Wednesday, January 31, 2018

Since Trump's election, US dollar has eroded badly

Trump has been bragging about the stock market's gains, but what we don't hear about is the fact that the US dollar has eroded badly. Since his election the dollar has fallen to a 3-year low.

Trump is destroying the US dollar.
Trump is destroying the US dollar.

I called this at the time of the election and I said it was based, at the time, on two things. 1) Trump's  proposed expansion of fiscal stimulus. (More spending and tax cuts.) And, 2) the ongoing rate hike campaign of the Fed, which is inflationary and therefore NOT bullish for the dollar contrary to what most people believe.

Since then a new and far more corrosive element has entered the picture and that is the Trump Administration's aggressive use of sanctions. This is what I have called the "weaponization" of the US dollar.

This has set in motion an irreversible trend of "de-dollarization." The Rest of the World has no other choice. The USA's use of sanctions designed to limit or completely shut entities or entire nations out of the global, dollar-based transaction and clearing system is too great a risk. Even US allies can be indirectly affected by the sanctions' policy.

Alternatives will be sought. We see this in the rise of new, bilateral trade and clearing arrangements (Russia-China, China oil trading in yuan, etc.) We also see this in rise of Bitcoin and other cryptocurrencies, which I believe, reflects this trend toward de-dollarization and it will continue.

Trump will go down as having presided over the greatest period of dollar depreciation in history. Watch.


Dave said...

Great post Mike. Totally agree, and time to profit off of it at least.

SDB said...

More government spending + tax cuts + an "improvement" in the trade balance (less demand leakage in terms of dollars flowing out of the country; more demand from foreigners for USA exports) + rate hikes (increased rate of return on financial assets) = DEMAND DEMAND DEMAND DEMAND. All four increase domestic demand and domestic purchasing power. Also, rate hikes should counteract de-dollarization to some extent.

Outlook appears great for economic growth.


Tom Hickey said...

Strategic Culture Foundation
Is Bitcoin a Reaction to US Dollar Hegemony?
Frederico Pieraccini

Matt Franko said...

It’s a reaction to incompetent unqualified academic economists running the USD system...

lastgreek said...

Matt, Tom (or anyone else) -- would you mind briefly commenting on Mike's take vs SDB's? Thank you.

Matt Franko said...

Greek imo they are congruent views ie the trump policy is looking like it’s going to create conditions under which foreign producers are likely to get some price increases for their imports in USD terms... from where their prices are now... oil, finished products, ag, etc...oil is already off its lows....

The multinational depository institutions (banks) financing the inventories see an increase in the USD asset value of their loans as the loan collateral prices rise in USD terms as importers raise their prices..... so as those assets are regulated at a fixed coefficient vs fixed capital, reserve assets are shed in the currency that is experiencing the increasing prices... so the exchange rate of the USD reserve assets correspondingly goes down vs the other reserve assets the banks can posses...

It’s a systemic effect.... and NOT a recommendation to do anything btw... it is my opinion....

Tyler said...

Does a weak dollar cause the poverty rate to rise?

Matt Franko said...

Tyler govt sets the poverty rate just like the interest rate and CAN set the exchange rate.... it’s a govt rate...

Matt Franko said...


Tom Hickey said...

SBD utlook appears great for economic growth.

Confidence is very high now and all ducks seem to be lined up for global growth, barring a shock and there are many reasons that a surprise may be in store, from growing private debt to war.

Inflation has been historically low for the past decade, which is not surprising given the slow recovery.

With the global economy posed to take off, inflation is now looming and that will influence currencies most affected by it as saving moves toward greater stability and less risk.

I would expect rising inflation in the US accompanied by a weaker dollar, all things being equal, but of course, they never are.

For example, there are reasons in play that could result in snappy US growth with moderate inflation for some time, with incomes rising to address debt service. But I don't rate the likelihood of this as very given other circumstances.

This is the preferred US strategy since economic warfare is like the neutron bomb that destroys the enemy and leaves the infrastructure standing to take over. The US intends to force the world to follow the rules its elite set or be isolated economically from the global financial system.

