Lyn Alden reveals her brilliant insights about the US dollar and what she thinks about the possibility of a future collapse or melt-up that could possibly destroy other fiat currencies.
This is a really good chart that shows Treasury security issuance vs demand over time.
Currently, the Fed is the major buyer of Treasuries during a time of record issuance. https://t.co/UlxxAStNRt
Today, there's a constant debate on it, experts like Brent Johnson and Luke Gromen have talked about it, but Lyn shares a lot of valuable insights you can't miss.
She also explains the difference between creditor and debtor nations and why most fiat currencies eventually find their equilibrium value around trade.
This interview is probably one of the bests I've ever done.
There's Not Enough Dollars To Go Around For Everyone!
George Gammon: The Rebel Capitalist Show. All right, guys. It gives me a great deal of pleasure to bring someone to the rebel capitalist show that I really enjoy following on Twitter.
She is a FinTwit Rockstar, that is for sure. Her name is Lyn Alden. And I'm super stoked to have her right here right now. Lyn, welcome to the Rebel Capitalist Show.
Lyn Alden: Thanks for having me.
George Gammon: Okay. So, you came out with a report or a blog post the other day that just completely blew my mind.
I've interviewed guys like Brent Johnson, Luke Gromen, and they all have a much different view on the dollar. But in this report, you laid out some of the cross-currents, which I thought were really, really interesting.
Can you go over that report and then let's dive into it?
Lyn Alden: Sure. Yeah. So, I have a couple of different reports on the topic like each one approaching it from a couple of different pieces like different parts of the puzzle.
The main crux of it is that there is a global dollar shortage which both Luke Gromen and Brent Johnson and others have touched on.
Lyn Alden: And so, that consists of a bunch of things. But as the BIS states, it's $12 or $13 trillion dollars in dollar-denominated debts outside of the US.
So, in addition to all the dollar debts inside the United States, there's that large shortage, that large debt outside the United States.
George Gammon: Right. So, when you say that there's a dollar shortage, basically, it's pretty simple.
You got XYZ company outside the United States that earns their revenue in let's say Colombian pesos, and they have a loan for $10 million. And they need to literally find dollars to service that debt.
George Gammon: And if there's a shortage of dollars out there, it just means there are not enough dollars to go around for everyone to pay back their debts. Is that the way it works?
Lyn Alden: Exactly. And yeah, for many countries because they borrow in currencies that they can't print.
So, even at the sovereign level, they can't necessarily bail out their own companies if they also can't get access to dollars.
And for a couple of the countries, it's actually not even the corporate level, it's the sovereign level that has the debts.
So, in some countries like Argentina, the debts are at the sovereign level. Whereas for other countries like Turkey, it's at the corporate level.
George Gammon: Okay. Got it.
Lyn Alden: So, the issue is there's all that dollar-denominated debt. And that's an artifact of the dollar being a global reserve currency for the past 50 years. And even before then if you go to the pre-1971 system.
So, for decades of global reserve status, there's so much international trade, commodity pricing that all happens in dollars. So, many countries borrow in dollars and-
George Gammon: Correct me if I'm wrong, but they really levered up back in 2011, 2012, meaning they bought a lot of dollars back then because the Fed took interest rates down to zero. And the dollar I think was around 70 on the DXY?
Lyn Alden: Yeah. The last dollar spike was, it peaked around 2002 or so, 2001, 2002. And then it was in a long decline.
And then I had that brief small spike during the 2008 crisis. But that was a pretty low period for the dollar, especially right after it. So, from 2009, 2010, 2011, '12, '13, they could lever up.
Lyn Alden: And then only in late 2014, the dollar strengthened. So, for the past five years, we've been in this strong dollar environment.
And so, there's all this $12, $13 trillion in debt outside the United States all in dollars, and they're reliant on getting dollars to service that and there's just a shortage of them.
Lyn Alden: Especially when in this environment, it was already a problem for the past several years, and that's part of why we've had slow growth.
But this crisis obviously brings it all to a head because trade is now greatly reduced, commodity prices are lower. So, many companies suddenly can't get dollars. It's more acute than it was in the past several years.
George Gammon: Right. I want to unpack that just a little bit before we move on, just so the viewers are following us here.
So, when there's a corporation in, let's say, China or Taiwan, anywhere outside of the United States, the way they get dollars is they produce something.
Fewer Dollars Not Getting To The Countries That Need Them In Time
George Gammon: They produce a widget. And then they send that widget to the United States and that goes into Walmart.
And then Walmart gives, for that widget, they give that company just green pieces of paper that we call dollars.
So, if there are a lot fewer widgets that are going around and being purchased by the United States, that means there are fewer dollars getting outside of the United States, and then just exacerbates the problem.
Lyn Alden: Yup. And then even if they get outside that states, not necessarily getting to the right countries. So, they could still be getting to Saudi Arabia.
They still could be getting to China, but they're not necessarily getting to another country that needs them or specific companies that need them.
George Gammon: And does the price of oil make it even worse? Because I would assume that a country that produced a lot of oil that would be great for them because they're getting revenue in dollars.
But as the price of oil goes from 100 a barrel down to 10, then they're getting a lot fewer dollars coming in. Am I seeing that right?
Lyn Alden: Yeah. It means fewer dollars get out there. And then those countries have to tighten their belts. So, they buy less stuff from another like say, non-oil producing nation.
So, the dollars circulate less because there's less than to spend on oil, there's less than spent outside of the country.
The Difference Between Creditor Nations And Debtor Nations
George Gammon: Okay. Got it. So, let's move on to the core of the one report which I love where you're talking about creditor nations versus debtor nations.
Lyn Alden: Yes. So, creditor nations, that's measured as the net international investment position, which is how much assets that people in that country or the government itself, but the total assets that that country has in other countries.
So, for example, Japan owns a lot of assets in the United States and other countries.
And the net international investment position is the difference between how much they own from other countries versus how much countries own their assets.
So, a creditor nation owns more foreign assets than foreigners own of their assets, and a debtor nation is vice versa.
