Introduction
Stress tests play an important role in improving financial stability by enhancing market discipline and transparency. Here we consider a third example of these stresses based on current market conditions and show how risk factors and their associated shock examples arise.
Dollar Milkshake Theory
The dollar milkshake theory, developed by San Diego Capital's Brent Johnson, focuses on potential sovereign debt and currency crises centered on the dollar. While dollar cost and dollar level availability have a huge impact globally, the most important factor is rate of change in dollars. Robert Triffin argues that the dollar cannot continue to be the world's reserve currency without the US running a growing deficit.
On the supply side, in addition to the liquidity impact of the Eurodollar system, the US has been printing a lot of dollars since the 2008 financial crisis. Therefore, you expect the currency to depreciate. However, the U.S. dollar index is a relative index, not a strength indicator. america is real It is true that a lot of money is printed, but they are not alone, and when comparing the global assets of central banks, the Bank of Japan and the European Central Bank far exceed these (see chart below).
However, the requirements are hidden differences. Everyone needs dollars because everything is denominated in dollars - whether it's China's copper purchases from Australia or Europe's oil purchases from the Middle East - trade invoices currency reserves and dollar-denominated debt as much as the latter is the most important.
Global debt-to-GDP ratios are estimated to fall by 400% as financing costs rise, putting pressure on local economies, leading to tighter credit and tighter global supply. Supply doesn't seem to be enough to keep up with demand, which seems to be the reason why the US hasn't seen any inflation since 2008 Before the supply chain crisis brought on by COVID. However, when other economies start to slow and the U.S. grows, there are fewer dollars circulating around the world, and prices rise as a result, as other countries that are already suffering still need to pay in dollars.
And so begins a dangerous vortex—as the dollar appreciates, the rest of the world needs to print more and more of its own currency in exchange for dollars to pay for goods and service dollar-denominated debt. As a result, many countries will be forced to devalue their currencies and the dollar continue to rise. This could lead to sovereign bond and currency crises.
So what are the options? Renminbi Euro? China is currently battling deflationary pressures from a downturn in the property market. As a country that imports a lot, this can lead to inflation, and with commodity prices rising, they are feeling the pinch now. To get around this, they could be Tend to loosen monetary policy and reduce deflationary pressure. At the same time, Japanese exports of regional products may become more competitive as the yen weakens. China may devalue the yuan, which could lead to a deflationary wave in China, leading to an equilibrium The dollar is higher and could lead to its runaway rise. What if the dollar gets too strong? Well, we'll see what some might call the End Game or The Great Reset or even maybe the Fourth Turning event.
About the Author
Greg Jewell is Head of Core Risk Products at TS Imagine, and also works on new product development across TSI's TradeSmart and RiskSmart solution suites.
Greg started out as a junior portfolio manager and broker at a proprietary trading firm before moving to Imagine Software where he worked for 10 years prior to the merger. Before moving to Product, he was responsible for EMEA Professional Services.
Greg has a BSc in Nuclear Astrophysics from the University of Surrey.
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