Five Threats to the US Dollar
- The Federal Reserve Devaluing the Dollar
- Gross Domestic Product Underwater
- Trade Wars and Tariffs
- Chinese Cryptocurrency?
- Election Year Uncertainties
1) The Federal Reserve Devaluing the Dollar
The Federal Reserve continues to devalue the dollar more and more. While this is often referred to as printing more money, what the Federal Reserve really does with a few clicks of the keyboard is issue government securities. Think of it as taking out a loan every month when new bills arrive in your mail. That strategy will not work if you try it with your home finances. It may convince others that you have money and you are creditworthy, but in the long run, the bills will come due.
This strategy of creating more money is dependent upon a future of work, a future of productivity. So, while the US debt is in excess of twenty-six trillion dollars– the equivalent of eight-hundred-sixty-four thousand dollars for every tax payer in the United States, the Fed keeps issuing securities to pay for bailout programs and everything else it needs. This borrowing against future productivity is dependent upon a future of growth and a continually thriving economy. Assuming a major devaluation of the dollar, American workers will be impoverished first for their dollars buying fewer goods and services. But it won’t stop there. All production anywhere is a consequence of global cooperation among producers. Fully aware of the dollar’s reduced exchangeability, producers around the world will demand more dollars in return for the inputs that enable U.S.-based production. Even worse, producers around the world could seek payment in currencies other than the U.S. dollar. Why, for instance, would Australia or Japan or Britain buy goods from Asia with the dollar weakening against their own currency?
Fully a third of our US debt is owned by China and Japan. Were China or Japan to suddenly unload its reserve holdings, its currency’s exchange rate would rise, making Chinese and Japanese exports more expensive in foreign markets, unless they also chose to transact in a currency other than the US dollar.
But, as China, in particular, inks deals with other countries to find new ports for its products because of a prolonged trade war with the U.S., what’s to keep it from cashing in its American debt chips? What does it have to lose when the U.S. consumer market is already dried up and the exports have slowed? Will foreign countries continue to want to buy US government securities, allowing the U.S. to continue to recklessly borrow and spend, if the U.S. credit worthiness drops again or the economy continues to slip into a depression? The possibility of China or Japan or both countries cashing out its thirty-three-point-eight percent of all U.S. debt to save their own economies is a real and ongoing threat to the U.S. dollar.
2) Gross Domestic Product Underwater
The second real, immediate threat to the U.S. dollar is the depth at which Gross Domestic Product in the U.S. and globally has plummeted. All that borrowing depends on future productivity, and the U.S. GDP has plummeted a staggering thirty-two point nine percent. Thirty-three percent! This is an index which historically moves in less than five percent increments. A loss of this magnitude hasn’t been seen since the Great Depression, yet the stock market soars. Economists are already starting to prognosticate a collapse and point to similarities between the stock market’s current vertical rise and earlier bubbles.
The fact is that there isn’t anything good for the dollar when the GDP sinks so low so fast. Unless a recovery is swift and most of those thirty-five million unemployed get back to work this quarter, and exports start to rise again, continued declines are imminent. With one-point-one million jobless claims filed this week costing over a trillion dollars, we are not on a good track to get the nation back to work. A prolonged negative GDP erodes the US economy’s creditworthiness and credibility around the globe. As other countries also suffer from an economic downturn resulting from the pandemic, it’s safe to assume that they will look for other means of generating value for their production. Other countries will recover from the pandemic lockdown faster. This may result in turning to their own fiat currencies and reducing their imports from foreign countries. This could compound problems for the dollar.
3) Trade Wars and Tariffs
The third threat to the U.S. dollar is a continued trade war. While tariffs and trade wars may be necessary equalizers in a thriving global economy, they backfire when productivity and imports and exports drop. The U.S. is manufacturing less, selling less, exporting less, and importing less. The cost of imported goods is going up. The cost to export goods is going up. That all equals fewer transactions and more costly transactions. That’s bad news for the dollar, as the dollar’s strength is partly derived from its transactional speed.
