Almost two decades after President George W. Bush invaded Afghanistan, America withdrew without much warning or consultation with either its allies or the people directly involved in the 20 years of sacrifice. The impact of this event on USD dominance, as established after the WWII, would be strategic and lasting.
The wealth of any nation consists of assets owned by its residents and institutions, minus their debts, plus all kinds of investment by foreign residents. The sum of all wealth enables a nation’s domestic and foreign production and services, which generate national income. The size of any national income is first determined by the size, productivity (indicated by e.g., GDP per capita) and quality of this wealth.
USD dominance implies that America can access and attract a part of any nation’s wealth for domestic use and income generation. The prerequisites until now have been free capital markets (the free movement of capital), and the market-determination of any currency’s exchange rate. In the case of any nation accumulating a certain amount of wealth, this wealth needs to be partly, if not entirely (e.g. before the Euro was established), transferred either into USD-accounts, or any other Western currency accounts of international institutions. Thus it is always accessible to the American administration (treasury) and the FED.
In case such wealth is used against American interests, as defined in Washington, political turbulence or even regime change of the nation in question will be the consequence. This system of USD dominance has made it very hard for any developing nation to accumulate and sustain enough domestic wealth, and acquire the necessary capital, for industrialisation and a self-sufficient economy.
In case such wealth is used against American interests, as defined in Washington, political turbulence or even regime change of the nation in question will be the consequence.
Because both the wealth and talent of these nations is often immediately exported to e.g. Wall Street or Silicon Valley, if their domestic society and economy are suffering turbulence, all moveable wealth, including human capital, is gone. Argentina, Brazil, South Africa, Egypt, and India or even Mexico have all suffered similar crises. Turkey in particular is currently experiencing an economic tragedy, with its currency losing more than 50% in value within a few weeks. Even in developed economies that lack protection from their capital markets, like Japan, Germany, other Eurozone nations and even Switzerland and the United Kingdom: USD dominance allows Americans to herd these countries’ movable wealth like sheep.
The foundation of this dominance is threefold: Free press, political and military intervention, and a free capital market guided by the exchange plus interest rate. This rule-based, economic world order has been America’s greatest achievement since winning WWII and the Cold War. It has also contributed to the peace and prosperity of developed nations and developing countries, particularly China. It is the true power behind America’s hegemony and its leadership in this area is respected by all allies, even China.
However, many short-sighted and sometimes ideological decisions in Washington are extremely damaging to these three pillars of USD dominance. There are, for instance, obvious similarities between how the decisions to invade Afghanistan were made and implemented two decades ago, and the current anti-China policies. Unsurprisingly, both were and are bipartisan, very unusual for Washington.
Washington spent over USD 2 trillion on its war in Afghanistan and gained nearly nothing from the USD dominance. The strategy to eventually utilize local minerals or even opium to develop the local economy, and partly finance the local government, have proved illusory. Chinese and German companies have been reaping the benefits of this invasion from the local economy, instead of their American counterparts. This fact is entirely contrary to Washington’s original geo-political motivations (if any), and has fundamentally shaken the confidence of all investors with regards to the American military’s return on investment. It has become obvious that USD dominance now relies on the FED’s monetary policies and its intelligence guiding world capital markets, which are in turn supported by American dominance in Western media.
The FED must protect and exercise USD dominance via an optimal combination of the money supply: the exchange rate plus a forward-looking interest rate policy. Especially now, when excessive borrowing by the administration remains a necessity, as well as a negative real interest rate. So far, the FED has mastered the balancing act of keeping borrowing costs low (even close to zero), while further attracting sufficient foreign capital and investment into American bonds and stocks. They have furthered high USD (asset) valuation, if not to say a bubble.
Whether the FED’s efforts will be effective and sustainable is also dependent on whether major incremental moving capital and wealth, generated in China and the BRI (Belt and Road Initiative) regions, will become part of USD dominance in the coming years. American failures in the Middle East and Afghanistan over the past 20 years, and Washington’s current consensus against China, are threatening USD dominance in Asia. This is due to both the RMB-USD trading and exchange rate alliance, and negatively perceived accusations regarding Xinjiang. This threat to USD dominance, so far not recognised and/or leveraged by BRI regions including China, is real.
This analysis intends to explore how Washington is damaging the free movement of capital and wealth, which is needed from Asia now and in the near future to maintain USD dominance. All bipartisan decisions made in Washington demonising China’s economic achievements are both emotional and shortsighted. They are fully comparable to America’s past decision to invade Afghanistan, and are damaging the current and future benefits that are required and achievable by the FED: the preserving, utilising, and extending of USD dominance.
USD dominance lost its military foundation in Afghanistan
To fight in Afghanistan, America assembled, under NATO command, the largest military coalition of countries since WWII. At times, this coalition included 54 countries. Even if some made only token contributions, these countries combined control well over 60% of world-wide military budgets and have some of the technically most advanced and powerful armed forces. Almost the entire Western world had descended on Afghanistan, one of the poorest countries in the world… and lost.
