Another Deflationary, DXY 160 Moment Begins

Going back a decade or more, I've been blogging about the possibility of yuan depreciation, that the yuan can fall. That the global financial system burns from the periphery to the core. Think of the Exeter pyramid: USD is above other fiat and gold above the dollar:

A dollar crash scenario involves blowing up all fiat simultaneously.

No country wants reserve status and no fiat currency can take the place of the U.S. dollar.

The U.S. dollar supply expands with credit growth, it is the base of inflation.

If the world is rapidly inflating with credit growth, USD should fall. The dollar normally falls during economic booms for this reason. Nearly everyone wants a weaker dollar.

Most countries inflate against USD.

To get an isolated crash in USD where it collapses far more than foreign currencies requires removing the US economy from the world, via civil war or something similarly disastrous like a communist revolution.

In conclusion, falling USD is the system working as intended. A dollar-centric crash is highly unlikely. If the dollar implodes, all fiat implodes with it. The system survives, one could imagine all exchange rates stay constant, but all fiat is now worth far less compared to gold, oil and so on.

To destroy up the system requires breaking it. Extinguishing credit money and making USD fail to function.

Rising USD causes credit defaults and devaluations of foreign currencies. No govt wants this.

Devaluation wipes out foreign debts, cleans the balance sheet of non-USD economies.

If USD is still rising, defaulted countries must issue debt in local currency or some alternative money.

Default in one nation creates contagion that spreads to more nations.

The euro is an artificial currency with no national backing. The yen has inflated credit more than any developed nation on Earth.

China's financial system requires U.S. dollars and it has inflated as much as the US relative to the economy. It has a closed capital account to keep the currency from collapsing.

The path to the dollar losing reserve status flows from a deflationary collapse that wipes out Japan, Europe and China's credit bubbles.

These nations would be "freed" from the dollar at that point if they wish.

The US would become the most indebted nation in the world, with an unsustainably high currency. It could not afford to bailout Japan, China or Europe even if it wanted to.

The US economy would collapse along with the world economy.

At this moment, the U.S. will either let a 1930s-style deflation wipe out the debt, saving the dollar as a currency, or it would actually press CTRL-P. Not swap debt for debt like with QE, and not issue treasuries, but instead the U.S. Treasury would bypass the Fed, directly print fiat dollars into the economy and reflate the system.

The path to a collapsed dollar goes through DXY 140 or maybe 160 or higher. The higher DXY goes, the more likely and more spectacular the ensuing inflation/collapse. DXY 120 would probably constitute a near miss that causes a bigger panic than 2008 and bear market on par with at least the doctom bust of the early 2000s.

Almost everyone in the world is on the wrong side of this trade. They don't believe it can happen or don't expect it will happen, or they are too large. A billionaire cannot preserve their wealth, only their assets. Maybe Bill Gates understands because he's been buying up farmland. Wealth based on numbers will evaporate. Wealth measured in physical capital: farmland, oil wells, factories and so on, they will retain relative value in the transition. Gold and crypto are there for preserving some "number" wealth during the transition. The wealth gap will close because poor people with nothing will still have nothing, but everyone counting wealth in digits, in things like stocks, bonds and so on, will see their wealth converge with zero.

This is an extreme outcome if a series of events keep triggering. A lot of dominos have to fall in the same direction. China housing bubble has to burst for example, something they've avoided several times the past decade. Even if all these dominos start falling, the trend can be aborted at any time by governments doing good things and more likely, doing bad things. Wars could halt the deflation and cause inflation. But this process is getting started again and knowing how these dominos fall will keep investors one step ahead of what will largely be clueless competition. Most investors do not think any of this is possible. They think dollar devaluation is inevitable. 

Even if all that happens is another mini-cycle like 2014-2016 and 2018 kicks off, most are wrong footed. Stocks will crumble, bonds rally. Things like gold and crypto fail in lower order versions of these events and then experience explosive rises in extreme, system-breaking scenarios. Crypto is far more vulnerable to losses than gold, a reflection of its speculative rise. If all that happens is a bear market, cryptos and NFTs could lose 90 to 100 percent of their value.