The coronavirus trigged economic and market downturns around the world, which created holes in incomes
and balance sheets, especially for indebted entities that had incomes that suffered from the downturn.
Classically, central governments and central banks had to create money and credit to get it to those entities they
wanted to save that financially wouldn’t have survived without that money and credit. So, on April 9, 2020 the US
central bank (the Fed) announced a massive money and credit creation program, alongside massive
programs from the US central government (the president and Congress). They included all the classic MP3
techniques, including helicopter money (direct payments from the government to citizens). It was essentially
the same announcement that Roosevelt made on March 5, 1933. While the virus triggered this particular
financial and economic downturn, something else would have eventually triggered it, and regardless of what did,
the dynamic would have been basically the same because only MP3 would have worked to reverse the downturn.
The European Central Bank, the Bank of Japan, and—to a lesser extent—the People’s Bank of China made similar
moves, though what matters most is what the Federal Reserve did because it is the creator of dollars, which are
still the world’s dominant money and credit.
The US dollar now accounts for about 55% of the world’s international transactions, savings, and borrowing. The
Eurozone’s euro accounts for about 25%. The Japanese yen accounts for less than 10%. The Chinese renminbi
accounts for about 2%. Most other currencies are not used internationally as mediums of exchange or storeholds of
wealth, though they are used within countries. Those other currencies are ones that even the smart people in those
countries, and virtually everyone outside those countries, won’t hold as storeholds of wealth. In contrast, the
reserve currencies I mentioned are the currencies that most people around the world like to save, borrow, and
transact, roughly in proportion to the percentages I just mentioned.
Countries that have the world’s reserve currencies have amazing power—a reserve currency is probably the most
important power to have, even more than military power. That is because when a country has a reserve currency it
can print money and borrow money to spend as it sees fit, the way the US is doing now, while those that don’t
have reserve currencies have to get the money and credit that they need (which is denominated in the world’s
reserve currency) to transact and save in it. For example right now, as of this writing, those who have a lot of debt
that they need to service and need more dollars to buy goods and services now that their dollar incomes have fallen
are strongly demanding dollars.
As shown in the chart in Chapter 1 that depicts eight measures of a country’s rising and declining power, the
reserve currency power (which is measured by the share of transactions and savings in that currency) significantly
lags the other measures of the country’s strength. That has been true for the US and the US dollar. For example, in
1944 when the US dollar was anointed as the world’s dominant reserve currency, the US had around two-thirds of
the world’s gold held by governments (which was considered money at the time) and accounted for about half of
world GDP. Today the US accounts for only around 20% of world GDP but still accounts for about 60% of global
reserves and about half of international transactions. So the US dollar and the dollar-based monetary and payments
system still reign supreme and are outsized relative to the size of the US economy.
As with all banks that printed reserve currencies, the Federal Reserve is now in the strong but awkward position of
running its monetary policy in a way that is good for Americans but that might not be good for others around the
world who are dependent on dollars. For example the US central government just recently decided that it would
borrow money to give it and dollar credit to Americans and the Federal Reserve decided to buy that US
government debt and a lot more other debt of Americans to help them through this financial crisis. Understandably
little of that will go to foreigners. The European Central Bank will do something similar for those in the Eurozone.
The Bank of Japan, which is still smaller on the world scene, will do the same thing for the Japanese, and the
People’s Bank of China will do the same thing for the Chinese. A couple of other relatively small countries (like
Switzerland) might be able to do something similar for their people, but most of the world won’t get the money
and credit they need to fill their income and balance sheet holes the way Americans will. This dynamic of countries
not being able to get the hard currency they need is like what happened in the 1982-91 period, except interest rates
can’t be cut significantly this time while they could be cut very significantly in that 1982-91 period.
At the same time, dollar-denominated debt owed by non-Americans (i.e., those in emerging markets, European
countries, and China) is about $20 trillion (which is about 50% higher than what it was in 2008), with a bit less
than half of that total being short-term. These dollar debtors will have to come up with dollars to service these
debts and they will have to come up with more dollars to buy goods and services in world markets. So, by having