zondag 1 juli 2018

The Dollar Is Oversupplied

In order to assess the effect of a credit crisis on the dollar, we must therefore gauge how extended the dollar appears to be in terms of its international circulation. The most recent numbers from the US Treasury TIC data is for the position in June last year for foreign ownership of US securities, and for end of year 2016 for US ownership of foreign securities. Putting to one side these timing differences, since 2006, dollar-denominated investments owned by foreigners totalled $8.52 trillion more than US ownership of non-dollar foreign investments, up 275% since 2008. This is illustrated in the following chart...


We cannot say for sure this represents something close to Triffin’s tipping point, where the quantity of dollars in foreign hands will undermine the currency. But according to the World Bank, global GDP has only increased by about 20% since 2008, suggesting that there are, indeed, far too many dollars in foreign hands relative to economic activity, compared with ten years ago. This being the case, the dollar could be set to fall on the foreign exchanges during a credit crisis, when investment liquidation pressures increase, and currency hedges are initiated. Importantly, it could also be the desired outcome for the Fed, which is firmly wedded to the idea that falling prices at the retail level must be avoided at all costs, and a lower currency could be used with zero, or even negative interest rates to help support domestic prices. In these circumstances, gold, and perhaps even cryptocurrencies, will be seen by investors as safe-havens from inflationary monetary policies, whose primary purpose will be to contain debt liquidation and protect the commercial banks. However, this is not the whole picture with respect to exchange rates.
It is the nature of fiat currencies that their individual values are inherently uncertain, each one reflecting purely subjective values in the foreign exchanges. There can be little doubt that the current equilibrium between, say, the Argentinian peso and the US dollar would be disturbed in a global credit crisis by undermining the peso. We cannot be so certain of the exchange rates between, say, the euro and the dollar. Nor can we be so certain how official Chinese policy towards dollar investments may change, or indeed the position of other sovereign wealth funds. All we can say is the foreign world outside America is overexposed to dollars, just as it was in the late 1960s, when the remedy was to sell them for gold....