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Musings Report 2022-24 6-11-22 Will the US Dollar Collapse or Soar? An Unconventional View
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Will the US Dollar Collapse or Soar? An Unconventional View
If "money" were straightforward, there would be easy agreement on what "money" is and how it works.
But money is not straightforward, and so there are intractable disagreements over what "money" is and how it works.
In my view, a good place to start is David Graeber's book Debt: the First 5,000 Years and Braudel's three-volume history Civilization & Capitalism 15th-18th Century.
One of Graeber's key points is "money" is whatever can be used to pay taxes and debts. This could be notched sticks or any number of other forms of "money."
One view holds that ultimately only gold and silver are "real money," and in the Roman era this was true, as taxes and wages were paid in gold and silver, and precious metals were traded for Indian gemstones and goods from China.
But by the Middle Ages, Muslim and European traders were using other forms of "money" that augmented gold and silver: bills of exchange at trade fairs, contracts that combined capital and labor in funding trading voyages, clearing houses of various forms of credit and so on.
Braudel's fine-grained history illuminates how these forms of "money" were integral to the ris of capitalism and European global dominance.
Gold and silver continued to be money--a durable form, to be sure--but precious metals were not the only form of money or even the most dynamic and prosperity-creating form.
As I have noted in various books, the Chinese and Indian elites who amassed gold and silver in vaults oversaw the stagnation, decline and collapse of their regimes: all that gold and silver sitting in a vault was dead money which did nothing to foster trade, innovation or wealth creation.
The bills of exchange, clearing houses, secure storage of goods and the commoditization of trading voyages all played essential roles in the vitality of Muslim and European economies.
Consider the ownership of 1/10th of a trading voyage to India. The owner could pay off a debt with this "money," or trade it for goods and services. How is it not "money"?
In the present, it's widely held that fiat currencies--currencies that aren't backed (i.e. convertible into) a tangible commodity such as gold will be "printed into oblivion" by those who own the printing press.
There is an intuitively appealing logic to this expectation, but it overlooks the key difference between physically printing money into existence and borrowing it into existence, or backing the currency with tangibles such as income streams and real estate and intangibles such as labor, trust, transparency, the network effect, etc.
In a fractional reserve currency like the US dollar (USD), banks create money by originating a loan. When a bank issues a mortgage, it's not taking currency from savings accounts and lending it out, it's creating money out of thin air.
But that mortgage is backed by two things: the income stream of the household that borrowed the money to buy a house, and the house itself.
This "fiat currency" is not unbacked; it's backed by income streams and the tangible house purchased with the mortgage.
The same is true of a government Treasury bond: the bond is backed by the interest paid by the government's income stream and its claims on the citizens and enterprises within its borders.
To say this borrowed-into-existence currency isn't backed is not true.
We can say that gold is more durable than an income stream, but that's not the same as saying the currency is unbacked.
It's important to understand this difference: if a state prints a currency bill, i.e. cash, that is unbacked. But a mortgage or bond is not cash; it is an asset owned by someone and a liability owed by someone.
When the loan or bond is paid off or defaulted, the asset and liability are removed from the ledger: they no longer exist. the printed currency bill continues to exist and hold its nominal value (face value).
This borrowed-into-existence USD is quite different from cash: physical currency or the currency held in bank accounts and other institutions--what the Federal Reserve calls M2 money supply.
M2 isn't "money" that vanishes when the debt is paid off; it is as durable as the system which issues it.
Gold and silver are more durable than any social construct / financial system: Roman coins are still stores of value 1,500 years after the political-social-financial system of the Roman Empire collapsed.
But in the here and now, currency held in cash or an account is "money" that will be "money" as long as the system that issues it endures.
Since governments can print "money" into existence in essentially unlimited quantities, the more "money" that is printed then the lower the value of that money. This diminishment of purchasing power is inflation: the purchasing power of the currency declines, requiring larger sums to buy the same goods and services.
But the supply of money has to be contextualized within the larger economic sphere of national output, trust in the rule of law, and the market value of various assets, from vintage furniture to artworks to trucks, oil wells, dwellings, stocks and bonds.
