Wednesday, July 27, 2011

U.S. Dollar Falls To New Lows On Money Supply Growth, Debt Limit Crisis

The U.S. dollar is falling to new lows against an increasing number of currencies, with for example the Australian dollar rising above US$1.10, the Swiss franc touching US$1.25 and the Singapore dollar rising above 83 U.S. cents and as it now costs less than 78 yens to buy a U.S. dollar. The U.S. dollar is even falling against currencies that for other reasons are weak, like the euro and the British pound.

There are two reasons for this. The most important factor is that QE2 has caused money supply growth to reach double digit levels at annualized rates in recent months, regardless of whether you prefer the M1, M2 or MZM definitions.

The drop in recent days however is however more related to a decrease in demand in dollar assets as the likelihood of a U.S. default increases due to the inability of Republicans and Democrats to agree on the terms of an increase in the federal debt ceiling.


Blogger Jim Slip said...

Mr. Karlsson, QE only affects the monetary base. M1/ M2 etc growth only depends on private credit growth (which is unaffected by changes in the monetary base) and fiscal deficits. Two decades of QE in Japan should have made this clear. Central Banks cannot control the money supply. Only governments can (treasury) through deficits or taxation.

2:39 PM  
Blogger stefankarlsson said...

This comment has been removed by the author.

8:45 PM  
Blogger stefankarlsson said...

Jim, M1/M2 is not unaffected by the monetary base since for one thing one thing Currency (aka physical cash) is a part of both and secondly QE2 lowers interest rate wbich in turn increases demand for credit. And by making deficit spending cheaper inflation encourages deficit spending.

8:46 PM  

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