Will the U.S. Dollar Collapse in 2018? Lombardi Letter 2017-11-24 08:31:58 will the U.S. dollar collapse in 2018?dollar collapseu.s. dollarjanet yellenfederal reservefederal reserve chairFedinterest ratesJerome powell The U.S. currency is not as strong as many would like to think. It’s really time to start wondering: will the U.S. dollar collapse in 2018? Analysis And Predictions 2018,News https://www.lombardiletter.com/wp-content/uploads/2017/11/US-Dollar-Collapse-2018-150x150.jpg

Will the U.S. Dollar Collapse in 2018?

US Dollar Collapse 2018

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Will the U.S. Dollar Collapse in 2018?

The U.S. currency, relative to its competitors, is not as strong as many would like to think. Amid a series of expected interest rate hikes in the eurozone and at the Bank of England, backed by actual economic growth, currency investors should pay attention in the coming year.

It’s really time to start wondering: will the U.S. dollar collapse in 2018?

Consider the U.S. Dollar Index’s long-term prospects, as illustrated in the chart below. It will not tell you exactly when the dollar crash will happen. But, given that the index compares the U.S. currency’s performance relative to other major currencies, it offers some sobering perspective.

It’s no secret that, over the course of the past three decades or so, the U.S. dollar has dropped by some 25%, compared to its rivals in the currency markets. And now, the dollar is about to collapse.

dolalr index nov 8

Is the U.S. Dollar Going to Collapse in 2018?

Whether by design (President Donald Trump claims he wants a low dollar) or by accident, the U.S. Dollar Index has lost about 10% in 2017. This trend can only continue—and likely accelerate—in 2018.

The U.S. dollar is paying, and will continue to pay, because of the inaction over the economy in Washington. The gamblers might bet on the dollar going up, but the wise will be the ones paying attention to U.S. dollar collapse predictions.

Is the U.S. Dollar Going to Collapse in 2018?

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Much of Trump’s economic strategy and recovery plan hinge on the passing of his fiscal reform. However, it’s too radical and may even be too unrealistic. As presented to Congress, loaded with major tax cuts for corporations and for private individuals alike, in theory it could help stimulate growth and raise the standard of living for everybody.

The logic of Trump’s tax reform is that the tide lifts all boats. It’s another interpretation of the trickle-down economics that President Ronald Reagan made popular in his first term (1981–1985). But, as that plan proved, it’s really only good for a few, and it produces huge debt. It’s one of the reasons that the U.S. dollar has lost so much strength over the past 30 to 40 years.

One of the big pillars of Trump’s economic reform is the tax reform. It’s one of the most ambitious fiscal reforms to date, bigger even than what Reagan did in the 1980s. But there are many doubts about its viability. Perhaps Trump, or more likely the Republicans in Congress, will have to revise the plan and dilute its provisions. According to rumors, there has been pressure to shave off one of the primary components of the tax bill.

This is the one that would lower corporate taxes to 20%. At best, that will have to be postponed. While the U.S. has a relatively higher corporate tax rate than many of its industrialized competitors, it also allows for more numerous and generous tax deductions. Similarly, there’s the ever-present perception and suspicion that the richest Americans are still going to end up as the biggest beneficiaries of the tax reform.

As political tensions rise internationally and domestically, President Trump can’t seem to make a single favorable move in the eyes of Democrats, meaning he could be a sitting duck. His opponents in Congress—and there’s plenty of bipartisan opposition to go around—will weaken the White House politically, resulting in a diluted tax bill, regardless of what else happens.

The Yuan

Before any discussion over the weakness of the U.S. economy (and if you doubt that, just look at the number of small- and large-sized retail chains collapsing), it’s worth noting the effect of the Chinese yuan.

The more international currencies there are, the more the dollar faces competition. The value of an international currency like the dollar derives not only from interest rates and pure economic strength; like gold, there is a strong element of perception.

The dollar’s strength, especially since the end of World War II, has been tied to U.S. economic strength and political stability. But it has also been tied to U.S. military might. Now, the world seems ready to shift toward a world where the U.S. is no longer the only hegemony on the block.

