USD dominance, established after WWII, enabled Wall Street to become the most competitive capital market in the world, attracting savings from around the globe and securing wealth generation for a select few, primarily in America. According to a new report by Oxfam, the richest 1 percent have obtained almost two-thirds of all new wealth (worth $42 trillion) created since 2020, which is nearly twice as much money as the bottom 99 percent of the world’s population. In the past decade, the richest 1 percent, many of whom reside in America, have captured approximately half of all new wealth. (Source)
Wealthy nations, specifically industrialized G7 countries with an average per capita income ranging from USD 40-70K annually, are facing increasing public deficits and debts. These deficits and debts are being financed by savings from developing countries, primarily from manufacturing powerhouse China and regions including Central and Southeast Asia, where the average per capita income is less than USD 20K annually. The current system of USD dominance means wealthy individuals and nations, like the United States, are rewarded while the risks are borne by the bottom 99 percent and developing nations, who provide their savings in USD at zero or even negative returns (considering high inflation).
Currently, the US banking industry is under stress due to the bottom 99 percent depositors switching their savings from small institutions to bigger ones and from zero-interest accounts to money funds. Arabic and Chinese investors have been shaken by the recent Signature Bank and Silicon Valley bank disasters and grow increasingly concerned in light of financial sanctions imposed by the United States on Russia. One needs only look at the example of Credit Suisse in Switzerland to see what catastrophic consequences a further separation might have.
Switzerland used to manage US$2.6 trillion in international assets according to a 2021 Deloitte study, making it the world’s largest financial center ahead of Britain and the United States. The financial sector’s contribution to the Swiss economy had already fallen to 8.9% of Swiss GDP in 2022 from 9.9% in 2002. (Source) Now, the dramatic fall of 167-year-old Credit Suisse within 48 hours has been another wake-up call for investors. The refusal of Arabic majority shareholders and holders of Credit Suisse AT1 bonds to rescue the bank have caused international savers and investors look to Singapore or Wall Street instead. Switzerland’s status as the leading wealth management center outside the US has slipped. In much the same way, a separation from China would lead Chinese depositors and investors to look elsewhere, effectively ending USD dominance that has been sustained by Chinese wealth growth since Nixon’s visit to China in 1972. (Source)
USD dominance’s high leverage business model results in insiders winning big
The key driver for achieving the highest possible returns lies in the high leverage business model of American financial institutions. The Federal Reserve mandates banks and other depository institutions to maintain a minimum level of reserves against their liabilities. Presently, the marginal reserve requirement is set at 10 percent of a bank’s demand and checking deposits. (Source) The Common Equity Tier 1 (CET1) capital ratio of the largest banks in the US, such as JP Morgan and Goldman Sachs, is around 12.2% and 14.2%, respectively. This implies a leverage ratio of around 10 times for banks. Shareholders of American banks can utilize $10 at a near 0% cost to make a profit of $1 of their own money before the interest hike by the FED to fight inflation. (Source) In comparison, the leverage for equity and hedge funds is not limited and could be much higher. The business model of benefiting from USD dominance relies on the free use of lender’s money and the transfer of all possible risks to creditors. The winners are those who can freely decide on the return and occupation duration of risk-takers’ capital.
Let’s start with Blackstone Inc in New York as an example. As an alternative investment company, Blackstone’s private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate division has actively acquired commercial real estate. As of 2021, Blackstone Inc.’s total assets amounted to $41.2 billion, enabling assets under management of $881 billion, thereby representing a leverage ratio of over 21 times. This business model can provide stakeholders with astronomical wins, especially if borrowing costs were around 0% or even negative, as defined by the FED, at the cost of the primary risk-takers such as creditors and lenders. According to a regulatory filing on February 25th, 2023, Blackstone Chief Executive Officer Steve Schwarzman received more than $1.26 billion in pay and dividends for 2022. Schwarzman received over $1 billion in dividends from his Blackstone shares and $253.1 million in compensation. (Source) How did Blackstone manage to achieve such a fantastic return for its shareholders? It’s clear that the company has the power to decide whether to return lenders’ money based on its own interests, and when and where it’s appropriate to do so.
