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King Dollar

Sep 29, 2022

While it is not unusual for the US dollar to appreciate in troubled times, the greenback’s current strength is notable, not least because all other advanced-economy currencies are among those being left in the dust. Given the dollar’s outsize role in the global economy, from foreign-trade invoicing to international-debt issuance, understanding the factors driving its appreciation, and the impact of its strength, is crucial for policymakers and investors alike.

According to Harvard’s Jeffrey Frankel, one factor that explains the dollar’s surge is that the US economy remains comparatively resilient. That resilience, economist Dambisa Moyo notes, reflects a wide range of advantages, from relative energy and food independence to effective governance to an abundance of immigrant labor. As a result, the US is “uniquely positioned to overcome the particular species of inflation” that it currently faces.

The US Federal Reserve is committed to driving that process forward by raising interest rates rapidly. In Frankel’s view, this is the most important driver of the greenback’s appreciation – and it looks set to continue. As Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, notes, the Fed’s slow start on monetary tightening has left it “continuously scrambling to catch up with realities on the ground.” As a result, the US will now need “more monetary-policy tightening than it would have if the Fed had reacted in a timely and credible fashion.” This will “produce ‘pain,’ in the form of foregone growth (actual and potential) and higher unemployment.”

Ernesto Talvi, a former minister of foreign affairs of Uruguay, doubts that the Fed will go that far, because “the US itself is highly leveraged.” This would be good news for highly indebted developing countries, whose debt-to-GDP ratios are flashing red as the US dollar grows stronger and global growth slows.

But it may be issuers of dollar-denominated debt – rich and poor countries alike – that stand to benefit the most from current trends. As Harvard’s Gautam Nair and former Central Bank of Argentina President Federico Sturzenegger note, they are in for a “windfall,” as “high inflation whittles away a towering stock of sovereign debt.”

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0 Comments on this paragraph, 13 Comments on this article

vic lai Oct 2, 2022

Today's King Dollar is no longer as commensurate with the domestic top-of-the-world manufacturing power of the dominant manufacturing companies in the US as in the good old days.
Take the US's typical Boeing Company (which had produced the impressive Apache attack helicopters).
I think the relative rise and fall of the US, if recorded by future history, can conveniently be reflected by the similar and concurrent relative rise and fall of Boeing since WWII.
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The relative fall of Boeing can be traced back to the year 1997, when the company merged with McDonnell Douglas in that year.
Since then, the management team led mainly by the new men from MD started to stress Wall-Street-like short-term financial gains, at the expense of the company's traditional dominant stress of flight safety.
Together with the bigger and bigger tide of globalization-induced offshoring since the late 1990s, Boeing had been facing fiercer and fiercer competition from Europe's Airbus, which had been much less affected by offshoring and hence had mostly concentrated their airliner-producing procedures in the same Continent.
To save money, Boeing, unlike Airbus, hadn't kept designing and producing new types of airliner, but had instead chosen to just further improve the old design of her previously produced airliners, like her recent disastrous 787 Max passenger airliners.
Also, the intercontinental diversification of Boeing's airliner-manufacturing system, unlike Airbus's opposite and relatively concentrated system, means a relative lack of close face-to-face communication between different workers working in different faraway places, and hence a relative lack of improvement of various parts or production procedures of the manufactured airliners.
And all these together with the deliberate ignorance by Boeing's management authority of many safety warnings coming from the workers in the production assembly lines.
It's said that some of Boeing's US assembly-line workers were just recently hired from elsewhere in the country (say, workers that originally were working in McDonald's), who hadn't received enough qualified training.
When asked, those workers plainly said that they would never be a future passenger of Boeing's airliner.
The grounding of Boeing's 737 MAX airliners worldwide between March 2019 and December 2020 perhaps first marked the long relative decline of the company herself.
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Many of the coming major internal problems facing today's US, like that haunting today's Boeing , can't be solved simply by the US's keeping harrassing her rival and even her ally countries alone.
Not even the persistence of King Dollar in the coming years can help solve those major internal problems of the US.
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- vic lai Oct 2, 2022
  
