London Insider is an experienced international investment executive with unique access to information. In his first story, he reveals that the U.S. is throwing its allies under the bus in order to extend the life of the dollar.
LONDON, UNITED KINGDOM — Is the U.S. dollar bulletproof? For some time now, the U.S. currency seems to defy textbook logic, which predicts that expansionary inflation of money supply should lead to a loss in value. The gold price hasn’t moved as much as many expected, and in relation to other major currencies, the dollar has appreciated through 2022 with a historic boost in the last few days.
The Federal Reserve started the money-printing bonanza first in 2000 to cushion the tech crash, then accelerated with the financial crisis in 2008 – and has taken all the stops out since the 2020 “pandemic.” The monetary base (M2 in the below chart) has exploded while the interest rate recently touched zero.
Other factors at play are the corrosion of the petrodollar foundation: even America’s closest allies (or most controlled vassals, depending on perspective) such as Saudi Arabia are openly considering selling their oil for Chinese Yuan – utterly unthinkable statements during the previous seven decades. The slow but steady demise of the petrodollar was widely believed to bring the end of dollar supremacy and turn the mountain of printed liquidity into accelerating devaluation.
FROM PETRODOLLAR TO GAS DOLLAR
How could the dollar remain strong through 2022 and even stage such a spectacular rise in the last days? A look to Europe reveals major geo-financial events. In short, the U.S. is throwing its poodle allies under the bus to extend the life of the dollar.
The Ukraine war is likely serving several purposes; one key outcome is to disconnect the Western European economies from trade with Russia. Western Europe is forced to switch from cheap Russian natural gas energy to expensive liquefied natural gas (LNG). LNG comes from the U.S. or from U.S. allies and needs to be paid in dollars – in essence supplementing the petrodollar with a gas dollar.
Europe has been relying on cheap Russian gas to produce affordable electricity and heat – plus a large range of industrial and chemical products that we take for granted. The sabotage of the Nordstream 1 and 2 pipelines – arguably the most important piece of Europe’s energy infrastructure – will lead to significant damage to European economies. Another consequence has been an instant and sharp sell-off of euros.
GLOBAL INVESTORS LEAVING
Some producing businesses will move to the U.S., increasing demand for the dollar at the expense of the euro. Germany's producer price inflation surged by a staggering 7.9 percent to 45.8 percent in August – the highest increase since the survey began in 1949.
Exploding input prices will render manufacturing goods in Germany increasingly unviable. The picture is similar in other Western European industrial centres. Accordingly, global investors are rotating out of euro-denominated holdings and into dollars, acknowledging the economic destruction in Europe.
A PERFECT STORM
But then the question is, is the dollar out of the woods? Can this last? An interesting case and perhaps a glimpse of what’s to come is the United Kingdom, where the British pound sterling just crashed to a historic low against the dollar. Inflation is rampant and many everyday expenses are rising by 20–30 percent; even the UK’s official inflation rate is well above 10 percent.
As in the U.S., the question in the UK has been what path the central bank will choose: dampening inflation with higher rates at the expense of recession or keep rates low and let inflation run at the expense of a later (perhaps disastrous) collapse. The answer now looks to be… both.
Following in the wake of the U.S. Federal Reserve, the Bank of England (the UK’s central bank) had set its course on a gentle path of interest hikes – behind and below the Fed’s hikes. These tentative steps were enough to spark panic: a looming collapse in government bonds prompted the BoE to reverse course and hit the pedal hard into buying those government bonds – while keeping the promise of interest rate hikes “to fight inflation.”
The real estate-dependent and mortgaged-to-the-hilt Brits face a perfect storm of rising debt payments and dwindling available income. Bloomberg writes “The Cost of an Average UK Mortgage Could Rise 70 percent by March”.
For now, the dollar has found a new lease on life. The cliché of “the cleanest dirty shirt” seems like a suitable analogy.