There is now no doubt in my mind that we are witnessing a replay of the inflection point in the global liquidity cycle that culminated in the Asian currency meltdown in 1997, the TMT debacle in 2000 and the subprime mortgage crisis/credit market contagion in September 2008.
China’s $5 trillion deflation nightmare has only just begun, a replay of Japan’s two lost decades with a property collapse, shadow banking crisis and a balance sheet recession that guarantees 2 to 3% GDP growth for the next 10 years. This is Lehman – only 100X worse. 18 months after the first Fed rate hike in March 2022, when the good fairy finally convinced Jay Powell that 9% CPI meant that inflation might not be transitory, the Fed has delivered the mother of all interest rate shocks to an American economy where credit contraction, a consumer spending slump and bank/property distress are themes du jour.
Milton Friedman became the 1976 Nobel Economics laureate for his insights that monetary policy works with long and variable lags and a US economy with a 128% debt to GDP ratio is about to find out just how draconian and just how variable the lags can be.
The collapse of Silicon Valley Bank, the spike in the $1 trillion credit card market delinquencies and the disaster in retail Q2 earnings/foot traffic are only the tip of an iceberg that guarantees recession at the same time as the Fed’s preferred inflation metric PCE is twice the FOMC’s dual mandate target. I have outlined my case for King Dollar and mini meltdowns in the Euro and sterling ad nauseum in these posts for the past 3-months. The real time proof of my puddings on Planet Forex is now in. Sterling (cable) is down from 1.2800 to 1.2460 since my cri de coeur to my Dubai investor peers.
The macro fit has also hit the shan in Germany’s das auto and property market. The reason why the cancer of stagflation/credit crunch has taken the Euro down from 1.12 in July to 1.07 now.
I get harangued by my de-dollarization critics who expect the BRICS currency to replace the greenback as the new payments/reserve currency of the world. The US dollar is almost 90% of global trade and 70% of foreign central bank reserves. With this metric upto 95% in the case of the UAE Central Bank and 80%+ for Abu Dhabi’s $1.8 trillion sovereign wealth fund assets.
The Chinese yuan is only used in 3% of global trade, mainly with the Dragon Empire’s vassal states, such financial superpowers as North Korea, Myanmar Pakistan and Cambodia. I postulate that a BRICS currency is a joke as long as Xi and Modi cannot bear to sit in the same room, let alone engage in a Namo style bro-hug over cold lassi and stop their soldiers from bludgeoning each other to death in icy Himalayan border decreed long ago on a map by Lord Curzon, the imperial patriarch of South Block’s wolf warriors. To paraphrase Ali, the boxing champion who floated like a butterfly and stang like a bee, I will say it again as I have said it before. King Dollar will fly in 2024.
Also published on Medium.