  Lately, some Ukrainian troops seem to be charging forward quite quickly, and the Russian soldiers are therefore forced to retreat at the same time, in the current military conflicts between the two countries in Ukraine.
  While this seems very good for Ukraine, it is also the most precarious moment for her, since Russia has shown to be sending her tactical nuclear weapons to the southern Ukrainian battlefields near Kherson.
  Similar tactical nuclear weapons have also recently been sent by Russia to Belarus.
  If NATO keeps supplying war materials, soldier-training directors, and mercenaries to Ukraine, Russia may eventually start to use her 9K720 Iskander ballistic missiles in the near future, since it's reported that 17 of such missiles have already been transported by Russia to Kherson.
  Those missiles can also carry nuclear warheads which may be around 3 to 10 tons.
  Some groups of Russia's doomsday "nuclear cavalry" also appear near Kherson, since during a nuclear military conflict the electronic devices near the battlefields can no longer function.
  ---
  Russia's nuclear striking targets will possibly include NATO's soldier-training camps and ammunition warehouses in Ukraine.
  The EU countries should now be fully aware that, the US's planned tactic of deliberately prolonging the war in Ukraine in order to persistently trap Russia into a very costly and exhaustive war there, is no longer in the interest of the western European Continent any more.
  ---
  - vic lai Oct 3, 2022
    
    (sorry, should be 30,000 to 100,000 tons.)
    ---
    Before the ongoing obvious US-Dollar appreciating cycle, there have been two similar super-appreciating cycle of the US dollar since the 1970s.
    The first cycle was from the 1970s to the early 1980s, in which the US dollar index had jumped to as high as 160, leading eventually to the Latin American debt crises.
    The second one lasted from the latter stage of the 1990s to the beginning of the 21st century, when the US dollar index once approached 120, which had led to the Asian Financial Crisis.
    The third one, which is happening today, seems to be mainly assaulting the warring European Continent, hurting the stock, debt and currency markets of both the EU countries and Britain there all at the same time.
    The Euro has recently dropped to below parity with the US dollar, and the British pound has also dropped to near parity with the US dollar.
    Currently, the US DXY is around 112.
    ---
    According to wiki, "the tight monetary policy of Federal Reserve's Chairman Paul Volcker and the expansionary fiscal policy of President Ronald Reagan's first term in 1981-84 pushed up long-term interest rates and attracted capital inflow, appreciating the dollar.
    From 1980 to 1985, the dollar had appreciated by about 50% against the Japanese yen, Deutsche Mark, French franc, and British pound, the currencies of the next four biggest economies at the time.
    The Plaza Accord was enacted in 1985 to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British Pound sterling by intervening in currency markets.
    Some commentators believe the Plaza Accord contributed to the Japanese asset price bubble of the late 1980s."
    This time, whether the US will force the Plaza Accord II on China sometime in the next few years, by requiring China's yuan to appreciate massively against the US dollar, remains to be seen.
    ---
    Zoltan Pozsar's claim, that today's runaway inflation in the US was mainly caused by global supply chains disruptions under the international environment of geopolitical conflicts, is now becoming weaker and weaker.
    Today, the still relatively high inflation in the US has mainly been supported by the strong demand of the US households, reflected by the country's heating real estate markets, in which the US housing rents in the major cities keep on rising, even though recent data show that the US real-estate market seems to be cooling.
    Other service prices in the US, like medical care and traffic services which are unrelated to the global supply chains, also kept rising quickly.
    The US inflation problem is also aggravated by the country's relatively tight labor market, in which the specter of wage-price spiral may still be haunting the country.
    Which means, the current time-lagged runaway inflation in the US has mainly been caused by the first unfortunate over-confident MMT experiment (perhaps unknowingly) practised by both the Trump and Biden Administrations in reaction to the aftermath of the pandemic which broke out in the US in the early 2020, with both Administrations believing misleadingly that if the first three rounds of QEs enacted in the US since the GFC of 2007-09 hadn't caused any serious inflation problems for the US whatsoever, this time would not be different.
    While the year-over-year US M2 money supply growth rate has been dropping, perhaps too quickly, from more than 12% in Novermber 2021 to 4.11% today, which will help dampen the US's coming inflation rates and even contribute to the coming economic recession in the US (if any), the Biden government has just enacted another expansionary defict-spending fiscal policy lately to help beg for votes in the coming mid-term Congress elections.
    Both of the above factors will affect the coming trend of US's inflation rates, albeit in the opposite directions.
    ---
    Anyway, the US Fed's increasingly hawkish attitude, accompanied by her non-stop rate-hiking and QT cycles, have mainly explained the latest strong performance of the the US dollar relative to not only the EM currencies but also many DM currencies as well.
    Even Russia's ruble, now with no more support of gas-Euros from the Nordstream pipelines, may start to fall against the US dollar sometime in the future.
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vic lai Sep 30, 2022

