By Graham Vanbergen
Suddenly, US assets are less attractive. Aggressive easing measures by the Federal Reserve has significantly diminished the USD’s rate advantage in an era of its own ballooning debt. Is the reign of the USD over and the rise of the European Union connected to a global reshuffle of power and wealth – accelerated by a pandemic?
It has taken just a few months for the world to change as dramatically as it has, and in so doing, weaknesses in the global system that no-one cared to scrutinise seemingly appeared from nowhere. But, of course, they were always there. Just like in 2008, when economists warned of the American bank-led financial crisis that plunged the world into economic and political chaos, the pandemic – warned about for years by scientists, also took us all by surprise. When the Brexit vote was delivered in June 2016 and Trump’s election victory was confirmed later the same year – it surprised everyone – including even, the people who voted for them.
Who would have predicted in 2015 that well over half the world would be ruled by populist leaders and that the USA would stoke a dangerous trade war with China forcing allies across the world to start picking sides?
Who would have predicted that wearing facemasks in a pandemic would polarise entire nations on the basis of freedom when civil society stood by for years and watched governments and police forces deploy illegal society-wide privacy abuses through facial recognition systems?
Today, we should be mindful that big change is on the agenda of every influential government in the world.
Another surprise is the question mark over the US dollar as the world’s reserve currency. Many speculate that as over 60 per cent of all global foreign exchange transactions are conducted in USD, it would not be possible for it to be replaced. And even if it was, by what? Yet, many organisations and countries are now using non-dollar denominated methods of exchange. China, Russia, India and many of their various allies are moving further and further away from the USD. The EU has found ways to trade in alternative currencies to bypass America’s overuse of financial sanctions. These sanctions, exercised as little more than economic leverage for political advantage now worry many countries around the world (1).
Gold has surged predominantly because America has failed the pandemic test. The trajectory of the precious metal for the near future looks set and has already confidently marched past its all-time high of $1917 an ounce in 2011. Many countries without the benefit of stable currencies and political systems are now buying gold and shying away from US bonds – with predictions that government gold-holding will double in the next 20 years. And in 20 years, there will likely be no mineable gold left to dig out (2).
Stephen Roach, the American economist who serves as a senior fellow at Yale University’s Jackson Institute for Global Affairs, was formerly chairman of Morgan Stanley Asia and its global chief economist. Roach says that – “An overvalued US dollar is ripe for a sharp decline, owing to America’s rapidly worsening macroeconomic imbalances and a government that is abdicating all semblance of global – or even domestic – leadership. And the European Union’s approval of a joint rescue fund is likely to accelerate the Euro’s rise.”
Harold James – Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance agrees and says “the US is like the Soviet Union in its final years“. James echoes Roach by saying that – “The United States is reeling from catastrophic failures of leadership and long-suppressed socioeconomic tensions that have finally boiled over. For the rest of the world, the most important development is that the hegemony of the US dollar may finally be coming to an end.”
The downfall of the USD would see America itself in rapid decline. We should be mindful that the Pound Sterling was a global reserve currency up to 1956 before Britain’s catastrophic decision over Suez. Back then 55 per cent of global reserves were held in Sterling. America took full advantage and forced the Pound out. Today Sterling accounts for just 4.3 per cent of global reserves.
The 2015 Nobel laureate in economics, Angus Deaton, believes that America’s malevolent and incompetent president has perfectly demonstrated the failure of not just of money management but of democracy – “Inequality is often cited as the cause of many social ills. As if America’s economic inequality weren’t bad enough, its institutionalised representational inequality has now severely undermined the effectiveness of its democracy.”
Another surprise is that predictions that the political arrangement of the European Union would fracture and its currency the Euro would disintegrate, have been replaced with a renewed confidence due to its handling of the Covid crisis. It rose to the occasion when it needed to the most.
Its defining moment was the historic agreement reached in July on a €1.2 trillion European Union recovery fund and loans structure – dubbed Next Generation EU. It changes everything. As Roach says, it will have – “profound and lasting implications for both an overvalued US dollar and an undervalued euro.”
It’s obvious to say now but 2020 should be seen as the year that changed everything. America has squandered any opportunities that a world in crisis may have provided. The European Union no longer sees the USA as a trusted ally.
