Let me start off by confusing everybody and say that to some extent, there is validity in the notion of the strong dollar reflecting a strong economy.
This is what happened in the 1980s when the U.S. and its U.S. Dollar Index hit its peak of 128 in March of 1985. It was going up because returns on investment in the U.S. were so much higher than they were in other places, and this led to great demand for dollars. It led to foreign investors pouring their money into the U.S. rather than elsewhere.
So it’s not a completely baseless fantasy that the dollar goes up when the economy is strong. It can be a contributing factor.
And I think in the current rally, we’ve seen the dollar rise in part because of a hallucination or a mirage that Donald Trump could change the basic problems that we have in this advanced economy, which is overly indebted, and make it profitable to produce lots of things in this country — which probably should be produced elsewhere, because they can be produced more cheaply.
This enables the world to live better on its income, whatever that is.
But the point I’m trying to make is that if you look at the big jump that happened in the Dollar Index starting in 2013 to 2014, which reached the headlines when the price of oil plunged … this did not happen because of strength.
It happened because of weakness.
And there is a reason that the dollar is going to continue going up from here, even though there may be a blip around the realization that Trump cannot wave a wand and reflate the economy. The reason it’s going to go up is because the economy is weak.
In particular, what is weak is the so-called eurodollar money supply.
The eurodollars — for those who are just skimming this article, eurodollars are not euros. They’re not the currency of the European Union. The eurodollar is a name that was created in the 1960s for American dollars that had run away from home. They were living outside of the U.S. banking system, and these eurodollars can be in Brazil; they can be in China; they can be in Europe.
But the crucial factor that is making the dollar rally is that the eurodollar money supply has been plunging.
So it’s down, say, 20%, and this is the main funding source for the world economy.
The fact that we’ve seen big sell-offs in recent years of the reserves held by China and Brazil in particular is a reflection of the fact that the private banking system is not providing the dollars that are required to maintain the necessary level of collateral in these systems, which have expanded debt in dollars dramatically. They don’t have the collateral to underpin that.
So it’s the weakness in the eurodollar system that is making the Brazilians and the Chinese sell their currency reserves in the form of U.S. Treasurys. If you look at those reports, you see that they’ve been selling trillions — not just a few dollars, but a lot of dollars — to make up for the lack of dollars in those systems. And it doesn’t seem to have done a lot of good.
China Is Crumbling
In fact, the Chinese system is starting to unravel. We’ve heard recently from the minister of housing in China that he thinks it’s a big bubble, and it’s all going to come to a close.
But just as in the United States, authorities said, “Well, look, the mortgage market is going to come to grief, but we can contain this very easily.”
Remember those famous words of wisdom from 2006 to 2007?
Well, it proved to be a farce.
They didn’t know how to do it, and the Chinese don’t either. And I think the actual fact is what we’re witnessing here is an equivalent, a parallel, to the collapse that happened in the mortgage market in the United States, that was described by us as the subprime, and is often known by some of its casualties, including the Lehman Brothers collapse.
But it also was initially a problem in the eurodollar market. This was not something that the Fed could handle. They didn’t know how to handle it then, and they even know less how to handle it now.
So I think that what we see unfolding in China is the leading indicator of a massive destabilization of the global monetary system, which will lead to hyperdeflation — not hyperinflation — because the area in which it’s happening is the area in which central banks had the least control.
The Brazilians and the Chinese have tried to step into the breach and provide funding by selling their dollar-denominated U.S. government securities, and taking those dollars and stuffing them into the holes in the eurodollar system in those countries. But this is only a temporary solution. It doesn’t work.
That’s why the Chinese are looking to devalue, and that’s why the Brazilian real has fallen sharply against the dollar over these years, while this process was unfolding.
And it’s going to continue to unfold, and it doesn’t matter whether there is thought to be a prompt reflation plan or not. The dollar will go up because of the weakness in the eurodollar system.
And this is what we have to prepare for.
The System Falls Apart
I think this is the biggest hidden dynamic in the world right now. It’s why Strategic Investment is one of the only publications that I know of that is warning you to prepare for hyperdeflation rather than hyperinflation, which is what all the politicians would prefer to have.
And if you ask the simple question: Would you rather have hyperdeflation, where people lose their jobs; they lose their homes; the economy shrinks dramatically?
Or hyperinflation, where everybody is just wandering around, building up their biceps by carrying extra bags full of money?
Well, extra bags of money are probably more widely desired than black holes in the balance sheet. But the black holes in the balance sheet are what we’re going to get, because the system is going to collapse at its weakest level, which is in this international global intersection between vacationing U.S. dollars and the debt that was created in the system.
There’s a great deal of instability in the system. And one thing that can be said without thinking is that this huge deficit that we see in the eurodollar market, the deficit dollars, the dollar shortage, is a reflection of an unstable system. It’s undoubtedly going to come to an end as everything that can’t go on forever does. And I think we’re closer to the end than most people would imagine.
James Dale Davidson
Editor, Strategic Investment