Speaker 1: This is Bloomberg opinion. I'm Vonnie Quinn. This week people
Speaker 1: say that this is the worst crisis President nature from
Speaker 1: the British Ruth Pollard on tri Lanka's warning to the world,
Speaker 1: and later Stephen mim on the stronger dollar's role in
Speaker 1: hurting developing nations. First related to the global pain, oil
Speaker 1: paid for, of course in dollars. Let's get to Liam denning. Liam,
Speaker 1: oil prices have come down over the last few weeks.
Speaker 1: How has that affected supply and demand? Well, I think
Speaker 1: it's a reflection of anticipation of supply and demand. So
Speaker 1: you know, the run up we saw in the say,
Speaker 1: first and second quarter of the year was really explicitly
Speaker 1: linked to the disruption of Russia's invasion of Ukraine and
Speaker 1: fears of what that might mean for supply. As sanctions
Speaker 1: began to ramp up, as some buyers of Russian crew
Speaker 1: began to draw back voluntarily for fear of reputational or
Speaker 1: regulatory clash. There's an old saying in the industry which
Speaker 1: is that the cure for high are prices is higher prices.
Speaker 1: So quite quickly we saw this alternative narrative begin to
Speaker 1: come into the market, which is you know, the economy
Speaker 1: is just recovering from COVID, the global economy, and it's
Speaker 1: still suffering the effects of that recurrent shutdowns in China
Speaker 1: and that sort of thing. So people began to worry, well,
Speaker 1: we're seeing these high prices. Now everyone's panicking, But what
Speaker 1: if this all tips into a recession next year? And
Speaker 1: I think those are the two competing narratives we're seeing.
Speaker 1: I think the reality is that expectations of disruption to
Speaker 1: Russian oil supply were probably a bit overplayed at the beginning.
Speaker 1: People were talking about, you know, two to three million
Speaker 1: barrels of Russian supply immediately getting knocked off the market.
Speaker 1: Some has been, but nowhere near that figure. You know,
Speaker 1: the Russians have found ways to sell the oil at
Speaker 1: a discount. In the meantime, we are definitely seeing pressure
Speaker 1: on the European economy from all sorts of Ukraine related pressures,
Speaker 1: notably around what's going to happen with natural gas, and
Speaker 1: we are starting to see signs of American drivers, still
Speaker 1: the single biggest pool of oil demand on the planet,
Speaker 1: starting to maybe take notice of those high gasoline prices
Speaker 1: that we've seen, even though they have been coming down
Speaker 1: I actually saw a board dollar or something at the
Speaker 1: MOMP the other day. Yeah, so, so you know, they
Speaker 1: went above five bucks for the first time ever in June.
Speaker 1: I believe it was, and that does appear to have
Speaker 1: had an effect in the context of broader inflationary pressure exactly. Now.
Speaker 1: Open Plus meets Wednesday, and it of course includes Russia.
Speaker 1: Will Russia counter calls for a more Persian crewed I
Speaker 1: think they will do so probably in the background Plus
Speaker 1: in some ways is in a strong position, right. You know,
Speaker 1: all prices are high, everyone's worried about tight supply. We
Speaker 1: haven't seen US shale raw back as it might have
Speaker 1: done a few years ago because of the constraints placed
Speaker 1: on it by investors. On the other hand, it's also
Speaker 1: in a difficult position. The likes of Saudi Arabia and
Speaker 1: the UAE, the big players in Open Plus, certainly don't
Speaker 1: want to tip the global economy into a recession that
Speaker 1: doesn't do them any good. As much as they are
Speaker 1: trying to deal with what they see as a United
Speaker 1: States that is pulling back from the Middle East, they
Speaker 1: also face a reality that they still depend overwhelmingly on
Speaker 1: the United States for their defense, for weapons, sales, for
Speaker 1: the presence of the fleet, for defending shipping lanes, etcetera, etcetera.
