The Global Dollar Short Squeeze

Unlike most developed countries, the United States government is heavily reliant on foreigners lending it money by buying its Treasuries. Foreigners currently hold $6.7 trillion in U.S. government debt.

However, from the start of 2015, due in part to the strong dollar environment, foreigners have been buying very little U.S. government debt compared

And it continues to grow; the United States is running large deficits (5% of GDP) during a period of low unemployment for the first time since the Vietnam War. In other words, we now have significant structural government budget deficits rather than just temporary cyclical/recession deficits:

You can see on the chart that it was similar during other dollar spikes from 1983-1987 and 1996-2003; dollar spikes are historically bad for U.S. corporate profit growth and this third one is no different.

This latest bout of corporate stagnation has been somewhat masked by higher equity valuations, corporate tax cuts that boosted after-tax profits,

Why Each Time is Worse

Each of these three dollar spikes over the past five decades caused harm to the global financial system at a lower level of dollar strength than the previous spike, resulting in either a planned correction or a self-correction towards a weaker dollar. There are likely two main reasons for this.

Firstly, global trade accounted f

The Triffin Dilemma Unfolds

In the 1960’s, economist Robert Triffin noted that global reserve currencies have to run large persistent trade deficits, which has been coined the Triffin Dilemma. If the reserve country doesn’t supply the world with a lot of their currency, then the world simply can’t use that currency for international trade, commodity

In recent decades, the S&P 500 now receives over 40% of its revenue from international sources, and a stronger dollar means that when those foreign revenues are translated back into dollars, it comes out to a lower number of dollars. The percentage of S&P 500 sales from foreign sources peaked in 2014 and has been on a mild downtrend, coinci

1990’s-2000’s Dollar Spike

During the 1990’s, several emerging markets began to grow substantially, and began taking on dollar-denominated debt while the dollar was comparatively weak.

Meanwhile, the United States enjoyed prosperity from the Baby Boomer demographic bulge in prime working age combined with the dotcom boom and its associated new mega

Emerging markets as we currently know them didn’t exist during the 1980’s dollar spike. The MSCI Emerging Market Index was created shortly afterward in 1987, and it was a small share of global GDP at the time. Developing countries of course existed during this dollar spike, but just weren’t significant players in the dollar market. So, this 1980’s

The first and largest dollar spike occurred in the mid-1980’s. From the 1970’s and into the early 1980’s, the U.S. dollar encountered serious devaluation and inflation, so Fed Chairman Paul Volcker hiked interest rates up to the double digits to stabilize the dollar and force inflation back down. This, however, made the real interest rate on the do