14 ms·

The Global Dollar Short Squeeze

391 points by exolymph 7y ago

3fe9a03ccd14ca5 7y ago
Does this help explain the disconnect between paper and physical gold that started about a few weeks ago?
- koolba 7y ago
  Shelter in place orders likely caused a chunk of that.
- wegymoo 7y ago
  the day before all non essential store (precious metal brokers) closed here I went to two and the asking price for silver was double the online spot for physical 1 ounce coins (not a high grade collectors coin just silver rounds)
  - 3fe9a03ccd14ca5 7y ago
    It looks like it’s still close to that online at the large sellers, like apmex and Kitco. For example, the spot price for silver is around $15, but the cheap, generic silver rounds are at $20 an ounce, 25% premium. American Eagles 40% premium. Other places not in stock at all.
    - mythrwy 7y ago
      This place has generic rounds silver $3 over spot. Appear to have stock. https://www.coin-rare.com/silver-bullion.aspx https://www.coin-rare.com/silver-bullion.aspx
      - 3fe9a03ccd14ca5 7y ago
        Any experience with them? Seems like a good price to me, even with shipping costs.
        mythrwy 7y ago
        Ya I ordered a bunch of stuff from them years ago. They have been around at least over a decade and were legit.
  - kaycebasques 7y ago
    I've heard that retail sellers deliberately milk the "it's the end of the world" narrative. They price gouge under the guise of "See! The price of physical gold is dislocating from paper money!"
  - jurassic 7y ago
    Premiums on physical silver are always pretty ridiculous, even in non-pandemic times. I've always preferred gold because the margins are a lot more reasonable.
- kevas 7y ago
  I read this last week (forgot where I read it) and haven't been able to find data to support what I read so take the following with a grain of salt. Many investors owned gold as a hedge. The market's downturn happened so rapidly and violently, their other positions took a massive beating. That divergence happened because big players needed to get out of their gold position to cover margin for their other positions.
- blihp 7y ago
  No, there's often a disconnect between paper and physical metals when there's economic volatility. The same thing happened in '08. The reality is that trading futures contracts (which generally settle in cash) isn't the same as trading the physical metals (where you have broker fees to contend with.) While the physical metals markets are based on the spot price, the discount/premium goes way up during periods of high volatility.
- 0x8BADF00D 7y ago
  That's due to a couple of different things. A lot of people were writing GC contracts w/o actually having physical gold to cover. When some buyers of those same futures contracts wanted to take delivery, those contract writers who took the short position had to now go into the open market and buy gold. However, because of COVID-19, there is very little supply of gold as it is now. A lot of mining companies have no intention of continuing to mine, as they can just give their miners time off and sit on their gold reserves, wait til the price spikes, and start selling their inventory at a 25% markup. That's my theory anyway.
- agravier 7y ago
  Some insights and speculations about the current issues with the market makers in charge on various flavours of paper gold: https://www.bullionstar.com/blogs/ronan-manly/bullion-bank-nightmare-as-lbma-comex-spread-blows-up-again/ https://www.bullionstar.com/blogs/ronan-manly/bullion-bank-n...
yingw787 7y ago
I signed up for Lyn's newsletter March 25th! Looking forward to seeing more of her content here, I really like how in-depth and insightful it is!
snowmaker 7y ago
If you enjoyed this, I recommend Lyn's more recent article, post-covid: https://www.lynalden.com/great-depression/ https://www.lynalden.com/great-depression/
- guiambros 7y ago
  What a fantastic read; thank you for sharing!
- echelon 7y ago
  That paints an astonishingly bleak picture. I'm not an economist, but that seems almost unreal. We have a lot of levers (some unpleasant) that we can tweak that aren't mentioned. Getting into a cold war with China and shaping trade seems like something America is uniquely positioned to do. It may even be possible to cancel US treasury debt to China if the entire world gets on board with that plan (suing the CCP over covid-19 coverups and unanimously agreeing to prevent credit rating downgrades). I've seen this idea floated around the internet, and it doesn't sound implausible.
  - chrisco255 7y ago
    Getting into a kind of cold war with China will lead to an actual war. But, here's the kicker. Our economy has been decimated over the last 30 years as we've exported our production to 3rd world countries (like China). We now have the strongest currency and it's going to get harder to export as a result. Meanwhile, all the factory and production skills we had 30 years ago are gone now. Those people are retired or dead. We now have 2 generations (Gen Z and Millenials) who fundamentally lack production skills. We are in a bad spot. It will take years to retool our economy.
    - echelon 7y ago
      > Getting into a kind of cold war with China will lead to an actual war. China does not want that, and we don't want to go to war with them either. MAD makes this an extremely unattractive option. > It will take years to retool our economy. No it won't. We're already manufacturing more high-skill goods domestically than at any point in our history, and now we have an opportunity to expand upon it. We can replace China with manufacturing in Vietnam, India, Mexico, Ethiopia, etc. and own the factories. China is already starting to shift expensive manufacturing out with One Belt One Road, but we can do the same with even more immediacy and effectiveness. India, Viet Nam, and Taiwan are itching to further distance themselves from China. There's no reason we can't be at the top of the manufacturing game worldwide in fifteen years. Especially if we use trade as a means to get partners on board. The G7 would do it.
