Trans-Atlantic Financial Shocks Producing Physical-Economic Loss in Developing Countries

June 13, 2022 (EIRNS)—An increase in U.S. Treasury interest rates by more than a quarter-point in one day, and in the 30-year standard home mortgage rate by half a percentage point in one weekend, were signs of increasing financial chaos today as economic recession comes down on the trans-Atlantic nations. And Bloomberg’s headline, “Japan Starting To Crack” referred to the fact that the interest rate on Japanese government bonds broke out of the top of the Bank of Japan’s official range of 0-0.25% and went to at least 0.31%.

Worse, the dollar jumped as a result against nearly all currencies, with poor countries’ currencies taking a big beating. This means accelerated capital flight and credit starvation in those countries, unless they protect themselves with capital and exchange controls as only Russia has in this crisis (China’s capital controls are of much longer standing). This will add to the debt crises hitting these nations as they have to spend much larger amounts to import essential fuels and foods.

Against the dollar the Brazilian real has dropped from 21 U.S. cents equivalent on May 31 to 19.5 cents today; the Argentine peso from .85 cents on May 15 to .81 cents now; the Turkish lira from 6.3 cents on May 23 to 5.8 cents now; the Indian rupee from 1.3 cents June 3 to 1.28 cents now; the South African rand from 6.5 cents on June 3 to 6.2 cents now; and so on. (The Russian ruble is the exception, to such a degree that its current value, around 55/dollar, is hurting Russian exporters; the Bank of Russia central bank is likely to lower its discount rate again soon to let the ruble fall.)

Economists Pam and Russ Martens’ “Wall Street on Parade” column for Monday, June 13 usefully described how the stocks of the big five Wall Street megabanks and the biggest European banks are leading the stock markets down. For example, only Morgan Stanley of the biggest Wall Street banks has seen a stock capitalization loss of less than 20%; it has lost 16% of its equity capital, while Citigroup at the other extreme has lost 38%. This means that despite their huge excess reserves the Fed has fortified them with, when the financial losses now hitting hedge funds and the like do reach them, they will have significantly less capital to keep them solvent.

Those banks’ analysts, and other Wall Street pundits, spent the day spreading rumors of a full percent Federal Reserve discount rate increase on Wednesday, June 15. They are hoping a big “relief rally” of stocks can be ginned up later in the week when the Fed does not do that.