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Strong USD Could Cause Next Global Financial Crisis

MS

As the US economy recovers, a strengthening USD could cause the next financial crisis, warns Singapore-based economist Andy Xie.

“The first dollar bull market in the 1980s triggered the Latin American debt crisis, the second the Asian Financial Crisis. Neither was a coincidence,” Xie writes for Caixin Online, a website specializing in China’s financial and business news.

When the Greenback is in a Bear Market, liquidity flows into emerging markets, causing their currencies and asset prices to appreciate, which supports domestic demand.

“When the dollar changes direction, so does liquidity,” according to Xie, a former Morgan Stanley NYSE:MS economist who predicted the economic bubbles like the 1997 Asian financial crisis and dot-com bubble.

“The virtuous cycle on the way up becomes a vicious one on the way down. The emerging economies already suffer inflation. The liquidity outflow leads to currency depreciation, which worsens inflation.”

When the dollar’s value falls, dollar debt tends to rise in emerging markets, as the weak USD lowers debt service and encourages over borrowing. But when the USD reverses course and strengthens, the debt burden becomes unsustainable.

“Hence, no lenders want to roll over the loans anymore,” Xie explains. “A liquidity crisis ensues. This is what occurred in Latin America in the 1980s and Southeast Asia in the 1990s.”

The BRIC countries; Brazil, Russia, India and China are bubbles ready to pop, he warns.

“Whenever there is a hot concept like BRIC, there is a bubble. There has never been an exception,” Xie writes. “The BRIC countries exhibit all the symptoms of binging on cheap credit: high levels of indebtedness, inflation and strong currencies.”

The BRIC countries have seen inflows of foreign capital dissipate, and they are much like Southeast Asian countries just before the Y 1996 crisis. A wrong policy move could prompt a “full-blown financial crisis.” The right move for the BRICs is to raise interest rates to tighten money supply now.

Do not count on that, they seem more interested in sustaining short-term growth, Xie says. “Some emerging market turbulence is quite likely within the next 24 months.” Emerging markets like the BRICs, fueled by Hot Money from abroad, are bubbles waiting to collapse .

“Global investors, seeking to diversify away from the post-bubble heavily-indebted Western world, have inadvertently created a massive ‘hot-money’ bubble in emerging market nations, causing overheated economies and property bubbles everywhere from Brazil to Israel to the Philippines,” he says.