We are in the middle of the Coronavirus pandemic. The US has been passing massive stimulus bills to combat the slowing economy. These stimulus bills are very large. In March the US passed the CARES Act with $2.2T in stimulus. Just last week, Congress passed a new stimulus bill for $484B in stimulus, and there is discussions of another stimulus bill in the works. The United States does not have excess money coming into the budget. So whenever there are these big stimulus bills, who pays for them? What happens is the Federal Reserve prints more money, sending more US dollars into the economy to generate growth. Whenever the US prints more money, it causes concern over inflation, and concern whether these policies are destroying the value of the US dollar. I have seen a lot of videos go up on YouTube recently about this. There are a lot of people concerned about the stability of the US dollar. So I wanted to make this video about how currency markets work and why I am personally not worried about the strength of the US Dollar in our current situation. I am going to go over a lot of information really quickly. So sit back and relax and we are going to talk about the US dollar. WATCH NOW!
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VIDEO SUMMARY
The most important thing in any discussion about currencies is that the real issue is about pricing. This is a practical day-to-day problem everyone faces in the real world. When you go to the store and you buy a loaf of bread, you want that price to be fairly consistent. So imagine you go to buy a loaf of bread. Let us say it is $2.50. You are going to pay for that bread with some currency. If that currency is unstable, the price of the bread is going to fluctuate wildly. So suddenly, that loaf of bread might be $4 one day or $1 the next day. That is why it is so important to have stable currency markets. Without it, your simple day-to-day activities become almost impossible.
Many of you will know the history of the Federal Reserve. The goal of the Federal Reserve is to manage inflation of the currency and maintain stable prices. The US used to be on the gold standard meaning the US Dollar was tied to the price of gold. Gold is a commodity which fluctuates wildly, so your currency fluctuates wildly, and the price of bread fluctuates wildly. The US abandoned the gold standard in 1971, which makes the US dollar a “fiat currency.” This means it is not backed by anything other than the US government. This allows the Federal Reserve to manage inflation of the currency without having to worry about fluctuations in the price of gold. And the result is that when you go to the store to buy a loaf of bread, you have confidence you can purchase it for $2.50.
I cannot emphasize enough how important it is to manage inflation. You can look at many examples through history that whenever currency markets become unstable, political revolutions happen. People get very upset when all their money suddenly becomes worthless. Governments are overthrown and things get violent. The most famous of these incidents was when Germany’s currency experienced massive inflation right before World War 2, which was one of the driving factors of how the Nazi party came to power.
The Federal Reserve knows this, and you can see the importance of managing inflation in policy decisions in the US. They have emphasized the importance of the stability of the US dollar. The proof of this is that the US dollar is what is called the “reserve currency” of the world. This means that there are institutions around the world that have money in their savings account. A lot of this money around the world is kept in US dollars as the “reserve currency.” This is done, because the US dollar is known as a stable currency. It is not going to fluctuate wildly in value.
The currency market is the biggest financial market in the world. It is much bigger than the stock market. Let us take a look at a chart. This shows the volume of trades as a percentage. You can see the US dollar makes up 88% of the currency trades. The US dollar is by far the most used currency in the world. This also shows what are considered the top four most attractive currencies: The US dollar, the Euro, the Japanese yen, and the British Pound sterling. So if you are going to hold money in your savings account, you are generally going to hold one of those four currencies because they are generally accepted as the most stable. We also see on this chart the Australian dollar, the Canadian dollar, the Swiss franc and the Chinese Renminbi.
| Rank | Currency | Symbol | % of daily trades |
| 1 | United States dollar | USD (US$) | 88.30% |
| 2 | Euro | EUR (€) | 32.30% |
| 3 | Japanese yen | JPY (¥) | 16.80% |
| 4 | Pound sterling | GBP (£) | 12.80% |
| 5 | Australian dollar | AUD (A$) | 6.80% |
| 6 | Canadian dollar | CAD (C$) | 5.00% |
| 7 | Swiss franc | CHF (CHF) | 5.00% |
| 8 | Renminbi | CNY (元) | 4.30% |
April 2019. Bank for International Settlements.
An important feature when you discuss currencies is that strategically they are a zero-sum game. There is always a winner and a loser because you are always transferring from one currency to another. We are talking about your savings account, so it needs to exist in some form of currency. If you wanted to get out of US dollars, you would convert them to Euros. Or you would convert Euros to Pound sterling.
So the question we are looking at is whether the US stimulus will make the US dollar undesirable as a currency. Let us look at this from a practical level. If you wanted to get out of holding US dollars you would probably look at converting it to one of the other three main currencies in the market. So let us talk about each one.
The Euro is a fairly young currency. The Euro started in 1999, so it has only been around about 20 years. The point of the Euro was that by combining all of Europe, you would have an economy that rivaled the US. But unfortunately, the Euro has had a lot of currency issues over the last twenty years. We have seen that it is difficult to coordinate monetary policy across different countries with their own governments, debts, and social policies. In comparison with the US, the US dollar is more attractive.
