Sunday, May 16, 2021

Dollar's Demise And Doom Predictions Are "Over Hyped"

A lot of people including Americans have come to the conclusion the dollar is about to collapse. Predictions of the dollar's demise are likely premature and overblown. Recently a combination of factors has caused people to become concerned about storing their wealth in the dollar. This has created huge interest in both precious metals and cryptocurrencies. Several things are driving the trend to diminish the dollar and other fiat currencies. One is the idea governments have targeted cash and wish to move us towards a "cashless" society where they control our every move. Another is rooted in the idea inflation is about to raise its ugly head as currencies are debased. 

The Sounding Line recently ran an article about how Stanley Druckenmiller, who made his name on highly successful currency trades including ‘breaking’ the Bank of England, says that he expects the U.S. Dollar to lose reserve currency status within 15 years due to a “totally inappropriate” combination of radical monetary and fiscal stimulus. Many people agree with him, the big question is how soon a major adjustment will take place. Clearly, 15 years is not tomorrow and it is difficult to look out that far. 

I contend that currencies have been trading in a hyper-manipulated state for several years. Fiat money tends to create a shelter from volatility. This is because once wealth is placed into this rather closed system, it tends to remain there. After all, laws and rules discourage it from breaking free. It is the coordinated collusion of the major central banks that have allowed this charade to exist. The fact it has not been recognized or acknowledged does not alter or guarantee the system will continue. The failure or major repricing of any of the world's four major reserve currencies will destroy the myth that major currencies are immune to the fate that has haunted fiat money throughout history.  

Over the years countries have become very adept at coordinating economic policy, currency swaps are only one of the tools they use, another has been to invest in stocks. This means over the last few years central bankers have developed more tools to manipulate currencies and keep them trading in a narrow range that will not rock the boat. When the dollar began to soar back in late 2014, fear began to rise and concerns grew about the stress it was causing in countries that owed a great deal of debt that would have to be paid back in dollars rather than their own currency. This allowed Fed Chairman Powell to pursue a course that weakened the dollar and in doing so the Fed propped up markets across the world.

Central Bank Balances Have Exploded
The view the dollar will rapidly decline in value is based on the view that when a nation granting a fiat currency is unable to control its budgets its currency suffers. Like many Americans, I have railed against our growing debt and questioned whether it would destroy the dollar, however, when looking at the miserable alternative currencies before us the dollar is without a doubt king.

History shows huge currency fluctuations tend to destabilize markets. The one thing the global economy doesn't need right now with all the uncertainty that is currently floating around is an unstable currency market. We must remember that in our modern financial system, capital can sneak and flow out of the country faster than its government can create new ways to bolster the currency.

As far as the idea that China and its cohorts will succeed in destroying  the dollar by reducing their holdings of U.S. Treasuries in order to support the yuan, their ability to carry out such a scheme is questionable. We must remember the world currency market is a complicated place full of paths that fall away or come back on themselves and many of the tools used by markets are like a double-edged sword that cut both ways. China will find that if the dollar falls much they will hear more calls to place duties and tariffs on their exports to America in an effort to reduce the trade deficit.

Currency Swaps Creates Illusion Of Stability

Refrain from calling me Captain Obvious when declaring that currencies are trading in a false paradigm and investors should get ready for a rude awakening when currency values shift. A dam has been built to protect market stability but pressure is building and when it breaks it will wreak major damage. Part of this is constructed upon the fallacy many investors have been given, and accepted, the notion that a major currency cannot fail or collapse. This fallacy will only become more apparent as concern over the future of both the yen and the euro becomes more of an issue. Both these currencies have major problems going forward. While people point to the fact that behind the dollar America stands with a rapidly growing national debt it is nothing compared to the issues Japan and the Euro-zone face.

The fact countries and areas face different growth paths is a problem that has haunted currency unions for centuries. Competitiveness and productivity developing at different paces lead to a shifting of wealth and large imbalances in growth among the members of a currency union. When the dollar union of the U.S. threatened to fall apart during the Great Depression because of the varying economic conditions and unequal potential apparent between states, the federal government found it necessary to enact federal income transfers from prosperous states to aid ailing ones. The federal budget rapidly increased and this practice of income transfers from one state to another to bind the states together as a union became permanently embedded in the American system.

