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An inconvenient truth: why the dollar has not yet collapsed
Material posted: Publication date: 04-02-2015

Pseudoanonymity repeatedly threatened us hyperinflation, collapse of dollar and the death of other currencies. Why the terrible prophecy does not come true? All the matter in a non-standard policy of Central banks after the crisis of 2008.

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR and U-FX Int – of unconventional monetary policies? No Central Bank until 2008 did not consider any of these measures – the policy of zero interest rates, quantitative easing, credit easing, a policy of "priority zone", a negative Deposit rate, and unlimited foreign exchange intervention, respectively. Today they have become one of the main tools for regulators.

Indeed, only in the last year and a half, the European Central Bank adopted its own version of FG ("priority zone"), and then moved to ZIRP (zero interest rate policy), and then took a CE (credit easing), and after decided to try NDR (negative Deposit rates). In January, it fully adopted QE policies (quantitative easing). And now the fed, the boe, the BOJ, the ECB and other Central banks of smaller developed economies, like the Swiss National Bank, have relied on such unconventional measures.

One result of this global activism of monetary policy in recent years has been the rebellion of the pseudo-economists and market hacks. That's a bunch of economists of the "Austrian" school, radical monetarists, adherents to the return of the gold standard and Bitcoin fanatics has repeatedly warned that such a significant increase in global liquidity would lead to hyperinflation, collapse of the dollar, sky-high gold prices and ultimately to destruction not secured by gold currencies at the hands of their cryptocurrency competitors.

None of those terrible predictions are not borne out in practice. Inflation is low and continues to fall in almost all advanced economies; Central banks of all developed economies are not able to achieve their goals – explicit or implicit – of 2% inflation, and some are trying to avoid deflation. In addition, the value of the dollar rose sharply against the yen, Euro and most emerging market currencies. Gold prices after their collapse in 2013 fell from $1900 per ounce to $1,200. And Bitcoin has shown the worst results among currencies in 2014, its value falling by almost 60%.

Of course, most of those soothsayers hardly have even a basic understanding of the economy. But this did not prevent them to influence the public debate. So it pays to ask yourself why they are so amazingly wrong.

The essence of their error consists in mixing cause and effect. Central banks have increasingly adopted non-traditional monetary policy because the post-2008 recovery has been extremely anemic. This policy is necessary to counteract the deflationary pressure caused by the painful need of getting rid of debt load after building large public and private debt.

For example, in most advanced economies there is still a very large decline in production, and when the volume of production and demand is well below capacity; therefore, the influence of firms on pricing is limited. Labor markets are quite sluggish: too many unemployed and too few available jobs, meanwhile, trade, globalization and labor-saving technological innovation is increasingly cutting jobs and wages, creating a further disincentive to demand.

Moreover, significantly weakened and the real estate market, where the boom was replaced by recession (in the US, the UK, Spain, Ireland, Iceland and Dubai). Swollen and bubbles in other markets (e.g. China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag him down the prices of residential real estate.

Commodity markets have also become a source of deflationary pressure. Shale energy revolution in North America has led to lower prices for oil and gas, and the slowdown in China undermined demand for a broad range of commodities, including iron ore, copper and other industrial metals, which offer great after years of high prices, contributed to the investment in new capacity.

China's slowdown, coming after years of excessive investment in property and infrastructure is also a cause of global commodity glut. For example, excess capacity in the steel and cement sectors of China and a sharp decline in domestic demand in these sectors is fueling further deflationary pressure in global industrial markets.

Growing income inequality by redistributing income from those who spend more, to the one who saves – has exacerbated the shortfall in demand. The same role was played by asymmetric adjustment between the economies of the lenders who save a lot and don't feel the need to spend more, and the economies of the debtor, whose excessive costs faced with such market pressures, but are now forced to save more.

Simply put, we live in a world in which too much supply and too little demand. The result is a permanent anti-inflation, if not deflationary pressure, despite aggressive monetary easing.

The inability of unconventional monetary policy to prevent a sharp deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and accelerating inflation. It is, however, a zero-sum game, where deflation and recession are just exported to other economies.

Perhaps even more important is the deep emerged a mismatch between monetary and fiscal policy. To be effective, monetary stimulus must be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. And the Eurozone, and the UK, and the USA with Japan in varying degrees, are guided by severe budget cuts and consolidation.

Even the international monetary Fund has correctly pointed out that one of the solutions to the world with too much supply and little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (excluding China). While long-term interest rates in most advanced economies is near zero (and in some cases even negative), the arguments in favor of infrastructure spending really convincing. But a variety of political constraints – particularly the fact that in economies with a lack of money the government initially cut capital investment, and then public sector wages, subsidies and other current expenditure is holding back much needed infrastructure boom.

All this creates the preconditions for further slow growth, a long stagnation, the slowdown in inflation, and even deflation. That is why in the absence of adequate fiscal policy to combat the lack of aggregate demand, unconventional monetary policies will remain a Central element of the macroeconomic landscape.

Nouriel Roubini



Tags: USA , crisis , finances , gold

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