July 18, 2018 glacierinvest

I wanted to share a chart from a report I read yesterday, focusing on the shrinking supply of U.S. dollars (“USD”) globally. You can find the report online here.

World dollar liquidity as depicted in the chart is the sum of the U.S. monetary base and Treasury securities owned by foreign central banks held at the Federal Reserve Bank of New York. The premise is that since USD is the world’s reserve currency the ebbs and flows of its supply impact global economic growth. For example, when year-over-year growth in the the global supply of USD contracts, the global economy is in for a slowdown and potentially a recession, which makes sense. When an individual country’s money supply shrinks, that’s usually a precursor to an economic slowdown or even a recession.

Shrinking the money supply is usually a central bank’s objective when it seeks to tighten monetary policy, which the Federal Reserve is currently doing. However, as I mentioned in yesterday’s post it’s a double whammy as the Fed is not only raising rates but it’s also shrinking its balance sheet by allowing the securities it purchased in the years after the last recession to mature. What the actual impact will be remains to be seen but I thought the chart above was a nice visualization USD supply growth and recessions (the gray vertical bars).