US deficits and the Federal Reserve’s quantitative tightening are sucking dollars out of the international financial system, to the detriment of emerging markets. From Adem Tumerkan at palisade-research.com:
One of the most important macro-situations that’s developing right now is the looming U.S. dollar shortage.
I don’t mean in the sense that banks don’t have enough dollars to lend out – I’m talking about the foreign sovereign markets.
Here are some of the things that’s causing liquidity to dry up. . .
1. Soaring U.S. deficits – the United States’ need for constant funding is requiring huge amounts of capital
2. A strengthening U.S. Dollar – which is weakening the rest of the worlds currencies
3. Rising U.S. short-term rates and LIBOR rates – courtesy of the Federal Reserve’s tightening
4. The Fed’s quantitative tightening program – unwinding their balance sheet by selling bonds
These four things are making global markets extremely fragile. . .
I’ve written about this dollar shortage before – but things are getting much worse.
As a recap of why this all matters – when the U.S. buys goods from abroad, they are taking in goods and sending out dollars. Otherwise said, they are selling dollars out of the country in return for goods.
Those countries that sold to America now have dollars in return. But since countries don’t have a mattress to store their money under – they must find liquid and ‘safe’ places to put it.
With the dollar as the world’s reserve currency – and U.S. treasury market being the most liquid – countries usually take the dollars and funnel them back into the U.S. via buying bonds.
Since the U.S. is a net-debtor – inflows of new money is constantly required to pay out outstanding bills. So there’s always fresh debt that foreigners can buy.
And if you haven’t checked lately, the national debt is over $21 trillion – and growing faster. The latest Congressional Budget Office (CBO) report stated that at the current rate – U.S. debt-to-GDP will be over 100% by 2028 (if not sooner).
So how does this tie into a dollar shortage?
Let me break it down. . .
The always-rapidly-growing U.S. deficit requires constant funding from foreigners. But with the Federal Reserve raising rates and unwinding their balance sheet through Quantitative Tightening (QT) – meaning they’re sucking money out of the banking system.
These two situations are creating the shortage abroad. The U.S. Treasury’s soaking up more dollars at a time when the Fed is sucking capital out of the economy.
Not too mention the strengthening dollar and higher short-term yields are making it more difficult for foreigners to borrow in dollars. Especially at a time when Emerging Market’s are imploding.
To continue reading: Looming Dollar Shortage Getting Worse As Emerging Markets Implode