Speaker 1: So they are playing this balancing act of trying to
Speaker 1: keep Russia within OPEC and not the place exactly, and
Speaker 1: they had to at the time because they had kind
Speaker 1: of lost their position of influencing prices. So they're trying
Speaker 1: to keep Russia on board and not be seen to,
Speaker 1: for example, direct lots of oil towards Europe to help
Speaker 1: it out. At the same time, they don't want to
Speaker 1: completely break with the US, you know, and don't forget.
Speaker 1: Will that have made a difference. It didn't seem to
Speaker 1: at the time. They were keeping their options open and
Speaker 1: felt like, I actually think it's hard to say, you know.
Speaker 1: I think that the broad reaction was that it was
Speaker 1: kind of a mayor tour, like nothing happened. I think, frankly,
Speaker 1: it's too early to say, you know. I think Biden's
Speaker 1: aim was a couple of things. One was to essentially
Speaker 1: get over this issue he has had with the Crown
Speaker 1: Prince of Saudi Arabia, his whole call to make him
Speaker 1: a prior on the campaign trail without completely being seen
Speaker 1: to get down on his knees and at the same
Speaker 1: time affirm that the US was still a presence in
Speaker 1: the Middle East. We won't really know how much of
Speaker 1: an effect that's had for a while because it will
Speaker 1: come through actions. You know, what will Biden do the
Speaker 1: next time a missile gets lobbed in from Yemen? What
Speaker 1: will he do with the next call for for an
Speaker 1: arms sale. It's it's hard to say. I want to
Speaker 1: talk to you a little bit about natural gas in
Speaker 1: Europe as well. There's a relationship there between the two obviously,
Speaker 1: but natural gas is trading sort of ten times higher
Speaker 1: than it was ten times. I mean, that's a huge
Speaker 1: increase and there's almost no supply where capacity now, and
Speaker 1: there is a fear that Russia will cut it to zero,
Speaker 1: which is very possibly. Could this's what one turbine working
Speaker 1: or something. Yeah, I mean I think working with quotation marks.
Speaker 1: We saw them do this actually with the deliveries from
Speaker 1: the Caspian pipeline not too long ago, where you know,
Speaker 1: a documentation issue was was getting in the way. I think. Look,
Speaker 1: the way to think about this is Europe is very
Speaker 1: dependent on Russian gas, you know, Russian gas imports. I
Speaker 1: think last year was something like of western Europe's gas consumption.
Speaker 1: You can't do without that. The Russians quite coincidentally and
Speaker 1: down their gas storage in Europe last four which was
Speaker 1: actually when we began to see these price increases come in,
Speaker 1: way before the acts of Ukraine. And I think the
Speaker 1: way President Vladimir Putin of Russia looks at this is
Speaker 1: there was this view at the beginning of the war
Speaker 1: that well, Russia would be crazy to turn off the
Speaker 1: gas supply to Europe because you know, it's a big
Speaker 1: source of revenue. Putin has invested billions upon billions in
Speaker 1: revitalizing the old Soviet legacy gas supply system to Europe,
Speaker 1: So why would he throw that away? Well, it looks
Speaker 1: like he has already thrown it away immunition, right, But
Speaker 1: regardless of what happens with this war and what happens after,
Speaker 1: the energy relationship between Russia and Western Europe is fundamentally broken.
Speaker 1: At this point. Pewton knows that he's crossed that rubicon already.
Speaker 1: So now what is he interested in? Well, what he's
Speaker 1: interested in is winning this war that he expected to
Speaker 1: last may be two hours, clearly didn't. And now he's
Speaker 1: locked in this grinding battle against Ukraine. And by extension,
Speaker 1: the West, because it's the West that's supplying the weapons
Speaker 1: that Ukraine is using. And I think from Pewton's point
Speaker 1: of view, Russia is suffering. Its economy is suffering as
Speaker 1: much as people point to, you know, a strong ruble
Speaker 1: and that sort of thing. Over time, the lack of
Speaker 1: access to technology, the brain drain of people leaving, the
Speaker 1: effective dismantling of parts of the Russian gas system over time,
Speaker 1: that's all going to really hurt the economy. This year,
Speaker 1: the I m F is predicting Russia will have its
Speaker 1: deepest recession since the early nineties, which is the post
Speaker 1: Soviet chaos. However, will put and be voted out of office?