This must have consequences that go far beyond Afghanistan. At the peak of the war, NATO could rely on over 200,000 foreign troops and foreign military contractors; it had total control over the skies of Afghanistan and commanded the most modern military and spy hard- and software that exists today. It was supported by an estimated 350,000 Afghan security forces and an undisclosed number of local pro-Government militias. They all were entirely equipped, trained, and financed by NATO and its allies. Although there are no official calculations, NATO and its allies may have spent between US$4 and US$4.5 trillion over the last 20 years, that is about twice the annual GDP of the whole African continent. [Wall Street International]
The Department of Defense (DOD) has also spent $837 billion on the war, during which 2,443 American troops and 1,144 allied troops have been killed and 20,666 U.S. troops injured. Afghans, meanwhile, have faced an even greater toll. At least 66,000 Afghan troops have been killed. More than 48,000 Afghan civilians have been killed, and at least 75,000 have been injured since 2001—both likely significant underestimations.
More tragically, history will remember that the most powerful military machine of mankind lost what George Bush named “war on terror”.
America mobilized NATOs very first invincible military deployment outside Europe or North America, received various types of military assistance from 136 allies and prompted 26 countries to join American troops in offensive operations. All these facts have proved to the entire world that overwhelming technology and advantages of American missiles and warplanes are not sufficient to defeat 60000 fighters in a country as big as Texas. [The New Yorker]
As French President Emmanuel Macron said on the air of the TF1 TV channel: “One thing is absolutely clear: you cannot impose democracy, you cannot impose a government from the outside. This is evidenced by the events in Iraq, Libya, and Afghanistan. It is necessary to understand that you cannot create democracy with the help of weapons in a few years.” [Pledge Times]
Worse than the military defeat will be the loss of trust among Afghans and in the wider region in its West. We could not deliver what we had promised and, after 20 years of war, we will leave Afghans to the mercy of the same group people NATO came to free Afghanistan from, the Taliban. It is a betrayal for all those Afghans who had sided with the West in the hope to reform their country. President Biden’s four-month delay in withdrawing US troops, constitutes a breach of a US-signed and UN Security Council sanctioned peace agreement and is a sign of internal US disagreements. Having abandoned his initial plan to link a troop withdrawal to an inner Afghan peace settlement, Biden only draws attention to how desperate the situation for the US must have become. Could Trump claim that signing his so-called peace accord with the Taliban may provide some guarantee that radical forces such as al-Qaida or the Islamic State (IS) would not get a foothold, Biden will now have lost credibility in Afghanistan and with it, on future developments there. [Wall Street International]
Washington’s discussions on Biden’s botched exit from Afghanistan mainly focus on the deficiencies and mistakes made at the operational level, rather than the gains and losses at the strategic and structural levels. It was, again, a true Saigon moment. Why are decision makers in Washington, including in the White House, so incapable of organising a withdrawal with dignity and self-respect? It shows the same lack of foresight and wisdom expressed in their decision to invade Afghanistan two decades ago.
Why are decision makers in Washington, including in the White House, so incapable of organising a withdrawal with dignity and self-respect?
In contrast, Beijing’s foresight regarding the possible consequences of this dramatic withdrawal contrasted strongly with American intelligence, something that Washington should take note of. The Chinese foreign ministry proudly announced that all Chinese citizens had been evacuated one month before the American exit, to ensure their safety. As early as in May, China’s Foreign Ministry issued a warning for Chinese citizens to avoid Afghanistan if possible; in June it again urged Chinese citizens to depart Afghanistan in time. Consequently, in July there were less than 300 Chinese remaining there. Beijing demonstrated again to Washington, and the entire world, that they could predict America’s decisions.
Henry Kissinger concluded critically: “The Taliban takeover of Afghanistan focuses the immediate concern on the extrication of tens of thousands of Americans, allies and Afghans stranded all over the country. Their rescue needs to be our urgent priority. The more fundamental concern, however, is how America found itself moved to withdraw in a decision taken without much warning or consultation with allies or the people most directly involved in 20 years of sacrifice.” [The Economist]
When American political decision makers and press were extremely frustrated that democracy, especially the protection of women’s rights and interests, could not be imposed on Afghanistan by force, they couldn’t see the forest for the trees. One part of Washington, including China hawks, bitterly regrets the withdrawal. Retaliating against al-Qaeda and preventing a repeat of the Sept. 11th attacks are the only objectives most Americans understand and accept. But this objective cannot justify a two-decade long war. These tactical objectives merely served as propaganda.
