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Musings Report #45 11-9-14 Could the U.S. Become the Unrivaled Superpower Again?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Could the U.S. Become the Unrivaled Superpower Again?
Two of the most durable and least-questioned narratives of the past 15 years are:
1. The world is becoming multipolar, meaning that rising power centers such as the BRIC nations (Brazil, Russia, India and China) are expanding their share of the global economy, at the expense of the U.S. and to a lesser degree, Europe and Japan. In sum: the U.S. is no longer the dominant superpower, but merely one power among many.
2. The U.S. dollar is in a long-term decline due to money-printing by the Federal Reserve and the world's desire for an alternative to the dollar as the world's default reserve currency.
Having just written a 3,000 two-part essay for PeakProsperity.com untangling the complex dynamics of currencies (in particular, the strength of the U.S. dollar), I am now doubting that these two narratives are correct.
I am now thinking the exact opposite is about to unfold: the dollar (USD) will rise another 40% to 50% (if not more) in the coming years, and as a result the U.S. will be left as the unrivaled superpower, financially, economically, militarily and geopolitically as its rivals suffer the consequences of the destabilizing dynamics that are just starting to unfold.
Preparing to pen this essay on currencies was a painful exercise because I had to read numerous commentaries to get all the threads aligned.
Here is the basic dynamic that is currently playing out globally:
Rather than address the structural problems revealed by the Global Financial Meltdown of 2008-9, central states/banks responded by increasing the supply of credit and money, and lowering interest rates to near-zero.
Since writing down all the bad debt in the system would have taken down the big banks that were central to the world's financial systems, the central banks enabled debt to be rolled over at lower rates and new credit to expand.
But these policies created an enormous global carry trade, in which financiers and institutions borrowed trillions of dollars and yen on the cheap and invested the borrowed money in emerging-market periphery economies with much higher yields.
As long as the Fed was issuing money to invest in peripheral nations and the dollar was declining, this trade was low-risk and profitable.
But once the Fed tapered its $1 trillion-a-year QE money issuance, the emerging market/periphery nations' economies suddenly took a nose-dive, as the flood of money into their financial systems started drying up.
As the USD started rising, the carry trade became less profitable and threatened to become a losing trade.
Japan's 40% devaluation of the yen introduced another risk, as the yen's decline cut profits when converted to dollars. This matters because 2/3 of the emerging-market debt is denominated in USD.
Here's what's happened beneath the surface: the central bank policies that have fueled "risk-on" global carry trades since 2009 have not addressed any of the structural problems that led to the 2008 global meltdown; all they've done is transfer the risk to the foreign-exchange (FX) market, which dwarfs the global stock and bond markets.
In effect, the central banks have inflated a new risk bubble in currencies, and these risks are only now becoming visible as the dollar's rise starts destabilizing commodities and periphery currencies.
There is a powerful positive feedback to this risk-off dynamic: as emerging market currencies decline and the USD strengthens, the incentives to convert periphery assets and cash into USD only increases. As the periphery currencies weaken, the urgency to preserve capital by selling periphery assets and buying dollars greatly increases.
In response, the periphery's central banks are forced to drastically raise interest rates to offset the drop in their currencies. This constriction of lending will push their economies into recession, further depressing their currencies and increasing the flow of capital into dollars.
This dynamic will increasingly lead to currency crises, which quickly blossom into political crises that then led to geopolitical crises as governments are delegitimized by the sharp decline of their currencies.
There are no winners in this domino-like destabilization of the global economy except the U.S. Japan is obsessed with importing inflation by devaluing the yen, which is in turn destabilizing Asian exports and currencies. China's currency is pegged to the dollar, so it rises along with the dollar, crushing Chinese competitiveness. China has little room to maneuver within the peg to the USD, and ending the peg introduces a new set of uncertainty and risk.
Europe cannot be the winner as Germany's exports crumble, and the carry trade turns against everyone borrowing in dollars and investing the money in other currencies.
That Grand Narratives based on short-term trends are often wrong should not surprise us.
Summary of the Blog This Past Week
One Chart, One Question 11/8/14
About That "S&P 500 Will Be 2,150 by Christmas" Call.... 11/7/14
If You Really Think It Matters Which Party Controls the Senate, Answer These Questions 11/6/14
Why Tax Just Soda? Why Not Tax Sugar? 11/5/14
Anatomy of a Failing State: Japan's Budgetary Nightmare 11/4/14
Japan's Monetary Pearl Harbor 11/3/14
My post on the scant differences between Republican and Democratic control of the Senate was widely reprinted or referenced--it seemed to capture some aspect of the current zeitgeist.
Best Thing That Happened To Me This Week
Finished the first 31,000 word sections of my next book, which I started in earnest on 10/5/14.
Market Musings: Is Gold heading down or poised for reversal?
There are few more emotional or manipulated markets than gold, and charts have limited traction on such treacherous ground.
For gold to rise, the forces suppressing it must either relinquish their suppression or lose control of the market.
That said, it seems as if gold might be poised for a reversal few expect. Indeed, what strikes me is the number of gold bulls who anticipate further declines to $1,050 or even sub-$1,000, and the number of savvy analysts who foresee far lower prices ahead for one reason or another.
This uniformly bearish sentiment has loaded the boat on one side, and that extreme of sentiment opens the door to the majority being wrong and gold finding its footing here. If it does, short-covering could push it up $100+/ounce in a matter of days.
Beyond that, we will have to look for clues that the trend has reversed for the long-term or the reversal was merely a bounce from oversold extremes.
From Left Field
WASTING TIME WITH KENNETH GOLDSMITH, BÊTE NOIRE OF THE IVY LEAGUE (Playboy interview) -- interesting thoughts on digital media and modernism...
The Sharing Economy’s ‘First Strike’: Uber Drivers Turn Off the App -- if it doesn't pay a living wage, it isn't sustainable...
Author Murakami chides Japan over WWII, Fukushima responsibility (via George B.)
81 CANTONESE PROVERBS IN ONE PICTURE (via Maoxian) -- some wonderful images/analogies: An old cat burns its whiskers, To pull a cow up a tree ...
From The Outside, It’s Just a Tiny Log Cabin--But Look Inside -- solid space planning....
Closed shop at the top in deeply elitist Britain, says study -- confirming the obvious....
A Calligraphy Master's Album (via Lew G.)
How to Clean Your Vinyl Records with Wood Glue (via Wayne A.) -- cannot confirm, counter-intuitive to say the least...
The Internet Arcade Lets You Play 900 Vintage Video Games in Your Web Browser for Free (via Wayne A.) Frogger forever!
What Shakespeare taught me about Marxism -- sounds obscure but is actually quite interesting, even if you don't know the plays that well. Recall Marx's famous line that in capitalism, everything solid melts into air...
Clint Eastwood Meets Mister Ed (via Atreya S.) -- from a simpler, less edgy era.....
Postcards with randomly overlaid images — byproducts of the printing process that are usually discarded — purchased at newsstands in Europe. (via Katharine K.)
"In the realm of ideas, everything depends on enthusiasm; in the real world, all rests on perseverance." Goethe
Thanks for reading--
charles |
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