Now The US Dollar Is Everyone's Problem

us dollars 84594 640Now The Dollar Is Everyone's Problem -Zero Hedge
"Investing is hard enough that there isn't much room for unforced errors, yet many investors allow themselves to get distracted and miss important things. For long-term investors this mistake often manifests itself by getting caught up in day-to-day news stories and losing perspective on key structural factors. One such key factor is the global monetary system....

Asset purchases by major central banks are especially powerful in boosting liquidity because they create base money from which even more money may be created through bank lending and other activities. As a result, asset purchases have a multiplier effect and can therefore be powerful tools for avoiding existential market risks due to lack of liquidity....Financial channels are driven by the US dollar as Martin Wolf points out in the FT, 'One traditional issue is the reliance on the US dollar in the global monetary system.' When dollars are easily available bubbles form, but when dollar liquidity dries up so too does associated economic activity. Wolf forecasts a continuation of negative trends....As a result, factors affecting dollar liquidity can pop up in lots of places. This presents a very different situation than in the early 1970s when Treasury Secretary John Connally famously (and arrogantly) told complaining European finance ministers, 'The dollar is our currency, but your problem.' Today, US dollar still reigns supreme relative to other fiat currencies (and therefor crucial for funding growth), but the US economy is a smaller part of the global total. At the same time, the Fed has considerably less control over US dollar liquidity which feeds back into lower global growth when it contracts. Now the dollar is everybody's problem."