The US dollar is getting perilously close to losing its status as the world’s reserve currency. Should it cross the line, the 2008 financial crisis could look like a summer storm.Read the rest here.
Yes, worries about insolvency in Europe dominate the headlines. Last week, Standard & Poor’s cut Spain’s bond rating to BBB+ — a clear sign that Europe’s financial crisis is far from over.
But America’s escalating debt problem is far more likely to precipitate a truly global crisis, because the dollar has for decades played such a central role in the world economy.
How bad is the US problem? Former Treasury official Lawrence Goodman recently pointed out that investors are shunning US bonds and notes; the lack of other buyers forced the Federal Reserve to buy “a stunning . . . 61 percent of the total net issuance of US government debt” last year. Like many others, he warns that ballooning debt puts the US economy at risk for a sharp correction.
But the even larger risk is the potential loss of the dollar’s “reserve currency” status — a key support of the world economy for the last four decades.
It started with the 1973 Saudi commitment to accept only US dollars as payment for oil, followed by OPEC’s 1975 agreement to trade only in dollars. Trading of other commodities came to be priced in dollars, reinforcing the dollar’s “reserve” status.
As a result, central banks worldwide have held onto large reserves of dollars to facilitate trade. That, in turn, has enabled the US to print much larger amounts of its currency, with seemingly little inflationary consequences. It’s also made it easier for Americans to import more than they export, to consume more than they produce, and to spend more than they earn.
But all that is changing rapidly.
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3 comments:
Cyclical dollar weakness is an intentional Fed policy. The Chinese paper tiger can only nibble around the edges of being a financial power by playing house with other emerging markets.
A lack of buyers for Treasury debt? Maybe in a parallel universe. Those Fed programs with cute names, like Quantitative Easing and Operation Twist, price other buyers out of the market for particular Treasuries.
"the lack of other buyers forced the Federal Reserve to buy “a stunning . . . 61 percent of the total net issuance of US government debt” last year. Like many others, he warns that ballooning debt puts the US economy at risk for a sharp correction."
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I have wondered about this for some time. How much of the Fed's purchases are financed by sheer monetization? Does anybody know? How much of that $2T in private sector-toilet paper the Fed bought through sheer monetization has been re-purchased by buyers with 'real' dollars?
The Fed is using monetary policy to keep the prices of assets--sovereign debt instruments--artificially high. The Fed is sitting on 'assets' of purely nominal $2T value. So just as the dot.com bubble was reflated by the housing bubble, so the housing bubble is reflated by the sovereign debt bubble. When this one pops, it will be a titanic shift. Somebody please prove me wrong.
All of the Fed's purchases are monetization other than those financed by fees or reinvested returns or Congressional appropriations.
The toxic assets aren't necessarily worthless, but various issues' values depend on the existence of a liquid market. Liquid markets freeze during financial panics, by definition.
The Fed is keeping Treasury prices high, not because Treasuries don't enjoy a liquid market, but to satisfy monetary policy aims, specifically, to counteract high monetary demand.
When the Fed decides to jack up rates, there'll be a Titanic shift after the usual 12-18 month lag, but not the one you're considering. China, Russia, and the other emerging markets have been indirect recipients of Fed liquidity, and the rug will be jerked out from under them. The sound that you'll hear in the distance will be my laughter at the Chinese economic miracle.
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