Monday, April 10, 2023

Dollar Hegemony Is Ending - by Karl Denninger

 If you've been paying attention you know that we've had a wee case of inflation..... and its not going back down very quickly either.

What's also happened, however, is that the dollar is losing its "prime" International Trade status.

These two things are connected.

Many people think this is some attempt to "take revenge" or "knock us down a few pegs" (or entirely off the ladder.)  No.  Simply put this is just merchants acting in their own best interest -- nothing more and nothing less.

That's the worst of all worlds for the US when you get down to it.  You see, its easy to blame someone and point fingers otherwise, but when you have a whole bunch of people who simply come to the conclusion that the dollar is not preferred because neither it or our government is as stable as their native currencies you've got a much more-difficult problem on your hands than you might think.

It's not that the dollar is collapsing in price -- it isn't.

It IS that the dollar has gone from 100 in early 2020 to 90 by 2021 and then to 114 by late 2022 and is now back to 100!

Those are large movements and what's much worse is that in particular the last year they've been very sharp, up wildly from the start of 2022 and then back down to now.

International trade takes time -- you order something, it is produced, it is shipped, and you pay for it.  Because it takes time if there are sharp moves in the interim while you might win from that you might also lose and when they're 20% moves over relatively short periods of time they are likely to be larger than your profit margin.

You can go bankrupt this way and its entirely out of your control, so instead of doing that you demand payment in your currency.

There's no fast, easy fix for this.  It is a product of the last four Presidents, not just one.  Trump is easily as responsible -- in particular, The King of Debt made it his hallmark to tamper with currency value; that's what debt does.  For good or bad this was going to be the outcome, and it was.  Biden has thrown gasoline on the problem, so don't think for a second this is a non-issue there, and then of course Obama did so with the bailouts and Bush did so with the response to 9/11 and the Nasdaq crash, all of which included crazy amounts of monetary game-playing.

This ship has sailed folks.  And frankly, its good for us.  We have a serious need to get our fiscal house in order and one of the chief ways to do it is for foreign nations to quit accidentally absorbing our monetary games via international trade settlement.

Nobody does that on purpose but we've been the beneficiaries.  The bad news is that it has led Congress to believe they can play this game basically forever.  That was never true -- but now its fully-evident and there's no going back to how it was.

We'll win from this -- eventually.  But not immediately.  It will force our government to confront the fact that whatever we wish to spend we must first tax.  That in turn means the people have to be willing to pay said taxes, and if they won't then whatever they were going to fund won't get delivered.

That's not going to be an easy conversation, particularly when you previously taxed someone and told them they'd get something and now they're going to force you to put those promises at the front of the line.  Specifically, Social Security.  But not Medicare; it was funded on a cost basis 20% of what medical care costs now, and the other 80% is almost all stolen.

Medical care can be fixed.  If it is the entire federal budget problem is also fixed, and so is dollar stability.

If it isn't then we're headed for a mess -- and not in ten or twenty years either -- right now and for the next twenty years if our nation survives that long which is by no means assured.

Those are the facts.