After the collapse of the Soviet empire in 1990, the United States made the mistake of believing it was the only superpower.

The mistake was good at first, helping speed up the transfer of technology from the military to the civilian realm. Few remember that the Internet and e-mail were first used by the military. Raytheon Company worked on the related infrastructure and basic idea of a connected information storage and access system in the late 1960s.

The apparent victory of the American system over the Soviet one eased security considerations and, by 1995, many people were using the Internet. By 2000, there were few people left in the world that were not using the Internet. American businesses and finance benefited tremendously from the emergence of the so-called “tech sector.” It became, and still remains, the main growth generator in the American economy.

But how long can America’s dominance last?

China’s Closing in…Fast

China is catching up quickly in every field of technology. Meanwhile, more and more American companies have moved their manufacturing to China already. Moreover, the Chinese are also expanding their military capabilities, building their own military vessels, stealth fighter jets, and smart weapons. They’re even planning a space mission to the moon.

China’s international influence is rising in conjunction with its technology and military capacity.

Part of that growing influence includes the yuan. China’s currency is growing in importance. The International Monetary Fund (IMF) recently included it as a special drawing rights currency.

Therefore, many central banks around the world are buying the yuan, with central banks reported having accumulated holdings valued at over $90.0 billion at the end of 2016. Just six months later, those same central banks held just short of $100.0 billion.

Internationally, and even in the domestic U.S., there is uncertainty that the yuan can continue to rise at this unexpectedly rapid pace.

Apart from the shift or erosion of American influence, the United States has built up a considerable but unfortunate phenomenon: debt. U.S. debt keeps growing larger and Trump’s aforementioned fiscal policies could accelerate the rise of debt rather than slow it down.

Trump’s plan risks pushing debt higher, well beyond the current $20.0 trillion. Therefore, the Federal Reserve will be unable to raise interest rates. Similarly, other governments will want to diversify their monetary reserves, accumulating currencies that are not the U.S. dollar. China, of course, is one of these key players.

The Bank of China alone holds about $1.0 trillion, and it has announced its intention to divest part of its U.S. dollar reserve. It plans to do this by using gold-backed future contracts and pricing oil in yuan. After taking concrete steps to dethrone the U.S. as the top tech power, China is closing in on the dollar. (Source: “China has grand ambitions to dethrone the dollar. It may make a powerful move this year,” CNBC, October 24, 2017.)

Higher Interest Rates Will Explode the Market

Trump has chosen Jerome Powell to succeed Janet Yellen as Chairperson of the Federal Reserve. Powell is not a fan of raising rates; he may be even less inclined than the outgoing Yellen. Should any Fed chair raise interest rates while U.S. debt keeps growing, the U.S. government will struggle even to pay back interest on the debt. At the current low level, the interest owed is more than $270.0 billion.

With rates at a more “normal,” or historical, level, the interest alone could top $1.0 trillion. For various reasons, quantitative easing (QE) will therefore have to continue. American consumers, many of whom are struggling to cope with one form of debt or another, would get an increased perception of “wealth” with interest rates kept low.

Higher rates would mean much higher interest on car loans, student loans, and mortgages. The U.S. comes closer to recession with every interest rate hike. Higher interest hurts the ability to borrow, which could prompt a recession. Trump has enough problems to worry about without adding that one to the list.

Investors don’t seem to be paying much attention to the value of stocks, much less the U.S. dollar. But they are wrong. The stock markets long ago passed the point of irrational exuberance. They are now entering “downright spooky” territory, and the level of risk is massive.

Any unexpected economic move, such as an interest rate hike, could now be the proverbial drop that spills the cup. Raising interest rates is the main way to help the dollar sustain its value against major currencies, especially since many central banks, such as the European Central Bank and the Bank of England, have hinted that they’re ready to adopt a tighter monetary policy.

Investors are hungry for outperformance in the markets. They’ve been getting it, yet that only makes the inevitable collapse harder. Trump will exercise more influence than other recent presidents over monetary policy. He will be careful to let interest move much higher to prevent a crack on Wall Street. That will eventually start pushing against the rise of the dollar.

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