On March 2nd, it was reported that Blackstone had defaulted on a 531 million-euro ($562.5 million) bond that was backed by a portfolio of offices and stores owned by Finnish company Sponda Oy. The rising interest rates in Europe impacted the value of the properties, leading the private equity firm to request an extension from the bondholders to repay the debt, which was denied. Bloomberg first reported the news, causing shares of the private-equity firm to fall 1.6%. In a statement, Blackstone expressed disappointment that their proposal was not advanced by the service, but stated that they had full confidence in the core Sponda portfolio and its management team. The bond was originally secured against 63 mostly office buildings in Finland, but Blackstone had sold off about 16 buildings to pay down nearly half of the note. The bond currently has an outstanding balance of 297.1 million euros, according to Fitch Ratings. (Source)
The same Blackstone has been limiting investor withdrawals from its $125 billion real estate investment fund following a spike in redemption requests. Blackstone is facing more than $5bn in redemption requests from another set of property funds, adding to pressure on the world’s largest alternative asset manager as investors try to pull out their cash. Blackstone Property Partners, a real estate offering for big institutions such as pension funds and endowments, is facing redemption requests equal to 7 per cent of its $73bn net asset value, the New York group said. BPP is comprised of dozens of funds Blackstone uses to invest in property. Blackstone didn’t disclose the withdrawal requests, but Barron’s estimates them at roughly $5.3 billion, based on the amount redeemed of $1.3 billion. Barron’s earlier estimated that BREIT redeemed $1.4 billion in January. BREIT didn’t initially disclose the redemption amount, but then updated its statement to show $1.3 billion in January redemptions. This marks the third month in a row that BREIT has capped withdrawals. During December, BREIT faced $3.8 billion of withdrawal requests and met just 4% of them because it was up against a quarterly cap of 5%. BREIT limits investor redemptions to 2% of its net asset value monthly and 5% quarterly. BREIT has been a source of investor concern since Blackstone disclosed that it had limited November withdrawals in early December. BREIT had been a big source of fee and asset growth at Blackstone, and investors worried that the BREIT’s big inflows of 2021 and early 2022 were heading into reverse.
Blackstone shares had tumbled when BREIT limited withdrawals, but have recovered the losses, fuelled by a broad market rebound and a $4bn investment made by the University of California into the fund this month. Blackstone has promised the UC a minimum annual return of 11.25 per cent for six years and is providing a $1bn backstop against those returns. If the returns fall short, Blackstone will forfeit BREIT shares it owns to the UC until either the return threshold is met, or the $1bn is exhausted. The UC invested a further $500mn into BREIT, and Blackstone contributed a further $125mn of its holdings in support of the return guarantees. Had UC invested in BPP, rather than BREIT, the inflows could have allowed some investors in BPP to redeem their holdings. “We haven’t really heard much from our clients in the institutional world around BPP vis-à-vis BREIT and the [UC],” CEO Gray said when asked if investors had complained about the arrangement. Blackstone sees the redemption requests from BPP as manageable, but they suggest liquidity risks will continue to affect fees and asset growth this year. While Blackstone’s perpetual real estate funds fell about 1.5 per cent in value during the quarter, they gained more than 10 per cent in 2022, fuelled by rising income from the properties. (Source)
Blackstone stock has surged this year, helped by a stronger stock market and a broad rally in alternative asset managers. The stock is up 26% in 2023, ahead of the roughly 20% gain in rivals KKR (KKR), Carlyle Group (CG), and Ares Management (ARES).
The Achilles heel of USD dominance: Interest rate increases amid inflation
The dominance of the USD as a global currency has a significant Achilles’ heel: the increasing interest rates amid inflation. The cheap borrowing costs and ample liquidity that support the high leverage business model for profiting from USD dominance are eroded by high-interest rates, which increase lending costs and diminish the value of bond holdings.
The war in Ukraine, in addition to monetary tightening by the Federal Reserve (FED) and the European Central Bank (ECB) amid high inflation, has caused interest rates for 10-year Treasury Bonds to increase from zero to over 4% in less than 24 months. This has significantly driven up lending costs and diminished the value of fast-growing high-tech companies and financial institutions’ bond holdings.
