Jan. 4, 2022

The New, New US Dollar.

If there's one thing we can rely on it's the United States Dollar. The world's reserve currency. Our store of value and medium of exchange. The standard by which all other financial assets are measured.

But what if I told you that today's dollar, is not the same as the dollar of just a couple of years ago. Oh, I'm not talking about some vast conspiracy, where some nefarious people backed up a truck and unloaded all the dollars from our nation's vaults.

No, I'm talking about something much more mundane than that. But perhaps equally profound. For our lives and for our investments.

First, we need to understand what's changed. And of course, the answer is that the nation has gone through two years of the Pandemic. Two years when our economic lives have literally been turned upside down.

It was early in 2020, when we first heard of this Novel Corona Virus, first reported to be affecting people in China. As you know the disease quickly spread to this country. And many of you may have been impacted.

I hope not seriously affected.

And as we enter another Winter, I know that many are struggling to deal with any health risks this year. You're in my prayers.

With all that said, I sense that there is a tendency, right now, to think the economic impact of the disease is behind us. And I don't think that's the case.

In fact, I think the economic impact, especially as it concerns the US Dollar, may yet lie ahead of us.

Let me explain:

There are two principal ways in which the 2022 US Dollar is now different than all the dollars that went before.

The first way this new dollar is different is that there are more of them. LOTS more of them.

Our financial brain trust consists of the Federal Reserve, the nation's central banker, and the Treasury Department, under the guidance of the Secretary of Treasury and the President. Took one look at that disastrous Second Quarter of 2020, and went into overdrive.

Now disaster is not too strong a word for Q2 2020. The economy was in real danger of a massive depression. Had we continued at that level, the economy would have declined by a third. That's a larger decline than the Great Depression of the 1930s. Companies would have failed, and much of the workforce would be unemployed.

But as extreme as that event was, the reaction from Washington was even more extreme.

Washington hit the printing presses. They started printing dollars. In less than two years, from January 2020 until the most recent reporting date, November of 2021, Washington has increased the M2 Money supply, a broad measure of money which included “near-cash” such as savings and money market funds. M2 increased by an incredible 40%. From 15 trillion US Dollars to 21 Trillion US Dollars.

More supply equals lower price, say the economists.

Now when the “price” of a dollar goes lower, we call that inflation. And this simple back-of-the-envelope analysis would imply that we may have much farther to go, inflation-wise.

After all, we had essentially no inflation in 2020. With steadily accelerating inflation in 2021. We ended 2021 with inflation running at better than 6%. And it's a good bet that's only the beginning.

The second major area that the 2022 US Dollar that is different from its predecessors is that the cost of a dollar is rising.

And by cost, I mean the interest rate. In fact, we've already seen the cost of money, the interest rates begin to rise. Short-term rates on the US Treasury Curve, are now substantially higher than they began in 2021.

And although still low by historic standards, remember we began the year at essentially zero short-term rates. Nonetheless, US Treasuries are telling us that rates are going higher.

This, of course, is underscored by the Federal Reserve which most analysts feel will raise rates at least three times this year. Beginning, I believe in the next month or so.

So the bottom line for investors. We need to appreciate that this is a very different monetary environment that we have seen in the years immediately preceding.

The dollar has changed.

We are in a time when inflation is accelerating. And when interest rates are rising.

Or more pointedly. We are in a time when the Dollar's value is declining, and the Dollar's cost is rising.