There’s Just One Thing Propping Up the Dollar
Phillip Patrick

Bad news is the new good news? It is to investors rooting for the Fed to lower interest rates. Those who think cheaper credit is the answer misunderstand the bigger picture.

This morning, the following headline caught my eye:

Does this strike you as strange?

A “stronger economy” means a productive economy, one that’s creating goods and services that make our lives better. Exporting them, even – improving the lives of people around the world.

In short, a “stronger economy” is a win/win. Everyone benefits! (To be sure, not everyone benefits equally, but that’s always the case in capitalism.)

For some reason, that’s not what investors want.

That’s exactly why you see the financial news media covering some decidedly bad news stories as good news. Here’s an extract from the article:

Bad news can be good news, at least when the Fed and interest rates are concerned.

For every crack revealed in an otherwise solid labor market, as new data showed Wednesday – and May's jobs report might show Friday – there's an impulse to cheer what it could mean for central bankers.

The worse the economy is doing, the more likely officials will reverse the tightening.

Rising unemployment, a slowdown in consumer spending, plunging mortgage demand, rising credit card and car loan delinquencies and reports that middle-class Americans are being squeezed so tightly they’re “gasping for air financially” – all this somehow becomes good news because it gives the Federal Reserve a reason to lower interest rates.

I’ve suspected this for some time now. Today the conclusion seems unavoidable. Investors and financial media are increasingly less concerned with the real economy and the real struggles people face, every day.

Every negative headline gives them another reason to hope the Fed will return to zero interest rates and money-printing.

They don’t seem to understand that higher interest rates are the only thing propping up the dollar’s value.

Today’s “nosebleed rates” vs. reality

There’s an entire generation of Americans who thought interest rates were supposed to be zero. That credit was always going to be free. They write sentences like this one:

The idea of what lower rates could bring is intoxicating, given how things have been going with nosebleed rates.

You’ll see dozens of headlines calling an Effective Federal Funds Rate (EFFR) of 5.33% as an “18-year high.” Technically true, but very misleading.

Most people aren’t aware that the long term average EFFR is 4.6% – which means today’s “18-year high” is only barely above the long-term average.

The last time inflation spiked in the U.S. Paul Volcker raised interest rates over 22% before it was finally crushed. That was a truly harrowing period for the nation – with two brutal, back-to-back recessions and double-digit unemployment. That tough time set the stage for the 20-year economic boom of the 80s and 90s.

(If you don’t understand the connection, here’s Dr. Ron Paul’s explanation of how interest rate repression leads to malinvestment.)

My point here is simply this – near-zero interest rates are not normal! Credit is supposed to cost something.

The problem facing the Fed right now is larger than the talking heads at CNBC seem to understand.

The real problem facing the Fed

Now, on the one hand, that bad economic news we discussed above puts the Fed in a really tight spot.

They’ve said, over and over, that they’re data dependent. They’re making interest rate decisions based on data – but which data specifically? That’s less clear.

Another thing most people have forgotten – during the pandemic panic, the Fed changed their own mandate. Now, instead of targeting 2% inflation, they’re targeting a long-term average of 2%

Theoretically, there’s nothing stopping Jerome Powell from declaring mission accomplished! (Well, nothing other than credibility.) With Core CPI at 3.6%, the Fed could decide that someday in the future inflation would eventually fall below 2%, that it would all average out in the long run.

They could lower interest rates. They know very well what would happen. Smoldering inflation would flare up everywhere, again, and the cost of living would skyrocket. Again. 

But there’s an even bigger problem…

Higher interest rates are preventing a total collapse in the dollar’s value

One final thing “investors” and the finance media forgets: The U.S. dollar has no intrinsic value.

None. Zero.

When the Treasury Department sells an IOU, they’re promising to pay nothing but dollars. And the Federal Reserve can, as Neal Kashkari famously said, can print an infinite number of dollars.

An infinite number of dollars won’t improve our situation.

See, the Biden regime has been flooding the world with U.S. debt at a staggering pace. When Biden took office, the nation had $28 trillion in debt.

Now, we’re at $34.6 trillion – a 24% increase! Not even counting his plans for the 2024 budget.

Biden’s legacy, $6.6 trillion in debt in three years, is an almost unimaginable amount of money… 

Even if we adjust for inflation, it’s 20% more than we spent in four years fighting World War II!

By itself, Biden’s $6.6 trillion alone would be the third biggest national debt in the world.

Since the dollar has no intrinsic value, its global value is based on supply and demand. A 24% increase in supply, without an equivalent increase in demand, has one result: Lower value.

Maybe you’ve wondered why your purchasing power has declined 17% since January 2021? Well, now you know.

Obviously this is not a problem you can solve by making more dollars! The only reason any sovereign currency has value is an implicit promise that the issuer won’t engage in reckless hyperinflationary money-printing.

The U.S. hasn’t crossed the line into hyperinflation – but the surging cost of servicing the national debt ($1 trillion in 90 days!) makes it a valid concern. Right now, pretty much the only thing standing between the dollar and a total collapse in value? The Fed’s 5.33% interest rate.

The promise that lenders can give Janet Yellen $100 today and get back $105.33 in a year. (Whether that $105.33 is worth as much as the $100 a year ago – or if it’s worth even less – is an open question.)

So what’s the solution?

Well, that depends on who you ask…

Paul Krugman, spokesman of the Modern Monetary Theory (MMT) crowd, says the government should default. It’s just “money we owe to ourselves,” he claims. He doesn’t mention how the foreign entities (banks, insurance companies, individuals and central banks) would respond to our decision to cancel the $7.4 trillion we owe them.

Steve Forbes thinks it’s time to bring back the gold standard. He’s right, but the U.S. gold reserve is only worth $614.5 billion – that’s not much balanced against the outstanding debt of $34.6 trillion…

One long-term solution is to grow the real economy. That means developing and manufacturing goods and services people around the world want to buy. That means reversing the trade deficit – to become a nation that exports cars and semiconductors and energy, rather than a nation whose chief export is debt.

Now, that could happen! In the meantime, though, I believe it’s smart to diversify our savings out of dollars. That’s what the world’s central banks are doing – for exactly the same reasons Birch Gold Group customers are. For a stable, inflation-resistant store of value that can’t be defaulted on.

Gold has intrinsic value. The dollar simply doesn’t.

Phillip Patrick is Birch Gold Group’s primary spokesman and educator. He was born in London and earned a politics and international relations degree at the prestigious University of Redding in Berkshire, England. Growing up in London, he saw the risks of government overreach and socialist policies first-hand.

He spent years as a private wealth manager at Citigroup on Lombard Street (the Wall Street of London). He joined Birch Gold Group as a Precious Metals Specialist in 2012. He’s been with us ever since. In 2021, Phillip became an American citizen (congratulations!).

Phil spends much of his time leading Birch Gold’s team of Precious Metals Specialists, working with them to understand the current state of the global economy and how macroeconomic factors change the lives of everyday Americans.

 

 

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