The Shortage Of Safe Assets And Now Dollars

The global shortage of safe assets has been a recognized problem since the financial crisis. It has resulted in below average and even negative interest rates. And the inability of politicians to muster the political will to confront this problem has robbed of us of the opportunity to rebuild our infrastructure and created the surge in huge capital flows as savings scour the globe in search of yield.

Now economist Carmen Reinhart documents the return of the “dollar shortage” and the emergence of parallel black market currency markets in countries around the world. The plunging commodity prices of the last few years have decimated currencies in places like Brazil, Russia, and Columbia. For those other countries that had pegged their currency to the dollar, it has meant a depletion of their currency reserves. As commodity prices still remained low, countries began to implement capital controls and tweaking their currency pegs. These moves allowed black-market currency markets to begin to pop up. Reinhart notes the emergence of these markets in places like Egypt, Nigeria, Iran, Angola, Uzbekistan, and South Sudan, among others. And, in the very worst cases like Venezuela and South Sudan, the dollar shortage is actually turning into food shortage. According to Reinhart, “Of far greater urgency is that dollar shortages have become food shortages in countries such as Egypt and Venezuela, as well as much of Sub-Saharan Africa, which rely heavily on food imports. Given import compression, the resulting scarcities, and skyrocketing black-market prices, the most vulnerable segments of the population have been left in profound jeopardy.”

The concept of a “dollar shortage” emerged in the post-World War II era and part of the idea of the Marshall Plan was to alleviate this problem in post-war Europe. Today, there is no such plan to be had and many of these countries will be turning to the IMF for assistance. But the IMF is an agency committed to preserving stability and is certainly not equipped to rectify this situation through the kind of redistributionist policies that are needed. There really is no international organization that exists that is designed to specifically deal with the social costs of plunging commodity prices around the world.

We all know that food shortages will inevitably lead to political instability – we can see that in Venezuela today. But the political elites are so invested in an austerity mindset and obsessed with debt that they have totally lost sight of concept of investment and the idea that wealth might need to be redistributed slightly in order to maintain social welfare and social order. They disregard these issues at their own peril.