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Weaponized US Greenback For International Hegemony – Bitcoin Journal

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October 30, 2022

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That is an opinion editorial by Luke Mikic, a author, podcast host and macro analyst.

That is the primary half in a two-part sequence concerning the Greenback Milkshake Idea and the pure development of this to the “Bitcoin Milkshake.”

Introduction

“The greenback is useless!”
“The Petrodollar system is breaking down!”
“The Federal Reserve doesn’t know what it’s doing!”
“China is enjoying the lengthy sport; the U.S. is just planning 4 years forward.”

What number of instances have you ever heard claims like these from macroeconomists and sound cash advocates in latest instances? These kind of feedback have develop into so prevalent, that it’s now a mainstream opinion to declare that we’re about to see the upcoming dying of the U.S. greenback and subsequent fall of the good U.S. empire. Is trendy America about to undergo the identical destiny as Rome, or does the nation nonetheless have an financial wild card hidden up its sleeve?

Equally dire predictions had been made concerning the U.S. greenback within the 1970s in the course of the
“Nice Inflation,” after the abandonment of the gold commonplace in 1971. It took the dynamic duo of Richard Nixon and Henry Kissinger to tug a rabbit out of the hat to save lots of the U.S. greenback. They successfully backed the USD with oil in 1973, birthing the petrodollar experiment.

It was an ingenious transfer that extended the lifetime of the greenback and the hegemonic reign of the U.S. because the world’s dominant superpower. The lesson we should always take away from this instance within the 1970s is to by no means underestimate an important empire. They’re an empire for a purpose. May the USA be compelled to play one other financial wild card immediately to retain their energy as the worldwide hegemon within the face of de-dollarization?

Historical past doesn’t repeat, but it surely typically rhythms.

One other similarity to the 1970s is rising immediately as Federal Reserve Chair Jerome Powell is aggressively elevating rates of interest in an try and combat essentially the most ravaging inflation we’ve seen since that point. Is Powell merely preventing inflation or is he additionally making an attempt to save lots of the credibility of the U.S. greenback within the midst of a 21st-century foreign money battle?

I imagine we’re on the precipice of the implosion of a globally interconnected, fiat-based monetary system. There are at present over 180 completely different currencies all around the globe, and in these two articles I’ll define how we’ll finish the last decade with two currencies left standing. One other dynamic duo, if you’ll.

Most individuals assume these two currencies left standing can be in violent opposition to one another, however I’m not so certain. I imagine they may kind a symbiotic relationship the place they praise one another, the identical manner a plump cherry compliments a milkshake on a heat, sunny day.

However how can we get there, and why do I imagine the U.S. greenback can be one of many final dominos to fall? Easy gravity! Sure, the U.S. is operating the biggest fiscal deficits of all time. Sure, the U.S. has $170 trillion of unfunded liabilities. However gravity is gravity, and there’s an estimated $300 trillion of economic gravity around the globe making it probably that the U.S. greenback would be the final fiat foreign money to hyperinflate. That is the most important mistake individuals make after they analyze the greenback. We regularly solely take a look at the availability of {dollars} and an exponentially rising Fed steadiness sheet.

Nonetheless, everyone seems to be forgetting the primary lesson of Economics 101: provide and demand. There is a gigantic demand for {dollars} all around the globe.

It is a Bitcoin publication, so I may even be discussing the position that bitcoin might have within the cascading fiat foreign money collapse that I count on to unfold within the coming months and years.

In case you settle for the hypothetical assumption that in the future the world will function on a bitcoin commonplace, most individuals will then assume that is unhealthy for the USA, as it’s the present world reserve standing holder. Nonetheless, the monetization of bitcoin advantages one nation disproportionally greater than another: the USA.

A powerful greenback will result in hyperdollarization.
A consequence of hyperdollarization is elevated bitcoin adoption.
A consequence of elevated bitcoin adoption is elevated stablecoin adoption.
A consequence of elevated stablecoin adoption is elevated U.S. greenback adoption!

