
The Global Dollar Short Squeeze - exolymph
https://www.lynalden.com/global-dollar-short-squeeze/
======
JumpCrisscross
> _The dollar’s claim to fame is that almost all oil is priced in dollars,
> globally_

This is the petrodollar hypothesis, a debunked theory of global trade.

Oil is globally traded. It can be and is priced in many currencies. Most
international trade was historically priced in dollars for two reasons. The
second was, until recently, the unique speed and breadth of the Fedwire
system.

The first is the American consumer. When Americans buy, we spend dollars. This
puts dollars in vendors’ hands. Those dollars can be reused for trade or
invested, the latter supporting dollar financial markets. Both support dollar
hegemony, which in turn drives its dominance in global trade and finance.

Oil is priced in dollars, and countries borrow in dollars, because dollars
reign supreme. Not the other way.

> _In 2018, the strong dollar broke Argentina and Turkey’s currencies and
> drove the countries into recession_

Argentina and Turkey’s currencies devalued relative to their trade-weighted
baskets of currencies. The dollar was not a driver of their problems.

> _foreign dollar-denominated debt means there is a ton of demand for dollars_

Domestic demand for cash eclipses foreign demand. The Fed and Congress have
printed trillions, yet we’re still on the precipice of deflation.

> _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._

Out of $25 trillion [1]. Also, $7 trillion is comparable to the amount
Congress and the Fed just created.

Currency crises are broadly studied. They are also complex. This analysis is
overly reductive.

[1]
[https://en.m.wikipedia.org/wiki/National_debt_of_the_United_...](https://en.m.wikipedia.org/wiki/National_debt_of_the_United_States)

~~~
magicsmoke
Good point on the Petrodollar hypothesis being debunked, but I'd like to add
more to the point that the US dollar is valuable simply because the US has the
world's largest consumer base.

Imagine you're a foreign country. You've put in a bunch of labor and manpower
to make goods for the US. You sell them to the US, and they pay you with green
pieces of paper.

Now what? Why are these American dollars valuable to you?

Because you can give them to other countries and they'll give you goods in
return? Then why are these American dollars valuable to those other countries?

Because it's turtles all the way down?

I think it's because somewhere along the line. Some country will take those
dollars and buy a F35. Or a IP license from Intel. Or the rights to distribute
the latest Marvel movie in their country. What do these things have in common?
No other country in the world can produce a equally good substitute.

That's the core of what still gives the USD its value. The US being able to
produce goods and services that the rest of the world has no substitute for.
And because the rest of the world must have USDs to buy American technology
and expects this to continue into the future, this allows the US to consume
more from the world and have a large consumer market.

~~~
simonh
This is missing a huge piece of the puzzle. US Treasuries. Any excess dollars
are simply used to buy T-Notes, lowering the US government’s borrowing costs
and anchoring the US economy. There is simply no need to go hunting for
someone to buy your dollars all the time when you can always go to the US
government itself.

The US special role is based on two things, size and stability. Everything
else is icing.

~~~
dpatru
US Treasuries pay in dollars. Buying a Treasury is a bet that dollars will
still be valuable in the future. Am I wrong to see the high value (low
interest rate) of Treasuries as a consequence of the value of the dollar, not
a cause? If people lose faith that the dollar will hold its value, the fact
that the US government is willing to pay 1% interest in dollar loans will not
help bolster confidence.

~~~
simonh
Foreign central banks don’t really care so much about making or losing money
on their dollar treasuries. They’re not currency speculators. They care much
more about stabilising their currency and economy with respect to the global
economy.

I don’t think you can un-pick dollar stability from its desirability. The
value of fiat currencies is based solely on confidence, nothing else. You
simply can’t say a currency is stable because people are confident in it, or
that they are confident in it because it is stable. They are both different
ways of saying the same thing. We measure confidence in a currency by
analysing how stable it is in the market.

------
cletus
So that was a fantastic article that I read to the end and it made several
fascinating claims:

1\. The recent disconnect between government debt and the economic cycle as
the debt-to-GDP ratio has shot up when unemployment is low. Who knows how bad
that's going to look as unemployment inevitably shoots up and government
receipts go down as a result.

