Money Printer Go Brrrr -Asset Bubble Inflation and De-Dollarization

A version of this article originally appeared in Beijing Review.

With the U.S. economy still reeling from the COVID-19 pandemic and record unemployment, real estate prices continue to skyrocket pricing thousands of house hunters out of the market in the U.S. and Canada. This may seem counterintuitive for an economy that has technically been in recession since February 2020 and saw unemployment peak at just over 14% last April. The last time U.S. home prices raised this quickly, it led to an ensuing crash that brought down the global economy.

This asset bubble is not restricted to the US but is crossing borders and going global making housing or even renting unaffordable for many – especially those worst affected by the global pandemic. In fact the rate of price increases has alarmed policy makers in both the U.S. and Canada. “The dream of homeownership is out of reach for so many working people,” Senate Banking Chair Sherrod Brown told Politico recently. “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.”

According to World Population Review “the typical value of U.S. homes was $269,039 as of January 2021, a 9.1 percent increase from January 2020. Between 1999 and 2021, the median price has more than doubled from $111,000 to $269,039.

Canadian Prime Minister, Justin Trudeau has also weighed into the topic recently in a statement saying that the cost of owning a home is too far out of reach for too many people in Canada’s largest cities, noting it can take 280 months for an average family to save for a down payment in a place like Toronto or Vancouver – a favorite with Chinese migrants.

But real estate is not the only asset class that is being inflated; both the NASDAQ and S&P 500 have increased by nearly 40% in the last 12 months despite unemployment near record COVID highs in the U.S. The NASDAC increased by 39.51% in the last 12 months while the S&P 500 rose 38.46% over the same period.

Source: Yahoo Finance
Source: Yahoo Finance

The source of this asset bubble inflation is the Federal Reserve’s policy of Quantitative Easing or QE – a term economist use to describe printing money and using it to buy back domestic treasury bonds from banks and other financial institutions.  This, in theory, is designed to reduce the interest rate and encourage lenders to lend to industry or individuals to stimulate the ‘real’ or productive economy.

In reality, much of this ‘free money,’ as Professor Michael Hudson, financial analyst and president of the Institute for the Study of Long-Term Economic Trends, contends is instead used to speculate on assets both domestic and international – particularly in emerging markets where the biggest and quickest gains can be made. In essence, QE disproportionately benefits those closest to the Fed. These asset bubbles show no sign of abating as the US is expected to approve an addition 2 trillion in stimulus this year and the Fed has said it won’t take it’s foot off the pedal when comes to pumping liquidity into the market.

 

Source: FRED
The chart above shows the growth of money supply from the Federal Reserve since 2002. Note the volume doubled during the Financial Crisis of 2008. From then on the economy continued to be buoyed up with periodic bouts of money printing before rocketing during the 2020 COVID-19 pandemic.

With many of these dollars being spent abroad the central banks of the receiving countries keep them and pay the receiver in local currency. But what can central banks around the world do with all these dollars.

As congress often blocks attempts to purchase U.S. companies and assets under the guise of national security – as with the Chinese oil company CNOOC’s $18.5 billion bid for Unocal in 2005 – there is only really one option left; to purchase U.S. Treasury Bonds or T-bills to further underwrite U.S. debt. All of this is made possible because of the U.S. dollar’s unique status as the world’s reserve currency.

Source: FRED
The graph shows how Federal Reserve money supply has nearly doubled in the last 18 months.

Aside from printing money ad infinitum, this special status as global reserve currency gives the U.S. another ability. Namely, to sanction countries or individuals that do not align with their foreign policy objectives. Potentially, it gives the U.S. the ability to essentially turn off the economies of counties that don’t follow U.S. hegemony for whatever reason. But it is this threat and the increasingly liberal use of unilateral sanctions that are leading some economies to attempt to de-dollarize their economies and insulate them from economic bullying.

One such country is Russia. On June 3, the Kremlin announced its policy outline for de-dollarization. The plan to abandon the US dollar was developed by the government in response to tougher US sanctions. Finance Minister Anton Siluanov announced plans to reduce the share of the dollar in the Russian National Wealth Fund (NWF) to zero.

“I can only say that the de-dollarization process is constant,” said Siluanov, expressing doubts about the reliability of the main reserve currency, at a press conference at the St. Petersburg International Economic Forum. According to him, this process is taking place not only in Russia, but also in many countries. “We made a decision to withdraw from dollar assets completely, replacing them with an increase in euros, gold, and other currencies,” the minister said.

According to him, as the share of the dollar is reduced to zero, the share of the euro will be 40%, the yuan 30%, gold 20%, pounds and yen 5% each. Siluanov, noted the replacement will take place “rather quickly, perhaps within the month”. Even before the Ministry of Finance announcement, the Bank of Russia carried out a large-scale restructuring of its gold and foreign exchange reserves, shifting about $100 billion in 2018 into euros, yuan and yen.

