Why is the Fed Printing So Much Money?
Last week, I pointed out how the Federal Reserve is acting aggressively to weaken the U.S. dollar.
If you missed those articles, the basic outline is that the Fed has dramatically shifted gears in the last few months.
Back in July when the Fed made its first rate cut in over 10 years, Fed officials suggested that this was not the start of an aggressive easing cycle. Rather, they stated that this was a “mid-cycle adjustment,” meaning it was probably the only rate cut they would make for some time.
Since that time, the Fed has eased via four monetary policies.
First, the Fed cut rates again (and it’s expected to cut them even further this week).
Second, the Fed launched a $60 billion per month quantitative easing (QE) program through which it prints $60 billion in new money and uses it to buy Treasuries from the large banks.
Third, the Fed launched an overnight repo program through which the Fed is providing $120 billion in liquidity – up from $75 billion when this program was originally launched in September.
And fourth, the Fed launched a second repo program, called a “term repo.” Meaning the Fed is lending out the capital for a set period of time. This program is now $45 billion – up from $30 billion when the Fed first launched this program in September.
Add it all up, and the Fed is now easing via four monetary policies. And all of them are designed to weaken the U.S. dollar.
The reason for this is simple.
A Global U.S. Dollar Shortage
The world is facing a massive U.S. dollar shortage, and the Fed is doing everything it can to make the U.S. dollar cheaper.
Globally, roughly 40% of all debt is denominated in U.S. dollars.
This means that the countries/firms that issued this debt need to pay back the debt (and its interest payments) in U.S. dollars. However, none of these coutnries/firms can print the U.S. dollar – only the U.S. can.
That alone means that globally, foreign nations and companies need to come up with trillions of U.S. dollars or face default. And considering the U.S. dollar is involved in over 90% of all global currency transactions, you quickly realize just how important it is for the U.S. dollar to be both easily accessible and not too strong.
The alternative is that the global financial system begins to grind to a halt.
Put simply, the Fed has no choice but to try and weaken the U.S. dollar.
For more information on this…
I was on Cheddar last week discussing the Fed’s actions in great detail. You can watch the full video here.
Editor, Money & Crisis