2\. The fact that corporate income has basically been flat since 2014. That
was a surprise to me and particularly surprisingly the almost unprecedented
stock market rally over that period. When earnings become divorced from
returns, it tends to signal the end of the boom and everything comes crashing
back to earth at some point.

3\. Seeing just how high China's USD-denominated debt is. I've read a few
things on the possible US-China trade war in the last couple of years and I'd
come round to the view that China was in a far weaker position for a
protracted trade war than many thought. This data point fits that view.

4\. The US tax "cuts" aka the GOP Donor Class Handout Act may well go down as
one of the most foolish missed opportunities of the modern era, particularly
given the trillions the government is clearly going to spend on Covid-19
bailouts.

5\. The Federal Reserve is likely going to have to go on an unprecedented
money printing spree to buy government debt.

What I'd like to know is will any of this impact inflation?

~~~
CyanBird
> will any of this impact inflation?

Probably not, as Philips Curve fueled inflation hasn't been a problem for a
very long time in the US, income & wealth inequality just eats that segment of
inflation up

Central banks through the western world have been getting consistent under
target inflation rates for many, many years now, and that's a chronic issue
that won't change unless strong systemic changes happen which fuel Phillips
Curve inflation once again

Last year the ECB published this amazing, amazing paper which cover how labor
costs affect inflation, specifically the Phillips Curve which I can't
recommend to all the other MacroEcon people to review

[https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077...](https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2235~69b97077ff.en.pdf)

~~~
tomatocracy
It depends how you measure inflation. Over the past decade or so we've seen
what I've heard described as "biflation" \- imported deflation in the prices
of many goods alongside pretty high rates of inflation in some services, goods
and assets (like company shares or real estate in some markets). Traditional
measures of consumer price inflation are pretty heavily skewed towards goods
and within those slightly skewed towards goods which come with imported
deflation so when that all gets averaged out it shows slightly below target
inflation but the headline numbers really don't tell you as much as they used
to.

Whether this continues I have no idea but it's worth thinking about the
components of "inflation" and what is and isn't included when considering its
impact on the economy.

~~~
tarsinge
That's a very good point, inflation in real estate is easy to grasp.

------
snowmaker
If you enjoyed this, I recommend Lyn's more recent article, post-covid:
[https://www.lynalden.com/great-depression/](https://www.lynalden.com/great-
depression/)

~~~
echelon
That paints an astonishingly bleak picture. I'm not an economist, but that
seems almost unreal.

We have a lot of levers (some unpleasant) that we can tweak that aren't
mentioned. Getting into a cold war with China and shaping trade seems like
something America is uniquely positioned to do.

It may even be possible to cancel US treasury debt to China if the entire
world gets on board with that plan (suing the CCP over covid-19 coverups and
unanimously agreeing to prevent credit rating downgrades). I've seen this idea
floated around the internet, and it doesn't sound implausible.

~~~
ilaksh
My comment will probably just be removed or buried, but I am going to put some
"crazy" beliefs out there.

1) The financial system is hopelessly oversimplified and hopelessly unfair.

2) It does need to be completely redone. We should understand that money is a
fundamental _technology_ and actually come up with a totally new set of high
technologies that replace its current incarnations with things that are much
more sophisticated.

3) Failing that, it is quite possible that countries other than the US may see
so much death and destruction due to the failing financial system (excessive
debt etc.) that they become desperate for a way to unhook from the dollar. A
certain amount of hunger and chaos could motivate a global war.

3) Up until just recently, it seemed pretty clear that it was not feasible to
defeat the United States in war.

4) The Covid-19 pandemic _may_ have unfortunately proven that there is now a
type of warfare that the United States cannot win - bio-warfare. I am not
suggesting that Covid-19 was actually a bioweapon, but due to the very
feasibility that a _similar_ virus could have originated in a lab in China,
the effect of this disaster could nevertheless be seen to be the bio-warfare
equivalent of Hiroshima. Again, does not appear to actually be the case, but
research in similar microorganisms was documented to occur in Wuhan. So you
can't say it isn't potentially plausible in the future. And so this is an
effective demonstration of the power of such a weapon, and the way that tight
controls on citizens and information makes it a feasible type of weapon for
China.

I am not writing this to try to create a rumor or something. But people have
to realize that if money doesn't work for a certain number of entire countries
they will fight for survival. And the US and it's outdated dollar system could
actually be what they have to fight against.

