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Common Cents & Wrestling with the U.S. Dollar

There's a reason the global economy continues to trade in the U.S. dollar.

This past Tuesday, I made an early morning economic presentation to a group in Knoxville, Tennessee. I followed the mayor of Knoxville, Glenn Jacobs, who used to be the WWE professional wrestler Kane.

Jacobs, a massive individual, went over his allotted time telling stories about his wrestling days. Trust me, no one in their right mind would give him the hook. So, the event organizers asked me to trim my remarks if I could.

Of course, I said I would do so, and shaved off about five-to-ten minutes of my prepared remarks.

Even so, I couldn’t resist telling His Honor towards the end “to be the man, you have to beat the man, and I am the man. Woo!” Of course, he had long since gone. I am no fool. However, I WAS foolish enough to follow that comment up with “after all, I am a styling, profiling, limousine riding, jet-flying, kiss stealing, wheeling dealing son of a gun.

I am confident my presentation in Knoxville was the first time anyone, anywhere, incorporated the Nature Boy, aka Slick Ric, into an economic presentation.

I suppose that does make me the man. Woo.

In all seriousness, I left a few minutes for questions, and someone from Memphis asked the following: “Do you think emerging economies and China are going to start trading with each other in their own currencies, as opposed to the U.S. dollar? If so, what will that mean for the United States?” This wasn’t the first time someone has asked me this. It also won’t be the last.

Intuitively, if people quit using the dollar for international transactions, our currency will weaken. If past is prologue, this should lead to higher levels of inflation and interest rates.

Obviously, these things would dampen growth in our consumer driven economy.

While this might be intuitive, it’s highly unlikely. The reason has very little do with global diplomacy. It has everything to do with the relative strength and liquidity of the US financial system, which is the result of the adherence of the rule of law and strong individual property rights.

Imagine, say, Argentina and the People’s Republic decide to conduct trade in their own currencies. Does Beijing really want to take the risk of holding a bunch of pesos on its balance sheet? How confident is Xi Jinping in the Egyptian banking system? Brazil’s adherence to the rule of law? The liquidity of the Russian ruble?

Think about it, does the Bank of China really want to hold onto massive amounts of highly volatile emerging market currency? Is it willing to take on that level of country-specific risk just to thumb its nose at Washington?

Or do you think Beijing will ultimately sell the stuff in order to buy US dollars?

But what if they trade in the Chinese currency instead? Well, that would dramatically increase the demand for renminbi, which isn’t fully convertible or transparent. This, then, would cause it to appreciate relative to other international currencies. If so, China’s export driven economy would take a hit, as its products become more expensive in the global marketplace. In order to combat this undesirable turn of events, Beijing would likely sell its own currency and buy, you guessed it, U.S. dollars.

Basically, China has two options:

  1. It can subject its balance sheet to unnecessary currency fluctuations, or
  2. It can allow its currency to appreciate, perhaps significantly.

I said as much in my answer to him.

The reason the global economy largely trades in the US dollar is its perceived safety and liquidity relative to other currencies.

Joe Biden has nothing to do with it, let alone Donald Trump. It has everything to do with the U.S., its economy and financial system.

So, no, I don’t lose sleep over the Chinese conducting transactions with, say, Venezuela in bolivars. They will eventually buy dollars later or suffer the consequences.

Of far greater concern to me are the continued strife in our society and polarization in Washington. If the United States ever debases its historic reputation for the rule of law and strong individual property rights, global demand for dollars will wane. That is as sure as the nose on my face. While there currently isn’t a true viable option, in my opinion, investors will eventually find alternatives.

If they do so, inflation and interest rates will soar. That isn’t a prediction. It is a promise. So, we can fight each other politically all we want. We do so to our own detriment.

So much so, that perhaps we should unleash former WWE World Champion, Kane, onto the naysayers and backbiters out there. He could give leg-locks and pile-drivers to folks who don’t want to get along with each other. Maybe he could even come “off the top rope” to mete out some justice and the American Way. A steel-cage match with Vladimir Putin? Loser leaves town sort of thing?

If so, maybe he could find a place for Ric Flair and yours truly in his posse, perhaps.

Woo.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris

 

 

 

 

John Norris – Chief Economist and WWE Champion