Aug 2015 - clik 1 - clik 2 - clik 3
Colapso vivido agora, mercados em pânico. Aí mídia desvia, culpa a China, sauditas - vale tudo.
The chaos in world financial and commodities markets has its origins in the policy paralysis in the US and will hasten the end of the dollar’s pre-eminent position as the world’s reserve currency.
What explains the extraordinary volatility in world markets? The Western financial press is blaming China and Saudi Arabia. China’s economy is supposedly slowing and facing a “hard landing”, supposedly forcing it to devalue its currency to regain competitiveness, thereby allegedly increasing the risk of “currency wars” i.e. of competitive devaluations by countries seeking trade advantages over each other - as happened disastrously during the Great Depression of the 1930s.
What explains the extraordinary volatility in world markets? The Western financial press is blaming China and Saudi Arabia. China’s economy is supposedly slowing and facing a “hard landing”, supposedly forcing it to devalue its currency to regain competitiveness, thereby allegedly increasing the risk of “currency wars” i.e. of competitive devaluations by countries seeking trade advantages over each other - as happened disastrously during the Great Depression of the 1930s.
Falling Chinese demand for commodities caused by the slowing of China’s economy is supposedly what is causing the price of oil and of other commodities to fall. Saudi Arabia is being criticised for causing the oil rout, supposedly because it has miscalculated the resilience of US shale oil producers, and is foolishly ramping up production during a period of oversupply, instead of cutting it. I do not find either of these arguments convincing. Concerns about China do not reflect what the statistics coming out of the country are saying, and are hardly justified by what has so far been a very small devaluation, which seems to have been intended primarily to strengthen China’s demand that the IMF include its currency in the IMF’s reserve currency basket. For an explanation of the present instability one has to look not at Beijing or Riyadh but to the policy paralysis in Washington. In 2014 the US Federal Reserve Board finally brought its quantitative easing programme to an end. Everyone expected - and the Federal Reserve Board encouraged everyone to think - that this would be followed quickly by a rise in interest rates. As I have discussed many times previously, it was this apparent tightening of monetary policy in the US that caused oil prices to collapse last year. In the event, instead of the rise in interest rates everyone was expecting, the Federal Reserve Board, apparently evenly split between supporters and opponents of a rate increase, has held fire.
Some of the reluctance to raise interest rates may be because economic performance in the US over the last year has been consistently below expectations, with productivity growth particularly bad. It is difficult however to avoid the feeling that behind the failure to take action is pressure from the Obama White House, worried about what an increase in interest rates would do to the Democrats’ chances of holding on to the Presidency in 2016. It is this uncertainty about the Federal Reserve Board’s intentions which is behind the instability in world markets. Since no one is sure what the authorities in charge of the world’s main reserve currency are doing or are going to do, no-one can plan ahead, so that positions are taken quickly and are reversed as quickly, as everyone nervously waits for the Federal Reserve Board to make up its mind.
That is why when it appeared last summer that the Federal Reserve Board was going to raise interest rates the oil price collapsed; why when it put off its decision to raise interest rates in the winter the oil price rallied; and why when talk it might be about to raise rates in September began to spread again during the summer the oil price collapsed again - taking other commodity prices down with it. It remains to be seen whether at the Federal Reserve Board’s forthcoming meeting in September a decision one way or the other is finally made. The very latest announcement suggests continued uncertainty.
FED hesita, impotente - deflagra nervosismo. Mercados em pânico.
In the meantime - in the absence of a clear decision - the US risks ending up with the worst of all worlds: having the costs of high interest rates without the corresponding benefits. Talk of an imminent rise in interest rates must already be causing interest rates to US borrowers - including shale oil producers - to creep up, without however providing the benefit of higher interest rates to US savers, who have had to get by with almost zero interest rates since 2008. At the same time speculation that US interest rates are going to rise has caused the dollar to surge and the currencies of the US’s competitors to fall, pricing out US goods and ensuring that most of the benefit of the oil price fall goes to the US’s manufacturing competitors rather than to the US’s own manufacturers. US dithering on this key question is having another effect. Governments and business people around the world - or at least outside the Western world - have long been exasperated at how their plans are constantly held hostage by the chaos in decision making in Washington and by the US’s narrow minded focus on its own interests. Once, not so long ago, US and Western economic predominance was so great this did not matter. Today that is no longer so. The result is increasing discussions around the world to end an international trade and financial system based around an increasingly erratic and unpredictable US and its currency, the dollar. That ultimately is what all the discussions and agreements between Russia, China, the Eurasian states and the BRICS states, that happened this year, were all about.
It is also what the discussions between the Russians and the Saudis, which have caused so much surprise and which have attracted so much comment, are also about. If the market instability of the last year shows the continued importance of the dollar, that same instability explains why the dollar is unlikely to retain that importance for very long. That is why when it appeared last summer that the Federal Reserve Board was going to raise interest rates the oil price collapsed; why when it put off its decision to raise interest rates in the winter the oil price rallied; and why when talk it might be about to raise rates in September began to spread again during the summer the oil price collapsed again - taking other commodity prices down with it. It remains to be seen whether at the Federal Reserve Board’s forthcoming meeting in September a decision one way or the other is finally made. The very latest announcement suggests continued uncertainty.
In the meantime - in the absence of a clear decision - the US risks ending up with the worst of all worlds: having the costs of high interest rates without the corresponding benefits. Talk of an imminent rise in interest rates must already be causing interest rates to US borrowers - including shale oil producers - to creep up, without however providing the benefit of higher interest rates to US savers, who have had to get by with almost zero interest rates since 2008. At the same time speculation that US interest rates are going to rise has caused the dollar to surge and the currencies of the US’s competitors to fall, pricing out US goods and ensuring that most of the benefit of the oil price fall goes to the US’s manufacturing competitors rather than to the US’s own manufacturers. US dithering on this key question is having another effect. Governments and business people around the world - or at least outside the Western world - have long been exasperated at how their plans are constantly held hostage by the chaos in decision making in Washington and by the US’s narrow minded focus on its own interests. Once, not so long ago, US and Western economic predominance was so great this did not matter. Today that is no longer so
The result is increasing discussions around the world to end an international trade and financial system based around an increasingly erratic and unpredictable US and its currency, the dollar. That ultimately is what all the discussions and agreements between Russia, China, the Eurasian states and the BRICS states, that happened this year, were all about. It is also what the discussions between the Russians and the Saudis, which have caused so much surprise and which have attracted so much comment, are also about. If the market instability of the last year shows the continued importance of the dollar, that same instability explains why the dollar is unlikely to retain that importance for very long.
