>FLASH ECONOMICS (ECONOMIC RESEARCH)

The loss of confidence in dollar denominated assets continues to grow

In this Flash we will look at the nature and severity of the loss of confidence resulting from the extremely expansionary fiscal and monetary policies being implemented in the United States. We must take into account the particular situation of the United States: if the US external deficit increases, central banks in many countries are forced to accumulate dollar-denominated assets
in order to stabilise the dollar:

■ the deterioration in the creditworthiness of the public debt (due to excessive fiscal deficits, the Treasury’s purchases of risky assets, etc.) is leading investors to increasingly prefer private-sector assets to public assets. This does not pose any problem for central banks: the dollar can be shored up through purchases of dollar-denominated private-sector securities. The result of this first stage of loss of confidence in the dollar is a rise in interest rates on public debts relative to private debts;

■ the deterioration in the quality of the Federal Reserve’s assets, due to the large number of programmes to buy risky assets, may entail a loss of confidence of a different kind, i.e. in the money issued by the Federal Reserve. This may trigger a flight-from-money phenomenon: economic agents get rid of money and buy real assets (real estate, companies, commodities, durable goods, etc.), and this triggers a surge in real asset prices (also known as "hyperinflation").

If central banks in countries posting a surplus reject dollar money as well, the stability of the dollar's exchange rate can no longer be maintained. In an initial phase, if the flight from dollar money concerns only private economic agents, central banks’ holding of dollar-denominated assets must significantly increase.

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