Guest Post: What Will Benefit From Global Recession? The US Dollar

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Understanding the euro's failure and Triffin's Paradox helps us understand why the dollar will rise significantly in the years ahead.


Many times what "should" happen does not happen. For example, global stock markets "should" decline as the global economy free-falls into recession, as global recession is not exactly an ideal scenario for rising corporate sales and profits or demand for commodities.
Yet global markets are by and large rising significantly.
Sometimes what "should" happen is simply being delayed. In other cases, some other dynamic is at work. Stock market bulls, for example, say the "other dynamic" is global money-printing by central banks, and this "easing" will power stocks higher even as sales and profits sag.
Analysts who believe fundamentals eventually over-ride monetary manipulation believe the stock market decline has only been delayed, not banished.
A similar tug-of-war is playing out between those who feel the U.S. dollar "should" decline in the years ahead and those who see the dollar strengthening significantly.
Those who feel the dollar should decline look at the Federal Reserve's money-creation operations (buying $85 billion a month of mortgages and Treasury bonds) and see money expansion that devalues the existing base of dollars. Thus they feel the dollar "should" decline, and any rise in the dollar versus other currencies, oil and gold are temporary.
Those on the other side are dollar bulls, of which I am one; I have consistently been presenting the case for a stronger dollar since early 2011. We see other dynamics in play that "should" push the dollar much, much higher.
The technical case is encapsulated in this chart, courtesy of our Chartist Friend from Pittsburgh:
This is not to say that we don't believe expansion of base money is not dollar-negative; clearly, expanding money while the real economy of goods and services remains stagnant will gradually devalue the currency.
But there are other forces at work that complicate the simple case for a dollar decline based on Fed money-creation. For example, money is constantly being destroyed as paid-in capital vanishes in writedowns and write-offs. Many readers insist money is not being destroyed, but it has to work both ways: money can't just be created, it can also be destroyed.
To cite my previous example: if J.Q. Citizen bought a house in 2007 with $50,000 down payment in cash, and the house was sold in 2010 for less than its outstanding mortgage, that $50,000 is gone. It was real money, and it's gone. The fact that the purchase money went to the previous owner and mortgage-holder in 2007 does not mean the money is still floating around: a decline in asset valuations destroys money. Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve.
So if the Fed prints $1 trillion and $2 trillion in losses are booked in the same time period, base money has actually declined. In effect, the Fed is creating money to offset the deflationary effects of deleveraging.
There is another structural dynamic in play known as the Triffin dilemma or paradox. The basic idea is that when one nation's fiat currency is used as the world's reserve currency, the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. The gold standard inhibited both massive trade deficits and money creation, so it was jettisoned.

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added) 

