Where Have All the Dollars Gone

Where have all the dollars gone?
Long time passing
Where have all the dollars gone?
Long time ago

Where have all the dollars gone?
Emerging markets have borrowed them everyone
Oh, when will they ever learn?
Oh, when will they ever learn?

-Peter, Paul and Mary, the Yuppie Years

The U.S. dollar is the global reserve currency and it underpins much of the global financial system. Banks in the U.S. create dollars when they lend money to borrowers and their act of credit creation is the dominant form of money creation. Foreigners obtain dollars via trade and U.S. outbound investment. Lately, exports of U.S. dollars are falling because the U.S. doesn't need as much oil from abroad and domestically, the U.S. isn't creating much credit:

In Credit Crunch Underway: Can Recession Be Far Behind?, Mish quotes heavily from a report on credit creation and concludes with this chart and commentary:

In the entire series since 2002, the only other time we have seen deep plunges in amount of credit extended and rejection of credit applications was deep in the middle of the last recession. Those are apples to apples comparisons, both seasonally adjusted.

Although comparisons between seasonally adjusted numbers and unseasonably adjusted numbers are technically invalid, if anything that would have led to more volatility between comparisons, not less.

The original report is here: Recessionary Level in Credit Conditions

The $9 trillion overseas debt load is widely discussed now (some background here: Another Look At the Dollar Short) and there are some trends being unleashed such as central bank buying:

In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60 percent in 2011 from 73 percent a decade earlier, though it’s since climbed back to 63 percent.

Bloomberg: The $9 Trillion Short That May Send the Dollar Even Higher

Also: Dollar’s Rise Reshuffles Global Economy Into Winners and Losers

The greenback’s ascent to the highest in a dozen years on a trade-weighted basis is eroding the competitiveness of the U.S. and countries whose exchange rates track the dollar, including China. It’s also pushing down commodity prices, hurting producers such as Brazil, and threatening other emerging markets where companies borrowed in the U.S. currency when it was cheaper.

On the flip side, the euro area and Japan are cashing in as their companies gain the edge in world markets that economies need to boost growth. The likes of India are benefiting, too, by paying less for their energy imports.
“The dollar’s rise is sorting the world into winners and losers,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York and a former Federal Reserve official.

The #1 export of the United States is U.S. dollars. The #1 export of the United States is U.S. dollars. The #1 export of the United States is U.S. dollars.

Citigroup Inc. economists identify Finland, Ireland, Germany and the Netherlands as the countries best positioned to benefit, given the volume of their trade and the sensitivity of their exports to foreign-exchange swings.

What about China?

China retains Asia’s fastest export growth -- even with the rising yuan -- and its leaders want to refocus the economy on consumption rather than investment, so the Chinese currency’s appreciation may assist the transition. Strength in the exchange rate also may help officials’ efforts to have the yuan used more widely abroad and added to the IMF’s list of world reserve currencies.

Still, the yuan’s gain will take its toll on growth that already is decelerating.

“It will certainly be a blow,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The short-term effect seems not obvious as the trade surplus remains high, but in fact the economy’s competitiveness is hurt.”

That was written two days ago. Today, we learned Chinese Trade Figures Plummet.

Meanwhile, the yuan is rising again today thanks to piggybacking on the U.S. dollar rally, and the greenback is testing its 2015 highs versus the euro.