Dollar Collapse And The $187 Reese’s Cup

With the House poised to pass Democrats’ $1.9 trillion virus relief bill and Joe Biden set to sign the legislation by Sunday, I wanted to take a moment to reiterate how manifestly absurd it is that lawmakers and market participants continue to insist on the notion that, eventually, fiscal rectitude will have to take precedence.

To be sure, most rational people who aren’t engaged in political grandstanding understand that now isn’t the time to fret over “debt” and deficits. Indeed, even political grandstanding is difficult due to the unique nature of the current crisis. Grandstanding in defense of budget rigor while scores of people perish in a pandemic is political suicide, something Republicans clearly realized around this time last year.

And yet, you’d have a very difficult time finding a US politician (or an analyst on Wall Street) willing to countenance the idea that no, in fact there will never come a time when austerity is “necessary” for the US. Not in a strict sense of the term. Put differently, no one in Congress or on Wall Street will admit that it is by definition false that the US will one day need to “get its fiscal house in order.”

The reason I describe those pretensions to fiscal rectitude as “by definition false” is simple. If it ever becomes truly imperative or actually urgent that the US reduce the deficit or run a budget surplus in order to restore confidence in the dollar, it’ll already be too late. And not just for the US. But for the whole world.

Either the world has faith in the dollar or it doesn’t. This is black and white. At least in the near- to medium-term.

The dollar can appreciate or it can depreciate, but its dominant role in global trade and finance must remain generally stable, where that means that any erosion of that dominance (e.g., any gains by the euro or any “incursions” by, say, the Chinese yuan or even Bitcoin), have to be gradual.

Have a look at the figure (above). If the world lost faith in the dollar, causing all of the dark grey bars to fall to zero in a short period of time, international trade, finance, and commerce would come to a screeching halt. Everything would collapse virtually overnight.

We pretend this isn’t black and white. That is, we pretend there’s a kind of grey area, where the world’s faith in the dollar waxes and wanes according to a number of factors, not least of which is America’s fiscal situation. You hear some version of that tale every, single day, whether you realize it or not. (The more red ink there is, the more perilous, etc.)

Those stories are true if you’re an FX trader. And oscillations in the dollar are obviously relevant for giant multinationals. And they’re relevant when Clark Griswold goes on a European vacation, something one reader previously pointed out.

But the “debate” is meaningless from a big picture perspective. The dollar isn’t the Turkish lira. Or the rand. Or the real. People’s “confidence” and “faith” in the dollar doesn’t really wax and wane on a daily, weekly, monthly, or even yearly basis.

If you go to Colombia and try to buy a tractor-trailer’s worth of illicit drugs, you’ll pay in dollars. And while the price would be notably higher than it was three decades ago, it won’t be materially different next month versus today, or if it is, the change would have everything to do with logistics or the vagaries of the cartel’s operation, and nothing at all to do with whether or not the latest COVID-19 relief bill passed by Congress was $959 billion or $1.9 trillion or $3.5 trillion.

That’s a crude example by design. The point is that when it comes right down to it, the conversations playing out in the halls of Congress and on social media and on financial news portals and among economists, are quaint to the point of being naive.

Everywhere and always, the discussions are self-referential and circular. Let’s say, for argument’s sake, that the Biden stimulus plan does cause hyperinflation and the price of a Reese’s cup soars to $187 by this time next year. What does that world even look like? For example, how does crude oil move around the globe and settle if Reese’s cups are $187? How do exporters (any exporters) recycle their savings if the interest-bearing instruments they previously favored for such purposes are based on a currency so worthless that it doesn’t even suffice to purchase a small piece of chocolate with peanut butter on the inside?

That world doesn’t exist. And it never will. Or actually, it surely will one day, but when it does, the problem “solves” itself, depending on your definition of “solved.” It’ll be anarchy, and in fairly short order. The last thing anyone will care about are exchange rates. It would probably be catalyzed by a natural disaster of some kind, there wouldn’t be enough time to set up a new regime, and because human beings no longer cooperate very well, an international barter system would probably be out.

Outside of humanitarian concerns, nobody cares how many bolívars it costs to buy a cup of coffee in Caracas. We may lament the plight of everyday Iranians, but unless a local economic meltdown causes regime change in Tehran, it makes little difference to the world how many rials it takes to buy a new rug. By contrast, if the price of Reese’s cups jumped to $187 by next year, it wouldn’t just be international news, it would be an international emergency.

When you hear about economies that are teetering on the brink of a currency crisis (even large economies like, say, Turkey) you hear about local demand for dollars — “dollarization.” That term has no meaning in a world where Reese’s cups are $187. Sure, it’s possible to imagine the euro or the yen stepping into that role, but how feasible is that, really?

