David Gracey

David Gracey

David Gracey

Head of Foreign Exchange and Fixed Income Trading

Episode 2: Is the USA starting to eat itself?

• We left off last time with Putin cozying up to China, followed by Xi’s ultra-friendly comments.

• So why should we care?

• Well- for more than 70 years the world has operated on a model that has suited the USA and has provided them unrivaled privilege.

• In the previous episode we looked at how the USA’s own trade with the world benefited them through the money flowing back into their financial system, but it’s even more beneficial than that!

• Even if two non US nations trade with each other, it often has to flow through the dollar. Consider for example, France buying Oil from Saudi Arabia. Traditionally the French would first have to buy USD to pay Saudis for the oil, and then the Saudis would have to park these Dollars in the US system until they bought something from the Yankees – perhaps weapons or such like.

• So the entire system benefits the Americans. The USD never weakens because of external deficits, and The Yanks can enjoy artificially low interest rates because of this never ending supply of their own currency.

• If needs be they can also simply just print USD to prop up the system.

• They also maintain a top end credit rating even though their budget deficit has ballooned to 130% of GDP – almost double that of South Africa for example, whose credit rating is in junk status.

• But now things may be changing? 

• Nations are in the early stages of trying to attempt bilateral trade circumventing the USD – using some other mechanism to pay for goods and services.

• Remember last year when Russia refused to accept USD for gas exports and wanted to be paid in Rubles…well that meant that the Ruble strengthened significantly even whilst Russia was involved in a very expensive war.

• Of course this was a little impractical given Russia’s need for external funding, but it was the first salvo fired in the early stages of an economic conflict that always follows in the footsteps of a real war.

• More recently there have been other developments, for example, the Saudis have accepted payment for oil in Chinese Yuan rather than USD …presumably when the  Saudis buy manufactured Chinese goods,  they will pay for these goods in the same Yuan.

• China and France entered into a gas transaction this week – paid for in Yuan for the first time ever.

• Oher nations are now also entering into Bilateral transactions paid for in currency other than the USD.

• It's very early days in this conflict and things are super fluid, but it also means political alliances are impacted.

• We know that down here on the Southern tip of Africa we seem to be a little confused. Our major trading partners reside in the West, but we appear to be allied with Russia and the East.

• We belong to BRICS – the economic coalition of Brazil, Russia, India, China and ourselves, and now other nations are wanting to join the alliance,  soon to be known as BRICSANDMORTARWITHALITTLESANDTHROWNIN if enough nations sign up.

• If this budding experiment is successful it will mean that the nature of global trade will change and it cannot bode well for the USD or the USA.

• Suddenly the  Americans will have to fund their largesse without having the benefit of those USD flowing back to the US.

• Their twin deficits (current account and Budget) will have to be funded elsewhere, and yes they are still able to print USD, but that would debase their home currency.

• Suddenly they would have to operate like other countries, ensuring that they live well within their means, leading to further internal political upheaval for the once untouchable USA.

• One only has to look at the debate raging internally in the US over Trumps announced indictment today WRT: his alleged payments to an adult actress, that he allegedly paid for her silence over an extra marital affair, to see how divided that country actually is.

• Red and blue in the US may as well be different countries. The extremities of either side of the political divide make our own political differences here in South Africa look rather timid by comparison.

• And this is why we need to watch these developments with keen interest. 

• The world economic workings changed dramatically post the second world war – we may well be in the early stages of another significant step change.

• At this stage it’s not clear how things will develop- but develop they will.