Currency Crisis

Currency Crisis

There may be no way of escaping the collapse of a boom brought about by credit expansions, which ends in a currency crisis.

Fed Chair Powell not only knows this, he even went on the record warning about perils to the economy by cutting stimulus.

Powell stated that the economy would not know how to function without stimulus measures because those measures had been active for so long, according to the October Fed meeting of 2012.  

Fast forward to 10 years later, and the economy has become even more reliant on debt by as many trillions of dollars. 

So a debt-fuelled recovery lifted the US economy out of the 2007-2009 Great Recession.

The twin US deficits, public, and balance of trade have skyrocketed, as the US debt clock ticks perilously above 31 trillion USD.  

As the debt-fuelled economy expands, a currency crisis follows

The exorbitant privileges, the benefit the US has due to its own currency being the international reserve currency, means the USD is more robust than less internationally traded currencies.  

But a rising multipolar world is a potential challenge to US hegemony and USD exorbitant privileges.

Currency crisis leads to a financial crisis

The holder of bonds receives capital invested plus yields on maturity. But if the currency is being debased due to a spiraling public deficit, financed by the issuing of sovereign bonds bought with central bank keyboarding currency, the currency depreciates on the foreign exchange.

So a currency crisis reduces demand from international investors because nobody wants to hold a bond where its underlying currency depreciates, say 10% against USD every few years. 

A currency crisis leads to a vicious circle where falling demand for the sovereign bond leads to further currency depreciation.

Currency crisis and debt defaults, bad loans 

So falling demand for the bond causes its corresponding yield to spiral.

10 Year sovereign bond is a yardstick for the cost of servicing medium, long borrowing. Rising yields burst the epic everything bubble in bonds, stocks, and property.

A currency crisis causes a secular fall in living standards as the cost of necessities hyperinflate. Civil unrest and strikes follow. 

The first sign of a failed state is skyrocketing crime rates, no go urban areas, and when woman engaging in survival sex to make ends meet.

Can a currency crisis be avoided?

Repatriation of capital to finance onshoring of manufacturing and building a productive economy could be the solution. An economy has got to work for everyone 

But a productive economy needs an abundant supply of inexpensive energy. That doesn’t jive with the green new agenda. 

Something has got to give.