The dollar collapses: when will it lose reserve currency status? We’Re gon na answer that question right here today, so make sure you stay tuned to the end of this video and i’m gon na explain this to you in three simple, fast steps, step number one we have to answer the question: has the dollar collapsed and maybe More importantly, against what, if you’ve turned on the news, if you listen to cnbc or bloomberg, you know the dollar has fallen out of bed on the dxy. It’S gone all the way from 100 down below 90 to the 89 handle. That is absolutely huge and everybody is saying the dollar has collapsed and it’s going to continue to go down from here, but let’s analyze exactly what that means, and if the statement the dollar has collapsed is accurate or not. Let me show you what i mean: i’ve got a chart of the dxy. Now, first and foremost, the dxy is a measurement of the dollar against a basket of other fiat currencies. More specifically, the euro. The euro is about 57 of this basket that the dollar is measured against, that comprises the dxy we’ve got a chart of the dxy from 2016 to 2020
We’Re using about a five year time frame here in all of our analysis for step number one on the left. We go from 90 at the bottom up to 102.5, so in 2016 2015 it was right about a hundred goes down a little bit then really goes up around 2017 to where we are over 1.25. Then it crashes down 2018 to around 90 goes up a little bit. Plateaus goes way up during the cerveza sickness. At this point in time it looked like it was going to 110 120, maybe even 140, and we would have needed a plaza accord 2.0. But then it crashes down due to all the stimulus, quantitative, easing repo market infinity and everything else that the fed has done. But, most importantly, i think it’s about the fed monetizing, the government debt and the new issuance of treasuries more on that in step. Number two, but as of last week, we’ve gotten down below 90 89 and, like i said at the beginning, everybody is saying that the dollar has collapsed. But let’s put this in perspective, it’s only gone down about 10 percent in the last five years. Would you really call that a collapse, but there are other things which, ironically enough, nobody is talking about that the dollar has definitely collapsed against. Let’S go back five years for these as well. First and foremost, is gold. Editor go ahead and throw up a chart. The dollar is down 40 percent roughly. This is just back of the napkin math, but the dollar is down about 40 percent against gold, meaning that gold has gone way up. Therefore, the dollar has lost purchasing power in terms of gold over the past five years. Let’S look at the chapwood index and this is something that my good buddy jason burrick turned me onto it’s like shadow stats, but they do a much better job of really nailing down exactly how much prices have gone up over the past five years in certain cities Across the united states so we’ll just lump all these numbers together, we’ll kind of annualize it take it out, five years again, roughly 40 percent, the dollar has crashed against goods and services in these markets. Look at housing we’re now at all time highs adjusted for inflation. Even when you look at the 2006 period, the top of the last bubble, so housing has gone up dramatically. In other words, the dollar has lost about 35 or 40 percent of its purchasing power against real estate. Let’S look at stocks, they’ve almost doubled in the last five years, so the dollar has lost 50 percent of its purchasing power against stocks and, let’s not forget bitcoin back five years ago at like two or three hundred bucks, so the dollar has lost about 99 of Its value against bitcoin, so the financial media is getting hyper, focused that the dollar has fallen out of bed on the dxy. But let’s really look at what’s most important and that’s the fact that the dollar has collapsed against things that you would want to buy. With your dollars, gold, goods and services, housing stocks and bitcoin step number two: will the crash of the us dollar continue in step number one? I encouraged you to take a more holistic approach to answering the question: is the dollar collapsing? You have to ask yourself against what i think it’s crystal clear in the last five years. The dollar has definitely been collapsing against everything you would want to buy, but when most people hear about a dollar crash, they’re really thinking about it through the lens of the dxy. So in step number two: let’s focus our attention there. We know that it’s now trading right about 90 or maybe even 89 – the dollar against the basket of currencies that comprises the dxy. Now we also have to understand that when you look at currencies and their cross rates, there are several cross currents, potentially hundreds or thousands of cross currents that are at play at any given moment that determine whether or not the individual currency is going up or down. In relationship to other fiat currencies, some of those cross currents, especially with the dxy, is what the ecb, the european central bank, is doing with their quote: unquote: money, printing and their balance sheet, because the euro is almost 57 of the dxy. What is the fed’s balance sheet doing? How many dollars are being created, how much base money and maybe how much m2 money supply through quantitative, easing or quantitative tightening negative real rates definitely has an impact on the dollar and gold? I might add m2 money supply. How many new currency units in the real economy are being created, not just the currency units, but taking it a step further, we have to ask ourselves how many bank deposits or bank liabilities are being created or destroyed in the real economy. Lastly, this has a lot to do with if the fed is monetizing the debt more on that in just a moment, but to analyze these cross currents, let’s check out some charts and go right to the internet. First, let’s go ahead and look at the balance sheet of the fed compared to the ecb and see, if there’s some periods in time over the past. Let’S call it 10 years since the gfc, where the ecb is printing money and the fed is not, or vice versa, i’m talking about money, i’m talking about bank reserves, base money and then we’ll contrast that to the dxy to see. If we can come to some conclusions as to what is really moving the dollar or the euro, going back to 2008, we know the fed’s balance sheet really took off to try to combat the crisis. It went from under a trillion about 800 billion to about 2.5 trillion. It kind of plateaued slightly then went up again during qe2, and then it plateaued in 2012.
