The US Dollar Is Still King

In the first half of this year, the Dollar didn't just gain against every other major currency, it also outperformed almost every single asset class. Stocks, bonds, real estate, Gold and Bitcoin are all down on the year. After two years of global central banks showering the economy with free money, they are now seeing the consequences of such loose monetary policy.

The pumping of endless liquidity into the system created bubbles in assets all around the world. Stocks rose to all-time highs with PE ratios we haven't seen since the .com bubble. Buying a home in major cities like New York, Toronto or Miami became such an impossible feat for the average person that most people even gave up on their goal of home ownership. We also saw speculative assets like Bitcoin moon way past their all-time highs.

Financial assets aren't the only thing that have been inflating to unprecedented levels over the last two years. Consumer prices have also been subject to inflationary pressures. Prices for gas, food and energy have all gone up at the fastest rate since the early 1980s. The consumer price index, also referred to as the CPI, measures the rate of change in the prices of a basket of goods and services. The CPI is up 9.1% year over year, which means prices have risen by almost ten percent in the last year.

This is all a result of the “free” government programs everyone supported in 2020 and 2021. No government program is ever free. They are all paid for by taxes or the hidden tax; inflation. When government promises something for free, they are flat out lying to the public. You can raise taxes to pay for a government program or you can print money out of thin air to increase the money supply. Most governments chose the latter during the pandemic and now we are stuck with an inflation problem.

But if inflation is running hot, shouldn't the Dollar be losing its value? After all, when an economy is experiencing inflation, it means the currency of that economy is losing its purchasing power. A $1000 last year would buy you more stuff than a $1000 today. So why is the US Dollar on a historical surge?

We are seeing major currencies like the Euro and the Yen at their lowest levels against the Dollar in more than 20 years. Part of the reason for that is that the US is raising interest rates at a rapid pace while Europe and Japan are still stuck near 0% interest rates. Rising interest rates usually signal strong economic growth so it's natural for speculators to be buying US Dollars against currencies that have the lowest interest rates in the world like the Yen and the Euro.

Another factor to the major rally in the Dollar is the bond market. US Treasury yields have been rising in tandem with the US Dollar all year long. This phenomenon occurs because capital flows are attracted to higher-yielding currencies. As the bond rate of one currency increases relative to another, investors are attracted to the higher-yielding currency.

The Bank of Japan came out earlier this year stating they will do whatever it takes to keep Japanese bond yields below 0.25%. For that reason, it is no surprise that the Dollar is gaining the most value against the Japanese Yen.

However, the third and maybe the most important factor for the historical surge in the Dollar is the looming liquidity crisis. After two years of pumping money into the system, central banks have finally pumped the brakes. Now central banks are taking money out of the system by draining liquidity to fight inflation and this is causing asset prices to come down sharply.

In this new economy, asset prices and the US Dollar operate on a reverse correlated equation. More liquidity = asset prices go up & the dollar goes down. Less liquidity = asset prices go down & the dollar goes up. It’s really that simple at this point.

When Covid touched down back in March 2020 and invoked a collapse in financial markets across the board, the economy was faced with a sudden liquidity crisis. It was the US Dollar that initially took off until the Fed stepped in and guaranteed liquidity for everybody. Once liquidity needs were met for businesses and institutions, the Dollar then sold off for a year straight to a three-year low.

We are seeing this same scenario play out again today but only in a more slow progression. The problem will keep getting worse until we find ourselves in another liquidity crisis yet again and we will have no choice but to print more money which will create more inflation, and that is the exact policy that got us to this point in the first place.

Right now the financial and economic situation is unlike anything we have ever seen before. US GDP for the second quarter will be released next week and it is expected to be negative. As a result, the US economy will be contracting for a second straight quarter and it will officially enter a recession. The last time the US was in recession while the Fed was hiking interest rates was the 1970s. It was a period of stagflation which means the economy is in decline while inflation is high.

Although, the state of the US economy in the 70s was significantly different from what it is today. Back then, the US was the biggest creditor nation in the world. Today, the US is the biggest debtor nation in the world as they hold more debt than all the other countries in the world combined. US national debt today is $30 Trillion, whereas in the 70s it was less than $1 Trillion.

It is a tall task for the Fed to be hiking interest rates and drain liquidity to fight inflation while the US economy is more levered up on debt than ever before. This fall will determine how serious global central banks are. Will they continue the fight against inflation or will they give up once we are faced with another liquidity crisis?

As for the US Dollar, it will keep rising until the Fed decides to reverse course and announce another quantitative easing program. In hindsight, this historic rise will go down as the Dollar’s last hurrah. Once this rally runs out of gas, the Dollar will melt just as quickly as it is soaring right now.

We are living in the biggest transition period since the post-WWII era in the 1940s. By 2030, the world will look a lot different from now. One of the most consequential events on the way to a new world order will be the collapse of the US Dollar and its reserve currency status. It will be an event that makes the pandemic seem like a walk in the park. Until then, invest your money in hard assets like property, commodities and Gold. You also might want to stock up on some food and guns. It will get a lot worse before it gets any better.