According to retired U.S. Army Colonel Lawrence Wilkerson, who served as Secretary of State Colin Powell’s chief of staff from 2002 to 2005, the real objective is that „it is the only hard power the United States has that sits proximate to the central Belt and Road initiative of China that runs across Central Asia. If we had to impact that with military power we are in a position to do so. Second reason we’re there is because we’re cheek and jowl with the potentially most unstable nuclear stockpile on the face of the earth, in Pakistan. We want to be able to leap on that stockpile and stabilize it if necessary. And the third reason we’re there is because there are 20 million Uyghurs, and they don’t like Han Chinese, in the Xinjiang Province in Western China. And if the CIA has to mount an operation using those Uyghurs, as Erdogan has done in Turkey against Assad, […] well the CIA would want to destabilise China and that would be the best way to do it. To form an unrest, and to join with those Uyghurs, in pushing the Han Chinese in Beijing from internal places rather than external.” [Ron Paul Institute]
In truth, any use of American military power has never truly served or defended the interests of other nations. It is one of the three fundamental ways America maintains USD dominance. It must strategically serve the dollar hegemony, ultimately integrating the wealth and resources of the invaded country or nation into American free markets. And yet, in the past few years, visitors from European and American business circles were impressed that while American soldiers in Afghanistan were maintaining law and order, German, and especially Chinese enterprises, were doing business.
In truth, any use of American military power has never truly served or defended the interests of other nations. It is one of the three fundamental ways America maintains USD dominance.
President Biden concluded the withdraw from Afghanistan, stating: “To those asking for a third decade of war in Afghanistan, I ask: What is the vital national interest? In my view, we only have one: to make sure Afghanistan can never be used again to launch an attack on our homeland. Remember why we went to Afghanistan in the first place? Because we were attacked by Osama bin Laden and al Qaeda on September 11th, 2001, and they were based in Afghanistan. …We delivered justice to bin Laden on May 2nd, 2011 — over a decade ago. Al Qaeda was decimated. And here’s a critical thing to understand: The world is changing. We’re engaged in a serious competition with China. We’re dealing with the challenges on multiple fronts with Russia. We’re confronted with cyberattacks and nuclear proliferation. … And there’s nothing China or Russia would rather have, would want more in this competition than the United States to be bogged down another decade in Afghanistan. This decision about Afghanistan is not just about Afghanistan. It’s about ending an era of major military operations to remake other countries. [The White House]
The American military became a negative asset in Afghanistan
For a long time, the words of “Afghanistan”, “Taliban”, “al-Qaeda” and “terrorism” have been confused among the core American policymakers surrounding President George W. Bush. On the one hand, according to the Report of the Special Investigation Committee of 9/11 released by the Biden administration, the 9/11 terrorist attack may not be directly related to the so-called Afghanistan and Taliban, and the hijackers are mostly Saudi Arabian. Al-Qaida, on the other hand, was not the same as the Taliban, whose problem at the time was hosting al-Qaeda and refusing to hand over its leader, Osama bin Laden. During military missions in Afghanistan late in the Bush administration, Americans were told by countless locals that al Qaeda was no longer there and that they had gone elsewhere. But the Americans continued to fight the Taliban as terrorists.
The lack of strategic clarity and consistency in the political decision to invade Afghanistan was first caused by the misguided manipulation of an elected president by the military leaders, in particular hawks in the Defense Department. America did not know who was responsible for 9/11, and in fact it was eight months before FBI Director Robert Mueller held his first major news conference; he was asked, “Who is responsible for 9/11?” Mueller concluded: “We believe the perpetrators are al-Qaeda and bin Laden, but we have not been able to confirm that.” Donald Rumsfeld, the Defense secretary and one of the main driving forces behind the invasion of Afghanistan, repeated the same message on other occasions.
The Taliban were ready to surrender almost as soon as the Americans invaded. Of course, the United States could have gotten bin Laden and al-Qaeda. Rumsfeld’s stance on the Taliban surrender was, “We don’t negotiate surrender with the Taliban.” President Bush endorsed Rumsfeld and said the same thing: “We will not negotiate surrender with the Taliban, we will only use force.” Asked about al-Qaeda and bin Laden, Mr. Bush said, “I don’t know anything about them. We’re not interested in them at all. ” [Washington Post, December 9th, 2019]
The Washington Post published 2,000 pages of classified documents on the War in Afghanistan. The documents were based on interviews conducted by the U.S. government with more than 600 insiders about the war from 2004 to 2018. The documents reveal the real beneficiaries of the long and unwinnable war were:
- Domestic arms dealers. These arms dealers are intertwined with the government and the Pentagon, further promoting the struggle to maintain the war
- American military contractors. Contractors who provide supplies, transport and advice to the US military got a share of the huge military expenditure, which is then fed back into the US military and political hierarchy in the form of “political contributions”
Since 2001, the Defense, State and USAID departments have spent or appropriated between $934 billion and $978 billion on Afghanistan, according to USAID estimates adjusted for inflation, and that doesn’t include money spent by other agencies like the CIA and the Department of Veterans Affairs. If you add them all up, it’s probably more than $2 trillion, or nearly $300 million a day on average in Afghanistan. Over the past 20 years, the United States has allocated a total of US $144.98 billion to assist Afghanistan, of which US $120.32 billion (83%) has gone to the Afghanistan Security Forces Fund (ASFF). Afghan Security Forces Funds), CERP (commanders-in-chief’s Emergency Response Program), ESF (Economic Support Fund), and the eight largest foundations to run. As of June 30, 2021, the cumulative amount of U.S. government appropriations by funding category shows that military security is the largest among all categories, followed by development governance, institutional operations, and humanitarian relief.
