Re:Federal Reserve balance sheet trends
by vmception on Thursday April 23, 2020 @11:54AM
(#22957312)
As long as the relative purchasing power of a dollar, compared only to other currencies, is managed, the Federal Reserve can purchase as much as it wants. When the Federal Reserve purchases things, each transaction creates new dollars (unless it had previously sold an asset for existing dollars and wanted to use those dollars instead).
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing - creating currency - weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can create more dollars to weaken it, avoiding deflation. Currencies based on scarce commodities have deflationary economies as the economy grows, which hampers liquidity and investment, the US has had that before and moved away from it because it wanted liquidity and investment. So you can predict that it will avoid deflationary environments.
All fiat currencies are in the same boat, but the dollar is not in that boat in isolation. Coordinated central bank accounts allow this to continue into perpetuity. Ie. If the European Central bank diluted their currency by creating trillions of Euros, the Euro might trade down to parity with the US dollars (at time of writing the 1 Euro can be traded for 1.09 US Dollar), instead of that happening in isolation, the Federal Reserve can also create an offsetting amount of dollars, weakening the dollar enough to force the Euro to still trade for 1.09 us dollars, while both banks have accomplished their goal of adding liquidity to their economy.
So for massive monetary unions, it is much harder to "fail" or enter into a hyperinflationary environment.
But yes, if that a lot of the newly created currency was being used to buy gold, then the price of gold would be expected to go up. It is just a much harder environment for the narrative of it becoming a replacement for the dollar to be there. Other fiat currencies outside of large monetary unions might have utility in switching to a commodity again.
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing - creating currency - weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can create more dollars to weaken it, avoiding deflation. Currencies based on scarce commodities have deflationary economies as the economy grows, which hampers liquidity and investment, the US has had that before and moved away from it because it wanted liquidity and investment. So you can predict that it will avoid deflationary environments.
All fiat currencies are in the same boat, but the dollar is not in that boat in isolation. Coordinated central bank accounts allow this to continue into perpetuity. Ie. If the European Central bank diluted their currency by creating trillions of Euros, the Euro might trade down to parity with the US dollars (at time of writing the 1 Euro can be traded for 1.09 US Dollar), instead of that happening in isolation, the Federal Reserve can also create an offsetting amount of dollars, weakening the dollar enough to force the Euro to still trade for 1.09 us dollars, while both banks have accomplished their goal of adding liquidity to their economy.
So for massive monetary unions, it is much harder to "fail" or enter into a hyperinflationary environment.
But yes, if that a lot of the newly created currency was being used to buy gold, then the price of gold would be expected to go up. It is just a much harder environment for the narrative of it becoming a replacement for the dollar to be there. Other fiat currencies outside of large monetary unions might have utility in switching to a commodity again.