The US dollar's current strengthening cycle is, as before, being accompanied by widespread foreign capital inflow into the US, which in turn can keep financing both the real investments of the US private corporations and the deficit-spending of the highly-indebted US federal government, at lower interest rate than is the case without the capital inflow, especially when most of the other foreign countries, whether EM or DM countries, have never imposed capital controls on their own economies to prevent massive and persistent capital flight there (with the obvious exception of China).
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Problem is, highly financialized and manufacturing-hollowing-out US has once again "wasted" this US-dollar-strengthening cycle by fully utilizing the inflowing foreign funds to help finance their sorely-needed Main Street investments of all kinds, so as to raise further the overall productivity and real wages of the global-consumer-of-last-resort country.
Instead, the inflowing funds have mainly gone to the country's highly financialized virtual economy, mostly seeking short-term non-trivial gains there.
This time, such a waste, in terms of all the forsaken new technological and biological inventions which will tremendously benefit both the current and the future human generations, is particularly acute, especially when we consider the fact that, under the current runaway inflationary environment in the US, both the government's new deficit spending, and the real investments in the country's Main Street, can and should no longer be financed very easily by the Fed's usual money-printing new QEs (and by the country's commercial banks at much higher interest costs than before).
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Those foreign capital inflow into today's US financial market will only delay the eventual popping of the country's consistently-low-interest-rate-induced everything asset bubble, but not really prevent in from happening, given the Fed's increasingly hawkish stance.
Which means, failing to really benefit the US herself, and at the same time greatly harming the capital-outflowing foreign countries, the current US-dollar-strengthening cycle has basically become a negative-sum game, and is no longer a zero-sum game as in the good old days.
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- vic lai Sep 30, 2022
  
  If you think today's US dollar is already strong enough relative to most other foreign currencies, then you should further wait and see.
  ---
  There are now signs that the rail system in Belarus is being adjusted to help the coming mobilization of both her own soldiers and the new Russian soldiers from the latest draft in Russia, to prepare for perhaps an invasion of Ukraine's Kiev early next year.
  Belarus's soldiers may participate in the coming war between Russia and Ukraine, and perhaps 200,000 of Russia's newly-drafted 300,000 new soldiers will be sent to Belarus for the coming southern invasion of Ukraine there.
  This new invasion may start around the middle of February next year, almost exactly one year after the start of the Ukraine War early this year, when the Winter season at that time will once again make the frozen Kiev rivers passable by military tanks and other military vehicles.
  ---
  It's unclear whether Romania, Poland, Hungary, or Slovakia will also participate in the coming military invasion of the western part of Ukraine, since all these countries are sharing borders with today's western Ukraine.
  If, for some reasons, some of these countries, together with Russia, choose to unite with each other to carve up Ukraine next year, then it will be like the carve-up of Poland by both Nazi Germany and communist Russia just before the start of WWII in the past century.
  ---
  If so, even more safety-seeking world capital may then choose to flow into the US, thereby further strengthening the King Dollar.
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  - vic lai Sep 30, 2022
    
