yuan
by
charleshughsmith
Executive Summary
- Other currencies are inflating faster than the USD
- The USD is still backed by a preponderance of the world's assets
- The potential for a global currency crisis is rising
- Why USD will be the (initial) safe haven when it arrives
If you have not yet read Part 1: How Much Higher Can The U.S. Dollar Go?, available free to all readers, please click here to read it first.
In Part 1, we reviewed the technical evidence in support of a second move higher in a multi-year U.S. dollar rally. Here in Part 2, we ask: What conditions might drive such a move higher?
To answer this question, let’s start with another question: What’s scarce in the world of foreign exchange (FX)?
We ask this because capital, profits and gains flow to what’s scarce and in demand. This boils down to supply and demand: gains go to whatever is in high demand and scarce, and whatever is not in demand and over-supplied will lose value.
Supply and Demand
Like every other commodity, currencies respond to supply and demand: whatever currency is scarce and in demand will rise, while currencies that are in oversupply and not in demand will decline.
Though many presume the world is awash in dollars as a result of Federal Reserve quantitative easing, the reality is that expansion of USD via bank loans (credit) and Fed money-creation is modest compared to the expansion of other global currencies such as China’s renminbi (RMB), a.k.a. yuan.
Consider this chart of bank credit expansion in the U.S. and in China since the onset of the “Great Recovery” in early 2009: China’s bank credit has soared by 260%, a sum that is roughly 140% of China’s entire Gross Domestic Product (GDP), while U.S. bank credit rose by a modest 12% of U.S. GDP.
If we compare M2 money supply, we find…
Why The Coming Currency Crisis Will Push The USD Higher
PREVIEW by charleshughsmithExecutive Summary
- Other currencies are inflating faster than the USD
- The USD is still backed by a preponderance of the world's assets
- The potential for a global currency crisis is rising
- Why USD will be the (initial) safe haven when it arrives
If you have not yet read Part 1: How Much Higher Can The U.S. Dollar Go?, available free to all readers, please click here to read it first.
In Part 1, we reviewed the technical evidence in support of a second move higher in a multi-year U.S. dollar rally. Here in Part 2, we ask: What conditions might drive such a move higher?
To answer this question, let’s start with another question: What’s scarce in the world of foreign exchange (FX)?
We ask this because capital, profits and gains flow to what’s scarce and in demand. This boils down to supply and demand: gains go to whatever is in high demand and scarce, and whatever is not in demand and over-supplied will lose value.
Supply and Demand
Like every other commodity, currencies respond to supply and demand: whatever currency is scarce and in demand will rise, while currencies that are in oversupply and not in demand will decline.
Though many presume the world is awash in dollars as a result of Federal Reserve quantitative easing, the reality is that expansion of USD via bank loans (credit) and Fed money-creation is modest compared to the expansion of other global currencies such as China’s renminbi (RMB), a.k.a. yuan.
Consider this chart of bank credit expansion in the U.S. and in China since the onset of the “Great Recovery” in early 2009: China’s bank credit has soared by 260%, a sum that is roughly 140% of China’s entire Gross Domestic Product (GDP), while U.S. bank credit rose by a modest 12% of U.S. GDP.
If we compare M2 money supply, we find…
by
Adam Taggart
by
charleshughsmith
Executive Summary
- Understanding the two different ways money flows into the US dollar
- How currency crises elsewhere can send the dollar skyrocketing
- Why yen, yuan and euro printing are not the same as dollar printing
- How these accelerating money flows are creating the next global crisis
If you have not yet read The Consequences of a Strengthening US Dollar available free to all readers, please click here to read it first.
In Part 1, we surveyed the key dynamic that is playing out across the globe: the problems revealed by the Global Financial Meltdown of 2008-2009 were not addressed; they were in effect shifted into the foreign exchange (FX) market. Now the risk bubble is in the FX market.
The complexity of the feedbacks into the FX market is nothing short of mind-boggling, and rather than attempt a comprehensive survey, I’m highlighting the dynamics that hold the greatest risks of triggering instability, not just in finance but in geopolitics, trade and commodities.
Two Kinds of Dollar Flows
Let’s start by differentiating between the two kinds of money flows into the dollar:
- Money converted from periphery currencies into dollars to pay back loans denominated in dollars
- Money flowing out of periphery economies and into dollar-denominated assets such as stocks, bonds, real estate and dollar-denominated bank accounts.
Broadly speaking, both of these capital flows are “risk-off,” but they have different effects.
In the first case, money borrowed on the cheap in dollars and invested in high-yield periphery bonds earned a tidy profit as the dollar weakened. The trader picked up a double profit: the arbitrage on the interest rates (borrow at .25% and earn 4+%) and the FX profit from the rise of the periphery currency and the decline of the dollar.
This currency-arbitrage profit reverses when the dollar starts rising, and it quickly wipes out the entire interest-rate profit as it leaps higher.
The carry trade is “risk-on” because money is being borrowed to speculate in interest-rate arbitrage. Deleveraging this trade is “risk-off” because the only way to stem the potential losses as the dollar strengthens is to…
Why The Strengthening Dollar Is A Sign Of The Next Global Crisis
PREVIEW by charleshughsmithExecutive Summary
- Understanding the two different ways money flows into the US dollar
- How currency crises elsewhere can send the dollar skyrocketing
- Why yen, yuan and euro printing are not the same as dollar printing
- How these accelerating money flows are creating the next global crisis
If you have not yet read The Consequences of a Strengthening US Dollar available free to all readers, please click here to read it first.
In Part 1, we surveyed the key dynamic that is playing out across the globe: the problems revealed by the Global Financial Meltdown of 2008-2009 were not addressed; they were in effect shifted into the foreign exchange (FX) market. Now the risk bubble is in the FX market.
The complexity of the feedbacks into the FX market is nothing short of mind-boggling, and rather than attempt a comprehensive survey, I’m highlighting the dynamics that hold the greatest risks of triggering instability, not just in finance but in geopolitics, trade and commodities.
Two Kinds of Dollar Flows
Let’s start by differentiating between the two kinds of money flows into the dollar:
- Money converted from periphery currencies into dollars to pay back loans denominated in dollars
- Money flowing out of periphery economies and into dollar-denominated assets such as stocks, bonds, real estate and dollar-denominated bank accounts.
Broadly speaking, both of these capital flows are “risk-off,” but they have different effects.
In the first case, money borrowed on the cheap in dollars and invested in high-yield periphery bonds earned a tidy profit as the dollar weakened. The trader picked up a double profit: the arbitrage on the interest rates (borrow at .25% and earn 4+%) and the FX profit from the rise of the periphery currency and the decline of the dollar.
This currency-arbitrage profit reverses when the dollar starts rising, and it quickly wipes out the entire interest-rate profit as it leaps higher.
The carry trade is “risk-on” because money is being borrowed to speculate in interest-rate arbitrage. Deleveraging this trade is “risk-off” because the only way to stem the potential losses as the dollar strengthens is to…
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