The global economy has slowed considerably and has become more localized. Countries are relying upon their own production means to supply their citizens as imports from other nations decrease. If you want to see this in real-time in the United States, go try and buy a bicycle or fishing supplies. The demand for these items, largely manufactured and imported from China, has outstripped supply as people seek activities to fill their time during a pandemic; but there are also slow to no imports to replenish supplies as trade slows and, in some cases, grinds to a halt.
With economic uncertainty looming over the American consumer, they are more likely to postpone purchases. This results in a lower demand for imported goods, which, because of the trade war, are more expensive to the consumer anyways. During a time of economic decline, trade lines should be throttled open to encourage transactions, but a trade war and tariffs do the opposite of that, further complicating economies and markets.
Add to this that the U.S. isn’t the only consumer in the world. Already, China’s response to the U.S. trade war has been to ink new deals with Australia and Brazil and others. The U.S. isn’t the only customer in the global store, so what happens when other countries simply find other consuming countries. Why would they then need to transact in U.S. dollars?
4) Chinese Cryptocurrency?
The fourth threat is a rumored one. With an ongoing trade war and other pressures eroding confidence in the U.S. dollar around the world, there have been rumors that China is looking to release its own cryptocurrency pegged to the Yuan and backed by gold. China’s efforts to release a cryptocurrency pegged to the Yuan becomes a shiny new option, and a new alternative to transactions in the U.S. dollar which take verifications from banks and a host of middlemen. Already, China conducts around sixteen percent of its transactions in electronic currencies. When goods and services built around the dollar no longer need lengthy contracts and teams of lawyers and bankers for verification, the dollar sheds some of its intrinsic value to instant transactions that do not require layer upon layer of verification and run on smart contracts.
Cryptocurrencies are a bit of an unregulated wild-wild west right now, so many may turn to a stable government regulated and gold backed crypto currency, even if that government is China. If the dollar is perceived as weak or feckless, it is reasonable to assume people will want to bailout of it with as much value as they can get. Were the U.S. government to try and slow the ditching of the dollar by stalling transactions or imposing banking regulations, people with capital may turn to crypto currencies. This will drive their price up, for sure, but right now there is only two-hundred-fifty-one billion dollars in crypto currency available.
Remember, the U.S. isn’t the only consumer in the global store. As such, it may not be able to maintain the rules of transactions by requiring its currency when so many other more viable options are out there. A new gold backed Chinese crypto currency, if the rumors are true, could deal a fatal blow to the U.S. dollar and cause a global monetary paradigm shift. These are just rumors right now. If true, the only things holding China back from proceeding with their plans were America’s dependence on consuming chinese exports, which has been eroded by a trade war and a global slowdown of purchases and the inking of alternate trade deals. When America no longer is one of China’s best customers, why would they receive the “best customer” treatment. Why would they continue to transact in U.S. dollars?
5) Election Year Uncertainties
The fifth threat to the U.S. dollars standing in the world is the fact that we are in an election year. This election is the most divisive and contentious election in years. One party defines the other as actually evil. One party defines the other as totalitarian. We have never seen such deep divisions in our lifetime. Maybe we will be just fine, and maybe there will be rioting in the streets. We don’t know. What the rest of the world sees, however, is that America is too tumultuous to risk investing in.
Every administration, whether new or bolstered with the confidence of a second term, brings with it dramatic policy shifts. These shifts in policy ripple across economies, so the natural reaction to the possibility of policy shifts is to hold off on investments until the waters settle. After a brutal third quarter and during an already hemorrhaging fourth quarter, the last thing America needs is the rest of the world holding off on investing or making deals with the U.S.
As it appears now, we may not really have any stability of vision until after inauguration day or slightly beyond. That’s around one hundred days of a global continual loss of confidence and delayed investing in the U.S. dollar at a time when the economy really needs to be chugging into a recovery with all hands on deck. As the rest of the world suffers similar global declines, though in many cases not as badly, will they seek to recover in more confident transactional currencies like the British Pound Sterling or the Japanese Yen?
The days and weeks after November third will be watched closely by people around the world and may determine the longevity of the U.S. dollar.
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