America wields many weapon systems that are unmatched by any of our adversaries. These systems include our high-tech nuclear arsenal, F-35 stealth fighter jets, Gerald R. Ford-class aircraft carriers, B-21 stealth bombers, Virginia-class submarines, hypersonic missiles, cyber warfare systems, laser weapons, and special forces.
Any one of these weapons or systems alone could take out most of our adversaries, wiping out their militaries, killing millions, and leveling entire cities.
But we have another weapon which is every bit as powerful as any of the weapon systems I list above.
America’s Most Powerful Weapon
That weapon is the U.S. dollar – and America wields it far more often than we realize. It is also why Mr. Trump, politicians on both sides of the aisle, and most administration officials are loathe to let the power of this mighty weapon wane.
This is a point Brent Johnson makes very often. And it is why Mr. Johnson does not believe the government will ever let Bitcoin or other crypto currencies become big enough to be actual threats to the dollar – but that is not the point of this blog.
The dollar is so incredibly powerful because it is the world’s reserve currency, as most people know, but they don’t understand what that entails.
Other countries must get access to dollars to import goods, borrow money, and pay back the money they borrow.
If they can’t access those dollars, then economies and governments can and do collapse.
Here are a few examples: Mexico,1994-1995; Asia (Thailand, Indonesia, Malaysia, South Korea) in 1997-1998; Argentina, 2001-2202; Russia, 1998; Turkey, 2018, Brazil, late 1990s; Venezuela, 2000s; India, 2013; Sri Lanka, 2022; Pakistan, 2022-Present; and Egypt, 2022-2023.
All of those countries were brought to their knees by the strength of the dollar and many governments collapsed as a result. We often don’t even feel a blip here in the States when this happens, but the economic misery felt by the residents of those countries is often intense.
The dollar’s value relative to other currencies has been rising rapidly over the last few months again too, putting many more countries in peril – including Russia and China – and U.S. officials know this well.
What gives the U.S. a special edge when it comes to the dollar is the fact that we can print more dollars, but other countries can’t.
There are numerous things the U.S. can do to increase the value of the dollar relative to other currencies including:
- Maintaining higher interest rates than other countries – which attracts capital from other countries which in turn increases demand for dollars.
- Pushing pro-growth initiatives in the U.S. – which also attracts foreign investment as long as the U.S. is more appealing than other countries.
- Encouraging foreign investment directly with tax breaks or tariff threats (like Mr. Trump is doing now).
The dollar’s value also increases when there are dollar shortages overseas. This happens when overseas banks stop lending because they fear an economic downturn or when overseas debtors with dollar debts pay down their loans – as, once again, most overseas dollars are created out of thin air by bank lending.
How the U.S. Wields The Dollar
The U.S. wields its dollar power by:
- Intentionally trying to increase its value on occasion, knowing that it will adversely impact other countries.
- Sanctioning other countries in ways that prevent them from accessing dollar-based financial systems (like we did with Russia and Iran in recent years).
- Preventing countries desperate for dollars from borrowing (via a variety of lending programs the U.S. runs) or getting them directly via foreign aid grants.
This power is immense, and it is why Mr. Trump is so concerned about the rise of a potential BRICS currency, it is why it is unlikely that crypto will ever reign supreme in the near term (per Mr. Johnson), and it is why the U.S. may maintain higher rates on occasion (per Mr. Johnson).
This is also why countries like China and Russia are so desperate to find an alternative to the dollar, as they obviously don’t want to be under America’s thumb in any way.
It is important for those of us in real estate and mortgages to understand this because dollar dynamics influence economics, interest rates, and geopolitics far more than most people understand.
