In the world of economics, one of the primary headline makers in 2020 was the Federal Reserve System. The U.S. central bank embarked upon an unprecedented monetary policy, unleashing unlimited quantitative easing, slashing interest rates to historic lows, and bailing out Corporate America (again). With a balance sheet adding trillions of dollars, critics fear there is a severe case of currency debasement and price inflation on the horizon. But the Fed might have a competitor in triggering a tidal wave of inflation: the Treasury Department. Should Joe Biden be named the official winner of the 2020 election, former Fed Chair Janet Yellen will helm the Treasury, a move that makes sense since she will have an enormous cash balance at her fingertips ready to deploy as part of stimulus and relief efforts.
By the time the coronavirus pandemic has come to an end, could a Treasury-Fed alliance put the final nail in the U.S. dollar’s coffin?
A Copycat in Washington
For the last several months, Congress has failed to pass another round of coronavirus stimulus and relief spending. This has resulted in the Treasury having a massive cash balance north of $2 trillion after it issued record levels of debt in the capital markets without ever spending a cent.
This means that the Treasury General Account (TGA) has a net supply of cash available at its disposal to do whatever it wants at any time for the next eight months. The United States faces a debt ceiling in August 2021, leading to a TGA drawdown to cover T-bill payments. And, of course, knowing the government, there will be a bipartisan campaign to kick the can down the road. This is important to note because it suggests reckless abandon of accounting principles.
When you crunch the numbers and determine how many dollars the Treasury can work with until possibly the end of next summer, it makes sense that Joe Biden selected Yellen to helm the Treasury. Since she was in charge of the world’s most powerful apparatus for four years, Yellen will now unleash a liquidity tsunami that matches what her Fed successor, Jerome Powell, is working with amid QE4ever.
Liberty Nation has routinely reported on the amount of liquidity central banks, including the Fed, are pumping into the economy. Be it government securities or corporate bonds, it is hard to envision a time when a monumental selloff comparable to the March market mayhem would transpire. Remember, the central banks’ main objective now is to prevent another coronavirus-induced situation from happening in the equities arena. This directive can become established when you can print money until the universe breaks apart.
The financial markets stabilized after the presidential election for two reasons. The first is the certainty surrounding the electoral result. The second is that Biden is far more likely to push for greater stimulus and relief spending, which is something investors have been pleading for in the second half of 2020. Main Street and Wall Street require an endless stream of liquidity being pumped into their veins to survive, and it is improbable a Biden administration would advocate policy tightening.
While stocks would receive another injection, the U.S. dollar would be victimized and conquered. The U.S. Dollar Index, which gauges the greenback against a basket of currencies, had peaked at 103.00 earlier this year, but it has cratered more than 15% since. Does this spell the end for the good old buck? Washington has yet to eliminate the 30-year-old strong-dollar mandate, but considering that the dollar has become a battered wife, you can only surmise that the currency’s strength is no longer a priority.
Pepto-Bismol or Gold?
For libertarians and critics of the Eccles Building, they could have found an ally in Treasury Secretary Steven Mnuchin, who recently withheld more than $200 billion from the central bank. But what is a couple of hundred billion dollars when the Fed has a $7.25 trillion balance sheet? The consensus on Wall Street is that Washington will ignite a storm of stimulus to cushion the economic blows and enhance the post-COVID-19 recovery. But this might lead to a Fed-Treasury tag team since both institutions have an astronomical amount of money at their disposal. If you own stocks, you might want to sing Happy Days Are Here Again. If you need to buy groceries and pay the rent, you may crave either a crate of Pepto-Bismol or gold bullion.
Read more from Andrew Moran.