If we contrast that to the balance sheet of the ecb, it did go up during the gfc, then it kind of came back down and it was much more flat. So we would assume that the dollar would go down during this time frame. Call it 2009 to 2012., but if we look at a chart of the dxy, it didn’t really go down significantly. It was just more choppy during this time frame. So, although this is a significant cross current during this time frame, it really didn’t affect the dollar that much one way or the other. We can’t really find a correlation, and we see this playing out again from roughly 2013 to 2014., when the balance sheets were going in completely different directions. The fed was increasing, base money significantly and the ecb was doing their version of quantitative tightening. So you would expect the dollar to really go down during that time frame and it was actually pretty flat. Now, let’s go ahead and pull up a chart of the 10-year treasury yield adjusted for inflation, so we can see if there were negative or positive rates during a specific time frame. Thing that stands out at you most is during 2012 to call it the end of 2013. We had negative real rates, so we would expect the dollar to have gone down during that time frame. But if we look at the chart of the dxy, we see it was pretty darn flat. We know that gold really went up during this time frame and it’s gone up again now in 2020, when we have negative real rates again. So the conclusion that i would draw is negative real rates, although they may be across current. They definitely do not affect the dollar the dxy index as much as they affect the price of gold. So you say to yourself: okay, george, so the ecb’s balance sheet really isn’t affecting the dollar too much relative to the fed’s balance sheet, nor our negative interest rates. So we’re kind of going through this process of elimination what is actually affecting the dxy and therefore, what can we focus on now to determine what may happen with the dollar? Moving forward to answer this question i reached out to my good friend and partner rebel capitalist pro lynn alden. She is definitely one of the smartest people. I know and she’s studied this extensively. So here’s her answer straight from twitter editor: let’s go ahead and pull this up. The cycle of dollar strength was created by the end of qe in mid 2014 and the initiation of qt in early 2018, all of which made us monetary policy relatively tight versus their peers. The cycle of strength is seemingly ending on the cessation of qt into indefinite qe from late 2019 and that’s when we had interest rates spike up to 10 percent in the repo market and the fed had to reverse qt and go back to doing qe. And then she goes on to say when the fed ended qe in 2014, the dollar shot up and began this third cycle of strength. It weakened in 2017 during the shanghai accord or her assumption is that had something to do with it, and if you don’t know what the shanghai accord was, it was an agreement in 2000. I think 16ish, where they were going to try to devalue the dollar. They meaning the central banks that were incentivized to have a weaker dollar and lynn adds to that. When the fed initiated qt in early 2018, the dollar shot back up until the repo spike, which forced the fed to shift back into quantitative easing. Her opinion is real rates do matter, but given the global dollar shortage, qe and qt matter even more and i would add, the fed monetizing the debt while doing quantitative easing matters the most. But let’s check out a chart that lynn sent me that illustrates her point beautifully when the fed ended quantitative, easing the dollar really shot up and plateaued, then, during this 2016-17 time frame, when we had this quote unquote shanghai accord, the dollar falls out of bed. Goes. All the way down, i think, even below 90, and then it gradually goes back up when the fed does quantitative tightening, but then sense has come down significantly like we were talking about earlier going back under 90 last week, so i think the main takeaway from looking At those cross, currents is the main driver for the dxy right now is m2 money supply. When that really shoots up an editor go ahead and throw up the chart, we can see it’s gone up by over 20 percent in just the last year. Think about that there are 20 percent, more bank deposits chasing goods and services today than there was just one year ago, and this goes back to the fed monetizing the debt. Let me remind you how that works, federal reserve right here, balance sheet assets and liabilities. The government, your drunk insolvent, uncle sam spending money like the drunken sailor, he is so. What does he do to get the money he issues treasuries? Normally those treasuries would be purchased by the private sector, so they would be taking money out of the private sector, giving it to your drunk insolvent uncle sam and he would be spending it right back into the real economy. So the net effect on m2 money supply would be a wash, but what’s happening now, when the fed monetizes the debt, those treasuries go directly to the fed’s balance sheet, they’re now an asset on the fed’s balance sheet and the primary dealer banks kind of get in The middle there’s this shell game, but the net results. Is those treasuries go on to the fed’s balance sheet and to pay