The dollar has been on a tear in recent months. Just last week, the dollar index rose from 107 to 108 with an inter-week high of 109.3. The greenback also reached parity with the euro last week. The dollar is near a 20-year high against the European currency and a 24-year high against the Japanese yen.
And yet, we are witnessing a massive devaluation of the dollar at the national level. In his podcast, Peter tries to make sense of this two dollar story.
You can see the impact of the strong dollar on import and export prices.
Export prices rose 0.7% on the month and are up 18.2% on the year, double the consumer price index. Peter noted that import prices better reflect the prices paid by consumers for domestically produced goods than the CPI of 9.1%.
It is a real number, unlike the CPI which is a completely made up and invented number where you have a formula which is reverse engineered to come out with a lower number.
On the other hand, import prices are much lower thanks to the strength of the dollar. Nevertheless, even with the strong dollar, import prices are still up 10.7% year-on-year.
It’s because the dollar is so strong that import prices only rose 10.7% for the year. Because if the dollar wasn’t so strong, import prices would have risen much more than that and that would have passed through to the CPI. So, but for the strong dollar, we would have much higher inflation numbers than what we’re dealing with.
The situation is reversed abroad. Europeans and Japanese pay much more for the products they import from the United States.
So their weak currencies exacerbate their inflation problem, while our strong currency alleviates our inflation problem.
Peter said the overall dynamic didn’t make sense. The United States has the highest inflation in 40 years, yet it also has the strongest dollar in 20 years. How is it possible ?
How can the dollar be so weak and yet so strong at the same time?
In short, inflation is the loss of purchasing power of a currency.
If our currency buys less, it means the currency is weakening. It loses value. We need more and more dollars to buy the same amount of goods and services.
If the government gave everyone $1 million, we wouldn’t be richer in absolute terms. The limiting factor is not money. The government can print money at will. The limiting factor is always the availability of goods and services.
If the government sends everyone a check for $1 million, but the factories don’t produce more products than before, if the service providers don’t provide more services than before, what -he ? Well, the only thing that can happen is that prices have to go up for Americans to end up buying the same amount of goods and services. They just pay $1 million more to buy them because every dollar they have is worth less. This is basic supply and demand. As the supply of something increases, the demand being equal, the value of that thing must fall. So if you double or triple the supply of dollars, the value of each dollar will lose proportional value.
This is what is happening in the United States. It’s not so much that the prices go up. The value of the dollar is falling. There are trillions more dollars in the economy than a few years ago, and as a result, the value of each dollar is decreasing.
But as the dollar loses value, it hasn’t been this strong in decades. It increases in value against other currencies.
It’s the dichotomy. It’s a two dollar story. You have the domestic dollar which is weak and losing value. And then you have this international dollar which is strong and rising in value.
The strength of the international dollar helps the Americans somewhat, but the national weakness exceeds this international strength.
The question remains: why is the dollar so strong internationally when it is so weak domestically?
During the inflationary period of the 1970s, the dollar was destroyed. It only started to rebound when Paul Volker took the fight against inflation seriously.
If you look at everything from a fundamental perspective, inflation today should weigh even more heavily on the value of the dollar against other currencies than it did in the 1970s. the opposite is happening. Inflation is becoming a boon for the dollar. The weaker the dollar in America, the stronger it becomes abroad.
Why is that? Where does all the demand for dollars come from? Foreigners don’t need dollars to buy American products. The United States has a huge trade deficit.
The demand comes from speculators.
Currently, the dollar acts as an inflation hedge for everyone outside of the United States. It is not an inflation hedge in the United States. You cannot buy the dollar to hedge inflation if you are an American living in the United States because there is no hedge. The dollar is losing value. … This is not the dynamic that the Europeans, or the Japanese, are looking for. From their perspective, returns in the US are very positive because they are looking at the appreciation of the US dollar.
Keep in mind that inflation is a global problem. All the central banks in the world have increased their money supply. For people outside the United States, the dollar looks like a solution to this problem. As the old saying goes, it’s the cleanest dirty shirt in the basket.
There is also a self-perpetuating dynamic in play. As foreigners buy dollars to hedge their currency’s inflation, the dollar rises, reinforcing the idea that it is a hedge against the inflation. This craves more purchases.
But Peter said none of that basically made sense.
The dollar is rising according to the biggest fool theory. Why do people buy dollars? Not because they need it to buy American products. They buy them because they think a bigger fool is going to pay a higher price for their dollars in the future. … It can only go so long until the bubble finally bursts. And that’s what’s going to happen to this dollar bubble. Because that’s it. It’s a huge, strengthening bubble where people are buying the dollar because it’s going up. And because it goes up, people buy it.
At some point, people will start selling dollars to get their own currencies back. So what?
Peter said this is the main reason the world is not rushing to gold. Right now, the dollar looks like a much better alternative to gold.
Right now the dollar is stealing the shine from gold. For a while everyone wanted bitcoin instead of gold. But now it’s the dollar that everyone wants instead of gold. Eventually people are going to realize they don’t want the dollar, just as many of them have realized they don’t want bitcoin. Eventually there will be a gold rush. As I said, gold will be the last safe haven because it is the only true safe haven.
In this podcast, Peter also discusses that inflation is not due to “expectations”, the politics of inflation, and he explains why investors who shelter in dollars abroad will wake up brutally.
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