U.S. to “Win” Currency Wars?

U.S. to “Win” Currency Wars?

Currency wars start at home because the value of the greenback relative to other currencies may be key to investors' purchasing power. The Fed has been busy buying Treasuries and MBS through QE programs and has helped finance US deficits.

Axel Merk
February 20th, 2013
Merk Investments

Currency Wars start at home because the value of the greenback relative to other currencies may be key to investors’ purchasing power. We know the Federal Reserve (Fed) has been busy buying Treasuries and Mortgage Backed Securities (MBS) through their Quantitative Easing (QE) programs. To pay for what is now a portfolio worth over $3 trillion in such securities, the Fed has deployed its “resources” – a fancy name for a computer keyboard, colloquially referred to as a printing press. Intentionally or not, the Fed has helped finance U.S. deficits as the more securities the Fed has purchased, the greater the interest it has earned, allowing it to most recently transfer close to $90 billion in annual “profits” to the Treasury. Of course much of that interest comes from Treasury securities held by the Fed, interest that is then transferred back to Treasury, effectively eliminating the interest the Treasury pays on the portion of outstanding debt held by the Fed (much of it higher yielding longer-term debt). Janet Yellen, current Fed Vice Chair and potential Bernanke successor, recently remarked in a February 11th presentation to the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) that the current (ultra accommodative) policy “is a policy that is not only good for output and employment and American workers, but also for the federal finances overall,” leaving the interpretation open that today’s policy is, at least in part, justifiable on the basis that it helps government finances.

Indeed, as the Fed’s actions have contributed to lower interest rates across the yield curve, the Administration banks on easy money curing its deficit woes: President Obama’s State of the Union Address, presented a slide claiming $500 billion in interest savings, a key contributor to $2.5 trillion in deficit reduction:

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