2016 – US dollar warning : the beautiful isolation of the « global reference currency »

Note for our readers : Following our monetary research work under the form of a surveillance of several months, our team is worried again about the US dollar. After a calming two year time, the dollar is heckled again within today’s new multi monetary world. Surprised by the conclusions of its own analyses, presented here below exclusively to you, our team of experts wishes to warn you, the GEAB readers, about the possible danger threatening the dollar. 2016 could very well be the year when the dollar wall will fall…

To explain the current financial turmoil, all official accusing fingers are pointing to a single guilty party: China, the ideal guilty player, the same way Greece and the euro currency were at their time. It is true that evidence seems to be on the side of those accusing fingers, due to the recently unstable Shanghai stock market and its low values.

Yet, there is something these mercenary detractors seem to forget: unlike in the United States, for example, the stock market is far from being vital in China, a country where this is more like “fun” than actual financing of the economy: in 2015, only 7% of the businesses were financed by equity[1]… This expansion of Macau casinos is therefore not at all representative of the Chinese real economy[2]. Of course, in the West the stock market has also been completely disconnected from the real economy, since the beginning of the accommodating policies of the central banks, but the importance of the financial markets is infinitely greater. As was mentioned particularly in the GEAB Edition 100, the finance system is truly at the heart of the American system (we have in mind mostly the enormous amounts of pensions that are being recycled within the stock market), and wants to be seen as the remedy for the industrial and economic decline of the country – but none of this is true in China. This means that the slightest cooling of the Shanghai stock is not the real reason for the pneumonia of the world’s finances (or of the world full stop). As a proof, note that the Shanghai index lost 32% in less than a month (!) during June-July 2015, without causing the emotion aroused by the two 7% drops (partially offset, now) registered earlier this year.

Yuan’s Way

The real reason was whispered, in fact, by some mainstream media, in place of a good analysis: in August 2015, what caused panic, much more than the market decline was the decision taken by the PBoC (Chinese Central Bank) to slightly devalue the yuan[3]. This would demonstrate, according to certain specialists, the weakness of the Chinese economy. Yet, this analysis is incorrect, our team believes, because the real cause of the panic is summarized in the figure below.

The real reason is the disconnection of the dollar from the “real world”. We stopped publishing our dollar index after May 2013 due to the fact that the evolutions in the monetary area were no longer very relevant; they have become relevant again at the end of 2014, once the American QE stopped and the European QE started.

What do we actually see in the figure above? We see that the dollar begins to lose touch with reality. Regardless of the measurement unit, the dollar is completely disconnected from the rest of the world. In two years, it increased by 54% compared to the average of the BRIC currencies (Brazil, Russia, India, China), and by 35% if we measure the same currencies with the economic weight of the countries concerned. Compared to a basket of currencies, one that is representative for today’s world (3 euro, 3 yuan, 2 Indian rupees, 2 Brazilian Reais, 2 rubles, 2 yen, 1£), we still notice an increase of 37%. If we compare it to the euro, it is up 26%. Finally, an increase of “only” 9% against the yuan is what crystallises the fears, given the centrality of China and its attachment to the dollar so far. It is precisely this attachment that disappears in two steps: a first time in August 2015, with the surprising devaluation of the yuan, and a second time at the beginning of 2016. In other words, China is dropping the dollar, and that’s the real reason for general panic. Our analyses have already sufficiently explained it so far: the United States holds it only thanks to their dollar, which depends on the support of the West and the benevolence of China. The weakness of the first and the dropping off of the second one mark the end of the dollar era (see the latest GEAB bulletin on this topic). A standard which loses its landmarks is no longer considered a standard. We currently are witnessing the end of the dollar as the pillar of the world.

The Fall of the Dollar “Wall”

It will have taken ten years for the crumbling dollar wall to collapse suddenly brick after BRIC, under the battering of reality. What our team had anticipated as early as the GEAB No. 1, in January 2006, and which sums up the crisis we have been facing, will have been delayed for a decade “thanks to” certain solutions which managed to undermine even more the foundations of the dollar system… this system declining in 2016 all the more violently.

Paradoxically, the final blow comes from an institution supposedly protective of the dollar, a pillar so vital for the United States: the Federal Reserve which, standing with its back to the wall due to its withdrawal, finds itself forced to stop its quantitative easing, and more recently, to increase its key rate. All this is in order to avoid losing all credibility (since the rate increase had been announced long before) and make believe the US economy is in good shape, while the latter is far from being restored and is apparently unable to cash the last part of the QE, much less a dollar increase.

End of the Western financial system

Moreover, if Western financial markets cut themselves off from the only places on Earth where some real economic activity exists, what will they do with their virtual money mountain? In these regions, the ‘Western’ activity (or, in any case, moving partly with Western money) disappears, leaving room for local activity.

The West therefore cuts any access[9] to this virtual money recycling plant, a reason why we anticipate a financial crash in the West, with ultimately little impact on other parts of the world, much less dependent on financial markets.

Even more than a crash, if there is nowhere else to recycle the money, it’s just the end of the Western financial system in sight, knowing that the other possible recycling area, the raw materials industry, has also collapsed.

Oil, a sign of the times

Getting ready for landing

However, the situation has evolved quite a lot since 2007. At the time, the world was still based on a single pillar – the United States[14] – and, when it started to sway, the entire planet was shaking. It is too early to say now how many pillars the world currently stands on: Europe could still be one of them; the BRICS undoubtedly, or even China alone (if the BRICS fail to understand their potential); the US if they finally have the intelligence to cooperate with the world…

Still, the collapse of the American pillar will not leave the planet without foundation, and these new pillars, as we have seen them, are better connected to the world and more stable than the US alone. That’s why our team anticipates that the next stock market crash of 2016 will certainly have painful consequences (actually more fatal for some players of the world before who will have had no one to save them), but less fatal on the entire global economy than the consequences of the 2008 crisis. (this article appeared in the GEAB No 101, January 2016)

Full article: 2016 – US dollar warning : the beautiful isolation of the « global reference currency » (GEAB)

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