The US dollar is depreciating against almost all major global currencies. FRN notes these come as just Monday, China announced the wholesale elimination of some $14 bln in US Treasury bonds. While this is just a small fraction of the Treasury bonds held by China, it sends a strong signal which ultimately can raise concerns in other countries, whether those central banks ought to consider further purchases – in the worst case scenario it could trigger a fire sale.
According to journalist Natalia Dembinskaya, the latest falls were prompted by statements by US Treasury Secretary Steven Mnuchin. Mnuchin said he supports the weakening of the US currency.
Another blow against the dollar was perhaps triggered by reportage in The Wall Street Journal, which shared US President Donald Trump’s criticism of the policy of the Federal Reserve which continues to raise interest rates.
Meanwhile, some financial analysts believe a real and massive collapse of the US currency is coming.
In October, the US, Asian and European stock markets faced losses from the massive sale of stocks. One of the main reasons for this decline is investor concern about rising US interest rates.
The restrictive monetary policy of the Federal Reserve led to the rise of US public debt securities yield as well as the mortgage rates and, consequently, causing a reduction in demand in the housing market. According to some analysts, interest rates will continue to grow even more, because in the US there is inflationary pressure. However, increased interest rates tend, in general, to work against inflation if they do not lead to economic stagnation – too much medicine is poison.
Donald Trump criticizes the Federal Reserve’s monetary policy, calling it the main threat to its success as a US leader. However, the Federal Reserve is an independent entity that does not depend on the White House and is not, in theory, pressured from the president.
The increase in interest rates or other restrictive monetary policy instruments leads to an increase in the cost of lending to companies. And instead of paying dividends and salaries and investing in their business, entrepreneurs are forced to channel all their money flows into debt repayment. This affects the prosperity of shareholders and workers and, as a consequence, of any economy in general.
In addition, US interest rates were extremely low for many years. That’s why American companies used to live on credit. When the Federal Reserve raises rates, these companies are forced to borrow more and more money to pay their own debts with even higher rates. This process could lead to a chain of bankruptcies, weakening the US economy and its national currency.
This is the standard argument, in summary for a low-interest rate, debt driven economy. On the other hand, there are some additional factors to consider.
Interest rates were relatively low in the years preceding the 2007 crisis, and the low interest rates were connected to both the speculative purchase of toxic assets, after which we saw the drying up of the market for mortgage-backed securities, collateralized debt obligations and credit default swaps. It was a speculative bubble driven by low interest rates and therefore high levels of liquidity, which eventually burst, leaving millions of first home buyers effectively homeless.
Relatively low interest rates works against those prudent and saving, and the increase in cash supply generally leads to demand-pull inflation. It also leads towards debasement of the currency in general, a related form of inflation. Ultimately it can distort many growth matrixes, which do not account for the amount of debt required to achieve a given GDP – GDP is reported at face value without looking at more important questions like its ratio to debt.
Economics know no nations – Russia has used the 2015 Ruble devaluation crisis to spur some degree of autarky, through income substitution industrialization, or ISI. Therefore, Trump’s ‘weaker dollar’ policy, it is thought, will reduce imports, such as those from China and Japan, by reducing how much American consumers can purchase. Restricting the amount of liquidity – the cash on hand – may slow investment in the physical economy, but also reduces the strength of the speculative economy.
None of this can be discussed outside of the reality of a US Federal Reserve which goes practically unchecked, and colludes precisely with both the major banks and the government which it is nominally independent of. The debasement to the US currency which occurred as a result of the so-called quantitative easing program of Bush and Obama some tens years ago, has been severe.