The Next Phase
Here we are.. almost a year since I wrote the Article …
It appears that both the American and European authorities have effectively implemented highly coordinated policies, coupled with stringent oversight of over-the-counter (OTC) derivatives, to fulfill the objectives outlined in my previous article without triggering a crisis.
The significant rise in interest rates in both the US and the EU has marginalized emerging markets and undermined any discourse of challenging the dominance of the USD.
Primarily, I believe that there has been a notable attainment of external credibility, with many developing nations finding themselves in a position where they would actually appreciate J. Powell's efforts in implementing rate cuts and weakening the USD.
This year, there's anticipation in the markets for announcements of rate cuts from both Powell and Lagarde. The FED is expected to initiate a cuts in May, marking a significant shift after one of the most aggressive rate hike periods in history.
...We've already delved into the reasons behind the unprecedented rate hikes. However, why is it now crucial to ease monetary policy? Is it due to concerns about regional banks?
I don't believe that's the sole reason...
Our priority is to reignite growth swiftly. With AI advancements taking center stage, it's essential to recognise that it is a double edged sword, particularly in service-heavy economies that are stagnating.
AI development has the potential to act as a powerful multiplier, driving economic expansion and fostering breakthroughs... but under the right circumstances.
Advanced economies with a substantial portion of GDP tied to services will experience the greatest impact from AI compared to less developed nations.
As Peter Thiel recently remarked in an interview, in a scenario of stagnant growth, your gain will come at the expense of someone else's loss.
From a geopolitical standpoint, the balance of power begins to shift this year, as developed nations face significant maturity walls in 2024 and 2025.
As we’ve mentioned before, the sharp rise in interest rates has placed immense strain on emerging economies reliant on USD reserves to stabilise their currency and facilitate international trade.
Meanwhile, it was anticipated that interest costs would increase for US companies too. However, the reality turned out to be different… for now
As we can see, net interest payments by US non financial firms actually went to a historical minimum!
Why? Well, why pay off debt when interest rates are at record lows, while the yield on cash balances is the highest it's been in the last 15 years?
As we hit a major maturity wall in 2024, this situation is set to change significantly. Other leaders know this, and with the balance of power shifting towards Russia and China this presents an opportunity for them to pursue or finally achieve some of their strategic objectives.
At present, the US is not inclined to escalate any conflicts. Our focus needs to be on regaining growth. The conflict in Ukraine has been used as a pretext to weaponize the USD, leveraging a surge in supply chain disruptions caused by the war and achieving many of the objectives outlined in the article linked at the beginning of this post.
So what’s the next phase?
In my opinion, forcing wage growth, stabilise inflation slightly above 2%, get back to growth and start introducing CBDCs in this scenario of monetary credibility is a must.
In the EU, minimum wages have been increasing significantly even in a scenario of basically low growth. I believe this will continue to be the trend in the next couple of years. Just look at Germany ..
I've long argued that printing money isn't the core issue. The real concern lies in weaponising this monetary policy against energy exporters. Enhanced productivity, technological advancements, new treatments, and other developments benefit the entire world and the overall standard of living. No matter if your Chinese, Russian, American or any other nationality.
In an economy prone to concentrating wealth at the top 1%, money printing can actually serve as a net positive for productivity and technology development. I'll address this further in a future post!
The implementation of Central Bank Digital Currencies (CBDCs) is also crucial. As we approach the conclusion of the tightening cycle, both the ECB and the Fed should capitalize on this moment to maximize the range of tools available to them.
CBDCs offer numerous avenues for addressing potential future challenges that may emerge.
Moreover, by introducing another level of intricacy, they would amplify the Cantillon Effect and prolong the time that would take for the benefits of money printing to be neutralised through inflation (Net Neutrality of Money).
Leave your opinions and comments for a future topic!