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

Here is an informed exploration of the relationship between Gold And Triffin's Dilemma (Zero Hedge).
A lively debate is taking place about how to "fix" the global currency so the U.S. doesn't have to run huge current-account deficits to provide liquidity and reserves for global trade. Some feel a return to the gold standard is the best solution, others favor a "basket of currencies" approach, while the International Monetary Fund (IMF) and other globalists unsurprisingly favor a supra-national new currency called the "bancor" overseen by (you guessed it) a global central bank.
In my view, the euro currency is a regional experiment in the "bancor" model, where a supra-national currency supposedly eliminates Triffin's paradox. It has failed, partly (in my view) because supra-national currencies don't resolve Triffin's dilemma, they simply obfuscate it with sovereign credit imbalances that eventually moot the currency's ability to function as intended.
What happens instead is the currency's central bank--in the case of the E.U., the European Central Bank (ECB)--attempts to square the circle by shifting surpluses from some nations (Germany) to those with structural imbalances via credit (debt). Correcting imbalances is the proper function of currencies, and the attempt to eliminate imbalances with a single currency has failed, for the simple reason you cannot eliminate imbalances between nation-states by brute force.
Now the ECB is attempting to paper over the imbalances with bank-issued credit.But the problem with credit is that it accrues interest, which must be paid in cash by somebody. Issuing credit does not resolve imbalances, it simply transfers the imbalance from the currency ledger to the credit/debt ledger. Eventually the imbalances destabilize the system. That is what Europe is experiencing but refusing to admit.
So where does the global recession leave the U.S. dollar? We know what happens in global recession: global trade declines as sales drop and "trade wars" arise to protect domestic economies from the ravages of global contraction.
The global demand for U.S. trade deficits to create dollar reserves will thus also decline. Domestically focused observers think that the Fed is the only creator of dollars, but in effect the U.S. creates dollars--and must create dollars--when it buys more from other nations (imports) than it exports. To expand their own credit base, trading nations need more reserve currency. This is the heart of Triffin's insight.
Another way of stating this is that the dollar will strengthen, buying more imports with fewer units of currency.
Those who believe the Fed's expansion of its balance sheet will weaken the dollar are forgetting that from the point of view of the outside world, the Fed's actions are not so much expanding the supply of dollars as offsetting the contraction caused by deleveraging.
Put another way, the global trading community and the domestic economy's interests align in a strengthening dollar. While many observers believe the Status Quo seeks a weaker dollar to boost exports, this overlooks the premium gained by the "exorbitant privileges" of the global reserve currency and petro-dollars. This premium is worth far more than marginal increases in exports.
I have long held that the demand for oil will plummet on the margins as the global economy contracts. As the dollar strengthens, the U.S. will pay less for imported energy and earn more for exported energy. This decline in energy costs will ripple through the real economy, offsetting any decline in exports. A strengthening dollar lowers the cost basis of all goods and services originating in the U.S.
A strengthening dollar also benefits trading nations, as the increasing value of their dollar reserves enlarges the base for their own credit. This is the irony of China's dumping of its dollar reserves: China only amassed such massive dollar reserves because it was running equally massive trade surpluses with the U.S. As the trade surplus shrinks, so too must China's dollar reserves contract.
From the point of view of the currency markets ($2-$3 trillion traded daily) and global trading nations, the Fed's expansion of base money is marginal: after all, the U.S. has some $60 trillion in household assets, a $15 trillion economy, an expanding base of energy production, a dynamic private sector, a dominant military, the petro-dollar and the global reserve currency.
As destructive as the Fed's policies are to the domestic U.S. economy, from this point of view the Fed's actions are stabilizing actions on the margin. The real action is in the global expansion/contraction of dollars from trade and in reserves. It boils down to supply and demand: the demand for dollars as reserves will remain high, while the supply will actually decline as global trade contracts. The dollar will rise in value for this reason alone.
There is also the question of alternatives: what other currency could act as a reserve currency and trade in size without disrupting markets? The renminbi? It's not even convertible/liquid yet, and recall Triffin's primary point: countries like China and Japan that run trade surpluses cannot host reserve currencies, as that requires running large structural trade deficits.
The euro? Good luck with a bet on papering over currency/trade imbalances with credit designed to drain the stronger economies of cash. The Swiss franc? It's now a proxy for the euro and it's simply too small to trade in size. Ditto all the other small currencies. Japan? With its history of trade surpluses and its demographic/fiscal cliff looming?

Not only are there no real-world alternatives to the dollar, its strengthening will benefit everyone holding dollars everywhere in the world. That is a positive development.

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slaughterer's picture

WTI + 3.38%

AAPL -.90%


TruthInSunshine's picture

I've pointed out countless times the example of the yen, and how its current valuation makes anti-sense.

It's practically doubled in value vs the USD (and appreciated significantly against most other currencies) since the Nikkei came crashing down, coincciding with the decline in Japan's real economic output, and prompting Japan to go from the largest creditor nation to the biggest debtor nation (by official count, at least), since 1989.

CURRENCY MARKETS; Dollar at 1989 High vs. Yen
Published: May 02, 1989

"In late trading in New York, the dollar was at 134.11 yen, up from 133 Friday and the highest level since late September."


Currencies are the play thing of the world's central banks, usually acting in collusion, but sometimes not, whose values bear absolutely no relationship with the real world or with logic, for so long as those central banks are able to maintain some level of control in pre-planning their (typically concerted) actions (aka for so long as real economic forces don't humiliate the people in the "hallowed" halls of central fractional reserve banks).

odatruf's picture

"Currencies... whose values bear absolutely no relationship with the real world or with logic"

So you are saying that currencies are the new equities? Got it.


mick68's picture

Nice sounding theory, but history proves otherwise. That is, if we are headed for more than just another recession.
If this is just a garden variety recession, I might agree, but alas, this is so much more.

strannick's picture

The author didnt mention vile and unbacked interest rate swaps as integral in sustaining the unsustainable dollar.

LawsofPhysics's picture

Yes, all of it is simply bullshit paper promises.  They are only as valid as the rule of laws and contract behind them.  FAIL.  Where is John Corzine?

Popo's picture

History?  You're reading it subjectively.  

