Dollar strength is fast becoming an Achilles heel for global economies, already grappling with geopolitical uncertainty and unmanageable inflation. Sterling’s plunge this week after a stunning HM Treasury announcement added a layer to FX market turmoil. Tom Orlik, Dan Moss and Andreea Papuc join. We also speak with Justin Fox on how labor market participation in the US could help the Fed.
Welcome to Bloomberg Opinion. I'm Vonnie Quinn. This week, I think the emerging markets Pride Dan Moss on how emerging markets X Britain no joke are coping with f X turmoil. We'll also speak with Justin Fox on just who needs to start participating in the US labor force to help the fed out. First though, to the crisis starting in Britain. Sterling and guilt's plummeted after new Chancellor Quasi Quarter unveiled a mini budget, the markets rejected. The Bank of England boked too, but hasn't pledged any emergency activity. I asked Bnoomberg Economics chief economist Tom Orlick to join, so Tom, you can call it alarm shock, markets taking fight. These are all headlines I've seen this week to describe the reaction to the new Chancellor of the Exchequer in Britain announcing forty five billion pounds of tax cuts along with the wave of borrowing. What happens next? It seems like markets had no idea how to handle this, So I think the challenge here is that the new Chancellor of the Exchequer in the UK, quality quass Hole, announced an unsustainable basical package. He's announced very substantial tax cuts but no offset from a drop in public spending. Now the market see of the UK is now on an unsustainable trajectory, and that's why we're seeing this extremely unusual combination of a sharp rise in borrowing costs for the UK government even as the pound fells off. Um what happens next, Well, there's a kind of potential emergency solution. The Bank of England could step in with an outsize hike in interest rates. That would restore a bit of stability to the pound, but it would come at a serious cost. The UK economy very sensitive to interest rates. A big hike, for example, would hammer the housing market. To get a fundamental solution, we really need to look at the origin of the problem. Until the British Treasury comes out with a credible plan for ensuring debt sustainability, it's tough to see this problem going away now. Guardon did talk about coming out with something in November that you know, he promises will calm the market, some kind of a strategy to put debt on a downward path. But what Robert could he possibly pull out of the Treasury's hat? So I didn't think there is an easy solution from here, Vonnie. Yes, we could have hikes from the Bank of England, which would stabilize the currency, but add additional burdens for an already very fragile economy. On the fiscal side, the most straightforward solution to this is for Quatang to either reverse course on some of the tax cuts or make an unpopular commitment to cut public spending now. Either or some combination of both of those could reassure the markets that the fiscal trajectory for the UK is now more sustainable, but neither of them would be politically popular. Why would it not be sustainable? How our traders so convinced that Britain can't enact some kind of are gonna ask type piscal policy over the next couple of years. I think Karwen is a little bit picking and choosing with the indicators which he points to to support his argument there. I think if we take a look at the move in UK borrowing costs, if we look at the move in the pound, clearly the markets are now questioning if the UK is on a sustainable trajectory now, how can you sort of square the circle? How can you convince the markets that the finances are actually going to be sustainable. Well, there's really sort of three variables which Quartung has to play with, and he will probably have to play with all of them. There's tax they just committed to massive tax cuts. Maybe they're going to have to roll back some of that commitment. There's spending. The fundamental issue here is that the commitment to tax cuts wasn't matched by a commitment to spending cut spending cuts at this point when so much of the UK is suffering and struggling to make basically massive energy costs exactly not really politically palatable. And the last piece of it is the idea that growth is going to solve all these problems. That old idea, going back to Ronald Reagan and his economist Laugher, that if you cut taxes, you drive growth higher, and you end up with more money coming into the government's coffers, not because you're taxing more, just because the economy is growing more quickly. So I think Qua Tong and the Treasury will also be trying to make the case that yeah, if you look at the tax numbers and the spending numbers, doesn't quite add up, but don't worry we're going to deliver on growth. Well, and remind me, doesn't Britain and the new administration also have to negotiate some trade deals, so that's not done right, So it's not like the pike can grow until that's done. So the US and China declared trade or on each other under the Trump administration. The UK went one better and declared trait or on itself by exiting the European Union, um the biggest sort of single trading block in the world. Now, the brexity is that, don't worry rexting the European Union, but that's going to give us freedom to negotiate trade deals with all the different other countries around the world. And if we add all of that, art's going to more than offset the cost of exiting the European Union. Well, I'm a brit I wish them luck on delivering on that agenda. So far it seems a bit harder than they anticipated. So this all is turning very sour. And you have the Bank of England desperately trying to hold on to its credibility because it can't lose credibility, along with the Treasury and the whole country. A commendators from Larry Summers to strategists like Manstermun talking about literally the words emerging market now when they talk about Britain which would have seemed far effected a week or two ago, how far affetched is it now? Or what kind of performative