Despite Massive QE And Congress Bill, The US Dollar Shortage Intensifies

How can the Fed launch an “unlimited” monetary stimulus with congress approving a $2 trillion package and the dollar index remain strong? The answer lies in the rising global dollar shortage, and should be a lesson for monetary alchemists around the world.

The $2 trillion stimulus package agreed by Congress is around 10% of GDP and, if we include the Fed borrowing facilities for working capital, it means $6 trillion in liquidity for consumers and firms over the next nine months.

The stimulus package approved by Congress is made up of the next key items: Permanent fiscal transfers to households and firms of almost $5 trillion. Individuals will receive a $1,200 cash payment ($300 billion in total). The loans for small businesses, which become grants if jobs are maintained ($367 billion). Increase in unemployment insurance payments which now cover 100% of lost wages for four months ($200 billion). $100 billion for the healthcare system, as well as $150bn for state and local governments. The remainder of the package comes from temporary liquidity support to households and firms, including tax delays and waivers. Finally, the use of the Treasury’s Exchange Stabilization Fund for $500bn of loans for non-financial firms.

To this, we must add the massive quantitative easing program announced by the Fed.

First, we must understand that the word “unlimited” is only a communication tool. It is not unlimited. It is limited by the confidence and demand of US dollars.

I have had the pleasure of working with several members of the Federal Reserve, and the truth is that it is not unlimited. But they know that communication matters.



The Federal Reserve has identified the Achilles heel of the world economy: the enormous global shortage of dollars. The global dollar shortage is estimated to be $ 13 trillion now, if we deduct dollar-based liabilities from money supply including reserves.

How did we reach such a dollar shortage? In the past 20 years, dollar-denominated debt in emerging and developed economies, led by China, has exploded. The reason is simple, domestic and international investors do not accept local currency risk in large quantities knowing that, in an event like what we are currently experiencing, many countries will decide to make huge devaluations and destroy their bondholders.

According to the Bank of International Settlements, the outstanding amount of dollar-denominated bonds issued by emerging and European countries in addition to China has doubled from $30 to $60 trillion between 2008 and 2019. Those countries now face more than $2 trillion of dollar-denominated maturities in the next two years and, in addition, the fall in exports, GDP and the price of commodities has generated a massive hole in dollar revenues for most economies.

If we take the US dollar reserves of the most indebted countries and deduct the outstanding liabilities with the estimated foreign exchange revenues in this crisis … The global dollar shortage may rise from 13 trillions of dollars in March 2020 to $ 20 trillion in December … And that is if we do not estimate a lasting global recession.

China maintains $3 trillion of reserves and is one of the best-prepared countries, but still, those total reserves cover around 60% of existing commitments. If export revenues collapse, dollar scarcity increases. In 2019, Chinese issuers increased their dollar-denominated debt by $ 200 billion as exports slowed.

Gold reserves are not enough. If we look at the main economies’ gold reserves, they account for less than 2% of money supply. Russia has the largest gold reserves vs money supply. China’s gold reserves: 0.007% of its money supply (M2), Russia’s gold reserves: c9% of its money supply. As such, there is no “gold-backed” currency in the world, and the best protected -in gold- the Ruble, suffers the same volatility in commodity slump and recession times as others due to the same issue of US dollar scarcity, although not even close to the volatility of those LatAm countries that face both falling US dollar reserves and a collapse in demand from their own citizens of their domestic currency (as Argentina)..

The Federal Reserve knows that it has the largest bazooka at its disposal because the rest of the world needs at least $ 20 trillion by the end of the year, so it can increase the balance sheet and support a large deficit increase of $10 trillion and the US dollar shortage would remain.

The US dollar does not weaken excessively because the rest of the countries are facing a huge loss of reserves while at the same time increasing their monetary base in local currency much faster than the Federal Reserve, but without being a global reserve currency.

Second, the accumulation of gold reserves of the central banks of the past years has been more than offset in a few months by the increase in the monetary base of the world-leading countries. In other words, the gold reserves of many countries have increased but at a much slower rate than their monetary base.

The Federal Reserve knows something else: In the current circumstances and with a global crisis on the horizon, global demand for bonds from emerging countries in local currency will likely collapse, far below their financing needs. Dependence on the US dollar increases. Why? When hundreds of countries try to copy the Federal Reserve printing and cutting rates without having the legal, investment and financial security of the United States, they fall into the trap that I comment in my book Escape from the Central Bank Trap (BEP): ignoring the true demand for their domestic currency.

A country cannot expect to have a global reserve currency and maintain capital controls and investment security gaps at the same time.

The ECB will likely understand this shortly when the huge trade surplus that supports the euro collapses in the face of a crisis. Japan learned that lesson by turning the yen into a currency backed by huge dollar savings and increased its legal and investment security to the standards of the US or UK, despite its own monetary madness.

