/ world today news/ The market, born in despair, grows in mistrust, matures in longing and is destroyed by false hope
The COVID-19 pandemic has shaken the global economy, including the American one. In fact, the accelerated economic recession makes it even more difficult to establish the risk to American corporations and the inability of the people to pay back all the debt they will receive. This is a profound challenge to the Joe Biden administration.
News has come that the White House is mulling another $3 trillion stimulus package, although a final decision has yet to be made.
In fact, on March 11, just 51 days after being sworn in as the 46th President of the United States, Biden signed the so-called $1.9 trillion “Relief Act”. According to the Committee for a Responsible Federal Budget, the bill “contains a third round of stimulus checks, an extension of increased unemployment benefits, additional tax credits for families and workers, education funding and support for state and local governments.
Smaller in number but significant costs include funding for COVID-19 testing and vaccines, small business grants, support for child care providers, rental assistance, and homeless assistance.”
Infusing huge amounts of dollars
It is not hard to see that injecting such a large amount of “cash” into the market is de facto spamming the US dollar and it can only be paid for with “borrowed money”. Such action can and will increase the debt burden of the US government. And it actually does.
The US federal government printed $1.5 trillion worth of currency notes in 2000. In 2021, it will print $6.75 trillion worth of notes. Predictably, the market will experience a short-term “high”.
Yet, while enjoying this “peak”, the country must realize that this will be a temporary prosperity and will set huge time bombs for emerging markets, and one such market is China.
As mentioned earlier, the recent large-scale monetary easing policy of the US Federal Reserve has officially transformed many of the former bailouts of the financial system into the basic livelihood of the people.
This is the first time that the US federal government has bypassed the usual intermediary role of commercial banks to directly or indirectly distribute life-saving financial assistance to large and small businesses and consumers. The Fed assumed the role of “lender of last resort.”
To be fair, the Fed’s fairly robust measures are intended to help companies deal with the pandemic downturn and people with unemployment, ease investors’ worries about credit market meltdowns, and prevent pressure on the US financial market, even tsunami in the global financial market. Perhaps such measures will help the US economy achieve a V-shaped recovery in the post-pandemic period. They can also enable multinational companies that urgently need a large infusion of US dollars to issue debt financing to protect themselves from the impact of the pandemic.
Long-term impacts on emerging markets
But the Fed’s measures could have a longer-term impact on emerging markets such as mainland China and Hong Kong.
First, by issuing excessive amounts of dollars, the US can and will further strengthen its global hegemony. Before 1971, every US dollar bill had the words “Gold Coin” on it, indicating that the bill was backed with gold and that the holder of the bill could exchange it at any time for gold.
But during the administration of President Richard Nixon in 1971, the US decided to end the system of exchanging banknotes for gold, and the words “Gold Coin” on US dollar bills were replaced with “Federal Reserve Note”. In essence, such a “note” is just a VON (I owe you).
Yet the US dollar and its related assets (such as US Treasuries) are the world’s most important foreign exchange reserves and liquid financial assets. This means that global pension companies, insurance companies and financial institutions are ready or forced to support the Fed’s policy of unlimited quantitative easing, or QE. To do this, they need to buy more US dollars and US dollar assets.
Likewise, countries that depend on the US dollar as a means of settlement as well as a reserve currency are also concerned that excessive monetary easing could significantly weaken their own currencies. Therefore, in order to stabilize their domestic market, these countries must also help expand US dollars along with the Fed (this is technically defined as the swap line) to obtain or maintain a large and stable supply of US dollars.
Dollar Swap Agreement
During the 2008 global financial crisis, the central banks of the European Union, Canada, the United Kingdom, Switzerland and Japan reached a temporary dollar swap agreement with the Fed. Under the agreement, the Fed will give these five central banks preferential treatment.
Indeed, such supply of US dollars to foreign central banks is tantamount to recognizing the unique status of the US dollar in the international financial market and a way to solve the short-term shortage of US dollars in foreign banks during financial crises.
