The dawning of a monetary and financial cataclysm

It is the abundance of cash resources which has propelled financial markets, likewise for all assets in general, since 2009. This gigantic reflation, orchestrated to the sound of 10 to 12 trillion dollars being injected into the system, has been the main and fundamental source, having authorised a global assessment, and even euphoria, since certain analysts have attributed 80% of the rise in stock exchange markets since 2009 to quantitative easing organised by the central banks. It would therefore now be necessary to create 200 to 250 billion dollars every trimester with the sole aim of maintaining market values at their current level.

Alas, as we approach the end of 2015, the world is entering a phase of asynchronous monetary policies with the devastating prospect of destabilisation due to divergent circles among the world’s main economic and financial powers. With this in mind, the critical moment when everything will irreparably come tumbling down will spell the end of zero rates put in place by the US in 2008: a process of increasing American interest rates will be set in motion before the end of the year. In such a situation, it is a grave error to believe that the US Federal Reserve – which has injected into the system a trillion new dollars per year – could simply be replaced by the European Central Bank and the Bank of Japan, which would in some way take control of this monetary creation. Another major phenomenon which I shall not elaborate on is that between a third and half of current operators on the market have never known a rise in American rates, since the last tightening of American monetary policy dates back to 2006! It was a time when many current players weren’t yet on the labour market: the youth, whose reaction we cannot predict once they perceive their housing costs to be higher on the dollar.

In reality, the main source of this cataclysm to come lies elsewhere. Contrary to the Fed, the ECB, the Bank of Japan and the People’s Bank of China can’t print dollars, which is the central banks’ currency and purveyor of cash resources for the entire system which irrigates the global economy. Because the Greenback isn’t just the currency of the biggest reserve in the world. In fact, American bond markets – in the order of 60 trillion dollars – are by a long stretch the most substantial on the planet, and surpass the European and Japanese debt markets in volume. In addition, it is only from the point of view of a worrying number of emerging currencies which are indexed to it that the role of the dollar is not fundamental. The situation is even worse because any rise in US interest rates, also denominated in dollars, will manifest itself in the form of earthquakes throughout the whole of these countries’ debt market. The Bank for International Settlements calculated that all non-American commitments (outside the financial system) together came to more than 9 trillion dollars by the end of 2014, a figure which had increased 50% since 2009!

Since then we have gained a better understanding of the destructive impact of rises in US rates, of any considerable increase in value of the dollar, basically of the planned rarefication of cash resources for this currency across all commitments and emerging countries’ debts. Difficulty and delays in payment will be the lesser evil endured by emerging nations who are also now suffering the full brunt of the collapse of raw materials, which as a direct consequence reduces their revenues even more and therefore their room to manoeuvre when settling their debts… In fact, this melee between the price of foodstuffs, oil rates and the price of “commodities” in turn induces a vicious circle of the reduction of dollar cash resources which has been a critical factor of global finance, and which has caused a propulsion in asset values. If this substantial fall in the price of energy is excellent news for the Western consumer’s purchasing power, it also reduces the mass of petrodollars in circulation which will inevitably result in the liquidation and forced sale of energy producers and their foreign investments, and will have a negative net effect on European and American economies.     

The conjunction of these factors (the fall in dollar cash resources on a global scale and in cash reserves of emerging nations) has already produced a rise in their interest rates which puts their ability to fulfil their commitments under fierce interrogation. As a result, risk reward is seeing a climb as irresistible as it is deadly. This is in fact why the German 10 year bond is going beyond 1% when it was still at 0 a few months ago. The same goes for the bond yield of the French, Italian and Spanish treasuries which have seen an appreciation of the same degree. And what is there to say for the emerging countries’ debt rates, like Indonesia’s (1.75%), South Africa’s (1.5%), etc…Our world – accustomed to and cradled by the cash flow generously poured over us by the Americans – has really therefore reached a crossroads. The tremors generated by the raising of their interest rates will be felt across monetary markets, and on a global scale. Global financial destabilisation is beginning to rear its ugly head.