The Japanese Yen is generally considered as a way to get exposure to Asian markets. But obviously Japan is just a small part of Asia, so this has its limitations. Also Japan historically has made some controversial monetary policy decisions, which impact the currency’s attractiveness. In comparison with the US, the US dollar is more attractive.
The British Pound is usually attractive, because out of the four major currencies, it has historically been the most conservative in terms of monetary policy. However, the United Kingdom is dealing with the Brexit craziness which casts a shadow over their currency. In comparison with the US, the US dollar is more attractive.
Looking next at the smaller currencies. They are generally not as attractive as the top four major currencies. And on a practical level, there just is not enough volume. There is so many US dollars around the world, you could not practically convert them into these smaller currencies.
If you wanted to get rid of your US dollars, you would have to select one of the other options to convert your currency. Which one would you choose? There are not many other attractive currency options available today, which is why so many people around the world hold US dollars.
With that background, how would a currency crisis happen with the US dollar? There have been many currency crisis throughout history, so we know a little bit about how it would happen. Currency is about confidence. So there would be a lack of confidence in the US ability to back their currency. We would see a massive flight from the US dollar into other currencies, probably the Pound, Yen, or Euro. There would be massive inflation in the US, and people would want to use other country’s currencies to make transactions because they would be more stable.
So that brings us to our current situation with the coronavirus. The unique thing in this crisis is that it is global. Every country around the world is dealing with the same problem. So there is no incentive to move your currency from the US to England, Europe, or anywhere else. They are just as bad as us. From a currency standpoint, they are even less attractive. So in a crisis that affects the entire globe, people actually want MORE US dollars. So all this US stimulus is actually being paid for by demand for US dollars around the world. People want US dollars. People want to buy US debt, because in comparison to other countries it is considered the most stable. It is supply and demand. The Federal Reserve is printing more money to satisfy the global demand for more US dollars. This is the benefit of being the reserve currency of the world. The world’s demand for your currency pays for your country’s stimulus bill.
What is the proof of this? We see it in markets. We see it in demand for US currency, and we see it in low interest rates for US debt. If there was a change in demand for US dollars, you would see it in markets. If this happened, the US would just change policies to strengthen the US dollar. And that is the whole job of the Federal Reserve. They watch the markets, and when they need to increase dollars or decrease dollars in the system, they do it in order to maintain stability of the currency.
I am not saying that the US dollar can never collapse. Obviously there are scenarios where currencies do fail. But the current coronavirus situation is not one of those scenarios. The scenario where you would have to worry would be if there was coronavirus in the US and no illness in Europe or some other location creating a huge disparity between the two economies. Then you would see major movements in currency markets. But as long as everyone is suffering the same fate, there is no reason to move your currency somewhere else.
So what about gold and silver? A lot of people think about gold and silver as protection against currency collapse. This is based on a hypothetical scenario that I find very unlikely. This is assuming that there is no other currency in the world you could move your money to. Because even if the dollar collapsed, you could just start using Euros. So this scenario really assumes that every central bank and currency in the world collapses at the exact same time. There would be no currency available to use, and so people would fall back on gold and silver. I just find this idea very unlikely. Realistically there would be some country that takes appropriate action to stabilize their currency. Or some other currency would take its place. I just do not see people walking into the grocery store and buying a loaf of bread with a bar of gold.
The other problem is that gold and silver are completely different asset classes from currency with different risk profiles. Gold and silver are commodities which fluctuate wildly because the price is driven by supply and demand. When there is high demand for Gold the price shoots up. When demand goes down, the price shoots down. So you should be careful with using a commodity to hedge against a currency that is designed by its very nature not to fluctuate wildly. It is a completely different risk profile. That is not the most effective way to hedge.
What about Crypto-currencies? I am not a fan of crypto-currencies and I have made a video about the problems with Bit-coin that you can watch if you are interested. But the essential issue is that currencies are backed by a government, whereas Bitcoin is not backed by a government. With currencies, there is a physical location somewhere that people own property, own businesses, and are making transactions in that currency. With Bitcoin there is no physical location, so where are you going to go to spend your money? If I have British pounds I know that I can hop on a plane and fly to England and buy food, buy clothes, or buy a house. If you put all your money into Bitcoins, someone on the other end can pull all their money out, convert it into US dollars, and leave you holding the bag with worthless Bitcoins. You would have nowhere in the world you can go and spend those Bitcoins. That is why you want your money backed by a physical government.
Ultimately, the strength of a currency is about the people that currency represents. The real reason the US dollar is the most attractive currency in the world, is because the US economy is the most productive country in the world. Americans work hard. We work the longest hours. We have the shortest vacations. And we make a lot of money, which we then spend in US dollars. So the real reason there is so much confidence in the US dollar, is that even if there is problems in the US economy, and the US is taking on more debt, there is confidence that the US citizen will be able to work their way out of it.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.