July 4, 2020
AliExpress WW
The COVID Shock To The Dollar

The COVID Shock To The Dollar

AliExpress WW

Posted by Stephen Roach through the Syndicate Project,

AliExpress WW

A pandemic is coming at a great speed. This is true for the level of COVID-19 infection, as well as the unprecedented scientific effort to find a vaccine. This is also true of the transformational processes currently taking place in countries affected by the pandemic. Just as the recession caused by the blockage led global economic activity to virtually stop in just two months, hopes for a V-shaped recovery are based on the equally quick opening of a closed economy.

It may not be so simple. sudden stop – long associated with capital flight from emerging markets – often reveal deep-rooted structural problems that can hinder economic recovery.

It can also cause a sharp movement in the price of an asset in response to the exposure of long-boiling imbalances.

This is the case with the US pandemic economy. Aggressive fiscal response to COVID-19 shock is not without significant consequences. Contrary to the widespread belief that budget deficits do not matter because almost zero interest rates hold back any increase in debt service costs, after all, no. “magic moneyOr a free lunch. Savings inside the country, already depressed, go deep into the negative territory. This can lead to a record current account deficit and oversized dive in the value of the dollar.

No country can afford to waste its savings potential – ultimately, the seed of long-term economic growth. This is true even for the United States, where the laws of economics are often ignored under the guise of “American exclusivity.”

Alas, nothing lasts forever. The crisis of COVID-19 is a particularly difficult blow for a country that has worked for a long time with a minimum reserve of savings.

Towards a Pandemic, America net rate of domestic savings – aggregate adjusted for depreciation savings of households, enterprises and the public sector – amounted to only 1.4% of national income, returning to the post-crisis minimum at the end of 2011. No need to worry, usually an excuse – America never saves.

Think again. The net national savings rate averaged 7% over a 45-year period from 1960 to 2005. And during the 1960s, long considered the strongest period of US economic growth driven by productivity in the post-World War II era, the level of net savings is actually an average of 11.5%.

The expression of these calculations in pure terms is not a trivial adjustment. Although gross domestic savings in the first quarter of 2020, amounting to 17.8% of national income, were also significantly lower than the 45-year norm at 21% from 1960 to 2005, the deficit was not as serious as in the net indicator. This reflects yet another alarming trend: America’s rapidly aging and increasingly obsolete stock of productive capital.

This is where the current account and the dollar come into play. Lacking savings and not wanting to invest and grow, the United States, as a rule, takes excess savings from abroad and suffers from a chronic current account deficit to attract foreign capital. Thanks to the US dollarexorbitant privilege“As the world’s dominant reserve currency, these loans are usually financed on extremely attractive terms, mainly in the absence of any interest or exchange rate concessions that might otherwise be required to compensate foreign investors for the risk.

That was then. There is no generally accepted wisdom during COVID.

The US Congress moved at an uncharacteristic pace to help in the face of a record economic downturn. Congressional Budget Office Awaits unprecedented federal budget deficit an average of 14% of GDP for 2020-21. And, despite the contentious political debate, additional fiscal measures are likely. As a result, the net rate of domestic savings should be carried deeper into the negative territory. This happened only once: during and immediately after the global financial crisis of 2008-2009, when net national savings averaged -1.8% of national income from the second quarter of 2008 in the second quarter of 2010, and the federal budget deficit averaged accounted for 10% of GDP.

In the era of COVID-19, the net national savings rate may drop to -5% -10% in the next 2-3 years. This means that today’s lack of savings in the US economy could well lead to a significant partial elimination of net savings.

As unprecedented pressure on domestic savings could increase America’s need for excess foreign capital, the current account deficit should increase dramatically. Since 1982, this wide measure of external balance recorded a deficit of 2.7% of GDP on average; Looking to the future, the previous record deficit of 6.3% of GDP in the fourth quarter of 2005 can be eclipsed. This raises one of the biggest questions of all: will foreign investors require concessions in order to ensure the massive increase in foreign capital that the lack of savings in America’s economy is going to demand?

The answer crucially depends on whether the United States deserves to maintain its exorbitant privilege. This is not a new discussion. New is the temporary deformation of COVID: a decision can be made sooner rather than later.

America is fighting for protectionism, deglobalization and denouement. this is share of world currency reserves fell from just over 70% in 2000 to just under 60% today. His containment of COVID-19 was a terrible failure. And his story of systemic racism and police violence has sparked a wave of transforming civil unrest. Against this background, especially when in comparison with other large economiesit seems reasonable to conclude that excessively stretched savings and current account imbalances will finally have effective effects on interest rates in dollars and / or the United States.

To the extent that reaction to inflation lagging behind and the Federal Reserve supports unusually adaptive position in the field of monetary policyThe bulk of the concession should be through the currency, not through interest rates. Hence, I expect the dollar index to fall by 35% over the next 2-3 years.

[ZH: Is that what gold is pricing?]

As shocking as it sounds, such a seemingly too big dollar fall not without historical precedent. Dollar real effective exchange rate decreased by 33% between 1970 and 1978, by 33% between 1985 and 1988 and by 28% between 2002 and 2011. COVID-19 may have spread from China, but the currency shock COVID seems to be made in America.


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