The foundations and contractors ended up benefiting. It all started with money thrown at them without careful planning in Washington. Politics as usual. The purpose of a company is to make money, if the money has been paid in advance, who is willing to work hard? The American occupation of Afghanistan, while costing money, became a platform for distributing the American budget directly to American businesses and Afghan authorities. For the American economy, the costs of Afghanistan’s mistakes do not end with the withdrawal of American troops from Afghanistan or Iraq; just paying for health care and disability for veterans of these wars could cost another $2 trillion, and those costs may not peak until 2048. America’s longest war has gone on far longer than anyone involved in Washington policymaking two decades ago expected — even when it was over. Brown University’s War Costs Project estimates that 47,000 civilians died in total; Of those killed, more than 2,400 were U.S. military personnel and nearly 4,000 were U.S. military contractors. [Quarterly Report to the United States Congress. SIGAR. 2021-07-30]
Afghanistan’s drug economy threatens the South China Sea countries
The entire world, especially Afghanistan’s Asian neighbours surrounding the South China Sea, clearly see that America, which has spent 20 years and more than $2 trillion in military intervention in Afghanistan, is doing business for itself, rather than seriously building a sustainable local economy based on Afghanistan’s pristine ecological environment. Even on issues such as national security and arms sales, it follows domestic political calculations that serve US interest groups and are content with short-sighted political considerations. The American military had been in Afghanistan for 20 years, 10 years longer than the Soviet army, and its biggest vested interest were the windfall profits from drug trafficking, which might continue to influence future decision-making.
In 2020, Afghanistan produced about 6,300 tons of opium, which accounted for 85% of the world’s opium. Drugs have become one of Afghanistan’s main industries, with the “Golden Crescent” region, also called “the biggest cancer in the blue star” and located at the junction of Afghanistan, Pakistan and Iran, supplies the majority. [DW News]
In 1979, when the Soviet Union launched a brazen invasion of Afghanistan, it shattered the fledgling centralized structure of Afghanistan. The whole country was completely fragmented, and tribal forces and warlords rose to prominence in various regions. Soviet forces had planned a quick victory but were dragged into Afghanistan for a decade. And the Soviets didn’t just have Afghans to contend with. The United States and other Western forces not only semi-openly trained Afghan mujahideen against the Soviet Union, but also provided weapons and economic assistance.
In addition to directly selling and delivering weapons and equipment suitable for guerrilla warfare, such as “stinger” shoulder anti-aircraft ballistic missiles and 107 rocket launchers, the United States educated and trained the Afghan Mujahideen! American historian Alfred McCoy points out that to get as much money as possible for the Anti-Soviet forces in Afghanistan, the CIA provided technology to upgrade local drug processing and even sent agents to teach illiterate Afghan farmers how to make drugs. In the 1980s, at least six heroin purification factories opened in southwestern Pakistan to serve Afghan jihadists.
The CIA also helped them smuggle opium out of Afghanistan, which eventually made its way to European markets and, in some cases, to the neighbouring Soviet Union. With US help, Afghanistan’s drug production doubled between 1982 and 1983 to 575 tons, making it the world’s largest heroin producer at the time. In the 1980s, along the Border with Pakistan, you often saw huge anti-Soviet guerrillas escorting truckloads of AMERICAN-aid weapons back to Afghanistan, unloading them and transporting them to Pakistan with opium and other drugs. Because of strong profits, selling drugs can not only cause war, it also let the tribes and warlords line their own pockets. Many local warlords even forced farmers to grow poppy. Gulbuddin Hekmatyar (Afghanistan’s former prime minister and president of the Islamic party) has six heroin extraction plants.
