Busy economic week and its Bermuda implications
Here are my observations of a very interesting last week in the world of finance and economics and the implications for Bermuda.
Dollar dominates: the US dollar achieved parity with the euro. The euro currency, established by the provisions in the 1992 Maastricht Treaty, has been in financial existence since 1999, with coins/paper notes floating three years later. The French franc, German mark, Italian lira, Spanish peseta, and many more country currencies disappeared as European singular country interests finally collaborated into forming the European Union.
This collective effort from the original start-up countries transcended more than 40 years of planning, persuasion, politicking, and member country agreements to adhere to financial policing.
I remember well its launch as it traded below the US dollar for several years, then rising to its highest valuation of $1.60 in July 2008, wondering at that time how a new community state currency could be valued higher than the US dollar, still considered the dominant global currency denominator. Today, the euro is used by the populace of 19 European countries with numerous other countries pegging their currency to the euro valuation.
Inflation exacerbates: the ordinary family is still seriously challenged in planning for unexpected increases in so many general household foods, goods and fuel. Canada, the US, and the UK all report higher inflation rates varying from 7 per cent to 9.5 per cent, while consumers in those jurisdictions (and Bermuda) are demonstrably cutting back on staples.
Researching various economic opinions, the predictions are somewhat vague. Sources of inflation include food, energy prices, supply-chain disruptions, lower supply of workers post-pandemic, consumer demand, and geopolitical Ukraine-war-linked conflicts and others. The main takeaway is that inflation probably will not last for years, could ease up by year-end, and may drop suddenly if some of these issues are resolved.
China conflates: various finance media and institutional spokespersons have indicated more caution on China-based investments — citing risk exposure, Hong Kong, regulatory and governance changes, Covid-19 protocols, citizen mortgage boycotts, and a decline in confidence in the country’s economy and assets.
Alternative global currency update: media thoughts and investor speculation continue around the potential creation and implementation of an alternative global reserve currency (besides the US dollar) that would be centred on commodity-based currencies.
This is a fascinating new strategy possibility being considered by other dominant economies, evocative of the quote “whoever owns the gold (add oil and rare earth metals) makes the rules”.
It is well worth taking the time to peruse the article headlined “Why the US dollar will be replaced as the dominant global currency — sooner than you think”, by Frank Giustra in the Toronto Star. Keep in mind that financial literacy is all about understanding the big-picture economic environment, because what goes on out there globally, will eventually impact locally.
A Bermuda note rolled over: the Bermuda government was successful in rolling over US$500 million in debt. It is worth noting that the new ten-year Bermuda Government note simply replaced the principal value of two redeemed notes.
In a positive note — excuse the play on words — the new Bermuda note’s initial offering was oversubscribed by five times ($2.5 billion) an indication of strong interest in Bermuda’s stable credit quality attributes.
Further information on the new note is listed on the Bermuda Stock Exchange – which by the way is becoming an increasing international investment influence partner – under BSX Fixed Income Securities, page 6.
What does all this mean for Bermuda islanders?
Dollar-euro parity: travel, goods, possibly food imports are cheaper since the Bermuda dollar value is pegged to the US dollar. Eurozone tourists may reduce vacation plans due to increased cost.
Inflation: not going away any time soon, but it might end as quickly as it started — we can hope.
As interest in Chinese investments by the western world appears to be declining, does this mean fewer cheap clothes? Perhaps, landfills will take slightly longer to fill up, if the “wear once and discard” routine becomes unpopular.
Bermuda’s debt rollover means only slightly higher interest rate payments to foreign investors.
Again, the question arises: why don’t we have a Bermuda bond offering just for Bermuda islanders? Wouldn’t you like to get a 5 per cent return from our own government, the one that taxes us infinitely. One could think of it as a discount against our other high-cost-of-living expenses.
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• Martha Harris Myron is a native Bermudian, author of the Bermy Island Finance Blog - Illuminating All Things Financial Bermuda and The Dawn of New Beginnings: Bermuda’s First Financial Literacy Primer. Contact me at email@example.com