A U.S. Dollar Collapse in 2017 Is More Likely Than Markets Suggest
You’d be right to mock suggestions that the U.S. dollar could drop in 2017. But you’d be even more foolish to ignore that prospect, because it exists. A U.S. dollar collapse in 2017 doesn’t have the odds that only a compulsive gambler might take. This is not just about purchasing power. The events that could happen if the U.S. dollar collapses could be worse than 2008.
If, like me, you were impressed by the optimism of President Donald Trump’s first address to Congress, thinking about when the dollar will collapse makes no sense. But optimism works best when applied from a situation of loss. Had Trump’s election prompted the Dow Jones index to lose over a thousand points, optimism would remind you that market performance might improve.
The trouble is, the markets have been overplaying the bullish act. Trump has spoken well and said things people were hungry to hear during the Barack Obama years, but he has yet to prove that his plan can work. What if the American economy goes bankrupt just as Trump’s casinos in Atlantic City did?
This is no snub to Trump. He’s a real capitalist CEO, not a Harvard MBA-type “capitalist.” Trump takes risks, CEOs get millions of dollars even when they fail; ask Marissa Mayer. That’s the problem, in fact. When everything seems to be going well, the same mistake or negative outcome makes a louder bang than when general circumstances are bad.
Beware the cheerful markets, for they are masking inconvenient facts about the state of the real U.S. economy. Dollar collapse predictions seem as unpopular as a financial crisis 2017. But it’s useful to think of both, because they are well within the realm of possibility. There’s no doubt that Trump has invigorated Americans’ (or half of them anyway) belief in themselves.
Trump policies, or at least what they promise (for it’s too early to tell), have pushed the dollar to highs not seen since 2002. More than Trump’s election victory (although there’s no doubt it helped), this has more to do with the weakness of the Chinese yuan. (Source: “Dollar Reaches a 14-Year High,” The Wall Street Journal, November 23, 2016.)
It seems inevitable that U.S. interest rates will be rising in 2017. But the fact that the expected sequence of hikes is the first in a decade presents many risks. It could trigger an outcome that few economists expect. It’s been so long since the last rate hike that an entire new generation of financial industry professionals has never dealt with interest rates above zero!
The course of the dollar does present a dilemma. The trite expectation that the U.S. dollar will gain value just because interest rates are going up fails the inevitability test. This is because Trump’s protectionist policies could kill international trade or could keep America out of the current system, which could prop up other currencies like the euro or the yuan.
As proof that uncertainty surrounds the dollar’s value, gold prices have, in fact, risen to the highest level since November 2016 in this part. The tensions generated by the new administration internationally have led many to seek refuge assets in expectation of a dollar collapse.
Black Swan Events That Will Follow If the U.S Dollar Collapses in 2017?
Indeed, higher interest rates could create the conditions for a black swan event. The conditions for that event, which nobody can foresee (such is the nature of black swans), could trigger a dollar collapse. In addition, the dollar collapse itself would unleash a series of black swan events that could wreak mayhem with the entire U.S. economy.
For starters, the basics, such as the U.S. unemployment rate in 2017 could skyrocket. Then there’s the matter of rising U.S. debt. Black swans are, by their nature, unseen and unpredictable. Contrarian philosopher and mathematician—as well as investment risk analyst—Nicholas Nassim Taleb devised the concept of the black swan event in the markets.
The concept of black swan events comes from the fact that, before Europeans went to Australia, all swans were white. Nobody had ever seen a swan other than one showing off white plumage. But, as the first colonists reached Australian shores, they discovered black swans, disrupting the notion that all swans are white.
Where the dollar is concerned, the lesson is that not all rate hikes produce a dollar value increase. So first I shall make a brief case for why the dollar could fall. Then a discussion will follow about the potential black swan events resulting from a U.S. dollar collapse.
Black Swans Are Already Flying Around U.S. Dollar Collapse
Given the nature of random events and the “munitions warehouse” state of the economy, the black swan scenario has a “chicken or egg” nature about it. The dollar collapse could either result in, or unleash, a series of destructive events that we can describe as black swans. In fact, the strength of the U.S. dollar is already under threat, black or white swans notwithstanding.
In Trump’s mercantilist vision of higher, much higher, tariffs, international trade will suffer. The free exchange of goods has been one of the hallmarks of the current global economic order. It has allowed developing countries like China and India, for example, to emerge as economic and geopolitical superpowers. But, mercantilism represents the ideological opposite of free trade.