At the other end of the chain, CIA “experts” from the United States provided technical support to Afghanistan, quickly affecting western Allies and their own citizens. In 1984 alone, heroin from The Pashtun areas of Afghanistan and Pakistan accounted for 60 percent of America’s market and 80 percent of Europe’s, according to some estimates. From 1979 to 1989, the Soviet Union fought a decade-long war in Afghanistan, killing nearly 50,000 people (15,000 of them dead), killing 1 million Afghans, and making 6 million refugees, while opium production increased 20-fold. Alfred McCoy, professor of history at the University of Wisconsin-Madison, lamented in his book “The Rise and Fall of American Global Power”: “U.S. drug policy in Afghanistan was subservient to the war against Soviet influence there, … The combination of Afghanistan’s unique ecology and U.S. military technology has made this remote, landlocked country the world’s first true narco-state… In this country, illegal drugs dominate the economy, influence political choices and make Afghanistan vulnerable to foreign intervention.” [A.W.McCoy, In the Shadows of American Century]
According to a 2006 World Bank report, Afghanistan’s four largest heroin producers are all senior Afghan government officials. Warlords, drug lords, local officials, and police, rather than the Taliban, reap as much as 75 percent of the profits from the extraction and trading of high-grade drugs such as heroin. As for the outside world’s judgment of Afghanistan’s drug economy, it is even more one-sided, because if we only consider the European and American consumption market, the total value of drugs in Afghanistan is as high as 65 billion dollars, but only 5% to 6% of the share, that is, only 2.8 billion to 3.4 billion dollars remain in Afghanistan. Eighty percent of the trade in drugs originates in consumption destinations such as Russia, the rest of Europe and the United States.
What’s more, the chemical precursors needed for drug extraction and their trading are also highly profitable, and most of the profits flow to the relevant enterprises in Western countries such as Europe and the United States. Of course, countries around the South China Sea have fully understood the American contribution to Afghanistan’s economy and costs to society behind it. [U.N. Office on Drug and Crime, Afghanistan Opium Survey 2008, Afghanistan Opium Winter Rapid Assessment January 2009]
More importantly, the essence of issues related to the South China Sea is the so-called Exclusive Economic Zone (EEZ), which was established by the 1982 United Nations Convention on the Law of the Sea. Within the 200-mile Exclusive Economic Zone, countries must enjoy complete freedom of navigation. However, a state within the EEZ should not “threaten the security of other states or use force”.
Now, China and India believe this means that other countries should not conduct military reconnaissance activities in the EEZ; But the US disagree, saying it has the right to conduct military and intelligence activities in the EEZ. They did so in India’s EEZ a few weeks ago. India protested bitterly, but apparently could do nothing about it, China protested too, but they have the power to do something about it. This is the point of contention: can the United States conduct military surveillance in China’s Exclusive Economic Zone? Once again, attention focused on the phrase “not to threaten the security of other countries or to use force”. The United States is the only major maritime power not to have signed the Convention. Of course – the US does not sign international conventions – because that would interfere with its sovereignty. [Science Direct]
For all countries around the South China Sea, the intervention and freedom of navigation in the South China Sea by the US is no different from sending troops to Afghanistan. America acts out of its own political interests and respects the security and economic interests of other countries only marginally, if at all.
USD dominance depends on the management of the exchange and interest rate
A necessary precondition for securing USD dominance and its benefits is that all currencies that are freely convertible with the USD must accept the FED’s decisions about their exchange rates and the financing costs of their economies directly and indirectly, namely interest rates. If this requirement cannot be achieved, then USD dominance can’t cover a country’s currency and its economy. USD dominance would not be able to implement its pricing power, including free trade, over all assets and wealth of a country’s economy, and the closed loop management of the dollar by the FED would not be feasible. If all tangible assets and intangible wealth (stored in digital/paperless bank accounts) of any nation/country are freely accessible to USD dominance, the nation/country doesn’t have financial sovereignty: it can’t decide about the usage of its own capital and its capital cost. In other words, if a country’s wealth can’t be stored in its own sealed economic pool, it can be freely used by Wall Street and America, represented by the FED, at any time, to generate income and wealth for themselves.
If a country’s wealth can’t be stored in its own sealed economic pool, it can be freely used by Wall Street and America, represented by the FED, at any time, to generate income and wealth for themselves.
Of course, individual owners of such wealth, if they understand the logic of Wall Street, can follow the ebb and flow of the American stock markets. They can achieve above average returns that no real economy, including that of their own country, can provide. Therefore, whether non-USD economies can develop their own real economy and create the employment and income (stability and growth) necessary for social stability depends first on whether they are able to secure their own capital and wealth accumulation and can make it serve their own national prosperity and sustainability.
Non-USD economies’ need for the financial sovereignty can, but need not, be a conflict of interest with USD dominance: Wall Street and the American economy can gain a large share from the growth of non-dollar economies and their increase in national per capita income. China’s development achievements in the past 40 years are indicated in its per capita national income, which has increased from tens of USD before reform and opening-up to over 10K USD. In the process, the per capita national income of the US went from over $10,000 per capita to between $50,000 and $60,000 per capita. In the past 40 years, China’s economic development has therefore delivered tremendous benefits to USD dominance.
