Observations on Growing Financial Stresses Around the US Dollar, and Productivity
GIC Board Member, J. Paul Horne
The Financial Times points to growing financial stresses around the USD which could involve key central banks. Today’s report on China’s CB organizing a greater international payments role for the Renminbi is indicative. Its claim that the RMB is the second largest trade finance currency and third largest payment currency may be questionable but the trend in this direction is clear.
Also noteworthy is that European Central Bank President, Christine Lagarde, and People’s Bank of China Governor, Pan Gongsheng met in Beijing last week to sign a cooperation agreement. This confirms that key Central Banks are maneuvering to gain flexibility beyond the US Dollar. Lagarde was very clear in her FT op-ed that the global order of open markets and multilateral rules is being fractured as the current U.S. administration appears willing to breaks rules, norms and relationships.
Jillian Tett raises a key technical issue which the College of Central Bankers Fellows know in depth: swap lines between central banks. The Fed’s permanent swap lines with the Euro Zone, Japan, UK, Switzerland and Canada are the “core pillar of the global financial system,” she says, giving three examples of how they prevented a financial meltdown.
But if Trump replaces Powell and the Fed attaches conditions to swaps, she asks if financial stability could be threatened. To this point, the Centre for Economic Policy Research think tank recently suggested that 14 central banks, excluding the Fed, use their estimated $1.9 tn in USD holdings to provide liquidity among themselves.
Another symptom of growing distrust of the U.S. is central banks’ continuing purchases of gold – not exactly a pillar of financial stability.
Finally, JPMorgan’s co-head of investment strategy notes that U.S. business sector productivity growth increased 2% annually since the pandemic but she wonders whether current policy chaos will slow business investment and the productivity growth that underpins U.S. economic growth and the USD.
I would note that total factor productivity growth, which lags business productivity, is even more important for underlying growth potential. (See: Bureau of Labor Statistics News Release for TFP trends.) Given the administration’s efforts to slow or stop net immigration, labor force growth will certainly slow this year and next, making productivity even more important for the economy underpinning the USD’s reserve currency role.
Would slowing productivity growth persuade the Fed to focus more on economic growth than inflation?