Lyn Alden: So, some of the largest creditor nations are Japan, Germany, Singapore, Switzerland, Norway, Saudi Arabia, Taiwan.
And then some of the biggest debtor nations, the United States is the largest absolute debtor nation, but then there's also as a percentage of GDP we are one of the worst but there are some that are even worse such as Spain, which is deeper in the debtor hole.
Foreign Nations Desperate For Dollars
George Gammon: Okay. All right. Got it. So, how does that balance sheet if you will, play out in terms of the strength or weakness of the dollar?
Lyn Alden: So, in the short run, it can strengthen it because like I said, there's no dollars getting out there.
But it also makes it so that in the intermediate-term, it's the United States problem that the dollar is so strong because if all those foreign nations can't get dollars, a lot of them even though they don't have dollars, they do have treasuries.
Lyn Alden: And they do have other US assets, including stocks, corporate bonds, real estate.
So, if some of those creditor nations have to start, they have a more acute need for dollars, their central banks can sell treasuries to help try to bail out their corporate sector.
And some private pensions or other institutions may have to sell US stocks, US corporate bonds.
Lyn Alden: Some householders that are in trouble might have to sell like say US real estate or other holdings that they have.
And currently, the numbers are that the net international investment position for the US is about a negative $11 trillion.
So, we own 29 trillion foreign assets. And foreigners collectively own about 40 trillion of our assets. So, there's an $11 trillion hole that we have.
George Gammon: Okay, great. So, if I'm a foreign entity, whether it's a sovereign or corporate, even at the individual level and I have dollar-denominated debt.
But all I have coming in is my local currency, so I don't have any of those dollars. What you're saying is, I might take some treasuries that are denominated in dollars, obviously, and sell those into the market to get the dollars I need to pay down my debt.
Lyn Alden: Yes. And more specifically, you might have to work with your central bank of your country or other major banks within your country that would work with the central bank to get access to those dollars.
Because the company themselves might not be holding treasuries, they might have to get dollars in a loan, some currency swap with their domestic institutions, which then either have to sell treasuries or use other means to get dollars.
Fed Steps In To Alleviate Dollar Shortage Pain But Will It Be Enough?
George Gammon: Okay, got it. So, any of these assets that we're selling that are denominated in dollars, most likely that could put pressure or downward pressure on the dollar because it's just creating more supply.
And then with treasuries more specifically though, if you're getting a lot of treasuries that are being sold into the market, that potentially could lower the price, increase the interest rate, which would cause a lot of problems for the United States government and our local domestic economy.
So, that's where the Fed is stepped in. Is that correct?
Lyn Alden: Yeah. So, a lot of their recent, it's called out the alphabet soup of different programs they've done.
They all often explicitly cite the treasury market as the catalyst for them doing it.
They keep citing how it's been a liquid. It's been very disorderly. And in mid-March, it actually crashed pretty significantly, the treasury prices.
Lyn Alden: So, if you look at TLT at one point, it was down about 16% from its highs and all those long bonds crashed pretty hard and that's because there was so much foreign selling pressure and some domestic hedge funds and other institutions also were net sellers due to leverage.
But foreigners specifically sold over $100 billion worth of treasuries in a very short period of time.
Lyn Alden: And historically, this happens when the dollar strengthens because suddenly, it happened back in 2016 when we had that global slowdown, we had recessions in several countries, such as Brazil, Russia.
We had an oil price reduction. And we saw the same dynamic there. So, the dollar spiked, the DXY went up to 103, 104. And we saw foreigners unloading treasuries to get dollars.
As Dollar Spikes, Demand Continues To Increase
George Gammon: Okay. So, why does the dollar going up, relative to other currencies, increase more demand for dollars?
Lyn Alden: Because when it's going up, it's indicative of a dollar shortage. So, it's a self-feedback loop.
So, it's going up partly because there's a shortage of dollars. And then the more it goes up relative to local currencies, the harder it is for them to get dollars.
George Gammon: So, that the dollar index going up is more of a symptom of what's going on which is creating the need to sell the treasuries.
Currency Swaps Remove Need To Sell US Treasuries
Lyn Alden: What they're trying to do is not have to buy almost the entire treasury market. So, they're buying hundreds of billions of dollars in treasuries per week now.
But some of the other measures that they're doing are to try to make it, so they don't have to buy as many.
Lyn Alden: So, for example, they're doing currency swaps, so they can give dollars without necessarily exchanging treasuries, it's a loan. And then they also now have an international repo.
So, foreign central banks can loan their treasuries back to the Fed, rather than sell treasuries on the open market in order to get dollars temporarily.
So, the Fed would prefer all this outright hard-selling of treasuries.
George Gammon: Right. It seems to me the Fed is trying to get as many of these assets on their balance sheet as they possibly can, so there are fewer sellers and just to prop up the prices, do you see it that way as well?
Lyn Alden: Well, yeah. Basically, there are not enough buyers for all the sellers, both internationally and domestically.
So, the Feds find themselves, instead of the buyer of last resort, they're becoming the only major buyer of treasuries.
George Gammon: Furious, yeah.
Lyn Alden: Yeah. Some traders are of course buying. But the only buyer at scale right now is the Fed.
They're a major buyer and they have to do that because there's just not enough dollars, not enough buyers to buy all those treasuries.
But then they don't want to just keep it going at this rate.
Lyn Alden: Because they don't want to buy the entire treasury market or the entire international treasury market.
They'd rather provide some of these loans to bridge the gap until hopefully, they get trade back up.
And then foreigners are under less pressure to sell treasuries. They want to not buy more than they necessarily have to.
Dollar's Short Term Strength Will Likely Lead To Long Term Weakness
George Gammon: Yeah. What are the downsides there? I mean, I think I understand them.
But for the audience, what would the downside be if the Fed just buying the entire treasury market and problem solved.
You don't have to worry about interest rates. We don't have to worry about all these pesky sellers.
Lyn Alden: Oh, in the long run, it results in currency devaluation most likely. Because the dollar actually has a lot of fundamental problems with it at the moment like it's overvalued based on a lot of metrics.
