A paradoxical situation in the short and long term

Short-term crisis management policies threaten the hegemony of the dollar

To support the valuation of financial assets in an unfavorable context, in 2009 the FED had to issue cash by buying the GSE MBS. QE2 has been typical of an action to support the value of US assets to better retain the attraction of the US market. The result was not long in coming, foreigners remained net purchasers of financial assets among which the shares and shares of mutual funds remained in high demand. The QE1 policy has at least had the merit of maintaining the possibility for the dollar to remain the bedrock of offshore credit in $.

This program, which ran from 2009 until the end of the 2010 S-1, did not stand up to investors’ growing doubts about the quality of US sovereign debt securities. Since the summer of 2010, the FED has bought US Treasury bills on the primary debt market. Since August 2011, the policy of twist of treasury bills has been an acknowledgment of a refusal of markets to buy US sovereign debt in the medium and long-term (5 years +). The result is a new sequence that is threatening the ability of the dollar to remain the bedrock of off-shore $ trade and credit.

The Treasury’s securities issues – slowed down only in S-1 2011 – helped ensure the preservation of the dollar as a major currency. The FED between 2009 and S-1 2010 managed to boost the valuation of financial assets by making a massive QE 2. It brought to the market a liquidity that it lacked. This policy was completed from 2010; the FED by purchasing newly issued debt securities of the Treasury put itself in the position of making the Treasury less dependent on foreign investors. The value of the American currency is threatened because it is the sale of treasury bills that provide the best support for the US currency today. Positive US equity and financial product purchases supported by QE2 are therefore threatened by a creeping QE3.

This threat is all the more paradoxical because the credit recovery has the effect of sustaining growth that is once again striking the US trade balance. QE2, which has metamorphosed into a rampant QE 3, is therefore subordinated to an artificial growth policy that tends to support activity and stock markets, but all the constituents of growth in imbalances are no longer granted.

By refusing to face the systemic crisis, the US keeps moving problems in the short term without solving them. The contradictions of their situation find in the American currency and in the conditions of monetary hegemony a field of expression of its insoluble contradictions. US cavalry and expedition play at dubious efficiency.

Long-term contradictions

EDF and Treasury have agreed since S-2 2011 to make the federal debt the ultimate way out of the crisis. The challenge of a rapid recovery is, therefore, today a means of supporting the value of financial assets and increasing them. If he succeeds in this bet, he will save the US great difficulties, but he will not save American growth from a long slowdown. But such a slowdown would inevitably lead to a dissociation of the growth rates of the United States and emerging countries. US growth will probably continue in external deficits, but these deficits will be smaller, the dollar will be less and less able to provide the amount of money essential for international trade.

This will result in a less dynamic US financial market, a lower valuation of financial assets and ultimately an inevitable weakening of the capacity of the US financial market to feed the expansion of off-shore dollar credit.

An analysis of the future situation of the US suggests a change in the monetary order introduced in 1971 to the benefit of the dollar. A global monetary order articulated with the major areas of economic growth (Asia-Europe-North America) seems to be on the horizon of the end of the crisis. It is the needs of Asia that should lead to this shift with positive effects on the Euro in the event that the EU will seize its chance.

This perspective is already in the past. Only by financing artificial growth in imbalances has the US been able to grow significantly in the decade before the crisis. The dollar retained its role as the entire US economy prepared for the current crisis. In the event that the US has taken a wiser course, the need for international credits and monetary needs have shaken for more than fifteen years the hegemony of the US currency. The crisis – which is far from over – will accelerate this process, which has been delayed for too long by the excesses of the US, which are paying dearly today.