As global leaders all around the world struggle with the storming economic catastrophes caused by the COVID-19 pandemic, banks worldwide have immediately opted to follow the solutions used in the 2008 global financial crisis. Disbursement of vast amounts of liquidity into the banking system just to try to keep up key asset markets with large-scale purchases may not sounds like the best idea to do as of the moment but it worked before and they think it’ll work for now. Undoubtedly, it does help lower all the panic and mayhem a little bit in certain places but the shock of it all is on a global scale and the fact is, we need a global response.
The Federal Reserve have been doing their best to take matters into their own hands and handle the responsibility of such a daunting task by funneling dollars to central banks across the globe. The question is, will this be enough to save the world from financial collapse?
The answer is “Liquidity swap lines”. They’re basically the main source of dollars in the global financial system. Way back in the 1960s, they first used these to circulate funds for central banks struggling to get ahold of fixed exchange rates. In essence, this method was devised so that central banks can credit each other with matching amounts of currency and balance out the financial system decades past. Now, these swap lines actually reflect the geography of the dollar-based financial system the world now knows.
Now, you might be asking what all this can do to help fight the financial wreckage caused by the coronavirus. You see, as governments, businesses and investors panic althroughout the world’s financial markets, people will begin to seek the safety and simplicity of cash. The economy as we know it may very look weak right now, but cash is still king, the most universally acceptable means of payment and store of value whichever country you’re in. However, with the pandemic worsening by the day with no end in sight, no one really knows if the liquidity swap line system of 2008 will be enough to tackle the deepening woes of the world facing the collapse of recession and financial crisis.
All we can do is hope for the best. That this will be enough to do the job somehow.
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