activity are we going to need from somebody in authority in order to restore some kind of confidence in Britain. So I think the fundamental problem here is that the new Chancellor of the Exchequer stood up and almost in his first statement convinced the market that he didn't care about fiscal sustainability, and of course that has triggered enormous costs with the rise in borrowing costs for the UK government and the plunge in the pound. Fundamentally, what is required to write this ship is for the same Chancellor to stand up and convince the market that actually, yes, he does care deeply about growth, he does want to deliver on an ambitious growth agenda, but he also understands and will credibly commit to delivering on fiscal sustainability as well. It doesn't look very good for the Trust administration, does it, Tom. I don't think this is going to go down in history as the most auspicious staff for any new administration every body. Let's put it like that, Bloomberg Economics chief economist Tom or Like. As the FED prepares for the unemployment rate to go up as part of its campaign detained inflation, part of the Fed's hope is that perforce participation rises. In other words, that people previously not even looking will become part of the labor force again. That would push the unemployment rate higher, for sure, but it wouldn't push people currently in jobs out of jobs, so less painful pain perhaps, to put it in contact, labor force participation was at or above sixty three before the pandemic. It's slow to sixty as the pandemic hits. It's now back up to sixty two point four. Bloomberg opinion columnist Justin Fox has been looking at various cohorts and finding some data that might surprise. So Justin, there's a belief out there that through the pandemic, people fifty five and over left the workforce and droves, and that that was exacerbating a trend already fifteen years in the making. But it turns out that that premise is actually false. Tell us more it's partly just that I'm fifty eight years old, and when I look at these reports about oh, fifty five and older labor force participation fell a lot during the pandemic and is still actually kind of falling, while most other groups have gone back. And then I look at people my own age that I know, but also just look at the statistics for the fifty five to fifty nine age group. It's actually up over the course of the pandemic, and so that just caused me to start looking a little more into it. And basically, people in their late fifties are actually slightly higher labor force participation than before the pandemic. Those in their early sixties it's a little lower, But for the people above sixty five, there's been a real drop. That drop has been smaller in percentage terms than the one point seven percentage point drop in overall fifty five and older labor force participation, which just seems weird. So people in their early seventies have seen a smaller labor force participation drop than the overall fifty five and older. And what it is is this thing that the economists called composition effects. It's just that within the fifty five and older age group. The age distribution is changing. What it is is there's the baby Boomers, and well I'm one of them too, but just barely. And the baby Boomers are simply a bunch of years where birth rates were higher than before or after. And so the oldest of the Baby Boomers are turning fifty eight this year. So when you look at the overall fifty five and older age group, it's starting to be filled at the young end by members of Generation X, and there aren't as many of them now in general after about age forty. The older you get, the less likely you are to be in the labor force. So as that happens if you have a big group of people now aging into their sixties and seventies and the smaller group of people aging into their late fifties, that just sort of automatically is going to cause participation rates to decline, even if participation rates of every age group within there is not declining at all. So you have to be very careful when you look at the data before you pull assumptions out of it and say, oh, everyone over fifty five just decided that life should be different to upter COVID. It's not like that at all. Early on, early retirement was this phrase for it, and when you looked at it, retirement wasn't up for people under sixty five. It was up for people over sixty five. And maybe they were retiring earlier than they had planned to, because there definitely was a leap for people in their late sixties and early seventies. Aren't that many of them working, but the numbers have been going up for a long time. So yeah, it's just there's definitely been a drop, but it's concentrated among people over sixty five years old. You know, A it's kind of understandable. COVID is really dangerous if you're over sixty five and so not exactly wanting to go into the office, or I mean, right before the pandemic, McDonald's was starting to recruit senior citizens to come work there. And it's like, maybe not a great idea, Yeah, exactly. So it's not that there hasn't been any decline. And and I actually, after writing this piece, I've did an age adjusted version and basically, half of the decline in fifty five and older labor force participation is an actual decline, and half is this statistical composition effect you did find that there are two groups for whom participation has defined substantially, and they may not be the ones that we would assume. Right. There are two groups under age sixty who have seen labor force participation decline from before the pandemic, and it's people in their early twenties and in their late thirties. So the early twenties you could maybe see so the pandemic is not exactly a time to go looking. It's very difficult interview. You don't even know where you really wanted. You don't know what businesses are going to be around after the pandemic, right, And a lot of people also delayed, took a gap year, so they're still in college now when they wouldn't have been otherwise at age twenty three or whatever. One other factor