Entropy and the Disintegrating Dollar

I always smiled and nodded my head knowingly when my grandmother would tell me how much of a pain in the butt getting old is. Her point never really resonated with me—how could it? I was still relatively young. Everything worked. I had no frame of reference.

Now…

I wake up in the mornings and my neck hurts. My back hurts. Randomly during the day, I get a sharp muscle cramp in my ribs. Sometimes, doing something as difficult as butterflying a pork chop, the pain of a knife jabbing into my shoulder socket shocks the hell out of me.

Granny was not lying.

That’s the way it is with age. What starts off strong and vibrant slowly degrades in time.

Entropy in action.

The human body isn’t the only proof of this degradation, of course.

I was driving through Cairo, Illinois, about six years ago and was infatuated with the degradation that city has seen. It was once a booming port town at the confluence of the Mississippi and Ohio rivers. There was talk at one point of turning it into the capitol city of the U.S.

But then along came the railroads to kill the steamboat.

And a long history of river flooding and racial tensions doomed the place.

People still lived there when I drove through in 2017. Creepy place, really, though some of the abandoned houses look like they would have been enviable, 19^th century mansions back in the day.

Today, Cairo is entirely abandoned. The town looks like a post-apocalyptic, dystopian movie set for HBO’s The Last of Us.

And where are you taking me, Jeff?

Odd pairing you’ve given me today: bodily aches and a dystopian river city. Where are we going with this?

To the end, that’s where we’re going.

Everything has its day in the sun. And then the sun begins to set.

Life changes.

Facts and circumstances change.

Nothing ever stays the same.

We have to learn to accept the change and move on, or rage against entropy, despite the futility in the effort.

Which brings me ‘round to the dollar.

The International Monetary Fund back in December released its more recent report on global reserves: how much cash of each major currency that world central banks hold.

The dollar is still #1… but it continues its inevitable decline.

As of Q3, the buck represented 54.6% of global reserves. A relatively big number. But a year ago it was 55.7%. Uncle Sam’s funny money has lost more than one percentage point of power.

Seems insignificant.

It’s not.

A decade ago, the dollar’s share of global reserves was well above 60%.

Now, to be clear, I am not bashing on the dollar. I’m simply pointing out that facts and circumstances change, and that reframes the way others see the dollar.

America’s political culture has devolved over the last decade into something that’s more tragi-comic performance art than it is the serious business of managing a country—particularly the world’s most influential country.

America’s finances are 100% destined for a massive, economy-shattering crisis, or a monetary reset that ruins middle-class lives across the country.

None of this is the dollar’s fault.

It was a fine currency in its prime.

Still a fairly decent currency, despite all the headwinds it faces from politicians and bureaucrats.

But entropy happened.

Other countries can see just as plainly as we can that all is not right with America, and, thus, all is not right with her money.

So, they do exactly what you and I would if we noticed our neighborhood was degrading and becoming less safe. They sell and move somewhere better.

That’s why the dollar’s share of global reserves is continually declining, little by little. Countries are moving on, looking for something safer, because they know this neighborhood will go through hell before it gentrifies once again.

It’s why you want non-dollar exposure in your financial life. As the dollar’s share of reserves continually declines, demand for the dollar continually declines, and that weighs on the dollar’s value relative to other world currencies.

You don’t need to dump your dollars wholesale. I’m not saying that. Your life is priced in dollars. Your income, you life insurance, mortgage—whatever—is all denominated in dollars. So you need dollars to live your life.

But one day we’re going to wake up and the dollar’s metaphorical neck is going to hurt. And its lower back will be stiff. It’s gonna wince from the shoulder pain and the aching knees. And the dollar is going to look around and realize its day atop the world has come and gone, and that other currencies are more vibrant and attracting more interest.

It will have been a very fine run the dollar had.

But the run will be over.