Spamming of US dollar will hurt emerging markets

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By Da Hsuan Feng/Haiming Liang

The COVID-19 pandemic has jolted the global economy, including the US economy. Indeed, the collateral rapid economic recession has made it extraordinarily difficult to ascertain the risk on US corporations and the inability of people to pay all the debt which they will incur. This is a profound challenge facing the Joe Biden administration.
News came that the White House is weighing another stimulus package of $3 trillion, though the final decision has not been made yet.
Indeed, on March 11, just 51 days after being sworn in as the 46th president of the United States, Biden signed the so-called “Relief Bill” worth $1.9 trillion. According to the Committee for a Responsible Federal Budget, the bill “contains a third round of stimulus checks, extension of enhanced unemployment benefits, additional tax credits for families and workers, funding for K-12 education, and support for state and local governments. Smaller, but significant, expenditures include funds for COVID testing and vaccines, grants to small businesses, support for child care providers, assistance for colleges, and rental and homelessness assistance”.
Infusion of huge amounts of dollars
It is not difficult to see the infusion of such a huge amount of “cash” into the market is de facto spamming of the US dollar, and it can only be paid for with “borrowed money”. Such an action can and will increase the debt burden of the US government. And actually it has.
The US federal government printed $1.5 trillion worth of currency notes in 2000. In 2021, it will print $6.75 trillion worth of bills. Predictably, the market will experience a short-term “high”.
Yet while basking in this “high”, the country must realize it will be temporary prosperity, and will plant huge time bombs in the emerging markets, and one such market is China.
As mentioned earlier, the recent massive-scale monetary easing policy of the US Federal Reserve has officially transformed many of the former rescue measures for the financial system into people’s basic livelihood.
This is the first time the US federal government has bypassed the usual intermediary role of commercial banks to directly or indirectly distribute life-saving financial aid among large and small enterprises and consumers. The Fed has taken on the role of a “lender of last resort”.
To be fair, the Fed’s rather robust measures aim to help companies deal with the pandemic-induced downturn and people with unemployment, relieve the concerns of investors about the collapses of the credit market, and prevent the onslaught of the US’ financial market, even a global financial market tsunami. Perhaps such measures will help the US economy achieve a V-shaped recovery in the post-pandemic period. They can also provide an opportunity for the multinational companies in urgent need of a large infusion of US dollars to issue debt financing to protect themselves against the impacts of the pandemic.
Long-term impacts on emerging markets
But the Fed’s measures can also have long-term impacts on emerging markets such as the Chinese mainland and Hong Kong.
First, by issuing excessive amounts of dollars, the US can and will further consolidate its global hegemony. Before 1971, every US dollar bill carried the words “Gold Coin”, indicating the bill was backed by gold, and the holder of the bill could exchange it for gold. But during president Richard Nixon’s administration in 1971, the US decided to terminate the bill-to-gold exchange system, and the words “Gold Coin” on US dollar bills were replaced with “Federal Reserve Note”. In essence, such a “note” is simply an IOU(I owe you).
Still, the US dollar and its associated assets (such as US Treasury bonds) are the world’s most important foreign exchange reserves and liquid financial assets. This means the global pension companies, insurance companies and financial institutions are either willing or forced to support the Fed’s unlimited quantitative easing, or QE, policy. To do so, they must purchase more US dollars and US dollar assets.
Likewise, countries that are dependent on the US dollar as a medium of settlement as well as reserve currency are also worried that the excessive monetary easing policy could substantially weaken their own currencies. Therefore, to stabilize their domestic market, such countries also need to help the expansion of US dollars with the Fed (this is what is technically defined as the Swap Line) in order to obtain or maintain large and steady supply of the US dollars.
Dollar swap agreement
It was during the 2008 global financial crisis that the central banks of the European Union, Canada, the United Kingdom, Switzerland and Japan reached a temporary dollar swap agreement with the Fed. According to the agreement, the Fed will give these five central banks preferential treatment. Indeed, such a supply of US dollars to foreign central banks is equivalent to acknowledging the unique status of the US dollar in the international financial market and a way to solve the short-term shortage of US dollars in foreign banks during financial crises.
Although not intended, the temporary swap agreements have now become permanent. This means the only source of international currency flow now is the Fed. With this, the US is able to function as the global “lender of last resort”. In this manner, the Fed’s unlimited QE policy not only marginalized the euro, the British pound, the Japanese yen and other international currencies, it also lengthened the process of internationalization of emerging countries’ currencies such as the Chinese yuan.
Second, the excessive issuance of US dollars could cause turbulence in the emerging markets. In the past, financial institutions used various indicators to ascertain the risks of and pressures on the financial market, including the Chicago Board Options Exchange volatility index, forward interest rate agreements, and overnight interest rate exchange spreads.
–The Daily Mail-China Daily News Exchange Item