Only a Half Trillion Dollars

It’s a sign of how much trouble we’re in when a budget deficit of a half trillion dollars seems like fiscal restraint.

It is progress, given that annual budget deficits were running above $1 trillion a year throughout President Obama’s first term and have been as high as $1.4 trillion.  And it could have been worse.  Recall the effort made by President Obama to stop the automatic spending cuts that took place when sequestration was adopted.

But a half trillion dollars is still a mountain of money.  It helps to give the number some context.CBO Chart

To reach a half trillion dollars, you would have to spend $8 per second beginning with the year 0 and continue spending through today.  If you had a stack of $1 bills adding up to $500 billion and were able to put them one on top of another, the stack would be 34,000 miles high.

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The Dollar Is In Danger

It’s a sign of America’s strength and its position as leader of the free world that the dollar is the world’s reserve currency.

Just as English is the closest we’ve come to an internationally accepted language, the dollar is a common denominator, held in reserve by governments and institutions around the world, and used in international transactions.

But that may be changing.  And if it does, we can blame ourselves – or, more specifically, the Federal Reserve Board.Reserve Currency Status

Why should we care?  With reserve currency status, the U.S. can:

  • Purchase imports and borrow internationally at a lower rate than other nations, because we don’t need to exchange our currency to do so.  The lower rate saves America about $100 billion a year.
  • Avoid a potential currency crisis.  When countries don’t have enough foreign exchange reserves to maintain the country’s fixed exchange rate, they face a currency crisis.  The result is typically attacks by speculators in the foreign exchange market and the devaluation of the currency.
  • Run higher trade deficits with less economic impact.
  • Print money to pay off its debts.
  • Preserve America’s status as a world leader.  The dollar’s reserve currency status is a symbol of American strength.  A loss of that role would be a sign of the country’s diminished status.

So if the dollar loses its reserve currency status, America is in trouble.  Government debt will rise, the cost of imports will be higher and the economy will suffer.

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The QE Apocalypse

The end is near.

The Federal Reserve Board has now put a date on the quantitative easing apocalypse, letting us know that bond buying will end in October – unless the central bank changes its mind, of course.

The October ending is not unexpected.  The Fed has been cutting back bond purchases by $10 billion a month since last year and it doesn’t take a math wizard to figure out that there will be nothing left to taper post-October.

Yet this news, reported in the just-released minutes to last month’s meeting of the Federal Open Market Committee, is being treated as a revelation.  It was, for example, the lead story in The Wall Street Journal, which typically doesn’t lead with news that was discussed last year and made official at a meeting that took place a month ago. Portugal

The real news, though, is what wasn’t discussed – the end of near-zero interest rates.  As a result, rather than pushing yields up and bond prices down, release of the meeting minutes had the opposite impact.

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Sprinkling the Fairy Dust of Illusory Riches

When the Bank for International Settlements (BIS) calls central bank market rigging “the fairy dust of illusory riches,” it’s time to pay attention.

The BIS is the central banks’ central bank.  Its role is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

To provide the statement with some context, and to alert you about what else you can expect from central banks moving forward, we provide a summary of other key points made in this year’s BIS annual report, which is appropriately titled, “In Search of a New Compass.”Compass

First, there’s recognition that easy money policy has gone far enough.  That’s self-evident, but of special interest when you consider the source.  BIS notes that despite a pickup in economic growth, the world economy “has not shaken off its dependence on monetary stimulus.  Monetary policy is still struggling to normalize after so many years of extraordinary accommodation.”

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