When the TBAC published the minutes to its quarterly refunding decision two weeks ago, the most interesting part of the discussion was the “unique challenges” faced by the Treasury over the medium term, especially the possibility of significant financing gap over next 10 years amounting to over $12 trillion and the potential need for more domestic investor participation if foreign reserve growth slows.
Here, among other things (which potentially include the Green New Deal, with its $6+ trillion cost) the TBAC cautioned that the Treasury’s financing needs are expected to increase significantly even without factoring in recession possibilities over the next decade. The TBAC warned that deficits to the tune of $1-$1.5trn a year, and cumulatively over $12trn, over the next decade, are coming and will have to be funded in the bond market. Meanwhile, the CBO stubbornly refuses to forecast a recession during the next decade, instead projecting a steady 1.5-2% real GDP growth over the next 10y. While the TBAC did not take a position on this laughable assumption, it warned that deficits typically rise 2-5% of GDP in recessions, which would translate to additional deficits of $0.5-1trn at current GDP levels, and warns that “these borrowing needs have to financed in the context of already high global dollar debt exposure.”
But the bigger problem is that in the context of soaring deficit funding needs, the TBAC is also increasingly worried that “foreign investors already hold significant dollar debt” which is why the US will have to increasingly rely on domestic savings to fund its future budget deficits.
And here the TBAC made a surprising, tongue-in-cheek observation, namely that reserve managers have been very gradually increasing allocation to other currencies, and that the USD share of FX reserves has steadily come down from 72% in 2000 to 62% now even though the “USD is still the dominant reserve currency.”
Still. As in for the foreseeable future, but not that much longer.
Needless to say commenting (or joking) even sarcastically about the reserve status of the dollar, is generally frowned upon in very polite company because if enough people start “joking” about it, it just might become a self-fulfilling prophecy. It won’t be the first time, just ask any of the countries below which all enjoyed reserve currency status for decades… and could print their way out of all trouble until one day, poof: “it’s gone.”
Scientists are telling us that we have entered “the sixth major extinction” in the history of our planet. A brand new…
We bring up all of this again, because yesterday in a blog post on the NY Fed “Liberty Street Economics” website, the researchers of the US central bank doubled-down on the snyde observations made by the TBAC when they “addressed the potential implications for the United States if the dollar’s global role changed” and we quote, noted that “the currency might not retain its dominance forever.”
But why now? Because just like Mnuchin’s calls to banks to comfort the public that they have sufficient liquidity sparked questions why is Mnuchin suddenly concerned about bank liquidity, so the recent focus on the viability of the dollar’s reserve status, first by the Treasury Department’s smartest Wall Street advisors, and now – by the Federal Reserve itself – is… a little troubling.
In any case, this is how the authors set the stage:
This post checks the status of the dollar, considering whether any erosion in the dollar’s international standing has occurred. The evidence to date is that the dollar remains the world’s dominant currency by broad margins. Alternatives have not gained extensive traction, albeit this does not rule out potential future pressures.