USD Wrecking Ball
The USD Wrecking Ball thesis by @UrbanKaoboy is very much in play right now. But my tiny brain needs explanatory steps to go from weak CNY to global pain. Let's figure it out together.
This is NOT something I'm happy to be right about. CNY deval (which IS happening in real-time) is going to inflict a lot of pain on the whole world and break something. pic.twitter.com/iKkXcXAgTB
— Michael Kao (@UrbanKaoboy) April 28, 2022
The context of the current devaluation is important. We are currently on a unique timeline coming out from the pandemic with disruptions in our supply chains, a war in Ukraine, the highest inflation in 40 years, and ready to end 13 years of quantitative easing.
First, the obvious. With Chinese goods becoming cheaper, many small-to-medium-sized export-driven economies could see reduced trade revenues. If these countries are heavily indebted and have a heavy dependence on exports, their economies will suffer.
Second, another obvious. On the opposite side of CNY devaluation is stronger demand for USD. With USD already rallying against all major currencies, the sudden devaluation of CNY, which is tightly managed by the Chinese Gov, will further strengthen USD.
And why is this bad for the world? The BIS estimated outstanding international debt securities and cross-border loans denominated in USD to be $22.6 trillion as of Q4 2019. As USD strengthens, it becomes increasingly more difficult to service these debts.
Spending more on servicing debt is not a productive use of capital. If worst comes to the worst, we may see a debt crisis around the world. And guess what. Defaulting on USD-denominated debt will reduce the dollar supply, which will further strengthen USD.
The US about to start QT. China about to start QE again. The devaluation is definitely not done yet.