29 August 2021
Data from the Federal Reserve shows that between July 2020 and July 2021 the amount of currency in circulation increased approximately 10% from $1,981.7 billion in July 2020 to $2,186.4 billion in July 2021.
Data from the MarketWatch dollar index showed that over the period July 2020 to July 2021, the value of the dollar decreased by 1.26%.
|Date||Currency in circulation (in billions)||MarketWatch Dollar Index|
Sources: Board of Governors of the Federal Reserve, MarketWatch Dollar Index
In theory, American demand for imports, American investments in foreign countries, and speculation adds to the supply of American dollars. Government intervention can also add to the supply of US dollars. Expected tapering of US Treasury bills and agency mortgage-backed securities is expected to start later this year and this activity may result in a reduction of US dollars in circulation as the Fed sells off these securities. The scarcity in dollars should see a future increase in dollar index value as well as an increase in interest rates.
The Federal Reserve tills the currency soil while the banks distribute the currency fruit. If dollars are distributed by banks via loans at higher interest rates, tax generating activities via business and commerce may slow down. The narrative behind the American currency, that American capitalism is the appropriate policy for generating and distributing wealth, will be tainted where capital becomes too expensive for businesses to access.
From the fiscal side, President Biden’s $3.5 trillion dollar infrastructure could suck more air out of the room putting upward pressure on rates and making more capital inaccessible by businesses. Upward pressure on interest rates will only compound the fears that current inflationary trends will become more stationary than transitory.
For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at email@example.com for information on consultation rates and to reserve an appointment.