If the value of the entire economic system's assets expands faster than money expands, then the expansion of "money" need not doom the "money" to worthlessness.
If the other assets in the system expand even faster than "money," then cash can actually gain scarcity value.
If you read the Federal Reserve's description of what's counted as "money" in M2 (see link above), this is $2.2 trillion in actual physical US bills (much of which is held overseas in $100 bills) and the rest of the $22 trillion is in accounts.
This is "real money." It has no counterparty that guarantees it other than the entire system within which it functions.
In this sense, the nation that issues the currency is the guarantor, and this is not just the income stream of the state but the global trust in its rule of law, transparency, liquidity, etc., its natural resources, river systems, ports, etc., and the vibrancy, transparency, productivity and adaptability of its entire socio-economic system.
Now let's compare the supply of US dollars--roughly $22 trillion--with the entirety of global assets, which Credit Suisse estimated at over $400 trillion.
This has taken a hit in the recent decline of stocks and bonds, but other assets such as oil have risen in value, so let's stick with $400 trillion as a base valuation of global assets.
This means the supply of US dollars is about 5% of all the assets that theoretically could be sold and converted into dollars.
Note that the vast majority of these dollars are held by US residents in US institutions. There are euro-dollars and petro-dollars, but these are placeholders, not actual US currency.
That means that if more than a few percentage points of global assets are converted into USD, there won't be enough US currency to fulfill that conversion. There will be a scarcity of dollars compared to the demand for dollars.
This relative scarcity will drive the scarcity value of USD higher--potentially much higher.
An enormous sum of loans have been issued globally that are denominated in dollars. There are various reasons for this, mostly due to currency arbitrage: if my local currency is gaining in value relative the USD, then the interest due on a USD-denominated loan declines over time, making it easier for me to pay. It makes sense to get a dollar-denominated loan when my home currency is gaining value relative to the USD.
But this reverses as the USD gains value relative other currencies: the loan payments when converted into the local currency go up.
In other words, currencies--like goods, services and commodities--are valued (priced) by supply and demand: if demand rises faster than supply, the value/price rises.
This is true of gold, oil, potash, wheat and currencies. If demand for USD increases faster than the supply of cash dollars, that demand will push the value of USD higher.
If you are skeptical this is even remotely possible, note that it is already happening:
In the Oil Market, the Strong Dollar Is the World’s Problem: Crude is trading at a record in many local currencies. That will eventually lead to demand destruction.
The USD is gaining value against the majority of currencies, meaning everything priced in USD (virtually all commodities) is becoming more expensive for holders of other currencies.
The Japanese yen, for example, has lost about 20% of its purchasing power when priced in USD in a few months. Everything priced in USD now costs 20% more in yen.
Why would someone somewhere in the global economy want to convert an asset into USD cash? The basic reason is the asset is at risk of declining farther and faster than the USD for any number of reasons.
Local governments might expropriate the asset, or a currency devaluation drastically reduces its value, or the asset is at risk of becoming illiquid, i.e. buyers vanish and the asset can't be sold except at a deep discount.
Someone with debts might conclude that converting their local cash and assets into USD is the lowest-risk way to pay down their debt while they still can.
These are just a few of the reasons why demand for USD could far exceed the actual supply of USD. If the US "prints" $1 trillion in new USD, but there is global demand for $2 trillion in USD cash, the purchasing power of the USD will rise, even though more USD has been issued.
It is my contention that the vast majority of the inflation we're experiencing isn't from excessive creation of USD, it's the result of scarcities of the essential materials of global industrialized life: energy and the other components of food production.
Since energy is the core component in virtually every good and service in the global economy, higher energy costs pile up in every supply chain.
The other core component of inflation is labor, and global workforces are finally demanding catch-up after decades of stagnant wages.
The third component of inflation is monopoly: monopolies and cartels increase their prices because there is no competition to limit price increases.
So college tuition has risen like clockwork, healthcare costs rise like clockwork, etc. Much of the economy is dominated by monopolies and cartels whose price increases don't reflect an increase in the quality or quantity of goods and services; they're a hidden tax that benefits the few at the expense of the many.
