The Federal Reserve has finally decided to shift gears by increasing interest ratesIn a pivotal meeting scheduled for Wednesday, the Fed will raise the federal funds rate by 25 basis points and deliberate on when to start trimming its balance sheetThis move is poised to significantly alter the global flow of the dollar.

The question on everyone's mind is whether the markets are adequately prepared for this changeWhat transformations will occur across the financial landscape following this rate hike? As early as late last year and into the beginning of this year, analysts had warned that the dollar's momentum would shift from "hot" to "cold," predicting that 2022 could be a turning point in global monetary easing.

One of the critical elements to consider is the cessation of quantitative easing (QE) by the Federal Reserve, which signifies a stop to the creation of base money

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If the banking system is compelled to decrease the creation of M2, heavily indebted economies may find themselves trapped in a liquidity shortage.

A sharp deceleration in money velocity (GDP/M2) signifies a decline in the overall efficiency of the economyThe vast amounts of debt are compelling banks to channel increasingly more of the created M2 currency into merely refinancing old debts rather than investing in productive activities.

This situation can be likened to the substantial debt burden in the United States, which resembles fat accumulating on the walls of blood vessels; as blood flow slows, the deposits worsen, leading to high blood pressure that externally constricts liquidity in the financial markets.

As the Federal Reserve embarks on rate hikes and balance sheet normalization, a tightening of dollar liquidity in the markets is inevitableThis condition will undoubtedly increase volatility in the bond market

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The fate of the stock market, on the other hand, hinges significantly on the availability of liquidity in the financial arena, particularly within the treasury market.

Recent years have shown how turbulence in the U.STreasury market can trigger crises such as the cash crunch in September 2019 and multiple stock market circuit breakers in March 2020. What implications will this forthcoming rate hike and balance sheet reduction bring? Is it merely an instance of yet another stock market upheaval? Or could the abrupt reversal of the dollar’s circulation lead to unanticipated consequences? What contingency plans does the Fed have in place to mitigate potential crises?

Simultaneously, the high inflation in the U.S., escalating warfare, and the cascade of financial sanctions against Russia exacerbate the precariousness of the dollar systemThe extent of the crisis could be deeper and more far-reaching than we might expect.

Recently, Zoltan Pozsar, a prominent former Fed official and the global short-term interest rate strategist at Credit Suisse, ignited significant debates on Wall Street with his latest report

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He posits that the existing monetary system is collapsing and that we are witnessing the birth of a new global monetary order referred to as Bretton Woods III.

On July 1, 1944, representatives from 44 nations gathered in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference, which solidified the framework for the dollar-centered international monetary system, known as the Bretton Woods system.

Over the subsequent 78 years, this system has undergone transformation, generally moving through two phases: the first, known as Bretton Woods I, stretched from 1944 until 1971. This era was characterized by a direct connection between the dollar and gold, fixed at $35 per ounce, enhancing the linkage of world currencies with the U.Sdollar.

The second phase, commencing in 1971 and continuing to the present day, is referred to as Bretton Woods II or the Jamaica Monetary System

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Following the disconnection of the dollar from gold, the dollar became linked to global oil trade and settlements, evolving into a currency backed by the trust in U.STreasury bonds, underscored by U.Ssovereign credit and economic clout.

The recognition of the dollar as a global reserve currency relies heavily on international trust in the U.Sand the existing financial frameworkHowever, Pozsar insists that Bretton Woods III is approachingHe asserts that trust crumbled after the U.Sand its allies began seizing Russian foreign reservesSuch actions undermine the previously held belief that wealth deposited in institutions like the International Monetary Fund was risk-free.

Even absent the current geopolitical conflicts, the reckless expansion of dollars—over $30 trillion in national debt—paired with the declining purchasing power of the dollar amid repeated financial corrections has left countries grappling with the consequences.

The crisis enveloping the U.S