ggm 7y ago
There are strong cultural ties to seeking precious metal as a hedge by individuals. Indians and the Chinese are used to huge ornate weddings and have a strong sense the jewelry bears a dual purpose. It's possible the last fifteen years of the diaspora has acculturated the precious metals practices of their cultures into America. Real hedge doesn't go to jewelry. But the lower grade gold and silver has to come from the same feedstock. So the localised effect would be felt in the investment community because some of the bars are going out the door to metalworking not to another vault. I'm less sure its indicative overall of risk these days. Real LME type trade is online. There is no shortage of metal worldwide is there? I thought most central banks de-gilded over the last decades anyway.
JumpCrisscross 7y ago
> The dollar’s claim to fame is that almost all oil is priced in dollars, globally This is the petrodollar hypothesis, a debunked theory of global trade. Oil is globally traded. It can be and is priced in many currencies. Most international trade was historically priced in dollars for two reasons. The second was, until recently, the unique speed and breadth of the Fedwire system. The first is the American consumer. When Americans buy, we spend dollars. This puts dollars in vendors’ hands. Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance. Oil is priced in dollars, and countries borrow in dollars, because dollars reign supreme. Not the other way. > In 2018, the strong dollar broke Argentina and Turkey’s currencies and drove the countries into recession Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems. > foreign dollar-denominated debt means there is a ton of demand for dollars Domestic demand for cash eclipses foreign demand. The Fed and Congress have printed trillions, yet we’re still on the precipice of deflation. > the United States government is heavily reliant on foreigners lending it money by buying its Treasuries. Foreigners currently hold $6.7 trillion in U.S. government debt. Out of $25 trillion [1]. Also, $7 trillion is comparable to the amount Congress and the Fed just created. Currency crises are broadly studied. They are also complex. This analysis is overly reductive. [1] https://en.m.wikipedia.org/wiki/National_debt_of_the_United_States https://en.m.wikipedia.org/wiki/National_debt_of_the_United_...
- chrisco255 7y ago
  Our consumer economy just shrank by 30% or more. We've used up all our credit. We were spending beyond our means. And now our consumption will shrink. What's this do to king dollar?
  - tick_tock_tick 7y ago
    Because literally every country is worse?
  - bobthepanda 7y ago
    Probably not much if every other economy responds in exactly the same way. It's too early to say; what matters more is what a recovery, if any, looks like. The US has a history of enduring greater short-term pain but bouncing back faster.
BubRoss 7y ago
This is a long article but well worth reading. There is a lot of good information that backs up the title.
0x8BADF00D 7y ago
> The United States now has loose fiscal policy and loose monetary policy. This is the key takeaway from this article. This will spell doom for the US consumer's purchasing power, it makes sense to own foreign currencies, gold, and foreign stocks. Getting out of dollar denominated assets before the dollar crashes is key.
- dntbnmpls 7y ago
  But everyone has loose fiscal and monetary policies - the EU, Japan, China, etc.
- panarky 7y ago
  You can't look at one nation's currency in isolation. Since other nations are simultaneously loosening in a competitive devaluation, buying foreign currencies and equities won't necessarily protect you. I've yet to see a step by step explanation of how the dollar is supposed to crash. While there are many hyperbolic and hand-wavy theories getting passed around, none that I've seen acknowledge the role of other nations or of second-order effects. I agree it's prudent to own some gold and Bitcoin in case the bottom falls out, but the probability of hyperinflation seems pretty low to me even if the Federal Reserve prints a few trillion dollars during a crisis.
  - 0x8BADF00D 7y ago
    See, this assumes that free trade is the norm and autarky isn’t. We are all supposedly interdependent it is said, but it could very easily become a scenario where everyone closes their economies. Heck, they’re already doing that now with COVID-19. Then there’s no need for the dollar as a reserve currency. Not saying this will happen but it is a possibility. The real test is if Trump will impose tariffs on foreign oil. Other countries may retaliate on other goods and it quickly spirals from free trade to autarky.
  - deleted 7y ago
    [deleted]
  - chrischen 7y ago
    The article is saying the longer term multi-year trend is for the dollar to de-value.
hogFeast 7y ago
There is, unfortunately, quite a lot wrong here (not just the topic...but obvious stuff like Triffin Dilemma). But the key points are basically two-fold. One, there isn't a shortage of dollars. Nowhere close to one. The Fed learned from what happened to Europe last time, and has already announced swap lines. Two, there isn't one generic "dollar" funding situation. In 2008, it was really about Europe. Now, we have lots of countries each with their own situation (which the Fed is watching closely). Japan has probably been where most of the growth in the market has come from. They are deep into CLOs but have a fairly neutral funding position (they borrow/lend in USD), and Japan has a huge stock of dollars...so a crisis seems unlikely. Canada is another big one but, again, this is US branches of Canadian banks...not an imbalanced position. The big mystery is China, which seems to be getting