The dollar bears and gold bugs are pouring a tall glass of “I told you so” right now.
Because the U.S. dollar is in big trouble.
The fact is, there have been big problems with the greenback for years. And the economic fallout from the COVID-19 pandemic might be the last straw.
On Friday Boston Fed President Eric Rosengren said continued fiscal and monetary support will likely be needed to address the ongoing spread of COVID-19, which could lead to further shut-downs in the U.S. and a slower economic recovery than expected.
In a virtual conference Rosengren stated Friday, “This lack of containment could ultimately lead to a need for more prolonged shut-downs, which result in reduced consumption and investment, and higher unemployment.”
The Federal Reserve has already intervened with monetary support to help curb the economic damage from the COVID pandemic –– including emergency rate cuts down to 0% to 0.25% and creating trillions of new dollars for lending.
In the nine weeks between March 9 and May 11, the Federal Reserve added $2.3 trillion dollars to the money supply, as measured by M2.
$2.3 trillion dollars in nine weeks! The Fed was creating over $425,000 in new money every second!
Despite this historic increase to the national money supply, Rosengren added during the conference, “I believe more support is likely to be needed from both monetary and fiscal policy.”
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The Fed’s response to the COVID-19 pandemic has already sparked over the future of the U.S. Dollar. Concerns range from too much inflation to the end of the greenback’s status as the world’s main reserve currency. Yale economist Stephen Roach writes:
The Era of the U.S. Dollar’s ‘Exorbitant Privilege’ as the World’s Primary Reserve Currency Is Coming to an End
Roach believes the U.S. is facing a “lethal combination” of macroeconomic issues, including the effects of the recent COVID pandemic, that could end up sparking a late 1970s-type stagflation crisis writing “a 35% decline in the value of dollar could well be in the offing.”
Roach said on CNBC’s Trading Nation last week, “The U.S. economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit. These problems are going from bad to worse as we blow out the fiscal deficit in the years ahead,” adding, “The dollar is going to fall very, very sharply.”
The fall of the U.S. dollar from the main reserve currency status would fundamentally change global economics in countless ways. It would not be the end of the world. Nor would it be the end of America. There are 190 other countries in the world, which (for the most part) get along just fine not being in control of the world’s reserve currency.
Still, the impact of the end of the USD’s reserve currency status can not be overstated not only for America, but also for the world. It would certainly be among the most important macroeconomic changes in our lives. Important, but also ultimately inevitable at some point. In fact, the complete collapse of the USD today would actually pretty much be par for the course already.
According to a study of 775 historic fiat currencies conducted by DollarDaze, there is very little historical precedence for fiat money having a lot of success. It concludes the average life expectancy for a fiat currency is 27 years. The U.S. dollar has been a fiat currency for 49 years.
Point is, the Federal Reserve’s, next move better be very well calculated. Faith in the U.S. dollar is already waning, and adding even more to the supply at this point certainly won’t help.
Of course, the Fed could also always take interest rates negative. Back in mid-May, Federal Reserve Chairman Jerome Powell said, “I know there are fans of [negative interest rates], but for now it’s not something that we’re considering.” Still, the Fed will ultimately do whatever it needs to do.
Any way you slice it, the future does look great for gold holders. High inflation or stagflation… USD reserve currency crisis… negative interest rates… any one of these could be the next big trigger for gold prices.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
