Return To Real #6 - July 13, 2022
According to the famous astrophysicist Neil DeGrasse Tyson, the origin of the universe stems from an explosion of matter called “The Big Bang” that began 13.85 billion years ago. Since that moment the universe has continued to expand. Today the earth is hurtling through the atmosphere at 67,000 miles per hour. Tyson explains that any time the universe stops expanding it creates what are called black holes.
A black hole is a region of space where gravity is so strong that nothing, not even particles of light can escape.
The dollar, like the universe, must always expand. Any time the dollar stops expanding it creates black holes in the global economy. This is the curse of being the world's reserve currency. When the Federal Reserve raises interest rates and removes assets from the balance sheet, the supply of dollars shrinks in the world. This then makes the dollar stronger.
Much like a black hole in space does with light particles, a strong dollar weighs down every currency that is tied to it.
Overview
One of the biggest misconceptions is that a strong dollar is a positive situation.
The word “strong” sounds good, but in reality dollar strength is killing the global economy. We believe it's destroying the United States even more.
Our 6th essay in the Return to Real essay series, Something Bad Is About to Happen, seeks to explain the difference between currency strength and economic strength and why we believe the United States needs a much weaker dollar over the long term for our home economy to become stronger. Dollar strength today is the root cause of the inflationary spiral being felt around the world.
Many people hear the words “strong dollar” and are asking the question; How can the dollar be strong with inflation running at over 9%? They are right to ask this question.
In August 2020, the national average for a gallon of gas was $2.12. Today the national average is $4.75. This amounts to inflation of more than 100%. Home prices have seen a dramatic rise in price as well. According to data from the St Louis Federal Reserve, the average sales price of a house in August of 2020 was $397,000. Today the national average is $507,000, a 25% increase in the last two years. The Consumer Price Index for-Urban Consumers - Food away from Home was at 276 in June of ‘21. Today it stands 11% higher at 305.
Clearly the dollar is weaker when measured against these real things. The dollar buys us 50% less gas, 20% less house, and 15% less food than it did two years ago. Inflation has eroded a significant amount of our buying power.
The Great Devaluation published in 2020 predicted this tangible inflation problem before just about anyone believed it was possible. Inflation is what happens when governments expand the money supply at a faster pace than they expand their productivity. The premise of TGD was that the Federal Reserve had no dry powder left to deal with a downturn in the economy. With interest rates at 2% at the time, and every recession calling for a 5% cut in interest rates, it seemed obvious that the Fed had no room to deal with the next crisis.
we are in the midst of that reset today...
We predicted a black swan would come, and that when faced with that crisis, the Federal Reserve would need to cut interest rates to 0% and then massively expand the balance sheet. These actions would then lead to dramatic inflation.
COVID-19 hit in earnest as our research was being published. It was a true black swan. The crisis provided the perfect cover for the Federal Reserve. What did they do? Exactly as we anticipated. They lowered interest rates to 0% and then more than doubled the balance sheet. These actions were concurrent with a fiscal stimulus from Congress that witnessed our national debt increase by roughly $9 trillion dollars.
This powerful monetary and fiscal combination amounted to tens of trillions of dollars being added to the system at once. It was akin to a monetary ‘big bang’ that witnessed dollars explode across the globe. The normal speed and pace of the dollar expansion around the world was multiplied. That awesome expansion in dollars, coupled with the simultaneous loss in productivity as workers were forced to stay home around the world, left only one outcome. Inflation.
There is only one tool that central banks can employ to fight inflation. Shrinking the money supply. They do this by raising interest rates and selling assets on their balance sheet.
The Great Devaluation sought to encourage investors to think about the future as a series of chess moves. It’s what comes after inflation that causes black holes and could cause the monetary system to collapse. We are facing this reality right now. We believe it's a “checkmate” for the U.S dollar.
Many people have predicted that due to our unpayable debts that the U.S dollar will ultimately die. Our conclusion however, was not that the dollar would die a death due to weakness, but rather we would ultimately need a monetary reset because the dollar would become too strong. We anticipated that dollar strength would eventually crush the world economy and why a “great” one time “devaluation” of the dollar, similar to 1933 and 1971 would again be necessary to reset the monetary system.
The subtitle of TGD is “How to Embrace, Prepare, and Profit from the Global Monetary Reset.”
