For those sceptics who believe that our dollar is America’s greatest threat, here’s an old saying: “When America sneezes, the world catches a cold.”
However, when our dollar rises the world ends up on life support.
Case in point, Emerging Markets.
You probably won’t read about this from most media Presstitutes because they don’t want you to see how a rising dollar undermines the pension system in America.
Here’s why.
The ridiculous zero-interest rate policy, created after the 2008 meltdown forced many pensions (including Government Pension plans) to seek higher yields in the junk bond market.
It stems from the fact that they (pensions) were designed with an assumed rate of return of 7.5-8% annually.
When you factor in that Treasury yields have historically averaged between 4-5%, you’ll understand the huge funding gap.
So, in desperation, pension managers have loaded up on Emerging Market bonds (Junk) to get higher yields.
This is another reason why you should never let politicians manage money.
But here’s the problem.
As our dollar gains strength, Emerging Markets get slaughtered.
Why?
You see, EM bonds are issued in dollars and NOT in a country’s local currency.
A strong US dollar means their dollar buys less. Therefore, the cost of servicing the debt (paying the interest) goes through the roof.
America’s Greatest Threat…
Adding gasoline to the fire, rising interest rates also lowers the value of existing bonds, making this a double whammy.
These bonds are marketed as safe Sovereign Debt.
But the only country that can survive a rise in the dollar is China.
And we’ve been pounding the table for several years now about how we a falling deeper into a global Sovereign Debt Crisis.
