We’ve been talking about the pending recapitalization of the United States this week…
For those just joining our conversation, enormous amounts of investment capital has flowed into American assets, Bitcoin, and other cryptocurrencies over the past month. If we look at the charts, it’s clear that the presidential election was the catalyst driving these moves.
There’s an old saying that if you want to know what’s going on, you have to follow the money. And the money is suggesting that institutional capital—large entities like pension funds, endowments, and insurance companies—are betting on significant policy changes.
My read is that we’re going to see a sincere effort to recapitalize the American economy. This will require a significant restructuring of America’s financial and economic framework on three levels:
- Government Debt and Fiscal Health
- Economic Revitalization
- US Dollar Stability
We talked about the US government impending debt wall and the need for dramatic spending cuts on Wednesday. And we hit on the prospect of economic revitalization yesterday.
Today let’s tackle dollar stability. And it starts with this chart…
As we can see, the US dollar has lost 88% of its purchasing power since 1970. That’s based on data coming directly from the Federal Reserve (the Fed).
How do we expect to have a robust economy if our currency massively depreciates like this?
Balancing the federal budget will go a long way towards stabilizing the dollar. We talked about that the other day. But interest rate policy is another major factor.
When it comes to interest rates, the financial media and most analysts are still stuck in the old paradigm. As evidence, they are still talking about how many times the Fed is going to cut interest rates… and how big the cuts will be.
Their presumption is that if the Fed cuts, interest rates will fall throughout the economy. That’s exactly how the system has worked in recent history… but not anymore.
When we talk about the Fed cutting rates, we’re talking about the federal (fed) funds rate. It’s the rate at which banks lend to each other overnight within the Federal Reserve System.
The fed funds rate influences short-term interest rates throughout the economy… but that’s it. Long-term interest rates hinge upon the prominent interest rate benchmark.
Financial institutions use interest rate benchmarks to price loans. That means interest rates throughout the economy are directly influenced by the benchmark used.
This benchmark is entirely different from the fed funds rate. The Fed doesn’t have direct control over it.
Until recently the London Interbank Offered Rate (LIBOR) was the interest rate benchmark for dollar-denominated loans and derivatives. Longer term lending rates throughout the economy hinged upon LIBOR.
The thing is – LIBOR magically moved in tandem with the fed funds rate from 2008 to 2021. And that’s because a cartel of the world’s largest banks – most of them in Europe – controlled LIBOR.
Those banks effectively manipulated LIBOR lower to keep rates artificially low throughout the economy. This made it look like central banks had the power to control long-term rates as well.
That jig is up.
Something called the Secured Overnight Financing Rate (SOFR) went into full effect in 2022. SOFR (pronounced “so-fur”) replaced LIBOR as the interest rate benchmark for dollar-denominated loans. Going forward, long-term rates will feed off of SOFR.
SOFR is based exclusively on transactions in the Treasury repurchase (repo) market. We’re talking about real transactions that have occurred between financial institutions.
That means SOFR is largely a market-driven interest rate. It can’t be manipulated lower by dictate.
The Fed has cut the fed funds rate twice this year… and guess what? Long-term interest rates went up, not down.
To a large degree, long-term interest rates are now set by the market – as they should be. The Fed is no longer in the business of trying to set interest rates for the whole economy.
So what does all this esoteric talk have to do with the stability of the US dollar?
Simply put, the higher interest rates are in the US, the stronger the dollar will be. Think about it this way…
We were not able to earn a yield on our savings for the better part of the last two decades. Bank savings and money market accounts paid a fraction of a percent. Treasury securities weren’t much better. All those vehicles offered a yield far below the rate of inflation.
In that climate, holding dollars was a losing proposition. And that’s not good for US dollar stability.
In a world where you can earn 4.5% in a money market account and Treasury securities – well, that’s a world in which the dollar will attract greater institutional capital… as we’re seeing right now.
I would prefer that we use sound money in our society—money that can’t be created from nothing. But I’ve learned not to let “perfect” be the enemy of “better”. And a dollar able to yield 4.5% is better than a dollar that generates no yield.
But wait – we started out this discussion by talking about the odd correlation between the Dow Jones Industrial Average, the US Dollar Index, Bitcoin, and Ripple… how do they factor into this?
More to come next week…
-Joe Withrow
P.S. The pending recapitalization of the United States will create what I’m calling the new rules of money for the 2020s and beyond.
We’re going to see fundamental shifts in how capital is allocated in the coming years. As part of this, I believe we’ll see money gravitate away from financialized assets and towards real assets of tangible value.
It’s going to be fascinating to watch it all play out. And we have an incredible opportunity today to position our own finances and investments to benefit from these shifts.
For more on how to do so, see our Finance for Freedom program right here.