This dynamic suggestions loop will in the end develop into an all-consuming, fiat foreign money black gap.

Welcome to the “Bitcoin Milkshake Thesis,” the scrumptious macroeconomic dessert you haven’t heard of.

Let me clarify many of those complicated-sounding macroeconomic theories prevalent immediately: petrodollars, eurodollars, greenback milkshakes, bitcoin milkshakes, Ray Dalio’s “Altering World Order.”

Most significantly, I’ll clarify how all of them relate to essentially the most scrumptious dynamic duo within the macroeconomic dessert place: the Greenback Milkshake meets the Bitcoin Milkshake.

The Greenback Milkshake Idea

By now, you’ve in all probability at seen the results that the “Dollar Milkshake Theory” had on monetary markets. The Greenback Milkshake Idea, created and proposed by Brent Johnson in 2018, helps to clarify why each asset class on the planet is cratering. From world equities, blue chip tech shares, actual property and bonds, cash is flowing out of belongings and the currencies of sovereign nations and into the worldwide secure haven: the U.S. greenback.

If there’s one chart that explains the Greenback Milkshake, that is it.

Distilled into its easiest format, the Greenback Milkshake Idea explains how the macroeconomic endgame will unfold for our debt supercycle. It particulars in what order Johnson believes the dominos will fall as we transition to a brand new financial system.

The “milkshake” a part of this scrumptious dessert consists of trillions of {dollars} in liquidity that world central banks have printed over the previous decade. Johnson articulates that the USD would be the straw that sucks up all of that liquidity when capital seeks security in instances of economic danger. Capital flows to the place it’s handled greatest. Johnson proposes that the U.S. greenback would be the final fiat foreign money standing, as sovereign nations are compelled to devalue and hyperinflate their very own nationwide currencies to supply the U.S. {dollars} they want throughout a world sovereign debt disaster.

Put very merely, the Greenback Milkshake Idea is a manifestation of the structural imbalances current in our financial system. These imbalances had been anticipated and even predicted by John Maynard Keynes on the Bretton Woods convention in 1944 and critiqued by Robert Triffin within the 1950s and 1960s. The implications of abandoning the gold commonplace with out utilizing a impartial reserve asset was ultimately going to come back again to hang-out the worldwide economic system.

With the greenback wrecking ball at present wreaking havoc on our monetary system and bankrupting governments all around the globe, I assumed it might be well timed to revisit what I mentioned over a 12 months in the past:

That quote originated from an article I printed in a sequence titled “Bitcoin The Big Bang To End All Cycles.” Within the piece, I analyzed the historical past of 80-year, long-term debt cycles and the historical past of hyperinflation to conclude that the inflation that had simply reared its head in 2021 was not going to be transitory, and as an alternative could be an accelerating catalyst that may propel us towards a brand new financial system by the top of the last decade. Regardless of anticipating acceleration, the acceleration we’ve seen since mid-2021 has nonetheless shocked me.

Right here, I’ll take a extra granular take a look at the middleman steps concerned on this world sovereign debt disaster, exploring the position bitcoin will play as this unfolds. That can give us hints as to which is more likely to be the following world reserve foreign money after the unwinding of this debt supercycle.

Many are puzzled by the U.S. greenback decimating each different fiat foreign money on the globe. How is that this attainable? There are two main techniques which have led to the structural imbalances current in our world economic system: the eurodollar market and the petrodollar system.

A lot of the dollar-denominated debt talked about above was created by banks outdoors of the U.S. That is the place the time period “eurodollars” comes from. I’m not going to bore you with an evidence of the eurodollar market, slightly simply provide the fundamentals which might be related to this thesis. The important thing takeaway we have to perceive is that the eurodollar market is rumored to be within the tens and even lots of of trillions of {dollars}!

