David Gracey

David Gracey

David Gracey

Head of Foreign Exchange and Fixed Income Trading

Episode 6: The rise (and potential fall) of the USD as global reserve currency.

•         I trust that by now the reader is familiar with the dynamics of the rise of the USD as the global reserve currency, post the second world war.

•        As the US, and later the world came off the gold standard, so the USD’s prominence as a global trading mechanism became entrenched, thus allowing the United States to borrow more and more on the international markets, as USD reserves needed to be warehoused/recycled into the US treasury market.

•        I am going to fast forward through the next 2 decades of events, as it will take too long to dissect each one as they occurred.

•        The basic premise remains the same –a  crisis materialises somewhere,  threatening the global economy, and central banks respond by slashing rates and providing liquidity.

•        Here is a list of events over the next 20 years or so……as you can see these events materialize fairly frequently. I also include significant political events that have shaped the world as we know it.

o       Feb 1989 – Russia exits Afghanistan. The war is unaffordable. 

o       1989 – communism collapses with the fall of the Berlin wall. Capitalism wins???- A new world order?

o       1989-1990. South Africa begins to dismantle apartheid leading to democratic elections in 1994.

o       1990 – Iraq invaded Kuwait, oil price spikes, Dow falls 18% in 3 months. The recession lasts 8 months.

o       1991 – Japan asset bubble bursts leading to a 20-30 year deflationary cycle, the effects of which are still with us today. Japan responds (eventually) with a massive stimulus package in an attempt to re-inflate the economy.

o       Sep 1992 – the UK withdraws the British Pound from the European Rate Mechanism. George Soros famously profits to the tune of over 1 billion USD by shorting the GBP.

o       1997 – Asian tiger financial crisis. Asian emerging market asset bubbles burst leading to a dramatic global stock market collapse in October of 1997.

o       1998 – tequila crisis in Mexico. The US bails Mexico out with a 40 billion USD aid package.

o       1998 – Russian crisis. Russia defaults on Ruble debt, devalues the Ruble, and declares a moratorium on foreign debt payments.

o       March 2000 – Dotcom bubble bursts. With the invention of the internet, online commerce was the flavor of the day. Every “dot-com” listing from books to pets has risen dramatically into bubble territory, until it all came tumbling spectacularly down. Amazon rises to fill the vacuum.

o       Sep 2001 – Nine Eleven. World trade towers in New York and other buildings are targeted by Islamic extremists, leading to stock market declines globally. The US will retaliate by attacking targets in Afghanistan. 20 years later they face the same fate as the Soviet Union did  13 years earlier.

o       Feb 2007 – the Chinese stock market falls 10% in a single day – leading to a global sell off.

• This brings us neatly to the global financial crisis of 2008. 

•        We will park our cruise liner right here for now. In the next episode, we will venture into the murky waters of the next 15 years of global finance and hopefully reach our destination in 2 episodes' time.

•        Over the period covered in today’s episode, interest rates declined steadily, leading to a steady rise in global debt.

•        But even these elevated levels of global debt would be dwarfed by what was to come.

•        Stay with me dear subscriber, we are almost at the end of the journey.