By Da Hsuan Feng/Haiming Liang
The US faces a multitude of challenges including the COVID-19 pandemic, with a significant number of businesses either facing closure or having closed, and unemployment being at an all-time high.
To turn the tide and stimulate the economy, the Federal Reserve has lowered the interest rate to zero, and more aggressively promoted quantitative easing. Which have increased the Fed’s asset liabilities from a steady $4 trillion since 2014 to $7 trillion in July in just three months.
US asset liabilities increase sharply
By the end of this year, the asset liabilities are expected to further increase to $8.5 trillion, which would be a jump of $4.5 trillion since the beginning of 2020.
Such a strategic monetary move is akin to a modern version of alchemy. So long as the US dollar’s exchange rate remains sufficiently strong, and the interest rates and prices remain stable, the world would accept unlimited quantitative easing by the US.
Using the above as preamble, the US can print more currency notes, and keep borrowing to finance its debt. And when the debt expires, it can simply “print more US dollar bills” to pay its “debtors”. In this way, the US can avoid repaying the principals and interests of old debts. This means the US can “raise funds” to stimulate its economy almost without any constraints.
While QE policies may have proven successful in the past, this time around the US administration has failed in its endeavor.
Many countries’ central banks and institutional investors, including the People’s Bank of China, are no longer willing to purchase US bonds in bulk.
They are reluctant because the impact of the pandemic on the global economy is no longer as serious as it was a couple of months ago. In fact, some economies have started to rebound, which has decreased the demand for more US dollars or US debt as a hedge－and a number of countries have been losing confidence in dollar assets.
For most of the second half of the 20th century, US dollars were printed with the words “Gold Coin”, meaning the greenback was backed by gold. But since 1971, when the US terminated the guarantee of exchanging dollars for an equivalent amount of gold, “Gold Coin” has been replaced by “Federal Reserve Note” on dollar bills, making the dollar “only” an IOU.
Since the dollar is no longer backed by gold, the phrase “In God We Trust” has replaced “In Gold We Trust”. So now if a person wants dollar bills redeemed, he or she has to approach the Almighty.
Of course, if the US government continues to issue new bonds to repay old debts, it would further increase its fiscal deficit. The risk of the US economy facing a mid-to long-term recession has increased and, as its collateral effect, any country holding US debt in bulk also faces high risks. In a sense, the US has planted a powerful financial time bomb that threatens all countries, China included.
Fed actions aimed at rescuing ‘Main Street’
In the past, the Fed’s large-scale monetary easing policy was primarily aimed at rescuing the financial system (read Wall Street). Now, it is directly aimed at rescuing “Main Street”, that is, American people’s basic livelihoods.
The Fed’s action, therefore, bypasses, directly or indirectly, the role of commercial banks as intermediaries, because credits are now given to large and small businesses, as well as consumers in dire need of life-saving finance. Effectively, the government has become the “lender of last resort to the main street”.
Fed’s move to put pressure on other countries
Since these companies and individuals are staring at bankruptcy and the Fed has made it its mission to protect US companies, the unemployed and the soon-to-be unemployed, its heavy-handed financial measures are understandable.
It is also understandable that the Fed wants to ensure the US economy can rebound and achieve a V-shaped recovery after the virus is contained.
Still, the Fed’s moves will put enormous pressure on other countries, including China, and its unlimited QE policy will encourage US companies and individuals to acquire large amounts of public or private loans, which will increase “consumption by the rich in the United States and production by the global poor”.
In the current global economic situation, the excessive supply of the dollar is de facto punishment of countries whose currency exchange rates fluctuate during unexpected external disturbances.
– The Daily Mail-China Daily News exchange item