dollars from nowhere, but like Japan they have a huge stock of dollar reserves. The situation with EM is also not that simple. A lot have a huge stocks of dollars. The reason why some are getting into trouble is: bad monetary policy, borrowers with bad credit, and (lesser extent) dollar strength. The last is going to continue but Turkey, as an example, has been in this position for years (I noticed their issues 6 or 7 years ago). What is happening now changes nothing. Definitely, we have seen surprising moves in GBP and CAD which suggested that people were looking for dollars quickly but JPY rallied...so...who knows? I don't think it is something to be unduly worried about. The US has supplied tons of dollars, China and Russia will keep kicking up a shit fit about this but the US isn't taking advantage of the situation, the Fed is providing the market with liquidity. We have SDRs, there was no issue with the supply of dollars before this point (in fact, the issue was there was too much)...so...I don't see what there is to worry about here.
- selectodude 7y ago
  China is getting dollars from foreign purchasers of their goods paired with a forced exchange to yuan (holding large values of usd In China is illegal).
  - toohotatopic 7y ago
    How are those dollars tracked? If somebody wires dollars to a Chinese bank, and that bank wires those dollars to another bank to exchange them, why can't that second bank make up any number when it wires dollars back to an American bank? Is it because at any time, those dollars were not only on the books of the Chinese banks but also on the books of some international clearance bank?
throwaway05835 7y ago
It seems like every economic argument for US strength relies exclusively on "we have the global reserve currency". How long will this remain the case? No country can survive solely on this without underlying economic strength. Ray Dalio's analysis on the topic last week clearly showed how the reserve status lags behind most other indicators of a country's global status.
jeffdavis 7y ago
I don't understand why servicing a dollar-denominated debt causes an increase in aggregate demand. Sure, you need to buy dollars, but when you pay the debt, now the person on the other end gets them and puts those dollars back in the market.
- daniel_levine 7y ago
  In order to mitigate the risk of currency fluctuation, countries with dollar-denominated debt will stockpile dollar-denominated assets in advance as well. Those stockpiles are an increase in demand over what is just needed for immediate transacting.
- magicsmoke 7y ago
  If all debters with dollar denominated debt could perfectly coordinate with each other that would be the case. They could all run through your scenario one at a time without causing a dollar shortage and a spike in demand and price. But the market is made up of independent actors all of whom want to make sure they get the dollars they need first. It's like a rush for the fire exit with everyone jammed at the door instead of an orderly line.
cletus 7y ago
So that was a fantastic article that I read to the end and it made several fascinating claims: 1. The recent disconnect between government debt and the economic cycle as the debt-to-GDP ratio has shot up when unemployment is low. Who knows how bad that's going to look as unemployment inevitably shoots up and government receipts go down as a result. 2. The fact that corporate income has basically been flat since 2014. That was a surprise to me and particularly surprisingly the almost unprecedented stock market rally over that period. When earnings become divorced from returns, it tends to signal the end of the boom and everything comes crashing back to earth at some point. 3. Seeing just how high China's USD-denominated debt is. I've read a few things on the possible US-China trade war in the last couple of years and I'd come round to the view that China was in a far weaker position for a protracted trade war than many thought. This data point fits that view. 4. The US tax "cuts" aka the GOP Donor Class Handout Act may well go down as one of the most foolish missed opportunities of the modern era, particularly given the trillions the government is clearly going to spend on Covid-19 bailouts. 5. The Federal Reserve is likely going to have to go on an unprecedented money printing spree to buy government debt. What I'd like to know is will any of this impact inflation?
- CyanBird 7y ago
  > will any of this impact inflation? Probably not, as Philips Curve fueled inflation hasn't been a problem for a very long time in the US, income & wealth inequality just eats that segment of inflation up Central banks through the western world have been getting consistent under target inflation rates for many, many years now, and that's a chronic issue that won't change unless strong systemic changes happen which fuel Phillips Curve inflation once again Last year the ECB published this amazing, amazing paper which cover how labor costs affect inflation, specifically the Phillips Curve which I can't recommend to all the other MacroEcon people to review https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077ff.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077...
  - tomatocracy 7y ago
    It depends how you measure inflation. Over the past decade or so we've seen what I've heard described as "biflation" - imported deflation in the prices of many goods alongside pretty high rates of inflation in some services, goods and assets (like company shares or real estate in some markets). Traditional measures of consumer price inflation are pretty heavily skewed towards goods and within those slightly skewed towards goods which come with imported deflation so when that all gets averaged out it shows slightly below target inflation but the headline numbers really don't tell you as much as they used to. Whether this continues I have no idea but it's worth thinking about the components of "inflation" and what is and isn't included when considering its impact on the economy.
