Just, until a year ago, the US economy relied on a very specific paradigm.
Taking advantage of the international reserve currency status of the dollar, it ran on a cash-aflush economy into which high amounts of dollars kept entering through mechanisms like the Federal Reserve and the fractional reserve lending of private banks. This setup did not cause inflation like it would if any other country tried it because the reserve currency status of the dollar kept the demand for the dollar high, preventing it from having an excessive supply as countries kept keeping high dollar reserves and using the dollars to do international trade. On top of this, the existing paradigm caused the dollar to be the prominent currency to invest in across the world, while also boosting up the US financial institutions thanks to the rich from across the world keeping their wealth in US banks. The US was the country that controlled the global financial system.
All of this ended up in a ‘zero interest economy’ which created an inflated stock market awash with overvalued stocks. Investors were awash with cash, it was easy to throw money on hundreds of ideas in a go, and even if just one of them succeeded, it would easily wipe the losses from all the failures because the valuation of that company would skyrocket in the inflated stock market, rewarding the investors with immense returns. So much so that many companies’ stocks were inflated to high heaven without being profitable or having an actual business model and some even constantly losing money — with some of them being overvalued up to 60 times the value that they should have had. The US enjoyed uncontested dominance of the international financial system, and as a result, it had so much wealth in the form of stock value.
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But Everything Came Crashing Down Within A Year
The Ukraine War started in spring 2022. The US effected endless sanctions on Russia, from confiscating the money of the Russian state, Russian companies, and even private Russian citizens that were deposited in the US-controlled financial system. On top of this, it forced the international electronic payment system, SWIFT, to expel Russia.
This has ended up being the final straw that broke the camel’s back. Having seen that the US could easily twist the international financial system it dominates to its ends and even confiscate the money of any country or person using it, many countries realized that it could be them at any point in the future if the US foreign policy decided so and as a result, they became open to using other currencies than the dollar for international trade to have financial sovereignty.
In this environment, both China and Russia rolled out SWIFT alternatives for international trade, and they grew with lightning speed:
Many countries started moving to dump the dollar to trade with Yuan, Ruble, and Rupee along with their currencies, foremost the Gulf Countries including Saudi Arabia.
Suddenly, the now-unused dollars started flowing back to the US as major economies and resource producers started trading in their currencies thanks to the SWIFT alternatives which caused major inflation. This prompted the US Federal Reserve to increase interest rates to counter the inflationary pressure.
Higher interest rates did two things in one go:
1 — Hampered the profitability of entire economic sectors due to falling demand and rising costs of borrowing, even putting in peril a lot of companies due to tight margins and cost of borrowing
2 — Caused the market to drop stocks in favor of bonds and other interest-based investment vehicles
Both of these had a massive impact on the US stock market. Companies across the spectrum lost their values. Tech was one of the most impacted, with a lot of companies losing up to 60% of their value.
The stock market could no longer rely on the cash-awash zero-interest economy that rode on the reserve currency status of the dollar. Suddenly, the investors could no longer continue the practice of funding hundreds of wild startup ideas to have just one of them succeed and make a fat exit that was enabled by the inflated stock values.
Business fundamentals like profitability suddenly became important again, causing a major impact in the tech sector. Tech companies that rode on inflated valuations had to cripple their manpower by laying off legions of highly educated and experienced employees up to the order of 400,000 people in 2 years just to boost their financial fundamentals.
The companies are trying to keep up with the economic environment by cutting costs, suspending new initiatives, and doing layoffs. They are hoping to ride the downturn until things somehow change, and the zero/low-interest economy returns again.
It Won’t Be Coming Back
The geopolitical situation is never going back to what it was.
The countries that started trading in their own currencies won’t stop doing that and again start buying unbounded quantities of dollars.
Neither the US has the military power to coerce other countries to do that anymore — Russia and China are now well established as military powers, and they are backing and defending all the countries that leave the orbit of the US and join the ‘Global South’ bloc. These countries are happy with being able to control their own national resources in this new setting, without the US or the international institutions that are controlled by the US dictating how they have to use those resources.
It could have been possible that the dollar gained some of the traction it lost when the geopolitical currents around the Ukraine war ended, but the US is not helping that at all by the actions it takes — ranging from trying to open new hostilities with China and trying to coerce anyone it can to join it to trying to keep the Ukraine war dragging on. Nor is it doing anything to gain back the trust it lost by using the international financial system that it controlled against the countries it targeted — it’s trying to double down on the anti-free-trade, subverted effort to wage economic war on the targeted countries and trying to rob the wealth of those countries that was deposited in Western financial instruments. All the countries see the writing on the wall: “Today it’s Russia and China. Tomorrow it could be us. Better to distribute our risk to many different currencies and financial instruments.”
Therefore there is little reason for literally 80% of the world to come back to the dollar when this ends. Now that international settlement alternatives to SWIFT exist, there is no reason to tie into the untrustworthy Anglo-American-controlled financial system that could confiscate their wealth at any point in time for whatsoever reason. It’s certain that when the war ends the pressure on the dollar may ease somewhat, but the dollar will never return to where it was before.
So there is no way for the zero-interest economy and the bloated stock market to come back.
The Investors Must Adapt
Investors must adapt to the new normal.
Non-stop funding moonshots and expecting gigantic IPOs riding on inflated stock prices won’t be feasible anymore.
Neither will the `growth’ based business model that seeks growth without any sensible future profitability.
It won’t be possible to outperform every other economy by just dumping money into Wall Street stocks and waiting for them to over-inflate.
Pumping up the prices of a given stock through PR shenanigans and endless media promotion will become pointless.
Also pointless are short-term shenanigans to draw quick profits by using financial schemes that destroy profit-making companies.
Now the business fundamentals of every company are important. Their long-term strategies, the strength of their products, the strength of their organizations, the size of their ecosystems…
The new investment environment will likely be more similar to other developed economies where the investors invest for the long-term without expecting immediate miracles and do it across industries and multiple companies.
This is definitely a better, healthier, and more stable format when compared to the earlier one — it relies on actual fundamentals of the companies and the economy instead of a magical non-inflationary cash influx. It can encourage a saner, more solid investment environment that could produce real value instead of highly profitable hot financial air that does not contribute to society. However, the existing investment and financial institutions would be unwilling to drop their existing practices and instead, they may try to eat the society from the inside out to keep the profits flowing, even if it would last only a short while more.
But what’s certain is that what was there before is not sustainable and both the investor class and the public must come to this realization and adapt…