    Relative to the coming maintenance of Pax Americana before the end of this century, and the US's increasing suffocation of China's continue geopolitical and economic rise (which has the potential to dethrone the US in the same time period), the US obviously needs the further cooperation (and subordination) of a relatively prosperous western Europe in the coming decades, especially when China will possibly further unite with Russia in developing the Eurasian Land Power against the Sea Power led by the US.
    ---
    Relative to the above main US long-term geopolitical stratagem, the widely-discussed ongoing blood transfusion from the much weakened EU patient to the ailing US patient, which is partly being reflected by the recent strength of the US dollar relative to the Euro, has only been a trivial short-term gain for the US, and so shouldn't be taken by us too seriously.
    Afterall, if the sickening EU patient becomes so ill and so is forced to lay in bed all the time in the future, the US herself will lose her most important and strong ally in the North Atlantic, and the Thucydides Trap will probably tilt in favor of China in the future, because the rest of the US's most reliable allies, like Britain, Japan, and Australia, are all not of the same caliber as today's EU countries as a whole.
    ---
    Which means, the King Dollar may not rise to the sky in the coming year.
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    - vic lai Sep 30, 2022
      
      It seems there are many sophisticated scholars, think-tanks, and strategic geopolitical advisors in the US, who are constantly giving practical and valuable geopolitical advice to the US government which will be deemed most favorable to the long-term benefit of the country as a whole, so that those accompanying short-term economic gains accrued to the US that are widely reported by the western press may have distorted us when we try to understand or explain the long-term foreign policies chosen and enacted by the US.
      ---
      Having decidedly won the previous Cold War against the USSR in the last century, the US will probably want to start another long Cold War with China in the coming decades, and will try hard to defeat China before say the middle of this century.
      Cold War is the literal form of Thucydides Trap that seems to be preferred by the US, because she has always had a comparative advantage in doing it, and so it will once again be chosen by her to try to fully subdue China in the coming decades.
      ---
      Through the ongoing Ukraine War, by using unfortunate Ukraine as her main chess, the US will succeed in much weakening both Russia and Germany in the coming years.
      The US's next striking target will probably be France, the leader of which
      (i) has just opposed the West's starting a new Cold War with China,
      (ii) has tried to establish a closer and closer relationship with China's leaders, and
      (iii) has also expressed his preference to remove brain-dead NATO from the EU countries.
      ---
      After the US has fully tamed all the "naughty" EU countries led by Germany-cum-France, she can then safely switch all her attention to East Asia, and start to take on China by starting her preferred 21st-century Cold War there.
      Contrary to popular perception, the US Fed's coming interest-rate policies, and hence the future strength of the US dollar vis-a-vis other foreign currencies, will pale into relative insignificance when they are compared to the US's chosen overall long-term grand geopolitical strategy in the coming decades.
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    - vic lai Sep 30, 2022
      
      While the US is gaining from warring Europe mostly through capital flights through the North Atlantic Ocean, and hence today's "King Dollar," China seems to be also gaining from the same energy crisis in the warring Continent, but mostly through the forced offshoring of many of Germany's heavy-energy-consuming industries to her different provinces.
      What's more, China looks set to get more and more relatively cheap energies, commodities and food from Russia in the coming decades.
      ---
      China's such gain is nothing new.
      During the similar global energy crisis of the 1970s, Japan's low-gasoline-consumption small cars have been able to beat the US's traditional heavy-gasoline-consuming big cars in the global car markets, and so enabling Japan to gradually incapacitate US's Detroit as we know it today.
      Japan's car industry today, and hence a large part of the Japanese economy for that matter, are still benefiting from that energy crisis that broke out half a century ago, even though Japan's fossil-fuel cars is now facing fiercer and fiercer competition from the new-energy-and-AI electric cars currently produced by both the US and China.
      ---
      - vic lai Oct 1, 2022
        