_ZeD_ 7y ago
I couldn't read past the repeated "wolkswagon"
- raverbashing 7y ago
  Yeah those mistakes take from the credibility of the text, which otherwise seems very well resourced.
- jmcqk6 7y ago
  I wonder what's really behind this phenomena. You were so distracted by a simple error, completely unrelated to the main point of the article, that you had to stop reading the article. And then other people are reading this as this is a problem with the article and not a problem with your brain. How, exactly, is this a problem with the credibility of the article? If you're unable to look past a simple misspelling in order to get to the real meat of an article, you're going to have larger problems. The world is an imperfect place, full of much more egregious mistakes than this. Being able to deal with that is a fundamental skill.
  - _ZeD_ 7y ago
    > How, exactly, is this a problem with the credibility of the article? it means there was no proofreading. if I can catch an error - on something so simple EVEN I know - how can I trust the article on something I don't know?
    - jmcqk6 7y ago
      It doesn't mean that. I don't know why you want it to mean that, but even proofreaders can miss things. You're rejecting the credibility of the articles based on something unrelated to the actual information the article is talking about. Spelling has nothing to do with the underlying information. Obviously you're going to justify this however you want in your head, and there are others out there who agree with you, but I think most people, when hearing that you literally couldn't read an article because of a spelling error will just roll their eyes.
grandinj 7y ago
There is too much debt in the system. Decades of goosing growth everywhere by making debt easier has put lots of places into tenuous territory where market adjustments combined with sentiment can tank things in unexpected ways.
felixfbecker 7y ago
I can’t ignore that Volkswagen is consistently spelled Volkswagon
- tasuki 7y ago
  It's maddening, but I also appreciate the consistency. Nothing worse than inconsistent spelling!
shrimpx 7y ago
Tangent but it seems to me that this Covid situation is ripe ground for the next crypto bubble. The envisioned endgame on which the 2017 bubble was based was “hyperbitcoinization,” the prospect that national currencies would give way to bitcoin, but nobody could really explain why. This new space of financial instability seems like ripe ground for the next wave of hyperspeculation.
- whoisjohnkid 7y ago
  Agreed.
- dylkil 7y ago
  will people wake up this time and realise bitcoins limit of 350k tx's per day makes it completely useless as a currency? My guess is no.
sdffdsfdsfsddsf 7y ago
I'm not an expert on these things, but I like to try to break down things into simpler concepts. I fear that in the reasoning like in the article, many things remain unclear or nontransparent. Maybe there is an error in picking misleading metrics and running with them? As an example, what if you were selling a product, and you were giving people unlimited credit to buy from you. Like you suppose everybody could buy a new iPhone on credit, that never needs to be paid back. I can imagine iPhones selling like hotcakes in that scenario. Now the question is, in that scenario, would Apple be doing great? They'd be selling a lot of iPhones, after all. And in the books, they would have the claim to a lot of money from the people who bought on credit. Realistically, though, they might not be doing so great, because most of their customers would end up unable to actually pay back the credit. Maybe something similar tends to happen on a larger scale, when the article says "a weak dollar is good for the economy" - it's just that "people" (in other countries) got access to free money to buy. Whether those sales turn out to be really good ones will only become clear in the long run. Money (dollars) is just debt, so "a weak dollar" may just mean it is cheap to borrow, a ka buy stuff for almost free. I don't know what the best metric for understanding such a situation, but it seems to me simply calculating in dollar values is rather misleading. It is a much more complicated question involving the ability of debtors to actually pay what they owe.
JamisonM 7y ago
I am confused by this article, was it that many words to say that "the US will have a strong dollar until it doesn't have a strong dollar"? Isn't the premise sort of undermined by the fact (posited in the text) that overseas US denominated debt is actually better offset by US dollar denominated holdings than ever before? And I don't entirely understand the importance of say a Turkey or Argentina default to this scenario. If large amounts if USD debts can't be serviced that alleviates the so-called "squeeze" because the haircuts represent money that doesn't need to be "found". There was a lot of words in there and it seems like a pretty big pile of assumptions stacked on top of assumptions and it doesn't make a straightforward argument in favour of the premise that we should expect the US dollar to devalue relative to other currencies in the medium term. (Also the link that explains trade deficits is a pretty bad explanation of trade deficits and how they do and don't matter.)
- symplee 7y ago
  Exactly. And then at the way end, there's a graph with the two scenarios predicting what will happen based on all of the article's analysis: Scenario 1: Dollar goes up, then down. Scenario 2: Dollar goes down. In each Microsoft Paint drawn scenario, there's only a vague implied scale. Scenario 1 going up to ~$130 around 2025, then falling to ~$92 around 2035. Scenario 2 falling to ~$75 by 2035. So if the dollar goes up, the author is right. If it goes down, the author is right. If it stays the same? ¯\_(ツ)_/¯