that I didn't write about, but the economist Adam Ozomac pointed out to me on Twitter, is that there's a bunch of twenty two year olds who got a bunch of money from various pandemic relief programs, and if they were still living at home, they probably still have all that money. So there's just less of an absolute need to get out on the job market. But the late thirties is a little more surprising. Yeah, I mean, it does seem like it would have something to do with childcare, because people in their late thirties are pretty much the most likely group now in the US to have small children. But what's interesting is, and this is true overall, women are now above their pre pandemic levels, both in that late thirties age group and for the entire prime working age. So while participation for women is up, male labor force participation overall continues to decline. Now, we've known for some time the participation for prime age men, so fifty four has been seeing an accelerating decline recap for us Why, Yeah, for men, I mean, some of it is stuff like people just staying in school longer, more people going to college, and some percentage of it is men taking on more responsibilities at home. But clearly most of it is a larger group of men than women who are just completely disconnected from work. And we're seeing that playoffs in polls and in elections. And yeah, I mean, and that's been a phenomenon. You know, there's a lot of talk about it over the past decade, and I imagine we will start talking about it again because it will continue to be, you know, and one clear reason for it is because men are much more likely to have criminal records, be ex convicts, and it's just been really hard for people to come out of prison and get into the workforce. So that's clearly part of it. But there are also just other issues with the kind of jobs that have been created and what men feel comfortable doing and are willing to do, and in general, men are struggling in school in a way that women aren't. One encouraging thing is it's clear, at least right now, the job market has been very good for non college graduates, so maybe that will help justin I guess the bottom line is we should rethink our assumptions about older workers. They're there and they're working, yeah, and to write and I guess what it is is, I just don't think there's a huge number of older workers who can be brought back into the workforce. There definitely are some, and you're and you're seeing the numbers keep inching up, but definitely people sixty five and older, you know, they keep getting older every year and and and it's reasonable that more of them would want to be out of the workforce. The oldest baby boomers are turning seventy five now, so you know they should probably. You know, obviously some people can keep working forever, but a lot of people don't want to and have saved up enough money that they don't have to. So I guess what it is is, if we're looking for sort of quick things that can increase labor force participation, we should probably spend more time thinking about what's going on with people in their early twenties and late thirties and trying to fix whatever hurdles there are. Bloomberg Opinions justin Fox we continue now with our review of currency turmoil. This week, I spoke with Bloomberg Opinions Dan Moss. So, Dan, if you look at w crs on the Bloomberg year today, it's really quite a site to see. All the majors, with maybe the exception of the Brazilian real and the pay so are down versus the dollar, and most of those by double digits. Turmoil unleashed in currency markets seems to be getting worse by the week. Are we in full blown f X crisis mold globally? No, I wouldn't say it is an ex crisis globally. What we are seeing though significant reverberation of US dollar strength, magnified in specific instances by local idiosyncrasies. You know, there's been a lot of attention volume on the agonist of the British pound in the past few days, justifiably, so you can't really talk about that without mentioning Japan's adventures in the currency market. Thursday evening at global time, Japan intervened to buy ying. They've had plenty of interventions selling it. They bought at this time. That's the first time since Epochal year for currencies China. Almost every day in our China is rolling out some sort of tweet towards rules and regulations to cushion the decline in the U are and I'm not stopping the depreciation. Were at some point to within obviously and presentage point to per dollar right now, and it's just continuing down even with the intervention. There are sound reasons for that. China's economy is not in a great state. We're used to in past decades during times of global economic softness, China kind of riding to the rescue. That's not happening anymore. The PBOC is never far from what's going on in Chinese markets to have a daily fixing. They limit fluctuations. They're not trying to stand against market forces. They are trying to mitigate some of the more extreme manifestations of that. You look at overnight volatility. So many pairs are seeing such activity, reverberation from the strong goaler are increasingly making themselves held in developed economies. What's unnerving about the situation the UK right now is British authorities find themselves managing a reputational crisis. Now it's one thing that inflation manage. That you've got slow growth, you can stimulate a bit, but we're now busy for the UK government is now busy distancing itself from this e M tag no less a person than a former US Treasury secretary. It's really quite incredible monthmore un Larry Somers, as you mentioned, so many people talking about Britain as an emerging market. But let's move to the emerging markets because obviously it's one thing for developed markets, as you say, with developed capital markets, but how do em and frontier economy survive. We've seen places like Pankistan and Turmoil, We've seen default. What happens in Hungary, where the foreign is down, Lira in Turkey down, Argentina. I think the emerging markets prey. Look, we've had this narrative off