A Monstrously Strong Dollar Is Stalking the Markets

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There was a point last Thursday when virtually all of the hundred or so market symbols I track were ‘red’ except for the U.S. Dollar Index. This was unusual and unsettling but hardly mysterious, since the dollar’s strength was the reason everything else was falling in value. The trend unfortunately is only just beginning and eventually will overwhelm the global economy and banking system. Any observer could have seen this coming, although few did. Even now, only hard-core deflationists understand the dire implications that a strong dollar holds for mountainous debts that have piled up around the world. Nor is it generally understood why hyperinflation is an extremely unlikely option for liquidating this debt, since it would destroy creditors – i.e., the Masters of the Universe – as a class. Deflation is not only far more logical, it already appears to have begun sucking asset values toward worthless singularity with power that ultimately will grow irresistible.

The possibility of a ruinous debt deflation was once considered looney-bin talk. I was virtually alone in writing about it in the early 1990s. I even suggested at the time, in think-pieces published in Barron’s and the San Francisco Examiner, that a short-squeeze on the dollar could bring on deflation precipitously. My floor-trading background made this scenario seem not merely plausible, but likely. It still is, I believe, and it seems predictable that it will begin with a small disturbance in the credit markets that quickly causes short-term lending to dry up. Borrowers unable to roll their loans as usual will be forced to settle in cash, an unfamiliar medium of exchange in the world of finance. This will cause ripples of panic overnight, but don’t bother lining up at the door of your bank before dawn, since the $25k to $50k that branches typically keep on hand may not be enough, even, to pay off the first two or three depositors in the queue.

Thinking Expansively

If you think of deflation as an increase in the real burden of debt, you’ll begin to understand it better than most eggheads. They say it’s a decrease in the money supply, and although that’s technically correct, it is a useless concept because no one has the foggiest notion how much money is out there. Moreover, trillions of new dollars can be borrowed into existence overnight by speculators merely thinking expansively (i.e., bullishly). The illusory wealth that results can work wonders in a bull market, making investors and even mere homeowners think of themselves as geniuses who can get richer and richer without doing much work. Those closest to the banks that are the source of the illusion have the boats and planes to prove it.

But reality is about to intrude because expansive thinking has already succumbed to a bear market in stocks that began early in 2022 and a real estate bust that is taking shape with alarming speed. Nor will Fed easing help, even if the quacks who run the central bank were inclined to cut interest rates. For if they did, we would soon discover, as occurred in 2007-08, that even 3% mortgages can crush borrowers when the value of their homes is falling.

No Hiding

A stock-market run-up to new record highs would remedy the problem temporarily. But shares have grown so heavy lately that even the obligatory head-fakes necessary to keep the rubes in the game have failed to materialize thus far. The result last week was that, rather than thinking expansively, investors seemed just an inch from a contractive panic that would have encompassed stocks, bonds, gold and all currencies save the U.S. dollar. A full-blown selling panic has yet to occur since the bear market began in January, but there is no way that this initial phase of the bear can end without one. In the meantime, the dollar’s rise has lurched out of control, setting up a deflationary shock far bigger than any problem the central banks have ever observed, let alone managed. The dollar monster that has walked among us for more than a generation has begun to stalk us, and there is no hiding from it.

  • Rich July 19, 2022, 5:03 pm

    The rich rule over the poor, and the borrower is slave to the lender.
    Proverbs 22:7

    Neither a borrower nor lender be
    Hamlet Act 1 Scene 3

    Debt Jubilees here and there, partial student loan forgiveness one example.
    Playing to the cheap seats.

    $1.9 T government guaranteed student loans kept academic prices rising over twice CPI, since 1976 cannot be forgiven by bankruptcy, killed American dream, added yet another of $171 T unfunded government liabilities.

    GS Chair Treasury Sec, who paid no taxes on his stock unlike ordinary mortals, promised to bail out underwater sub-prime borrowers, then bailed out banks.

    FDR asked what life expectancy was, then set Social Security benefit payments to start after that.
    SS IRR negative after inflation. So-called COLAs based on defining CPI down from 1980.

    Anyone holding gold long term has a better measure of inflation.
    Ever notice how illegal sized naked derivative shorts knock precious down from time to time ?
    Name banks gleefully pay pennies on the dollar for market fixing fines to profit.
    Can fool some of the people some of the time…

    Unsound currency and Borrowers not paying what they owe hurts them and the lender, destroying trust in individuals, institutions and markets. Federal Reserve Notes appear strong against other currencies by definition. In point of fact, Financial Weighted USD fell from 100 in 1985 to 62 now. If BRICS have their way with gold-backed currencies, katie bar the door.

    People with cash can make a fortune on distressed sale tax liens and foreclosures.
    Grandfather bought bayside swamp side half of South Jersey barrier island with vacation railroad for back taxes in 1930s.
    Local RE professionals scoffed.
    He filled it in with bulkhead, bay dredge and gravel top.
    Planted beloved hedge roses, bayberry and pine that thrived in rich bay bed soil.
    New York vacationers, Eisenhowers and Nixons, Loveladies Artists and Musicians in Residence and Summer Stock Surflight theater drove prices sky high.

    Meantime, SPY + 8 % from June 17th low. 2 % to go ?

    Ever finding value, bought more VGPMX for $10 and change.

    One of these days Will Rogers observation during the last Great Depression applies:
    “I’m not so much interested in the return ON my money as I am in the return OF my money.”

    Only one asset has no counter-party risk.

    And it ain’t bitcoin.

    &&&&&

    Who was your grandfather? RA

  • GMRUNNER July 17, 2022, 7:01 pm

    If the bank’s freeze and can’t process one’s checking accounts to pay bills what happens to car payments ?and mortgage payments ? And credit card payments? Won’t the FED be forced to provide liquidity to guarantee deposits. While creditors are next to God Almighty, would that not lead to a debt forgiveness if no one can pay?

    &&&&&

    There is no debt forgiveness: the creditor pays. That’s deflation. RA