Showing posts with label currency rates. Show all posts

Tuesday, September 20, 2022

The strong dollar should not become a sharp blade to cut the world, THE NEED FOR BRETTON WOODS III

Is the Dollar the key to US hegemony?

Illustration:Chen Xia/Global Times

The US Federal Reserve will hold a new policy meeting on Tuesday and Wednesday, with the decision on interest rate growth being the limelight. It is widely anticipated that the Fed will deliver at least another 75-basis-point interest rate hike to tame inflation. This might further increase the value of the US dollar against other currencies, which is at its 20-year high. Driven by the Fed's aggressive rate hikes, the US dollar is viewed as "experiencing a once-in-a-generation rally." For many countries in the world, this might be the beginning of another nightmare.

The meeting will witness the fifth time that the Fed will raise interest rates. The direct reason is to ease the high pressure of inflation in the US. But if people dig the root cause, this is an inevitable consequence of US' blind and unlimited money printing to temporarily maintain "prosperity." In other words, in the face of the deep-seated problems exposed by the 2008 financial crisis, Washington has been powerless, and unwilling as well, to solve them. Instead, it was extremely short-sighted to cover up the crisis and curry favor with the Wall Street, while taking advantage of the hegemony of the US dollar to quietly treat the crisis like dumping wastewater - draining it to the world.

A super strong US dollar and the fall of other currencies will, to a certain extent, ease the scorching inflation in the US economy, but the world will have to pay for it, which is often referred to as "when the US is sick, the world has to takes pill." The ensuing severe inflation, economic recession and other problems have already appeared on a large scale in many countries. Thirty-six currencies around the world have lost at least one-tenth of their value this year, with the Sri Lankan rupee and Argentine peso falling by more than 20 percent, since the dollar strengthened.

This has not only worsened the already weak economies of Europe and Japan, but also forced a large number of developing countries to swallow the bitter pills of the economic recession caused by imported inflation. Countless families were impoverished overnight. This is a very abnormal situation that is not supposed to occur, but it is the cruel truth behind the US "containment of inflation."

In fact, since the end of World War II, the US has used dollar hegemony to carry out "financial looting" or "export crises" against other countries several times. As a widely popular phrase in the West goes, the US enjoys the exorbitant privileges created by the dollar and the deficit without tears, and used the worthless paper note to plunder the resources and factories of other nations.

Each round of dollar appreciation in the past decades has been accompanied by extremely bad memories: The Latin American debt crisis broke out in the first round, Japan suffered from the "lost two decades" during the second round and the Asian financial crisis took place during the third. Particularly in the Asian crisis, which is still fresh in many people's memories, more than 100 million middle-class people in Asia fell into poverty, according to the World Bank estimation. The strengthened dollar, time and again, cuts the world like a sharp blade.

Therefore, while the political elites in Washington boast of the "myth of the American system" and take credit for "alleviating the crisis," thousands of poor families around the world are being trampled by them. They are not unaware of this, but still collectively choose to be indifferent and arrogant, as if this is the privilege that the "hegemon" should enjoy. As US former treasury secretary John Connally put it in the 1970s, "The dollar is our currency, but it's your problem." Today, the dollar is once again the world's problem. In a sense, it's hard to believe that the "prosperity" of the US is clean and moral.

However, the crisis cannot be covered up forever. Washington keeps laying mines but never removes them, which will eventually explode the US itself. The incompetence of US financial policymakers has been exposed by the consecutive interest rate hikes that have contributed to the abnormal appreciation of the US dollar with the purpose of defusing the severe inflation.

For the US itself, what will rise accordingly are the cost of corporate financing, the pressure on residents to repay their loans, and the price of export production among others. Meanwhile, the credibility that the US dollar has as a global currency is being continuously exhausted by the US "beggar-thy-neighbor" policy. Now the anxiety and insecurity brought by the US dollar to the world has heralded the beginning of the decline of its hegemony - regarding Washington's insatiable exploitation, Europe, Asia, the Middle East and other regions have explored the path of "de-dollarization," leading to the inevitable diversification of the international monetary system.

The best way to restrain the rampaging hegemony is to practice true multilateralism. Whether it was the Asian financial crisis in 1997 or the global financial crisis in 2008, the world seemed to have stumbled more than once by the same stone, which, however, is not that firm anymore. The instability and fragility of international financial markets have once again become prominent. It is precisely at such times that the international community should be more determined to cooperate and build a reliable, systemic and long-term multilateral international financial system. This cannot wait.

