Reserve Currencies Key Factors and Future

By pjain      Published Aug. 12, 2020, 3:28 a.m. in blog Invest   

-- XFR --- What CAN YOU do about Massive Printing by All Central Bankers, and USD/Euro Fall

Buy Gold & Silver - ETFs and Physical Bullion, stored safely

Buy Inflation Protected Assets - Other than Real Estate

Buy Your OWN Family Home as Real Estate

Manage Deep Real Estate Debt/Boom/Bust Cycles

Tightly Manage Income Producing Real Estate in Face of Rent Control

  • Don't rent to disabled, HUD, etc. losers
  • Require high security deposits
  • Enforce maintenance, no pets
  • Don't buy in Slums, Drug neighborhoods

--- XFR --- Tracking Forex

DXY is used to measure dollar strength

This is measured by the DXY index of trade-weighted currencies

2020 Covid USD Weakens on Massive Stimulus, Forever low 0.5% 10yr UST

  • Feds Balance sheet to go to $10T in 6 months
  • USA screwed up virus response (?200,000+ real deaths)
  • Money inflows stopped as Deficits at $2-3T/year
    • Investors expect the Fed to keep interest rates low for long - maybe years
    • USTs @0.5%Money fled dollar-denominated safe havens, such as US government bonds - so rates are low as Fed is buying not real buyers!
    • Real Estate, Company and House foreign buyers - decreased markedly
  • Aug July 2020 DOLLAR LOWS 10% drop - The dollar fell in July 2020 to a two-year low against the euro
    • Depreciation that has reversed almost half of the appreciation of the last ten years within the space of just months.
  • May 2020 - Massive Fed Swaps and pouring buckets of liquidity into financial markets => USD Depreciation rapidly
  • Mar 2020 - DOLLAR HIGHS Strengthened on crisis - When the COVID-19 pandemic went global in March, the dollar strengthened on the back of safe-haven flows into US Treasuries, as it does at the start of every crisis.

2020 EU - pragmatic

  • EU has pragmatically straddled US/Russia/China relationships - able to be the "hard forex buyer" of global goods vs US trade wars
  • EU has not had to WASTE massive amounts on defense like USA - so it invests all that into its "social welfare", education and training Industry 4.0
  • Europe has had FAR better Covid-19 recovery
  • Europe PMI and optimism at high levels
  • Euro $775b bailout for weak countries
    • This validates EU's push for deeper fiscal integration - and alternative to USD
    • But this is only 5% of outstanding USTs - ie it would take 20 years for Euro to be as important in global reserves!

2018+ Trump Trade wars

The Dynamics of Reserve Currencies

Privilege

Being the world’s main reserve currency lets a country exchange Digital entries for the goods and services that other countries produce. It enjoys disproportionate influence over important multilateral decisions and appointments. And it benefits from others’ willingness to outsource to its own institutions the management of their financial wealth.

SCALE IS KEY - $15T of UST

  • There is a minimum economic scale needed to create a benchmark asset with the liquidity of US Treasuries.
  • The $775b European bailout of 2020 is a 5% drop in the bucket

Mean Control of Tx Closings - US Control of SWIFT and Sanctions viciously enforced

While arbitrary abuse of SWIFT eg to encircle Iran with sanctions will eventually hurt USD, in the short term, it just makes rest of world bend a knee to power of almighty dollar!

This willingness to exercise and even abuse the power of being the reserve currency is like the life-and-death power of dictators like Mao, Assad, N.Korea's Kims, Colombian Drug Mafia lords etc. The day you are not feared, or seen as weak or unable to destroy others, that is the day you are targeted for extinction.

30%+ Global Trade Role Transactions

Trump’s administration has done more than any in living memory to disrupt US trade.

MONOPOLY POWER - Oil

Petrodollars provided a strong foundation of USD dominance

SAFETY and Sound Fiscal policies

Normally, investors hold a currency when the issuer’s policies are sound and stable.

  • 1971 Nixon went off the gold standard amid massive money printing as Vietnam war escalated under Kissinger with even mad expansion of bombing of Laos/Cambodia.
  • mid-2018 The Federal Reserve started a policy of unwinding foot to pedal, but had to unwind it as markets and Trump threw tantrums.
  • 2020 US policy under Trump has been risky and erratic. It failed in Covid-19 response in VERY UNSCIENTIFIC - SEEN AS IRRATIONAL!

Provide Global Liquidity

Governments, for their part, hold and use the currencies of their alliance partners.

But under Trump, the United States today is no longer the reliable alliance partner it once was.