Speaker 1: Not very likely. He looks at the West. He sees,
Speaker 1: you know, several governments having already fallen, recently, Italy, the
Speaker 1: UK Prime ministers, parliamentary loss as parliamentary majority, Democrats struggling
Speaker 1: with high gasoline prices as they head to the mid terms,
Speaker 1: and he thinks to himself, if I can just push
Speaker 1: on enough pain points economically, I can get these people
Speaker 1: to back off. And he may be right about that.
Speaker 1: You know, one of the things I've noticed about the
Speaker 1: European Union's response to this is rhetorically, at least, they're
Speaker 1: not really admitting what the issue is. And the issue
Speaker 1: is Europe is already in an energy war with Russia.
Speaker 1: That's how Russia sees it. Europe is still talking of
Speaker 1: this as essentially an economic problem, you know, it's inflationary,
Speaker 1: or it's going to cause cost of living increases and
Speaker 1: hardship and that sort of thing. No, it may have
Speaker 1: a significant chunk of its energy supplies simply cut off,
Speaker 1: with implications that can range from high prices, through two
Speaker 1: factories being shut down, people being thrown out of work,
Speaker 1: all the way through effects to the labor economy in
Speaker 1: every and if you have a severe winter, all the
Speaker 1: way through to people being forced to us between paying
Speaker 1: their gas bill or paying for food, or literally freezing
Speaker 1: in their homes. This is a more existential threat than
Speaker 1: just some high gas prices, and what it demands is
Speaker 1: a war economy. And what I found interesting about, you know,
Speaker 1: the agreement that was reached this week for the EU
Speaker 1: to have this mechanism to cut gas in mind by
Speaker 1: you know, Hungary's Victor Auburn actually denounced it on Facebook
Speaker 1: as a step towards a war economy, and you know,
Speaker 1: we can leave all bands politics aside. But what I
Speaker 1: found amusing is yes, that's exactly what it is, and
Speaker 1: that's exactly what Europe needs. It needs to think of
Speaker 1: this as a war and measures like rationing and planning
Speaker 1: and coordinating the gas policy to deal with the war situation.
Speaker 1: So what happens next? Then? At what point do leaders
Speaker 1: stop denying what's happening and trying to deal with this?
Speaker 1: And I guess Germany is the obvious example. Do we
Speaker 1: see mandates bigger mandates? Doesn't seem like asking people to
Speaker 1: cut their usage by for some time is going to
Speaker 1: do much. I would look at it slightly differently, and
Speaker 1: that I think agreements like that are a step towards
Speaker 1: grappling with the reality of the situation. I think you can,
Speaker 1: In fact, I think you've seen signs of it in
Speaker 1: different places. You know, for example, here in the US,
Speaker 1: we've seen President Biden invoke the Defense Production Act, not
Speaker 1: necessarily for oil or gas, but he did it for
Speaker 1: critical minerals for batteries, and that's quite a far reaching
Speaker 1: Paris and emergency. We've seen him spr use the SPR
Speaker 1: exactly to adjust the taxes on gasoline prices. I think
Speaker 1: we're going to see this kind of action. Well, I'd
Speaker 1: say there's two parts. We're going to see this kind
Speaker 1: of action happen, particularly as we get closer to winter,
Speaker 1: and particularly if Pewton decides, well, if the Europeans want
Speaker 1: to get off Russian gas, there's no way I'm going
Speaker 1: to wait around and help them do that. I'll just
Speaker 1: cut it off because as much as he'll take some
Speaker 1: fine actual hit, oil is really the mainstay of Russian revenue.
Speaker 1: The gas is really much more a geopolitical tool. So
Speaker 1: he will be quite willing to cut it off, I believe.
