A financial professional, Chuck (Atsushi) Kawakami (pictured) recently reported a question mark on the sustainability of the US dollar as a key currency, which worsens fiscal and external balance. MIRUPLUS pick up his analysis as follows;

So far, the US dollar has been relatively strong and the market is very optimistic. Looking at the level of credit, it is a situation that can be said to be abnormal.

Yields on bonds below the CCC rating have recently fallen below 7%. This rating level became even more optimistic as crude oil prices rose, partly due to the large number of shale oil-related bond issuers. However, looking from 1996 to 2019, this CCC or lower bond yield hit 7.91% only once on June 24, 2014, but since then it has been around 10% or more, and this time. In 2019, before the pandemic, the average rate was 11%.

Currently, it is a historically low level below 7%. The Greek 10-year government bond, which has the worst fiscal balance, has also remained at a bottom with yields below 1%. In the current credit market, it can be said that there is no need to think about risks.

However, the risks are increasing. In June, BIS's global non-financial debt balance was announced at the level up to December last year, but the ratio of that balance to GDP has almost reached 300%. Not only non-financial companies, but also general government debt has become extremely large due to the expansion of fiscal spending for corona measures.

The above are gross figures, but the OECD has announced net debt (net assets), which is the difference between financial assets and financial liabilities of the general government. Taking a look at this, the fact that the net balance is poor as a percentage of GDP is that Italy, Japan, and the United States are in the top five, with Greece at the top. 

The debt situation of the U.S. government is worse than generally imagined. There is widespread recognition that the debt situation of Japan's central government is "bad." Therefore, we compared the consolidated balance sheet of the Japanese government (the general account and the special account combined to offset the duplication of debts and credits) with the balance sheet of the U.S. federal government. The latest announcement in Japan is at the end of March 2020, and the latest announcement in the United States is at the end of 2020.

 （Data：OECD)

This shows that there is no big difference in the figures measured by the ratio of net debt to GDP of the central governments of the two countries, and it does not mean that Japan, which is notorious for the size of gross debt balance, also stands out alone. 

With $ 1.9 trillion in additional spending this year and $ 6 trillion in spending budgets next year, the U.S. government's balance is likely to worsen. It was on June 23 that Treasury Secretary Janet Yellen announced under the current fiscal law that the risk of default would materialize in August without a debt cap hike.

The external balance of the United States is also deteriorating. Net external assets (net debt) also exceeded $ 14 trillion at the end of last year. This is a rapid increase that has more than tripled immediately after the Lehman shock. The trade balance continues to deteriorate.

It would be no surprise that the sustainability of the U.S. dollar as a key currency, whose fiscal and external balance deteriorates in this way, is questioned. Already, the countries sanctioned by the United States (China, Russia, Iran, etc.) are also making their own payments that do not rely on the U.S. dollar using each other's currencies. If this expands, the demand for the dollar will fall further than it is now.

In fact, in SWIFT, dollar trading is slowly declining and euro trading is increasing. It seems that the long-term trend of the dollar and the dollar-based currency system are entering a cautionary phase. Although the currency of one country is used as the key currency, it cannot be denied that the confidence level of that key currency country may fluctuate significantly depending on the balance of the country.

Chuck (Atsushi) Kawakami

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