American Consequences - November 2020

emerging market, that faith – regardless of who’s in the White House – is going to continue to be tested... by U.S. politics, as well as the U.S. Federal Reserve’s rampant expansion of its balance sheet and the extraordinary and unprecedented printing of new dollars for coronavirus stimulus and other measures. There’s a limit to how many new dollars can be created until the global economy calls the U.S. government’s bluff. Just because that limit hasn’t been reached yet doesn’t mean it doesn’t exist. A currency is only as strong as the economy – You don’t have to like a country or its leaders to hold its currency... But you do need to trust the country’s economic policy and the people making that policy. A currency is only as strong as the economy – and the country – standing behind it. If you don’t think you’ll be paid back... if you don’t trust the potential products of the structures and institutions of politics... or if you think the value of the paper you’re holding is going to collapse, you’re going to stop lending, and you’re going to want to sell it. and the country – standing behind it. Historically, reserve currencies tend to last around a century, give or take a few decades, before inflation, high debt, bad policy management, and just plain greed end their time in the sun. By that calendar, the American dollar’s time at the top may be within a

sure – of all printed dollars are used outside the 50 states. Seven different countries use the U.S. dollar as their official currency, while 65 others peg their national currencies to it. And in 2019, 88% of all foreign-exchange trades involved the dollar. (The euro was second, with a role in 32% of all foreign-exchange trades in that span.) Thanks to the dollar’s supreme status, the U.S. government can borrow cheaply – and as we’re seeing nowadays, seemingly indefinitely – from the rest of the world, which remains hungry for dollars. And the government can defer repaying its lenders by constantly rolling over (and increasing) its debt, seemingly forever... The U.S. national debt now stands at a mind- boggling $27.3 trillion (up just over 20% in 2020). To put that in perspective, that’s roughly $82,400 in debt for every single American citizen. The only way the American economy can continue to borrow from everyone else is if the rest of the world continues to covet U.S. dollars. And the whole premise hinges on the faith of the rest of the world in the dollar... and more specifically, the U.S. government. Faith in the U.S. dollar is linked directly to the credibility of the U.S. government. Just like you need to believe in the management of a company whose stock you own, big holders of U.S. dollars – most global governments – need to believe that the decision-makers managing the U.S. dollar won’t do anything

to harm the value of their holdings. And as the U.S. has devolved into an

American Consequences


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