The Rising Dollar and the Broken System
Here at Wanderer, we have been warning that the strengthening dollar is going to break things. Sometimes we need to wait for a while before the obvious eventuates. Other times, the obvious happens, but it is far removed from our everyday lives. That is what is happening right now on the periphery, and it is moving inward towards the core economies. Let’s expand…
Lebanon is experiencing an unprecedented economic collapse. Three-quarters of its population have been thrown into poverty. The currency has imploded against the dollar, losing 90% of its value. Basic staples have done the opposite, and have either disappeared, or have become so expensive as to be unobtainable. Simply topping up a petrol tank can take as much as a month’s salary.
For some, it’s even worse. That is because some business will only accept US dollars. Imagine walking into your local store and being told they won’t accept your money! That is exactly what is happening thanks to a skyrocketing dollar. The problem is, there aren’t many dollars floating around. Tourism has dried up, and the official exchange rate has long since broken. That means it requires more local currency to buy the limited dollars that are being hoarded by anyone who happens to have some.
The brightest minds have mostly left, with many leaving for Turkey, Cyprus, or any other place that will take them. We could go on about Lebanon, but you get the idea… Things are broken. Let’s move on to another nation— Sri Lanka.
Sri Lanka’s problems might sound familiar to that of Lebanon, as the currency has similarly imploded against the dollar, sending the economy into a tailspin. Again, we could expand on the problem the good people of Sri Lanka are facing, but they are similar to those of Lebanon, and both countries are considered emerging markets. Let’s go a bit more mainstream.
How about England? England’s central bank has had to intervene in recent weeks to maintain order in their capital markets. The pound has reached its lowest exchange rate against the dollar in over forty years. Interest rates are spiking due to questions of solvency and lack of liquidity. The Bank of England is in the middle of trying to quell inflation, yet they were forced to abandon their tight monetary policy and promise to buy unlimited amounts of sovereign debt to keep order.
England is no Sri Lanka. Our guess is that most folks in the US don’t even realize how bad things are in Lebanon or Sri Lanka because we are so removed from it. But the UK shows us that what is currently happening at the extremities is moving inward.
Right now, we are only feeling and hearing about tremors. But an economic earthquake in England will be felt around the world. The thing is, the problem is getting worse, not better. The dollar continues to rally, sending other nations reeling and scrambling to shore up their currency.
The result is a worldwide tightening that could rapidly bring about the prospect of deflation next year. It might seem impossible right now when we are reading about inflation every day, but the current inflation problem bubbled to the surface quite rapidly. A transition to a deflationary scare could happen just as quickly.
When the market begins to openly fret about deflation, Powell will feel the pressure to do something about it. That is when he will be forced to pivot to a loose monetary policy, and that is very likely when the stock market will find a durable low to rally off of.
That time will come. Probably next year. But right now, things are still breaking as the dollar continues its upward trajectory. Put some cash and coins aside for a rainy day, because there are clouds forming on the horizon, and people are already feeling a few drops.
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Living, trading, and running a business from a boat is pretty amazing. Just ten years ago the idea of doing all of this would have seemed impossible. While technically it may have been doable, it would have been a near constant headache, mostly due to internet connectivity. These days, almost nothing stands in the way of a mobile lifestyle, whether retired or working or some mixture of both. This past year I've gone from Bonaire to Aruba on our boat, to across the US via vintage motorhome, and am now on my boat in Mexico. Life is different in every location, but work and trading remain the same. The world is wide open to us vagabonds.
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