How many US Dollars are enough?

by Shaun Richards

The issue of what you might call King Dollar is not one which gets the coverage it deserves. Instead the media coverage tends to highlight claims that its period of rule is on the way out with China demanding more use of the Yuan or Russia the rouble and so on. Or we get the various proclamations that we need some sort of world currency which to my mind are more like pie in the sky thinking than blue sky thinking. When we looked at the IMF on the I noted the suggestions that its SDRs ( Special Drawing Rights) could become the world currency but there are all sorts of flaws there.

So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

If we look at the issues of the Euro can anybody even imagine trying to apply a fixed exchange-rate to the whole world? We would have all sorts of individual booms and busts before we even get to the idea of a joint interest-rate. That is before we get to the track record of the IMF after all can you imagine trying to get its currency accepted in Argentina and Greece.

Supply of US Dollars

It is not as if the taps have been turned off.

The numbers: The Federal Reserve’s balance sheet expanded to a record $6.6 trillion in the week ended April 22, an increase of $205 billion from the prior week, the central bank said Thursday.

What happened: Holdings of U.S. Treasurys rose by $120.5 billion to $3.9 trillion. The central bank has been purchasing Treasurys at a rapid pace in a bid to restore functioning to this key U.S. financial market. The central bank’s holdings of mortgage-backed securities rose $54 billion to $1.6 trillion. ( MarketWatch)

As you can see the balance sheet is expanding at a rapid rate and let me just add that if you really think the US Federal Reserve is buying US Treasury Bonds to “restore functioning to this key U.S. financial market.” I have a London bridge to sell you. The truth is that it is implicitly financing the US Budget Deficit as we note that the ten-year yield is a mere 0.58% and the long bond is a mere 1.17% in spite of surging expenditure.

We can now switch to the money supply for further insight because we have noted in the past that QE does not go straight into the numbers as one might assume. Looking at the ECB data has shown that what should be clear cut narrow money creation seems to sometimes go missing in action. However we are seeing quite a surge in the money supply as we note that the narrow money measure ( M1) only went through US $4 trillion as March began but by the 13th of April was already US $4.73 trillion.

I’ll be back in the high life again
All the doors I closed one time will open up again
I’ll be back in the high life again
All the eyes that watched me once will smile and take me in ( Steve Winwood )

Putting that another way the annual rate of increase is 11.6% the annualised six-monthly one is 15.7% and the quarterly one is 23.4%. You can see which way that is going and I would point out that only a month or so ago 11.6% would be considered very high.

Peering into the detail we see that the surge in narrow money is mostly deposits, There has been a rise in cold hard cash, dirty money as Stevie V would say but deposits have risen by around US $700 billion over the past couple of months.

Sending Dollars To Friends Abroad

This a subject I have covered throughout the credit crunch and NPR seem to have caught up with.

As the global economy shuts down, the U.S. Federal Reserve has begun sending billions of dollars to central banks all over the world. Last month, it opened up 14 “swap lines” to nations such as Australia, Japan, Mexico, and Norway. A “swap line” is like an emergency pipeline of dollars to countries that need them. The dollars are “swapped,” i.e., traded for the other country’s currency.

The numbers here have ballooned and are the missing link so to speak in the balance sheet data above. As of last night some US $432.3 billion have been supplied to foreign central banks. I will let that sink in and then point out that it means banks in those countries or regions either cannot get US Dollars at all or can only get them at an interest-rate which challenges their solvency.

As to the demand then we always expected it to be mainly from the following too although not always in this order. Bank of Japan US $215 billion and the ECB $142 billion. Particularly troubling from the Japanese point of view is that as well as being the leader of the pack they are needing ever more. When we note that the Bank of England has only asked for US $27.3 billion which is low when you look at the size of the UK’s banks we see the Bank of Japan needed another US $19 billion overnight.

One factor of note is that the Norges Bank requested some US $3.6 billion for 84 days yesterday. So the heat is on for at least one Norwegian bank.

Also the extension of the swaps to Emerging Markets as requested by @trinhonomics has been used. The Bank of Korea has taken US $16.6 billion, the Bank of Mexico some US $6.6 billion and the Monetary Authority of Singapore some US $5.9 billion.

Exchange Rate

In spite of the balance sheet rises and the effort to become in effect the world’s central bank by supplying US Dollars the exchange rate remains firm. We can look at it in terms of the broad index being 123.2 as opposed to the 114.7 it ended 2019 or simply that it was set at 100 in 2006.

Comment

There are plenty of influences here but one thing we can be sure of is that the US Dollar is in demand. Let me give you some examples.

Kenya shilling hits a new all-time low of 107.6500 against the US dollar according to data from @business

 

Rupee falls to all-time low of 76.87 against US dollar in early trade ( Press Trust of India from Wednesday)

 

At the start of the year, $1 bought you 4.00 Brazilian reals. It now buys you 5.53 reais. That’s a 38% rise for the dollar (27% fall for the real) in less than four months. ( @ReutersJamie )

We have looked at India before and back then going through 70 seemed significant. As to Kenya an interest-rate of 7.25% is not helping much is it? Then we have Brazil showing how the Dollar has impacted South America.

So economics 101 is having another bad phase because a massively increased supply is not pushing the price down. In come respects it may even be creating more demand because if you know there is a ready supply then you may then use it more. Ouch! After all the much lower oil price should be reducing the demand for US Dollars and indeed the negative price such as it applied should be depth-charging it.

Once I built a tower up to the sun
Brick and rivet and lime
Once I built a tower, now it’s done
Brother, can you spare a dime? ( Bing Crosby )