Bloomberg Businessweek - USA (2019-05-27)

36

ILLUSTRATION

BY

EVAN

COHEN.

*INCLUDES

THE

CARIBBEAN;

DATA:

CHINA

GLOBAL

ENERGY

DATABASE,

WORLD

BANK

● Argentina’sfinancialcrisishasleft

it increasinglybeholdentoBeijing

Power Play

Setona remotesteppeinPatagonia,wherethe

windshowlandguanacosboundthroughthebrush,

thetwindamsontheSantaCruzRiverareinthe

earlystagesofconstruction,butthey’realreadyrel-

icsofa bygoneera.The$4.1billionconcretemam-

mothsareArgentina’sfirstmajorhydroelectric

projectina quarter-century.Harnessingriversto

generatepowerhasbecomepasséinanagewhen

windandsolarareascendant,andnaturalgasis

plentifulandcheapinmanypartsoftheworld.

There’sa one-wordanswertowhytheSouth

Americannationisbuckingthetrend:China.

Argentinaisinthegripsofa financialcrisisthat

hasallbutlockedit outofcreditmarketsandpara-

lyzedinvestment.PresidentMauricioMacri,who

atonepointseemedabouttopulltheplugonthe

Chinese-financedpowerplants,haslittlechoice

buttoallowconstructiontogoforwardashecam-

paignsforreelectioninOctober.“Macristaked

hispresidencyonthearrivalofinvestments,but

he’sendedupfightingoneeconomicfireafter

another,”saysFranciscoUrdinez,anassistantpro-

fessoratthePontificalCatholicUniversityofChile

THEBOTTOMLINE TheFederalReservewillresumelarge

purchasesofU.S.debtsecuritiesasearlyasnextyear,partlyto

ensureamplebankreserves.

post-crisisregulationshavecurbedfinancialrisk-

taking. This all suggests the Fed will keep increas-

ing its asset base—indefinitely—by continually

buying Treasuries.

The balance sheet is likely to be discussed when

Fed policymakers meet with leading academics

in June at a conference in Chicago that will mark

the culmination of an unprecedented monthslong

effort to gather views from outside the central

bank on its monetary policy strategy, tools, and

communication practices. “The Fed’s framework

review appears likely to further solidify the sta-

tus of QE as a standard part of the toolkit,” David

Mericle and William Marshall of Goldman Sachs

Group Inc. wrote in a May  17 note to investors.

�Liz Capo McCormick and Alex Harris

mortgages and other long-term loans are slightly

lower because of the Fed’s large debt holdings.

Granted, a lot of the bang from QE came from its

“signaling effect,” which drove yields lower as inves-

tors anticipated the Fed’s purchases, says Lawrence

Dyer, head of U.S. rates strategy for HSBC. Another

caveat: The Treasury market has doubled in size in

the past decade, lessening the impact of Fed pur-

chases. Also, relative to the size of the economy, the

central bank’s bond investments will be smaller than

they were during the height of QE.

Before the start of the first round of QE in 2008,

the Fed had less than $900  billion in U.S. debt

securities. By 2017 it had amassed $2.5 trillion of

Treasuries—the most ever—plus $1.8  trillion in

mortgage-backed securities. The Fed finally began

unwinding QE in October 2017 by not replacing all

the bonds that matured, in an effort to “normalize”

its monetary policy, and it will continue letting its

holdings shrink through the end of September.

Chair Jerome Powell has said the Fed was never

likely to get the size of its balance sheet back down

to pre-crisis levels. But officials haven’t detailed how

large it will grow or how much U.S. debt the cen-

tral bank will gobble up. The Fed will have about

$2 trillion in Treasuries by yearend. Most Wall Street

dealers expect the central bank to again start accu-

mulating Treasuries by mid-2020. By the end of the

next decade, the Fed will have more than doubled

its holdings of the debt, to about $4.4 trillion, leav-

ingtheoverallsizeofitsbalancesheetcloseto$5tril-

lion,accordingtoanestimatefromWellsFargo.(The

centralbank’sstockofmortgage-backed securities

will shrink from more than $1.4 trillion to less than

$400 billion over that span.)

Next year alone, TD’s Misra expects the Fed will

amass about $300 billion of Treasuries in the open

market, or about 30% of the more than $1 trillion the

U.S. is forecast to issue to cover its ballooning defi-

cit. That’s in addition to the almost $300 billion of

maturing Treasuries the Fed will replace by purchas-

ing directly from the government.

Why exactly is the Fed getting back into the

business of buying bonds? Part of it has to do with

accounting. While attention has been focused on the

asset side of the Fed’s balance sheet, it also has lia-

bilities, mainly in the form of currency in circulation

and bank reserves. As with any balance sheet, the

two sides need to net out. Since the Fed’s liabilities

tend to naturally increase over time with the size of

the economy, so too must its assets.

Two factors have prompted lenders to hold far

more cash than before: The Fed pays interest on

banks’ excess reserves—those above what regula-

tors, creditors, and internal controls require—and

Condor Cliff Dam

LaBarrancosa Dam

● Argentina

◼ ECONOMICS Bloomberg Businessweek May 27, 2019