Empty Economic spaces Threaten life

Away  from Facebook  for a fortnight 

Cut off from French town  home for months 

With occassional WhatsApp  calls and messages

And contemplating  on the current  dollar's  dilemma

I have been  striving  to renew myself  afresh. 

There's  peace and quiet here

In Adelaide  I can  lock the house and walk  out to the sun

When it shines brightly and more gently 

Even  during  winter

By sheer position  and geographical location 

Australian  coastlines  are 

A sheer beauty  pleasant  sight to watch

"Where the sea beats upon a wider shore" 

And around  these nerves cities  have lined up.

While  Sydney  and Melbourne  have been  battling  with the semi virus 

Adelaide  has swiftly  recovered  and it's  much safer relatively

While  I am  in the comforts  of home and confronting  winter

And wrapped  up in love and affection 

The others  the collective  term  which captures  all the disadvantaged  under the sun

Are  missing  their work and sleep 

When  empty  economic spaces frighten them.

There's  no solution  in sight

Except  to fight it alone in their hearts.

The corana, the US dollar and world economy

The corana has not just shaken the world economy through shut down and slow down but also jolted the US dollar .The disease can't be soley blamed because the entire responsibility rests on  Donald Trump for his inept handling of both the disease as also the economy .

By menacingly embracing America first policy and inflating America's nationalism in a thoroughly misplaced fashion, he has engendered trade and currency wars with China and the rest of the world ..

America's economic  illness stems from its ridiculous low savings and this macroeconomic imbalance, investment exceeding domestic saving spiller over into trade and current account deficits resulting in more unemployment at home .His tirade agaisnt foreign labour as if they are stealing away the American jobs is also devoid of economic logic.Tarrifs do not save jobs as it relocates labour and raises costs which eventually affects competitiveness..

For long the excessive absorption of the US  was masked by captive capital flows and the critical ability to attract them at low interest rate.

But the post covid  financial and economic scenario suggest that Europe , Japan and China are now better placed and the reliance on risky dollar will no longer be relished .The talk of digital currency and china's new found enthusiasm to undermine the dollar hegemony are the pointers for a new international monetary order..The dollar will have a secular tendency to decline inorder to correct its distorted exchange value which was not allowed to be corrected earlier.This was the familiar dollar dilemma stemming from its key currency status and the fear of currency appreciation of the surplus countries like China.

The US has been operating with the twin prices namely interest rate and exchange rate which It did not deserve but enjoyed and that only excesprated the US problem.The US enjoyed it because others allowed it.

Now the million dollar question is whether or not gold will continue to dance without interference ? Clearly revealing that market has lost faith in the risky dollar.

Will China make efforts to make its currency popular.?will Euro be an ALTERNATIVE?

Gold is not money now but just a commodity and yet it becomes super money whenever dollar is in deep trouble.

The happening today is only the old story repeated with more sophistication with a prayer for treating the US as any other ordinary country..

How to handle  the huge dollar asets beld by foreign central banks ?They will not afford to sink the dollar ship by just abandoning it as everyone will lose..The best way now is allow the dollar to fall and meanwhile convert the dollars into some other assets..But someone has to hold  those unwanted dollars.The US  by exporting can accept them.But does it have the capacity to do so ? Will others allow?

The tricky issue is all the debts are in US dollars..The US can simply print and pay them.if that happens who will own them and hold it for long?

The dollar as transaction currncy,  reserve currency and invoicing currency is suspect now.No solution is in immediate sight ..

America has to tighten the belt and pay the price as other countries have done .

But as a rich nation but poor by the criteria of ballooning debt, weak growth , incredibly weak fiscal, more unemployment and expected inflation and inflationary expectations leading to rise in interest rate and so on will not that easily forgo the continuing residual key currency advantages.who will break  the ice? what ever might be the outcome post covid world economy can't go on with greater asymmetric benefits among countries.world is trapped  not by corana but also by greater viruses like irresponsible global leadership and rightist tilt in politics and policy which has ignored the vital questions like inequality and rising economic deprivation for many.The predicament of dollar and it's existential dilemma now can't be separated from these.Labour mobility is threatened now and for the first time capital movements will be also tested by the health of the economy both general health and economic health.

will the US have the exorbitant privilege of printing dollar and have it supported by the Aisan central banks and foreign investors ?

In my post entitled what's happening to world money  I made a reference to rising fiscal deficit and declining US economy and let me continue the story of the inevitable but slow death of dollar.

The corana virus has only compounded the economic chaos engendered by Trump administration in the recent times .

The fall in the value of dollar is now the natural consequence of ultra cheap money policy pursued in response to the pandemic crisis and the consequent fall in the yield of the Treasury bonds and securities.when combined with the data that the cumulative fiscal deterioration over decades has made the public debt to touch 100% relative to the GDP.

All these have  rekindled the fear that the US will not be a safe haven under the present circumstances.The Expectation is that given the precarious fiscal and interest rate at zero level, the cheap money policy and explosion in liquidity will become the reality, unmindful of the inflatinary consequence.

Any country accumulating debt will attempt to deflate away its value by debasing it and that's what the US is doing now.This is nothing but Mundell's Law which I have coined in my thesis.

Kindly recall that post 2008 crisis the quantitative easing pumped more money and easy monetary policy solved the problem.After initial capital outflow, the US could attract more nervous capital from other counties.But now the case is different..No longer the interest rate configuration and the plausible rise in dollar appreciation in future is there to undertake carry foward trade and bring money to the US.capital is going out.without controlling virus and frittering away the gloabal leadership Trump can't use the exorbitant privilege  of benign neglect on the fiscal front.

This is not to suggest that  the dollar will lose  its weight as reserve currency overnight  as more than 60%  of world foreign exchange reserves is still in the form of dollar and china's yuan is just 2%.So China's move to decouple will not have any instantaneous magic..

what's happening to world money now?

The title given above has been my self financed project for more than a decade and that has been in a state of suspended animation.In my PhD thesis I had addressed this question way back in the early 90's.

Despite the progressive decline in America's economic strength the U.S dollar continued to play the role of the major key currency as there was no effective alternative for it as Richard N Cooper had pointed out many decades ago .

The brain child of Nobel Laureate professor R A Mundell Euro which was supposed to dethrone the dollar had its own existential dilemma ever since its birth and the European debt crisis exposed the vulnerability of the monetary union of Europe without being a fiscal union and absence of lender of the last resort to help the afflicted nations.

They are now part of history..Close on the heels of the corana virus and the indifference shown by the Trump administration is now the immediate cause for the loss of confidence  on the dollar.Against it's major trading partners currency the US dollar has plunged and it's also being captured by the phenomenal rise in the price of gold,viz.2000 U S dollars an ounce of gold which was just 34 dollars in 1934 when the dollar was devalued from its previous level of 28 dollars.

The prime villain of the piece is of course the gross mismanagement of the economy by Trump .The economic decline is much revealed through a massive rise in fiscal deficit and escalation in unemployment and the traditional safe haven hypothesis which lured the investors is now missing.The confrontation with China has  its share too.It has been making efforts to de dollarize their tade relations and they have alrady begun the process  to reduce the dollar mountain on which that have been sitting.

It appears that the post covid economics constrains and contains the role of the dollar as a key currency..

As the response to the disease a massive tax cuts and government expenditure has contributed to escalation in deficit and there's reason to believe that in the near term the deficit  will be close to 20% of the GDP of America.

To me as a student of international finance it's clear that the days of dollar are being numbered now and the US must measure its steps.But the facts are contraary to what wish.