After the financial turmoil in 2008 passed, the world was not at ease. In fact, there are hidden concerns about inflation caused by “water release” measures adopted by various countries, and the decline in debt leverage is very limited. After that, the United States consciously adopted interest rate hikes and tightened balance sheet measures, which once made everyone feel at ease. Under the impact of the New Coronavirus epidemic and the impact of oil prices, the Fed has continuously introduced emergency measures such as sharp interest rate cuts and overweight quantitative easing, unlimited purchases of treasury bonds and relaxation of bank supervision. The Fed’s balance sheet is expanding at an average weekly rate of US$500 billion. As of April 2, the total scale reached nearly US$6 trillion, setting a record high in history.

The Fed’s countermeasures can be simply referred to as “little water release” without a limit, promising to provide unlimited liquidity support. This time, the problems of the US and the US dollar again require the payment of countries around the world. However, we must not only worry about inflation, but also the global economic depression caused by economic stagnation.

The top priority is to solve the market liquidity problem, and the Fed has to take the above measures. Since the U.S. dollar is the world’s most important currency, the Fed must not only ensure the liquidity of the U.S. market, but also provide U.S. dollar liquidity support to the global markets. This is the background of the Fed’s recent US dollar swap arrangements with 14 developed central banks. In the wave of globalization with the US dollar as the anchor after World War II, the global financial market has a huge demand for the US dollar and a global commodity market with the US dollar as the main settlement currency. The U.S. dollar is the main settlement currency in the financial market and commodity (bulk and import/export) markets. Due to the large amount of U.S. dollars returning to support the U.S. financial market from collapsing, various countries have experienced various degrees of "dollar shortage".

The dollar seems to have fallen into a bottomless black hole. Despite the Fed's all-out efforts, the dollar index is still high, indicating that although the dollar shortage has eased, it has not been completely resolved. We can roughly guess where the dollar is going. The U.S. real estate and securities markets are the main destinations, and some have flowed into the real economy through corporate bond issuance, and some dollars have been "locked in" in the commercial banking system. Real estate and government debt have a certain "solidification" nature. The bull market in the U.S. stock market in the past eleven years has also benefited from the continuous issuance of bonds by listed companies, and then the behavior of maintaining stock prices through repurchases. This part of the dollar was evaporated as the stock market melted. The amount of dollars that have actually entered the circulation and production of commodities may be dwarfed, and will not be enough to trigger inflation.

The dollar decoupling process is long.

There are no exact figures to confirm this speculation. People will inevitably believe that the Fed’s “no bottom line” release will pass on the debt crisis and cause imported inflation in other countries based on common sense in economics, thereby further deepening the expectation of weak world economic growth.

The consequences of a high degree of quantitative easing are still uncertain. However, the stagnation or even slowdown in the growth of the world's major economies caused by the epidemic is a high probability event. This will further trigger a global debt crisis, especially the high default risk of US dollar debt. We are not sure whether there will be a chain default situation similar to that in 2008. A slightly less harmful scenario is the gradual exposure and release of debt risks, the continuous issuance of US dollars, and countries sharing the losses of the US, and the credit of the US dollar is greatly depleted. The worst scenario is that the "dollar shortage" is out of control, leading to a substantial depreciation of the national assets of countries that rely on the US dollar, which is hit by both the financial crisis and the economic crisis. If the latter situation occurs, no country in the world will be immune. Just as the dependence on the US dollar is difficult to be quickly lifted, the problems of high loan-to-deposit ratios of banks in various countries and high government debt-to-GDP ratios cannot be alleviated in the short to medium term.

The Fed had to assume the role of a "global central bank" at this time, lest the market collapse due to the lack of this greenback as a medium of exchange. This is a fact that we have to acquiesce in the current global financial system with the US dollar as its core. But the US dollar is not the only hard currency. Euro, RMB, gold, etc. are alternative currencies to the US dollar. The global supply and demand of US dollars is a dynamic process of change. The decoupling of the global financial system from the US dollar will be a long-term evolutionary process. The foreseeable trend in the future is that more and more commodities will no longer only be settled in U.S. dollars, and the total scale of securities markets and commodity markets denominated and traded in other major currencies will also increase. This process will be accompanied by the shift of US global hegemony and changes in international geopolitics.

The general public as ordinary consumers has no ability to change the status quo. The only thing that can be done is to remain cautious, minimize investment risk exposure, and be prepared for the difficult environment in the next three years.

INERI Vice President, Zheng Lei