Printing and Borrowing Always Ends Badly
As more countries copy the Federal Reserve’s monetary policy without the global demand of the US dollar, financing trade and fiscal deficits printing a weakening currency, nations become more dependent on the US dollar.
Neither domestic nor international citizens demand local currency, and governments continue to build large fiscal and trade imbalances believing the magic money tree will solve everything. However, as confidence in their domestic currency collapses, global US dollar-denominated debt soars because very few investors want local currency risk and central banks need to build US dollar reserves to cushion the monetary debasement blow.
Implementing aggressive so-called expansionary policies almost always backfires because the impact on growth of large spending plans is minimal, and the destruction of purchasing power of the currency rises.
Governments always want to believe that they will be able to disguise their imbalances with monetary debasement, but the effect is the opposite.
It is, therefore, no surprise that most global currencies have depreciated against the US dollar even in a year of high Federal reserve injections and commodity price rises. When a commodity exporting country sees its currency collapse despite rising exports, you know that -again- the myth of modern monetary theory has evaporated.
As the domestic economy and currency in countries like Brazil, Argentina or Turkey get worse, governments turn the blame to the International Monetary Fund.
The relationship of countries with the International Monetary Fund (IMF) always makes the headlines when governments have already spent the money they borrowed and do not want to return it. Interestingly, few seem to criticize the IMF when it rescues governments from their fiscal imbalances, and harsh comments only surface when the money must be paid back.
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