Outlook for the U.S. Dollar Continues to Darken, One Month Into the Biden Administration.
As this article goes to bed in the last week of February 2021, U.S. President Joseph Robinette Biden has just completed his first month in office, with his Democrat Party also having taken control of both Houses of Congress. Where the popular U.S. stock market indices crashed one year ago, as the COVID-19 Pandemic hit full force, they now have recovered fully and are trading at or near record highs.
While soaring equity prices may appear inconsistent with a continuing, horrendous economic outlook, they are perhaps not so inconsistent in inflation-adjusted real terms, given rapidly mounting inflation and Dollar-debasement pressures. The U.S. Dollar debasement continues, triggered by extreme Monetary stimulus from the Federal Reserve, exacerbated by extreme Fiscal stimulus from the U.S. Treasury and Congress during the Trump Administration, and as pending under the Biden Administration. In the new Administration, former Federal Reserve Chair Janet Yellen has taken over the U.S. Treasury from Steven Mnuchin.
The U.S. Dollar also crashed in the currency markets a year ago, as the Pandemic hit, with a brief, partial rebound. Yet, the Dollar broadly has continued to sink anew, since then, down year-to-year by about 7.9%—near a three-year low—against the British Pound as of February 22nd. It also is down year-to-year by about 8.0% against the Chinese Yuan, 8.4% against the Swiss Franc, 10.8% against the Euro and by 16.2% against the Australian Dollar. Measured on a trade-weighted basis against the Federal Reserve’s Advanced Foreign Economies (AFE) Index, the U.S. Dollar is down by about 8.0% year-to-year, down by 4.2% since the day before Election Day 2020. As an aside, the plunge in the U.S. Dollar against the Australian Dollar largely has been post-election, suggestive of some capital flight from disgruntled U.S. voters to outside the United States.
Currency Strength Depends on Positive Relative Economic Strength, Political Stability and Contained Inflation, with Conservative Underlying Fiscal and Monetary Policies. The U.S. dollar effectively remains, and should continue to remain, the world’s primary reserve currency, yet it has been roiled recently in an unprecedented manner by the Pandemic and related domestic economic and financial-market turmoil.
Resurgent U.S. economic activity will be limited for at least the next year, with the U.S. trade deficit continuing to explode (the fourth-quarter 2020 deficit was the deepest in U.S. history), and with the domestic economic “recovery” in third-and fourth-quarter GDP activity possibly relapsing into a first-quarter quarterly decline, as reflected in softening January 2021 payroll reporting. That also was suggested by Pandemic-disrupted unemployment levels (unemployment including the four million or so who cannot look for work due to the Pandemic, and who otherwise are excluded from formal unemployment calculations). So adjusted, the Pandemic-distorted unemployment rate held for the third month at around 12% in January 2021, the worst level seen since before World War II, outside of the Pandemic.
That said, the U.S. economy has suffered serve disruption with extreme psychological and financial stress on its population. I anticipate minimally five years, possibly a full decade or more, before U.S. economic activity and consumer conditions regain pre-Pandemic levels. Consider that the Manufacturing and Residential Construction Sectors of the U.S. economy still have not recovered pre-Great Recession (2007) levels of activity.
HYPER INFLATIONARY PRESSURES ALREADY ARE BEGINNING TO BUILD
Actions already taken or underway by the U.S. Federal Reserve, actions already taken by the former Trump Administration and actions pending by the Biden Administration, already may have doomed the U.S. economy to an eventual hyperinflationary economic collapse, in the next year or two. Yet those government and central bank actions and continuing actions to “salvage” the U.S. financial system and economy were needed to prevent an even more severe, immediately disruptive economic implosion to, and displacement of, public economic activity due to the Pandemic.
The Federal Reserve’s emergency, unlimited expansion of the Money Supply continues, with annual growth in traditional Money Supply M1 hitting an unprecedented, inflationary 70% in January 2021, with M2 at a record 26%, and Currency in Circulation at a record-high 17%, other than for Alan Greenspan’s emergency cash provisions for the one month of December 1999, leading into Y2K.
New U.S. Treasury Secretary (former Fed Chair) Janet Yellen has advocated creative Monetary and Fiscal Policies in the past. She is in the same philosophical camp as former Fed Chairmen Greenspan and Bernanke, and the current Fed Chairman Jerome Powell, that “we always can create inflation.” More aggressive money creation lies ahead, well into 2022 and possibly 2023, per recent minutes of the Fed’s Federal Open Market Committee (FOMC).
Where the U.S. Government debt level ratio to GDP already was at its highest reading ever (exceeding World War II levels), coming out of the Trump Administration, promised and pending new stimulus from the Biden Administration will set new record highs in the months ahead. There is no circumstance in place, at the moment that will pull back on these extraordinary Monetary or Fiscal Stimulus measures. As such, again, the United States likely will see continuing debasement of the U.S. Dollar and accelerating upside pressure on domestic inflation.
Repeated from prior Executive Global (Autumn 2020) and Executive Global (Spring 2019), “...with U.S. federal debt levels up against the [currently suspended] debt ceiling, a euphemistically entitled Modern Monetary Theory (MMT) has generated some political turmoil in Washington. Largely dismissed out of hand by mainstream economists and politicians, MMT offers a rapid downhill ride into a U.S. hyperinflation. In contrast, mainstream U.S. politicians already have the U.S. on a slower, albeit just as calamitous downhill ride into hyperinflation.”
“... MMT centers on the concept that a sovereign state, such as the United States, can print its money at will, no need to balance a budget or to sell bonds. The theory goes that the U.S. cannot default on debt denominated in its sovereign currency, the U.S. Dollar, since the U.S. simply can print any dollars needed to cover its obligations.
“Applied to the United States, the theory advocates that the government simply print whatever dollars it needs to provide a guaranteed minimum income and/or employment to the general population. There is no need to issue bonds. Should inflation pick up and become a problem, the U.S. government simply has to take excess cash out of the system to contain it, by raising taxes or then by selling bonds, per MMT.
“Having reviewed the MMT approaches, I find that this system effectively guarantees a hyperinflation, and a full debasement of the purchasing power of the U.S. dollar, rather quickly.
“Nonetheless, the MMT concept has been embraced by Democratic Socialists in the U.S. Congress. That circumstance could foment particularly contentious and tumultuous political conditions coming into the 2020 Presidential and Congressional elections, where elements of the popular U.S. media already have embraced the MMT concepts. In contrast, Federal Reserve Chairman Powell indicated, ‘The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.’ MMT largely has been denounced and dismissed out of hand by establishment economists, politicians and Federal Reserve officials, who otherwise have brought the U.S. economy, U.S. fiscal conditions and the U.S. Dollar to their current [pre-Pandemic] states of extreme peril.”
Indeed, the Democrat-controlled House of Representatives, Senate and the Biden Administration appear to be looking seriously at MMT. Explosive new growth in Fiscal stimulus is promised, which should further exacerbate domestic hyperinflation pressures.
SALVAGING THE U.S. DOLLAR POST-HYPERINFLATION
Continuing “salvage” of the U.S. financial system eventually should lead to efforts at to revive a fully debased U.S. currency, from some form of a hyperinflationary depression. “Saving” of the U.S. Dollar at that point, likely will reflect a rebasing of the Dollar, along with other currencies, in some form of a new Gold Standard, backed by sovereign holdings of gold, where the United States remains the largest sovereign holder of physical gold. An implication here for current investors, otherwise, is to hold physical gold as an investment and hedge against price inflation and currency debasement. EG