What’s Next for the US Dollar?

I think the biggest question in the economic room right now is the following: “Will the USD continue to function as the world’s reserve currency for the foreseeable future?”

My answer: “Probably not.”

Why is this? It’s because recently that status has been over-abused. It’s abused every time we get further in debt, it’s abused every time we give it away through multi-billion dollar handouts overseas, and it’s abused every time the government pins the inflation problem on domestic spending instead of wasteful spending and increasing the money supply.

You see, there would be no inflation problem if more money is not printed – in fact there would be substation deflation. I argue there would even be negligible inflation if domestic needs which slightly exceed incomes were the only spending that happened.

What pushes inflation over the edge happens when billions and trillions are printed and shipped to certain parties or interests. This huge amount of cash usually first lands itself in financial institutions and defense contractors and then trickles its way down to smaller local banks and businesses after inflation has already occurred.

If the Federal Reserve lowers interest rates, I think we’ll see ballooning asset prices and a true reckoning with the start of a hyper-inflationary period.

Ways I see to protect against this:

  1. Secure more assets
  2. Invest in commodities
  3. Invest in yourself and your skills

 

In other words, a well trained craftsman in any trade will continue to provide the same utility value as he or she did before – and will ultimately be able to charge the same amount in terms of utility value regardless of denomination.

A house is a house, and is worth a house.

A bar of copper is worth a bar of copper, always.

 

I think the next reserve currency HAS to be backed by something, and the USD has enjoyed decades in the from the 1700’s to the 1970’s being backed by GOLD. And from the 1980’s it has been backed by OIL. That has somewhat fallen apart as of late, as much effort is made to re-instate the petrodollar. See https://geopoliticaleconomy.com/2023/08/10/us-saudi-arabia-sell-oil-dollars-chinese-yuan/

All of this is conjecture, but I hope you’re prepared either way.

 

The End of the Era of the Dollar as the World’s Reserve Currency

Coins Link

The status of the USD as the world’s reserve currency has been a cornerstone of the global economy for decades. However, recent geopolitical and economic developments have raised concerns that the era of the dollar may be coming to an end. The US has increasingly used its dominant position to impose sanctions on other countries, weaponizing the dollar in the process. This has led many nations to seek alternative means of conducting international trade, such as barter or using other currencies like the euro, yuan, or even cryptocurrencies. The trend is a worrying sign for the US economy and the global financial system as a whole, as it could lead to a loss of confidence in the dollar and trigger a crisis of confidence.

Changing geopolitical landscape: rivals and former allies moving away from the dollar

The situation is compounded by the changing geopolitical landscape. Countries such as Russia and China, which have traditionally been viewed as rivals to the US, are increasingly asserting themselves on the global stage, challenging American hegemony. At the same time, other nations, including former allies and neutrals, are also moving away from the dollar, seeking to protect themselves from the risks associated with its use as a weapon. India, for example, has been buying Russian oil and conducting transactions in rupees, while Saudi Arabia and Iran have cooperated with China as a mediator, bypassing the dollar altogether.

Ron Paul’s views on the matter are relevant here. He has long advocated for the US to stop instigating conflicts and to focus on mutual interests and trade rather than conflict over forms of government. By following these policies, Paul believes the US could have avoided the current situation, where many countries are seeking to move away from the dollar as the world’s reserve currency. If the US had pursued a more cooperative approach to international relations, it could have maintained the dollar’s dominance as the world’s reserve currency.

Consequences of a shift away from the dollar

The consequences of a shift away from the dollar could be far-reaching. The US economy is heavily reliant on the dollar’s status as the world’s reserve currency, with around two-thirds of all foreign currency reserves held in dollars. A loss of confidence in the dollar could lead to a sharp decline in demand for US treasuries, making it more difficult and expensive for the government to borrow money. This could trigger a financial crisis, with ripple effects felt around the world. The US would also face a loss of influence on the global stage, as the dollar’s dominance has given it significant leverage in international affairs. The future of the dollar, therefore, is a matter of concern not just for the US but for the entire world.

Austerity for the Government and You

Painful but necessary. I’m talking about the United States Federal spending. Instead of choosing constituent classes to give free money to that comes from the wider population, it’s time now to reduce spending across the board.

