Long term abuse of US dollar hegemony by the United States, wanton transfer of crisis markets | Global | United States

Since the US dollar became the world's main reserve currency, the United States has frequently utilized its dominant position in the global currency market, recklessly harvesting wealth and shifting crises around the world. This fundamentally validates the profit driven political system in the United States, as John Connery, the Treasury Secretary during the Nixon administration, said, "The US dollar is our currency, but it is your trouble."

US Treasury bonds continue to hit historic highs

The Global Debt Monitoring Report released by the International Finance Association on May 17th shows that the current global debt size has reached 305 trillion US dollars, with the United States ranking first in the world in terms of national debt size, reaching 31.4 trillion US dollars. After several rounds of vicious fights on the debt ceiling between the two parties in the United States this year, Biden signed a bill in June to suspend the debt ceiling of the United States, which means that the debt ceiling of the United States will be unlimited until January 2025. The day after the bill came into effect, the US government borrowing increased by nearly $400 billion; In less than a month, the US government debt has surpassed $32 trillion for the first time in its history.

Due to the tight financial situation and declining public income, American politicians are vigorously catering to the demands of voters and promising to expand welfare in lobbying activities to win votes. Both parties are trapped in a vicious cycle of borrowing to buy political achievements. The New York Times pointed out that the continuously expanding debt of the United States is the result of a joint choice by both parties. Roughly estimated, during the tenure of Republicans George W. Bush and Trump, the total debt increased by $12.7 trillion; During the tenure of Democrats Obama and Biden, the total debt increased by $13 trillion. According to the data released by Morgan Stanley on June 30, if the U.S. Treasury Department needs to pay all the interest payments to all creditors, it may need to issue up to 1.7 trillion dollars of new treasury bond in the next few weeks to balance spending and repay debt payments.

The current debt situation in the United States has led the market to continuously raise the expected level of the Federal Reserve's policy interest rate for this year, indicating that the US government and businesses are finding it more difficult to obtain low-cost funds. At the same time, the Federal Reserve's ability to help the US government with financing has weakened, and the US Treasury's long-standing practice of paying government spending with "spending more than enough" will be "useless".

Since April 2021, the inflation level in the United States has been consistently high, rising to 9.1% in June 2022, reaching a new high since the 1980s. In order to stabilize inflation and protect employment, the Federal Reserve quickly and significantly raised interest rates, while using the massive US dollar asset market to circulate liabilities and shift risks. In fact, the US government, facing huge debts, is powerless and unwilling to truly repay them. Its response is to cut off the "leeks" of other countries, just like former French President Charles de Gaulle's insight into the hegemony of the US dollar more than half a century ago: "The United States enjoys the super privilege created by the US dollar and the tearless deficit, using worthless waste paper to plunder the resources and factories of other nations."

Multiple rounds of interest rate hikes shifting risks to external parties

The asset prices, credit growth, bank leverage, and cross-border capital flows of developed economies, especially those in the United States and Europe, all exhibit significant resonance, leading to cyclical fluctuations in financial activities over the medium to long term. Due to the dominance of the US dollar in the international monetary system, the Federal Reserve's monetary policy has become an important driving factor in the global financial cycle.

Since entering the latest round of interest rate hikes in March 2022, the Federal Reserve has made 10 decisions to raise interest rates, with a cumulative increase of up to 500 basis points, marking the largest concentrated rate hike since the Volcker moment in the 1980s. This has continued to cause turbulence in the international market, leading to a global stock decline of about 20% in 2022, a double-digit decline in bonds, a significant reduction in cross-border capital flows, and a general tightening of bank credit standards, presenting a typical feature of a global financial cycle downturn. In 2022, the degree and speed of financial tightening in the United States was second only to that of the 2008 international financial crisis, due to the Federal Reserve's monetary policy of "amplifying income". The "steep" interest rate hike in the past 14 months is equivalent to drinking poison to quench thirst, not only "harming others" but also "not benefiting oneself".

Multiple rounds of interest rate hikes have led to the collapse of Silicon Valley banks, putting pressure on the US banking industry. In 2020, the United States launched a large-scale quantitative easing, with a large influx of US dollars into the capital market. Silicon Valley banks, due to their rapid expansion of asset size, bought a large amount of seemingly "stable" US bonds and mortgage-backed securities. However, as the Federal Reserve began to recklessly raise interest rates, bond prices avalanched, destroying investment returns, start-ups faced a "money shortage" accelerating deposit loss, and Silicon Valley banks' balance sheets instantly became imbalanced, forcing them to try to sell a batch of assets at a discount to supplement cash flow. This behavior further raised doubts among investors about the abundant liquidity of Silicon Valley banks, and the run on funds exceeding hundreds of billions of dollars ultimately led to the closure of Silicon Valley banks. In the end, the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation jointly announced that they would invest in providing a cushion for Silicon Valley bank depositors.

