So we now face a possible interesting paradox in the world. Since the crash of 2008, more dollars have been printed at a faster rate than any other time in history. The Federal Reserve has printed around $3.5 trillion of dollars, raising the money supply us to over $4 trillion dollars in this time period. This is the fastest rate of increase in the money supply since the start of the Fed.
But, with all these new dollars in the circulation, is it possible that there is a possible shortage of dollars on the horizon?
First, consider the high amount of dollars that corporations are holding on their balance sheets. CNN Money estimated the amount of dollars held by Fortune 50 companies was at $1.4 trillion at the end of 2014 with the total continuing to climb. Perhaps the biggest reason to keep more cash on the balance sheet is if the leadership of the company is uncertain or fearful about the future. Companies may also think that even with the really low rate of return on cash, it still may seem to be better than to take a risk by investing the money into new equipment or a plant expansion.
Next, even though the amount of dollars has increased substantially, the amount of dollar denominated debt has grown by nearly $57 trillion since the crash. This is a growth rate of 20 times. The greatest percentage of growth comes from sovereign debt. Another $14 trillion comes from companies below investment grade, or considered to be in the junk bond status. Most of this comes from companies in emerging economies that borrowed dollars. Another big source of borrowing in the past 6 years has come from energy companies who borrowed expecting the price of oil to stay above $70 a barrel.
All this extra borrowing is much more than the growth of dollars in the market. This will increase the demand for dollars as a dollar based debt needs to have repayments in dollars. The supply of dollars overseas is going down with the Fed’s recent bend toward interest rate hikes. Increasing rates in the US causes capital flows to come into the US as investors will abandon foreign markets for the return and safety of the US. This places a double whammy on the foreigner debtor who not only has to pay back the dollar debt, but now he pays a higher rate with the appreciating dollar compared to his local currency.
So, the Fed appears to be bent this year on using whatever positive economic news as a reasoning behind a tightening program of interest rate hikes. The most recent factor cited was the strong December employment number of 292,000 new jobs. On the surface it appears to be a strong amount of growth. Former White House budget director David Stockman, mentions the importance of looking at the seasonal adjustments. When you take away the statistical voodoo, you are left with only 11,000 new jobs in December. This is a pittance in a nation as large as ours. It is also interesting to compare the nonseasonable adjusted job count today to the same point in other economic cycles. In December 1999, around 140,000 new jobs were added and in December 2007, 212,000 new employment positions were gained.
The lack of new jobs is downright scary. What is worse is the number of new jobs that pay $50,000 or more a year remains below levels of both 1999 and 2007. Labor force participation is at its lowest level since the Carter Administration. A record number of people are now dependent upon government assistance for their survival. This weakness in the job front is also pointing to another sign of economic weakness with Americans taking on less debt than they used to. Growth in consumer credit has slowed to $14 billion in November, which is 22% lower than the consensus projections. The news was enough to pull the Dow down another 130 points in the final hour of trading last Friday.
So if the Fed uses any sort of economic surface news to continue its tightening, the higher rates will increase the supply of dollars back to the US and drive up the value of the dollar relative to other currencies. Commodity prices will continue to weaken as a stronger dollar can acquire more goods. US exports will weaken and other countries with weaker currencies will have products that are cheaper in the world market.
The rate increases will slow down the US economy further. Slower economic growth coupled with weaker commodity prices will have the possibility of causing downgrades and defaults in the bond area, especially with those borrowings tied to energy of emerging markets. None of the solutions to the current economic situation are easy and most have side effects of deleveraging the system with defaults and restructuring on one side or inflation to pay off debt. Either way indicates there may be warning signs up ahead as a dollar shortage takes hold.