Economic Turmoil: Rates, Prices, and Faith

● Fed-Pope, BOK-Fortune Teller

The Hidden Truth of Non-Reserve Fiat Currencies and the Global Economy: The Fed, the Nixon Shock, and the Reality of the Bank of Korea

This article will comprehensively and systematically explain all the key aspects necessary to properly understand the global economy, including the essence of the fiat currency system, the Nixon Shock as the starting point of dollar hegemony, price fluctuations and inflation over the past half-century, and the status and role of central banks (especially the Bank of Korea), in chronological order.
It will help you understand how modern economic problems are connected to the fiat currency system and what risks we should pay attention to in the future.

1. What is the Fiat Currency System?

A fiat currency is a legal tender that is not based on physical assets such as gold or silver, but is circulated solely on the trust of the state or central bank.
Such a currency is “paper money printed by the government,” and its value inherently depends on the government’s credibility.
The representative global fiat currency is the US dollar.

The core problem of fiat currencies is the 'possibility of unlimited issuance.'
From the perspective of governments and central banks, they can print money at will during crises to put out immediate fires in the short term, but this leads to severe inflation and asset value distortions in the long run.
Historically, the average lifespan of fiat currencies is only about 35 years.

2. The Nixon Shock (1971) and the Birth of the Fiat Dollar

In 1971, President Nixon abruptly announced the suspension of the exchange of US dollars for gold. This is known as the ‘Nixon Shock.’
This event led the world to transition from a gold-exchange fixed exchange rate system to a complete fiat currency system.
This was the starting point for the “fiat dollar” we use today.
The current fiat dollar is about 54 years old – counting from 1971, it has about 14 years left (based on the usual lifespan of 35 years).

The 'Fed (US Central Bank)' is an absolute and decisive power in the global currency market, while central banks of non-reserve currencies like the Bank of Korea have very limited actual roles and influence.
In this context, if the Fed is the Vatican Papacy, the BoK is akin to a neighborhood fortune teller.
That is, the fate of the global economy changes with a single word from the Fed, but the BoK finds it difficult to exert its power in the face of global capital flows, regardless of its policies.

3. The Relationship Between Fiat Currencies and Price Increases, Inflation

For 54 years since the fiat system began, the global inflation rate has soared sharply.
Inflation has become extreme in developed countries such as the United States, Europe, and South Korea.
This is the result of governments and central banks printing and pouring tens to hundreds of trillions of won into the fiscal, financial, and asset markets during crises.
In other words, the fiat currency system inevitably causes inflationary pressures and asset imbalances.
In this process, asset prices (real estate, stocks, etc.) soar and real economic imbalances occur.

4. Limitations of the Bank of Korea and the Reality of Non-Reserve Currency Countries

The Bank of Korea ostensibly pursues an independent monetary policy, but in reality, it is swayed by the decisions of the US Federal Reserve and global capital flows.
That is, when the dollar is strong, the won is weak, and the BoK has no choice but to follow policy decisions according to US interest rate decisions.
The reason is that non-reserve currency countries such as Korea are vulnerable in terms of foreign exchange reserves and credit ratings, and once capital outflows begin, there are no suitable cards other than strong responses such as monetary tightening and interest rate hikes.

5. Structural Risks and Socio-Economic Problems of the Fiat Currency System

The amount of fiat currency issued is determined by the needs of politics and government.
This process always prioritizes the government’s short-term political and economic interests over the market’s ‘supply/demand logic.’
Eventually, socio-economic problems such as wealth inequality, asset concentration, financial instability, and inflation are repeated in short cycles.
The major economic problems we face today (youth housing difficulties, asset bubbles, stagnation of real wages, etc.) are ultimately structural problems resulting from the government’s abuse of fiat currency and mismanagement of policies.

6. Global Economic Risks to Watch Out For

The structural limitations of fiat currencies as ‘political currencies’ are expected to continue for the time being.
As long as dollar hegemony is maintained, it will be very difficult for non-reserve currency countries (such as Korea) to secure policy independence.
In particular, they are vulnerable to US-China conflicts, rapid increases in global debt, recurring inflation, and volatility in currency values.
Ultimately, discussions on a new global monetary order (transition to digital currencies, revival of gold-based systems, SDRs, etc.) may begin in earnest within the next 10 to 20 years.

< Summary >
Fiat currency is paper money issued solely on the trust of the government.
The dollar became the key fiat currency with the Nixon Shock in 1971.
Since then, the Fed has controlled the global financial market, and the power of non-reserve central banks such as the BoK is weak.
Global prices and asset values have soared due to the government's money printing over the past 54 years.
The fiat system creates social problems such as inflation, asset imbalances, and financial instability.
Global economic risks will inevitably increase in the future, so we must closely monitor the direction of monetary policy and structural risk factors.

We structurally analyze the economic phenomena we are facing now, including non-reserve currency fiat currencies, dollar hegemony that began after the Nixon Shock, inflation, the policy limitations of central banks, and the possibility of global financial crises. We comprehensively address key issues such as sustainable monetary systems, asset market risks, monetary policy changes, inflation factors, and global financial stability, and objectively present future economic prospects.

