It is easy to attack the Fed without truly looking at the magnitude of what is taking place. There is a lot happening with the banking system and it is all tied to the monetary situation. The last couple weeks have exposed the liquidity crisis that is at hand. However, as we are starting to see, things in Europe are much worse.
As we stated repeatedly, the world is going through a shortage in the US dollar. This is true for both the domestic economy along with international operations. The belief in central banks reserves is being exposed to be a farce. They do not provide currency to the economy.
Another issue is the fact that people keep bringing up how the world does not want the dollar and it is going to zero. The usual is to point to the drop in Treasuries held by foreign countries. Hence, since they are going down, the reason must be due to the fact that nobody wants it.
The reality, sadly for the global economy, is much different.
FIMA Skyrocketing
Deflationary money is not a positive. For some reason, people mistakenly think this is the answer. Unfortunately, things can go south very quickly.
The USD is required. Countries are not de-dollarizing but, rather, a de-dollared. Basically, they are selling securities because they need US dollars. When it comes to Europe, it is worse: they are broke.
While the Treasuries drop according to the most recent numbers, we see a different story with the Fed.
In 2021, it opened the Foreign and International Monetary Authorities (FIMA) Repo Facility. This is another project in a long line of swap arrangements the Fed started. Here we see, contrary to what many say, the need for dollars by the central banks of the world.
This is basically a program to provide liquidity, an issue we see clearly now.
The Federal Reserve established a repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility). By creating a backstop source of temporary dollar liquidity for FIMA account holders, the facility can help address pressures in global dollar funding markets that could otherwise affect financial market conditions in the United States. Its role as a liquidity backstop also helps to support the smooth functioning of financial markets more generally.
We can see from the most recent h.4.1, the facility was accessed to the tune of over $60 billion in the last couple weeks. This almost offsets all the selling of Treasuries by the foreign countries.
Negative Interest Rates
The ECB has done enormous damage to the economy of the EU. It decision to push the negative interest rate policy (NIRP) have blown up the bond market.
Silicon Valley Bank experienced what happens when liquidity cannot be accessed. The bank had an abundance of assets yet couldn't turn it into cash. The combination of long dated bonds being off-the-run along with the value of them dropping by more than 50% make liquidity impossible.
This is a problem that European banks face. The fact that a portion of their balance sheets are in European sovereign debt does not bode well for them. Outside the EU, these assets are not being accepted as collateral. This means it is getting difficult for these banks to turn to the market.
Here is where the Fed has to step in. It is the one entity tasked with providing liquidity in USD. The other central banks have no ability to do this for either the corporations in that country nor the banking system.
Credit Suisse was a bank with a lot of problems. However, we cannot expect it to end here. Deutsche Bank made headlines and is of major concern.
The Fed is doing what it can to provide the liquidity to the global system. The years of negative interest rates are now rearing their ugly heads. Capital flows means the EU is going to get left behind. This was shown the last 5 years based upon the Net International Investment Position for the UniTed States.
The USD Will Strengthen
Currencies operate like everything else, with supply and demand having a large impact. The shortage of the USD along with the built in demand due to global debt means that upward pressure is going to exist for a while.
Estimates are that global debt is now pushing $350 trillion with more than half of it denominated in USD. This means that companies all over the world need dollars to make their payments. They are also required for refinancing of the debt which is going to be the preferred route in many instances.
The deaht of the dollar will not be due to weakening. The end will be when it becomes so strong that countries around the world are forced to take other measures.
At the moment, the Fed is trying to provide the liquidity the banking system needs. This is going to get a lot worse before it gets better. They are likely too late to the game.
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it was really interesting. I think that the American policies that have been applied to the world will be involved so that countries can take measures. If we consider the political power of the dollar , countries will have to do something sooner or later, and the future will determine this!
If the USD keeps appreciating against their currencies, they most certainly will do something. That is where the fall of the USD is likely to come from.
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At some point, I think there will be a decision the Fed will have to do and that is to ensure the dollar is strong or to ensure that the global economy will work. There are conflicting interests and I do agree that if the Fed focuses on the dollar then the rest of the world will be in trouble.
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Right now the focus is on liquidity. The Fed realizes countries need access to it. That is why the swap lines were originally set up.
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I agree also✌🏼
These developing nations can no longer bear the weight of the US dollar on their shoulders anymore. Some will re-align more with China and Russia, while others will adopt Bitcoin and/or other cryptocurrencies.
Well they have to do something although the USD has dropped a bunch since it peaked.
The problem is they keep increasing the amount of debt denominated in USD.
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Too bad. But, is there a permanent solution to that? What do you think?
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The answer is more money in the economy. This is what happens with deflationary money. We see it in the USD and eurodollar systems.
Bank balance sheets are contrained.
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Downvoted a lot I notice. So bad for Hive.
The Fed is definitely caught between a rock and a hard place. It has to lend liquidity to the US Treasury, which only has ~$187B left in cash on its balance sheet, while also having to lend to all the US commercial banks, mainly the regional ones, while simultaneously lending USD liquidity to Europe, Mexico, Canada, Australia, Asia, and Africa. it's a lose-lose-lose
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