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.