However, can income polarisation and American job losses, caused by the US economy’s meritocracy, be alleviated through e.g. a war in Afghanistan? The godfathers of USD dominance, and the masterminds behind the FED’s decisions, are Mr Soros and his fellow successful Wall Street investors. The politicians in Washington are their trading executors, and the US military is merely a tool of Washington’s politicians. Washington’s protection of USD dominance, and the realisation of its benefits from other countries or regions, usually requires unrest and protest. Especially when countries become capable of ignoring or even acting against the FED’s decisions regarding the exchange and interest rate. Social and economic turbulence conveniently causes capital and wealth to flee these countries away into the US or another economy with USD dominance.
The Trump administration’s support for Taiwanese independence forces and arms sales, and the Biden administration’s exaggerating of the mainland’s military domination of Taiwan, are undoubtedly one of the best examples for the strategic use and gains of USD dominance. From January to October 2021, Taiwan’s investment in China was about $4.3 billion, down 8.6 percent from the same period last year. It declined further to 14.5 percent if November was included. Was it because Taiwan’s returns on investment in the mainland were under political pressure, and they couldn’t make the money and go elsewhere?
On the contrary, these two years were the most profitable period for Taiwanese investment in the mainland. In 2020, investment income on the mainland topped T $400bn. Taiwanese companies Nanya, Taihua, Quanta and Zhengxin have seen annual revenue growth of more than 300% on the mainland. In the first quarter of 2021, it reached a new high of 114,508 billion Yuan (NT $), up 285.59% from the same period last year. On the other side of the ocean, the United States has quietly become the “new favorite” of Taiwanese investors. In 2020, Taiwanese investment in the United States increased by 654.22%. In 2020, Taiwan’s investment in the United States reached 4.273 billion US dollars. The United States accounted for 23.7 percent of Taiwan’s outbound investment, up from less than 4 percent a decade ago. [Toutiao News]
But after 20 years of politicians aligning with military interests in Afghanistan, Washington’s operatives of USD dominance have damaged the trust of Central Asia’s population, especially in the Belt and Road regions, and discredited USD dominance there. Now it’s up to the godfathers of Wall Street and the FED to restore USD dominance over the region and to cash in on its interests. Their still magnificent means to achieve this are the intelligent and forward-looking management of the dollar’s exchange rate and interest rate.
Washington’s operatives of USD dominance have damaged the trust of Central Asia’s population, especially in the Belt and Road regions, and discredited USD dominance there.
After the Trump administration’s massive tax cuts and the Biden administration’s helicopter-drops of USD into the struggling economy during the pandemic, there are too many partisan interests in Washington. These make it impossible for political decisions to rebalance the budget sustainably.
Just like the huge amount of US debt accumulated during the World War II, which was eventually devalued by inflation and so could be paid back, monetising US debt is the only viable way out of the current ballooning debt mess. In other words, the FED have bought and will buy all public debts not absorbed by the market and put them on the shelf first (the Balance Sheet of the FED). The debt value will be reduced by inflation over time (around 2% as targeted by the FED) and repaid one day down the road, ideally when it has become worthless. Of course, USD dominance during this process will continue to enable the US to issue new debt to foreign investors and to repay the old debt, while the devaluation will be shared by all other economies that own 2/3 of USD assets.
It has, is and will be done by the FED. At present, the FED is still maintaining but not increasing liquidity in economies dominated by the USD and might be forced by inflation to start raising interest rates, to channel part of domestic consumer demands into investment, and thus, to increase USD bond yields and their attractiveness to global monetary liquidity. This will certainly increase the cost of issuing debts for the government and enterprises. However, if the real interest rate of buying USD bonds is negative, that is, the nominal interest rate is lower than inflation, the interest rate hike will be the continued reaping of other countries’ wealth interests via USD dominance, rather than reducing its benefits or even giving them up.
USD dominance now demands the FED raise interest rates
Global bond markets are on course for their worst year since 1999 after a global surge in inflation battered an asset class that is typically allergic to rising prices. The Barclays global aggregate bond index — a broad benchmark of $68tn of sovereign and corporate debt — has delivered a negative return of 4.8 per cent so far in 2021. The decline has been largely driven by two periods of heavy selling in government debt.
At the start of the year, investors dumped longer-term government bonds in the so-called “reflation trade” as they bet that the recovery from the pandemic would usher in a period of sustained growth and inflation. Then, in the autumn, shorter-dated debt took a hammering as central banks signaled, they were preparing to respond to high levels of inflation with interest rate rises.
