The Great Dollar Shortage: An Update

Four weeks from today, the Federal Reserve will trigger the next stage of the global “dollar shortage.”

The best-case scenario is a wicked stock market correction. The worst case is an entirely new financial crisis.

Jim Rickards has noted that the Federal Reserve would raise its benchmark fed funds rate in December. It would be the first such move in a year. With the election in the rearview, it’s time to further tease out the implications…

“The December rate hike was baked in before the election,”

Jim reminds us. No matter who won, the Fed would act.

There’s just enough evidence of resurgent inflation to give the Fed cover. And the Fed desperately wants to raise rates so it can cut them again whenever the next recession rolls around — and there’s evidence that too is approaching.

What’s more, the Fed appears either oblivious or indifferent to the market chaos a rate increase would cause.

We’ve made mention of a speech by the Fed’s No. 2 man, Stanley Fischer — one of only four people in the Fed power structure whose opinions really matter, according to Jim. Fischer said beyond the December increase, rates are set to plateau at levels below historical norms.

That’s a longer-term thing. He said something shorter term that Jim finds surprising, indeed alarming.

From a Reuters account of the speech: “Fischer also said he was ‘reasonably confident’ that spillovers from the Fed raising interest rates would prove manageable for foreign economies to which the United States is interlinked by trade and financial channels.”

In other words, the Fed raising rates won’t have the effect of jacking up rates in other countries or crashing the value of foreign currencies.

“That’s troubling and almost certainly represents wishful thinking on Fischer’s part,” says Jim.

“In fact, there’s already a global dollar shortage.”

It’s worth revisiting this dollar-shortage paradox — a phenomenon explored back in September. “The idea of a dollar shortage sounds strange to many observers,” Jim acknowledged. “Didn’t the Fed print $3.4 trillion of new money from 2008–2015? How could there possibly be a dollar shortage with that much new money around?

“The answer is that the world created new dollar-denominated debt faster than the Fed created money.”

In the United States, energy firms loaded up on debt, assuming oil prices would stay in the $80–110 range forever. This morning, it’s barely $46.

Meanwhile overseas, emerging-market companies loaded up debt denominated in dollars, assuming the dollar would stay weak forever. This too isn’t working out as planned; relative to a broad basket of foreign currencies, the dollar is approaching a 14-year high.

symptom dollar shortage

“Over $60 trillion of new dollar-denominated debt was created from 2009–2015,” says Jim. “This huge debt pyramid was fine — as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.”

But soon after the dollar started to strengthen in 2011, the U.S. budget and trade deficits began to shrink dramatically. By 2013, the Federal Reserve began to tighten policy. And global growth was slowing down. “The dollar shortage took hold,” Jim goes on. “It seemed that everyone wanted his money back.

“Chinese corporations began to default. European banks started to show signs of stress. The spread between fed funds and the OIS (the overnight index swap rate) began to blow out. Now, in late 2016, the dollar shortage has started to morph into a debt crisis and potential liquidity crisis.”

But Mr. Fischer at the Fed seems not to know or not to care about the consequences.

Yesterday, he declared, “It is certainly too soon to declare that a broad reduction in market liquidity has occurred.”

Fischer’s what-me-worry attitude echoes that of another of the Fed’s Big Four decision-makers.

Last month, we told you about Jim Rickards’ dinner gathering with New York Fed president William Dudley. Jim reminded Dudley that when the Fed raised rates last year, it set off an 11% stock market correction over the following eight weeks. Was Mr. Dudley not concerned?

He was not. Indeed, he saw no connection between the Fed’s action and the stock market. And even if a rate increase did tank stocks, Dudley said it’s “not our job” to put a floor under stock prices. “The Fed does not see the market carnage coming,” Jim concludes.

“November was volatile because of the election. December may be even more volatile as the Fed leans into the dollar shortage and makes matters much worse.”

It might even trigger the crisis Jim anticipates in his new book, The Road to Ruin  (Learn how to claim your copy for FREE here) — released only yesterday. The dollar shortage and the resulting scramble for liquidity could be so severe that the global monetary authorities would resort to what Jim calls the “ice-nine” plan for the money in your bank account.

It would be there… but good luck getting access to it.


Dave Gonigam
for The 5 Min. Forecast

[Editor’s note:] Because we have Jim in our stable of editors, we’ve arranged to publish a special edition of The Road to Ruin — unlike the one you’d get from Amazon or Barnes & Noble. It contains a bonus chapter about the No. 1 investment to own going into the crisis — something that’s been available only for the last 16 years.

If you act in the next 13 days, your copy will also be signed by Jim. But there’s no reason to wait until the last minute — and every reason to start preparing your portfolio and your household for the crises ahead. And all you pay is a $4.95 charge for shipping the book. Claim your copy now at this link.

Here’s a hint of what you’ll find inside:

➤The U.S. government’s “ice-nine” plan to steal your wealth and prevent you from getting your cash. If you have a dollar to your name, you need to read Page 22

➤The secret program for controlling citizens used by elites and leaders from Caesar and Napoleon to Rockefeller and Roosevelt… through both Bushes and Obama. If you think this is some conspiracy theory, you better see Page 58

➤The exact date by which the elites will finally reach their goal of world money under their control. You MUST take immediate and specific action before that. Hurry to Page 186

➤The institution that will decide what the dollar is worth in the near future. (Hint: It is NOT the Federal Reserve, Congress, the U.S. Treasury or the IMF.) Page 70

➤The climate change “Trojan horse” the elites are using to mask a troubling plan for you and the world’s taxpayers. Page 88.

That’s just the beginning. There’s more. Lots more.

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The Daily Reckoning