US will flood world with liquidity for years to come

From Dr. Desmond Lachman

Sir, There are many reasons to be concerned about the long-run global economic outlook and about the prospects for the long-run maintenance of an open international trading system. However, a shortage of global liquidity would not appear to be one of them, notwithstanding Barry Eichengreen’s assertion to the contrary (“The dollar’s days as a reserve currency are numbered”, October 9).

Prof Eichengreen’s main concern is that a relative decline in the US economy will undermine its ability to supply the world with an adequate amount of safe and liquid assets. Yet that concern is hardly supported by the experience of the past few years.

Since 2008, in the context of the weakest US economic recovery in the postwar period, the US has contributed to an unprecedented increase in global liquidity. Over that period, the US Federal Reserve has expanded its balance sheet from about $800bn to about $2.5tr while the US Treasury has issued short-term debt at a record rate. And all of this was done without in any way destabilising the US dollar or kindling US inflation.

With the Federal Reserve now embarked on QE3 without a terminal date and with the US government deficit likely to remain high, there is every prospect that the US will continue to flood the global economy with too much rather than with too little liquidity for many years to come.

There is also every prospect that this increase in global liquidity will occur within the setting of a stable US dollar as the euro, the US dollar’s main competitor for international reserve currency status, continues its process of gradually unravelling. And there is also every prospect that US inflation will be contained by the persistence of very large output and labour market gaps.

If this does occur, Prof Eichengreen might take comfort in the fact that he will not have been the first to cry wolf about the US dollar’s imminent demise as the world’s reserve currency.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

To secure southern border, US must lead international effort to stabilize Central America
image The Ryan pro-work, anti-poverty plan: Thomas Aquinas 1, Ayn Rand 0
image Does SNAP support work? Yes and no
image Obama Democrats lose their big bet on health exchanges
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.