Why The US Dollar is King – For Now

I'm seeing a lot of content that talks about the USD losing a lot of value in the near future.

Guess what? Not going to happen.

Why?

Because other countries around the world are seeing historic currency collapses – Lebanon, Turkey, Argentina, and Venezuela, to name a few. What do people in countries outside the USA do when that happens?

They buy dollars. Even as the dollar loses reserve currency status, this trend means there will still be demand for new dollars. 

As you can see, the USD Index (DXY) has held up quite well over the past ten years. After a minor dip recently, the index appears to be consolidating and possibly preparing to trend higher. This means that relative to other fiat currencies, the dollar remains king.

[DXY chart by MarketWatch.com]

For now, this isn't changing. At some point, it will, and everyone should position themselves for that. But in the near-term, the dollar is king. Fiat currency only has relative value, and so long as other currencies continue to fail faster, the dollar will come out on top.

Money Must Move To Create Inflation

Another factor is the M2 Velocity of Money. It has hit record lows.

That means money is not moving around – economic activity has never been slower. In an environment like that, you don't get inflation outside of essentials or assets central banks are supporting.

It does not matter how many trillions of new currency units they print if that money doesn't go anywhere.

We saw something similar happen in the crisis of 2008/2009. Many people believed that the trillions created through quantitative easing would lead to hyperinflation.

But nothing of the sort ever happened. Why?

Most of that money never made its way into the system. While some of it did, leading to asset bubbles in stocks and real estate, most of the funds just sat on the balance sheets of the big banks that had failed.

In 2008, the financial system died. The big banks that were deemed “too big to fail” were kept alive, even though they were insolvent, turning them into zombie banks.

So, rather than destroying the dollar, all of those new dollars did little more than replace the dollars that these insolvent banks had already destroyed.

Inflation vs. Deflation

Predicting whether we will see inflation or deflation is no easy task. But it does come down to two simple factors – supply and demand.

While it makes sense to predict deflation in the face of collapsing demand due to government-enforced lockdowns of society (which citizens had no say in whatsoever, by the way), there could still be inflation if supply falls even faster due to supply chain disruptions.

In deflation, cash is king.

During inflation, many asset classes outperform, particularly gold, equities, real estate, and Bitcoin.

[Photo by Dmitry Demidko on Unsplash]

It seems likely that the near future will see stagflation – a period of inflation in essential goods but deflation everywhere else. We’re already seeing this with rising food prices.

For this one reason alone, holding some dollars makes sense. You’re going to need more of them to survive in the near future.

The End is Here

For years, I and many others have been writing about the inevitability of a time when fiat currencies rapidly lose value. That time no longer lies on the horizon – it’s here, right now.

The draconian measures taken to stop the spread of the coronavirus, which have in turn collapsed economies and ruined many millions of lives, may not have been foreseeable.

[Photo by Nasonov Aleksandr on Unsplash]

But what certainly was foreseeable was the fragility of the financial system, resting upon debt-based fiat currencies swimming in a sea of unbearable debt, kept afloat only by never-ending money printing.

The logical end result of this madness, whether spurred on by COVID-19 lockdowns or not, is the end of an era. Make no mistake, there will never be a return to normal.

The old paradigm has come to an end. What takes its place will be determined by how people respond to what happens next.