Whereas countries depending on trade demand U.S. dollars, when one of these two is in shortage, there is a problem. It’s not just China that benefits from freer trade; the U.S. does as well. Fewer tariffs make goods cheaper to buy abroad, creating more demand.
Meanwhile, such big-ticket items as the ones that the U.S. produces, be they cars or airplanes, importers (other countries) need U.S. dollars. That’s because they pay in U.S. dollars. Oil is sold in U.S. dollars too. Less trade means slower economic growth, and that also reduces demand for dollars.
Boeing Co (NYSE:BA) is the largest American exporter by value.
When China needs more airplanes—by one estimate, they will need about a trillion dollars’ worth in the next 20 years or so—it converts yuan into dollars. Foreign governments also invest, or recycle, dollars they gain from American importers in the United States. They buy up debt or government-issued Treasuries.
This system has worked well for so long that any disruption would create panic; the kind of panic that throws markets upside down. But the clear effect is that with less global trade—and especially a less prominent role for America in the world economy, the dollar would lose value.
The likely winner would be the euro, because the European Union (EU) has no intention to break loose of the global trade circuit. If the high U.S. dollar makes American goods uncompetitive abroad, the low-value dollar would be even worse in the context of Trump’s more isolationist approach to trade and geopolitics.
Trump has already announced 33% tariffs or higher on foreign goods. Reciprocity dictates that American goods would be subjected to the same standards. But, the main problem is that the performance of the financial markets might be stellar right now, the true recovery has not begun. The financial markets and the real economy are not necessarily related.
What Are the Events That Could Happen if the U.S. Dollar Collapses?
Trump has already announced 33% tariffs or higher on foreign goods. Reciprocity dictates that American goods would be subjected to the same standards. But the main problem is that the performance of the financial markets might be stellar right now, but the true recovery has not begun. The financial markets and the real economy are not necessarily related.
There is the matter of the U.S. deficit. Sooner or later, the U.S. will face the problem of debt and the trade deficit. The United States has not really been growing to the same extent that the stock markets suggest; far from it.
The recession that resulted from the 2008 financial crisis was more of a depression. The recovery on Wall Street has masked the fact that Main Street remains in a slump.
A low dollar and a reduced trade regime means many consumers used to cheap goods would no longer have that choice. Meanwhile, the statistics tell a different tale than the markets. Fewer than half of U.S. citizens have full-time work, and 40% have a salary of nearly $20,000 per year.(Source: “1 In 2 Working Americans Make Less Than $30,000 A Year,” The Daily Caller, October 25, 2015.)
Many Americans eat thanks only to food subsidies. These are hardly the statistics of a strong and recovering economy. In the midst of this, America has a massive debt, and much of it is held by countries that Trump has been threatening with trade wars or more. China occupies a privileged role in both categories, and it owns the majority of U.S. debt.
Challenged by Trump—and not only economically—China could rid itself of its almost-$1.20 trillion worth of Greenbacks. This would flood the markets, weakening the dollar at any time. Meanwhile, even the resulting weak dollar would leave China indifferent to U.S. goods, weakening the dollar and the American economy further in a spiraling collapse.
Let’s not forget that China has a $600.0 billion/year trade surplus with the United States. Imagine what would happen if China stopped buying debt purchases. The dollar would collapse. The U.S. imports many raw materials, and other types of materials, to produce goods. Trade is always a game of give-and-take. If you try to alter that balance, the results could be catastrophic.
Basically, a low dollar leaves the U.S. vulnerable to what we might call financial attacks. The lower the dollar, the higher the risks and the greater the effects of the attacks. A low dollar can be advantageous in an equilibrium. That is in a situation in which the other factors of the global economic equation remain constant.
But Trump wants to disrupt that system. While the dollar is moving higher for the time being, driven by Federal Reserve considerations, the risks are that it could collapse. The only way for the U.S. to defend itself is if another country—wealthy enough—can buy up U.S. debt instead of China. Belgium started to play that role in recent years, but it has sold off much of it.
Might the U.K. seek closer ties to the United States, showing its goodwill by buying U.S. debt? The U.K. has its own troubles to worry about as it faces Brexit. To pay for things, meanwhile, the United States would have to print more money, pushing up inflation, and possibly leading to hyperinflation.