U.S. Dollar Trash Talk

Given the actions of the Fed and the U.S. governrnment, the U.S. dollar is glorified toilet paper that simply has not made it to the sewer yet… or at least, that’s what I’m commonly told. Other countries are leaving the currency behind, turnrning their backs on the U.S. and it’s cheatin’ ways (see any article on FATCA).

In fact, the BRICS countries have set up their own organization that mirrors the Internrnational Monetary Fund so that they are no longer chained to the U.S. currency and its master. Finally, representatives of China and Russia are busy traveling the globe, making trade agreements in many countries that cut out the need for using U.S. dollars.

All of this means that the days of U.S. dollar supremacy are over. We should start transitioning our wealth to metals and hard assets in preparation for the day of currency judgment.

There’s only one problem. The U.S. dollar is going the other way…

It’s getting stronger. In the last few weeks, the Japanese yen has topped 107, while the euro dropped below $1.30. The Russian ruble is at historic lows against the dollar, while the Chinese renminbi is pegged to the dollar. This doesn’t mean that the actions of the Fed are good for the U.S. or that other countries are suddenly rushing to buy U.S. dollars because they want to patch up their relationships with us.

It simply highlights that the other major currencies have worse problems than we do, which is what we’ve been forecasting for so long.

Over the last five years, we’ve consistently made two forecasts that have caused a lot of anxiety. The U.S. dollar will go up and gold will go down. These are really two sides of the same coin. Our main position is that the dollar will strengthen, not fade away, as so many others claim. The point was never that the U.S. would be so well managed that investors and internrnational parties would flock to our currency, it was always about relativity.

There isn’t one major currency in the world backed by, well… anything. All of them are subject to the whims of the issuing country or economic bloc, or at least to its central bank. So everyday investors, merchants, bankers, and anyone else who deals in currency risk has to evaluate all the moving parts to determine how currency issuers stack up to each other.

What are the prevailing interest rates? What are their growth prospects? Are governrnment policies hindering trade or helping it? Are there any capital restrictions? What will happen to this currency in a time of crisis? How likely am I to get my funds back?

With all of this in mind, it’s not hard to see how the U.S. can, and does, stack up favorably.

While our interest rates are low, they far outstrip what can be had in stable European countries and Japan. In addition, both of these currency issuers have proactively said they intend to weaken their currencies to foment greater trade. How much clearer can a central banker be? “Hold our currency at your own risk, we will devalue it the best we can!”

As for the Chinese renminbi, there aren’t many securities (like governrnment bonds) to be had, so what is an investor to do once he has converted funds? And will the Chinese governrnment continually allow free exchange between its currency and others? Who can be sure?

As I pointed out earlier, Russian rubles are trading near their all-time record lows, so who wants to be holding that currency?

This is one of those times when we’re right, but there’s not much joy in it. We agree with many of the arguments against the U.S. dollar. Eventually it will lose its status as the currency of reserve, and there’s no question in our minds that the Fed and the U.S. governrnment are pursuing policies that hold us back, not lead us forward.

But the outcome of a much weaker U.S. dollar is years away, long after the millennials jump into the driver’s seat of the economy around 2020. During the weak intervening years, those that bet against the U.S. dollar do so at their own peril.

Talk trash about the currency all you want, just make sure it’s stacked up in your bank account.



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