for them? They just create additional bank reserves in the account of the treasury. The tga, the tga, writes checks against those bank reserves that go back into the real economy. Let’S say to the average joe in the form of a stimulus check. He deposits that stimulus check with his local commercial bank, which increases m2 money supply because the government is spending the money into the real economy without taking the money out of the real economy. In the first place, you see normally, let’s review one more time. They would take the money out of the real economy because the average joe would buy the treasury from your drunk insolvent uncle sam. Then the government would just spend that same money back into the economy, basically redistributing it, but when the fed monetizes the debt, the treasury goes right to the fed they pay for it with newly printed bank reserves. And then those checks go out because the government spends the money and instead of it being a net wash because it first extracted money from the real economy, then added it back into the real economy. Now all it’s doing is adding money into the real economy without extracting it first. So the questions you have to be asking yourself to determine what the future has in store for the united states dollar number one. What are the probabilities? The fed continues to monetize the government debt and what are the probabilities? The government continues to run huge deficits. I would say personally, the probabilities of those two things are extremely high. If that happens, m2 money supply continues to go up. In other words, the deposits or the liabilities in the commercial banking system continue to go parabolic and this being the strongest cross current for the dollar most likely over the long run sends it lower, as measured by the dxy step number three. What is the end game for the dollar? When will it lose its reserve currency status? As you can imagine, i can’t give you a specific date, but what i can do is give you a chart that i’ve been looking at. I think if you focus on this chart and see which direction it’s going, it’ll give you the information you need to determine if the dollar is in the process of losing its reserve currency status. To get our minds around this, i think it’s important. We start with a clip from mike greene’s, most recent real vision interview where he gives us his definition of money check this out. Money is that which cancels debt to the government, that’s the form of taxes on an individual or a private basis. That is debt. If you read a dollar bill, it says very clearly: this is legal tender for the extinguishment of all debts, public or private. That’S all money is so if one of the definitions of money is that it’s used to cancel debt, i think if we look at debt denominated in specific currencies, we can see which of those currencies are being used more or less as money itself. This is a chart going back to 2000 all the way to 2018
It is non-bank, global debt denominated in four main currencies: united states, dollar, euro british pound and japanese yen. The blue line is the united states dollar. That’S what we should be most concerned with. We see it going up, peaking out at the gfc coming down slightly, but then continuing on this upward trajectory back in 2000, there was about two trillion dollars of global debt now in 2018, and i would imagine it’s even higher. Today there was over 12 trillion dollars in global debt, compare that to only maybe 4 trillion euros, maybe 2 trillion british pounds and under a trillion in japanese yen. So this chart shows us that the dollar is being used to create debt far more than any currency. So, let’s think this through momentarily we’ve got the united states. It’S called japan, china or country xyz abc and one two. Three currently global trade or the majority of global trade is done in united states dollars, so they’re paying for goods and services from japan to china. In dollars, china to south america dollars south america to the united states, europe down to south america, mostly in dollars. But if we start to see this line come down, meaning the percentage of overall debt in the world denominated in dollars. What this is telling us is that the dollar is being used less and less. So, if, instead of using dollars with all of these transactions, they start to use other currencies, and it doesn’t necessarily have to be one other currency. The dollar doesn’t have to have a replacement. It could happen very slowly by the use of other currencies, a lot of other currencies instead of dollars. So maybe china starts doing business with south america in one. Maybe south america starts doing business in europe in euros and then between japan and china. Maybe that’s done in japanese yen, so the dollar is being used less. Therefore, the amount of debt you would see in this chart denominated in dollars would be going down. My point is when the percentage of global debt denominated in dollars starts going down. That’S when you know the dollar is losing its world reserve currency status for more content, that’ll help you build wealth and thrive in a world of out-of-control central banks and big governments check out this playlist right here, and i will see you on the next video
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