Inflation Roadmap

It is beginning to be obvious that global economic woes extend beyond covid lockdowns and that monetary inflation for the dollar, as the common foundation for other fiat currencies whose issuers face similar problems, will continue to accelerate.

Fiat currencies have only survived this long due to increased financialisation of the dollar and the US economy. Since the 1980s Wall Street has gradually dominated the US economy at the expense of Main Street. It has done so through monetary inflation, creating the conditions for the ultimate monetary collapse.

This article describes how the dollar’s collapse is likely to progress. There are two distinct aspects. The first is foreign selling, which is already becoming apparent in the weakening trade weighted index. The second is the realisation of domestic Americans that the purchasing power of their dollars will not remain stable, as the CPI suggests, but continue to decline, and that they should dispose of them sooner rather than later. There is evidence from prices of financial assets in a financialised economy that this is already beginning to happen.


It is dawning on officials and commentators alike that the covid-19 crisis will not just go away and normality return when populations are vaccinated. The disease will be subdued, but the economic wreckage is immensely serious and long lasting. Talk of V-shaped or W-shaped recessions is increasingly being dismissed as little more than attempts to bolster consumer confidence or just wishful thinking. The damage to hospitality and retail industries is extremely serious, with bankruptcies extending to their suppliers and their supply chains as well. And it doesn’t stop with those sectors.

The global economy was already fragile, with nothing fixed by policies of extend and pretend since the Lehman crisis twelve years ago. In the advanced economies, monetary inflation has resulted in further accumulations of unproductive debt. And the greater the debt mountain, the greater the problem: modern economies have become prey to a fatal combination of profligate governments and zombie corporations managed by crony capitalists. It is a situation bound for failure, and the longer failure is put off the worse it will be.

Central to it all is an accelerating issuance of money by central banks. But the wise heads in commercial banks know they cannot be part of the solution, having already over-extended their balance sheets and are now suffering mounting bad debts. We blame the bad debts on the virus, but before the virus the global economy was already tipping into a credit-induced slump.

Have we forgotten the repo crisis, which, if nothing else, indicated that after eleven years of bank credit expansion, the banking system had run out of balance sheet capacity? Have we forgotten the trade war between the world’s two largest economies, and how that ground cross-border trade to a halt, driving exporting nations, such as Germany, into recession? And only then came the virus to deflect our attention from an already deteriorating situation.

To anyone relying on macroeconomic statistics, causes for alarm look overblown. But as Lord Canning remarked two hundred years ago, long before the modern reliance upon them, that you can prove anything with statistics — except the truth. The reality of Canning’s aphorism is set to surprise those who think GDP actually means something, and that changes in the CPI are an acceptable estimate of changes in the purchasing power of state-issued currencies.

This is the background to an acceleration of monetary inflation, which was with us long before the virus and its lockdowns. The virus merely made a deteriorating outlook even worse. As the second wave of covid-19 hits us, the full horror of the economic consequences is only now just dawning upon us. And our governments’ response can only be one: issue money without limit to stop zombie corporations from going bankrupt and to fund government deficits. Our economies are on the crumbling edge of a chasm, which without the support of increasing state intervention will fall into it. This imperative tells us that state-issued currencies are being sacrificed in a vain attempt to save us all.

Central to this sacrifice is the US dollar. As the world’s premier currency, it is the representative for all the others. If the dollar fails, the others fail. But the world’s insatiable desire for more dollars, vital for its credibility, is fading. That is the consequence of American trade protectionism and bank credit contraction replacing the previous vision of continual economic growth. All that is now history, and multinational corporations are beginning to realise it. Their need for yet more dollars is now diminishing with falling global trade prospects as America and China continue to pursue policies destructive to free trade.

International demand for dollars is reversing

In a number of recent articles, I have drawn a distinction between changes of a currency’s purchasing power emanating from the foreign exchanges and from purely domestic considerations. The motivations and reasonings of these two categories are different, and domestic users of the currency will be addressed later in this article. In the main, foreign users of the dollar are comprised of manufacturers exporting to another country including the US, businesses which will always require an element of treasury and currency management. This includes the maintenance of liquidity and the anticipation of foreign currency payments. The treasury department of a multinational corporation itself becomes a profit centre, dealing in the currencies of every country in which the corporation conducts business. And if the corporation manages its own employees’ pension fund, payment for foreign portfolio investment will usually be routed through the treasury department.

An organisation run on these lines does not take strategic positions, unlike foreign central banks and sovereign wealth funds, where politics can play a role. But it would be hard to refute the charge that as well as running a balanced position, corporate treasurers are tempted to speculate with their currency positions in order to generate extra profits. These speculations are normally in the more liquid currency and derivative markets. Nowhere is this speculation greater than in dollar exposure, where, according to the latest available figures from the US Treasury TIC system (for August) foreigners own an estimated $28.6 trillion, $22 trillion of which is invested in US long-term securities, an increase of $3.1 trillion since March.[i] The balance is in cash and short-term Treasury and commercial bills.

Of that increase, $2.4 trillion was due to private sector foreign investors increasing their exposure to equities and equity funds, with a further $363bn held by foreign official sources such as the Swiss National Bank and sovereign wealth funds. But adjusted for the performance of US equities, either private sector foreign-owned equities significantly underperformed the S&P500 index — up only 37% compared with 50% for the index and more for NASDAQ — or they have been net sellers.

Private sector foreigners have also reduced their holdings of Treasury stock and Agency debt by £254bn, which is hardly surprising, given ultra-low yields and the weakness of the dollar. But they have increased holdings of corporate debt, one assumes because of the attraction of higher yields, or just as likely, by investing in loans with an equity entitlement attached.

In addition to long-term financial investments, by August foreigners owned $6.6 trillion of dollar bank deposits and short-term bills, which together with the long-term investments described above totalled $28.6 trillion. This remarkable figure is about 140% of current US GDP and is easily the largest numerical displacement from national currencies into a foreign currency ever recorded.

The behaviour of these foreign private sector investors is likely to determine the near-term course of financial asset prices as well as the future exchange rate for the dollar, so it is essential to look at the dollar’s prospects from their perspective.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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