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.

 

Inflation is More than Just Money Printing

The inflation we are experiencing in the United States is more than just money printing. It is because of herd mentality here in the States compounded by a growing lack of trust in the US Dollar abroad.

the first thing on most people’s minds during inflation is their food prices

Demand for Benjamins Abroad

When I lived in Malaysia, each weekend there was a line that stretched for at least a few dozen people at a mall named Mid Valley in heart of Kuala Lumpur. That line was people exchanging their local currency – the Malaysian ringgit, into US Dollars. They did so to preserve purchasing power since their local currency was being devalued due to their country’s dependence on oil production for their economy. You see, when the US dollar is the world reserve currency it tends to preserve its power since everyone wants to collect them and not necessarily spend them. Imagine if everyone in the world was doing the same, and not just the mom and pop citizens but also entire governments!

This action takes circulating USD out of circulation at least temporarily, and demand of this nature makes the USD stronger versus the currency that are being exchanged out of. Even though both the US and Malaysia were making fiat (and I’m not talking about the poorly made cars) paper currency, the US benefits from strong demand from other countries continuing to prop up the dollar and wanting to sell their goods for dollars.

Herd Mentality Causing Price Spikes at Home

Now if you tune into CNN or some other popular news channel you will be told that price hikes have to do exclusively with ports being backed up due to Covid related worker shortages – this is not the whole story. Demand for goods is higher, and the desire to hoard goods hasn’t completely gone away from more than a year ago (remember when everything was rationed?). If you go to the local Costco or Sams Club here in Albuquerque they are still limiting the number of bottle water packs you can buy to two or three, people seem to still be being more toilet paper than normal, and there are folks who are already finishing up their Christmas shopping for fear of items not being available or being much more expensive come December. This spending is what I like to call velocity of money in motion, and is causing prices to go up on main street.

What about Real Estate?

The cash that the Federal Reserve created months and years ago had already funneled into the financial system first and caused companies flush with cash to go for asset buying sprees, such as real estate. Big companies like OpenDoor and Zillow bought homes over their value, in anticipation of “flipping” them and making money purely from the upward price trend that was happening since mid 2020. The only problem is individuals stopped receiving stimulus checks and companies started opening up and wanting people to get back to work – slowing down the home buying and turning the rising price trend around if even slightly.

I wholeheartedly expect home prices to fall in the hottest areas this winter, but I do think the fall will be short-lived as moderate inflation catches up. People will start to demand higher wages and the most profitable industries will be able to provide them. Industries that cannot adjust their prices very much to keep track with inflation will suffer, and their employees will suffer with stagnant wages. I expect the agriculture industry to come out of this better than before, same with companies that sell inelastic goods such as food and modest housing. Luxury housing will suffer along with luxury good industries.

What can I do?

Go back to my blog and read the article titled “How To Preserve Your Assets During 1970’s Style Inflation?

Make sure your income keeps up with inflation, pivot to make that happen. Make sure you have skills that are in demand that are well compensated for if you’re starting out, and if you already have assets make sure they are cash flowing. Having debt during high inflation is a great thing as long as your income keeps up with inflation. For example, if you own a rental property and pay a 30 year fixed rate mortgage ideally you’ll be able to adjust your rent for inflation.

Bottom Line

Inflation is not transitory in that it will return to what it was before Jerome Powell’s speech. It may slow down and prices for certain things may decrease as supply rises to meet demand, but you shouldn’t be dormant with your cash but put it to work ASAP. Watch for a real estate correction this winter for a buying opportunity if you’ve been waiting. Don’t panic.