Is the US Dollar Failing? - Trading Journal (08.09.20)

2020 has been an interesting year for financial markets. The Covid19 has effectively created a lot of head winds for global economies. In order for the United States to weather this storm it has put itself in greater debt in order to ride through main street's shutdown. The country's GDP has fallen at its fastest pace and unemployment rates are at its worse since the Great Depression. Yet the Federal Reserve and government has stepped up with fiscal and monetary policies to support the struggling economy.

What has been done since March?

The Federal Reserve in early March immediately implemented rate cuts on the funds rate quickly to zero % and in acted infinite QE while extending Repo market. While the government passed the Cares act to provide all US citizens stimulus checks, extend and increase unemployment benefits, and create forbearance on house mortgages and student loans. Add on top of all this they had initiated a PPP loan which gave money directly to small businesses with little to no requirements to repaying back.

Wikipedia has more detail breakdown of what occurred in March and is an interesting read for those who are curious. Link here.

Sixth month into the Pandemic what Now?

A lot of uncertainty still remains regarding the safety of opening the country while Covid cases remain high in the US. Many of the benefits in March are all used up and the government is planning to provide additional stimulus. However as of today the government has yet to get a bipartisan bill pass hence currently President Trump has signed an executive order to extend unemployment benefits and cut pay roll tax on individuals.

Whether he has the authority to do so is not the focus of this post. The focus lies on deeper meaning of what the president is trying to accomplish. It is obvious with election coming up the president is trying his best to appease his voters, but is what he doing really going to help or worsen the situation?

Some History of the Dollar

In 1944 Bretton Wood Conference held in July consisted of back in the day most powerful nations. The conference ended up having US dollar primarily as the reserve currency of the world and all other countries to be pegged to the dollar. While in order for the US dollar to be the reserve they were to be pegged to the price of gold. By the late 1970s President Nixon moved forward to un-pegging the dollar which in turn allowed much more flexibility for the US to print additional dollars into the system.

Why Dollar so Important in the Economy

The US dollar is still considered a reserve currency based on its trust however that may begin to lose some faith as the country is still going through this Covid crisis. The lose of faith lies in how people need the dollar to survive is becoming less and less of real value. The FED and government has chose a path of providing as much dollar as they can to supporting the economy that is struggling on its own. The issues that will arise will not be felt until later. Inflation of the US dollar is one of those concerns. President's Trump's executive order actually amplifies these concerns. But a concern of a different sort.

For those who are aware in order for a currency to have trust they must be used among its people. For the president if allows people to not have to pay income taxes it will mean people no longer technically need to save or spend in US dollar as what they earn get to be kept to be spent on what ever they want. You see in order for the dollar to remain a reserve it requires people to use it for daily needs. Without requiring them to pay in US dollar what they earn is essentially allowing them to not necessary have to hold US dollar to what is obligated to when taxes have to be paid.

I leave with this final thought. The federal reserve, FED, was created in 1913. The federal income tax bill was passed in 1909 but was official amendment in 1913. This was not a coincidence. The dollar became a universal currency in US in 1913 so taxes would be easier to collect. If no taxes then why would people need to hold the US dollar? The work and can get paid in US dollars or they can earn in a different form of currency. This no payroll tax may seem to benefit more than hurt but there are hidden costs to it that has yet to be thought through. It will be interesting to see if or when this executive order indeed proceeds.

Thanks for reading!

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