The Dollar's New Clothes

Summary

• The Federal debt is $25 trillion and rising fast.
• The Fed has pegged interest rates at 0.00% to 0.25%.
• US unemployment is at Great Depression levels.
• The cost of bailouts might be $6 trillion or more.
• The M2 money supply is $17.4 trillion, and the US trade deficit is $833 billion.

The tale “The Emperor’s New Clothes” by Hans Christian Andersen can be compared with the present situation of the US dollar. It is clear that the dollar is practically naked; it has been stripped down.

Debt, Debt and More Debt

The size of the Federal debt is increasing at a rapid rate. The present Republican Administration seems willing to spend at will just as much as the preceding Obama government. The cost of servicing the debt is “only” $373 billion thanks to low interest rates on Treasury paper. The current rate of increasing expenditures is not sustainable, and it is highly unlikely that negative interest rates would attract investors. Hyperinflation would lighten the debt load but is not an optimal solution. What might happen is that the Fed will start buying Treasury paper at negative interest rates. That might solve the problem of the Federal debt, but it might also have repercussions on the position of the US dollar as the principal global reserve currency.

Low Interest Rates

The Fed has moved quickly to lower interest rates in the hope of countering the oncoming recession and the liquidity crisis in the financial markets. It should be obvious that very low interest rates encourage corporations to borrow money at a very low cost in order to finance share buybacks. In fact financialization has become a dominating characteristic of the American economy and accounts for the increase In the wealth gap as well as for stagnating manufacturing production. Under Bernanke and Yellen interest rates remained at very low interest rates for too long, and now the Fed has gone back and is repeating past mistakes. Preparations for the next financial bubble are thus already been undertaken.

Unemployment

Recent claims for unemployment compensation have totalled over 30 million. That does not include, obviously, all the people who have given up looking for work. Unemployment figures of this magnitude were typical of the Great Depression, and the lockdowns are only being lifted sporadically in various states while the Coronavirus is still widespread and may even become far worse in the event of a second wave with the reopening of the economy.

What is to be expected is that many of the unemployed will find that their jobs have ceased to exist and that there is no return to “normalcy” for them. They will have to seek other employment opportunities, which may be hard to find as employers are only too happy to switch to automation and the use of robots to replace humans at the workplace.

Bailouts Galore

The final cost of bailouts for the current financial crisis is difficult to predict but the figure of $6 trillion has been bandied about and may correspond to what the real cost will be. The CARES Act was for $2.2 trillion and then there was a further bailout for small companies. The Treasury has set up a whole series of SPVs to bail out the financial system. It remains to be seen how many trillions of dollars will be spent buying up bonds and ETFs. The Japanification of the US is already underway.

Money Supply

Since the US dollar is also the most important global reserve currency, it is essential for the world economy that there be a sufficient supply of US dollars to ensure the liquidity of the system. Many countries contract debts denominated in US dollars as investors would not be interested in acquiring debt in local currencies. There is therefore an incessant demand for dollars for financing debt issues, for servicing debt denominated in US dollars and also repayment of debts. So the Fed also has to be careful to ensure that there is sufficient liquidity not only for the US financial system but also for the global economy. There is thus high demand for US dollars that is independent of the US economy.

The role of the US dollar as the dominant global reserve currency may be influenced by the introduction of a gold-based digital yuan. See the Zero Hedge article by Pepe Escobar “Get Ready for the Next Game-Changer: the Gold-Backed Digital Yuan”, which originally appeared in “The Strategic Culture Foundation”.

The Chinese have been working on a digital currency for several years and formed a special commission in 2014 to develop a digital currency that would also handle financial transactions. At present this new Chinese digital currency is being tested in four major Chinese cities. See the Escobar article cited above. What the outcome of this development will be is currently not clear. What is clear is that the US has a commercial balance of payments problem.