391 points by exolymph 7y ago

3fe9a03ccd14ca5 7y ago

Does this help explain the disconnect between paper and physical gold that started about a few weeks ago?

koolba 7y ago
Shelter in place orders likely caused a chunk of that.
wegymoo 7y ago
the day before all non essential store (precious metal brokers) closed here I went to two and the asking price for silver was double the online spot for physical 1 ounce coins (not a high grade collectors coin just silver rounds)
- 3fe9a03ccd14ca5 7y ago
  It looks like it’s still close to that online at the large sellers, like apmex and Kitco. For example, the spot price for silver is around $15, but the cheap, generic silver rounds are at $20 an ounce, 25% premium. American Eagles 40% premium. Other places not in stock at all.
  - mythrwy 7y ago
    This place has generic rounds silver $3 over spot. Appear to have stock. https://www.coin-rare.com/silver-bullion.aspx https://www.coin-rare.com/silver-bullion.aspx
    - 3fe9a03ccd14ca5 7y ago
      Any experience with them? Seems like a good price to me, even with shipping costs.
      - mythrwy 7y ago
        Ya I ordered a bunch of stuff from them years ago. They have been around at least over a decade and were legit.
- kaycebasques 7y ago
  I've heard that retail sellers deliberately milk the "it's the end of the world" narrative. They price gouge under the guise of "See! The price of physical gold is dislocating from paper money!"
- jurassic 7y ago
  Premiums on physical silver are always pretty ridiculous, even in non-pandemic times. I've always preferred gold because the margins are a lot more reasonable.
kevas 7y ago
I read this last week (forgot where I read it) and haven't been able to find data to support what I read so take the following with a grain of salt. Many investors owned gold as a hedge. The market's downturn happened so rapidly and violently, their other positions took a massive beating. That divergence happened because big players needed to get out of their gold position to cover margin for their other positions.
blihp 7y ago
No, there's often a disconnect between paper and physical metals when there's economic volatility. The same thing happened in '08. The reality is that trading futures contracts (which generally settle in cash) isn't the same as trading the physical metals (where you have broker fees to contend with.) While the physical metals markets are based on the spot price, the discount/premium goes way up during periods of high volatility.
0x8BADF00D 7y ago
That's due to a couple of different things. A lot of people were writing GC contracts w/o actually having physical gold to cover. When some buyers of those same futures contracts wanted to take delivery, those contract writers who took the short position had to now go into the open market and buy gold. However, because of COVID-19, there is very little supply of gold as it is now. A lot of mining companies have no intention of continuing to mine, as they can just give their miners time off and sit on their gold reserves, wait til the price spikes, and start selling their inventory at a 25% markup. That's my theory anyway.
agravier 7y ago
Some insights and speculations about the current issues with the market makers in charge on various flavours of paper gold: https://www.bullionstar.com/blogs/ronan-manly/bullion-bank-nightmare-as-lbma-comex-spread-blows-up-again/ https://www.bullionstar.com/blogs/ronan-manly/bullion-bank-n...

yingw787 7y ago

I signed up for Lyn's newsletter March 25th! Looking forward to seeing more of her content here, I really like how in-depth and insightful it is!

snowmaker 7y ago

If you enjoyed this, I recommend Lyn's more recent article, post-covid: https://www.lynalden.com/great-depression/ https://www.lynalden.com/great-depression/

guiambros 7y ago
What a fantastic read; thank you for sharing!
echelon 7y ago
That paints an astonishingly bleak picture. I'm not an economist, but that seems almost unreal. We have a lot of levers (some unpleasant) that we can tweak that aren't mentioned. Getting into a cold war with China and shaping trade seems like something America is uniquely positioned to do. It may even be possible to cancel US treasury debt to China if the entire world gets on board with that plan (suing the CCP over covid-19 coverups and unanimously agreeing to prevent credit rating downgrades). I've seen this idea floated around the internet, and it doesn't sound implausible.
- chrisco255 7y ago
  Getting into a kind of cold war with China will lead to an actual war. But, here's the kicker. Our economy has been decimated over the last 30 years as we've exported our production to 3rd world countries (like China). We now have the strongest currency and it's going to get harder to export as a result. Meanwhile, all the factory and production skills we had 30 years ago are gone now. Those people are retired or dead. We now have 2 generations (Gen Z and Millenials) who fundamentally lack production skills. We are in a bad spot. It will take years to retool our economy.
  - echelon 7y ago
    > Getting into a kind of cold war with China will lead to an actual war. China does not want that, and we don't want to go to war with them either. MAD makes this an extremely unattractive option. > It will take years to retool our economy. No it won't. We're already manufacturing more high-skill goods domestically than at any point in our history, and now we have an opportunity to expand upon it. We can replace China with manufacturing in Vietnam, India, Mexico, Ethiopia, etc. and own the factories. China is already starting to shift expensive manufacturing out with One Belt One Road, but we can do the same with even more immediacy and effectiveness. India, Viet Nam, and Taiwan are itching to further distance themselves from China. There's no reason we can't be at the top of the manufacturing game worldwide in fifteen years. Especially if we use trade as a means to get partners on board. The G7 would do it.