~~~
sbierwagen
In what way do you think the financial system is unfair, and how do you think
this could be solved with technology?

~~~
whoisjohnkid
The financial system is rigged in the favor of bigger players; especially
stock market. Big players with a lot of capital can easily add “insurance” to
their investments via hedging strategies that a small investor would not be
able to utilize due to the high capital requirements currently in place. They
are other regulations that make it tough for small players to get into the
game such as the mark to market feature which abolishes/ makes one exempt from
the “wash sale rule”; the requirements to get this is an uphill battle for a
small investor.

On the surface wash sale rule seems to make sense but in reality it limits the
amount of trades you can do especially in times of high volatility. And as
Nassim Taleb mentions in his book “Antifragile” things that are harmed during
times of high volatility are extremely “fragile”.

The technology is already there to make proper investing available to the
masses; unfortunately regulations heavily hinders the feasibility for a small
company to roll something like this out.

~~~
quickthrowman
What do you mean by “high capital requirements in place” for hedging a
portfolio? Do you know what options are? They can be used for hedging, and the
bid/ask is the same for an institution or an individual.

You or I could’ve followed the 50 cent VIX call trader and made several
thousand percent, all for 50 bucks a contract.

Hedges cost a percentage of a portfolio, it doesn’t matter whether it’s
100,000 or 1,000,000,000 dollars, if the overall composition is the same, the
hedge will cost the same percentage of the portfolio.

You and I can trade mark-to-market assets too, CME micro futures have pretty
cheap margin requirements.

It sounds like you have a lot of theoretical knowledge, but don’t actually
have a practical knowledge of trading/investing. All of the stuff you complain
about not existing actually exists.

Sure, you and I aren’t going to be able to put on a hedge like Ackman did, but
only because the notional value of the derivatives used is so high. Use the
tools available to the average investor, there are plenty.

~~~
whoisjohnkid
Wow thanks for the response really appreciate it. I’m actually dabbling in
trading atm, very familiar with bid ask spread and would def consider myself a
practitioner, and not an economist/only thinking of things from a theoretical
point of view.

I have a trading bot that trades crypto at the moment.

Anywho, what I was trying to convey in my initial post is that regulations
make it tough for the little guy; especially on the stock market side.

My knowledge on options is definitely lacking, plan on learning more about
that eventually, but when I referenced “insurance” I was def alluding to
options / inversely correlated positions.

Any who what I mean by large capital requirements is to safely trade equities
and crypto you typically want to trade based on a position sizing algorithm.
Which reduces your position size based on the risk you’re exposed to.

In crypto the capital requirements are very low in the sense that you can buy
a fraction of a share for as little as a few cents or even less in some
places.

In stocks fractional shares are now becoming more and more accessible to
people. But the problem there is you can’t actively trade a single stock
unless you register as a active trader with the IRS. Also in most places
fractional shares are $1. I would like to see this be even lower to truly
allow anyone to run sophisticated strategies without needing a lot of capital.

$50 might not be a lot to me or you but it’s def a lot to others. Just wish
system was designed in a way where you could trade sophisticated strategies
with as little as $5 or heck 50 cents.

------
shrimpx
Tangent but it seems to me that this Covid situation is ripe ground for the
next crypto bubble. The envisioned endgame on which the 2017 bubble was based
was “hyperbitcoinization,” the prospect that national currencies would give
way to bitcoin, but nobody could really explain why. This new space of
financial instability seems like ripe ground for the next wave of
hyperspeculation.

~~~
dylkil
will people wake up this time and realise bitcoins limit of 350k tx's per day
makes it completely useless as a currency? My guess is no.

