It may be extremely strange to many that the dollar’s weakening is related to the strength of the financial markets in the United States. After all, the adjective “weak” has a clearly negative connotation. In addition, a weakening currency is almost always bad news for Latin Americans. In the United States, however, the news is interpreted as a great triumph. Why?
This is especially confusing for the average bitcoiner, influenced by the economic ideas of the libertarians, as the strength of a currency is seen as a great virtue in crypto circles. Hence, the weakening of the current dollar is often misunderstood as a failure of US monetary policy. Error. Many will be surprised to learn that what is happening is intentional. And the weakening of the dollar is seen as a success and a sign that the plan is working.
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The dollar has not been like that since December 2017 / January 2018. Yes, the second half of 2017 was a time of great monetary expansion. If we compare the history of the dollar (DXY) over the past 10 years with the history of the price of bitcoin, we will actually run into a surprise. If we compare the DXY chart to the SP 500 chart for the past two decades, we will find that weakness actually means wealth and strength, not crisis.
At this point in time, the DXY is 91.7. This is an annual minimum that is approaching the January 2018 minimum (88.8). Of course, we are still very far from the level reached in March 2008 or April 2011 (72.9) (71.3).
During the worst part of the dotcom bubble, the DXY hit a rate close to 120 for a moment, and even surpassed it during the recession of the early 1980s. Contrary to what many bitcoiners think, a strong currency is fatal to the economy. This explains the current celebration and concern back in March when the DXY hit 102.
Because of the confirmation bias, many mistakenly interpret Bitcoin’s recent surge as a reaction to the dollar’s alleged “failure”. In other words, a kind of referendum on Fiat. But that’s totally absurd. The weakening of the dollar is intentional. The dollar is like this because the Federal Reserve wants it to be to stimulate the economy. It is not causal that the major stock indices are currently at their all-time highs. Monetary authorities and Wall Street are celebrating because the plan works. In fact, more incentive is coming soon. This is the current craze.
Why is a weak dollar good for the economy? First, I have to make it clear that this “weakness” is entirely relative. We are not talking about devaluation based on the Latin American model. In other words, it’s not the same weakness of the Venezuelan bolivar. In the context of the dollar, “weakness” means a few cents below the euro. And “strength” means pennies above it.
Indeed, the dollar is an extremely stable currency. But it moves in cycles. It’s been relatively strong for the past three years and will certainly lean on the weak side and then strengthen again for the next few years. In other words, it is never too far from the euro. Why? Because the Federal Reserve is in control of the situation.
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The case of Latin American devaluations is very different. There are usually no cycles here. Simply free fall. Usually you never talk about pennies. Here the weakening of the currency is a catastrophe. This weakening is usually the result of poor management of monetary policy by the region’s central banks, which causes large capital flight due to the population’s loss of confidence in the institutions.
We need to understand that the reality is different in the United States. “Weakening” the dollar is not synonymous with money failure and does not imply capital flight as in the case of Latin America. But on the contrary. In the United States, monetary expansion means investment. This means that the liquidity injections are working and investors are investing in the financial markets.
But what about the savings? Well, there really is no savings in America. The dollar is not an investment vehicle. The dollar is a medium of commercial exchange. Americans don’t usually save money. You invest in mutual funds. It is precisely for this reason that the authorities are weakening the dollar. Strengthening the financial markets. And this is exactly why it is celebrated when the stock indices hit an all-time high. Saving is not done in cash, but in assets.
A weak dollar means that US exports are more competitive in the international market. And that usually means higher income. Hence an increase in employment. Liquidity is positive in many ways. And if inflation can be kept under control, it is synonymous with investment and economic growth. Because of this, it is state policy.
Why is hard currency investment and the economy fatal? The strong dollar is damaging exports. And discourage spending. In addition, the debt burden increases. The depreciation of goods and services reduces income. So we have unemployment. The lack of liquidity leads to economic growth. Here’s the problem with a too strong dollar.
Basically, stability is desired. But stability does not mean immobility. So there are cycles: Temporary weakness. Temporary fortress. Today’s weakness offsets the strength of the first half of the year. This is a clear indication of the economic recovery.
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Personally, I think a tough monetary system would be fatal for the economy. It has been tried in the past and the results have been very negative. I don’t think having an economy with a currency that is scarce is a very good idea. It would mean an eternal recession. However, I like to invest in scarce assets. That means Bitcoin would be a lousy currency for me, but it’s an excellent investment.
On the other hand, along with Wall Street, I applaud the liquidity injections from the Federal Reserve. The word “stimuli” is music to my ears. In fact, I am looking forward to the momentum for next year as I know the positive effects this will have on financial markets. Thanks to this liquidity, Bitcoin could grow strongly in 2021. Our success does not depend on the failure of the system, but on success. The Federal Reserve is our fairy godmother. Monetary liquidity, economic growth, and the rise in stock indices are closely related to the rise in Bitcoin. In fact, the dollar is Bitcoin’s great friend as an investment.