Interest Rate Cuts Bring Joy, Hikes Spell Doom: How 'Dollar Tides' Sweep the Globe

The dollar tide, while not a new phenomenon, continues to have a lasting impact on countries around the world. As the saying goes: "Lowering interest rates makes everyone happy, but raising them is like a crematorium."

What exactly are the dangers of the dollar tide, and what effects does it have on us? To thoroughly understand the dollar tide, let's start with a few stories...

Argentine Economic Crisis

Argentina, affected by the dollar tide, experienced severe currency devaluation and an economic crisis. In 1991, Argentina, with an unknown source of courage, implemented a monetary policy known as the "convertibility plan," pegging its currency, the peso, to the US dollar at a fixed rate of 1:1. The original intention of this policy was to control the out-of-control inflation at the time.

Initially, the policy seemed to be successful, with inflation under control and economic growth. This was because the US dollar was still in a cycle of lowering interest rates, with rates not being high. However, this fixed exchange rate system also made Argentina's economy overly dependent on the stability of the US dollar and neglected the optimization and diversification of its domestic economic structure.

Around the year 2000, the US dollar continued to strengthen in the international currency market, meaning that the dollar appreciated relative to other currencies (such as the euro, yen, etc.). For Argentina, since its currency, the peso, was pegged to the US dollar and maintained a fixed 1:1 exchange rate, this meant that the value of the peso also increased accordingly.The direct consequence of this exchange rate policy is that Argentina's export products have become more expensive in the international market. When products priced in Argentine pesos are converted into the currencies of other countries, their costs are higher, leading to increased prices. For instance, if an Argentine product is sold for 100 pesos in the domestic market, then in the case of a strong US dollar, importers from other countries would need to pay more of their own currency to purchase an equivalent amount of US dollars, and subsequently, to buy the product.

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As the prices of export products rise, Argentine goods lose their price competitiveness in the international market. Typically, buyers seek out similar goods at lower prices, which leads to a decrease in demand for Argentine exports. The reduction in export volume directly affects the country's economic growth, as exports are one of the key drivers of economic growth for many countries.

With the slowdown in economic growth, Argentina began to borrow heavily to keep the economy running. Moreover, these debts were largely denominated in US dollars. As the US dollar continued to rise in interest rates, the debts swelled. This led to a continuous accumulation of national debt, ultimately triggering a financial crisis. By 2001, the Argentine economy collapsed completely. There were large-scale protests and social unrest within the country, and the government imposed capital controls, restricting the public from withdrawing their deposits, which further exacerbated economic and social turmoil.

Argentina was unable to repay the accumulated massive debt and eventually declared national bankruptcy at the end of 2001, which was one of the largest sovereign debt defaults in history.

This is the story of the first victim of US interest rate hikes.

Turkish Collapse

Let's now discuss Turkey.

In 2002, the Justice and Development Party led by Erdogan came to power and initiated a series of economic reforms. These reforms put the Turkish economy on a fast track for rapid development. Over the next decade or so, the performance of the Turkish economy was quite commendable. From 2002 to 2016, the Turkish economy maintained steady growth. According to statistics, during this period, the per capita GDP increased from about $3,100 to around $12,500, making a significant leap into the "ten thousand US dollar society."

During this time, the Federal Reserve was in a cycle of lowering interest rates. The US dollar was relatively weak, and a large amount of foreign capital flooded into Turkey's real estate market, driving up local housing prices. However, this prosperity did not last long. In 2016, Turkey experienced an attempted coup, which directly affected the country's economic and political stability. That year, not only did economic growth slow down, but there were also issues of currency devaluation and inflation.

After inflation rose, from the perspective of traditional economics, it would be time to raise interest rates and withdraw liquidity to suppress inflation. However, Erdogan held a peculiar economic viewpoint.Influenced by his interpretation of Islamic doctrine, he believes that high interest rates are the root of inflation, rather than the solution traditionally considered by conventional economics. Islamic doctrine generally holds a negative view of charging interest.

Erdogan believes that low interest rates can promote investment and consumption, thereby stimulating economic growth. This view is contrary to traditional macroeconomic policies, which usually raise interest rates to reduce the money supply and consumption when inflation is high.

Moving on to 2018, the Turkish economy truly entered crisis mode. That year, the Federal Reserve raised interest rates four times within the year. This caused the value of the Turkish lira against the US dollar to plummet, and the inflation rate continued to soar. The lira became increasingly worthless.

Every time the US dollar raises interest rates, Turkey snaps. There are several main reasons for this.

First, the Turkish economy largely depends on imports, especially energy, machinery, and some basic raw materials, such as steel and chemicals. After the appreciation of the US dollar, these goods are basically priced in US dollars and will also appreciate accordingly. This directly leads to an increase in the cost of Turkey's important capital goods.

Second, the cost of Turkey's substantial foreign debt is also raised. Due to the lack of a buffer from foreign exchange reserves, the pressure of foreign debt cannot be released.

Third, the foreign capital that previously flooded into Turkey, after the strength of the US dollar, withdrew massively and returned to the United States. This further hit its domestic asset prices.

From 2019 to 2022, the Turkish economy continued to face challenges. High inflation and currency devaluation became the norm. For example, in 2022, the nominal GDP growth rate reached as high as 80%, but this was mainly due to rising prices.