We believe that we are in the midst of that reset today.
Pay attention to the state of the world around us. Japan’s currency, the Yen, is crashing. The European currency, the Euro is crashing, China is facing bank runs by their citizens. The economy in Sri Lanka is collapsing, as are the economies of Ecuador, Ghana, Chile, and Egypt. It’s all been exacerbated by the strong dollar.
This glimpse of a cracking world has been a problem of our own creation. It has been ushered in due to our massive expansion of debt and solidified by our sanctions on Russia. We have played right into Russia’s hand. We may be now in the final checkmate with no good move left.
Central banks are forced to deal with the inflation they themselves created. Their solution is to shrink the money supply. This action only tamps down demand. Unfortunately, these policies have no impact on supply. Raising rates in the U.S to fight inflation at home only makes the problems from the Russian war even worse for the rest of the world.
Germany, the strongest country in Europe, is almost completely reliant on Russian energy. They are now facing a severe depression and an extreme shortage of gas and energy which could lead to having to turn off the heat this winter. The fact that the Euro has fallen 17% against the dollar is amplifying their pain.
The world as we know it will never be the same. A monetary reset by crisis or accord may be the only solution.
Something Bad Is About To Happen
The Monetary system is built on an interconnected network of currencies. The U.S dollar is the freeway that connects them all.
The Dollar Index (DXY) measures the relative strength of the dollar against a basket of major currencies (UK Pound, Euro, Japanese Yen, Swedish Krona, and Swiss Franc). In May of last year the DXY was trading at 91. Today the dollar index stands at 108. This is a dramatic increase in the relative value of the dollar against other major currencies of over 18% in just the last 12 months.
When the dollar strengthens against other currencies it means that we are exporting inflation to the rest of the world. This is the oxymoron of a strong dollar for Americans. The dollar buys less things here at home while at the same time buys us more things abroad. We note that the dollar index has not been this high for 20 years. We believe this signals the entire structure of the monetary system is already broken.
In our 6th essay of the Return To Real series, we dive into the risks presented by a US Dollar that continues to strengthen against other currencies, the negative impact it’s having on the global economy, and how a higher dollar from here will lead to further global unrest.
The uprisings happening in Sri Lanka, the Netherlands and Albania today are a product of an inflationary crisis directly exported by the United States. Should the U.S dollar continue to strengthen further from here we believe that the world crisis could look like Sri Lanka times ten.
The scariest part is that it could all unfold in the 4th quarter of this year as Europe will face a winter in the midst of an energy crisis, and much of Africa and the Middle East likely suffer from food shortages.
We must first recognize that all major currencies are measured against the dollar. When the dollar is unstable and either falls or rises too quickly, it creates instability around the world. A strong dollar technically punishes the global economy. It punishes us at home too.
On the domestic front, dollar strength has created a significant rise in the negative balance of trade of the United States. The previous high mark for America’s trade deficit was in 2006 when it hit $763 billion. In the first quarter of this year our trade deficit hit a whopping $288 billion and is on pace for an annual deficit of over $1 trillion dollars. When we run trade deficits that are this high it’s an indication that we are diverting dollars from investment at home and sending them abroad. Our stronger currency allows us to import cheaper labor and goods from overseas. This is the curse of a strong currency. Investment at home becomes less appealing to corporations than importing from other countries.
A strong dollar hurts our exports as our homemade goods and services become more expensive internationally. This reality reduces our industrial investment at home, wipes out the middle class, and exposes the United States healthcare and defense risks as we become more dependent on foreign countries for our labor, energy, technology and medical development.
A strong dollar also slows our overall domestic growth. International corporations who do business in other countries with weakening currencies suffer lower profit margins. Foreign earnings translate into fewer dollars. This is a major headwind for equity markets, especially the technology sector which gets a major portion of its profits overseas.
This is a real concern as we head into earnings season. According to Mike Wilson of Morgan Stanley, “for every percentage point increase (of the DXY) on a year over year basis it’s approximately a 0.5X hit to earnings per share (EPS) growth. At today's 16% year over year level, that translates to an 8% headwind for the S&P 500 EPS growth.” Stanley has been one of the most accurate analysts and believes the S&P 500 will soon fall to 3400 points.