First off,  never bet against the side whose army is vastly bigger than everyone elses.

The dollar is oil.  Oil is the dollar.  That relationship is enforced (See Libya, Iraq and soon: Iran) by the world's biggest army.

The problem with drawing historic parallels to currency debasement is that economics doesn't exist in a vacuum, and to exclude energy and military force is to create a totally unrepresentative model which lacks predictive capacity.

Yes,  if the dollar wasn't the reserve currency, and if it wasn't the world's energy-trading medium, and it wasn't backed by the biggest force in history -- then yes,  the USD would hyperinflate.

One should also note however that gold will still go to the moon even if the dollar strengthens -- although not so much in dollar terms of course.  The Euro is toast.  And likely, so are the Yen, Rupee, Rial, Renminbi and a dozen other emerging market currencies.  The flight to gold will be massive and global.  

But the demise of the dollar will not happen.   Never bet against the house.

LawsofPhysics's picture

Correct.  This has always been about power and control.  All that any fiat does is allow those in charge to continually change the rules and stay in charge until they no longer have willing participants in the monetary game.  Many great empires have fallen before and many more will.

Scalaris's picture


Old post, same words.


[..sole mandate of the USA Inc., as a separate entity of the nation of the United States of America, which is to preserve their military dominance through the presence of its numerous military forces, which is needed for the maintenance of the US navy global superiority, which is needed for ensuring the global oil shipping lanes, which is needed in order to maintain the hegemony of the US dollar and its export as the de-facto  denominated currency for the transaction of the world's main energy source, which is needed for the export of dollar denominated financial products from the only remaining American industry..]

thewhitelion's picture

China and Russia may want to have a word about that "the house" thing.

Almost Solvent's picture

Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve.

It's all electronic digits on a server somewhere. The "real money" of a $ for that does not exist, only the electronic digits.


Like shadows on the cave wall, or something like that.

walküre's picture

WTI is the odd one out today. Rumors of war?

Johnny Utah's picture

Enough with this deflation nonsense!!! They are not making up for deleveraging. They are monetizing the debt and the deficit. The author is a buffoon!!! Next year $1 trillion gets monetized relieving pressure on the short term treasury market and creating a market for worthless 30 year paper. Comparing the monetary expansion to household wealth or GDP is idiotic. How about comparing M0-M3 to new money printing or currency in circulation to new money printing (see fed balance sheet). They claim they will keep printing until the unemployment rate goes down. If you believe that is the reason for the printing, I've got some tungsten, I mean gold to sell you.

Ahmeexnal's picture

It's Bush's fault!

The beneficiaries will be Visa and MasterCard:


Sweden has seen a decrease of around 10 percent in cash usage nationwide over the past five years, a trend that has prompted more and more shops to accept only cards at the counter. 

 One of the latest companies to make the move to cards only was Swedish telecom operator Telia, which recently put a complete stop to cash in its 80 shops nationwide.

The most common arguments for switching from cash to card are that using hard currency can be a threat to staff safety, can be complicated, and can prove expensive.

Yep, you read that right. CASH IS A THREAT TO YOUR SAFETY. 

Sweden: the first slave colony of the banksters.

slaughterer's picture

Bought AAPL $625.00  iPad mini and iPotter must save me now.   I know hedge fund # 124 ain't.  

Skateboarder's picture

Ouch. Come on slaughterer, you could've gotten like 18-20 ounces of silver for that. You can bet your ass Ag will at least double. AAPLs, once rotten, have nowhere to go but down. =\

francis_sawyer's picture

Tell it to granny... She's gonna be thrilled to know that her rations of catfood will now double...

LMAOLORI's picture



Well Francis the policies are actually working like a charm granny be damned the goal was to bring down the American middle class to the level of other third world shit holes. You know so it was more just and equitable and fair with the added benefit of the dear leaders having an easier time managing the people.

francis_sawyer's picture

It's too easy to just look at Japan over the past 20 years & say that's what's going to happen... Or ~ that the 'knee jerk' reaction to 2008 was a strengthening of the dollar... There are simply too many variables to make any accurate predictions at all...

The author may be right, but I wouldn't be putting all my eggs in a strong dollar basket...

LMAOLORI's picture



The U.S. Central Bank is undertaking policies that benefit the banks at the expense of it's own citizens that was the point I was trying to make. In any case I found these economic cold war articles interesting especially the video in the first one.