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THE NEED FOR BRETTON WOODS III

World Affairs – Non-Partisan and Objective

Why the US Needs to Destroy Russia and China — The Need for Bretton Woods III

The United States of America is in big trouble, short term and long term. In 2022, the stock market is crashing, bond market is down the most in 40 years, housing bubble is bursting, inflation is skyrocketing, debt is exploding, and GDP is shrinking. These are not temporary crises. Instead, they reveal systemic flaws in the American economy that is propped up by a rigged global financial system.

However, that fraudulent system is starting to crumble and the primacy of US dollar is in serious trouble, thanks to an emerging multipolar world. (Don't believe the nonsense that the US can keep printing infinite amount of dollars).

US central government’s debt is now $31 trillion, amounting to 130% of GDP. Soon, the interest payments on the debt alone will be $1 trillion per year. Of course, the principal amount will never get paid off. Then, add in the unfunded liabilities — like future payments for social security — the debt is staggering over $200 trillion.

Furthermore, there are not enough buyers of US treasuries. Thus, since the 2008 financial crisis, the Federal Reserve Bank has been creating trillions of dollars literally out of thin air and buying the US debt (treasury bonds). This is voodoo economics and not sustainable.

What’s the end game? The US needs to default on its debt and start new. The goal is to declare bankruptcy and … yet remain the #1 country. This will be the “Bretton Woods III” agreement.

The US needs to default on its debt and start new. Declare bankruptcy and yet remain the #1 country. This will be the "Bretton Woods III" agreement.

Sounds ridiculous? Well, it's possible only if all the other countries are weak and nobody is strong enough to challenge the US.

This is why the US must not only crush Russia and China — its two biggest geopolitical rivals, but also weaken Europe. This paves the way for the US to establish a new global order which is similarly rigged and just as deceitful and corrupt — in order to prolong the American Century.

Dollar Hegemony

America's extraordinary power comes from the power of US dollar, which is the established global currency for trade. This also means that countries around the world have to accumulate US dollars in their foreign exchange reserves. But the US has been abusing its power by weaponizing the dollar through sanctions and confiscations of hard-earned reserves.

No wonder that China, Russia and others are seeking ways to circumvent the dollar in trade. Since 1999, the share of US dollar assets in central bank reserves has dropped by 12 percentage points—from 71 percent. Hence the share of US dollar in global reserves is now only 59%. When that number falls below 50%, the tectonic shifts in global finance will become more apparent to Americans.

To fully grasp the nature of the current world order, let's see how the US established the dollar as the world currency, carried about the biggest gold heist in human history, then defaulted on its obligations, but revived the moribund dollar with a clever deal. That's the story of Bretton Woods I and II.

Bretton Woods I - Gold-backed Dollar

WW2 was a wonderful thing for the US. First, it took the US economy out of the Great Depression. The US played the role of arms supplier and gladly watched European empires destroy themselves. Even before the war was over, the US brought in all the allies to Bretton Woods, New Hampshire, and said, "When the war is over, you will all be weak and broke. I will be the new empire and my dollar will be the global currency. And it will be as good as gold -- a guaranteed rate of $35 per ounce of gold."

This meant that if you have $35, you can go to a bank and get an ounce of gold!

The world agreed. When the war was over, everyone bought US dollar with gold and used it for trade. Huge amounts of gold were also physically transferred from Japan, Germany and other parts of the world into the vaults of the Federal Reserve Bank in New York.

This system worked until 1971 when the US suddenly declared that, "Oops, the dollar is not backed by gold anymore. If you have US dollars, they are just pieces of paper now. You cannot get your gold back!" People called it the "Nixon Shock."

1970s - When Fiat Dollar almost died

This was also the biggest gold theft in human history. But what could the world do? America had nuclear weapons and the mightiest military.

Of course, the switch to a fiat currency caused havoc. The value of US dollar fell precipitously and inflation skyrocketed. Oil price quickly doubled and grew five-fold by 1979. The oil shock and gas shortage rocked American politics.

The US economy was in deep trouble. That's when the US elites came up with a clever idea to rescue the dollar and restore its primacy.

Bretton Woods II - The Birth of Petrodollar

How to make the dollar relevant? Hmm...What if everyone needed US dollar to buy something essential?

Like ... OIL. Brilliant!

This was the birth of Petrodollar.

