Brewing debt crises in emerging markets
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DXY Annual change signals crises unfolding
As the Federal Reserve, which has sole control over the monetary policy of the world’s reserve currency, continues to tighten monetary policy to the US dollar, the global economy has begun to collapse as a result, being hit by a strong dollar and rising commodity prices in tandem.
We can look at the US Dollar Index (DXY), which measures a weighted basket of fiat currencies against the dollar, which has risen to peaks for two decades. If we compare the DXY year-over-year change with bitcoin, we can clearly see the market periods through the history of bitcoin that coincides with rising and falling dollar strength.
The Bitcoin price shows an inverse correlation to the strength of DXY.
So while the use of bitcoin and cryptocurrency more generally has its own native adoption curve, the cyclical bubbles and bristles can be assumed to be both activated and then crashed by the tidal wave of central bank monetary policy dove and hawk.
To draw attention to Japan and Europe, both the Japanese yen and the euro are behaving like emerging market currencies. The two majors have lost more in value against the dollar over the past year than the FXMC emerging markets index basket of Chinese yuan, Mexican peso, South African rand and Turkish lira. Of the equally weighted curve, the yuan and the peso have lost 3.5% and 3.8% respectively in the last year, while the rand has lost 15.7% and the lira has fallen almost 50%.
Both the euro and the Japanese yen are down significantly compared to the US dollar
The structural imbalance with the euro and the yen is due to the fact that both the EU and Japan are major importers of energy, while their central banks, the ECB and the BoJ, respectively, continue to aggressively devalue their currency with various forms of yield curve management.
The irony is that the world’s second and third largest currencies are in fact not emerging markets, but rather developed economies that now have a massive shortage of energy and real commodities that cannot be solved with a central bank money changer. Currencies are collapsing as a result of this imbalance.
Incoming debt default in emerging markets
According to Bloomberg, nearly a quarter of a trillion dollars worth of emerging market debt is traded in distress and accounts for about 17% of all emerging market debt denominated in dollars, euros or yen.
As natives of bitcoin / cryptocurrency know all too well in recent months, the default of one counterparty is only isolated in theory, and in practice, second / third order effects are apparently impossible to know in advance.
As for El Salvador’s bitcoin adoption, the nation has only bought $ 38 million worth of bitcoin, giving residents the option to use either BTC or USD as a tax-free legal tender, which is a small amount of money compared to $ 800 million. worth of dollars. debt on the bonds in 2025.
The most important thing to understand is that in a debt-based monetary system, a debt crisis is essentially a short squeeze. Especially with regard to the dollar, despite the gigantic amount of stimulus that was provided through 2020 to 2021, there is a structural shortage of dollars due to the construction of the international monetary order.
There may have been and still can be a surplus of dollars, but the massive implicit short position around the world creates an imbalance between supply and demand; lack of dollars. The answer is that assets denominated in dollars are sold to cover positions on dollar liabilities, which creates a feedback loop of falling asset prices, declining liquidity, the debtor’s creditworthiness and increasing financial weakness.
Bitcoin is definitely in short supply, but has no structural defect built into the system. During a credit settlement, bitcoin sells itself when people rush for dollars to cover their short positions (debt).
To quote our March 7 issue,
“It would be wise to warn our readers that despite being extremely positive about bitcoin’s long – term prospects, the current macroeconomic outlook looks extremely weak. Any excessive influence on your portfolio should be evaluated.
“Bitcoin in your cold store is completely safe, while market value is not. For willing and patient accumulators of bitcoin, the current and potential future price action should be seen as a huge opportunity.
“If a liquidity crisis is to unfold, arbitrary sale of bitcoin will occur (along with all other assets) in a hurry against the dollar. What is happening during this time is essentially a short squeeze of dollars.
“The response will be a deflationary cascade across financial markets and a global recession if this is to unfold.”
Last note
The contagion that has emerged in recent months in the cryptocurrency markets may have been just a taste of what is going on in traditional financial markets. Despite the fact that bitcoin is almost 70% from all-time highs, bitcoin is currently being treated as a high beta asset for older market liquidity dynamics, and if the worst is yet to come in terms of lending and further volatility in traditional markets, bitcoin does the. does not exist in a vacuum. It will be subject to the global flight to the dollar during a major risk event.
