The Revised U.S. Treasury Securities Standard System

Abstract

Michael Hudson has suggested that the global financial system since the post-Bretton Woods system could be regarded as the ‘US Treasury bill standard’ system, in the sense that monetary authorities in developed countries were, effectively, forced to buy US Treasury securities in the 1970s. Analogous to his view, the global financial system in the 2000s, characterized by emerging Asian official ownership of US Treasuries, could be called by ‘the revised US Treasury securities standard system’. The revised US Treasury securities standard system in the 2000s depends on not only foreign official demand for US Treasuries, but also, most importantly, a new type of market-driven demand for US Treasuries as ‘the globally accepted collateral’ in the unregulated shadow banking system. How are the official and private demands for US Treasuries fundamentally linked? In order to consider the question, the paper proposes the development of ‘the US Treasury securities-repo market nexus’ in the 2000s. The notion captures the role of US Treasury securities, whose market value and creditworthiness are sustained by emerging Asian official ownership, serving as the globally accepted collateral for creating new type of USD-denominated short-term liabilities, that is repo liabilities, to non-US residents. Importantly, the procyclical leverage during the US housing bubble intensified the market-driven demand for US Treasuries as globally accepted collateral, which induced large broker-dealers in the US and Europe, the center of the shadow banking system, to develop new financial instruments and financial innovations in the creation and intermediation of the globally accepted collateral. This development amplified the volatility in the issuance of USD-denominated repo liabilities by the broker-dealers vis-à-vis offshore financial centers (OFCs) such as the UK and the Caribbean, contributing to the explosion of USD-denominated financialization in the global context in the 2000s prior to the Global Financial Crisis (GFC). However, since the GFC, the lack of dynamics in the procyclical leverage led to the structural stagnation in USD-denominated financialization in the global context in the 2010s.