The dollar hit a twenty year high against the basket of major international currencies known as the DXY this week, as the effects of the Feds seventy five basis point interest rate rise made themselves known.
For years the world’s central banks have been engaged in an undeclared dirty war against each other, debasing currencies left right and centre in a race to the bottom.
And, in spite of the impressive smokescreens put up on behalf of the central banks by the proponents of modern monetary theory, it was obvious to anyone with a modicum of economic literacy that there would one day be a reckoning.
That reckoning is now here, having arrived somewhat sooner than the economic establishment might have reckoned on – because of covid and the Russian invasion of Ukraine.
It’s early days, of course.
Recession is looming around the world, and it’s really only wilfully blind members of the Biden administration who now think it can be avoided.
Voters will try to wake the Democratic party up in the midterms in December, but whether they’ll get the message remains to be seen.
After all, a lot of it is their fault.
Obama-era stimulus packages kicked it all off – the days when the world was gaslighted into calling money printing “quantitative easing.”
Money printing continued under Bush and Trump too, but just as the economy was wavering under the first signs of inflationary pressure, along comes President Biden and pumps several trillion dollars more into the system.
No wonder it broke.
It’s hardly even worth citing the M1, M2 or M3 numbers these days, they’re so far off the charts.
And will anyone be able to put the genie back into the bottle?
That’s the big question.
Because national electorates that have been moaning about austerity for the better part of two decades ain’t seen nothing yet. All the bailouts of Bear, Fannies May and Mac, RBS and the money printing that paid for them did was kick the can down the road.
The real pain from 2008 is about to roll over us. Only now, there’s the additional pain of covid and the Ukraine war supply crunch to factor in on top of it.
Whatever happens, it’s going to be messy.
The signs are already there.
Mothers can’t get baby formula in the USA and gasoline prices are going through the roof. Forecasts for major food shortages in the autumn may prove wide of the mark, but certainly the supply of grain will be tight. We already have twenty years of easy money pushing prices up, but with supply also constricted, it’s likely that they’ll go through the roof.
That is, if the market is allowed to operate freely.
Will food become subsidised, like it was during the Roman empire? Already in the UK, direct cash payments are being made from government to taxpayers to enable them to pay their energy bills. The fact that this cash will take the form of a direct rebate on the bills themselves doesn’t alter the fact that this is helicopter money.
At some point, at some time, governments are eventually going to have to let go of the reins and let consumers realise what things actually cost. It’s either that, or initiate Soviet-style command economies.
In the UK, there is a little bit of precedent for that, but it’s hard to see that kind of intervention really flying in the USA, where cultural fractures are already splitting the country in two. That the term “civil war” trends on Twitter now and again isn’t just mere internet hyperbole. If you think about it, there actually has been fighting on the streets of the US for years – the Democrats back BLM, Trump says there are good people on both sides, the Capitol is invaded, and after Kenosha burns Kyle Rittenhouse is acquitted.
These are just the opening moves, but what can we say at this stage?
One – in a gradually worsening economic crisis people hold gold and sell crypto. The buy case for crypto may just about still be intact, but it turns out that at this stage of the cycle it was hot money that was holding up the value. As soon as that money was needed elsewhere, away it went.
No so with gold.
Indeed, given the US dollar strength, gold has considerably outperformed, which is another way of saying that over the past few months it’s been broadly flat against a rising dollar. The reasons aren’t so hard to find. In fact, they are the age old reasons why people have always held gold – it’s the most reliable way of hedging against risk.
There’s no hot money in gold, and there’s no central bankers monkeying with supply. It’s hard to destroy, and as the Canadian truckers know to their cost, it’s harder to confiscate than fiat money.
Crypto can’t tick all of those boxes and the dollar can’t tick any. All it’s got is its yield, and at the moment that’s being inflated away far more quickly than the Fed can build it up. This is not yet over.
