Macro Musings with David Beckworth

Hanno Lustig on Dollar Dominance, Dollar Safety, and the Global Financial Cycle

Sep 27, 2021
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INSIGHT

Exorbitant Privilege From Safe-Asset Monopoly

  • Exorbitant privilege arises partly because the US monopolizes safe asset supply, not only from insurance roles.
  • This monopoly yields convenience-income that increases in bad times, boosting the dollar.
INSIGHT

Sovereign Trade-Off: Taxpayer Insurance Vs. Bond Risk

  • Governments face a trade-off between insuring taxpayers and keeping debt risk-free.
  • Providing more insurance to taxpayers makes sovereign debt riskier and raises required bond yields.
INSIGHT

Countercyclical Seigniorage Eases Trade-Off

  • Countercyclical convenience yields partially offset recession tax shortfalls by raising seigniorage.
  • For the US this alleviates but does not fully resolve the taxpayer–bondholder trade-off quantitatively.
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