In the first of our currency catch up series we’ll be looking at countries whose primary export is debt. This includes a portion (but not all) of the West. You could say the “home” countries of the west are the primary exporters of debt. While their remaining colonial holdings (Australia, New Zealand, and Canada) are very much resource countries whose home currencies are tied to the price of their primary export. The primary export of western countries is debt, and we’re going to be reviewing what that means, and then most of what has happened within these countries over the past 2 months.
Table of Contents
Debt as a Resource
France
Spain
The UK
The US
Rising Rates in the West
US News
UK News
Europe News
Conclusion
Internal References
1. Debt as a Resource
Every decent fiat currency in the world is tied to some commodity or trade good. As we discuss the 8 major currencies that we’ve been covering over the last year, we are going to group each currency based on what it is tied to. The only exception to this rule is Japan, which we will be covering alongside Switzerland as they both used to behave extremely similarly, but due to some obviously boneheaded moves by the BoJ, the Yen has lost it’s correlation to the price of Gold. Even the price of Bitcoin is (was, a separate article about the future of bitcoin miners is warranted) tied to the hash rate of all of the active Bitcoin miners at any given time, and this hash rate is fairly closely tied to the price of electricity available to the current active miners.
The first group of countries we’ll discuss have debt as their primary resource. These are the hardest to explain but nobody ever said that I ever shrink away from a challenge so here we are.
These countries did not end up like this on accident. The world of capital flow has organized itself in the manner that was the most convenient to suit the historical needs of the world we live in today. Things are the way they are because they needed to be that way in the past. We always must be ready for things to change as they are no longer needed. It was just last century that Europe had colonies throughout the middle east, Africa, and the Americas.
France
Much of the infrastructure of the colonial era is still intact. We covered evidence of this last summer, when we were discussing the Central African Republic’s clash with the French treasury, when the CAR legalized bitcoin.
These currencies have (of course) direct convertibility to the Euro that is guaranteed by the French treasury. Which means that if a business wishes to operate within these countries, it’s in their interest to borrow money from a European bank as lending rates in Europe are far lower than in Africa and the fixed convertibility makes it a no-brainer. Looking at a map of colonial Africa in 1914, you can see that French colonial holdings line up fairly close to the map of where the African Franc is in use today.
The only difference between these maps is that Germany lost it’s colonial holdings to France as part of the Treaty of Versailles after WW1, which is why old German colonial holdings also fall under the usage of the African Franc today.
Spain
Spain spent much of the 19th and 20th century losing it’s colonial holdings. Either to independence movements in Central and South America, to military losses in Africa, or in military losses to America in the Spanish American war (Puerto Rico, the Phillipines, Guam, Palau, etc.). While Spain’s colonial holdings are very weakly tied to Spain now if at all, Spanish banks like Santander, BBVA, Sabadell, and Caixabank still have extensive operations throughout Central and South America.
Due to the extremely low interest rates in Europe over the last several decades, they have viewed Latin America as their primary growth geography because these banks could borrow in the Euro for low or even negative rates, then lend to latin-america and charge a 6% or 7% risk premium to cover currency fluctuations, and hedge at a 2% expense rate and still come out with a 4-5% profit.
The fact that the majority of Spanish ex-colonial holdings still speak Spanish, puts Spanish banks at a significant advantage for moving in and onboarding staff to work in these countries. Despite having the same GDP as New York, Spain has managed to roughly match US investments into Latin America over the last 3 decades.
The UK
Who could forget the greatest colonial power of the last century? I would be remiss if I didn’t speak of England. The UK held on to it’s colonies the longest, with many not receiving independence until the 1960’s. As a personal note, both of my parents were born in a British colony that achieved independence only after they were alive. That is how recent this period is to the modern era.
Today there are 15 remaining nations that voluntarily choose to share the British monarch. These countries are referred to as the Commonwealth. Notables among them still are Canada, Australia, and New Zealand. The list of commonwealth countries is still shrinking to this day though, with Barbados having become fully independent in November of 2021 and Jamaica announcing that it wished to become fully independent back in March of 2022. It wouldn’t be much of a shock for the British commonwealth to no longer exist in our lifetimes. Prior to the US establishing the Petrodollar in the 70’s, the UK held that position. You can listen to my appearance on Episode 67 of the Against the Mob podcast on Spotify discussing the Petrodollar. The entire episode is relevant to this post, but for the bit specifically relevant to Britain you can start listening at about 50:30 minutes in to hear about what occurred on December 11, 1974. Prior to that ~20% of all global invoicing for oil was done in British Pound Sterling. Prior to WW2, when the british empire spanned the entire globe, the British pound was the de-facto international currency. Eastern Africa, the middle east, south Asia, and Oceania have all been primary lending grounds for British banks. England might have lost it’s holdings through the mid-1900’s, but the financial relationships remained in tact. The habits of a colonial empire don’t end with the empire itself. However, the UK has fallen much further, which is what happens when you start off so much higher than your peers. They had the world reserve currency, the sun never set on their empire, colonies around the world. All of that was torn down because Archuke Franz Ferdinand’s driver happened to make a wrong turn and stopped right in front of the diner that Gavrilo Princip was eating at after their earlier assassination attempt had failed.
