After putting out my memo on “Will the USD Crash?” I had someone ask me the following question, “Under what circumstances would the dollar actually be able to crash?”.
So I’ve decided to share my thoughts in this follow-up memo. Think of it as food for thought, a devil’s advocate to my previous memo.
So, What Could Actually Make the USD Crash?
If we assume that other global economies won’t do better than the US in the near term, then we agree the USD won’t crash because of other currencies going up against it. Instead, we’ll need to look internally at the United States and its financial position to understand how it can impact its own dollar.
Currently, the US federal debt to GDP ratio is high at 124% and growing and the US deficit as a percentage of GDP is around -5.5%, growing and higher than in the past, indicating a worsening situation. If the US cannot inflate away debt (meaning let inflation continue) or increase their tax revenues to pay down their debt, then they will have to issue more debt to pay for and service the current debt and deficit.
Where does the US debt come from?
In the past, the marginal buyer of the debt/lender of money to the United States has been foreign institutions like other global central banks and financial institutions. Unfortunately, those foreign buyers/lenders have significantly reduced their buying of US debt. Meaning, going forward for the United States to issue more debt, they’ll need to finance it locally either through local financial institutions like the banks, or more probable, the federal reserve to lend to the US gov’t. Though, in order for the federal reserve to keep purchasing debt/lending money to the United States gov’t, it will require printing of US dollars.
It would be under this scenario that the printing of new US dollars by the federal reserve would increase USD supply faster than other currencies thereby devaluing the US dollar vs other currencies, making the dollar effectively “crash”.
Sources:  https://www.ceicdata.com/en/indicator/united-states/government-debt--of-nominal-gdp
Financial Advisor, Manulife Securities Incorporated
Life Insurance Advisor, Manulife Securities Insurance Inc.
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