I speak to thousands of people around the world each year. One of the most common questions I get is that the dollar is about to collapse. They suggest that the Chinese will sell the dollar and dump US treasuries on the market thus precipitating a collapse in the dollar.
Doom and bloomers point to the unsustainable federal deficits and the incredibly high debt as reasons for the dollar to collapse.
Actually, the Chinese are already dumping treasuries. Nobody knows exactly but it appears that they have already sold at least $200 billion in the last two years. That is a massive downward pressure on the treasury market and a downward pressure on the dollar as they switch the proceeds of the sale into other currencies.
I believe that this selling by the Chinese is the reason that the US dollar has not skyrocket yet. But it will. Here’s why.
The US has about the tightest monetary policy in the world. Adjusted monetary base is the best number to determine monetary policy along with interest rates.
The monetary base exploded during the financial crisis from about $900 billion to over $4.1 trillion at its peak in 2014. It then stayed at about $4.1 trillion until about September 2015 when it started to contract. It has now dropped to about $3.6 trillion.
In other words, the Fed has been tightening the quantity of money for about a year! The exact opposite of quantitative easing! They are quantitative tightening!
At the same time, other countries, particularly Japan, have been easing aggressively.
It is common sense that a declining supply of dollars increased the value of those dollars. This is particularly important relative to other easing sectors.
Other countries are in the midst of a currency war to boost exports to boost their moribund economies. The US is not participating. Other central banks are actively trying to depreciate their currencies. The US is not.
The second main factor that will propel the dollar higher is the incoming Trump presidency creating massive fiscal stimulus.
I look for him to fulfill his promise to spend $1 trillion on infrastructure. There is no way the Democrats will stop this program so we will see a big fiscal boost to the US economy, particularly in relation to the dead economies in Europe and Japan.
Money will flow out of those areas and into the US to take advantage of the better economic prospects. Why invest in boring Japan when you can make some serious coin in the US?
But won’t other countries dump dollars to reduce the power of the dollar as a reserve currency?
Well, they are certainly trying! But not succeeding.
In spite of massive efforts by such countries as China and Russia, the dollar has gained market share as a reserve currency and trading currency. 95% of global trade is in US dollars.
Countries like China and Russia have succeeded in signing bilateral agreements to avoid the dollar but have not succeeded in dislodging the dollar as the king of trading.
This flood of money will accelerate after Trump reduces corporate tax rates to 15%. Right now, US corporate tax rates are about the highest in the OECD and cutting them to 15% will place them in the norm.
Capital flows to where it is treated best. So look for massive flows in as the punitive tax rate is normalized with the rest of the world.
Look, there are many things that I dislike about US economic policy. But currency values are relative not absolute. So US policy could be bad but the dollar will rally if those policies are better than the competition.
Courtney Smith is Chairman of WealthbuilderLLC.com. He is the author of 10 books on investing. He speaks to thousands of people every year. He is the only man in history to have managed a top ranked mutual fund and hedge fund.