“Margin Call from Hell”: Why a Stronger Dollar will Lead to Deflation, Recession and Crisis

“Margin Call from Hell”
Why a Stronger Dollar will Lead to Deflation, Recession and Crisis
By Mike Whitney
“There are no nations…. no peoples…. no Russians.. no Arabs…no third worlds…no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multi-variate, multi-national dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels. It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today.”

– Arthur Jensen’s speech from Network, a 1976 American satirical film written by Paddy Chayefsky and directed by Sidney Lumet

March 14, 2015 “ICH” – “Counterpunch” – The crisis that began seven years ago with easy lending and subprime mortgages, has entered its final phase, a currency war between the world’s leading economies each employing the same accommodative monetary policies that have intensified market volatility, increased deflationary pressures, and set the stage for another tumultuous crack-up. The rising dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead. The stronger buck is also wreaking havoc on emerging markets that are on the hook for $5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate. Author’s Michele Brand and Remy Herrera summed it up in a recent article on Counterpunch titled “Dollar Imperialism, 2015 edition”. Here’s an excerpt from the article:
“There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.
http://smirkingchimp.com/thread/mike-whitney/61381/margin-call-from-hell-why-a-stronger-dollar-will-lead-to-deflation-recession-and-crisis
A strong dollar is NOT good for the economy, job creation, raising incomes, and — most importantly — America’s debt.
October always seems to be a bad month. And this go-round has been particularly troublesome because of all the uproar globally.

We have Ebola in America freaking out the natives (not to mention investors). We have the sanctions in Europe and Russia undermining the European economies. And we have double trouble in the oil markets: the Saudis are manipulating the price to run high-cost American and Canadian producers out of the market, while at the same time a robust dollar is reducing oil demand globally.

And at the pinnacle of this pyramid of problems sits our Federal Reserve. This month, it has promised, it will end its Quantitative Easing (QE) campaign and begin moving toward normalized interest rates.
The market as a whole is wildly uncertain as to what that means and what impact it will have on global bond and equity markets when the Fed is out of the bond-manipulation business. Investors are trying to front-run a future that they expect will not be good for stocks, commodities, gold or currencies other than the dollar.
As emotion takes the reins, market volatility races higher …
Wall Street has grown fearful and anxious in regards to Yellen and her Fed these days. Investors haven’t a clue what the Fed is really up to … because the Fed itself seems a bit clueless in its directions and commentary. And the Street reflexively understands that the Fed has itself in a nasty pickle:

• The Fed has said it will begin raising interest rates, possibly within six months of ending the QE program, which would imply spring … yet the euro zone is pushing rates down in Europe. That means interest rates on the dollar and the euro will be moving in opposite directions … which means money coming out of the euro and into the dollar, resulting in a stronger dollar. That’s not good, because …
• The Fed needs a stronger economy to create jobs and, the Fed hopes, inflation that then flows through to higher personal incomes that have been on the decline for the better part of a decade. Yet a stronger dollar works to undermine that need, since a strong dollar curtails export activity, thereby slowing the U.S. economy. Meanwhile …
• The Fed has to balance higher rates with America’s horrific levels of debt. As rates rise, so do interest payments on our debt … which either impacts Congress’ ability to fund the various programs it needs to fund, or it requires America to borrow even more money to cover the higher interest payments, throwing us into the early stages of a deadly debt vortex.

Fed governors, thus, are walking a tightrope as thin as floss, and investors are expressing their panic by fleeing all assets but the dollar.

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