Although not intended, temporary swap agreements have now become permanent. This means that the only source of international currency flow is now the Fed. With this, the US can function as a global “creditor of last resort”.
Thus, the Fed’s unrestricted QE policy not only marginalized the euro, the British pound, the Japanese yen and other international currencies, but also prolonged the internationalization process of developing country currencies such as the Chinese yuan.
Second, excessive issuance of US dollars can cause turbulence in emerging markets. In the past, financial institutions used a variety of metrics to gauge risks and pressures in the financial market, including the Chicago Stock Exchange Volatility Index, interest rate options and overnight interest rate spreads.
However, given the Fed’s unrestricted QE policy now, it is easier to determine whether market turbulence has subsided simply by watching the appreciation and depreciation of the US dollar. Ultimately, the volatility of the US dollar can create major turbulence in the global market.
For example, amid the COVID-19 pandemic, the Fed’s unrestricted quality control measures have created panic among investors. When such panic is coupled with a lack of market liquidity, the natural reaction of companies, central banks and investors around the world will be to hoard more and more US dollars and use dollar-denominated assets as collateral. As for the assets of other countries, including those in emerging markets, they will be sold off.
A key indicator of risks in the banking system
As a result, this could not only push the dollar’s funding costs to record highs, but also make the appreciation and depreciation of the dollar a “mirror” reflecting the health of the global market －even a key indicator of risks in the banking system.
Perhaps the best way to determine the stability of the global financial system is to monitor the movement of the US dollar index. During the global financial crisis in 2008, the US dollar index was the lowest at 70.7. If the US dollar index rises above 96, the global economic and financial outlook will be considered not particularly optimistic, prompting international investors to dump large numbers of emerging market assets and buy stable US dollar assets for the sake of hedging .
But if the US dollar index falls below 96, it means that the global economy and financial markets are improving. Funds that had flowed into the US market will quickly return to emerging markets to earn better returns. This will lead to a sharp decline in the cost of funds in emerging markets. And rising asset prices can be seen as ticking time bombs like overinvestment, overheating of the economy and inflationary pressures.
„It’s hard to give up the addiction to US dollars”
Thus, the Fed’s unrestricted QE policy will gradually make it harder for international investors to give up their “US dollar dependence.” This also means that in the future, emerging markets will experience the “boom and bust” cycle.
And if emerging markets continually go through the bubble-inflating-bursting cycle, their economies will suffer long-term “internal injuries” that would be difficult to heal －and they could become “emergency markets” instead of develop a future.
Third, by printing excessive amounts of dollar bills, the US will force a significant number of the global poor to support the rich in the US.
Unrestricted QE measures will also help US companies and individuals stimulate consumption by taking out large amounts of public and/or private borrowing, further deepening the pattern of “the US rich consume global products and the poor”.
Given the bleak global economic outlook, the Fed’s aggressive QE policy is actually an additional punishment for emerging economies’ currencies that are already reeling from macroeconomic imbalances, foreign capital withdrawals, and/or political instability.
Asymmetric model of economic cooperation
Thus, if these emerging countries want to obtain additional US dollars or dollar assets as foreign exchange reserves to stabilize their domestic economies and exchange rates, they will have no choice but to export more raw materials, consumer goods, and industrial products for the United States.
Such an asymmetric pattern of economic cooperation works in the US’s favor simply because it can issue an unlimited number of banknotes, regardless of the accompanying growing deficit.
This means that in the future, an increasing number of poor people around the world will have to work harder to provide more consumer and industrial goods for rich Americans so that they can get the US dollars.
It would be foolish to believe that the Fed’s unlimited QE policy is aimed at saving the global market and steering emerging markets into a new round of the economic cycle. As the old saying goes, “the market, born in despair, grows in half-belief, ripens in longing, and is destroyed by false hope“.
Indeed, when the market looks increasingly hopeful, that is when global vigilance is called for.
Da Hsuan Feng is the General Counsel and Haiming Liang is the Chairman of the iValley Research Institute of China’s Silk Road.
Translation: ES
#USD #spam #hurt #emerging #markets
