Tags: world | reserve | currency | safe | bond market

Workable World Reserve Currency Needs Big, Safe Bond Market

Workable World Reserve Currency Needs Big, Safe Bond Market
(M-sur/Dreamstime)

By    |   Monday, 03 August 2020 09:17 AM

Members of Congress continue their talks about the next fiscal stimulus package, while White House Chief of Staff Mark Meadows said on Sunday he was not optimistic about reaching an agreement soon for the next relief bill.

The boost to unemployment benefits ended on Friday and this means that many middle class Americans will be experiencing what it is like to live on normal welfare payments for the first time. There are three possible implications from this:

  • Consumption is likely to be weakened for those people who are out of work;
  • Consumption may be weakened for those people who fear unemployment and decide therefore to hold on the savings that were acquired during periods of lockdown as a precaution;
  • In the longer term, voters’ attitudes towards welfare might shift as more people experience the welfare system personally. 

At a personal level, it is of course the impact on those out of work that is most damaging.

From an economic point of view, it is probably the fear of unemployment and the financial consequences of that unemployment that is the biggest risk.

The economic damage of the virus has always been about fear rather than the virus itself, and that fear could affect large numbers of people who would otherwise be supporting the economic bounce back with their spending.

There will still be a bounce back, but the scale of the U.S. economic bounce back will now depend on keeping fear contained, and that implies a quick solution to the fiscal debate.

It is worth noting that there is next to nothing that the Federal Reserve can do directly to mitigate the fear of the financial consequences of unemployment.

On the ongoing talks of the acquisition by Microsoft of the popular Chinese video app TikTok, on Sunday, Reuters informed that President Donald Trump had only agreed to allow Microsoft acquiring TikTok, if it could secure a deal in 45 days, which is a deadline that was put to ByteDance and Microsoft by the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes deals for potential national security risks.

President Donald Trump had said on Friday he was planning to ban TikTok amid concerns that its Chinese ownership represents a national security risk because of the personal data it handles, Reuters informed.

For investors and in context of all this, it might be good to recall that the whole undertaking by Microsoft to buy the Chinese video app TikTok, could be seen as part of the ongoing escalation of tensions between the United States and China.

Coming back to the central issue for financial markets that is that the U.S.-China trade deal needs to stay intact, although this is somewhat less important with the ongoing decline in global trade, but nevertheless, it still does matter a lot to financial markets.   

Finally, hereby some thoughts about the U.S. dollar. As we all know, these days there is a lot of negative talk about the U.S. dollar, which in my view is not a sure thing at all.

First of all, the U.S. GDP numbers that were published last week were misleading when compared to the GDP numbers from other important states or unions. Investors should not overlook the fact the U.S. publishes its GDP numbers are seasonally adjusted “annualized” rates (SAAR) while the others like the Euro Area publish in percentage from quarter to quarter and are not calculated on an annual basis.

On that basis, a real comparison is possible and we have: U.S. -9.5 percent q/q; Euro Area -12.1 percent q/q; Germany -10.1 percent q/q; Italy -12.4 percent q/q and Spain -18.5 percent q/q.

Besides all that, there is no real alternative to the U.S. dollar as the world’s reserve currency. The COFER data given by the IMF show that the U.S. dollar as part of the international FX reserves represented 62.6 percent in Q1-2008 and 62.0 percent in Q1-2020. Which are numbers that speak for themselves.

Never forget, a workable world reserve currency needs a big, safe and liquid underlying bond market, while that currency also needs to serve as a settlement asset, and that currency must be usable without limits for foreign exchange interventions.

So, it’s rather simple, the U.S. dollar is the only currency that fulfills all these requests.

"Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
As we all know, these days there is a lot of negative talk about the U.S. dollar, which in my view is not a sure thing at all.
world, reserve, currency, safe, bond market
729
2020-17-03
Monday, 03 August 2020 09:17 AM
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