February 13, 2017
What Will Trump Do About the Central-Bank Cartel?
The US is by far the biggest economy in the world. Its financial markets — be it equity, bonds or derivatives markets — are the largest and most liquid. The Greenback is the most important transaction currency. Many currencies in the world — be it the euro, the Chinese renminbi, the British pound or the Swiss franc — have actually been built upon the US dollar.
The world is effectively on a US-dollar-standard, and the US Federal Reserve (Fed) has risen to the unofficial status of the world’s central bank. The rise of the Greenback has to a large extent been propelled by international banking, which has basically “dollarized” in terms of its lending and issuing activities.
The Fed Sets Global Policy
The Fed’s policy not only determines credit and liquidity conditions in the US, but does so in many financial markets around the world as well. For instance, movements of long-term US interest rates regularly have effects on credit and equity markets in, say, Europe and Asia. The Fed’s actions are the blueprint for monetary policymaking in many countries around the world.
The graph shows the Fed’s supply of newly created US dollar liquidity sent to other central banks around the world. It also shows the so-called “euro cross currency basis swap,” which can be interpreted as a “stress indicator”: If it drops into negative territory, it means that euro banks find it increasingly difficult to obtain US dollar credit in the free market place. The Fed’s injection of new US dollar balances into the financial system has helped to reduce the euro currency basis swap. Since late 2016, however, it has started to venture again into negative territory — potentially signaling that euro banks are again heading for trouble.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source: Janet Yellen, Mario Draghi, via Federal Reserve and European Parliament
About the Author
Thorsten Polleit is chief economist of the precious-metals firm Degussa and co-founder of the investment boutique Polleit & Riechert Investment Management LLP. He is honorary professor at the Frankfurt School of Finance & Management and associated scholar of the Mises Institute. He was awarded the 2012 O.P. Alford III Prize in Libertarian Scholarship. His website is Thorsten-Polleit.com. See Thorsten Polleit’s article archives.