Currency Crashes Portend Dark Days Ahead

Written by Jason Simpkins
Posted October 12, 2018

Many countries issued dollar-denominated debt to bolster their economies as we emerged from the 2008 financial crisis.

But now that the dollar is strengthening against their weakening currencies, those debt levels are becoming more burdensome.

The end result is likely to be a wave of defaults and bailouts that echo similar collapses in Greece and Cyprus.

So far this year, India’s rupee is down 12.5%, Turkey’s lira is down 40%, Argentina’s peso is down 60%, and Iran’s rial is down 70%.

Pakistan’s currency, the rupee, tumbled 7% this week as the country sought its 13th IMF bailout since 1988.

Perhaps most dangerous of all, China’s currency, the yuan, fell 8% from March to August. The slide is in part organic — driven like others by the strength of the dollar. But it’s also policy driven, as Beijing is working to mitigate the effects of President Trump’s tariffs.

Indeed, the U.S.-China trade war has come at an inopportune time. And if the yuan continues to slide, other major exporters — South Korea, Singapore, Japan, Australia, and the EU — will be pinched, as well.

This would further exacerbate the regional currency sell-off and spur more dollar buying. Thus, the whole debt situation would intensify.

Emerging-market bond funds have already suffered net outflows of $21.6 billion so far this year, compared with inflows of $64.4 billion over the same period in 2017.

What this means is that the appetite for emerging market debt has vanished. So these countries will struggle to issue more to pay for their current obligations.

Again, this increases the odds of default.

The debt crises have bled into equity markets, as well. The MSCI Emerging Markets Index — the benchmark equity gauge for developing economies — is down 21% since January.

Of course, none of this means America is safe. It just means we’ll be the last domino to fall. As contagion spreads through emerging markets, more mature markets, such as Australia and the EU, will eventually succumb, as well.

And the U.S. economy won’t be able to survive on its own.

Especially since we carry our own lofty debt burden.

Since taking power, the party of “fiscal responsibility” has doubled the federal deficit over the past year. The government is currently running a $214 billion deficit, compared with a $107 billion deficit in August 2017.

Government spending is up 7% so far this fiscal year, while revenues have risen only 1%.

The federal debt currently stands at about $15 trillion, or 78% the size of the U.S. economy. If current trends continue, the debt will roughly equal the size of the economy within a decade.

And last week, Republicans introduced a “tax bill 2.0” that would add another $2 trillion to the debt.

What happens when there’s no one left to buy U.S. bonds?

A financial reckoning, that’s what.

This is what market prognosticator James Dines has been predicting for years.

And it looks like he’s right.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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