One of the important foundations of the United States' ability to maintain global hegemony lies in financial hegemony. Today, I will explain in detail why the US dollar has become a crisis in the world.
For years, the United States has used the dollar's status as the world's reserve currency to contain the rise of other countries and maintain its global hegemony (comic | Liu Rui)
Since March 2022, the Fed has raised interest rates six times in a row, triggering significant volatility in the global economy. This round of interest rate hikes can be called the fastest-paced, largest and most frequent interest rate hike cycle in the United States since 1982, and the federal funds rate has jumped rapidly from 0%-0.25% at the beginning of the year to 3.75%-4%. Although the US CPI (Consumer Price Index) and PPI (Industrial Producer Price Index) both slowed down more than expected in October, it is too early to assert that inflation has "peaked", and the possibility of a further rise in the upper limit of the federal funds rate range to 5% or even higher cannot be ruled out.
The US federal funds rate continues to rise in 2022 (Source| Fed data)
As for the purpose of raising interest rates, the Fed unsurprisingly still avoids the important, insisting that "the interest rate hike is to control inflation." The most typical scene is that Federal Reserve Chairman Powell directly claimed with the title of "Monetary Policy and Price Stability" at the 2022 Jackson Valley Global Central Bank Annual Meeting that the US economy needs tight monetary policy until inflation is brought under control.
However, Sima Zhao's heart is well known that the Fed's interest rate hike is to create a tide of dollar interest rates, stimulate the return of capital to the United States, enable the dollar to harvest more collateral, and enable the United States to once again enjoy the sacrifice of international capital.
The US dollar is our currency
But it's your trouble
This is a famous quote by former US Treasury Secretary John Connery, and it is also a true portrayal of the willful selfishness of the US dollar hegemony. Looking back at history, the Fed's madness by creating "dollar tides" to "soak global wool" has long been a bad record.
Triggered the Latin American debt crisis
After independence, Latin American countries are in ruins, but due to lack of capital, they generally embark on the road of borrowing foreign debt, and the balance of foreign debt in Mexico, Argentina and other countries accounts for more than 50% of GDP.
In 1979, the Federal Reserve adopted a hawkish monetary tightening policy to solve the so-called domestic inflation problem, and the interest rate level jumped sharply, which had a disastrous impact on Latin American countries.
On the one hand, the increase in interest rates in the United States has greatly increased the burden of debt and interest service in Latin American countries. On the other hand, the dollar index has climbed, commodity prices have plummeted, and the ability of Latin American countries, which mainly rely on primary product exports, to earn foreign exchange and repay their debts has been severely weakened.
In October 2012, when the Argentine frigate Liberty stopped at a port in Ghana, the US company NML held a US court judgment and seized the frigate through the Ghana Commercial Court to blackmail Argentina into repaying its default debt
Since 1982, Mexico, Argentina and other countries have successively used up their foreign exchange reserves and are unable to continue to repay their debts, and the Latin American debt crisis has broken out in full force. Because they fell into the "debt trap" created by the United States, these countries could only drink to quench their thirst and sell themselves to pay off their debts, and were forced to accept the conditions offered by the United States, sell their core state-owned assets at a low price, and turn themselves into raw material supply bases for the United States and other Western countries. A dollar interest rate hike has completely interrupted the backbone of Latin America's industrialization.
Triggered the financial crisis in Southeast Asia
In the late 80s and early 90s, Southeast Asia attracted a large amount of international capital, the scale of foreign debt rose sharply, and asset bubbles in speculative fields such as real estate continued to expand. Thailand and other countries pursue free and open financial markets and choose to maintain a fixed exchange rate system, leaving opportunities for international capital speculation.