Start with Foreign Spending

Starting with non-constituents, meaning foreign entities – foreign countries, organizations, etc. The Federal Government, whose job it is to represent US citizens, needs to reduce foreign aid spending.

There’s a really good website that breaks down foreign assistance by country called “ForeignAssistance.Gov” – it’s located at https://foreignassistance.gov/cd

You’ll find that four countries almost or exceeding a billion USD in US aid each year, including:

  1. Afghanistan
  2. Israel
  3. Jordan
  4. Egypt
  5. Iraq
  6. Ethiopia
  7. Yemen
  8. Columbia
  9. Nigeria
  10. Lebanon

Less USD in circulation means less spending and less inflation. Countries will learn to be self sufficient, and less needy on external income coming in to keep them going. If we’re lucky other foreign competitors will prop up these countries and deplete their own cash reserve. Regarding the Ukraine spending, the US is on track to donate almost 100 billion dollars. So far total US aid to Ukraine has been more than 68 billion. [1]

Without getting into whether the spending is “right” or “wrong”, I think it’s objectively fair to say we’re treating Ukraine better than we did the UK back in WW2. Back in WW2 at least we had the UK send us gold and create loans for the material we were sending over. A much more prudent policy that keeps American interests in view.

Domestic Spending

Social Security, Healthcare, and many branches of the Federal government spend a lot of money on non-essential workforce. Also, much of that money is spent towards pension plans that the rest of the economy does not have the luxury to have – you can check out more details about government pension eligibility here at https://www.opm.gov/retirement-center/fers-information/eligibility/. Long story short, as the size of government grows so does the residual costs. Unlike the free market, government agencies do not have to prove they are effective, as free market businesses do. They don’t even have to effectively carry out their mission, because there are no other competing agencies to compare against. At the state level, at least different states can compare their effectiveness in carrying out services against other states.

While it’s hard to simply say we need to cut Social Security and Medicare spending, or Military spending, it is a question that needs to be brought up. It’s a political landmine but I think what needs to happen is each of these behemoths need to be objectively inspected completely to ensure that wastage is kept to a minimum. I see technology and analytics as a good means of really proving out the effectiveness of these agencies each and every one.

chart government spending

US Gov. Spending 2022

Personal Spending

The US Government is probably not the only entity that needs to cut on spending. Readers should also consider cutting the fat if they can help it while staying sane.

US personal spending is a double edged sword. Without a lot of domestic spending the economy will be damaged and there will be less money in circulation. However, increased domestic spending generally tends to result in higher prices because of more demand than supply. Higher inflation is the reason the Federal Reserve increased interest rates, and further interest rate increases will harm the stock market. While technically higher interest rates were long overdue, they come at a time when the economy and it’s companies are addicted to cheap loans. You will find that many of these companies that were overly dependent on this cheap money will start to go out of business.

What Should I Do?

For those reading this, I’d encourage you all to refrain from frivolous spending and continue to focus on spending money on assets rather than liabilities. Given the volatile nature of the stock market in relation to interest rates, I’d suggest holding a healthy chunk of cash in a high yield savings account. I’m currently getting 3.3% interest on my savings account holdings, and at least 2% cash back on credit card purchases. The Citi Double cash card gives me 2% back on everything and I use an Amex card to get 5% back on groceries. Spending less by choosing carefully where to shop adds up in the long run. Walk more and try to do activities that don’t require cash that are still fun.

My best guess estimate about when the stock market and real estate market start to gain ground again is when the Federal reserve stops raising interest rates and starts lowering them again – It may be late this year or may be up to three years from now.

Citations

[1] “Aid to Ukraine Explained in Six Charts.” Aid to Ukraine Explained in Six Charts | Center for Strategic and International Studies, 9 Jan. 2023, https://www.csis.org/analysis/aid-ukraine-explained-six-charts.

20 Years Since US Government Ran a Surplus

“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale” -Thomas Jefferson

“Government debt is a system, not only ruinous while it lasts, but one that must soon fail and leave us destitute” – Abraham Lincoln

If you’ve graduated from university in the past 20 years most likely you’ve been taught that deficit spending is good for an economy, you’re also most likely aware that for the past 20 years that we’ve had consistent government deficit spending. The last time the government ran a surplus was between 1998 to 2001. Going back further the last surplus before 1998 was in 1969 when Nixon took office. The period between including the 70’s and 80’s the US experienced high inflation but on paper PPP per capita GDP also went up. If you look at the chart below the Federal Debt was still less than 60% of GDP throughout the 70’s and 80’s but as of the latest data reported at the end of 2020 we are currently at 127% Debt/GDP.

