The Great Dollar Shortage

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The coronavirus pandemic is a human tragedy. It’s also an economic tragedy, as the global economy is collapsing around us.

Second-quarter U.S. GDP may drop as much as 30%, which is a staggering figure. Many economists predict a third-quarter recovery, but there are still so many unknowns that it’s impossible to say.

It’s still too soon to say when America will reopen for business. And you can’t just flip a switch and return things to normal. That’s not how economies function.

Many industries may never recover and millions may be out of work for extended periods.

At the very least, we’re heading into a severe recession. And we could well be heading for a full-scale depression.

That’s not being alarmist.

The crisis will also accelerate the collapse of the dollar as the world’s leading reserve currency. So you need to prepare now. What do I mean?

The U.S. dollar is at the center of global trade.

The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. About 40% of the world’s debt is issued in dollars.

The Bank for International Settlements (BIS) estimates that foreign banks hold over $13 trillion in dollar-denominated assets.

All this, despite the fact that the U.S. economy only accounts for about 15% of global GDP.

The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is there’s a deep, liquid dollar-denominated bond market.

But the coronavirus crisis is creating a massive problem for foreign nations dependent on the dollar.

That’s because the world is facing a critical dollar shortage.

Many observers are surprised to hear about a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008?

Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt.

This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.

But that’s no longer the case, and that’s an understatement. Global growth was anemic before the crisis hit. Now it’s contracting rapidly.

If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.

But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access dollars?

Yes, but it’s not nearly enough to meet global funding needs.

Foreign nations are scrambling to acquire dollars right now. And that surging demand for dollars only drives up the value of the dollar, which puts additional strain on their ability to service debt.

When those debt holders want their money back, $4 trillion is not enough to finance $100 trillion, unless new debt replaces the old. That’s what causes a global liquidity crisis.

We’re facing a global liquidity crisis far worse than the one that occurred in 2008. In fact, the world is heading for a debt crisis not seen since the 1930s.

The trend away from the dollar was already underway before the latest crisis, led by China and Russia. Now that trend will greatly accelerate as the world seeks to eliminate, or greatly reduce, its dependence on the dollar.

That’s not just my opinion, by the way. Here’s what Eswar Prasad, former head of the IMF’s China team, says:

“The dollar’s surge will renew calls for a shift from a dollar-centric global financial system.”

It can happen much faster than you think. And the dollar’s days are more numbered now than ever.

But what will replace it? And why can you expect the dollar to lose up to 80% of its value in the years ahead? Read on.

Regards

Jim Rickards
for The Daily Reckoning

The post The Great Dollar Shortage appeared first on Daily Reckoning.

“Hell Is Coming”

This post “Hell Is Coming” appeared first on Daily Reckoning.

We sense that we are among unrealities…

It is as if some hinge, deep within the national psychology, has suddenly given way.

The daily rites of life are suspended. Businesses, schools and arenas the nation over have gone dark. Travel is hopeless…. and borders are sealed shut.

Unemployment claims are piling up. Treasury Secretary Mnuchin has suggested they may ultimately scale a depression-level 20%.

San Francisco residents are under house arrest, confined to barracks 24 hours of the day. Emergencies and food shopping provide the only officially sanctioned furloughs.

(Our spies report large numbers of lawless who are flouting the ban.)

Rumors are on foot that other municipalities — New York City included — will follow.

USNS Comfort — a hospital ship — is presently plowing a course for New York Harbor, under presidential orders.

An identical vessel steams for the West Coast.

You Can’t Even Go to Church

Locally, a blanketing hush has fallen over the city of Baltimore. Residents have abandoned the streets. Dining and ale houses are shuttered.

Those who hazard a public appearance approach one another with suspicion… as if every stranger has a gun in his hand and murder on his mind.

Even the churches have suspended their Godly operations, their flocks scattered to the winds:

IMG 1

Even in wartime a fellow can take refuge in the comforting arms of God. But not when a pestilence is loose.

Yet the trees near our office are in blossom:

IMG 2

And old Washington keeps his reassuring watch over the city:

IMG 3

And we shall remain chained to our post… bound in solemn duty.

Three Years of Gains Wiped Out

The stock market went to the devil again today.

