This is not the first time the Fed has had to actively increase the exchange value of the dollar. Paul Volcker’s Fed had to hike overnight rates to 20% in 1980-81 so the dollar would be reaffirmed as a store of global value for US trading partners, including OPEC. We believe the Fed is doing the same today, in spite of its de-stimulative impact, because it wants to attract global capital to US banks and asset markets. Doing so would ensure USD hegemony, which would be necessary if/when global leverage leads to hyperinflation and multilateral trade and currency wars. Once substantial wealth is held in dollars and dollar-denominated assets, the US political dimension and the Fed, through the BIS and IMF, would be able to control the terms of a global monetary reset, which in turn would de-leverage balance sheets across currencies and economies in a controlled manner; in effect, a pre-packaged bankruptcy in real terms.
We expect global monetary authorities to protect the dollar as long as they can and we expect them to fail. Stocks and bonds will react violently; stocks and weak credits falling, treasuries prices rising (at first). That failure will lead to hyperinflation – not driven by demand, but rather by central bank money printing. A new global monetary understanding will then emerge.
We expect weak equities and a strong treasury market in 2017, as they begin to discount this fundamental structural shift.
We expect global monetary authorities to protect the dollar as long as they can and we expect them to fail. Stocks and bonds will react violently; stocks and weak credits falling, treasuries prices rising (at first). That failure will lead to hyperinflation – not driven by demand, but rather by central bank money printing. A new global monetary understanding will then emerge.
We expect weak equities and a strong treasury market in 2017, as they begin to discount this fundamental structural shift.
