Deflation Hinges on a Dollar that Refuses to Die


My astute friend Greg Hunter at USA Watchdog weighed in recently with such a despairing outlook for the dollar that it’s probably a good time to determine whether the charts support this view. Here’s the post from his site, which over the years has featured my own thoughts on deflation, the global economy and other topics:

The Fed keeps telling us that inflation is going to be transitory, and things will fall in price and go back to normal soon. Nobody is buying this in the real world where people are watching their dollars fall in value and are paying more for just about everything. In simple terms, the dollar is tanking. Maybe this is why JP Morgan is the first big bank (with many to follow) that is putting high-net-worth clients into crypto currencies. Bo Polny says this is all part of a “Jubilee year which began in September of last year and ends in early September of this year.” Polny says, “Expect to see in the next four to five weeks a fall of the dollar, the world’s reserve currency. This could start as early as next week causing a run into tangible asset that include gold, silver and crypto currencies like Bitcoin. All hell is about to break loose on evil.”

Sounds ominous, for sure. However, it flatly contradicts a forecast I’ve held to for decades – that deflation would ultimately wreck the global economy, driving the dollar into such scarcity that many, if not most, Americans would have to barter to survive. This may seem hard to believe at the moment, given the Fed’s unprecedented monetary blowout and the illusory prosperity it has created. Most of the digital cash has gone into investable assets, triggering a seemingly unlikely run-up in stocks during a year of Covid lockdowns. It has also created a real estate bubble even more extreme than the one that popped in 2008, nearly taking the global economy with it.

This Isn’t the 1970s

We should note that the current inflation is very different from the one of the 1970s. That was self-perpetuating to the extent wages and prices drove each other higher in a seemingly endless spiral. The current inflation is not self-perpetuating; rather, it is being fed by an increase in paper wealth that will reverse and crash in the next bear market. Nor are people desperate to trade dollars for physical assets as occurs in a hyperinflation; mainly, it has been Baby boomers spending a significant portion of their paper wealth on second homes in desirable locations away from urban centers.

Still, one might ask: With the Fed and every other central bank inflating like there’s no tomorrow, how could deflation possibly result?  The answer lies in the inescapable fact that every penny of what we collectively owe must ultimately be repaid –if not by the borrower, then by the lender. This implies, for one, that when Biden and the Democrats “forgive” student loans amounting to $1.7 trillion, creditors will eat the entire loss. Twelve zeroes worth of receivables will be wiped from their books with the stroke of the President’s pen; shortly thereafter, yacht prices will begin to soften ever-so-slightly in West Palm Beach, and the market for $20+ million homes in the Hamptons will appear to totter, producing small tremors in Aspen, Scarsdale and Atherton.

Now imagine this implosion multiplied a hundredfold. That’s what will happen when the inevitable bear market in stocks unfolds. It will suck far more digital dollars into a black hole of deflation than the Fed could conceivably monetize in an unrehearsed attempt to hold off a collapse. The deleveraging will not stop until it has reduced the $2 quadrillion financial derivatives market to an infinitely dense singularity. A thousand financiers working 24/7 and backed by the full faith and credit of the U.S. Government will not be able to pry loose even a dime of credit from this market for at least a decade. That’s how long it will take, at a minimum, for a wrecked middle class to push their credit scores back above 400.

Dollar Short-Squeeze

The collapse will end our misplaced faith in a bank clearing system that is ultimately as fragile as crystal, rendering ATMs and credit cards useless overnight. Money markets will seize up like a flash-frozen ocean as lenders refuse to roll overnight loans, instead demanding settlement in cash. That’s when we will discover that real cash-dollars are actually in short supply. In the absence of a functioning market for digital dollars, the resulting short-squeeze on real ones will be like the squeeze that pushed the shares of Gamestop and AMC into the stratosphere. The comparison is appropriate because, like debt issued by those two companies, the dollar ultimately is just a worthless I.O.U.

For the time being, however, the dollar will remain under pressure despite assurances from Fed bag-man Jerome Powell that inflation has peaked. We should note, however, that the dollar has not exactly collapsed under the weight of QE derangement. To the contrary, and as the chart above makes clear, the greenback is down just 4% from the sweet spot of its pre-pandemic trading range. Moreover, a key, long-term support at 90 has survived two brutal shakedowns this year. Although the support could conceivably give way on renewed selling, nothing in the chart says this is likely, let alone that the dollar is in a condition of imminent collapse.

