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Will the Dollar Be the Next COVID-19 Victim?

By Shlomo Maital


   Will the dollar be the next victim of COVID-19?   Bloomberg’s Stephen Roach, former Morgan Stanley chair and now a Yale U Professor, thinks it might. Here is why.

   Here in short is his argument: “Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.”

   The dollar for 75 years, since 1945, has been a safe haven for investors – a port in a storm, for their money. This may no longer be true. As US deficits mount – so far this fiscal year alone, the federal deficit totals $738 billion, and will likely double, out of a $20 trillion GDP, or a 7% deficit.

     Since Americans save very little, US deficits have been funded by, among others, China, which has bought massive amounts of US Treasury bonds in the past. This is highly unlikely to continue, given the toxic atmosphere between Trump and Xi Jinping. So the only way the US will be able to finance its massive deficit spending, will be for the Federal Reserve to buy Treasury bonds, implying an enormous tsunami of cash flowing into the economy. Short-term, this may be OK; but long term, it could well undermine the value of the dollar, as the world becomes awash in them.

   The dollar problem predates the pandemic. Roach observes: “The seeds of this problem were sown by a profound shortfall in domestic U.S. savings that was glaringly apparent before the pandemic. In the first quarter of 2020, net national saving, which includes depreciation-adjusted saving of households, businesses and the government sector, fell to 1.4% of national income. This was the lowest reading since late 2011 and one-fifth the average of 7% from 1960 to 2005.”

   So – to simplify: If Americans do not save, and if the US government is dissaving, and borrowing like mad – who will lend it the money? Americans? No. Foreigners? Probably not. So if nobody is willing to lend to the US, except the Federal Reserve, the only alternative is to flood the world with cheap dollars. And that may spell doom for the global value of the dollar.

     This may be wrong. But it is worth thinking about – one more thing to worry about, because the global economy depends on the dollar as a main key currency.


IMF – Oops! We Got It Wrong!

By Shlomo Maital  



 The International Monetary Fund (IMF) was invented at Bretton Woods, NH, in July 1944.  It is headquartered in Washington, DC and its task is to bail out companies that get into financial trouble, overspending, overborrowing, etc.   And this happens often.

   The IMF is an exemplary organization. It has among the world’s best economists (its former deputy director was Stan Fisher, formerly head of Israel’s Central Bank, now Vice Chair of the U.S. Fed), and it even has an independent evaluation board that checks whether it has acted correctly.

   Now, this independent board has reported that..the IMF erred.  Ooops.

   Initially, when the global crisis broke out in 2007-8, the IMF recommended that governments support the economy, and indirectly its banks and financial institutions,  by using fiscal policy, i.e. deficit spending.  But then, the IMF switched direction, under pressure perhaps from capital markets, and said that governments should impose AUSTERITY,   cut spending, cut borrowing.

    Bad idea.  The independent IMF board said:  the IMF erred. It recommended austerity too early.  Perhaps, it should not have recommended austerity at all.

    It is sad when the world’s fireman, the world’s Mother Hen telling its chicks what the right thing to do is,  admits it blundered.  And sad when economics makes a mistake that is costly for hundreds of millions of people. 

It will be hard for even a serious body like the IMF to regain its credibility in future.

 When Will the Yuan Replace the Dollar?

By Shlomo  Maital


 Most of the world’s foreign trade and foreign investment is still done in dollars.  Perhaps 80 percent or more of transactions on the London foreign exchange market, still the world’s biggest, involve dollars.    

  For the global economy, this is a problem.  America’s economy is weak and unstable, hence so is the currency – and the currency is not just America’s money, but it is the world’s, so when America has a problem, so do we all.  As the U.S. Treasury Secretary once said, the dollar is our currency – and your (the world’s) problem.

   With China’s economy now the world’s largest, by some measures, it makes sense that the Chinese currency, the renminbi (ren – min – bi,  ‘money of the people’) should take a correspondingly important role in world trade and finance.  But China has been unwilling to loosen its tight control of the RMB, because the undervalued exchange rate, around 6 RMB per dollar, provides strong advantages for exports.   Since 2005, though, China has been gradually (everything China does is gradual) loosening control of the RMB (that was the year it dropped the fixed ‘peg’, or fixed exchange rate, and let the RMB slowly slowly gain in value) and since 2009, it has loosened restrictions on yuan trading outside China. 

    Now, according to the Wall Street Journal, more and more American firms are paying for Chinese goods in RMB (yuan).  Ford Motor Co., for instance, has reacted swiftly to the China’s government easing of restrictions on use of the yuan by global companies.  There are big advantages – if you can pay directly in yuan, you can save substantial trading costs.   

  U.S.-China trade totals $500 b.  America has been pressing China for years to let its currency appreciate more, reflecting its true value, and making Chinese exports more expensive.

    According to the B.I.S. (Swiss-based Bank for International Settlements), the Central Banks’ bank,  the yuan is the 9th most traded currency in the world. 

    Ninth is very far from first. But look for the yuan to move up in the World Cup forex rankings.   There are big opportunities here for experts in forex and financial services.   Japan, for instance, doggedly resists making the yen a global currency, by imposing restrictions on foreign currency movements into and out of Japan.  I believe this was a big mistake.  China seems about to avoid Japan’s strategic error.

What is Helping the Dollar Defy Gravity?

By Shlomo  Maital   


  What in the world is helping the U.S. dollar defy gravity, keeping it from falling relative to other currencies?  The U.S. economy’s recovery is weak, job creation is awful, President Obama is incompetent, the Congress is deadlocked, and America is turning inward, or returning to its traditional isolationism. Moreover, the Fed continues to print dollars (by buying $85 m. worth of Treasury bonds monthly). There is an enormous overhang of printed dollars out there.

   China has lots its appetite for buying dollars.  According to Floyd Norris (New York Times, Feb. 22-23/2014),  China bought a net $48.5 b. worth of U.S.Treasury bonds last year.  This is $20 b. less than in 2012.  China now holds $1.27 trillion in Treasury bonds; together with Japan, this amounts to 42 per cent of the total $5.8 trillion in Treasuries held by all foreigners. 

    There is a great science fiction plot here.  What if those foreign Treasury holders decided to spite the U.S. by dumping their dollar holdings?  The dollar would crash, stock markets all over would drop, and an enormous crisis would result.  Why would anyone do this?  Well, America has plenty of ill-wishers out there.  The fact is, the fate of the dollar, and the U.S. economy, is now in the hands of Chinese, Japanese and others, who hold vast amounts of U.S. assets. 

    By great good fortune, just as China is easing off its dollar purchases to support the dollar,   Japan, under Abe and his “Abe-nomics”, has stepped up its buying.  Japan bought a huge $71.3 b. in Treasuries in 2013, up from $53 b. in 2012.  Japan is now the single largest purchaser of dollar assets.  Of course, Japan does this to weaken the yen and help its exports.  So far, it isn’t working too well.

    It is significant that the American public, including the banks, slashed their holdings of U.S. treasuries.  Clearly everyone knows that interest rates aren’t going down, they’re going up, which means Treasuries are going down, which means we should be selling them.  Apparently, foreigners are more bullish about the dollar than Americans are.   Not a good sign. 

     Right next to Norris’ column is an account of Fed discussions during the 2008 crisis.  It is very disturbing.  It shows how clueless the Fed Open Market committee was, especially after the Lehman bankruptcy, and how the Fed continued to worry about inflation, when the pressing problem was in fact deflation.   It seems that not only are there no competent political leaders left in power, there are no competent economic and financial leaders either. 


Blog entries written by Prof. Shlomo Maital

Shlomo Maital