Dollar Apocalypse Now

Now, I do not expect you to know this news. Maybe you heard it; maybe not. But it’s big news that has big repercussions across the global economy and the US. Moreover, it could lead to a reversal that sees the dollar become one of the weakest currencies in the modern world.

What happens if the reversal really occurs?

How will that flow through the average American life?

My bet… well, I’ll share that bad juju in a minute.

This reversal is based on two events:

• The Bank of Japan has announced plans to finally normalize interest rates.

For 30 years now, the BoJ has played a game of financial engineering, betting that it could stimulate a moribund Japanese economy by driving interest rates so low that the floor is a step up.

Alas, the last 30 years have shown the BoJ’s financial engineering failed.

• Donald Trump wants Kevin Hassett to replace Jerome Powell as the new chairman of the Federal Reserve.

Hassett is a Trump toady, through and through. He will work tirelessly to see to it that the Fed drives down to 1% the Fed Funds Rate, the interest rate the Fed raises and lowers to manipulate the economy.

In an inflationary era, America needs 1% rates like an Ozempic patient needs a month’s worth of Happy Meals. That alone is highly inflationary in America.

The big problem, however, is the combination of events #1 and #2.

As Japan raises rates, and as Trump’s man in the Fed lowers rates, the yen becomes more attractive to investors while the dollar becomes less attractive.

Less attractive means falling demand for the dollar.

And falling demand for the dollar means the dollar’s value declines relative to other currencies around the planet.

If you’re an investor, why put your money in a currency with low interest rates when you can put your money in a currency with high interest rates?

Now, here’s where that problem blossoms into a reversal that slams American families.

It all starts with something called the “carry trade,” which I explained in a recent dispatch you can read here.

In a nutshell, the carry trade is a simple strategy in which a trader borrows and immediately sells a low-yield asset (like the yen for the past 30 years) to buy a high-yield asset (stocks, crypto, real estate, other currencies). That trader then captures the difference between the low yield they must pay and the high yield they collect. Easy peasy.

Except, the yen-based carry trade is now unwinding because yen yields are rising, which makes borrowing yen less appealing.

In a world that seems highly probable at this point, dollar yields under Kevin Hassett will fall below yields on the yen.

And when that happens… we get the reversal: The dollar replaces the yen as the funding source for a new carry trade.

The world of traders will be selling oodles of dollars and using those proceeds to buy higher-yield assets, probably crypto and stocks.

For the dollar, however, all the selling pressure will keep the greenback cheap relative to other currencies. America’s long-standing “strong dollar policy” will become an unspoken “weak dollar” reality.

And in that are some very painful truths.

Inflation in America amplifies.

The US imports a great deal of products, both raw and finished, that it cannot grow or produce itself, or at least not in a quantity adequate to meet domestic demand. Bananas, coffee, cocoa, manganese, potassium, etc.

As the dollar declines in value, the cost of imported goods necessarily rises in dollar terms. Just simple math. If I as a producer have to pay $100 for Imported Product X, well I will suddenly need more dollars to buy the same quantity product as the dollar falls in value relative to the currency in which Imported Product X is priced. My production costs go up, which flows through to the consumer… inflation.

As the value of the buck sinks, the value of hard assets also rises. Gold, silver, copper, oil, lumber, natural gas, iron ore, etc. etc. That, in turn, has knock-on effects with finished goods.

Higher lumber prices mean higher homebuilding costs.

Same with higher copper prices.

Higher natural gas prices mean higher fertilizer costs, which means higher food costs. (Nat gas is the primary source of nitrogen fertilizer.)

Higher iron ore prices mean higher steel costs, which means higher cost for building cars, oil wells, steel tubing, stainless steel pots and pans, and on and on.

Gold prices keep pushing ever-higher because gold is a source of wealth preservation as fiat money loses purchasing power. (Same with bitcoin, by the way.)

And the biggest risk of all…

The dollar sees historic lows and, in that process, potentially loses reserve currency status.

The dollar is the global grease for world trade (though that’s already in decline). Why would the world want to hold a currency that is losing value relative to what it can afford? If Korea wants to buy soy from Brazil, spending dollars would mean having to accept a smaller amount of soy than what spending Korean won would otherwise afford.

No country is going to make that losing trade for long.

They’ll just dump dollars and trade in local currencies, or they’ll trade in some other reserve asset that emerges (and one will certainly emerge). And just like that, the dollar is no longer a world reserve currency.

For Americans, such a world is even more problematic than simply having the dollar serve as the funding mechanism for the carry trade.

Losing reserve currency status upends the world every American alive today has known across their lifetime.

But more than on that soon.

Just remember: Swiss francs, bitcoin, gold. With that trio, you’re ready for a dollar-pocalypse.