WILLINGNESS TO LET Foreigners Put their Greasy Hands on Your Currency

NO Capital Controls

China is clearly unwilling to let Yuan float or let its citizens take it anywhere in the world else they really would buy London, Vancouver or Seattle $1m flats instead of overpriced Shanghai ones. Wait - the rich Chinese figure out ways to already do that! But an open Yuan would make it possible for even the middle class to do what CCP princes and uber-rich Chinese have been doing for decades.

Forex is VERY HARD to predict, Too much uncertainty

But no theory of what determines the exchange rate works well!

Bankers of Last Resort

  • FED With the 2008 and 2020 massive swaps, the Federal Reserve has repeatedly shown it is able and willing to act as lender of last resort to the world, the status quo is tolerable.

  • WB/IMF duo are in contrast seen as protecting the debt portfolios of their politically motivated investment bankers, etc. Case in point, how can a tiny badly mismanaged economy like Argentina be favored with a $60b bailout by the IMF?

  • Keynes bancor of 1944 - yet to be implemented! Like the UN - the idea is good but nobody wants to put up the money (or in case of UN be the armed enforcer).

TINA - There is no Alternative to USD for now! Neither Euro nor Yuan!

At this time, there simply is no other currency that can or will fill the dollar’s shoes. The euro is not an alternative. The stock of safe euro assets remains segmented along national lines

TINA is a metaphor -- xfr--

The world works on as Margaret Thatcher put it, is “TINA” - There Is No Alternative - but in the context of "market economy is the only system that works". Of course this narrative was twisted to benefit inequality boosting globalization, City-led financialization and UK's control of major tax-havens and finance centers of London and Hong Kong and deep influence over Dubai and Singapore.

Critics of this slogan said it legitimized "Globalised capitalism, so called free-markets and free trade were the best ways to build wealth, distribute services and grow a society's economy. Deregulation's good, if not God."

  • 2010-2015 Angela Merkel said no alternative but ECB/IMF bailout response to the PIIGS European sovereign-debt crisis of unable to service debts. Problems had been caused by the push for an Euro where all were credit-worthy to takeon ultra-low-interest payments that created fiscal deficit abuses and unsustainable balance of payments in first place. Over time, this led to the accumulation of deficits in the South, primarily by private economic actors. For example, Italian business people were avoiding paying tax to buy Mercedes at very low rates and under underwriting by Italian banks! For a while the partying was good on both the Northern industrial suppliers and Southern consumers. With huge fiscal deficits the PIIGS governments got deeper into debt as well. European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing.

  • 2013 Stocks were the only alternative for institutional investors needing a certain return in a world of perpetually low interest rates and financial repression.

Interest Parity

If you can predict the outlook for interest rates esp. between two regions, you can understand the change in the exchange rate - this is called interest parity.

The Future Reserve Currencies

SDRs

Multipolar - USD,EURO,Yuan, Yen world

Gold and Silver as Global Money Equivalent

Gold has been a Global currency for thousands of years

Most countries mint an ounce of Gold as a currency in their country. In the US it is called, “The US Gold Eagle” Coin. Hard assets, such as commodities and precious scarce resources like Gold may re-emerge as the dominant world reserve currency.

China dominating Superpower - Eurasia

2015 Chinese Yuan recognized as a world currency - HUGE OUTFLOWS occurred

In November 2015 the Chinese Yuan was recognized as a world currency. On a PPP (Producer Price Parity) basis China is the largest economy in the world with the US in second place.

2016 China clamped down forex and capital controls - restoring Internal stock and home markets

China Economic Policies dominating South China Sea, Belt-and-Road, String-of-Pearls

The Chinese love the Bretton Woods ,, (a) see the United States as the British of the 1940s - a declining imperial power facing economic and political problems that threaten its global position. And they see themselves (the Chinese) as being the Americans of the 1940s. - Benn Steil, author and director of international economics at the Council on Foreign Relations

India Long Road to Join Global Hard Currencies, RBI beggars it

1947 Independence - India followed along with Peg to Pound

1949 India continues Pound - Devalue wrt USD

The 1949 30% devaluation of UK Pound started an international realignment of exchange rates in which many other countries devalue their currencies against the U.S. dollar, including Australia and India.

1966 Famine - hurt India - further devaluation

1992 Forex Crisis

2015+ RBI Controls INR and continues to Beggar the Rupee

Still RBI has massive currency flow controls. Indian Rupee is not a freely or fully convertible currency.