I have been posting about de-dollarization for some time now and it is now gaining steam as the US ramps up economic warfare against all perceived competition. That is a raw power move and it is provoking a reaction, e.g., in lose of US soft power, alternative systems being put in place, damaged US alliances, and a global split between North and South, and East and West, with countries forced to take side in a zero-sum game of you are with us or against us.

The US is also deeply divided domestically to the point that an implosion seems to be in the cards. All geopolitical-geostrategic players can see this. So there is no need to oppose the US by pushing back and risking war. Better to just sit tight and watch the US destroy itself from within, while laughing up one's sleeve.

We are now witnessing the collapse of the American Empire as will the status quo in the US. This will provoke different reactions within the US, from inter-elite conflict to the onset of a reset and possible spiritual regeneration, although there is also the danger of swerving into fascism, which is the dialectical dead end of late-stage capitalism collapsing on itself.

This spells endemic dollar weakness as the US declines and China rises, with alliances beginning to shift accordingly, which is already visible.

This is a very dangerous time and it is doubtful that the Empire will go peaceably. So some surprises are likely in order. The good news is that Russia and China are keeping their powder dry even as the US pushes up against red lines. But that won't go on forever, since the US regards it as weakness and will push ever harder.

NeilW said...

"We are now witnessing the collapse of the American Empire as will the status quo in the US."

As a Brit, the attitude in the USA appears very similar to the Edwardian period in the UK. That tension ended with the First World War. A war the UK should never have got involved in.

SDB said...

Ironically Republican POTUS and a Republican controlled House and Senate are on the verge of creating a macroeconomic environment that is a mix of progressive wings of the liberal-left: the Dean Baker "fix the trade balance" wing and the MMT "the deficit doesn't matter" wing.
(I know: the deficit does matter, just not in the way most people think it does).

To be sure, they're definitely not enacting an MMT program. That would need a job guarantee, tax cuts primarily directed toward the middle and poor and not the wealthy, a zero-interest rate Fed policy, and all sorts of expansions to the welfare state.

Nevertheless, a mix of higher government spending (Trump wants a big infrastructure plan) + lower taxes + improved trade balance + higher interest rates = pumping demand and potential demand into the economy. Keynesian 101.

At the same time... seriously, when is the last time demand-driven inflation was a significant problem in the United States? Maybe 100 years ago during World War 1? Considering all the student loan debt, 5%-8% annual inflation that made it into wages might actually be a good thing, because for that kind of inflation to make it into wages, we're talking about an enormous economic boom like the post WW2 period.

With respect, I think Tom is being negatively hyperbolic. The USA might possibly be on the verge of spearheading a significant global economic expansion, which would be coming on top of one of the longest economic expansions in history. Much is forgiven when real incomes are rising.

Tyler said...

Does a weak dollar cause an increase in unemployment?

Tom Hickey said...

The USA might possibly be on the verge of spearheading a significant global economic expansion, which would be coming on top of one of the longest economic expansions in history. Much is forgiven when real incomes are rising.

I would agree if this were really a genuine Keynesian situation but it is not.

Under neoliberalism, the gains have not been distributed and there is no prospect that they will be. The elite have too much invested in the status quo to go full-Keynesian regarding distribution.

Moreover, the big problem for the US is that a global expansion favors China, since it is developing very fast and is about to surpass the US in absolute numbers owing to the population advantage. This translates into economic, geopolitical and military power.

The core US policy is that the US will not allow a rival economically or militarily. Actually, economic infrastructure is the basis for military power. So the US either bows out gracefully, or not. No indication that the US intends to give up dominance no matter what it takes.

In addition, another fundamental problem that the US now faces is political divisiveness. I read widely across the spectrum and find that the there are two major cohorts in the US inhabiting different conceptual universes with different facts.The population seems to be split about equally.

There is no compromise possible in this climate. This is a zero-sum game in their minds, and each sees the other as the devil.

I hope people come to their senses and we get on with opportunity, but I don't see it on the ground yet.

One of the big problems politically is that both parties reward their constituencies when in power and punish the other party's constituencies.

And both parties are divided internally into establishment wing and populist wing. So there are lots of losers, many of whom believe strongly that they have been cheated.

