The degree of crisis that we are now moving into is just off the charts. The G20 finance ministers have urged the Federal Reserve to “minimize negative spillovers†from potential interest-rate increases. With the collapse of the Swiss/Euro Peg, they have been stunned into the realization of cross-currency borrowing. For decades, bankers have been marketing loans in different currencies as a means to reduce interest rate costs. However, once the bankers sell these deals, they just walk away.
The collapse in the Swiss/Euro Peg has exposed the amount of mortgages and loans in Swiss being found in Britain to Greece. This is a drop in the bucket. For the amount of debt issued in dollars has grown by 50% since 2007 and has now reached some $9 trillion. This is the total amount owed in dollars by non-bank borrowers outside the USA. If the Fed raises interest rates as anticipated this year for the first time since 2006, higher borrowing costs for companies and governments, along with a stronger greenback, will create the greatest economic collapse in modern times.
The dollar debt is just one example of how the Fed’s tightening would ripple through the world economy, from the housing markets in Canada and Hong Kong to capital flows into and out of China and Turkey right down throughout South America and let’s not forget the Middle East and Australia.
I have explained the QE1-3 would not be inflationary and all those who simply try to equate inflation to money supply have been dead wrong. The dollar is now THE world currency. Not merely is world trade taking place in dollars, we have world debt as well. The increase in money supply has been easily absorbed globally and that has rendered the old theory constructed on a simplistic idea that inflation is solely driven by an increase in money supply are in adequate in today’s global economy.
Liquidity conditions globally will start to tighten along with this idea of negative interest rates unwinding the entire leverage of the economy as well. Emerging markets will not be the only area that will be affected. We have a domestic US economy now being fueled by collapsing energy prices and mortgage rates falling through the floor to historic lows. Anyone who can now take a mortgage or refinance at these lower rates on a FIXED basis should get off the couch and run before it is too late.