Basically, the U.S. used Saudi Arabia’s oil to save the dollar. That is, Saudi Arabia (and other smaller producers) would sell oil only for US dollars. And to make sure that the Saudis don't get too powerful, they will be forced to recycle most of their profits back into the US economy. It was also a protection racket, which meant the US military would occupy Saudi Arabia and protect it from enemies.

Saudi King Faisal with Kissinger. Birth of Petrodollar

But why would the Saudis agree to this? Because the U.S. make Saudi Arabia the new king of oil and the most influential Middle East power ... after crippling Iran.

Win-win for the US.

Thus, the U.S. armed and funded Saddam Hussein of Iraq to wage a decade-long war on Iran. US provided arms/intelligence. Germany and France provided deadly chemical/biological weapons to Iraq. Here’s Donald Rumsfeld with Saddam in 1983.

Of course, the same Rumsfeld would bomb Iraq and kill Saddam twenty years later.

Thus, the Petrodollar deal with Saudi Arabia could be called as Bretton Woods II. It extended the life of the American Empire by a few more decades.

Bretton Woods III -

For the last four decades, countries around the world have been foolishly working hard for US dollars, buying US treasuries, and funding the American Empire. But within the next decade, those U.S. treasury bills and bonds might be worthless. Deja vu all over again.

The U.S. needs Bretton Woods, Version 3. Somehow, the world needs to write off all American debt and start the racket anew. But … with America still as #1 How the hell could this happen?? This is how:

If the world is full of weak countries, they will accept the new rules -- just like they did in 1944 and 1974. Imagine a world where Russia and Europe destroy one another. Imagine a world where Japan and India attack China … and they all get destroyed. A world on fire, destroyed by passion and bombs.

In that world, America will come in as the savior at the last moment, stop the war, and make everyone a happy vassal.

Great Reset. Bretton Woods III. New World Order. Call it what you will.

Conclusion

The wheels are in motion. After eight years of provocation, the US successfully forced Russia to invade Ukraine. And the US also brilliantly pulled Europe into the mess. Europe's economy is being crushed and de-industrialized.

As for China, the U.S. is trying its best to start a war using Taiwan as the pawn. Japan is being asked to re-militarize and procure 1000 long-range missiles. The US needs a few more years to manufacture this mother of all wars. A lot depends on India, since Japan wouldn't want to be the only Asian country to attack China.

Four years ago, I predicted all this in the article "The Most Dangerous Decade." However, much of the world is still happy to be mesmerized and led into the slaughterhouse.

Only Russia and China can change how this story evolves. If Putin can quickly and decisively win the Ukraine war, he can force a peace settlement with Europe.

And China needs to accelerate the internationalization of Yuan. There is no de-dollarization without a robust alternative financial system. China also needs to muster the greatest diplomatic efforts to make peace with Japan and India, the two most potent adversaries and puppets of the US.

In the most optimistic scenario, the Global South or the people of the developing nations can bring into fruition a new fair world without catastrophic wars or financial devastation. As Sun Tzu said, "The supreme art of war is to subdue the enemy without fighting."

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Brent Neiman, a counselor to US Treasury Secretary Janet Yellen, urged China to "take part in coordinated debt relief for vulnerable nations to avoid the specter of a systemic sovereign-debt crisis," Bloomberg reported on Wednesday.

Rising calls for increased yuan use in C.Asia amid growing risk of dollar hegemony

Companies attending the 7th China-Eurasia Expo in Urumqi, Northwest China's Xinjiang region said the increased use of the yuan in cross-border trade in Central Asia is making business more convenient and reducing foreign exchange risks stemming from the use of the US dollar, and they called for more arrangements to ...

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Whither the ringgit? US Inflation & workforce are the bigger problems

WITH the ringgit passing the RM4.50 mark to the mighty US dollar, questions have been asked as to where the ringgit is headed, as it ha...

How Come the West Does Not Have Great Leaders?

Saturday, September 17, 2022

Whither the ringgit? US Inflation & workforce are the bigger problems

WITH the ringgit passing the RM4.50 mark to the mighty US dollar, questions have been asked as to where the ringgit is headed, as it has dropped almost 9% year-todate and at a level last seen during the Asian Financial Crisis in 1998 – almost a quarter of a century ago.

“See you at five” – a term coined during the crisis time, is being re-played like a broken record as speculation mounts that the ringgit will hit the unthinkable five handle to the dollar in future.

