Editor’s Note: This is an excerpt from Planet Moneythe newsletter of. You can register here.
ANDREW CABALLERO-REYNOLDS / AFP via Getty Images
As the global economy comes to a halt, the US Federal Reserve has started sending billions of dollars to central banks around the world. Last month it opened 14 “swap lines“to countries like Australia, Japan, Mexico and Norway. A” swap line “is like an emergency pipeline of dollars to countries in need. Dollars are” swapped “, that is, that is, exchanged for the other country’s currency.The Fed has also started allowing about 170 foreign central banks holding US Treasuries to exchange them temporarily for dollars.
Sending billions of dollars overseas in the midst of a historic economic crisis may sound crazy: as the US economy crumbles, why are we moving our precious dollars * out * of the country?
The answer has to do with the Fed’s unique position in the global economy. Dollars are the backbone of world trade. International loans, debts and banking transactions are done largely with dollars. Foreign central banks need dollars to stabilize their financial systems. The dollar is not just America’s money. It is the world’s money. This is why when the COVID-19 crisis hit, there was a record rushing to get dollars around the world. And the Fed is the only institution with the power to print them.
When asked if there were any constraints on how many dollars the Fed could create, Fed Chairman Jerome Powell recently said “there is no limit” except, roughly, what Washington wants. Economists call this power – and the luxury that comes with it – the “exorbitant privilege.” It’s a privilege because, as the world asks and pleads for dollars to pay off their dollar-denominated debts and buy vital goods across their borders, America has control over who gets what and when.
It’s also a privilege because even though the federal government is running historic deficits, America still sees a huge demand for dollars and dollar-backed treasury bills, which allows it to issue seemingly unlimited amounts of debt. at low interest rates to help pay for all of these expenses. . “The fact that our debt is denominated in our own currency prevents panic,” says Kenneth Rogoff, economist at Harvard. “We are in a very lucky position.”
By opening these swap lines, the Fed is behaving much like it is the central bank of the world. But this is not altruism. These dollar pipelines to important trading partners ultimately serve the US economy. The United States also needs world trade. This is why, for the second time this century, the Fed is allowing swaps, allowing other countries to access the Fed’s unlimited dollar reserve as if they were US banks in need of a loan.
The Fed is selective about who has access to the swap lines. Unsurprisingly, countries like Russia, Iran and China born Catch them. And only four emerging markets – South Korea, Mexico, Singapore and Brazil – do Catch them. “Swapped” loans are very short and almost risk-free, not the type of longer-term development assistance loans typically provided by the IMF and World Bank.
“With privilege comes responsibility, and our responsibility now is to provide the dollars the global economy needs to stabilize the economy and eventually start growing again,” said Barry Eichengreen, economist at UC Berkeley. The Fed, he said, has “taken a step towards acknowledging its exorbitant liability, but it must do more and provide dollar exchange lines to more countries in distress.”
Doing all of this is not easy and the Fed is in a delicate political position. It is a creature of Congress, which gave it the dual mandate of ensuring price stability and low unemployment in America. He is accountable to American voters. And, during a period of growing isolationism, US politicians aren’t exactly calling for the Fed to print extra dollars to avoid disasters abroad.
Princeton economist Alan Blinder, who is a former vice chairman of the Federal Reserve, says he personally thinks more swap lines are a good idea, but “it would be very difficult politically for the Fed to to sell the idea that they should do line swaps with a whole bunch of poor countries. ”Plus, he says, they would fall short of providing the kind of resources these countries need.
The developing world needs more than just short-term currency swaps to avert what could turn into a humanitarian catastrophe. They need long term loans, grants and debt relief. And, for this, the burden falls mainly on the IMF, the World Bank and elected officials of rich countries. Last week there was a small progress on this front. But there is still a lot to do.
These lines of exchange and lending facilities are all a bit shrouded in the mysterious and confusing language of central bankers, which is probably why many people ignore them. But for some, like historian Adam Tooze, the Fed accepting its position of de facto The global lender of last resort has represented something of a revolution in the global financial system.
Did you enjoy this newsletter? Well, it’s even better in your inbox! You can register here.