Federal Debt as % of GDP

The last time the US has ever had this much Federal Debt was back in 1945, when the US had not only spend a lot of money on Roosevelt’s New Deal to get out of the Depression but also we had spent an enormous amount of money on bringing an end to WWII.

US Public Debt Historical

 

The US has disastrously mismanaged the COVD-19 crises and unfortunately had to pay a lot of money because of it. How many rounds of stimulus will be enough, or will this become the new normal? A major beneficiary of this stimulus has been the stock market and real estate has been buoyed by historically low interest rates. However I think our consumption economy may have rough seas ahead unless it can tackle a few issues:

  1. Tax Evasion by Mega-Corporations – Without getting too much into specifics large corporations have ways to avoid taxes, a luxury not available to smaller businesses. This is a double edged thorn because not only does it stifle competition but also it further contributes to a growing national debt. Add lobbyists to the equation and the little guy has his work cut out for him. Ironically for us the investor class it means we should “go with the flow” and make sure we are at least riding the wave of blue chips and the Silicon six to retirement.
  2. Boosting manufacturing – the US needs to produce goods especially high tech manufacturing so it does not become eclipsed by other countries. It needs to make sure it can make medicines and vaccines domestically as well as cutting edge semiconductors, batteries, and circuit printing. Even though Intel is I would say one generation behind other companies I think the US needs to focus on getting it and other manufacturers caught up with, for example, Taiwan and South Korea.
  3. Repair infrastructure that was built in the 60’s. A lot of the US, especially the power grid and train systems, are woefully out of date. Rather than just giving money away, expanding the idea of UBI, the US should emphasize infrastructure from roads, electricity, trains, hydroelectric, and nuclear energy. Solar panel construction should only be done after evaluating the carbon cost of production and disposal, as well as impact on local environments.
  4. The Suburbs. The Suburbs as a concept were well-intentioned, but common sense and other towns across the world show that it really makes more sense for people to live closer if not walking distance from where they work. Strictly regulated commercial vs residential zoning should be re-evaluated so that people don’t need to travel by car or by train for that matter for everyday life. I think this will become essential as populations grow and in the US as the dollar starts to lose its status as the reserve currency.

So in conclusion, the US has some time left to fix a few things before the Federal Debt becomes an issue too hard to handle. It needs to use the time it has leverage as the world’s reserve currency to put the value of the currency to good use to put us on solid ground going into the future. Other countries have been keeping our standard of living up by creating cheap goods and accepting US dollars for them even though they know we can create dollars out of thin air. The Federal Reserve should keep it’s interest rates low while this transition takes place so the Government Debt doesn’t spiral up to 200% of GDP. Banks should be vigilant as they dole out mortgages with low interest rates to avoid another massive real estate bubble.

Is this going to happen? Probably not. Another large scale event like Covid, such as a new war would really cause issues with our government debt and most likely also crash the stock market. Stagflation may be the new buzzword and everyone will be wishing they were holding gold or bitcoin instead of stocks.

US Debt 25 Trillion and Counting. How to Protect Yourself.

The United States is 25 trillion dollars in debt. It collects around 3.2 trillion dollars in tax revenue every year and spends 6.2 trillion dollars every year. The spending continues to go up and all the while the US is paying interest on its debt. Instead of hoarding dollars you should consider some of these other stores of value.

The US dollar is one of the strongest currencies out there, backed by the strongest military and economy the world has ever seen. That being said it is not in the interest of the United States government to have the US dollar increase in value, especially because it owes so much in the form of Treasury bonds and notes. Thankfully most debt is internal – meaning the debt is held by US entities and the Federal Reserve, however there is a lot of debt owned by foreign countries as well. This makes inflation FAVORABLE for multiple reasons – the amount owed to others decreases in real value and economic growth occurs when people use their money to make a higher return than inflation and the interest rates.

If the Federal Reserve were to increase interest rates it would strengthen the US dollar, going against the interests I mentioned above.

This is fine, you just need to know where to put your money so you aren’t affected as much by it.

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