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The decline of world stock indexes, which occurred almost synchronously with the collapse of the US basic indicators, became a harbinger of global cataclysms that could shake the world economy in the near future. Some experts say about the temporary correction and a regular "rebound", but such a synchronous and deep fall cannot be caused by a set of some random or seasonal factors. There should be a more fundamental reason for this.
The Dow Jones index, which shows the level of capitalization of enterprises in the real sector of the US economy, declined by 4.6%. This has already happened in 2011, but then such fall was justified by post-crisis "relapses". The S&P500 index, which demonstrates the capitalization of 500 largest US companies, fell by 4%, and the index of high-tech Nasdaq companies lost 3.8%.
The likelihood of such scenario loomed on the horizon at the end of last year, so that recent events cannot be called a "black swan", in terms of the famous economist Nassim Taleb.
In November-December last year it became clear that the United States is soon preparing to start a third world war. No, we are not talking about turning a new cold war into a hot one or punishing the disobedient Juche followers. Americans will not be forced to use the arms of the most expensive military ship in the history of mankind – Gerald R. Ford-class aircraft carrier. The US will fight with the means of the 21st century – the dollar and interest rates. We should not underestimate the power of this weapon of mass of world wealth "redistribution". As a result of this war, someone should become poorer, someone richer, and someone, perhaps, will get away with this. The fact that the US is starting a global financial war shows that they want to win and, accordingly, become richer. China and a group of developing countries, which will not have time to hide during this "Showdown in Chinatown", should become poorer. Europe, probably, would be saved. It is not difficult to see that Ukraine, although it tries to attract attention, by all means, bouncing over the fence that separates it from the "golden billion", runs the risk of being in one basket together with China. Ready or not, here I come: the US should not be blamed.
The change in global politics became evident after the nomination of the candidacy of Jerome Powell to the post of Chairman of the Board of Governors of the Federal Reserve System. At the same time, an unspoken tradition was broken in the first presidential cadence (or at least in the first years of the presidency) to extend the powers of the current head of the federal reserve. In addition, it is not comme il faut to appoint the leaders of the Fed who are too incorporeal in the affairs of the ruling party. In the case of Jerome Powell, everything looked like a nice family get-together.
For a long time, the US professed a policy of cheap dollars. It looked like this: the attractiveness of the US financial instruments was constantly declining due to their low profitability (which directly depends on the level of interest rates of the Fed), as a result of which capital from America was constantly "leaking out" to developing countries where local markets could offer significantly more (against the background associated risks). As a consequence, the investment attractiveness of such countries as India, China, and other developing countries has gradually grown, as well as their industrial potential. The plants were opening in Shanghai and were closing, relatively speaking, in Detroit. As a compensation, developing countries made a substantial part of their free liquidity in US Treasury bonds. Due to the release of these bonds, the budget deficit of the world's largest economy was covered; it grew, while production in the largest American industrial centers closed. Nevertheless, the participation of the entire world in the process of implementing the US budget allowed the Americans to continue to lead the habitual way of life: no one felt any change for the worse. America was less and less participating in the generation of the final tangible product, was more and more involved in the sphere of services, innovations and information technologies. Calculations show that since 1980, the US public debt and credit debt of the country's population increased from $ 3 trillion (80% of the median household income - $ 38 thousand) to $ 41 trillion by early 2017 (more than 580% of the median household income – 330 thousand dollars). Thus, today every American family should pay $ 330,000 for itself and for that guy.
New Federal Reserve System (FRS) leaders Bernanke and Yellen used the emergency fire extinguishing system as a quantitative expansion program for QE when markets were actually flooded with additional liquidity. Bernanke's favorite story of the Great Depression was about a grandmother and grandson who asked why Granny did not have shoes in those days. "Because there was no money," was her answer. "And why there was no money?" asked the granddaughter. "Because they closed the shoe factory, where I worked," the grandmother put a fat point. This simple story pushed Bernanke to a simple conclusion: when the crisis begins, you just need to give as much money as the economy needs, and everything stabilizes.
The most difficult task fell on the period of Janet Yellen’s cadence. She made a rather risky decision about the beginning of the reduction of the quantitative easing program and the withdrawal of excess money. Initially, it was about $ 40-50 billion, which was planned to be monthly “squeezed” from the financial system (eventually stopped at $ 10 billion a month). In the opinion of US monetarists, this should prevent the emergence of new financial bubbles and block the strengthening of inflationary processes. The problem of this whole model was that 81.5% of the liquidity that was put into circulation came back to the federal reserve in the form of additional reserves of banks (the level of reserves was increased after the 2008 crisis to 10% of the attracted deposits). As a result, the FRS has accumulated up to $ 2.4 trillion of banking resources, which are, as it were, deferred requirements of the financial sector. With the help of this resource, the Federal Reserve has financed up to 40% of the deficit of the US state budget in recent years and has become the largest holder of Treasury bonds of the Ministry of Finance: the size of its government securities portfolio amounts to 25% of GDP.
Despite the calls to "stimulate" the economy in 2017, Janet Yellen tried to consider the modeling of the future inextricably linked with the prospects for the world economy. She has reasonably pointed out that "expensive" dollar would probably help the US solve short-term narrow-egoistic goals, but ultimately would lead to a new global crisis, where the standard monetary instruments would be powerless, and all the shaky results of stabilization after the systemic breakdown of world finance in 2008 will be lost forever. Considering that the dollar is the world reserve currency, this position is not groundless: the US should be responsible for those who they have brought by.
