The ‘Deflationary Vortex’: Global Dollar Economy Suffers Biggest Plunge Since Lehman, Down $4 TRILLION

deflationary vortex

–  The “Deflationary Vortex”: Global Dollar Economy Suffers Biggest Plunge Since Lehman, Down $4 Trillion (ZeroHedge, Jan 20, 2015):

One of the macroeconomic observations that has gotten absolutely no mention in recent months is the curious fact that while global economic growth has not imploded in recent quarters, it is because GDP has been represented, as is customary, in local currency terms. Of course, this comes as a time when local currencies (at least those which are not the USD) have been plunging against the greenback on the back of the expectations that the Fed will hike rates some time in the summer or later in 2015. Which also means that in “dollar economy” terms, i.e., converted in USD, things are not nearly as good.

In fact, as the chart above shows, the global dollar economy is not only shrinking fast, but it is doing so at the fastest pace since the Lehman collapse, having shrunk by $4 trillion, or a whopping 5%, in just the last 6 months!

By way of comparison the dollar economy lost $7 trillion, or a 10% contraction, during the Lehman crisis. Should the USD continue to appreciate, the global dollar economy collapse may surpass the plunge observed just as the great financial crisis struck. SocGen calls it “a deflationary vortex“; CNBC would call it a “global recovery.”

Here is SocGen on this largely undiscussed topic with “The deflationary vortex of a shrinking dollar economy

As the ECB prepares to race faster in a bid to export deflation, the risk is that the dollar economy (world GDP measured in US dollars) will shrink further. The dollar economy is down by just over 5% since July, marking a loss of just over $4tn in nominal terms. The last sharp contraction of the dollar economy took place in 2008. Back then the economy shrank by just over $7tn, marking a loss in excess of 10%. The foreign trade mix of the US fairly closely mirrors the composition of world GDP. As such, if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis. Any offset then comes from nominal GDP growth in local currency terms. Since July, the trade weighted dollar has gained just over 10%.

Viewing the global economy from the vantage point of the dollar economy, it is hardly surprising that when the trade weighted dollar appreciates, commodity demand is eroded as economies with depreciating currencies lose purchasing power. To the extent that central banks actively seek currency depreciation, this could see further shrinkage of the dollar economy and add further downward pressure to commodity prices. Analysis by the IMF (WEO, April 2008), suggest that, as a rule of thumb, a 1% appreciation in the trade weighted dollar yields a 0.89% decline in the oil price after 1 month and 1.13% after 12 months.

There also seems to be a link between the size of the dollar economy and long bond yields. Again, this link has a sound economic rational. As major central banks ease monetary policy relative to the US, this not only lowers interest rates in the country in question, but also eases (ceteris paribus) pressure on the Fed to tighten. To the extent that foreign investors expect further dollar appreciation, this also triggers capital flows that exert further downward pressure on US interest rates. A shrinking dollar economy is also a headwind for corporate earnings.

The irony it seems is that as a growing number of central banks actively seek to export deflation, this could further exacerbate the market phenomena that have investors on edge. In a nutshell, if central bank accommodation and lower commodity prices fail to sufficiently boost GDP and inflation elsewhere in the world, the dollar economy is likely to shrink further. From a fundamental point of view, this is a clearly down side risk.

Yes, we too find it ironic that central bank policies are now actively collapsing the global economy just so they can boost stock prices a little bit higher before the rug is pulled from underneath everyone, and find it even more ironic that it took sellside pundits and the peanut gallery just about 6 years to figure it out.

10 thoughts on “The ‘Deflationary Vortex’: Global Dollar Economy Suffers Biggest Plunge Since Lehman, Down $4 TRILLION”

  1. The “Dollar Economy” is dying, the new economy, led by BRICS, is growing.
    The “Dollar Economy” will die because most of the world has followed the lead of Russia and China, and found a way around the need for any world reserve currency using technology. The open basket of currencies that now belong to BRICS, use an electronic currency that allows all members to use their own currencies when trading with another nation. The electronic currency, based on the Sucre, translates the value of each currency at the time of transaction, making the need for ANY world reserve currency obsolete.

    In January of 2010, 100% of world economies used the dollar to complete international transactions. Today, it is about 30%………….down 70% since 2010.

    Using my memory, Russia, China, India, Brazil and South Africa lead up BRICS. Most of the emerging African nations, Turkey, Iran, Qatar, (OPEC is going to dump the dollar, they already do big deals with Russia and China) Most of South and Central America, New Zealand, Australia, Switzerland, Canada……..and others I cannot remember have all dumped the dollar for the open basket of currencies BRICS offers.

    The only real holdout, now that OPEC has kicked the Petrodollar to the curb by refusing to cut production last month…… hurts the US far more than it does Russia. As for OPEC, this is a move to strike the US down, and they don’t care what it costs. US troops keep some OPEC kings on their thrones, but they will soon be replaced by Russian or Chinese troops. Foreign troops are foreign troops…….and oppressive kings and dictators have always used them. The political cost of using US troops has grown too high, the US is so despised in that part of the world.