The Dow Jones slipped into the 18,000s today. It “recovered” to 19,899 by closing whistle… a 1,338-point loss on the day.

The S&P shed another 130 points; the Nasdaq 345.

Thus all market gains since Mr. Trump assumed his office are eliminated — three years of gains into the furnace.

“We’re only about halfway there,” hazards one trader. That of course being the bottom.

Gold, meantime, absorbed another slating today, down $30 and change.

But the 10-year Treasury yield went shooting in the other direction…

Yields vaulted 27% to 1.266%.

The reason is the promise of economic “stimulus” (more on which below).

The “Coronavirus Investment Summit”

Jim Rickards predicted the coronavirus scourge in early February, before markets caught the fever.

Wrote Jim in an email dated Feb. 5:

The real infection rate and death rate may be 10 times the official statistics… If you want to see how bad things can get, study the “Spanish flu” pandemic of 1918–20. Over 50 million dead.

And while the stock market was thundering down, Jim’s readers enjoyed the opportunity to nearly triple their money with one of his recommended trades — in one single day.

“Hell Is Coming”

We presently confront a springtime not of growth and life but of sickness and death.

And the carefree days of summer will likely yield to the careful days of summer… heavy with the mighty fear of a miniature bug.

The president — after all — let slip the other day that fortunes may only swing in August.

“Hell is coming,” shrieks Bill Ackman of Pershing Square Capital. He continued:

We need to shut it down now… This is the only answer… America will end as we know it. I’m sorry to say so, unless we take this option.

What precisely constitutes “this option”?

Chaining down the entire economy for 30 days. All gears of commerce must wind to a complete and immediate 30-day halt. More:

The hotel industry and the restaurant industry will go bankrupt first. Boeing is on the brink, Boeing will not survive without a government bailout… Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown…

Every hotel is going to be shut down in the country… If we allow this to continue the way we have allowed it to continue, every hotel company in the world is done. No business can survive a period of 18 months without revenue.

Will the president heed this fellow’s counsel?

“Wartime President”

Mr. Trump has now declared himself a “wartime president.”

And he has pledged to invoke the 1950 Defense Production Act (Pub.L. 81–774) — “in case we need it.”

The Defense Production Act is:

An Act to establish a system of priorities and allocations for materials and facilities, authorize the requisitioning thereof, provide financial assistance for expansion of productive capacity and supply, provide for price and wage stabilization, provide for the settlement of labor disputes, strengthen controls over credit and by these measures facilitate the production of goods and services necessary for the national security, and for other purposes.

“Other purposes,” of course.

From bull market to wartime economy within the space of one month — if you can believe it.

A journalist once asked British Prime Minister Harold Macmillan what could knock his plans off the course.

“Events, dear boy, events,” came his supposed response.

The president has been washed over by events.

Emergency Relief

Meantime, the administration proposes to write Americans checks — $500 billion worth in total.

The first would go in the mail April 6 — pending congressional approval of course. The second batch would go on May 18.

The specific amounts will depend upon a family’s income and number of children in residence.

“Millionaires,” we are told, are ineligible for relief.

Meantime, we are informed the Senate has the votes sufficient to expand paid leave and unemployment insurance.

The bill has already cleared the House of Representatives. Off it goes for the president’s signature once the Senate pushes it out.

But what will the rest of us purchase with the money we are to receive?

“The. Party. Is. Over.”

Our colleague Byron King laments we have “silent spring” on our hands, “courtesy of one too many imports from China.”

And the shelves may run thin by summer:

My maritime friends tell me that over the past two months, over 260 large cargo ships — 10,000–20,000 containers and more per each one — were canceled or sailed partly loaded (from China). Out of over 4 million containers that “should” have shipped, 2 million — about 50% — never made it.

What you see on the current shelves — the Chinese stuff — all showed up last fall and early winter. Looking ahead, those missing containers of Chinese goods will compound future shortages of all manner of things.

Expect to start seeing the effects in April, May and June.

Concludes Byron, with dreadful emphasis:

“The. Party. Is. Over.”

We hope he is mistaken. Yet we fear he is not.

We do not care one whit for this new America. Please, 1,000 times, please, return us to the former America — botched as it may have been.

But if our choices are reduced to death by coronavirus or death by hunger… we opt for the virus.

The end comes much faster.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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