A tidy round-up in Global Finance magazine (free subscription here) on the "Shortage of dollars" hit my snail-mail box a couple of days ago.
The "credit crunch" by another name, the shortage began in earnest, as everyone knows, when free lunches were removed and Lehman went down. Serious dollar hoarding followed amongst banks and money market funds (a key source of dollar finance to non-US banks). BRIC countries are at it too as they look to rebuild dollar reserves dropping precipitously - October ’08 saw these fall by $140bn, a monthly record.
Though the article ignores the additional dollar-supportive role of deleveraging by non-US banks, in visual form - and taking last Spring as the starting point - it all adds up to something like this:
US Dollar index, weekly:
Quite surprising for a currency whose central bank seems to be bent on printing money willy-nilly since its November $500bn purchase of Fannie Mae, Freddie Mac and Ginnie Mae mortgage backed securities (plus the additional liquidity programme of $100m). And there is the doubling (to over $600bn) of Federal Reserve swap lines to the European Central Bank (and others), mitigating the aforementioned money market hoarding, to bear in mind too.
This shift to a "creation of money’" policy in harness with the previous stand alone "price of money" stance is the crux of the deflation/inflation debate so much cyber and real ink is being spilt over. Toss in the financing form of the bigger-every-day Obama fiscal package - Treasury sale vs reserve creation by the Fed – and watch it run and run.
Then, yesterday as I confessed (without irony or basis) to coveting the credit for her post Ethics Exam, Cassandra Does Tokyo sent me this link to an excellent Econobrowser post and highlighted the comment below from Professor Perry Mehrling of Columbia University:
"It seems to me that what we are seeing is simply the balance sheet consequences of the Fed's decision to take the wholesale money market onto its own balance sheet…In this view, inflation seems much less likely. Why not? If the original wholesale money market borrowing and lending was not inflationary, then why should its substitute be inflationary? Indeed, the real question is whether the expansion of the Fed's balance sheet is keeping pace with the contraction of money market credit more generally. If not, then the consequence may be deflationary."
That elevates the discussion, I think, to one about the health and future structure of the wholesale money market. Is it a salvage and rebuild job? Or does it only need time to heal itself back to normal (at which point, ZIRP and money creation will be revealed as excessive and bite back)?
An era of salvage, reconstruction and enduring deflation is what is very clearly signposted currently - including the impact of today's ongoing policy responses. But, citing from a Bloomberg appearance by Bill Poole a few days ago, "shit happens".
Which is econ speak for "beware the lags".