Speaker 1: And as that reality sinks in, European leaders in particular
Speaker 1: are going to be faced with a choice. Are they
Speaker 1: going to back up the rhetoric that they've been talking
Speaker 1: about with regards to Ukraine, of defending values, of defending
Speaker 1: European security and therefore adopt more kind of coordinated planned
Speaker 1: war economy measures whatever you want to call it on
Speaker 1: the energy side, or are they going to back down. Well,
Speaker 1: and they need to be voted into office to right,
Speaker 1: so they're thinking of their own domestic elections, And I mean,
Speaker 1: is it a case of once people are back in
Speaker 1: parleman Macon has Obviously he won't have a legislative majority,
Speaker 1: but he's back in power. I mean, has he got
Speaker 1: more leeway now than say, some of the other economies
Speaker 1: where there may not even be a government. I think
Speaker 1: this is part of the problem Europe has that Pewton
Speaker 1: tries to exploit. And we saw it, for example, in
Speaker 1: this the wrangling o you saw particularly Southern European countries
Speaker 1: say well, we kept our house in order and Germany didn't,
Speaker 1: so why should we have and obviously back for the
Speaker 1: euro exactly now we laugh about this, but that is
Speaker 1: exactly a sort of division that Peutin seeks to exploit. Clearly,
Speaker 1: some economies are much more exposed, Germany being the prime example.
Speaker 1: It's very difficult to say how this will play out,
Speaker 1: because you can say, under one scenario, we have a
Speaker 1: freezing winter, there's a deep procession in parts of more
Speaker 1: Than and southern Europe, maybe people literally freezing to death
Speaker 1: in their homes, and a lot of people just say
Speaker 1: why are we doing this Ukraine. On the other hand,
Speaker 1: it's possible that Peutin overplays his hand, does something pretty
Speaker 1: terrible like that, and that actually leads to people saying
Speaker 1: this is untenable and as bad as this situation is,
Speaker 1: we simply can't tie ourselves to a situation where you
Speaker 1: do what Russia says. At the same time, it's much
Speaker 1: easier as a citizen of a country to say that
Speaker 1: when you have your air conditioning or you have your heating,
Speaker 1: because that's what decisions depend upon, right, the electorate's mood,
Speaker 1: and it's not going to be very good if they're freezing,
Speaker 1: and that's absolutely what Putin will count on. I mean,
Speaker 1: the counterpoint I would say is, I think there are
Speaker 1: two things that are quite obvious to a lot of
Speaker 1: voters in Europe. One is Putin's invasion of Ukraine is
Speaker 1: wholly unjustified, awful. We've seen all the images, We're probably
Speaker 1: going to see a lot more over time. The second
Speaker 1: thing is it's quite obvious that the gas isn't flowing
Speaker 1: because Russia has turned it off. So if any sort
Speaker 1: of political support is to be built for seeing this through,
Speaker 1: it will have to rely on reinforcing those messages over
Speaker 1: and over again. But no question, this is going to
Speaker 1: be an extraordinarily hard winter for Europe. It's simply tied
Speaker 1: to literally via a pipeline. A country that effectively sees
Speaker 1: the worst as its enemy, and it's come to the
Speaker 1: fore now, Liam Denning there, do get in touch via
Speaker 1: Twitter a Vanney Quinn or email v Quinn at Bloomberg
Speaker 1: dot net opinions and comments. Always welcome to Sri Lanka
Speaker 1: now and Ruth Pollard. So, Ruth, Sri Lanka is in default,
Speaker 1: inflation is above seventy. We saw protesters sacked the presidential
Speaker 1: palace the flight of then President got A Biraja Paxa,
Speaker 1: who later resigned. Now the former Prime Minister of Ranil
Speaker 1: Wickramasinger has the presidency. He was voted into the presidency.
Speaker 1: Why did lawmakers vote him in? In particular, I think
Speaker 1: when Neil is seen by lawmakers as a known quantity.
Speaker 1: He's pretty well respected on the global stage, having the
Speaker 1: Prime minister six different times over the past couple of decades,
Speaker 1: and he's seen as I guess, the safe pair of
Speaker 1: hands to leave the negotiations with the International Monetary Fund
Speaker 1: for a much needed bail out package for Sri Lanka.