The US Trade Deficit

The current US trade deficit is $833 billion. With such a deficit the US dollar still maintains its strength in Forex markets. The dollar index shows dollar strength.

U.S. Dollar Index (DXY)

This is due to the petrodollar and the role of the US dollar as the principal global reserve currency. Should Saudi Arabia accept payment for petrol in currencies other than the dollar and should the US dollar suffer competition from a gold-back digital yuan or a renewed SDR currency, then one could expect the dollar to weaken considerably.

This writer has advised investors to anticipate a precipitous fall of the US dollar by diversifying into other currencies, investing in strategic real estate and acquiring physical gold as well as gold-mining shares. It is not a question of “if” the dollar will fall. It is only a question of “when”. The irresponsible increase in the Federal debt, huge budget deficits, the current financial crisis and fall in GDP, huge expenditures for the military, which includes the maintenance of over 800 overseas military bases and the ongoing financialization of the economy have produced a situation that is not sustainable. The debt clock is ticking away, and investors will not have much more time to protect their wealth from the insidious developments fostered by all the points mentioned above.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions. The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions. The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

Comments

[Chris Valley]

I like Switzerland because their interest rate is zero. They have been charging savers for years. Also minimum wage is zero. That's how neutral Switzerland is.

Meanwhile their schweizerrik national bank buys dozens of my favorite stocks and is one of the largest holders of American stocks.

[WWS Swiss Financial Consulting SA]

That is quite right Switzerland is a neutral country that buys American stocks.

[Fabien Hug]

Borrowers want to borrow in a weakening currency; it makes repayment cheaper. If the dollar weakens, it will reinforce its status as reserve currency. Because it will allow more borrowing and will induce more financial flux and hedging. If the Chinese issue a gold backed currency that you can trust (and that's another question), it will not threaten the dollar status as the reserve currency. It may become a storage currency and that's a different thing altogether. Finally, there is much more in the reserve currency status than simply the relative value of the currency; innovation, military capabilities, financial markets depth amongst certainly many more factors.

[WWS Swiss Financial Consulting SA]

The Chinese plan far ahead. Who would have thought 30 years ago that China could have ever been a challenge to the US? Now the Chinese have stealth bombers. They are planning on supplanting the US dollar on their way to becoming "hegemon" of the world. They are piling up gold, have an oil futures market and are developing a new digital currency. The current pandemic crisis is going to cause havoc in the US with unemployment, bankruptcies and more and more debt. China is on the way to overtaking the US. When trust in the US dollar lessens, American workers are going to be even worse off. This is a very pessimistic view, but the US has to shape up fast in order to avoid the worst.

[User 50944166]

Well, didn't things change, or do you still see as before?

I heard China allowing bankruptcy starting in Shenzhen, that tells you something, I guess it would be new experiment for China..

[Capitalism2015]

“Who would have thought 30 years ago that China could have ever been a challenge to the USA?” .... Many people thought about it but not the three previous US administrations. Whatever you think about Trump he Recognized the threat.

[permanent]

"This writer has advised investors to anticipate a precipitous fall of the US dollar by diversifying into other currencies, ..........."

It might happen at some point but the time is not here yet.

China does not want a strong currency, same for Japan, the Eurozone is a mess, the SNB is trying everything to avoind a stronger "Franken". Every one of the players in this game knows that a strong currency will lead to jobs lost.
That is why the US has exported so many jobs, because the USD has been over valued for a long period of time.

[BeneGesserit]

"This writer has advised investors to anticipate a precipitous fall of the US dollar by diversifying into other currencies, ..........."

Bingo. But they should specify currencies of the non-printable sort like Gold and BTC. The dollar will sink slower than the other unbound currencies so diversifying into others only accelerates the loss in purchasing power.

[WWS Swiss Financial Consulting SA]

Right. The US has lost millions of job due to off-shoring.

[WWS Swiss Financial Consulting SA]

Physical gold and gold-mining stocks have been recommended.