In fact, there are many small countries like Turkey that are affected by the dollar tide. For example, Venezuela, any movement of the US dollar can make its economy totter. These countries are like small boats swept into the dollar tide, being washed up to the sky one moment and then falling to the bottom the next.

So, what exactly is the "dollar tide"? Simply put, it is due to the dominant position of the US dollar in the global economy, the monetary policy and economic trends of the United States can affect the global economy like tides. Once the Federal Reserve adjusts its interest rate policy, or if there is any significant fluctuation in the US economy, the whole world has to follow its rhythm. This is the "dollar tide" we are talking about, an invisible force that can control the fate of the global economy.The key to the formation of the dollar tide is that the US dollar is the most central international reserve currency. How did it achieve its current status?

When discussing the process of the US dollar becoming the world's leading currency, we must look at the numbers. After World War II, the United States held nearly 70% of the world's gold reserves, a figure that is not to be taken lightly! At that time, countries linked their currencies to gold through the Bretton Woods system, and gold was linked to the US dollar.

Subsequently, the US dollar was deeply tied to oil, continuing its strong position after decoupling from gold.

In this way, the US dollar, like a universal golden key, has unlocked its hegemonic status in the global economy.

Next, let's talk about the impact of fluctuations in the US dollar exchange rate on the world. Imagine when the US dollar is strong, the currencies of other countries seem like discounted goods, appearing worthless. At this time, countries that borrow in US dollars are like taking out usurious loans, with immense pressure to repay. When the US dollar weakens, these countries seem to be pumped up, suddenly feeling that their currencies have become powerful. Ironically, this power is actually based on the "fickleness" of the US dollar.

It's as if the United States holds the scoring power in the global economic arena, arbitrarily changing the rules. Other countries can only nervously watch the whistle in the hands of the United States, fearing that a whistle blow will require them to adjust their economic strategies again. In this situation, other countries want to control their own destiny, just like gambling in a casino to guess the next dice roll, full of uncertainty.

Both developing and developed countries are deeply affected by the "dollar tide."

First, let's look at developing countries. These countries are usually "loyal fans" of the US dollar because their debts and trade are mostly calculated in US dollars. But this is like gambling, once the value of the US dollar changes, their economy is like a roller coaster, ups and downs.

Imagine a developing country called Country B, which has a large amount of foreign debt denominated in US dollars. When the US dollar is strong, Country B needs more of its own currency to exchange for the same amount of US dollars to repay its debt. This increases the burden on Country B, which may lead the government to print more of its own currency to pay off the debt, thereby causing inflation. Suppose Country B originally needed 1 billion of its own currency to exchange for 100 million US dollars to repay its debt, but after the appreciation of the US dollar, it may need 1.5 billion of its own currency to exchange for the same 100 million US dollars, which is a huge blow to the economy of Country B. The debt becomes heavy, inflation rages like wildfire, and economic policies become constrained. It's like dancing under the big stick of the US dollar, and one might step on a mine at any time.

Let's talk about developed countries. Although they have some solid foundations, they cannot escape the impact of the dollar tide. For example, Europe and Japan, when the US dollar exchange rate changes, their export and import markets may be greatly affected, and even the financial market has to dance with the rhythm of the US dollar. When the US dollar is strong, their exports may be hindered; when the US dollar is weak, it may lead to a surge in import costs. These countries on the global economic stage are like dancers following the rhythm of the US dollar, who have to be careful, for fear of making a mistake.China's economy has become increasingly integrated into the global market, which means that fluctuations in the US dollar can also have an impact on China. However, China has its own advantages: our vast domestic market, gradually strengthening scientific and technological innovation capabilities, and a growing international trade network. Moreover, we have a massive foreign exchange reserve as a buffer. Faced with the challenges of the dollar tide, China is striving to enhance its economic resilience, reduce dependence on the US dollar, and promote the use of the renminbi in international trade.

The dollar tide is like a grand theater of the global economy, where every country plays its own role on this stage. Some countries may be dragged along by the fluctuations of the US dollar, while others are trying to find their own rhythm. In this grand play, each country must carefully design its own strategy to cope with the challenges brought by the dollar tide.

The Federal Reserve's adjustments to interest rates and monetary policy may seem to be for the purpose of stabilizing the US domestic economy, but in reality, these measures often have profound implications for the global economic landscape. By manipulating the money supply and interest rates, the US can to some extent control the economic development and financial stability of other countries. It is as if in a game of international chess, the US plays the role of a chess player who can move pieces at will, while other countries are like passive pieces on the chessboard.

Furthermore, the US government often uses monetary policy to achieve its political and economic objectives. For example, by maintaining a strong dollar policy to preserve its international economic hegemony, or by waging currency wars to weaken the economic strength of competitors. This strategy is sometimes like an "economic big stick" policy in the field of economics, used to maintain and expand America's global influence.

In this context, the dollar tide is not just a purely economic phenomenon; it is more like a means for the US to maintain its global hegemony. This strategy may not be a good thing for the healthy and balanced development of the world economy. It not only causes global economic instability but also exacerbates the phenomenon of economic power inequality.