The Federal Reserve's impending decision to increase interest rates marks a significant shift in global financial dynamicsDuring the upcoming meeting, which is set for this Wednesday, an increase of 25 basis points is expected alongside discussions on when to begin reducing the balance sheetThis pivotal moment is not just an internal adjustment; it signifies a broader change in the circulation of the dollar across international markets.

As the wheels of monetary policy begin to turn, questions abound: Are markets adequately prepared for this shift? What transformations will unfold in the financial landscape once interest rates rise?

In our analyses from late last year and early this year, we alerted stakeholders that the tide was turning for the dollar flow, forecasting a year marked by a significant departure from prior monetary expansion, thereby establishing 2022 as a potential reversal year for global liquidity.

A cessation of quantitative easing (QE) by the Fed, combined with the consequent tightening in the banking system's ability to create M2 money supply, could lead to a liquidity crunch in economies already laden with debt.

The rapid decline in monetary velocity—expressed as GDP/M2—points to a deteriorating efficiency in economic activity, where overwhelming debt forces created M2 money into a cycle of refinancing rather than productive investment.

To illustrate, the vast U.S

debt resembles fat accumulating along the walls of blood vesselsAs the speed of blood flow (capital) slows, the buildup becomes more pronounced, leading to higher "blood pressure" that constricts liquidity in financial markets.

Once interest rates begin to rise and the balance sheet contraction commences, the dollar liquidity in the market will tightenThis tightening will certainly increase the volatility across the bond market, while the health of the stock market will increasingly hinge on the level of liquidity available, particularly that coming from the Treasury market.

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Treasury market can lead to severe repercussions; for instance, the cash crunch in September 2019 and multiple halts in the stock market in March 2020 were direct results of such instability.

However, the upcoming rate hikes and potential balance sheet reductions beg the question: Are we merely in for another episode of stock market instability? What unforeseen consequences might arise from a sudden reversal in dollar circulation? And what tools does the Federal Reserve have at its disposal to mitigate possible crises?

Simultaneously, with inflation climbing in the U.Sand geopolitical conflicts intensifying, particularly in the wake of sanctions on Russia, this episode threatens to be even more impactful than anticipated for the dollar-based global financial structure.

Zoltan Pozsar, a former Fed official and global short-term interest rate strategist for Credit Suisse, has recently stirred significant debate on Wall Street with his latest report.

He argues that the current monetary system is on the brink of collapse and that we are witnessing the birth of Bretton Woods III—a brand new world currency order.

A historic backdrop is essential to understand this assertion: On July 1, 1944, representatives from 44 nations convened in Bretton Woods, New Hampshire, during the United Nations Monetary and Financial Conference, ultimately establishing the dollar-centric international monetary system known as the Bretton Woods Agreement.

Over the next 78 years, this system underwent significant transformations, generally classified into two distinct phases:

The first phase, from 1944 to 1971, is termed "Bretton Woods I", characterized by a direct gold-dollar peg at $35 an ounce, with other currencies linked to the dollar.

Following 1971, we entered the era of "Bretton Woods II", also referred to as the Jamaica Monetary System

In this phase, the dollar decoupled from gold, establishing its association with global oil trade, gradually evolving into a currency backed by U.STreasury credit, underpinned by national sovereignty and economic strength.

The enduring global acceptance of the dollar, even after severing its gold ties, largely depends on worldwide trust in the U.Sand the existing financial order.

However, Pozsar posits that "Bretton Woods III" is imminentHe underscores that the confiscation of Russian currency reserves by the U.Sand its allies symbolizes the collapse of "Bretton Woods II". Without trust, previously perceived risk-free deposits in institutions like the IMF now face tangible confiscation threats.

Even in the absence of this conflict, the U.S.'s indiscriminate "printing" of dollars, exceeding $30 trillion in national debt, coupled with declining dollar purchasing power amid recurrent financial harvests, has long plagued economies worldwide.

The complexities of the current crisis surrounding the U.S