Think inflation is bad here? Brent Johnson (SantiagoAuFund) predicted the global financial crisis we’re in, and he thinks it’s going to get much worse. A conversation with KevinTDugan
unveiled a budget proposal that, during normal times, would have been unremarkably conservative — but instead triggered a deep sell-off in the British pound, nearly triggered a Lehman Brothers–like domino effect, and compelled the International Monetary Fund to regard the United Kingdom like a struggling third-world economy.
You called this scenario of the dollar rising in value while other currencies decline the “Dollar Milkshake.” Why a milkshake, of all things?, there’s a scene in the movie where this oil baron is negotiating with one of his neighbors. The neighbor is trying to convince the oil baron to buy his land in order to get the oil that’s underneath it. And Daniel Day-Lewis, who is the oil baron, says, “I don’t need to buy your land. All I have to do is stick a straw down into the ground.
As that dynamic worsens, there starts to be a rise in global defaults. Once these defaults start to happen, it can have a knock-on effect, which creates more defaults and more financial volatility and more contagion. And now with global growth slowing, they are all hitting the wall — they just don’t have the cash to make those dollar-denominated payments that just keep rising in their local currencies.Let’s use Europe as an example.
They’ve had to resort to yield curve control. That’s a fancy term for saying they need to step into the bond market and manipulate interest rates on U.K. debt lower. They print more money, then they go in, and to keep government bond yields from rising , they buy those bonds. But again, by doing this, they’re putting that money that they printed into the market, and that makes the dollar even stronger against the pound.
If the dollar has already risen so much, why does the U.S. keep raising interest rates – which just drives the dollar higher?
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