This implies there’s really extra debt outdoors the U.S. than there’s throughout the nation. Numerous nations both selected, or had been compelled, to tackle U.S. dollar-denominated debt. For them to repay that debt, they should entry {dollars}. In instances of an financial slowdown, lockdown of the worldwide economic system or when exports are low, these different nations typically should resort to printing their very own currencies to entry U.S. {dollars} within the overseas alternate markets to pay their dollar-denominated money owed.

When the greenback index rises — indicating that the U.S. greenback is getting stronger towards different currencies — this places much more stress on these nations with massive dollar-denominated money owed. That is precisely what we’re witnessing immediately because the greenback index (DXY) reached 20-year highs.

The one-month chart for the greenback index (DXY) going again to 1981 reveals 20-year highs.

For a extra detailed breakdown on the Greenback Milkshake Idea and the devastating results it’s having on markets immediately, I devoted a weblog to explaining the thesis.

This milkshake dynamic creates an unlimited demand for U.S. {dollars} outdoors of the nation, which allows and really requires the Fed to create monumental quantities of liquidity in an effort to provide the world with the {dollars} the world must service its money owed. If the Fed desires the worldwide economic system to operate successfully, it merely should provide {dollars} to the world. It is a key level. In a globally interconnected world throughout peacetime, it is sensible the Fed would provide the world with the wanted {dollars}.

Since we’ve been on the petrodollar system for the previous 50 years, we’ve skilled many requires the dying of the greenback. Nonetheless, essentially the most threatening instances our monetary system confronted have emerged when there’s been a scarcity of U.S. {dollars}, and the DXY has strengthened relative to different currencies.

The Lethal Greenback Bull Runs

The dominant narrative within the macroeconomic setting over the previous decade has surrounded the Fed and central banks with traditionally unprecedented unfastened financial coverage. Nonetheless, this seems to be altering in 2022.

As we watch the Fed and central banks around the globe elevate rates of interest in an try to regulate inflation, many are shocked and confused as to what this new paradigm of tightening financial coverage will imply for our deglobalizing world economic system. It’s paramount to recollect: All fiat currencies are dropping buying energy towards items and providers.

All currencies are being quickly devalued and can ultimately return to their intrinsic worth of 0. Of the hundreds of currencies which have existed since 1850, most have gone to 0. At present, we’re within the means of witnessing the ultimate 150 or so development to Zero in a globally aggressive debasement to the underside.

One of many main measurements everybody makes use of to measure this relative power is the greenback index. It’s measured towards six main currencies: the euro, Japanese yen, British pound, Canadian greenback, Swedish krona and Swiss franc.

The DXY has had three main bull runs since 1971 which have threatened the steadiness of the worldwide monetary system. Each time the U.S. greenback has rallied, it’s destroyed the steadiness sheets of rising market nations which have taken on an excessive amount of U.S. debt with too little reserves.

On this greenback bull cycle, it’s not simply fringe rising markets which might be affected by the hovering U.S. greenback. Each single foreign money is being decimated towards the mighty dollar. The Japanese yen has lengthy been thought to be a secure haven alongside the U.S. greenback and for years it’s been held up because the poster foreign money by Keynesian economists. They’ve had the enjoyment of pointing towards Japan’s monumental 266% debt-to-GDP ratio, alongside the Bank of Japan’s enormous 1,280-trillion-yen balance sheet with many years of low inflation.

Japan held $1.three trillion of U.S. Treasurys as of January 2022, beating out China as the biggest overseas holder of U.S. debt.

Each the Japanese and the Chinese language have not too long ago resorted to selling their U.S. Treasury holdings as they undergo from the worldwide greenback scarcity.

A weak Japanese yen is usually unhealthy for China as a result of Japanese exports develop into extra engaging the weaker the yen will get. This is the reason each time the yen has considerably weakened, the yuan has sometimes adopted. There seems to not be an exception to this rule in 2022, and shut consideration needs to be paid to the opposite exporting Asian currencies, just like the South Korean received and the Hong Kong greenback.