------
JamisonM
I am confused by this article, was it that many words to say that "the US will
have a strong dollar until it doesn't have a strong dollar"?

Isn't the premise sort of undermined by the fact (posited in the text) that
overseas US denominated debt is actually better offset by US dollar
denominated holdings than ever before?

And I don't entirely understand the importance of say a Turkey or Argentina
default to this scenario. If large amounts if USD debts can't be serviced that
alleviates the so-called "squeeze" because the haircuts represent money that
doesn't need to be "found".

There was a lot of words in there and it seems like a pretty big pile of
assumptions stacked on top of assumptions and it doesn't make a
straightforward argument in favour of the premise that we should expect the US
dollar to devalue relative to other currencies in the medium term.

(Also the link that explains trade deficits is a pretty bad explanation of
trade deficits and how they do and don't matter.)

~~~
symplee
Exactly. And then at the way end, there's a graph with the two scenarios
predicting what will happen based on all of the article's analysis:

Scenario 1: Dollar goes up, then down.

Scenario 2: Dollar goes down.

In each Microsoft Paint drawn scenario, there's only a vague implied scale.
Scenario 1 going up to ~$130 around 2025, then falling to ~$92 around 2035.
Scenario 2 falling to ~$75 by 2035.

So if the dollar goes up, the author is right. If it goes down, the author is
right. If it stays the same? ¯\\_(ツ)_/¯

------
sdffdsfdsfsddsf
I'm not an expert on these things, but I like to try to break down things into
simpler concepts.

I fear that in the reasoning like in the article, many things remain unclear
or nontransparent.

Maybe there is an error in picking misleading metrics and running with them?

As an example, what if you were selling a product, and you were giving people
unlimited credit to buy from you. Like you suppose everybody could buy a new
iPhone on credit, that never needs to be paid back.

I can imagine iPhones selling like hotcakes in that scenario.

Now the question is, in that scenario, would Apple be doing great? They'd be
selling a lot of iPhones, after all. And in the books, they would have the
claim to a lot of money from the people who bought on credit.

Realistically, though, they might not be doing so great, because most of their
customers would end up unable to actually pay back the credit.

Maybe something similar tends to happen on a larger scale, when the article
says "a weak dollar is good for the economy" \- it's just that "people" (in
other countries) got access to free money to buy. Whether those sales turn out
to be really good ones will only become clear in the long run. Money (dollars)
is just debt, so "a weak dollar" may just mean it is cheap to borrow, a ka buy
stuff for almost free.

I don't know what the best metric for understanding such a situation, but it
seems to me simply calculating in dollar values is rather misleading. It is a
much more complicated question involving the ability of debtors to actually
pay what they owe.

------
hogFeast
There is, unfortunately, quite a lot wrong here (not just the topic...but
obvious stuff like Triffin Dilemma).

But the key points are basically two-fold.

One, there isn't a shortage of dollars. Nowhere close to one. The Fed learned
from what happened to Europe last time, and has already announced swap lines.

Two, there isn't one generic "dollar" funding situation. In 2008, it was
really about Europe. Now, we have lots of countries each with their own
situation (which the Fed is watching closely).

Japan has probably been where most of the growth in the market has come from.
They are deep into CLOs but have a fairly neutral funding position (they
borrow/lend in USD), and Japan has a huge stock of dollars...so a crisis seems
unlikely. Canada is another big one but, again, this is US branches of
Canadian banks...not an imbalanced position. The big mystery is China, which
seems to be getting dollars from nowhere, but like Japan they have a huge
stock of dollar reserves.

The situation with EM is also not that simple. A lot have a huge stocks of
dollars. The reason why some are getting into trouble is: bad monetary policy,
borrowers with bad credit, and (lesser extent) dollar strength. The last is
going to continue but Turkey, as an example, has been in this position for
years (I noticed their issues 6 or 7 years ago). What is happening now changes
nothing.

Definitely, we have seen surprising moves in GBP and CAD which suggested that
people were looking for dollars quickly but JPY rallied...so...who knows? I
don't think it is something to be unduly worried about. The US has supplied
tons of dollars, China and Russia will keep kicking up a shit fit about this
but the US isn't taking advantage of the situation, the Fed is providing the
market with liquidity. We have SDRs, there was no issue with the supply of
dollars before this point (in fact, the issue was there was too much)...so...I
don't see what there is to worry about here.