One of the last remaining arguments to remain bullish on equities today is that EPS growth is still very strong. This will soon change as the soaring dollar will put even more pressure on equities as firms begin reporting in July. As we can see from the chart above forecasters are finally catching up. They have continued to downgrade earnings throughout June.
a global recession should follow should the dollar strengthen too much...
These are the reasons why a stronger dollar at this moment in time simultaneously punishes both the United States and the rest of the world. Donald Trump identified these issues and regularly bashed the Federal Reserve for not allowing the dollar to weaken against other currencies. He argued that in order to make America great again we must allow the U.S. dollar to weaken. Doing so would allow more investment at home for energy infrastructure, technology, biomedical development, and updating our outdated electrical grid.
It’s all coming to a head today. Right now there is massive divergence between the world’s major central banks.
The Federal Reserve is promising 15 rate hikes and a $1 trillion worth of quantitative tightening, while at the same time the Euro cannot even hike 25 basis points and Japan is still buying bonds in an effort to continue their policy of yield curve control. This divergence is pushing Europe into recession. A global depression could follow should the dollar continue to strengthen too much.
Our global system relies on dollars. The dollar is the blood that flows through the organism of the world economy. Eighty eight percent of all currency trades are performed in dollars. It’s why we need to consider the dollar's impact on the world when thinking about our currency, because most assuredly the world is thinking about us. Less dollars is the equivalent of “bloodletting” across the global money system.
The west has backed themselves into a corner. Debt expansion makes higher interest rates an impossibility for the long term. Russian aggression seeks to take advantage of this impossible predicament. Should Russia “turn off the gas” we could see a worldwide depression. This is the most likely scenario unless there is a dramatic devaluation of the dollar.
The Unipolar Dollar System
An understanding of history will help us to recognize the reality today. It will also help us consider what comes next and why gold provides the ultimate solution.
The dollar has officially been the reserve currency of the world since 1944. It was formalized by the Bretton Woods agreement, which reset the world monetary system after World War II. The deal was simple. Every major currency would be pegged to the dollar and the dollar would be backed by gold. The agreement allowed the dollar to become the reserve currency of the world.
However, more was needed for the free world to fully adopt the dollar.
The Truman doctrine enacted in 1947 sealed the deal of Bretton Woods by establishing that the United States would provide political, military and economic assistance to all democratic nations under threat from external or internal authoritarian forces. This doctrine initiated what would come to be known as the ”cold war” between the United States and the Soviet Union and their respective allies. The cold war then led to the formation of the North American Treaty Organization (NATO) in 1949. NATO was a unified military command to resist the Soviet presence in Europe.
These consecutive pacts permitted the dollar to quickly be adopted as the trading currency of the free world. This occurred not only because of disproportionate American gold holdings and our strong economy, but also because of our promise to militarily protect all democratic nations who supported it.
Bretton Woods was built on a promise to maintain the integrity of the dollar.
This meant that we would not increase the money supply without a corresponding increase in our physical gold reserves. The promise was not built on faith alone, but also collateralized by the reality of physical gold. Countries holding dollar reserves could exchange them for gold at any time. It’s important to note that during this time the gold price was fixed. The prevailing fix in the 1960’s was $35 dollars per ounce of gold.
Having the dollar as the world’s currency provided significant advantages to the United States. It effectively allowed our country to run budget deficits without concern of default. In the 1960’s, French President Charles de Gaulle, referred to the dollar as the United States’ “exorbitant privilege.” His description defined our ability to expand the money supply without concern of default since we could always print more dollars to cover our debts.
De Gaulle recognized that the United States was not holding up her end of the bargain. The expansionary fiscal and monetary policies of the United States from 1956 to 1971 would witness a 500% increase in the money supply relative to our gold holdings. The only remedy for foreign central banks against this dollar devaluation was to demand gold instead of dollars.
gold had always provided the solution for currency debasement
This is exactly what occurred.
In 1956, the United States physical gold reserves totalled 18,794 metric tonnes. By 1971 our gold reserves had dwindled by more than 50% to just over 8000 tonnes. This occurred as other countries led by France repatriated their gold to offset expansionary US monetary and fiscal policies. These actions were highly inflationary and led to the runaway inflation of the 1970’s.
Gold had always provided the solution for currency debasement.
