The New Week

The demise of America and the dollar has been an often-told tale.  Some even suggested that the sharp appreciation of the purely speculative crypto-token (Bitcoin) confirmed the loss of the US and the dollar's privileged position in the world economy.  In fact, quite the opposite appears to be taking place.  The latest reserve data from the IMF shows that foreign central banks held more dollars in reserves than ever before at the end of last year, over $7 trillion. The more timely custodian holdings at the Federal Reserve show that Treasuries held for foreign central banks reached a new record high last month.  

Instead of continuing to decline as it has done since last March on a trend basis and accelerating as it did last November and December, the dollar appreciated in Q1 and is beginning Q2 at elevated levels.   The critical consideration is that no country can match the US fiscal and monetary stimulus and the combination of contracts with vaccine developers and the manufacturing capacity to deliver. The US recorded a budget deficit in 2020 of more than 15% of GDP.  This year's deficit is expected to be over 14% of GDP.  Despite the fiscal stimulus and a labor market recovering faster than projected, the Federal Reserve's asset purchases are also larger than others at $120 bln a month.  

The doom and gloom camp bemoans that America cannot even produce the things it invented. They miss the point and ignore all the work about the production life-cycles.  Ultimately, they do not appreciate the US manufacturing sector's flexibility demonstrated through the pandemic and vaccine.  The US can make consumer products, PPE, and vaccines.  Businesses chose instead to focus on higher-value-added activity, like equipment and machinery. What it does produce, it often uses capital-intensive techniques, and still, on the eve of the pandemic, unemployment was the lowest in a generation.  

While the US is the driver of the divergence, it is not like Europe is doing well. Caught up in another wave of contagion, some countries are extending social restrictions for most of this month.  The vaccine rollout has been poor at best.  The contraction being experienced throughout the eurozone will increase counter-cyclical spending, but the actual stimulus seems marginal.  On aggregate, after running a budget deficit of less than 1% in 2017-2019, it jumped to 9.3% last year and is expected to be between 6.0%-6.5% this year.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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