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August 5, 2024 - 10:30am
Stock markets across the world are selling off. The collapse in the price of shares which started in Japan last week appears to be spreading to other countries. After more selling this morning, Japan’s Nikkei is now down over 23% from a month ago. The trouble has spread to South Korea, whose Kopis index fell nearly 9% in trading today. At the time of writing, futures for the Nasdaq in the United States are down over 5% and the FTSE in London is down over 2%. At the very least, we are in for a choppy day of trading.
Nor is the bleeding confined to stock markets. Bitcoin is down over 9% and there are reports that over $1 billion worth of liquidations have taken place on the crypto markets due to recent selling. Liquidations take place when investors who hold leveraged positions in the market run out of margin and the exchange forcibly closes their positions.
When violent sell-offs such as this occur in markets, analysts reach for explanations, and one currently in circulation is a coming recession in the United States. If these fears have contributed to the sell-off, the irony is that they have largely been spread by supporters of the Democratic Party hoping to get an interest rate cut prior to the election in November. GDP growth came in at a solid 2.9% in the first quarter, but the market mayhem may well push the economy off a cliff. In other words, Democrats and their supporters may have memed an early recession into existence.
The true proximate cause of the recent sell-off, however, is to be found in Japan. Last week the Bank of Japan raised interest rates from 0% to 0.25%, aiming to stop the yen’s continuing fall against the dollar. Really, though, this represents broader chaos within the global dollar system itself. The underlying driver of this chaos is the energy price inflation associated with the Ukraine war and the accompanying sanctions, which have forced most Western central banks to raise interest rates.
Due to serious demographic problems and stagnant wages, Japan has a naturally deflationary economy. This has meant that Tokyo has not been able to raise interest rates in lockstep with other countries, and so the yen has sold off. But as the market chaos spreads, it is starting to look as if Japan was simply a canary in the coal mine. Stock markets in countries which lie within the dollar-based system have been vastly inflated for years — mostly because of monetary experiments by central banks such as quantitative easing (QE) — and now the whole set-up appears to be unravelling.
The question is whether the dollar-based global system can survive this turmoil. When markets crashed in 2008 the system took a beating, with foreign holders of American assets shocked to find out that their purchases were not worth what they paid for them. At the time, however, the rest of the American-led system seemed stable and so the dollar’s hegemony chugged on. Now, with the enormous geopolitical shifts we are seeing across the world, it is unclear whether the dollar-based system can survive another financial markets crash.
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SubscribeA short explanation of the Yen carry trade:
https://www.alt21.com/hedge-glossary/japanese-yen-carry-trade/
Wait, we’re not already in one? News to me. If this is what they call a “recovery” I hate to see what they call a disaster.
QE or printing new money, would also seem to be highly inflationary, especially on the scale it has been used in recent years. It is rarely mentioned as a factor though.