The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. About 40% of the world’s debt is issued in dollars.
The Bank for International Settlements (BIS) estimates that foreign banks hold over $13 trillion in dollar-denominated assets.
All this, despite the fact that the U.S. economy only accounts for about 15% of global GDP.
The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is there’s a deep, liquid dollar-denominated bond market.
But the coronavirus crisis is creating a massive problem for foreign nations dependent on the dollar.
That’s because the world is facing a critical dollar shortage.
Many observers are surprised to hear about a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008?
Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt .
This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.
But that’s no longer the case, and that’s an understatement. Global growth was anemic before the crisis hit. Now it’s contracting rapidly.
If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.
But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access dollars?
Yes, but it’s not nearly enough to meet global funding needs.