All of these forces constrict supply, so demand pushes prices higher. Money-printing is the easy explanation, but this misses the dynamics of supply and demand that govern not just goods and services (inflation) but currencies themselves.
This circles back to my recent posts on the Core-Periphery: the Core attracts capital because it is a safer haven than the periphery, as it has more transparency, more assets and greater dynamic stability, i.e. is is more resilient and has more antifragility, the ability to not just weather crises but emerge stronger.
In terms of currency, there is only one core, the USD. Everything else is periphery.
This offends many sensibilities, but that's what's playing out as the yuan, yen and euro--the world's key currencies--are all losing value when priced in dollars.
This rise in the purchasing power of the US dollar could become a self-reinforcing feedback, as those losing value holding other currencies and assets rush to trade their currencies and assets that are losing value for USD.
This demand will only push the relative value of the USD higher, attracting more capital.
Despite the many claims that the USD will be "printed into oblivion," in my view it's actually more likely that the expansion of the USD money supply will drastically lag demand for USD, pushing the purchasing power of the USD higher--potentially much higher.
There is a difference between the Core and the Periphery, and it's not a matter of opinion or conjecture. Just look at which currencies are losing and gaining purchasing power, and which ones have the highest levels of liquidity, transparency, rule of law and relative scarcity.
In my admittedly unconventional view, the problem won't be the U.S. creating too many dollars, it will be the U.S. isn't creating enough dollars to meet global demand as the vast periphery unravels.
I could be completely wrong here. If my understanding is wrong, my prediction will be wrong. If everyone else's understanding is wrong, then their prediction of the USD collapsing will be wrong.
In a few years, which prediction was right will be clear. Maybe the USD soars and then collapses. We'll see. If I'm wrong and the USD collapses in the next few years, I'll admit I was wrong.
I strongly suspect the world of 2030 will be quite different in ways few fully anticipate. The valuations of various forms of "money" may well be one of the things that will be different in ways few anticipate.
Highlights of the Blog
Hunter's Hooker: A Teachable Insight into American Capitalism 6/10/22
There's No Stopping a Recessionary Reckoning 6/8/22
New Prosperity Magazine: Goldilocks and the Crack-Up Boom 6/6/22
Best Thing That Happened To Me This Week
After a multi-year battle with Audible/ACX to recognize my rights as the author, the publisher of my "Get a Job" audiobook who hasn't paid me royalties since 2017 finally transferred the audiobook to my account.
The money I should have received wasn't much, but I am a bit of a fanatic when it comes to preserving ownership / control of my work. So this is a victory, modest though it may be.
For eye candy, here's a stalk of bananas that ripened in two days.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
New IRS Data Reveals Florida Biggest Winner, New York Biggest Loser In Competition For People & Their Wealth--voting with their feet becomes consequential...
Meet Our Foodmakers -- Umami Insider -- remarkable list of small artisan suppliers in Japan...
The Complexity Trap -- Tim makes an important point here...
Escape from Auschwitz: the most extraordinary Holocaust story you’ve never heard
The World At War: Peter Zeihan: Full Interview. (via Stuart L.)
Robots Pick Up More Work at Busy Factories (via Tom D.) -- cobots--robots that work in conjunction with human workers...
5 Must Have Guitars For Every Player--for electric guitar players...one acoustic, four electrics... one oversight, no hollow-body electric like the Epiphone Casino or Gibson 335...
Chinese police run secret operations in B.C. to hunt allegedly corrupt officials and laundered money (1:42 min) (via Maoxian)--probably not an isolated operation....
How dirty money is driving up Canadian real estate prices (from 3 years ago)(via Maoxian)
In the Oil Market, the Strong Dollar Is the World’s Problem: Crude is trading at a record in many local currencies. That will eventually lead to demand destruction.
Here's What Happened When I Tried 12 Brands Of Cat Food (via Duen Hsi Y.)
These Charts Show the Wealth Devastation to U.S. Investors from Wall Street’s Unchecked Corrupt Practices (via U. Doran)
"Procrastination is the soul rebelling against entrapment." Nassim Taleb
Thanks for reading--
charles |
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