Allow me to preface my analysis by saying this: The dollar has always been crashing, but it really depends on what frame of view by which you're looking at it to determine how much it really should matter to you. That's where we can have a debate.
As you know, we've seen headlines about the dollar collapse, and it has become quite a common fear among clients and friends. But I have a challenge for the rest of you to consider: What makes this 'crash' any different from the persistent crisis our dollar has experienced?
Here's what you'll see folks point to:
\- Dollar debasement; Dollar is being dropped as a reserve currency.
\-Gold and silver prices screaming to new heights.
\-Recent inflation has been exceptional, where aggregate prices are 26% higher today than in 2019-2020.
\-The DXY, a measure of our currency relative to a basket of first-world nations, has come down considerably
\-Our Debt/GDP Ratio is out of control
This is what I'd like to point to: Nothing changing about the dollar and its relevance are fundamentally new. let's look at the above talking points one-by-one.
**1) Dollar debasement; Dollar is being dropped as a reserve currency & 2) The DXY has come down considerably**
In recent history, it is true that we are seeing declines in how the often the dollar is relied on to affect trade. Is this new? No. The rate at which it has been losing volume on the global stage has remained largely consistent with a couple years after 2020 being the exception that offset this decline. We actually so more countries fleeing to the dollar, as we were one of very few nations that hiked interest rates to fight in inflation in a time when global productivity was *artificially* being stymied. Just like the OPEC-mandated shortages that caused fuel prices to surge in late 70s and 80s, we experienced the same ordeal with the dollar. Raising interest rates and unwinding our balance sheet allowed a dollar shortage. You may argue "But did our money supply not increase??". The answer is yes. It did. But currencies are held on a relativistic scale with the rest of the world. Dollars did become scarce in times of uncertainty. Hence the DXY moving rapidly higher to levels not seen in decades. It was only a matter of time that we would see the reversal of this extreme as economies around the world normalized. The advent of Trump's tariffs, like him or not, did add some fuel to the fire. Selling off the dollar is what alleviates the burden of paying tariffs to sell goods here. China being a large proponent to this. Overall, you'll come to find the dollars relevance in trade is still exceedingly higher than the runner-up.
**Gold and silver prices screaming to new heights**
The price increases of Gold/Silver have been often misread as "this must mean the value of the dollar is falling", when it should mean that the prophecy set by the first bullet point is self-fulfilling. If people believe the sky is falling, they'll buy bunkers. It's not that people building bunkers is causal to the sky falling. I've already made a post on my thoughts regarding silver, so I'll not stay too long on this one, but I want to point out that in the coming months, you may see the price stagnate then climb higher. You may also see it come crashing back down. Both events are equally likely. Fundamentally, however, I do know the shortages in gold and silver are not led by central banking or any monetary authority. We can check money flows. When we do this, we find that A) there's already been an industrial shortage for silver and B) This shortage has been exacerbated largely from investors and speculators without any industrial need of their own. If you use fund inflows to exchange-traded products backed by gold and silver, you see they've gone up by 20-30 fold. That's not nothing. That's behavioral and not fundamental. But let's go with the assumption that the dollar must be crashing for a moment and back test this with 2 things:
1) **current and expected CPI**
2) **Long term treasury yields**
\-The CPI expectation hovers at 2.7-3.2%. This is well within an expected long term CAGR from the last 50-60 years.
As for Long term treasury yield, we use this figure because I don't want to open myself up to someone saying "Well, the fed has been buying treasuries, so that decreases yields". They would be right, but 10 and 30-yr terms are the exception. Fed only interjects in overnight and short term rates.
If the dollar was expected to crash domestically and internationally, we would see massive selloffs of treasuries within these 10 and 30-yr terms, pushing yields up to a level that absorbs inflation expectations. We'd also see a really difficult auction. We haven't seen either. Right now, yields are 160 Bps below the 60-year average, and Investor appetite for treasuries is still strong; evidenced by the 'bid-to-cover' ratio, which is actually within a normal range at **2.55**.
**Our Debt/GDP Ratio is out of control**
THIS is the only real predictor we ought to pay attention to and pay attention to very closely. Our public debt vs GDP is going to tell us about our forecasted ability to cover future interest payments and the likelihood for reducing deficit spending. As interest payments as a % of total tax revenues increases, it leaves less on the table for any of our other federal programs to expand. I think it should also be a predictor for where future tax policy might change. However, some would argue that we can potentially grow our way out an unfavorable Debt/GDP ratio. This is less likely as GDP growth in real terms historically under-paces the rate in which we accumulate public debt. Which leaves another option on the table that gives merit to the "Dollar Crash" concern: QE (Quantitative Easing). QE is a tool from which the fed purchases public debt of any maturity and does so with created credits. This typically leads to monetary expansion through our banks.
**So where are we really?**
It's complicated. And the news doesn't help. The dollar is and has been declining since inception with inflationary at a consistently higher cadence since the 70s. I'll not lie to you and say everything is okay, but I also want to be clear in saying that the dollar is not going away. We have a real problem with debt. It's growth is a constraint and though we have the same number of options for handling debt, each path loses its effectiveness as deficits continue to be a scourge on our nation's treasury. But here's the detail we can't miss:
Our economy is capitalistic, not communistic. In a capitalist country, the flow of capital has a strong tendency towards the prevailing smaller number of owners relative to the entire populace. And because fewer persons have the claims on newly created money, that skews inflation recognition. Not for capital assets but for consumables. We've seen this happen in the last decade during 2 really important eras. 1) the easy-money policy when debt was near 0%. 2) During covid as stimulus spending made its way to the top-end of the economy. Hence the K-shaped recovery.
This created asset inflation, and we can call it asset inflation because of how P/E ratios, (adjusted for earnings growth), have drifted a few orders of magnitude higher than historic averages. Some of this is structural. Companies, today, are quicker to have growth realized and go parabolic much sooner than in history. That can pull-forward tomorrow's pricing to today. But that's an incomplete story. If we look at capital assets, they've outpaced consumer inflation and have a tight correlation with money supply. That's where the **dollar's value 'plunging'** shows up.
This leads me back to my overall argument. The dollar crisis shows up depending on where you're looking. Capping it all off, I'll leave you with this scenario:
Say I controlled the treasury and could print money at my own whim. And let's say I print off $10 Trillion dollars and keep all of it to myself (I would).
By every measure, M2 money supply has increased by nearly 50%, but does this mean the dollar's purchasing power has been cut by 1/3? No.
It's the act of spending the money that creates inflation and thereby induces dollar's loss of purchasing power.
If I started to then spend that $10 Trillion, buy all the food from the shelves, feed America and continued that commitment without respect to the price I'm paying, then you'd see inflation.
**The rule:**
In a true currency crisis, you want to find the most stable currency with the highest liquidity and lowest transaction-related friction. For many countries, companies and individuals, that currency is still the US Dollar. When you have dollars, convert your savings into productive assets. Let the function of those productive assets determine the best currency for them to conduct business in and you will have reaped the benefits of their price discovery.
No other class of asset will deliver this favor to you at the scale a business does.