There is probably no more important concept for people to understand than this: why can the U.S. print so much money without inflation when other countries can’t?
It is so important because so many people are under the impression that our massive government deficits are going to crash the dollar from all the “printing” and bring on “hyperinflation.”
But yet, despite our deficits and the printing, the dollar itself is surging in value outside the United States, and inflation is surprisingly tame.
Why is the dollar so strong still? And why don’t we have far higher inflation?
Turkish Lira Used Only in Turkey; Dollars Used Across the World
Turkey’s inflation rate is a whopping 72%. This is because when Turkey prints its currency (the lira) it all stays in Turkey.
If there were a total of 1 billion lira circulating in Turkey, for example, and Turkey printed another 1 billion lira, prices in Turkey would eventually double if there was no corresponding increase in production because all of those lira would stay trapped in Turkey.
In contrast, if there were a total of 1 billion dollars in the U.S., and the U.S. printed another 1 billion dollars, prices would go up very little.
This is because dollars are NOT trapped within the U.S.; we are not a closed system; and our dollars are in demand throughout the world – and that demand is growing, despite our problems.
Other countries need our dollars to service their dollar-denominated debts and, more importantly, to pay for imports (like oil and other commodities) that are priced in dollars.
The sellers of those commodities won’t accept lira, yen, won, yuan, or any other currency, so those countries have to convert their currencies into dollars to buy the imports they need to survive.
Dollar Wrecking Ball
In 2011, the “M2 Money Supply” (checking, savings, money market accounts) in the U.S. was about $9 trillion, but by 2022, it was close to $22 trillion (almost 2.5x larger).
But yet we saw very little inflation during that time…until 2022 (and nothing close to what you might expect).
In 2011, it only took 80 Japanese yen to buy one U.S. dollar, but in 2022 it took 150 yen to buy one U.S. dollar.
So, the yen lost almost HALF of its value, even though the U.S. was printing like crazy.
This happened largely because there is a shortage of dollars outside the U.S. Those dollars outside the U.S. are called “Eurodollars” and they are created by banks lending them into existence.
When banks slow down lending or when U.S. dollar debts get paid off, the supply of Eurodollars tightens – and this can be devastating to countries overseas.
Currently, much of the world, and especially Asia, is suffering greatly because of this situation. Japan, Korea, Vietnam, China, etc. cannot afford imported oil and other commodities because the dollar is so strong – and they’re crying “uncle” to Janet Yellen (they want her to lower rates, print even more dollars, or loan them dollars). The dollar is a “wrecking ball” bringing these countries to their knees.
Odd Side Effects: Exporting Inflation; Importing Deflation; Dollars as Investments
This allows the U.S. to export its inflation and import other countries’ deflation (because we get to use our stronger and stronger dollars to buy their cheaper and cheaper goods).
Even more interesting is this: if Japanese investors moved their yen into dollars in 2011, their dollar holdings would have doubled in value (relative to the yen) simply because the dollar appreciated so much against the yen.
This is partially why other countries and overseas investors continue to demand U.S. stocks and Treasuries, as they are dollar-denominated and often appreciate in other countries even if they do not do well here in the U.S.
Drunken Sailor Spends $10,000 per Day on Cocaine and Hookers
What if a drunken sailor spent $10,000 per day on cocaine and hookers every day for a year only to find out that his savings were continually being replenished by some obscure system he didn’t understand?
He would of course start to spend even more.
And that drunken sailor is akin to our Congress, as I am certain none of them understand the Eurodollar system.
It will all come to an end at some point, and we will be just like Turkey, but it will just not be as soon as doomsayers think.
It is so important to understand in general too because it means that inflation will not be as bad as everyone fears…for a few years at least.
Here are two recent podcasts discussing all of this: Dollar Wrecking Ball Is Leading To The Unthinkable… (George Gammon); and Milkshakes, Markets, Madness (Brent Johnson).
Final note: The above blog is oversimplified, as always, for brevity’s sake.
