www.armstrongeconomics.com
Civil unrest is continuing to rise in Hong Kong after crowds of mask and
helmet wearing demonstrators fled the area to escape hundreds of riot
police firing tear gas. The entire issue has arisen from Lam’s
government pushing legislation that would allow extraditions to China, a
move that alarmed locals and multinational companies. The clashes have
embarrassed the government in Beijing. The demonstrations came on the
anniversary of the former British colony’s return to Chinese rule.
In 1863, the Hong Kong Government declared the silver dollar (a form
of international currency issued by many nations) to be the legal tender
for Hong Kong. In 1866, the government began issuing a Hong Kong
version of the silver dollar. The silver standard became the basis of
Hong Kong’s monetary system until 1935, when during a world silver
crisis, the government announced that the Hong Kong dollar would be
taken off the silver standard and linked to the pound sterling at the
rate of HK$16 to the pound.
In 1972, the Hong Kong dollar was pegged to the U.S.dollar at a
rate of HK$5.65 = US$1. Between 1974 and 1983, the Hong Kong dollar
floated. On October 17, 1983, the currency was pegged at a rate of HK$7.8 = US$1 through the currency board system.
The problem Hong Kong will face is as the financial crisis in Europe
erupts it will push the Greenback higher. If Hong Kong keeps desperately
trying to hold the peg, they will import DEFLATION and
turn their economy down very hard all because of international events.
The models we showed at the Singapore Conference targeted 2019 for an
important turning point.
The Hong Kong dollar peg climbed as much as 0.19% to 7.7987 a dollar
on Tuesday, crossing the 7.8 threshold. Local interbank rates remain
near a decade high, outstripping the income a trader can expect on U.S.
dollars. That’s undermining a carry trade — sell Hong Kong dollars, buy
greenbacks — that had been profitable for years.
The tight liquidity is coinciding with dramatic street protests.
There has been a surge in borrowing costs suddenly. Companies are
hoarding cash.
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