Has the USD already failed?
Why the writing may in fact be on the wall.
The U.S. has abused the “exorbitant privilege” of having its own currency as the world’s reserve currency. The U.S. has done this by printing a bunch of money to do things like bailing themselves from financial crises, funding impractical military spending, and providing the hubris for a reckless and over-leveraged financial climate.
That takeaway is this, $USD momentum will be halted due to the massive liquidity injections.
But before we get into the nitty-gritty of how we got here, this story begins in ancient Babylon, now commonly known as Bagdhad.
King Belshazzar’s Feast
To cut a long Old-Testament story short, the last king of Babylon hosted a grand feast, while his city lay under siege from the Persians. This revelry led to drinking from sacred vessels looted from the First Temple.
Upon drinking from the vessels, a hand appears and writes ‘mene mene tekel upharsin’ on the palace wall.
While initially the message could not be deciphered, it was later interpreted as;
Belshazzar’s days are numbered, you have been weighed and found wanting, the kingdom will be given to the Persians.
Belshazzar had been arrogant, and reckless and this was his recompense.
That night he was murdered, and the Persian’s took the city.
And thus, with acute accuracy, the writing had been on the wall — only Belshazzar couldn’t see it.
The Forest for the Trees
Recently I sent an email to Lyn Alden of Alden Investment Strategy which asked her about her outlook for the US dollar-based on recent QE. I will go through her concise answer below in sections to make it easier to digest.
Hi Dion,
I never use the word “destroy” in reference to the USD. It’s just that
the equilibrium value of the USD would be a lot lower than where it is,
if not for the global dollar shortage.
Because the US Dollar serves as the world’s reserve currency all countries, especially the U.S., need liquidity in the form of U.S. dollars to meet their financial obligations and liabilities.
A dollar shortage occurs when a country lacks a sufficient supply of U.S. dollars (USD) to manage its international trade effectively. This occurs when a country has to pay out more U.S. dollars for its imports than the U.S. dollars it receives from its exports, in addition, to lacking enough USD to service its dollar-denominated debts.
Because the U.S. dollar is the world’s most widely traded currency, many nations must hold assets in dollars to maintain a steadily growing economy and to trade effectively with other countries who use U.S. dollars.
So, because of this, the $USD is most likely overvalued.
The US has a current account deficit, in part because the USD is too
overvalued in order to make a lot of competitive products domestically.
As above, the US is paying more for imports, than it is receiving from exports due to the fact that it cannot compete domestically with overseas production costs. This is clearly evidenced here.
We also have a negative NIIP, meaning foreigners own a lot of our
assets. If dollar strengthens too much, it hurts U.S. industry and
results in foreigners selling U.S. assets.
The Net International Investment Position (NIIP), is basically the difference between how much assets a country owns of the rest of the world, minus the number of assets the rest of the world owns of their country. Since 2008 this number has been bleak. This chart goes back to 1976 and shows when the US was in surplus.
This metric does not just include assets owned, it also encompasses dividends earned and remittances. So dividends leaving the country versus coming into the country, and money being earned in the US leaving versus money being earned overseas and coming back into the States.
In total, the NIIP currently sits at negative $9.717 trillion.
Put simply The U.S. was once the world’s largest creditor nation and is now the world’s largest debtor nation.
QE, and various other liquidity measures, supply the dollars and
alleviate the dollar shortage. Whenever the Fed does this and addresses
the shortage, the USD starts drifting towards its lower equilibrium
value.
Currency strength has many variables, but the strongest long-term variable is the trade balance.
Currencies eventually find equilibrium around their trade balance. The dollar status as the reserve currency, along with the current dollar crunch, in particular, has prevented this from happening for the US. Thus, the $USD tends to remain overvalued.
Because the dollar shortage has been addressed somewhat with the Fed’s profound money printing, the dollar should weaken towards equilibrium value.
To go into this in further detail you should check out Lyn’s (@LynAldenContact) incredible Twitter thread below.
The Unstable Equilibrium
Since Trump came into office, annual deficits and debt levels have ramped upward, in a comparatively strong economy.
This is one reason why Bridgewater Associates’ Ray Dalio is bearish on the dollar.
He fears the Federal Reserve may have to print more money to fund the U.S. budget at some point because the sale of Treasuries won’t do the trick without substantially higher yields, which would hurt growth.
Yields must increase to compensate for lower demand.
Trump’s failure to rein in the budget and trade deficits, is the primary reason why American super investor Jeffrey Gundlach is also bearish long-term on the USD.
Robert Kiyosaki, the author of #1 New York Times bestseller ‘Rich Dad Poor Dad’ (a book that advocates the importance of financial literacy) is also extremely bearish on the USD.
This is particularly interesting given his core audience are retail investors, who would expect his commentary to be conservative, and risk-averse. This is this brand he has built, and the audience his risks alienating, and yet the tea leaves are clear.
The global economy on the back of the troubled USD is now teetering on a very narrow ledge, with very little to catch its fall.
How to take advantage of a Declining Dollar
At this point, it should be clear that the US economy and its “exorbitant privilege” as conductors of the reserve currency are under threat.
Nearly all markets are going to struggle for the foreseeable future, and as the legendary hedge-funder Steve Cohen warns;
“Markets don’t come back in a straight line; after an earthquake there are tremors.”
People are naturally exiting to liquid positions out of fear of how long this will last, and not knowing where the bottom is. Naturally when times like this occur, gold is where people often run — and with good reason.
But as I outlined a few weeks ago, Bitcoin was designed for this exact moment.
A few days ago Bitcoin railed 17% in 24 hours to which Forbes reported;
As sustained concerns about economic turmoil helped push investors toward safe-haven assets.
Even Forbes is now reporting Bitcoin as a safe-haven asset!
This was followed up by Bitcoin commentator Pomp summarising the situation well when he put the opportunity into context;
Now is the time to be entering the crypto market, as this is the exact moment it was designed for.
At this point, if you cannot see the writing on the wall — well maybe your name is Belshazzar!
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Dion Dalton-Bridges