In the US, which comprises more than a third of the index and saw inflation surge to a four-decade high of 6.8 per cent in November, the 10-year US Treasury yield has risen to 1.49 per cent from 0.93 per cent at the start of the year, reflecting falling bond prices. The two-year yield has climbed to 0.65 per cent from 0.12 per cent. “We shouldn’t be too surprised that bonds are a bad investment when inflation is running at 6 per cent,” said James Athey, a portfolio manager at Aberdeen Standard Investments. “The bad news for bond investors is that next year looks tricky too. We have the potential for a further shock if central banks move quicker than expected, and I don’t think [riskier bonds] are particularly attractively priced.” During four decades of rising bond markets, years of negative returns have been relatively few and far between. The global aggregate index last recorded weaker returns in 1999, when it lost 5.2 per cent as investors fled bond markets for the booming dotcom-era stock market. [Financial Times]
In an environment where the ECB and FED share zero interest rates, if inflation is lower in the Eurozone than in the Dollar zone, Euro bonds will be more attractive for liquidity in global economies than Dollar bonds. One of the biggest benefits of USD dominance, the attractiveness of the American economy (with its higher return on USD assets) to the floating wealth of other countries, would be diminished or even extinguished, an outcome that the FED cannot allow to happen.
China’s recent issuance of Euro bonds has been warmly welcomed by investors in the Eurozone, and enabled zero real interest rate costs. The current zero-interest benefits of USD dominance are now shared by Beijing. This is a wake-up call for the FED, especially Wall Street. The FED announced on Wednesday Dec 15th that its ultra-loose monetary policy since the COVID-19 outbreak is coming to an end and will be replaced by an aggressive policy of interest rates to combat soaring inflation. The FED plans to raise rates three times in 2022, two times in 2023 and two more times in 2024, according to projections released on the same day. The FED also said it had expanded its balance sheet by just $2 billion in the last four weeks to $8.7 trillion, with little additional liquidity flowing into the financial system.
“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Chairman Jerome Powell said at his post-meeting news conference. The Federal Open Market Committee’s moves, approved unanimously, represent a substantial adjustment to policy that it the loosest it has been in its 108-year history. The post-meeting statement noted the impact from inflation. “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the statement said. The committee sharply ratcheted up its inflation outlook for 2021, pushing it to 5.3% from 4.2% for all items and to 4.4% from 3.7% excluding food and energy. For 2022, the expectation is now 2.6% for the headline and 2.7% for the core, both up from September.
For the Powell FED, tightening policy now marks a dramatic pivot off a policy enacted just over a year ago. Known as “flexible average inflation targeting,” which meant it would be content with inflation a little above or below its long-held 2% target. The policy’s practical application was that the Fed was willing to let inflation run a little hot in the interest of completely healing the labor market from the hit it took during the pandemic. The Fed’s new policy sought employment that was both full and inclusive across racial, gender and economic lines. Officials agreed not to raise interest rates in anticipation of increasing inflation, as the central bank had done in the past. However, as the “transitory” narrative came into question and inflation began to look stronger and more durable, the Fed has had to rethink its intentions and shift gears. [CNBC]
The FED has been aware of this development: Investors are piling into inflation-linked assets in a bet that consumer prices will continue to soar even as central banks gear up to tighten monetary policy after almost two years of pandemic stimulus. Inflation-protected government bonds, commodity funds and real estate investment trusts are among the products absorbing cash in a search for ways to preserve spending power. This year a record $66.8bn has flowed into funds holding Treasury Inflation-Protected Securities, US government bonds that are indexed to inflation, according to data provider EPFR. BlackRock, the world’s largest asset manager, said it expected inflation will persist at higher levels than those before the coronavirus pandemic, and has an overweight position in Tips. In Britain, demand for inflation protection is so robust that the sale last month of £1.1bn in inflation-adjusted gilts maturing in 2073 drew the lowest yield — and highest price — at auction on record. Some smaller investors have sought out inflation protection by purchasing so-called Series I US savings bonds from the US Treasury, which offer a 7.12 per cent interest rate based partly on inflation. Individuals are only allowed to purchase $10,000 in Series I bonds each year, but the Treasury announced it had issued $1.3bn of new bonds in November, the largest monthly figure on record. [Financial Times]
A policy combination of exchange rates and interest rates for net capital inflows
For foreign investors in USD bonds, the negative interest rate on US treasuries has been more than balanced by the appreciation of the USD in the past 12 months, and the real return on USD treasuries in terms of the local currency of foreign investors in the past year is far above zero. An index of the dollar’s exchange rate against other international hard currencies over the past 12 months, DXY, surged 8 per cent from a one-time low of 89.4 on January 5, 2021, to 96.6 on December 21, far exceeding the negative return of 4.8 per cent in 2021 of the Barclays global aggregate bond index. [CNBC]