and on for the better part of two decades, which is all about emerging markets decoupling from the dollar finding their own strength. But the episodes that we've seen of late sort of put a line to that. There's not a lot an emerging market but the exception of China can really do about this other than don't kick own goals. Dollar strength is such that any country that's perceived to be winging it or engaging in indulgences is going to get picked off, right or wrong. That is the way the UK fiscal package was perceived a day after the Japanese intervention. Look, it's king dollar, and the question is what does king dollar do with the Kingdom don How much can export oriented economies benefit from currency weakness in order to show a domestic activity, let's say, even as their external deadloads get heavier. I mean there is a point beyond which even export oriented economies can't take this anymore. Right, Well, in theory, it's great for an export dependent economy. However, it's got to be the demand for the stuff. Now we saw an update to O E c D Global growth for CUFF. That was a very significant cup. Where I'm sitting in Southeast Asia, China has been both a big source of export and import tom and we're just not seeing that because China's economy is in retreat. So what do you do? It's a really tough one. Are we going to see more defaults and more pressure on organizations such as the International Monetary Fund? So let's go back twenty five years in Southeast Asia where I'm now sitting. The IRONF was the first port of core. But don't underestimate the ill will fostered by the very, very harsh conditionality that the IMF imposed. And in many instances the IMF was, if not caused, then certainly midwife to significant political dislocations. Now you can say, hey, it brought true democracy to South Korea, the first opposition Canada was elected. It brought a complete reorganization of governance in Indonesia. Malaysia rolled the dice on capital controls and kind of got away with it in the short term, that at the price of significant reputational risk and a long term split within the ruling party. So the Ironmas has to be there, but the countries have to be willing to go to it, and certainly emerging markets in this region know that it ain't a free lunch. Bloomberg Opinions don Mass to return to the story of the week now, and that is turmoil and FX markets across the globe. Bloomberg Opinions Andrea pop Book joins so Andrea Bloomberg Opinions. Done Mass told us that emerging markets can do really very little in the eye of dollar strength. His advice actually was to pray, and he was only a little bit being tongue in cheek. Where are the dangers most obvious right now? Yeah, Look, I don't think it's only emerging markets that can do very little. If you look around, there is very little that anyone, including China and Japan, can do. In the last week, we saw Japan come in and intervene to prop up the yen, and while that did have an immediate reaction, I guess if you look at the level of the yen right now, it is not much below where the Ministry of Finance and the Bank of Japan came in last week. And also we have got a Chinese yuan falling to a record alone, and again it seems that China is perhaps less determined to go in there and stem that slide. And the reason is, if we step back, this is the green bag pretty much steam rolling every single currency around the world. And look, it is a very classic example of interest rate differentials playing out. We know that the FED is determined to keep going with interest rate increases to bring down this runaway inflation. And as long as that keeps going on, you will continue to see the dollar strengthen. And I think you know, in very simple terms, what we are seeing is higher US rates, capital outflows out of emerging markets, especially China. And yes, it's not just the emerging markets, it is everywhere exactly. And you mentioned China's you and the on shore has weakened two above seven twenty two versus the US dollar. Now, obviously it's different in the basket of currencies. But China, even if it's been offloading US government debt for some time, it still holds mountains of US How does China navigate these waters? Yeah, and look it looks at the moment it is easing its grip. It is, for want of a better word, becoming more comfortable. I don't think it's that, but I think it realizes that it cannot stand in the way of this higher US rate. And so keep in mind, China has its own issues with the fact that it's clinging to this COVID zero policy. It has the property market worlds, So you are not likely going to see the accommodative monetary conditions in China and any time soon. You are unlikely to see China lifting grades anytime soon. I think, like probably every other central bank, it just needs to stay tight. At the moment. It seems that everyone is just waiting to see what is going to happen, because there is very little they can do to stand in the way of the U s dollar strength. But also we're also staring down the barrel of a potential global recession, you know, So where do people want to park their money. They want to park their money, I guess in the safest asset and that remains the US dollar. Well, and then when you see the International Monetary Fund literally asking the British Treasury to reevaluate its unfunded tax cards just announced, I mean, that's quite the event on the currency stage as well. Are you seeing any little pockets of opportunism. I suppose, I'm asking, is there any chance that we're going to see a currency collapse or a peg collapse anytime soon? The Internactional Moretive fund that was really interesting. Look, I think it just adds to the uncertainty out there. And I think one other potential pocket of uncertainty that hasn't had much attention this week is the Euro and the Italian election, and that is potentially another geo political uncertainty that could rattle the Euro. There are some analysts expecting the Euro to fall to point nine five. So we haven't it's seen the effect of this. I don't want to call it a crisis, call it a currency mailed