The Dollar Strength Index Rises to a Yearly High

Dow Jones is down slightly by 0.3%, but its index is at new highs of above 36,000, up significantly from the previous peak of 29,000 in February 2020.

Likewise bitcoin has fallen a bit at just under $61,000, but remains near its new all time high of $67,000, with a lot of this data not making too much sense.

That’s because while the dollar index has been gaining, assets have been rising as well, while the euro and cny has been gaining even more.

One explanation could have been an increase in the velocity of money, but there hasn’t been one. Instead it has actually fallen, nearing again record lows as of Q3 2021.

A general increase in productivity could well explain the strengthening of the dollar while assets gain too. The economy has grown at some 6.5%, but that’s after last year’s depression.

The Federal Reserve Banks committee however thinks the economy is sufficiently strong to reduce some of the money printing with Jerome Powell, Fed’s chair, stating:

“Beginning later this month, we will reduce the monthly pace of our net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.”

That’s out of $120 billion a month, so a reduction of nearly 10%. The balance seems interesting as they’ve chosen to reduce government bonds by twice the amount they’ve reduced mortgages, we would have done the reverse.

Such small reduction was however to be expected. Powell presumably wants to test and see the reaction, with there being none in bonds in part perhaps because the sums involved are fairly small.

The Bank of England on the other hand apparently has surprised by keeping interest rates on hold with Michael Hewson of CMC Markets saying:

“This was surprising given that Governor Andrew Bailey had briefed on more than one occasion in recent weeks that a hike was coming due to rising inflation expectations.”

That has given a relatively big red candle to the pound from $1.37 to $1.348. However, it is probably a bit too soon for interest rates to rise.

They should. Our timeline if we were in charge would be reaching 2% by the opening of the Paris Olympics in 2024 and then we would keep them there for some years at exactly 2%.

We would then give a lot more leeway to inflation or indeed deflation as much of Europe is currently seeing so as to set the expectations of that 2%.

This way we would be effectively firing Powell, while still keeping him as a backstop in case of anomalies, so as to remove monetary policy from economic activity.

We would go to that 2% because banks need an incentive to lend, but we would not go any further unless the circumstances are truly exceptional because it shouldn’t be our job to tell the market what to do.

The Treacherous Road

The gradual reduction in bond purchases shouldn’t affect stock markets significantly because the funds get to stocks only in a very indirect way, if they get to stocks at all instead of banks parking them in repos.

It will however have an effect on the government and depending on how the government reacts, it may have an effect on everything.

That’s because this is lowering demand for government debt which so far has run at above half a trillion a year, with that gradually to be removed completely perhaps by this time next year when a gradual increase in interest rates can begin.

It is only removing demand from one participant however, with one easy way to increase such demand being increasing the accessibility of bonds.

Our IBKR account for example doesn’t let us buy them. They made us go through a test and still they won’t let. This is something for the market to address because we should be able to buy bonds and the best way to learn about something is to ‘feel’ it and see how it behaves with say $100 to begin with.

Depending on the circumstances, demand can also rise out of patriotism especially if the populace feels we’re going in the right direction or thinks its needed to get somewhere.

The government however may respond instead with taxation. This might be a very bad mistake because it isn’t clear the private sector can bear any further resources being taken away on top of what is already far, far too much.

Yet there’s a deficit and funding it by Powell buying means regressive taxation for all, so the only way out of the quagmire is growth, real proper growth, and a freeze in government spending or even a reduction especially in USA where the army is concerned.

We’re in a time of peace, finally. And though there are tensions, Serbian nationalism is on the rise for example in an echo of the 90s, we are in a situation where we should hopefully enjoy a peace dividend.

We are also in a transitionary period. In Europe and America especially, there’s so much innovation going on in pretty much every field, innovation developed over the past two decades, with that now beginning to take shape and so we’re at the dawn of the tech revolution beginning to transform pretty much all industries, including the civil service.

That should give a productivity boost, and so proper growth is possible, and even foreseeable, if the government views the market as a force, rather than just a cash cow.

You square the circle therefore, of a deficit while not increasing taxes and not printing money, by facilitating growth.

As such if we were Rishi Sunak or Janet Yellen, we would do nothing even as the Fed moves, we’d only watch. We wouldn’t increase taxes, we’d keep on current levels of spending, we’d even invest in infrastructure especially where it concerns electric cars and by the Paris Olympics we should hopefully also have flying cars with Lilium jets and e-helicopter Joby already flying them in showcased tests. The latter demonstrated a 150 mile flight, a breakthrough.

But if we were Sunak he’d probably think either we’re talking of some magic or that it’s just wishful thinking you can deficit without printing or new taxes, and you can even boldly invest in the digital industrial revolution.

But why not try it? Why not first see the market’s reaction to deficit bonds without Powell support? If one can communicate a conviction that growth will get us out of it, why not even call on your people to buy them bonds.

And it has to be tried because it is the only way out. If instead they keep repeating the same reaction of higher taxes or cutting spending, they’ll also repeat the same downward spiral that has us now in nearly 14 years of a financial ’emergency.’

It is perhaps time to be bold and end the ’emergency.’ Move towards 2% and stay there with a jealous iron fist, see the increased lending to consumers and commerce, see the increased growth and thus the increased gov income, see the deficit narrowing, see the bond market liking that very much and so we get to a good new normal that returns the market to the market.

A market that should expect growth if the government is not taking more and more from it and as consumers purchasing power increases due to an end to devaluation. And as such, it should be very willing to lend to the government to cover its deficit of merely 5% of the GDP.

Where cryptos are concerned, first in regards to bitcoin the end way to measure it is through global productivity. You assume bitcoin is a fixed measurer of all things, and as a fixed measure its value in itself can not increase or decrease, 1 bitcoin is always 1 bitcoin out of 21 million. The value of all things relative to bitcoin can increase or decrease however in supply, and the way we measure that is by global growth or global productivity. If growth up, then bitcoin should also rise.

Currently bitcoin has its own growth in adoption and so on, which has to be constantly integrated into the price, but where the medium to long term view is concerned, growth is good for bitcoin and for all things.

So we don’t know what it might do in the short term, depends a lot on whether the market fears a return to financial normality, or whether it sees it as an opportunity that unleashes growth.

For ethereum likewise the growth in users due to tons of innovations on its network is far more important to its price than macro.

Macro naturally affects everything to some extent, but fundamentally whatever Powell does amounts to printing because that’s the inherent nature of the dollar as a moving (or ideally tracking) measurer of value. If at current rates or current asset purchase levels, it’s top down printing for gov and banks/corps or the upper middle and the richer. If it moves towards 2% it becomes more consumer money printing in as far as banks lend more and take more risk because more profitable.

Thus fixed assets shouldn’t really be that affected, with bitcoin’s and eth’s own factors far more important to their valuation.