Date: 5/10/2022
Author: Mr. X
Inflation is rampant. Food prices are skyrocketing. President Joe Biden’s moves to reduce gasoline prices have had little effect at the pump.
Is this it? Is this the fabled collapse of the dollar and the end of the American world order?
Is it the rise of currency free from any government’s control?
Far from it. We’re looking at a situation where the dollar remains king even as inflation increases.
Consider how the dollar is performing compared to other contenders. The Chinese yuan (technically the renminbi, but everyone calls it the yuan) just hit an 18-month low against the dollar. This comes at a time when the People’s Bank of China is trying desperately to prop up its currency.
All the regulatory moves in the world can’t compete with the slowdown that is hitting the Chinese economy due to the government’s wildly impractical commitment to a “zero-COVID” strategy. It’s so illogical that there is some speculation that we may be seeing some signs of a power struggle against the “Shanghai faction,” a group of more pro-Western, liberal-minded elites than the current Chinese leadership. Of course, political instability is hardly the best guarantor of a strong currency.
What about the euro? The euro is almost at parity with the dollar (meaning that if it weren’t for COVID-19, this might be a good time to go to Europe.) Interestingly, European foreign-exchange traders are generally more pessimistic about their currency than global foreign-exchange traders.
The European economy is practically stagnant. The Russian invasion of Ukraine may have crippled the Motherland’s economy and embarrassed its armies, but the Continent is also taking a hit. The decision for political reasons to gradually wean itself away from Russian energy supplies is a massive drag on growth. President Vladimir Putin may have underestimated Europe’s willingness to hurt its own economy in order to stand up to him on Ukraine.
The British pound isn’t doing much better against the dollar. The Bank of England’s most recent Monetary Policy Report flatly declared that it expects “the economy to slow.” This is occurring even as the UK is undergoing its own inflation.
The Japanese yen is falling against the dollar because the Bank of Japan is maintaining its commitment to low interest rates. Japanese Finance Minister Shunichi Suzuki said last month that a weak yen isn’t worth the supposed economic benefits. Yet there’s been little change.
Ironically, the major currency that may be performing best against the dollar right now is the Russian ruble. It hit a two-year high against the dollar just last week. But what can you buy with it, given all sanctions? This may have more to do with capital controls and restrictions on speculation than any underlying strength in the Russian economy or a flood of foreign investors who suddenly want rubles.
This should be cryptocurrency’s moment. Instead, the entire crypto sector is in utter collapse. UST, a Terra stablecoin, may no longer have sufficient backing to be pegged to the dollar. This poses a potentially fatal threat to LUNA, once seen as a potential “Ethereum Killer.” Dr. Kent Moors warned about the potential problems with Tether, another stablecoin, all the way back in July 2021.
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Why does this matter? Though the entire premise of cryptocurrency is that you are building an alternative to fiat, there must be a link to existing currencies if people are ever going to make a profit in trading. While cryptocurrency has many exciting potential uses, most traders involved now use it for speculation. If there aren’t sufficient reserves to back a stablecoin, meaning that a crypto stablecoin that is supposedly worth one dollar can’t be traded for one actual American dollar, they can’t be redeemed. The Federal Reserve specifically identified this as a key risk in its Financial Stability Report just yesterday.
BTC (bitcoin) and ETH (ethereum) are both down from their highs of just a few months ago. Glassnode reports that four in 10 BTC holders are underwater. BTC’s decline since almost $70,000 has been staggering. It’s lost about 55% of its value and as of this writing is staying just above $30,000. Ethereum is facing a similar plunge. What’s worse, the widely anticipated Ethereum upgrade, which would reduce “gas fees” (costs of transactions) and make the protocol more useful, has been delayed. Actually using ETH instead of just trading it will continue to be expensive until we get the upgrade. Unfortunately, we may just end up with another delay.
As of this writing, gold and silver are slightly increasing, but they are down massively in recent weeks. Silver had topped $26 an ounce earlier this year and now it is struggling to hold $22.
The United States of America is a haven. It is not as heavily hit by the Russian war in Ukraine, the country is no longer suffering under pandemic lockdowns, unemployment is low, and consumers are spending despite inflation. The Federal Reserve also seems committed to doing whatever is necessary to combat inflation, even if it means slowing growth.
The American dollar is and will remain the foundation of the global financial order. Yet that status poses unique dangers to Americans and the world. It imposes a terrible burden on our elites.
If the Federal Reserve cannot control inflation, if a renewed pandemic from a COVID-19 variant causes more lockdowns, or if political extremism increases, it’s going to have a massive effect on every other country. American economic growth is essential to giving the global economy any chance of a recovery. The International Monetary Fund has already cut its global growth forecast for 2022 and 2023. America, like Atlas, is buckling under the weight of global expectations.
The dollar remains king, but its realm is a ruin. People are fleeing into the dollar because of a lack of options, not because of faith in the American economy. If the king’s castle starts to show some cracks even after the Fed increases interests rates further, we might see a true global economic crisis comparable to the beginning of COVID-19.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