While in the United States a no-bailout policy of crisis-hit states that had been enacted decades ago remains, our "inter-system wealth transfers" has contributed that "special something" the Euro-zone lacks. Inequality has a way of growing and must be addressed early. After a certain point, it becomes too late to implement a system that transfers wealth from the most prosperous to the most needy regions of the economy because some people feel cheated and others resentful. 

The bigger a debt problem and inequality is allowed to grow the more people and institutions suffer when they become the victims of a default. Greece has fallen and continues to suffer the consequences of this while much bigger countries like Italy and Spain are teetering on the brink. During the last several years the question of how to exit the Euro-zone monetary union and the euro has become an important economic issue. Uncertainty and fear relating to its costs tend to discourage political leaders from taking the risk and decisive steps towards an exit but if one or more sizeable countries bolt from the shelter of the euro or the Euro-zone the currency could quickly unravel. 

As stated earlier in this article, the other major fiat currencies stand as miserable alternatives to the dollar. A major cause of the Euro-zone problem is growing inequality among its members. This is exacerbated by the lack of system-wide bank protection which causes money and wealth to flee the weaker countries and their failing banks. These problems give credence to the possibility that the euro is on its way to the dustbin. It could be argued that the reason the euro has fared so well recently is that investors have sold dollars and bought euros to buy assets in the EU because prices are so high in the US. Buying "cheap assets" in the EU does not translate into the idea America is rapidly falling apart or that the EU has suddenly resolved any of its many problems, it merely says American assets are way overvalued.

Japan faces an entirely different problem while its national debt is an issue for the central banks that issue both currencies. Japan's debt is massive and the country faces a demographic crisis that leaves it forced to support a population comprised of citizens far too old to work. This is a reason to think the yen will fail at some point and if they do it is very likely that in our modern era, where wealth leaps across borders at the push of a button, its death will be fast, and swift. For decades Japan has benefited greatly from China's growth but that may come to an end.

We must not underestimate the advantage the dollar has as the world's reserve currency or the size of debt floating across the globe comprised of dollar based-agreements. This means when all is said and done, people and companies must buy dollars to settle these debts. If the dollar proves victorious in the currency wars and is indeed the last major currency standing the people of America will reap the benefits of a game well played or just plain luck.


Footnote;  If you have read the above article in its entirety I urge you to not nitpick or respond with a knee-jerk reaction. To say this is a complex issue is an understatement and I would be interested in your thoughts. I recognize those interested in pursuing a New World Order will gladly throw any country under the bus if it promotes their agenda. Still, regardless of the games being played in the background, shifting currency values remain are a big deal.

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)


  1. Being the International reserve currency offers great benefits to most Americans who own assets and have decent paying jobs. However, as we admit and internally generate a growing percentage of our population who have neither, we have a problem. The strong dollar motivates any high employment business entity to relocate elsewhere. Much of American business is in the Harvest the Asset mode, or automating as fast as possible, both negative for employment. Japan may have a huge demographic problem today, but a declining population may be to their advantage in the future.

  2. The US Dollar is probably the cleanest shirt in the laundry hamper. At least the US Dollar has never been cancelled as other currencies have. Most recently the 1,000 Swiss Franc was cancelled.

    But what's coming down the road is to convert the US paper dollar to a digital currency. Say bye bye to all your freedoms when that takes place. The world govenments are moving away from paper to digital currencies.

  3. Economist, John Williams has the inflation numbers in the double digits and says the Government is giving a low estimate. He sees eventually a Hyper-inflationary scenario followed by an economic implosion.

  4. Here's the latest interview from Economist John Williams.

    1. Thanks, nice link, and remember things relate in a way that where "everything is relevant." The article below supports the John Williams article. Several factors make this scenario possible, they are outlined below. As investors shift into assets that do well during times of inflation, it is possible they may set in motion a self-feeding loop or cycle. More about this in the following article.