Russell Napier, author, market strategist, founder of research platform ERIC
The current global monetary system is coming to an end – and the euro could be the main casualty, warns analyst and financial historian Russell Napier in the Financial Times. Napier notes since the Asian economic crisis in the late 1990s, central banks in emerging economies have been intervening in the foreign exchange markets to keep their currencies weak against the US dollar.
As a result, their reserves of dollars have ballooned (as they sell their own currencies to buy dollars), resulting “in the forced purchasing of US Treasuries” (as they invest the accumulated dollars in a “safe” asset). This has repressed US Treasury yields, fuelling an investment and consumer boom.
But now foreign exchange reserves are no longer growing, which means new US government debt (and there’s a lot of it) needs to be bought by savers, rather than foreign central banks. In turn, demand for assets such as equities will fall, and consumer spending and economic growth will slow.
The big risk is that a heavily indebted China will respond to slowing growth by moving to a flexible exchange rate for the yuan, “thus creating the freedom to grow and inflate away these debts”. The key risk for the euro is that this will cause global economic chaos, just as elections in May are likely to see many far-right and far-left politicians elected to the European Parliament.
Faced with economic havoc and angry voters, we could see the “imposition of capital controls by key eurozone countries”.