In one of those odd coincidences that make history so interesting…It turns out that the adventurer Marco Polo was wandering through Kublai’s kingdom at the time, and as we know, Marco Polo was a pretty keen observer. He’d never seen paper money before, but the canny Italian caught on immediately, writing in his Travels:
- “You might say that (Kublai) has the secret of alchemy in perfection…the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.”
Marco Polo was understandably skeptical of the Khan’s grand scheme, and wrote of the consequences of this early experiment in currency inflation:
- “The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”
Polo took his keen observations back to the West.How much influence his writings may have had, concerning this subject, is unknown. Perhaps his warnings did in fact put people off. Anyway, all we know is that paper banknotes would not appear in Europe for nearly 400 years after he returned home (Sweden being the first to issue a banknote). What Khan understood nearly a millennium ago is still put in practice today. And it has many doomers cheering or reeling an end to paper money. Or boosting the latest conspiracy that the USD is doomed. Recently, Argentina and Brazil discussed forming a common currency. I can’t count how many messages I get saying “The Petrodollar is over, look what ____ is doing.” Nonsense. Follow the Fed and act accordingly. Right now, their number one target is inflation. The fed rate rise has been nothing short of historic, representing one of the fastest hiking cycles we’ve ever seen…
I don’t have any reason to believe this will slow down until inflation is firmly under control.
It’s important to keep in mind the meaning of the term, inflation.Today, people tend to think of it exclusively in the sense of rising prices of goods and services in the marketplace. But it originally meant expansion of the money supply beyond the need to simply meet demand. When that happens, you have an excess of currency chasing the same amount of goods and services, which is what drives the market price of them up. Thus, price inflation is a consequence of monetary inflation; it isn’t so much a matter of prices going up as it is the value of the currency going down.
- Deflation is the opposite; it is triggered by a withdrawal of currency from the economy.
And that’s on purpose.As economist Ludwig von Mises put it: “The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.” Inflation is at the point where mainstream rap artists can’t help but talk about it. Sorry, I had to show you this clip—it’s just too funny and some of her other comments—either she is doing some grand messing with her followers or she is absolutely clueless about economics.
Crossflation and Understanding the U.S. Dollar
One of the major deterrents to the Rise of America would be a cratering U.S. Dollar, something that’s predicted by many of the self-appointed “experts” in the field of economics. I couldn’t disagree more. Today, we see disinflation metrics in many commodities and sectors of the economy that experienced significant inflation in 2022. In fact, deflation is the ultimate boogeyman that is just around the corner. In 2020 I coined the term ‘Crossflation’ and that is exactly the new state of affairs.
- Crossflation means that we will have areas of broad deflation with concentrated pockets of inflation popping up here and there and real wages losing purchasing power.
Understanding that is central to the way I see the status of the U.S. Dollar going forward.Crossflation will be the direct result of the implementation of MMT as the eventual guiding monetary policy.
1. Certain sectors of the economy, those that are primary recipients of MMT’s largesse, have and will experience significant inflation. For example, real-world economy like building a mine, etc.
2. On the other side, there will be significant deflation in sectors that are in direct competition with the ones that have most benefited from the government’s easy money, think digital world as an example.
Demand for the Dollar
There is no doubt there are some challenges faced by the U.S. dollar going forward…A number of powerful forces are running loose: Inflation, deflation, stagflation, crossflation, recession, depression, economic collapse—all of these things are in play. And no one can say with certainty what the eventual outcome will be as they interact. Many if not most of the mainstream economic talking heads are predicting a devaluation of the USD, if not the outright end of the USD’s reign as the reserve currency of the world. Some are calling for a ruinous inflation that will savage the currency, if not totally destroy it. I have a different view. I don’t like baseless speculation. As I’ve said over and over, I prefer to deal with what lies right in front of me. And what I see is a world that is currently in desperate need of U.S. Dollars, and will be for a long time to come. It’s within the full power and authority of the U.S. Fed, via the tools of FMC and then MMT, to “print” the digits necessary to satisfy the global dollar addiction. If you take nothing else away from these writings, take this: the USD will remain the strongest global fiat currency going forward.
The Debt Factor
Other countries, especially emerging market economies are deeply indebted to the U.S.As you can see in the chart below, nearly two-thirds of emerging market debt is denominated in US dollars.
Emerging markets have borrowed to build out their infrastructures, modernize their industries, develop their natural resources and so on.Those debts must be paid back in U.S. dollars, not the local currency. And who is to say the Braziltina Peso (Argentina and Brazil’s new currency) will happen or even succeed—do not forget, Argentina is where dreams go to die. There will be bankruptcies and defaults along the way. There will also be places where nationalization of resources takes place.
- In my premium research service – Katusa’s Resource Opportunities – I identify these places in my analysis of companies.
But in general, countries with access to capital in the form of USD will not want to jeopardize that access.It’s a self-fulfilling loop: continuing indebtedness that must be paid off in USD naturally creates a continuing demand for USD. The Rest of the World (RoW) is in a predicament I call US DIC.
- D – Debt in USD is continuing or rising.
- I – Income is down in USD as the U.S. purchases fewer imports.
- C – Capital outflows are increasing, meaning foreigners are selling assets in order to acquire USD.
This means that the Central Banks, corporations, states and provinces of the rest of the world are going to be in a perpetual shortage of USD.This is especially true during the pandemic and its associated crisis, as people everywhere are engaged in a flight to safety, which always means dollars. And high demand strengthens the market value of any commodity, including money. The RoW (rest of world) is in deflation (then eventually stagflation and then inflation) at a time when the U.S. markets are having their great reset. Yes, the RoW will experience deflation while the U.S. markets keep attracting money and remain on an inflationary trajectory. In a sense, it’s global crossflation. Through it all, the dollar will remain dominant, and the Fed’s implementation of international SWAP Lines will continue. Regards, Marin Katusa
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