This is a poisonous dynamic that that began when the GOP blamed Nixon's loss to JFK on the Mayor Daley rigging the Chicago vote. Then the Dems blamed Nixon for dirty dealing. Then the GOP blamed the Dems for the Nixon impeachment. It was all downhill from there and has just gotten exacerbated since the Bush-Gore fiasco.

So this is not a matter of just Trump and "populism." It's been building for quite a while.

SDB said...

International geo-politics is outside of my wheelhouse. I'll defer on that.

Allow me to edit:
"Trump and company might possibly be on the verge of spearheading a significant domestic economic expansion, which would be coming on top of one of the longest economic expansions in history. Much is forgiven when real incomes are rising."

Tom, while I agree that politics seems to be especially toxic in the USA right now, imo the liberal-resisters the the liberal media are simply just acting as insane as the conservative-tea partiers and the conservative media were when Obama and the Democrats took power in 2008.

Probably nothing alleviates political strife quite like increasing standards of living across the board.

Noah Way said...

The GAO is warning that the debt limit will be reached before the next quarter.

Revenue from payroll tax is down $10-15b month under the new tax law.

Matt Franko said...

Noah withholding should start this week and then tax refunds have to go out ... TGA is up to 275b so they have that plus other extraordinary measures to work with for a while ...

January was a surplus of 23b but this should be short lived with the new withholding and tax refunds ramping up...

SDB said...


All else equal, a weaker currency tends to be a positive for reducing unemployment. This is why export-driven economic growth is the fastest path from underdeveloped country to developed country. The inflow of foreign direction investment increases a developing country's capital and technological capabilties and serves as a continuous fountain of demand. = job creation.

A developed country like the United States doesn't need a week currency though. Once you're an advanced economy, just float the currency and use functional finance to keep the economy humming along and counter-cyclical policies to prevent depressions. But since our politicians don't utilize the principles of functional finance, a weaker dollar will end up being a net positive for unemployment in the United States. Progressive/Liberal economist Dean Baker has been arguing for the benefits of a weaker dollar for at least a decade.

Dave said...

Just a general question, and perhaps there is no way to show this in economic terms but:
What will the impact be on all of these economic policies when you factor in the effects of global warming starting to kick in.

Example- Cape Town SA is running out of water. Droughts, fires and floods are the norm, and I would assume food shortages are as well?

I feel like the models we are discussing are old models that don't take the new reality seriously.

Tom Hickey said...

Trump says no problem the ice caps are growing (which is false).

The major problem with climate change is tradeoffs, and economic tradeoffs are huge if it granted that humans are playing role in it.

Another problems is that the challenges are unevenly distributed so while a distributed solution is largely required, not all are affected equally, at least in the same time frame.

So far, there really is no plan to speak of.

I suspect that the can will be kicked down the road until the issue can no longer be denied or swept under the rug. The question is where the tipping point is.

I look at this as the most serious issue other than wide-spread war, especially if it goes nuclear.

Epidemics are another challenge and they increase with warming climate, as tropical diseases move out of the tropics.

This is also going to result in demographic problems that we are already seeing in the form of mass migration.

I view it as vise that is slowly closing and it's eventually going to start squeezing.

What happened to Puerto Rico will look mild.

Dave said...

Thats the way I see it as well Tom. I guess I imagine that before it gets that bad, (like Puerto Rico on steroids) governments and economies will endure shocks, and those shocks are not built into the models. For example, I am certain neo-liberal globalists never built into their assumptions the Trump Phenomenon, but I do think that Trump is a direct result of the general decline we see, not only in our culture and empire, but also the environmental effects of global climate change, and to a degree, the need for industrial giants to have access to cheap oil. All of these things, and many others I haven't named, are capable of hitting us with shocks, which will cause other shocks, etc. So I think that pretty much turns most macro models to dust, unless they can account for this somehow.

Tom Hickey said...

What they call "shocks" or "surprise" is foreseeable through dialectical thinking and systems thinking, which are closely related.

Categorical thinking is not both A and not-A.

Dialectical thinking is the whole is A and non-A.

In systems thinking, synergy applies, that is, the whole is greater than the sum of the part. It is the parts and their web of relationships in the system.

These types of thinking have their place, and misapplying them has consequences.

Dave said...

Ok that makes sense. I assume when you say they are kicking the can, then we are going to get hit with a Black Swan at some point.