~~~
selectodude
China is getting dollars from foreign purchasers of their goods paired with a
forced exchange to yuan (holding large values of usd In China is illegal).

~~~
toohotatopic
How are those dollars tracked?

If somebody wires dollars to a Chinese bank, and that bank wires those dollars
to another bank to exchange them, why can't that second bank make up any
number when it wires dollars back to an American bank?

Is it because at any time, those dollars were not only on the books of the
Chinese banks but also on the books of some international clearance bank?

~~~
goodcanadian
Ultimately, unless they are holding physical currency (undoubtedly, they have
some), the dollars are held in an account at a correspondent bank in the US
and ultimately at a federal reserve bank. If China tries to spend money they
don't have, someone in the chain is going to reject the transaction.

~~~
s1artibartfast
I never thought of this and find it an interesting. Are you saying that the
primary counterfeit tracking of digital dollars is a distributed ledger where
each bank knows where they got money and where they sent it? Do banks share
these ledgers with each other or the fed?

~~~
goodcanadian
Sort of . . .

I think it helps to go back and think of money as a physical object. I have
some cash which I deposit at a bank. The bank holds the cash in a vault and
gives me a statement telling me what I have. If I want to pay someone using
the same bank as me, the bank can simply debit my account and credit the
payee. The cash just stays sitting in the vault.

Now, I tell the bank that I want to pay someone at another bank using a wire
instruction. My bank debits my account and tells the payee's bank to credit
his account. However, my bank now has too much cash in the vault and the
payee's bank, not enough. To settle the transaction, my bank must physically
transfer the cash to the recipient's bank. The banks have large numbers of
customers and handle large numbers of transactions, so they can net it all out
and only transfer the difference.

Still, the banks don't really want to be transferring large amounts of
physical currency everyday, so they deposit some of their currency with the
federal reserve (think of it like the bank's bank). Then, instead of
transferring physical cash, they can tell the federal reserve to transfer the
money from one bank's account to another while the physical cash sits in the
vault at the Fed (or more likely doesn't exist at all because the Fed is the
source of truth).

This can all get several levels deep. If I wire money to a supplier in China,
the Chinese bank receiving the money doesn't want to transport cash across the
Pacific, so almost certainly, they have an account at a "correspondent" bank
in the US which, in turn, holds an account at the federal reserve. Meanwhile,
in order to facilitate foreign currency exchanges, the US bank likely also has
an account at a correspondent Chinese bank . . . and I can't say anything
about how the Chinese banking system works, but I'm sure it is analogous.

~~~
s1artibartfast
Thank you for the lengthy response

------
felixfbecker
I can’t ignore that Volkswagen is consistently spelled Volkswagon

~~~
tasuki
It's maddening, but I also appreciate the consistency. Nothing worse than
inconsistent spelling!

------
throwaway05835
It seems like every economic argument for US strength relies exclusively on
"we have the global reserve currency". How long will this remain the case? No
country can survive solely on this without underlying economic strength. Ray
Dalio's analysis on the topic last week clearly showed how the reserve status
lags behind most other indicators of a country's global status.

------
ggm
There are strong cultural ties to seeking precious metal as a hedge by
individuals. Indians and the Chinese are used to huge ornate weddings and have
a strong sense the jewelry bears a dual purpose. It's possible the last
fifteen years of the diaspora has acculturated the precious metals practices
of their cultures into America.

Real hedge doesn't go to jewelry. But the lower grade gold and silver has to
come from the same feedstock. So the localised effect would be felt in the
investment community because some of the bars are going out the door to
metalworking not to another vault.

I'm less sure its indicative overall of risk these days. Real LME type trade
is online. There is no shortage of metal worldwide is there? I thought most
central banks de-gilded over the last decades anyway.

