The Global Dollar Short Squeeze

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

... See more

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,

... See more

These trade deficits are self-reinforcing rather than planned. It’s not like the global reserve country necessarily decides to have persistent trade deficits. Using the United States as an example, if the whole world agrees or is forced to mainly use dollars to buy commodities and settle the majority of international deals, then there is naturally

... See more

In other words, while there is significant foreign demand for dollars (especially to service the aforementioned dollar-denominated debts), there is not a big foreign demand for Treasuries. That’s a key distinction, and that’s what generally happens when the dollar is strong. When the dollar starts rising into a spike, foreigners hold less and less

... See more

Under the current global monetary system that came into effect in 1971, the dollar has had three major cycles of weakness and strength, and each one of these cycles of strength has caused a global short squeeze, leading to financial crises, and impeding growth until resolved. Nations that have the least foreign-exchange reserves and/or the most lia

... See more

The U.S. housing and banking system was the epicenter of the global financial crisis in 2008, and the Fed used a few rounds of quantitative easing (i.e. expanding the monetary base to buy U.S. government debt and other securities) in the aftermath, which kept its currency relatively weak due to plentiful supply.

When the United States finished its t

... See more

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

... See more

Based on BIS data, in 2000 during the second dollar spike, non-bank government and commercial borrowers outside of the United States had a little over $2.3 trillion in dollar-denominated debts. By way of comparison, U.S. GDP was $10.1 trillion, and U.S. broad money supply was $4.6 trillion. So, ex-USA dollar-denominated debts were 23% of U.S. GDP,

... See more

Imagine, as an extreme example, that the entire world had to use Swiss francs for its international transactions and commodity purchases. It simply wouldn’t work, because there isn’t enough money supply from that small country for the whole world to use. It’s not liquid enough; there aren’t enough francs.

The current system is running into that issu

... See more