Quantitative easing and de dollarization during the epidemic (2010-2025)
In the past decade, the United States has experienced an unprecedented expansion of monetary stimulus. After the end of QE3 in 2014, the Federal Reserve’s balance sheet exceeded $4 trillion, four times that of before the crisis. The brief attempt to shrink the balance sheet in 2017 was interrupted due to the impact of the repurchase market in 2019, which exposed the system’s dependence on Federal Reserve liquidity. In response to COVID-19, the Federal Reserve lowered interest rates to zero, restarted QE, and introduced emergency tools, with assets almost doubling to nearly $9 trillion by mid-2022, accounting for 36% of GDP. At the same time, over $5 trillion in fiscal stimulus will push federal debt to 98% of GDP in fiscal year 2024. Inflation will reach 9% in 2022, forcing the Federal Reserve to reverse its policy, raise interest rates to over 5%, and shrink its balance sheet to $6.8 trillion at the beginning of 2025. The US dollar still dominates the foreign exchange market, accounting for 88% of trading in the BIS report, but its global reserve share has decreased from 66% in 2015 to 57.8% in the fourth quarter of 2024. The trend of de dollarization is accelerating: Russia’s frozen reserves due to Ukraine’s invasion have raised awareness of the risks associated with the US dollar; Saudi Arabia’s failure to renew the petrodollar agreement marks a symbolic shift; Iran is increasingly settling trade in non US dollar currencies; China promotes RMB trade settlement, especially after the Trump tariff war intensifies tensions between China and the United States.
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Since Nixon closed the gold window in 1971, the US dollar has been freely floating as a pure legal tender. Nowadays, 12 regional Federal Reserve banks issue a single national currency – Federal Reserve notes, while the US Treasury Department mints coins. Almost all other ‘dollars’ exist in the form of electronic bank deposits settled through the Federal Reserve System. The federal government finances by selling treasury bond, and the treasury bond bond market is still the world’s deepest pool of safe haven assets: foreigners hold about $8.8 trillion in treasury bond, while Japan alone holds $1.13 trillion. The continuous global demand has maintained a relatively low yield, and the yield of 10-year treasury bond hovers around 4%, although the publicly held debt has now reached 122% of GDP and continues to rise. This’ reserve currency dividend ‘is the other side of dollar hegemony: the United States can run huge deficits and borrow at low cost, as the world needs dollar assets for trade, security, and regulation.