Roach confirms that the Next Generation plan will draw critical support from large-scale issuance of pan-European sovereign bonds. To interpret – this means that “Europe is now on the map as the backer of a new risk-free asset in a world that up until now has only known only one: US Treasuries.” In the meantime, global reserves of the Euro has just reached 21 per cent and for every per cent it rises, holdings in the USD will fall.
In the meantime, as the EU gets both politically more potent and has a rock-solid plan for a post-Covid world, Britain – once the world leaders in diplomatic manoeuvring has taken sides – and picked the loser. In political circles, senior Conservative party MP’s are now quietly praying that Joe Biden will win the election in November and turn America’s fortunes around. Either way – the damage has been done for the USA. Trust has been hoovered up by the political vacuum that Trump’s hypocrisy created.
In normal times, Brexit would present itself as a golden opportunity for level headed, experienced politicians and negotiators. But the basis of its stance is the EU buckling under the threat of the UK agreeing on a trade deal with America. The complete lack of political competence has led to both objectives ending in failure. This is what happens when populists are elected based on nothing more than false promises. Britain is facing years of an economic, political and diplomatic winter if a hard Brexit occurs (3).
The pandemic has accelerated the decline of both Britain and America. The new world order will be dictated by the political rise of the European Union and the economic muscle of China.
The recent publication of the Russia Report in Britain says a lot about a country that was used to punching way above its weight. The report focused on Russian meddling in Britain’s democracy. It deliberately steered clear of Brexit and of criticising the Johnson government over its blatant manipulation of electoral laws. The Russian Ambassador to London fro 2011 to 2019, Alexander Yakovenko, returned to Moscow last year to be awarded the Alexander Nevsky Order of Merit from Putin himself. He is widely reported to have told colleagues in the Kremlin after a decade long campaign to undermine the UK – “We have crushed the British to the ground. They are on their knees and will not rise for a very long time.” Yakovenko is one of the world’s most highly experienced and skilled diplomats with an impressive curriculum vitae (4).
The only actions Britain can take to stave off this impending disaster are now simply unreachable as the country heads towards the autumn with the threat of another Covid outbreak, of Brexit and economic meltdown due to its over-reliance on the ‘services’ industry.
The pandemic has accelerated the decline of both Britain and America. The new world order will be dictated by the political rise of the European Union and the economic muscle of China. And while Britain and America fight their internal demons with civil society completely polarised on everything from economic ideology to falling standards of living, the European Union and China are now looking to the future. Both see something different, and neither wants aggression to define that path.
The EU sees a green future with carbon-neutrality at the heart of its economic growth – backed by a strengthened fiscal union. Being the worlds largest trading bloc it intends, at arm’s length, to manage both China and Russia for mutual benefit – and keep the peace. The EU pivot towards Asia is decisive. It will, on occasions falter but that’s where the future is.
America will continue to abdicate all former responsibility of its global leadership as it concentrates on deglobalisation, decoupling, and trade protectionism. Britain will stumble from one crisis to the next as an inter-generational conflict emerges over Brexit that craters the standard of living of the young. In the meantime, the European Union looks fully set to rise to the new challenges of the decade ahead.
About the Author
Graham Vanbergen is a publisher, author (Brexit – A Corporate Coup D’Etat), and journalist.
References
1) https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
2) https://www.marketwatch.com/story/in-20-years-the-world-may-run-out-of-minable-gold-2015-03-30
3) https://truepublica.org.uk/united-kingdom/dark-money-is-now-coursing-through-the-veins-of-britains-democracy/
4) https://bylinetimes.com/2020/07/21/the-russia-report-what-has-boris-johnson-got-to-hide-by-refusing-to-investigate-russian-interference-in-brexit/
The Structural Changes in a Post-Pandemic Global Finance
By Chan Kung and Wei Hongxu
In many ways, COVID-19 has had a huge impact on the world. Under the presence of increased global trade frictions and the unfolding of anti-globalization, countries are beginning to see large changes in their economy and society, with the impact of the pandemic exceeding that of other general infectious diseases. The havoc that it wreaked and the prevention-control efforts made towards the global economy will go down as one of the most historical moments in life, with many believing that the damage caused to be comparable to that of the Great Depression. It not only disrupted economic growth, but posed numerous long-term effects to global trade, finance, and industrial chains too.
