The Mystery of Ephraim

Pessimism used to be for monetary cranks; now even Goldman Sachs warns the dollar will go the way of the pound

ASIATIMES by David Goldman / April 13, 2022

NEW YORK – The staggering sum of US$18 trillion – nearly equal to a year’s gross domestic product (GDP) – is the amount that the United States has taken in from foreigners since the Great Financial Crisis of 2008.

The notion that the dollar’s dominance in world finance might come to an end was a fringe view only five years ago when America’s net foreign investment position was a mere negative $8 trillion. Now one reads forecasts of the end of the dollar era in research reports by Goldman Sachs and Credit Suisse.

Washington’s seizure of Russian foreign exchange reserves seems like a self-defeating measure given America’s enormous and accelerating dependence on foreign borrowing. Paradoxically, America’s strength lies in its weakness: A sudden end to the dollar’s leading role in world finance would have devastating consequences for the US economy, as well as the economies of its trading partners.

In addition to the $18 trillion of net foreign investment in the US, foreigners keep about US $16 trillion in overseas bank deposits to finance international transactions. That’s $34 trillion of foreign financing against a US GDP of not quite $23 trillion. Foreigners also have enormous exposure to the US stock and real estate markets.

And David Goldman didn’t include the $30 trillion national debt to this $34 trillion Bubble!

No one – least of all China with its $3 trillion in reserves– wants a run against the dollar and dollar assets. But the world’s central banks are reducing dollar exposure, cautiously but steadily.

The trickle of diversification out of dollars could turn into a flood. What the International Monetary Fund on March 22 called “the stealth erosion of dollar dominance” prefigures a not-so-stealthy exit from the dollar. Unlike Nebuchadnezzars’ handwriting on the wall, the king’s soothsayers can read the message as plain as day.

Notably, Russia’s central bank cut the share of the US dollar in its reserves from 21% a year ago to just 11% in January, while increasing the share of RMB to 17% from 13% a year ago. Russia’s central bank has also bought more gold than any other institution in recent years.

With just 8% of world export volume versus China’s 15%, the reserve role of the US dollar no longer reflects American economic strength. It derives, perversely, from the rest of the world’s desire to save.

The populations of the world’s high-income countries are aging rapidly. In 2001, 28% of their people were aged 50 years or older; by 2040 the proportion will reach 45%. Aging populations save for retirement. The Germans and Japanese save nearly 30% of GDP, and the Chinese save 44%; Americans save just 18% of GDP.

For the past 15 years, American consumers have spent on goods each year roughly a trillion dollars more than were brought in by American exports.

The import-led consumption boom and the availability of cheap electronics from China and other Asian exporters fed a digital entertainment boom that inflated the stock prices of Apple, Microsoft, Google, Meta and other US software companies.

“Be afraid,” David Goldman warns of the biggest bubble of a $34 (plus $30 more?) trillions about to burst, “Be very afraid!”

Foreigners then invested their earnings from exports in US tech stocks, as well as government bonds, real estate and so forth. The tech boom harmed the US economy far more than it helped it, reducing American teenagers to risk-averse recluses addicted to smartphones and social media while generating stock market valuations never before imagined.

The result is the biggest bubble in world financial history. When the Covid-19 pandemic threatened to collapse the bubble, the US government added $6 trillion in stimulus to the economy. That restarted the tech bubble, which explains why the US net foreign investment position fell by another $6 trillion between 2019 and 2022, to today’s negative $18 trillion level.

Therefore the LORD, the God of hosts, the LORD saith thus: “Wailing shall be in all streets, and they shall say in all the highways, ‘Alas! Alas!’ And they shall call the husbandman to mourning, and such as are skillful in lamentation to wailing.

And in all vineyards shall be wailing, for I will pass through thee,” saith the LORD.
Woe unto you that desire the day of the LORD! To what end is it for you? The day of the LORD is darkness, and not light:

as if a man fled from a lion, and a bear met him; or went into the house and leaned his hand on the wall, and a serpent bit him.

Shall not the day of the LORD be darkness, and not light? Even very dark, and no brightness in it? Amos 5:16-20

~ by Joel Huan on April 15, 2022.

Posted in Ephraim, US