The U.S. dollar has had an unexpected rally and continued strength this year. Its value shrank against other major currencies late last year, a fate we expected would continue as other nations’ economies began to rebound from the global shutdown… and trillions were being pumped into the U.S. economy.
Instead, the dollar has gained 2.5 percent so far this year against the currencies of the U.S.’s major trading partners, confounding some of the most bearish predictions that it would fall by as much as 20 percent.
Instead, rather than falling lower after the latest $2 trillion U.S. money pumping scheme, the buck’s value was propped up on the hopes the injections would greatly encourage the nation’s economic expansion.
As we have forecast, however, all of those new dollars will temporarily flood the market at a time consumers are ready to let loose and satisfy a year’s worth of pent-up demand. A national spending spree will drive up prices quickly, setting off inflation.
Inflation weakens the value of money; inflated prices require more cash to buy the same amount of goods.
Also, the new stimulus has added a thick, new layer to the U.S. national debt at a time when commercial interest rates are rising, which also could crimp economic activity as well as government spending on infrastructure and other stimulus measures.
The U.S. budget deficit reached 14.9 percent of GDP last year, and the total national debt reached 102 percent of GDP, which means the government owes more than the economy produces.
Although rampant inflation has been dormant in the U.S. for more than three decades, again, we forecast the vast new scale of the national debt and the annual deficit will revive it.
TRENDPOST: From 2010 through 2014, the Fed bought 40 percent of new government debt and doubled its portfolio of treasury securities, now owning 18.9 percent of them, according to the Securities Industry and Financial Markets Association.
In 2020, the Fed bought 55 percent of the new debt, the association noted.
As the government borrowed to aid the economy, the U.S. trade deficit has continued to grow; combined trade and budget deficits add to a currency’s vulnerability, economists warn.
Foreign investors may sense that vulnerability: although they still own most of U.S. government debt, their purchases of the securities slowed last year. Their share of ownership of U.S. debt slipped from 35 percent to 30.