The Federal Reserve system was designed around gold. When the Fed wanted to tighten they could increase their stockpiles of gold by raising interest rates which then encouraged American citizens and other countries to deposit gold into the U.S. banking system. Weakening monetary policy did the opposite and caused gold to be withdrawn.
Mass withdrawals of gold by U.S citizens was what prompted FDR to close the banking system in 1933, an order that physical gold holdings by private citizens become illegal. The move was taken during the great depression to stop the bleeding and the run on banks that occurred as the dollar weakened.
The exact same situation occurred again in the 1960’s.
Only this time it wasn’t private citizens withdrawing their personal gold holdings. The run on the U.S gold witnessed foreign countries repatriating and preferring gold reserves over reserves of dollars. It helps to consider why. We must recognize foreign central bank reserves are the equivalent of savings. Once we do, we can see that expanding the money supply against a fixed gold price without a corresponding increase in gold supplies was tantamount to “robbing” foreigners holding our dollars in reserve as the dollars they held were being devalued.
The outflow of gold soon led to an inflationary crisis here and abroad. The crisis caused Nixon to close the gold window in 1971 and stop the bleeding of gold. His move was initially meant to be temporary. Like many temporary government actions, the closing of the gold window became permanent. Since that time the dollar has been a “fiat” currency backed only by the full faith and credit of the United States.
Nixon’s action meant that there would be no further remedy for foreign countries against expansionary American monetary and fiscal policies. From that point forward the US dollar has been “our currency, your problem.” While many predicted Nixon’s action would cause the monetary system to collapse, Nixon’s policies ultimately can be considered a “reset.” Gold prices have since floated. By closing the gold window and allowing gold to float, Nixon actually devalued the dollar against gold prices which would rise 20X during the decade.
Triffin's Dilemma
It’s all happening again. Note the remarkable similarity between the inflationary 1970’s and where we find ourselves today.
The massive expansionary fiscal and monetary policies in the 15 years prior to the closing of the gold window in 1971 are eerily similar to the expansionary monetary and fiscal policies of the last 14 years. The same 500% expansion in the money supply relative to gold from 1956 to 1971 is identical to what has occurred since 2008 as our money supply has increased 500% relative to gold prices. We covered this phenomenon in our Gold Inflation Indicator Report released last year.
The correlation between gold prices and the money supply provided the critical premise that allowed Brentwood Research to predict inflation well before most others. We believe the 1970s offered a preview of what we can expect to see in the years to come. In many ways we are right back where we were 50 years ago. All major currencies are still pegged to the dollar.
But here is where the problem exists today.
The difference between today and prior to 1971 is that there is no longer any recourse for foreign nations against American expansionary monetary and fiscal policies. Whereas before 1971 foreign nations could demand gold, no such remedy exists today. Our “exorbitant privilege” is more than simply an entitlement, we now have an exorbitant sword.
It’s one that cuts both ways, however. The United States' number one export is dollars. In order to maintain the status of reserve currency we must keep shipping dollars overseas to ensure the global machine keeps running. This insists we continue to run trade deficits. At home we can expand our debts and our balance sheet without negatively impacting our credit since every country is forced to hold dollars. In fact, as the world expands more dollars are necessary to fund that growth.
This is called Triffin's Dilemma.
Robert Triffin was an economist who believed the dollar could not survive as the world’s reserve currency without requiring the United States to run ever growing deficits. If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage would pull the world economy into a contractionary spiral leading to global instability.
This is exactly the problem we are facing today. Raising interest rates and decreasing our balance sheet are actions that cause the supply of dollars to shrink. As a result, our currency has strengthened against other currencies. It’s why when we attempt to decrease the overall money supply as we are doing today, we put pressure on the rest of the world as we export inflation. The challenge becomes a crisis when supply shortages occur and prices rise.
Long term monetary tightening becomes an impossible situation for over indebted economies. As interest rates rise into unpayable debt loads, the costs to service the debt continue to increase, forcing larger and larger budget deficits. It’s why interest rates must continue to go lower over the long term, or, we must have a restructuring of the entire monetary system.
Dollar Wrecking Ball
We can see the problems of a strong dollar playing out today.
As we raise rates and reduce our balance sheet to fight off inflation at home, we pressure the global economy as dollar liquidity dries up. Emerging markets borrow in dollars. When the dollar strengthens it puts pressure on their ability to service their debts in their devaluing currencies. Since all currencies are a derivative of the dollar, the more the dollar strengthens the more it hurts the global economy. In turn, the more it hurts us at home as our trade becomes further imbalanced, and capital that should go toward domestic infrastructure spending diverts abroad.