China v. the US: 'Free Trade Is Only for Friends'

Danger of currency wars with more quantitative easing by central banks

Element's picture

Exactly, for every sound argument that predicts some factors causing USD to rise, there's another sound argument theme predicting it will surely fall.

All I know is I have a very hard time accepting that endless monetisation and zombie bank recapitalisation and asset quality dilution leads to a more stable, more attractive and more trustable dollar for trade reconciliations.

I think not.  What the NET effect is no one knows.  Theory is not going to get us an answer.

Alpo for Granny's picture

Oh no!!!! I can barely afford these prime cuts in gravy as it is!

slaughterer's picture

Soros fund is trying to start a short squeeze on WPRT right now. 

Someone else is algoing NFLX back up to $70.  

VonManstein's picture

good points but basing an argument on the premise "demand for dollars as reserves will remain high" is a little bit creative. ISnt it already declining?

Having said that it is in th eplanners interest and im sure theyve considered it. Print and manufacture "value" for your paper via crisis and FX market counter devaluations.

Think we are missing the small issue of the 16 tillion something or other...

Bay of Pigs's picture

I'll say he misses something, like the Elephant in the Room. 

US debt has gone expotential. 

bank guy in Brussels's picture

Indeed, and the above article is missing the whole related area where the the Asian nations, very significantly China, Russia, Iran and India, along with Brazil and other non-Nato countries, have set up alternative payment schemes for oil and other goods, to avoid both the dollar and the SWIFT international bank payment system ... which the US stupidly convinced to get involved in the Iran sanctions, and now there is a whole non-dollar payment and banking system ready for the whole rest of the world.

Anyone trying to claim a bright future for the US dollar, needs to confront that already, a lot of the world is already configured to bypass the US dollar entirely. Asia sees what is coming and they are prepared.

Also, since the 1970s the US dollar has been partly propped up by the crooked 'petro-dollar' deal between the US and Saudi Arabia ... the US backed the brutal Saudi monarchy against their own people with full protection, and Saudis guaranteed to lead OPEC in pricing oil sales in dollars.

That era is now ending. Jim Willie suggests it is when Saudi Arabia's monarchy collapses - perhaps in months! - that will take down the 'petro-dollar' it ... and also the whole role of the US dollar as a 'reserve' currency for trade.

In his recent article, 'Death Knells for the US Dollar', Jim Willie speaks of how China is already offering to sell oil for renminbi (yuan) internationally, and this is fully backed by the world's largest oil producer, Russia:

« ... Russia has promised to meet all requests for crude oil made by China, with settlement in Yuan and Ruble currencies ... »

bahaar's picture

China and India get their oil from Iran.  Which is why they have set up alternative payment scheme.  Not because they've lost their faith in US dollar.  Strength and stability of a currency depends on the economy.  But economy in turn depends on political stability.  China and Russia could hardly be called politically stable countries.  China is totally opaque.  In fact I hear smart money is leaving China.  Just look at SHCOMP.  Russia is a kelptocracy.    India is more transparent but poverty and wealth gap constantly nips at its ankle.  Brazil's economy is too small for Real to become reserve currency.   And anyways, in the Soviet era, all these countries (except perhaps Brazil) did trade with each other heavily and had their own payment schemes.  That didn't break the US dollar.

Bay of Pigs's picture

Are you suggesting anything going on in the USA is stable and transparent?

LOL...yeah okay. Go long the doelarr.

Atlas Shrieked's picture

Your comments would be true--the problem is the Chinese and their trading partners have both explicitly expressed concern with USDollar hegemony, but more importantly, they have taken action to back up that sentiment by signing bilateral trade agreements, effectivly blocking out the USDollar as the international trade settlement currency.

Urban Redneck's picture

I agree, but forget the 70's, go and look at charts of non G8/G20 USD crosses since 1990.  Banana Republic currencies are only supposed to move in one direction, over any significant length of time.  What happened in 2003?

Element's picture



That era is now ending. Jim Willie suggests it is when Saudi Arabia's monarchy collapses - perhaps in months! - that will take down the 'petro-dollar' it ... and also the whole role of the US dollar as a 'reserve' currency for trade.

In his recent article, 'Death Knells for the US Dollar', Jim Willie speaks of how China is already offering to sell oil for renminbi (yuan) internationally, and this is fully backed by the world's largest oil producer, Russia:

« ... Russia has promised to meet all requests for crude oil made by China, with settlement in Yuan and Ruble currencies ... »



yeah ... well ... that really is going to sit too well with all those aircraft carriers and Admirals in the kiddy pool.