On March 3rd, 2022, Federal Reserve Chair Jerome Powell issued a warning that Russia’s invasion of Ukraine has already resulted in higher oil prices and is likely to exacerbate the high inflation that is currently affecting the US economy. “Commodity prices have moved up — energy prices, in particular,” Powell said when asked about the economic consequences of Russia’s invasion of Ukraine. “That’s going to work its way through the U.S. economy. We’re going to see upward pressure on inflation, at least for a while.” At the same time, Powell said he is committed to doing whatever it will take to slow inflation, underscoring the Fed’s high-risk challenge in raising interest rates enough to stem price increases without tipping the economy into another recession. Sen. Richard Shelby, an Alabama Republican, urged Powell to do “what it takes” to control inflation. He praised Paul Volcker, who led the Fed in the early 1980s and who sharply increased the Fed’s benchmark short-term rate to choke off the double-digit inflation of the 1970s. Volcker’s actions also led to a deep recession in 1981-82. Shelby asked Powell whether he, like Volcker, was willing to be “draconian” to “get the inflation under control and protect price stability.” Powell replied that Volcker was the “greatest economic public servant of the era” and added that, “I hope history will record that the answer to your question is yes.” (Source)
On Jun 22, 2022, Jerome Powell, confirmed last month to a second term as chairman, explained to the Senate Banking Committee that “inflation was high before” the Feb. 24 Russian invasion of Ukraine, which increased global food and energy prices. “I realize there are a number of factors that play a role in those historic inflation that we’re experiencing — supply chain disruptions, regulations that constrain supply, we’ve got rising inflation expectations and excessive fiscal spending, but the problem hasn’t sprung out of nowhere.” “In January of 2021, inflation was at 1.4%. By December of 2021, it had risen to 7% — a fivefold increase. Now, since the war in Ukraine began in late February, the rate of inflation has risen incrementally another 1.6% to a current level of 8.6%. So again, from 7% to 8.6%.” (Source) The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told U.S. lawmakers on March 6,2023. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” the U.S. central bank chief said in his semi-annual testimony before the Senate Banking Committee. “The only way to get this sticky inflation down is to attack it at the monetary side and the fiscal side. The Fed’s policy rate is currently in the 4.50%-4.75% range. As of December, officials saw that rate rising to a peak of around 5.1%, a level investors expect may move at least half a percentage point higher now. (Source)
Forbes’ 14th annual America’s Best Banks list looks at growth, credit quality and profitability in the 12 months through September 30, 2022, to rank the 100 largest (by assets) publicly-traded banks and thrifts from best to worst. After Forbes listed Silicon Valley Bank as one of the “Best Banks” in US on February 16, 2023, it collapsed and was placed under FDIC control on March 10 due to a bank run prompted by fears about its interest rate exposure. (Source), particularly venture-backed tech and life sciences companies in the U.S. The 40-year-old company was forced into a fire sale of its securities on Thursday, March 8, dumping $21 billion worth of holdings at a $1.8 billion loss while raising $500 million from venture firm General Atlantic, according to a financial update late Wednesday. The U.S. Federal Reserve has hiked interest rates aggressively over the past year, which caused long-dated bond values to fall.
Billionaire investor and Pershing Square CEO Bill Ackman said in a tweet on early Friday that should SVB fail, it could “destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash.” “If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.” (Source) Amid fears the government was prepared to let SVB and its uninsured depositors go to the wall, venture capitalists launched a concerted lobbying effort. They argued that it would not only have big economic repercussions, with companies struggling to write pay cheques, but also that an outright failure would have geopolitical ramifications. “The theme was: ‘this is not a bank’,” said one person involved in the lobbying campaign. “This is the innovation economy. This is the US versus China. You can’t kill these innovative companies.” According to Brad Sherman, a Democratic congressman from California on the House financial services committee, the government became convinced that it had to take aggressive action to restore confidence after the failure of Signature. “One black swan is a black swan. Two black swans is a flock,” he said. “Once a second regional [bank] was shut down, this was systemic.” (Source) The Biden administration has claimed SVB’s failure will not hit taxpayers because other banks will cover the cost of bailing out uninsured depositors — over and above what can be recouped from the lender’s assets. However, a European regulator said that claim was a “joke”, as US banks were likely to pass the cost on to their customers. “At the end of the day, this is a bailout paid for by the ordinary people and it’s a bailout of the rich venture capitalists which is really wrong,” he said. (Source)