        It's also reported that some Russian soldiers have been selling their own weapons and ammunitions to their Ukranian enemy soldiers during the ongoing Ukraine War.
        The transacting parties communicate with each other through the internet, and never physically contact with each other.
        The transacted military weapons or ammunitions will be placed by the Russian soldiers in a certain place, and the Ukranian soldiers are free to have a look at them first, and if found suitable, the buyers need only to deposit the required money at a certain place that will be collected by the Russian side later.
        Say a Russian armored vehicle is being sold at just a low price of US$5,000.
        It perhaps helps explain the relative sluggishness of Russia's invasion of Ukraine in the past months.
        ---
        This kind of transaction is again nothing new.
        During the China-Japan military war in WWII, some frontline Chinese army generals were said to transact with their Japanese counterparts, by secretively bartering with each other through the help of each others' military trucks, which sent the necessary products demanded by the other side to each other.
        Following the completion of their barter trades, they directed a small-scale military conflict at the battlefield so that they could responsibly report to their senior army officers who were far away from the battlefields.
        The preference of human being to transact with each other is very strong indeed, and this alone has made
        us so different from the other animals on this planet.
        ---
        Needless to say, the surveillance army officers sent by the military headquarters of both sides to the battlefields had already been bribed by those bargaining army generals on both sides of the "military conflict."
        Almost everything has a price.
        Yuan Shikai (1859-1916), China's most powerful man near the end of China's imperial Qing Dynasty, once said that every man on earth can be successfully bribed, if it fails it only means the "gift" isn't valuable enough to the man being bribed.
        Not even the richest tycoons in the world can be exempted from it, or so I think, according to Maslow's hierarchy of human needs.
        ---
        
        vic lai Oct 1, 2022
        
        The US fully realizes that, while both the EU energy crisis and the latest destruction of the gas-pipelines combined will be quite enough to much diminish the future geopolitical and economic link between the EU led by Germany and Russia, they will also slowly but surely turn Russia into China's Canada, and so further strengthen the future energy-buying bargaining power of China in the world.
        From the US's long-term strategic geopolitical point of view, Russia's coming closer and closer link with China will be much more problematic for her than Russia's growing close relationship with Germany led by Angela Merkel in the past decade, since China is her coming arch rival while the EU led by Germany remains her traditional close ally.
        ---
        One way for the US to avoid China's further strengthening from happening may be that, the US is likely to make some consessions in the ongoing Ukraine War, so that perhaps the war there can more quickly fully end than is commonly expected, and Russia will also be allowed to resume some degree of her past relatively close energy-transaction relationship with Germany and other unfriendly EU countries in the future.
        ---
        Afterall, the foundation for long-term full cooperation of all kinds between Russia and China will never be water-proof, considering the facts that,
        (i) Russia's tradtional animosity or doubts regarding China has always been there, and this is easily reflected by the fact that there have been no China towns in Russia whatsoever, and Russia's sparsely populated Eastern Siberian territories is bordering northern China which is now being populated by more than 100 million Chinese people.
        (ii) Today's China always remember that Russia was the most deadly foreign enemy country facing her imperial Qing Dynasty in the 19th century, during which a large chunk of precious northern territories had been grabbed by Russia through various unequal treaties imposed on the Qing government.
        ---
        My guess is that, there will be some sort of undertable transactions betweeen Russia and the US in the coming future, which will eventually lead to
        (i) an eventual end of the war in today's Ukraine which therefore will last a much shorter period of time than most people tend to expect, and
        (ii) Russia's having a future non-intervention and hence neutral stance when the next agency war in Taiwan against today's China is started by the US sometime in the coming years.
        ---
        If the Taiwan agency war eventually breaks out in Asia, today's King dollar might further become God Dollar.
        China beware.
        ---
        
