Hayes noted that the dollar-yen exchange rate is a core part of the power struggle, which he believes is the most important global economic variable.
Arthur Hayes, co-founder and former CEO of BitMEX, has addressed the ongoing power tussle among world powers, particularly the United States, Japan, and China, in his latest publication. These powerhouses are doing the most to preserve their currencies and power at the expense of the long-term good of other nations. He addressed the current geopolitical and economic crises between the dollar and yen and their implications for the global financial system.
Hayes revealed that policymakers prioritize short-term solutions that preserve their power, benefits, and existing order, even if they inflict pain on the public in the long run. He tagged these actions as ‘easy button’ solutions but proposed what he thinks is a better solution that could also weaken the dollar.
How Japanese Yen’s Value Can Be Increased with Minimal Effect on USD
Hayes noted that the dollar-yen exchange rate is a core part of the power struggle, which he believes is the most important global economic variable. The current situation leads to what he terms a crypto Valhalla.
The former BitMEX CEO cited a scenario where the Federal Reserve, acting on orders from the Treasury, can legally swap unlimited amounts of US dollars for the yen with the Bank of Japan (BOJ). By providing the yen to the BOJ, the Fed increases the supply of Japanese currency in the market, potentially strengthening the yen relative to the dollar.
He asserted that if Japan does not become a forced seller, it will aid the United States Treasury in continuing to fund the government at negative interest rates. Hayes states:
“If Japan Inc., the largest holder of USTs, does not become a forced seller, it helps the US Treasury continue to fund the free-spending federal government at negative real interest rates. Otherwise, the Treasury would have to initiate yield curve control (YCC). This is the ultimate destination, but it must be forestalled as long as possible because of the apparent inflationary and possibly hyperinflationary effects.”
China’s Perspective and Concerns
However, this policy will not please China, as it is Japan’s direct export competitor. China is most concerned about weakening the Japanese yen, which will affect its export competitiveness. Hayes noted that China is also facing a deflationary downturn caused by the collapse of its property market and needs to create inflation to maintain a debt-based economy.
Amid this, the Asian country is also unwilling to devalue its currency, the yuan, as it could lead to high import costs. Hayes maintained that a weaker yuan could decrease the incentives for American manufacturers to restore production, which could affect the political future of President Biden. He said:
“If China devalues the yuan, jobs will continue to flee. If Biden doesn’t carry these states, he will lose the election.”
The BitMEX co-founder proposed an instant or nuclear monetary option in which China could sell its US treasuries for gold and then peg the yuan to gold, which could devalue the yuan against the dollar. This system could cause an issue for the Western Bank because it could show that they have been selling gold that they don’t actually have.
According to Hayes, the US dollar can be weakened, to reflate China’s economy and strengthen the yen without the BOJ raising interest rates, which is by using the dollar-yen currency exchange between the Fed and the BOJ. However, he pointed to the potential risk of an intense dollar-yen swap, saying that it could devalue the dollar far too much and eventually lead to the end of the USD reserve system.
