By Brandon McWaters
OCPA Intern
The same country that introduced the modern system of banking is now in the throes of a potential financial meltdown. Italy is currently faced with paying record interest rates on its growing national debt. Italy has been a member of the eurozone since the union's inception and claims that it will not have to leave due to recent economic setbacks. The EU is putting on a brave face and still holds that the euro will make it through this crisis and will not have to be dissolved.
While there are many reasons to be skeptical about this claim, recent moves by the Federal Reserve, the European Central Bank, and the central banks of Canada, Britain, Japan, and Switzerland led to a deal Wednesday, that made U.S. dollars cheaper in order to give cash-strapped banks an affordable outlet for taking on loanable funds. The rationale behind this move is simple: European banks were finding it difficult to make dollar loans and had switched to loans based on the euro which depressed its value and restricted how much could be loaned out by European banks.
The move brought about praise by the international market as stocks skyrocketed yesterday in response with the lowest gain reported by the UK’s FTSE 100 at an astonishing 3%. Richard Hunter at Hargreaves Lansdown Stockbrokers said that if banks take advantage of the cheaper funding, "a great deal of tension will be removed from the system, both in terms of liquidity and market sentiment.”
In my earlier post, I talked about the potential effect that a eurozone meltdown could have on the U.S. economy and why Americans should actively watch the situation across the pond. With this move by the central banks of the world, and the resulting 400+ point increase by the Dow Jones Wednesday, it is clear that the two economies are tied together. While the move by the Fed to cheapen the dollar may seem to be an act of weakening our global position in the financial market, it actually is a positive move both for our dollar and our economy. Currently the U.S. dollar is the preferred currency for international transactions and by making it more affordable to European banks to buy and then loan out, we increase the attractiveness of our U.S. Treasury Bonds to be bought by foreign investors and we keep the dollar as the preferred currency rather than losing out to the now over-rated euro. What this means for us is that we keep our position as the world’s leading economy, and hopefully leave recessionary times in the past.
Links:
No comments:
Post a Comment