Bear Sinks All Ships

It is even arguable that the dollar index’s sideways move since early 2015 has been base-building for a moon shot to 120 or higher.  That would be extremely bad news for anyone who owes dollars, since they would be far more difficult to come by. Unfortunately, this problem will eventually enmesh us all, since it is not just a matter of mortgages and car loans, but also of our collective liabilities for private pensions, Social Security and Medicare. These are the deflationary whales that will bear down on us when the actuarial folly that has sustained them lies fully exposed by a stock-market bear. The whopping debts that we owe ourselves cannot be monetized without hyperinflating the programs themselves into quick oblivion.

That’s one reason why the economic endgame is all but certain to feature deflation rather than hyperinflation. If there is a silver lining, it is that deflation will visit pain on borrowers that is more or less commensurate with their sins of excess. It would also leave intact the banking system and other institutional conduits of credit.  Hyperinflation, on the other hand, would destroy the bond markets that enable lending, throwing the economy into a state of barter indefinitely. Could things ever get that bad? Most surely. It would simply reflect the deleveraging of illusory financial wealth that has grown to more than ten times the size of global trade in actual goods and services.  Like the stock market, the world’s financial system is trading at an absurd multiple. Even more absurd is the notion that the massive debt-overhang can be stage-managed indefinitely with a sham “taper” crafted by the charlatans at the central bank.

  • Richard Charles July 27, 2021, 4:43 pm

    Please pardon double post replies all.

    Something ails this stock market.

    Big Tech stink on crazy earnings.

    TIP record low real yield.

    Black Hole Event Horizon ?

  • cc chow July 27, 2021, 12:59 am

    I believe US dollar Index will go over 100, and gold will correct to under 1500, that’s my opinion only.

  • Richard Charles July 26, 2021, 1:11 pm

    Beautifully well-writ Rick, one of your best.

    Good thing we both read C Vernon Myers Finance and Energy while he was alive, making fortunes for faithful readers, fleeing government persecution and offering common sense wisdom of a Depression survivor.

    Canadian Vern bought gold stocks from $35 to $1000, oil from single digits and treasuries at double digit yields when the nattering nabobs of negativism were clueless as ever.

    I well recall few clients but wealthy ones buying at these prices.

    Austrian Credit Cycle Economists long noted how Banks loan umbrellas on a sunny day and want them back when it rains.

    Writing sixth book, struck by how George Hearst, Joseph Kennedy, George Whittell Jr (Thunderbird Lodge here at Tahoe) preserved capital during the Great Depression by cashing out stocks and going to precious real currency.

    Current favorite chart Velocity of MZM Money Stock below one, meaning GDP contracting relative to fiat.

    Economy going nowhere fast.

    No wonder Mr Powell and Ms Yellen’s bosses discontinued it.


    Thanks for the kind words, Richard — and for your always-trenchant historical perspective. Speaking of Hearst, the portrayal of him in Deadwood was not particularly flattering. But how true? RA

    • Richard Charles July 27, 2021, 4:36 pm

      Media seem to prefer to attack self-made rich for the cheap seats.
      Rarely touch rich who did not work for their wealth.
      Geo raised in a log cabin and supported his family with three farms and a general store when his pappy died.
      Geo a hard working mining genius who went from broke in 1850 to $400 M ($12 B today) in 1891 when he passed.
      Married teaching student Phoebe half his age when he went home to take care of his dying mother.
      Phoebe took only child Bill to Europe, showed him wonders, became philanthropist and Bahai, passed in Pleasanton in 1919 of Spanish flu, interred at Colma Cypress Lawn.
      Geo served as US Senator, acquired 240,000 acres from San Simeon Central California Spanish Land Grant.
      Where his only son Bill built Bucket List Hearst Castle left to state of CA for future generations to enjoy.


      Perhaps not the ruthless scoundrel depicted in Deadwood, then? (He made Ian McShane’s character seem like Mr. Nice Guy. Thanks for the rich enlightenment.