So, as you relieve the dollar shortage on the other side of this, there's a pretty good likelihood that we're going to see a weaker dollar.
And then you open up the can of worms for inflation and other consequences like that.
George Gammon: When you say inflation, how would you define that as far as numbers?
Do you define that as anything over… well, I know literally, it's just above zero, I understand that.
But when we get into serious inflation, maybe that's a better question.
How would you define serious inflation? Does it get up to 8%, 10% or higher, or what type of range do you see?
Lyn Alden: That's a possibility. I mean, I would define inflation as getting notably above the Fed's target of 2%.
So, even if they might target 2.5%, 3% because now they changed the goalposts.
Now, they're now they're targeting symmetric inflation.
So, they had inflation below 2%. So now, they're happy with maybe 2% to 3%. But if you start seeing inflation get to 4% or 5%, that's not in their playbook.
George Gammon: Yeah. And let's just say that inflation got to 4% or 5% or maybe even higher. How do they combat that if they're basically trying to peg the yield curve?
Lyn Alden: The best playbook we have to compare what they did is all the way back in the 1940s, they actually encountered that situation.
That's the last time that US debt to GDP got this high. It's the only other time in history it was this high, it was actually slightly higher back then and that was of course for World War II.
Lyn Alden: And so, what the Fed did was they did yield curve controls.
So, they worked with the treasury and then they basically said like, “We'll buy any treasury we need to at 2.5%.” So, they locked the yield curve.
The T-Bill was at something like 0.38%. And then the long duration stuff was at 2.5% percent.
Lyn Alden: And then in the middle of that there's 1%, 1.5%. So, they had this low positive yield curve and they just overrode the market and said, “We'll use our infinite balance sheet.” And that's what the yield curve is.
So, inflation actually in 1942… and then again, in 1947, inflation got into the double digits.
George Gammon: Yeah. Like this high as the 70s.
Lyn Alden: Yeah. The actual peak was a little bit higher than the 70s, it was just less sustained. So, we've had these bursts of double-digit inflation.
And if you look at that period, for the whole 1940s, that whole decade, treasuries lost a lot of value on a real basis, even though they made money nominally, you got paid 2.5%, there were no defaults.
But your actual purchasing power with those treasuries went down because they locked the yield curve below the inflation rate for several years.
George Gammon: Right. So, a couple of things there. When I think about the debt or the debt to GDP being that high back in World War II, it seems as though it's so much different now.
Because back then, it was just a one-time cost. If I'm looking at it as a business, okay, well, I'm not going to be in a world war for the next 50 years, it's not a recurring cost.
George Gammon: It's not my monthly rent, it's just a one time fee. Where now, it seems like the balance sheet or the debt side is just all these recurring costs that are the opposite.
They're not one time, it's going to be there forever. Am I seeing it correctly?
We're Getting Close To The End Of This Dollar Cycle
Lyn Alden: Yes. And my thesis that I started presenting in around September, October of last year with the repo spike, is that we're getting close to the end of this dollar cycle.
And that over the next five plus years are very likely to see a weaker dollar for that reason.
So, it was 5% of GDP and it was structural. It's based on our current plan of entitlement spending, healthcare, military spending, the whole permanent financial budget we have in place is just out of whack.
Lyn Alden: So, we had this growing deficit going into this crisis. Whereas normally, during economic expansions, we rarely have surpluses, but at least they narrow the deficit generally during expansions, where is this one, towards the end of it was the opposite.
Lyn Alden: We started to have growing deficits as a percentage of GDP going into this crisis.
So, for the next year, two years, we're going to have very large deficits, but that's on top of a structural deficit.
So, even after that's all over, we're still looking at nothing but deficits until they change something.
Lot Of Selling Pressure In The Treasury Market
George Gammon: Right. But that means a lot of selling pressure in the treasury market. Because basically, a treasury is just a long-dated dollar.
And so, if I'm holding dollars and I'm committing to hold those dollars for call it 30 years, do I really want to do that at a 2% interest rate, when I see inflation potentially going to 3%, 4%, 5%, 8%, 10%, you're losing a lot of money and purchasing power, even though you're getting paid back anomaly.
George Gammon: So, what's going on in my head is I'm saying, “Okay, I get it. I see how this could increase interest rates due to inflation expectations.”
But I also see that the Fed, the very last thing they want is for interest rates to go up, because technically if interest rates got high enough and went there fast enough, that could be as detrimental to the economy as the virus we're dealing with.
They went high enough. So, how does that play out?
How Does The Fed Prevent Interest Rates From Going Up While There are Higher Inflation Expectations?
Lyn Alden: So, the main way they do it is because their balance sheet is, it's technically infinite. So, they can create money, buy bonds.
And on that front, there's no limit. But of course, there's no free lunch.
So, the limit ends up being that the currency weakens. So, they can definitely set the yield or whatever they want to set it out.
Lyn Alden: They can say, okay, the free market wants to set the yield at 3%, 4%, 5%. If we get to that period where debts going up, inflations increasing, and the market wants to have higher rates, they can override that.
So, they have the power to do that. But they can't override that and maintain currency strength. So, the release valve would be, you lower the yields but then you lose value for the dollar.
Lyn Alden: So, that's generally the release valve how this works. And if you look at the long-term debt cycle, that's normally how debt cycles play out.
Whenever you get the debt this high, most regimes end up devaluing their currency, either intentionally or unintentionally.
George Gammon: Yeah. That's really my point, is that if the Fed is trying to peg the yield curve with the yield curve control, and they're having to print more dollars to do that, then that's going to increase inflation expectations which the market would want to push rates up while the Fed is trying to push them down.
The Dollars Doom Vortex Explained
George Gammon: So, everything that the Fed is doing to push rates down, it makes the market sell more bonds.
So, you get this, I call it a doom vortex or Raoul Pal calls it a doom loop where it just feeds on itself. And the more the Fed tries to peg those rates, the more money they print, the more inflation expectations, the more the market sells off, the long end of the yield curve.
George Gammon: That seems to me that gets really bad really quickly as far as the release valve is the dollar.
