Bond yields are up, equities are down, foreign exchange markets worldwide are reeling under the strength of the dollar. We therefore touch upon Triffin’s Dilemma.
Good morning, I’m Austerity Jones and wow, what a week in financial markets! Bond yields are up, equities are down. What are your thoughts C Thomas?
C Thomas: I think the central banks and more importantly their governments need to proceed very carefully. Liz Truss, now the most important person in the UK, released her tax package this week and it contains sharp tax cuts and this is in addition to the subsidization of energy bills by extending energy caps. This was not well received. Former US Treasury Secretary Larry Summers said “The UK is behaving a like an emerging market turning itself into a sub-merging market.” Now much like a porcupine, Larry can be a bit prickly, however the British bond and currency markets basically said- knock it off! The Bank of England is trying to control inflation and the government is throwing out inflationary policies with the biggest tax cuts since 1972. Remember when we discussed Margaret Thatcher on this platform? If not, go back to May 8 and read about this great lady and her contrasting policies. She raised taxes and angered her party and her country. Why, because it was needed and the reason why we look back to history is to find analogs that we can apply to our lives today. Ms. Truss cut taxes because it was popular. Popular is popular, but popular is seldom the right thing. Good talk gets you elected, but it is good policies that makes you an effective leader. It might be only a couple weeks into Ms. Truss’ time at the top but I think we can now safely know where she stands.
Guy Johnson on Bloomberg reported this amazing stat. The British pound chances of going to parity with the US dollar are 1 in 7 while it was only a few months ago that the odds were 1 in 100. The British pound is currently sitting at 1.10 down over 20% on the year actually it is now at 1.09 that’s how fast it was falling on Friday as I was writing this, and an update this Sunday morning – its sitting near 1.08 and a half. That is a monster move in a major world currency and a 37 year low against the dollar. Larry Summers expects it to sink past parity with the dollar meaning a 1 to 1 ratio. Stay tuned.
Citizens are being squeezed by inflation. Politicians are playing politics by giving money away to people. By giving money away, whether it be student loan forgiveness, tax cuts, stimulus checks it doesn’t matter- this is inflationary. People need to wake up and realize that it is government policies which are creating these problems. Do you really think that everyone needs a $2500 workout bicycle paid for by free money stimulus checks? Where did that come from? Does the UK think that their nation which is an energy importer can buy energy and then not sell it for enough to cover its costs? Where does that money magically come from to cover those costs? Government money isn’t free and at some point people need to be like the person walking to their car after a keg party late at night. Someone comes up and offers you a beer. You decline, but the person says its free. You are a big fan of beer, you are a big fan of free beer, but you say, I’m sorry I’ve had enough. This is where we must get to as societies and simply tell the government we’ve had enough free stuff because we know if we consume much more, we are going to be sick and regret it. Its time for adults to take over and say no dessert until you finish your vegetables.
So while the western economies are acting like teenagers coming home from a keg party the rest of the world which is used to suffering is working and developing their own economies. This is where I wildly speculate Austerity, as we say here at the C Thomas Printer Cooperative we want you to think, so think about this. So if I am a chess player like a certain Russian leader or maybe even a go player like a certain Chinese leader I seem to sense an opportunity. If you were going to start a new world reserve currency wouldn’t you need customers? If everything was working smoothly, there wouldn’t be much impetus for change. Which brings us to the word of the week- impetus.
Impetus- the force that makes something happen or happen more quickly.
But the foreign exchange markets worldwide are reeling under the strength of the dollar. I believe dollar strength is the impetus. The yuan is slipping, the pound sterling is crashing, the Euro is below parity, the yen has dropped over 20% in the last 5 months and you can forget about Turkey and Argentina. This is due to the world reserve currency being limited in supply and I believe we are reaching the inevitable conclusion of Triffin’s dilemma or Triffin’s paradox. It is named after Belgian-American economist Robert Triffin who coined the idea in the 1960’s. If the US wants to continue to be the global reserve currency, then it needs to supply dollars to the rest of the world for growth and thus continue to run trade deficits. John Maynard Keynes also realized this difficulty which is why he advised against the current Bretton Woods system in 1944 only to be overruled. When American policy does the right thing for American’s debt crisis and own internal inflation problems by instituting quantitative tightening and raising interest rates as Chairman Powell is attempting to do now, it does the same to global markets only with more leverage and dire consequences. This is what is happening now I believe, and some nations have realized for some time now that the only way to create true financial independence for themselves is to sever this tie. In keeping with our theme this week- how do you accomplish this? Very carefully.
The Brics nations have said that they are starting a new world currency with the hopes that it becomes adopted as an alternative for the US dollar, the BRICS meaning: Brazil, Russia, India, China, and South Africa. This is about 40% of the world’s population that is actively trying to create a system of exchange and more importantly a way to balance trade accounts outside the US dollar system. I believe that the US sanctions on Russia over their military operation in the Ukraine showed the rest of the world that if you get on the wrong side of American policy then we will attempt to ruin you financially. We took the Russian foreign reserves and as we mentioned attempted to wreck their currency and we did for a short time, but then something amazing happened that I do not think we predicted. The Russian currency rebounded and is even stronger today than before the sanctions in fact the Russian Ruble is the strongest performing currency in the world this year. The Russians are settling trades in rubles because we forced them to do so. Now the Bank of India has created its own banking mechanism to settle their transactions in Rupees. China has been well prepared for this with their own digital currency and even their own gold exchange which is one of the commodities that have been floated as backing the new currency. With the dollar is wrecking the economies of so many nations around the world wouldn’t that be the best case scenario for providing countries an incentive for adoption? I’m afraid that the sanctions may have accelerated this shift away from the US dollar and if America loses its ability to use the US dollar as a sledgehammer on the rest of the world and simply become its largest trading partner while trading in another system, well we have the credit profile of a great big Greece or Italy with Debt to GDP of over 120%. The US needs to also proceed very carefully.
Sincerely yours,
C Thomas Printer
Also born on this date:
F. Scott Fitzgerald,
“Mean” Joe Greene,
Lou Dobbs,
Tommy Armour,
Kevin Millar,
and the creator of “The Muppets” Jim Henson.