Speaker 1: He's got a lot of support from got A Buya
Speaker 1: Rudget Parks's ruling party in order to take power. So
Speaker 1: that's really important to bear in mind, right, and he
Speaker 1: had promised a type of unity government, and yet of
Speaker 1: the eighteen cabinet ministers that he can appoint, they all
Speaker 1: seem to be from his party, with the exception of
Speaker 1: perhaps two from one opposition party. That's not what the
Speaker 1: protesters were looking for, is it not at all? And
Speaker 1: indeed Renal is seen as part of the problem by
Speaker 1: the protesters. He has been been from the political elite
Speaker 1: and therefore a really big part of what led Sri
Speaker 1: Lanka to this really really dire situation that it finds
Speaker 1: itself in now. The protests obviously they were calling for
Speaker 1: the resignation. That's got a buyout past there, and they
Speaker 1: complained some victory over having forced him from office and
Speaker 1: indeed forced him to flee the country. But Renal will
Speaker 1: have to find some layers really differentiating himself from the
Speaker 1: rudget parks a government. And one way that he could
Speaker 1: do that is to acceed to the protests of demands
Speaker 1: she really cut back on the extraordinary powers of the
Speaker 1: presidency that got to buyer awarded himself during his short
Speaker 1: term in office. It remains to be seen whether he
Speaker 1: will do that. I guess for him the priority is
Speaker 1: talks with the i m F. Sri Lanka does have
Speaker 1: a big social safety net, but that hasn't helped. People
Speaker 1: are suffering and they're angry. That's right. I mean he
Speaker 1: has two priorities. I think one of them is obviously
Speaker 1: pushing ahead with these talks with the i MS as
Speaker 1: well as at the same time speaking assistance from Bile.
Speaker 1: Actual vendors like Japan, India and China today have been
Speaker 1: sort of sitting on the sidelines and waiting to see
Speaker 1: what happens before they come up with any kind of
Speaker 1: cold hard cash. India has provided a lot of aid
Speaker 1: in terms of delaying loan payment and sending fuel and
Speaker 1: wheat and essential medicine to Sri Lanka, but what it
Speaker 1: really means is cold hard cash to keep the economy
Speaker 1: you're going. The other priority for Vicumous is to keep
Speaker 1: the protests at say, while he tries to stabilize the country. Now,
Speaker 1: he did that to some extent by this violence overthrow
Speaker 1: the protests as camp out by the presidential residents last week,
Speaker 1: and obviously that move was widely con then but if
Speaker 1: he does wind back the powers of the presidency and
Speaker 1: show some good will towards the protests, then that will
Speaker 1: go a long way to maintain his stability in the country.
Speaker 1: China's role, what will it be? President ji Jinping has
Speaker 1: promised aid, but in fact Belton Road Initiative spending has
Speaker 1: volunto zero. What are China's intentions? It's very difficult to
Speaker 1: see what China's plan is. Could Sri Lanka beyond not
Speaker 1: getting caught up in the slow car crash that we've
Speaker 1: seen Sri Lanka going through in terms of its default
Speaker 1: and the political instability that has come after it. China
Speaker 1: has invested a lot instrumenta over the years as part
Speaker 1: of its Belton Road program, but that only makes us
Speaker 1: tempt sense of subject that Sri Lanka owns. So we
Speaker 1: have to put China's role in in very clear context. Now,
Speaker 1: a lot of the projects that China has funded as
Speaker 1: widely seen as white elements, when many of them are
Speaker 1: flustered in the Rugi pasta heart Landers hand. Then TOTA
Speaker 1: investors had been looking to Sri Lanka as an example
Speaker 1: of an emerging market economy that might default and now
Speaker 1: has defaulted. What kind of an example is this for
Speaker 1: investors in terms of other developing countries? That might default,
Speaker 1: given that all the particulars are so individual. In this case,
Speaker 1: Sri Lanka is very much seen as a warning in
Speaker 1: the South Asia region. Of course, we're all watching Pakistan
Speaker 1: and with great interest. It too has uncustainable levels of
Speaker 1: foreign debt that had just managed to negotiate a deal
Speaker 1: with the IMF that may be stabilized somewhat. Of course,
Speaker 1: it is deeply reliant on by election vendors such as
Speaker 1: Staudi Arabia and China to back in that I MS
Speaker 1: loan and create even more stability. But it is in
Speaker 1: a very difficult financial situation and it's certainly not out
Speaker 1: of the woods yet. Rules you've seen this before. Is
Speaker 1: this the worst crisis that Sri Lanka has seen? It's
Speaker 1: obviously been through very many of them. Yeah, I mean
Speaker 1: obviously discivil war which went for decades was a terrible
Speaker 1: crisis that the country faced. But when I was in
Speaker 1: Sri Lanka last week, people from one information to the
Speaker 1: other said to me that this is truly the worst crisis.