Urban Redneck's picture

Jim Willie is actually a bit behind the times.

The Russia-China deal has been public for almost FOUR YEARS (it dates to the flaming-bag-of-poo Christmas gift from the Chinese December 25, 2008).

Depending on which petro-dollar one believe in, it either died April 29, 2003 or March 16, 2006.

SmittyinLA's picture

yes but......"we" don't own the dollar anymore 

TheCanadianAustrian's picture


"This is not to say that we don't believe expansion of base money is not dollar-negative;"


Quadruple-negative FAIL.

Muppet of the Universe's picture

"thinks inflation = dollar ^"


Don't even bother reading this piece of shit.


doesn't know elites wanna wipe out population with economic collapse...

Guess what happens when ppl can't buy things anymore?  Great depression dipshits

walküre's picture

They could try and do a rerun of the Eighties. Romney's ammo is crash & burn and buy on the cheap. Basically. He and his buddies are sitting on massive Dollar cash holdings or cash equivalents. Diluting their loot would NOT be in their best interest.

Who cares what everyone thinks about the USD and gold and inflation. The moneychangers have the game under tight control and they're not just going to abandon the carefully crafted FIAT experiment that has everyone in shackles.

We will be amazed (again) to find out what superior military might, a reserve currency status and lots and lots of propaganda will do to PERCEPTION. The US has the best argument and unless there is a strong allegiance of anti-US sentiment, this game will not change.

Iran can't change it. China can't change it. We're doomed to live under the SHACKLES of SHYLOCK for ETERNITY.

No escape from the reality and perception they created. No hiding from it, no protesting against it. All useless.

Give me liberty or death. I guess I'm finally understanding what that truly means.

Winston Churchill's picture

But maybe China AND Russia can do it.

Don't be surprised by the gold backed ruan.

walküre's picture

I welcome ANY change to the current status quo.

odatruf's picture

"This is not to say that we don't believe expansion of base money is not dollar-negative"

What the fuck, Charles? Can't you write a little more clearly? Haven't you ever heard the rule of avoiding double negatives? So what, you had to go for triple? Quadruple, even, if you count the final hyphenated term.

I often agree with what you have to say, but I just as often have to read it a few times to make sure.

PiratePawpaw's picture

Interesting theory.

Unfortunately; the reality is that the historical track record shows that all fiat currnecies once debasement begins have and will revert to their intrinsic value. ZERO

Theory + Reality = FAIL

Dr. Engali's picture

The dollar may strengthen when you compare it to a basket of shit , but when measured against real money , gold, it will continue to lose purchasing power.

Tinky's picture

Up arrow not only for the simple, yet important point, but also because, unlike a shocking number of posters (on this and other sites), you spelled "lose" correctly. (The wide misuse of "loose" underscores the basic lack of literacy shared by a big subset of the American public.)

Jake88's picture

the subset being generally those under fifty

cranky-old-geezer's picture



When central banks print boatloads of currency and give it to other banks (for worthless securities) who put it right into the stock market, then yea, stocks are gonna rise.  It's a no-brainer.

Printing boatloads of currency.  That's what Weimar Germany did.  And Zimbabwe.  And it debased the currency rapidly, just like the US dollar is debasing rapidly, losing half it's value in the last 4 years.

50% loss of value in 4 years.  Is it inflation or hyperinflation? 

Weimar Germany and Zimbabwe eventually saw currency collapse.  It lost all value.

US dollar might last a bit longer being world reserve currency and all.  But it will collapse eventually, lose all value, and won't be WRC anymore.

So yea, we might see the Dow hit 30,000 while we're going thru severe hyperiflation. 

Your stock portfolio will look great, but gas will be $20 / gal too.

We might even see the Dow hit 50,000 ...right before USD collapses and loses all value.

All someone has to do is issue a gold-backed currency, and it's lights out for the US dollar.

Of course it would have to some someone militarily strong enough to thumb their nose at America's military.

A huge nuclear arsenal would be the ticket.  America won't send it's military up against some nation with a huge nuclear arsenal.

hawk nation's picture

It will be tough to wage war when the dollar is worthless and you cant buy gas and other materials needed to wage war


Besides who will fight when they are not getting paid

Element's picture

State rationing, gold confiscation, National Service, forced labour, Libertee/Freedum/Truff and Justus Bonds, and a whole lot of propaganda, fear, spying, coersion, torture and execution.

"I'm doing my part"!

Would you like to know more?