Understand The Different Types Of Inflation
George Gammon: And then I also want to define for the viewers that when you're talking about inflation, are you talking about just domestic deflation with consumer prices? Or inflation, excuse me. Are you talking about maybe asset inflation? Or, are you talking about inflation, or a devalued dollar relative to other currencies?
Because what we've seen in the past is you can have all these things happening at the same time.
The dollar can be going up outside the United States, but we can also see 4%, 5% CPI increases. So, how do you compartmentalize inflation?
Lyn Alden: Sure. So, it always depends on a couple of different variables. And one example I like to use in Japan.
So, I did a case study for Japan for their 2012 to 2015 period. So, people often cite Japan as this example of printing a ton of money. And so far, not getting a ton of consequences for it.
Their central bank balance sheet is over 100% of their GDP, whereas the Fed going into this crisis was 20% of our GDP is probably already up to 25% now or something like that.
Lyn Alden: Yeah. The ECB went into this at about 40% of Eurozone GDP. So, Japan is very far ahead on the curve for how much they've already printed.
But if you look at the timeline of when they did that, they really started ramping up printing in late 2012.
That's when their balance sheet starts… it was flat and then it just starts going up at a slope and it just doesn't stop all the way until today.
It started to go a little bit slower but it's just been a diagonal, move up.
George Gammon: Yeah. I call it the buzz lightyear balance sheet, it's infinity and beyond, right?
Lyn Alden: Yeah. So, yeah. Their debt to GDP is well over 200%. And they've just printed a massive amount of money to buy a very large portion of their sovereign bonds and then added, stocks, and other assets.
And if you look at what happened to their currency. So, starting in late 2012, right?
Lyn Alden: When they started that massive ramp-up in their printing, the yen devalued significantly compared to the dollar.
So, the yen was 70 something yen, maybe 74 yen to the dollar. And then by 2015, three years later, that it was 120 yen to the dollar. So, they had a very significant yen devaluation.
Lyn Alden: And it also devalued against major other currencies not quite as much as it did to the dollar, but compared to the euro, it lost value. But they didn't experience any domestic inflation.
They didn't have a lot of price inflation at the consumer level. So, that's an example of a non-inflationary devaluation.
So, it's not like you point out there are different variables. You can have devaluation without necessarily consumer price inflation.
George Gammon: Could we have the opposite? Could we have consumer price inflation when the CPI but yet the dollar getting “strong”?
It could if there's inflation in other countries in addition to the United States, you could have inflation, but the dollars we're still retaining strength versus other currencies.
Now, I don't consider that as probable in this environment, but it's definitely in the realm of things that mathematically can happen.
Is Modern Monetary Theory Coming (MMT)?
George Gammon: Okay. Yeah. Trust me I'm by no means an economist and I'm just some crazy person on YouTube.
But some of the components to the puzzle that I saw were just potentially MMT coming down the line more so in the future.
I think once people get a few checks, it becomes more of a permanent government program like every temporary government program.
George Gammon: And the more they do this and create additional money supply in the real economy through additional deposits.
Most of my viewers know from watching my videos that if the Fed prints money, it's just a bank reserve, it doesn't necessarily mean that it's the additional money supply that's circulating with velocity in the economy chasing goods or services.
George Gammon: So, I see MMT is a way of increasing the deposits. And then also with these four-letter, five-letter alphabet soup programs, that might also create more deposits.
And then you might have fewer goods and services because of de-globalization and disrupted supply chains.
George Gammon: So, you have more money chasing the same amount of fewer amount of goods and services while at the same time with the disruption of imports from global supply chains.
You don't have as many dollars getting outside to service the debt that we talked about at the beginning of the conversation.
George Gammon: So, that's where you might get that dollar getting “strong” while we see consumer price inflation.
Am I not seeing it correctly, though? Because again, I'm by no means a professional.
Lyn Alden: No, that's certainly possible. There are parts of that that I would totally agree with.
And then the other part that while they could happen, they're not in my base case what would happen.
So, the part that I definitely agree with is the fiscal side or the MMT side, and that's the thing you have to watch.
Lyn Alden: Because so after 2008, as you point out, they did a lot of QE, but it's bank reserves.
So, they weren't sending out checks because it wasn't getting down to the everyday buying level. So, we had an expansion, the monetary base. The balance sheet went up.
Lyn Alden: But the average person didn't have more money, so there wasn't a lot of money chasing the same level of products.
So, we didn't have consumer price inflation. Going forward, we're already seeing checks going out but it depends on what they do going forward fiscally.
Lyn Alden: Because we don't know how long this is going to last. We don't know how hard it is going to be to take away the money once they've been giving it out. I don't know how easy it is going to be to say, “Okay, we're done with checks.”
So, in order to see that inflation on the consumer level, there has to be a mechanism to get money into the hands of people.
Lyn Alden: And that's what you could find that really caused that inflation get out of control. So, over the past 10 years in this cycle, we have seen inflation in financial assets. We've seen inflation in healthcare.
We've seen inflation in luxury goods. But due to the combination of technology which is generally deflationary, especially for consumer goods, electronics, because it makes things more efficient.
Lyn Alden: And outsourcing, these are been deflationary forces for consumer prices combined with the fact that money wasn't really getting down to the common person level.
So, you didn't see a lot of money chasing few goods. So, we didn't really have that consumer price inflation.
Lyn Alden: But it's definitely more of a risk going forward not necessarily this year because we have these current deflationary forces.
But on the other side of this, when we still have these large structural deficits, we still have whatever damage is still lingering from this recession, this debt crisis, it's certainly possible that you're going to keep seeing that injection of money into the mainstream.
Lyn Alden: And especially because that money's not being extracted anywhere else. It's not being extracted with taxes.
It's not being extracted from the economy. It's just new money that's entering the economy, and then it just but it's a matter of magnitude and where it ends up.
George Gammon: Yeah, got it. Okay. So, where you're saying, George, you probably got the probabilities a little bit wrong, is you're seeing the demand shock being so extreme, that there's just not going to be velocity there even though those dollars are getting out into the system in the short term may be the next year or so.