Then we have now the Hong Kong greenback peg, which can also be on the point of a significant breakout, because it continues to knock on the 7.85 peg.

This peg has been held for over 30 years.

This peg has been held for over 30 years.

Shifting our consideration to a different energy-impoverished space, we will see that the USD can also be exhibiting monumental power towards the euro, which is the second-largest foreign money on the planet. The EUR/USD has damaged a 20-year assist line and has not too long ago traded beneath parity with the greenback for the primary time in 20 years. The eurozone is struggling tremendously from a fragile banking system and vitality disaster with its foreign money dropping 20% of its worth towards the greenback up to now 18 months alone.

The euro has misplaced 20% of its worth towards the greenback in simply 18 months.

The European Central Financial institution seems to be in disaster mode as they’ve barely gotten rates of interest into the constructive realm, whereas the Fed has moved its federal funds fee to nearly 4%.

The Fed has moved its federal funds fee to nearly 4%.

This has triggered important capital flight out of Europe, and as a result of latest volatility of their bond market, ECB President Christine Lagarde was compelled to announce a brand new type of quantitative easing (QE). This “anti-fragmentation” software is a brand new type of QE the place the ECB sells German bonds to purchase Italian bonds in an try and hold the fracturing eurozone collectively.

This greenback bull run is wreaking havoc on the world’s largest and most secure currencies. The yen, euro and the yuan are the three largest options to the U.S. greenback and all are rivals if the U.S. had been to lose its reserve foreign money standing. However the rising market currencies are the place the actual ache is being felt essentially the most. Nations like Turkey, Argentina and Sri Lanka are all experiencing 80%-plus inflation and function nice examples of how the greenback wrecking ball hurts the smaller nations essentially the most.

What Comes Subsequent?

The DXY has had a hell of a run over the previous 12 months, so a pullback wouldn’t shock me. Each the DXY and the extra equally-weighted broad greenback index are very prolonged after having parabolic rises in 2022 and are each now breaking down from their parabolas.

One-day chart of the DXY exhibiting a parabolic enhance

One-day chart of the trade-weighted broad greenback index, additionally exhibiting a parabolic enhance

May we see a Fed steadiness sheet shoot to $50 trillion whereas concurrently seeing hyperdollarization because the eurodollar market is absorbed?

It’s attainable, however I believe the Fed is racing the clock. The petrodollar system is breaking down quickly because the BRICS nations are racing to arrange their new reserve foreign money.

It’s essential to note, this milkshake situation was at all times going to unfold. The structural imbalances in our monetary system would’ve at all times inevitably manifested themselves on this domino impact of foreign money collapses that Brent Johnson articulated.

Apparently, I imagine some latest occasions have really accelerated this course of. Sure, I see all of the signposts that the greenback doomsayers are mentioning; the greenback will die ultimately, simply not but. Nonetheless, let’s entertain the concept that the greenback is actually dying, and the USD will lose reserve foreign money standing.

Who would take over the worldwide reserve foreign money of the world?

For the financial causes I’ve talked about above, I don’t imagine the euro, the yen and even the Chinese language yuan are viable replacements for the U.S. greenback. In a latest article titled, “The 2020s Global Currency Wars,” I explored the theses of Ray Dalio and Zoltan Pozsar and defined why I believed each had been ignoring the geopolitical, demographic and energy-related headwinds going through all of the rivals to the U.S.

I do imagine that commodities are considerably undervalued and that we’ll see a 2020s “commodities supercycle,” on account of many years of underinvestment within the trade. I additionally imagine securing commodities and vitality will play a key position in a nation’s safety, because the world continues to deglobalize. Nonetheless — disagreeing with Pozsar right here — backing cash with commodities isn’t the answer to the issue the world is going through.

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