My subject line is not clickbait or even close.
There is a severe dollar shortage even though inflation (resulting from too many dollars) persists in the U.S.
The dollar shortage is overseas in the Eurodollar market – and the “threat” is entirely real because the U.S. dollar has been shooting up in value relative to other currencies.
This confuses many people because the Bitcoin and gold crowds keep telling us the dollar is going to crash, and because we have an inflation problem here in the U.S.
But this is what is going on.
There is an entire market for dollars completely outside of the Fed’s control – and it is known as the Eurodollar market.
It has nothing to do with Europe, and it simply refers to any dollars created by banks outside of the United States – and the market for those dollars is gargantuan.
I’ve blogged about the Eurodollar market many times, including this blog that went viral: The U.S. Dollar Is Going to Collapse & It Will Be HORRIFIC!
The gist of the blog is this: the dollar is NOT going to collapse for a long time, as the market for dollars is far too large and complex to be replaced.
As a reminder, commercial banks create most of the new money in circulation through lending (literally creating money out of thin air) – and that is particularly the case with overseas banks that loan dollars (the Eurodollar market).
These banks can be from anywhere (not just Europe once again) – and it is these banks that started to create the massive Eurodollar market as far back as the 1950s, as both countries and companies needed dollars for investment, commerce, and trade.
Those overseas banks are now, however, pulling back on their lending because they are concerned about the world economy as a whole – and as a result there is now an overseas dollar shortage.
China Is Selling Treasuries Because They Need Dollars; Not Because They Want to Ditch the Dollar
These guys often explain that China is not selling U.S. Treasuries because they want to ditch the dollar (like the Bitcoin and gold guys often tell us). China is selling Treasuries because they desperately need dollars to service dollar debts and to buy goods traded in dollars.
The problem is very severe too, as many analysts link much of the turmoil we see in the world (South Korea, Syria, China, Japan) to the strong dollar, as it fosters budget crises in other countries (when those countries are unable to raise enough dollars to import goods or service dollar debts).
How Does a Strong Dollar Influence Interest Rates?
A strong dollar makes imports cheaper, which could soften the impact of inflation – and it makes U.S. exports more expensive, which could slow the economy – making the Fed more likely to cut.
A surging dollar, though, like we’re seeing now makes currency crises more likely – and many analysts like Michael Gayed and Lyn Alden think they’re inevitable.
What Is a Currency Crisis and Why Do We Care?
A currency crisis results when a country’s currency collapses in value relative to the dollar – creating havoc in the country facing the crisis.
We’ve seen major currency crises over the last 40 years in Latin America (1980s); Mexico, Asia, and Russia (1990s); and Argentina (2000s).
When a severe crisis arises with a major economy – rates often fall as capital flees to the “safety” of U.S. Treasuries and as the world economy slows as a result of the crisis.
If Gayed, Alden, and others are right, we will see currency crises in the coming year.