ggm 7y ago

There are strong cultural ties to seeking precious metal as a hedge by individuals. Indians and the Chinese are used to huge ornate weddings and have a strong sense the jewelry bears a dual purpose. It's possible the last fifteen years of the diaspora has acculturated the precious metals practices of their cultures into America. Real hedge doesn't go to jewelry. But the lower grade gold and silver has to come from the same feedstock. So the localised effect would be felt in the investment community because some of the bars are going out the door to metalworking not to another vault. I'm less sure its indicative overall of risk these days. Real LME type trade is online. There is no shortage of metal worldwide is there? I thought most central banks de-gilded over the last decades anyway.

JumpCrisscross 7y ago

> The dollar’s claim to fame is that almost all oil is priced in dollars, globally This is the petrodollar hypothesis, a debunked theory of global trade. Oil is globally traded. It can be and is priced in many currencies. Most international trade was historically priced in dollars for two reasons. The second was, until recently, the unique speed and breadth of the Fedwire system. The first is the American consumer. When Americans buy, we spend dollars. This puts dollars in vendors’ hands. Those dollars can be reused for trade or invested, the latter supporting dollar financial markets. Both support dollar hegemony, which in turn drives its dominance in global trade and finance. Oil is priced in dollars, and countries borrow in dollars, because dollars reign supreme. Not the other way. > In 2018, the strong dollar broke Argentina and Turkey’s currencies and drove the countries into recession Argentina and Turkey’s currencies devalued relative to their trade-weighted baskets of currencies. The dollar was not a driver of their problems. > foreign dollar-denominated debt means there is a ton of demand for dollars Domestic demand for cash eclipses foreign demand. The Fed and Congress have printed trillions, yet we’re still on the precipice of deflation. > the United States government is heavily reliant on foreigners lending it money by buying its Treasuries. Foreigners currently hold $6.7 trillion in U.S. government debt. Out of $25 trillion [1]. Also, $7 trillion is comparable to the amount Congress and the Fed just created. Currency crises are broadly studied. They are also complex. This analysis is overly reductive. [1] https://en.m.wikipedia.org/wiki/National_debt_of_the_United_States https://en.m.wikipedia.org/wiki/National_debt_of_the_United_...

chrisco255 7y ago
Our consumer economy just shrank by 30% or more. We've used up all our credit. We were spending beyond our means. And now our consumption will shrink. What's this do to king dollar?
- tick_tock_tick 7y ago
  Because literally every country is worse?
- bobthepanda 7y ago
  Probably not much if every other economy responds in exactly the same way. It's too early to say; what matters more is what a recovery, if any, looks like. The US has a history of enduring greater short-term pain but bouncing back faster.

BubRoss 7y ago

This is a long article but well worth reading. There is a lot of good information that backs up the title.

0x8BADF00D 7y ago

> The United States now has loose fiscal policy and loose monetary policy. This is the key takeaway from this article. This will spell doom for the US consumer's purchasing power, it makes sense to own foreign currencies, gold, and foreign stocks. Getting out of dollar denominated assets before the dollar crashes is key.

dntbnmpls 7y ago
But everyone has loose fiscal and monetary policies - the EU, Japan, China, etc.
panarky 7y ago
You can't look at one nation's currency in isolation. Since other nations are simultaneously loosening in a competitive devaluation, buying foreign currencies and equities won't necessarily protect you. I've yet to see a step by step explanation of how the dollar is supposed to crash. While there are many hyperbolic and hand-wavy theories getting passed around, none that I've seen acknowledge the role of other nations or of second-order effects. I agree it's prudent to own some gold and Bitcoin in case the bottom falls out, but the probability of hyperinflation seems pretty low to me even if the Federal Reserve prints a few trillion dollars during a crisis.
- 0x8BADF00D 7y ago
  See, this assumes that free trade is the norm and autarky isn’t. We are all supposedly interdependent it is said, but it could very easily become a scenario where everyone closes their economies. Heck, they’re already doing that now with COVID-19. Then there’s no need for the dollar as a reserve currency. Not saying this will happen but it is a possibility. The real test is if Trump will impose tariffs on foreign oil. Other countries may retaliate on other goods and it quickly spirals from free trade to autarky.
- deleted 7y ago
  [deleted]
- chrischen 7y ago
  The article is saying the longer term multi-year trend is for the dollar to de-value.

