Dollar reserve and bubbles

Source: TW

Why do countries as different as the US, China and India have big asset bubbles at the same time? What is the common factor? The common factor is the dollar as the reserve currency and very undisciplined monetary policy by the US Fed. Lets explore.

In a normal business, when your output fetches a higher value than the sum of your inputs, you make a profit. That profit is a claim on the broader world. A country that exports more than it imports is similar but with a crucial difference. Lets look at their surplus. The surplus of the net exporter is a claim on the broader world and those claims are mostly denominated in the reserve currency, US dollar. With persistent multi-decade trade deficits by the US, those claims have been piling up. What happens to those accumulated claims?

The US dollar is a “reserve asset” in the global banking system and is in fact the major reserve asset. That is just another way of saying that those claims get multiplied in the global banking system (read about fractional reserve banking) by a big multiplier (10x or 15x?) So the trillions of dollars of original claims on the US (lets call them “real dollars earned in trade” or RDET) get multiplied in to tens of trillions of “dollar-denominated claims” (DDC) around the world. DDC is several times bigger than RDET.

It gets even worse than that. Given the opaque and loosely regulated nature of the global financial system and the existence of “shadow finance” (even more unregulated financial entities) the amount of dollar-denominated claims (DDC) around the world is a very big but unknowable number.

Now asset bubbles. All those dollar-denominated claims are “US dollars” but unlike the “real” dollars arising from the US trade deficit, these multiplied dollar claims don’t have any US Fed backing.These expanded dollars have entered global asset markets (real estate, stocks, bonds, art). The explosion in those dollar claims, driven by the explosion in the US trade deficit, has caused asset bubbles everywhere. Such dollar claims, because they are “US dollars” but unbacked by the Fed, also enter the US asset markets (drug dealer getting high on his own supply!).+++(5)+++ This financial malpractice has had cheerleaders like @paulkrugman whose Nobel is for his work on global trade! Somehow it escaped this genius to connect the dots between exploding US trade deficits, ultra-loose monetary policy, global asset bubbles and extreme inequality.

With flawed economic theory peddled by Nobel-prize winning economic charlatans and reckless practitioners who were only too happy to follow the advice, we have the setting for a perfect global economic crisis. Our only option is to be prepared. 🙏