run, but at what cost to our ecosystem and long-term prosperity? 4. Can the U.S. dollar remain the global reserve currency? I have discussed in previous articles the precarious state of the U.S. fiscal situation. In the past, we were looking at annual deficits above 5% of GDP, growing to almost 8% by 2030 with the unwinding of social security and Medicare trust funds. That level of deficit through the decade would lead to the U.S. debt-to-GDP ratio exceeding 150% by 2030, even with robust assumptions (3%) for GDP growth. While this track was troublesome in and of itself, with real concerns about the long-term fiscal solvency and stability for the U.S., the policy reactions to the COVID crisis have sped up the timing of this conversation. Since WWI, the dollar has served as a bastion of safety when troubles brewed around the globe. But since the start of the COVID crisis, the dollar has lost 10% of its value and gold has reached record heights. The deficit this year will exceed $4 trillion, or more than 20% of pre-COVID-19 GDP, with all indications that this number will continue to grow in 2020 as states and municipalities put their hands out for subsidies. Now we are looking at a debt-to-GDP ratio approaching 200% by 2030, with substantial reliance upon foreign investors to fund our debt. This leaves us with two potential paths to regaining our footing...
1. Raise taxes substantially, which is politically unsustainable, damaging to the economy, and a drag on GDP growth. 2. Inflate our troubles away by reducing the value of the dollar and the debt. It looks like this second path will be more likely... In fact, the growth in M2 (a commonly used metric for money supply) since 2000 has been astounding. From less than $5 trillion prior to 2000 to an excess of $18 trillion today... wow, talk about rearranging a historical perspective! As a result of this heroic growth, the ratio of M2 to GDP has risen from 48% to an excess of 90%. The world is paying attention... Since WWI, the dollar has served as a bastion of safety when troubles brewed around the globe. But since the start of the COVID crisis, the dollar has lost 10% of its value and gold has reached record heights. Is gold regaining its status as the only real reserve currency? What are the implications for exchange and interest rates, for the shape of the interest-rate curve, and the implied volatility embedded in an ocean of derivatives across the system? In short, there is a lot to consider for a CRO today as we guide our firms through this crisis. The good news is that none of us have to predict all the uncertainties in the world. Instead, we try to ensure that our firms will survive no matter which path in the scenario we end up traveling down. Change is opportunity and risk, and times like these are where strong risk management goes from being a necessary evil to a competitive advantage.
American Consequences
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