    One nice part of the oil crash is that it is stopping the destructive shale oil industry which was destroying our drinking water. I don’t care about shale, I sure care people have enough water.

    The dollar industry is no longer the #1 power. 70% of the world is now part of the sister economy built around the US and EU. Putin’s genius was to create the same economy, wasting no time in re-inventing the wheel, without the need for any world reserve currency. This new economy isolates the US, and to a lessor extent, the EU. The debt laden EU is the only financial power that continue to use the dollar……….at least on the surface. Already the Germans, French and UK are finding other avenues of trade to avoid the dollar.

    Putin just told Greece if they leave the EU, he will help them with food……something the drought plagued US cannot do any longer. Switzerland is already a member of BRICS, and the act of the SNB last week has added pressure to all EU members.

    Until the EU followed the directives of the US, and put fool sanctions on Russia……ones that China can cover for them……Putin has stopped buying from the EU. China can provide the vehicles (they have the blueprints and MFG skills to build every vehicle on the planet thanks to corporate greed) and Brazil can provide the food. The EU lost E120 billion a year Russia was pumping into their struggling economy. At some point, they will drop the sanctions, the sanctions are only costing them money. Already France has spoken out against them, so we are getting closer to that time.

    The EU nations have one thing in common, debt to GDP of 200%+++. Ireland is the worst, their debt equaling 1066% of GDP……the UK is over 400%, Germany, France and others are well over 200%. Even worse, they are sliding into deflation, and the fool bankers are feeding it by keeping interest rates at nearly zero.

    At some point soon, member states of the EU will start openly supporting a move into BRICS. When this happens, the dollar will collapse. Regardless of the lies told on US media, the dollar is not getting stronger, it is weakening as fewer nations want or use it.

    The “Dollar economy” is shrinking…………and it is far more than a few percentage points. From 100% of the world to 30% sounds closer to a 70% loss….but I am a historian, not an economist. I loved Econ in school, but I already had too many points in English and Psychology for a history major….no time for economics, so I have a conceptual view.

    When the EU starts breaking down politically and economically, the dollar will be dropped there as well. They need Russian products and trade far too much, and the debt level of each state is staggering. The EU needs the income they used to enjoy from Russia, and Putin knows it. He is squeezing them, first gently, now growing in pressure, and the EU cannot take much more. Financial pressure is the most powerful of all, and the war the east has waged on the US has been financial.

    As the US leader has raced madly around the world trying to get a war going to please his supporters……….to hell with the American people who are sick of war………a truth has emerged that is very disturbing to those around him with a grain of sense. The US has no allies left except the madman in Israel, and he is even more hated than the US. The US cannot even put together a coalition “of the willing” ……..nobody will join them in their endless pursuit of destruction.

    The US has been operating militarily, while Putin has led his people to war financially………….a plan worthy of a master chess player. Without him, they might not have figured it out, but he is there, and those in the US who realize what is really happening know Putin’s genius is behind it. The US has been destroyed……….without a single shot or bomb……….just finances. It is checkmate for the US, and nothing they can do will ever bring back an obsolete system that includes a world reserve currency. That game is over, the US has lost. If Putin vanished tomorrow, the US still loses; the “dollar economy” will still die.

    Great article except I don’t agree with the author’s numbers, the truth is far more dramatic. I’ve watched this story emerge since Hugo Chavez introduced the first electronic currency, the Sucre, in Spring of 2010 for his tiny organization, the South American Trade Alliance. It consisted of 11 of the poorest nations in South America and Cuba. The Sucre allowed all member nations to trade directly with each other, using their own currency, leaving the dollar out. This was the solution, and the organization was so small, it flew under US radar.

    I caught the story because I was looking to see what would happen. By 2010, all hopes Obama would do anything to remedy or change the crooked market that cause entire nations to go bankrupt were dashed. It was obvious, business as usual, and not one crook faced investigation or prosecution. No laws were passed to fix a thing. So, the rest of the world was looking for a solution.

    Saddam Hussein had called for a return to gold as the world reserve currency because of the way the greedy guts were exploiting the power of the dollar…..we all saw what happened to him, right down to his hanging on TV. So, the world had to find another way, and it started moving away from the US.

    Russia and China watched Hugo Chavez’s moves with great interest, and in November of 2010, they adopted the same system for themselves. First, it was Russia and China’s trade agreement, but the recruiting was on. Soon, much of the world had joined.

    In 2014, Putin finally went public with his de-dollarization system……..I had been watching for years, but I saw he waited until he had over half the world in his camp before saying a word.

    Today, he has the nations I listed and more…….the US is sliding south fast.
    Dollar economy? Soon a thing of the past.

  2. Here is an article which supports my claims about the shifting in the world economy. The author sees WW3 coming out of it, I think WW3 is about over, and the East has won……… was financial, and the US cannot wage war without funds or allies. An interesting article from a website you introduced to me, friend at IU…..


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