The Unofficially Global Monetary War and Its Outcome

At the FED ‘s meeting last week it was decided for the first time, after nearly eleven years, to reduce the basic borrowing dollar rate by 0.25%. Even though that for several years the US economy has been leading a long period of economic growth which is characterised by low unemployment and inflation rates respectively, while obliging the FED until a week to maintain its basic borrowing dollar rate at a level of 2,5%.

by Thanos S. Chonthrogiannis-https://www.liberalglobe.com 

The objectives of the central banks of the major economies of the world

The European Central Bank (ECB) is always aimed at maintaining inflation in the Eurozone below the 2% annual limit. So, all its policies are aimed to maintain the Eurozone inflation rate at low level.

At the same time, however, such a monetary policy, and given that the fundamentals of the Eurozone economy ‘ justify ‘, the ECB is venting any available weapons to deal with a strong demand-side shock, through the application of continuously renewed quantitative easing programs.

At the same time, these quantitative easing programs create the basis for the perpetuation of a weak euro in relation to the US dollar. This chronic monetary policy of the ECB creates the preconditions for global trade and monetary disputes, given that a weak euro makes the euro area’s exports very competitive.

The FED (Federal Reserve System) has more clear objectives in terms of the exercise of its monetary and interest policy, which always considers the maintaining a low level of unemployment that does not trigger inflation.

Essentially, the FED lowers its basic borrowing dollar interest rate when the fundamentals of the US economy show signs of slowing down and always taking into account the relationship between the annual percentage unemployment and inflation, respectively, and increases its basic borrowing dollar interest rate when it believes that there are valid signs of overheating of the US economy.

The People’s Bank of China (the Central Bank of the PRC) also implements China’s economy conservation policies within specific contexts without affecting the growth rates of the Chinese economy, but at the same time it uses its huge reserves in US dollars to devalue or to rise, according to the conditions that laid down in the foreign exchange markets, the value of the yuan-its national currency.

The US economy

In general framework, the US economy remains in good condition, maintaining a ten-year period of continuous expansion with the unemployment rate to be just below the annual limit of 4% (we are not currently considering the qualitative structure of the created new jobs, i.e. whether the majority of these new jobs are part-time or full time employment status).

However, some signs of deceleration in the US economy are observed.

1. The growth rate of the Q22019 was 2.1% while the corresponding rate for Q12019 was 3.1%.
2. The indices in construction and export as well as in the investments showed a slight retreat.
3. The data for corporate earnings has been revised downwards.

Could these indications justify a partial reduction of the FED’s basic borrowing dollar interest rate? They could, but the main reason for the recent reduction of the FED ‘s basic borrowing dollar interest rate by 0.25%, was the constant pressure exerted by President Donald Trump on the FED

The President of the United States considers that the FED ‘s basic borrowing dollar interest rate was high and intercepted the growth of the US economy.

Essentially US President Donald Trump and as part of his strategy to reduce the trade deficit between the US and China through the trade war with China, he believed and continues to believe that the FED should be responding vigorously to the interest rate reductions that China makes every time, so that it achieves its goal of being China being forced to accept its economic conditions.

The Global Monetary War

A day later from the FED ‘s announcement of 0.25% reduction in the basic borrowing dollar interest rate, US President Donald Trump announced the imposition of new 10% tariffs and 01/09/2019 on all remaining Chinese imports into the US totaling $300 billion, which had not been charged to date.

In the coming days China, in response to US tariffs announcements, caused the deep devaluation of the yuan’s national currency against the US dollar, causing even more disruption to the foreign exchange markets, while are expected further reactions from the United States.

A country to win a monetary war should have huge reserves in US dollars (of the world currency reserve) and at the same time its basic principles-institutions in its economy which in this case are the country’s Ministry of Finance (treasury) and its Central Bank to coordinate flawlessly and in such a way that when the Ministry of Finance intervenes in the foreign exchange markets to have the full support of the central bank which has the huge funds available in US $.

China currently has reserves in US dollars amounting to $3.1 trillion. At the same time, due to the communist regime and the authoritarian type of capitalistic system, the coordination of its two basic principles-institutions, namely the Ministry of Finance and its Central Bank, People’s Bank of China (China’s Central Bank) may be impeccable in a world monetary war.

On the other hand, the FED is unlikely to agree to a series of consecutive reductions in the US basic borrowing dollar interest rate, putting into practice the weak dollar strategy that US President Donald Trump urges with aim to increase the competitiveness of the American businesses and to continually create new jobs in the American economy in order to win the elections in 2020.

This element shows us that U.S. President Donald Trump will have a problem coordinating the basic principles-institutions of the US economy, namely the Ministry of Finance and the FED in case he wants to get involved and win a world monetary war. Since the FED resists in the US President’s wish to participate in a global monetary war, which would in such a case will bring the FED against the ECB and the Bank-of-Japan, then the President’s choices shrink and rely on the decisions of Congress.

More specifically, in a monetary war and as I mentioned in the first paragraph of this section, the U.S. Ministry of Finance and aiming to create a weak dollar and always without its support from the funds of the FED, should use all the funds which has available in its custody by interfering in the forex markets to sell dollars and buy other foreign currencies thereby causing the further weakening of the dollar.

In addition to further deregulation of the American economy in such a case and always based on the fundamentals of the US economy, the U.S. Ministry of Finance (Treasury) has a limited amount of funds in dollars, totaling $126 billion, which they are placed in the Exchange Stability Fund.

Since the FED may not agree to apply a series of reductions in the basic borrowing dollar interest rate, in this case the only option that US President Donald Trump will have in his hands to find the available funds that will support the unlimited massive sale of dollars for the purchase of other major currencies in the foreign exchange markets with aim to create a weak dollar, it should appeal to Congress and ask for approval for greater access to capital.

This means that he will ask Congress to approve the debt increase of the US federal government and whatever that it means, with aim to use more funds in order to win the monetary war against all.

But will this Congress approve? Or the President of the United States will be involved in a global monetary war without securing the participation of the main “players” of his country that will secure the unlimited funds to win the world monetary war, causing an uncertain outcome of this war that would cause damage to the prestige of the United States?

Thanos S. Chonthrogiannis

It is prohibited by intellectual property law or in any way illegal use of this article, with heavy civil and criminal penalties for the offender.