Dollar Strength and Global Currency Debasement – Daniel Lacalle 10/2/22


Why are market participants scared of a strong dollar? Because for years there was a massive carry trade against the US dollar, predicated on a bet that constantly printing currency and cutting rates would never create inflation. The world got used to betting on one thing -massive money supply growth- and the opposite -weak inflation-. Cheap money became expensive, as I explained in my book, Escape from The Central Bank Trap.

The US dollar is not strong. The loss of purchasing power of the greenback is the largest of the past three decades. The US dollar is only “strong” in relative terms against other currencies that are collapsing in a global currency debasement that comes after years of monetary excess.

The pound is not collapsing because of a misguided prime minister’s tax plan, it is collapsing alongside the yen, which saw the Bank of Japan intervene to try to stop the depreciation as well, the euro, the Swedish krona, the Norwegian, Danish krone, or most currencies.

In the past year until the closing of this article the US dollar index (DXY) has risen 19% and reached a twenty-year high and the yen is down 23% against the US dollar: The euro has fallen 15%, the pound 17%, the emerging market currency index also fell 14% and even in China the PBOC had to intervene, like the Bank of Japan or the Bank of England, to control a massive depreciation against the US dollar.

Welcome to the vacuum effect of the US dollar that we mentioned months ago.

In periods of complacency, the world’s central banks play at being the Federal Reserve without having the world’s reserve currency or the legal security and financial balance of the United States. Many massively increase money supply without paying attention to the global and local demand for their currency, and in addition, governments issue more U.S. dollar-denominated debt, hoping low rates will make the financing of huge deficits affordable. Complacency builds and all asset classes see massive inflows and elevated valuations because money is cheap and abundant. A monster multi-trillion carry trade with many bets on the long side and one short: the US dollar.

All this, in turn, leads the global demand for U.S. dollars to increase, not because the Federal Reserve conducts a restrictive policy, but because the comparison with others shows the alternative fiat currencies are much worse.

This is the hangover from the great monetary binge of 2020, which saw an unprecedented increase in the balance sheet of central banks and global money supply soar to all-time highs. Furthermore, a massive binge that directly targeted at government current spending. Now, the boomerang effect is vicious: High inflation, currency collapses as well as equities and bonds market crash.

You wanted “unconventional” responses to a crisis? You got the most conventional of them all: Printing and destroying the purchasing power of the currency. Implemented for centuries with the same disastrous effects only to be dusted off by a new group of bureaucrats that promised that this time would be different.

“Spend now and deal with the consequences later” was often repeated by Keynesian consensus economists and now they shrug their shoulders and wonder why their “models did not work” as Lagarde and Krugman have said recently. Their models said that inflation would not appear after printing trillions of dollars and euros at the same time and none of them wondered if the models were junk. Why did they not question their “models”? Because the models said what they wanted to hear. However, inflation did appear, it was not transitory, and the trap was set. An overleveraged, massively indebted world with gigantic imbalances built on top of each other due to the placebo effect of monetary laughing gas generated the “bubble of everything” and now it bursts.

The US dollar is not strengthening because of a few, and modest rate hikes, the world’s currency and asset bubble is deflating….

Read More…