The dollar wrecking ball is a feedback loop that ultimately destroys everything. Over the past 12 months the Euro, Pound Sterling, and Japanese Yen have all dropped in value dramatically relative to the U.S dollar. One year ago the Euro was trading at roughly 1.19 to the dollar. It’s now trading at par. The Pound has fallen from 1.40 to 1.19. The Japanese Yen has also seen a major devaluation against the dollar.
This problem has been exacerbated as the monetary policy of the Federal Reserve has diverged from that of the ECB, the Bank of England, and the Bank of Japan.
But it’s not just the developed countries that are suffering. According to Bloomberg, the value of the debt of emerging markets has fallen sharply and is having its worst year in history. The Fed’s hawkish policies are killing the rest of the world.
on a monetary basis, Russia is winning the war...
Germany in particular is suffering among the most as they above all European economies are most dependent on Russian energy. This was a specific point made by Donald Trump in a NATO speech. Trump argued that Germany was “controlled by Russia” by putting all of their energy security into the hands of Putin.
Interestingly, the Chinese Renminbi and the Russian Ruble have not devalued accordingly. The ruble has gotten incredibly stronger this year. On a monetary basis, Russia is winning the war. The Ruble, which dropped to lows of 158 against the dollar after their invasion, has soared back to 55, a level of strength that puts the ruble in stronger stead than any year since 2015.
Globally, our partners are suffering while China and Russia are not, at least as measured by currency valuation. Unfortunately, the pain may have to get worse before it gets better and brought to the world by the Federal Reserve.
Today witnessed the release of June CPI numbers. Economists predicted that inflation will hit a headline number of 8.8%. The actual number came in much higher at 9.1%. This is the highest inflation print in the United States since November of 1981. It’s what comes next that is crushing global markets. The Federal Reserve has vowed to do whatever it takes to stop inflation. They have already executed 150 basis points of rate hike in the last several months and have indicated they are open to another 75 basis point hike at their next meeting. The political pressure on the Federal to follow through with their 75 basis point hike at the end of the month will be strong. The market odds of a 100 basis point hike rose to 42% today.
The Fed will lose face if they pivot too hard. This is why the world is now stuck. While the world needs a dollar that weakens, here at home we need inflation to end. We are now forced to put ourselves ahead of the rest of the world. The impact of the strong dollar could lead to more pain in financial markets in the coming weeks. The moment CPI numbers were announced today the stock market dropped 1.5%. Keep in mind that one of the biggest impulses for investors when the Federal Reserve tightens monetary policy is to move out of financial assets and into cash. Selling stocks to buy cash is likely to drive the relative value of the dollar even higher.
By raising rates the Fed could effectively be ushering in a recession here and abroad.
It’s all odd timing. As the United States seeks to unify our NATO alliances against Russia and China, we are simultaneously hurting these very same partners with our tightening monetary policies at home. Russia’s control of European energy punishes all of Europe and is very likely to feed a serious depression overseas as the Euro attempts to overcome supply shortages. Federal Reserve policies that continue to foster a stronger dollar only put more pressure on what is already a global inflationary spiral.
The Fed is not stupid, they understand all of this. We anticipate the Fed will ultimately be forced to pivot away from the uber hawkish policies.
Russia's Endgame –
A New Monetary System
Now that we have explained the world through the eyes of the United States it is worthwhile to look at the world from the perspective of our enemies. It would be a mistake to believe that China and Russia are not aware of this critical moment or that it's not their ultimate intention. We believe the events in Ukraine are designed to usher in a new monetary system. We believe this is the precise goal for Putin as he forges ahead in his war against Ukraine.
Putin spoke about trust in global currencies and breaking the unipolar world order at the World Economic Forum in 2021. He reiterated these sentiments two weeks ago at the 25th St. Petersburg International Economic forum. The following excerpts from Putin’s speech make clear the Russian agenda:
I welcome all participants and guests of the 25th St Petersburg International Economic Forum. It is taking place at a difficult time for the international community when the economy, markets and the very principles of the global economic system have taken a blow. Many trade, industrial and logistics chains, which were dislocated by the pandemic, have been subjected to new tests. Moreover, such fundamental business notions as business reputation, the inviolability of property and trust in global currencies have been seriously damaged. Regrettably, they have been undermined by our Western partners, who have done this deliberately, for the sake of their ambitions and in order to preserve obsolete geopolitical illusions.
