Top heavy dollar faces concerns amid global turmoil
Growing economic pressures to include: rampant inflation, supply-chain disruptions, and eastern commodity shortages, combine together to create a financial bleak out look for the global economy.
Investors Flock to Cash Due to Economic Uncertainty
The DXY, or the US Dollar Index, clearly supports this move, as most investors flock to the greenback in times of declining global market growth. The DXY has increased 24 basis points since May of 2021.
Similar action can be witnessed in 1973 after the G-10 pressure forced the US off the gold standard. This was prompted by several runs on the US Dollar as there were too many dollars circulating in foreign markets creating an overvaluation. The overvaluation caused panic to ensue since there were more dollars than backed gold. Ultimately, two years later it was market pressure that ultimately led to aa free-floating USD, this removed the dollar from a fixed exchange rate pegged to the gold standard. This was formally known as The Bretton Woods Agreement.
A common misconception is that Nixon took the US off the gold standard in 1971, although he was the main catalyst, The Smithsonian Agreement ultimately failed, most likely due to his authoritarian like dictation.
Unemployment Matches Lull for Quantitative Tightening
Another striking similarity between economic conditions attributable to the 70s is the probable rising unemployment due to Quantitative Tightening (QT) amid inflationary concerns.
Although the impetus differs slightly, the result is almost synonymous. The Nixon Shock in the 1970’s witness an almost doubling at the employment rate. This was due to exponentially increasing inflation following the Vietnam War in the 1960s.
This time around the US doesn’t have an unscrupulous war-time machine spending to blame for rampant inflation. The major reason for inflation this time for inflation is the US almost doubling its national shortage amidst a viral outbreak. The COVID-19 pandemic’s crisis led to record breaking inflation, reportedly transitory, has now created a global fiscal dilemma.
The Fed only has so many levers it can pull. They can either increase bond buying as they do during time periods of Quantitative Easing (QE) & introduce money back into the market. The consequences of which usually are more political, as right leaning partisanship scoff at increasings. In whole, this usually bodes well for central banks and encourages tertiary lending as banking balance sheets show more assets then liabilities.
The double edge sword of easier lending, however, puts more dollars into circulation and devalues the currency. This is the primary concern of inflation, too many dollars chasing too few goods. This is fine in a time when assets are in abundance and dollars are equally proportionate to growth, but not when a global economy is trying to reboot from pandemic shutdowns.
Read more about the Feds response to inflation here: Hawkish Fed Meeting Shows Signs of Potential Crypto Decoupling
Current Inflation Trends
Irrelevant of CPI data coming out September 13th, most pundits speculate the Fed will increase interest rates another 75 basis points. Futures have already priced the expected increase to 3.75% to 4.00% next March (2023). The highest its been in 40 years.
Even with potential CPI numbers in the low 8’s, energy prices continue to soar due to sanctions on Russia. Europe is among those worst hit, with Germany & Austria rationing oil, along with other nations dependent on imported Russian Oil. This can also be substantiated by the increase in the DXY as investors leave foreign currencies in preparation for the incipient downturn.
Oddly enough, the same scenario with oil sanctions on Russia marked the same price action for the DXY as Russia annexed former Ukraine’s Crimea. As a consequence, the US removed Russia from the G-8, reverting back to the former 1996 G-7 group.
Uncertainty is teeming in the market, with projected rate hikes. The primary concern of the Fed right now is to stifle rampant inflation. If their goal is to reduce inflation back to the 2%, the growth target the Fed aims for, then job outlook and lending with be put on the back-burner.
Its unlikely that job growth is the only part of the economy that is going to suffer. QT is going to stifle economic growth traditionally led by investment. President Biden is already hard pressed to keep government programs running and will face declining polling numbers and potentially take the fall for high inflation, rising interest rates, along with higher energy prices.
President Biden’s carbon neutral policies, have not only shunted imported oil from US pipelines- pun intended, but are hardly carbon neutral. The United States is a far cry away from being oil independent. Stifling growth is not a partisan concern, but is also an economical concern. Instead of oil being imported by Alaska, we now have the luxury of relying on oil either being imported or fraced from shales in the northern mid-west.
Will History Repeat?
If we were to follow the same inflationary pressures of the Nixon shock, we could possibly be looking at another 6 years of rising, rising interest rates to curtail said pressures, and a lackluster stock market due to stagflation.
As investors lose faith in an already encumbered political fiat system, many might look to alternative asset classes outside of the traditional financial banking system. Cryptocurrencies, demarcated as novel, operate outside the realm of central banks and are thus independent of regulatory mechanisms by which they impose. This is slowly changing, digital currencies now offer a relief from the politics and partisanship of sovereign governments battling over resources.
Cryptocurrencies main token, Bitcoin, has proven bullish in spite of declining equities and an inverted bond curve. The same price action the DXY experiences due to market hesitancy, Bitcoin has as well. This could mark a shifting attitude away from investors chasing nominal returns resultant from irresponsible fiduciary central banking system. Central banks favor institutional firms and hedge funds, whereas digital currency provides a level playing field for emerging markets. Those who once might have put their faith in the world’s reserve currency, might now seek opportunities in the digital-neutral financial world.
Disclaimer: I am not a Financial advisor the information provided above is for education purposes, none of which should be considered financial advice.
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