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● Inflation Dip, Trump’s Tariff Tactics

2024 Latest Global Exchange Rate Trends and In-Depth Economic Issue Analysis

Key Issues at a Glance

This article systematically and chronologically explains the most important issues that influenced the economic trends of this period, including the reasons for the sharp rise and fall of the dollar exchange rate as of June 2024, whether there will be changes in US exchange rate policies, interpretations of various global inflation indicators such as CPI and PPI, US employment status, international oil price movements and the impact of President Trump’s energy policies, US-India tariff negotiations, major news from representative global companies such as Apple, and performance updates from large retail and retail companies.

1. Background of Exchange Rate Fluctuations and US Exchange Rate Policy

The won-dollar exchange rate recently fell to the early 1,390 won range, continuing a significant roller coaster pattern.
The US Trump administration has confirmed its position that it will “not include exchange rates in formal trade negotiations” (Bloomberg report).
The market interprets this as a retreat from the possibility of a currency war and sudden Plaza Accord, but pressure to intervene in exchange rates remains even without formal demands.
The US Treasury included Japan, China, and Taiwan as exchange rate monitoring countries and has Korea participate as well. Although there are no explicit demands, the market is reacting in advance to the possibility of a weak dollar.

2. US Price Indices (PPI/CPI) and Inflation Outlook

The PPI (wholesale price index) turned negative compared to the previous month, below expectations, especially the service sector, which fell -0.7% (the largest drop since 2009).
Although affected by declines in energy (-0.4%) and food (-1.1%), the main cause is margin compression. The effect of passing on supply and distribution margin sacrifices to consumer prices (CPI) is limited.
The final consumer price index (CPI) also fell below expectations. Living prices such as eggs, food, and manufactured goods are stable, and the wholesale price of eggs fell -39.4%.
Concerns about inflation due to tariffs have not yet been significant in terms of hard data, but if distribution companies can no longer sacrifice margins, price increases could begin in earnest.

3. US Employment Indicators Review ― Consumption and Real Economy Analysis

Weekly new unemployment claims and continuing claims both met or fell below expectations, maintaining a stable level.
Unemployment has not expanded significantly (although there are concerns about restructuring, the ‘solid labor market’ position is maintained for now).

4. Global International Oil Prices and Trump’s Policy Stance

WTI crude oil prices fell 3% in one day, fluctuating in the mid-$61 range. Trump is actively inducing lower oil prices through easing/restoring sanctions on Syria and negotiating with Iran.
Goldman Sachs analysis: Trump’s preferred oil price range is estimated to be $40-50 based on SNS and official statements, and if it exceeds $60, downward pressure will continue.
Excessive declines (below $50) pose a threat to domestic industries such as US shale workers.

5. US-India Tariff Negotiations and Global Trade Reorganization

India proposed a mutual agreement with the US to apply ‘zero tariffs’ (0%) to some items such as automobiles and pharmaceuticals. Trump sent a message for other countries to refer to.
Apple was expanding production in India to reduce costs and diversify risks, but Trump added pressure to ‘require US production for sales in the US’. Apple’s production costs/strategies will inevitably be reset.
The time has come to verify the coexistence of risks and opportunities in China tariffs, escape from China strategies, and increased proportions in countries such as India.

6. Global Major Company News ― Performance Trends of Apple, Boeing, Starbucks, etc.

Apple: Demands for production in India → China → the US are expanding global supply chain risks. Concerns about new product price increases (around +$50-100).
Boeing: A large-scale contract for 160 Qatar aircraft; the amount set by Trump ($200 billion) is exaggerated, and the actual amount is estimated to be around $96 billion.
Starbucks: Reviewing the sale of some stake in its China business → restructuring + local strategy shift. Intensifying competition with local companies such as Luckin. The strategy of hedging risks in the China business is beginning in earnest.

7. US Retail Performance ― Walmart, Dick’s Sporting Goods, Foot Locker

Walmart: Sales fell short of expectations, but EPS (earnings per share) met/exceeded expectations. E-commerce growth continues, and the company is defending its market share.
The CFO mentioned in an interview that ‘tariff impacts could begin to significantly increase prices from the end of this month~June’. Even mega-marts are indicating that they have reached their last line of defense, signaling a further rise in consumer prices.
Dick’s Sporting Goods/Foot Locker: Foot Locker focuses on urban areas, and Dick’s focuses on suburban retail → aiming for synergy through M&A. Foot Locker’s stock price +84%, Dick’s -10% (concerns about the burden of acquisition). Because the management environment of both companies is negative due to tariffs and demand slowdown, opinions are sharply divided: ‘difficulty + difficulty = synergy? vs. greater risk?’.

Concluding Points

This week, the global economy is experiencing a confluence of major trends, including exchange rate volatility, policy uncertainty, solid consumption and employment, restructuring/supply chain reorganization.
Global macro economic variables such as liquidity, exchange rates, international oil prices, prices, and trade negotiations are all operating simultaneously in both the stock market and the real economy. It is necessary to prepare for further volatility in the future.

< Summary >

The possibility of official intervention in US exchange rate policy has decreased, but market anxiety remains.
Price indices such as CPI and PPI are declining, and declines in energy, wholesale, and service margins have been confirmed.
Employment indicators are stable, and there is no sign of a rapid increase in the unemployment rate yet.
Downward pressure on international oil prices; Trump prefers levels around $40-50.
Tariff-free agreements, Apple and global supply chain strategies, US real/retail performance, etc., are complex issues intersecting.

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*YouTube Source: [Maeil Business Newspaper]

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