realities of how most people live in developing countries.

Harsh realities are also a problem for many European Union members. Ask the Greeks, the Italians, the Spanish, the Portuguese, the Irish, and many French how well they have fared after 2008. And their problems aren’t over.

Indeed, the working classes of the West and those in emerging economies face a similar obstacle in the borderless financial capitalism that dominates today.

The investment banking and speculator class prowls like a wild animal in the savannah.

But it’s tired. Rather than exploring new and constructive ideas, the kind that produce and add to real GDP, it has set its sights on a weak prey: Argentina. Specifically, the Argentinian Peso.

Argentinians have a tendency to buy dollars when their currency loses value. That attracts jackals from abroad. They participate in the shorting of the peso, accelerating the accumulation of dollars in a vicious circle.

The Argentine Central Bank has raised interest rates to 40%. The effects on the economy are incalculable.

The government has brought back some of its currency, wasting $5.0 billion. But, Buenos Aires has thrown in the towel; it has called in the International Monetary Fund (IMF).

Speculators Rule

The speculation against the peso will not stop. The jackals smell blood. Inflation will rise and, of course, hit the middle and lower classes, who can’t protect themselves with dollars.

The speculation on the peso stems directly from the interest on the U.S. 10-year Treasury bonds increasing. This has pushed the dollar higher. But it has slapped South American financial markets.

Argentina is perhaps the first and most dramatic so far, given its monetary history and tendency to use the “dollar defense.”

The Fate of the Peso Will Not Be Unique

All emerging markets will face, with varying intensity, the inflationary effects of the higher dollar.

Given the predatory international finance that continues to dominate, the emerging economies can all expect to suffer. The short-sellers have not yet earned a reputation for empathy.

Governments of emerging economies will try to contain the fallout. They might use the standard “diffuse and reassure” ploy, reminding their people that national currencies fluctuate.

For years, emerging economies have tied their development fate to a wider integration in the international markets and the international banking system. That’s the essence of globalization, after all.

Yet, the integration does not protect infant economies from speculation on Wall Street. That’s the other and darker side of globalization, which the enthusiast neoliberal and neoconservatives rarely mention.

Emerging Economies Linked to the Dollar

The governments of emerging economies have linked their financial fate to the dollar. They convinced their populations to endure some sacrifices.

They also applied the classic neoliberal policies of reducing taxes on foreign capital and investment to a degree. Even the fathers of modern capitalism, Adam Smith and David Ricardo, would be embarrassed to endorse that.

President Donald Trump’s isolationist plans are not entirely misplaced.

Encouraging American companies to employ more Americans in the United States seems more than acceptable and understandable.

Wall Street Is Greedy and Ambitious

The problem, nevertheless, is that Wall Street knows no boundaries. It’s free to speculate and wreck economies anywhere, anytime.

The high dollar, resulting from the Federal Reserve’s misplaced fears of inflation and higher yields, will encourage the rapacious currency speculators, the wannabe George Soros types, to target weak economies.

This kind of “investment” exacerbates difficulties. Instead of investing in job creation or industrial development, governments such as the one in Buenos Aires—but it may as well be Santiago, Bogota, or Saigon—will have to shift investments to buying back their currency.

Of course, the main effect is to increase indebtedness. Unlike the United States however, no other economy can rely on the power of the petrodollar. As for the emerging economies like Argentina, they can always rely on the IMF and World Bank…

The Argentine inflation disease is contagious, given the quickly rising dollar. It will spread all over the world and target weak “hosts,” weakening currencies, which will test unprecedented lows.

The peso’s saga and the high dollar show the downside of globalized financial markets. It also shows that predatory speculation rules the game. The idea to invest in financial vehicles linked to productive activities that contribute to GDP has become old-fashioned.

It’s a Real Global Earthquake

Financial markets are interconnected and dominated by speculation.

Nevertheless, while many Americans can take comfort from the fact that they don’t live in Argentina, the fast-rising dollar is not all “fun and gains” in the U.S.

The earthquake that occurred in the global markets in 2008 started with tremors from rising Treasury yields. As with the emerging market case, blame speculation.

The 10-year Treasury recently topped a three-percent yield.

Most investors were caught by surprise; the dollar’s trend seemed bearish. But speculation accelerated in conjunction with sharply rising oil prices in expectation of a more aggressive U.S. foreign policy in the Middle East.

Those who bet short on the dollar had to reverse course—and sharply. Thus, the speculators managed to light up the dollar, as if the real economy—as opposed to the stock market—was finally and truly showing signs of significant improvement.

This is not the view from across the Atlantic. The central banks of Europe, from the Bank of England to the European Central Bank, remain cautious on interest rates, even if there have been signs of steady growth in the eurozone and U.K.

The European decision to maintain stimulus programs has weakened the euro.

This has intensified the bullish speculation on the dollar. Emerging markets like Argentina have been the first to pay the price.

All Around Risk of Defaults

Argentina, but also China and emerging economies in general, now risk defaults. They are exposed to higher dollar payments and ever-growing debt.

The higher the dollar rises, the more these governments will have to pay to service them.

This is a problem of globalization. And many economies could implode, unleashing millions of unemployed workers.

Such could be their numbers as to render several countries socially unsustainable. The risk of mass social disruption and an Arab Spring effect has intensified.

The debt of emerging countries continues to rise and so do the many security risks and concerns. Europe has experienced an unsustainable wave of migration that has altered the very course of its politics and threatened the foundations of the union itself.

If Trump thinks he can stop Latin American illegal migration with a Wall, then it’s time to start building it. Because the same factors that have plagued Argentina are plaguing Mexico.

Before globalization, most African, Asian, and Latin American countries relied on international aid. It limited them, but it also kept them away from exposure to the financial games in the West.

Now they have become an integral part and it seems fair that the West share that risk. A risk that takes the form of migration pressure.

Manipulation of the Dollar

The Federal Reserve—and the other central banks—have resorted to manipulating the dollar. But the Federal Reserve has taken a more immoral course than its counterpart in Frankfurt (the ECB).

The Fed has adopted the low interest rates of quantitative easing to lift the sinking ship that was the U.S. economy after the 2008 financial crisis. It was a way to manipulate the dollar to fix the damage done by the large investment banks.

These banks were, moreover, bailed out. They never paid for their mistakes, the biggest of which was to turn away from the real economy.

Instead, they dedicated their efforts to “conceiving” and selling new and highly risky financial products. They had become speculators—not bankers.

To prevent their collapse, the Fed bought—with financial resources created from thin air—hundreds of billions of dollars in bonds.

Now, the chickens are coming to the Fed to roost. Higher interest rates may strengthen the dollar. But they weaken the global economy, including that of the United States.

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