Speaker 1: They have never had a situation where they've had to
Speaker 1: queue for fuels, the days and days and days where
Speaker 1: they've had no access to potential medicines and where people
Speaker 1: have been taking blood pressure medications, for example, every other
Speaker 1: day in order to conserve those pharmaceutical where schools haven't
Speaker 1: been able to operate. Exams can't be done because there's
Speaker 1: no money to print them on paper. And of course
Speaker 1: there's a food crisis. Farmers have not been able to
Speaker 1: harvest crops for sometimes two seasons now, and they're not
Speaker 1: even sure if they can plant next season's crops because
Speaker 1: there's no money to import fertilizns. So people say the
Speaker 1: West Class expressage for nightcract beside from the British Ruth
Speaker 1: Pollary with us from New Delhi. By the way, do
Speaker 1: get in touch. Comments and opinions always welcome at Bonney
Speaker 1: Quinn on Twitter or email v Quinn at Bloomberg dot net.
Speaker 1: Happy to have Stephen mim with US Now columnist and
Speaker 1: University of Georgia history professor. We're going to talk about
Speaker 1: how the strength of the US dollar has been a
Speaker 1: constant threat to developing nations. Stephen, the Dollar Index d
Speaker 1: x Y was below ninety for the first half of
Speaker 1: last year for context. Right now we're above one oh seven,
Speaker 1: and we've had a little reprieve this month, but we've
Speaker 1: been essentially strengthening all that time explained to us why
Speaker 1: this is so significant for other economies. It's very significant
Speaker 1: because every time the dollar strengthened, there's concurrent weakening of
Speaker 1: other currencies, and it's not just the Euro. The currencies
Speaker 1: that are hit the worst and that have the greatest
Speaker 1: impact are the currency issue by so called emerging economies
Speaker 1: in Asia, Latin America, Africa, elsewhere the world, and this
Speaker 1: weakening is something that poses some dangers for these eCos.
Speaker 1: We know that already Sri Lanka and Russia are in default,
Speaker 1: both for idiosyncratic reasons, but also at least in Sri
Speaker 1: Lanka's case, partially because the US dollar is so strong.
Speaker 1: We're looking at another couple of dozen countries daring default
Speaker 1: in the face. How much relief would we need to
Speaker 1: see on d X Y in order for these economies
Speaker 1: to actually feel some relief, well, a significant amount, which
Speaker 1: is highly unlikely at this point. I'm afraid because there
Speaker 1: are all sorts of signals being given by the sort
Speaker 1: of reserve that they will be serious about finding inflation,
Speaker 1: and that the war against inflation, particularly at this moment
Speaker 1: of global chaos, is one that will inevitably lead to
Speaker 1: the strengthening the dollar. And the key here, of course,
Speaker 1: is that the strengthening of dollar means that the death
Speaker 1: of these emerging economies will start to rise the burden
Speaker 1: of those debts because they're denominated in dollars more often
Speaker 1: than not. And this is where we get the idea
Speaker 1: of original sin explained to us. What economists have deemed
Speaker 1: original sin. Obviously not in the theological sense, right right,
Speaker 1: But you know, economists are oftentimes blamed for being not
Speaker 1: very creative. But Barry I. Can Green, who's one of
Speaker 1: the economistic question who coined this phrase, have to be
Speaker 1: credited for coming up with a creative way of understanding
Speaker 1: or framing the question of why is it that many
Speaker 1: countries around the world are not permitted or unable to
Speaker 1: borrow in their own domestically issue currencies. Instead, they're forced
Speaker 1: to borrow in other countries currencies, namely, more often than not, dollars.