Added to this, at the end of 2019, several European countries set up a new transaction channel designed to facilitate companies to continuing to trading with Iran despite US sanctions after President Donald Trump unilaterally withdrew from the nuclear agreement or the Joint Comprehensive Plan of Action (JCPOA).

Set up by Germany, France and the UK, the ‘Instrument in Support of Trade Exchanges’ or INSTEX gives European companies the capacity to bypass the U.S. controlled SWIFT banking system – a network that enables financial institutions worldwide to send and receive information about financial transactions and one of the main tools for U.S. sanctions.

“We’re making clear that we didn’t just talk about keeping the nuclear deal with Iran alive, but now we’re creating a possibility to conduct business transactions,” German Foreign Minister Heiko Maas told reporters at the time.

In addition, China launched its Cross-border Interbank Payment System (CISP) in 2015. CISP is a payment system which offers clearing and settlement services for participants in cross-border yuan payments and trade.

At the start of the 21st Century the idea of de-dollarizing global trade seemed insurmountable. But now it seems as if the COVID-19 pandemic and America’s response may be accelerating the process faster than many imagined possible.

Developing Asia’s Economic Growth to Contract in 2020

Developing economies across Asia are set to contract this year for the first time in nearly six decades but are likely to begin to emerge from the economic devastation caused by the coronavirus next year according to a report released by the Asian Development Bank (ADB) yesterday. The report, the Asian Development Outlook (ADO) 2020 Update forecasts a GDP contraction of -0.7 percent for developing Asia this year – its first negative growth since the early 1960s.

However, the report goes on to say growth will likely rally to 6.8 percent in 2021 – in part as growth will be measured relative to a weak 2020, leaving next year’s output below pre-COVID-19 projections. With three-quarters of the regions’ economies expecting negative growth in 2020 the ADB is suggesting an “L”-shaped rather than a “V”-shaped recovery for the region.

“Most economies in the Asia and Pacific region can expect a difficult growth path for the rest of 2020. The economic threat posed by the COVID-19 pandemic remains potent, as extended first waves or recurring outbreaks could prompt further containment measures. Consistent and coordinated steps to address the pandemic, with policy priorities focusing on protecting lives and livelihoods of people who are already most vulnerable, and ensuring the safe return to work and restart of business activities, will continue to be crucial to ensure the region’s eventual recovery is inclusive and sustainable,” said ADB Chief Economist Yasuyuki Sawada.

To mitigate the ongoing risk, governments in the region have delivered wide-ranging policy measures, including support packages—mainly income support—amounting to $3.6 trillion, roughly equivalent to about 15 percent of regional GDP.However, the report points out a prolonged COVID-19 pandemic remains a major biggest downside risk to the region’s economic outlook this year and next.

According to the ADB, the PRC is one of the only regional economies bucking the trend with expected grow of 1.8 percent this year and 7.7 percent next, with successful public health measures supporting growth. In India, where lockdowns have stalled consumer and business spending, the ADB estimates GDP contracted by a record 23.9 percent in the first quarter of its fiscal year and is forecast to shrink 9 percent in FY2020 before recovering by 8 percent in FY2021.

The report goes on to highlight other potential downside risks in the region arising from geopolitical tensions, including an escalation of trade and technology disputes between the United States and the PRC; as well as financial vulnerabilities exacerbated by a prolonged pandemic.

COVID-19 to Plunge Global Economy into Worst Recession since World War II -World Bank

According to the World Bank the swift and massive global shock of Covid-19 and the measures to contain it have plunged the world economy into a severe contraction.

According to World Bank forecasts, the global economy is set to shrink by 5.2 percent this year representing the deepest recession since the Second World War, with the largest fraction of economies experiencing the largest declines in per capita output since 1870, according to their June 2020 Global Economic Prospects. Download here for depressing reading.

Economic activity between advanced economies is anticipated to shrink 7 percent in 2020 with domestic demand and supply, trade, and finance severely disrupted.

Emerging markets and developing economies (EMDEs) are expected to shrink by 2.5 percent this year, their largest collective decline for sixty years,  with per capita incomes expected to decline by 3.6 percent – tipping millions into extreme poverty.

The hardest blow is hitting countries worst affected by the pandemic and where there is heavy reliance on global trade, tourism, commodity exports, and external financing.

While the situation in each country will be different, all EMDEs have vulnerabilities that are magnified by external shocks. Moreover, interruptions in schooling and primary healthcare access are likely to have lasting impacts on human development.

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges. Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”

said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. 

In a best case scenario, assuming the pandemic recedes sufficiently to allow the lifting of some mitigation measures by mid-year in advanced economies and a bit later in EMDEs; adverse global spillovers ease during the second half of the year; and that dislocations in financial markets are not long-lasting — global growth is forecast to rebound to 4.2 percent in 2021, as advanced economies grow 3.9 percent and EMDEs bounce back by 4.6 percent.