Am I hearing that correctly?
$1200 Checks Mean Nothing To A Multi Trillion-Dollar Money Supply
Well, it depends on what they do later this year. But at the current time, especially if you look at the magnitude of how much money is getting to the middle class, right?
So, if everybody gets a $1,200 check, and you get some checks for kids, that portion of the whole bill is several hundred billion dollars, which sounds like a lot.
Lyn Alden: But compared to the multi-trillion-dollar money supply and compared to the $22 trillion GDP, it's still not this giant inflationary impulse. It's mostly offsetting the reduction in equity prices, we could have a reduction to home equity, the reduction incomes that people have.
Lyn Alden: So, right now, at the current stage, it's not likely to be inflationary. But on the other side of this, we could certainly see more inflation.
And in the near term, we could see very targeted inflation, inflation of toilet paper, or some good that is scarce that everyone suddenly wants.
George Gammon: Yeah. I think the probability of that is extremely high. We all know toilet paper is going up in price, that's for sure.
All right. So, I'm totally following what you're saying. If the consumers, the average Joes and Janes out there take the money from the government.
George Gammon: Let's say they're locked up in their house. They're really worried about what's happening in the future, maybe with their job, with the economy, and they're like, “Listen, I've got this credit card debt, I've got this XYZ debt, I'm just going to take this money and pay off some of these lines of credit that I have.”
George Gammon: That could potentially lower or decrease the money supply. It all depends on psychology.
And so, if that's correct, could you explain to the viewer how paying off debt decreases the money supply.
So, even though the government is creating all these currency units or putting them into existence, it could actually create deflation from a price standpoint.
Lyn Alden: Well, yeah, definitely the near term. Because if you eliminate debt, you're basically also taking away an asset.
So, someone else's asset. So, people their confidence in spending partially comes from how much money they have in the bank account, but also comes from what is their stock and bond portfolio worth, what is their home equity worth, that can all influence consumer behavior.
Lyn Alden: And also, your availability of credit. So, if you have a home, and it recently went up a lot in value, and then you take a home equity loan out of it, and then you go buy a new car with it.
So, you can extract a lot of spending power from these non-money assets, you can monetize them.
Lyn Alden: So, if you have a reduction in stock prices or home equity and then also you have consumers that are suddenly more fearful about losing their income, or losing their spouses income and just their overall income pictures less stable, they can spend less and they can leverage less and the can even reduce existing leverage.
So, you could see that near-term deflation, if people aren't confident to spend, you know, outside of certain targeted areas like necessities.
George Gammon: Okay. Great, got it. I just wanted to give people both sides of the short-term argument there for a local domestic, assuming we've got a US view or the local domestic inflation compared to maybe local domestic deflation.
Well, let's circle back if we can to the report where you're talking about the creditor nations and the debtor nations.
George Gammon: And I think I'd like to think through if the Fed is pegging the yield curve and that's creating inflation expectations.
We talked about how that works domestically, but outside of the United States, if I'm one of these nations, it's a creditor nation, and a lot of the assets that I have dollar-denominated are treasuries.
I think I want to be a seller of those treasuries as well.
George Gammon: So, I mean, how many dollars would they have to print to potentially absorb all of this dollar selling, that would most likely be a result of future inflation expectations.
And then I guess the next step would be, is the demand for dollars, because of all the debt, enough to absorb that. I mean, how do those crosscurrents really play out?
In A Normal System, Currencies Eventually Find An Equilibrium Around Trade
Lyn Alden: Sure. So, the way that I start with currency assessment is that the trade balance is at the heart of it. Because in a normal system, currencies eventually find an equilibrium around trade.
So, if a country runs a persistent trade deficit, generally what happens is there's some financial crisis or some shock that happens and suddenly they're forced to reduce their consumption of imports, and their currency generally weakens.
Lyn Alden: And that weakening makes it so they can import less. So, for example, we looked at that with Turkey, for example.
Turkey was running a big trade deficit. And then when their currency had this big weakening, suddenly, it was a self-reinforcing cycle.
So, they now are importing less, because they have to. Because they have a weakening currency.
Right. Oh, yeah. I just wanted to unpack for the viewer.
So, the reason they import less because they can't afford those products because their currency goes down in value.
All of a sudden, you go to Walmart, and everything's quadruple price because the dollar goes down theoretically against the Chinese yuan or something.
Lyn Alden: Yup. And so, that makes it so that they have to import less. And also, it makes their exports more competitive.
Because suddenly, say we're using the example of Turkey. Suddenly Turkish labor is pretty cheap for foreigners to access their products and services.
So, it lowers their imports, it boosts their exports generally, as long as it's still a functioning economy, as long as it's not a failed state something like Venezuela.
Lyn Alden: As long as you have a functioning economy, it helps a currency find an equilibrium.
Because once you have the trade balance start to settle out again, that's where the currency can find a floor and then start stabilizing from there.
And that's actually what we saw in that example with Japan from 2012 to 2015.
Lyn Alden: Even though Japan kept printing money after that. They printed money starting in 2012.
They printed all the way through 2015. And then they kept printing all the way up until 2020, they're still printing. But their currency stopped weakening in 2015.
Lyn Alden: And actually, it strengthened slightly versus the dollar since then. It's still way weaker than it was before in 2012 but it's down from its peak weakness. It's strengthened a little bit.
And that's because if you look at their trade deficit over the same time, they basically hit equilibrium.
Lyn Alden: So, Japan has a long history of having positive trade balances and positive current account balances.
And that's how they built up their large creditor status. But in around 2012, they actually had a rare trade deficit.
So, the economy is pretty weak at that time. They had large fiscal deficits. They started to have a small trade deficit.
Lyn Alden: And they started printing aggressively, it weakened their currency.
So, we saw that effect, where it made their exports more competitive, and it made their imports a little bit more expensive for them.
And so, within that three-year period, we saw that the trade deficit went back down to zero, roughly, and their current account was slightly positive.