A fully convertible currency is one which has the least capital and current account controls. This is only possible if your banking system, treasury markets, bond markets should have depth (volume) and breadth ( Variety of instruments) to withstand capital inflows and outflows .

INR as a fragile currency, Low Share of Global Trade, Even though Indians everywhere

Rupee’s share in global trade settlement is negligible.

Even though Indians are one of top overseas populations, sadly it is far from a hard currency.

Why is Indian rupee so weak? - “When you have decent inflows, there is no reason for the rupee to depreciate and the RBI's sharp dollar purchases are the predominant reason behind the weakness,” said Anindya Banerjee, a currency analyst at Kotak in Mumbai.Nov 28, 2019

Oil and Gold Imports Waste Forex - mess up balance

Do Liberal Educational Loans Waste Forex

Outbound Travel Waste Forex = Total FDI

A WTO study says Outbound forex spent was $20b in 2015 growing 12% per year. WTO estimates 50m per year will travel abroad, spending $60 billion by 2020, or about the same as the total FDI inflow into India in 2017.

Sadly FDI inflows are NOT rising by even 10% per year - no wonder that between lack of FDI and the massive Public sector banks, there is a massive capital starvation in India.

  • Encouraged by its pace-setting 7% GDP global growth rate, rising personal income levels and changing lifestyles, huge middle class as well as the availability of low-cost air fares and diverse travel packages, India is rapidly becoming one of the fastest growing outbound travel markets in the world, second only to China.

India’s population currently 1.35 billion overtakes China’s

Its young, tech-savvy, educated workforce are GLOBALS ie well connected and traveling abroad often. A sizable number of Indians have a net worth of more than $1 million and 180 million Indians - three times the population of the UK - speaks English, and many of these folks own cars, cell phones and carry credit cards.

India's middle class is already bigger than entire US population and will double in size to 547 million .

Every year, more than 5.4 million Indians go abroad to conduct business, attend meetings, study, sight-see, shop, honeymoon and especially to visit friends and relatives (VFR). With more than 20 million Indian nationals now living throughout the world (3.4 million in the US), the volume of outbound travel is increasing about 25% a year.

Indians spend the most!

There was a time when Americans spent big, tipped generously and lived life king-size while travelling the globe. Now when traveling abroad, Indian tourists are among the world’s highest-spending globetrotters.
In fact they spend this money in an average 2 weeks alone!

Nationality Spend/Trip
India $1200
Americans $700
British $500
Chinese $300
Japanese $300

Most Indian business and VFR trips include leisure and shopping components, and nearly half of all Indians who venture abroad do so to shop with almost 75% buying branded duty-free goods.

If expectations are realized, the UNWTO predicts today’s 20 million outbound Indian travelers will more than double to 50 million over the next three years.

Kinds of trips abroad - Business - really important including IT/outsourcing travel - last 3+ weeks - Holiday trips last 2 weeks and usually setup as booked discount tours - VFR remains the staples of Indian outbound tourism and last 4-6 weeks - Sports vacations - luxury travel - MICE trips - Honeymoons - people are spending $10,000+ for fancy Aussie and Swiss honeymoons paid for bride's Dear-old-Dad - Cruises

Most Popular Destinations

Nearby and Southeast Asian countries remain preferred destinations as they are "Cheap" and bring back "Goods" - Thailand - the top destination esp. Bankok - Dubai is probably the No. 2 destination for Indians - Singapore - Malaysia - Sri Lanka - Nepal - Australia

Canada and U.S. dominates for business/careers - US in 2000 over 250k Indians came, growing to in 2015 1.1m+, by 2018 1.4m+ and by 2025 2-3m - Indians were the 7th largest market for US - spending $12b in 2015 alone - Air India and United offer the only nonstop flights to New York and San Francisco from India

European countries are popular in the luxury segment. - 2.5m Indians visited Europe in 2016, adding almost $3 billion to the local economies of individual countries. - London, Scotland, Paris, Switzerland and Germany remain age-old favourites esp. as many Bollywood movies were shot on location there - East European countries such as Hungary, Slovakia, Poland are loved by Indians being picturesque and high value for money - The Mediterranean weather countries of Greece, Spain and Portugal have also gained popularity esp. by the "been-there" Europe travellers

In Asia emerging destinations drawing attention include - China - Japan

SDR currency - Multipolar Yuan-Yen-Euro-USD as Reserve

  • PKJ does NOT think anyone currency will replace, instead the dominant powers with STRONG current account surpluses will create a new SDRs.

References

Digital Currencies

Bitcoin, Libre - to disrupt Fiat Currencies possibly


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