Dollar Maximalism

Sophism and the future of the US Dollar

“To hell with them, I’m not worried about them, I’m worried about us.”

—John Connally, US Treasury Secretary, 1971-1972

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There isn’t a more contentious topic in macro than the Dollar’s reserve currency status. Friendships are broken, followers are blocked, people are cancelled…you get the point!

My hit piece, Peak American Empire, discusses the historical context and relationship between the Dollar’s reserve currency status and American global hegemony. The two are interlinked in more ways than you can imagine — read it here.

A Strong Dollar Regime

The DXY (pronounced Dee-Xy) is up 17% since Biden was inaugurated in January 2021. It was up even more in 2022 when the Euro was crashing through the floor (see how that works?)

Dollar Index, Monthly

At the same time, the BRICS — the arch-rival of the West’s G7, is fast ascending and working on Dollar alternatives while the fiscal situation of the US isn’t exactly getting better.

Uncontrollable deficits leading to skyrocketing government debt — and a $34 trillion debt stockpile increasingly relying on foreigners and Fed intervention to finance it.

How are things domestically? 😱

No need to dwell too much on this point. It’s clear that things are one step before chaos. The sitting president seems to be suffering from some form of dementia, unable to rely on himself for basic functions. Even with all this, he seems hell-bent in staying in the race.

Signs of an empire in decline? I think so…

But if you try and discuss this with a Dollar maximalist, he will swiftly point you to the strong Dollar and mutter something that has nothing to do with a sustainably strong currency.

“There is no alternative! What are you going to do, park your reserves in another currency?! Ha! You fool!” —Dollar Maximalist

The Fundamentals

Let’s face it, fundamentals are inexistent in backed-by-nothing currencies of over-indebted nations that resort to debasing the currency to stay afloat.

—> Therefore, we are forced to play a relative game of musical chairs to gain an edge.

What are the 3 functions of a currency?

• Store of Value ❌

• Unit of Account

• Medium of Exchange

In the past 4 years, compounded CPI inflation is touching ~25%. That means the currency’s value has been debased by 25%. And that’s the official number, I bet in actuality it’s way more.

You think those parking reserves in the USD are OK with being debased 25% in 4 years? Think again!

De-Dollarization

This is another area of great dispute between macro intellectuals…

Dollar Maximalists argue that global trade can be powered with no other currency than the USD. The thing is, at some point you have to understand that the end of a unipolar world means the end of a unipolar FX as well.

To strengthen their argument that “there can be only one” pundits throw in the impossibility of a BRICS currency.

—> The BRICS don’t need their own currency to take a turn away from the Dollar. All they need is a system between them to facilitate trade.

But if you think the BRICS are going to continue trading in USD and have the heavy sword of the American Empire hanging over their heads, you are being misled.

FINANCIAL REPRESSION and Safe Havens

Forcing countries to park their reserves in quickly debasing USD is financial repression — and it won’t go too long without a revolt from those bearing the costs… In the background, the safe haven terrain is changing.

I published “Where are the Safe Havens?” to talk about that and more.

Dollar Maximalists seem to believe that global reserves have no place to go but to finance US deficits (via purchases of US treasurys). Not only is that a huge fallacy, it’s also a nonlinear trap.

What do I mean?

X is not f(X). If X is an event, f(X) is what happens to you from said event, and the two are not the same.

—> In simpler terms, even if 10% of global reserves parked in the Dollar, are then UN-parked, the damage to the Dollar would be multiples of that 10%.

The Dollar would lose more of its prestige, rates would probably move up in the process, the Fed would have to fill that gap with asset purchases, the budget would have to be reigned in etc. 🔁

Which brings us to…

Culture

“The US has all the cool people. The US has global celebrities, artists, rockstars, actors, Hollywood, Coca Cola, Starbucks, Apple, whatever…”

—> Dollar Maximalists point to this as a reason the Dollar will remain dominant.

No doubt, American culture is the most deeply-engrained across the world. Music, Films, Studios…where do you go to make it big? Hollywood of course.

But did Britain not have a globally-known culture when it was an empire? They did. Did they fall? Yes they did.

My point, dear reader, is that we should not conflate things only to derive the conclusions that we would have liked to be true.

And even if Taylor Swift or Coca Cola is Dollar positive, then what about all those things that are Dollar negative? You can’t overcount what you like and undercount what you don’t like.

On that note..

Military

It’s not the strong military that keeps the dollar strong. It’s the strong dollar that allows the US to maintain that military… This is a great misconception.

Being the reserve FX of the world means you get to fund your deficits in beneficial ways… 🔁

The belief that the Dollar cannot be unseated causes American leaders to overstep. As a consequence, American public relations aren’t exactly going great these days, and their bullying has pushed “the others” to create and strengthen the BRICS.

Remember when the US/EU seized Russian reserves because of the invasion into Ukraine? That rang alarms for other countries..

Next up I will present Biden’s Techno-Expansion Cycle, how it has benefited the USD, and how I see that cycle reversing.

Sincerely,

Philo 🦉