Investing.com – The global financial system is experiencing a historic change which moves from the US dollar, and the implications could redefine the flexibility of the fiscal and foreign policy of America, according to George Saravelos German bank (ETR:).
Despite President Donald Trump’s reversal on the threats of customs prices, Saravelos maintains that the damage caused to the USD are already made.
He highlighted a rapid de-political process, obvious by the simultaneous sale of the US dollar and bond markets.
At the heart of the Saravelos thesis is a reassessment of the American tax space. He said that the sustainability of sovereign debt depends less on debt/GDP ratios and more external imbalances, in particular the dependence of a country with foreign funding.
For decades, the United States was the exception, capable of financed its twin deficits thanks to the role of the dollar as a world reserve currency.
With this current change, the equilibrium level of sustainable American tax deficits decreases, according to Saravelos.
This reduces the flexibility of the American administration in the pursuit of an expansionist tax policy to support growth.
The pressure extends beyond the economy. As the United States becomes more dependent on foreign financing, the feeling of international investors is becoming more and more crucial.
It is an often repeated sentence that a country with twin deficit depends on the “kindness of foreigners”. This now applies to the United States, said Saravelos, warning that Washington may have to adopt a more conciliatory foreign policy to preserve market stability.
Saravelos rejected comparisons with emerging markets, where the simultaneous weakness of currency and the bond market often leads to a crisis.
The key difference, he said, is that the United States has no significant commitments to foreign currencies, reducing the risk of spiral debt dynamics. Instead, he suggested that market weakness could possibly attract foreign capital to American assets, if valuations are adjusted enough.
The biggest challenge in the dollar at the moment is its starting point for high valuations, significant foreign asset allowances and a conflictual foreign policy approach, he said.
Saravelos noted that the increase in tax space in alternative reserve currencies such as the euro could be offset by an unwanted assessment of the currency, potentially encouraging the European Central Bank to adopt a more accommodating position.
He concluded that the change in world capital flows triggered by de-political is likely to have large-scale and unpredictable consequences.
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