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May 19, 2023

The US hegemony is unlikely to end with the "Lehman crisis 2.0"

(This was originally published in Newsweek Japan. English translation is provided by the English-Speaking Union of Japanhttps://www.esuj.gr.jp/jitow/686_index_detail.php#japanese)

May 12, 2023
The shadow of financial panic is creeping up on the world. Panic is a psychological phenomenon rather than an economic one. Even if speculation runs wild and bad debts accumulate due to excess money, the economy will keep moving, as long as everyone continues to trade. However, if one day a bank collapses somewhere, the paranoia of "Is that company, that bank also a zombie? Will I lose money by doing business with them?" spreads, deposits are withdrawn, loans stop, and the economy comes to a halt. No one knows when this may happen.

There are basically only two prospects for the immediate future. One is to hold steady for the time being. However, the dilemma of such fear as "If we don't raise interest rates, inflation will run rampant, but if we do raise interest rates, banks may collapse and cause financial panic" will not go away. Eventually, we will likely fall off the tightrope.

The other prospect is that Lehman 2.0 will happen now. In that case, the Fed in the US will likely ease the interest rate hikes they have been pursuing for the past year or even resume financial easing. The US government will inject public funds into bankrupt financial institutions or large companies and the FED will allocate dollars to central banks around the world (although this is only a nominal swapping of currencies) to prevent the settlement of global trade and investment transactions from stopping.

In the case of the 2008 crisis, the US government and the Federal Reserve stimulated the economy through fiscal expansion and large-scale financial easing and recovered positive growth in 2010. However, much of the growth initially flowed to the wealthy, which led to an increase in inequality and ultimately helped Trump win the 2016 presidential election.

A shift in hegemony?

In the case of the 2008 crisis, an odd thing happened where the value of the dollar, the currency of the financially broken US, skyrocketed due to a shortage of dollars worldwide. However, after a year, the effective exchange rate of the dollar plummeted reflecting its true value.
In Japan, which did not lower interest rates, the yen appreciated, but with the arrival of the Abe administration, interest rate cuts were enforced, and the yen became excessively weak. In the midst of this, the euro and other currencies also lost value, so the world's currency order did not change.

Meanwhile, China maintained growth by forcibly expanding domestic demand measures (money, equivalent to over 10% of GDP, was injected into the economy) in response to the Lehman crisis, and surpassed Japan in GDP in 2010. However, its economy still depends on exports and infrastructure construction. Moreover, the renminbi is not liberalized in financial transactions, so it cannot become the world's reserve currency.

If the United States falters, the economies of China and Russia will collapse. China's huge trade surplus with the US (about $400 billion in 2021) will shrink dramatically, and the price of crude oil, which is the lifeline of the Russian economy, will plummet even further.

Since the 16th century, capital has moved from Mediterranean cities to the Netherlands, then from the Netherlands to Britain during the 18th century, and finally from Britain to the United States during the 20th century. Capital always seeks out "big and promising" partners to invest in, further elevating the invested entity.

Today, there is no investment target that surpasses the United States. China finds itself in the aforementioned situation, and India lacks the environment for modern business. Even if the yuan were digitized, China would not gain the currency hegemony. This is because the Chinese authorities will not allow foreigners beyond their control to freely use the yuan.

Therefore, the dollar-US-centric system, backed by the power of the United States, still persists. I only wish that the rapid fluctuations in the value of the dollar be somehow moderated. By using blockchain technology, fund flows can become transparent, which will prevent excessive bubbles and speculation from occurring.