And from there, even though they kept printing aggressively, their currency stopped weakening, because it found that equilibrium of where if it weakens any further, it's going to push them into a trade surplus because suddenly their products are going to keep getting cheaper and cheaper.
Lyn Alden: So, if we think of it like that, most currencies eventually sometimes find it quickly, sometimes they can take years to find that equilibrium.
But they generally find an equilibrium around trade. Now, the US is a little bit different because we have the global reserve currency.
Lyn Alden: So, we have this extra layer of demand for the dollar over the past several decades. And in some ways, that's a good thing.
But it's also very bad for our manufacturing because it means that our currency never really gets a chance to find its equilibrium to balance out our trade balance.
Lyn Alden: So, part of being the world's reserve currency is that we have to run trade deficits persistently in order to provide the world with dollars.
If we have a global system where all oil pricing and most commodity pricing is in dollars, there has to be enough dollars out there in the global system. They can't all just be in the US.
George Gammon: Right. Triffin's paradox.
Lyn Alden: Yup, exactly. So, after several decades of this, we're on the wrong side of Triffin's paradox. We got all the benefits decades ago.
So, but now, because we have the privilege to be able to print money for oil and other hard assets. But decades and decades of this, we've had very persistent trade deficits.
Lyn Alden: So, after World War I, World War II, we were the world's largest creditor nation. So, we had more foreign assets than foreigners owned by our assets. And then that slowly deteriorated.
So, by 1985, we went into debtor status slightly. And then during the previous recession in 2007, 2008, our net international investment position was negative 10% of our GDP.
Lyn Alden: So, we were a mild debtor status and then since then in just that 12 years. In 2020, we're now down to below negative 50% of GDP because we can continue to run very large deficits because our currency is just overvalued consistently compared to what it would be if it could just find an equilibrium.
Because the global dollar shortage keeps it up. And the fact that all commodity pricing globally or most commodity pricing happens in dollars it provides this constant demand that wouldn't exist if we didn't have this current setup in place.
George Gammon: Right. So, I got zillion questions here. Well, let's start by trying to explain to the viewer who might be very new to this.
A lot of my viewers are incredibly intelligent, all of them are incredibly intelligent but they have varying degrees of understanding of our lingo and the economic jargon and whatnot.
George Gammon: They just see what's going on with the Fed and they have a visceral feeling that hey, something's not right here.
You just can't print money with no consequence. I need to watch one of George's videos to figure out what's going on.
So, for that type of person, let's explain why being a creditor like the pros and cons of being a creditor nation compared to a debtor nation.
But if you think of it as a household, a creditor nation is like you have a, maybe a low mortgage, but you have tons of home equity.
George Gammon: Lyn, before you continue, I'm sure what everyone's thinking in their mind right now is how can Japan be a creditor nation when they have 220% debt to GDP? And I get that.
But if you could answer that simple one, because I think that's where people really get confused. Yeah.
Lyn Alden: Yeah. Often if you say creditor nation or debtor nation, they assume it's sovereign debt to GDP, but that's it's a different measure.
So, they do have that problem. But the main variable there is that they own most of their own debt.
So, most of their sovereign debt as large as it is is held by their citizens and their central bank.
Lyn Alden: So, most of that debt is not held by foreigners. So, we don't own most of the Japanese debt. Other creditor nations don't own much of Japan's debt.
They own most of their own debt but then they also own a lot of our debt. And they own a lot of European assets and just assets around the world.
So, that's where that comes from that they… yeah, it's a different metric.
George Gammon: Got it. So, now, we're talking about Japan and how they're a creditor nation. You're comparing it to a household. So, they just have a lot more assets at their disposal puts them into a more powerful position. Is there any downside to the creditor nation?
Lyn Alden: One of the downsides is that their currency has a tendency to strengthen which Switzerland actually finds themselves in this position.
So, Switzerland's one of the largest creditor nations. And they have a large trade surplus and current account surplus.
Lyn Alden: And if left to its own devices, their currency would keep strengthening to the point where their products would be very uneconomical, like uncompetitive in the global landscape.
So, they're known for their banking services obviously, but they also have manufacturing like high skilled manufacturing.
Lyn Alden: And we're willing to pay up for that quality.
But if they let it strengthen so much, eventually, they priced themselves out of the market and they'd actually start to get either a smaller trade surplus or even a trade deficit, and they could start to unwind that position.
Lyn Alden: So, what the Swiss National Bank does is they actually print a ton of money.
But then unlike the Fed or the ECB or the Bank of Japan, they use most of that money printing to buy foreign assets.
So, they're purposely printing more of their money to try to weaken it, and then buying foreign assets with it.
Lyn Alden: So, it keeps their creditor status up, but also trying to weaken their currency.
And then the downside of that is that they can get called currency manipulators by other countries because that's what they're actually trying to do. They have some of the most negative industries in the world.
Lyn Alden: And then they also, are printing just huge amounts of money. Their balance sheet last I checked is like Japan where it's 100% of their GDP.
But the main difference is that a lot of their assets are external assets because they have the quote “problem” of as current is too strong.
George Gammon: Right. So, and this a joking question. But if interest rates are the price of money or the currency.
And the central banks, especially the Fed is manipulating artificially the interest rate. Isn't every single country a currency manipulator especially the United States?
Essentially, yes. Yeah. It's all a matter of how much they're manipulating it. And then also different viewers view it in different things.
So, China gets accused of being a currency manipulator a lot, right?
So, because they don't want their currency to be too strong because they rely on exports. But at the same time, people think that China is a big Ponzi scheme and they're propping up their currencies which is, are they propping it up or they weakening it.
The Downsides To Being A Debtor Nation Like The United States
George Gammon: Okay, exactly. So now, let's dive into the United States. And what's the downside there with being such a debtor nation and how you see that playing out over the next few years?
Lyn Alden: So, yeah, there's a couple of major downsides. The biggest one is that the group of people that suffers a lot from that is the American working class, middle class.
Lyn Alden: So, we've exported a lot of our industrial base to foreign markets, especially China, but even Europe.
Especially in this in these five years strong dollar environment from 2014 to present, Europe has a very large trade surplus with the United States.