Speaker 1: And he called this phenomenon original sin because when you
Speaker 1: look at a country like Argentina, for example, but it
Speaker 1: is a serial defaulter, we often assume that the problem
Speaker 1: here lies with the institutions of Argentina or other other
Speaker 1: failings of the tree question the emerging marketing question, and
Speaker 1: what I can green argued instead is that before any
Speaker 1: of this became a problem, these countries began borrowing in
Speaker 1: other countries current and that created the conditions for default.
Speaker 1: Because when you borrow, especially sovereign debt and in other
Speaker 1: country's currencies, your hostage effectively to exchange refluctuation, and that
Speaker 1: also ties your hands in your own fiscal and monetary
Speaker 1: policy that you can leverage in a time of crisis.
Speaker 1: So original Senior is kind of the idea that this
Speaker 1: act of borrowing in a foreign currency pre dates all
Speaker 1: the other profligacy that we associate with emerging market And
Speaker 1: it's interesting because when we think of the major crises
Speaker 1: of our time, we obviously think of big stock market
Speaker 1: crashes or the Great Financial Crisis, but also the currency crisis.
Speaker 1: They have been some of the biggest events in my lifetime.
Speaker 1: You point out in your column this actually goes back
Speaker 1: two years. Of course, that's right, and it's and going on.
Speaker 1: You know, it's been a problem, especially in Latin America
Speaker 1: since really the early nineteenth century, where you know, these
Speaker 1: these countries borrowed and in not in dollars at that time,
Speaker 1: they were borrowing in pounds, sterling or in gold to
Speaker 1: repay debts in gold, but it was effectively the same
Speaker 1: thing that put them in the cross areas of an
Speaker 1: exchange rate crisis, currency crisis. And and yes, this this
Speaker 1: recurrent problem very different from the two thousand seven crisis,
Speaker 1: but this recurrent problem is one that dominated the existence
Speaker 1: for emerging markets for close to two years. Stephen. Do
Speaker 1: you see conditions in place right now for a significant
Speaker 1: dollar related event or group of events around the world. Yes,
Speaker 1: I do. That's not to say it will be guaranteed
Speaker 1: to happen, but the FED is in this extraordinarily difficult
Speaker 1: position where it can't really go easy on inflation if
Speaker 1: it to maintain credibility. So if it does continue along
Speaker 1: those lines, you may see something very similar to what
Speaker 1: happened back in beginning in early nineteen or mid night
Speaker 1: when Paul Vulker made it very clear to financial markets
Speaker 1: that he was he was going to tame inflation. It
Speaker 1: but the collateral damage of that was, for example, in
Speaker 1: Mexico being plunged into the ABYSS not long afterward, and
Speaker 1: in other countries following. Students of subsequent periods, so we've
Speaker 1: been down this road before, unfortunately, and while it's great
Speaker 1: for the dollar and great for the credibility of the
Speaker 1: United States, not so great for emerging markets. No, and
Speaker 1: in fact, we haven't seen one for quite some time.
Speaker 1: You point out there in Mexico that was four. There
Speaker 1: was obviously the Asian currency crisis, Russia, Argentina two two.
Speaker 1: Have we had one since two thousand two? No, but
Speaker 1: that's exactly when the dollar began at twenty year decline.
Speaker 1: I mean not it wasn't a linear decline, but it
Speaker 1: was a secular decline over those twenty years. And so
Speaker 1: the dollars suddenly strike thing, you know, reminds us that
Speaker 1: eventually things always come full circle. And it looks likely,
Speaker 1: especially if you consider the geopolitical you know, chaos or
Speaker 1: disorder between Ukraine and all sorts of things happening, it's
Speaker 1: quite likely that the dollar might strengthen even further. Stephen,
Speaker 1: What institutions have had success in cleaning up the mess
Speaker 1: that a strong dollar has created from time to time?
