A
severe crash (50% or more) in the stock market will cause certainly a
recession. Unemployment will soar, businesses will close and banks become more
cautious and impotent.
The
fake world of fake money with fake interest rate will clash with the real
world. Debts, and real estate will deflate. Then the policy prescription will
be to “inflate or die”. And that may lead to hyperinflation unless money is
kept rather than spent. QE4 was buying toxic assets to the tune of USD350
billion in 4 days. The Fed has announced pumping up to USD75 billion into money
markets. Over next 12 months USD850 billion in new money will be in the system.
This is without a crisis.
In
the first quarter of 2019, global debt hit USD246.5 trillion. Encouraged by
lower interest rates, governments went on a borrowing spree as they ramped up
spending, adding $3 trillion to world debt in Q1 alone. It reverses a trend
that started in the beginning of 2018, of reducing debt burdens, when global
debt reached its highest on record, $248 trillion.
The
first-quarter spending spree brought the debt pile to 318% of global GDP. According
to the Institute of International Finance (IIF), Finland, Canada and Japan saw
the largest increase in debt-to-GDP ratios of all the countries tracked by IIF,
in a one-year period. The IIF study is alarming because high levels of debt put
countries in a vulnerable position in the event of a downturn. According to the
World Bank, countries whose debt-to-GDP ratios are above 77% for long periods
experience significant slowdowns in economic growth. Every percentage point
above 77% knocks 1.7% off GDP, according to the study. The United States’
current debt-to-GDP ratio is 106.5%.
Apocalyptic
visions like these have pundits emerging from strange places offering
outside-the-box solutions. One of them is Canadian Mark Carney. The out-going
Bank of England governor dropped a bombshell during a recent luncheon speech.
In it Carney devoted 23 pages to describing why the US dollar’s “destabilizing”
reserve status in the world economy has to end.
As the graphics below show, every couple of hundred years there
has been a change in the world currency, dating all the way back to the
denarius of ancient Rome.
Even
more radical, was his explanation of why central banks need to join together to
create their own currency to replace the dollar, backed by either gold or a
cryptocurrency.
Close
to 50 years ago (1971), the gold backed dollar was released from its handcuff
of a fixed rate of USD35 per ounce to the dollar. Since then, the Federal Reserve
has been slipping new bills to Wall Street and the elite. Funding speculations,
buybacks, bonuses and simply guaranteeing investments have become common. Over
USD30 trillion in extra wealth was created but not earned. So the elite are
grateful but remain greedy.
Meanwhile,
US debt is now USD22 trillion and will rise to USD30 trillion by end of 2030.
Nobody knows when the banking system will fail or how it will fail.
What’s
the solution?
The
gist of Carney’s argument is that the dollar’s reserve status has conferred on
it a status that it no longer deserves. While emerging-market economies have
become more important to the world economy, contributing 60% to global activity
versus 45% before the financial crisis, their currencies have not seen a
corresponding increase in importance. The best example is the Chinese yuan.
Also,
the dollar’s use in half of international trade transactions is out of
proportion to its share of world imports – five times more in transactions than
imports – which fuels demand for US assets and exposes many countries that hold
US Treasuries to damaging spillovers from swings in the US economy.
What
Carney is hinting at here is the US dollar’s loss of “exorbitant privilege”. The
dollar is the most important unit of account for international trade, the main
medium of exchange for settling international transactions, and the store of
value for central banks.
Well
one way is to have asset-backed currencies. It could be gold, precious metals
or commodities – why? It justifies the amount of currency available in a
country. The formula may include parameters like population, assets, economy
and others. This will end currency and trade wars.
The
formula devised may equalise all currencies and it will lead to a Global
Currency Reset. An explicit requirement will be for every country to reset and
apply global standards. The other option is to use IMF’s Special Drawing Rights
as the new universal currency. China and Russia have already agreed to reduce
the use of the U.S. dollar in bilateral trade. And with multilateral trade
arrangements like CPTPP, the yuan may be on the rise.
The
Euro is another alternative. But it means the decline of the dollar caused by
the Americans themselves. A reset is thus due and forthcoming with growing
malaise of U.S. politics and banking.
Reference:
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