Due to the financial crisis in Southeast Asia, a residential project in Johor, Malaysia, was abandoned and remains unfinished
Entering the mid-90s, the dollar once again entered a cycle of interest rate hikes. In the process of strengthening the US dollar interest rate, the meager foreign exchange reserves of Southeast Asian countries can hardly support the increasingly strong local currency value. George? Soros and other international speculators took the opportunity to enter and first stockpile a large amount of local currency, and then concentrated selling in the foreign exchange market, triggering a collapse in market confidence. In order to maintain fragile exchange rates, Southeast Asian countries' already small dollar reserves were depleted within a few days, and then the central bank could no longer afford to support the market, the foreign exchange market collapsed, and the value of the local currency generally depreciated by 50% to 80%. In order to repay their debts, these countries can only accept harsh conditions, borrowing from financial institutions dominated by Western countries such as the International Monetary Fund, and are almost as wanton as Latin America.
Triggered the subprime mortgage crisis
After 9/11, the Fed's ultra-low interest rates spurred a real estate boom and spawned financial derivatives such as mortgage securitization. As layers of complex packaging have allowed buyers around the world to relax their scrutiny and vigilance, mortgage lenders have gradually relaxed their credit checks on home buyers, and many less qualified subprime lenders have also been granted loans.
The low interest rate environment began to reverse in 2004, and house prices began to fall in early 2007 due to higher interest rates. Rising interest rates and falling home prices have rapidly deteriorated the U.S. mortgage market. With the end of the mortgage concession period, buyers are faced with repayment at high market interest rates, and the repayment amount even far exceeds the value of the house itself, and the market defaults on a large number of debts.
In September 2010, Lehman Brothers, once the fourth-largest investment bank in the United States, which had gone bankrupt during the subprime mortgage crisis, was removed and sold by Christie's auction house employees
Subsequently, financial institutions in various countries that had purchased a large number of subprime loans fell into trouble or went bankrupt, and the subprime mortgage crisis broke out in 2008 and quickly spread around the world, turning into a devastating international financial crisis.
History does not repeat itself
But always strikingly similar
Affected by the Fed's multiple rounds of interest rate hike cycles, the instability and uncertainty of the world economy have increased significantly. Violent interest rate hikes in the US dollar may be creating a new round of large-scale turmoil and even a global crisis. This leads to capital outflows from other countries. Many emerging markets and even developed countries such as Japan, France, and Italy have begun to continue to flow out of capital. According to the Institute of International Finance in August, more than $38 billion has been withdrawn from emerging market equities and bonds for five consecutive months since March, the longest outflow since 2005, including about $10.5 billion in July alone. Push up the debt risk of other countries. According to the International Monetary Fund, the debt-servicing burden of middle-income developing countries is already at its highest level in 30 years. By the end of March 2022, more than half of the 69 low-income countries were in debt distress or at high risk. Among them, Lebanon has declared bankruptcy of its national government and central bank, and Sri Lanka has declared a default on sovereign bonds.
In March 2021, a woman with her child begged on the street in the Lebanese city of Beirut, with graffiti on her back that read, "We are all beggars"
Emerging economies mostly rely on overseas financing, and the past two years have been the peak period for their debt repayment. Considering the current high stock of external debt in these economies, the rise in financing costs in the future may increase the pressure of refinancing, which will undoubtedly significantly increase their economic operation risks. Trigger the devaluation of multinational currencies. So far this year, the dollar index has risen above 114.5, the highest since 2002, up 17.2% from the beginning of the year. The US dollar has shown an upward trend against the currency indices of various economies, and a strong US dollar is bound to reduce the level of global trade, causing the global trade market to shrink and impact the global economy. Limit the monetary policy of other countries. According to the latest data from central banks, developed countries have generally raised interest rates by 50 to 400 basis points since the beginning of this year, and developing countries have also generally raised interest rates, with the Bank of Argentina raising interest rates by 3,700 basis points and Zimbabwe even raising interest rates by 12,000 basis points at a time.
Zimbabwe has one of the highest interest rates in the world. The picture shows Zimbabweans holding signs with the slogan "Hungry millionaires" during protests
The process of world economic recovery is not on the same track as the "dollar tide" cycle, and the US economy is moving towards recovery and taking the lead in raising interest rates, but other countries that are still at the trough of the economy are not yet ready to raise interest rates. The Fed's continued interest rate hikes are bound to greatly limit the space for monetary easing in other economies.
