Have you ever noticed that whenever the US dollar’s exchange value goes up, nothing good comes from it? The simplest, most obvious correlation to make yet it has taken a decade and half for some Economists to start putting two and two together.
For years following 2008’s dramatic dollar spike, the one which conspicuously coincided with the worst monetary panic since the Great Depression, any time the currency’s value went up it was associated with some form of domestic strength. Whether it was economic or financial, what everyone “knew” was that there had to have been some factor better here compared to everywhere else driving “capital” into dollar assets.
The most absurd of these attempts began to appear around 2015 when these rationalizations were forced part way toward the truth via the laundry business. From Yahoo!Finance in January 2015:
“The cleanest dirty shirt? The best horse in the glue factory? Whatever analogy you want to use, the U.S. economy is looking strong against a weakening global backdrop. And business leaders are well aware of that.”
Those business leaders had grown pessimistic about global economic prospects. By comparison, the US system looked to be holding relatively well.
This wasn’t to say everything was hunky dory here at home (from the US business perspective), far from it; thus, the dirt on the shirt. For all the purported good aspects, there were several crucial elements – GDP growth never got going, inflation was confoundingly absent, labor participation had yet to bottom out from 2008 - stubbornly absent from the recovery picture.
Against that backdrop, the dollar had absolutely surged anyway. Between July 1, 2014, and March 13, 2015, the main US dollar index, DXY, went on a near-unstoppable run which saw its value against the world’s major currencies increase by more than 25%. Week after week, month after month during it, there were few down days to break up the dollar, um, bull.
How else would anyone have explained this?
If you had been paying attention to market signals, the money signals, in particular, you’d have had the answer from the beginning. A gigantic one of those showed up on October 15, 2014. Because it was unrecognizable to the standard textbook money definition, it went entirely unnoticed.
I recalled only a little later in July 2015 about how the government had swept the October 15 affair under the rug:
“Liquidity is multi-dimensional and money funds only form one part of one dimension - what passes for cash these days. If liquidity, and really systemic capacity, is dangerously low, then it is the unseen dearth of dark leverage. As I have said and written since October 15, we note this deficiency mostly outside the domestic experience. Brazil, Russia, China, etc., can all attest to ‘dollar’ problems, and quite severe disorder as a result. October 15 here in the US should have been a resounding alarm, but instead it is swept away as some computer-trading effect lasting only 12 minutes by all the authorities and agencies (including the Treasury, Federal Reserve Board and FRBNY) that have vested interests in looking the other way and proclaiming only ‘resiliency’ and successful rebuilding.”
Nothing about computers, instead a collateral shortage so acute it nearly broke the Treasury market. Utter chaos had driven dangerously desperate monetary participants to scramble for every last USTs they could find the telltale signs of a persistent collateral shortage which had suddenly turned into a run.
That run was no one-off, merely the worst instance during a period when tightness had been focused more so, as I wrote back then, outside the US than inside. It had been so intense and unfamiliar (not to anyone paying attention since 2007, though) none of the world’s monetary “experts” in the media or even at central banks quite knew what to make of it. So they blamed high-frequency computer trades and went back to whitewashing the economy’s shirts.
Seeming like someone else’s problem, the term “decoupling” was revived and reversed from its original premise. It had first come to use back in 2008 when it was said the rest of the world would do just fine even though the US was suffering greatly from that subprime mortgage affliction.
Then the dollar surged, spun out of control around the world and before anyone on it could take a breath suddenly everyone got caught up in the monetary, financial, and economic maelstrom – in that order.
When it reappeared in 2014, confusion reigned. To this day, hardly anyone realizes just how bad – how close – the real dirt had been. No mainstream media source dared to honestly assess what had happened. The New York Times only much later, September 2018, would write about what it called the Invisible Recession of 2016:
“Sometimes the most important economic events announce themselves with huge front-page headlines, stock market collapses and frantic intervention by government officials. Other times, a hard-to-explain confluence of forces has enormous economic implications, yet comes and goes without most people even being aware of it. In 2015 and 2016, the United States experienced the second type of event. There was a sharp slowdown in business investment, caused by an interrelated weakening in emerging markets, a drop in the price of oil and other commodities, and a run-up in the value of the dollar.”
Rather than decouple, the whole global economy was tied together in a synchronized downturn. If there were any difference, they were only to the extent of damage done in various local places. China suffered strongly, the US maybe less so, Brazil utterly devastated. No one was spared.
There are no winners when the dollar rises, only degrees of losers.