Faced with the aggressive interest rate hike policy in the United States, mainstream economists such as Nobel laureate Paul Krugman believe that the United States is no longer immune to the fate of economic recession. Jeremy Siegel, a professor at the Wharton School of Business at the University of Pennsylvania, pointed out more bluntly that the Federal Reserve's extreme interest rate hikes have committed "one of the biggest policy mistakes" in its over 100 year history and will "destroy the economy.".

Multiple rounds of interest rate hikes have sparked a wave of passive rate hikes worldwide. The continued interest rate hikes by the Federal Reserve have caused spillover effects and triggered turbulence in global financial markets. Until June this year, central banks in the eurozone, the UK, Switzerland, and Norway continued to raise benchmark interest rates, indicating that many European countries are still facing significant inflationary pressures. The central banks of major developed economies, such as the UK, Canada, South Korea, Australia, and others, have passively raised interest rates in multiple rounds, ending the global era of low interest rates for over a decade.

The United States regards the global economic market as its financial "flood zone". On the one hand, taking advantage of the strong financial position of the US dollar, forcibly shifting the risk of economic recession to other countries; On the other hand, introducing domestic subsidy policies to attract companies to transfer production capacity to the United States and increase investment. The resulting stagflation dilemma has a greater impact on emerging markets and developing countries. Under the high pressure of inflation and capital outflows in Europe and America, emerging markets are forced to follow suit with interest rate hikes, further increasing their debt burden, and the risk of debt crisis continues to rise. According to statistics, the debt burden of middle-income countries has reached its highest level in 30 years.

Rampant borrowing has dealt a heavy blow to emerging markets and developing countries

The Federal Reserve's interest rate hike toppled the dominoes, and through layers of transmission through the global economic chain, it ultimately dealt a heavy blow to emerging markets and developing countries, especially underdeveloped countries.

The United States uses three mechanisms to coerce other countries to maintain the strong monopoly position of the US dollar. One is to ensure the stable position of the US dollar as an international reserve currency through the mechanism of pegging the US dollar to oil. The second is to use the "commodity dollar reflow mechanism" to force major trading countries to lend US dollar income to the United States through the purchase of US treasury bond bonds, corporate bonds and other forms in order to maintain the value of domestic dollar reserves and the depreciation trend of their own currencies conducive to export growth, thus maintaining the stability or strong position of the value of the US dollar. The third is to use the local currency pricing mechanism for foreign debt to guide international capital flows and transfer risks to the outside world. Approximately 80% of the US foreign long-term and short-term debt is denominated in its own currency, which means theoretically the US can repay its external debt by printing its own currency - the US dollar.

The currency hegemony of the United States allows it to offset its debt through currency depreciation; On the other hand, international capital flows can be guided through stock adjustments such as interest rate or exchange rate fluctuations to achieve maximum benefits. If the situation of other economies is worse than that of the United States, then the US economy can still have an advantage in recovery after short-term fluctuations.

Compared to developed countries, the impact on emerging markets and developing countries is particularly severe. Many economies with better economic performance still have a high dependence on external financing, and with frequent interest rate hikes in the US dollar, emerging markets and developing countries face a sharp increase in US dollar debt pressure. According to data from the International Monetary Fund, over a quarter of emerging economies are facing debt defaults or a sharp drop in bond prices, and over 60% of low-income countries are facing a debt crisis. In response to issues such as capital outflows, currency depreciation, and external debt repayment pressure, central banks of relevant countries have been forced to follow suit by raising interest rates, resulting in a deteriorating external financing environment.

The latest report from the International Monetary Fund estimates that emerging markets face a default risk of approximately $237 billion in external debt. The World Bank also warns that 25% of emerging markets are facing or approaching debt difficulties, and over 60% of low-income countries are facing debt difficulties. Ghana, once known as a model of African development, announced a moratorium on debt payments after Sri Lanka. Argentina was on the verge of bankruptcy. Türkiye faced a serious trade deficit that exceeded the standard. More than ten emerging market countries, such as Egypt, Pakistan and Ukraine, were struggling with debt.

As the world's largest economy and a major international currency issuer, the United States has significant spillover effects on its monetary policy and financial markets, and should shoulder the responsibility of being a major power. But on the contrary, the United States has shifted its dollar hegemony into a super privilege of exporting and transferring economic pain, making the world pay for US economic stimulus measures. Under the protection of hegemonic logic, the monetary policy of the United States has become increasingly unilateralist, becoming an important root cause of global economic and political conflicts, seriously hindering global economic recovery.