The Reality Behind The Speculation of the U.S. Dollar Collapse

The Intro

“Dollar Crash”, “The dollar will collapse” and “hyperinflation” … What else did you hear about the dollar in the past few weeks? Nothing but ultimate negativity.

Here are some pictures from the media:

Let us begin with stating the main reason that fueled this debate in the first place: The U.S. Federal Reserve Printing nearly $3.5 Trillion of Dollars[1] and using it for Quantitative Easing[2].

For those who do not know, Quantitative Easing is when “central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity”[3]. In other words, Central banks creates “new” money and then use it to buy several assets from the market to support the economy.

Most people believe that the U.S. Federal Reserve is printing a lot of money out of thin air, and in return this “should” make the dollar cheaper causing (hyper)inflation!

Let us express this in a simple equation:

The U.S. Federal Reserve Printing Money = More money for everyone = (hyper)inflation.

And here is the chart that shows how much money the U.S. Federal Reserve is printing:

The figure above shows how much dollars are available (after they are printed) from the period 1/1/2000 until 27/7/2020. The red box highlighted in Figure 1 above shows the aggressive increase in printing money since March 2020.

According to the media and all the “doomsayers”, the figure above that comes directly from Federal Reserve, is the perfect recipe for the dollar’s collapse. However, this has not happened (yet!). So, what is really going on here? What is the missing piece? Why are we not living in inflation yet? The answer is in the next section.

The missing part of the equation

The world is in a pandemic mainly due to COVID-19, which caused the United States GDP dropped by a record 33% in the 2nd quarter[4]. Furthermore, U.S. unemployment hit record highs greater than the Great Depression[5]. Additionally, the U.S. was rocked with massive riots across the nation[6] with the “Black Lives Matter” movement, causing significant damages to many businesses and shops. Yet the dollar did not collapse!?

If the Dollar was really going to collapse, then it should have happened already. But it did not happen (yet!), because there is one missing piece that the “doomsayers” overlooked: Money velocity.  In other words, did the newly printed money cause a surge in dollars availability across the nation?

Let us have a look at some data figures:

The figure above comes directly the U.S. Federal Reserve, and according to them:

“If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.[7]

and by looking at the chart above we can safely analyze that this is not the case. In fact, the opposite has been happening since the beginning of 2020. Moreover, the recent sharp drop in the velocity highlighted in the chart above, indicates that dollars are not moving in the economy. And when dollars are not moving (ex. sitting in the bank), this means that the amount of dollars available in the market (supply) is shrinking too! Yet, everyone in the U.S. and all the world still needs dollars (demand) to pay for debts and imports.

Therefore, what is happening in reality is a shrinking supply of dollars (due to decreased velocity) while the demand for the dollars remains the same (high). According to the Law of Supply and Demand, this should lead to a higher value per dollar, which then leads us straight into an unexpected candidate: Deflation[8].

Not convinced yet? Have a look at the U.S. Inflation Rate below:

We can clearly see the inflation rate dropping abruptly in April 2020, reaching nearly ZERO in May 2020, regardless of the money printing going on by the U.S. Federal Reserve! And still, inflation rates continue to be near ≤1%, which is also 50% lower than last year!

Did the “doomsayers” who swear that (hyper)inflation is coming and make fun words like “BRRRRRRR…” see this chart? … I guess not.

What does the data and charts say from history?

The most recent data[9] coming from Reuters and U.S. CFTC (U.S. Commodity Futures Trading Commission) suggest that net-shorts on the U.S. dollars “soared to the highest level since August 2011”8. This is a 9-year high level. Meaning that there are more speculators betting on more downside for the U.S. dollar nowadays.

In trading, some traders usually say “history repeats itself”, and others like the saying:

“History Doesn’t Repeat Itself, but it Often Rhymes”.

– Mark Twain

No matter which way it is said, the final point is the same: History can suggest what is coming next. Therefore, let us look what happened to the U.S. Dollar since August 2011:

Looking at the chart above, we can see that in 1st August 2011, when the same event happened (net-shorts at all-time high), the U.S. Dollar index reversed from its bottom, and for the upcoming several years, increased a whopping 41%, leaving all the net-short traders suffering from large losses. Moreover, despite all the current bad economic data, the U.S. Dollar is still 25% up from its August 2011 low.

Yes, we cannot expect the same reaction this time, but we can predict that the U.S. Dollar might just pull the same trick again: Do the opposite of what everyone predicts. In other words, the U.S. Dollars might reverse from here and move higher, contrary to what the crowds say.

Therefore, we hate to be the bearer of bad news for the dollar “doomsayers”, but there is not a single sign of (hyper)inflation, and there is absolutely no sign of dollar crash happening just yet.