Ironically, it’s probably more feasible outside of the US where citizens are at least somewhat familiar with the concept of currency swapping. How would an unbanked West Virginia resident go about getting his hands on some yen in a dollar collapse scenario? How easily could someone living in an inner city housing project who’s never had a debit card obtain euros? How would some random, lower-middle class Kentuckian get ahold of some yuan?

Please, I implore you: Don’t let anyone tell you there’s precedent. There isn’t. There are no historical parallels to this situation. You can’t compare dollar dominance in an interconnected, globalized, digitized, financialized, highly complex world, to some ancient coin minted by an emperor somewhere. We can’t just transition to cowrie shells if we need to.

And most people who “own” gold and silver own it through ETFs, which, let’s face it, isn’t really “ownership,” is it? If I own the deed to a truck I’ve never seen and someone promises me it’s stored in a garage in Vancouver, do I really “own” that truck? Is it even there? Does that truck really exist outside of the paper certificate I have? It’s a good question. Because I might need that truck to haul 45 pounds of worthless paper dollars so I can buy a sandwich. Or a Reese’s cup.


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12 thoughts on “Dollar Collapse And The $187 Reese’s Cup

  1. When I reviewed everything else included in the $1.9T that was not a direct payment, I was actually pleasantly surprised to see the $3,600/$3,000 child tax credit. Parents can spend as needed in their household.
    Although only for one year, if it goes well- hopefully becomes part of the baseline.
    Next, if we can get basic universal healthcare coverage, as every other wealthy country has, we can get two more pillars in place to support the global position of the US and the USD. People do not believe it, but there are studies showing that universal basic healthcare actually reduce total healthcare costs.

  2. An interesting part of this post is the difficulty of most Americans would have exchanging currencies to euro, yuan, yen, etc. It’s an interesting excercise to think about the difficulty those same Americans might have in exchanging to Bitcoin, as many people know someone who can act as a gateway.

  3. Excellent per usual, H …

    I just hope that unbanked West Virginia citizen continues to support Joe Manchin whom I hope is up for one more election in 2024 at age 77 …

  4. Didn’t we already have a test run for “international emergency” last February and March when everybody in the world bought dollars? Not stocks, credit, Treasuries, bitcoin, other FX, etc. Everyone ran to US dollar. What other proof does one need?

      1. If so much of the world’s debts are denominated in one currency, is it even possible for that currency to “collapse”?

        I guess the USD always rallies in a true crisis as the loss of trust means it’s so much harder to refinance existing USD debts, forcing asset sales.

  5. You can tell things are changing. First the many critics of Biden on the left are being very quiet. They did not get everything, but they realize they got a lot – and more from Biden than Obama- BIden learned the lesson of Obama’s reticence. When you have the chance you go for it. Second, the GOP while not swallowing their pride and retreating are probably in for a tough time at the polls in 2022. What can they campaign on? Defense of Neanderthals? What are Americans going to rebel against. Effective vaccination distribution? Increased social welfare and health care aid. Increased competency in government? A more civil and reasonable discourse?

  6. For months I’ve watched inflation jawboning, gold jawboning, political jawboning, treasury rate jawboning, pandemic stimulus jawboning — and really don’t see much to get excited about. I don’t mean to be disingenuous or take on devil advocating, but this pandemic era is a singularity event that is different, it has no precedent in history and it doesn’t link to any traditional economic rationality, models, charts or theories related to jawboning.

    The spike in inflation is short term, the spike in treasury rates certainly don’t offset the yield decline that’s been in place for a decade, and if anything, all the pandemic has done is to expose things that were already weak. As with Darwinism, there will be some evolutionary changes where adaption will take course — then, poof, this singularity will fade away, as a story told by survivors.

    This isn’t rocket science, it’s Darwinism — the dollar is here to stay — long live the dollar.

  7. The “world currency” has changed in the past, and will in the future. Prior to the USD it was the Pound Sterling. It took two world war’s and the Depression to de-throne it, although there were some sign’s of it’s decline prior to 1914.

    It will happen to the USD, but I don’t think we are even close at the moment. The world is probably drifting in that direction, but it take something of a totally different scale and character than a $1.9tn budget to move the scales in a meaningful way.

    It is worth noting that if the USD is eclipsed as the dominant currency, it does not mean the end of the USD.

  8. The danger is that more and more people are saying the quiet part out loud – the quiet part being that MMT is real and that dominant currency sovereignty gives unlimited printing power.

    Those things are true. But the more people subscribing to that truth and publicly promoting that truth, the less likely they are to continue to be true.

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