U.S. Dollar Reigns Supreme... For Now...
If you’re still adjusting to Monday after a long and lazy weekend, allow us to bring you back up to speed. Bond yields are up, gold is still beaten down and the major stock indexes are rising.
The greenback is still the world’s reserve currency. As it will be… until it isn’t anymore.
The U.S. economy’s saving grace? It’s doing a tad better than the other guys’. As such, the dollar’s sitting near three-year highs.
Last week, the European Central Bank reported that central banks around the world continue to cut their euro holdings for the third straight year. The Old World’s scrip now accounts for only 23.3% of foreign reserve holdings.
The typical news report will add that the euro is still the second-most-held reserve currency, after the dollar. That’s true. But remember, the best of the worst still sucks. And the second best of the worst sucks even more.
“In 2012, the euro-area sovereign debt crisis continued to weigh on the international use of the euro,” ECB president Mario Draghi wrote in the report’s foreword. “The persistent fragmentation of the euro-area financial system is one of the main underlying causes of these developments, as it affects the depth and liquidity of euro-area capital markets.”
Translation: The greenback is still the world’s reserve currency. That is, until it isn’t anymore.
No matter how many digits are magically “printed,” we can’t have all “up” and no “down.” That’s not how markets work. As our founders Addison Wiggin and Bill Bonner noted in their book Financial Reckoning Day:
“[Free markets go] from crisis to crisis… from creative boom to creative destruction. From fully functioning, liquid markets to markets as frozen solid as the polar ice cap in the days before global warming… But now, in step the central banks. The boom is fine, they say, but we’ll put a stop to those nasty busts.”
The idea isn’t new. There are indisputable movements in the market. We’re talking about big trends up and down. Central bankers can delay those trends, but they can’t stop them.
In fact, with the last Vancouver Investment Symposium, “A Tale of Two Americas,” around the corner, we’ve been wondering: How is it we can have an impending currency crisis and have new paradigm shifting technological breakthroughs at the same time?
The answer, or at least the context for an answer, comes by way of an early 20th-century Russian economist, Nikolai Kondratiev. His defense of capitalism found him on the wrong end of Stalin’s Tokarev TT-33.
Kondratiev wrote about economic cycles that would take place every 50 years or so. After his death, Joseph Schumpeter called labeled his idea “Kondratiev waves,” or K-waves for short. They are broken up into “seasons.”
Spring is the start of a boom; people start out weary of the market, only to be egged on by something like cheap credit. That’s when summer hits. As businesses starts to boom, people become more confident and start to enter the market. Inflation starts to creep in. Real estate, stocks, gold and other commodity prices get pumped up.
Then in autumn, debt begins to balloon and stock prices start to peak. People realize the state of affairs is unsustainable. All of the market’s supply and debt cause inflation to slow, setting the stage for winter. That’s when the bust sets in. Then all of the debt and oversupply is defaulted on and liquidated.
After the system is flushed, the cycle starts all over again.
Without getting too wonky, by the K-Wave standard, we’re entering winter. Western debt has come to a head thanks to cheap credit. And cheap credit was enabled at the expense of the currencies we use. When a full-blown winter hits, the old currencies will be purged and something new will emerge.
As Currency Wars author James Rickards predicts, that could be a new paper money configuration, a type of gold standard or complete chaos. Each one of those possibilities is too hairy to untangle here today. Suffice it to say that holding some of the yellow metal during this “winter season” would be prudent.
Ed. Note: In The Daily Reckoning email edition — in which this piece was origingally featured — we regularly offers subscribers specific ways to play the up-and-down gold market. If you’re not yet receiving the DR email, you’re missing out. Click here to sign up for free and get The Daily Reckoning delivered straight to your inbox every day around 4 p.m.