However, as we are aware, the ringgit is not to be entirely blamed for its weakness, as there are other factors that are playing out.

If one were to analyse carefully, the ringgit is in actual fact firmer against the Japanese yen by about 12.5%, up 7.2% and 7.1% against the British pound and the South Korean won respectively; between 0.9% and 3.8% higher against the Chinese yuan, Thai baht, Philippine peso and the euro.

Other than the US dollar, the ringgit is only weaker against the Australian dollar, Indonesian rupiah, and the regional champion, the Singapore dollar by between 1.1% and 4.5%.

Hence, overall, for the performance year-to-date, the ringgit may look like a weak currency as we are fixated on comparing the ringgit’s performance against the US dollar as well as the Singapore dollar, but in actual fact, the ringgit has outperformed at least seven other major and regional currencies.

The strength of the US dollar cannot be denied as the Federal Reserve (Fed) is battling hard against high inflation prints and is left with no choice but to raise the benchmark Fed fund rate (FFR).

Having raised 225 basis points or bps so far this year, the Fed is now poised to increase the FFR by another 75 bps in the September Federal Open Market Committee (FOMC) meeting next week, with odds of 100 bps too not being ruled out at all.

This was after the headline and core US inflation prints came in at 8.3% and 6.3%, and ahead of the market forecast of 8.1% and 6% respectively. Should the FOMC raise the FFR by 75 bps next week, the market is pricing in another 75-bps hike in the November meeting and a 50-bps increase in the December meeting.

This will take the FFR to 4.25%4.50% and bring the 2022 rate hikes to 425 bps. With the US 10-year treasuries at 3.43%, the yield spread between the Malaysian benchmark 10-year Malaysian Government Securities has narrowed to just 72 bps from 209 bps at the start of the year.

Indeed, the divergence in the monetary policy adopted by the Fed has a significant impact on the ringgit too.

Another key factor that the ringgit seems to be suffering is the correlation between the ringgit and the yuan. Both currencies removed the dollar-peg in July 2005, with Kuala Lumpur following suit right after Beijing’s move. Since then, the ringgit seems to have a high correlation with the yuan.

Year-to-date, although the ringgit is up 0.9% against the yuan since the start of the year, the ringgit’s movement against yuan has been relatively flat over the past five years with the local currency down by 0.4% compared with a year ago, and 1.2% over the past five years.

The yuan has also been weaker against the US dollar, as the Chinese economy has not been doing well since China’s zero tolerance towards Covid-19 cases, which has resulted in major cities or regions going into short-term lockdowns. The yuan even hit a fresh two-year low, flirting with the seven handle against the US dollar.

Other factors too are playing out on the ringgit weakness, although we are fortunate that we continue to run a current account surplus, we have been running budget deficits for nearly a quarter of a century.

This has ballooned our federal government debt level to the extent that we have even moved the needle to ensure we remain within the redefined debt/gdp ratio.

Malaysia also has an over-dependence on foreign workers, which continues to weaken the ringgit with a high level of foreign remittances as well as a deficit in our services account and net outflows from primary income.

In addition, Malaysians investing abroad is another strain on the ringgit, while errors and omissions too can be a large contributor to the ringgit’s weakness as well.

As measuring a currency is all relative, it is understandable when the general public refers to the ringgit’s strength or weakness as “only” when compared with the US dollar and to a certain extent, the Singapore dollar.

Chart 1 shows the relative performance of the ringgit against the major global and regional currencies.

It can be seen that much of the weakness against the US dollar and the Singapore dollar occurred this year itself, while against the pound, euro, yen, won, baht and peso, the ringgit has been gaining ground not only year-to-date but also over the past year and five years.

Against the Australian dollar and rupiah, the ringgit has recouped its weakness against the two currencies with a stronger performance year-to-date.

While the picture looks respectable over the past five years, data going back over a 10-year and 15-year period, suggests that the ringgit has significantly underperformed.

Chart 2 shows the performance of the ringgit vis-à-vis the major global and regional currencies.

As seen in Chart 2, over a 10-year horizon, ie, from mid-september 2012 to the present, the ringgit is only firmer when compared with the yen (19.1%); Australian dollar (5.1%) and the rupiah (5%).

Against all the other currencies, the ringgit is weaker by between 6% against the pound to as much as 49.1% against the US dollar.

