Rewind. Global risks weigh heavily on investors

US Federal Reserve Chairman Janet Yellen cites global risk factors as a reason to put on hold the newly started up-cycle of interest rates.

Central bankers have brought interest rates down to an absurd level, with some going into negative territory. This encourages consumption, dissuades savings and annihilates those who had worked hard to build a retirement nest egg as it now does not provide them with enough interest income to live comfortably.

Thus, the asinine zero interest rate policy and negative interest rate policy have negated the guiding principles of life, to work hard and save for a rainy day, by destroying the very reason for saving.

It is imperative for central bankers, starting with the US Fed, to raise interest rates. This is because the pension funds of all 50 States are unable to meet their pension obligations with the current low interest rates. This can result in social unrest.

Yet, the US Fed is hesitant to raise rates again, after having raised them once, citing global risk factors.

What do these consist of? There are several risks, many of them being geopolitical in nature.

For example, Saudi Arabia last week threatened to liquidate its hundreds of billions of dollars worth of US Treasury Bills if US lawmakers proceeded with a Bill seeking to re-examine Saudi Arabia’s role in the 9/11 terrorist attack. Should Saudi Arabia sell its holdings aggressively, it would push down US bond prices and drive up yields, thereby making it increasingly difficult to raise money in the bond market.

US corporations have $4.1 trillion of corporate debt which is due for refinancing up to 2020.

A lot of this debt has been used for buying back stock of these companies, as a result of which the US markets have been buoyant though earnings growth is falling. If US corporations cannot refinance the debt, or if it becomes expensive as a result of the Saudi bond sale, it would affect the US equity market.

Saudi Arabia is also peeved at the deal the US struck with Iran, its traditional rival in West Asia. If relationships turn sour, it may start pricing its crude oil in a currency other than the US dollar.

It is because most global trade, and almost all oil trade, is priced in dollar that the US currency enjoys the status of a global currency and hence its deficits get funded by others.

Were the Saudis to price crude oil in another currency (the Russians have already made a deal with China to sell Russian crude in renminbi), then there is risk to the status of the greenback as the world’s global currency.

China also wishes to dethrone the US dollar. It has just introduced a new benchmark for gold which is denominated in yuan and not in US dollar.

China is the world’s largest producer, consumer and importer of gold and sees no reason for gold trading to be priced in the US dollar.

So, if both crude oil and gold get priced in a currency other than the US dollar it poses a risk to the greenback’s status as the world’s reserve currency, and therefore the ability of the US to have the world pay for its overspending.

George Soros, however, feels that China is now in a similar position as the US was before the 2008 collapse, and is due for a hard landing. Its economy has been pump-primed due to excessive credit, and China will pay the price for it, just as the US did in 2008. These are serious risks and investors should watch out for them.

The writer is India Head, EuroMoney Conferences

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