Lyn Alden: So, we often think as China has been the one that we have a big trade deficit with, which is true.
But even Europe as a developed continent, they actually are far more competitive in terms of manufactured products than us because their currency is not overvalued like ours is.
Lyn Alden: So, there's a reason we drive German cars and Japanese cars and they don't really drive American cars because our currency is just always too strong in order to make our products as competitive as they could be on the global market.
So, we have this whole process of deindustrialization, it benefits some people but it's about 50% or 70% of the country that's this more harmed by it.
George Gammon: Right. But as far as the United States moving forward relative to the dollar and inflation and interest rates in the long end of the yield curve.
If we are this huge debtor nation, that means that so many of those foreigners own our assets or dollar-denominated assets, and that puts us in a potential position of weakness.
George Gammon: Where the only thing that we can do is print money to try to either get those assets back onto the balance sheet of the Fed.
The bottom line is it puts us in a position where you just got to print money. You got to more dollars.
Regimes In A Debt Crisis – Collapse Or Devalue Currency?
Unfortunately, yeah. Historically, regimes when they have this debt crisis, they can either let it collapse, which they almost never choose, or they can print and devalue their currency, which is what they almost always choose to do.
George Gammon: If we try to start buying the US so no more imports from China or India or Europe? Isn't that going to create another problem in the sense that it's going to exacerbate inflation?
Because we don't have any of those supply chains set up, we have a higher cost of labor instead of outsourcing to a lower-cost labor pool.
And then, how does that combine with the Fed having to print money and create more dollars at the same time?
Lyn Alden: So, going back to what I said before of currencies trying to find an equilibrium value, basically around trade.
And our biggest problem now is that we're on the wrong side of the trip and dilemma where after decades of being the world reserve currency and decades of trade balances.
Lyn Alden: We have a very deep negative debtor position, and we have a very uncompetitive industrial base and we have an overvalued currency.
So, and that because we're the world reserve currency because we have this dollar shortage where there's so much debt, dollar-denominated debt outside of the country that it currently doesn't give our currency a chance to weaken.
Lyn Alden: We never get down to that equilibrium where our currency can find its natural resting point where we become competitive again.
And there's a couple of ways that are probably going to be adjusted over time.
One is, I think naturally what they're doing now, on the other side of this, whether they like it or not, they're probably going to have a weaker dollar.
Lyn Alden: Even though in the near term, there is a risk of a spiking dollar if they don't provide enough liquidity to get through this period.
But on the other side of this, when we look at how large deficits are going to be, when we look at how much debt there is in the system, and what our trade balance is.
Lyn Alden: If we if we alleviate the dollar liquidity problem, then the natural resting place of the dollar is lower, and that's what we found over the past few months.
So, for example, starting with the repo spike in September of 2019. The Fed started printing money to basically backstop the repo market and expanding its balance sheet.
Lyn Alden: And that helped in the short term alleviate the dollar shortage. So, we started to see the dollar index fall from about 99 to about 96. And then it stopped.
printing around, right at the turn of the year in January 2020. So, we started to have the dollar strengthened again.
Lyn Alden: And then of course, it all blew up and we had this this virus, it shut everything down. We had the dollar breakout. DXY got up to about 103.
But basically, on the other side of this, once the dollar liquidity shortage is addressed, we're probably going to see a naturally weaker dollar.
Lyn Alden: And then over the longer run, that's when we get in a geopolitical solution.
So, for example, you can have multi-currency oil pricing, so that the dollar isn't the only currency out there to buy commodities with, so that the dollar has less national demand for it.
Lyn Alden: Basically, for many decades there was a national interest to have a strong dollar. But now, it's more of a natural interest to have a dollar that's not necessarily weaker, but that is just at its equilibrium price, which is weaker.
So, it's not like we don't want an artificially weak dollar. But we want the dollar to go to find its resting value.
Finding The Dollars Equilibrium
George Gammon: What do you think that equilibrium is?
Lyn Alden: Well, if we look at what happened in 2008, our imports fell pretty considerably. And our trade deficit narrowed a little bit. But even that wasn't quite enough. And DXY was down below 80.
And even that wasn't quite enough of an equilibrium value to get us down to break even. So, probably equilibrium values below 80 on the dollar index.
George Gammon: So, what happened with our trade when we were down at 70 on the DXY in 2011 or '12? Did we see a big difference there?
Lyn Alden: Yeah. Our trade deficit narrowed significantly after that whole crisis. It sharply came back in during 2008 or so.
And it narrowed but it still remained negative even with the dollar index below 80. So, that showed that we definitely were closer to equilibrium, but we still weren't even at equilibrium at that value.
George Gammon: So, it might be equilibrium maybe 60 or 55, something like that?
It could be 60. Could be 70. Could be 65. It's a moving target. Yeah. It depends on what the other currencies are doing.
George Gammon: Right. And then how much of the debt that we're talking about? So, demand for dollars outside the United States.
How much of that is short term, meaning they got to roll it over every two years or three years or is it more, longer-dated debt?
Lyn Alden: There's a big spectrum of it. A lot of it is short term, a lot of it is medium long term.
Also, the BIS has a breakdown of how much of it is loans versus bonds. So, over time, more of it is shifted towards bonds.
I don't know the exact maturity profile offhand. But it's a pretty broad set of maturities.
George Gammon: Yeah. The reason I asked that is do you see these entities outside the United States when they have to roll over that debt?
Do you see them rolling it back over into dollars?
Or maybe saying, “Wait a minute, this probably isn't a good idea.” Let's borrow maybe a local currency and that, creating less demand for the dollar and the moving forward basis?
Lyn Alden: Yeah. So, there is a pretty big market for euro-denominated debt. So, that's a logical choice. Also, China's been active in lending, but they have generally been lending in dollars for their Belt and Road initiative. So, you could see a diversification of the type of lending they do.
Lyn Alden: Also, we're starting to see different countries actively seek to de-dollarize.
So, Russia has been spearheading that where they've been trying to do deals with China and Europe to price oil in non-dollar terms. And they've had some arms deals with India where they price it in rubles.
