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Trouble brewing in Hong Kong


Hong Kong has for decades been one of the most stable places in the world.

When the British took Hong Kong over in the late 1800s, it was nothing more than an irrelevant backwater made up of fishing villages and illiterate fishermen.

But after a few decades, it became one of the most prosperous places in the world.

And that wasn't an accident. Hong Kong allowed unbridled capitalism to dominate and it worked extraordinarily well.

Sure, a handful of people got super wealthy. But, in general, there's been bountiful prosperity across the board.

As a result of the prosperity and bent toward capitalism, Hong Kong has become one of the most important financial centers in the world. And for decades, it's had a very well capitalized banking system.

And one of the key reasons for that is the Hong Kong dollar (HKD) has been pegged to the US dollar (USD) since the early 1980's.

The peg is a double-edged sword for Hong Kong.

The key advantage is international stability. As long as the USD remains the global reserve currency, the fact that it's interchangeable with HKD means economic stability.

The disadvantage is that the peg doesn't give Hong Kong any independence. They have to follow US interest rate policy regardless of whether or not it's good for them.

And that's definitely caused problems, which are accelerating this year.

The US is just coming off a decade of ultra-low interest rates meant to boost domestic growth. But HK, which wasn't in a dire, economic situation to begin with, has also had a decade of low rates.

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