When I spoke at the Davos Forum a year and a half ago, I also stressed that the era of a unipolar world order has come to an end. I want to start with this, as there is no way around it. This era has ended despite all the attempts to maintain and preserve it at all costs. Change is a natural process of history, as it is difficult to reconcile the diversity of civilisations and the richness of cultures on the planet with political, economic or other stereotypes – these do not work here, they are imposed by one center in a rough and no-compromise manner.
The flaw is in the concept itself, as the concept says there is one, albeit strong, power with a limited circle of close allies, or, as they say, countries with granted access, and all business practices and international relations, when it is convenient, are interpreted solely in the interests of this power. They essentially work in one direction in a zero-sum game. A world built on a doctrine of this kind is definitely unstable.
Putin identified the monetary policies of the west as “a zero sum game.”
History is repeating before our very eyes. Putin is calling out the exact monetary situation that forced France and other countries to repatriate gold in the 1960’s. The unipolar power of the dollar which has been supported by the G7 countries, has robbed Russia and other labor and commodity exporting nations of their savings. We must acknowledge the expansionary monetary policies of the G7 countries over the last 14 years since the global financial crisis are no different than the expansionary policies undertaken in the 1960’s. The United States, Europe, Japan, and Great Britain have dramatically expanded the money supply of their currencies.
The pie chart below is from the International Monetary Fund and shows the balance of reserves that are held amongst central banks globally. Every central bank in the world holds G7 currencies. The Dollar (58%) and the Euro (20%) are the two most held currencies in the world by central banks amounting to 78% of global reserves. The third largest central bank reserve holding is physical gold.
Source: https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
Reserves represent a country's savings which come from productivity. When Russia sends Europe oil, when China sends the west labor and goods, we pay them in Euros and in dollars and other diluted G7 currencies. Much in the same way the U.S. was “robbing” other countries with our expansionary policies in the 1960’s as we held the price of gold fixed while expanding our money supply by 500%, a similar theft has occurred over the past 14 years as the United States, Europe and Japan the have taken on tremendous debts and expanded their balance sheets by more than 10X and seen their currencies expand 500% relative to the value of gold
...citizens have been acquiring physical gold...
The autocratic East has been getting paid in diluted currencies with no remedy other than inflation. It is why central banks have been net buyers of physical gold over the last decade. This is a trend that will continue, especially since the sanctions on Russia have made it clear that we can now freeze the dollar reserves of any country, at any time.
When the primary currencies central banks are forced to hold in reserve are devalued via massive monetary expansion and ultra low interest rates, it is effectively a tax on the savings of all of the central banks holding them. This is no different than what happened in the 1960’s as the U.S. employed massive monetary expansion forcing France and other nations to repatriate their gold in the 1960’s. Unfortunately, the remedy of gold repatriation has not existed for the last 50 years. Inflation is all that is left.
Putin’s argument is one the west would do well to appreciate. It’s why Russia’s central bank has sold off their holdings in U.S. dollars and replaced them with gold over the last seven years. China has also been accumulating massive reserves of gold. As G7 currencies devalue against necessary tangible commodities of food and oil, gold prices will rise. Keep in mind that gold prices are at all time highs in every nation in the world except the United States and Canada. As these other currencies are falling, their citizens have been acquiring physical gold.
Conclusion
We believe Putin and Xi Jinping methodically and purposefully planned the military action in Ukraine. The poor policies of Germany which made them completely dependent on Russia for their energy have exposed the weakness of the entire system. It’s also not a coincidence that Russia is attacking grain silos and other critical food and energy infrastructure in the Ukraine.
remedy to fight inflation is to put our own economies into recession...
They understand that our only remedy to fight inflation is to put our own economies into recession. The more pressure that Russia can put on the supply chains for the most critical commodities of energy and food, the more they force the existing monetary system to implode on itself. The more sanctions we impose the more we punish ourselves.
