We have all heard of exporting energy resources and human capital (basically, migration), but what about exporting something intangible like inflation?
How is it possible that, in addition to goods and services, the United States has caused price increases in other countries for so many years, thus undermining their economic stability?
First of all, it is often unintentional and ends up being a side effect of several factors: the world’s heavy dependence on the dollar and the Fed’s actions, coupled with uncertainty.
You see, for more than a year, Fed members have been trying to restore price stability by raising interest rates, leaving a carry trade and increasing demand for “greenbacks”.
As a result, the DXY rose (the dollar strengthened), while the value of other currencies, such as the Chinese yuan, the Japanese yen, the euro, the Indian rupee and the British pound, fell.
The problem is that since the U.S. dollar is involved in almost 90% of currency transactions, half of world trade, and three-fourths of Asia-Pacific trade, this becomes a problem.
In particular, the cost of importing food and fuel for these countries increases, so companies must increase final prices to compensate for the losses.
And this is how the United States unwittingly exports inflation, causing economic instability and disrupting the welfare and stability, if I may say so, of other nations.
In short, on the one hand, the basically universal use of the dollar makes calculations more convenient, but on the other hand, it has adverse consequences.
To be more precise, according to the IMF, a 10% strengthening of the dollar leads to an average inflation rate of 1%. This pressure is especially felt in developing markets.
We have discussed the reasons or the principle of exporting inflation, but what about possible solutions to the problem?
For example, would abandoning the dollar or the current trend towards de-dollarization in favor of trade in national currencies help?
In reality, the problem would only get worse. Suppose you signed a multi-million dollar contract to import industrial equipment using Pakistani rupees a couple of months ago.
It is time to pay, but the country’s currency has appreciated by more than 9% in the last month. You would have suffered financial losses if you had not foreseen this scenario.
Obviously, you will have to raise prices for end consumers to cover the costs. Now, let’s consider that this is not only a problem for one company but for 80% of importers.
The conclusion is that although the dollar has some negative consequences, they are much smaller than the use of national currencies.
In addition, there are no problems when withdrawing dollars.
More specifically, in India, strict monetary legislation prohibits taking Indian rupees out of the country. So what to do with them if they are kept in a local bank?
Monetary intervention is one of the few options available to countries to counteract the adverse effects of a strengthening dollar.
The local central bank must intervene to support the domestic currency. The risk is to be accused of currency manipulation, and the imposition of sanctions could follow.
In short, “it is better to make peace with a known evil than to seek refuge in the unknown”.