Who could be blocked by the US currency risk?
They want to put America back to work and this doctrine is the way to go.
It is Keynesian with the addition of seigniorage and is compelling for our time.
Seigniorage is the profit that the government derives from the issuance of currency, specifically the difference between the face value of banknotes and coins and their costs of production – that is, the benefit accruing to the issuer of money that holders of money grant by not receiving interest on their holdings.
Since President Nixon suspended gold convertibility 50 years ago, the dollar has depended on the kindness of strangers to support its value.
Therefore, there were lingering fears of his collapse, but the stories of his death have always been shown to be exaggerated.
Indeed, if we look at its nadir in spring 2008, the low is solid, only 24% below today’s value.
That’s not to say that its purchasing power has held up, just that it hasn’t dropped faster than everything else despite the monstrous deficit financing that still persists.
What if seigniorage is underestimated and everyone is looking askance?
What if the Chinese weren’t fed up with throwing away their trillions of bonds?
The image has been painted a thousand times, but even though the United States abuses its privilege, everyone still wants to hold dollars.
On the other hand, during times of turmoil, people run to the dollar and it remains the ultimate risky asset.
Other currencies can collapse and burn.
The dollar: not so much.
And because of seigniorage, all of those deficit dollars are being financed at lower interest rates than would be warranted by comparable savings pulling the same blow.
The fall in the interest rate on the dollar creates the temptation.
Human nature is steeped in short-term dissonance, so it’s no surprise that time and time again, when the dollar goes up, we see dollar borrowers go up in flames.
1982 ended Mexico which had borrowed from oil revenues; which collapsed.
The 1987 crash hit Turkey, whose currency and stock market collapsed together.
Black Wednesday in 1992 punished the British individuals who had listened to the sirens’ voices to remortgage in dollars or Swiss francs as the British pound collapsed out of the ERM.
The Asian crisis of 1997 only spread to emerging countries, bringing down a new domino each time hope is reborn from its ashes.
The common thread of borrowers: hope for a better future, based on prospects that seemed to justify a boost.
And now? We know the store of value is stronger than ever: The dollar soared in March 2020 as the global economy hit the wall.
We also know that bondholders have borne the most negative real interest rates since the 1970s with a CPI at 5.4% and the 10-year bond at 1.3%.
What is the Chinese pain threshold that would sell them?
Not here, of course.
Despite the integrity of gold or crypto, dollar seigniorage is more powerful than ever and Democrats know it.
If the infrastructure plan gets a boom or if fear causes a reduction in risk, overseas dollar borrowers will suffer.
Who borrows less than local rates to take advantage of the good yields available?
Who hasn’t done it before? Africa?
We don’t know but it’s worth keeping in mind because when fraying starts it always hurts more than you expected.
Richard de Lisle is manager of the VT De Lisle America fund