The question is, how does the economic depression affect the world? ANBOUND’s chief researcher Chan Kung believes the main structural impact lies in the financial sector. In order to cope with the pandemic, major global economies have adopted unique policies, some even with unlimited easing means to stimulate the financial market and real economy to cope with COVID-19 on many levels. That said, the financial market itself has experienced numerous violent fluctuations as the pandemic spread. Stock markets saw never-before-seen declines with abysmal rate of recovery and these changes accelerate the global monetary environment’s evolution and the laws of financial markets.
On one end, the series of derivative impacts of the pandemic has caused the real economy and financial system to become more independent of each other. When the pandemic triggered a large-scale economic contraction and an “economic depression”, the divergence between financial markets and the real economy became more apparent too. International organizations including the IMF and the World Bank, official agencies of the U.S. National Bureau of Economic Research (NBER), the Federal Reserve, and other major research institutions and investment banks worldwide believe the world is now in a state of “economic depression”, and warns that the full extent of the economic downturn’s effects have yet to be realized. Ironically though, the financial market, backed by sky-high liquidity, has moved to a “bull market” amidst the depression following its fall in March, while Wall Street stock markets have experienced a surge in record as well. This reflects the increasing divergence between the financial system and the real economy after the 2008 financial crisis. The super loose monetary environment has pushed asset price bubbles up and formed a relatively independent self-circulation, while the financial system gains more significance in the economy.
On the other, policy influence on the financial market has become greater, and conversely, the market’s own regulatory role will become weaker as the central bank enters the market. Currently, central banks in various countries purchase assets in the financial market on the grounds of promoting “monetary easing”, which has the effect of easing the liquidity crisis and prevent the financial market from collapsing. However, with the market value dwindling and the mentality of survival of the fittest no longer favored, financial market participants will seek out new asset valuation, pricing models, and new asset allocation tools. Specifically, the rise of the stock market has clearly departed from the past value theory, and it is more of a post-excess liquidity bubble. The reason for that is not the way assets are priced, but that the “asset shortages” supported by endless funding sources has stirred an imbalance between supply and demand. Funding support are reliant on having more needs, while price is a tool for capital allocation, yet it is only a classification tool for stock assets. The market does not look at the performance of listed companies, but rather the momentum. If any, during a time of crisis, the bull market is proof of an economic depression.
The pandemic has caused the current global monetary system to experience topsy-turvy changes. The negative interest rate or zero interest rate monetary environment brought by the super easing policy has been further “popularized”, and its long-term effect on the economy has become more unpredictable. Both Fed Chairman Jerome Powell and the People’s Bank of China Governor Yi Gang said the stimulus plan always has an “exit” problem, but the current monetary easing exit is becoming more of a challenge, although one might argue that “borrowing to repay” is completely justified. Countries around the world, including the United States, have yet to find an answer to the “exit”. The “living within one’s means” financial theory has given way to “soft currency economics.” The world’s monetary system based on sovereign credit has changed, and the central bank’s monetary policy will slowly become ineffective in the future.
The practice of stimulus policies in countries in a pandemic-affected world shows the credit and monetary system that supports the global economy is facing theoretical and practical challenges. Unorthodox monetary theories are becoming a norm. The relationship between debt, deficit, and inflation has seen many unique changes, making traditional monetary and financial theories increasingly difficult to explain and be applied. The soft currency economics represented by modern currency theory is not a mainstream currency theory, and is even considered by many economists to be a “heresy.” However, the current pandemic has produced large amounts of money, which is equivalent to locking in reality. Central banks everywhere have adopted more realistic policy choices, provided they can stabilize the market.
All in all, it can be surmised that the impact of the pandemic is concentrated in the financial sector. It has not only changed the financial market itself, but the monetary and financial theory system too. Therefore, the structural impact caused by COVID-19 and future finance are no longer as we know it.
Final analysis conclusion:
The changes caused by COVID-19 towards the global economy and society possess structural and long-term characteristics, and it is mainly centered in the financial sector. Such “virtual” economic field is not only growing in size, it is also changing the very foundation and internal laws as we know it, no thanks to the pandemic.
About the Authors