hogFeast 7y ago

There is, unfortunately, quite a lot wrong here (not just the topic...but obvious stuff like Triffin Dilemma). But the key points are basically two-fold. One, there isn't a shortage of dollars. Nowhere close to one. The Fed learned from what happened to Europe last time, and has already announced swap lines. Two, there isn't one generic "dollar" funding situation. In 2008, it was really about Europe. Now, we have lots of countries each with their own situation (which the Fed is watching closely). Japan has probably been where most of the growth in the market has come from. They are deep into CLOs but have a fairly neutral funding position (they borrow/lend in USD), and Japan has a huge stock of dollars...so a crisis seems unlikely. Canada is another big one but, again, this is US branches of Canadian banks...not an imbalanced position. The big mystery is China, which seems to be getting dollars from nowhere, but like Japan they have a huge stock of dollar reserves. The situation with EM is also not that simple. A lot have a huge stocks of dollars. The reason why some are getting into trouble is: bad monetary policy, borrowers with bad credit, and (lesser extent) dollar strength. The last is going to continue but Turkey, as an example, has been in this position for years (I noticed their issues 6 or 7 years ago). What is happening now changes nothing. Definitely, we have seen surprising moves in GBP and CAD which suggested that people were looking for dollars quickly but JPY rallied...so...who knows? I don't think it is something to be unduly worried about. The US has supplied tons of dollars, China and Russia will keep kicking up a shit fit about this but the US isn't taking advantage of the situation, the Fed is providing the market with liquidity. We have SDRs, there was no issue with the supply of dollars before this point (in fact, the issue was there was too much)...so...I don't see what there is to worry about here.

selectodude 7y ago
China is getting dollars from foreign purchasers of their goods paired with a forced exchange to yuan (holding large values of usd In China is illegal).
- toohotatopic 7y ago
  How are those dollars tracked? If somebody wires dollars to a Chinese bank, and that bank wires those dollars to another bank to exchange them, why can't that second bank make up any number when it wires dollars back to an American bank? Is it because at any time, those dollars were not only on the books of the Chinese banks but also on the books of some international clearance bank?

throwaway05835 7y ago

It seems like every economic argument for US strength relies exclusively on "we have the global reserve currency". How long will this remain the case? No country can survive solely on this without underlying economic strength. Ray Dalio's analysis on the topic last week clearly showed how the reserve status lags behind most other indicators of a country's global status.

jeffdavis 7y ago

I don't understand why servicing a dollar-denominated debt causes an increase in aggregate demand. Sure, you need to buy dollars, but when you pay the debt, now the person on the other end gets them and puts those dollars back in the market.

daniel_levine 7y ago
In order to mitigate the risk of currency fluctuation, countries with dollar-denominated debt will stockpile dollar-denominated assets in advance as well. Those stockpiles are an increase in demand over what is just needed for immediate transacting.
magicsmoke 7y ago
If all debters with dollar denominated debt could perfectly coordinate with each other that would be the case. They could all run through your scenario one at a time without causing a dollar shortage and a spike in demand and price. But the market is made up of independent actors all of whom want to make sure they get the dollars they need first. It's like a rush for the fire exit with everyone jammed at the door instead of an orderly line.

cletus 7y ago

So that was a fantastic article that I read to the end and it made several fascinating claims: 1. The recent disconnect between government debt and the economic cycle as the debt-to-GDP ratio has shot up when unemployment is low. Who knows how bad that's going to look as unemployment inevitably shoots up and government receipts go down as a result. 2. The fact that corporate income has basically been flat since 2014. That was a surprise to me and particularly surprisingly the almost unprecedented stock market rally over that period. When earnings become divorced from returns, it tends to signal the end of the boom and everything comes crashing back to earth at some point. 3. Seeing just how high China's USD-denominated debt is. I've read a few things on the possible US-China trade war in the last couple of years and I'd come round to the view that China was in a far weaker position for a protracted trade war than many thought. This data point fits that view. 4. The US tax "cuts" aka the GOP Donor Class Handout Act may well go down as one of the most foolish missed opportunities of the modern era, particularly given the trillions the government is clearly going to spend on Covid-19 bailouts. 5. The Federal Reserve is likely going to have to go on an unprecedented money printing spree to buy government debt. What I'd like to know is will any of this impact inflation?

CyanBird 7y ago
> will any of this impact inflation? Probably not, as Philips Curve fueled inflation hasn't been a problem for a very long time in the US, income & wealth inequality just eats that segment of inflation up Central banks through the western world have been getting consistent under target inflation rates for many, many years now, and that's a chronic issue that won't change unless strong systemic changes happen which fuel Phillips Curve inflation once again Last year the ECB published this amazing, amazing paper which cover how labor costs affect inflation, specifically the Phillips Curve which I can't recommend to all the other MacroEcon people to review https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077ff.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077...
- tomatocracy 7y ago
  It depends how you measure inflation. Over the past decade or so we've seen what I've heard described as "biflation" - imported deflation in the prices of many goods alongside pretty high rates of inflation in some services, goods and assets (like company shares or real estate in some markets). Traditional measures of consumer price inflation are pretty heavily skewed towards goods and within those slightly skewed towards goods which come with imported deflation so when that all gets averaged out it shows slightly below target inflation but the headline numbers really don't tell you as much as they used to. Whether this continues I have no idea but it's worth thinking about the components of "inflation" and what is and isn't included when considering its impact on the economy.

