Dollar scarcity is on the rise

From Bloomberg on Monday (citing Morgan Stanley research):

Morgan Stanley says the potential scarcity of dollars among foreign private borrowers represents the U.S.’s net position with lenders abroad of minus $2.4 trillion, adding $4.8 trillion of U.S. financial assets held by central banks, and subtracting $500 billion of foreign official assets held by the U.S.

That equals about $2 trillion of demand from foreign private banks and companies. The gap has expanded from $400 billion in 2008, according to the New York-based firm. In 2002, there was a dollar surplus of $900 billion, the data show.

The fact that the net dollar shortage position of foreign private banks and companies has increased to $2 trillion is quite something.

Readers might remember that as the crisis intensified in 2008 it was the dollar experienced a huge pop, not gold. Goldbugs were indeed quite confused at the time as to why gold would lose its safe haven shine at such a critical moment:

People, though, soon realised that one of the key things which was driving the dollar rush in the first place was the number of foreign dollar-denominated liabilities outstanding. With the number of eurodollars (those dollars that circulate outside of the US) ultimately capped, pressure on the dollar exchange rate began to show as investors grappled to raise dollar funding to meet margin calls on depreciating dollar-denominated assets.

The fact that Morgan Stanley estimates the dollar shortage figure could be four times larger than it was in 2008 is thus quite worrying. Though this should hardly come as a surprise given the scramble for US Treasury securities that has taken place in the last four years, a situation which has led to a now well documented shortage of “safe” dollar collateral in the market.

All of which is why we called this the most important chart in the world right now (probably).

And why we are watching the “dollar shortage” story in China even more closely.

Related links:
The decline of “safe” assets - FT Alphaville
Dollar Shortage Seen in $2 Trillion Gap Says Morgan Stanley – Bloomberg
The dollar shortage problem, evaluated – FT Alphaville

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