Following up on Tuesday’s discussion of why the dollar isn’t collapsing and will not do so, let’s take a look at some of the other panic memes showing up in our news feeds. This will be a range of quick hits, as there are a bunch to cover.
The collapse of the banking system (this one is a bit dated, say by a week or two), but you will notice that we haven’t seen any more bank failures in the headlines. As I said at the time, the government took the necessary steps to contain the problem, and here we are with no headlines. This one is a good lesson for the rest of the list here.
Per my previous post, the data shows de-dollarization simply isn’t happening. The dollar remains reasonably strong, countries continue to want to sell to the U.S., and in almost all cases there really isn’t an alternative. This argument also applies to the petrodollar headlines. It’s something that comes up every couple of years (check the blog archives), but it wasn’t true then and it isn’t true now.
The Fed’s Negative Cash Flow
This is a new one and a follow-up on the banking crisis (which, as noted, isn’t one) and poses the question, can the Fed go bankrupt? The answer is no. Per my friend and colleague Sam Millette: “The Fed was not created to generate profits . . . and this has never been a requirement. The central bank operates to promote maximum employment and stable prices. While historically it has been able to generate profits that have been remitted to the Treasury . . . this is not a requirement or even a formal goal for the Fed. The Fed is not a commercial bank that can suffer from depositor runs, and there is no risk of default.”
Beyond noting that it is hard to go bankrupt when you can create money, which the Fed can do, I couldn’t say it any better.
Official Digital Currency
Speaking of creating money, the Fed is now exploring the notion of an official digital currency. The scare headlines are that this currency will replace the dollar and enable the government to surveil and/or confiscate people’s savings. Indeed, the Fed is looking at this, but not in any kind of immediate way. If the Fed does pursue it, it will not make much of a difference, as most money is now essentially digital anyway. When was the last time you paid your mortgage with cash? Do you use a debit card? Nothing will happen in the short to medium term. If and when it does? It won’t make any more of a difference than switching from cash to credit/debit cards did. As for confiscation, the system will be no more vulnerable to that than it is now—and that won’t happen either. You may remember the great 401(k) confiscation scare of a couple of years ago, which never happened.
A Common Theme
Of course, the common theme is that when you look at what is actually happening, the headlines take a real fact or trend and then exaggerate and distort it to scare people. Often, when you look back, you see this happening over and over again, every couple of years. These people are trying to sell something, not inform. When you keep that in mind, it is easier to let these headlines pass you by.
Are there things to worry about? Certainly, and we talk about them regularly. But they are generally large scale and slow. The good thing about them is that we can track the data and see when we are getting into trouble. And as a result, we usually can avoid it. Not always, of course, but the second piece of that is that there are tools available, like in the recent banking “crisis,” that can help limit or solve the problem. There is almost never something worth panicking about. That is the real answer to these and similar headlines.
Keep calm and carry on.