Economic Tectonic Plates shift in the Global Economy By PAUL BETTANY, Collinson FX The world has changed since the pandemic hit, more than two years ago. Western Governments followed the Chinese lead and decided to lock-down all of society and their economies. This was against all of the established protocols for 'Pandemic Management', which was established following the 'Spanish Flu Pandemic', more than 100 years ago. The protocols, paraphrased and put in simple terms, emphasised the maintenance of a functioning society, by keeping business and schools running normally, while protecting the vulnerable. This was completely upended when the COVID pandemic hit and lockdowns were introduced globally. The damage has been devastating, as it is not just the economic damage, but the social and personal costs, which are immeasurable. This was confirmed by the John Hopkins University study, which showed the lockdowns had no 'noticeable effect' on COVID related deaths, but a 'devastating effect' on economic and social ills. The latest variant of the virus was the Omicron, which was highly infectious,
but only as dangerous as a mild flu. The virus spread like wildfire around the world, infecting vaccinated and non-vaccinated, without prejudice. The virus was highly contagious, but had only a mild impact on those infected. The new variant therefore provided the most 'effective vaccine', that of natural immunity. This will likely turn the page on the pandemic, but how has this changed the structure of our economy, into the future? Will government return the power, freedoms and rights of the people and business, confiscated in the name of safety and health? Globalism was exposed, throughout the crises, with the break-down of global supply chains. Will countries now move to more domestic production and more independent supply chains, for both production and consumption? The 'new normal' will impact the nature of international trade and logistics. And how we live and work. The whole structure of the world economy has changed in two short years. The financial system has not been immune
to these monumental changes and that could not have been better demonstrated, than with the recent outbreak of war in
the Ukraine. The US and Western allies responded dramatically and with severe and unprecedented sanctions. They have imposed heavy restrictions on the Capital Assets owned and controlled by the Russian Central Bank and attempted to remove Russia's financial institutions from the SWIFT international payment system. This could signal a tectonic shift in global trade and finances. The Russians will need to move to their own payment system (SPFS), or the Chinese system (CIPS), (or a combination/ marriage of both). These systems are already operational and will include many of their major trading partners, including India, Brazil etc. The fallout from this, has the potential to turn the established trade and financial system, upside down. The USD remains the reserve currency of the world, but this could be challenged, now that a significant portion of the world
is forced into trading and payment systems that are not USD denominated. This would cause an economic upheaval that we have not seen since WW2. There are further consequences of the Ukrainian situation, as it only aggravates the global energy crises, centred around Europe. Russia supplies much of the energy that keeps Europe functioning and this will only be incensed by these sanctions. This crisis may develop and extend, only exaggerating the rampant inflation, further destabilising interest rates and currencies. Central Banks around the world, have been forced to recognise the most pressing economic problem facing them, and that is rampaging inflation. For more than a year, Reserve Banks, have been ignoring the issue and labelling it as 'transitory'. Inflation is now out of the box and hitting economies, like a sledgehammer. The Bank of England, Bank of Canada, South Korean Central Bank and the RBNZ have all embarked on a new hawkish cycle of interest rate rises. The yield curve is on the rise. The RBA has resisted raising interest rates, as heavy COVID regulations/restrictions devastated much of the economy, and suppressed growth and inflation. That inflation train is now headed down the track, at full speed, and the RBA will need to look at raising rates in the very near future.
At the heart of the aversion to raising interest rates, is the fear of suppressing economic growth, the economic recovery, and debt servicing costs. Governments have been spending like 'drunken sailors', during the pandemic and this has been funded by Central Banks buying up this debt (Monetising Debt). Historically low and regulated interest rates have allowed Governments to run enormous deficits and debt, but this option is suddenly disappearing as the cost to service said debt, sharply increases. Global sentiment is plunging, and equities, bonds and currencies are all trading accordingly. US equities are correcting, experiencing extreme volatility, which has spread across all the asset classes. This has only been intensified by the outbreak of war in Eastern Europe. The Australian economy is recovering from the pandemic, but has many challenges ahead, with the supply chain threats only being antagonised by the Geo-Political issues surrounding China, Russia and others. There will be many tests for the AUD, as it copes with uncertainty and disruptions in markets, with rising interest rates and an inflationary economy. The good news is that commodity prices have been very strong, underpinning the economy and the currency. To avoid currency risk, employ a pro-active risk management program. Plan and chart your foreign currency flows and talk to your professionals about adopting an appropriate strategy, using the available tools necessary, to mitigate liability
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