FEDERAL RESERVE: WORLD’S CHEAP MONEY BARRON

From the beginning of the global economic shutdown until April, the U.S. Federal Reserve had loaned almost $500 billion to the central banks of other nations.

The Fed’s goal was to prevent panic sales of dollar-denominated assets by countries desperate to raise cash to treat virus victims and prop up their economies. Fire sales would have crushed the value of those assets, including those held by U.S. investors, businesses, and the Fed itself.

The flood of dollars into the world’s markets kept them calm and functioning relatively normally. 

An estimated 88 percent of the $6.6 trillion in daily global currency trades involve dollars. The dollar is also the most commonly used currency in international trade.

Most of the loans were made as “dollar liquidity swap lines:” the Fed lends dollars to a foreign central bank in return accepting an equal value of that country’s currency at market exchange rates. When the loan comes due, the country repays the loan, the Fed returns the currency at the original exchange rate, and collects interest.

As the global economy began to recover, countries started settling their Fed loans. By August, the total outstanding was just over $107 billion.

For countries without swap lines, the Fed began lending against those nations’ holdings of U.S. treasury securities. By April, the Fed had loaned $449 billion to 170 countries through the program.

On 29 July, the Fed extended its foreign support programs through 21 March and promised to leave them in place “until we’re confident they’re no longer needed,” said Fed chair Jerome Powell.

“The crisis and economic fallout from the pandemic are far from over,” he added. “People have become more dependent on the dollar than on any other currency.”

The euro and Chinese yuan had sought to challenge the dollar as the world’s leading currency. Those efforts were unsuccessful, in part because nations have learned the Fed will use its machinery to maintain the dollar’s value during uncertain times.

Although the dollar’s value has weakened as digital greenbacks have multiplied around the globe, it remains near its level before the pandemic struck and above its long-term average.

When Powell testified before Congress in June, lawmakers did not ask a single question about the Fed’s massive foreign lending program.

“Political support for the Fed to be aggressive” during the economic crisis “is widespread,” said William Dudley, former president of the Federal Reserve Bank of New York.

TREND FORECAST: As evidenced, much of the global economy and subsequently equity markets have been artificially propped up with digital dollars backed by nothing and printed on nothing.

As goes the dollar, so goes gold. With the dollar at a two-year low, but rising a bit today, despite the sharp downturn in gold and silver prices today, we maintain our long term forecast that their prices will continue to rise.

Again, it is impossible to forecast when equity markets will crash, since governments and central banks will do all they can to artificially prop them up, Gregory Mannarino’s article in this issue, “MARKET MELTDOWN: COMING SOON” provides valuable insights and projections on what to expect and what actions to consider.