Is the US Losing Its Monetary Edge?

McAlvany Recap • Mar 06 2023
Is the US Losing Its Monetary Edge?
MPM Posted on March 6, 2023

The Ukraine war notwithstanding, most wars in the modern era have been waged with dollars and credit rather than jets and tanks—within the First and Second Worlds at any rate. And while the dogs of war are clearly—and disconcertingly—licking their chops, dollar diplomacy (or its modern heir) remains the preferred strategy.

How long will that remain true? Well, a strategy dependent upon a weapon must change if the weapon changes. And the dollar, perhaps the most potent weapon ever devised, is under immense stress. Backed first by gold and later by oil, it is now backed increasingly by only the full faith and credit of the United States government.

That would be one thing if the country were living within its means, but the US is many trillions of dollars in debt, with many more trillions of dollars committed to unfunded liabilities such as Social Security, Medicare/Medicaid, pensions and welfare payments, etc. More than a few analysts consider the country to be bankrupt in all but name.

Further, the US’s worldwide trading system is under pressure. The BRICS countries (Brazil, Russia, India, China, and South Africa) would clearly prefer a second worldwide system of payments and infrastructure—though a satisfactory alternative has proved elusive. If one is found or developed, tentative steps in that direction could lengthen and strengthen in the years ahead.

In short, the drama playing out at the Fed and in worldwide markets and economies is even more momentous than it seems. While the global dollar has disadvantaged many here at home and fundamentally changed the character of the US, it has obviated the need for more deadly weapons in international relationships. Will the dollar’s decline in influence make the world a more dangerous place? That is certainly a possibility.

In that light, and in the more familiar light of retail, equity, and bond prices, be sure to follow the well-read and deeply thought-out commentary of the McAlvany analysts. Just follow the links below.

Key Takeaways:

  • The party line constrains thinking
  • Bonds are shouting a message; is anyone listening?
  • The Fed continues to channel Hamlet: QT or not QT?
  • The more volatile precious metal remains true to form

The McAlvany Weekly Commentary: In the lead-up to their conversation on inflation, David and Kevin discuss the importance of going beyond canned narratives. Most countries have a party line—even America, which was founded in such a way as to make canning the narrative difficult. Human nature, however, tends to prefer to win arguments using power rather than persuasion. It’s more efficient in the face of multiple competing truth claims, especially for people or parties that hold non-freedom-based philosophies of rule. The hosts discuss how they have overcome such canned narratives in the past, how they do so now, and how important it is for all of us to live in reality rather than Potemkin villages.

Credit Bubble Bulletin: After describing the state of bond and derivatives markets in considerable detail, Doug asks the provocative question, “So, why would risk premiums and indicators remain sanguine in the face of a yield spike and hawkish reassessment of Fed rate policy? Phrased differently, what is holding back ‘risk off’ dynamics? A Friday evening Bloomberg headline: ‘Blaring Bond Alarms Are Falling on Deaf Ears in the Stock Market.’ ” His insights in answer to these questions are utterly fascinating in both nature and profundity. They reveal a depth of knowledge about market nature and characteristics that comes from decades of careful analysis.

Hard Asset Insights: While continuing to chronicle the dominant economic narrative (whether the Fed will tighten or loosen monetary policy), Morgan takes some time to put its recent history into easily understood perspective. From the Fed’s too-little, too-late response to rising inflation to the gradual easing of its hardline rate increases, the author details the making of the Fed’s current quandary: recessionary QT or inflationary QE? It’s a situation in which heads, the Fed loses; tails, it loses badly. At a time when the nation needs a clear and unequivocal decision on this matter, the Fed seems to be stuck on the horns of its dilemma. Or perhaps it’s more accurate to say that the programme du jour appears to be to pursue Plan A until it hurts, then Plan B until it hurts, then Plan A… Will leadership by pain avoidance work?

Golden Rule Radio: Miles continues to see the trend in which silver leads gold as they both rise and fall. Recently, both metals have seen some down moves, but both have also seen some small increases. In each case, silver moved first. If the trend holds, and if recent increases presage more upside, we should watch both metals climb to their next resistance levels—led, of course, by silver. Miles believes that there could be some limited downside before these up moves, but the next few weeks will be key. To see what this looks like in two dimensions, along with charts on and analysis of equities and the dollar, tune into GRR.

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