A wicked man is his own hell
In the face of this insatiable "American scythe", countries have not sat still, the hegemony of the dollar is being challenged unprecedentedly, and the dominant position of the dollar in the field of payment and settlement has been "burned everywhere".
Many countries have reduced the proportion of US dollar reserves. According to IMF data, the proportion of US dollars in global foreign exchange reserves has shown an overall downward trend in the past 20 years, accounting for 58.88% in the first quarter of this year, significantly lower than the proportion of more than 70% around 2000. Central banks are gradually reducing their holdings of dollars.
In addition to Russia and other countries, Israel, a key ally of the United States, has also begun to include the Canadian dollar, Australian dollar, yen and yuan in its foreign exchange reserves this year, compared with only three currencies: the US dollar, the British pound and the euro, while the country's central bank plans to reduce the proportion of the US dollar in its foreign exchange reserves from 66.5% to 61% to reduce its exposure to the US dollar.
Israel began adding Canadian dollars, Australian dollars, Japanese yen and renminbi to its foreign exchange reserves this year. (Source: | State Bank of Israel)
The dollar's settlement position is becoming more and more loose. SWIFT data in October showed that the proportion of international payments in the US dollar has fallen to 39.16%, and the share of payments in euros, yen, yuan and other currencies has gradually increased.
In this Ukraine crisis, the United States froze hundreds of billions of dollars of Russian reserve assets, and directly promoted Russia and other countries to use other currencies for international trade settlement. Since April, Russia has switched to rubles for gas supplies to "unfriendly" countries and regions.
The RBI launched the rupee settlement mechanism for international trade in July with the aim of "supporting the growing interest in the rupee in global trade". In July, Iran's economy minister said it had been confirmed that it would no longer use the U.S. dollar for economic and commercial trade with Russia.
The renminbi is recognized by more countries. In May 2022, the IMF decided to raise the weight of RMB in the SDR basket from 10.92% to 12.28%, which came into effect on August 1. In July, Australian mining company BHP Billiton's iron ore arrived at a Chinese port, and the Australian side took the initiative to settle the transaction in yuan instead of US dollars. The RBNZ also announced an annual revision of the New Zealand dollar trade-weighted index.
On June 22, 2013, People's Bank of China signed a RMB 200 billion/GBP bilateral currency swap agreement with the Bank of England, aiming to support bilateral economic and trade exchanges and help maintain financial stability. In November 2021, People's Bank of China renewed its agreement with the Bank of England
At present, China has signed bilateral currency swap agreements with more than 40 countries and regions, and RMB assets have increasingly highlighted the role of "safe haven" and "stabilizer".
The dollar raised interest rates "self-destructively by eight hundred". The reasons for the current round of inflation soaring in the United States are complex, but the main problems on the supply side of the economy are the epidemic, the Sino-US game and the Ukraine crisis, the imbalance of the production and supply chain, changes in the industrial structure, and the hollowing out of the US industry. The interest rate level regulated by the Fed is more on the demand side, so it is very different to curb inflation by raising the interest rate level, and will have a serious impact on its own employment level, people's lives, and wealth distribution.
In addition, the interest rate of U.S. Treasury bonds is rising, and prices have begun to plunge, which has triggered Japan, China, Ireland, Canada and other top U.S. bond holders to sell U.S. bonds in a concentrated manner, limiting the financial capacity of the U.S. government and raising its own debt costs. It can be said that the Fed's interest rate hike has also put a "noose" on its own head.
In the current era of anchorless dollars, the Fed's irresponsible printing of green paper and irresponsible harvesting has seriously damaged its international credibility, triggering more and more countries to join the wave of de-dollarization, and the dollar hegemony will eventually die out like a rootless wood and sourceless water, and the "American sickle" will eventually be difficult to reap the wealth created by the hard work of the people of all countries.
Source: Chaoyang Shaoxiao