Ken Griffin, founder of hedge fund Citadel, said the rescue package for Silicon Valley Bank unveiled by US regulators shows American capitalism is “breaking down before our eyes”. Griffin told the Financial Times that the US government should not have intervened to protect all SVB depositors following the collapse of the Santa Clara-based bank on Friday. “The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” he said in an interview on Monday, a day after US regulators pledged to protect all depositors in SVB — even those with balances above the $250,000 federal insurance limit. “There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin added. Ken Griffin’s Citadel made $16bn profit for investors last year, the biggest dollar gain by a hedge fund in history and a haul that establishes his company as the most successful of all time. Citadel, which manages $54bn in assets, made a 38.1 per cent return in its main hedge fund and strong gains in other products last year, equating to a record $16bn profit for investors after fees, according to research by LCH Investments, run by Edmond de Rothschild. The profit, which was driven by bets across a range of asset classes including bonds and equities, surpasses the roughly $15.6bn made by John Paulson in 2007 through his bet against subprime. Last year’s huge sell-off in government bonds provided a highly attractive trade for many macro managers, helping them to their biggest gains since the onset of the global financial crisis. Citadel, which Griffin set up in 1990, made a total gross trading profit of about $28bn last year, meaning that it charged its investors — one-fifth of whom are its own employees — roughly $12bn in expenses and performance fees. (Source)
Investors wiped $52.4bn off the market value of the four largest US banks by assets on March 8, 2023, amid a widespread sell-off of financial stocks that analysts linked to investor fears over the value of lenders’ bond portfolios. The sell-off in JPMorgan Chase, Bank of America, Citigroup and Wells Fargo appeared to have been sparked by difficulties at this small, technology-focused lender Silicon Valley Bank. The steep losses on the sale of the SVB securities shifted investor attention to the risks that might be lurking in the huge bond portfolios held by other US banks, many of which invested an influx of deposits during the coronavirus pandemic into long-dated securities such as Treasuries. The value of those holdings has fallen sharply in price over the past year as interest rates have risen rapidly. The KBW Bank index was down more than 7 per cent, its steepest drop since June 2020, when investors dumped shares of banks because of fears of a financial shock during the early months of the Covid-19 pandemic.
American depositors have options when it comes to securing their savings. They can transfer their money to banks that are deemed “too big to fail” and thus considered safe, or they can move their funds from low-interest or zero-interest accounts to money funds that offer a more attractive 4% interest rate. The recent bank run can be seen as a rejection of the high leverage business model that underpins the USD’s dominance. The Federal Reserve’s interest rate hikes have incentivized depositors to seek safety and higher interest rates, which in turn, reduces the leverage ratio of banks.
San Francisco-based First Republic Bank, a bank for wealthy clients and a member of the bank index, was down more than 16 per cent. Wells Fargo analyst Mike Mayo described the sell-off as the banking industry’s “SIVB Moment”, referring to SVB’s ticker on Nasdaq. He said the tech-focused lender’s weakness was not illustrative of a sector-wide problem but was affecting investor sentiment nonetheless. The sell-off on Thursday came just days after data from the Federal Deposit Insurance Corporation, a banking regulator, showed US lenders were sitting on roughly $620bn of combined unrealized losses in their securities portfolios. That is far less than the industry’s overall equity of $2.2tn at the end of 2022. Total realized losses last year were $31bn. However, the rising paper losses have coincided with a drop in deposits at banks, as savers search for higher yields at a time when the Federal Reserve keeps on raising interest rates. The worst-case scenario for banks would be that they might have to follow SVB by selling some of their securities at a loss to cover deposit withdrawals. “The banks with the big Treasury books have the most problem. They fell asleep. No one was expecting this continued inflation,” he said. “Rates aren’t moving up today. But they don’t have to. All they have to do is stay where they are — banks are going to have to recognise huge losses. Everyone’s looking at this losses and marking them to market.”
In addition to banks, equity funds are also suffering amid high interest rates. Cathie Wood’s Ark Investment Management has earned more than $300mn in fees on its flagship exchange traded fund since its inception nine years ago, while wiping out almost $10bn of investors’ cash in the same period. (Source) Investors have continued to plough money into the Ark Disruptive Innovation ETF, known by its ticker ARKK, over the past two years even though it has been badly burnt by the downturn in technology stocks. Ark has earned more than 70 per cent of its $310mn fees since the fund’s valuation plummeted by nearly three quarters from its high in February 2021, according to FactSet data. This year it has brought in an average of roughly $230,000 in fees a day as ARKK’s value recovered slightly, rising by a quarter. “Investment fees have provided ARK and Cathie Wood a very good living,” said Elisabeth Kashner, director of global funds, research and analytics at FactSet. “Her investors haven’t been so lucky.” The fund manager has amassed a devoted following for her punchy bets on fast-growing tech companies, which until early 2021 produced outsized returns for investors and drew eye-popping inflows. Line chart of ARKK share price ($) showing Ark’s flagship fund has plummeted. The ARKK fund has backed risky companies that it sees as radically reshaping the future in technology, robotics, biotechnology and space exploration. More than $3bn flowed into ARKK in the first two weeks of February 2021 when the fund was up more than 700 per cent from its launch, bringing its assets to a peak of $27.9bn. But a rising interest rate environment that hammered growth stocks led to a slump in its value. It now manages $7.6bn in assets.