Speaker 1: Obviously the World Bank and the I m F have
Speaker 1: had roles. Have they played their part well? Well? At
Speaker 1: what cost? I think is often the question to clean up?
Speaker 1: That is often rhymes imposed on these countries so called
Speaker 1: emerging economies, are oftentimes punitive to an extreme. And while
Speaker 1: that may be justified in terms of rectifying that, the imbalances, again,
Speaker 1: the problems predate the act of of of the default
Speaker 1: that they go back to this this larger issue of
Speaker 1: original sin. And sadly, you know, these are reminders constantly
Speaker 1: for folks living in countries like our Continua that they
Speaker 1: live in a fallen world, that they live in this
Speaker 1: kind of cycle of what economists are called sin. Well,
Speaker 1: and you see these ridiculous amounts of inflation in these
Speaker 1: countries as well. So you have a humanitarian crisis on
Speaker 1: top of a fiscal crisis, and it spreads you know,
Speaker 1: social unrest and so on. What's the alternative, I mean,
Speaker 1: is there an alternative for these countries to having so
Speaker 1: much dollar denominated debt? Yes, well, one is, you know,
Speaker 1: a kind of attempt to market debt in their own currency, which,
Speaker 1: believe it or not, has actually happened to some extent
Speaker 1: in the last ten years. That well, less since two
Speaker 1: thousand and seven, there's been more debt denominated in local
Speaker 1: currencies as we call them. The problem, though, is that
Speaker 1: while that's happened to some extent, it's gone him and
Speaker 1: him with a rather alarming development, which is the rise
Speaker 1: of what's sometimes called domestic original sin, which is a
Speaker 1: slightly different flavor of of borrowing and currencies abroad. So
Speaker 1: instead of the sovereign debt being denominated dollars, the corporate
Speaker 1: non financial and you know firms in say Argentina are
Speaker 1: borrowing in dollars at law maturities, and so it's the
Speaker 1: exact same dynamic, it's just different players becoming indebted. So Stephen,
Speaker 1: having looked at the history of this, usually doesn't end
Speaker 1: well at least for somebody, and there's usually a winner
Speaker 1: on the other side as well, typically an individual or
Speaker 1: a hedge fund, right right, that's right, That's that's absolutely right.
Speaker 1: There's the these are these are great opportunities for for
Speaker 1: short to flock in name. I would say, you know,
Speaker 1: as this as a as an aside that not just
Speaker 1: because you borrow in a currency than your own does
Speaker 1: not automatically doom you. There there are clearly many examples
Speaker 1: and and and one of them is in fact the
Speaker 1: United States. Originally but you know, it's debt was denominated
Speaker 1: in gold clauses in other words, that we had to
Speaker 1: repay our debt in gold, not in dollars, and we
Speaker 1: were able to quote ungle graduate from that state. But
Speaker 1: it's something that only seems to happen for countries that
Speaker 1: achieved some kind of hegemonic status within the larger international
Speaker 1: financial system, and we're we're one of those countries. Actors. Yeah,
Speaker 1: John Yellen used to talk about feedback loops. I mean,
Speaker 1: what will the consequences be for the United States of
Speaker 1: one or several countries defaulting. Well, I guess I think
Speaker 1: there's a there's a question here if you look historically
Speaker 1: and what happens when this happens, like Sri Lanka for example,
Speaker 1: this kind of canary in the coal mine. The problem
Speaker 1: that we've seen in the past is that there's then
Speaker 1: a flight to safety globally. In other words, countries that
Speaker 1: are completely beyond reproach but that nonetheless are borrowing in
Speaker 1: dollars are subjected to the same kind of dynamics. And
Speaker 1: that's where the kind of coordination that we saw in
Speaker 1: the late nineties between central bankers around the world to
Speaker 1: tame the crisis, and that that probably will be necessary
Speaker 1: again things get that beat. Stephen mim there. We're now
Speaker 1: choosing to end all conversations not with you, though as
Speaker 1: always we love to hear from you. I'm at Vonney
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Speaker 1: money Quinn