The FED’s efforts to keep USD debt interest rates, for as long as possible, at the lowest possible level, are still a must. While the FED must minimise cost of debt for the government and real economy, the strength of the USD must be maintained and USD liquidity must be kept in the American economy. This includes tolerating all digital currency bubbles, like Bitcoin. So, supply shortages of USD outside America will appreciate in value and help keep USD assets attractive for foreign investors right now, as long as the interest rate remains low. Nearly 36 trillion U.S. pension assets (twice as much as the GDP) are invested in the American stock and bond market to preserve their value. If liquidity can no longer be added into the financial system, foreign capital would be needed, more than ever, to help sustain the high valuation and even part of the American equity market in bubble (with an overblown price/earnings ratio). That is exactly the benefit of USD dominance needed right now. [Published by F. Norrestad, Nov 16, 2021]
The final tally for the budget deficit in fiscal 2020 came to $3.13 trillion, more than triple last year’s shortfall of $984 billion and double the previous record of $1.4 trillion in 2009, courtesy of a stimulus package passed that year to battle the financial crisis. The fiscal year ended with government debt at just under $27 trillion, all but $6 trillion of which is held by the public. The cost to service all that debt for the year came to $522.8 billion, which actually was the lowest total since 2017. Low government bond yields, helped in part by the Federal Reserve, helped keep debt service costs lower. The FED’s zero interest rate policy and its massive purchases have effectively reduced the cost of debt to the lowest possible level, successfully controlling the transfer of interest income to foreign investors in particular. [CNBC]
With the FED’s masterful usage of USD dominance to keep the incremental cost of over-borrowing at zero, Washington has nothing to worry about right now other than how to stimulate the economy. As a result of multiple stimulus measures aimed at combating the pandemic’s economic impact, Congress will run a budgetary shortfall in 2021 equivalent to 13.4% of GDP, the second-largest level since 1945 and exceeded only by the 2020 spending over USD 3 trillion；The deficit in 2020 totaled $3.13 trillion and already is at $2.06 trillion through the first eight months of the 2021 fiscal year. Total government debt is now $28.3 trillion, of which the public holds $22.2 trillion. “The economic disruption caused by the 2020–2021 coronavirus pandemic and the legislation enacted in response continue to weigh on the deficit (which was already large by historical standards before the pandemic),” the office wrote in a report. [CNBC]
The FED easily enriches Washington and Wall Street
The FED’s use and preservation of USD dominance, unscathed even in 2021 as the U.S. military failed in Afghanistan and the Capitol Hill invasion by Trump supporters shocked the world, ensured high returns for global investors of dollar assets, and thus their confidence and trust in Wall Street. The FED, especially in 2021, has shown the world, and Beijing in particular, that USD dominance, on which American capital markets always rely, has become completely independent of the ineptitude, myopia, and lack of it’s understanding on Capitol Hill and in the White House. Even America’s $750 billion Defense budget this year is a breeze and peanuts, compared with two consecutive Administration’s deficits of more than $3 trillion, and the endless extendible FED’s already near $9 trillion heavy balance sheet.
The S&P 500 rose 26.89% in 2021, marking the benchmark’s third straight positive year. The Dow and Nasdaq also notched three-year winning streaks, gaining 18.73% and 21.39% for the year, respectively. [CNBC] This Wall Street market performance has fully met the expectations of global investors, especially as it far outperformed other developed Eurozone countries and London with Paris as an only exception, not to mention the developing countries that are starting to crash, like Turkey. The core of this achievement is that the Federal Reserve has deliberately and massively purchased the USD Bonds of US government and enterprises. By doing so, it has maintained price stability and even partially raised the prices of USD bonds, helped to suppress the cost of debt, and realised a low interest rate, even partially a zero interest rate.
To summarise: First, the Fed tightened the supply of USD overseas, especially to the Eurozone financial system, artificially inflating the exchange rate of the USD to ensure that foreign investors in dollar assets would not be denied the expected return in their own currency due to low/zero interest rates. In addition, individuals in the American economy, especially retail investors, have pumped up the stock market because of the Biden Administration’s helicopter money. Finally, corporations have ample liquidity to buy back shares due to the Fed buying their bonds, plus the high valuations for high-tech companies due to zero/low interest rates. These three factors directly add up, causing the stock market to be buoyed by USD dominance.
One side effect by the FED’s managing a USD value increase is that gold’s reputation as a reliable hedge against inflation is at risk. The precious metal hasn’t produced a positive return during periods of consistent inflation since the 1970s, the firm’s chief investment officer said, citing data from Morningstar Direct. Since the Labor Department reported that inflation climbed at the highest year-over-year rate since 1982 in November, gold has only risen by about 1%, she added. “This year, you’ve seen the inflation hedge really being in the [real estate investment trust] and real estate … segment of the market as well as stocks in general.” The only trend against which gold might prove a successful hedge is the U.S. printing too much money, Piper Sandler senior technical research analyst Craig Johnson said in the interview. He pointed to gold’s decline relative to breakeven five-year inflation rates, bitcoin and REITs more than doubled since the start of 2020. [CNBC]