_ZeD_ 7y ago

I couldn't read past the repeated "wolkswagon"

raverbashing 7y ago
Yeah those mistakes take from the credibility of the text, which otherwise seems very well resourced.
jmcqk6 7y ago
I wonder what's really behind this phenomena. You were so distracted by a simple error, completely unrelated to the main point of the article, that you had to stop reading the article. And then other people are reading this as this is a problem with the article and not a problem with your brain. How, exactly, is this a problem with the credibility of the article? If you're unable to look past a simple misspelling in order to get to the real meat of an article, you're going to have larger problems. The world is an imperfect place, full of much more egregious mistakes than this. Being able to deal with that is a fundamental skill.
- _ZeD_ 7y ago
  > How, exactly, is this a problem with the credibility of the article? it means there was no proofreading. if I can catch an error - on something so simple EVEN I know - how can I trust the article on something I don't know?
  - jmcqk6 7y ago
    It doesn't mean that. I don't know why you want it to mean that, but even proofreaders can miss things. You're rejecting the credibility of the articles based on something unrelated to the actual information the article is talking about. Spelling has nothing to do with the underlying information. Obviously you're going to justify this however you want in your head, and there are others out there who agree with you, but I think most people, when hearing that you literally couldn't read an article because of a spelling error will just roll their eyes.

grandinj 7y ago

There is too much debt in the system. Decades of goosing growth everywhere by making debt easier has put lots of places into tenuous territory where market adjustments combined with sentiment can tank things in unexpected ways.

felixfbecker 7y ago

I can’t ignore that Volkswagen is consistently spelled Volkswagon

tasuki 7y ago
It's maddening, but I also appreciate the consistency. Nothing worse than inconsistent spelling!

shrimpx 7y ago

Tangent but it seems to me that this Covid situation is ripe ground for the next crypto bubble. The envisioned endgame on which the 2017 bubble was based was “hyperbitcoinization,” the prospect that national currencies would give way to bitcoin, but nobody could really explain why. This new space of financial instability seems like ripe ground for the next wave of hyperspeculation.

whoisjohnkid 7y ago
Agreed.
dylkil 7y ago
will people wake up this time and realise bitcoins limit of 350k tx's per day makes it completely useless as a currency? My guess is no.

sdffdsfdsfsddsf 7y ago

I'm not an expert on these things, but I like to try to break down things into simpler concepts. I fear that in the reasoning like in the article, many things remain unclear or nontransparent. Maybe there is an error in picking misleading metrics and running with them? As an example, what if you were selling a product, and you were giving people unlimited credit to buy from you. Like you suppose everybody could buy a new iPhone on credit, that never needs to be paid back. I can imagine iPhones selling like hotcakes in that scenario. Now the question is, in that scenario, would Apple be doing great? They'd be selling a lot of iPhones, after all. And in the books, they would have the claim to a lot of money from the people who bought on credit. Realistically, though, they might not be doing so great, because most of their customers would end up unable to actually pay back the credit. Maybe something similar tends to happen on a larger scale, when the article says "a weak dollar is good for the economy" - it's just that "people" (in other countries) got access to free money to buy. Whether those sales turn out to be really good ones will only become clear in the long run. Money (dollars) is just debt, so "a weak dollar" may just mean it is cheap to borrow, a ka buy stuff for almost free. I don't know what the best metric for understanding such a situation, but it seems to me simply calculating in dollar values is rather misleading. It is a much more complicated question involving the ability of debtors to actually pay what they owe.

JamisonM 7y ago

I am confused by this article, was it that many words to say that "the US will have a strong dollar until it doesn't have a strong dollar"? Isn't the premise sort of undermined by the fact (posited in the text) that overseas US denominated debt is actually better offset by US dollar denominated holdings than ever before? And I don't entirely understand the importance of say a Turkey or Argentina default to this scenario. If large amounts if USD debts can't be serviced that alleviates the so-called "squeeze" because the haircuts represent money that doesn't need to be "found". There was a lot of words in there and it seems like a pretty big pile of assumptions stacked on top of assumptions and it doesn't make a straightforward argument in favour of the premise that we should expect the US dollar to devalue relative to other currencies in the medium term. (Also the link that explains trade deficits is a pretty bad explanation of trade deficits and how they do and don't matter.)

symplee 7y ago
Exactly. And then at the way end, there's a graph with the two scenarios predicting what will happen based on all of the article's analysis: Scenario 1: Dollar goes up, then down. Scenario 2: Dollar goes down. In each Microsoft Paint drawn scenario, there's only a vague implied scale. Scenario 1 going up to ~$130 around 2025, then falling to ~$92 around 2035. Scenario 2 falling to ~$75 by 2035. So if the dollar goes up, the author is right. If it goes down, the author is right. If it stays the same? ¯\_(ツ)_/¯