Dr Andy Xie, economist, shared his insights that the US dollar super bubble may finally be popped, by the Israel-Gaza war, in his recent article in SCMP.
Here is an excerpt:
The massive distortions in the global monetary system, which drives financial bubbles, come from the yuan-dollar peg. When China adopted the export-led development model decades ago, it copied other East Asian economies and decided to adopt a dollar peg in 1994. This officially ended in 2005, but while one-time adjustments have occurred and controlled volatility is allowed, the yuan remains, in effect, a pegged currency.
A small economy with a dollar peg doesn’t change the dollar world. But China’s rapid growth and sheer size changed things.
After the first round of bubbles burst in 2008, major central banks embarked on quantitative easing – in effect reinflating the bubbles. China’s M2 broad money supply rose by 5.6 times from 2007-2022, while the Fed’s balance sheet expanded by nine times. These two numbers explain the rapid rise in asset values relative to economic output in so many asset classes and across the world. The US stock market peaked at 200 per cent of its GDP in value, more than twice the historical norm, while China’s residential property market surged past six times its GDP over the last decade, by my analysis.
This rapid monetary growth lasted so long only because the link between money supply and inflation was cut. This was because China’s labour force entered the global economy by the hundreds of millions and companies shifted their production to China. Whatever money the central banks printed was absorbed by financial speculation. The anomalies in the global financial system over the past three decades can be traced back to that dynamic.
The US went down the path of borrowing and spending because it could. Former Fed chairman Ben Bernanke’s quantitative easing laid the foundation for this. Since 2007, the US national debt has risen from around US$9 trillion to approach US$33 trillion when its GDP has risen by only half as much.
Debt has been an easy habit. It hurts no interest group and as long as the market doesn’t rebel, US debt can easily double in 10 years. But in the end, no matter how delightful the journey, be warned: debt will eventually lead an economy to hell.
Dr Andy Xie 謝國忠 is a renowned Chinese economist based in Shanghai who has been named one of the “50 Most Influential Persons in Finance” by Bloomberg.
Andy Xie’s skill and has been tried and tested through the years. He is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States.
He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Before that, Andy spent two years with Macquarie Bank in Singapore an associate director in corporate finance and five years as an economist with the World Bank. Dr Andy Xie is currently a director of Rosetta Stone Advisors.
Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.