Over a 15-year horizon, the ringgit was also seen as weaker as it was down by between 4.5% against the yen and Australian dollar to as much as 40% against the Singapore dollar.

The ringgit is only firmer against the pound (25.6%); rupiah (18.1%); won (13.3%) and the euro (6.2%).

Another comparison is the performance of the ringgit since it was de-pegged on July 21, 2005.

Here one can observe that while the ringgit is down 41.3% since then against the yuan and 19.3% against the US dollar, it is firmer against other major currencies, rising by 1.9% against the euro, 6.4% against the yen and 21.3% against the pound.

Regionally, although the ringgit is up more than 20% against the rupiah, the ringgit is down significantly against other regional currencies.

This is sharpest against the Singapore dollar with about 42.7% depreciation, 35.7% against the baht, and 16.5% against the peso.

As currencies are valued on a relative basis by comparing one currency with another, an alternative approach is to look into the real effective exchange rate (REER) which takes into account the weighted average of a currency in relation to an index or a basket of other major currencies. The weights are based on comparing the relative trade balance of a currency against each country in the index.

REER data is provided by the Bank of International Settlement (BIS) monthly and Chart 3 summarises Malaysia’s REER performance since the de-pegging days, plotted against the US dollar.

The chart shows a highly correlated chart whereby the correlation was observed at -0.95, suggesting that REER has a significant impact on the value of the US dollar-ringgit exchange rate.

A tough question as the valuation of a currency is always seen as a relative point to another currency while the strength/weakness of one currency can also be attributed to the relative weakness/strength of another currency.

Nevertheless, if one were to gauge the REER as a reference point, the ringgit is effectively undervalued by approximately 16.8%, as a neutral REER should be at the 100.00 index point level.in

At this level, the ringgit’s fair value is approximately RM3.89 to the US dollar. However, the REER has always been trading below the 100 index point level, except for a brief occasion between April 2010 and August 2011; in February/march 2012; and between November 2012 and May 2013.

In July 2011, the ringgit traded at its post de-pegging high of RM2.9385 before succumbing to weakness due to multiple reasons.

Bank Negara’s international reserves begin to weaken from a peak of Us$141.4bil (or Rm435.5bil) as at May 2013 at a time when the ringgit was trading at RM3.08 to the dollar and the REER was at its peak of 104.11 points.

However, if one were to take the average REER of 93.34 points over the past 17 years, the ringgit has a fair value of RM4.17 to the dollar.

Hence, while the ringgit has weakened considerably against major currencies, especially since its de-pegging days, the local currency remains an undervalued currency by between 8.9% and 16.6%.

While the ringgit is seen as weak against the US dollar and Singapore dollar, it has outperformed against other major currencies like the euro, pound and yen.

Over the longer term, Malaysia needs to address the serious structural issues that have made us less competitive than our neighbours. Top of the list is education reforms which should be addressed quickly as we are losing out our young bright minds via migration.

One of Malaysia’s biggest losses is the brain drain that has benefitted many countries, especially Singapore, Australia and even as far as the United States.

The second issue that Malaysia needs to address is to attract right-minded high-skilled knowledge workers as well as the ability to attract the right investment dollars into Malaysia.

The spill-over effect from an investment-friendly country is multiple, as it can help to lift Malaysia’s competitiveness not only in traditional fields but new robust industries related to the technology and services industry.

Third, Malaysia needs to address the current low wage levels of Malaysians as we cannot be a high-income nation if 50% of Malaysians are earning less than RM2,100 per month.

There must be a concerted effort to increase wages, which will indirectly address not only the rising cost of living but increase the affordability as well as tax revenues of the government.

Fourth is our fight against corruption. It is a known fact that a low ranking in Transparency International’s Corruption Perception Index is highly correlated to the cost of doing business.

Malaysia needs to make greater efforts to weed out the corrupt practices, both in the government and in the private sector to enable Malaysia to be better position to not only attract the right global investors but to reduce the cost of public spending, which eventually leads to a lower cost to consumers.

Finally, it’s the politics and public policies that come with it. We must not only be investor friendly but must avoid flip-flopping policies that can cause serious irreparable damage to our reputation in the eyes of the world.

Public policies too must be cleverly crafted with the right inputs from all stakeholders to enable Malaysia to march forward as one.

Only then, we will see a stronger ringgit not only against the currencies that Malaysia has outperformed but also against the mighty US dollar and Singapore dollar

by StarBizPANKAJ 4. KUMAR Source link