Fed has come to the rescue of a global economy slowing to stall speed
It has extended a lifeline to a China sinking ever deeper into a debt-deflation trap. The Fed has relieved pressure on the $13 trillion nexus of dollar-denominated debt traded offshore. The Bank for International Settlements says emerging markets have racked up $5.2 trillion of dollar debt – from companies in Brazil, or Kazakhstan or Korea. This understates the true scale of borrowing embedded in the derivatives market – FX swaps, forwards, etc – which pushes the dollar liabilities of non-US banks to over $35 trillion. This has to be rolled over continuously. “Much of this debt is very short-term,” said the BIS. The Hong Kong property market may start to come back from the worst crash since the Asian financial crisis in 1998. The Fed deliberately rescued China in 2016 because economic “blowback” from its currency crisis was hitting US shores. But there is a large caveat to this rosy global picture. It all depends on whether the Fed is ahead of the curve and delivers a soft landing;