The fee bill calls attention to ARKK’s unusually high investor retention for an ETF with such poor performance. Flows have remained resilient despite the fund losing $9.5bn in investor cash with Wood’s bold bets, according to Morningstar data. Wood said in a presentation to investors in late January that “innovation was punished” in the last quarter of 2022. But she reiterated her commitment to investing in “disruptive innovation” that would lead to “exponential growth trajectories” despite accruing big losses. Since inception, ARKK investors have lost nearly 27 per cent in dollar weighted returns — meaning on average, every dollar invested in the fund is now worth 73 cents, according to FactSet. Investors who bought at the peak are down more than 74 per cent. (Source)
BlackRock chief executive Larry Fink has raised the specter of a “slow rolling crisis” in the US financial system following the failure of Silicon Valley Bank, “with more seizures and shutdowns coming”. In his closely watched letter to investors and chief executives, the founder of the $8.6tn money manager said SVB’s collapse was an example of the “price we’re paying for decades of easy money”. Rapidly rising interest rates were “the first domino to drop” while SVB was an instance of the second, Fink wrote as he warned that other regional banks and investors who rely on leverage could also follow suit. Fink said that swift regulatory action had helped stabilize markets after the biggest bank failure since 2008. But he nonetheless compared recent events to the 1980s savings and loan crisis, when more than 1,000 lenders collapsed. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he wrote. Banks will inevitably pull back on lending, which will prompt more companies to turn to the capital markets — creating opportunities for investors and asset managers, Fink predicted. But funds invested in illiquid investments, such as private equity, real estate and private credit, “could yet be a third domino to fall”, particularly if they have used borrowed money to increase returns, he wrote. (Source)
USD dominance: The leverage business model depends on Chinese growth
The potential realignment of the democratic Western world, and the restructuring of global trade excluding China and the One Belt One Road regions, poses a severe threat to the high-leverage business model of USD dominance. Such decoupling would cut off over USD 11 trillion liquidity inflow into the USD economy annually from China alone, having an impact 22 times greater than the FED’s monetary tightening in 2022 and fundamentally destabilizing USD dominance.
World’s largest asset manager posts 15% decline in fourth-quarter revenue. BlackRock’s Larry Fink has admitted that “negative markets had a substantial impact” on the world’s largest fund manager last year, wiping out $1.4tn of its assets and hitting profits. In an internal memo seen by the Financial Times, the chief executive said the operating environment “is unlike anything we’ve seen in decades”. His comments come as asset managers across the industry have suffered steep declines in assets under management amid one of the toughest market environments in recent history. Global stocks and bonds fell last year by nearly 20 per cent and 14 per cent respectively. Reporting fourth-quarter results, BlackRock said its assets under management dropped from a record $10tn a year ago to $8.6tn. Revenues fell by 15 per cent to $4.3bn compared with the same period a year ago. (Source)
Global stocks and bonds lost more than $30tn for 2022 after inflation, interest rate rises and the war in Ukraine triggered the heaviest losses in asset markets since the global financial crisis. The broad MSCI All-World index of developed and emerging market equities has shed a fifth of its value this year, the biggest decline since 2008, with shares from Wall Street to Shanghai and Frankfurt all notching up significant falls. Dec 30th 2022, marked the final day of trading in what has been a painful year for stocks. All three of the major averages suffered their worst year since 2008 and snapped a three-year win streak. The Dow fared the best of the indexes in 2022, down about 8.8%. The S&P 500 sank 19.4%, and is more than 20% below its record high, while the tech-heavy Nasdaq tumbled 33.1%. Sticky inflation and aggressive rate hikes from the Federal Reserve battered growth and technology stocks and weighed on investor sentiment throughout the year. “We’ve had everything from Covid problems in China to the invasion of Ukraine. They’ve all been very serious. But for investors, it is what the Fed is doing,” said Art Cashin, director of floor operations for UBS, on CNBC’s “The Exchange.” FED balance sheet decreased from its peak of USD 9.0 Tn on Apr 17th 2022 to USD8.5Tn on Dec 27th 2022, thus withdrawing USD 0.5 Tn liquidity from the financial system, while increasing the interest rate paid on reserve balances from 0% in Feb 2022 to 4.65%, effective February 2, 2023. (Source)
Over the past 70 years, the USD has been the dominant global currency, leading to economic growth and prosperity. The savings of emerging nations such as China and oil-rich Middle Eastern countries have funded highly indebted wealthy nations such as the United States, whose national debt has exceeded USD 31.6 trillion. (Source) This global economic order, established after WWII, enabled the elimination of all WWII debts, but now it must be utilized to drive economic growth and fund the increasing national debt of all western countries, particularly America.