The race to zero of central banks in their monetary madness is not to see who wins, but who loses first. And those that fail are always the ones who play at being the Fed and the US without their economic freedom, legal certainty, and investor security.

The Federal Reserve can be criticized, and rightly so, for its monetary madness, but at least it is the only central bank that truly analyzes the global demand for US dollars and knows that its money supply must increase a lot less than its total currency demand. In reality, the Fed QE is not unlimited, it is limited by the real demand for US currency, something that other central banks ignore or prefer to forget. Can the US dollar lose its global reserve position? Sure it can, but never to a country that decides to commit the same monetary follies as the Fed without their analysis of real demand for the currency they manage.

This should be a lesson for all countries. If you fall into the trap of playing reserve currency and endless printing without understanding demand, your US dollar dependence will intensify.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

28 thoughts on “Despite Massive QE And Congress Bill, The US Dollar Shortage Intensifies

    1. Makes no sense, at 10,000 an ounce the reality is that no economy, from China to the US, would be able to assume the gold standard as money supply growth would still far exceed their reserves.

  1. What will happen to all the debt if every major economy will swith to a digital currency?
    Will it be erased?

  2. Congrats Daniel. ¿Is it possible not increases inflaction in USA, due to usa demanding cames from over the world?

  3. Great article! Do you foresee a rise in inflation within the Eurozone as a result of an unmatched foreign demand for the Euro (as opposed to what happens with the USD)?

  4. Insightful analysis Daniel, a couple of questions:

    Core inflation in the Eurozone is low…should not be the time to monetize the part of the deficit caused by the Covid and (on conditions of stability and reforms) the non sustainable part of the public debt of many countries?

    The other one is about inflation itself, or the lack of it. Despiste massive monetary stimulus worlwide, it remains subdued…what’s the cause in your opinion?


  5. Hi Daniel. My question is, where do you see EUR/USD in the mid term (2021), once the covid-19 crisis in over? Shouldn’t it go to the 1,15-1,20’s, given that rates gap is so small now? Thanks!

  6. Reading your replies is as insightful as reading your well thought out articles Daniel. Thanks for your excellent analysis.

  7. That is the best articulation of the relationship between money supply, sovereign debt, & gold that I’ve read. Thank you. It brings up a question, though. There’s a lot of trepidation surrounding the sovereign debt load the U.S. is carrying now, over 100% of G.D.P., and the spendthrift habits of Congress. But is the U.S. government over-spending because they just can’t help themselves, or are they overspending to bolster dollar liquidity in the global system? If the latter, given that the global demand for dollars outstrips even the U.S. government’s ability to spend & issue sovereign debt, doesn’t that imply that the capacity of the dollar to remain as the global reserve has reached its limit?

  8. No questions, just well done. Not easy to find article like this, based on understanding how system works. As most others are based on simple assumptions.

  9. What about the recently introduced swap lines? And don’t you think that – at least to a certain extent – one or the reasons why we are still seeing strong usd demand and tension in fed-libor is because some of the measure announced, like the Commercial Paper facility, take time to get implemented ?

  10. Mr. Lacalle,
    What’s your view for BRL Currency? We’re much worried here in Brazil…
    Thanks for your time. Great article.

  11. Hi Daniel, big fan here! Thank you for the article. How about the swap lines the Fed has opened (not the first time) with other central banks? It is not clear to me if this is highly effective to ease the upward pressure on the dollar. It seems like it does take a lot of air off the balloon. What are your thoughts?

  12. Interesting to see is that, even tho USD is getting stronger, and there is flight to cash, we see that XAUUSD is also rising. I know it’s a safe haven, but as we saw in previous years – in liquidity events, when brutal crashes occurs – normally gold is decling also. Now as I see equities, commodities and metals markets seems to be in bear market correction after march crash, apart from Gold. XAUUSD seems to be starting it’s new bull run, which is strange – silver seems to completely decorrelate from gold, and is in bear market, as other metals.

    Something which is question to me how Palladium will behave. Logic and hard data would support thesis, that it’s now in bear market (big losses in the automotive market, cars sales is declining more than 50% in various parts of the world after lockdown) after last waves, which were fundamentally driven (car producers demand outstripped supply for years), but in last 2-3 months it was very speculative. I wonder, if we just had XPDUSD bubble popped, and it will decline the same way as other metals now (apart from gold). IMO yes, and all metals should now correlate more or less the same – XAG, XPT and XPD, and apart only XAU is looking bullish.

  13. Hi Daniel!

    Thank you for this great article!
    Do you think that EUR/USD – given the current trend – could make it short time >1.25 and to new all time highs above 1.60 on a 5-6 years time frame or will the rising dollar scarcity most likely revert this trendline much earlier ?

    1. The Euro always bounces on optimistic and unrealistic expectations of recovery and growth, then the reality hits expectations.

      If you look at the long term trend of the euro-usd is that the euro remains relatively stable but weakening.

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