------
_ZeD_
I couldn't read past the repeated "wolkswagon"

~~~
jmcqk6
I wonder what's really behind this phenomena. You were so distracted by a
simple error, completely unrelated to the main point of the article, that you
had to stop reading the article.

And then other people are reading this as this is a problem with the article
and not a problem with your brain.

How, exactly, is this a problem with the credibility of the article?

If you're unable to look past a simple misspelling in order to get to the real
meat of an article, you're going to have larger problems. The world is an
imperfect place, full of much more egregious mistakes than this. Being able to
deal with that is a fundamental skill.

~~~
_ZeD_
> How, exactly, is this a problem with the credibility of the article?

it means there was no proofreading.

if I can catch an error - on something so simple EVEN I know - how can I trust
the article on something I don't know?

~~~
jmcqk6
It doesn't mean that. I don't know why you want it to mean that, but even
proofreaders can miss things. You're rejecting the credibility of the articles
based on something unrelated to the actual information the article is talking
about.

Spelling has nothing to do with the underlying information.

Obviously you're going to justify this however you want in your head, and
there are others out there who agree with you, but I think most people, when
hearing that you literally couldn't read an article because of a spelling
error will just roll their eyes.

------
jeffdavis
I don't understand why servicing a dollar-denominated debt causes an increase
in aggregate demand. Sure, you need to buy dollars, but when you pay the debt,
now the person on the other end gets them and puts those dollars back in the
market.

~~~
daniel_levine
In order to mitigate the risk of currency fluctuation, countries with dollar-
denominated debt will stockpile dollar-denominated assets in advance as well.
Those stockpiles are an increase in demand over what is just needed for
immediate transacting.

------
grandinj
There is too much debt in the system. Decades of goosing growth everywhere by
making debt easier has put lots of places into tenuous territory where market
adjustments combined with sentiment can tank things in unexpected ways.

------
0x8BADF00D
> The United States now has loose fiscal policy and loose monetary policy.

This is the key takeaway from this article. This will spell doom for the US
consumer's purchasing power, it makes sense to own foreign currencies, gold,
and foreign stocks. Getting out of dollar denominated assets before the dollar
crashes is key.

~~~
panarky
You can't look at one nation's currency in isolation.

Since other nations are simultaneously loosening in a competitive devaluation,
buying foreign currencies and equities won't necessarily protect you.

I've yet to see a step by step explanation of how the dollar is supposed to
crash. While there are many hyperbolic and hand-wavy theories getting passed
around, none that I've seen acknowledge the role of other nations or of
second-order effects.

I agree it's prudent to own some gold and Bitcoin in case the bottom falls
out, but the probability of hyperinflation seems pretty low to me even if the
Federal Reserve prints a few trillion dollars during a crisis.

~~~
chrischen
The article is saying the longer term multi-year trend is for the dollar to
de-value.

------
BubRoss
This is a long article but well worth reading. There is a lot of good
information that backs up the title.

------
yingw787
I signed up for Lyn's newsletter March 25th! Looking forward to seeing more of
her content here, I really like how in-depth and insightful it is!

------
3fe9a03ccd14ca5
Does this help explain the disconnect between paper and physical gold that
started about a few weeks ago?

~~~
wegymoo
the day before all non essential store (precious metal brokers) closed here I
went to two and the asking price for silver was double the online spot for
physical 1 ounce coins (not a high grade collectors coin just silver rounds)

~~~
3fe9a03ccd14ca5
It looks like it’s still close to that online at the large sellers, like apmex
and Kitco.

For example, the spot price for silver is around $15, but the cheap, generic
silver rounds are at $20 an ounce, 25% premium. American Eagles 40% premium.

Other places not in stock at all.

~~~
mythrwy
This place has generic rounds silver $3 over spot. Appear to have stock.

[https://www.coin-rare.com/silver-bullion.aspx](https://www.coin-
rare.com/silver-bullion.aspx)

~~~
3fe9a03ccd14ca5
Any experience with them? Seems like a good price to me, even with shipping
costs.

~~~
mythrwy
Ya I ordered a bunch of stuff from them years ago. They have been around at
least over a decade and were legit.