When we connect the dots and remember history, we recognize that the exorbitant privilege that allowed the U.S. to dramatically expand the money supply in the 1960s against gold was a detriment to all who held our dollars in reserves. Back then there was recourse to repatriation of gold and a massive inflationary spiral. Gold no longer is a part of that equation. Inflation is all that’s left.
So what is likely next? We look to history for our guide.
A similar situation played out from 1980 through 1985 when the tight monetary policies of the Federal Reserve under Paul Volcker caused the dollar to appreciate significantly against other currencies. In January of 1980, the dollar index was at 89. Just 5 years later in March of 1985 the dollar had risen to highs of 164. Our tight monetary policies caused our currency to strengthen against the major currencies of G5 countries.
The Plaza Accord was an agreement entered into in 1985 between the G5 nations, France, Germany, the United States, the United Kingdom, and Japan which manipulated exchange rates by depreciating the U.S dollar relative to the Japanese Yen and the German Deutsche Mark.
The goal of the Plaza Accord was to weaken the US dollar in order to reduce the mounting U.S trade deficit. The accord led to the mark and the yen both dramatically increasing in value relative to the dollar. Over the course of the next decade from 1985 to 1995, the DXY would fall 50% from highs of 164 back to lows of 80.
When we consider what’s happening in Europe and around the world today we must be thinking about a new accord, one that allows the dollar to weaken dramatically relative to other currencies. As Trump himself highlighted, our long term interests are likely best served by a U.S dollar that is substantially weaker. A weaker dollar eases pressure on the world economy. This, we believe, is precisely the aim of the Russian invasion in Ukraine.
remember, the dollar sits opposite gold
Which leaves us thinking about gold.
Remember, the dollar sits opposite gold. While we are no longer on a gold standard, gold is still the standard by which our currency is measured. When the dollar rises in value relative to other currencies it leads to a programmed trade to sell gold. Algorithms that have become the main driver of the market automatically sell gold when the dollar strengthens.
However, this time looks different. The DXY has risen from 91 to over 108 over the last year. This type of currency move would ordinarily see a massive sell off in gold prices. That has not occurred. While many people are questioning why gold is not performing better in this environment they are missing a critical fact: it actually is. Gold prices have only fallen 2% against the dramatic 20% increase in the dollar over the last 12 months.
What happens next will certainly be historic.
The first is a Fed pivot where they intentionally choose to lose credibility. Imagine if the Fed underdelivers with only a 50 point or a 25 basis point hike in July? In that case we would likely see the DXY fall as the dollar loses value to other currencies. This would be good for the world and would reduce inflation everywhere but the United States. It would likely witness a big move higher in precious metals.
When we couple the current situation with the recognition that we are technically already in recession, and that in recessions the Fed always cuts interest rates, then the path to a weaker dollar becomes all the more obvious. It is why we are so bullish on gold and silver at this moment. Not only does the world need a weaker dollar to avoid a depression, we also need a weaker dollar to lift us out of recession at home. As the Fed is forced to pivot we expect to see the dollar weaken. As that occurs, gold and silver prices could launch much higher.
Of course, this would only be a band aid on a much bigger problem. The truth of The Great Devaluation remains. Triffin's dilemma is one that has torn our country apart. The best outcome for the United States is one where the strength of our reserve currency status is weakened and voluntarily restructured.
The way out before is the way out once again.
A weaker dollar is coming. Unfortunately, we may ultimately only get there after something terribly bad has happened.
Don't Miss Out on Adam's next release!
Use Adam's expert insight to get ahead in an inflationary world.
Hardback book copy of 'Return To Real'
Receive a FREE hardback book copy of 'Return To Real' when it's released (out in Q1 2023).
'Return To Real' email subscription
Receive FREE newsletters from Adam Baratta delivered directly to your inbox.
Support and Consultation
Get FREE support and consultation from one of our senior representatives.
Support and Consultation
Get FREE support and consultation from one of our senior representatives.
Support and Consultation
Get FREE support and consultation from one of our senior representatives.
Support and Consultation
Get FREE support and consultation from one of our senior representatives.
JOIN 100,000+ READERS.
NO SPAM. EVER.
Adam Baratta
National Bestselling Author
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur.
Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum. Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
This website is for informational purposes only. No information contained on this website constitutes tax, legal, insurance or investment advice.
This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. (see more)
© 2022 Gold is a Better Way
Customer Support: 888-805-0797 | Terms & Conditions | Privacy Policy