And no surprises. The progression was as clear as the results had been predictable: money goes bad, trade suffers impacting those around the world who depend more on it, before eventually synchronized contraction visits everyone including the cleanest of the lot.
Closing in on a decade since then, having suffered another episode of the same in 2018 and 2019 (laughably blamed on the few billion in tariffs which were trumped-up into a “trade war” excuse), central bankers and their enlarged staffs are finally being forced toward the truth by these repeated exercises and the clear results and correlations each one keeps producing.
One of these few was published just a week ago (thanks Todd!):
“A tightening of U.S. monetary policy sets the circle in motion, generating an appreciation of the dollar. Given the structural features of the global economy, tighter policy and an appreciation of the dollar lead to a contraction in manufacturing activity globally, led by a relatively larger decline in emerging market economies. The resulting contraction in global (ex-U.S.) manufacturing will spill back to the U.S. manufacturing sector due to the reduction in foreign final demand for U.S. goods.”
And as US manufacturing weakens by quite a lot, the rest of the economy falls into the dreaded danger zone since so much of services is, after all, about managing, transporting, and selling goods manufactured here and abroad.
The above was written and published – a couple decades too late – over at the New York Fed’s Liberty Street Economics blog. Its authors get the sequence just right, even the main signal of the US dollar.
As usual, though, they miss on the cause. Monetary policy? Nah. But what else can we expect Fed staffers to do other than keep the Fed at the center of everything; even when, as in this case, it is something bad?
Did Ben Bernanke’s FOMC set the dollar in motion in 2008? There’s so much you can lay at the man’s doorstep; this isn’t one of those. The fault in the Fed was instead how it didn’t do anything about the monetary disaster which had been building offshore and broke out into the clear open (as he actually admitted to Congress in February 2010).
Demand for USTs and collateral were a huge part of it back then, too.
What did any Fed policy do which might have triggered the 2014-16 experience? Ben Bernanke again in this case had merely slowed the pace of QEs 3/4 (yes, there were four at that point), leaving for Janet Yellen to terminate it amidst the dollar’s wrecking bull-in-China’s-shopping.
There weren’t even rate hikes, for whatever those are supposed to do.
No, these repeated instances of monetary tightening are entirely exogenous. As is, very importantly, the monetary system itself, this eurodollar system. The Fed is along for the ride just like everyone else. Like an avalanche, once it gets rolling, get out of the way.
Furthermore, there is more than just the dollar’s exchange value which clearly denotes the rampaging bull: money and bond curves, swap rates and spreads, T-bill prices and so many more that when you know where to look you stop paying much attention to “a tightening of monetary policy.”
We are today on the cusp of yet another, if not already sunk within its grasp. The dollar, you’ve noticed, surged not just last year but from the latter half of 2021, well before the Fed hiked rates let alone Jay Powell pretending to be Paul Volcker (the original monetary poseur).
Global money tightened, those highly exposed to it howled (I wrote about them, especially India, all year) from the onrushing pain and then to end last year the damage started to be revealed. Trade numbers in Asia, for example, have plummeted. China just this week reported more severe contractions in both exports and imports, and those are by value. Who knows just how bad the volumes must be.
We do know how bad those are in Japan and, oh boy, Germany where the latest statistics put that crucial bellwether country’s levels equal to 2008-09 lows. Not a typo.
Shipping rates continue to plunge as containers which were once the very epitome of the supply shock “inflation” for a global dearth of them now stack up in un-majestic mountains of emptiness nearly everywhere, only starting with Chinese ports that have grown eerily silent, disturbingly vacant of late (so much for reopening from Zero-COVID).
For once, we can listen to some FRBNY Economists who have finally come around to sensing what the next stage is almost certain to be. “The contraction in global (ex-U.S.) manufacturing will spill back to the U.S. manufacturing due to production linkages and a reduction in demand. This will also lead to a decline in commodity prices and world trade.”
Commodity prices are largely heading downward and have been for some time, quite alarmingly in lockstep with China’s PPI which is already highly correlated with the country’s trade data; including exports shipped to the US. All pointing in unison toward one more dark global experience.
For Jay Powell and American policymakers’ renewed hawkishness over inflation fears, their hopes have already been answered. And that’s still the bad news. The only question is whether this one will be so silent. Trillions upon trillions of, well, those exogenous (euro)dollars are betting it absolutely will not be. I don’t mean a few at FRBNY finally recognizing what has been rather obvious this entire time.