Two major wars absolutely devastated the continent of Europe and the European colonial empires began to collapse as they could not afford to rebuild their own continent, yet alone continue to invest in colonies all around the world; they had to step back and the lone superpower left standing stepped in to fill the void.
The US
Of all of the currencies whose primary product is debt, America is chief among them the most liquid in terms of available debt and the most useful in terms of where that cash can then be spent. Directly after WW2, the feeling within the US was that Europe could no longer hold the world together and that someone would have to step in and do it… so why not us?
Here is a direct quote from President Truman’s Under Secretary of State for Economic Affairs, William Clayton;
The reins of world leadership are fast slipping from Britain's competent, but now very weak hands. These reins will be picked up either by the United States or by Russia. If by Russia, there will almost certainly be a war in the next decade or so, with the odds against us. If by the United States, war can almost certainly be prevented.
From this attitude sprang forth The Marshall Plan, and it was, in my opinion, the event that laid the foundations for the petrodollar as we know it today. The basis of the plan was for the US congress to appropriate $13.3b (~$164b in todays money if using the official measure of inflation), to rebuild countries ravaged by WW2. In exchange, those countries would use the aide money they received to buy US manufactured goods. Essentially creating a captive market first within Europe, and then Japan, The Sino-Pacific, North Africa, and parts of the Middle East that was slowly being taught that the dollar was the most useful currency for them to use. Even if you weren’t part of the Marshall Plan, it was still advantageous to use the dollar when trading with a country on the Marshall Plan, because it was the most liquid and easily spendable currency that could be used at that time.
It was a Keynesian’s wet dream. Print 5.2% of the country’s GDP, give it to other people and tell them to buy our stuff from us with our own money, and somehow it created more economic prosperity. I don’t think the Keynesian’s really thought through the fact that the additional demand creation of the Marshall Plan was essentially a one time event, and each time we’ve tried to repeat that since then it comes with diminishing returns. Other than when we convinced the Saudi’s to peg their own currency to the dollar and to invoice oil exports in dollars we haven’t managed to find large enough markets to increase demand for the dollar enough to pull us out of the recessions caused by over-printing since then. Consider, the infrastructure put in place by the Marshall Plan created enough foreign dollar demand to pull us out of the Great Depression. The petrodollar agreement with the Saudi’s on December 11th, 1974 pulled us out of the hyperinflationary spiral that was the post Bretton Woods world. But the Eurodollar very recently accounted for 84% of all global trade invoicing. There isn’t much more juice left to squeeze. But the octogenarians in Congress and the Senate who can only ever remember the success of the Marshall Plan (Pelosi, Biden, McCarthy, Feinstein, McConnell Grassley, etc.), think they are replicating it when they send $100m to Pakistan for non-binary gender research knowing damn well that the Pakistani’s will have to pay an American firm to do it because no one else has this expertise. They’re just pissing in the wind.
This is why the US government’s primary activity has been random military deployments within or to country’s that we believe we can effectively bully into using US dollars more often. And due to the nature of where these countries are, we often end up protecting the Euro-dollar as a whole due to deployments in the Caribbean, South America, Central America, and now the Middle East and Africa.
Rising Rates in the West
With interest rates being the cost of debt, it is no surprise that as interest rates rise, lending becomes more profitable and thus the value of the dollar increases. Europe, the UK, and the US all have debt as a primary export. Debt is in far more demand, than there is supply of it. Rising rates is just a function of supply and demand. As covered numerous times on here already, treasury rates rose first and the central banks were forced to raise the overnight lending rates to keep up.
Normally, for countries that export debt, this would be a massive boon, and in the short term it kind of was for the US. So long as they kept pretending they could keep up with the real rate of interest being demanded by the markets then the speculative traders (like us) wouldn’t take short positions on the dollar (by purchasing counter-inflationary assets), and in the meantime people who had debt they needed to pay off would be selling their assets for dollars to pay off their higher interest rates. But unfortunately, the west’s largest lending counterparty is itself. Despite debt being a key export, the US, Europe, and the UK are all lending far more money to themselves than they are to any other country or entity world-wide even when accounting for private party loans.
Gone are the days of colonial powers lending money to build railroads in India or to build gold mines in Central America. Now, they are just a shadow of their former selves, and even these shadows still have so much further to fall.
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