By JC Collins
When will the dollar begin its inevitable depreciation? This is the question everyone has wanted answered.
The benefits to the American economy of dollar depreciation have been thoroughly covered here, even though the mechanism which would cause such depreciation has not been fully considered or reviewed.
The assumption has always been made that the growing demand for an alternative to the dollar, which is now being realized with the internationalization of the Chinese renminbi and the SDR, would create enough momentum to begin shifting currency valuations between China and the United States. But given the international status of the dollar, and the need to have that depreciation look like a reaction as opposed to a purposeful strategy, a more visible mechanism would be required.
The number one indicator of valuation is confidence. US monetary authorities would not want to be labeled as currency manipulator, which is a slur that Donald Trump has been hurling at China throughout the presidential campaign. The only way to avoid such a situation would be to cause a global reaction which would cause a drop in dollar confidence. This would give the US the dollar depreciation it requires without the direct blame.
The benefits of dollar depreciation are mentioned by Trump on a regular basis through job creation, though the listening public does not connect one with the other. Trump wants to bring back American jobs and factories. Understanding how this will happen will require understanding why jobs and factories left in the first place.
The reserve role of the US dollar in the international monetary system dictates that it has to retain its value. The vast amount of dollars which have been printed and are held in the foreign exchange reserve accounts of central banks around the world should be considered as an investment. Each nation holding large amounts of dollar and dollar denominated securities do not want to see a depreciation of those investments.
As such, nation’s holdings dollars on reserve have in most cases maintained some form of exchange rate mechanism with the USD. As more dollars are printed and the demand continues to increase, the downward pressure on the currencies of other nations becomes extreme. Nations are forced to devalue their own domestic currency in order to maintain the dollar peg which has been arranged. The alternative would be to devalue the dollar, which would cause a lack of confidence. This cannot be allowed to happen with the primary reserve currency.
What this does to American exports is brutal. The high valuation of the dollar against the value of other currencies means those other nations have to pay a lot more for American made goods. Companies which have manufactured in America have been forced to move their factories to these other countries, which are holding large amounts of dollars, in order to reduce costs and make profits.
There are of course the regulations which have made it possible for these same corporations to increase profits even further by importing those same products back into America and charge outrageous prices to the middle class consumer. These regulations are also being discussed by Trump and will be reduced in time as well.
Once the dollar begins to depreciate, the cost of American exports will decrease as the currencies of other nations begin to appreciate. As this takes place the reverse of what was explained above will take place. American exports will once again become affordable to the rest of the world and factories will return and new ones will be opened.
As American exports increase again the nations GDP will grow. This will start the process of reducing the trade deficit which the US has developed over the last seven decades and move towards a modest trade surplus, or some equilibrium between surplus and deficit, which is ultimately the objective being mandated by the International Monetary Fund and other global institutions. A lower deficit and growing GDP will lower the debt-to-GDP ratio, making managing the debt more effective.
The benefits to America of a depreciated domestic dollar are huge. The benefits to the international dollar are not so great. The lower demand and rise of alternatives will shift the whole international monetary framework and lower American influence and hegemonic power in the world. This is also why Trump is expressing the reality that NATO and other nations will have to begin paying their fair share.
The Trump script of renegotiating trade deals and forcing other nations to pay more for their own defense, as well as renegotiating America’s debt with the creditor nations, is causing a growing lack of confidence in the American international dollar.
The other aspect of what is taking place throughout this American election cycle is the exposure of the rampant corruption within the political establishment. One of the core indicators of dollar confidence has always been the stability of the American political system. The rise of Donald Trump and the open corruption of the establishment will create the perfect environment for the rest of the international community to lose confidence in the dollar.
This is happening at the same time that dollar alternatives are becoming available. This is not by accident. The scripting which is taking place is massive. The whole world is being conditioned to lose confidence in the American dollar. On one side you have Trump who is portrayed as an idiot and degenerate, and on the other side you have Clinton who is corrupt and diseased. No matter who wins, confidence in the dollar will collapse.
The SDR framework and renminbi mechanisms have been developed and put into play. The only piece that is now missing is the contraction of confidence in the dollar. The American establishment is in a checkmate position from which it can never recover. A new America is beginning to emerge. A multilateral America, which in turn will be an America for the people of America, is just now on the horizon. – JC