Multi-Currency Oil Pricing
Lyn Alden: So, especially in Eurasia, especially if Russia, China. Europe has an interest in being able to buy oil with euros.
If we start to see multi-currency oil pricing, then naturally some of those dollar-denominated debts could shift to other currencies because they're less locked into this dollar status.
George Gammon: Yeah. So, you see that being a trend on a moving forward basis?
Lyn Alden: I believe so. It's hard to see it not move forward at this point because back when the global reserve currency was established, the United States was a very large portion of the global economy.
And we're also the world's largest commodity consumer importer.
So now, China imports more oil than we do, and yet oil is still predominantly priced in dollars, which is used to make sense.
Lyn Alden: And now, we're in a world where it makes less sense. A lot of people might think the United States would never let this go, we would use our military to protect the fact that we have the global reserve currency.
But as for reasons I've discussed, it's actually no longer in the US interest to have a currency that's strong, it's just not benefiting our industrial base.
Lyn Alden: We can't even make masks. It turns out we're at a shortage of masks. So, historically, the US has put pressure on any attempt by countries to price their oil in something other than dollars.
Either sometimes, there are military actions that are coincidentally in countries that have recently priced oil in euros or other currencies.
Lyn Alden: And then most recently, Russia was pricing oil in euros and we ramped up sanctions on them. But going forward, I think they're going to figure out that it's not necessary in their best interest to lock all oil globally in dollar terms.
George Gammon: So, it sounds like a weaker dollar is beneficial for all parties involved, which will bring me to my last question here and I really appreciate your time.
And that's if the DXY, and that's the measurement of the dollar compared to really the euro, but a basket of currencies outside the US.
George Gammon: If that gets up to 110, 120 to where it is just putting an immense amount of pressure on those entities that brought in dollars, and then it's also putting pressure on the United States domestic economy.
Do we have a plaza accord 2.0 type of thing or how do you see that being resolved if we get that big spike that that Brent Johnson, as an example is predicting.
Lyn Alden: So, it's possible. A spike of that magnitude. One thing I've always viewed is that some of the dollar bulls underestimate how damaging that spike would be for the US, including the US, historically, US asset prices.
So, for example, when dollar spiked in 2008, the spike of the dollar coincided almost perfectly with the bottom in the US stock market. When we hit that bottom in early 2009, that was the within the-
George Gammon: Yeah. I think you had a chart on that in your report. Yeah.
Yup. Those were in days of the dollar spike. And then if you also look at US corporate profits over the past 50, 60 years, the three major dollar spikes that we had in 1985 and then 2001.
And then currently, each one lasts roughly five years.
Lyn Alden: US corporate profits go flatline for that whole period including this…
…even though we've had pretty strong S&P 500 earnings when you take into account tax cuts and buybacks.
If you actually look at top-line earnings and top-line revenue, it's been really flat for the past five years.
Lyn Alden: And then we saw the same thing, the last few times we had these dollar spikes. So, it makes it so that our products are way less competitive globally.
And then also because the S&P 500 has over 40% of its revenue outside the United States.
George Gammon: Yeah, they're all international. Sure.
Lyn Alden: Yup. And all that currency gets translated back in fewer dollars when the dollar is strong.
George Gammon: Yeah. But then, of course, most of their expenses are denominated in dollars. So, that makes things even worse.
Okay. So, this has been a fantastic conversation. But I know my viewers would be extremely angry with me if I didn't ask you about what you think is going to happen to, let's do this, let's do dollar short term meaning the next year.
Gold And Bitcoin
George Gammon: Dollar long term maybe three years plus and then gold, what do you see.
And then, I don't know if you know anything about Bitcoin, but I've got a lot of viewers who I really love the crypto space as well.
Lyn Alden: Sure. So, I became more leaning bearish on the dollar starting in October of last year. So, the past six months or so.
Now, this current virus definitely gives a short-term headwind. So, we have got this dollar spike at least a small one for now. So, we hit about 103 in the dollar index.
Lyn Alden: I think it's possible that was the local top. But it's very dependent on policy. So, it depends on how much the Fed does to keep a lid on the dollar liquidity problem.
So, predicting the near term is challenging, because it depends on how good people are at trying to do what they say they're trying to do.
So, as long as the Fed keeps providing liquidity and we could see that the dollar top is already in.
It's also possible we retest that, maybe go a little bit above that if this persists longer than people think, and if the Fed doesn't stay ahead of it.
And then another backup option you asked before, like what are the options if the dollar spikes.
Lyn Alden: We saw recent headlines where the IMF is also willing to provide dollar loans and also provide dollar liquidity to help the Fed in any holes that they might have.
Because the biggest threat right now is to countries that have dollar debts, but then are not creditor nations and don't have dollar assets to sell.
Lyn Alden: So, that's countries like Mexico, Indonesia, Chile, multiple countries that just don't have the dollar assets to fund their liabilities, Turkey, Argentina.
So, they're the ones that are risk of default, risk of major currency weakness. Whereas countries like South Korea or China, even though they have dollar-denominated debt they also have a lot of dollar assets.
George Gammon: Yeah. And I heard that the request at the IMF went up to some astronomical number. They generally get one request a month and they got 80 requests in the last week or something like that.
Lyn Alden: Just multiple countries are either have defaulted or at risk of default or at risk of major currency weakness because they don't have the dollar assets to sell. So, they're the most vulnerable currently.
So, in the near term, the next year or so it really depends on the Fed and the IMF, how much liquidity they can provide.
Lyn Alden: Because right now, the dollar shortage overrides any currency fundamentals of the dollar itself because it's all about getting your hands on dollars to service the debts.
So, my base case is that every day that the dollar goes up, they will introduce new tools to try to provide liquidity.
Lyn Alden: So, whether it's currency swaps, which they already did. They did now doing international repo's. They can lend treasuries.
If countries have to outright sell treasuries, they'll buy them. So, we might have seen the top. You might retest the top.
Lyn Alden: And the worst-case scenario is you can see a spike if they just totally dropped the ball and this whole thing persists longer than they expect.