However, the outlook is massively uncertain given the inability of nations to cooperate and the downside risks are potentially huge; including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages.

A worst-case scenario could lead the global economy to shrink by as much as 8 percent this year, followed by a sluggish recovery in 2021 of just over 1 percent, with output in EMDEs contracting by almost 5 percent this year.

The U.S. economy is forecast to contract 6.1 percent this year, reflecting the the lack of coordinated pandemic-control measures.

Euro Area output is expected to shrink 9.1 percent in 2020 as widespread outbreaks took a heavy toll. Japan’s economy is anticipated to shrink 6.1 percent.

“The COVID-19 recession is singular in many respects and is likely to be the deepest one in advanced economies since the Second World War and the first output contraction in emerging and developing economies in at least the past six decades. The current episode has already seen by far the fastest and steepest downgrades in global growth forecasts on record. If the past is any guide, there may be further growth downgrades in store, implying that policymakers may need to be ready to employ additional measures to support activity.”

said World Bank Prospects Group Director Ayhan Kose.

Developing Asia to Grow Just 0.1% in 2020 — ADB

Viet Nam is forecast to grow 4.1% in 2020.

Developing Asia will barely grow in 2020 as containment measures to address the coronavirus disease (COVID-19) hamper economic activity and weaken external demand, according to a new set of forecasts from the Asian Development Bank (ADB).

According to the report , excluding the newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China, developing Asia is forecast to grow 0.4% this year and 6.6% in 2021.

“Economies in Asia and the Pacific will continue to feel the blow of the COVID-19 pandemic this year even as lockdowns are slowly eased and select economic activities restart in a ‘new normal’ scenario,” said ADB Chief Economist Yasuyuki Sawada. “While we see a higher growth outlook for the region in 2021, this is mainly due to weak numbers this year, and this will not be a V-shaped recovery. Governments should undertake policy measures to reduce the negative impact of COVID-19 and ensure that no further waves of outbreaks occur.”

Risks to the outlook remain on the downside. The COVID-19 pandemic may see multiple waves of outbreaks in the coming period and sovereign debt and financial crises cannot be ruled out, the report goes on. There is also the risk of renewed escalation in trade tensions between the United States and the People’s Republic of China (PRC).

East Asia is forecast to grow 1.3% in 2020—the only subregion to experience growth this year—while growth in 2021 will recover to 6.8%. Growth in the PRC is forecast at 1.8% this year and 7.4% in 2021, compared to the April estimates of 2.3% and 7.3%, respectively.

Hit hard by COVID-19, South Asia is forecast to contract by 3.0% in 2020, compared to 4.1% growth predicted in April. Growth prospects for 2021 have been revised down to 4.9% from 6.0%. India’s economy is forecast to contract by 4.0% in fiscal year (FY) 2020, ending on 31 March 2021, before growing 5.0% in FY2021.

Economic activity in Southeast Asia is expected to contract by 2.7% this year before growing by 5.2% in 2021. Contractions are forecast in key economies as containment measures affect domestic consumption and investment, including Indonesia (-1.0%), the Philippines (-3.8%), and Thailand (-6.5%). Viet Nam is forecast to grow 4.1% in 2020. While that is 0.7 percentage points lower than ADB’s April estimates, it is the fastest growth expected in Southeast Asia.

Central Asia’s economic activity is expected to contract by 0.5% compared to the 2.8% growth forecast in April due to trade disruptions and low oil prices. Growth is forecast to recover to 4.2% in 2021.

Restricted trade flows and declining tourism numbers have dampened economic outlook for the Pacific subregion. The subregional economy is forecast to contract by 4.3% in 2020 before rising to 1.6% growth in 2021.

Source: ADB

 

World Bank Reports True Impact of Covid-19 Globally

As countries around the world contend with the health emergency of the COVID-19 pandemic, the economic effects of mitigation measures have immediately impacted the world’s commodity markets and are likely to continue to affect them in the longer term. 

The global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020, the April Commodity Markets Outlook reports. The following figures are courtesy of the World Bank.

The COVID-19 pandemic is expected to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. Advanced economies are projected to shrink 7 percent. That weakness will spill over to the outlook for emerging markets and developing economies, who are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. 

Taking care of the land and preserving biodiversity – through healthy soil, reliable water access and pollinators – is vital for providing livelihoods for rural populations, particularly during times of economic shock like that caused by the current COVID-19 pandemic.

Healthy ecosystems have been shown to provide a lifeline to the poorest. The Poverty Environment Network project that collects income data of forest adjacent communities from 24 countries, estimates that environmental income (most of it from the forest) represents 28 percent of total income of these households