USD dominance has enabled China’s workforce to supply and fulfill the basic needs of low-income populations in North America and Western Europe, keeping inflation low for the past four decades. China’s economy has amassed private wealth exceeding USD 85 trillion in 2021, with an increase of USD 11 trillion in the same year. This has significantly widened the capital supply of the global market, resulting in low borrowing costs and zero interest policies by the FED and ECB. With the war in Ukraine and sanctions on Russia, limiting the supply of cheap energy, food, and mineral resources, China is now the primary source of real economic growth and must be the solution to absorb debts accumulated in wealthy countries. (Source)
It is crucial to restructure trade and supply chains in China and America, particularly in matters concerning national security. Relying on countries or currencies with differing strategic interests for critical goods and services is not feasible. However, this restructuring need not result in a decoupling or confrontation between America and China. By significantly reducing the supply-side capital at Wall Street, such restructuring is likely to take place over time without causing disruption. Nonetheless, interest rates and borrowing costs will need to rise substantially, exceeding the markets’ current expectations.
Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia. China buys more than 25% of the oil that Saudi Arabia exports. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co. , known as Aramco. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration. “The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks. “China has been offering everything you could possibly imagine to the kingdom,” the official said. (Source)
Wall Street patrons are evidently aware of this overarching view. On September 23, 2022: Rep. Blaine Luetkemeyer (R-MO-3) didn’t mince words: “Should the CCP follow through on his threat to invade Taiwan? Are your banks prepared to pull your investments out of China? Brian Thomas Moynihan, Chairman and CEO of the Bank of America responded first: “Sure, I think we’ll follow the government’s guidance, which is has been for decades to do work with China,” he said. “And if they change their position, (we) will immediately change it as we did in Russia.” “We would do likewise,” said Jane Fraser, CEO of Citigroup. “We would follow the government guidance on that (although) we very much hope it doesn’t happen.” JP Morgan CEO Jamie Dimon, who was the resident spitfire of the seven bank executives that took hours of questioning from the House and Senate this week, said his bank would “absolutely salute and follow whatever the American government said.”
Dimon: “So America, if you have to do a full comparison, we have all the food, water and energy we need. They don’t. We’ve got the Atlantic and Pacific and wonderful neighbors in Canada and Mexico. They’re the most complex region of the world. … And so I think before Americans panic about it, we should be very thoughtful. This relationship for the next 50 or 100 years is the most important thing in the world and if America wants to make the next century our century, we have to be very careful around strategic, economic, trade and all those issues that really matter. I think it’s very important that you understand is that the American government sets foreign policy. The American government does not want American business to disengage from certain parts of the world because it’d probably be a bad idea. We talk to them (diplomats) quite a bit about this issue because it’s just as important to me as it is to you and your constituents.” Fraser: “When we look at the clients that we serve, many of them are multinational clients in China. And we see that there is a high degree of interdependence as we’ve experienced, and the Europeans have experienced as they’ve tried to decouple the Russian economy from the western economies. And so I think as we look forward, we’ve got to take a strategic view in America as to where it is that we need more strategic independence and to build that in a thoughtful manner, but also in a way that doesn’t cause crises, economic crises along the way.” (Source)
The high-leverage business model that relies on the dominance of the US dollar is currently and will continue to depend on the cheap goods and money supply provided by the economic growth of China and its trading partners. If there were to be a potential economic decoupling from China, it would be over 22 times more disastrous for Wall Street than what was experienced in 2022 amid the Fed’s monetary tightening, including a rate hike to control inflation. Strategically, Western Europe and North America, which are both wealthy but indebted, require economic growth in China to jointly shoulder their deficits and expected further debt increase, in addition to managing the environmental sustainability of the US dollar’s dominance. Only by continuing the dominance of the US dollar with China can rocketing borrowing costs and sticky inflation be prevented from endangering the high leverage and profitable business model. If there were to be a confrontation between America and China, such as the war in Ukraine, it would imply a rate rise that the entire capital market does not currently foresee.