Usually when you add huge supply of something to the market–in this case trillions of U.S. dollars–the value of it goes down.
Yet the U.S. is flooding the market with dollars, and the dollar remains strong. There’s one quick-and-easy answer for this: U.S. Treasury bills and bonds are still considered the safest investment in the world. They’re (obviously) denominated in U.S. dollars, so you need to buy dollars to buy them.
And we guess the theory that since almost every country (and especially 1st world countries) is getting devastated by the Coronavirus to some degree, everyone’s economy will be brutally damaged, and it’ll take a long time for everybody to recover.
But that may not be the case. The U.S. way of handling at least the economic side of the Coronavirus crisis is somewhat unique in the world. U.S. companies are in effect being encouraged to fire employees so those employees can receive extended unemployment benefits (although companies are also being rewarded if they promise to bring those people back afterwards–really, the first stimulus bill Congress passed is not a bad bill.) Then those ex-employees need to find health insurance (or go on to COBRA where they have to shoulder their entire insurance bill, which in many cases their companies were taking care of part of before). But in other countries, particularly in Europe, workers don’t get fired. Germany, for instance, even before this, already had a system in place for short term economic disasters in which employees take a cut in work hours and pay (which is paid for by the government, not their company) but companies don’t have to fire anybody, and workers then get their jobs back. Of course, if economic conditions end up being horrible, they may be fired eventually, which is why the program also provides financial incentives if the employees use some of their down time to expand their job training. And of course they also have medical insurance built-in.
Will that make it easier for countries like Germany to come back when this is over? We’ll see. Will the U.S. be leading the way back? We’ll also see. It’s certainly not showing itself to be the global leader in this crisis. At least not so far.
For years, the U.S. has enjoyed something called “exorbitant privilege“. Which basically means because most global transactions are done in U.S. dollars, the U.S. economy automatically has an advantage over the rest of the world, which is almost always in the position of being forced to buy U.S. dollars. (Trump doesn’t like a strong dollar, but on balance, it’s been a good thing.) For instance, oil prices are almost always quoted in dollars, regardless of whether the oil is coming from Texas, the North Sea, or the Persian Gulf.
Could the Coronavirus crisis flip this convention of the world economy on its head? We’ve heard lots of chatter about China emerging from this with stronger global influence. But nobody’s paying much attention to Europe. And the Euro. There already are some Euro denominated bonds. But they’ve never really caught on big. And the Euro isn’t the go-to global currency because the U.S. dollar is. (And also frankly, because Britain never let go of using the British Pound even when it was a member of the European Union, but with Brexit, the EU no longer has to worry about that: its most enduringly unpleasant member has just packed its bags and left). The Chinese Renminbi never can be the de-facto global currency at least as long as it’s not free-floating, which it isn’t, and people can’t trust the Chinese government not to manipulate the value of it, which they do all the time. So is it the Euro’s time to rise?