$400 billion dollars buys you weak dollar and emerging market rally

what will happen to growth and asset prices if govt of India spends 300000 ( roughly 2% of GDP) crore in a quarter? Well… This is the amount of liquidity as a % of GDP which US treasury  unleashed into the money markets when it let the cash balances of the US Treasury run down so the government wouldn’t breach the debt ceiling. At the same time, the Fed was trying to tighten financial conditions by hiking in December 2016 while the Treasury unintentionally floods money markets with $400 billion ( roughly 2% of US GDP) in cash in the 1st quarter of 2017.In reality, the US Government actually spent US$400bn which ended up in deposit accounts which were not simultaneously drained by sales of Treasury Bills.

So…the system was flush with an additional US$400bn of dollar reserves.

Think what this high powered money can do to asset markets and there you have ……markets after markets making a new high

US Treasury Cash Balances at Federal Reserve Banks plummet to prevent a breach of the debt ceiling. (chart below)

Now we know what created the liquidity mirage, weakened the dollar, and sent EM & precious metals rallying through the first half of the year

At some point in near future when Americans will solve their debt ceiling problem, US treasury will have to replenish this liquidity by issuing Treasury bills/notes and that would be the time we will have tightening of dollar liquidity and bid under US Dollar.

Ritesh Jain

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