        vic lai Oct 2, 2022
        
        Since Ukraine's Kiev is geographically too close to Russia's Moscow, the ambitious and over-confident NATO's constant eastern geographical expansion, probably instigated by the US as well, has led to the eventual invasion of Ukraine by defending Russia in this year, together with the resulting unexpected people-killing energy crisis in many of the EU countries themselves.
        Now that the Angela-Merkel-induced old geopolitical relationship with Russia has just been hurt seriously, those incumbent ruling politicans of the affected EU countries are also inappropriately increasing their animosity towards China, again under the misleading guide of the US.
        It's now vital for the EU countries not to create too many enemies at the same time, especially when even her closest "friendly" ally to the West has just destroyed their most precious life-supporting gas pipelines.
        Today, it should be entirely clear to the EU people that it's no longer in the interest of western Europe to side fully with the US and act against both Russia and China at the same time.
        ---
        Due to the latest explosion of the Nordstream pipelines, and the possible similar bombing of other existing EU-Russia gas pipelines in the near future, it now becomes less urgent for the EU countries led by Germany-cum-France to resume their previous relatively harmonious relationship with Russia in the foreseeable future, and so it's now in the best interest of them to restore a good relationship with China, which hopefully can
        (i) keep providing the EU countries in the coming years with not-so-expensive LNG that China has been importing from the US according to the contract that had already been signed between the US and China,
        (ii) continue to tap China's big and quickly growing economic markets in the future.
        ---
        Perhaps led by France, today's EU countries can express their new sincerity toward China say by agreeing to issue the Airworthiness Certificate to China's newly developed C919 passenger jets, and allow the jets to fly to some of the chosen major cities of the EU countries in the near future.
        This way, Airbus will also be able to receive even more new passenger-jet buying orders from China in the coming years which will be denied to Boeing.
        ---
        
        vic lai Oct 2, 2022
        
        The true country-level culprit of the systemic sabotage of the Nordstream gas pipelines can easily be ascertained by the seriously-affected EU countries, through their quickly sending neutral and professional international diving teams to the sabotage scene, to collect the crucial remaining bombing materials there, which will probaby consist of the remnants of the used torpedoes or time bombs.
        Note that only the diving team and their employers alone fully know whether the collected remaining sabotage materials are genuinely found near the true bombing undersea site.
        ---
        Once the remnants of the sabotage materials can be "found" and safely collected and preserved by say Germany and France, the EU countries led by them will then be in a better future geopolitical position to further bargain with the identified culprit country or countries, and if so, the EU's new China-friendly position can more easily be established by the EU in the near future.
        ---
        
        vic lai Oct 2, 2022
        
        Before the Ukraine War, the EU's increasing hostile attitude toward China can partly be explained by China's quick rise in the global value-added chains (GVCs), which means Germany and other advanced EU countries, like Japan, South Korea, and Taiwan in the East, will have to face fiercer and fiercer competition from China at the high-value-added parts of the GVCs in the future.
        Thanks to the Ukraine War, the true "enemy country" of those EU countries led by Germany is now found to be actually the US, which, after the coming prolonged destructions of the gas pipelines under the Baltic Sea, is now actively luring many of Germany's heavy-energy-consuming industries to be offshored to her own energy-cheap territories.
        ---
        Over the past decades, while the US has been hurt by the "over-offshoring" of most of her low-to-middle-end manufacturing industries, and therefore benefiting the developing Asian and other countries accordingly, the EU countries are now being seriously hurt by her "under-offshoring" in the same period of time, even though Germany has also offshored many of her low-value-added manufacturing factories to the nearby eastern European countries.
        But the relative lack of inter-continental geographical and hence energy diversification is now seriously hurting Germany and other similar EU countries, which have all precariously put most of their precious eggs in only a single continental basket.
        ---
        
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