The US dollar ain't dead

and yes, it is a weapon and has been since 1970s

There is a lot of nonsense going around about the dollar’s demise. The demise of the dollar is not imminent. It has been in a rally since the global financial crisis of 2008 and has only recently come off a 20-year high a bit on debt limit anxiety.

Since Nixon took the world off the Bretton Woods gold standard, US political economy can be described as Central Bank + fiat reserve currency + nukes. The American economy is still the locomotive of the world economy. Chaos abroad increases the demand for dollars. The Neocons know this. Europe is a basket case after a decade of negative interest rates. China is in debt deflation with shipping containers piling up at their ports as manufacturers wait for foreign orders that are not coming.

Proponents of regime change point to the steady fall in the dollar’s share of central banks’ foreign exchange reserves. That stood at around 59% in 2022, down from over 70% in 1999, according to the International Monetary Fund.

Meanwhile, the U.S. share of the world economic output has fallen from 32% in 1980 to 24% in 2020, according to calculations by the U.S. Federal Reserve, while the country’s share of global trade dropped from 14% to 11% in the same period.

Yet in other respects the dollar’s grip is as tight as ever. The dollar was on one side of 88% of all foreign exchange trades in April last year, according to the Bank for International Settlements. The Fed estimates that between 1999 and 2019 the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world. Banks used the greenback for around 60% of all international deposits and loans. [source]

China holds $980.8 billion of U.S. Treasurys, which is 3.2% of the total U.S. debt ¹.

For those factors [cited by those announcing the dollars demise] to pose a serious threat to the dollar, though, they would have to trigger a shift in capital flows. China would need to recycle its savings domestically, running a current account deficit for the first time since 1993. And Japanese investors would have to repatriate at least some of their $1.3 trillion in U.S. Treasury bonds. Central banks, meanwhile, would have to find a safe and liquid alternative currency, or crypto asset, in which to park their reserves.

In the past such financial revolutions have generally coincided with other upheavals such as world wars. In the absence of such a seismic shift, King Dollar will remain on its throne. [source]

Reuters Graphics

Reuters Graphics

As corrupt and fatuous as our financial markets are, they are still the world’s most liquid. If the dollar comes down, as seems likely, it hurts all those countries who are exporting to the US while benefiting US exporters.

With respect to our major trading partner, China, my impression checking prices on Amazon is that they are desperate for sales and the currency decline will be absorbed. Consider this tool kit from Alibaba’s Amazon clone, AliExpress:

I’d say they are desperate for sales. I got a pair of tennis shoes for $10 just to see what they would be like, and they were decent.

It is usually said that the dollar has been weaponized, but now, it is more accurate to say that weapons are being used to defend the dollar. Principal spokesmodel for the Neocons Peter Zeihan echoes his mentor George Friedman of stratfor.com in espousing the strategy of spreading chaos abroad among friends and allies alike as a way of staying on top.

Now the rest of the world has figured it out and has decided they don’t like it much. But there is no other currency as good for holding reserves. So a lot of central banks are buying gold, but you don’t make 5% holding gold.

It will take time – or perhaps a world war – to unseat the dollar.

And just to end on a totally contrarian note, here’s what Goldman Sachs researchers see for the US consumer:

Spending
We’re in the stores, and we’re spending money. Real (adjusted for inflation) consumer spending grew at a firm pace in February (2.5% year over year). More recent data has been weaker however, as nominal (not adjusted for inflation) retail sales declined by 1.0% (month over month) in March.

Despite the weak March data, our economists continue to see consumer spending as a source of strength in our economy and forecast that real spending growth will grow by +2.2% on a Q4/Q4 basis this year.

Income
We’re seeing more money in our checks. Real disposable income grew at a very rapid 7.7% pace (3-month average annualized) in February, partly reflecting Social Security cost-of-living adjustments and tax changes. Income growth should slow in the next few months as pandemic emergency food stamp and Medicaid benefits end, however, and lower tax refunds are expected in 2023 vs. 2022.

Still, our colleagues are forecasting 3.75% real (adjusted for inflation) income growth in 2023, with increases across all income levels.

Wealth
Our household balance sheets remain strong. But our economists estimate we’ve spent about 40% of the extra savings accumulated during the pandemic period and will have spent almost 60% by the end of the year.

The boost to economic growth from the high wealth levels of the past few years may be mostly behind us. Wealth levels are still elevated enough, however, to help keep us spending in the face of inflation and other economic headwinds.

Debt
Our race to borrow is slowing a bit. Consumer credit growth showed signs of cooling in February (7.6% year over year) after growing at an extremely fast pace in 2022 and early 2023.

Right now, the amount of credit we’re using, the costs for using it and the delinquency rates are low, by historical standards. But some signs of stress are starting to show: Credit card delinquency rates for younger borrowers have now climbed above their pre-pandemic levels.

Consumer confidence
The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence that asks people how they feel about their personal finances, the economy, business conditions and prices. The index ticked up in April but remains severely depressed.

TL:DR: Our low level of confidence right now is likely influenced to a large extent by the highly visible realities of rising prices and volatile markets. But the truth is that the American consumer is in a historically strong position in terms of our income, wealth and debt. [source: client email]

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Upcoming: the Coppock Curve is going to send a buy signal this month! The market rally Thursday may have been a cheer.

I will try to review the very schizoid state of the economy — the stock market sending a buy signal, yield curve forecasting recession before yearend — this weekend. It might get bumpy.

Peace.