It is amazing how people keep touting the demise of the dollar yet cannot comprehend that it remains the only game in town. We may yet see a tremendous capital flight to the dollar for a host of reasons from war and political risk to the landscape of interest rate trends. An Asia capital fight to the dollar may really set in motion the most dramatic swings in the world economy starting very soon.
The central banks are fearful of a massive exodus of capital and a flood into the dollar when US interest rates begin to rise. Central Banks in Asia are especially fearful to a rise in US interest rates from a capital flow perspective. They are hoping to defend again a flight to the dollar in the capital flows by keeping their own interest rates high. A rise in US rates will force rates to rise in Asia to stem the tide in capital flows and fixed-investment. Indeed, borrowing costs are rising in Asia. For the past two years now, the real, risk-free interest rate in the region has been risen to a high of about 5 percent, triple the long-term average. The China Shanghai share market peaked in 2007 and thus the investment flows have been into the fixed-investment flows. But rates are rising and an uptick in rates in the US will have a tremendous shock in Asia. This can send cash pouring into the USA even without saber-rattling.
In 2013, the total amount of investment in Asia (excluding Japan) was $6 trillion. The impact of an Asian investment downturn is tremendously ominous 2016-2020. Already, fixed capital formation fell 8% in Thailand during the first half of 2014. Investment has also declined in Hong Kong and Singapore as well in 2014. Investment did increase marginally in the Philippines, Malaysia and Taiwan. Only South Korea and India have witnessed somewhat moderate growth. China’s fixed-asset investment this year is up 24%, it’s a far cry from the stimulus-driven expansion of 70% five years ago.
When we look at the foreign-exchange reserves of developing Asian nations, we find that they are now growing 12% annually. This trend has been bullish for the dollar for central banks are deeply worried about Europe and this limits the scope of what they can hold to primarily dollars. Those who keep preaching the crash on the dollar are perpetually myopic and cannot see the financial landscape on a global scale.
Numerous countries and foreign companies borrow in dollars for rates have been cheap. This trend has masked the decline in China for Chinese companies were borrowing dollars at 1% in Hong Kong and depositing in Beijing collecting 5%. However, because world trade is measured simply by capital movement, this carry-trade masked the fact that real trade was declining matching the performance of the Shanghai Index.
We are preparing a special report on World Currencies. We are dealing with a potential massive rally coming in the dollar for it is hugely short with so many dollar loans (short) that have to be repaid (long). With books on the crash of the dollar and Europe touting these books that the dollar will crash, has set the stage for the exact opposite outcome.
