T he generations of these years have had the lot to experience three events destined for history books: theSept. 11, the financial crisis of 2008 and the 2020 pandemic. We will discuss at length the consequences of the three and what makes them comparable to each other, but for now at least one fundamental difference does not seem to have been much discussed. It is not the most important, but it starts to be evident: for the first time the dollar responds to a great shock of globalization by weakening on the international currency markets.
The weakness of the dollar is a novelty: why?
Usually the opposite happened. In the seven weeks that followed attack on the Twin Towers, the greenback gained 5% on the weighted average of the other major currencies. After bankruptcy of Lehman Brothers, with the global financial system paralyzed, the US currency rose 13% in just over a month. In both cases the shocks were spreading from the United States, the country hit hardest. Yet the reaction of international investors, who sought security in the dollar, was rational: for them the greenback was not just theagain of the international monetary system and clearly the first reserve and exchange currency; it was a currency whose promise of substantial macroeconomic stability over time would never fail. For this reason, in 2001 and 2008 panic, even if it spread from the United States, led to an international rush to the dollar.
This time it was different. Since the explosion of the pandemic, the greenback has depreciated by 11.6% on the weighted average of other currencies (according to the St. Louis Federal Reserve) and more than 13% against the euro. Yet this health crisis does not come from the United States and does not hit them harder than other mature economies: for example, the fall in activity in 2020 was almost double and the recovery in 2021 promises to be slower in Europe than in America.
The anomaly and export issues (also Italian)
It therefore remains to be seen why this is the first major global shock of the century after which many have tried to protect themselves by selling, not buying dollars. Not a small question: the future of the exorbitant privilege will depend on the answer it allows Americans to borrow with far fewer limits than the rest of the world and thus become buyers of last resort of European and Asian products. An essential part depends on this question of the export of industrial powers such as Germany, Japan, Italy or South Korea.
The surge in public debt
So really different this time and confidence in the dollar as the system’s stable anchor is failing? In the short term, to be almost completely excluded. As he points out Matteo Maggiore of the Stanford Graduate School of Business, the share of federal government debt held by the investing public in the United States grew from less than 40% of US gross product before the 2008 financial crisis to over 100% in the year of the pandemic. but yet 10-year US government bond yields remain just 1.29% last Friday: less than inflation, which in the United States is now 1.4%. This is also due to the enormous increase in the creation of money for market intervention by the Fed (just see the graph on the page on the unparalleled surge in the dollar money supply). In other words, the US central bank is monetizing unprecedented amounts of public debt. But still the public of creditors around the world are accepting a loss in real terms, just to hold a redeemable US Treasury card in ten years. There could be no stronger demonstration of faith in the stability, present and future, of a coin.
Movements in government bonds and stock market fears
Yet even these signs are ambivalent. Not everything you see looks normal. Since the beginning of the year, the yield curve of American debt has become much steeper and in a way that is not entirely reassuring: n for the stability of the markets in the face of the risk of shocks in the short term, n for the underlying trends in a more distant future. Because everything is in motion. Since the beginning of the year, the market yield of the ten-year Treasury has risen by 38%, that of the one-month T-bill has fallen by 66%. What can such large and fast movements mean?
One-month bonds are widely used as collateral required by banks for investors who borrow to take speculative positions on the market.
The fact that T-bills today are suddenly in high demand, to the point where yields plummet even as inflation accelerates, suggests that Wall Street banks are asking investors to replenish – that is, strengthen – those collateral for not they feel quite protected from what they think could happen in the markets in the coming weeks. There is a growing fear of a correction after a long run in the lists in recent months. Then, however, the surge in ten-year Treasury yields remains to be explained, while the corresponding Bunds, for example, remained substantially stable.
Biden’s stimulus plan
This was determined by the announcement of a $ 1.9 trillion stimulus package by the new administration of Joe Biden. That plan is for pouring direct subsidies into the pockets of many tens of millions of Americans and adds to a similar recent $ 900 billion package signed by Donald Trump just before last Christmas. This is the last legacy of the now ex president’s debt to his constituents. Biden’s instead serves to turn the page from the recent past and make the troubled middle class forget the rise in inequalities, the stagnation of lower and middle class incomes and the anger that brought Trump to power. But, in common, the two planes have aspects that lead one to wonder if someone will end up seeing the greenback as a prisoner of a bubble. Together, the packages of Trump and Biden are worth in a few months a sum equal to 14% of the American product, paid in debt into the pockets of the Americans.
The social model (unbalanced) and the stability of the currency
There is almost nothing in there to deal with them causes of inequalities n the vested interests that feed them: no opening of the higher education market, where annuity positions and cost cartelage abound even among universit dell’Ivy League; very few projects of infrastructure; not even a beginning of discussion on how to counteract the growing concentration of the market power of large groups, which increase profits at the expense of consumers.
So a huge stimulus plan that looks like a version of the Basic income inflated by the steroids of ever-increasing public debt and furiously monetized by the Fed, it not only risks generating inflation and instability in 2021.
It also looks like a model that in the long run it cannot have a stable currency, if it does not find a less unbalanced social model.