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Is the U.S. Dollar's Reign Coming to an End? How the Erosion of Institutional Independence Affects the Dollar’s Reserve Status.
Here is what we will be getting into today:
The Threat to the U.S. Dollar as the World's Reserve Currency: Political Pressure and Erosion of Institutional Independence.
The State of Consumer Debt in the US: A Look at Credit Card Balances, Delinquencies, and Interest Rates.
The Consequences of the Federal Reserve's Quantitative Easing Program.
Let's Dive In!
Website: Daniel Lacalle
Title: How A Country Loses Its Currency Reserve Status
Here are the key highlights:
The U.S. dollar is still the world’s reserve currency due to its legal and investor security, an open & transparent market, and the presence of independent institutions with checks and balances that limit political power. However, these factors are currently under threat due to increasing pressure from politicians. The political threat is not only against monetary authorities but also all institutions that provide independent checks and balances. The focus on the “social use” of money by politicians is putting the reserve of value status of fiat currencies at risk, and this can lead to higher inflation and the collapse of the currency.
The decline of a nation often begins with the destruction of its currency. While rulers of a state may believe that the process of erosion is slow and that it will not lead to the collapse of their nation, history has proven otherwise.
Hyperinflation and a rapid decline in the value of a currency can occur suddenly, causing domestic and foreign citizens to abandon it as a means of payment and reserve of value. Governments that attack the reserve of value status of their currency and the independence of their institutions are contributing to the erosion of their currency's demand. It is a false belief that citizens will always accept a devalued currency issued by the state.
The illusion of monetary sovereignty, as perpetuated by modern monetary theory, is just that - an illusion. The collapse of past empires serves as a stark reminder that the erosion of a currency's purchasing power can be a sign of the decline of a nation.
The U.S. dollar's also keeps its status as the world reserve currency because of its global demand, but this demand is not solely due to its sound policies. The U.S. government and the Federal Reserve must recognize that imposing the use of a currency through digital currencies is not the solution. The U.S. dollar's reserve status can only be strengthened by increasing its global demand through independent institutions, not through force.
While there may be no alternatives to the U.S. dollar at present, a true reserve of value with independent backing could emerge as a contender. The Fed has been wise to point out the limitations of cryptocurrencies, but ignoring the importance of reserve of value as a policy will only bring the end of the United States' global status closer. The U.S. government and the Federal Reserve must work to strengthen the U.S. dollar's reserve status, rather than assuming that its current position is secure simply because there are no current contenders.
Website: Wolf Street
Title: Where Households Are on their Credit Card Balances, Credit Limits, Available Credit, Delinquencies, and Collections
Here are the key highlights:
The New York Fed recently released a report on household credit that includes data on credit card balances, credit limits, available credit, and delinquency measures. About 60% of credit card accounts do not carry revolving balances, while the remaining 40% have revolving balances.
Credit card balances outstanding in Q4 grew by $56 billion due to holiday spending and inflation, bringing the total balance to a new high of $986 billion. Other consumer loans such as personal loans and payday loans also increased to $507 billion in Q4. Credit card & other consumer debt combined ticked up to 7.9% of disposable income in Q4, but is still lower than 20 years ago when it was 14%.
The average credit card interest rate is now 20%. The pandemic monies handed directly to consumers and the monies that consumers didn't have to pay created a historic trough in delinquencies, but this trend has largely ended. The number of borrowers who transitioned into 90-day or over delinquencies rose from historic lows for younger borrowers, but remain below pre-pandemic levels for older borrowers. The % of consumers with third-party collections fell to 5.2%, the lowest on record.
Newsletter: Exorbitant Privilege
Title: Payment Due.
Here are the key highlights:
The Federal Reserve's Quantitative Easing program has resulted in substantial losses that will have long-lasting effects. Though some have argued for reducing payments on reserves and reverse repurchase facility, such a measure would be difficult to sustain because it would risk short-term interest rates dropping below the Fed's target level. The best course of action is to tackle inflation as soon as possible in order to reduce the period of QE losses.
The Federal Reserve's Quantitative Easing (QE) program was designed to provide economic stimulus in times of financial crisis. However, it has come at a high cost that will only get worse over time. The policy shifted overall government debt portfolio (government plus central bank) from long-duration to short-duration funding, which removed duration risk from the non-government sector but added duration risk to the (consolidated) governments balance sheet.
This means that the Federal government is going to miss out on hundreds of billions of dollars in profit transfers from the Fed for many years. Though some have suggested reducing or removing the payment of interest on excess reserves and reverse repurchase facility, this would be a difficult argument to sustain. Such a measure could cause short term interest rates to drop below the Fed's target level, thus undermining their policy goal of addressing inflation.
The best course of action is to address inflation as soon as possible in order to shorten the period of QE losses. This means that the Fed needs to take away its own punch bowl and make sure that inflation does not become out of control. Though this may be a difficult task, it is necessary in order to avoid more significant losses in the future due to QE.
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