Warning - Signs of further upheaval

What is the current downturn doing to economies and how are politics and finance influencing a more significant divide between rich and developing countries? 

Will inequality and debt become the lessons and legacy of the century? 

Economists have made their predictions on the year ahead. A great majority of the global economy has come to realise the pressing need to restore trust, order and unity in a fractured world.

Job loss, failing economic health and no growth in low-income countries will force sectors of the global economy to stall. The worry is that there will be a significant default on debt in the months and years to come. These defaults will further extend the gap between wealthy countries and developing nations, making it considerably more challenging to the poorer ones to access long term loans. These low-income countries will be forced to secure financing at relatively onerous terms that often results in debt traps.

Disorder

The historical symbol of Capitol Hill eroded only days ago when Trump supporters forcibly gained access to the Capitol building. Donald Trump encouraged the protest that led to the breach in a last-ditch effort to retain his grasp on power that will come to an end in just over a week. Yet again an undivided America is in the world's spotlight. For someone easily inebriated on power, relinquishing the control that influences nations does not come easily. Change is now a certainty; the American people have spoken. Democracy must be upheld for trust to be restored in the American constitution and for meaningful change to occur. Living free and having the privilege to speak freely is a moral right we ought to leave for our children and their children. People of all nations should never have to look back at history in shame, and life is too short for resentment.

Politics and Wealth

In a time where placing your money in banks delivers little to no returns, and it costs more in fees to store your cash in institutions than to expect returns, funds are being diverted to more favourable environments. The expected returns once relished in prior decades from savings accounts have all but evaporated. Negative interest rates have forced steady gravitation toward stocks, digital currencies and other alternatives, reflecting pensioners' sentiment. The millennial generation has a propensity to live life to the full, spend accordingly, rather than save. There is also very little room for savings for most millennials as the cost-of-living increases; they are unable to save.

In times of crisis, people struggle to anticipate the future. The primal instinct of fight or flight takes hold and more often than not, there is a dash toward security or safe zones. The complexity of calculating the time in safe zones is hard to measure as turbulence duration is difficult to predict. A dark winter is taking its toll on Europe, America and parts of Asia as the third wave of COVID persists, and 2021 begins on a sombre note.

There has always been a dash to the USD's security as a haven currency in prior downturns in times of historical uncertainty, and this downturn has been no different. Nevertheless, there have been fracture lines identified in the USD's dominance. The dollar's decline in value highlights the unrest and the vulnerabilities of the US economy. The US's political might has been waning amidst the great divide that threatens to destabilise the American nation. It is challenging to be the light at the end of the global tunnel when internal strife sends a message of losing control. The partial loss of control has set Europe and other nations on their paths toward economic stability that is no longer in full alignment with the US. 

The president-elect Joe Biden has a monumental task ahead as he steps into office. The rift is deep and is widening between the left and right, and people have forgotten the fragility of democracy. Moreover, they have forgotten the base principles of humanity. Power struggles will always be present in the world as emerging powers attempt to topple the dominant. However, generally, the people at the lower end of the food chain bear the brunt of economic hardship, unrest, and war. 

The USD in Question

There have been broad discussions about the USD concerning its losing influence globally and whether or not it should remain the world's reserve currency. To date, an estimated 40% of the world's debt is in USD, and an estimated 61% of all central banks hold USD reserves which would make it incredibly complex to challenge. Moreover, what would be the substitute replacement for the USD? Europe has no contender which leaves the only arguable possibility to be the Chinese Renminbi. Nevertheless, the lack of transparency within the Chinese ecosystem and the strangulating controls makes it a less convincing alternative. A reserve currency requires trust and stability, two sentiments rarely associated with China. The USD has also been dominant for a very long time and has the experience to recover from adverse reactions. The Chinese financial markets are still in their adolescent phase and have yet to bloom into trusted, dependable options. Moreover, the upheaval in the United States invites challenge as a lack of unity portrays weakness in China's eyes.

The conclusion is that the USD will retain its position of being the world's fiat currency if it can get its act together and find a common purpose to unify its undivided states. Internal bickering will widen the doorways to geopolitical threats, and the strength of the dollar will continue to be questioned in all aspects of its reign. A weakening dollar may sound attractive from a trade perspective. However, a falling dollar brings external challenges that could eventually spell the end of the dollar's dominance over time. How would such a change impact democracy and the world as we know it?

Business Action 

In the short term, having access to US dollars will inevitably allow for quicker transactional payments between markets, expanding opportunities internationally. The global COVID debt in loans, bonds, both sovereign and corporate will further demand access to USD, strengthening the dollar's position as economies begin to vaccinate populations—the desired recovery will be contingent on the liquidity in the markets, the strategies deployed and the response to the vaccines. Furthermore, the US central bank will launch its digital currency referred to as CBDC, which will bring along other concerns that will be addressed in the subsequent articles. 

Organisations need to keep in mind the expanding gap between rich and poor as investments follow the yield curve. Billionaires are becoming wealthier at exorbitant rates due to the traditional trust placed in blue-chip stocks within leading companies. However, overpriced valuations are a bubble waiting to burst, and a correction is long overdue. Monetary allocations should be targeting the innovative minds that will build on the emerging value of the global economy. Redirection of capital will give up-and-coming businesses the opportunities they so desperately seek to prove their worth. The only way a balancing of the scales will ever occur is for global wealth to expand across nations, providing benefits for less fortunate and strengthening the next generations' value trees. Disproportional investment allocations inflate valuation prices beyond their realistic valuations, creating multiple bubbles.

If you are a business that is looking to expand internationally or a business seeking investment, there will be two impacts for you to navigate.

1. It won't be as easy as it used to be to grow in emerging markets; there will be a higher need for strategy than just tapping into market growth rates to gain rapid growth.

2. Venture and PE capital, are more motivated to look for growth and yield but will be more discerning. Again, requiring an investment strategy that will convince investors.

If you would like help to expand your business opportunities, mitigate risks and work toward your contribution to an inclusive, robust economy, Strategy Hubb is on hand to assist.

Strategy Hubb can assist with planning, restructuring, financial modelling and business strategies to limit your risk exposure. The world is in the hands of the ones which are best prepared. 

Disclaimer: The discussion points in this article are for information purposes and are not to be used as financial or strategic advice for personal or business interests. For bespoke advice contact Strategy Hubb for a consultation.

Keywords: Global Economy, Economics, USD, Stimulus, Liquidity, Politics, Money, Wealth, Currencies, COVID-19, Renminbi, Strategy, Planning, Strategy Hubb.