America’s Road to Hyperinflation

If it ain’t broke… it probably means you’re about to shoot yourself in the foot.

Forgive the mixed metaphor. But it works quite well for today’s dispatch.

See, there’s an emerging, decidedly non-mainstream notion that the U.S. dollar is in serious decline. That we’re watching in real-time as a global reserve currency loses its title as King.

I happen to share that belief because, well, the evidence is as clear as the black swans found in Australia in 1697 that the rest of the world at that time insisted should not exist. Those who only believed in white swans were not open-minded enough to consider the possibility that somewhere else in the world, life might be different.

That’s the mainstream take on the dollar’s decline today: “black swans don’t exist.” They’re just white swans who sullied themselves frolicking in a muddy pond… One day the rain will come and wash away the mud, and all will be right with the world. You’ll see, you shit-stirring malcontent!

In other words, people cannot accept that the monetary world is changing…

To be fair, this is a common problem on a broader scale. This affliction has a name in psychological circles: the “Status Quo Bias”—the belief that every tomorrow will pretty much resemble today and every recent yesterday.

Though this is mentally convenient, it’s a shortsighted and destructive way of seeing the world.

The Path From De-Dollarization to Hyperinflation

Life changes all the time.

The woman who never expected her husband to run off with the secretary wakes up to find her status quo upended. The turkey who lives peacefully wakes up one morning in November to find his status quo is terminally different.

That’s what’s going on right now with the dollar.

Mainstream media has trapped itself in a version of Status Quo Basis we’ll call “dollar hegemony”—the idea the dollar rules the world and always will.

For the last 100-ish years, that was true. The world uses the dollar for everything from buying TVs in South Korea to soy in Uruguay to barrels of Saudi oil.

That arrangement, however, is now rubbing a lot of the world the wrong way.

First, it gives the U.S. an enormous advantage. We don’t have to pay currency-conversion costs, since the world prices in dollars everything we trade.

Second, much of the rest of the world feels aggrieved that the White House and Congress have used the dollar as a political weapon over the last six or seven years. America is cutting countries’ access to dollars. That’s crushing those countries’ ability to trade globally. Which crushes the local economy. Which harms local people who have nothing to do with what their government’s antics.

And, so, the world is actively shifting away from the dollar, what’s called de-dollarization.

Which means American families are in trouble because… we could face hyperinflation.

Now, I understand if that seems an extreme leap. Declining use of the dollar wouldn’t seem correlated with bread that costs the same as a tank of gas. But let’s connect the dots…

We can all agree that America is insanely burdened by debt—some $32.6 trillion and rising.

As well, I also feel confident no one will argue with the idea that politicians will never seriously cut spending. The only viable cuts would be to Social Security, Medicare, and defense spending. But cutting those would anger the voters who keep the clowns employed. And it would anger the lobbyists who keep the clowns fat and happy financially. So… no way the budget deficit is seriously addressed anytime soon.

Eight Short Steps to Hyperinflation

The path from de-dollarization to hyperinflation is a short, eight steps:

  1. Use of the dollar in global trade declines (quickly or over time).
  2. Since countries have less need to trade in dollars, demand for U.S. Treasury debt falls. (No need for sovereign nations to hold as many dollars for international trade.)
  3. But Uncle Sam is rolling over hundreds of billions of dollars in debt every month, and if the world doesn’t need as many of those dollars, then the only way to entice buyers is to offer higher interest rates as a sweetener.
  4. Higher interest rates, however, lead to higher repayment costs for the U.S.
  5. And because the U.S. runs a budget deficit every year, it must sell more and more debt just to afford the higher repayments.
  6. That pushes America into a debilitating debt cycle, in which more and more debt is needed to meet ever-higher debt repayments.
  7. Interest rates, meanwhile, keep rising to entice borrowers who aren’t stupid and realize the U.S. is facing a monetary and fiscal hurricane.
  8. At some point, the Federal Reserve loses control of the boat amid tsunami conditions. Inflation morphs into hyperinflation because so much money is sloshing around… and the country founders.

Will this definitively happen?

That I cannot say. But I also cannot see what changes will come along to prevent any of those eight steps. Frankly, I expect we see no changes until a crisis is afoot. Unfortunately, that’s how America works.

I’m not saying we will absolutely see hyperinflation.

Nevertheless, all the ingredients are in the mix at this point.

All I can offer you is that before this cake goes into the oven, you’re going to want to protect your lifestyle and your wealth by owning exposure to nondollar assets including gold, Swiss francs, bitcoin, and high-quality, dividend-rich blue-chip foreign stocks..

The voyage to Australia is underway. And the sailors are about to discover that black swans do indeed exist.

Sign Up for Jeff's (almost) daily Field Notes