Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18
Stock Market Uptrend Resuming? - 11th Mar 18
Bond Market Interest Rate Yields Are Rising Again… Stocks Are on Thin Ice - 11th Mar 18
Death of Europe's Greenest City, Police State Sheffield Labour Council to Fell 50% of Street Trees - 11th Mar 18
Do All Bull Stocks Markets Need to Have a Bearish Divergence? - 11th Mar 18
An Inflation Indicator to Watch, Part 3 - 11th Mar 18
Online Stock Trading Tips - Tips about Online Trading & Day Trading - 11th Mar 18
NDX makes a new high. What does that mean? - 10th Mar 18
Blue Chip Companies on Track for $800 billion Buyback Record in 2018 - 10th Mar 18
Cheap Gold Stocks Basing - 10th Mar 18
An Introduction to Online Forex Trading - 10th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

Margin Call from Hell - Why Strong Dollar Leads to Deflation, Recession and Crisis

Politics / Global Financial System Mar 16, 2015 - 06:03 PM GMT

By: Mike_Whitney


The crisis that began seven years ago with easy lending and subprime mortgages, has entered its final phase, a currency war between the world’s leading economies each employing the same accommodative monetary policies that have intensified market volatility, increased deflationary pressures, and set the stage for another tumultuous crack-up. The rising dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead. The stronger buck is also wreaking havoc on emerging markets that are on the hook for $5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate. Author’s Michele Brand and Remy Herrera summed it up in a recent article on Counterpunch titled “Dollar Imperialism, 2015 edition”. Here’s an excerpt from the article:

“There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.

The World Bank warned in January against a “disorderly unwinding of financial vulnerabilities.” According to the Financial Times on February 6, there is a “swelling torrent of ‘hot money’ cascad[ing] out of China.” Guan Tao, a senior Chinese official, said that $20 billion left China in December alone and that China’s financial condition “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.” The anticipated rise of US interest rates this year, even by a quarter point as the Fed is hinting at, would exacerbate this trend and hit the BRICS and other developing countries with an even more violent blow, making their debt servicing even more expensive.” (Dollar Imperialism, 2015 Edition” Michele Brand and Remy Herrera, CounterPunch)

The soaring dollar has already put the dominoes in motion as capital flees the perimeter to return to risk-free assets in the US. At present, rates on the benchmark 10-year Treasury are still just slightly above 2 percent, but that will change when US investment banks and other institutional speculators– who loaded up on EU government debt before the ECB announced the launching of QE–move their money back into US government bonds. That flush of recycled cash will pound long-term yields into the ground like a tent-peg. At the same time, the Fed will continue to “jawbone” a rate increase to lure more capital to US stock markets and to inflict maximum damage on the emerging markets. The Fed’s foreign wealth-stripping strategy is the financial equivalent of a US military intervention, the only difference is that the buildings are left standing. Here’s an except from a Tuesday piece by CNBC:

“Emerging market currencies were hit hard on Tuesday, while the euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year. The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar, while the Turkish lira traded within sight of last Friday’s record low. The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar…

The volatility in currency markets comes almost two years after talk of unwinding U.S. monetary stimulus sent global markets reeling, with some emerging market currencies bearing the brunt of the sell-off…

Emerging market (EM) currencies are off across the board, as markets focus back on those stronger U.S. numbers from last week, prospects for early Fed tightening, and underlying problems in EM,” Timothy Ash, head of EM (ex-Africa) research at Standard Bank, wrote in a note.

“In this environment countries don’t need to give investors any excuse to sell – especially still higher rolling credits like Turkey.” (Currency turmoil as US rate-hike jitters bite, CNBC)

Once again, the Fed’s easy money policies have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral. (The crash in the EMs is likely to be the financial calamity of the year.) If Fed chairman Janet Yellen raises rates in June, as many expect, the big money will flee the EMs leaving behind a trail of bankrupt industries, soaring inflation and decimated economies. The blowback from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nation’s aggressively compete for a larger share of dwindling demand.

The crisis in the emerging markets is entirely the doing of the Federal Reserve whose gigantic liquidity injections have paved the way for another global recession followed by widespread rejection of the US unit in the form of “de-dollarization.” Three stock market crashes and global financial meltdown in the length of decade and a half has already convinced leaders in Russia, China, India, Brazil, Venezuela, Iran and elsewhere, that financial stability cannot be achieved under the present regime. The unilateral and oftentimes nonsensical policies of the Fed have merely exacerbated inequities, disrupted normal business activity, and curtailed growth. The only way to reduce the frequency of destabilizing crises is to jettison the dollar altogether and create a parallel reserve currency pegged to a basket of yuans, dollars, yen, rubles, sterling, euros and gold. Otherwise, the excruciating boom and bust cycle will persist at five to ten year intervals. Here’s more on the chaotic situation in the Emerging Markets:

“The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. [...] The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are ‘short dollars’, in trading parlance. They now face the margin call from Hell…. Stephen Jen, from SLJ Macro Partners said that ‘Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015.’” (Fed calls time on $5.7 trillion of emerging market dollar debt, Ambrose Evans Pritchard, Telegraph)

As the lone steward of the reserve currency, the Fed can boost global liquidity with a flip of the switch, thus, drowning foreign markets in cheap money that inevitably leads to recession, crises, and political unrest. The Fed was warned by Nobel Prize-winning economist, Joseph Stiglitz, that its loosy goosy-monetary policies, particularly QE, would have a ruinous effect on emerging markets. But Fed Chairman Ben Bernanke chose to shrug off Stiglitz’s advice and support a policy that has widened inequality to levels not seen since the Gilded Age while having no noticeable impact on employment , productivity or growth. For all practical purposes, QE has been a total flop.

On Thursday, stocks traded higher following a bleak retail sales report that showed unexpected weakness in consumer spending. The news pushed the dollar lower which triggered a 259 point rise on the Dow Jones. The “bad news is good news” reaction of investors confirms that today’s market is not driven by fundamentals or the health of the economy, but by the expectation of tighter or looser monetary policy. ZIRP (Zero interest rate policy) and the Yellen Put (the belief that the Fed will intervene if stocks dip too far.) have produced the longest sustained stock market rally in the post war era. Shockingly, the Fed has not raised rates in a full nine years due in large part to the atmosphere of crisis the Fed has perpetuated to justify the continuation of wealth-stripping policies which only benefit the Wall Street banks and the nation’s top earners, the notorious 1 percent.

The markets are bound to follow this convoluted pattern for the foreseeable future, dropping sharply on news of dollar strength and rebounding on dollar weakness. Bottom line: Seven years and $11 trillion in central bank bond purchases has increased financial instability to the point that any attempt to normalize rates threatens to vaporize emerging markets, send stocks crashing, and intensify deflationary pressures.

If that isn’t an argument for “ending the Fed”, then I don’t know what is.

By Mike Whitney


Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

© 2014 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules