Swap Lines, the Global Financial Safety Net, and Global Imbalances

a new publication highlights policy pushing against itself

There’s been much ado in the past couple weeks about the Fed potentially refusing to extend its swap lines to partners around the globe. Setting aside entirely whether or not that will actually happen (such a prediction would be a fool’s errand), what does seem true is that there’s something motivating those fears: the current administration’s disdain for international commitments—of which swap lines are presumably part.

But to shake confidence in America’s dollar liquidity safety net would be to work at cross purposes with the administration’s other goals, like reducing foreign demand for Treasury assets and limiting the trade deficit. The mechanism is that swap lines can serve as a substitute for reserve accumulation, which, all else equal, would result in more purchases of Treasury and Agency debt, sometimes with surpluses created intentionally for that purpose: war chest-building, if you will. To resolve trade imbalances, you have to think about financial flows too.

Please check out the full article over at Barron’s, with a gift link for Discursive Etc. readers, courtesy of the good folks at Barron’s. (It will look like you’re still paywalled at first, but you’re not—just click the carrot dropdown to minimize the ad banner.)