down. We haven't seen everything play out, so there are still potential headwinds out there for the likes of the Euro. But it's a testament to exactly how much has been going on and how crazy everything seems now when we talk about a currency crisis and theory, I guess it's a nominal depreciation of at least twenty Obviously, in practice it can be different percentages and so on, but Sterling did meet that definition for a moment. The end is down more than the Swedish crona and A Region crona too, and New Zealand and South Korea aren't far off. This is obviously just versus the US dollar. It feels like we're storing up all kinds of problems for the next six months to a year. Andrea, is that stoking too much panic to say that? Oh? Look, I think you're right. I mean, I'm looking now at the appreciation we have seen this year, and yes, the tame biggest currencies against the US dollar are inching their way, if you like, towards the twenty percent. It's a moving fist, isn't it. It's so hard to say when this is going to end. It definitely feels like a crisis. No one has kind of attached that label to it yet, but I think it's fair to say that that is potentially what we are looking at for the next six months. And I think one of the things that's worth keeping in mind is that it seems that every central bank, from the Bank of Japan to the People's Bank of China, they are on their own in trying to defend their currencies. There's no concerted effort for central banks to come together to do anything it's sort of every man for himself in central bank land. And what we have seen so far is that the effect of coming into proper your currency is very short term. Uh well, and beyond that, exchange reserves will be declining in certain countries, not just because they're being used for those purposes, but also because if you're not an exporting country, and if you don't have commodities, and if you're mainly an important country, if you need food supplies and so on, you're in deep trouble. We've seen socioeconomic unrest in various places, not just for this reason and for many reasons, but everything is interconnected. At this point, Should we be concerned about particular countries? Yeah, Look, you're right. I mean, how far do you want to deplete your reserves given that what you're trying to achieve seems to have almost no effect at a time when you have got countries dealing with elevated cost of living inflation is a problem. So yeah, and I think at this moment these are kind of theoretical things that could happen. But definitely, the longer this goes on, the longer that will become a problem. And you're right, will government step in. Will we need to see more fiscal support probably emerging countries And the moment you see that, are you going to see budget deficits blowout? And these are questions that will probably come a lot clearer the longer this goes on. But these are definitely risks, right, And you mentioned energy. I mean oil has retreated to an extent, But if there were to be another shark and oil or another markets, would central banks even have the ability to withstand those sharks? I mean certain central banks are very weakened at this point, that's right. And look, oil has come down, and I guess that is one positive thing, especially if you're a country that is a major oil important in the sense that it takes some of that pressure of inflation. And you know, having these weak currencies also helped with controlling inflation to a certain extent. So that is I guess one of the positive But I think all of that at the moment seems to be drowned out by the fear of capital outflows out of emerging markets, especially out of China. We know that China is incredibly concerned. As the one weakens, you are likely going to see this capital outflows. So it's a very fine line that these especially emerging market countries are trading right now, but this massive outflows of capital and how do they navigate that? You know, I think they are in a very precarious situation, especially as we're talking about a currency crisis. So there's some major hurdles ahead to some of these governments that will potentially have to come in and held fiscally. It's almost ironic that the one government that we have seen do that in recent weeks as the UK government, and look what that spurred. That's right, and I think for the UK government, the timing was very unfortunate, simply because inflation is just so high, so it's almost like adding fuel to the fire with these text cuts that they announced, and you know what you're saw in financial markets. It really was a loss of faith in the new UK government. You can understand why they were doing it, but it seemed reckless given the fact that you have got the Bank of England trying to bring down inflation like every other central bank around the world. So, Andrea, what countries are you watching most closely? Where could we see the next move? Well, look, it's interesting one one country that it's worth keeping an eye on is Australia. The economy here, it remains quite strong. We've got record employment. Unemployment rate is at a record low. You've got a central bank that has been listing interest rates and is determined to do so. And yet the dollar now looks like it could test the psychological level of fixed cents after it's broken through these technical levels. So that's one currency that you know was quite resilient, but again it is a victim of what's going on globally. And it seems that even the Osie dollar can't expect to remain elevated. It has fallen about twenty percent this year and with training around sixty four now. But yeah, I mean the fact that six pcents is inside, that's one currency that's worth keeping an eye on. It too, is falling into the dollars worldpool. Bloomberg Opinions. Andrea Papock there that does it for this week's opinion. I'm at Vanney Quinn on Twitter, or send your thoughts to v Quinn at Bloomberg dot net. Don't forget. We're also available as a podcast on Apple, Spotify, or your preferring platform. We're produced by Sarah Livesay till next time. On bloomerg Opinion,