Under the Bretton-Woods monetary system of the time, the U.S. still had to honor its commitment to exchange its gold at $35/ounce to foreigners, however. Unlimited paper issuance by the U.S. forced a default on this obligation in 1968. Unfortunately, the world then adopted the fiat dollar as the world's reserve currency, exacerbating the "exorbitant privilege."
Over the decades, the U.S. has certainly enjoyed its status as the issuer of the reserve currency of the world. As of Q3 2013, the IMF's COFER report shows that foreign exchange reserves (held largely by central banks) amounted to $11.4 trillion U.S. dollar equivalents (up 6.7x since Q3 1999), with approximately 60% held in dollars. Let's call that $6.8 trillion issued by the U.S. and held overseas.
About half of that total ($3.3 trillion) is held by the Fed itself. That is, foreign central banks may recycle the dollars that they generate via their current account surplus into securities held at the Fed. Here is a graph of that activity over the recent years:
Weekly, As of Wednesday, Not Seasonally Adjusted, Updated: 2014-01-30 3:53 PM CST
It is easy to see that foreigners were not keen dollar sellers in 2008/9 crisis, though their accumulation did stop towards the end of 2008 as global trade slowed dramatically. Periods of emerging market weakness have been somewhat different since then, with foreigners becoming net dollar sellers in the second half of 2011, the middle of 2013, and again very recently.
If this is a sign that the age of America's "exorbitant privilege" is ending, there is also then potential for a significant rise in CPI type inflation if overseas demand falls and these dollars return home.
Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.
No comments:
Post a Comment