During 2017, the basic interest rate of the FRS has constantly increased from 0.75% to 1.25-1.5%. In 2018, rates are likely to increase more significantly: according to forecasts of JPMorgan Chase & Co, the FRS’s rate can be increased fourfold and, according to various estimates, brought to the level of 3.5-3.7%. In this case, such currencies as the ruble and hryvnia can go down by 15-20% in addition to the planned level of devaluation.
Thus, the problem of rising inflation and wages in the US will be solved by a whole range of monetary measures: an increase in the basic interest rate of the FRS, as well as withdrawal of excess liquidity from the market. And all this happens against the backdrop of the threat of the budget deficit increase. Reduction in tax costs of $ 1.5 trillion, announced by Trump, has no real compensatory mechanisms so far. Such a compensator can become only the already issued liquidity, which can be withdrawn from the adjacent markets, primarily developing ones. It is impossible to cover the budget deficit with the help of a constant increase in the upper limit of the national debt: the emission channel threatens to bring inflation to a critically dangerous level. Hence, it is necessary to look for non-emission sources, that is, to return the dollar liquidity "to permanent residence".
The public debt of the United States exceeded $ 20 trillion. The sum looks really monstrous, especially for the developing countries. Ukraine would have to work two hundred years to collect a similar amount, at the same time giving away its entire annual GDP.
Overcoming the "psychological line" of the US debt caused fearful reactions in the rest of the world economy. Although such "reflections" have long ago acquired the form of stable stereotypes and phobias. The world has divided into two camps of the Cavaliers and Roundheads - supporters and opponents of the American debt growth. The Cavaliers say that everything is relative and $ 20 trillion for the US is like two hundred billion for some other average countries ( "look at the Americans' hefty GDP"). The Roundheads reasonably note that the entire world economy is fixated on the dollar, and the system of savings and reserves is based on US Treasury bonds, and therefore the appearance of a financial bubble threatens with a big assault: the islands of Fiji and Kiribati will not survive.
Many researchers drew attention to the fact that the volume of the emission of the dollar and the United States debt securities has long passed into a hyperactive phase, which some futurologists call a financial singularity. This financial singularity, created in the USA, is no longer interpreted in the real world because the model that emerged does not correspond to the impression of the real sector of the economy. Its impact on the rest of the world can be very devastating because it violates the fundamental symmetry of the basic parameters of the world economy and completely distorts the mechanism of international equivalent exchange. But it allows the US to remove any budgetary restrictions.
In fact, we have witnessed the emergence of a large black hole in the world financial system, where the American printing press acts as a collider. Let us recall the physical description of a black hole: at some stage, the observer can still escape from its impact, but there comes a point when it is already impossible to do it after a certain horizon of events has happened. In physical terms, we have a financial space with unlimited curvature. If the largest country in the world violates the principle of equivalence of economic exchange and removes budgetary constraints, it becomes an economic antagonist for the rest of the world and a source of permanent crises.
Moreover, the contraction of time, allocated for correction of the negative model formed, will only increase, and hence the frequency of crises will also increase. It is almost like in the Apocalypse: "There will be no time."
For Ukraine, all this is fraught with the appearance of a kind of raw scissors. At the beginning of the 2000s, growth in oil prices was accompanied by the same rapid increase in metal prices. But we also had cheap Russian gas at that time: this explains the economic miracle of the times of Kuchma.
In 2018-2019, we will most likely observe a paradoxical model of raw scissors: rising energy prices against an anemic increase in world prices for agricultural raw materials and stagnant metal prices (with the risk of sliding into the negative zone). Thus, the cost of our products might increase, and the competitive advantage in foreign markets might be lost. The strength of the raw curse will in this case double: we will suffer not only from cheap raw materials exports but also from expensive raw materials imports (primarily energy).
Let us not forget about a possible outflow of capital, when attracting investment or debt capital will be impossible. At the same time, we will have to give a significant part of the external debt in 2018-2020.
The internal manifestation of the crisis will be concentrated on such indicators as inflation and devaluation of the hryvnia. Under these conditions, the National Bank of Ukraine (NBU) will be forced to raise the discount rate above 20%, which will bury the economic growth that has begun. In this case, we will no longer have the safety margin that was in 2008. The economic decline of 15% in 2014-2015 has been compensated for only 4%, and supposed GDP growth in 2018 is quite questionable.
In the financial sector, the edge of the crisis will plunge into the sector of state-owned banks. If the crisis of 2008 was amortized by foreign banks, and the collapse of 2014-2016 was amortized by the banks with Ukrainian capital, at the moment almost 58% of the liabilities of the banking system, including 10 billion USD of individuals' funds, are accounted for the state system. That is they will take the brunt in the event of a growing crisis and a massive outflow of deposits. At the same time, the fate of the law on state guarantees of population deposits in state banks is still unclear, and it in the peak, the population will be told that this legislative act has not come into effect.
The only thing that can at least somehow protect ordinary Ukrainians is the currency cache. Well, this is not something new for us.
This column does not necessarily reflect the opinion of 112.International editorial board and its owners.