by Simon Kazinsky
on 19:30 May 25, 2020
A wealth of analysts, influencers, youtubers are predicating the end of the dollar. In their eyes the massive stimulus by the FED, so welcomed and encouraged by the US administration, combined with the skyrocketing US government debt will bring the buck to its knees. They claim hoarding gold, some exotic currencies or exoteric Bitcoin is the way to weather the storm.
The flows of that logic are already becoming evident. Nearly half a year since we became aware of the Corona outbreak and multiple stimulus packages later we can see the dollar has not only lost value but it is generally stronger against most world currencies. Because, yes, there are more dollars in circulation created out of thin air but the same can be said about most other currencies. Unlike fiat currencies Gold can’t be created by turning the printer on and yet, though it has mildly appreciated it hasn’t as much as it could have done in a market turmoil that brought US stock indices down by 1/3 in a matter of weeks. Precious metal should have thrived in that environment but their reaction was contained. In fact, silver is still close to its decade lows while gold appreciated about 7% since the virus started to set foot in the western world.
I won’t spend too many keystrokes in Bitcoin, an alternative asset that has been more correlated to risk on than to risk off. It’s volatility makes it unsuitable at this time to be considered a safe haven anyway.
Besides, money velocity -M2- is mercileslly declining, people are not moving and so it is their money so the increase of money supply is conflicted with the lack of use hence preventing broad inflation at this point.
Most of the world’s debt is denominated in dollars and this is the ultimate key to understand why the buck is not going down. In good times credit flows and loans get extended in time and in quantity. We are now in a new phase of uncertainty. At times of uncertainty, let alone at times of economic contraction, credit DECREASES and everyone wants to take their money out of the table and put it in the vault for safety. Hence credit gets reduced while debts have to be repaid on time when they mature. This means debtors have to scramble to find hard cash to pay their debt (which globally is mostly denomianted in dollars) and this drives its price higher as demand grows.
If debt doesn’t get paid, ie. because of defaults and bankrupcies, these are dollars that were on the creditors books and that, all of a sudden, vanish. That money was not in the debtor’s hands as expected (for example because of wrong valuations) and now it can no longer be in the creditor’s books. The effect is therefore that globally there are less dollars than estimated and as supply shrinks the price of the asset -the dollar- rises.
From an analysis of the long term dollar index chart we can also conclude the dollar remains in a long term uptrend started in 2011. There is absolutely nothing in the chart that warns of a decline in the dollar value, the trend is up and the index is likely to cross above the 100 mark and above in a new leg up.
I can’t see good reasons to sustain the notion that the dollar is going to collapse while I find surprising that this is the main position at present among commentators and analysts. To the contrary, I bet the dollar will rise against most currencies and the US stock market indices will fall, as they are denominated in dollars, while gold may stay steady or mildly lose some value against the buck.